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 January 28, 2017
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 website, 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. x
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 July 29, 2016, was approximately $7.8 billion, computed by reference to the price of $33.60 per share, the price at which the common equity was last sold on July 29, 2016, 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 March 20, 2017, the registrant had 309,110,840 shares of its Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its 2017 Regular Meeting of Shareholders ("Proxy Statement") are incorporated by reference into Part III. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
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," "assume," "believe," "estimate," "expect," "intend," "foresee," "outlook," "plan," "project," 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 2017 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. Any references to our website addresses do not constitute incorporation by reference of the information contained on the websites.
Description of Business
We were incorporated in the state of Minnesota in 1966. Today, we are a leading provider of technology products, services and solutions. We offer these products and services to customers who visit our stores, engage with Geek Squad agents or use our websites or mobile applications. We have operations in the U.S., Canada and Mexico.
Information About Our Segments and Geographic Areas
We have two reportable segments: Domestic and International. The Domestic segment is comprised of the operations in all states, districts and territories of the U.S., under various brand names including Best Buy, bestbuy.com, Best Buy Mobile, Best Buy Direct, Best Buy Express, Geek Squad, Magnolia Home Theater and Pacific Kitchen and Home.
The International segment is comprised of all operations in Canada and Mexico under the brand names Best Buy, bestbuy.com.ca, bestbuy.com.mx, Best Buy Express, Best Buy Mobile and Geek Squad.
In March 2015, we decided to consolidate Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in permanently closing 66 Future Shop stores and converting 65 Future Shop stores to the Best Buy brand. Additional information on these changes is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 4, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Financial information about our segments and geographic areas is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 11, 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.
Operations
Our Domestic and International segments are managed by leadership teams responsible for all areas of the business. Both segments operate an omni-channel platform that provides customers the ability to shop when and where they want.
Domestic Segment
Development of merchandise and services offerings, pricing and promotions, procurement and supply chain, online and mobile application operations, marketing and advertising and labor deployment across all channels are centrally managed at our corporate headquarters. In addition, support capabilities (for example, human resources, finance and real estate management) are generally performed at our corporate headquarters. We also have field operations that support retail teams from our corporate headquarters and regional locations. Our retail stores have procedures for inventory management, asset protection, transaction processing, customer relations, store administration, product sales and services, staff training and merchandise display that are largely standardized within each store brand. All stores within each store brand generally operate under standard procedures with a degree of flexibility for store management to address certain local market characteristics.
International Segment
Our Canada and Mexico store operations are similar to those in our Domestic segment.
Merchandise and Services
Our Domestic and International segments have offerings in six revenue categories: Consumer Electronics, Computing and Mobile Phones, Entertainment, Appliances, Services and Other. The key components of each revenue category are as follows:
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• | Consumer Electronics - home theater, home automation, digital imaging, health and fitness and portable audio; |
• | Computing and Mobile Phones - computing and peripherals, networking, tablets, mobile phones (including related mobile network carrier commissions), wearables (including smart watches) and e-readers; |
• | Entertainment - gaming hardware and software, movies, music, technology toys and other software; |
• | Appliances - major appliances (for example, refrigeration, dishwashers, ovens, laundry, etc.) and small appliances (for example, coffee makers, blenders, etc.); |
• | Services - consultation, design, delivery, installation, set-up, protection plans, repair, technical support and educational classes; and |
• | Other - snacks, beverages and other sundry items. |
Distribution
Domestic Segment
U.S. Best Buy online merchandise sales are typically either picked up at U.S. Best Buy stores or delivered directly to customers from a distribution center or retail store. The ship-from-store capability allows us to improve product availability and delivery times for customers. Most merchandise is shipped directly from manufacturers to our distribution centers located throughout the U.S. In order to meet release dates for certain products, merchandise may be shipped directly to our stores from suppliers.
International Segment
Our Canada and Mexico distribution model is similar to our Domestic segment model.
Suppliers and Inventory
Our Domestic and International segments purchase merchandise from a variety of suppliers. In fiscal 2017, our 20 largest suppliers accounted for approximately 77% of the merchandise we purchased, with five suppliers – Apple, Samsung, Sony, Hewlett-Packard, and LG Electronics – representing approximately 53% of total merchandise purchased. We generally do not have long-term written contracts with our vendors that would require them to continue supplying us with merchandise or secure any of the key terms of our arrangements.
We carefully monitor and manage our inventory levels in an effort to match quantities on hand with consumer demand as closely as possible. Key elements to our inventory management process include 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 to design, develop, test and contract-manufacture our exclusive brand products.
Store Development
We had approximately 1,200 large-format and 400 small-format stores at the end of fiscal 2017 throughout our Domestic and International segments. Our stores are a vital component of our omni-channel strategy and represent an important competitive advantage. In the U.S., we have the ability to ship from all of our Best Buy stores. Customers may also elect to pick up orders initiated online in any of our stores. In recent years, we have opened vendor store-within-a-store concepts to allow closer vendor partnership and a better quality customer experience. In fiscal 2018 and beyond, we will continue to look for opportunities to optimize our store space, renegotiating leases and selectively opening or closing locations to support our operations.
In March 2015, we made a decision to consolidate Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in permanently closing 66 Future Shop stores and converting 65 Future Shop stores to the Best Buy brand.
Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for tables reconciling our Domestic and International segment stores open at the end of each of the last three fiscal years.
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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, Dynex, Geek Squad, Insignia, Magnolia, Modal, My Best Buy, Pacific Sales, Rocketfish, Platinum 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 websites.
Seasonality
Our business, like that of many retailers, is seasonal. A higher proportion of our revenue and earnings is generated in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico.
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 and growth opportunities. Our working capital needs typically increase in the months leading up to the holiday shopping season as we purchase inventory in advance of expected sales.
Competition
Our competitors are primarily multi-channel retailers, internet-based businesses, technology service providers, traditional store-based retailers and vendors and mobile network carriers, who offer their products and services directly to customers. We believe our ability to deliver a high quality customer experience offers us a key competitive advantage. Some of our competitors have low cost operating structures and seek to compete for sales primarily on price. In addition, in the U.S., online-only operators are exempt from collecting sales taxes 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 levels. We carefully monitor pricing offered by other retailers, and maintaining price competitiveness is one of our ongoing priorities. In addition, we have a price-matching policy in the U.S. that allows customers to request that we match a price offered by certain retail store and online operators. In order to allow this, we are focused on maintaining efficient operations and leveraging the economies of scale available to us through our global vendor partnerships. We believe our dedicated and knowledgeable people, integrated online and retail assets, broad product assortment, strong vendor relationships, range of focused service and support offerings, distinct store formats, brand marketing strategies and supply chain are important ways in which we maintain this advantage.
Environmental Matters
Best Buy is committed to positively impacting the environment and our communities. We believe that effectively managing our environmental impacts, setting sustainability goals and advancing energy-efficient consumer solutions create long-term value for all of our stakeholders.
We are continuously looking for cost-effective solutions to minimize carbon emissions in our operations. In fiscal year 2016, we set a new goal to reduce our own carbon emissions by 45 percent by 2020 (over a 2009 baseline), from both operational reductions and renewable sourcing.
See our Best Buy Corporate Responsibility & Sustainability Report for further information on environmental performance.
Number of Employees
At the end of fiscal 2017, we employed approximately 125,000 full-time, part-time and seasonal employees in the U.S., Canada, Mexico and our sourcing office in China. 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 locally and in the aggregate relative to others in our industry.
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Available Information
We are subject to the reporting requirements of the Securities Exchange Act of 1934 (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"). We make available, free of charge on our website, our Annual Reports 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 website at www.investors.bestbuy.com. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC at www.sec.gov.
We also make available, free of charge on our website, our Amended and Restated Articles of Incorporation, Amended and Restated By-laws, the Corporate Governance Principles of our Board of Directors ("Board") and 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; and Nominating, Corporate Governance and Public Policy Committee. These documents are posted on our website at www.investors.bestbuy.com.
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 at 7601 Penn Avenue South, Richfield, MN 55423-3645.
Item 1A. Risk Factors.
Described below are certain risks that we believe apply to our business and the industry in which we operate. You should carefully consider each of the following risk factors in conjunction with other information provided in this Annual Report on Form 10-K and in our other public disclosures. The risks described below highlight potential events, trends or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity or access to sources of financing and, consequently, the market value of our common stock and debt instruments. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. The risks described below are not an exhaustive list of all the risks we face. There may be others that we have not identified or that we have deemed to be immaterial. All forward-looking statements made by us or on our behalf are qualified by the risks described below.
We face strong competition from multi-channel retailers, e-commerce businesses, technology service providers, traditional store-based retailers and vendors and mobile network carriers that offer their products and services directly to customers, which directly affects our revenue and profitability.
The retail business is highly competitive. Price is of great importance to most customers, and price transparency and comparability continues to increase, particularly as a result of digital technology. The ability of consumers to compare prices on a real-time basis puts additional pressure on us to maintain competitive prices. We compete with many other local, regional, national and international retailers and technology service providers, as well as certain of our vendors and mobile network carriers that offer products directly to consumers. Some of our competitors have greater financial resources than us and may be able to offer lower prices than us for a sustained period of time. The retail industry continues to experience a trend towards an increase in sales initiated online and using mobile applications, and some online-only businesses have lower operating costs than us and are not required to collect and remit sales taxes in all U.S. states, which can negatively impact the ability of multi-channel retailers to be price competitive on a tax-included basis. Online and multi-channel retailers continue to focus on delivery services, with customers increasingly seeking faster, guaranteed delivery times and low-price or free shipping. Our ability to be competitive on delivery times and delivery costs depends on many factors, and our failure to successfully manage these factors and offer competitive delivery options could negatively impact the demand for our products and our profit margins. Because our business strategy is based on offering superior levels of customer service and a full range of services to complement the products we offer, our cost structure is higher than some of our competitors, and this, in conjunction with price transparency, puts pressure on our margins.
As these and related competitive factors evolve, we may experience material adverse pressure on our revenue and profitability.
Many of the products we sell are highly susceptible to technological advancement, product life cycle fluctuations and changes in consumer preferences.
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In general, consumer electronics product life cycles (which begin with initial market launch and conclude with maturity or obsolescence) have become shorter and less predictable. This is largely due to rapid technological advancement and innovation and generally faster adoption by consumers. Consumer preferences have also become susceptible to rapid change, and this adds to the unpredictability of our business. These factors affect us in a number of ways, for example:
• | the emergence of new products and categories (for example, virtual reality); |
• | the rapid maturity and decline of relatively new categories (for example, tablets); |
• | cannibalization of categories (for example, the effect of smart phones on demand for GPS, mobile audio, digital imaging devices, etc.); |
• | intense consumer interest in high-profile product updates (for example, smartphone model updates) which concentrates purchasing activity around new launch dates and can often lead to shortages of merchandise; |
• | unpredictable consumer adoption rates (for example, contrasting adoption rates of 3D and Ultra-HD televisions); |
• | rapidly declining price-points in many categories (for example, digital imaging, Ultra-HD televisions, etc.); and |
• | availability of content (for example, Ultra-HD programming, online streaming services, sporting events or other broadcast programming). |
The effects of these factors can also be exacerbated by the competitive environment and the ease with which customers can research and compare product features and price. If we fail to interpret, predict and react to these factors in a timely and effective manner, the consequences can include:
• | not offering the products and services that our customers want; |
• | having excess inventory, which may require heavy discounting or liquidation; |
• | not securing adequate access to brands or products for which consumer demand exceeds supply; |
• | delays in adapting our merchandising, marketing or supply chain capabilities to accommodate changes in product trends; and |
• | damage to our brand and reputation. |
These and other similar factors could have a material adverse impact on our revenues and profitability.
Our reliance on key vendors and mobile network carriers subjects us to various risks and uncertainties which could affect our revenue and profitability.
