Best Buy posts mixed Q4 earnings, plans to close 50 U.S. stores

Best Buy on Thursday reported results for the fourth fiscal quarter of 2012. The nationwide retail giant had missed Wall Street’s estimates in both the second and third fiscal quarters, and it posted mixed results in the fourth quarter. Revenue came in at $16.6 billion compared to analysts’ consensus of $17.15 billion, and non-GAAP earnings of $2.47 per share, up 25% from the same quarter in fiscal 2011, beating the Street’s $2.15 EPS consensus. “In order to help make technology work for every one of our customers and transform our business as the consumer electronics industry continues to evolve, we are taking major actions to improve our operating performance,” said Best Buy CEO Brian J. Dunn. “As part of our multi-channel strategy, we intend to strengthen our portfolio of store formats and footprints — closing some big box stores, modifying others to our enhanced Connected Store format, and adding Best Buy Mobile stand-alone locations — all to provide a better shopping environment for our customers across multiple channels while increasing points of presence, and to improve performance and profitability.” After jumping more than 3% in pre-market trading, shares of Best Buy stock were down 7% shortly after the market opened on Thursday. The company’s full press release follows below.

Best Buy Reports Fiscal Fourth Quarter and Full Year 2012 Results

Outlines New Transformation Strategy
Describes Specific Actions to Improve Business Performance

– Fourth Quarter and Full Year EPS:

  • GAAP: loss of ($4.89) in the fourth quarter; ($3.36) for the full year, inclusive of previously announced charges
  • Adjusted (non-GAAP): profit of $2.47 in the fourth quarter, up 25 percent; $3.64 for the full year, up 6 percent

– Transformation Strategy to Focus on:

  • Multi-year cost reduction program
  • U.S. store format improvements
  • Growth initiatives 
  • Improved customer experience

– Actions to Improve Business Performance:

  • $800 million in planned cost reductions by fiscal 2015; $250 million in fiscal 2013
  • Reductions to fund investments in enhanced customer experience and growth initiatives
  • Launch Connected Store full market test in the Twin Cities and San Antonio in fiscal 2013
  • Closure of 50 U.S. big box stores in fiscal 2013
  • Opening of 100 U.S. Best Buy Mobile small format stand-alone stores in fiscal 2013
  • Plans to grow Domestic segment online revenue 15 percent in fiscal 2013

– Fiscal 2013 EPS Outlook

  • GAAP:  $2.85 to $3.25
  • Adjusted (non-GAAP): $3.50 to $3.80, up 3 to 12 percent vs fiscal 2012 EPS of $3.39 (as recast for new fiscal year)

MINNEAPOLIS, March 29, 2012 — Best Buy Co., Inc. (NYSE: BBY) today reported a GAAP net loss of ($1.7) billion, or ($4.89) per share, for its fourth quarter ended March 3, 2012 compared to net income of $651 million, or $1.62 per diluted share for the prior-year period. The fiscal fourth quarter 2012 results include $2.6 billion of charges primarily related to the actions announced on November 7, 2011, which consist of the purchase of Carphone Warehouse Group plc’s (CPW) share of the Best Buy Mobile profit share agreement and related costs, a non-cash impairment charge to reflect the write-off of Best Buy Europe goodwill, and restructuring charges (primarily associated with U.K. big box pilot store closures).

Excluding the above charges, adjusted (non-GAAP) diluted earnings per share for the fourth quarter were $2.47, an increase of 25 percent when compared to adjusted diluted earnings per share of $1.98 for the prior-year period. Comparable store sales for the quarter declined 2.4 percent compared to a decline of 4.7 percent for the prior-year period.

For the fiscal year ended March 3, 2012, GAAP loss per share totaled ($3.36) compared to diluted earnings per share of $3.08 in fiscal 2011. Adjusted (non-GAAP) diluted earnings per share for the fiscal year totaled $3.64, an increase of 6 percent when compared to the previous year’s adjusted diluted earnings per share of $3.43. Comparable store sales for the fiscal year declined 1.7 percent compared to a decline of 1.8 percent for the prior-year period.

