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BBY > SEC Filings for BBY > Form 10-Q on 9-Sep-2013All Recent SEC Filings

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Form 10-Q for BEST BUY CO INC


9-Sep-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. Unless otherwise noted, transactions, trends and other factors are discussed in order of magnitude. In addition, unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior year. Our MD&A is presented in six sections:

Overview

Business Strategy Update

Results of Operations

Liquidity and Capital Resources

Off-Balance-Sheet Arrangements and Contractual Obligations

Significant Accounting Policies and Estimates

Our MD&A should be read in conjunction with our Transition Report on Form 10-K for the fiscal year ended February 2, 2013, and the recast financial information included in the Current Report on Form 8-K filed on June 21, 2013 (the "June 21st Form 8-K) to recast certain financial information to reflect the results of Best Buy Europe as discontinued operations, 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 multi-national, e-commerce and physical retailer of consumer electronics, including mobile phones, tablets and computers, large and small appliances, televisions, digital imaging, entertainment products and related accessories. We also offer consumers technology services - including support, repair, troubleshooting and installation - under the Geek Squad brand.

Best Buy operates as two reportable segments: Domestic and International. The Domestic segment is comprised of all operations within the U.S. and its territories. The International segment is comprised of all continuing operations outside the U.S. and its territories.

Our business, like that of many 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 Mexico. While consumers view some of the products and services we offer as essential, others are viewed as discretionary. Consequently, our financial results are susceptible to changes in consumer confidence and other macroeconomic factors, including unemployment, consumer credit availability, and the condition of the housing market. Consumer confidence and macroeconomic trends continue to be uncertain, making customer traffic and spending patterns difficult to predict. Additionally, there are other factors that directly impact our performance, such as product life-cycles (including the introduction and pace of adoption of new technology) and the competitive retail environment. As a result of these factors, predicting our future revenue and net earnings is difficult. However, we remain confident that our differentiated value proposition continues to be valued by the consumer. Our value proposition is to offer: (1) the latest devices and services, all in one place; (2) knowledgeable, impartial advice; (3) competitive prices; (4) the consumer's ability to shop Best Buy wherever and whenever they like; and (5) technical and warranty support for the life of the product.

Revenue growth, along with disciplined capital allocation and expense control, remain key priorities for us as we navigate through the current environment and work to grow our return on invested capital.

Beginning in the first quarter of fiscal 2013, we changed our fiscal year-end from the Saturday nearest the end of February to the Saturday nearest the end of January. As a result of this change, our fiscal year 2013 was an 11-month transition period ending on February 2, 2013. The results for the six months ended August 4, 2012 include our fiscal month ended March 3, 2012 for operations that are not reported on a lag (primarily our Domestic segment and Canadian operations), which were also included in our results for the fiscal year ended March 2, 2012, included in our fiscal 2012 Form 10-K. See Note 2, Fiscal Year-end Change, in the Notes to Consolidated Financial Statements included in our Transition Report on Form 10-K for the fiscal year ended February 2, 2013, and the recast financial information included in the June 21st Form 8-K, for additional information regarding our fiscal year-end change.


Table of Contents

Throughout this MD&A, we refer to comparable store sales. Comparable store sales is a commonly used metric in the retail industry, which compares revenue for a particular period with the corresponding period in the prior year, excluding the impact of sales from new stores opened. Our comparable store sales is comprised of revenue from stores operating for at least 14 full months, as well as revenue related to call centers, websites, and our other comparable sales channels. Revenue we earn from sales of merchandise to wholesalers or dealers is not included within our comparable store sales calculation. Relocated stores, as well as remodeled, expanded, and downsized stores closed more than 14 days, 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 calculation of comparable store sales excludes the impact of the extra week of revenue in the first six months of fiscal 2013, as well as revenue from discontinued operations. 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.

In our discussions of the operating results of our consolidated business and our International segment, we sometimes refer to the impact of changes in foreign currency exchange rates or the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert the International segment's operating results from local currencies into U.S. Dollars for reporting purposes. The impact of foreign currency exchange rate fluctuations is typically calculated as the difference between current period activity translated using the current period's currency exchange rates and the comparable prior-year period's currency exchange rates. We use this method to calculate the impact of changes in foreign currency exchange rates for all countries where the functional currency is not the U.S. Dollar.

In our discussions of the operating results below, we sometimes refer to the impact of net store changes on our results of operations. The key factors that dictate the impact that the net store changes have on our operating results include: (i) store opening and closing decisions; (ii) the size and format of stores, as we operate stores ranging from approximately 1,000 square feet to approximately 50,000 square feet; (iii) the length of time the stores were open during the period; and (iv) the overall success of new store launches.