We source the products we sell from a wide variety of domestic and international vendors. In fiscal 2017, our 20 largest suppliers accounted for approximately 77% of the merchandise we purchased (75% in fiscal 2016), with 5 suppliers – Apple, Samsung, Sony, Hewlett-Packard, and LG Electronics – representing approximately 53% of total merchandise purchased (51% in fiscal 2016). We generally do not have long-term written contracts with our vendors that would require them to continue supplying us with merchandise. Our profitability depends on us securing acceptable terms with our vendors for, among other things, the price of merchandise we purchase from them, funding for various forms of promotional programs, payment terms, allocations of merchandise, development of compelling assortments of products, operation of vendor-focused shopping experiences within our stores and terms covering returns and factory warranties. To varying degrees, our vendors may be able to leverage their competitive advantages -- for example, their financial strength, the strength of their brand with customers, their own stores or online channels or their relationships with other retailers -- to our commercial disadvantage. The potential adverse impact of these factors can be amplified by price transparency (which can limit our flexibility to modify selling prices) and a highly competitive retail environment. Generally, our ability to negotiate favorable terms with our vendors is more difficult with vendors where our purchases represent a smaller proportion of their total revenues, consequently impacting our profitability from such vendor relationships.
We are also dependent on a relatively small number of mobile carriers to allow us to offer mobile devices with carrier connections. The competitive strategies utilized by mobile network carriers can have a material impact on our business. For example, if carriers change the structure of customer contracts, customer upgrade terms, customer qualification requirements, monthly fee plans, cancellation fees or service levels, the volume of upgrades and new contracts we sign with customers may be reduced, adversely affecting our revenues and profitability. In addition, our carriers also may serve customers through their own stores, websites, mobile applications and call centers or through other competing retail channels. Carriers may decide to cease allowing us to offer their contracts or certain categories of their contracts, focus their marketing efforts on alternative channels or make unfavorable changes to our commissions or other terms. Each of these factors could have a materially adverse impact on our revenue and profitability.
We have internal standards that we require all of our vendors to meet. Our ability to find qualified vendors who can supply products in a timely and efficient manner that meet our standards of quality and safety can be difficult, especially with respect
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to goods sourced from outside the U.S. Political or financial instability, merchandise quality issues, product safety concerns, cross-border trade restrictions or tariffs, work stoppages, port delays, foreign currency exchange rate fluctuations, 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 related issues could materially adversely affect our financial results.
Product safety and quality concerns could have a material adverse impact on our revenue and profitability.
If the products we sell fail to meet applicable safety standards or our customers' expectations regarding safety and quality, we could be exposed to increased legal risk and our reputation may be damaged. Failure to take appropriate actions in relation to product recalls could lead to breaches in laws and regulations and leave us susceptible to government enforcement actions or private litigation. Recalls of products, particularly when combined with lack of available alternatives or our difficulty in sourcing sufficient volumes of replacement products, could also have a material adverse impact on our revenue and profitability.
Our focus on services as a strategic priority exposes us to certain risks that could have a material adverse impact on our revenue and profitability as well as our reputation.
We offer a full range of services that complement our product offerings, including consultation, design, delivery, installation, set-up, protection plans, repair, technical support and educational classes. Designing, marketing and executing these services is subject to incremental risks. These risks include, for example:
• | increased labor expense to fulfill our customer promises, which may be higher than the related revenue; |
• | unpredictable warranty failure rates and related expenses; |
• | employees in transit using company vehicles to visit customer locations and employees being present in customer homes, which may increase our scope of liability; |
• | the potential for increased scope of liability relating to managed services offerings; |
• | employees having access to customer devices, including the information held on those devices, which may increase our responsibility for the security of those devices and the data they hold; and |
• | the engagement of third parties to assist with some aspects of construction and installation and the potential responsibility for the actions they take and for compliance with building codes and related regulations. |
In addition, as customers increasingly migrate to websites and mobile applications to initiate transactions, it is inherently more difficult to demonstrate and explain the features and benefits of our service offerings, which can lead to a lower revenue mix of these services. If, for these or other reasons, we fail to design and market services effectively to our customers or fail to meet our customers’ expectations in the execution of these services, our reputation, revenue and profitability could be adversely affected.
Macroeconomic pressures in the markets in which we operate could adversely affect consumer spending and our financial results.
To varying degrees, our products and services are sensitive to changes in macroeconomic conditions that impact consumer spending. As a result, consumers may be affected in many different ways, including, for example:
• | whether or not they make a purchase; |
• | their choice of brand, model or price-point; |
• | how frequently they upgrade or replace their devices; and |
• | their appetite for complementary services (for example, protection plans). |
Consumer confidence, inflation, employment levels, oil prices, interest rates, tax rates, availability of consumer financing, housing market conditions, foreign currency exchange rate fluctuations, costs for items such as fuel and food and other macroeconomic trends can adversely affect consumers' demand for the products and services that we offer. Our future results could be significantly adversely impacted by these factors.
Interruptions and other factors affecting our supply chain, including in-bound deliveries from our vendors, may adversely affect our business.
Our supply chain is a critical part of our operations, particularly in light of recent industry trends and initiatives such as ship-from-store and the emphasis on fast and free delivery when purchasing online. We depend on our vendors' ability to deliver
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products to us at the right location, right time and in the right quantities. We also depend on third parties for the operation of certain aspects of our supply chain network. The factors that can adversely affect these aspects of our operations include:
• | interruptions to our delivery capabilities; |
• | failure of third parties to meet our standards or commitments; |
• | disruptions to our systems and implementation of new systems; |
• | limitations in capacity; |
• | consolidation or business failures in the transportation and distribution sectors; |
• | labor strikes or slow-downs impacting ports or any other aspect of our supply chain; |
• | damages or other loss to products; and |
• | costs that are excessive. |
The risks associated with our dependence on third parties are greater for small parcel home deliveries, because of the relatively small number of carriers with the scope and capacity required by our business. The continuing growth of e-commerce increases our exposure to these risks. If we fail to manage these risks effectively, we could experience a material adverse impact on our reputation, revenue and profitability.
If we fail to attract, retain and engage appropriately qualified employees, including employees in key positions, our operations and profitability may be harmed. Changes in market compensation rates may adversely affect our profitability.
Our performance is highly dependent on attracting, retaining and engaging appropriately qualified employees in our stores, service centers, distribution centers, field and corporate offices. Our strategy of offering high quality services and assistance for our customers requires a highly trained and engaged workforce. The turnover rate in the retail industry is relatively high, and there is an ongoing need to recruit and train new employees. Factors that affect our ability to maintain sufficient numbers of qualified employees include employee morale, our reputation, unemployment rates, competition from other employers, availability of qualified personnel and our ability to offer appropriate compensation packages. We operate in a competitive labor market and there is a risk that market increases in compensation could have a material adverse effect on our profitability. Failure to recruit or retain qualified employees in the future may impair our efficiency and effectiveness and our ability to pursue growth opportunities. In addition, a significant amount of turnover of our executive team or other employees in key positions with specific knowledge relating to us, our operations and our industry may negatively impact our operations.
Demand for the products and services we sell could decline if we fail to maintain positive brand perception and recognition.
We operate a 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 ubiquity of social media means that customer feedback and other information about our company are shared with a broad audience in a manner that is easily accessible and rapidly disseminated. Damage to the perception or reputation of our brands could result in, among other things, declines in customer loyalty, decreases in gift card and service plan sales, lower employee retention and productivity and vendor relationship issues, all of which could materially affect our revenue and profitability.
Our success is dependent on the design and execution of appropriate business strategies.
We operate in a highly-competitive and ever-changing commercial environment. Our success is dependent on our ability to identify, develop and execute appropriate strategies within this environment. Strategies that have proved successful in the past may not be successful in the future. Our current strategy includes continuous improvement of our business and the pursuit of new growth opportunities. It is possible that our strategies may be ineffective and that we may need to make substantial changes to them in the future. It is also possible that we will be unsuccessful in executing our strategies or that they expose us to additional risks. Our results could be materially adversely affected if we fail to develop and execute appropriate strategies. The market value of our common stock and debt instruments could be materially adversely affected if investors are uncertain about the appropriateness of our strategies or our ability to execute them.
Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information regarding our strategies.
Failure to effectively manage our real estate portfolio may negatively impact our operating results.
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Effective management of our real estate portfolio is critical to our multi-channel strategy. Most of our properties are subject to long-term leases. As such, it is essential that we effectively evaluate a range of factors that may influence the success of our long-term real estate strategy. Such factors include, for example:
• | changing patterns of customer consumption and behavior, particularly in light of an evolving omni-channel environment; |
• | the appropriate number of stores in our portfolio; |
• | the formats and sizes of our stores; |
• | the locations of our stores; |
• | the interior layouts of our stores; |
• | the trade area demographics and economic data of each of our stores; |
• | the local competitive positioning in and around our stores; |
• | the primary term lease commitment for each store; |
• | the long-term lease option coverage for each store; |
• | the occupancy cost of our stores relative to market rents; |
• | our supply chain network strategy; and |
• | our ongoing network of service locations. |
If we fail to effectively evaluate these factors or negotiate appropriate terms or if unforeseen changes arise, the consequences could include, for example:
• | having to close stores and abandon the related assets, while retaining the financial commitments of the leases; |
• | incurring significant costs to remodel or transform our stores; |
• | having stores, supply chain or service locations that no longer meet the needs of our business; and |
• | bearing excessive lease expenses. |
These consequences could have a materially adverse impact on our profitability, cash flows and liquidity.
For leased property, the financial impact of exiting a location can vary greatly depending on, among other factors, the terms of the lease, the condition of the local real estate market, demand for the specific property, our relationship with the landlord and the availability of potential sub-lease tenants. It is difficult for us to influence some of these factors, and the costs of exiting a property can be significant. In addition to rent, we are still responsible for the maintenance, taxes, insurance and common area maintenance charges for vacant properties until the lease commitment expires or is terminated. Similarly, when we enter into a contract with a tenant to sub-lease property, we usually retain our obligations as the master lessor. This leaves us at risk for any remaining liability in the event of default by the sub-lease tenant.
Failure to effectively manage our costs could have a material adverse effect on our profitability.
Some of our operating costs are fixed and/or are subject to multi-year contracts. Some elements of our costs may be higher than our competitors, because of, for example, our differential service offerings or levels of customer service. As discussed above, our revenues are susceptible to volatility from various sources, which can lead to periods of flat or declining revenues. Accordingly, our ongoing drive to reduce cost and increase efficiency represents a strategic imperative. Failure to successfully manage our costs could have a material adverse impact on our profitability and curtail our ability to fund our growth or other critical initiatives.
Our liquidity may be materially adversely affected by constraints in the capital markets or our vendor credit terms.
We need sufficient sources of liquidity to fund our working capital requirements, service our outstanding indebtedness and finance business opportunities. Without sufficient liquidity, we could be forced to curtail our operations, or we may not be able to pursue business opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash and liquid investments, credit facilities, other debt arrangements and trade payables. Our liquidity could be materially adversely impacted if our vendors reduce payment terms and/or impose tighter credit limits. If our sources of liquidity do not satisfy our requirements, we may need to seek additional financing. The future availability of financing will depend on a variety of factors, such as economic and market conditions, the regulatory environment for banks and other financial institutions, the availability of credit and our credit ratings and our reputation with potential lenders. These factors could materially adversely affect our costs of borrowing and our ability to pursue business opportunities, and threaten our ability to meet our obligations as they become due.
Changes in our credit ratings may limit our access to capital and materially increase our borrowing costs.
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Our credit ratings and outlooks at March 20, 2017, are summarized below. In fiscal 2017, Standard & Poor's Rating Services upgraded its long-term credit rating from BB+ to BBB- with a Stable outlook; Moody's Investors Service, Inc. affirmed its long-term credit rating of Baa1 with a Stable outlook; and Fitch Ratings Limited affirmed its long-term credit rating of BBB- with a Stable outlook.
Rating Agency | Rating | Outlook | ||
Standard & Poor's | BBB- | Stable | ||
Moody's | Baa1 | Stable | ||
Fitch | BBB- | Stable | ||
Any future downgrades to our credit ratings and outlook could negatively impact the perception of our credit risk and thus our access to capital markets, borrowing costs, vendor terms and lease terms. 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 change the ratings assigned to us due to developments that are beyond our control, including the introduction of new rating practices and methodologies.
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 shopping season.
Approximately one-third of our revenue and more than one-half of our net earnings have historically been generated in our fourth fiscal quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico. In addition, the holiday shopping season also incorporates many other unpredictable factors, such as the level of competitive promotional activity and customer buying patterns, which makes it difficult to forecast and react to these factors quickly. Unexpected events or developments such as natural or man-made disasters, economic factors, product sourcing issues, failure or interruption of management information systems or disruptions in services or systems provided or managed by third-party vendors could significantly disrupt our operations. As a result of these factors, there is a risk that our fourth quarter and annual results could be adversely affected.
