UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 3, 2012
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-9595
________________________________
BEST BUY CO., INC.
(Exact name of registrant as specified in its charter)
Minnesota | 41-0907483 | |
State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) | |
7601 Penn Avenue South Richfield, Minnesota | 55423 (Zip Code) | |
(Address of principal executive offices) | ||
Registrant's telephone number, including area code 612-291-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $.10 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
____________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) o Yes x No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of August 27, 2011, was approximately $6.6 billion, computed by reference to the price of $24.79 per share, the price at which the common equity was last sold on August 27, 2011, as reported on the New York Stock Exchange-Composite Index. (For purposes of this calculation all of the registrant's directors and executive officers are deemed affiliates of the registrant.)
As of April 26, 2012, the registrant had 342,198,524 shares of its Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated on or about May 9, 2012 (to be filed pursuant to Regulation 14A within 120 days after the registrant's fiscal year-end of March 3, 2012), for the regular meeting of shareholders to be held on June 21, 2012 ("Proxy Statement"), are incorporated by reference into Part III.
CAUTIONARY STATEMENT PURSUANT TO THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Annual Report on Form 10-K are forward-looking statements and may be identified by the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "foresee," "plan," "project," "outlook," and other words and terms of similar meaning. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our future results to differ materially from the anticipated results expressed in such forward-looking statements. Readers should review Item 1A, Risk Factors, of this Annual Report on Form 10-K for a description of important factors that could cause our future results to differ materially from those contemplated by the forward-looking statements made in this Annual Report on Form 10-K. Our forward-looking statements speak only as of the date of this report or as of the date they are made, and we undertake no obligation to update our forward-looking statements.
BEST BUY FISCAL 2012 FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business.
Unless the context otherwise requires, the use of the terms "we," "us" and "our" in this Annual Report on Form 10-K refers to Best Buy Co., Inc. and, as applicable, its consolidated subsidiaries.
Description of Business
We are a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services. We operate retail stores and call centers and conduct online retail operations under a variety of brand names such as Best Buy (BestBuy.com, BestBuy.ca), Best Buy Mobile (BestBuyMobile.com), The Carphone Warehouse (CarphoneWarehouse.com), Five Star, Future Shop (FutureShop.ca), Geek Squad, Magnolia Audio Video, Pacific Sales and The Phone House (PhoneHouse.com). References to our Web site addresses do not constitute incorporation by reference of the information contained on the Web sites.
Information About Our Segments
During fiscal 2012, we operated two reportable segments: Domestic and International. The Domestic segment is comprised of the operations in all states, districts and territories of the U.S., operating under various brand names including, but not limited to, Best Buy, Best Buy Mobile, Geek Squad, Magnolia Audio Video and Pacific Sales.
The International segment is comprised of: (i) all Canada operations, operating under the brand names Best Buy, Best Buy Mobile, Cell Shop, Connect Pro, Future Shop and Geek Squad; (ii) all Europe operations, operating under the brand names The Carphone Warehouse, The Phone House and Geek Squad; (iii) all China operations, operating under the brand name Five Star and (iv) all Mexico operations, operating under the brand names Best Buy and Geek Squad.
Financial information about our segments is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 14, Segment and Geographic Information, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Domestic Segment
We were incorporated in the state of Minnesota in 1966 as Sound of Music, Inc. Today, our U.S. Best Buy stores offer our customers a wide variety of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services with variations on product assortments, staffing, promotions and store design to address specific customer groups and local market needs.
In fiscal 2001, we acquired Magnolia Hi-Fi, Inc. — a Seattle-based, high-end retailer of audio and video products and services — to access an upscale customer segment. Today, we operate Magnolia Home Theater store-within-a-store experiences in certain U.S. Best Buy stores, offering customers high-end electronics with specially trained employees. In fiscal 2010, we also began operating Magnolia Design Center store-within-a-store experiences to further enhance the unique product offerings and high-touch customer service provided by the Magnolia brand in select U.S. Best Buy stores.
In fiscal 2003, we acquired Geek Squad Inc. Geek Squad provides repair, support and installation services. We acquired Geek Squad to further our plans of providing technology support services to customers. Geek Squad service is available in all U.S. Best Buy branded stores.
In fiscal 2007, we acquired California-based Pacific Sales Kitchen and Bath Centers, Inc. ("Pacific Sales"). Pacific Sales specializes in the sale and installation of high-end and mass-market premium brand kitchen appliances, plumbing fixtures and home entertainment products, with a focus on builders and remodelers. In fiscal 2011, we also began integrating Pacific Sales into select U.S. Best Buy stores via our store-within-a-store experience, offering customers many of the same products and services offered in that brand's stand-alone store format.
In fiscal 2007, we also developed the Best Buy Mobile concept through a management consulting agreement with U.K.-based The Carphone Warehouse Group PLC ("CPW"). Best Buy Mobile provides a comprehensive assortment of mobile phones, accessories and related services using experienced sales personnel, now in all U.S. Best Buy stores, as well as stand-alone stores.
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In fiscal 2012, we acquired mindSHIFT Technologies, Inc ("mindSHIFT"), a managed service provider for small and mid-sized businesses, providing cloud services, data center services and professional services throughout the U.S.
In the future, we expect to see a reduction in the number of large-format stores, a reduction in square footage for certain of our large-format stores and a continuation of the growth in small-format Best Buy Mobile stores.
International Segment
Our International segment was established in fiscal 2002 with our acquisition of Future Shop Ltd., Canada's largest consumer electronics retailer. Since that acquisition, we have operated a dual-brand strategy in Canada by introducing the Best Buy brand, which allows us to retain Future Shop's brand equity and attract more customers by offering a choice of distinct store experiences.
In fiscal 2007, we acquired a 75% interest in Jiangsu Five Star Appliance Co., Ltd. ("Five Star"), one of China's largest appliance and consumer electronics retailers. In fiscal 2009, we acquired the remaining 25% interest in Five Star.
In fiscal 2009, we acquired a 50% share in Best Buy Europe Distributions Limited ("Best Buy Europe"). Best Buy Europe is a venture with CPW, consisting of CPW's former retail and distribution business with nearly 2,400 small-format The Carphone Warehouse and The Phone House stores, online channels, device insurance operations, and mobile and fixed-line telecommunication services.
In fiscal 2009, we also expanded our Best Buy Mobile operations to Canada by opening stand-alone stores. We now also offer the Best Buy Mobile store-within-a-store experience in all Canadian Best Buy branded stores. Also in fiscal 2009, we opened our first Best Buy branded store in Mexico, located in Mexico City.
As of the end of fiscal 2012, we had closed all of our large-format Best Buy branded stores in China, Turkey and the U.K.
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 Europe, China and Mexico operations on a two-month lag. Consistent with such consolidation, the financial and non-financial information presented in this Annual Report on Form 10-K relative to our Europe, China and Mexico operations is also presented on a two-month lag.
Operations
Domestic Segment
Our Domestic segment is primarily managed by product and service categories, with separate leadership teams responsible for each category. These teams are responsible for determining how their products and services are marketed through our three primary channels – retail stores, online and call centers. In addition to these teams, separate teams manage core capabilities (e.g., human resources and real estate management) and channel operations. Retail store operations are divided into territories and districts based on geography and store size. District managers monitor store operations and meet regularly with store managers to discuss performance.
Our U.S. Best Buy, U.S. Best Buy Mobile, Magnolia Audio Video and Pacific Sales stores have developed procedures for inventory management, transaction processing, customer relations, store administration, product sales and services, staff training and merchandise display that are standardized within each store brand. Corporate retail management for each store brand generally controls advertising, merchandise purchasing and pricing, as well as inventory policies. All stores within each store brand generally operate in the same manner under the standard procedures adjusted to local customer needs.
International Segment
Located throughout eight European countries, The Carphone Warehouse and The Phone House stores are significantly smaller than our Best Buy branded stores and employ sales associates that provide independent advice on the service and hardware best suited to each customer. Most phone sales require in-store registration with the mobile phone network operator facilitated by our employees, allowing the customer to leave the store with a fully active phone and a service contract. Advertising, merchandise purchasing and pricing and inventory policies for these stores are controlled by corporate retail management in each respective local market.
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Canada store operations are organized to support two principal store brands. Future Shop stores have predominantly commissioned sales associates, whereas employees in Best Buy branded stores in Canada, like employees in U.S. Best Buy stores, are noncommissioned. Each store brand has national management that monitors store operations. All Canada stores use a standardized operating system that includes procedures for inventory management, transaction processing, customer relations, store administration, staff training and merchandise display. Advertising, merchandise purchasing and pricing and inventory policies are centrally controlled. Our Best Buy Mobile stores in Canada employ an operating model similar to that used in our U.S. Best Buy Mobile stores.
Our Five Star stores primarily utilize vendor employees and full-time sales associates to sell our products. Corporate retail management generally controls advertising, merchandise purchasing and pricing, and inventory policies, although management for individual regions within our Five Star brand may vary these operations locally to adapt to customer needs.
Our Best Buy branded stores in Mexico employ an operating model similar to that used in our U.S. Best Buy stores.
Merchandise and Services
Domestic Segment
U.S. Best Buy stores and the related online channel have offerings in six revenue categories: Consumer Electronics, Computing and Mobile Phones, Entertainment, Appliances, Services and Other. Consumer Electronics consists primarily of video and audio products. Video products include televisions, e-Readers, navigation products, digital cameras and accessories, digital camcorders and accessories and DVD and Blu-ray players. Audio products include MP3 players and accessories, home theater audio systems and components, musical instruments and mobile electronics such as car stereo and satellite radio products. The Computing and Mobile Phones revenue category includes notebook and desktop computers, tablets, monitors, mobile phones and related subscription service commissions, hard drives and other storage devices, networking equipment, office supplies and other related accessories such as printers. The Entertainment revenue category includes video gaming hardware and software, DVDs, Blu-rays, CDs, digital downloads and computer software. The Appliances revenue category includes both major and small appliances. The Services revenue category consists primarily of service contracts, extended warranties, computer-related services, product repair, and delivery and installation for home theater, mobile audio and appliances. The Other revenue category includes non-core offerings such as snacks and beverages.
U.S. Best Buy Mobile offerings are included in our Computing and Mobile Phones and Services revenue categories. Revenue from U.S. Best Buy Mobile stand-alone stores is primarily derived from mobile phone hardware, subscription service commissions from mobile phone network operators and associated mobile phone accessories.
Magnolia Audio Video stores have offerings in two revenue categories: Consumer Electronics and Services. Consumer electronics consists of video and audio products. Video products include televisions, DVD and Blu-ray players and accessories. Audio products include home theater audio systems and components, mobile electronics and accessories. The services revenue category consists primarily of home theater system installation as well as extended warranties.
Pacific Sales stores have offerings in three revenue categories: Appliances, Consumer Electronics and Services. Appliances consists of major appliances, evenly split between high-end and mass-market premium brands, and plumbing, which consists of kitchen and bath fixtures including faucets, sinks, toilets and bath tubs. Consumer Electronics consists of video and audio products, including televisions and home theater systems. The Services revenue category consists primarily of extended warranties, installation and repair services.
The offerings from our managed service provider for small and mid-sized businesses, mindSHIFT, are included in our Services revenue category and consist primarily of information technology-related service contracts.
International Segment
Our The Carphone Warehouse and The Phone House stores in Europe have offerings in two revenue categories: Computing and Mobile Phones and Services. Computing and Mobile Phones consists primarily of mobile phone hardware, subscription service commissions from mobile phone network operators, associated mobile phone accessories and tablets. Services consists of insurance operations, providing protection primarily for the replacement of a lost, stolen or damaged mobile phones and tablets, as well as mobile and fixed-line telecommunication services, billing management services and Geek Squad repair services.
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In Canada, the Future Shop and Best Buy branded stores have offerings in five revenue categories: Consumer Electronics, Computing and Mobile Phones, Entertainment, Services and Other, and at Future Shop only, a sixth revenue category, Appliances. Consumer Electronics consists of video and audio products. Video products include televisions, e-Readers, navigation products, digital cameras and accessories, digital camcorders and accessories and DVD and Blu-ray players. Audio products encompass MP3 players and accessories, home theater audio systems and components, musical instruments and mobile electronics such as car stereo and accessories. The Computing and Mobile Phones revenue category includes notebook and desktop computers, tablets, monitors, mobile phones and related subscription service commissions, hard drives and other storage devices, networking equipment, office supplies and related accessories such as printers. The Entertainment revenue category includes video game hardware and software, DVDs, Blu-rays, CDs and computer software. The Appliances revenue category includes both major and small appliances. The Services revenue category includes extended warranties, repair, delivery, computer-related services and home theater installation. The Other revenue category includes non-core offerings such as snacks and beverages.
Although Future Shop and Best Buy branded stores in Canada offer similar revenue categories (except for major Appliances, which are only offered at Future Shop stores), there are differences in product brands and depth of selection within revenue categories. Further, Geek Squad services are only available in the Best Buy branded stores with Future Shop's service offerings branded as Connect Pro.
Canada Best Buy Mobile offerings are included in our Computing and Mobile Phones revenue category. Revenue from Canada Best Buy Mobile stand-alone stores is primarily derived from mobile phone hardware, subscription service commissions from mobile phone network operators and related mobile phone accessories.