This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), as well as certain non-GAAP financial measures such as adjusted operating income, adjusted net earnings from continuing operations, adjusted diluted earnings per share from continuing operations and adjusted debt to earnings before goodwill impairment, interest, income taxes, depreciation, amortization and rent ("EBITDAR") ratio. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position, or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.

We believe that the non-GAAP measures described above provide meaningful information to assist shareholders in understanding our financial results and assessing our prospects for future performance. Management believes adjusted operating income, adjusted net earnings from continuing operations, and adjusted diluted earnings per share from continuing operations are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management makes standard adjustments for items such as restructuring charges, goodwill impairments, non-restructuring asset impairments and gains or losses on sales of investments, as well as adjustments for other items that may arise during the period and have a meaningful impact on comparability. To measure adjusted operating income, we removed the impact of restructuring charges and non-restructuring asset impairments from our calculation of operating income, and we have also removed the impact of second quarter fiscal 2014 LCD-related legal settlements. Adjusted net earnings from continuing operations was calculated by removing the after-tax impact of operating income adjustments and gain on sale of investments, as well as the tax impact of the Best Buy Europe sale from our calculation of net earnings. To measure adjusted diluted earnings per share from continuing operations, we excluded the per share impact of net earnings adjustments from our calculation of diluted earnings per share. Management believes our adjusted debt to EBITDAR ratio is an important indicator of our creditworthiness. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These non-GAAP financial measures are an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures within our discussion of consolidated performance, below, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.


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Business Strategy Update

In November 2012, we identified two main areas of focus: stabilizing and improving our comparable store sales and increasing operating margin. Since that time, these two areas of focus have become our Renew Blue rallying cry and the organization's goals and objectives have been prioritized accordingly. Our six Renew Blue priorities in fiscal 2014 include: (1) accelerating online growth;
(2) escalating the multi-channel customer experience; (3) increasing revenue and gross profit per square foot through enhanced store space optimization and merchandising; (4) driving down cost of goods sold through supply chain efficiencies; (5) continuing to gradually optimize the U.S. real estate portfolio; and (6) further reducing selling, general and administrative ("SG&A") costs.

During the second quarter of fiscal 2014, we continued to make progress on our Renew Blue priorities. This progress included: (1) a 10.5% increase in Domestic segment comparable online sales; (2) improving our Net Promoter Score, which is a metric we use to track customer service, by over 300 basis points compared to the prior-year period; (3) enriching our retail customer experience through the rollout of our Samsung Experience Shops and Windows Stores; (4) piloting our "buy online - ship from store" initiative in 50 stores; and (5) eliminating an estimated $65 million in annualized costs, which brings our total annualized cost reductions to $390 million since we began our Renew Blue initiatives.

In the third and fourth quarters of fiscal 2014, we expect to continue to make pricing and SG&A investments related to the following Renew Blue initiatives:
(1) price reductions to further enhance Best Buy's price competitiveness where needed; (2) increased marketing costs to support growth in the mobile category;
(3) improvements in the multi-channel customer experience; (4) optimization of our retail floor space; and (5) the re-platforming of bestbuy.com.

In addition to the ongoing Renew Blue pricing and SG&A investments discussed above, two other operational factors are also expected to negatively impact our fiscal 2014 third and fourth quarter results. The first is a temporary increase in our product warranty-related costs due to higher claims frequency on our legacy Geek Squad Protection programs that will expire or be operationally restructured over the next several quarters. The second is a longer-term change in the economics of our private-label credit card program that is being sold by Capital One to Citibank in the third quarter of fiscal 2014. This impact is due to the expiration of our previous agreement with Capital One, which offered Best Buy substantially better financial terms than what is commercially available in the market today due to changes in both the regulatory environment and general consumer credit market overall. We believe this increase in operational costs, and the Renew Blue pricing and SG&A investments, will be partially offset by continued improvement in our core business performance, the positive financial benefit that we expect to see from the $390 million in annualized Renew Blue cost savings, and further cost reductions that we are expecting to deliver in the third and fourth quarters of fiscal 2014.

On June 26, 2013, we completed the sale of our 50% ownership interest in Best Buy Europe to Carphone Warehouse Group plc ("CPW") in return for the following consideration upon closing: net cash of 341 million ($526 million); 80 million ($123 million) of ordinary shares of CPW; 25 million ($39 million), plus 2.5% interest, to be paid by CPW on June 26, 2014; and 25 million ($39 million), plus 2.5% interest, to be paid by CPW on June 26, 2015. We subsequently sold the ordinary shares of CPW for $123 million on July 3, 2013.

