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Best Buy Stock Price Dips to Nine-Year Low on Weaker Than Expected Quarter

by Sean P. Aune | August 21, 2012

Best BuyThings at Best Buy are definitely not turning around as quickly as the company would like.

Best Buy released the quarterly report this morning for the second quarter of its 2013 fiscal year, and it wasn’t exactly cheerful. Net profit dropped by 90 percent as the company was faced with restructuring charges and weaker than expected sales. It earned $12 million in profit for the quarter compared to $128 million in the same quarter a year ago.

The biggest hit came in the international stores opened at least 14 months that saw an 8.2 percent decline in sales, while the locations in the U.S. took a hit of 1.6 percent, resulting in an overall decline of 3.2 percent. The company did say it saw growth in the sales of appliances, e-readers, mobile phones and tablets, but declines hit them in digital imaging, gaming, notebooks computers and televisions. Considering how much floor space is dedicated to the televisions in a given Best Buy location, a hit in that department is sure to bring the stores down fairly quickly.

Hubert Joly was announced as the new CEO of Best Buy yesterday, and the hope is that he will be able to turn things around for the struggling retailer, but it looks like he has quite the battle ahead of him. Shares of Best Buy stock hit a nine-year low today on the announcement of the quarterly results.

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Best Buy Reports Fiscal Second Quarter 2013 Results

Hubert Joly named Best Buy Chief Executive Officer
Improved sequential sales trends and stable Domestic market share
GAAP diluted EPS of $0.04; adjusted (non-GAAP) diluted EPS of $0.20
Company expects annual free cash flow of $1.25 billion to $1.5 billion and suspends earnings guidance

FISCAL SECOND QUARTER PERFORMANCE SUMMARY
(U.S. dollars and square footage in millions, except per share and per square foot amounts)
Three Months Ended
Aug. 4, 2012 July 30, 2011 Change
Revenue $10,547 $10,856 (3%)
Comparable store sales % change1 (3.2%) (3.8%) 60bps
Gross profit as % of revenue 24.3% 25.4% (110bps)
SG&A as % of revenue 23.1% 23.0% 10bps
Restructuring charges $91 $0 N/A
Operating income $33 $260 (87%)
Operating income as a % of revenue 0.3% 2.4% (210bps)
Diluted EPS from continuing operations $0.04 $0.39 (90%)
Adjusted (non-GAAP) Results2
Operating income $124 $260 (52%)
Operating income as a % of revenue 1.2% 2.4% (120bps)
Diluted EPS from continuing operations $0.20 $0.39 (49%)
Key Metrics3
Total U.S. big box retail square feet              41.0                 42.6 (4%)
Revenue per square foot (Domestic segment) $857 $846 1%
Adjusted operating income per square foot (Domestic segment) $41 $45 (9%)
Adjusted return on invested capital4 11.1% 10.7% 40bps

Fiscal Second Quarter 2013 Highlights

  • Domestic comp store sales decline of 1.6 percent improved compared to fiscal first quarter decline of 3.7 percent
  • Domestic estimated market share maintained year-over-year
  • U.S. big box square footage reduced by 4 percent year-over-year; Domestic revenue per square foot up 1 percent year-over-year
  • Similar to the first quarter of fiscal 2013, International segment year-over-year operating income decline driven primarily by lower revenue in China, Canada and increased competitive conditions in Europe
  • Domestic segment total Services category revenue increased approximately 6 percent
  • Momentum grows in Domestic services with key partnerships announced recently: AARP, Verizon and Target
  • Domestic segment online revenue growth of 14 percent
  • Domestic segment connections growth of 11 percent
  • Domestic segment mobile phones comparable store sales growth of 35 percent
  • Domestic segment comparable store sales growth in tablets, mobile phones, appliances and eReaders more than offset by declines in gaming, digital imaging, televisions and notebooks
  • Adjusted (non-GAAP) Domestic segment year-over-year operating income decline driven primarily by lower gross margins in computing, mobile phones and televisions

MINNEAPOLIS, August 21, 2012 — Best Buy Co., Inc. (NYSE: BBY) today announced GAAP net earnings from continuing operations were $12 million, or $0.04 per diluted share, for the three months ended August 4, 2012 compared to net earnings from continuing operations of $150 million, or $0.39 per diluted share for the prior-year period. Excluding previously announced restructuring charges, adjusted (non-GAAP) net earnings from continuing operations for the second quarter of fiscal 2013 were $68 million, or $0.20 per diluted share.

