Business context and reporting period
Best Buy Co., Inc. filed this Form 10-K for fiscal 2011, the 52 weeks ended February 26, 2011. The multinational consumer-electronics retailer reports Domestic and International segments; International results for Europe, China, Mexico and Turkey are generally consolidated on a two-month lag.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $50.272 billion | $49.694 billion |
| Comparable sales | -1.8% | +0.6% |
| Gross profit rate | 25.1% | 24.5% |
| SG&A rate | 20.5% | 19.9% |
| Operating income | $2.114 billion | $2.235 billion |
| Operating margin | 4.2% | 4.5% |
| Net earnings attributable to Best Buy | $1.277 billion | $1.317 billion |
| Diluted EPS | $3.08 | $3.10 |
| Operating cash flow | $1.190 billion | $2.206 billion |
| Capital expenditures | $744 million | $615 million |
Gross profit rate gains, led by higher-margin mobile-phone sales, were more than offset at the operating-income level by higher SG&A and restructuring charges. The fourth quarter generated $16.256 billion of revenue and $651 million of attributable net earnings, but comparable sales fell 4.6%.
Cash and cash equivalents were $1.103 billion, with $22 million of short-term investments. Working capital was $1.8 billion and the current ratio was 1.2. Total debt, including current maturities, was $1.709 billion: $557 million of short-term debt and $1.152 billion of long-term debt. The company had no borrowings on its $2.3 billion main revolving facility and reported $2.5 billion of total undrawn credit capacity. Operating lease obligations totaled $8.247 billion, before certain landlord charges.
Material changes versus the prior period
- Revenue grew 1.2%, primarily from net new stores and favorable currency translation, despite a 1.8% comparable-sales decline. Domestic revenue decreased 0.3% and International revenue increased 5.7%.
- Operating income declined 5.4%; attributable net earnings fell 3.0%, while diluted EPS was nearly unchanged. Results included $222 million of restructuring charges, versus $52 million in FY2010.
- Domestic comparable sales declined 3.0%; International comparable sales increased 2.4%. Domestic operating income was $2.031 billion; International operating income was $83 million, including $171 million of restructuring charges.
- Operating cash flow decreased 46.1%, principally due to working-capital movements, including lower accounts payable and reduced cash provided by receivables. Cash declined by $723 million, with share repurchases a major use of funds.
- Best Buy repurchased 32.6 million shares for $1.193 billion and paid $237 million in dividends. The quarterly dividend rose from $0.14 to $0.15 per share during the year.
Outlook, commentary, risks and unusual items
Management said it expected available liquidity to support operations, planned expansion and strategic initiatives in fiscal 2012; the filing does not provide clear numerical revenue or earnings guidance. Planned openings included approximately 150 U.S. Best Buy Mobile stores, 40–50 Five Star stores in China, 6–8 U.S. Best Buy stores, and approximately 18 large-format stores in Canada, the U.K. and Mexico.
In February 2011, Best Buy announced plans to exit Turkey and close all eight large-format Best Buy stores in China during fiscal 2012, while exploring other China growth options. It expected additional restructuring charges of approximately $5 million domestically and $10–$15 million internationally in fiscal 2012, with the actions substantially complete that year.
- Management cited cautious consumer spending, weak demand in several product categories and unpredictable product cycles. Domestic weakness included televisions and entertainment; mobile phones, tablets and appliances were relative strengths. Online Domestic revenue rose 13%.
- Key risks include intense competition, pricing pressure, changing consumer preferences, labor and cost control, reliance on key suppliers, foreign-exchange exposure, credit-market access, information-system or data-security failures, and execution of international and strategic initiatives. The 20 largest suppliers represented just under 65% of merchandise purchases; five suppliers accounted for 39%.
- The business is highly seasonal: approximately one-third of revenue and more than half of net earnings historically arise in the fourth fiscal quarter. Promotional-financing card sales represented 18% of Domestic revenue in FY2011.
- $110 million of auction-rate securities remained at fair value, with failed auctions limiting liquidity; par value was $115 million. Fitch’s BBB+ outlook was negative; Moody’s Baa2 and S&P’s BBB- outlooks were stable.
- Shareholder securities lawsuits filed in 2011 allege misleading statements concerning fiscal 2011 earnings guidance. A separate employment-discrimination class action remained stayed. Best Buy said it would defend the cases and could not meaningfully quantify potential exposure.
- After year-end, the company issued $1.0 billion of notes, receiving $990 million net proceeds: $350 million due 2016 at 3.75% and $650 million due 2021 at 5.50%. The filing also reports a $7 million pre-tax gain from the sale of Speakeasy.
Most important facts for investors to verify
- Whether comparable-sales trends and operating performance improved after the sharp fourth-quarter decline, particularly in Domestic operations.
- Whether restructuring delivers the expected cost, service and return improvements, and whether fiscal 2012 closure charges remain within the stated range.
- Whether operating cash flow recovers and liquidity remains adequate given working-capital needs, share repurchases, debt maturities and substantial lease commitments.
- How the Turkey exit and China store restructuring affect results, and whether planned international and mobile-store expansion earns adequate returns.
- Developments in the earnings-guidance litigation, supplier concentration, auction-rate securities liquidity and credit-rating outlook.