In China, our Five Star stores have offerings in four revenue categories: Appliances, Consumer Electronics, Computing and Mobile Phones and Services. Our Five Star stores do not carry products in our Entertainment revenue category. The Appliances revenue category includes both major and small appliances, air conditioners and housewares. The Consumer Electronics revenue category consists of video and audio products, including televisions, digital cameras, MP3 players and accessories. The Computing and Mobile Phones revenue category includes desktop and notebook computers, tablets, mobile phones, traditional telephones and accessories. The Services revenue category includes extended warranties, repair, delivery, computer-related services and installation.
Our Best Buy branded stores in Mexico have offerings in six revenue categories: Consumer Electronics, Computing and Mobile Phones, Entertainment, Appliances, Services and Other, with products and services similar to those of our U.S. Best Buy stores.
Distribution
Domestic Segment
Generally, U.S. Best Buy, U.S. Best Buy Mobile, Magnolia Audio Video and Pacific Sales stores' merchandise, except for major appliances and large-screen televisions, is shipped directly from manufacturers to our distribution centers located throughout the U.S. Major appliances and large-screen televisions are shipped to satellite warehouses in each major market. These stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to our stores from manufacturers and distributors. Contract carriers ship merchandise from the distribution centers to stores, though Pacific Sales stores' merchandise is generally fulfilled directly to customers through a distribution center in California. Generally, U.S. Best Buy online merchandise sales are either picked up at U.S. Best Buy stores or fulfilled directly to customers through our distribution centers.
International Segment
Our small-format The Carphone Warehouse and The Phone House stores' merchandise is shipped directly from our suppliers to our distribution centers across Europe. Contract carriers ship merchandise from the distribution centers to stores. Stores hold the immediate stock requirement and the distribution center in each market holds additional inventory.
Our Canada stores' merchandise is shipped directly from our suppliers to our distribution centers in British Columbia and Ontario. Our Canada stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to our stores from manufacturers and distributors. Contract carriers ship merchandise from the distribution centers to stores.
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We receive our Five Star stores' merchandise at nearly 50 distribution centers and warehouses located throughout the Five Star retail chain, the largest of which is located in Nanjing, Jiangsu Province. Our Five Star stores are dependent upon the distribution centers for inventory storage and the shipment of most merchandise to our stores or customers. Large merchandise, such as major appliances, is generally fulfilled directly to customers through our distribution centers and warehouses.
Our Best Buy branded stores in Mexico have distribution methods similar to that of our U.S. Best Buy stores.
Suppliers and Inventory
Our strategy depends, in part, upon our ability to offer customers a broad selection of name-brand products and, therefore, our success is dependent upon satisfactory and stable supplier relationships. In fiscal 2012, our 20 largest suppliers accounted for just over 60% of the merchandise we purchased, with five suppliers — Apple, Samsung, Hewlett-Packard, Sony and Toshiba — representing 40% of total merchandise purchased. The loss of or disruption in supply from any one of these major suppliers could have a material adverse effect on our revenue and earnings. We generally do not have long-term written contracts with our major suppliers that would require them to continue supplying us with merchandise. We have no indication that any of our suppliers plan to discontinue selling us merchandise. At various times throughout fiscal 2012, our ability to maintain satisfactory sources of supply for certain products was directly affected by supply chain interruptions in the industry caused by natural disasters in foreign countries. However, we generally expect that adequate sources of supply will be available for the various types of merchandise we sell.
We carefully monitor and manage our inventory levels to match quantities on hand with consumer demand as closely as possible. Key elements to this inventory management process include, without limitation, the following:
• | continuous monitoring of historical and projected consumer demand; |
• | continuous monitoring and adjustment of inventory receipt levels; |
• | agreements with vendors relating to reimbursement for the cost of markdowns or sales incentives; and |
• | agreements with vendors relating to return privileges for certain products. |
We also have a global sourcing operation in China in order to design, develop, test and contract manufacture our own line of exclusive brand products.
Store Development
Our store development program has historically focused on testing stores in new markets; adding stores within existing markets; and relocating, remodeling and expanding existing stores in order to offer new products and services to our customers.
In our Domestic segment, our current store development strategy is focused on increasing our retail points of presence, while decreasing our overall store square footage, for increased flexibility in a multi-channel environment. This includes our plans to remodel existing key stores in test markets with our new "Connected Store" format in fiscal 2013, as well as increasing the number of small-format Best Buy Mobile stand-alone stores. We announced plans to close approximately 50 large-format Best Buy branded stores in the U.S. in fiscal 2013 and explore options for downsizing other stores throughout our portfolio.
In our International segment, we have recently exited or closed our large-format Best Buy branded stores in the China, Turkey, and U.K. markets. We intend to focus our international store strategy on areas we believe offer the best opportunity for profitable growth, such as Five Star in China and our small-format The Carphone Warehouse and The Phone House stores in Europe.
Domestic Segment
During fiscal 2012, we opened 135 new stores and closed five stores in our Domestic segment. Although we have closed all of our Geek Squad stand-alone stores, we offer Geek Squad support services, as well as the Best Buy Mobile store-within-a-store experience, in all U.S. Best Buy stores.
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The following tables show our Domestic segment stores open at the beginning and end of each of the last three fiscal years:
U.S. Best Buy Stores | U.S. Best Buy Mobile Stand-Alone Stores | Pacific Sales Stores | Magnolia Audio Video Stores | ||||||||
Total stores at end of fiscal 2011 | 1,099 | 177 | 35 | 6 | |||||||
Stores opened | 7 | 128 | — | — | |||||||
Stores closed | (3 | ) | — | (1 | ) | (1 | ) | ||||
Total stores at end of fiscal 2012 | 1,103 | 305 | 34 | 5 | |||||||
U.S. Best Buy Stores | U.S. Best Buy Mobile Stand-Alone Stores | Pacific Sales Stores | Magnolia Audio Video Stores | Geek Squad Stand-Alone Stores | ||||||||||
Total stores at end of fiscal 2010 | 1,069 | 74 | 35 | 6 | 6 | |||||||||
Stores opened | 31 | 103 | — | — | — | |||||||||
Stores closed | (1 | ) | — | — | — | (6 | ) | |||||||
Total stores at end of fiscal 2011 | 1,099 | 177 | 35 | 6 | — | |||||||||
U.S. Best Buy Stores | U.S. Best Buy Mobile Stand-Alone Stores | Pacific Sales Stores | Magnolia Audio Video Stores | Geek Squad Stand-Alone Stores | ||||||||||
Total stores at end of fiscal 2009 | 1,023 | 38 | 34 | 6 | 6 | |||||||||
Stores opened | 46 | 36 | 1 | — | — | |||||||||
Stores closed | — | — | — | — | — | |||||||||
Total stores at end of fiscal 2010 | 1,069 | 74 | 35 | 6 | 6 | |||||||||
International Segment
During fiscal 2012, we opened 219 new stores, primarily within our Best Buy Europe and Five Star operations, and closed 114 stores in our International segment, primarily within our Best Buy Europe business. Our small-format stores in Europe tend to have a greater number of store openings and closings compared to our other store formats, as we continually reposition and resize stores in certain markets and locations in order to optimize overall performance. We offer Geek Squad support services in all Best Buy branded stores and within select The Carphone Warehouse and The Phone House stores in the U.K and Spain, as well as similar Connect Pro branded services in Future Shop stores. We offer the Best Buy Mobile store-within-a-store experience in all Best Buy branded stores in Canada, with a similar Cell Shop branded concept in the majority of Future Shop stores.
The following tables show our International segment stores open at the beginning and end of each of the last three fiscal years:
Europe | Canada | China | Mexico | ||||||||||||||
The Carphone Warehouse and The Phone House Stores | Future Shop Stores | Best Buy Stores | Best Buy Mobile Stand-Alone Stores | Five Star Stores | Best Buy Stores | ||||||||||||
Total stores at end of fiscal 2011 | 2,357 | 146 | 71 | 10 | 166 | 6 | |||||||||||
Stores opened | 145 | 5 | 6 | 20 | 41 | 2 | |||||||||||
Stores closed | (109 | ) | (2 | ) | — | — | (3 | ) | — | ||||||||
Total stores at end of fiscal 2012 | 2,393 | 149 | 77 | 30 | 204 | 8 | |||||||||||
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Europe | Canada | China | Mexico | ||||||||||||||
The Carphone Warehouse and The Phone House Stores | Future Shop Stores | Best Buy Stores | Best Buy Mobile Stand-Alone Stores | Five Star Stores | Best Buy Stores | ||||||||||||
Total stores at end of fiscal 2010 | 2,371 | 144 | 64 | 4 | 158 | 5 | |||||||||||
Stores opened | 85 | 2 | 7 | 6 | 12 | 1 | |||||||||||
Stores closed | (99 | ) | — | — | — | (4 | ) | — | |||||||||
Total stores at end of fiscal 2011 | 2,357 | 146 | 71 | 10 | 166 | 6 | |||||||||||
Europe | Canada | China | Mexico | ||||||||||||||
The Carphone Warehouse and The Phone House Stores | Future Shop Stores | Best Buy Stores | Best Buy Mobile Stand-Alone Stores | Five Star Stores | Best Buy Stores | ||||||||||||
Total stores at end of fiscal 2009 | 2,380 | 139 | 58 | 3 | 164 | 1 | |||||||||||
Stores opened | 79 | 5 | 6 | 1 | 6 | 4 | |||||||||||
Stores closed | (88 | ) | — | — | — | (12 | ) | — | |||||||||
Total stores at end of fiscal 2010 | 2,371 | 144 | 64 | 4 | 158 | 5 | |||||||||||
The store activity tables above exclude the impact of our recently closed large-format Best Buy branded stores in China, Turkey and the U.K., as well as recently sold The Phone House stores in Belgium, all of which are now included in the results of our discontinued operations.
Fiscal 2013 Store Opening and Closing Plans
As part of our current store development strategy focused on increasing retail points of presence while decreasing our overall square footage, we plan to open approximately 100 small-format Best Buy Mobile stand-alone stores and close approximately 50 large-format Best Buy branded stores in the U.S. in fiscal 2013. Our International store development strategy consists primarily of opening approximately 50 Five Star stores in China, including 14 new mobile store-within-a-store concepts.
Intellectual Property
We own or have the right to use valuable intellectual property such as trademarks, service marks and tradenames, including, but not limited to, "Best Buy," "Best Buy Mobile," "The Carphone Warehouse," "Dynex," "Five Star," "Future Shop," "Geek Squad," "Init," "Insignia," "Magnolia," "mindSHIFT," "Pacific Sales," "The Phone House" and "Rocketfish," and our "Yellow Tag" logo.
We have secured domestic and international trademark and service mark registrations for many of our brands. We have also secured patents for many of our inventions. We believe our intellectual property has significant value and is an important factor in the marketing of our company, our stores, our products and our Web sites.
Seasonality
Our business, like that of many retailers, is seasonal. Historically, we have realized more of our revenue and a large portion of our earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Europe and Canada, than in any other fiscal quarter.
Working Capital
We fund our business operations through a combination of available cash and cash equivalents, short-term investments and cash flows generated from operations. In addition, our revolving credit facilities are available for additional working capital needs, for general corporate purposes and investment opportunities. Our working capital needs are typically greatest in the months leading up to the holiday shopping season as we purchase inventories in advance of expected sales.
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Customers
We do not have a significant concentration of sales with any individual customer and, therefore, the loss of any one customer would not have a material impact on our business. No single customer has accounted for 10% or more of our total revenue.
Backlog
Our stores, call centers and online shopping sites do not have a material amount of backlog orders.
Government Contracts
No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any government or government agencies or affiliates.
Competition
Our primary competitors are consumer electronics retailers including vendors who offer their products direct to the consumer, internet-based businesses, wholesale clubs, discount chains and home-improvement superstores.
Some of our competitors operate low cost operating structures and seek to compete for sales purely on price. In addition, in the U.S., internet-only operators receive an exemption from collecting sales taxes for sales in certain states. We believe this advantage will continue to be eroded as sales tax rules are re-evaluated at both the state and federal level. We carefully monitor pricing offered by our competitors and continuously adjust our pricing and promotions to maintain our competitiveness. In most of our locations, we offer some form of price-match to our store-based competitors. In order to allow this, we are focused on maintaining efficient operations, leveraging the economies of scale available to us and our global vendor partnerships.
In addition to price, we believe our ability to deliver a high quality customer experience offers us a key competitive advantage. We believe our dedicated and knowledgeable people, integrated store and online channels, broad product assortment, range of focused service and support offerings, distinct store formats and brand marketing strategies are important ways in which we maintain this advantage.
Research and Development
We have not engaged in any material research and development activities during the past three fiscal years.
Environmental Matters
While seeking and discovering new and innovative ways to engage our customers in the connected world, we also strive to lessen our impact on the environment. Our energy efficiency strategy includes end-to-end efforts to reduce energy use in our own internal operations and of the products and services we offer our customers. And with an expanding selection of our internally developed exclusive brand products, we continue to make efforts to provide products that use less energy, are made of non-toxic materials and are packaged in more responsible ways.