Failure to effectively manage strategic ventures, alliances or acquisitions could have a negative impact on our business.
We may decide to enter into new joint ventures, partnerships, alliances or acquisitions with third parties (collectively, "new ventures"). Assessing the viability of new ventures is typically subject to significant uncertainty and the success of such new ventures can be adversely affected by many factors, including, for example:
• | different and incremental business risks of the new venture; |
• | failure to motivate and retain key employees of the new venture; |
• | uncertainty of forecasting financial performance; |
• | failure to integrate aspects of the new venture into our existing business, such as new product or service offerings or information technology systems; |
• | failure to maintain appropriate internal control over financial reporting; |
• | failure to generate expected synergies such as cost reductions; |
• | unforeseen changes in the business environment of the new venture; |
• | disputes or strategic differences with other third party participants in the new venture; and |
• | adverse impacts on relationships with vendors and other key partners of our existing business or the new venture. |
If new ventures are unsuccessful, our liquidity and profitability could be materially adversely affected, and we may be required to recognize material impairments to goodwill and other assets acquired. New ventures may also divert our financial resources and management's attention from other important areas of our business.
Failure to protect or effectively respond to breach of the integrity, security and confidentiality of our employee and customer data could expose us to litigation costs and materially damage our standing with our employees or customers.
The use and handling of personally identifiable data by our business, our business associates and third parties is regulated at the state, federal and international levels. We are also contractually obligated to comply with certain industry standards regarding payment card information. Increasing costs associated with information security, such as increased investment in technology and qualified staff, the costs of compliance and costs resulting from 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 customer and other
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confidential information over public networks, including the use of cashless payments. While we take significant steps to protect this information, lapses in our controls or the intentional or negligent actions of employees, business associates or third parties or failure to effectively respond to such compromises, may undermine our security measures. As a result, unauthorized parties may obtain access to our data systems and misappropriate employee, customer and other confidential data. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may not prevent the compromise of our customer transaction processing capabilities and customer 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. Any such compromise of our security or the security of information residing with our business associates or third parties could have a material adverse effect on our reputation or our relationship with our employees, which may in turn have a negative impact on our revenue, and may expose us to material costs, penalties and compensation claims. In addition, 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.
Catastrophic events could adversely affect our operating results.
The risk or actual occurrence of various catastrophic events could materially adversely affect our financial performance. Such events may be caused by, for example:
• | natural disasters or extreme weather events; |
• | diseases or epidemics that may affect our employees, customers or partners; |
• | floods, fire or other catastrophes affecting our properties; or |
• | terrorism, civil unrest or other conflicts. |
Such events can adversely affect our work force and prevent employees and customers from reaching our stores and properties and can disrupt or disable portions of our supply chain and distribution network. As a consequence of these or other catastrophic events, we may endure interruption to our operations or losses of property, equipment or inventory, which would adversely affect our revenue and profitability.
Our exclusive brands products are subject to several additional product, supply chain and legal risks that could affect our operating results.
Sales of our exclusive brands products, which include Insignia, Modal, Dynex, Init, Platinum and Rocketfish branded products, represent an important component of our product offerings and our revenue and profitability. Most of these products are manufactured by contract manufacturers based in southeastern Asia. This arrangement exposes us to the following additional potential risks, which could materially adversely affect our operating results:
• | we have greater exposure and responsibility to consumers for warranty replacements and repairs as a result of exclusive brand product defects, and our recourse to contract manufacturers for such warranty liabilities may be limited in foreign jurisdictions; |
• | we may be subject to regulatory compliance and/or product liability claims relating to personal injury, death or property damage caused by exclusive brand products, some of which may require us to take significant actions such as product recalls; |
• | we may experience disruptions in manufacturing or logistics due to inconsistent and unanticipated order patterns, our inability to develop long-term relationships with key manufacturers or unforeseen natural disasters; |
• | we may not be able to locate manufacturers that meet our internal standards, whether for new exclusive brand products or for migration of the manufacturing of products from an existing manufacturer; |
• | 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 or other intellectual property owners if we inadvertently infringe upon their patents or other intellectual property rights, or if we fail to pay royalties owed on our exclusive brand products; |
• | we may be unable to obtain or adequately protect patents and other intellectual property rights on our exclusive brand products or manufacturing processes; and |
• | regulations regarding disclosure of efforts to identify the country of origin of “conflict minerals” in certain portions of our supply chain could increase the cost of doing business and, depending on the findings of our country of origin inquiry, could have an adverse effect on our reputation. |
Maintaining consistent quality, availability and competitive pricing of our exclusive brands products helps us build and maintain customer loyalty, generate revenue and achieve acceptable margins. Failure to maintain these factors could have a significant adverse impact on the demand for exclusive brand products and the profits we are able to generate from them.
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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 environments expose us to complex compliance and litigation risks that could materially adversely affect our operations. Some of 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 potential for unexpected costs related to compliance with new or existing environmental legislation or international agreements affecting energy, carbon emissions, electronics recycling and water or product materials; |
• | ensuring compliance with applicable product compliance laws and regulations with respect to both the products we sell and contract to manufacture, including laws and regulation related to product safety and product transport; |
• | the impact of new regulations governing data privacy and security, whether imposed as a result of increased cyber-security risks or otherwise; |
• | the impact of other new or changing statutes and regulations including, but not limited to, financial reform, National Labor Relations Board rule changes, health care reform, corporate governance matters, escheatment rules 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 the potential implementation of more restrictive trade policies or the renegotiation of existing trade agreements in the U.S. or countries where we sell our products and services or procure products; |
• | the impact of potential changes in U.S. or other countries tax laws and regulations, including the imposition of the border adjustment tax on imported products as is currently being discussed by U.S. Congress that could increase the cost of the products we sell because a significant portion of the products we sell in the U.S. are sourced from outside of the country; and |
• | the impact of litigation trends, including class action lawsuits involving consumers and shareholders, and labor and employment matters. |
Regulatory activity focused on the retail industry has grown in recent years, increasing the risk of fines and additional operating costs associated with compliance. Additionally, defending against lawsuits and other proceedings may involve significant expense and divert management's attention and resources from other matters.
Changes to labor or employment laws or regulations could have an adverse impact on our costs and impair the viability of our operating model.
As an employer of approximately 125,000 people in a large number of different jurisdictions, we are subject to risks related to employment laws and regulations including, for example:
• | unionization and related regulations that affect the nature of labor relations, the organization of unions and union elections; in the U.S. the National Labor Relations Board continually considers changes to such regulations; as of January 28, 2017, none of our U.S. operations had employees represented by labor unions or working under collective bargaining agreements; |
• | laws that impact the relationship between the company and independent contractors; and |
• | laws that impact minimum wage, sick time, paid leave and scheduling requirements, that could directly or indirectly increase our payroll costs and/or impact the level of service we are able to provide. |
Changes to laws and regulations such as these could adversely impact our reputation, our ability to continue operations and our profitability.
Economic, regulatory and other developments could adversely affect our ability to offer attractive promotional financing to our customers and adversely affect the profits we generate from these programs.
We offer promotional financing and credit cards issued by third-party banks that manage and directly extend credit to our customers. Customers choosing promotional financing can receive extended payment terms and low- or no-interest financing on qualifying purchases. We believe our financing programs generate incremental revenue from customers who prefer the financing terms to other available forms of payment or otherwise need access to financing in order to make purchases. Approximately 23% of our fiscal 2017 revenue was transacted using one of the company's branded cards. In addition, we earn profit-share income from our banking partners based on the performance of the programs. The income we earn in this regard is subject to numerous factors, including the volume and value of transactions, the terms of promotional financing offers, bad debt
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rates, interest rates, the regulatory and competitive environment and expenses of operating the program. Adverse changes to any of these factors could impair our ability to offer these programs to customers and reduce customer purchases and our ability to earn income from sharing in the profits of the programs.
We rely heavily on our information technology systems for our key business processes. Any failure or interruption in these systems could have a material adverse impact on our business.
The effective and efficient operation of our business is dependent on our management information systems. We rely heavily on our management information systems to manage all key aspects of our business, including demand forecasting, purchasing, supply chain management, point-of-sale processing, services fulfillment, staff planning and deployment, website offerings, financial management, reporting and forecasting and safeguarding critical and sensitive information. The failure of our management information systems to perform as we anticipate (whether from internal or external factors), or to meet the continuously evolving needs of our business, could significantly disrupt our business and cause, for example, higher costs and lost revenues and could threaten our ability to remain in operation.
We utilize complex information technology platforms to operate our websites and mobile applications. Disruptions to these services, such as those caused by unforeseen traffic levels, malicious attacks or other technical difficulties, could cause us to forgo material revenues, incur material costs and adversely affect our reputation with consumers.
We utilize third-party vendors for certain aspects of our business operations.
We engage key third-party business partners to support various functions of our business, including but not limited to, information technology, web hosting and cloud-based services, human resource operations, customer loyalty programs, promotional financing and customer loyalty credit cards, gift cards, customer warranty, technical support, transportation and insurance programs. Any material disruption in our relationship with key third-party business partners or any disruption in the services or systems provided or managed by third parties could impact our revenues and cost structure and hinder our operations, particularly if a disruption occurs during peak revenue periods.
Our international activities are subject to many of the same risks as described above, as well as to risks associated with the legislative, judicial, regulatory, political and economic factors specific to the countries or regions in which we operate.
We operate retail locations in Canada and Mexico. In addition, we have wholly owned legal entities registered in various other foreign countries, including Bermuda, China, Germany, Hong Kong, Luxembourg, the Republic of Mauritius, Turks and Caicos, and the U.K. During fiscal 2017, our International segment's operations generated 8% of our revenue. In general, the risk factors identified above also have relevance to our International operations. In addition, our International operations also expose us to other risks, including those related to, for example:
• | political conditions; |
• | economic conditions, including monetary and fiscal policies and tax rules; |
• | legal and regulatory environments; |
• | rules governing international trade and potential changes to trade policies or trade agreements and ownership of foreign entities; |
• | risks associated with foreign currency exchange rates; |
• | cultural differences that we may be unable to anticipate or respond to appropriately; |
• | difficulties in enforcing intellectual property rights; and |
• | difficulties encountered in exerting appropriate management oversight to operations in remote locations. |
These factors could significantly disrupt our International operations and have a material adverse effect on our revenue and profitability and could lead to us incurring material impairments and other exit costs.
Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in a decline in our stock price.
We may provide public guidance on our expected financial results or other forward-looking information for future periods. Although we believe that this guidance provides investors and analysts with a better understanding of management's expectations for the future and is useful to our existing and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not be in line with guidance we have provided. If our financial results for a particular period
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do not meet our guidance or the expectations of market participants or if we reduce our guidance for future periods, the market price of our common stock may decline.
Item 1B. Unresolved Staff Comments.
Not applicable.
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Item 2. Properties.
