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| BBY > SEC Filings for BBY > Form 10-Q on 9-Oct-2008 | All Recent SEC Filings |
9-Oct-2008
Quarterly Report
Unless the context otherwise requires, the use of the terms "Best Buy", "we", "us" and "our" in the following refers to Best Buy Co., Inc. and its consolidated subsidiaries.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in seven sections:
† Overview
† Results of Operations
† Liquidity and Capital Resources
† Off-Balance-Sheet Arrangements and Contractual Obligations
† Significant Accounting Policies and Estimates
† New Accounting Standards
† Outlook
We consolidate the financial results of our China operations on a two-month lag and have also consolidated the financial results of our new acquisition, Best Buy Europe, on a two-month lag. In addition, we plan to reflect our Mexico and Turkey businesses on a two-month lag. Consistent with such consolidation, the financial and non-financial information presented in our MD&A relative to these operations is also presented on a two-month lag. No significant intervening event occurred that would have materially affected our financial condition, results of operations, liquidity or other factors had it been recorded during the three months ended August 30, 2008.
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 1, 2008, as well as our reports on Forms 10-Q and 8-K and other publicly available information.
Overview
We are a specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services. We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all store, call center and online operations within the U.S. and its territories. The International segment is comprised of all store and online operations outside the U.S. and its territories. For additional information regarding our business segments, see Note 9, Segments, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Our business, like that of many U.S. retailers, is seasonal. Historically, we have realized more of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S. and Canada, than in any other fiscal quarter. The timing of new store openings, costs associated with the development of new businesses, as well as general economic conditions may also affect our future quarterly results.
Throughout this MD&A, we refer to comparable store sales. Comparable store sales is a measure commonly used in the retail industry, which indicates the performance of our existing stores by measuring the growth in sales for such stores for a particular period over the corresponding period in the prior year. Our comparable store sales is comprised of revenue at stores, call centers and Web sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The portion of our calculation of the comparable store sales percentage change attributable to our International segment excludes the effect of fluctuations in foreign currency exchange rates. The method of calculating comparable store sales varies across the retail industry. As a result, our method of calculating comparable store sales may not be the same as other retailers' methods.
Financial Reporting Changes
To maintain consistency and comparability, we reclassified certain prior-year amounts to conform to the current-year presentation as described in Note 1, Basis of Presentation, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Highlights
† Net earnings in the second quarter of fiscal 2009 were $202 million, or $0.48 per diluted share, compared with $250 million, or $0.55 per diluted share, in the same period one year ago.
† Revenue in the second quarter of fiscal 2009 increased 12% to $9.8 billion, compared with $8.8 billion in the same period one year ago, driven primarily by the net addition of 154 new stores in the past 12 months, a 4.2% comparable store sales gain and favorable fluctuations in foreign currency exchange rates.
† Our gross profit rate in the second quarter of fiscal 2009 decreased to 24.3% of revenue, compared with 24.4% of revenue in the same period one year ago. The decrease was due primarily to a continued shift in our revenue mix driven by increased sales of lower-margin products, including notebook computers and video gaming hardware, partially offset by increased sales of higher-margin mobile phones.
† Our selling, general and administrative ("SG&A") expense rate in the second quarter of fiscal 2009 was 20.8% of revenue, compared with 19.9% of revenue in the same period one year ago. The increase was due primarily to additional store labor and costs to support the Best Buy Mobile store-within-a-store experience, various store projects and continued expansion of our international businesses.
† During the second quarter of fiscal 2009, we completed the conversion of all of our U.S. Best Buy stores and now operate 973 Best Buy Mobile store-within-a-store locations in the U.S. Additionally, we opened three Best Buy Mobile store-within-a-store locations in Canada Best Buy stores during the fiscal quarter. In the future, we expect to roll-out additional Best Buy Mobile experiences in our Best Buy stores in Canada and similar experiences in our Best Buy stores in China, Mexico and Turkey.