Please see “Reconciliation of Non-GAAP Financial Measures” attached to this release and on the investor relations website, http://www.investors.bestbuy.com, for more detail.

ACTIONS TO TRANSFORM BUSINESS OPERATIONS

“In order to help make technology work for every one of our customers and transform our business as the consumer electronics industry continues to evolve, we are taking major actions to improve our operating performance,” said Brian J. Dunn, CEO of Best Buy.

“As part of our multi-channel strategy, we intend to strengthen our portfolio of store formats and footprints — closing some big box stores, modifying others to our enhanced Connected Store format, and adding Best Buy Mobile stand-alone locations — all to provide a better shopping environment for our customers across multiple channels while increasing points of presence, and to improve performance and profitability.

“These changes will also help lower our overall cost structure. We intend to invest some of these cost savings into offering new and improved customer experiences and competitive prices — which will help drive revenue. And, over time, we expect some of the savings will fall to the bottom line. At the same time, we will continue to accelerate our key initiatives — growing connections and services, expanding our digital capabilities and growing our business in China.

“As a result, we believe these actions will position us to grow earnings, improve ROIC, and increase value to our shareholders in the years ahead.”

$800 Million Multi-year Cost Reduction Program
In order to be more efficient and align the company with the opportunities that will provide the greatest returns, the company is taking significant actions to lower its cost base:

  • Planning $800 million in cost reductions by fiscal 2015; including approximately $250 million in fiscal 2013.
  • The planned Domestic segment reductions include:
    • Retail stores: $300 million
    • Corporate and support structure: $300 million
    • Cost of goods sold: $200 million.
  • Specific actions intended to lower costs are expected to include:
    • The closure of 50 U.S. Best Buy big box stores in fiscal 2013.
    • Cost savings in corporate and support structure from IT services savings, procurement savings on non merchandise purchases, a reduction in outside consultant services and reduction of approximately 400 positions in our corporate and support areas.
    • Savings in cost of goods sold driven by reduction of product transition costs, lower product return and exchange expenses and supply chain efficiencies.

U.S. Store Format Improvements
Best Buy’s retail store strategy is to increase points of presence, while decreasing overall square footage, for increased flexibility in a multi-channel environment. The company intends to remodel key stores with a new Connected Store format in fiscal 2013, and to continue to build out the successful Best Buy Mobile small format stores throughout the U.S.

  • Based on results from store pilots conducted in 2010 and 2011, Best Buy will be deploying “at-scale” market tests of its new Connected Store format in the Twin Cities and San Antonio metro areas. The store remodels are expected to be completed before the 2012 holiday season. Connected Stores are remodeled big box stores that focus on connections(1), services and multi-channel experience through a total transformation of both the store and the operating environment.
  • The company expects total big box square footage in these combined test markets to be reduced by almost 20 percent through store downsizing and closures, while points of presence will increase by more than 20 percent.
  • Best Buy expects to open another 100 U.S. Best Buy Mobile small format stores in fiscal 2013 and continues to expect to have a total of 600 to 800 such stores by fiscal 2016 (from 305 today).

Growth Initiatives
Best Buy plans to invest to maximize the long-term opportunities offered through its existing four key growth initiatives: e-commerce, connections, services and China.

  • Domestic segment online sales are expected to grow 15 percent in fiscal 2013 and the company continues to expect to reach $4 billion by fiscal 2016.
  • As announced earlier this month, Stephen Gillett has been named to the newly created role of executive vice president and president, Best Buy Digital and Global Business Services to lead the company’s global digital strategy.
  • Connections in the U.S. are targeted to grow 15 percent in fiscal 2013, driven by continued mobile phone growth and increased connections in other product categories including tablets and computing.
  • Revenue from Domestic segment services category is expected to grow 10 percent in fiscal 2013.
  • In China, the company plans to open 50 new Five Star stores in fiscal 2013, including 14 new mobile store-within-a-store concepts, and continues to target $4 billion in sales and a total of 400 to 500 (from 204 today) Five Star stores by fiscal 2016.