Stores, Distribution Centers, Service Centers and Corporate Facilities
Domestic Segment
The following table summarizes the location and total square footage of our Domestic segment stores at the end of fiscal 2017:
U.S. Best Buy Stores | U.S. Best Buy Mobile Stand-Alone Stores | Pacific Sales Stores | |||||||
Alabama | 15 | 3 | — | ||||||
Alaska | 2 | — | — | ||||||
Arizona | 23 | 2 | — | ||||||
Arkansas | 9 | 4 | — | ||||||
California | 118 | 18 | 28 | ||||||
Colorado | 21 | 4 | — | ||||||
Connecticut | 12 | 5 | — | ||||||
Delaware | 3 | 1 | — | ||||||
District of Columbia | 2 | — | — | ||||||
Florida | 64 | 31 | — | ||||||
Georgia | 28 | 10 | — | ||||||
Hawaii | 2 | — | — | ||||||
Idaho | 5 | 2 | — | ||||||
Illinois | 49 | 11 | — | ||||||
Indiana | 23 | 10 | — | ||||||
Iowa | 11 | 1 | — | ||||||
Kansas | 9 | 3 | — | ||||||
Kentucky | 9 | 7 | — | ||||||
Louisiana | 16 | 4 | — | ||||||
Maine | 4 | — | — | ||||||
Maryland | 21 | 10 | — | ||||||
Massachusetts | 24 | 10 | — | ||||||
Michigan | 32 | 9 | — | ||||||
Minnesota | 22 | 11 | — | ||||||
Mississippi | 8 | 1 | — | ||||||
Missouri | 19 | 9 | — | ||||||
Montana | 3 | — | — | ||||||
Nebraska | 5 | 3 | — | ||||||
Nevada | 10 | 4 | — | ||||||
New Hampshire | 6 | 3 | — | ||||||
New Jersey | 27 | 8 | — | ||||||
New Mexico | 5 | 3 | — | ||||||
New York | 53 | 13 | — | ||||||
North Carolina | 32 | 9 | — | ||||||
North Dakota | 4 | 1 | — | ||||||
Ohio | 37 | 10 | — | ||||||
Oklahoma | 13 | 4 | — | ||||||
Oregon | 12 | 2 | — | ||||||
Pennsylvania | 37 | 12 | — | ||||||
Puerto Rico | 3 | — | — | ||||||
Rhode Island | 1 | — | — | ||||||
South Carolina | 14 | 4 | — | ||||||
South Dakota | 2 | 1 | — | ||||||
Tennessee | 16 | 8 | — | ||||||
Texas | 103 | 30 | — | ||||||
Utah | 10 | — | — | ||||||
Vermont | 1 | — | — | ||||||
Virginia | 34 | 8 | — | ||||||
Washington | 19 | 8 | — | ||||||
West Virginia | 5 | — | — | ||||||
Wisconsin | 22 | 11 | — | ||||||
Wyoming | 1 | 1 | — | ||||||
Total | 1,026 | 309 | 28 | ||||||
Square footage (in thousands) | 39,662 | 429 | 737 | ||||||
Average square feet per store (in thousands) | 39 | 1 | 26 | ||||||
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The following table summarizes the ownership status of our Domestic segment store locations at the end of fiscal 2017:
U.S. Best Buy Stores | U.S. Best Buy Mobile Stand- Alone Stores | Pacific Sales Stores | |||||||
Owned store locations | 25 | — | — | ||||||
Owned buildings and leased land | 36 | — | — | ||||||
Leased store locations | 965 | 309 | 28 | ||||||
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers, service centers and corporate offices of our Domestic segment at the end of fiscal 2017:
Square Footage (in thousands) | ||||||||
Location | Leased | Owned | ||||||
Distribution centers | 24 locations in 18 U.S. states | 7,844 | 3,168 | |||||
Geek Squad service centers(1) | Louisville, Kentucky | 237 | — | |||||
Principal corporate headquarters(2) | Richfield, Minnesota | — | 1,452 | |||||
Territory field offices | 12 locations throughout the U.S. | 109 | — | |||||
Pacific Sales corporate office space | Torrance, California | 12 | — | |||||
(1) | The leased space utilized by our Geek Squad operations is used primarily to service notebook and desktop computers. |
(2) | Our principal corporate headquarters consists of four interconnected buildings. Certain vendors who provide us with a variety of corporate services occupy a portion of our principal corporate headquarters. We also sublease a portion of our principal corporate headquarters to unaffiliated third parties. |
International Segment
The following table summarizes the location and total square footage of our International segment stores at the end of fiscal 2017:
Best Buy Stores | Best Buy Mobile Stores | Best Buy Express Stores | ||||||
Canada | ||||||||
Alberta | 19 | 9 | — | |||||
British Columbia | 22 | 9 | — | |||||
Manitoba | 4 | — | — | |||||
New Brunswick | 3 | — | — | |||||
Newfoundland | 1 | — | — | |||||
Nova Scotia | 3 | 1 | — | |||||
Ontario | 54 | 29 | — | |||||
Prince Edward Island | 1 | — | — | |||||
Quebec | 23 | 5 | — | |||||
Saskatchewan | 4 | — | — | |||||
Square footage (in thousands) | 3,783 | 50 | — | |||||
Average square feet per store (in thousands) | 28 | 1 | — | |||||
Mexico | ||||||||
Coahuila | — | — | 1 | |||||
Estado de Mexico | 3 | — | — | |||||
Distrito Federal | 7 | — | 3 | |||||
Guanajuato | 1 | — | — | |||||
Jalisco | 4 | — | — | |||||
Nuevo Leon | 2 | — | 1 | |||||
Michoacan | 1 | — | — | |||||
Veracruz | 1 | — | — | |||||
San Luis Potosi | 1 | — | — | |||||
Square footage (in thousands) | 670 | — | 8 | |||||
Average square feet per store (in thousands) | 34 | — | 2 | |||||
Total store count | 154 | 53 | 5 | |||||
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The following table summarizes the ownership status of our International segment store locations at the end of fiscal 2017:
Canada | Mexico | ||||||||||
Best Buy Stores | Best Buy Mobile Stores | Best Buy Stores | Best Buy Express Stores | ||||||||
Owned store locations | 3 | — | — | — | |||||||
Leased store locations | 131 | 53 | 20 | 5 | |||||||
The following table summarizes the location, ownership status and total square footage of space for distribution centers and corporate offices of our International segment at the end of fiscal 2017:
Square Footage (in thousands) | Square Footage (in thousands) | ||||||||||||||
Distribution Centers | Leased | Owned | Principal Corporate Offices | Leased | Owned | ||||||||||
Canada | Brampton, Ontario | 1,057 | — | Burnaby, British Columbia | 141 | — | |||||||||
Vancouver, British Columbia | 439 | — | |||||||||||||
Mexico | Estado de Mexico, Mexico | 89 | — | Distrito Federal, Mexico | 32 | — | |||||||||
Exclusive Brands
We lease approximately 56,000 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. Additional information regarding our operating leases is available in Note 1, Summary of Significant Accounting Policies, and Note 8, 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.
For a description of our legal proceedings, see Note 12, Contingencies and Commitments, 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 4. Mine Safety Disclosures.
Not applicable.
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Executive Officers of the Registrant
(As of March 20, 2017)
Name | Age | Position With the Company | Years With the Company | |||
Hubert Joly | 57 | Chairman and Chief Executive Officer | 4 | |||
Corie Barry | 42 | Chief Financial Officer | 17 | |||
Paula F. Baker | 49 | Chief Human Resources Officer | 13 | |||
Shari L. Ballard | 50 | President, Multi-channel Retail and Operations | 24 | |||
R. Michael (Mike) Mohan | 49 | Chief Merchandising and Marketing Officer | 13 | |||
Keith J. Nelsen | 53 | General Counsel and Secretary | 11 | |||
Asheesh Saksena | 52 | Chief Strategic Growth Officer | 1 | |||
Trish Walker | 50 | President, Services | 1 | |||
Mathew R. Watson | 46 | Chief Accounting Officer | 11 | |||
Hubert Joly is our Chairman and Chief Executive Officer. He was appointed as President and Chief Executive Officer and a Director in September 2012 and as Chairman in June 2015. Mr. Joly was previously the President and Chief Executive Officer of Carlson, Inc., a worldwide hospitality and travel company based in Minneapolis, Minnesota, from 2008 until he joined Best Buy. Prior to becoming Chief Executive Officer of Carlson, Mr. Joly was President and Chief Executive Officer of Carlson Wagonlit Travel, a business travel management company, from 2004 until 2008. He held several senior executive positions with Vivendi S.A., a French multinational media and telecommunications company, from 1999 to 2004. Prior to that time, Mr. Joly worked in the technology sector at Electronic Data Systems (now part of Hewlett-Packard Company) from 1996 to 1999 and at McKinsey & Company, Inc. from 1983 to 1996. Mr. Joly is currently a member of the Board of Directors of Ralph Lauren Corporation, a leader in the design, marketing and retailing of premier lifestyle products. He also serves on the Board of Directors for the Retail Industry Leaders Association, the Executive Committee of the Minnesota Business Partnership and on the Board of Trustees of the Minneapolis Institute of Arts and the Minnesota Orchestra. Mr. Joly previously served as a Director of Carlson, Inc.; Chair of the Board of Directors of the Rezidor Hotel Group; Chair of the Board of Directors of Carlson Wagonlit Travel; Chair of the Travel Facilitation Sub-Committee of the U.S. Department of Commerce Travel and Tourism Advisory Board; on the executive committee of the World Travel and Tourism Council; and on the board of overseers of the Carlson School of Management.
Corie Barry was appointed our Chief Financial Officer in June 2016. In this role, she is responsible for overseeing all aspects of global finance, as well as information technology, information security, audit, procurement and pricing functions. Ms. Barry joined Best Buy in 1999 and has held a variety of financial and operational roles within the organization, both in the field and at the corporate campus. She most recently was our Chief Strategic Growth Officer and the Interim Leader of Best Buy’s Services Organization from 2015 until 2016. Prior to that dual-role, she served as Senior Vice President of Domestic Finance from 2013 until 2015; Vice President, Chief Financial Officer and business development of our Home Business Group from 2012 to 2013; and Vice President, Finance of the Home Customer Solutions Group from 2010 until 2012. Prior to Best Buy, Ms. Barry worked at Deloitte & Touche LLP.
Paula F. Baker was appointed our Chief Human Resources Officer in March 2016. In her role, Ms. Baker oversees talent development and the health and well-being of the more than 125,000 Best Buy employees worldwide. Prior to her current role, she served as Vice President, Territory General Manager for the Southeast region of the United States, responsible for 172 stores and more than 10,000 employees, since 2012. Prior to that, Ms. Baker was a Territory Human Resources Director from 2010 to 2012. She has also previously held District Manager and General Manager roles from 2004 to 2010. Before joining Best Buy in 2004, Ms. Baker worked at Books-A-Million, a large chain bookstore in the southeast, Golfsmith International, a retail golf superstore, and St. Andrews Golf Company, a premier golf club manufacturer and retailer, in retail leadership roles. Ms. Baker serves as a board member on the Richard M. Schulze Foundation and on the Quality Committee of Children’s Hospital of Minnesota.
Shari L. Ballard is our President, Multi-channel Retail and Operations. She was named President, U.S. Retail and Chief Human Resources Officer in 2014 and in March 2016 transitioned out of her human resources responsibilities to focus primarily on our store operations. In March 2017, she added responsibility for E-commerce and will now focus primarily on maximizing the multi-channel customer experience. Previously, she served as President, International and Chief Human Resources Officer from 2013 to 2014; Executive Vice President and President, International from 2012 to 2013; Executive Vice
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President, President - Americas from March 2010 until 2012; Executive Vice President - Retail Channel Management from 2007 to 2010; and 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 serves on the board of directors for the University of Minnesota Foundation. She previously served on the board of directors of the Delhaize Group, a Belgian-based international food retailer.
R. Michael (Mike) Mohan is our Chief Merchandising and Marketing Officer. He was appointed our Chief Merchandising Officer in January 2014 and in March 2017 added responsibility for our marketing organization. In this role, he manages the category management supply chain, merchandising and marketing functions for our U.S. business, including our category growth strategies, vendor relationships, private label business, merchandise assortment and marketing strategy, branding and execution. Previously, Mr. Mohan served as President, Home since June 2013 until his current appointment; Senior Vice President, General Manager - Home Business Group from 2011 to June 2013; Senior Vice President, Home Theater from 2008 to 2011; and Vice President, Home Entertainment from 2006 to 2008. Prior to joining Best Buy in 2004 as Vice President, Digital Imaging, Mr. Mohan was Vice President and General Merchandising manager for Good Guys, an audio/video specialty retailer in the western United States. Mr. Mohan also previously worked at Future Shop in Canada from 1988 to 1997, prior to our acquisition of the company, where he served in various merchandising roles. Mr. Mohan serves as a trustee for the Boys & Girls Clubs of America.
Keith J. Nelsen has served as our General Counsel and Secretary since 2011. In this role, he manages our enterprise legal and risk management functions, as well as acts as Secretary to our Board of Directors. Previously, in addition to his current role, he also served as Chief Risk Officer from 2012 to 2013. He was appointed Executive Vice President, General Counsel in May 2011 and Secretary of the Company in June 2011 and served as Senior Vice President, Commercial and International General Counsel from 2008 until his current appointment. Mr. Nelsen joined Best Buy in 2006 as Vice President, Operations and 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 and serves on the boards of the Children's Cancer Research Fund and the Chad Greenway Lead the Way Foundation.
Asheesh Saksena was appointed our Chief Strategic Growth Officer in June 2016. In this role, he leads our efforts to refine and implement our growth strategy. Mr. Saksena is a highly strategic leader with more than 20 years of experience in creating and leading strategic growth. Prior to joining Best Buy, he served from 2011 to 2016 as the Executive Vice President of Strategy and New Business Development at Cox Communications, one of the nation’s leading cable television providers. Prior to that, he was the Deputy Chief Strategy Officer for Time Warner Cable from 2008 to 2011. He has also held leadership roles at Accenture and Tata Group.