† On June 30, 2008, we closed on our acquisition of a 50% interest in the retail and distribution business of The Carphone Warehouse Group PLC ("CPW"), a retailer of mobile phone products and services, for an aggregate purchase price of $2,196 million. We consolidate the financial results of the acquisition, now referred to as Best Buy Europe, on a two-month lag to align with CPW's quarterly reporting periods.
† On June 24, 2008, we sold $500 million principal amount of 6.75% notes due July 15, 2013. The proceeds were used to finance a portion of our acquisition of Best Buy Europe.
† Based on our results through the end of the fiscal second quarter, our expectations for the operating results of Best Buy Europe and our decision to suspend share repurchases for the remainder of fiscal 2009, we continue to project earnings for fiscal 2009 in the range of $3.25 to $3.40 per diluted share. This guidance assumes revenue of approximately $47 billion, reflecting the impact of new store openings and a projected comparable store sales gain of 2% to 3%. For additional information about our annual earnings guidance, see Outlook below.
Results of Operations
Consolidated Performance Summary
The following table presents unaudited selected consolidated financial data ($
in millions, except per share amounts):
Three Months Ended Six Months Ended
August 30, 2008 September 1, 2007 August 30, 2008 September 1, 2007
Revenue $ 9,801 $ 8,750 $ 18,791 $ 16,677
Revenue % gain 12 % 15 % 13 % 15 %
Comparable store sales % gain 4.2 % 3.6 % 4.0 % 3.3 %
Gross profit as % of revenue 24.3 % 24.4 % 24.0 % 24.2 %
SG&A as % of revenue 20.8 % 19.9 % 20.7 % 20.2 %
Operating income $ 339 $ 401 $ 616 $ 667
Operating income as % of revenue 3.5 % 4.6 % 3.3 % 4.0 %
Net earnings $ 202 $ 250 $ 381 $ 442
Diluted earnings per share $ 0.48 $ 0.55 $ 0.91 $ 0.94
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Net earnings were $202 million, or $0.48 per diluted share, in the second quarter of fiscal 2009, compared with $250 million, or $0.55 per diluted share, in the same period one year ago. In the first six months of fiscal 2009, net earnings were $381 million, or $0.91 per diluted share, compared with $442 million, or $0.94 per diluted share, in the same period one year ago.
In both the second quarter and first six months of fiscal 2009, the decrease in net earnings reflects an increase in our SG&A expense rate, a modest reduction in our gross profit rate and a decrease in investment income and other, partially offset by an increase in revenue.
Revenue in the second quarter of fiscal 2009 increased 12% to $9.8 billion, compared with $8.8 billion in the same period one year ago. In the first six months of fiscal 2009, revenue increased 13% to $18.8 billion, compared with $16.7 billion in the same period one year ago. In both the second quarter and the first six months of fiscal 2009, the net addition of new stores in the past 12 months accounted for approximately six-tenths of the revenue increase; the comparable store sales gain accounted for approximately three-tenths of the revenue increase; and the remainder of the increase was due to the favorable effect of fluctuations in foreign currency exchange rates.
The following table presents consolidated revenue mix percentages and comparable store sales percentage changes by revenue category in the second quarter of fiscal 2009:
Revenue Mix Summary Comparable Store Sales Summary
August 30, 2008 September 1, 2007 August 30, 2008 September 1, 2007
Consumer electronics 38 % 38 % 2.2 % (1.6 )%
Home office 33 % 31 % 11.9 % 9.8 %
Entertainment software 15 % 16 % 1.4 % 9.3 %
Appliances 8 % 8 % (11.2 )% (7.1 )%
Services 6 % 6 % 7.0 % 5.3 %
Other <1 % 1 % n/a n/a
Total 100 % 100 % 4.2 % 3.6 %
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Our comparable store sales in the second quarter of fiscal 2009 increased 4.2%, reflecting a higher average transaction amount, which was driven by continued growth in the sales of larger-ticket items. Also contributing to the fiscal second-quarter comparable store sales gain was an increase in online purchases of 27%, as we continued to add features and capabilities to our Web sites. In the second quarter of fiscal 2009, our largest comparable store sales gains were in flat-panel televisions, notebook computers, video gaming hardware and software, mobile phones and GPS navigation products. Growth in the sales of these product categories was partially offset by comparable store sales declines in tube and projection televisions, digital cameras, DVDs and CDs.
