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| BBY > SEC Filings for BBY > Form 10-Q on 9-Jul-2009 | All Recent SEC Filings |
9-Jul-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 six sections:
† Overview
† Results of Operations
† Liquidity and Capital Resources
† Off-Balance-Sheet Arrangements and Contractual Obligations
† Significant Accounting Policies and Estimates
† New Accounting Standards
We consolidate the financial results of our Europe, China and Mexico operations 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 May 30, 2009.
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 28, 2009, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited.
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. Relocated, remodeled and expanded 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 attributable to Best Buy Co., Inc. decreased 15% to $153 million, or $0.36 per diluted share, in the first quarter of fiscal 2010, compared with $179 million, or $0.43 per diluted share, in the same period one year ago. The decrease in net earnings attributable to Best Buy Co., Inc. was driven by increases in other expense and our effective tax rate.
† Operating income increased 7% to $296 million, or as a percentage of revenue, 2.9%, in the first quarter of fiscal 2010, compared with $277 million, or 3.1%, in the same period one year ago. The decline in the operating income rate was driven by a comparable store sales decline of 6.2%, an increase in our selling, general and administrative expenses ("SG&A") rate as well as $52 million in restructuring charges, partially offset by an increase in our gross profit rate.
† Revenue in the first quarter of fiscal 2010 increased 12% to $10.1 billion, compared with $9.0 billion in the same period one year ago, driven primarily by the acquisition of Best Buy Europe, which contributed $1.3 billion of revenue, and the net addition of 185 new stores in the past 12 months. These gains were partially offset by a 6.2% comparable store sales decline and unfavorable fluctuations in foreign currency exchange rates.
† Our gross profit rate in the first quarter of fiscal 2010 increased to 25.3% of revenue, compared with 23.7% of revenue in the same period one year ago. The increase was due primarily to the inclusion of Best Buy Europe as well as an improved gross profit rate in our Domestic segment driven primarily by rate improvements in digital cameras and camcorders, televisions and services.
† Our SG&A rate in the first quarter of fiscal 2010 increased to 21.9% of revenue, compared with 20.6% of revenue in the same period one year ago. The increase was due primarily to deleverage on the comparable store sales decline and the inclusion of Best Buy Europe, partially offset by reductions in spending in certain discretionary categories and in corporate payroll. Excluding fiscal 2009 acquisitions, SG&A dollars in the fiscal first quarter were essentially flat versus the prior year period.
Results of Operations
Consolidated Performance Summary
The following table presents selected consolidated financial data ($ in
millions, except per share amounts):
Three Months Ended
May 30, 2009 May 31, 2008
Revenue $ 10,095 $ 8,990
Revenue % gain 12 % 13 %
Comparable store sales % (decline) gain (6.2 )% 3.7 %
Gross profit as % of revenue1 25.3 % 23.7 %
SG&A as % of revenue1 21.9 % 20.6 %
Operating income2 $ 296 $ 277
Operating income as % of revenue 2.9 % 3.1 %
Net earnings attributable to Best Buy Co., Inc. $ 153 $ 179
Diluted earnings per share $ 0.36 $ 0.43
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1 Because retailers do not uniformly record costs of operating their supply chain between cost of goods sold and SG&A, our gross profit rate and SG&A rate may not be comparable to other retailers' corresponding rates. For additional information regarding costs classified in cost of goods sold and SG&A, refer to Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2009.
2 Included within our operating income for the first quarter of fiscal 2010 is $52 million of restructuring charges related to measures we took to restructure our businesses. These charges resulted in a decrease in our operating income of 0.5% of revenue for the first quarter of fiscal 2010.
Revenue in the first quarter of fiscal 2010 increased 12% to $10.1 billion, compared with $9.0 billion in the same period one year ago. The revenue increase resulted primarily from the acquisition of Best Buy Europe, which contributed $1.3 billion of revenue, and the net addition of 185 new stores (of which 45 were Best Buy Europe stores) in the past 12 months. The increase was partially offset by a 6.2% comparable store sales decline and the unfavorable effect of fluctuations in foreign currency exchange rates.