Trish Walker was appointed our President of Services in April 2016. In this role, she oversees our Geek Squad services in stores, online and in customers’ homes. Before joining Best Buy, Ms. Walker spent 27 years at Accenture, most recently serving as Senior Managing Director leading the North America retail practice and global client account lead. Prior to leading the retail practice, she held numerous leadership positions in Accenture’s retail practice, including marketing, operations, SAP and change management. Ms. Walker also serves on the advisory board of iOwn, LLC, a computer software development company.
Mathew R. Watson has served as our Vice President, Controller and Chief Accounting Officer since April 2015. Mr. Watson is responsible for our controllership and external reporting functions. Mr. Watson has served in the role of Vice President, Finance - Controller since 2014. Prior to that role, he was Vice President - Finance, Domestic Controller from 2013 to 2014. Mr. Watson was also Senior Director, External Reporting and Corporate Accounting from 2010 to 2013 and Director, External Reporting and Corporate Accounting beginning in 2007. Prior to joining us in 2005, Mr. Watson worked at KPMG, a professional audit, advisory and tax firm, from 1995 to 2005. He serves on the board of directors of AchieveMpls.
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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 and Dividends
Our common stock is traded on the New York Stock Exchange under the ticker symbol BBY. 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. In addition, our Board approved a special dividend that was declared and paid in the first quarter of each of fiscal 2016 and fiscal 2017. On March 1, 2017, we announced a 21% increase in our regular quarterly dividend to $0.34 per share. Future dividend payments will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board. 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 and the dividends declared and paid during the periods indicated.
Sales Price | Dividends Declared and Paid | ||||||||||||||||||||||
Fiscal 2017 | Fiscal 2016 | Fiscal Year | |||||||||||||||||||||
High | Low | High | Low | 2017 | 2016 | ||||||||||||||||||
First Quarter | $ | 34.95 | $ | 26.10 | $ | 42.00 | $ | 34.13 | $ | 0.73 | $ | 0.74 | |||||||||||
Second Quarter | 33.63 | 28.76 | 37.18 | 31.68 | 0.28 | 0.23 | |||||||||||||||||
Third Quarter | 40.58 | 32.02 | 39.10 | 28.32 | 0.28 | 0.23 | |||||||||||||||||
Fourth Quarter | 49.40 | 37.10 | 36.51 | 25.31 | 0.28 | 0.23 | |||||||||||||||||
Holders
As of March 20, 2017, there were 2,566 holders of record of our common stock.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In June 2011, our Board authorized up to $5.0 billion of share repurchases, which became effective on June 21, 2011. There is no expiration date governing the period over which we can repurchase shares under the June 2011 program. During fiscal 2017, we repurchased and retired 21.1 million shares at a cost of $0.8 billion. At the end of fiscal 2017, $2.2 billion of the $5.0 billion of share repurchases authorized by our Board in June 2011 was available for future share repurchases. In February 2017, our Board approved a new $5 billion share repurchase authorization, which superseded the authorization from 2011. On March 1, 2017, we announced our intent to repurchase $3 billion of shares over the next two years.
The following table presents the total number of shares of our common stock that we purchased during the fourth quarter of fiscal 2017, 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 repurchased at the end of the applicable fiscal period, pursuant to our June 2011 $5.0 billion 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 Program | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1) | |||||||||
Oct. 30, 2016 through Nov. 26, 2016 | 1,534,476 | $ | 40.09 | 1,534,476 | $ | 2,399,000,000 | |||||||
Nov. 27, 2016 through Dec. 31, 2016 | 1,705,027 | $ | 46.13 | 1,705,027 | $ | 2,321,000,000 | |||||||
Jan. 1, 2017 through Jan. 28, 2017 | 1,900,057 | $ | 43.50 | 1,900,057 | $ | 2,238,000,000 | |||||||
Total Fiscal 2017 Fourth Quarter | 5,139,560 | $ | 43.35 | 5,139,560 | $ | 2,238,000,000 | |||||||
(1) | At the beginning of the fourth quarter of fiscal 2017, there was $2.5 billion available for share repurchases under our June 2011 $5.0 billion share repurchase program. The "Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program" reflects the $223 million we purchased in the fourth quarter of fiscal 2017 pursuant to such program. For additional information, see Note 7, Shareholders' Equity, of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. |
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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, 2012, the last trading day of fiscal 2012, 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
Fiscal Year | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||||
Best Buy Co., Inc. | $ | 100.00 | $ | 68.66 | $ | 102.94 | $ | 157.58 | $ | 129.90 | $ | 211.63 | |||||||||||
S&P 500 | 100.00 | 111.94 | 136.02 | 155.37 | 154.34 | 185.27 | |||||||||||||||||
S&P Retailing Group | 100.00 | 123.88 | 156.39 | 188.05 | 221.02 | 261.85 | |||||||||||||||||
* 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
12-Month | 11-Month | |||||||||||||||||||
Fiscal Year | 2017(1) | 2016(2) | 2015(3) | 2014(4) | 2013(5)(6) | |||||||||||||||
Consolidated Statements of Earnings Data | ||||||||||||||||||||
Revenue | $ | 39,403 | $ | 39,528 | $ | 40,339 | $ | 40,611 | $ | 38,252 | ||||||||||
Operating income | 1,854 | 1,375 | 1,450 | 1,144 | 90 | |||||||||||||||
Net earnings (loss) from continuing operations | 1,207 | 807 | 1,246 | 695 | (259 | ) | ||||||||||||||
Gain (loss) from discontinued operations | 21 | 90 | (11 | ) | (172 | ) | (161 | ) | ||||||||||||
Net earnings (loss) including noncontrolling interests | 1,228 | 897 | 1,235 | 523 | (420 | ) | ||||||||||||||
Net earnings (loss) attributable to Best Buy Co., Inc. shareholders | 1,228 | 897 | 1,233 | 532 | (441 | ) | ||||||||||||||
Per Share Data | ||||||||||||||||||||
Net earnings (loss) from continuing operations | $ | 3.74 | $ | 2.30 | $ | 3.53 | $ | 2.00 | $ | (0.76 | ) | |||||||||
Net gain (loss) from discontinued operations | 0.07 | 0.26 | (0.04 | ) | (0.47 | ) | (0.54 | ) | ||||||||||||
Net earnings (loss) | 3.81 | 2.56 | 3.49 | 1.53 | (1.30 | ) | ||||||||||||||
Cash dividends declared and paid | 1.57 | 1.43 | 0.72 | 0.68 | 0.66 | |||||||||||||||
Common stock price: | ||||||||||||||||||||
High | 49.40 | 42.00 | 40.03 | 44.66 | 27.95 | |||||||||||||||
Low | 26.10 | 25.31 | 22.30 | 13.83 | 11.20 | |||||||||||||||
Operating Statistics | ||||||||||||||||||||
Comparable sales gain (decline)(7) | 0.3 | % | 0.5 | % | 0.5 | % | (1.0 | )% | (2.7 | )% | ||||||||||
Gross profit rate | 24.0 | % | 23.3 | % | 22.4 | % | 23.1 | % | 23.6 | % | ||||||||||
Selling, general and administrative expenses rate | 19.2 | % | 19.3 | % | 18.8 | % | 20.0 | % | 20.7 | % | ||||||||||
Operating income rate | 4.7 | % | 3.5 | % | 3.6 | % | 2.8 | % | 0.2 | % | ||||||||||
Year-End Data | ||||||||||||||||||||
Current ratio(8) | 1.5 | 1.4 | 1.5 | 1.4 | 1.1 | |||||||||||||||
Total assets | $ | 13,856 | $ | 13,519 | $ | 15,245 | $ | 13,990 | $ | 16,774 | ||||||||||
Debt, including current portion | 1,365 | 1,734 | 1,613 | 1,647 | 2,290 | |||||||||||||||
Total equity | 4,709 | 4,378 | 5,000 | 3,989 | 3,715 | |||||||||||||||
Number of stores | ||||||||||||||||||||
Domestic | 1,363 | 1,415 | 1,448 | 1,495 | 1,503 | |||||||||||||||
International | 212 | 216 | 283 | 284 | 276 | |||||||||||||||
Total | 1,575 | 1,631 | 1,731 | 1,779 | 1,779 | |||||||||||||||
Retail square footage (000s) | ||||||||||||||||||||
Domestic | 40,828 | 41,216 | 41,716 | 42,051 | 42,232 | |||||||||||||||
International | 4,511 | 4,543 | 6,470 | 6,636 | 6,613 | |||||||||||||||
Total | 45,339 | 45,759 | 48,186 | 48,687 | 48,845 | |||||||||||||||
(1) | Included within net earnings (loss) from continuing operations and net earnings (loss) attributable to Best Buy Co., Inc. shareholders for fiscal 2017 includes $161 million ($100 million net of taxes) due to cathode ray tube (CRT) and LCD litigation settlements reached, net of related legal fees and costs. Settlements relate to products purchased and sold in prior fiscal years. Refer to Note 12, Contingencies and Commitments, in the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. |
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(2) | Included within operating income and net earnings (loss) from continuing operations for fiscal 2016 is $201 million ($159 million net of taxes) of restructuring charges from continuing operations recorded in fiscal 2016 related to measures we took to restructure our business. Net earnings (loss) attributable to Best Buy Co., Inc. shareholders for fiscal 2016 includes restructuring charges (net of tax and noncontrolling interest) from continuing operations. Refer to Note 4, Restructuring Charges, in the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. |
(3) | Included within net earnings (loss) from continuing operations and net earnings (loss) attributable to Best Buy Co., Inc. shareholders for fiscal 2015 includes $353 million due to a discrete benefit related to reorganizing certain European legal entities. |
(4) | Included within operating income and net earnings (loss) from continuing operations for fiscal 2014 is $149 million ($95 million net of taxes) of restructuring charges from continuing operations recorded in fiscal 2014 related to measures we took to restructure our business. Net earnings (loss) attributable to Best Buy Co., Inc. shareholders for fiscal 2014 includes restructuring charges (net of tax and noncontrolling interest) from continuing operations. |
(5) | Fiscal 2013 (11-month) included 48 weeks. All other periods presented included 52 weeks. |
(6) | Included within our operating income and net earnings (loss) from continuing operations for fiscal 2013 (11-month) is $415 million ($268 million net of taxes) of restructuring charges from continuing operations recorded in fiscal 2013 (11-month) related to measures we took to restructure our business. Also included in net earnings (loss) from continuing operations for fiscal 2013 (11-month) is $614 million (net of taxes) of goodwill impairment charges primarily related to Best Buy Canada. Included in gain (loss) from discontinued operations is $23 million (net of taxes) of restructuring charges primarily related to Best Buy Europe and $207 million (net of taxes) of goodwill impairment charges related to Five Star. Net earnings (loss) attributable to Best Buy Co., Inc. shareholders for fiscal 2013 (11-month) includes restructuring charges (net of tax and noncontrolling interest) from continuing operations and the net of tax goodwill impairment. |
(7) | Our comparable sales calculation compares revenue from stores, websites and call centers operating for at least 14 full months, as well as revenue related to certain other comparable sales channels for a particular period to the corresponding period in the prior year. Relocated stores, as well as remodeled, expanded and downsized stores closed more than 14 days, are excluded from the comparable sales calculation until at least 14 full months after reopening. Acquisitions are included in the comparable sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The Canadian brand consolidation, which included the permanent closure of 66 Future Shop stores, the conversion of 65 Future Shop stores to Best Buy stores and the elimination of the Future Shop website, had a material impact on a year-over-year basis on the remaining Canadian retail stores and the website. As such, from the first quarter of fiscal 2016 through the third quarter of fiscal 2017, all Canadian store and website revenue was removed from the comparable sales base and the International segment no longer had a comparable metric. Therefore, Consolidated comparable sales equaled the Domestic segment comparable sales. Beginning in the fourth quarter of fiscal 2017, we resumed reporting International comparable sales as revenue in the International segment was once again deemed to be comparable and, as such, Consolidated comparable sales are once again equal to the aggregation of Domestic and International comparable sales. |
(8) | The current ratio is calculated by dividing total current assets by total current liabilities. |
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 the following sections:
• | Overview |
• | Business Strategy |
• | Best Buy 2020: Building the New Blue |
• | Results of Operations |
• | Liquidity and Capital Resources |
• | Critical Accounting Estimates |
• | New Accounting Pronouncements |
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.
