Best Buy Co., Inc. — Fiscal 2015 Form 10-K
Reporting period: Fiscal year ended January 31, 2015 (52 weeks), with fourth-quarter results for the three months ended on that date. Unless noted, financial amounts are in U.S. dollars. The company sells technology products and services through stores and online in the U.S., Canada and Mexico; its reportable segments are Domestic and International.
Financial performance
| Metric | Fiscal 2015 | Prior comparable period |
|---|---|---|
| Revenue | $40.339 billion | $40.611 billion |
| Comparable sales | +0.5% | -1.0% |
| Gross profit / rate | $9.047 billion / 22.4% | $9.399 billion / 23.1% |
| Operating income / rate | $1.450 billion / 3.6% | $1.144 billion / 2.8% |
| Continuing-operations net earnings | $1.246 billion | $695 million |
| Diluted EPS from continuing operations | $3.53 | $2.00 |
| Operating cash flow | $1.935 billion | $1.094 billion |
| Cash, cash equivalents and short-term investments at year-end | $3.888 billion | $2.901 billion |
| Debt, including current portion | $1.621 billion | $1.657 billion |
Fourth-quarter revenue was $14.209 billion, comparable sales increased 2.0%, operating income was $810 million, continuing-operations net earnings were $524 million, and diluted EPS from continuing operations was $1.47. In the prior-year fourth quarter, revenue was $14.025 billion, comparable sales declined 1.3%, operating income was $452 million, continuing-operations net earnings were $300 million, and diluted EPS was $0.85.
Fiscal 2015 gross margin declined 0.7 percentage points, principally because fiscal 2014 included LCD-related legal settlement proceeds. Excluding those settlements, Domestic gross profit increased and its gross margin improved 0.2 percentage points. SG&A fell $514 million, and the SG&A rate improved to 18.8% from 20.0%, reflecting cost reductions and expense controls. Capital expenditures were $551 million. Working capital was $4.0 billion, and the current ratio was 1.5.
Material changes and business drivers
- Consolidated revenue declined 0.7%; foreign exchange reduced reported revenue by an estimated $308 million. Comparable sales rose 0.5%, but the company estimates the new mobile installment-billing classification added 0.5 percentage points; excluding that effect, comparable sales were flat.
- Domestic revenue increased 0.6% to $36.055 billion; comparable sales rose 1.0% and online revenue reached $3.5 billion, with comparable online sales growth of 16.7%.
- International revenue fell 10.4% to $4.284 billion, reflecting a 6.4% foreign-exchange impact, comparable sales decline of 3.5%, and store closures. The segment reported $13 million of operating income versus a $1 million loss.
- Category trends were mixed: U.S. appliances, televisions and gaming grew, while tablets and services declined. Tablet demand and physical entertainment media faced structural pressure. International comparable sales declined across all listed categories.
- The company completed its exit from mindSHIFT in February 2014 and sold its interest in Best Buy Europe in 2013. Five Star was classified as held for sale at year-end and sold on February 13, 2015.
Liquidity, capital and outlook
- Operating cash flow increased to $1.935 billion, primarily from improved working-capital management. Year-end cash and short-term investments totaled $3.888 billion; no borrowings were outstanding on the $1.25 billion revolving facility, which expires in 2019. The company reported compliance with facility covenants.
- Long-term debt included $350 million of notes due 2016, $500 million due 2018 and $650 million due 2021. Adjusted debt to EBITDAR, a non-GAAP measure, improved to 2.8 from 3.2. Contractual obligations include $3.876 billion in operating lease payments, excluding $1.2 billion of landlord taxes and common-area costs.
- Management reported $1.02 billion in cumulative annualized Renew Blue cost reductions. Fiscal 2016 plans target approximately $400 million of additional annualized savings over three years, while anticipated investments of $100–$120 million are expected to offset savings in part. Fiscal 2016 capital expenditures are projected at $650–$700 million.
- Management expected fiscal 2016 first- and second-quarter revenue and comparable sales, excluding installment-billing effects, to be flat to negative low-single digits. It expected non-GAAP operating margin to decline approximately 0.3–0.5 percentage points in those quarters, citing investment, competitive and cost pressures.
- In March 2015, Best Buy announced the consolidation of Future Shop and Best Buy in Canada: 66 Future Shop stores to close and 65 to convert to Best Buy. It expected $200–$280 million of restructuring charges and impairments, mostly in fiscal 2016 Q1, including $140–$180 million of cash costs; management also forecast a temporary $0.10–$0.20 diluted-EPS impact and up to $160 million in additional capital spending for the Canadian customer-experience plan.
- The company announced a $0.51-per-share special dividend, a 21% increase in the regular quarterly dividend to $0.23, and an intention to repurchase $1 billion of shares over three years. These were announced after year-end and are not fiscal 2015 operating results.
Unusual items, risks and contingencies
- Fiscal 2015 continuing-operations earnings included a $353 million discrete, non-cash tax benefit from reorganizing European legal entities. The reported effective tax rate was 10.1%; excluding that benefit, it would have been 35.6%. Adjusted non-GAAP diluted EPS was $2.60 versus $2.07, and non-GAAP operating income was $1.497 billion versus $1.163 billion.
- Fiscal 2015 included $5 million of continuing-operations restructuring charges and $42 million of non-restructuring asset impairments. Fiscal 2014 included $149 million of restructuring charges and material LCD settlement proceeds.
- Key risks include intense price competition and margin pressure, shifts in technology and consumer demand, reliance on major suppliers and mobile carriers, execution of the transformation and Canadian consolidation, seasonal dependence on holiday-quarter results, cybersecurity and IT disruption, foreign currency exposure, and consumer-spending weakness. The five largest suppliers represented approximately 47% of merchandise purchases; promotional financing and credit-card programs represented approximately 20% of revenue.
- A securities class action concerning historical earnings guidance remained pending, with an appeal expected to proceed in 2015; the company said it intended to defend the claims and could not estimate reasonably possible losses. Other routine proceedings were not expected by management to materially affect results. The company received $67 million net proceeds from a CRT antitrust settlement in fiscal 2016 Q1; further recoveries were uncertain.
- Moody’s rated the company Baa2 with a Stable outlook; S&P rated it BB with a Stable outlook; Fitch rated it BB with a Stable outlook. Management stated that rating changes could affect borrowing costs, market access and vendor terms.
Important facts for investors to verify
- How much of reported earnings growth reflects sustainable operations versus the $353 million tax benefit and other adjustments; reconcile GAAP results with management’s non-GAAP measures.
- Whether underlying comparable sales and margins improve after removing the estimated installment-billing classification benefit and prior-year LCD settlements.
- Progress, realized savings, cash costs and customer or sales effects from the Canadian store consolidation and related investments.
- Trends in tablets, services and warranty attachment, and whether growth in appliances, televisions, online sales and other categories can offset declines.
- Liquidity and debt-service capacity in light of lease commitments, planned shareholder returns, capital spending and the 2016 note maturity.
- Developments in the securities litigation, tax positions and other contingencies, and the completion and financial impact of the Five Star sale.