BEST BUY CO INC quarterly report, Q1 FY2013

Business context and reporting period

Best Buy Co., Inc. is a multinational consumer-electronics and related-services retailer, reporting Domestic and International segments. This unaudited 10-Q covers the three months ended May 5, 2012 (fiscal 2013 first quarter). Best Buy changed its fiscal year-end; fiscal 2013 is an 11-month transition year, and the reported quarter contains 14 weeks versus 13 weeks in the recast prior-year comparison. February 2012 revenue of $3.908 billion was also included in fiscal 2012 results, making period comparisons and year-to-date interpretation important.

Financial performance and liquidity

Revenue growth of 2.1% was supported by the extra week and net new stores; comparable-store sales declined. Continuing-operations diluted EPS was $0.47 versus $0.64. Restructuring charges were $127 million in continuing operations, compared with $4 million a year earlier. SG&A was $2.518 billion, or 21.7% of revenue, versus $2.457 billion, or 21.6%.

At May 5, cash and cash equivalents were $1.386 billion; current assets were $10.316 billion and current liabilities $9.001 billion (current ratio 1.1). Total debt, including current portions, was approximately $2.027 billion, including $306 million of short-term debt. The company reported $415 million of restricted cash. U.S. revolving facilities had no borrowings outstanding; $306 million was drawn on International facilities. The company said it was in compliance with facility covenants. Adjusted debt to EBITDAR was 2.7, versus 2.4 a year earlier.

Material changes versus the prior comparable period

• Operating income fell 43%, primarily reflecting International operating losses and higher Domestic restructuring charges.
• International revenue declined 6.3%, and the segment moved from $94 million operating income to a $33 million operating loss. Comparable-store sales fell 10.5%, amid European macroeconomic and competitive pressures and weaker China demand following the end of stimulus programs.
• Domestic revenue rose 5.1%, including the extra week, but comparable-store sales fell 3.7% and operating income declined to $295 million from $366 million. Tablet, mobile-phone and appliance strength was offset by weakness in several product categories.
• Operating cash flow was substantially lower, which management attributed mainly to prior-year inventory reduction and the timing of accounts payable.
• Cash was well below the prior-year balance of $2.793 billion; management cited share repurchases and the fiscal 2012 Mobile buy-out as key factors.

Outlook, commentary, risks and unusual items

Management provided no specific revenue or earnings guidance in the supplied filing text. It expects $165 million to $215 million of additional pre-tax charges for fiscal 2013 restructuring, principally facility-closure costs, and expects to substantially complete the actions during fiscal 2013. The plan includes closing approximately 50 large-format U.S. stores and changing store, corporate and supply-chain operations.

Management described consumer spending as cautious and difficult to predict, citing macroeconomic conditions, product life cycles and intense competition. It identified growth and investment priorities including Best Buy Mobile, Five Star in China, Connected Store pilots and information technology, while noting that spending, repurchases or expansion could be constrained if liquidity proves insufficient. Credit ratings were under pressure: Fitch’s outlook and S&P’s CreditWatch were negative; Moody’s affirmed Baa2 with a stable outlook.

Remaining auction-rate securities had $71 million par value and $66 million fair value; auctions had failed, restricting access to principal, and the company recorded a $5 million pre-tax unrealized loss. Securities and derivative litigation remained pending; management said reasonably possible losses could not be estimated. The principal class-action complaint had been dismissed with prejudice, but plaintiffs sought reconsideration.

Most important facts for investors to verify

• How the 14-week quarter, fiscal-calendar change and February revenue overlap affect comparisons and reported trends.
• Whether comparable-store sales and International profitability stabilize, particularly in Europe and China.
• Actual store-closure timing, restructuring costs against the $165 million–$215 million estimate, and expected savings.
• Cash generation, working-capital movements, debt levels, liquidity covenants and any credit-rating changes.
• Recoverability and liquidity of auction-rate securities, and developments in securities-related litigation.