Best Buy Co., Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2011, the three months ended May 29, 2010. Comparisons are with the three months ended May 30, 2009, unless stated otherwise. Dollar amounts are in millions except per-share data. Best Buy is a multinational retailer of consumer electronics, appliances, home office products, entertainment software and related services. Results are seasonal, with the company historically generating more revenue and earnings in its fiscal fourth quarter.
Financial performance
| Metric | Quarter ended May 29, 2010 | Prior-year quarter | Change or context |
|---|---|---|---|
| Revenue | $10,787 | $10,095 | Up 6.9% |
| Comparable-store sales | Up 2.8% | Down 6.2% | Domestic up 1.9%; International up 6.3% |
| Gross profit | $2,793 | $2,557 | Gross margin 25.9%, up from 25.3% |
| SG&A | $2,480 | $2,209 | 23.0% of revenue, versus 21.9% |
| Operating income | $313 | $296 | Up 5.7%; operating margin was 2.9% in both periods |
| Net earnings attributable to Best Buy | $155 | $153 | Nearly flat |
| Diluted EPS | $0.36 | $0.36 | Unchanged |
| Cash from operating activities | $169 | Used $53 | Improved by $222 |
| Cash and cash equivalents | $1,239 | $535 at May 30, 2009 | Short-term investments were $205 at May 29, 2010 |
- Revenue drivers: Management attributed growth to net new stores, comparable-sales growth and favorable foreign exchange. Foreign currency contributed an estimated $258 to reported revenue, with no estimated impact on net earnings. Domestic online revenue increased 21%.
- Margins and earnings: Gross margin improved, but higher SG&A as a percentage of sales offset the benefit. Prior-year operating income included $52 of restructuring charges; none were recorded in the current quarter. Management estimated that approximately 0.4 percentage points of the Domestic gross-margin improvement came from nonrecurring items.
- Segment results: Domestic revenue was $7,923, up 5.3%, and operating income was $298 versus $303. International revenue was $2,864, up 11.4%, and operating income was $15 versus a $7 loss. International growth included a 10.0% favorable foreign-exchange contribution; the period also had one fewer week of Best Buy Europe activity than the prior-year comparison.
- Cash flows and investment: Investing activities used $254, including $161 of property and equipment additions and $150 of investment purchases. Financing activities used $494, including $907 of debt repayments, $111 of share repurchases and $59 of dividends. Cash declined $587 from the fiscal-year-end balance of $1,826.
Balance sheet, debt and liquidity
- Total assets were $17,956 and total shareholders’ equity was $7,007 at May 29, 2010.
- Short-term debt was $197, down from $663 at February 27, 2010 and $1,017 a year earlier. Long-term debt, including its current portion, was $1,127; total debt including short-term debt was $1,324.
- The current ratio was 1.2. Management reported a GAAP debt-to-capitalization ratio of 17%, compared with 22% at fiscal year-end and 31% a year earlier. Its non-GAAP adjusted ratio, including capitalized operating leases, was 62%.
- Best Buy reported no borrowing under its $2.3 billion corporate revolving credit facility at May 29, 2010, and $820 of availability under International facilities, of which $197 was outstanding. It was in compliance with financial covenants.
- Management said available cash, operating cash generation and credit facilities should be sufficient for operations, anticipated expansion and strategic initiatives for the remainder of fiscal 2011, while warning that weaker cash generation or reduced access to financing could constrain expansion or opportunities.
Material changes, outlook and risks
- Sales mix: Domestic comparable sales benefited from mobile computing, mobile phones and appliances; entertainment software declined. Management cited industry softness and a maturing platform in video gaming, as well as continued declines in CDs and DVDs. International comparable sales rose in Europe and China but declined in Canada.
- Liquidity and investments: At quarter-end, auction-rate securities had a fair value of $233 against $243 par and were subject to failed auctions. The company recorded a $10 pre-tax temporary unrealized loss and said further losses or impairment charges could occur. It reported selling an additional $93 at par after quarter-end through July 6, 2010.
- Capital returns: Best Buy repurchased 2.5 million shares for $111 during the quarter. The quarterly dividend was $0.14 per share; the company announced a planned increase to $0.15, effective with the dividend expected in October 2010, subject to authorization.
- Subsequent transaction: On June 8, 2010, Best Buy agreed to combine its Speakeasy business with Covad and MegaPath, subject to closing conditions and regulatory approvals. Closing was expected in the third calendar quarter of 2010. The company expected cash and a minority equity interest, and did not expect a significant gain or loss.
- Contingencies: A purported class action alleges discrimination in employment policies and practices. Best Buy disputed the allegations and said it intended to defend the case. Management considered other ordinary-course legal proceedings adequately provided for and not expected to have a material effect.
- Other risk factors: The filing identifies economic conditions, consumer preferences, credit-market constraints, competition and promotions, product availability, foreign exchange, store locations, labor costs, new product introductions, regulation and execution of transactions as factors that could affect results. The business is seasonal, and interim results may not indicate full-year performance.
- Controls: Management concluded disclosure controls were effective as of May 29, 2010, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-sales momentum and gross-margin gains persist, especially given higher SG&A and the identified nonrecurring contribution to Domestic margin improvement.
- How much of reported revenue growth reflects underlying demand versus foreign exchange, new stores and the differing number of reporting weeks.
- The recoverability and liquidity of remaining auction-rate securities, including any subsequent sales, valuation changes or impairment charges.
- Debt, lease-adjusted obligations, credit-facility availability and covenant compliance as working-capital needs and seasonal inventory levels change.
- Completion and final consideration for the Speakeasy transaction, and any material development in the employment class action.
- The filing provides no specific revenue, earnings or comparable-sales forecast; verify any subsequent company guidance rather than infer a full-year outlook from this quarter.