Results of Operations

In order to align our fiscal reporting periods and comply with statutory filing requirements in certain foreign jurisdictions, we consolidate the financial results of our China and Mexico operations on a one-month lag. Our policy is to accelerate recording the effect of events occurring in the lag period that significantly affect our consolidated financial statements. Consistent with such consolidation, the financial and non-financial information presented in our MD&A relative to these operations is also presented on a one-month lag. There were no significant intervening events which would have materially affected our financial condition, results of operations, liquidity, or other factors had they been recorded during the three months ended August 3, 2013.

Discontinued Operations Presentation

The results of Napster, our large-format Best Buy branded stores in China, and our Best Buy Europe operations are presented as discontinued operations in our Consolidated Statements of Earnings. Unless otherwise stated, financial results discussed herein refer to our continuing operations.


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Consolidated Performance Summary

Net earnings from continuing operations for the second quarter of fiscal 2014
increased $206 million from the prior-year period. The increase was largely the
result of LCD-related legal settlements and a decrease in restructuring charges.
In addition, we continued to focus on implementing our Renew Blue initiatives
and finalized the sale of our 50% ownership interest in Best Buy Europe.

The following table presents selected consolidated financial data ($ in
millions, except per share amounts):
                                                Three Months Ended                     Six Months Ended
                                        August 3, 2013     August 4, 2012      August 3, 2013     August 4, 2012
Revenue                                $       9,300      $      9,339        $      18,680      $      19,712
Revenue % decline                               (0.4 )%           (3.6 )%              (5.2 )%               -  %
Comparable store sales % decline                (0.6 )%           (3.3 )%              (1.0 )%            (4.3 )%
Gross profit                           $       2,469      $      2,261        $       4,639      $       4,845
Gross profit as a % of revenue(1)               26.5  %           24.2  %              24.8  %            24.6  %
SG&A                                   $       2,049      $      2,082        $       4,045      $       4,275
SG&A as a % of revenue(1)                       22.0  %           22.3  %              21.7  %            21.7  %
Restructuring charges                  $           7      $         91        $          13      $         218
Operating income                       $         413      $         88        $         581      $         352
Operating income as a % of revenue               4.4  %            0.9  %               3.1  %             1.8  %
Net earnings from continuing
operations                             $         237      $         31        $         334      $         200
Gain (loss) from discontinued
operations(2)                          $          29      $        (19 )      $        (149 )    $         (30 )
Net earnings attributable to Best Buy
Co., Inc. shareholders                 $         266      $         12        $         185      $         170
Diluted earnings per share from
continuing operations                  $        0.69      $       0.09        $        0.97      $        0.59
Diluted earnings per share             $        0.77      $       0.04        $        0.54      $        0.50

(1) Because retailers vary in how they record certain costs 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 Transition Report on Form 10-K for the fiscal year ended February 2, 2013, and the recast financial information included in the June 21st Form 8-K.

(2) Includes both net gain (loss) from discontinued operations and net loss from discontinued operations attributable to noncontrolling interests.

The components of the 0.4% and 5.2% revenue decreases for the second quarter and first six months of fiscal 2014, respectively, were as follows:

                                                      Three Months Ended     Six Months Ended
                                                        August 3, 2013        August 3, 2013
Comparable store sales impact                                 (0.6 )%               (0.9 )%
Non-comparable sales channels(1)                              (0.1 )%                  -  %
Net store changes                                              0.2  %               (0.5 )%
Impact of foreign currency exchange rate fluctuations          0.1  %               (0.1 )%
Extra week of revenue(2)                                         -  %               (3.7 )%
Total revenue decrease                                        (0.4 )%               (5.2 )%

(1) Non-comparable store sales channels primarily reflects the impact from revenue we earn from sales of merchandise to wholesalers and dealers, as well as other non-comparable sales not included within our comparable store sales calculation.

(2) Represents the estimated incremental revenue associated with stores in our Domestic segment and Canada in the first six months of fiscal 2013, which had 27 weeks of activity, compared to 26 weeks in the first six months of fiscal 2014.

The gross profit rate increased by 2.3% of revenue in the second quarter of fiscal 2014. Our Domestic segment contributed a rate increase of 2.5% of revenue, with an offsetting rate decrease of 0.2% of revenue from our International segment. For the first six months of fiscal 2014, the gross profit rate increased by 0.2% of revenue. Our Domestic segment contributed a rate increase of 0.4% of revenue, with an offsetting rate decrease of 0.2% of revenue from our International segment. For further discussion of each segment's gross profit rate changes, see Segment Performance Summary below.