The components of the net revenue increase in the first quarter of fiscal 2010 were as follows:
Acquisition of Best Buy Europe 15 % Net new stores 5 % 6.2% comparable store sales decline (6 )% Unfavorable impact of foreign currency (2 )% Total revenue increase 12 % |
The following table presents consolidated revenue mix percentages and comparable store sales percentage changes by revenue category in the first quarter of fiscal 2010 and 2009:
Revenue Mix Summary Comparable Store Sales Summary
May 30, 2009 May 31, 2008 May 30, 2009 May 31, 2008
Consumer electronics 32 % 38 % (8.8 )% (0.7 )%
Home office 40 % 31 % 6.8 % 8.2 %
Entertainment software 13 % 17 % (21.0 )% 9.8 %
Appliances 5 % 7 % (18.8 )% (3.6 )%
Services 9 % 6 % 2.2 % 4.8 %
Other 1 % 1 % n/a n/a
Total 100 % 100 % (6.2 )% 3.7 %
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Our comparable store sales decline of 6.2% in the first quarter of fiscal 2010 reflected a decrease in customer traffic due to continued macro-economic weakness and an essentially flat average ticket. In the first quarter of fiscal 2010, our largest comparable store sales declines were in video gaming, digital cameras, DVDs and major appliances. Comparable store sales declines for these product categories were partially offset by comparable store sales gains in notebook computers and mobile phones.
Our gross profit rate in the first quarter of fiscal 2010 increased by 1.6% of revenue to 25.3% of revenue. The gross profit rate increase was due to increases in both our Domestic and International segments' gross profit rates. The inclusion of Best Buy Europe, which predominantly features sales of higher-margin mobile phones, increased our gross profit rate for the quarter by 1.0% of revenue. For further discussion of each segment's gross profit rate changes, see the Segment Performance Summary for Domestic and International below.
Our SG&A rate in the first quarter of fiscal 2010 increased by 1.3% of revenue to 21.9% of revenue. The SG&A rate increase was due to an increase in our International segment's SG&A rate, while the Domestic segment's rate remained flat compared to the prior year. The inclusion of Best Buy Europe increased our SG&A rate for the quarter by 1.0% of revenue. For further discussion of each segment's SG&A rate changes, see the Segment Performance Summary for Domestic and International below.
Restructuring Charges
Our restructuring charges in the first quarter of fiscal 2010 were $52, compared to $0 in the same period one year ago. In April 2009, we notified our U.S. Best Buy store employees of our intention to update our store operating model, which included eliminating certain positions. In addition, we incurred restructuring charges related to employee termination benefits and business reorganization costs at Best Buy Europe.
Other Income (Expense)
Our investment income and other in the first quarter of fiscal 2010 decreased to $9 million, compared with $21 million in the same period one year ago. The decrease was primarily due to the impact of lower average cash and investment balances, as investments were liquidated to fund our acquisition of Best Buy Europe, as well as lower interest rates on our cash and investment balances, in the first quarter of fiscal 2010.
Additionally, interest expense in the fiscal first quarter increased to $23 million, compared with $13 million in the same period one year ago. The increase was primarily due to increased borrowings to acquire Best Buy Europe and for working capital needs.
Income Tax Expense
Our effective income tax rate in the first quarter of fiscal 2010 was 45.0%, compared with a rate of 37.1% in same period one year ago. The increase was caused primarily by losses in certain foreign jurisdictions for which we have not recorded any tax benefit.
Segment Performance Summary
Domestic
The following table presents selected financial data for the Domestic segment ($
in millions):
Three Months Ended
May 30, 2009 May 31, 2008
Revenue $ 7,525 $ 7,453
Revenue % gain 1 % 11 %
Comparable stores sales % (decline) gain (4.9 )% 3.5 %
Gross profit as % of revenue 25.1 % 24.4 %
SG&A as % of revenue 20.7 % 20.7 %
Operating income1 $ 303 $ 277
Operating income as % of revenue 4.0 % 3.7 %
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1 Included within our Domestic segment's operating income for the first quarter of fiscal 2010 is $25 million of restructuring charges related to measures we took to restructure our businesses. These charges resulted in a decrease in our operating income of 0.4% of revenue for the first quarter of fiscal 2010.