Our energy efficient practices include a centralized automated energy management system for our U.S. Best Buy stores and retail energy reports by store. We continue to evolve our High Performance Building Program as we remodel and update locations. For example, where economically viable, during remodels we are installing skylights and dimmable lighting which enables us to reduce our energy consumption. These energy efficiency improvements, as well as process enhancements, have helped us reduce our own carbon footprint. In calendar 2010, we set a new long-term goal of reducing our carbon dioxide emissions by 20% by calendar 2020 (over a 2009 baseline). During calendar 2011, our retail stores, distribution centers and corporate offices reduced over 59,000 metric tons of carbon dioxide (CO2) emissions, an “absolute” decrease of 7.5% from the previous calendar year.
We continue to experience consumer demand for environmentally-friendly products and services, which leads us to focus on providing energy efficient products and a means to recycle old products. Our U.S. Best Buy customers purchased over 24 million ENERGY STAR® qualified products in calendar 2011. Through our ENERGY STAR® program, we helped our customers realize utility bill savings of over $143 million in calendar 2011. This energy savings equates to just over 2 billion pounds of CO2 avoidance, or the equivalent of removing 180,000 cars from the road. We are also investing in a number of technologies and partnerships that increase our product and service offerings to our customers including: home automation; alternative fuel sources and transportation; and partnerships with utility companies in 23 states in the U.S. that will allow for more affordable consumer purchases of energy efficient products.
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Our nationwide consumer electronics take-back program allows customers to bring many consumer electronics products to our U.S. stores for free recycling. This recycling program is available in all U.S. Best Buy stores. We also collect old, inefficient appliances for recycling through a haul-away program. Best Buy has publicly committed to recycle 1 billion pounds of consumer goods. Through this program, Best Buy helps to reduce the overall energy impact of our supply chain and minimize the impact of mining for raw material. Since June 2008, when our goal was announced, we have diverted 500 million pounds from the waste stream. We project attaining our goal in 2014.
Continued efforts to be more environmentally conscious in our exclusive brands packaging focused on the use of recycled materials, non-solvent coatings and organic inks where possible. Through a variety of opportunities, we reduced plastic usage by 713 tons and eliminated 803 tons of PVC from our exclusive brands packaging during fiscal 2012.
We are not aware of any federal, state or local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, that have materially affected, or are reasonably expected to materially affect, our net earnings or competitive position, or have resulted or are reasonably expected to result in material capital expenditures. See Item 1A, Risk Factors, for additional discussion.
We believe we can continue to reduce energy consumption and carbon emissions in cost effective ways that deliver value to our shareholders, customers, employees and the communities we serve, whether it's in our own internal operations or through our work to connect customers with more energy efficient solutions.
Number of Employees
At the end of fiscal 2012, we employed approximately 167,000 full-time, part-time and seasonal employees worldwide. We consider our employee relations to be good. We offer our employees a wide array of company-paid benefits that vary within our company due to customary local practices and statutory requirements, which we believe are competitive in the aggregate relative to others in our industry.
Financial Information About Geographic Areas
We operate two reportable segments: Domestic and International. Financial information regarding the Domestic and International geographic areas is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 14, Segment and Geographic Information, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Available Information
We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). Copies of these reports, proxy statements and other information can be read and copied at:
SEC Public Reference Room
100 F Street NE
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC's Web site at www.sec.gov.
We make available, free of charge on our Web site, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. These documents are posted on our Web site at www.investors.bestbuy.com — select the "Financial Performance" link and then the "SEC Filings" link.
We also make available, free of charge on our Web site, the Corporate Governance Principles of our Board of Directors ("Board") and our Code of Business Ethics (including any amendment to, or waiver from, a provision of our Code of Business Ethics) adopted by our Board, as well as the charters of all of our Board's committees: Audit Committee, Compensation and Human Resources Committee, Finance and Investment Policy Committee, Global Strategy Committee and Nominating,
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Corporate Governance and Public Policy Committee. These documents are posted on our Web site at www.investors.bestbuy.com — select the the "Corporate Governance" link.
Copies of any of the above-referenced documents will also be made available, free of charge, upon written request to:
Best Buy Co., Inc.
Investor Relations Department
7601 Penn Avenue South
Richfield, MN 55423-3645
Item 1A. Risk Factors.
Described below are certain risks that our management believes are applicable to our business and the industry in which we operate. There may be additional risks that are not presently material or known. You should carefully consider each of the following risks and all other information set forth in this Annual Report on Form 10-K.
If any of the events described below occur, our business, financial condition, results of operations, liquidity or access to sources of financing could be materially adversely affected. The following risks could cause our actual results to differ materially from our historical experience and from results predicted by forward-looking statements made by us or on our behalf related to conditions or events that we anticipate may occur in the future. The following risks should not be construed as an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf. All forward-looking statements made by us or on our behalf are qualified by the risks described below.
If we do not anticipate and respond to changing consumer preferences in a timely manner, our operating results could materially suffer.
Our business depends, in large part, on our ability to successfully introduce new products, services and technologies to consumers, the frequency of such introductions, the level of consumer acceptance, and the related impact on the demand for existing products, services and technologies. Consumers continue to have a wide variety of choices in terms of how and where they purchase these products, services and technologies. Consumers also continue to benefit from the convergence of technology products, where one product combines and replaces several others. Failure to accurately predict and adapt to constantly changing consumer tastes, preferences, spending patterns and other lifestyle decisions, or to effectively address consumer concerns, could have a material adverse effect on our revenue, results of operations and reputation with our customers.
Economic conditions in the U.S. and key international markets or other conditions leading to a decline in consumer discretionary spending may materially adversely impact our operating results.
We sell certain products and services that consumers may view as discretionary items rather than necessities. As a result, our results of operations tend to be more sensitive to changes in macroeconomic conditions that impact consumer spending, including discretionary spending. Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, consumers' ability to obtain credit, and fuel and energy costs could reduce consumer spending or change consumer purchasing habits. In the past three fiscal years, many of these factors adversely affected consumer spending and, consequently, our business and results of operations. A slowdown in the U.S. or global economy, continued economic and financial instability in Europe, or an uncertain economic outlook, could materially adversely affect consumer spending habits and our operating results in the future.
The domestic and international political situation also affects consumer confidence. The threat or outbreak of domestic or international terrorism, civil unrest or other hostilities could lead to a decrease in consumer spending. Similarly, an overly anti-business climate or sentiment could potentially lead consumers to decrease or shift their spending habits. Any of these events and factors could cause a decrease in revenue or an increase in inventory markdowns or certain operating expenses, which could materially adversely affect our results of operations.
Other conditions or factors that may impact our results of operations include disruptions to the availability of content such as sporting events or other televised content. Such disruptions may influence the demand for hardware that our customers purchase to access such content, as well as the commissions we receive from subscription services. Accordingly, such disruptions could cause a material adverse effect on our revenue and results of operations.
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Our results of operations could materially deteriorate if we fail to attract, develop and retain qualified employees.
Our performance is dependent on attracting and retaining qualified employees who are able to develop the skills necessary to achieve our business strategies. We believe our competitive advantage is providing unique end-to-end solutions for each individual customer, which requires us to have highly trained and engaged employees. Our success depends in part upon our ability to attract, develop and retain a sufficient number of qualified employees, including store, service and administrative personnel. The turnover rate in the retail industry is high, and qualified individuals of the requisite caliber and quantity needed to fill these positions may be in short supply in some areas. Our inability to recruit a sufficient number of qualified individuals in the future may delay planned openings of new stores or affect the speed with which we expand our initiatives, our exclusive brands and our international operations. Delayed store openings, significant increases in employee turnover rates or significant increases in labor costs could have a material adverse effect on our business, financial condition and results of operations.
We face strong competition from traditional store-based retailers, internet-based businesses, our vendors and other forms of retail commerce, which could materially adversely affect our revenue and profitability.
The retail business is highly competitive. We compete for customers, employees, locations, products and other important aspects of our business with many other local, regional, national and international retailers, as well as our vendors who offer their products and services direct to the consumer. We continue to face pressure from our competitors, some of which have greater market presence and financial resources than we do. In addition, certain internet-based businesses do not collect and remit state and local sales taxes in all of the states in which we are required to collect and remit such taxes. These factors could require us to reduce our prices or increase our costs of doing business. In addition, because our business strategy includes staffing and support models for both products and services, our cost structure is generally higher than those offering products only. Some of our vendors also continue to interact directly with customers by embedding their services into the products we sell. As a result of this competition and the potential for direct product distribution, we may experience lower revenue and/or higher operating costs, which could materially adversely affect our results of operations.
Our results of operations could materially deteriorate if we fail to maintain positive brand perception and recognition.
We operate a global portfolio of brands with a commitment to customer service and innovation. We believe that recognition and the reputation of our brands are key to our success. The advent of social media, which uses web-based technologies for interactive dialogue, represents an increasingly popular outlet for various types of feedback, opinions and criticism surrounding the perception and reputation of our business and our brands. Damage to the perception or reputation of our brands could result in declines in customer loyalty, lower employee morale and productivity concerns, and vendor relationship issues, and could ultimately have a material adverse effect on our business, financial condition and results of operations.
Our growth is dependent on the success of our strategies.
Our growth is dependent on our ability to identify, develop and execute our strategies. Our failure to properly deploy and utilize capital and other resources may adversely affect our initiatives designed to assist our customers in connecting to a digital lifestyle. We are focusing on areas where we see the greatest opportunities for growth and profit: growth in connections in mobile phones, tablets and other computing devices; enhanced digital and e-commerce strategies, including competitive online pricing, broader use of free shipping, expanded online assortment and the further development of the Best Buy Marketplace; growth in our services business; and expansion of our established business in China. Likewise, we recently announced a series of actions intended to transform our business, focusing on improving the customer experience and our financial performance, including the roll-out of our Connected Store format in select markets. Misjudgments or flaws in our execution of these initiatives and strategies could have a material adverse effect on our business, financial condition and results of operations. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information surrounding our strategies.
Our ability to generate profitable growth is dependent upon the effective management of our property portfolio.
Our future growth is dependent, in part, on our ability to build, buy or lease new stores. We compete with other retailers and businesses for suitable locations for our stores. Local land use, local zoning issues, environmental regulations and other regulations applicable to the types of stores we desire to construct may impact our ability to find suitable locations, and also influence the cost of building, buying and leasing our stores. We also may have difficulty negotiating real estate purchase agreements and leases on acceptable terms. Failure to manage effectively these and other similar factors will affect our ability to build, buy and lease new stores, which may have a material adverse effect on our future profitability.
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We may seek to expand or reposition our business in existing markets in order to attain a greater overall market share. Because our stores typically draw customers from their local areas, a new store may draw customers away from our nearby existing stores and may cause customer traffic and comparable store sales performance to decline at those existing stores.
We also open stores in new markets from time to time. The risks associated with entering a new market include difficulties in attracting customers where there is a lack of customer familiarity with our brands, our lack of familiarity with local customer preferences, seasonal differences in the market and our ability to obtain the necessary governmental approvals. In addition, entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence.
Our current growth strategy includes refocusing our investments on areas that we believe have the potential to meet our rate of return expectations. We expect to continue the expansion of our small-format Best Buy Mobile stand-alone stores in the U.S. and our Five Star branded stores in China. We cannot ensure that our new stores, regardless of brand, size, format or market, will be profitably deployed. As a result, our future profitability may be materially adversely affected.
Additionally, in order to optimize the returns we realize from our property portfolio, we may vacate leased properties or modify the terms of such leases prior to the termination of the lease. If we are unable to effectively negotiate such changes with the landlords and/or find suitable subtenants, we may incur excessive lease costs associated with these actions.
The failure to control our costs could have a material adverse impact on our profitability.
Certain elements of our cost structure are largely fixed in nature. Consumer spending remains uncertain, which makes it more challenging for us to maintain or increase our operating income. As a result, we must continue to control our expense structure. Failure to manage our labor and benefit rates, advertising and marketing expenses, operating leases, other store expenses or indirect spending could delay or prevent us from achieving profitability goals or otherwise have a material adverse impact on our results of operations.
Our liquidity may be materially adversely affected by constraints in the capital markets.
We must have sufficient sources of liquidity to fund our working capital requirements, service our outstanding indebtedness and finance investment opportunities. Without sufficient liquidity, we could be forced to curtail our operations or we may not be able to pursue promising business opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash and cash equivalents, and borrowings under credit facilities and other debt financings.
If our sources of liquidity do not satisfy our requirements, we may have to seek additional financing. The future availability of financing will depend on a variety of factors, such as economic and market conditions, the availability of credit and our credit ratings, as well as the possibility that lenders could develop a negative perception of us or the retail industry generally. If required, we may not be able to obtain additional financing, on favorable terms, or at all.
Changes in our credit ratings may limit our access to capital markets and materially increase our borrowing costs.
In fiscal 2012, Moody's Investors Service, Inc. and Standard & Poor's Ratings Services maintained their corporate and debt ratings at investment grade level with a stable outlook. Fitch Ratings Ltd. maintained its rating of our corporate and debt securities at investment grade level but lowered it from BBB+ to BBB-, while raising its outlook to stable. Subsequent to the end of fiscal 2012, Fitch Ratings Ltd. reaffirmed its corporate and debt rating, but revised its outlook to negative.
Future downgrades to our long-term credit ratings and outlook could negatively impact our access to the capital markets and the perception of us by lenders and other third parties. Our credit ratings are based upon information furnished by us or obtained by a rating agency from its own sources and are subject to revision, suspension or withdrawal by one or more rating agencies at any time. Rating agencies may review the ratings assigned to us due to developments that are beyond our control, including as a result of new standards requiring the agencies to re-assess rating practices and methodologies.