Improved Customer Experience
Best Buy plans to expand the benefits under its Reward Zone Silver loyalty program, whose members account for a significant percentage of the company’s profit. Reward Zone Silver customers will receive exciting enhancements including free expedited shipping, premier access to many of the most popular products and major sales events, a free house call from the Geek Squad, and 60-day no hassle returns and price-match policy.

As part of the company’s actions to significantly improve the customer experience, Best Buy will be making important changes later this year to its store operating model that are designed to drive a differentiated employee experience. The company plans to introduce a new store labor model to be implemented in all of its U.S. big box stores before the 2012 holiday season that will provide increased store employee training and a new enhanced compensation plan that introduces financial incentives for delivering on customer service and business goals. The new compensation plan, which will be implemented across the company later this year, is based on a model that has been used successfully in the company’s Best Buy Mobile stores.

FOURTH QUARTER AND FULL YEAR FISCAL 2012 FINANCIAL RESULTS

As announced November 7, 2011, net operating results from the closed Best Buy stores in the U.K., China and Turkey, along with other recently sold businesses, are now treated as discontinued operations. All information regarding the company’s operating results, unless otherwise noted, pertains to its continuing operations.

FISCAL FOURTH QUARTER PERFORMANCE SUMMARY
(U.S. dollars in millions, except per share amounts)
Three Months Ended
Mar. 3, 2012 Feb. 26, 2011 Change
GAAP
Revenue $16,630 $16,083 3%
Comparable store sales % change(2) (2.4%) (4.7%)
Gross profit $4,057 $3,929 3%
SG&A $2,765 $2,654 4%
Restructuring charges $16 $138 (88%)
Goodwill impairment charge $1,207
Operating income $69 $1,137 (94%)
Diluted EPS from continuing operations ($4.73) $1.84 n/a
Diluted EPS, including discontinued operations ($4.89) $1.62 n/a
Adjusted (non-GAAP) Results(3)
Gross profit as % of revenue 24.5% 24.5% 0bps
SG&A as % of revenue 16.3% 16.5% (20bps)
Operating income $1,357 $1,284 6%
Operating income as % of revenue 8.2% 8.0% 20bps
Diluted EPS from continuing operations $2.50 $2.07 21%
To facilitate comparison to prior results and expectations, the following table presents key line items that reflect adjusted (non-GAAP) results from both continuing and discontinued operations. Please see “Reconciliation of Non-GAAP Financial Measures” attached to this release for more detail.
Three Months Ended
Mar. 3, 2012 Feb. 26, 2011 Change
Adjusted (non-GAAP) Results, including both continuing and discontinued operations(4)
Revenue $16,730 $16,256 3%
Gross profit as % of revenue 24.5% 24.4% 10bps
SG&A as % of revenue 16.5% 16.9% (40bps)
Operating income $1,326 $1,227 8%
Operating income as % of revenue 7.9% 7.5% 40bps
Diluted EPS $2.47 $1.98 25%

Fiscal Fourth Quarter 2012 Highlights

  • Domestic segment online revenue growth of 21 percent
  • Domestic segment mobile phones comparable store sales growth of 20 percent
  • Domestic segment connections growth of 13 percent
  • Domestic segment tablets and eReaders comparable store sales each increased low triple-digits
  • Domestic segment comparable store sales declines in gaming, notebooks, digital imaging and televisions
  • International gross profit rate improvement of 120 basis points
  • Share repurchases of $317 million (12.8 million shares)

