Business context and reporting period
Best Buy Co., Inc. filed this unaudited Form 10-Q for the quarter ended November 28, 2009, the third quarter of fiscal 2010. The retailer reports Domestic and International segments; Europe, China and Mexico results are consolidated on a two-month lag. Results are seasonal, with the fourth quarter typically strongest due to holiday shopping.
Financial performance and position
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Three months ended Nov. 28, 2009 | Three months ended Nov. 29, 2008 | Nine months ended Nov. 28, 2009 | Nine months ended Nov. 29, 2008 |
|---|---|---|---|---|
| Revenue | $12,024 | $11,500 | $33,141 | $30,291 |
| Gross profit | $2,942 | $2,861 | $8,183 | $7,375 |
| Gross margin | 24.5% | 24.9% | 24.7% | 24.3% |
| Operating income | $376 | $274 | $952 | $890 |
| Operating margin | 3.1% | 2.4% | 2.9% | 2.9% |
| Net earnings attributable to Best Buy | $227 | $52 | $538 | $433 |
| Diluted EPS | $0.53 | $0.13 | $1.27 | $1.04 |
- Quarterly comparable sales rose 1.7% overall (Domestic +4.6%; International −6.7%). Nine-month comparable sales declined 2.5% overall.
- Quarterly SG&A was $2,566, or 21.3% of revenue, versus $2,587, or 22.5%, a year earlier. For nine months, SG&A was $7,179, or 21.7%, versus $6,485, or 21.4%.
- Nine-month operating cash flow was $679, versus cash used of $80 in the prior-year period. Investing used $405, compared with $2,969, reflecting the prior-year acquisition outlay and lower capital spending; financing used $208, versus $2,141 provided. Cash increased $66 to $564.
- At quarter-end, cash and short-term investments totaled $657. Current assets were $13,267 and current liabilities $12,678; the reported current ratio was 1.0.
- Debt including current maturities totaled $1,881: short-term debt $741, current long-term debt $36 and long-term debt $1,104. Debt-to-capitalization was 25%; adjusted debt-to-capitalization including capitalized operating leases was 66%.
- Total assets were $21,100 and shareholders’ equity was $6,124. Quarterly dividends declared were $0.14 per share; no shares were repurchased during the quarter.
Material changes versus comparable periods
- Quarterly revenue increased 5%, supported by 1.7% comparable-sales growth and net new stores, partly offset by unfavorable currency effects. Domestic revenue increased 9%; International revenue declined 6%.
- Quarterly operating income rose 37%. Management attributed the improvement to higher gross-profit dollars and lower SG&A as a share of revenue. Gross margin declined 0.4 percentage points, while SG&A rate improved 1.2 points.
- Quarterly net earnings increased substantially, but comparison is affected by the prior-year $111 CPW investment impairment charge. The prior-year quarter also did not include Best Buy Europe’s results; the current quarter did.
- Nine-month revenue growth of 9% primarily reflected the inclusion of Best Buy Europe, which added $2.6 billion of revenue in the first six months of fiscal 2010, and net new stores. Nine-month comparable sales declined 2.5%.
- International reported quarterly operating income of $23 versus a $9 loss a year earlier, but a nine-month operating loss of $19 versus income of $15. Domestic operating income was $353 for the quarter and $971 for nine months.
Outlook, commentary, risks and unusual items
- Management said available cash, operating cash generation and credit facilities should be sufficient for operations, announced restructuring and anticipated expansion and strategic initiatives for the remainder of fiscal 2010. It gave no specific earnings or revenue forecast in the supplied filing text.
- A $61 favorable tax settlement in Best Buy Europe reduced income tax expense and increased net earnings attributable to Best Buy by $31 in the quarter. The quarterly effective tax rate was 25.6%, versus 54.6% a year earlier; nine-month rates were 36.7% and 40.2%.
- Restructuring charges totaled $52 in the first quarter of fiscal 2010 ($25 Domestic and $27 International); none were recorded in the second or third quarters. Management said announced restructuring activities were substantially complete.
- Most auctions for the company’s auction-rate securities had failed. The portfolio had $293 par value and $284 fair value at quarter-end, including a $9 temporary impairment; $195 was classified as non-current and $89 as short-term. Best Buy said it intended to hold the securities until principal could be recovered and had other liquidity sources. UBS rights cover $89 par value, with management planning to exercise them in fiscal 2011.
- Currency strength reduced estimated revenue by about $73 in the quarter and $329 year to date; management estimated no quarterly net-earnings impact and a $2 adverse year-to-date impact. A hypothetical 100-basis-point change in credit-facility rates would change annual pretax earnings by $7.
- Credit ratings at January 5, 2010 were Fitch BBB+ (negative outlook), Moody’s Baa2 (stable) and S&P BBB− (stable). The company reported compliance with its financial covenants. Legal proceedings were described as ordinary-course matters; management did not expect a material effect.
- International results remain exposed to weaker comparable sales, currency movements, promotional pricing and new-store investment. Management also cautioned that cash generation, borrowing access and financing terms cannot be assured.
Important facts for investors to verify
- How much of earnings growth reflects underlying operations versus the prior-year CPW impairment and the favorable tax settlement?
- Whether Domestic sales strength can offset continued International comparable-sales weakness and pressure on gross margins.
- Whether operating cash flow remains sustainable given the large inventory build and reliance on accounts-payable growth and vendor payment terms.
- The timing and recoverability of failed-auction securities, including the planned exercise of UBS rights, and any further impairment risk.
- Available liquidity, debt levels, lease-adjusted leverage and credit-rating outlooks as the company funds seasonal working capital needs and expansion.
- The extent to which Best Buy Europe and other acquisitions contribute to future operating income, and the risks associated with integration and international operations.