Our gross profit rate in the second quarter of fiscal 2009 decreased by 0.1% of revenue to 24.3% of revenue. In the first six months of fiscal 2009, our gross profit rate decreased from 24.2% of revenue to 24.0% of revenue. The gross profit rate decrease in both the second quarter and first six months of fiscal 2009 was due to a decrease in our Domestic segment's gross profit rate, partially offset by an increase in the gross profit rate in our International segment. For further discussion of each segment's gross profit rate changes, see the Segment Performance Summary for Domestic and International below.
Our SG&A expense rate in the second quarter of fiscal 2009 increased by 0.9% of revenue to 20.8% of revenue. In the first six months of fiscal 2009, our SG&A expense rate increased from 20.2% of revenue to 20.7% of revenue. The SG&A expense rate increase in both the second quarter and first six months of fiscal 2009 was due to increases in our Domestic and International segments' SG&A expense rates. For further discussion of each segment's SG&A expense rate changes, see the Segment Performance Summary for Domestic and International below.
Other Income (Expense)
Our investment income and other in the second quarter of fiscal 2009 decreased to $9 million, compared with $22 million in the same period one year ago. Our investment income and other in the first six months of fiscal 2009 decreased to $30 million, compared with $66 million in the same period one year ago. In both the second quarter and first six months of fiscal 2009, the lower investment income and other was due primarily to lower average cash and investments balances related to $3.5 billion of share repurchases made in the prior fiscal year, as well as our purchase of Best Buy Europe in the second quarter of fiscal 2009.
Our interest expense in the second quarter of fiscal 2009 decreased $2 million to $21 million, compared with $23 million in the same period one year ago. The decrease was due primarily to lower interest rates, partially offset by higher debt balances in the second quarter of fiscal 2009. Our interest expense in the first six months of fiscal 2009 increased $4 million to $34 million, compared with $30 million in the same period one year ago. The increase was due primarily to higher debt balances in the first six months of fiscal 2009, partially offset by the benefit of lower interest rates.
Income Tax Expense
Our effective income tax rates in the second quarter and the first six months of fiscal 2009 were 37.3% and 37.2%, respectively, up from 36.3% and 36.7%, respectively, in the corresponding periods of fiscal 2008. The increase in our effective income tax rate for the second quarter of fiscal 2009 was due primarily to state income tax expense. For the first six months of fiscal 2009, the increase was due to lower tax-exempt interest income.
Segment Performance Summary
Domestic
The following table presents unaudited selected financial data for the Domestic
segment ($ in millions):
Three Months Ended Six Months Ended
August 30, 2008 September 1, 2007 August 30, 2008 September 1, 2007
Revenue $ 8,133 $ 7,234 $ 15,586 $ 13,938
Revenue % gain 12 % 9 % 12 % 9 %
Comparable stores sales % gain 5.3 % 1.7 % 4.4 % 1.7 %
Gross profit as % of revenue 24.9 % 25.1 % 24.7 % 24.9 %
SG&A as % of revenue 21.0 % 20.2 % 20.9 % 20.4 %
Operating income $ 315 $ 358 $ 592 $ 628
Operating income as % of revenue 3.9 % 5.0 % 3.8 % 4.5 %
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The following table reconciles Domestic stores open at the beginning and end of the second quarter of fiscal 2009:
Total Stores at Total Stores at
Beginning of End of
Second Quarter Stores Stores Second Quarter
Fiscal 2009 Opened Closed Fiscal 2009
U.S. Best Buy 949 24 - 973
Magnolia Audio Video 13 - - 13
Pacific Sales 20 2 - 22
Best Buy Mobile 14 7 - 21
U.S. Geek Squad 7 - - 7
Total 1,003 33 - 1,036
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Note: No store in the Domestic segment was relocated during the second quarter of fiscal 2009.
