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| BBY > SEC Filings for BBY > Form 10-Q on 8-Jan-2009 | All Recent SEC Filings |
8-Jan-2009
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 and Europe operations 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 November 29, 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 10, 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., Canada and Europe, than in any other fiscal quarter. The timing of new store openings, costs associated with restructuring or asset impairments, if any, 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.
Acquisitions
On October 25, 2008, we completed our acquisition of Napster Inc. ("Napster") for $120 million, or $99 million net of cash acquired. Napster is an online provider of digital music downloads. Napster was consolidated into our Domestic segment from the date of acquisition. The premium we paid in excess of the fair value of the net assets acquired was to obtain Napster's capabilities and digital subscriber base to reach new customers with an enhanced experience for exploring and selecting music and other digital entertainment products over an increasing array of devices, such as bundling the sale of hardware with digital services. We believe the combined capabilities of our two companies will allow us to build stronger relationships with customers and expand the number of subscribers.
On June 30, 2008, we acquired a 50% stake in Best Buy Europe Distributions Limited ("Best Buy Europe") for $2.2 billion, or $2.1 billion net of cash acquired. Best Buy Europe is our venture with The Carphone Warehouse Group PLC ("CPW") comprised of CPW's former retail and distribution business, comprising all 2,400 stores, web and direct business, insurance operations and airtime reselling business. CPW is Europe's largest mobile phone retailer. The transaction also includes CPW's economic interest in Best Buy Mobile in the U.S. and the Geek Squad in the U.K. and Spain. We made the investment in Best Buy Europe to further our international growth plans and obtain an immediate retail presence in Europe.
Best Buy Europe's operations contributed revenue of $1.7 billion to our consolidated financial results for the third quarter of fiscal 2009. At November 29, 2008, Best Buy Europe operated 2,430 stores located throughout Europe.
Highlights
† Net earnings in the third quarter of fiscal 2009 were $52 million, or $0.13 per diluted share, compared with $228 million, or $0.53 per diluted share, in the same period one year ago.
† Revenue in the third quarter of fiscal 2009 increased 16% to $11.5 billion, compared with $9.9 billion in the same period one year ago, driven primarily by the acquisition of Best Buy Europe and the net addition of 181 new stores in the past 12 months. The revenue increase was partially offset by a 5.3% comparable store sales decline and unfavorable fluctuations in foreign currency exchange rates.
† Our gross profit rate in the third quarter of fiscal 2009 increased to 24.9% of revenue, compared with 23.5% of revenue in the same period one year ago. The increase was driven primarily by the inclusion Best Buy Europe, which has a normally higher gross profit rate, as well as an improved gross profit rate in our Domestic segment driven by rate improvements in televisions, computing and digital imaging and increased sales of higher-margin mobile phones. The increase was partially offset by increased sales of lower-margin notebook computers.
† Our selling, general and administrative ("SG&A") expense rate in the third quarter of fiscal 2009 was 22.5% of revenue, compared with 20.0% of revenue in the same period one year ago. The increase was due primarily to the inclusion of Best Buy Europe, which has a normally higher SG&A expense rate, deleverage of payroll and overhead on lower sales, increased labor to support Best Buy Mobile growth, various store projects and continued expansion of our international businesses. Partially offsetting the increase was lower incentive compensation and reduced advertising.
† In accordance with our policy for evaluating investments for other-than-temporary impairment, we determined, based on specific facts and circumstances, that our investment in the common stock of CPW had incurred an other-than-temporary impairment at November 29, 2008. Accordingly, we recorded a $111 million other-than-temporary non-cash impairment charge on the investment during the third quarter of fiscal 2009.
Results of Operations
Consolidated Performance Summary
The following table presents unaudited selected consolidated financial data ($ in millions, except per share amounts):
Three Months Ended Nine Months Ended
November 29, 2008 December 1, 2007 November 29, 2008 December 1, 2007
Revenue $ 11,500 $ 9,928 $ 30,291 $ 26,605
Revenue % gain 16 % 17 % 14 % 15 %
Comparable store sales %
(decline) gain (5.3 )% 6.7 % 0.6 % 4.6 %
Gross profit as % of
revenue 24.9 % 23.5 % 24.3 % 23.9 %
SG&A as % of revenue 22.5 % 20.0 % 21.4 % 20.1 %
Operating income $ 274 $ 351 $ 890 $ 1,018
Operating income as % of
revenue 2.4 % 3.5 % 2.9 % 3.8 %
Net earnings $ 52 $ 228 $ 433 $ 670
Diluted earnings per share $ 0.13 $ 0.53 $ 1.04 $ 1.47
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Net earnings were $52 million, or $0.13 per diluted share, in the third quarter of fiscal 2009, compared with $228 million, or $0.53 per diluted share, in the same period one year ago. In the first nine months of fiscal 2009, net earnings were $433 million, or $1.04 per diluted share, compared with $670 million, or $1.47 per diluted share, in the same period one year ago.