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The SG&A rate decreased by 0.3% of revenue in the second quarter of fiscal 2014. SG&A rate declines in our Domestic and International segments accounted for a decrease of 0.1% of revenue and 0.2% of revenue, respectively. The SG&A rate for the first six months of fiscal 2014 remained flat at 21.7%. For further discussion of each segment's SG&A rate changes, see Segment Performance Summary below.

We recorded restructuring charges of $7 million and $13 million in the second quarter and first six months of fiscal 2014, respectively, related primarily to our International segment. These restructuring charges resulted in a decrease in our operating income in both the second quarter and first six months of fiscal 2014 of 0.1% of revenue. We recorded $91 million and $218 million of restructuring charges in the second quarter and first six months of fiscal 2013, respectively, all of which were recorded in our Domestic segment. These restructuring charges resulted in a decrease in our operating income in the second quarter and first six months of fiscal 2013 of 1.0% and 1.1% of revenue, respectively. For further discussion of each segment's restructuring charges, see Segment Performance Summary below.

Operating income increased $325 million, or 369.3%, and our operating income rate increased to 4.4% of revenue in the second quarter of fiscal 2014, compared to 0.9% of revenue in the second quarter of fiscal 2013. The increase in operating income was primarily driven by LCD-related legal settlements and a decrease in restructuring charges. For the first six months of fiscal 2014, operating income increased 65.1% to $581 million or, as a percentage of revenue, to 3.1%, compared to 1.8% of revenue in the first six months of fiscal 2013. The increase in operating income was the result of LCD-related legal settlements, a decrease in restructuring charges, and lower SG&A in the first six months of fiscal 2014, partially offset by the extra week of operations in the first six months of fiscal 2013.

Income Tax Expense

Income tax expense increased to $169 million in the second quarter of fiscal 2014 compared to $33 million in the prior-year period, primarily as a result of an increase in pre-tax earnings. Our effective income tax rate in the second quarter of fiscal 2014 was 41.6% compared to a rate of 51.7% in the second quarter of fiscal 2013. The decrease in the effective income tax rate was primarily due to the increase in our pre-tax earnings, as the impact of discrete tax items on our effective income tax rate is less when our pre-tax earnings are higher.

Income tax expense increased to $218 million in the first six months of fiscal 2014 compared to $103 million in the prior-year period, primarily as a result of an increase in pre-tax earnings. Our effective income tax rate for the first six months of fiscal 2014 was 39.4%, compared to a rate of 33.9% in the first six months of fiscal 2013. The increase was caused primarily by the resolution of a foreign tax matter in the prior year period.

Our consolidated effective tax rate is impacted by the statutory income tax rates applicable to each of the jurisdictions in which we operate. As our foreign earnings are generally taxed at lower statutory rates than the 35% U.S. statutory rate, changes in the proportion of our consolidated taxable earnings originating in foreign jurisdictions impact our consolidated effective rate. Our foreign earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax.

Discontinued Operations

The gain from discontinued operations in the second quarter of fiscal 2014 compared to the loss from discontinued operations in the second quarter of fiscal 2013 was primarily the result of a tax allocation between continuing and discontinued operations. The increased loss from discontinued operations in the first six months of fiscal 2014 compared to the first six months of fiscal 2013 was primarily the result of the non-cash impairment of our investment in Best Buy Europe in the first quarter of fiscal 2014 and increased restructuring charges, partially offset by a first quarter gain on the sale of Best Buy Europe's fixed-line business in Switzerland and a tax allocation benefit between continuing and discontinued operations. Refer to Note 2, Discontinued Operations, in the Notes to Condensed Consolidated Financial Statements for additional information.


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Non-GAAP Financial Measures

The following table reconciles operating income, net earnings, and diluted
earnings per share for the periods presented from continuing operations (GAAP
financial measures) to adjusted operating income, adjusted net earnings and
adjusted diluted earnings per share from continuing operations (non-GAAP
financial measures) for the periods presented ($ in millions, except per share
amounts).
                                                 Three Months Ended                       Six Months Ended
                                        August 3, 2013       August 4, 2012      August 3, 2013      August 4, 2012
Operating income                       $         413       $             88     $         581      $            352
Net LCD settlements(1)                          (229 )                    -              (229 )                   -
Non-restructuring asset impairments               15                      2                27                    16
Restructuring charges                              7                     91                13                   218
Adjusted operating income              $         206       $            181     $         392      $            586

Net earnings from continuing
operations                             $         237       $             31     $         334      $            200
After-tax impact of net LCD
settlements(1)                                  (147 )                    -              (147 )                   -
After-tax impact of non-restructuring
asset impairments                                 10                      1                19                    10
After-tax impact of restructuring
charges                                            5                     57                 9                   141
After-tax impact of gain on sale of
investments                                       (9 )                    -                (9 )                   -
. . .
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