Fiscal Full Year 2012 Highlights

  • Comparable store sales decline of (1.7) percent
  • Estimated gain in total market share in the Domestic segment
  • Domestic segment online revenue growth of 18 percent
  • Domestic segment mobile phones comparable store sales growth of 13 percent
  • Domestic segment connections growth of 11 percent
  • International adjusted operating income dollars increased 17 percent
  • Free cash flow of $2.5 billion(5)
  • Share repurchases of $1.5 billion (54.6 million shares)
  • Closed U.K. big box pilot stores to refocus Best Buy Europe on 2,400 small format stores
  • Purchased CPW’s interest in Best Buy Mobile profit share agreement in the U.S. and Canada to more fully capitalize on the significant and growing connections opportunity

Revenue

Three Months ended March 3, 2012 Prior-Year Period
($millions) Revenue Change YOY Comp. Store Sales Comp. Store Sales
Domestic $12,600 4.2% (2.2%) (5.5%)
International 4,030 1.1% (2.9%) (1.7%)
Total $16,630 3.4% (2.4%) (4.7%)

Total company revenue was $16.6 billion during the fiscal fourth quarter, an increase of 3.4 percent compared to the prior-year period and included a comparable store sales decline of 2.4 percent. Excluding the 53rd week in the fourth quarter of fiscal 2012, total company revenue declined 1.1 percent compared to the prior-year period. The Domestic segment areas of comparable store sales growth included tablets and mobile phones within the Computing & Mobile Phones revenue category and eReaders within the Consumer Electronics revenue category. These increases were more than offset by comparable store sales declines in other areas, including gaming within the Entertainment revenue category, notebooks within the Computing and Mobile Phones category and digital imaging and televisions within the Consumer Electronics revenue category. The Domestic segment online channel delivered a 21 percent revenue increase compared to the prior-year period.

The International segment comparable store sales decline was primarily driven by industry softness in gaming, home theater and digital imaging in Canada and lower connections in Europe given the difficult macro environment, partially offset by gains in Five Star stores in China.

Gross Profit

Three Months ended March 3, 2012
($millions) Gross Profit Change YOY % of Revenue
Domestic $3,015 2% 23.9%
International 1,042 6% 25.9%
Total $4,057 3% 24.4%
Adjusted gross profit – Domestic $3,034 3% 24.1%
Adjusted gross profit – International 1,042 6% 25.9%
Adjusted gross profit(3) $4,076 4% 24.5%

Excluding restructuring charges, Domestic segment adjusted gross profit dollars increased 3 percent including the 53rd week and represented a rate decline of 40 basis points. The primary factor influencing this Domestic segment rate decline was a larger mix of lower-margin promotional small and mid-size televisions. International segment gross profit dollar growth of 6 percent was the result of a rate increase of 120 basis points driven by improvements from stores throughout the International segment.

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

Three Months ended March 3, 2012
($millions) SG&A Change YOY % of Revenue
Domestic $1,932 1% 15.3%
International 833 13% 20.7%
Total $2,765 4% 16.6%
Adjusted SG&A – Domestic $1,932 1% 15.3%
Adjusted SG&A – International 787 7% 19.5%
Adjusted SG&A(3) $2,719 2% 16.3%

In the Domestic segment, focused cost control activities resulted in only 1 percent growth in SG&A spending compared to the prior-year period. The International segment’s SG&A includes $46 million in costs related to the purchase of CPW’s share of the Best Buy Mobile profit share agreement. Excluding those expenses, International segment adjusted SG&A spending increased 7 percent, driven primarily by the absence of a Best Buy Mobile profit share payment, which historically was an increase in Domestic segment SG&A and a reduction in International segment SG&A, and new store openings in Canada.

Total company adjusted SG&A dollar spending increased 2 percent and as a percent of revenue improved 20 basis points. Excluding the effect of the 53rd week, total company adjusted SG&A spending was approximately flat.

