Business context and reporting period
Best Buy Co., Inc. filed this unaudited Form 10-Q for the third quarter and first nine months of fiscal 2011. The quarter ended November 27, 2010; comparisons are with the periods ended November 28, 2009. Best Buy operates Domestic and International consumer-electronics retail segments. Results are seasonal, with the largest revenue and earnings historically in the fiscal fourth quarter.
Key financial metrics
| Metric | Three months ended Nov. 27, 2010 | Prior-year quarter | Nine months ended Nov. 27, 2010 | Prior-year period |
|---|---|---|---|---|
| Revenue | $11,890 million | $12,024 million | $34,016 million | $33,141 million |
| Gross profit / margin | $2,983 million / 25.1% | $2,942 million / 24.5% | $8,694 million / 25.6% | $8,183 million / 24.7% |
| Operating income / margin | $385 million / 3.2% | $376 million / 3.1% | $1,109 million / 3.3% | $952 million / 2.9% |
| Net earnings attributable to Best Buy | $217 million | $227 million | $626 million | $538 million |
| Diluted EPS | $0.54 | $0.53 | $1.50 | $1.27 |
| Cash from operations | Not separately presented for the quarter | $545 million | $679 million |
At November 27, 2010, cash and short-term investments totaled $927 million; current assets were $14,829 million and current liabilities $13,420 million (reported current ratio: 1.1). Debt was $1,824 million, including short-term debt; adjusted debt-to-EBITDAR was 2.4. Nine-month capital expenditures were $529 million. The company repurchased $1,128 million of stock and paid $178 million in dividends during the nine-month period.
Material changes versus prior comparable periods
- Quarterly revenue fell 1.1%, primarily reflecting a 3.3% comparable-sales decline and unfavorable foreign exchange, partly offset by new stores. Nine-month revenue grew 2.6%, led by new stores and favorable currency effects, despite a 0.4% comparable-sales decline.
- Quarterly net earnings declined to $217 million from $227 million even as operating income rose to $385 million. The effective tax rate increased to 35.7% from 25.6%, mainly because of foreign tax matter settlements in the prior-year quarter.
- Nine-month operating income increased 16.5%; the prior-year period included $52 million of restructuring charges, while the current period had none.
- Domestic quarterly comparable sales declined 5.0%, including declines in consumer electronics and entertainment software. International comparable sales rose 2.3%, with gains in Europe and China partly offset by Canada.
- Nine-month operating cash flow decreased to $545 million from $679 million, mainly due to higher incentive compensation payments. Financing cash use increased to $1,093 million, largely because of share repurchases.
- Cash declined from $1,826 million at fiscal year-end to $925 million, while inventory and accounts payable rose substantially with seasonal working-capital needs.
Outlook, commentary, risks and unusual items
- Management said available cash, operating cash flow and credit facilities should be sufficient for operations, planned expansion and strategic initiatives for the remainder of fiscal 2011. It gave no specific revenue or earnings guidance and cautioned that weaker cash generation or reduced borrowing access could require lower capital spending or constrain opportunities.
- Management cited cautious discretionary spending, uncertain consumer confidence, unemployment and credit availability, product-cycle shifts, competition, promotional activity and product availability as factors making sales and earnings difficult to predict. The business is particularly exposed to seasonal holiday performance.
- The $2.3 billion unsecured revolving facility had $500 million drawn at quarter-end; the balance was repaid during the following week. International facilities had $190 million outstanding, and the company reported compliance with financial covenants.
- Remaining auction-rate securities had a fair value of $131 million against $141 million par value, including a $10 million pre-tax temporary unrealized loss. Auctions remained failed; principal recovery timing is uncertain, and further valuation losses are possible. The company reported selling $8 million at par after quarter-end through December 30, 2010.
- The Speakeasy business sale generated a $7 million pre-tax gain in the second quarter. A pending employment-discrimination class action was stayed; the company said its exposure could not be meaningfully quantified. Other ordinary-course proceedings were not expected to materially affect results or financial condition.
- Foreign exchange movements were estimated to reduce third-quarter revenue by about $43 million but increase net earnings by about $2 million. A hypothetical 100-basis-point increase in rates on outstanding credit facilities would change annual pre-tax earnings by $7 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the fourth-quarter holiday season offsets the domestic comparable-sales weakness, especially in televisions and entertainment software.
- Whether gross-margin gains persist and can offset higher SG&A as sales trends, promotions and product mix evolve.
- Inventory, accounts payable and operating cash flow after the seasonal build, alongside the impact of continued repurchases and dividends on liquidity.
- Access to credit facilities, debt and lease-adjusted leverage, and any changes in credit ratings or covenant headroom.
- Recoverability and valuation of the remaining auction-rate securities, and any change in the status or potential exposure of the class-action litigation.