Overview
We are a leading provider of technology products, services and solutions. We offer these products and services to customers who visit our stores, engage with Geek Squad agents or use our websites or mobile applications. We have operations in the U.S., Canada and Mexico. We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all operations within the U.S. and its districts and territories. The International segment is comprised of all operations outside the U.S. and its territories.
Our fiscal year ends on the Saturday nearest the end of January. Fiscal 2017, 2016 and 2015 each included 52 weeks, noting that fiscal 2018 will include 53 weeks with the additional week included in the fourth quarter. Our business, like that of many
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retailers, is seasonal. A higher proportion of our revenue and earnings is generated in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico ("Holiday").
Throughout this MD&A, we refer to comparable sales. Our comparable sales calculation compares revenue from stores, websites and call centers operating for at least 14 full months, as well as revenue related to certain other comparable sales channels for a particular period to the corresponding period in the prior year. Relocated stores, as well as remodeled, expanded and downsized stores closed more than 14 days, are excluded from the comparable sales calculation until at least 14 full months after reopening. Acquisitions are included in the comparable sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The calculation of comparable sales excludes the impact of revenue from discontinued operations and the effect of fluctuations in foreign currency exchange rates (applicable to our International segment only). The Canadian brand consolidation, which included the permanent closure of 66 Future Shop stores, the conversion of 65 Future Shop stores to Best Buy stores and the elimination of the Future Shop website, had a material impact on a year-over-year basis on the remaining Canadian retail stores and the website. As such, from the first quarter of fiscal 2016 through the third quarter of fiscal 2017, all Canadian store and website revenue was removed from the comparable sales base and the International segment no longer had a comparable metric. Therefore, Consolidated comparable sales equaled the Domestic segment comparable sales. Beginning in the fourth quarter of fiscal 2017, we resumed reporting International comparable sales as revenue in the International segment was once again deemed to be comparable and, as such, Consolidated comparable sales are once again equal to the aggregation of Domestic and International comparable sales. However, we have not provided International comparable sales for fiscal 2017 as the calculation would only include comparable revenue from the fourth quarter of fiscal 2017 and may be misleading in future periods when used for comparison purposes. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers' methods.
Non-GAAP Financial Measures
This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), as well as certain adjusted or non-GAAP financial measures such as constant currency, non-GAAP operating income, non-GAAP effective tax rate, non-GAAP net earnings from continuing operations, non-GAAP diluted earnings per share ("EPS") from continuing operations and non-GAAP debt to earnings before interest, income taxes, depreciation, amortization and rent ("EBITDAR") ratio. We believe that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors in evaluating current period performance and in assessing future performance. For these reasons, our internal management reporting also includes non-GAAP measures. Generally, our non-GAAP measures include adjustments for items such as restructuring charges, goodwill impairments, non-restructuring asset impairments and gains or losses on investments. In addition, certain other items may be excluded from non-GAAP financial measures when we believe this provides greater clarity to management and our investors. These non-GAAP financial measures should be considered in addition to, and not superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.
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. We also use the term "constant currency", which represents results adjusted to exclude foreign currency impacts. We calculate those impacts as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period currency exchange rates. We believe the disclosure of revenue changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates and our inability to report comparable store sales for the International segment in fiscal 2016 as a result of the Canadian brand consolidation.
Refer to the Non-GAAP Financial Measures section below for the detailed reconciliation of items that impacted the non-GAAP operating income, non-GAAP effective tax rate, non-GAAP net earnings from continuing operations and non-GAAP diluted EPS from continuing operations in the presented periods.
Refer to the Other Financial Measures section below for the detailed reconciliation of items that impacted the non-GAAP debt to EBITDAR ratio. Management believes this ratio is an important indicator of our creditworthiness. Furthermore, we believe that our non-GAAP debt to EBITDAR ratio is important for understanding our financial position and provides meaningful additional information about our ability to service our long-term debt and other fixed obligations and to fund our future growth. We also believe our non-GAAP debt to EBITDAR ratio is relevant because it enables investors to compare our indebtedness to
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that of retailers who own, rather than lease, their stores. Our decision to own or lease real estate is based on an assessment of our financial liquidity, our capital structure, our desire to own or to lease the location, the owner’s desire to own or to lease the location and the alternative that results in the highest return to our shareholders.
Business Strategy
During fiscal 2017, we executed against the three priorities we shared at the beginning of the year:
1. | Build on our strong industry position and multi-channel capabilities to drive the existing business; |
2. | Drive cost reduction and efficiencies; and |
3. | Advance key initiatives to drive future growth and differentiation. |
Below is summary of our progress against these priorities:
• | We believe we continued to gain market share in most of our product categories. We believe the total market for our product categories was down low-single digits in calendar 2016 and that our market share gains helped us offset the market decline; |
• | We increased our Net Promoter Score by over 350 basis points; |
• | We grew the Domestic segment online revenue with comparable sales of 20.8% in fiscal 2017; |
• | The successful Canadian brand consolidation was the primary driver of operating income of $90 million in our International segment for fiscal 2017 compared to a loss of $210 million in fiscal 2016; |
• | We continued to progress against our three-year target to reduce cost and optimize gross profit by $400 million and achieved $350 million cumulative savings by the end of fiscal 2017; these savings enable us to invest in customer experience improvements while maintaining near flat SG&A; |
• | As for the third priority, fiscal 2017 was a year of exploration and experimentation, and we are continuing to test several concepts around the country that we believe have the potential to be compelling customer experiences; we expect to launch some of these concepts in fiscal 2018. |
Best Buy 2020: Building the New Blue
In November 2012, we introduced our transformation strategy called Renew Blue. Since then we have stabilized comparable sales and increased our profitability. A little more than four years later, we have now completed Renew Blue and unveiled a new strategy: Best Buy 2020: Building the New Blue.
Our customers are at the core of Best Buy 2020. Technology continues to evolve, creating more excitement and opening up an increasing range of possibilities for our customers. It is also creating more complexity and we believe many of our customers need our help. Our purpose is to help customers pursue their passions and enrich their lives with the help of technology. We want to play two roles for them: be their trusted adviser and solution provider; and be their source for technology services for their home. Our customer value proposition is to be the leading technology expert who makes it easy for our customers to learn about and confidently enjoy the best technology.
From a financial standpoint, we seek to gradually grow our revenue, pursue ongoing cost savings necessary to both offset inflationary pressures and fund investments and build a more predictable set of revenue streams built on more recurring revenues and stickier customer relationships. There are three growth pillars we will be pursuing as part of Best Buy 2020:
1. | Maximize the multi-channel retail business by continuing to enhance the customer experience, investing in growth of certain key product categories and developing broader and stickier customer relationships; |
2. | Provide services and solutions that solve real customer needs and help us build deeper customer relationships - for example, by meeting the significant technical support needs of our customers and providing more complete solutions such as security monitoring and home automation services as well as the associated products; and |
3. | Accelerate growth in our International segment, which consists of Canada and Mexico. |
With the launch of Best Buy 2020, fiscal 2018 will revolve around the following four priorities:
1. | Driving growth from the pillars described above; for example: |
• | We will continue to innovate our digital capabilities to effectively help our customers in their shopping journey; |
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• | We will pursue growth around key product categories, including emerging product categories like connected home, appliances where we believe we can continue to grow revenue and mobile where we have the opportunity to return to growth by providing a more compelling experience to our customers; |
• | We plan to expand our in-home advisor program ("IHA") to more markets. With our IHA program, customers receive a free in-home consultation with an experienced technology advisor who can identify their needs, design personalized solutions and become a personal resource over time; |
• | We will continue to test new concepts around the country that have the potential to be compelling customer experiences. We have a pipeline of opportunities, some of which we will expect to expand later in fiscal 2018; and |
• | We will pursue growth in our International segment by continuing to drive our online channel and by expanding the launch of the successful store remodels in Canada and opening nine new stores in Mexico over the next two years. |
2. | The second priority is to improve our execution in key areas. We believe we continue to have significant opportunities from improving our sales effectiveness and proficiency, our supply chain for large product fulfillment and small package delivery and our services fulfillment capabilities. |
3. | The third priority is to continue to reduce costs and drive efficiencies through the business. As stated previously, we have achieved $350 million of our current $400 million cost reduction target. We are working on the next phase of cost savings and will provide updates on the next goal once we complete our current program. |
4. | The fourth priority is to build the capabilities necessary to deliver on the first three priorities, which will involve making investments in people and systems to drive growth, execution and efficiencies. |
Results of Operations
In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations on a one-month lag. Consistent with such consolidation, the financial and non-financial information presented in our MD&A relative to these operations is also presented on a lag. Our policy is to accelerate the recording of events occurring in the lag period that significantly affect our consolidated financial statements. No such events were identified for the periods presented.
The results of Jiangsu Five Star Appliance Co., Limited ("Five Star"), in our International segment, are presented as discontinued operations in our Consolidated Statements of Earnings. Unless otherwise stated, financial results discussed herein refer to continuing operations.
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Consolidated Results
The following table presents selected consolidated financial data for each of the past three fiscal years ($ in millions, except per share amounts):
Consolidated Performance Summary | 2017 | 2016 | 2015 | |||||||||
Revenue | $ | 39,403 | $ | 39,528 | $ | 40,339 | ||||||
Revenue % decline | (0.3 | )% | (2.0 | )% | (0.7 | )% | ||||||
Comparable sales % gain (1) | 0.3 | % | 0.5 | % | 0.5 | % | ||||||
Comparable sales % gain (decline), excluding estimated impact of installment billing(1)(2) | n/a | (0.1 | )% | — | % | |||||||
Restructuring charges - cost of goods sold | $ | — | $ | 3 | $ | — | ||||||
Gross profit | $ | 9,440 | $ | 9,191 | $ | 9,047 | ||||||
Gross profit as a % of revenue(3) | 24.0 | % | 23.3 | % | 22.4 | % | ||||||
SG&A | $ | 7,547 | $ | 7,618 | $ | 7,592 | ||||||
SG&A as a % of revenue | 19.2 | % | 19.3 | % | 18.8 | % | ||||||
Restructuring charges | $ | 39 | $ | 198 | $ | 5 | ||||||
Operating income | $ | 1,854 | $ | 1,375 | $ | 1,450 | ||||||
Operating income as a % of revenue | 4.7 | % | 3.5 | % | 3.6 | % | ||||||
Net earnings from continuing operations | $ | 1,207 | $ | 807 | $ | 1,246 | ||||||
Gain (loss) from discontinued operations(4) | $ | 21 | $ | 90 | $ | (13 | ) | |||||
Net earnings attributable to Best Buy Co., Inc. shareholders | $ | 1,228 | $ | 897 | $ | 1,233 | ||||||
Diluted earnings per share from continuing operations | $ | 3.74 | $ | 2.30 | $ | 3.53 | ||||||
Diluted earnings per share | $ | 3.81 | $ | 2.56 | $ | 3.49 | ||||||
(1) | The Canadian brand consolidation that was initiated in the first quarter of fiscal 2016 had a material impact on a year-over-year basis on the Canadian retail stores and website. As such, beginning in the first quarter of fiscal 2016 through the third quarter of fiscal 2017, all store and website revenue was removed from the comparable sales base, and an International segment (comprised of Canada and Mexico) comparable sales metric has not been provided. Therefore, Consolidated comparable sales for fiscal 2017 include revenue from continuing operations in the Domestic segment for the full year and the International segment for the fourth quarter only, and Consolidated comparable sales for fiscal 2016 equal the Domestic segment comparable sales. |
(2) | Represents comparable sales, excluding the estimated revenue benefit from installment billing. In fiscal 2015, we began selling installment billing plans offered by mobile carriers to our customers to complement the more traditional two-year plans. While the two types of contracts have broadly similar overall economics, installment billing plans typically generate higher revenues due to higher proceeds for devices and higher cost of sales due to lower device subsidies. As we increased our mix of installment billing plans, we had an associated increase in revenue and cost of goods sold and a decrease in gross profit rate, with gross profit dollars relatively unaffected. This change in plan offer did not impact our International segment. Beginning in fiscal 2017, we no longer reported comparable sales, excluding the estimated revenue benefit from installment billing, as the mix of installment billing plans became comparable on a year-over-year basis. |
(3) | Because retailers vary in how they record costs of operating their supply chain between cost of goods sold and SG&A, our gross profit rate and SG&A rate may not be comparable to other retailers' corresponding rates. For additional information regarding costs classified in cost of goods sold and SG&A, refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. |
(4) | Includes both gain (loss) from discontinued operations and net earnings from discontinued operations attributable to noncontrolling interests. |
In addition, we generated $2.5 billion in operating cash flow in fiscal 2017, compared to $1.3 billion in fiscal 2016, and we ended fiscal 2017 with $3.9 billion of cash, cash equivalents and short-term investments, compared to $3.3 billion at the end of fiscal 2016. During fiscal 2017, we made four regular dividend and one special dividend payments totaling $1.57 per share, or $505 million in the aggregate.