The following table reconciles Domestic stores open at the beginning and end of the first quarter of fiscal 2010:
Total Stores at Total Stores at
Beginning of End of
First Quarter Stores Stores First Quarter
Fiscal 2010 Opened Closed Fiscal 2010
U.S. Best Buy 1,023 9 - 1,032
Best Buy Mobile 38 1 - 39
Pacific Sales 34 - - 34
Magnolia Audio Video 6 1 - 7
U.S. Geek Squad 6 - - 6
Total Domestic stores 1,107 11 - 1,118
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Note: No store in the Domestic segment was relocated during the first quarter of fiscal 2010.
The following table reconciles Domestic stores open at the beginning and end of the first quarter of fiscal 2009:
Total Stores at Total Stores at
Beginning of End of
First Quarter Stores Stores First Quarter
Fiscal 2009 Opened Closed Fiscal 2009
U.S. Best Buy 923 26 - 949
Best Buy Mobile 9 5 - 14
Pacific Sales 19 1 - 20
Magnolia Audio Video 13 - - 13
U.S. Geek Squad 7 - - 7
Total Domestic stores 971 32 - 1,003
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Note: No store in the Domestic segment was relocated during the first quarter of fiscal 2009.
Our Domestic segment's operating income in the first quarter of fiscal 2010 was $303 million, or 4.0% of revenue, compared with $277 million, or 3.7% of revenue, in the same period one year ago. The increase in our Domestic segment's operating income rate reflected an increase in both revenue and the gross profit rate while the SG&A rate remained relatively flat. The increase was partially offset by $25 million of restructuring charges.
Our Domestic segment's revenue in the first quarter of fiscal 2010 increased 1% to just over $7.5 billion, compared with just under $7.5 billion in the same period one year ago. The net addition of 115 new stores in the past 12 months contributed to the revenue increase, partially offset by a 4.9% comparable store sales decline.
The components of our Domestic segment's net revenue increase in the first quarter of fiscal 2010 were as follows:
Net new stores 6 % 4.9% comparable store sales decline (5 )% Total revenue increase 1 % |
The following table presents revenue mix percentages and comparable store sales percentage changes for the Domestic segment by revenue category in the first quarter of fiscal 2010 and 2009:
Revenue Mix Summary Comparable Store Sales Summary
Three Months Ended Three Months Ended
May 30, 2009 May 31, 2008 May 30, 2009 May 31, 2008
Consumer electronics 37 % 39 % (7.6 )% (0.6 )%
Home office 35 % 31 % 9.5 % 9.3 %
Entertainment software 15 % 18 % (20.6 )% 8.2 %
Appliances 5 % 6 % (20.1 )% (10.6 )%
Services 7 % 6 % 1.7 % 5.0 %
Other 1 % <1 % n/a n/a
Total 100 % 100 % (4.9 )% 3.5 %
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Our Domestic segment's comparable store sales decline in the first quarter of fiscal 2010 was driven by a reduction in customer traffic and essentially flat average ticket. The product categories having the largest effect on our Domestic segment's comparable store sales decline in the fiscal first quarter were video gaming, digital cameras, major appliances and DVDs. Weaker sales in these product categories were partially offset by comparable store sales gains in product categories such as notebook computers and mobile phones.
In the first quarter of fiscal 2010, our Domestic segment's consumer electronics revenue category posted a 7.6% comparable store sales decline, driven primarily by decreases in the sales of digital cameras, navigation products and tube and projection televisions. Flat panel televisions experienced essentially flat comparable store sales as unit sales increases offset average selling price decreases. The home office revenue category posted a 9.5% comparable store sales gain driven primarily by a continuation of increases in the sales of notebook computers and mobile phones. The entertainment software revenue category recorded a 20.6% comparable store sales decline due primarily to a decline in the sales of video gaming, caused primarily by the impact of several new gaming releases in the prior year quarter, as well as a decline in sales of DVDs. The appliances revenue category recorded a 20.1% decline in comparable store sales due to continued weakness in the housing sector. The services revenue category recorded a 1.7% comparable store sales gain due primarily to sales growth in our product repair business.
Our Domestic segment's gross profit rate in the first quarter of fiscal 2010 increased by 0.7% of revenue to 25.1% of revenue. The increase was due primarily to margin rate improvements in digital cameras and camcorders, televisions and services, as well as increased sales of higher-margin mobile phones and decreased sales of lower-margin video gaming. Partially offsetting these improvements was a continued shift in the segment's revenue mix to sales of lower-margin notebook computers.
