Business context and reporting period
Best Buy Co., Inc. filed this unaudited Form 10-Q for the quarter ended November 26, 2011, the third quarter of fiscal 2012. The retailer reports Domestic and International segments; its business is seasonal, with the largest share of revenue and earnings typically in the fiscal fourth quarter.
Financial performance and liquidity
| Metric | Three months ended Nov. 26, 2011 | Three months ended Nov. 27, 2010 | Nine months ended Nov. 26, 2011 | Nine months ended Nov. 27, 2010 |
|---|---|---|---|---|
| Revenue | $12.099bn | $11.890bn | $34.386bn | $34.016bn |
| Comparable sales | +0.3% | -3.3% | -1.4% | -0.4% |
| Gross margin | 24.2% | 25.1% | 24.9% | 25.6% |
| Operating income / margin | $178m / 1.5% | $385m / 3.2% | $747m / 2.2% | $1.109bn / 3.3% |
| Net earnings attributable to Best Buy | $154m | $217m | $467m | $626m |
| Diluted EPS | $0.42 | $0.54 | $1.23 | $1.50 |
- Quarterly revenue rose 1.7%, but operating income fell 53.8%; nine-month revenue rose 1.1%, while operating income fell 32.6%. Management attributed the earnings declines chiefly to restructuring charges, weaker gross margin rates and relatively flat revenue and SG&A.
- Restructuring charges were $150m in the quarter and $154m for nine months, including $13m of inventory write-downs in cost of goods sold. The reported after-tax and noncontrolling-interest impact on net earnings was $66m and $69m, respectively.
- Cash provided by operating activities was $2.627bn for nine months, versus $545m a year earlier. Management cited inventory reduction from unusually high fiscal year-end levels and normalization of accounts payable. Capital expenditures were $616m; cash used in investing activities was $598m.
- Cash and cash equivalents were $2.392bn at quarter-end, versus $1.103bn at fiscal year-end. Current assets were $15.909bn and current liabilities $13.566bn; the reported current ratio was 1.2. Restricted cash was $528m.
- Total debt, including current portions, was $2.277bn; short-term debt was $163m. U.S. revolving facilities had no borrowings outstanding, while $163m was outstanding under International facilities. The company reported compliance with financial covenants.
- Interest expense rose to $37m for the quarter and $102m for nine months, primarily following the issuance of $1bn in notes. The debt-to-net-earnings ratio was 2.0, and adjusted debt to EBITDAR was 2.8, compared with 1.2 and 2.4, respectively, at the prior-year quarter-end.
Material changes and operating trends
- Domestic third-quarter comparable sales increased 0.9%, led by computing and mobile phones (+8.8%) and appliances (+13.7%); consumer electronics (-4.8%) and entertainment (-9.0%) declined. Promotional activity helped sales but pressured margins.
- International comparable sales declined 1.7%; the segment recorded a $29m operating loss versus $45m operating income a year earlier. Foreign currency translation contributed to reported revenue growth.
- Best Buy sold its TalkTalk and Carphone Warehouse shares for $112m, recognizing a $55m pretax gain. It repurchased 41.8m shares for $1.2bn over nine months and declared dividends of $0.46 per share for the period.
- The company issued $350m of 3.75% notes due 2016 and $650m of 5.50% notes due 2021. It also announced a fiscal year-end change: fiscal 2013 will be an 11-month year ending February 2, 2013.
Outlook, commentary, risks and unusual items
- Management gave no specific revenue or earnings guidance in the supplied filing text. It expects the usual seasonal concentration of sales and earnings in the fourth quarter and said consumer spending, traffic and spending patterns remain difficult to predict.
- Best Buy planned to close its large-format U.K. stores in the fourth quarter of fiscal 2012 and refocus Best Buy Europe on small-format stores. It expected an additional $100m–$115m of International restructuring charges and about $10m of Domestic charges in that quarter; substantially completing these activities during fiscal 2012 was expected.
- A proposed approximately $1.3bn buyout of Carphone Warehouse’s interest in the Best Buy Mobile profit-share arrangement was subject to shareholder approval. If completed, the company expected to record a non-cash goodwill impairment; preliminary estimates indicated substantially all of approximately $1.2bn of Best Buy Europe reporting-unit goodwill could be impaired.
- After quarter-end, Best Buy completed its $167m acquisition of mindSHIFT Technologies on December 28, 2011; results were to be included from the fourth quarter. Holders of $387m of convertible debentures could require cash repurchase in January 2012.
- Key risks include weak discretionary spending, intense competition and promotional pressure, declining product life cycles in televisions, notebooks, gaming and music, foreign exchange exposure, restructuring execution, and potential changes in credit ratings or access to financing. The remaining $89m par value of auction-rate securities was subject to failed auctions and carried at $81m fair value.
- The employment-discrimination class action settlement was approved, with payments due by January 8, 2012. Securities and shareholder derivative actions remained pending; Best Buy said potential losses, if any, could not be estimated.
Important facts for investors to verify
- Whether Carphone Warehouse shareholders approved the proposed $1.3bn Mobile buyout, the resulting cash outlay and any goodwill impairment recorded.
- Actual fourth-quarter restructuring charges and closure costs compared with management’s estimates, and the impact on operating results and cash.
- Fourth-quarter comparable sales, gross-margin trends and performance in tablets, mobile phones, appliances and weaker product categories.
- Cash requirements for convertible-debenture repurchases, the U.K. restructuring and other commitments, alongside available liquidity and covenant headroom.
- Progress in resolving securities litigation and the valuation or eventual liquidity of the auction-rate securities.