In both the third quarter and first nine months of fiscal 2009, the decrease in net earnings reflects an increase in our SG&A expense rate, an investment impairment charge, and an increase in other expenses, partially offset by an increase in revenue and an increase in our gross profit rate.
Revenue in the third quarter of fiscal 2009 increased 16% to $11.5 billion, compared with $9.9 billion in the same period one year ago. In the first nine months of fiscal 2009, revenue increased 14% to $30.3 billion, compared with $26.6 billion in the same period one year ago. In the third quarter of fiscal 2009, excluding the acquisition of Best Buy Europe, which contributed $1.7 billion of revenue in the fiscal third quarter, revenue declined modestly. The net addition of 181 new stores in the past 12 months was more than offset by the comparable store sales decline and the unfavorable effect of fluctuations in foreign currency exchange rates. For the first nine months of fiscal 2009, excluding the acquisition of Best Buy Europe, which contributed $1.7 billion of revenue in the first nine months of fiscal 2009, the net addition of new stores in the past 12 months accounted for approximately nine-tenths of the revenue increase. The remainder of the revenue increase was primarily due to a modest comparable store sales gain as well as the favorable effect of fluctuations in foreign currency exchange rates during the first half of fiscal 2009.
The following table presents consolidated revenue mix percentages and comparable store sales percentage changes by revenue category in the third quarter of fiscal 2009:
Revenue Mix Summary Comparable Store Sales Summary
November 29, 2008 December 1, 2007 November 29, 2008 December 1, 2007
Consumer electronics 33 % 41 % (11.8 )% 2.4 %
Home office 38 % 28 % 8.9 % 6.5 %
Entertainment software 16 % 19 % (11.4 )% 23.1 %
Appliances 5 % 6 % (11.0 )% (1.8 )%
Services 8 % 6 % 1.5 % 5.6 %
Other <1 % <1 % n/a n/a
Total 100 % 100 % (5.3 )% 6.7 %
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Our comparable store sales in the third quarter of fiscal 2009 decreased 5.3%, reflecting a decrease in customer traffic and an unfavorable calendar shift within our Domestic segment, as the quarter had seven fewer post-Thanksgiving shopping days than the prior year's period. Partially offsetting the decline in traffic was an increase in the average ticket as our revenue mix continued to shift toward large-ticket items, such as notebook computers and mobile phones. In the third quarter of fiscal 2009, our largest comparable store sales declines were in digital cameras, projection and tube televisions, appliances, DVDs, CDs and MP3 players. These declines were partially offset by comparable store sales growth in notebook computers and mobile phones.
Our gross profit rate in the third quarter of fiscal 2009 increased by 1.4% of revenue to 24.9% of revenue. In the first nine months of fiscal 2009, our gross profit rate increased from 23.9% of revenue to 24.3% of revenue. The gross profit rate increase in both the third quarter and first nine months of fiscal 2009 was due to an increase in both our Domestic and International segments' gross profit rates. The acquisition of Best Buy Europe increased our gross profit rate by 1.1% of revenue and 0.4% of revenue in the third quarter and first nine months of fiscal 2009, respectively. 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 third quarter of fiscal 2009 increased by 2.5% of revenue to 22.5% of revenue. In the first nine months of fiscal 2009, our SG&A expense rate increased from 20.1% of revenue to 21.4% of revenue. The SG&A expense rate increase in both the third quarter and first nine months of fiscal 2009 was due to increases in our Domestic and International segments' SG&A expense rates. The acquisition of Best Buy Europe increased our SG&A expense rate by 1.6% of revenue and 0.6% of revenue in the third quarter and first nine months of fiscal 2009, respectively. 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 (loss) income and other in the third quarter of fiscal 2009 decreased to ($3) million, compared with $32 million in the same period one year ago. Our investment income and other in the first nine months of fiscal 2009 decreased to $27 million, compared with $98 million in the same period one year ago. In both the third quarter and first nine months of fiscal 2009, the lower investment (loss) 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 acquisition of Best Buy Europe in the second quarter of fiscal 2009. In addition, lower interest rates also contributed to the lower investment (loss) income and other in both the third quarter and first nine months of fiscal 2009.