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Fiscal 2017 Results Compared With Fiscal 2016
Consolidated revenue of $39.4 billion in fiscal 2017 decreased 0.3% compared to fiscal 2016. The components of the 0.3% revenue decrease in fiscal 2017 were as follows:
Impact of foreign currency exchange rate fluctuations | (0.2 | )% |
Non-comparable sales(1) | (0.3 | )% |
Comparable sales impact | 0.2 | % |
Total revenue decrease | (0.3 | )% |
(1) | Non-comparable sales reflects the impact of revenue in our International segment for the first through third quarters of fiscal 2017, net store opening and closing activity, as well as, the impact of revenue streams not included within our comparable sales calculation, such as profit share revenue, certain credit card revenue, gift card breakage and sales of merchandise to wholesalers and dealers, as applicable. |
Our gross profit rate increased 0.7% of revenue in fiscal 2017. Our Domestic segment contributed a rate increase of 0.5% of revenue, while our International segment contributed 0.2%. For further discussion of each segment's gross profit rate changes, see Segment Performance Summary, below.
The SG&A rate remained flat on a year-over-year basis with both our Domestic and International segments contributing flat year-over-year SG&A as a percentage of revenue. For further discussion of each segment's SG&A rate changes, see Segment Performance Summary, below.
SG&A restructuring charges decreased from $198 million in fiscal 2016 to $39 million in fiscal 2017. The fiscal 2017 activity primarily related to our Domestic segment, while our fiscal 2016 activity was driven by our International segment. For further discussion of each segment's SG&A restructuring charges, see Segment Performance Summary, below.
Our operating income increased $479 million, and our operating income as a percent of revenue increased to 4.7% of revenue in fiscal 2017, compared to operating income of 3.5% of revenue in fiscal 2016. The increase in our operating income was primarily due to an increase in our gross profit rate and a decrease in our restructuring activity.
Fiscal 2016 Results Compared With Fiscal 2015
The components of the 2.0% revenue decrease in fiscal 2016 were as follows:
Impact of foreign currency exchange rate fluctuations | (1.3 | )% |
Non-comparable sales(1) | (1.1 | )% |
Comparable sales impact | 0.4 | % |
Total revenue decrease | (2.0 | )% |
(1) | Non-comparable sales reflects the impact of revenue in our International segment, net store opening and closing activity, as well as, the impact of revenue streams not included within our comparable sales calculation, such as profit share revenue, certain credit card revenue, gift card breakage and sales of merchandise to wholesalers and dealers, as applicable. |
Our gross profit rate increased 0.9% of revenue in fiscal 2016. Our Domestic segment contributed a rate increase of 0.9% of revenue and there was no change in our International segment. For further discussion of each segment's gross profit rate changes, see Segment Performance Summary, below.
The SG&A rate increased 0.5% of revenue in fiscal 2016. Our Domestic segment contributed a rate increase of 0.5% of revenue and there was no change in our International segment. For further discussion of each segment's SG&A rate changes, see Segment Performance Summary, below.
SG&A restructuring charges increased from $5 million in fiscal 2015 to $198 million in fiscal 2016. Our International segment drove this increase. For further discussion of each segment’s SG&A restructuring charges, see Segment Performance Summary, below.
Our operating income decreased $75 million, and our operating income as a percent of revenue decreased to 3.5% of revenue in fiscal 2016, compared to operating income of 3.6% of revenue in fiscal 2015. The decrease in our operating income was primarily due to an increase in restructuring charges partially offset by net CRT/LCD legal settlement proceeds received in fiscal 2016.
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Segment Performance Summary
Domestic Segment
The following table presents selected financial data for our Domestic segment for each of the past three fiscal years ($ in millions):
Domestic Segment Performance Summary | 2017 | 2016 | 2015 | |||||||||
Revenue | $ | 36,248 | $ | 36,365 | $ | 36,055 | ||||||
Revenue % gain (decline) | (0.3 | )% | 0.9 | % | 0.6 | % | ||||||
Comparable sales % gain(1) | 0.2 | % | 0.5 | % | 1.0 | % | ||||||
Comparable sales % gain (decline), excluding the estimated impact of installment billing(1)(2) | n/a | (0.1 | )% | 0.5 | % | |||||||
Gross profit | $ | 8,650 | $ | 8,484 | $ | 8,080 | ||||||
Gross profit as % of revenue | 23.9 | % | 23.3 | % | 22.4 | % | ||||||
SG&A | $ | 6,855 | $ | 6,897 | $ | 6,639 | ||||||
SG&A as % of revenue | 18.9 | % | 19.0 | % | 18.4 | % | ||||||
Restructuring charges | $ | 31 | $ | 2 | $ | 4 | ||||||
Operating income | $ | 1,764 | $ | 1,585 | $ | 1,437 | ||||||
Operating income as % of revenue | 4.9 | % | 4.4 | % | 4.0 | % | ||||||
Selected Online Revenue Data: | ||||||||||||
Online revenue as a % of total segment revenue | 13.4 | % | 11.0 | % | 9.8 | % | ||||||
Comparable online sales % gain(1) | 20.8 | % | 13.5 | % | 16.7 | % | ||||||
(1) | Comparable online sales gain is included in the total comparable sales gain (decline). |
(2) | Represents comparable sales, excluding the estimated revenue benefit from installment billing. In fiscal 2015, we began selling installment billing plans offered by mobile carriers to our customers to complement the more traditional two-year plans. While the two types of contracts have broadly similar overall economics, installment billing plans typically generate higher revenues due to higher proceeds for devices and higher cost of sales due to lower device subsidies. As we increased our mix of installment billing plans, we had an associated increase in revenue and cost of goods sold and a decrease in gross profit rate, with gross profit dollars relatively unaffected. Beginning in fiscal 2017, we no longer reported comparable sales, excluding the estimated revenue benefit from installment billing, as the mix of installment billing plans became comparable on a year-over-year basis. |
The following table reconciles our Domestic segment stores open at the end of each of the last three fiscal years:
Fiscal 2015 | Fiscal 2016 | Fiscal 2017 | ||||||||||||||||||
Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | ||||||||||||||
Best Buy | 1,050 | — | (13 | ) | 1,037 | — | (11 | ) | 1,026 | |||||||||||
Best Buy Mobile stand-alone | 367 | — | (17 | ) | 350 | — | (41 | ) | 309 | |||||||||||
Pacific Sales | 29 | — | (1 | ) | 28 | — | — | 28 | ||||||||||||
Magnolia Audio Video | 2 | — | (2 | ) | — | — | — | — | ||||||||||||
Total Domestic segment stores | 1,448 | — | (33 | ) | 1,415 | — | (52 | ) | 1,363 | |||||||||||
We continuously monitor store performance. As we approach the expiration date of our stores leases, we evaluate various options for each location, including whether a store should remain open.
Fiscal 2017 Results Compared With Fiscal 2016
Domestic segment revenue of $36.2 billion in fiscal 2017 decreased 0.3% compared to the prior year. The components of the 0.3% revenue decrease in the Domestic segment in fiscal 2017 were as follows:
Comparable sales impact | 0.2 | % |
Non-comparable sales(1) | (0.5 | )% |
Total revenue decrease | (0.3 | )% |
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(1) | Non-comparable sales reflects the impact of net store opening and closing activity, as well as the impact of revenue streams not included within our comparable sales calculation, such as profit share revenue, credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers. |
The net store changes did not have a material impact on our revenue in fiscal 2017, as the majority of closures related to our small-format Best Buy Mobile stand-alone stores. The closing of small-format Best Buy Mobile stores have a significantly smaller impact given their smaller size and limited category focus compared to our large-format stores.
The profit-share revenue included in our non-comparable sales relate to our extended warranty protection plans that are managed by a third party underwriter. We may be eligible to receive profit-sharing payments, depending on the performance of the portfolio. When performance of the portfolio is strong and the claims cost to the third party underwriter declines, we are entitled to share in the excess premiums. In fiscal 2017, we recognized $110 million of such profit-share revenue, with an equal impact to gross profit and operating income. In fiscal 2016, we recognized $148 million. The fiscal 2017 profit-share revenue decrease from fiscal 2016 reflects reductions to the premiums that we pay to the third party underwriter. In light of the continued impact of these lower premiums, we expect the profit share payments to continue to decrease in future periods.
In fiscal 2017, Domestic segment online revenue of $4.8 billion increased 20.8% on a comparable basis primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased 240 basis points to 13.4% versus 11.0% last year.
The following table presents the Domestic segment's revenue mix percentages and comparable sales percentage changes by revenue category in fiscal 2017 and 2016:
Revenue Mix Summary | Comparable Sales Summary | ||||||||||
Year Ended | Year Ended | ||||||||||
January 28, 2017 | January 30, 2016 | January 28, 2017 | January 30, 2016 | ||||||||
Consumer Electronics | 34 | % | 32 | % | 5.0 | % | 4.7 | % | |||
Computing and Mobile Phones | 45 | % | 46 | % | (1.8 | )% | (2.6 | )% | |||
Entertainment | 7 | % | 8 | % | (13.8 | )% | (3.6 | )% | |||
Appliances | 9 | % | 8 | % | 7.8 | % | 15.4 | % | |||
Services | 5 | % | 5 | % | (3.3 | )% | (11.6 | )% | |||
Other | — | % | 1 | % | n/a | n/a | |||||
Total | 100 | % | 100 | % | 0.2 | % | 0.5 | % | |||
The following is a description of the notable comparable sales changes in our Domestic segment by revenue category:
• | Consumer Electronics: The 5.0% comparable sales increase was primarily due to an increase in the sales of connected home products, streaming devices and large screen televisions. |
• | Computing and Mobile Phones: The 1.8% comparable sales decline was primarily due to continued industry declines in tablets and product constraints in, and to a lesser effect, lower sales of mobile phones. This decline was partially offset by an increase in the sale of computers. |
• | Entertainment: The 13.8% comparable sales decrease was driven by declines in gaming, music and movies due to continued industry declines. |
• | Appliances: The 7.8% comparable sales gain was a result of continued growth in both large and small appliance sales. |
• | Services: The 3.3% comparable sales decline was primarily due to lower reimbursement revenue from our third party underwriter on extended protection plan claims. This trend, which primarily related to mobile phones, was a reflection of changes to the design of our extended protection plans in fiscal 2016, improvements to our repair and fulfillment operations and industry trends. |
Our Domestic segment experienced an increase in gross profit rate to 23.9% in fiscal 2017 from 23.3% in fiscal 2016. This rate increase was primarily due to (1) rate improvements in computing hardware, and (2) an increase in CRT legal settlements, partially offset by (1) lower margins from mobile phones due to changes in device mix, and (2) a decrease in our periodic profit share revenue as described above.
Our Domestic segment SG&A rate slightly decreased to 18.9% of revenue in fiscal 2017 compared to 19.0% of revenue in the prior year. The decrease in rate was primarily driven by cost reductions and lower incentive compensation, partially offset by investments in growth initiatives.
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Our Domestic segment recorded $31 million of restructuring charges in fiscal 2017 and incurred $2 million of restructuring charges in fiscal 2016. The restructuring charges in fiscal 2017 related to the Renew Blue Phase 2 plan that began in the first quarter of fiscal 2017. Refer to Note 4, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Our Domestic segment’s operating income increased $179 million in fiscal 2017 compared to fiscal 2016. In addition, the operating income rate increased to 4.9% of revenue in fiscal 2017 compared to 4.4% of revenue in the prior year. The increase was driven by the revenue, gross profit rate and SG&A rate improvements described above.
Fiscal 2016 Results Compared With Fiscal 2015
Domestic segment revenue of $36.4 billion in fiscal 2016 increased 0.9% compared to the prior year. This increase was primarily driven by a comparable sales growth of 0.5%, which included an estimated 0.6% of revenue benefit associated with installment billing, and a periodic profit sharing benefit based on performance of our externally managed extended service plan portfolio.
