Best Buy Co., Inc. — Form 10-Q Summary
Reporting period: Second quarter ended August 4, 2012, filed September 6, 2012. This is fiscal 2013 Q2. Best Buy changed its fiscal year-end, making fiscal 2013 an 11-month transition year; the quarter had 13 weeks, while the first six months had 27 weeks versus 26 in the recast prior-year comparison.
Financial performance
Amounts are in millions except per-share data. Comparisons are with the recast prior-year periods.
| Metric | Three months ended August 4, 2012 | Prior-year quarter | Six months ended August 4, 2012 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $10,547 | $10,856 | $22,157 | $22,225 |
| Gross profit | $2,564 | $2,762 | $5,471 | $5,683 |
| Operating income | $33 | $260 | $295 | $720 |
| Net earnings attributable to Best Buy | $12 | $128 | $170 | $340 |
| Diluted EPS | $0.04 | $0.34 | $0.50 | $0.87 |
| Cash from operating activities | Not presented for the quarter | $(222) | $1,169 |
- Quarterly revenue declined 2.8%; comparable sales fell 3.2%. Six-month revenue was down 0.3%, including an estimated 3.3% benefit from the extra week; comparable sales fell 4.3%.
- Quarterly gross margin was 24.3%, down from 25.4%; operating margin was 0.3%, down from 2.4%. Six-month gross and operating margins were 24.7% and 1.3%, respectively, compared with 25.6% and 3.2%.
- Quarterly results included $91 million of restructuring charges; six-month charges were $218 million, versus $4 million in the prior-year six months. Excluding restructuring charges, non-GAAP adjusted operating income was $124 million for the quarter and $513 million for the six months; adjusted diluted EPS was $0.20 and $0.92, respectively. These are company-defined non-GAAP measures.
- Domestic quarterly sales were $7.803 billion and operating income was $83 million, down from $239 million. International sales were $2.744 billion and the segment recorded a $50 million operating loss, versus $21 million income.
Liquidity, debt and capital
- At August 4, cash and cash equivalents were $680 million, down from $1.199 billion at March 3, 2012. The current ratio was 1.1, versus 1.2 at fiscal year-end.
- Total debt, including current maturities, was approximately $2.226 billion. Short-term debt was $519 million, primarily borrowings under the Europe facility; $542 million of long-term debt was classified as current, including the $500 million 2013 Notes.
- Six-month cash flow was $(222) million from operations, $(195) million from investing and $(334) million from financing. Cash and cash equivalents decreased by $519 million after the filing’s fiscal-year-change adjustment.
- Restricted cash was $360 million. The remaining auction-rate securities were valued at $22 million; auctions had failed, and the principal was not currently accessible. The company reported a $2 million pre-tax unrealized loss on these securities.
- Best Buy reported no borrowings on its U.S. revolving credit facilities at August 4 and compliance with facility covenants. A $1 billion 364-day U.S. facility was renewed on August 31, 2012. International facilities had $519 million outstanding.
- Credit ratings were under pressure: Moody’s affirmed Baa2 with a Developing outlook; S&P and Fitch lowered ratings to BB+ and placed them on negative watch/review. The downgrade increased the coupon on the 2013 Notes from 6.75% to 7.00%.
Business changes, outlook and risks
- Management cited cautious consumer spending, macroeconomic pressure in Europe and China, product life-cycle declines, and competitive pricing. Tablets, mobile phones and appliances grew in the Domestic segment, but declines in televisions, notebooks, gaming and entertainment offset growth. International comparable sales fell 8.2% in the quarter.
- The company initiated a Domestic restructuring that included closing approximately 50 large-format U.S. stores and changing store and corporate operating models. Forty-one stores had closed by quarter-end. Best Buy expected another $25 million to $75 million of pre-tax charges and substantial completion during fiscal 2013; lease costs for vacated locations may continue beyond that period.
- Management said it expected to suspend share repurchases for the remainder of fiscal 2013. It continued to prioritize liquidity, working capital, expense control, technology investment, Best Buy Mobile and pilot Connected Store formats. No specific earnings or revenue guidance is provided in the filing.
- On August 19, 2012, Hubert Joly was appointed President and CEO, effective September 4. The company also disclosed a renewed U.S. credit facility after quarter-end.
- Risks include uncertain consumer demand and product cycles, foreign currency and competitive pressures, possible further ratings changes and financing-cost effects, restructuring execution and costs, and inaccessible auction-rate-security principal. Securities and derivative lawsuits remained pending; Best Buy said reasonably possible losses could not be estimated. Other routine legal matters were not expected to have a material effect.
Important facts for investors to verify
- How fiscal-calendar recasting and the extra week affect period-to-period comparability, especially for six-month results.
- Whether restructuring costs, store closures and operating-model changes deliver the expected savings, and whether costs stay within the disclosed range.
- Whether International segment performance and comparable-sales trends improve, and whether Domestic margin pressure persists.
- Cash generation, borrowing needs, debt maturities and any further rating actions, including the effect on financing costs and vendor or lease terms.
- Progress on the CEO transition, capital-allocation plans and the suspension of share repurchases.
- Developments in the securities litigation and the recovery prospects for the remaining auction-rate securities.