Any downgrade to our debt securities may result in higher interest costs for certain of our credit facilities and other debt financings, and could result in higher interest costs on future financings. Further, in the event of such a downgrade, we may not be able to obtain additional financing, if necessary, on favorable terms, or at all.
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Failure in our pursuit or execution of new business ventures, strategic alliances and acquisitions could have a material adverse impact on our business.
Our growth strategy also includes expansion via new business ventures, strategic alliances and acquisitions. Assessing a potential growth opportunity involves extensive due diligence. However, the amount of information we can obtain about a potential growth opportunity may be limited, and we can give no assurance that new business ventures, strategic alliances and acquisitions will positively affect our financial performance or will perform as planned. The success of these growth opportunities is also largely dependent on the current and future participation, working relationship and strategic vision of the business venture or strategic alliance partners. Integrating new businesses, stores and concepts can be a difficult task. Cultural differences in some markets into which we may expand or into which we may introduce new retail concepts may result in customers in those markets being less receptive than originally anticipated. These types of transactions may divert our capital and our management's attention from other business issues and opportunities. Further, implementing new strategic alliances or business ventures may also impair our relationships with our vendors or strategic partners. We may not be able to successfully assimilate or integrate companies that we acquire, including their personnel, financial systems, distribution, operations and general operating procedures. We may also encounter challenges in achieving appropriate internal control over financial reporting in connection with the integration of an acquired company. If we fail to assimilate or integrate acquired companies successfully, our business, reputation and operating results could suffer materially. Likewise, our failure to integrate and manage acquired companies successfully may lead to impairment of the associated goodwill and intangible asset balances.
Failure to protect the integrity, security and use of our customers' information and media could expose us to litigation and materially damage our standing with our customers.
The use of individually identifiable data by our business, our business associates and third parties is regulated at the state, federal and international levels. Increasing costs associated with information security – such as increased investment in technology, the costs of compliance with consumer protection laws and costs resulting from consumer fraud – could cause our business and results of operations to suffer materially. Additionally, the success of our online operations depends upon the secure transmission of confidential information over public networks, including the use of cashless payments. While we have taken significant steps to protect customer and confidential information, the intentional or negligent actions of employees, business associates or third parties may undermine our security measures. As a result, unauthorized parties may obtain access to our data systems and misappropriate confidential data. There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and personal data. Furthermore, because the methods used to obtain unauthorized access change frequently and may not be immediately detected, we may be unable to anticipate these methods or promptly implement preventative measures. If any such compromise of our security or the security of information residing with our business associates or third parties were to occur, it could have a material adverse effect on our reputation, operating results and financial condition. Any compromise of our data security may materially increase the costs we incur to protect against such breaches and could subject us to additional legal risk.
Risks associated with the vendors from whom our products are sourced could materially adversely affect our revenue and gross profit.
The products we sell are sourced from a wide variety of domestic and international vendors. In fiscal 2012, our 20 largest suppliers accounted for just over 60% of the merchandise we purchased. We generally do not have long-term written contracts with our major suppliers that would require them to continue supplying us with merchandise. If any of our key vendors fails to supply us with products or continue to develop new technologies that create consumer demand, we may not be able to meet the demands of our customers and our revenue could materially decline. Likewise, the formation and/or strengthening of business partnerships between our vendors and our competitors could directly alter the composition of products and level of customer purchasing within our stores and online, which could have a material adverse impact on our operating results.
We require all of our vendors to comply with applicable laws, including labor and environmental laws, and otherwise be certified as meeting our required vendor standards of conduct. Our ability to find qualified vendors who meet our standards and supply products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced from outside the U.S. Political or financial instability, merchandise quality issues, product safety concerns, trade restrictions, work stoppages, tariffs, foreign currency exchange rates, transportation capacity and costs, inflation, civil unrest, natural disasters, outbreaks of pandemics and other factors relating to foreign trade are beyond our control. These and other issues affecting our vendors could materially adversely affect our revenue and gross profit.
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Our exclusive brands products are subject to several additional product, supply chain and legal risks, which could have a material adverse impact on our business.
Sales of our exclusive brands, which primarily include Insignia, Dynex, Init, Geek Squad and Rocketfish branded products, represent an important component of our revenue. Most of these products are manufactured under contract by vendors based in southeastern Asia. This arrangement exposes us to the following additional potential risks, which could materially adversely affect our reputation, financial condition and operating results:
• | We have greater exposure and responsibility to the consumer for warranty replacements and repairs as a result of product defects, as we generally have less recourse to contracted manufacturers for such warranty liabilities; |
• | We may be subject to regulatory compliance and/or product liability claims relating to personal injury, death or property damage caused by such products, some of which may require us to take significant actions such as product recalls; |
• | We may experience disruptions in the manufacturing or the logistics within the manufacturing environment in southeastern Asia caused by inconsistent and unanticipated order patterns, our inability to develop long-term relationships with key factories or unforeseen natural disasters; |
• | We are subject to developing and often-changing labor and environmental laws for the manufacture of products in foreign countries, and we may be unable to conform to new rules or interpretations in a timely manner; |
• | We may be subject to claims by technology owners if we inadvertently infringe upon their patents or other intellectual property rights, or if we fail to pay royalties owed on our products; and |
• | We may be unable to obtain or adequately protect our patents and other intellectual property rights on our products, the new features of our products and/or our processes. |
Maintaining consistent product quality, availability and competitive pricing of our exclusive brands products for our customers is critical to building and maintaining customer and brand loyalty. Changes in consumer acceptance or confidence relating to our exclusive brands products could materially reduce our overall revenues and negatively affect operating results.
We are subject to certain statutory, regulatory and legal developments which could have a material adverse impact on our business.
Our statutory, regulatory and legal environment exposes us to complex compliance and litigation risks that could materially adversely affect our operations and financial results. The most significant compliance and litigation risks we face are:
• | The difficulty of complying with sometimes conflicting statutes and regulations in local, national or international jurisdictions; |
• | The impact of new or changing statutes and regulations including, but not limited to, financial reform, environmental requirements, National Labor Relations Board rule changes, health care reform, corporate governance matters and/or other as yet unknown legislation, that could affect how we operate and execute our strategies as well as alter our expense structure; |
• | The impact of changes in tax laws (or interpretations thereof by courts and taxing authorities) and accounting standards; and |
• | The impact of litigation trends, including class action lawsuits involving consumers and shareholders, and labor and employment matters. |
Defending against lawsuits and other proceedings may involve significant expense and divert management's attention and resources from other matters. Furthermore, pending regulatory rules regarding requirements to disclose efforts to identify the origin of “conflict minerals” in certain portions of our supply chain could increase the cost of doing business, adversely affecting our results of operations.
Changes to the National Labor Relations Act or other labor-related statutes or regulations could have a material adverse impact on our business.
The National Labor Relations Board continually considers changes to labor regulations, many of which could significantly impact the nature of labor relations in the U.S. and how union elections and contract negotiations are conducted. In 2011, the definition of a bargaining unit changed, making it possible for smaller groups of employees to organize labor unions. Furthermore, new representation election rules – which became effective on April 30, 2012 – have streamlined the election
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process, shortening the time between the filing of a petition and an election being held. Additional changes are anticipated in 2012. As of March 3, 2012, none of our U.S. operations had employees represented by labor unions or working under collective bargaining agreements. Changes in labor-related statutes or regulations could increase the percentage of elections won by unions, and employers of newly unionized employees would have a duty to bargain in good faith over matters such as wages, benefits and labor scheduling, which could increase our costs of doing business and materially adversely affect our results of operations.
Additional legislation or rulemaking relating to environmental matters, including but not limited to, energy emissions, could have a material adverse impact on our business.
Environmental legislation or rulemaking efforts could impose unexpected costs or impact us more directly than other companies due to our operations as a global consumer electronics retailer with over 4,000 stores and 91 distribution centers worldwide.
Specifically, environmental legislation or international agreements affecting energy, carbon emissions, water or product materials are continually being explored by governing bodies. Increasing energy and fuel costs, supply chain disruptions and other potential risks to our business, as well as any significant rulemaking or passage of any such legislation, could materially increase the cost to transport our goods and materially adversely affect our results of operations.
Regulatory developments in the U.S. could impact the promotional financing offers available to our credit card customers and have a material adverse impact on our revenue and profitability.
We offer promotional financing in the U.S. through credit cards issued by third party banks that manage and directly extend credit to our customers. The cardholders can receive low- or no-interest promotional financing on qualifying purchases. Promotional financing credit card sales accounted for 20%, 18% and 17% of our Domestic segment's revenue in fiscal 2012, 2011 and 2010, respectively.
If future legislative or regulatory restrictions or prohibitions arise that significantly alter the operational, economic or contractual aspects of these programs and we or the issuing banks are unable to adjust in a timely manner, our revenue and profitability may be materially adversely affected.
Changes to our credit card agreements could adversely impact our ability to facilitate the provision of consumer credit to our customers and could materially adversely impact our results of operations.
We have agreements with third party banks for the issuance of promotional financing and customer loyalty credit cards. Under the agreements, the banks manage and directly extend credit to our customers. The banks are the sole owner of the accounts receivable generated under the credit card programs and absorb losses associated with non-payment by the cardholders and fraudulent usage of the accounts. We earn revenue from fees the banks pay to us based on the number of credit card accounts activated and card usage, as well as revenue generated from various enhancement services products such as debt cancellation, credit monitoring and identity protection services . The banks also reimburse us for certain costs associated with our credit card programs. Financing fees are paid by us to the banks and are variable based on certain factors such as the London Interbank Offered Rate (“LIBOR”), charge volume and/or the types of promotional financing offers.
As a result of the continuing changes in the economic and regulatory environment for banks, these institutions continue to re-evaluate their strategies, practices and terms, including, but not limited to, the levels at which consumer credit is granted and the strategic focus on various business segments, such as the retail partner card business. If any of our credit card programs ended prematurely or the terms and provisions, or interpretations thereof, were substantially modified, our results of operations and financial condition may be materially adversely impacted.
Our International activities subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic conditions specific to the countries or regions in which we operate, which could materially adversely affect our financial performance.
We have a presence in various foreign countries, including Bermuda, Canada, China, France, Germany, Hong Kong, India, Ireland, Japan, Luxembourg, Mexico, the Republic of Mauritius, the Netherlands, Portugal, Spain, Sweden, Switzerland, Taiwan, Turks and Caicos, and the U.K. During fiscal 2012, our International segment's operations generated 26% of our revenue. Our future operating results in these countries and in other countries or regions throughout the world where we may operate in the future could be materially adversely affected by a variety of factors, many of which are beyond our control, including political conditions, economic conditions, legal and regulatory constraints and foreign currency regulations.
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Specifically, significant concerns exist surrounding the ability of certain governments of member states of the European Union to meet their financial obligations and the indirect impacts this could have on the macroeconomic environment in Europe.
In addition, foreign currency exchange rates and fluctuations may have an impact on our future earnings and cash flows from our International segment's operations, and could materially adversely affect our financial performance. Moreover, the economies of some of the countries in which we have operations have in the past suffered from high rates of inflation and currency devaluations, which, if they were to occur again, could materially adversely affect our financial performance. Other factors which may materially adversely impact our International segment's operations include foreign trade, monetary, tax and fiscal policies both of the U.S. and of other countries; laws, regulations and other activities of foreign governments, agencies and similar organizations; and maintaining facilities in countries which have historically been less stable than the U.S.
Additional risks inherent in our International segment's operations generally include, among others, the costs and difficulties of managing international operations, adverse tax consequences and greater difficulty in enforcing intellectual property rights in countries other than the U.S. The various risks inherent in doing business in the U.S. generally also exist when doing business outside of the U.S., and may be exaggerated by the difficulty of doing business in numerous sovereign jurisdictions due to differences in culture, laws and regulations.
We rely heavily on our management information systems for inventory management, distribution and other functions. If our systems fail to perform these functions adequately or if we experience an interruption in their operation, our business and results of operations could be materially adversely affected.
The efficient operation of our business is dependent on our management information systems. We rely heavily on our management information systems to manage our order entry, order fulfillment, pricing, point-of-sale and inventory replenishment processes. The failure of our management information systems to perform as we anticipate, or to meet the continuously evolving needs of our business, could disrupt our business and could result in decreased revenue, increased overhead costs and excess or out-of-stock inventory levels, causing our business and results of operations to suffer materially.
A disruption in relationships with key third-party business partners could materially adversely affect our business and results of operations.
We have engaged Accenture LLP (“Accenture”), a global management consulting, technology services and outsourcing company, to manage significant portions of our information technology and human resources operations. We rely heavily on our management information systems for inventory management, distribution and other functions. We also rely heavily on human resources support to attract, develop and retain a sufficient number of qualified employees. Furthermore, we have engaged other key third-party business partners to manage various functions of our business, including but not limited to, customer loyalty programs, promotional financing and customer loyalty credit cards, customer warranty and insurance programs, and other outsourced functions. Any material disruption in our relationship with Accenture or other key third-party business partners could result in decreased revenue and increased overhead costs, causing our business and results of operations to suffer materially.