Our interest expense in the third quarter of fiscal 2009 increased by $12 million to $35 million, compared with $23 million in the same period one year ago. The increase was due primarily to higher debt balances, partially offset by the benefit of lower interest rates. Our interest expense in the first nine months of fiscal 2009 increased $16 million to $69 million, compared with $53 million in the same period one year ago. The increase was due primarily to higher debt balances in the first nine months of fiscal 2009, partially offset by the benefit of lower interest rates.
Investment Impairment
During the second quarter of fiscal 2008, we purchased in the open market 26.1 million shares of CPW common stock for $183 million, representing nearly 3% of CPW's then outstanding shares. In accordance with our policy for evaluating investments for other-than-temporary impairment, we determined, based on specific facts and circumstances, that our investment in CPW had incurred an other-than-temporary impairment at November 29, 2008. Accordingly, we recorded a $111 million other-than-temporary impairment charge on the investment in the third quarter of fiscal 2009.
Income Tax Expense
Our effective income tax rates in the third quarter and the first nine months of fiscal 2009 were 54.6% and 40.2%, respectively, up from 35.6% and 36.3%, respectively, in the corresponding periods of fiscal 2008. The increase in our effective income tax rate in the third quarter and first nine months of fiscal 2009 was due primarily to the other-than-temporary impairment of our investment in the common stock of CPW, which increased our effective tax rate by 18.1% and 3.2%, respectively. The investment is owned by one of our Canadian subsidiaries; and under Canadian tax law, only 50% of capital gains and losses may be included in taxable income.
Segment Performance Summary
Domestic
The following table presents unaudited selected financial data for the Domestic
segment ($ in millions):
Three Months Ended Nine Months Ended
November 29, 2008 December 1, 2007 November 29, 2008 December 1, 2007
Revenue $ 8,196 $ 8,206 $ 23,782 $ 22,144
Revenue % gain 0 % 15 % 7 % 11 %
Comparable stores sales %
(decline) gain (6.3 )% 6.1 % 0.5 % 3.3 %
Gross profit as % of
revenue 24.4 % 24.2 % 24.6 % 24.6 %
SG&A as % of revenue 20.9 % 20.2 % 20.9 % 20.3 %
Operating income $ 283 $ 329 $ 875 $ 957
Operating income as % of
revenue 3.5 % 4.0 % 3.7 % 4.3 %
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The following table reconciles Domestic stores open at the beginning and end of the third quarter of fiscal 2009:
Total Stores at Total Stores at
Beginning of End of
Third Quarter Stores Stores Third Quarter
Fiscal 2009 Opened Closed Fiscal 2009
U.S. Best Buy 973 37 - 1,010
Magnolia Audio Video 13 - - 13
Pacific Sales 22 7 - 29
Best Buy Mobile 21 18 - 39
U.S. Geek Squad 7 - - 7
Total 1,036 62 - 1,098
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Note: Four U.S. Best Buy stores in the Domestic segment were relocated during the third quarter of fiscal 2009. No other store in the Domestic segment was relocated during the third quarter of fiscal 2009.
The following table reconciles Domestic stores open at the beginning and end of the third quarter of fiscal 2008:
Total Stores at Total Stores at
Beginning of End of
Third Quarter Stores Stores Third Quarter
Fiscal 2008 Opened Closed Fiscal 2008
U.S. Best Buy 872 45 - 917
Magnolia Audio Video 13 - - 13
Pacific Sales 15 2 - 17
Best Buy Mobile 5 2 - 7
U.S. Geek Squad 7 - - 7
Total 912 49 - 961
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Note: Three U.S. Best Buy stores in the Domestic segment were relocated during the third quarter of fiscal 2008. No other store in the Domestic segment was relocated during the third quarter of fiscal 2008.
Our Domestic segment's operating income in the third quarter of fiscal 2009 was $283 million, or 3.5% of revenue, compared with $329 million, or 4.0% of revenue, in the same period one year ago. In the first nine months of fiscal 2009, our Domestic segment's operating income was $875 million, or 3.7% of revenue, compared with $957 million, or 4.3% of revenue, in the same period one year ago. The decrease in our Domestic segment's operating income in the third quarter of fiscal 2009 reflected an increase in our SG&A expense rate, partially offset by an increase in our gross profit rate. In the first nine months of fiscal 2009, the decrease in our Domestic segment's operating income reflected an increase in our SG&A expense rate, partially offset by an increase in revenue.
