01—Abstract
Summary
Summary of the 10-K filed May 28, 1997. Cited figures are marked; the original filing is the authoritative source.
Best Buy Co., Inc. reported fiscal 1997 (ended March 1, 1997) revenues of $7.77 billiona, up 8% from $7.22 billion in fiscal 1996, but net earnings collapsed to $1.7 million, or $.04 per share, versus $48.0 million, or $1.10 per share, a year earlier.
The Company attributed the decline to a difficult consumer electronics and personal computer environment, a 5% comparable store sales decline, and pressure on gross margins and operating expenses. Operating income fell to $53.2 millionb from $122.6 million, and SG&A rose to 12.9% of sales from 11.3%. The filing notes a $15 million pre-tax inventory write-down on personal computers in the third quarter and a $10 million markdown reserve addition for recorded music in the fourth quarter.
The company curtailed expansion in fiscal 1997, opening 21 stores to reach 272 at year end, and plans only 13 new stores in fiscal 1998, with management expecting comparable store sales to decline again and a loss in the first half of fiscal 1998 but improved earnings for the full year. Cash used in operating activities was $20.4 millionc, and the Company violated its interest coverage covenant in the third quarter of fiscal 1997; the lenders waived the violation and amended the covenant through the second quarter of fiscal 1998. Total assets declined to $1.73 billion from $1.89 billion, and shareholders' equity was $438.3 million.
For investors, the central issues are margin recovery, covenant compliance under its credit facilities, and whether the planned slowdown in store growth and inventory improvements can restore profitability. Management stated that sufficient alternative working capital financing is believed to be available for fiscal 1998 operations, but noted there can be no assurance it will meet the covenants.
02—Key points
Key Highlights
- Revenues rose 8% to $7.77 billion in fiscal 1997, driven mainly by 21 new stores, while comparable store sales declined 5%.
- Net earnings fell to $1.7 million ($.04 per share) from $48.0 million ($1.10 per share) in fiscal 1996.
- Operating income dropped to $53.2 million from $122.6 million; gross profit margin improved to 13.6% from 13.0%, but SG&A rose to 12.9% of sales from 11.3%.
- Recorded a $15 million pre-tax personal computer inventory write-down in the third quarter and a $10 million addition to the recorded music markdown reserve in the fourth quarter.
- Violated the interest coverage ratio covenant in the third quarter; lenders waived the violation and amended the covenant through the second quarter of fiscal 1998.
- Slowed expansion sharply: 13 new stores planned for fiscal 1998 versus 21 opened in fiscal 1997, with year-end store count projected at 285.
- Management expects comparable store sales to decline again in fiscal 1998, with a first-half loss anticipated but improved full-year earnings expected.
03—Questions
Frequently Asked Questions
How did Best Buy perform financially in fiscal 1997?
Revenues increased 8% to $7.77 billion, but net earnings were only $1.7 million, or $.04 per share, compared with $48.0 million, or $1.10 per share, in fiscal 1996. Operating income fell to $53.2 million from $122.6 million.
What caused the decline in profitability?
The filing cites weak consumer electronics demand due to a lack of new products, a sharp decline in personal computer selling prices during the holiday season, and a 5% comparable store sales decline. Higher SG&A expenses, which rose to 12.9% of sales from 11.3%, also pressured profits, along with the inventory and markdown charges.
What is management's outlook for fiscal 1998?
Management expects comparable store sales to decline again, with the declines more pronounced in the first half of the year. The Company anticipates a loss in the first half but expects improved earnings for fiscal 1998 as a whole. It plans to open 13 new stores and capital spending is expected to be about $65 million.
Are there any concerns about the Company's debt covenants?
Yes. In the third quarter of fiscal 1997 the Company violated its interest coverage ratio covenant. The lenders waived the violation and amended the covenant through the second quarter of fiscal 1998, after which it reverts to its original level. The filing states there can be no assurance the Company will meet the covenants, which depend on future operating results.
Why is the Company slowing store expansion?
Management cited an anticipated industry-wide softness in product category growth and reduced profits available to fund store growth. The Company opened 21 stores in fiscal 1997 and plans 13 in fiscal 1998, and it intends to use its larger existing stores to test new products and merchandising strategies.
04—Continue