We are highly dependent on the cash flows and net earnings we generate during our fourth fiscal quarter, which includes the majority of the holiday selling season.
Approximately one-third of our revenue and more than one-half of our net earnings are historically generated in our fourth fiscal quarter, which includes the majority of the holiday shopping season in the U.S., Europe and Canada. Although our results for the fourth quarter of fiscal 2012 included certain impacts arising from the buy-out of a profit share agreement and from restructuring activities, we remain highly dependent on cash flows and net earnings generated during our fourth fiscal quarter. Unexpected events or developments such as natural or man-made disasters, product sourcing issues or adverse economic conditions in our fourth fiscal quarter could have a material adverse effect on our annual results of operations.
Item 1B. Unresolved Staff Comments.
Not applicable.
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Item 2. Properties.
Stores, Distribution Centers and Corporate Facilities
Domestic Segment
The following table summarizes the location of our Domestic segment stores at the end of fiscal 2012:
U.S. Best Buy Stores | U.S. Best Buy Mobile Stand-Alone Stores | Pacific Sales Stores | Magnolia Audio Video Stores | |||||||||
Alabama | 15 | 5 | — | — | ||||||||
Alaska | 2 | — | — | — | ||||||||
Arizona | 26 | — | 2 | — | ||||||||
Arkansas | 9 | 4 | — | — | ||||||||
California | 126 | 29 | 31 | 3 | ||||||||
Colorado | 23 | 5 | — | — | ||||||||
Connecticut | 12 | 3 | — | — | ||||||||
Delaware | 4 | — | — | — | ||||||||
District of Columbia | 2 | 1 | — | — | ||||||||
Florida | 67 | 30 | — | — | ||||||||
Georgia | 30 | 6 | — | — | ||||||||
Hawaii | 2 | — | — | — | ||||||||
Idaho | 5 | — | — | — | ||||||||
Illinois | 58 | 14 | — | — | ||||||||
Indiana | 23 | 11 | — | — | ||||||||
Iowa | 13 | — | — | — | ||||||||
Kansas | 10 | 2 | — | — | ||||||||
Kentucky | 9 | 5 | — | — | ||||||||
Louisiana | 16 | 6 | — | — | ||||||||
Maine | 6 | — | — | — | ||||||||
Maryland | 25 | 11 | — | — | ||||||||
Massachusetts | 29 | 11 | — | — | ||||||||
Michigan | 34 | 10 | — | — | ||||||||
Minnesota | 28 | 9 | — | — | ||||||||
Mississippi | 9 | 2 | — | — | ||||||||
Missouri | 21 | 7 | — | — | ||||||||
Montana | 3 | — | — | — | ||||||||
Nebraska | 6 | 3 | — | — | ||||||||
Nevada | 10 | 4 | 1 | — | ||||||||
New Hampshire | 6 | 3 | — | — | ||||||||
New Jersey | 27 | 7 | — | — | ||||||||
New Mexico | 5 | 1 | — | — | ||||||||
New York | 55 | 13 | — | — | ||||||||
North Carolina | 34 | 14 | — | — | ||||||||
North Dakota | 4 | — | — | — | ||||||||
Ohio | 39 | 10 | — | — | ||||||||
Oklahoma | 13 | 3 | — | — | ||||||||
Oregon | 12 | 3 | — | — | ||||||||
Pennsylvania | 38 | 12 | — | — | ||||||||
Puerto Rico | 4 | — | — | — | ||||||||
Rhode Island | 2 | — | — | — | ||||||||
South Carolina | 15 | 4 | — | — | ||||||||
South Dakota | 2 | 1 | — | — | ||||||||
Tennessee | 17 | 6 | — | — | ||||||||
Texas | 110 | 25 | — | — | ||||||||
Utah | 10 | — | — | — | ||||||||
Vermont | 1 | — | — | — | ||||||||
Virginia | 37 | 10 | — | — | ||||||||
Washington | 20 | 4 | — | 2 | ||||||||
West Virginia | 5 | — | — | — | ||||||||
Wisconsin | 23 | 10 | — | — | ||||||||
Wyoming | 1 | 1 | — | — | ||||||||
Total | 1,103 | 305 | 34 | 5 | ||||||||
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The following table summarizes the ownership status and total square footage of our Domestic segment store locations at the end of fiscal 2012:
U.S. Best Buy Stores | U.S. Best Buy Mobile Stand-Alone Stores | Pacific Sales Stores | Magnolia Audio Video Stores | |||||||||
Owned store locations | 24 | — | — | — | ||||||||
Owned buildings and leased land | 37 | — | — | — | ||||||||
Leased store locations | 1,042 | 305 | 34 | 5 | ||||||||
Square footage (in thousands) | 42,413 | 428 | 876 | 68 | ||||||||
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers, service centers and corporate offices by our Domestic segment at the end of fiscal 2012:
Square Footage (in thousands) | ||||||||
Location | Leased | Owned | ||||||
Distribution centers | 24 locations in 18 U.S. states | 7,427 | 3,882 | |||||
Geek Squad service centers(1) | Louisville, Kentucky | 237 | — | |||||
Principal corporate headquarters(2) | Richfield, Minnesota | — | 1,452 | |||||
Territory field offices | 28 locations throughout the U.S. | 163 | — | |||||
Pacific Sales corporate office space | Torrance, California | 15 | — | |||||
Other corporate office space | Los Angeles, California | 15 | — | |||||
(1) | The leased space utilized by our Geek Squad operations is used primarily to service notebook and desktop computers. |
(2) | Our principal corporate headquarters is an owned facility consisting of four interconnected buildings. Accenture, who manages significant portions of our information technology and human resources operations, and certain other of our vendors who provide us with a variety of corporate services, occupy a portion of our principal corporate headquarters. We may also sublease a portion of our our principal corporate headquarters to other businesses. |
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International Segment
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 Europe, China and Mexico operations on a two-month lag.
The following table summarizes the location of our International segment stores at the end of fiscal 2012:
Europe | Canada | China | Mexico | ||||||||||||||||||
The Carphone Warehouse Stores | The Phone House Stores | Future Shop Stores | Best Buy Stores | Best Buy Mobile Stand-Alone Stores | Five Star Stores | Best Buy Stores | |||||||||||||||
Europe | |||||||||||||||||||||
France | — | 340 | — | — | — | — | — | ||||||||||||||
Germany | — | 205 | — | — | — | — | — | ||||||||||||||
Ireland | 83 | — | — | — | — | — | — | ||||||||||||||
Netherlands | — | 187 | — | — | — | — | — | ||||||||||||||
Portugal | — | 140 | — | — | — | — | — | ||||||||||||||
Spain | — | 526 | — | — | — | — | — | ||||||||||||||
Sweden | — | 110 | — | — | — | — | — | ||||||||||||||
United Kingdom | 802 | — | — | — | — | — | — | ||||||||||||||
Canada | |||||||||||||||||||||
Alberta | — | — | 18 | 11 | 5 | — | — | ||||||||||||||
British Columbia | — | — | 24 | 13 | 5 | — | — | ||||||||||||||
Manitoba | — | — | 5 | 2 | — | — | — | ||||||||||||||
New Brunswick | — | — | 3 | — | — | — | — | ||||||||||||||
Newfoundland | — | — | 1 | 1 | — | — | — | ||||||||||||||
Nova Scotia | — | — | 6 | 2 | — | — | — | ||||||||||||||
Ontario | — | — | 59 | 33 | 17 | — | — | ||||||||||||||
Prince Edward Island | — | — | 1 | — | — | — | — | ||||||||||||||
Quebec | — | — | 29 | 13 | 3 | — | — | ||||||||||||||
Saskatchewan | — | — | 3 | 2 | — | — | — | ||||||||||||||
China | |||||||||||||||||||||
Anhui | — | — | — | — | — | 17 | — | ||||||||||||||
Henan | — | — | — | — | — | 11 | — | ||||||||||||||
Jiangsu | — | — | — | — | — | 127 | — | ||||||||||||||
Shandong | — | — | — | — | — | 12 | — | ||||||||||||||
Sichuan | — | — | — | — | — | 7 | — | ||||||||||||||
Yunnan | — | — | — | — | — | 6 | — | ||||||||||||||
Zhejiang | — | — | — | — | — | 24 | — | ||||||||||||||
Mexico | |||||||||||||||||||||
Estado de Mexico | — | — | — | — | — | — | 2 | ||||||||||||||
Distrito Federal | — | — | — | — | — | — | 2 | ||||||||||||||
Guadalajara | — | — | — | — | — | — | 3 | ||||||||||||||
Monterrey | — | — | — | — | — | — | 1 | ||||||||||||||
Total | 885 | 1,508 | 149 | 77 | 30 | 204 | 8 | ||||||||||||||
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The following table summarizes the ownership status and total square footage of our International segment store locations at the end of fiscal 2012:
Europe | Canada | China | Mexico | ||||||||||||||||||
The Carphone Warehouse Stores | The Phone House Stores | Future Shop Stores | Best Buy Stores | Best Buy Mobile Stand-Alone Stores | Five Star Stores | Best Buy Stores | |||||||||||||||
Owned store locations | — | 2 | — | 3 | — | 7 | — | ||||||||||||||
Leased store locations | 885 | 1,506 | 149 | 74 | 30 | 197 | 8 | ||||||||||||||
Square footage (in thousands) | 711 | 788 | 3,944 | 2,432 | 31 | 7,539 | 407 | ||||||||||||||
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers and corporate offices by our International segment at the end of fiscal 2012:
Square Footage (in thousands) | Square Footage (in thousands) | ||||||||||||||
Distribution Centers | Leased | Owned | Principal Corporate Offices | Leased | Owned | ||||||||||
Europe | Throughout five European countries | 270 | — | Acton, West London and throughout Europe | 905 | — | |||||||||
Canada | Brampton and Bolton, Ontario | 1,763 | — | Burnaby, British Columbia | 141 | — | |||||||||
Vancouver, British Columbia | 639 | — | |||||||||||||
Five Star | Jiangsu Province, China | 1,498 | — | Corporate headquarters, Jiangsu Province, China | 26 | 46 | |||||||||
Throughout the Five Star retail chain | 952 | — | District offices throughout the Five Star retail chain | 170 | — | ||||||||||
Mexico | Estado de Mexico, Mexico | 66 | — | Distrito Federal, Mexico | 21 | — | |||||||||
Exclusive Brands
We lease approximately 52,000 square feet of office space in China to support our exclusive brands operations.
Operating Leases
Almost all of our stores and a majority of our distribution facilities are leased. Terms of the lease agreements generally range from 10 to 20 years. Most of the leases contain renewal options and rent escalation clauses.
Additional information regarding our operating leases is available in Note 11, Leases, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Item 3. Legal Proceedings.
Employment Discrimination Action
In December 2005, a purported class action lawsuit captioned, Jasmen Holloway, et al. v. Best Buy Co., Inc., was filed against us in the U.S. District Court for the Northern District of California (the “Court”). This federal court action alleged that we discriminate against women and minority individuals on the basis of gender, race, color and/or national origin in our stores with respect to our employment policies and practices. The action sought an end to alleged discriminatory policies and practices, an award of back and front pay, punitive damages and injunctive relief, including rightful place relief for all class members. In June 2011, the plaintiffs filed a motion for preliminary approval of the parties' negotiated settlement including conditional certification of settlement classes and seeking a schedule for final approval. The proposed class action settlement terms included, in exchange for a release and dismissal of the action, certain changes to our personnel policies and procedures; payment to the nine named plaintiffs of $0.3 million in the aggregate; and payment in an amount to be determined by the Court, not to exceed $10 million, of a portion of the plaintiffs' attorneys' fees and costs. In November 2011, the Court fully approved the proposed class action settlement and consent decree; certified the settlement class; and approved and directed distribution of the settlement. Final judgment dismissing the matter with prejudice was also entered in November 2011. All payments in respect of this class action were made in full by their due date, January 8, 2012. It is not reasonably possible that we will incur losses materially in excess of the amounts paid.
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Securities Actions
In February 2011, a purported class action lawsuit captioned, IBEW Local 98 Pension Fund, individually and on behalf of all others similarly situated v. Best Buy Co., Inc., et al., was filed against us and certain of our executive officers in the U.S. District Court for the District of Minnesota. This federal court action alleges, among other things, that we and the officers named in the complaint violated Sections 10(b) and 20A of the Exchange Act and Rule 10b-5 under the Exchange Act in connection with press releases and other statements relating to our fiscal 2011 earnings guidance that had been made available to the public. Additionally, in March 2011, a similar purported class action was filed by a single shareholder, Rene LeBlanc, against us and certain of our executive officers in the same court. In July 2011, after consolidation of the IBEW Local 98 Pension Fund and Rene LeBlanc actions, a consolidated complaint captioned, IBEW Local 98 Pension Fund v. Best Buy Co., Inc., et al., was filed and served. We filed a motion to dismiss the consolidated complaint in September 2011, and in March 2012, subsequent to the end of fiscal 2012, the court issued a decision dismissing the action with prejudice. In April 2012, the plaintiffs filed a motion to alter or amend the court's decision on our motion to dismiss. As a result, the court's decision on the motion to dismiss is not final, and the time period for an appeal thereof is delayed until 30 days after a court order disposing of the plaintiff's new motion.