The following table reconciles Domestic stores open at the beginning and end of the second quarter of fiscal 2008:
Total Stores at Total Stores at
Beginning of End of
Second Quarter Stores Stores Second Quarter
Fiscal 2008 Opened Closed Fiscal 2008
U.S. Best Buy 852 20 - 872
Magnolia Audio Video 19 - (6 ) 13
Pacific Sales 14 1 - 15
Best Buy Mobile 5 - - 5
U.S. Geek Squad 7 - - 7
Total 897 21 (6 ) 912
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Note: One U.S. Best Buy store in the Domestic segment was relocated during the second quarter of fiscal 2008. No other store in the Domestic segment was relocated during the second quarter of fiscal 2008.
Our Domestic segment's operating income in the second quarter of fiscal 2009 was $315 million, or 3.9% of revenue, compared with $358 million, or 5.0% of revenue, in the same period one year ago. In the first six months of fiscal 2009, our Domestic segment's operating income was $592 million, or 3.8% or revenue, compared with $628 million, or 4.5% of revenue, in the same period one year ago. In both the second quarter and first six months of fiscal 2009, the decrease in our Domestic segment's operating income reflected an increase in our SG&A expense rate and a decrease in our gross profit rate, partially offset by an increase in revenue.
Our Domestic segment's revenue in the second quarter of fiscal 2009 increased 12% to $8.1 billion, compared with $7.2 billion in the same period one year ago. In the first six months of fiscal 2009, our Domestic segment's revenue increased 12% to $15.6 billion, compared with $13.9 billion in the same period one year ago. In both the second quarter and the first six months of fiscal 2009, the net addition of 124 new stores in the past 12 months accounted for approximately six-tenths of the revenue increase, and the comparable store sales gain (5.3% for the second quarter of fiscal 2009 and 4.4% in the first six months of fiscal 2009) accounted for the remainder of the increase.
The following table presents revenue mix percentages and comparable store sales percentage changes for the Domestic segment by revenue category in the second quarter of fiscal 2009:
Revenue Mix Summary Comparable Store Sales Summary
Three Months Ended Three Months Ended
August 30, 2008 September 1, 2007 August 30, 2008 September 1, 2007
Consumer electronics 38 % 39 % 2.0 % (3.3 )%
Home office 34 % 31 % 15.1 % 7.8 %
Entertainment software 16 % 17 % 0.0 % 7.0 %
Appliances 5 % 6 % (9.8 )% (7.4 )%
Services 7 % 7 % 8.7 % 3.2 %
Other <1 % <1 % n/a n/a
Total 100 % 100 % 5.3 % 1.7 %
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Our Domestic segment's comparable store sales gain in the second quarter of fiscal 2009 reflected an increase in the average transaction amount, driven by the continued growth in the sales of larger-ticket items, including flat-panel televisions and notebook computers. The products having the largest effect on our Domestic segment's comparable store sales gain in the fiscal second quarter were flat-panel televisions, notebook computers, mobile phones, video gaming hardware and software, and GPS navigation products. Strong sales in these product categories were offset by comparable store sales declines in tube and projection televisions, digital cameras, DVDs, CDs and major appliances.