Our Domestic segment's revenue was unchanged at $8.2 billion in the third quarter of fiscal 2009 compared with the same period one year ago. In the first nine months of fiscal 2009, our Domestic segment's revenue increased 7% to $23.8 billion, compared with $22.1 billion in the same period one year ago. In the third quarter of fiscal 2009, the net addition of 137 new stores in the past 12 months was offset by a comparable store sales decline of 6.3%. In the first nine months of fiscal 2009, the net addition of new stores accounted for nine-tenths of the increase, with the remainder of the revenue increase attributable to the 0.5% comparable store sales gain and the acquisitions of Speakeasy and Napster.
The following table presents revenue mix percentages and comparable store sales percentage changes for the Domestic segment by revenue category in the third quarter of fiscal 2009:
Revenue Mix Summary Comparable Store Sales Summary
Three Months Ended Three Months Ended
November 29, 2008 December 1, 2007 November 29, 2008 December 1, 2007
Consumer electronics 39 % 42 % (13.7 )% 1.7 %
Home office 32 % 27 % 11.1 % 8.0 %
Entertainment software 19 % 20 % (12.4 )% 20.9 %
Appliances 4 % 5 % (21.0 )% (6.7 )%
Services 6 % 6 % 1.3 % 4.5 %
Other <1 % <1 % n/a n/a
Total 100 % 100 % (6.3 )% 6.1 %
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Our Domestic segment's comparable store sales decline in the third quarter of fiscal 2009 reflected a decrease in customer traffic and an unfavorable calendar shift, as the quarter had seven fewer post-Thanksgiving shopping days than the prior year's period. Partially offsetting the decline in traffic was an increase in the average ticket as our revenue mix continued to shift toward large-ticket items, such as notebook computers and mobile phones. The products having the largest effect on our Domestic segment's comparable store sales decline in the fiscal third quarter were digital cameras, projection and tube televisions, appliances, DVDs, CDs and MP3 players. Declines in the sales of these product categories were partially offset by comparable store sales gains in notebook computers and mobile phones.
In the third quarter of fiscal 2009, our Domestic segment's consumer electronics revenue category posted a 13.7% comparable store sales decline. The consumer electronics comparable store sales decline was driven primarily by decreases in digital cameras, projection and tube televisions and MP3 players. Our home office revenue category posted an 11.1% 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 posted a 12.4% comparable store sales decline, driven primarily by declines in the sales of DVDs and CDs as well as video gaming. Our appliances revenue category recorded a 21.0% 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 a 1.3% comparable store sales gain due primarily to increased repair and warranty revenue.
Our Domestic segment's gross profit rate in the third quarter of fiscal 2009 increased by 0.2% of revenue to 24.4% of revenue. In the first nine months of both fiscal 2009 and fiscal 2008, our Domestic segment's gross profit rate was 24.6% of revenue. In the third quarter of fiscal 2009, the increase was due primarily to margin rate improvements in televisions, computing and digital imaging and increased sales of higher-margin products within our mobile phone category, partially offset by a shift in our revenue mix to sales of lower-margin products within our notebook computers product category. In the first nine months of fiscal 2009, the decrease from the shift in our revenue mix to lower-margin products such as notebook computers and video gaming hardware was offset by margin rate improvements in televisions and computing as well as mix improvements from the sales of higher-margin mobile phones.
Our Domestic segment's SG&A expense rate in the third quarter of fiscal 2009 increased by 0.7% of revenue to 20.9% of revenue. In the first nine months of fiscal 2009, our Domestic segment's SG&A rate was 20.9% of revenue, compared with 20.3% of revenue in the same period one year ago. The increase in both the third quarter and first nine months of fiscal 2009 was due primarily to the deleveraging of payroll and overhead on lower comparable store sales; increased spending on investments, including the roll-out and staffing of the Best Buy Mobile store-within-a-store experience; store projects such as resets of GPS, computing and video gaming selling space and information technology enhancements to our point-of-sale systems; and increased expenses for consulting services company-wide. However, the SG&A expense rate for the third quarter of fiscal 2009 benefited from lower incentive compensation as a result of lower . . .
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