In June 2011, a purported shareholder derivative action captioned, Salvatore M. Talluto, Derivatively and on Behalf of Best Buy Co., Inc. v. Richard M. Schulze, et al., as Defendants and Best Buy Co., Inc. as Nominal Defendant, was filed against both present and former members of our Board of Directors serving during the relevant periods in fiscal 2011 and us as a nominal defendant in the U.S. District Court for the State of Minnesota. The lawsuit alleges that the director defendants breached their fiduciary duty, among other claims, including violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in failing to correct public misrepresentations and material misstatements and/or omissions regarding our fiscal 2011 earnings projections and, for certain directors, selling stock while in possession of material adverse non-public information. Additionally, in July 2011, a similar purported class action was filed by a single shareholder, Daniel Himmel, against us and certain of our executive officers in the same court. In November 2011, the respective lawsuits of Salvatore M. Talluto and Daniel Himmel were consolidated into a new action captioned, In Re: Best Buy Co., Inc. Shareholder Derivative Litigation, and a stay ordered until after a final resolution of the motion to dismiss in the consolidated IBEW Local 98 Pension Fund v. Best Buy Co., Inc., et al. case.
The plaintiffs in the above securities actions seek damages, including interest, equitable relief and reimbursement of the costs and expenses they incurred in the lawsuits. We believe the allegations in the above securities actions are without merit, and we intend to defend these actions vigorously. Based on our assessment of the facts underlying the claims in the above securities actions, their respective procedural litigation history, and the degree to which we intend to defend our company in these matters, the amount or range of reasonably possible losses, if any, cannot be estimated.
Other Legal Proceedings
We are involved in various other legal proceedings arising in the normal course of conducting business. For such legal proceedings, we have accrued an amount that reflects the aggregate liability deemed probable and estimable, but this amount is not material to our consolidated financial position, results of operations or cash flows. Because of the preliminary nature of many of these proceedings, the difficulty in ascertaining the applicable facts relating to many of these proceedings, the variable treatment of claims made in many of these proceedings and the difficulty of predicting the settlement value of many of these proceedings, we are not able to estimate an amount or range of any reasonably possible additional losses. However, based upon our historical experience, the resolution of these proceedings is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
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Executive Officers of the Registrant
(As of April 26, 2012)
Name | Age | Position With the Company | Years With the Company | |||
Shari L. Ballard | 45 | Executive Vice President and President, International | 19 | |||
Stephen E. Gillett(1) | 36 | Executive Vice President and President, Best Buy Digital and Global Business Services | — | |||
Christopher K.K. Gould | 42 | Vice President, Treasurer | 1 | |||
Susan S. Grafton | 55 | Senior Vice President, Controller and Chief Accounting Officer | 11 | |||
Barry Judge | 50 | Executive Vice President, Chief Marketing and Strategy Officer | 12 | |||
George L. Mikan III(2) | 41 | Chief Executive Officer (Interim) | — | |||
James L. Muehlbauer | 50 | Executive Vice President, Finance and Chief Financial Officer | 10 | |||
Keith J. Nelsen | 48 | Executive Vice President, General Counsel, Chief Risk Officer & Secretary | 6 | |||
Richard M. Schulze | 71 | Founder and Chairman of the Board | 46 | |||
Timothy R. Sheehan | 47 | Executive Vice President, Chief Administrative Officer | 27 | |||
Carol A. Surface | 46 | Executive Vice President, Chief Human Resources Officer | 2 | |||
Michael A. Vitelli | 56 | Executive Vice President and President, U.S. | 8 | |||
(1) | Mr. Gillett joined us as Executive Vice President and President, Best Buy Digital and Global Business Services in March 2012. |
(2) | Mr. Mikan became our Chief Executive Officer (Interim), effective April 10, 2012. |
Shari L. Ballard was named Executive Vice President and President, International in January 2012. Previously, she served as Executive Vice President, President – Americas from March 2010 until being appointed to her current role; Executive Vice President – Retail Channel Management from 2007 to 2010; and as Executive Vice President – Human Resources and Legal from 2004 to 2007. Ms. Ballard joined us in 1993 and has served as Senior Vice President, Vice President, and General and Assistant Store Manager. Ms. Ballard is a member of the University of Minnesota Foundation board of trustees and sits on its executive and human resources committees. She has also accepted an offer to join the board of directors of the Delhaize Group, a Belgian international food retailer, pending shareholder approval in May 2012.
Stephen E. Gillett was appointed Executive Vice President and President, Best Buy Digital and Global Business Services in March 2012. Mr. Gillett was previously the chief information officer of Starbucks, Inc. (“Starbucks”) and the executive vice president of Digital Ventures, Starbucks' technology business group. In his role, Mr. Gillett led Starbucks' efforts to use technology to provide operational capabilities, connect with customers and enhance customer experiences. He was responsible for all global enterprise technology activities at Starbucks, including retail technology, business intelligence, emerging platforms, software engineering, technology services, program management, information security, global infrastructure, and international technology, as well as all of its digital business activities. Mr. Gillett joined Starbucks in 2008 as its senior vice president, chief information officer and general manager of Digital Ventures. Prior to joining Starbucks, Mr. Gillett was CIO and SVP, Engineering for Corbis, a digital media company, from May 2006 to May 2008. From December 2004 to May 2006, Mr. Gillett was Senior Director Engineering with Yahoo!, an internet destination and online media company. Mr. Gillett's previous roles also include multiple years of technology leadership with CNET Networks and Sun Microsystems. He joined the board of directors for Symantec Corp., a developer of information security, at the beginning of 2012.
Christopher K.K. Gould joined us in 2010 when he was named Vice President, Treasurer. Previously, Mr. Gould spent 11 years at Wal-Mart Stores, Inc., a global retailer, most recently as vice president and head of the capital markets division from 2007 to 2010. From 2006 to 2007, he was a senior director and head of finance for the financial services division, and prior to that, Mr. Gould held other financial leadership roles in Wal-Mart in its international, corporate finance and investment analysis divisions. Earlier in his career, Mr. Gould worked with Wasatch Funds and Bankers Trust Company. He previously served on the board of the Business Consortium Fund, an affiliate of the National Minority Supplier Development Council, Inc.
Susan S. Grafton was named Senior Vice President, Controller and Chief Accounting Officer in 2011. She previously served as Vice President, Controller and Chief Accounting Officer from 2006 until being named to her current role. From 2005 to 2006, she served as Vice President – Financial Operations and Controller, and from 2004 to 2005, she served as Vice President – Finance, Planning and Performance Management. Prior to joining us in 2000, she worked in finance and accounting positions with The Pillsbury Company and Pitney Bowes, Inc. Ms. Grafton is a member of Financial Executives International's
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Committee on Corporate Reporting and the Finance Leaders Council for the Retail Industry Leaders Association. She also serves on the board of Perspectives, Inc., a non-profit supportive housing program in Minneapolis, Minnesota.
Barry Judge took on additional strategic responsibilities as Executive Vice President, Chief Marketing and Strategy Officer in March 2012, after being named Executive Vice President, Chief Marketing Officer in 2009. He was appointed to the Chief Marketing Officer role in 2008. Prior to that appointment, Mr. Judge served as Senior Vice President – Marketing from 2007 to 2008 and as Senior Vice President – Consumer and Brand Marketing from 2004 to 2007. Mr. Judge joined us in 1999 as a member of our e-commerce team. Prior to joining us, he spent four years as vice president of marketing for Caribou Coffee Company. His professional career also includes marketing and management positions at Young & Rubicam, Coca-Cola USA, The Quaker Oats Company and The Pillsbury Company. Mr. Judge serves on the board of directors for Total Wine & More, the country's largest independent retailer of fine wine.
George L. Mikan III is currently serving as our Chief Executive Officer (Interim) as of April 2012. Prior to his current appointment, he served until February 2012 as executive vice president of UnitedHealth Group Incorporated ("UnitedHealth"), a diversified health and well-being company. From June 2011 until his departure from UnitedHealth, he served as executive vice president and also provided transitional duties for his executive role as CEO of Optum, a health care services company and affiliate of UnitedHealth, which he was appointed to in January 2011. From November 2006 to January 2011, he served as the executive vice president and chief financial officer of UnitedHealth Group. From February 2006 to November 2006, Mr. Mikan served as senior vice president of finance of UnitedHealth. From 2004 to 2006, Mr. Mikan was chief financial officer of UnitedHealthcare and president of UnitedHealth Networks, both affiliates of UnitedHealth. Mr. Mikan joined UnitedHealthGroup in 1998 and has served in various leadership roles from 1998 until 2012, including an executive role on the corporate development group responsible for merger and acquisition activities. From 1994 to 1998, he was employed at Arthur Andersen LLP.
James L. Muehlbauer was named Executive Vice President, Finance and Chief Financial Officer in 2008 after being appointed Enterprise Chief Financial Officer (interim) in 2007. From 2006 to 2007, he served as Senior Vice President and Chief Financial Officer – Best Buy U.S., and from 2003 to 2006, as Senior Vice President – Finance. Prior to joining us, Mr. Muehlbauer spent 10 years with The Pillsbury Company, where he held senior-level finance management positions, including vice president and worldwide controller, vice president of operations, divisional finance director, director of mergers and acquisitions and director of internal audit. Prior to that, Mr. Muehlbauer spent eight years with Coopers & Lybrand LLP (now PricewaterhouseCoopers) including senior manager positions in the firm's audit and consulting practices. He serves on the board of overseers of the University of Minnesota Carlson School of Management.
Keith J. Nelsen was named Executive Vice President, General Counsel, Chief Risk Officer and Secretary in March 2012, after being appointed Executive Vice President, General Counsel in May 2011 and Secretary of the Company in June 2011. He previously served as Senior Vice President, Commercial & International General Counsel from 2008 until his current appointment. Mr. Nelsen joined us in 2006 as Vice President, Operations & International General Counsel. Prior to joining us, he worked at Danka Business Systems PLC, an office products supplier, from 1997 to 2006 and served in various roles, including chief administration officer and general counsel. Prior to his time at Danka, Mr. Nelsen held the role of vice president, legal from 1995 to 1997 at NordicTrack, Inc., a provider of leisure equipment products. Mr. Nelsen began his career in 1989 as a practicing attorney with Best and Flanagan, LLP, a law firm located in Minneapolis, Minnesota. Mr. Nelsen is a member of the board of directors of NuShoe, Inc., a privately held shoe repair facility in San Diego, California.
Richard M. Schulze is a founder of Best Buy and Chairman of our Board of Directors. He has been an officer and director from our inception in 1966. Effective in June 2002, he relinquished the duties of CEO, having served as our principal executive officer for more than 30 years. Mr. Schulze serves on the University of St. Thomas board of trustees and board of governors for the Opus College of Business at St. Thomas. In addition, he is also chairman of St. Thomas' Executive and Institutional Advancement Committee, and a member of its Board Affairs Committee. He is also a director of the Richard M. Schulze Family Foundation, Olympus Ventures, LLC and Founders Properties, LLC. Mr. Schulze previously served on the boards of Pentair, Inc., a diversified industrial manufacturing company, and The Best Buy Children's Foundation. Mr. Schulze holds an honorary doctorate of laws degree from the University of St. Thomas.
Timothy R. Sheehan was named Executive Vice President, Chief Administrative Officer in 2010. He previously served as Executive Vice President – Enterprise Retail Operations since 2009. From 2004 to 2009, he served as Senior Vice President – Customer Experience Creation, where he focused on our branding and consumer support. Mr. Sheehan joined us in 1985 as a part-time sales associate and steadily advanced his career as our company grew. He has served us as Regional Manager, District Manager and Store General Manager. Upon moving from the field into corporate, Mr. Sheehan served in positions in retail operations, consumer relations and store support.
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Carol A. Surface joined us in 2010 when she was appointed Executive Vice President, Chief Human Resources Officer. Prior to joining us, Ms. Surface spent 10 years at PepsiCo, Inc., a global food, snack and beverage company, where she served most recently as senior vice president of human resources and chief personnel officer for PepsiCo International. From 2009 to 2010, Ms. Surface served PepsiCo in Dubai where she was responsible for all human resources aspects across the Asia Pacific region, Middle East and Africa. Prior to that, Ms. Surface spent five years in Hong Kong, serving as PepsiCo's senior vice president of international human resources and chief personnel officer for the Asia region. Prior to her work at PepsiCo, her professional career included human resources and organization development positions with Kmart Corporation, Eaton Corporation and The Dow Chemical Company.
Michael A. Vitelli was named Executive Vice President and President, U.S. in January 2012. He previously served as Executive Vice President, President – Americas since March 2010 and as Executive Vice President – Customer Operating Groups since 2008. Mr. Vitelli joined us in 2004 and served as Senior Vice President and General Manager of Home Solutions from 2007 to 2008, and Senior Vice President – Merchandising from 2004 to 2007. Prior to joining us, he spent 23 years with Sony Electronics, Inc., serving in positions of increasing responsibility including executive vice president of Sony's Visual Products Company. Mr. Vitelli serves on the boards of the National Multiple Sclerosis Society, Minnesota Chapter; the National Consumer Technology Industry chapter of the Anti-Defamation League, where he serves as the industry chair; and the Consumer Electronics Association executive board.
