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

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Form 10-Q for BEST BUY CO INC


9-Dec-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 technical 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 in our unique customer promises: (1) the latest devices and services, all in one place; (2) impartial and knowledgeable advice; (3) competitive prices; (4) the ability to shop Best Buy when and where you want; and (5) support for the life of your 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 nine months ended November 3, 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.


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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 nine 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, non-restructuring asset impairments and the impact of second quarter fiscal 2014 LCD-related legal settlements from our calculation of operating income. Adjusted net earnings from continuing operations was calculated by removing the after-tax impact of operating income adjustments and the gain on sale of investments, as well as the tax impact of the Best Buy Europe sale from our calculation of net earnings from continuing operations. 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 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 spare 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.

The increase in revenue in our Domestic segment in the third quarter of fiscal 2014 demonstrates that our focus on delivering our unique customer promises is starting to pay off. Our efforts to control costs and to bring greater efficiency to our operations contributed to an increase in operating income. While we remain mindful of the fact that we still have a long way to go, we are pleased with the progress of our Renew Blue transformation efforts.

During the third quarter fiscal 2014, we delivered a Domestic segment comparable store sales increase of 1.7% and increased diluted EPS, and we continued to make progress on our key Renew Blue priorities. This progress included, most notably:
(1) achieving a 15.1% increase in Domestic segment comparable online sales driven in part by the continued optimization of our online website, the implementation of a single-site sign-on capability for loyalty program customers, enhancements to our buy online - pick up in store process, an increase in the number of product reviews and the completion of the online expansion of our final two (of eight) distribution centers; (2) continuing to enhance our multi-channel customer experience with a nearly 400 basis point increase in our Net Promoter Score (a metric we use to track customer service), driven primarily by the improvement in service provided by our Blue Shirts and Geek Squad agents; (3) extending our "ship from store" pilot to over 400 stores;
(4) replacing our Reward Zone loyalty program with an enhanced program branded My Best Buy, which is designed to deepen our relationship with our customers;
(5) completing this fiscal year's retail floor space optimization, including the deployment of vendor experiences, increasing the space for growing products like mobile phones, tablets and appliances, redesigning space to support new gaming product launches and creating space to more effectively showcase clearance and open-box inventory; (6) implementing new "retail-store" replenishment processes, which will allow us to shorten our inventory replenishment windows during this year's holiday season; (7) renegotiating rent reductions on expiring leases; and
(8) eliminating an additional $115 million in annualized costs, which brings our total annualized cost reductions to $505 million, compared to our previously-announced target of $725 million.

Looking ahead to the holiday season in the fourth quarter of fiscal 2014 and beyond, we plan to continue to drive our Renew Blue transformation. Our mission is to be the destination and authority for technology products and services. We want to help our customers discover, choose, purchase, finance, activate, enjoy and eventually replace their technology products and solutions. We also help our vendor partners market their products by providing them the best showroom for technology products online and in our stores. Specifically for the fiscal 2014 holiday, we have worked to enhance and deliver on our unique customer promises. For example, we are: (1) offering highly competitive prices, compelling promotions and our Low Price Guarantee, which is boosted further by up to 6% in rewards value we provide with the use of the My Best Buy credit card; (2) delivering a curated assortment of exciting new products, including a broad range of branded and private-label products exclusive to Best Buy; (3) enhancing the multi-channel convenience of shopping at Best Buy by offering our customers a significantly improved online experience, made better by improved site navigation and search, new buying guides and an increased number of customer reviews; (4) providing a highly trained sales force complemented by Apple, Samsung and Windows experts; (5) giving far greater access to total company inventory through our newly launched ship-from-store capability, now active in more than 400 stores; (6) offering free shipping for online orders over $25; and
(7) providing a unique services capability through the Geek Squad.

In the fourth quarter of fiscal 2014, we anticipate facing a competitive consumer electronics environment and increased promotions. We are committed to being competitive on price, as we consider this a cornerstone of our transformation. As such, we expect increased promotions in the fourth quarter could have a negative impact on our gross margin rate. We are also committed to serving our customers when and where they want, and to support this commitment, we plan to open our stores at 6:00 pm on Thanksgiving Day and not close them until late evening on Black Friday. This decision will require increased promotional offers and an incremental investment in store payroll.

In addition to the holiday-related factors discussed above, the following four factors are expected to negatively impact our fiscal 2014 fourth quarter results: (1) the negative impact of ongoing price investments; (2) the negative impact of $150 million to $200 million in incremental fiscal 2014 Renew Blue SG&A investments; (3) the increase in our product warranty-related costs due to higher mobile phone claims frequency; and (4) a longer-term change related to our private-label credit card program with Citibank, which is expected to negatively impact our gross profit rate due to less favorable economics as a result


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of changes in both the regulatory environment and overall consumer credit market. We believe this increase in operational costs, and the Renew Blue pricing and SG&A investments, will be substantially offset by the positive impact of the Renew Blue cost savings.

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 November 2, 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.

Consolidated Performance Summary

Net earnings (loss) from continuing operations for the third quarter of fiscal
2014 increased $52 million from the prior-year period. The increase was largely
the result of our Renew Blue cost reduction initiatives, which contributed to a
decrease in SG&A expenses in both segments.