Our Domestic segment's SG&A rate in the first quarter of fiscal 2010 remained flat compared to the prior year period at 20.7% of revenue. Increases attributable to the deleveraging impact of lower comparable store sales on payroll, benefits and overhead were offset by reductions in outside and outsourced services, travel expense, advertising and corporate payroll.
Our Domestic segment's restructuring charges in the first quarter of fiscal 2010 were $25, compared to $0 in the same period one year ago. The charges were primarily the result of changes to our U.S. Best Buy store operating model, which resulted in the elimination of certain positions, for which we incurred employee termination costs.
International
The following table presents selected financial data for the International
segment ($ in millions):
Three Months Ended
May 30, 2009 May 31, 2008
Revenue $ 2,570 $ 1,537
Revenue % gain 67 % 26 %
Comparable stores sales % (decline) gain (13.9 )% 4.7 %
Gross profit as % of revenue 26.0 % 20.3 %
SG&A as % of revenue 25.3 % 20.3 %
Operating (loss) income1 $ (7 ) $ -
Operating (loss) income as % of revenue (0.3 )% 0.0 %
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1 Included within our International segment's operating loss for the first quarter of fiscal 2010 is $27 million of restructuring charges related to measures we took to restructure our businesses. These charges resulted in a decrease in our operating income of 1.1% of revenue for the first quarter of fiscal 2010.
The following table reconciles International stores open at the beginning and end of the first quarter of fiscal 2010:
Total Stores at Total Stores at
Beginning of End of
First Quarter Stores Stores First Quarter
Fiscal 2010 Opened Closed Fiscal 2010
Best Buy Europe 2,465 26 (32 ) 2,459
Five Star 164 4 (4 ) 164
Future Shop 139 1 - 140
Best Buy Canada 58 - - 58
Best Buy China 5 - - 5
Best Buy Mobile Canada 3 - - 3
Best Buy Mexico 1 - - 1
Total International stores 2,835 31 (36 ) 2,830
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Note: We relocated eight Best Buy Europe stores during the first quarter of fiscal 2010. No other store in the International segment was relocated during the first quarter of fiscal 2010.
The following table reconciles International stores open at the beginning and end of the first quarter of fiscal 2009:
Total Stores at Total Stores at
Beginning of End of
First Quarter Stores Stores First Quarter
Fiscal 2009 Opened Closed Fiscal 2009
Five Star 160 2 (1 ) 161
Future Shop 131 2 - 133
Best Buy Canada 51 - - 51
Best Buy China 1 - - 1
Total International stores 343 4 (1 ) 346
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Note: We relocated two Future Shop stores during the first quarter of fiscal 2009. No other store in the International segment was relocated during the first quarter of fiscal 2009.
Our International segment's operating loss in the first quarter of fiscal 2010 was $(7) million, or (0.3)% of revenue, compared with break even in the same period one year ago. The International segment's decrease in operating income resulted primarily from lower operating income in Canada and $27 million of restructuring charges, which was partially offset by the inclusion of Best Buy Europe's operating income.
Our International segment's revenue in the first quarter of fiscal 2010 increased 67% to $2.6 billion, compared with $1.5 billion for the same period one year ago. The inclusion of Best Buy Europe and the net addition of 70 new stores (of which 45 were Best Buy Europe stores) accounted for the majority of the revenue increase. Partially offsetting these increases were the effects of a 13.9% comparable store sales decline and unfavorable fluctuations in foreign currency exchange rates. Excluding the addition of Best Buy Europe and the negative impact of fluctuations in foreign currency exchange rates, the International segment's revenue declined approximately 9% versus the prior year period.
The components of our International segment's net revenue increase in the first quarter of fiscal 2010 were as follows:
Acquisition of Best Buy Europe 87 % Net new stores 3 % 13.9% comparable store sales decline (12 )% Unfavorable impact of foreign currency (11 )% Total revenue increase 67 % |
The following table presents revenue mix percentages and comparable store sales percentage changes for the International segment by revenue category in the first quarter of fiscal 2010 and 2009:
Revenue Mix Summary1 Comparable Store Sales Summary2
Three Months Ended Three Months Ended
May 30, 2009 May 31, 2008 May 30, 2009 May 31, 2008
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