Resignation of Chief Executive Officer
On April 9, 2012, Brian J. Dunn notified the Board that he resigned, and the Board accepted his resignation, as Chief Executive Officer and Director of Best Buy, effective April 10, 2012. Director George L. Mikan III was named Chief Executive Officer (Interim) while a search for a permanent Chief Executive Officer is conducted. The Audit Committee initiated an independent investigation into allegations related to Mr. Dunn's personal conduct. The terms of Mr. Dunn's separation from Best Buy, as well as the results of our Audit Committee's ongoing investigation, will be made available once that investigation is complete and the separation terms have been finalized.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the New York Stock Exchange under the ticker symbol BBY. The table below sets forth the high and low sales prices of our common stock as reported on the New York Stock Exchange — Composite Index during the periods indicated.
Sales Price | |||||||
High | Low | ||||||
Fiscal 2012 | |||||||
First Quarter | $ | 33.22 | $ | 28.09 | |||
Second Quarter | 32.85 | 23.25 | |||||
Third Quarter | 28.36 | 21.79 | |||||
Fourth Quarter | 28.53 | 22.48 | |||||
Fiscal 2011 | |||||||
First Quarter | $ | 48.83 | $ | 36.28 | |||
Second Quarter | 42.65 | 30.90 | |||||
Third Quarter | 45.63 | 31.32 | |||||
Fourth Quarter | 44.62 | 32.00 | |||||
Holders
As of April 26, 2012, there were 3,100 holders of record of our common stock.
Dividends
In fiscal 2004, our Board initiated the payment of a regular quarterly cash dividend with respect to shares of our common stock. A quarterly cash dividend has been paid in each subsequent quarter. Our quarterly cash dividend for the first two quarters of fiscal 2011 was $0.14 per share. For the remaining two quarters of fiscal 2011, and for the first two quarters of fiscal 2012, our quarterly cash dividend was $0.15 per share. Our quarterly cash dividend for the remaining two quarters of fiscal 2012 was $0.16 per share. The payment of cash dividends is subject to customary legal and contractual restrictions.
Future dividend payments will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
From time to time, we repurchase our common stock in the open market pursuant to programs approved by our Board. We may repurchase our common stock for a variety of reasons, such as acquiring shares to offset dilution related to equity-based incentives, including stock options and our employee stock purchase plan, and optimizing our capital structure.
In June 2011, our Board authorized up to $5.0 billion of share repurchases. The program, which became effective on June 21, 2011, terminated and replaced a $5.5 billion share repurchase program authorized by our Board in June 2007. There is no expiration date governing the period over which we can repurchase shares under the June 2011 program. During fiscal 2011, we repurchased and retired 32.6 million shares at a cost of $1.2 billion. During fiscal 2012, we repurchased and retired 54.6 million shares at a cost of $1.5 billion. At the end of fiscal 2012, $4.1 billion of the $5.0 billion of share repurchases authorized by our Board in June 2011 was available for future share repurchases.
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We consider several factors in determining when to make share repurchases including, among other things, our cash needs, the availability of funding, our future business plans and the market price of our stock. We expect that cash provided by future operating activities, as well as available cash and cash equivalents and short-term investments, will be the sources of funding for our share repurchase program. Based on the anticipated amounts to be generated from those sources of funds in relation to the remaining authorization approved by our Board under the June 2011 share repurchase program, we do not expect that future share repurchases will have a material impact on our short-term or long-term liquidity.
The following table presents the total number of shares of our common stock that we purchased during the fourth quarter of fiscal 2012, the average price paid per share, the number of shares that we purchased as part of our publicly announced repurchase program, and the approximate dollar value of shares that still could have been purchased at the end of the applicable fiscal period, pursuant to our June 2011 share repurchase program:
Fiscal Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) | |||||||||
November 27, 2011, through December 31, 2011 | 4,699,241 | $ | 24.55 | 4,699,241 | $ | 4,312,000,000 | |||||||
January 1, 2012, through January 28, 2012 | 3,517,375 | 24.62 | 3,517,375 | 4,226,000,000 | |||||||||
January 29, 2012, through March 3, 2012 | 4,576,249 | 25.07 | 4,576,249 | 4,111,000,000 | |||||||||
Total Fiscal 2012 Fourth Quarter | 12,792,865 | 24.76 | 12,792,865 | 4,111,000,000 | |||||||||
(1) | "Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs" reflects our $5.0 billion share repurchase program announced on June 21, 2011, less the $889 million we purchased in fiscal 2012. There is no stated expiration for the June 2011 share repurchase program. |
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information about our common stock that may be issued under our equity compensation plans as of March 3, 2012.
Plan Category | Securities to Be Issued Upon Exercise of Outstanding Options | Weighted Average Exercise Price per Share(1) | Securities Available for Future Issuance(2) | ||||||
Equity compensation plans approved by security holders(3) | 40,637,573 | (4) | $ | 38.08 | 24,537,808 | ||||
Equity compensation plans not approved by security holders(5) | 11,250 | $ | 34.44 | n/a | |||||
Total | 40,648,823 | $ | 38.08 | 24,537,808 | |||||
(1) | Includes weighted-average exercise price of outstanding stock options only. |
(2) | Includes 1,852,958 shares of our common stock which have been reserved for issuance under our 2008 and 2003 Employee Stock Purchase Plans. |
(3) | Includes our 1994 Full-Time Non-Qualified Stock Option Plan, as amended; our 1997 Directors' Non-Qualified Stock Option Plan, as amended; our 1997 Employee Non-Qualified Stock Option Plan, as amended; and our 2004 Omnibus Stock and Incentive Plan, as amended. |
(4) | Includes grants of stock options and market-based, performance-based and time-based restricted stock. |
(5) | Represents non-plan options issued to a former executive officer in April 2002 in consideration of his service to the Board prior to his employment with us. The options, which were fully vested upon grant, have an exercise price of $34.44 per share and expire on April 11, 2012. |
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Best Buy Stock Comparative Performance Graph
The information contained in this Best Buy Stock Comparative Performance Graph section shall not be deemed to be "soliciting material" or "filed" or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
The graph below compares the cumulative total shareholder return on our common stock for the last five fiscal years with the cumulative total return on the Standard & Poor's 500 Index ("S&P 500"), of which we are a component, and the Standard & Poor's Retailing Group Industry Index ("S&P Retailing Group"), of which we are also a component. The S&P Retailing Group is a capitalization-weighted index of domestic equities traded on the NYSE and NASDAQ, and includes high-capitalization stocks representing the retail sector of the S&P 500.
The graph assumes an investment of $100 at the close of trading on March 2, 2007, the last trading day of fiscal 2007, in our common stock, the S&P 500 and the S&P Retailing Group.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Best Buy Co., Inc., the S&P 500
and the S&P Retailing Group
FY07 | FY08 | FY09 | FY10 | FY11 | FY12 | ||||||||||||||||||
Best Buy Co., Inc. | $ | 100.00 | $ | 93.68 | $ | 63.74 | $ | 81.98 | $ | 73.82 | $ | 56.75 | |||||||||||
S&P 500 | 100.00 | 96.40 | 54.64 | 83.93 | 102.88 | 108.15 | |||||||||||||||||
S&P Retailing Group | 100.00 | 82.47 | 56.44 | 96.87 | 121.23 | 141.63 | |||||||||||||||||
* Cumulative total return assumes dividend reinvestment.
Source: Research Data Group, Inc.
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Item 6. Selected Financial Data.
The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Five-Year Financial Highlights
$ in millions, except per share amounts
Fiscal Year | 2012(1)(2) | 2011(3) | 2010(4) | 2009(5)(6) | 2008 | ||||||||||||||
Consolidated Statements of Earnings Data | |||||||||||||||||||
Revenue | $ | 50,705 | $ | 49,747 | $ | 49,243 | $ | 44,737 | $ | 39,892 | |||||||||
Operating income | 1,085 | 2,374 | 2,368 | 2,014 | 2,185 | ||||||||||||||
Net earnings from continuing operations | 330 | 1,554 | 1,495 | 1,150 | 1,426 | ||||||||||||||
Loss from discontinued operations | (308 | ) | (188 | ) | (101 | ) | (117 | ) | (16 | ) | |||||||||
Net earnings including noncontrolling interests | 22 | 1,366 | 1,394 | 1,033 | 1,410 | ||||||||||||||
Net (loss) earnings attributable to Best Buy Co., Inc. | (1,231 | ) | 1,277 | 1,317 | 1,003 | 1,407 | |||||||||||||
Per Share Data | |||||||||||||||||||
Net (loss) earnings from continuing operations | $ | (2.89 | ) | $ | 3.44 | $ | 3.29 | $ | 2.66 | $ | 3.16 | ||||||||
Net loss from discontinued operations | (0.47 | ) | (0.36 | ) | (0.19 | ) | (0.27 | ) | (0.04 | ) | |||||||||
Net (loss) earnings | (3.36 | ) | 3.08 | 3.10 | 2.39 | 3.12 | |||||||||||||
Cash dividends declared and paid | 0.62 | 0.58 | 0.56 | 0.54 | 0.46 | ||||||||||||||
Common stock price: | |||||||||||||||||||
High | 33.22 | 48.83 | 45.55 | 48.03 | 53.90 | ||||||||||||||
Low | 21.79 | 30.90 | 23.97 | 16.42 | 41.85 | ||||||||||||||
Operating Statistics | |||||||||||||||||||
Comparable store sales (decline) gain(7) | (1.7 | )% | (1.8 | )% | 0.6 | % | (1.3 | )% | 2.9 | % | |||||||||
Gross profit rate | 24.8 | % | 25.2 | % | 24.5 | % | 24.4 | % | 23.8 | % | |||||||||
Selling, general and administrative expenses rate | 20.2 | % | 20.2 | % | 19.5 | % | 19.7 | % | 18.4 | % | |||||||||
Operating income rate | 2.1 | % | 4.8 | % | 4.8 | % | 4.5 | % | 5.5 | % | |||||||||
Year-End Data | |||||||||||||||||||
Current ratio(8) | 1.2 | 1.2 | 1.2 | 1.0 | 1.1 | ||||||||||||||
Total assets | $ | 16,005 | $ | 17,849 | $ | 18,302 | $ | 15,826 | $ | 12,758 | |||||||||
Debt, including current portion | 2,208 | 1,709 | 1,802 | 1,963 | 816 | ||||||||||||||
Total equity(9) | 4,366 | 7,292 | 6,964 | 5,156 | 4,524 | ||||||||||||||
Number of stores | |||||||||||||||||||
Domestic | 1,447 | 1,317 | 1,190 | 1,107 | 971 | ||||||||||||||
International(10) | 2,861 | 2,756 | 2,746 | 2,745 | 342 | ||||||||||||||
Total(10) | 4,308 | 4,073 | 3,936 | 3,852 | 1,313 | ||||||||||||||
Retail square footage (000s) | |||||||||||||||||||
Domestic | 43,785 | 43,660 | 42,480 | 40,924 | 37,511 | ||||||||||||||
International(10) | 15,852 | 13,848 | 13,295 | 13,000 | 10,987 | ||||||||||||||
Total(10) | 59,637 | 57,508 | 55,775 | 53,924 | 48,498 | ||||||||||||||
(1) | Fiscal 2012 included 53 weeks. All other periods presented included 52 weeks. |
(2) | Included within our Operating income and Net earnings from continuing operations for fiscal 2012 is $58 ($38 net of taxes) of restructuring charges from continuing operations recorded in fiscal 2012 related to measures we took to restructure our business. Also included in Net earnings from continuing operations for fiscal 2012 is $1,180 (net of taxes) of goodwill impairment charges related to Best Buy Europe. Included in Loss from discontinued operations is $186 (net of taxes) of restructuring charges recorded in fiscal 2012 related to measures we took to restructure our business. Net (loss) earnings attributable to Best Buy Co., Inc. for fiscal 2012 includes restructuring charges (net of tax and noncontrolling interest) from both continuing and discontinued operations and the net of tax goodwill impairment, and excludes $1,303 in noncontrolling interest related to the agreement to buy out |
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Carphone Warehouse Group plc's interest in the profit share-based management fee paid to Best Buy Europe pursuant to the 2007 Best Buy Mobile agreement (which represents earnings attributable to the noncontrolling interest).