The following table presents selected consolidated financial data ($ in
millions, except per share amounts):
                                                  Three Months Ended                          Nine Months Ended
                                        November 2, 2013      November 3, 2012     November 2, 2013      November 3, 2012
Revenue                                $        9,362        $       9,381        $       28,042        $       29,093
Revenue % decline                                (0.2 )%              (5.2 )%               (3.6 )%               (1.7 )%
Comparable store sales % growth
(decline)                                         0.3  %              (5.1 )%               (0.6 )%               (4.6 )%
Gross profit                           $        2,170        $       2,228        $        6,809        $        7,073
Gross profit as a % of revenue(1)                23.2  %              23.8  %               24.3  %               24.3  %
SG&A                                   $        2,048        $       2,192        $        6,093        $        6,467
SG&A as a % of revenue(1)                        21.9  %              23.4  %               21.7  %               22.2  %
Restructuring charges                  $           31        $          34        $           44        $          252
Operating income                       $           91        $           2        $          672        $          354
Operating income as a % of revenue                1.0  %                 -  %                2.4  %                1.2  %
Net earnings (loss) from continuing
operations(2)                          $           43        $          (9 )      $          377        $          191
Gain (loss) from discontinued
operations(3)                          $           11        $          (1 )      $         (138 )      $          (31 )
Net earnings (loss) attributable to
Best Buy Co., Inc. shareholders        $           54        $         (10 )      $          239        $          160
Diluted earnings (loss) per share from
continuing operations                  $         0.12        $       (0.03 )      $         1.09        $         0.56
Diluted earnings (loss) per share      $         0.16        $       (0.03 )      $         0.69        $         0.47

(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 earnings (loss) from continuing operations and net earnings from continuing operations attributable to noncontrolling interests.

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


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The components of the 0.2% and 3.6% revenue decreases for the third quarter and first nine months of fiscal 2014, respectively, were as follows:

                                                      Three Months Ended     Nine Months Ended
                                                       November 2, 2013      November 2, 2013
Comparable store sales impact                                  0.3  %               (0.5 )%
Non-comparable sales(1)                                        0.3  %                0.1  %
Net store changes                                             (0.4 )%               (0.5 )%
Impact of foreign currency exchange rate fluctuations         (0.4 )%               (0.2 )%
Extra week of revenue(2)                                         -  %               (2.5 )%
Total revenue decrease                                        (0.2 )%               (3.6 )%

(1) Non-comparable sales reflects the impact of revenue streams not included within our comparable store sales calculation, such as certain credit card revenue, gift card breakage and sales of merchandise to wholesalers and dealers, as applicable.

(2) Represents the estimated incremental revenue associated with stores in our Domestic segment and Canada in the first nine months of fiscal 2013, which had 40 weeks of activity, compared to 39 weeks in the first nine months of fiscal 2014.

The gross profit rate decreased by 0.6% of revenue in the third quarter of fiscal 2014. Gross profit rate declines in our Domestic and International segments accounted for a decrease of 0.5% and 0.1%, respectively. For the first nine months of fiscal 2014, the gross profit rate remained flat at 24.3% of revenue. For further discussion of each segment's gross profit rate changes, see Segment Performance Summary below.

The SG&A rate decreased by 1.5% of revenue in the third quarter of fiscal 2014. SG&A rate declines in our Domestic and International segments accounted for a decrease of 1.4% of revenue and 0.1% of revenue, respectively. The SG&A rate for the first nine months of fiscal 2014 decreased by 0.5% of revenue. SG&A rate declines in our Domestic and International segments accounted for a decrease of 0.4% of revenue and 0.1% of revenue, respectively. For further discussion of each segment's SG&A rate changes, see Segment Performance Summary below.

We recorded restructuring charges of $31 million and $44 million in the third quarter and first nine months of fiscal 2014, respectively, related primarily to cost reduction initiatives related to our Renew Blue priorities. These restructuring charges resulted in a decrease in our operating income in both the third quarter and first nine months of fiscal 2014 of 0.3% of revenue and 0.2% of revenue, respectively. We recorded $34 million and $252 million of restructuring charges in the third quarter and first nine 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 third quarter and first nine months of fiscal 2013 of 0.4% and 0.9% of revenue, respectively. For further discussion of each segment's restructuring charges, see Segment Performance Summary below.

Operating income increased $89 million and our operating income rate increased to 1.0% of revenue in the third quarter of fiscal 2014, compared to 0.0% of revenue in the third quarter of fiscal 2013. The increase in operating income was primarily driven by lower SG&A expenses driven by Renew Blue cost reduction initiatives. For the first nine months of fiscal 2014, operating income increased 89.8% to $672 million or, as a percentage of revenue, to 2.4%, compared to 1.2% of revenue in the first nine months of fiscal 2013. The increase in operating income was the result of lower SG&A expenses, LCD-related legal settlements and a decrease in restructuring charges in the first nine months of fiscal 2014, partially offset by the extra week of operations in the first nine months of fiscal 2013.

Income Tax Expense

Income tax expense increased to $35 million in the third quarter of fiscal 2014 compared to a benefit of $6 million in the prior-year period, primarily as a result of an increase in pre-tax earnings. Our effective income tax rate in the third quarter of fiscal 2014 was 44.3% compared to a rate of 42.9% in the third quarter of fiscal 2013. The increase in the effective income tax rate was primarily due to the increase in our pre-tax earnings and the resolution of certain state tax items in the prior-year period.

Income tax expense increased to $253 million in the first nine months of fiscal 2014 compared to $97 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 nine months of fiscal 2014 was 40.0%, compared to a rate of 33.4% in the first nine months of fiscal 2013. The increase was caused primarily by the resolution of a foreign tax matter and certain state tax items in the prior-year period.


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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 third quarter of fiscal 2014 was flat compared to the third quarter of fiscal 2013. The increased loss from . . .

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