In the second quarter of fiscal 2009, our Domestic segment's consumer electronics revenue category posted a 2.0% comparable store sales gain. The consumer electronics comparable store sales gain was driven primarily by increases in flat- panel televisions and GPS navigation products, partially offset by decreases in the sales of tube and projection televisions, digital cameras and MP3 players and accessories. Our home office revenue category posted a 15.1% comparable store sales gain, driven primarily by continued gains in notebook computers and mobile phones, the latter due to the roll-out of our Best Buy Mobile store-within-a-store locations. The entertainment software revenue category recorded flat comparable store sales, with gains in the sales of video gaming hardware and software being offset by declines in the sales of DVDs and CDs. Our appliances revenue category recorded a 9.8% decline in comparable store sales driven primarily by a decrease in the sales of major appliances, reflecting a continued industry-wide decline Our services revenue category recorded an 8.7% comparable store sales gain due primarily to increases in the sales of computer and home theater services and extended service contracts.
Our Domestic segment's gross profit rate in the second quarter of fiscal 2009 decreased by 0.2% of revenue to 24.9% of revenue. In the first six months of fiscal 2009, our Domestic segment's gross profit rate was 24.7% of revenue compared with 24.9% of revenue in the same period one year ago. In both the second quarter and the first six months of fiscal 2009, the decrease was due primarily to a shift in our revenue mix, which was driven by increased sales of lower-margin products such as notebook computers and video gaming hardware, partially offset by increased sales of higher-margin products within our mobile phones product category.
Our Domestic segment's SG&A expense rate in the second quarter of fiscal 2009 increased by 0.8% of revenue to 21.0% of revenue. In the first six months of fiscal 2009, our Domestic segment's SG&A rate was 20.9% of revenue, compared with 20.4% of revenue in the same period one year ago. The increase was due primarily to increased spending on investments, including the roll-out and staffing of the Best Buy Mobile store-within-a-store experience; store projects such as the reset of our GPS selling space, the addition of musical instruments rooms and information technology enhancements to our point-of-sale systems; and increased spending on store labor. In addition, the SG&A expense rate for the second quarter of fiscal 2009 was impacted by higher-than-expected legal and travel expenses, though the additional leverage on strong revenue growth partially offset the increase.
International
The following table presents unaudited selected financial data for the
International segment ($ in millions):
Three Months Ended Six Months Ended
August 30, 2008 September 1, 2007 August 30, 2008 September 1, 2007
Revenue $ 1,668 $ 1,516 $ 3,205 $ 2,739
Revenue % gain 10 % 54 % 17 % 54 %
Comparable stores sales % gain
(decline) (1.0 )% 16.3 % 1.7 % 14.7 %
Gross profit as % of revenue 21.3 % 21.2 % 20.8 % 20.6 %
SG&A as % of revenue 19.9 % 18.4 % 20.1 % 19.2 %
Operating income $ 24 $ 43 $ 24 $ 39
Operating income as % of revenue 1.4 % 2.9 % 0.7 % 1.4 %
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The following table reconciles International stores open at the beginning and end of the second quarter of fiscal 2009:
Total Stores at Total Stores at
Beginning of End of
Second Quarter Stores Stores Second Quarter
Fiscal 2009 Opened Closed Fiscal 2009
Future Shop 133 - - 133
Canada Best Buy 51 1 - 52
Five Star 161 - - 161
China Best Buy 1 - - 1
Total 346 1 - 347
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Note: No store in the International segment was relocated during the second quarter of fiscal 2009.
The following table reconciles International stores open at the beginning and end of the second quarter of fiscal 2008:
Total Stores at Total Stores at
Beginning of End of
Second Quarter Stores Stores Second Quarter
Fiscal 2008 Opened Closed Fiscal 2008
Future Shop 122 4 - 126
Canada Best Buy 47 1 - 48
Five Star 137 7 (2 ) 142
China Best Buy 1 - - 1
Total 307 12 (2 ) 317
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Note: No store in the International segment was relocated during the second quarter of fiscal 2008.
Our International segment's operating income in the second quarter of fiscal 2009 was $24 million, or 1.4% of revenue, compared with $43 million, or 2.9% of . . .
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