(3) | Included within our Operating income and Net earnings from continuing operations for fiscal 2011 is $147 ($93 net of taxes) of restructuring charges recorded in the fiscal fourth quarter related to measures we took to restructure our businesses. These charges resulted in a decrease in our operating income rate of 0.3% of revenue for the fiscal year. Included in Loss from discontinued operations is $54 (net of taxes) of restructuring charges recorded in the fiscal fourth quarter related to measures we took to restructure our business. Net (loss) earnings attributable to Best Buy Co., Inc. for fiscal 2011 includes the net of tax impact of restructuring charges from both continuing and discontinued operations. |
(4) | Included within our Operating income, Net earnings from continuing operations and Net (loss) earnings attributable to Best Buy Co., Inc. for fiscal 2010 is $52 ($25 net of taxes and noncontrolling interest) of restructuring charges recorded in the fiscal first quarter related to measures we took to restructure our businesses. These charges resulted in a decrease in our operating income rate of 0.1% of revenue for the fiscal year. |
(5) | Included within our Operating income and Net earnings from continuing operations for fiscal 2009 is $78 ($48 net of tax) of restructuring charges recorded in the fiscal fourth quarter related to measures we took to restructure our businesses. Included within Loss from discontinued operations is goodwill and tradename impairment charges of $64 (net of tax) related to our former Speakeasy business. Net (loss) earnings attributable to Best Buy Co., Inc. for fiscal 2009 includes the net of tax impact of restructuring charges from continuing operations and the goodwill and tradename impairment from discontinued operations. |
(6) | Included within our Net earnings from continuing operations and Net (loss) earnings attributable to Best Buy Co., Inc. for fiscal 2009 is $111 ($96 net of tax) of investment impairment charges related to our investment in the common stock of CPW. |
(7) | Comparable store sales is a measure commonly used in the retail industry, which indicates store performance by measuring the growth in revenue for certain stores for a particular period over the corresponding period in the prior year. 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, Web sites 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, 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. The calculation of comparable store sales excludes the impact of the extra week of revenue in the fourth quarter of fiscal 2012, as well as revenue from discontinued operations for all periods presented. |
(8) | The current ratio is calculated by dividing total current assets by total current liabilities. |
(9) | As a result of the adoption of new accounting guidance related to the treatment of noncontrolling interests in consolidated financial statements, we recharacterized minority interests previously reported on our Consolidated Balance Sheets as noncontrolling interests and classified them as a component of shareholders' equity. As a result, we have reclassified total shareholders' equity for fiscal years 2009 and 2008 to include noncontrolling interests of $513 and $40, respectively. |
(10) | In the second quarter of fiscal 2009, we acquired 2,414 stores pursuant to our acquisition of a 50% interest in Best Buy Europe. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A is presented in seven sections:
• | Overview |
• | Business Strategy and Core Philosophies |
• | Results of Operations |
• | Liquidity and Capital Resources |
• | Off-Balance-Sheet Arrangements and Contractual Obligations |
• | Critical Accounting Estimates |
• | New Accounting Standards |
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Our fiscal year ends on the Saturday nearest the end of February. Fiscal 2012 included 53 weeks and fiscal 2011 and 2010 each included 52 weeks.
On November 2, 2011, our Board of Directors approved a change in our fiscal year-end from the Saturday nearest the end of February to the Saturday nearest the end of January, effective beginning with our fiscal year 2013. As a result of this change, our fiscal year 2013 transition period will be 11 months and will end on February 2, 2013, and we will begin consolidating the results of our Europe, China and Mexico operations on a one-month lag, compared to a two-month lag in fiscal year 2012, to continue aligning our fiscal reporting periods with statutory filing requirements in certain foreign jurisdictions. We will begin filing our quarterly reports on Form 10-Q based on the new fiscal year-end beginning with the first quarter of fiscal year 2013.
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We also currently plan to report the first quarter of fiscal year 2013 as a three-month period, which will include the results of the last month of fiscal year 2012.
Overview
We are a multi-national retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services. We operate 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 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., Europe and Canada, than in any other fiscal quarter.
While some of the products and services we offer are viewed by consumers as essential, others are viewed as discretionary purchases. Consequently, our results of operations are susceptible to changes in consumer confidence levels and macroeconomic factors such as unemployment, consumer credit availability and the condition of the housing market. Consumers have maintained a cautious approach to discretionary spending due to continued economic pressures. Consequently, customer traffic and spending patterns continue to be difficult to predict. Other factors that directly impact our performance are product life-cycles (including the introduction and adoption of new technology) and the competitive retail environment for our products and services. As a result of these factors, predicting our future revenue and net earnings is difficult. By providing access to a wide selection of products and accessories; a vast array of service offerings, such as extended warranties, installation and repair; an integrated multi-channel approach; and a knowledgeable sales staff to help our customers select their devices and access related services and content, we believe we offer our customers a differentiated value proposition. Disciplined capital allocation, working capital management and expense control remain key priorities for us as we navigate through the current environment.
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, Web sites 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, 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. The calculation of comparable store sales excludes the impact of the extra week of revenue in the fourth quarter of fiscal 2012, as well as revenue from discontinued operations.
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 new stores on our results of operations. The key factors that dictate the impact that the net new stores have on our operating results include: (i) the size and format of new stores, as we operate stores ranging from approximately 1,000 square feet to approximately 50,000 square feet; (ii) the length of time the stores were open during the period; and (iii) the overall success of new store launches.
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Business Strategy and Core Philosophies
In recent years, the consumer electronics industry experienced limited new product innovation in many key product categories, such as televisions, computers and gaming. At the same time, consumers have enjoyed greater price transparency and easier comparison shopping. These factors have combined with a continuation of economic pressure weighing on many consumers. In response to these circumstances, we have accelerated our cost reduction efforts, adjusted our sales mix and focused on improving the experience we offer our customers.
Last year, we took important steps to begin transforming our company and focusing on strategies we believed offer the best opportunities to improve returns. We significantly restructured our International business, closing our large-format Best Buy branded stores in China, Turkey and the U.K. when it became clear that they would not deliver returns consistent with our expectations and timelines. We also agreed to buy out the Best Buy Mobile profit share-based management fee paid to Best Buy Europe pursuant to the 2007 Best Buy Mobile agreement (the “profit share agreement”). The buy-out of the profit share agreement allows us to more fully capitalize on what we believe is the growing connections opportunities related to devices and connection services in the U.S. and Canada.
We are currently focused on four initiatives to continue to drive the transformation of our company, all of which are focused on improving our financial performance:
• | Multi-year Cost Reductions; |
• | U.S. Store Format Improvements; |
• | Growth Initiatives; and |
• | Improved Customer Experience. |
Multi-year Cost Reductions. We are taking several actions to lower our cost structure in certain areas of our business. These actions are intended not only to help us be more efficient, but also to allow for current investments in our initiatives designed to grow earnings over the long-term. We plan to redirect our financial resources to invest in enhancements to the customer experience and in investment opportunities that will provide the greatest returns. In total, we expect to reduce costs in targeted areas by $800 million by fiscal 2015 – with $250 million of the cost reductions expected to be realized in fiscal 2013. These planned reductions primarily fall into three areas:
• | Retail stores – including the closure of approximately 50 large-format Best Buy stores in the U.S. in fiscal 2013; |
• | Corporate and support structure – savings from information technology services, procurement savings on non-merchandise purchases, reduction in consulting services and reduction in corporate and support positions; and |
• | Cost of goods sold – reduction of product transition costs, lower product return and exchange expenses and supply chain efficiencies. |
U.S. Store Format Improvements. We are revising our portfolio of store formats to improve the customer experience and to improve store performance and productivity. In the immediate term, this will involve closing some large-format Best Buy branded stores, modifying others to our pilot Connected Store format, and adding more small-format Best Buy Mobile stand-alone stores. The Connected Stores will be remodeled large-format stores that focus on connections, services and an enhanced multi-channel experience through a total transformation of both the physical store and the operating model. As we continue to focus on making it easier for customers to shop with us – anywhere, any time and any way they want – we are increasing our points of presence, while decreasing overall square footage, which we believe will result in increased profit per square foot.
Growth Initiatives. From an investment standpoint, we will continue to prioritize the opportunities in existing businesses through four key growth initiatives: e-commerce, connections, services and China. We expect these initiatives to benefit our overall financial performance.
• | To continue to drive the growth of our e-commerce platform, we are focused on improving the customer experience by providing more competitive online pricing, broader use of free shipping, the expansion of our online assortment and the further development of the Best Buy Marketplace, which significantly expanded the range of assortment, price points and brands available to our customers. |
• | We will continue to focus on growing connections, not only from Best Buy Mobile, but from other parts of our business. While we believe Best Buy Mobile will remain an important driver of our connections performance, we plan to leverage our mobile connections expertise for other devices – including tablets, notebooks and e-Readers – to drive increased attachments of connections, accessories and services. |
• | We see the wide range of services we can offer our customers as a key differentiator and an area with growth potential. Our growth initiatives will include: (i) refining our extended product support services with tailored programs for |
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certain products, such as mobile phones and tablets; (ii) expanding the range of our services to customers both in our stores and remotely; and (iii) further increasing our service revenue from small and medium-sized business customers, including through our mindSHIFT acquisition.
• | In China, we will continue to grow our Five Star business through approximately 50 new store openings and the introduction of the Best Buy Mobile store-within-a-store concept during fiscal 2013. |
Improved Customer Experience. Delivering outstanding experiences to our customers is a constant area of focus, and we believe the strength of those experiences is an important differentiator for us. We continuously search for ways to improve our customer interactions, whether in store, online or in customers' homes.
For example, our recently-announced “Perfect Match Promise” is based on a strategic message that we believe is important to customers: 30 days of free telephone support to assist customers in using their products; 30 days of easy returns with no restocking fees; and 30 days of competitor price matching.
In fiscal 2013, we also plan to enhance our Reward Zone loyalty program for premier level members. These enhancements include: free expedited shipping; premier access to new technology, popular products and sales events; a free house call from a Geek Squad agent; and extended returns and price-match benefits.
In order to support our focus on improving customer experience, we also plan to introduce enhanced training, recognition and reward programs which will sharpen our employees' focus on delivering outstanding customer experiences.
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 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.
Our policy is to accelerate the recording of events occurring in the lag period that significantly affect our consolidated financial statements. In November 2011, we announced plans to close our large-format Best Buy branded stores in the U.K. However, a portion of the charges were not recorded until the stores were closed in January 2012. Accordingly, $82 million of restructuring charges recorded by Best Buy Europe in January 2012 related to the store closures were included in our fiscal 2012 results. Furthermore, in January 2012, we determined that the goodwill attributable to our Best Buy Europe reporting unit had been fully impaired. Accordingly, we recorded the $1,207 million impairment charge in our fiscal 2012 results. Except for these restructuring activities and the goodwill impairment, no significant intervening event occurred in these operations that would have materially affected our financial condition, results of operations, liquidity or other factors had it been recorded during fiscal 2012.
Discontinued Operations Presentation
During the fourth quarter of fiscal 2012, we began presenting the results of our large-format Best Buy branded stores in China, Turkey and the U.K., The Phone House retail stores in Belgium, Napster and Speakeasy as discontinued operations in our Consolidated Statements of Earnings. The discontinued operations presentation has been retrospectively applied to all prior periods presented. Unless otherwise stated, financial results discussed herein refer to continuing operations.
Fiscal 2012 Summary
• | Fiscal 2012 included a net loss of $1.2 billion from total operations (including both continuing and discontinued operations), compared to net earnings of $1.3 billion in fiscal 2011. The net loss in fiscal 2012 was primarily due to our decision to buy out of the Best Buy Mobile profit share agreement for $1.3 billion (the "Mobile buy-out"), as well as the resulting $1.2 billion goodwill impairment in our Best Buy Europe reporting unit. Loss per diluted share from total operations was $3.36 in fiscal 2012, compared to earnings per diluted share of $3.08 in fiscal 2011. |
• | Revenue increased 1.9% to $50.7 billion. The increase was driven primarily by the net addition of 235 new stores during fiscal 2012, an extra week of revenue from stores in our Domestic segment and Canada, and the favorable impact of foreign currency exchange rate fluctuations, partially offset by a comparable store sales decline of 1.7%. |
• | Our gross profit rate decreased by 0.4% of revenue to 24.8% of revenue. The decrease was driven by a decline in our Domestic segment's gross profit rate primarily due to increased promotional activity and an increased sales mix of promotional items. |
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• | In fiscal 2012, we recorded $58 million of restructuring charges related to changes in our mobile broadband offerings and actions to improve supply chain and operational efficiencies in our Domestic segment, as well as changes in our international expansion strategy in the International segment. |
• | We ended fiscal 2012 with $1.2 billion of cash and cash equivalents, compared to $1.1 billion at the end of fiscal 2011. Operating cash flow increased to $3.3 billion in fiscal 2012 compared to fiscal 2011 operating cash flow of $1.2 billion due primarily to changes in working capital, as capital expenditures remained relatively consistent at $766 million in fiscal 2012. |
• | During fiscal 2012, we made four dividend payments totaling $0.62 per share, or $228 million in the aggregate. |
• | We repurchased and retired 54.6 million shares of our common stock at a cost of $1.5 billion during fiscal 2012. |
Consolidated Results
The following table presents selected consolidated financial data for each of the past three fiscal years ($ in millions, except per share amounts):
Consolidated Performance Summary | 2012(1) | 2011 | 2010 | ||||||||
Revenue | $ | 50,705 | $ | 49,747 | $ | 49,243 | |||||
Revenue gain % | 1.9 | % | 1.0 | % | 10.1 | % | |||||
Comparable store sales % (decline) gain | (1.7 | )% | (1.8 | )% | 0.6 | % | |||||
Gross profit | $ | 12,573 | $ | 12,541 | $ | 12,042 | |||||
Gross profit as % of revenue(2) | 24.8 | % | 25.2 | % | 24.5 | % | |||||
SG&A | $ | 10,242 | $ | 10,029 | $ | 9,622 | |||||
SG&A as % of revenue(2) | 20.2 | % | 20.2 | % | 19.5 | % | |||||
Restructuring charges | $ | 39 | $ | 138 | $ | 52 | |||||
Operating income | $ | 1,085 | $ | 2,374 | $ | 2,368 | |||||
Operating income as % of revenue | 2.1 | % | 4.8 | % | 4.8 | % | |||||
Net (loss) earnings from continuing operations(3) | $ | (1,057 | ) | $ | 1,427 | $ | |||||