On August 20, 2012, the company’s Board of Directors appointed Hubert Joly, a leading global CEO with expertise in turnaround and growth across the media, technology and service sectors, as Best Buy’s President and Chief Executive Officer and a member of its Board of Directors. He is expected to begin his new role in early September.

Revenue

Three Months ended Aug. 4, 2012 Prior-Year Period
($millions) Revenue Change YOY Comp. Store Sales Comp. Store Sales
Domestic $7,803 (2.2%) (1.6%) (4.1%)
International 2,744 (4.7%) (8.2%) (2.8%)
Total $10,547 (2.8%) (3.2%) (3.8%)

The Domestic segment comparable store sales decline of 1.6 percent was driven by declines in gaming within the Entertainment revenue category, digital imaging and televisions within the Consumer Electronics revenue category and notebooks within the Computing and Mobile Phones revenue category. These declines were partially offset by comparable store sales growth in tablets and mobile phones within the Computing & Mobile Phones revenue category, the Appliances revenue category, and eReaders within the Consumer Electronics revenue category. The Domestic segment online channel revenue grew 14 percent compared to the prior-year period.

The International segment comparable store sales decline of 8.2 percent was driven by the lower growth in consumer spending in China and the continued impact from the expiration of government sponsored programs, which negatively impacted sales in Five Star. Market softness in notebooks, digital imaging and home theater in Canada also contributed to the International comparable store sales decline.

Gross Profit

Three Months ended Aug. 4, 2012
($millions) Gross Profit Change YOY % of Revenue
Domestic $1,896 (6%) 24.3%
International 668 (9%) 24.3%
Total $2,564 (7%) 24.3%

Domestic segment gross profit decreased 6 percent, reflecting a rate decline of 110 basis points compared to the prior-year period. The Domestic segment rate decline was primarily due to three factors. In mobile phones, connection growth and a mix into higher price point smart phones resulted in strong comp sales and gross profit dollar growth, although at a lower overall rate. Second, industry softness in computing resulted in increased promotional activity in the quarter to stimulate consumer demand ahead of the second half of fiscal 2013, which will include the Windows 8 launch. Finally, there was less favorable product mix within the television category.

International segment gross profit declined 9 percent, reflecting a rate decline of 130 basis points compared to the prior-year period. This rate decline was driven by Best Buy Europe and due primarily to increased mix of lower margin wholesale sales and promotional activity within a price competitive environment for mobile phones.

Selling, General and Administrative Expenses (“SG&A”)

Three Months ended Aug. 4, 2012
($millions) SG&A Change YOY % of Revenue
Domestic $1,722 (4%) 22.1%
International 718 0% 26.2%
Total $2,440 (2%) 23.1%

Total SG&A spending declined 2 percent compared to the prior-year period as the company executed on previously announced actions to reduce costs through changes in its corporate and field operating models, adjusting labor to match demand and from store closures. As a reminder, year-over-year SG&A comparisons for both Domestic and International segments were impacted by the absence of the Best Buy Mobile profit share payment in fiscal 2013 as a result of the purchase of Carphone Warehouse Group plc’s (“CPW”) share of the Best Buy Mobile profit share agreement in the fourth quarter of fiscal 2012. These intercompany profit share payments previously increased Domestic segment SG&A expense while lowering International segment SG&A and had no impact on the company’s consolidated operating income.

Operating Income

Three Months ended Aug. 4, 2012
($millions) Operating Income Change YOY % of Revenue
Domestic $83 (65%) 1.1%
International (50) n/a (1.8%)
Total $33 (87%) 0.3%
Adjusted operating income – Domestic $174 (27%) 2.2%
Adjusted operating income – International (50) n/a (1.8%)
Adjusted operating income2 $124 (52%) 1.2%

Operating income of $33 million included $91 million of restructuring charges primarily related to store closure costs. Excluding these charges, adjusted operating income for the quarter declined 52 percent to $124 million.

Please see the table titled “Reconciliation of Non-GAAP Financial Measures” attached to this release for more detail.

Share Repurchases and Dividends
The company repurchased $122 million, or 6.3 million shares, of its common stock at an average price of $19.28 per share during the fiscal second quarter. The company has suspended its share repurchases for fiscal 2013 as it goes through the transition to a new CEO. On July 3, 2012, the company paid a quarterly dividend of $0.16 per common share outstanding, or $54 million in the aggregate.
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Sean P. Aune

Sean P. Aune has been a professional technology blogger since July 2007, but his love of tech dates back to at least 1976 when his parents bought...Sean P. Aune has been a professional technology blogger since July 2007, but his love of tech dates back to at least 1976 when his parents bought...


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