Similar to fiscal 2017, we recognized $148 million of profit-share revenue in fiscal 2016, with an equal impact to gross profit and operating income. The amount recognized in fiscal 2016 was substantially higher than for prior periods. The unusually strong performance of the portfolio for fiscal 2016, which particularly related to mobile phones, was due to changes to the design of our extended service plans, improvements to our repair and fulfillment operations and industry trends. These trends have also led to lower revenues from repairs we undertake on behalf of the insurers, as discussed further below.
Domestic segment online revenue of $4.0 billion increased 13.5% on a comparable basis primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased 120 basis points to 11.0% versus 9.8% in fiscal 2015.
The components of the 0.9% revenue increase in the Domestic segment in fiscal 2016 were as follows:
Comparable sales impact | 0.5 | % |
Non-comparable sales(1) | 0.4 | % |
Total revenue increase | 0.9 | % |
(1) | Non-comparable sales reflects the impact of revenue streams not included within our comparable sales calculation, such as credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers. |
The net store changes did not have a material impact on our revenue in fiscal 2016, as the majority of closures occurred in the fourth quarter and related to our small-format Best Buy Mobile stand-alone stores. The closing of small-format Best Buy Mobile stores have a significantly smaller impact given their smaller size and limited category focus compared to our large-format stores.
The following table presents the Domestic segment's revenue mix percentages and comparable sales percentage changes by revenue category in fiscal 2016 and 2015:
Revenue Mix Summary | Comparable Sales Summary | ||||||||||
Year Ended | Year Ended | ||||||||||
January 30, 2016 | January 31, 2015 | January 30, 2016 | January 31, 2015 | ||||||||
Consumer Electronics | 32 | % | 31 | % | 4.7 | % | 3.7 | % | |||
Computing and Mobile Phones | 46 | % | 47 | % | (2.6 | )% | (0.6 | )% | |||
Entertainment | 8 | % | 9 | % | (3.6 | )% | 4.5 | % | |||
Appliances | 8 | % | 7 | % | 15.4 | % | 7.5 | % | |||
Services | 5 | % | 5 | % | (11.6 | )% | (11.1 | )% | |||
Other | 1 | % | 1 | % | n/a | n/a | |||||
Total | 100 | % | 100 | % | 0.5 | % | 1.0 | % | |||
The following is a description of the notable comparable sales changes in our Domestic segment by revenue category:
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• | Consumer Electronics: The 4.7% comparable sales increase was primarily due to an increase in the sales of large screen televisions, the expansion of Magnolia Design Center stores-within-a-store, and expanded assortment of streaming devices. This increase was partially offset by industry declines in point and shoot cameras and lower sales in small and mid-size televisions. |
• | Computing and Mobile Phones: The 2.6% comparable sales decline was primarily due to continued industry declines in tablets and to a lesser extent lower demand for mobile phones. |
• | Entertainment: The 3.6% comparable sales decrease was driven by declines in music and movies due to continued industry declines as well as declines in gaming hardware. |
• | Appliances: The 15.4% comparable sales gain was a result of continued growth in major appliances sales as well as the expansion of Pacific Kitchen & Home stores-within-a-store. |
• | Services: The 11.6% comparable sales decline was primarily due to lower repair revenue from extended protection plan claims. This trend, which primarily related to mobile phones, was a reflection of changes to the design of our extended protection plans, improvements to our repair and fulfillment operations and industry trends. |
Our Domestic segment experienced an increase in gross profit of $404 million, or 5.0%, in fiscal 2016 compared to fiscal 2015. Excluding the $88 million of CRT/LCD litigation settlement proceeds received in fiscal 2016, we experienced an increase in gross profit of $316 million, or 3.9%. Refer to Note 12, Contingencies and Commitments, in the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information. This rate increase was primarily due to (1) the periodic profit-share revenue described above; (2) rate improvements in computing hardware driven by our more disciplined promotional strategy; (3) an additional positive mix shift due to significantly decreased revenue in the lower-margin tablet category; (4) the positive impact of lower repair revenue (as discussed above), which typically earns a low gross profit rate; (5) an increased mix of higher-margin large screen televisions; and (6) positive revenue impact related to our credit card portfolio. These increases were partially offset by (1) lower rates related to large appliances; (2) a lower rate in the mobile category driven by increased sales of higher priced iconic mobile phones, which have higher gross profit dollars but carry a lower gross profit rate; (3) decrease in margin for portable audio products; (4) a decreased mix of higher-margin digital imaging products; (5) an increased mix of lower-margin wearable devices; and (6) an investment in services pricing.
Our Domestic segment's SG&A increased $258 million, or 3.9%, in fiscal 2016 compared to fiscal 2015. In addition, the SG&A rate increased to 19.0% of revenue compared to 18.4% of revenue in the prior year. The increases in SG&A and SG&A rate were primarily driven by investments in growth initiatives, a greater portion of our vendor funding being recorded as an offset to cost of goods sold rather than SG&A and higher incentive compensation. This increase was partially offset by the implementation of Renew Blue Phase 2 cost reductions.
Our Domestic segment recorded $2 million of restructuring charges in fiscal 2016 and incurred $4 million of restructuring charges in fiscal 2015. The restructuring charges had an immaterial impact on our operating income rate in fiscal 2016 and fiscal 2015. Refer to Note 4, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Our Domestic segment’s operating income increased $148 million in fiscal 2016 compared to fiscal 2015. In addition, the operating income rate increased to 4.4% of revenue in fiscal 2016 compared to 4.0% of revenue in the prior year. The increase was driven by higher revenue and margin and $75 million in net CRT/LCD litigation settlement proceeds received in fiscal 2016, partially offset by the increase in SG&A as described above.
International Segment
During the first quarter of fiscal 2016, we consolidated the Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in the permanent closure of 66 Future Shop stores and the conversion of the remaining 65 Future Shop stores to the Best Buy brand. The costs of implementing these changes primarily consisted of lease exit costs, a tradename impairment, property and equipment impairments, employee termination benefits and inventory write-downs.
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The following table presents selected financial data for our International segment for each of the past three fiscal years ($ in millions):
International Segment Performance Summary | 2017 | 2016 | 2015 | |||||||||
Revenue | $ | 3,155 | $ | 3,163 | $ | 4,284 | ||||||
Revenue decline % | (0.3 | )% | (26.2 | )% | (10.4 | )% | ||||||
Comparable sales % decline(1) | n/a | n/a | (3.5 | )% | ||||||||
Restructuring charges - cost of goods sold | $ | — | $ | 3 | $ | — | ||||||
Gross profit | $ | 790 | $ | 707 | $ | 967 | ||||||
Gross profit as % of revenue | 25.0 | % | 22.4 | % | 22.6 | % | ||||||
SG&A | $ | 692 | $ | 721 | $ | 953 | ||||||
SG&A as % of revenue | 21.9 | % | 22.8 | % | 22.2 | % | ||||||
Restructuring charges | $ | 8 | $ | 196 | $ | 1 | ||||||
Operating income (loss) | $ | 90 | $ | (210 | ) | $ | 13 | |||||
Operating income (loss) as % of revenue | 2.9 | % | (6.6 | )% | 0.3 | % | ||||||
(1) | The Canadian brand consolidation has a material impact on a year-over-year basis on the Canadian retail stores and the website. As such, beginning in the first quarter of fiscal 2016 through the third quarter of fiscal 2017, all store and website revenue was removed from the comparable sales base, and an International segment (comprised of Canada and Mexico) comparable sales metric for the full year has not been provided. International comparable sales for the fourth quarter of fiscal 2017 was 0.9%. |
The following table reconciles our International segment stores open at the end of each of the last three fiscal years:
Fiscal 2015 | Fiscal 2016 | Fiscal 2017 | |||||||||||||||||||||
Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Stores Converted | Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | ||||||||||||||||
Canada | |||||||||||||||||||||||
Future Shop | 133 | — | (68 | ) | (65 | ) | — | — | — | — | |||||||||||||
Best Buy | 71 | 3 | (3 | ) | 65 | 136 | — | (2 | ) | 134 | |||||||||||||
Best Buy Mobile | 56 | — | — | — | 56 | 1 | (4 | ) | 53 | ||||||||||||||
Mexico | |||||||||||||||||||||||
Best Buy | 18 | — | — | 18 | 2 | — | 20 | ||||||||||||||||
Express | 5 | 1 | — | — | 6 | — | (1 | ) | 5 | ||||||||||||||
Total International segment stores | 283 | 4 | (71 | ) | — | 216 | 3 | (7 | ) | 212 | |||||||||||||
Fiscal 2017 Results Compared With Fiscal 2016
International segment revenue of $3.2 billion in fiscal 2017 decreased 0.3% compared to the prior year. The components of the 0.3% revenue decrease in the International segment in fiscal 2017 were as follows:
Non-comparable sales(1) | 1.8 | % |
Comparable sales impact | 0.3 | % |
Impact of foreign currency exchange rate fluctuations | (2.4 | )% |
Total revenue decrease | (0.3 | )% |
(1) | Non-comparable sales reflects the impact of net store opening and closing activity, including the Canadian brand consolidation activity in the first three quarters of fiscal 2017, as well as the impact of revenue streams not included within our comparable sales calculation, such as certain credit card revenue, gift card breakage and sales of merchandise to wholesalers and dealers, as applicable. |
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The following table presents the International segment's revenue mix percentages by revenue category in fiscal 2017 and 2016:
Revenue Mix Summary | |||||
Year Ended | |||||
January 28, 2017 | January 30, 2016 | ||||
Consumer Electronics | 31 | % | 31 | % | |
Computing and Mobile Phones | 48 | % | 48 | % | |
Entertainment | 7 | % | 9 | % | |
Appliances | 6 | % | 5 | % | |
Services | 7 | % | 6 | % | |
Other | 1 | % | 1 | % | |
Total | 100 | % | 100 | % | |
As noted above, comparable sales information has not been provided for the International segment for fiscal 2017 or 2016 due to the Canadian brand consolidation. As such, it is also impractical to provide such information on a revenue category basis. However, as noted above, the revenue mix by category has not changed significantly from fiscal 2016.
Our International segment experienced a gross profit increase of $83 million, or 11.7%, in fiscal 2017 compared to fiscal 2016. Excluding the impact of foreign currency exchange rate fluctuations, the increase in gross profit was $98 million. The gross profit rate increased to 25.0% in fiscal 2017 from 22.4% of revenue in fiscal 2016. This increase was primarily due to the increased promotional activity in fiscal 2016 as a result of the Canada brand consolidation which did not reoccur and to a lesser extent rate growth in computing and home theater.
Our International segment's SG&A decreased $29 million, or 4.0%, in fiscal 2017 compared to the prior year. Excluding the impact of foreign currency exchange rate fluctuations, the decrease in SG&A was $9 million. The SG&A rate decreased to 21.9% in fiscal 2017 from 22.8% of revenue in fiscal 2016. The decrease in SG&A rate was driven by year-over-year sales leverage.
Our International segment recorded $8 million of restructuring charges in fiscal 2017 and incurred $199 million of restructuring charges in fiscal 2016. The fiscal 2017 restructuring charges related to adjustments to our vacant space liabilities outstanding as a result of the Canadian brand consolidation and the Renew Blue plan. The adjustments were due to changes in estimates related to sublease income. The fiscal 2016 restructuring charges primarily related to the Canadian brand consolidation and consisted of facility closure costs, tradename impairments, property and equipment impairments, and employee termination benefits. Refer to Note 4, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Our International segment operating income was $90 million in fiscal 2017 compared to a loss of $210 million in the prior-year period. The improvement in operating income was primarily driven by lower restructuring costs and gross profit and SG&A rate improvements.
Fiscal 2016 Results Compared With Fiscal 2015
In our International segment, revenue declined 26.2% to $3.2 billion in fiscal 2016 due to (1) the loss of revenue associated with closed stores as part of the Canadian brand consolidation; (2) a negative foreign currency impact of 12.5%; and (3) ongoing softness in the Canadian economy and consumer electronics industry.
The components of the International segment's 26.2% revenue decrease in fiscal 2016 were as follows:
Impact of foreign currency exchange rate fluctuations | (12.5 | )% |
Non-comparable sales(1) | (13.7 | )% |
Total revenue decrease | ||