Operating Income

Three Months ended March 3, 2012
($millions) Operating Income Change YOY % of Revenue
Domestic $1,077 8% 8.5%
International (1,008) n/a n/a
Total $69 (94%) 0.4%
Adjusted operating income – Domestic $1,102 6% 8.7%
Adjusted operating income – International 255 2% 6.3%
Adjusted operating income(3) $1,357 6% 8.2%

Excluding restructuring charges, costs related to the purchase of CPW’s share of the Best Buy Mobile profit share agreement and the goodwill impairment, adjusted operating income for the quarter increased 6 percent to $1.4 billion, or 8.2 percent of revenue, compared to $1.3 billion, or 8.0 percent of revenue, for the prior-year period.

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

Free Cash Flow, Share Repurchases and Dividends
Fiscal 2012 free cash flow was $2.5 billion, primarily driven by effective management of inventory levels and the timing of several working capital items at the end of the previous fiscal year. During the fourth quarter, the company repurchased $317 million, or 12.8 million shares, of its common stock at an average price of $24.76 per share. For the full year, the company repurchased $1.5 billion, or 54.6 million shares, of its common stock at an average price of $27.47 per share. On January 24, 2012, the company paid a quarterly dividend of $0.16 per common share outstanding, or $56 million in the aggregate.

Fiscal Year Change 
As announced on November 7, 2011, Best Buy will change its fiscal year to end the Saturday nearest the end of January, effective starting in the first quarter of fiscal 2013. Below is detail on the quarterly periods for fiscal 2013, which includes 53 weeks:

1st Fiscal Quarter: Feb. / March / April January 29, 2012 to May 5, 2012
2nd Fiscal Quarter: May / June / July May 6, 2012 to August 4, 2012
3rd Fiscal Quarter: Aug. / Sept. / Oct. August 5, 2012 to November 3, 2012
4th Fiscal Quarter: Nov. / Dec. / Jan. November 4, 2012 to February 2, 2013

Under the new fiscal year, fiscal 2013 will include 53 weeks, while the recast fiscal 2012 includes 52 weeks. The company’s annual report for fiscal 2013 on Form 10-K will cover the 11-month period of March 4, 2012, to February 2, 2013. For important information on the fiscal year change, including fiscal 2011 and 2012 financial statements recast for the new fiscal year, please visit the company’s investor relations website,www.investors.bestbuy.com.

Fiscal 2013 Annual Guidance 
The following guidance is based on the company’s new fiscal year. Fiscal 2013 comprises the 53-week period ending on February 2, 2013, and fiscal 2012 now comprises the 52-week period ending on January 28, 2012.

  • Revenue expected in the range of $50.0 billion to $51.0 billion, reflecting a comparable store sales decline in the range of 2 to 4 percent. These expected results are compared with fiscal 2012 revenue of $50.0 billion and comparable store sales decline of 2.1 percent (recast for the new fiscal year).

  • Adjusted (non-GAAP) operating income dollars expected to decrease 4 to 11 percent when compared to adjusted operating income for fiscal 2012 from continuing operations (recast for the new fiscal year) of $2.3 billion. Adjusted operating income dollars expected to be in the range of a 4 percent decline to 4 percent growth when compared to adjusted operating income for fiscal 2012 from total operations (including both continuing and discontinued operations recast for the new fiscal year) of $2.1 billion.

  • Adjusted (non-GAAP) diluted EPS expected in the range of $3.50 to $3.80, including the expected repurchase of approximately $750 million to $1.0 billion of common shares and excluding fiscal 2013 restructuring costs related to the transformation strategy outlined above. This reflects growth of 3 to 12 percent over the fiscal 2012 adjusted EPS based on the new fiscal year of $3.39.

The company’s preliminary estimates for pre-tax restructuring charges in fiscal 2013 related to its transformation strategy outlined above is a range of $300 to $350 million, including store closures, severance, asset impairments and other costs. Including these charges, the preliminary GAAP diluted EPS is expected in the range of $2.85 to $3.25. Please see “Reconciliation of Non-GAAP Guidance” attached to this release for more detail.

For more information on the fiscal year change, including fiscal 2011 and fiscal 2012 financial statements recast for the new fiscal year, please visit the company’s investor relations website, www.investors.bestbuy.com.

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