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Best Buy has healthy cash flow [ClearOnMoney]
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Best Buy has healthy cash flow

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Commentary

Best Buy has healthy cash flow

3 Sep 2012 by Jim Fickett.

There is a great deal of talk these days about the imminent death of Best Buy (and brick-and-mortar retailers in general) at the hands of Amazon (for physical goods) and Apple (for music). While I duly note the demise of many bookstores and record shops, and while I do a large fraction of my own shopping online, I find this story somewhat exaggerated. A large fraction of the population doesn't even have decent internet connectivity and, among those that do, I know many people who still prefer to go into a store, see the product, talk to a salesperson, and buy.

So I've been curious just how bad the situation with Best Buy really was.

It is true that Best Buy is not in the best of health, but there are few signs the disease is terminal. The clearest sign that there is a real problem is probably found in the fact that comparable store sales decreased in the last two years – down 1.8% in fiscal 2011 and 1.7% in fiscal 2012. Still, these decreases are small so far, and revenues overall increased.

Probably part of the extremely negative mood that currently prevails is due to recent overall losses. The company's net loss in 2012 was $1.2 billion. However this was mainly due to extraordinary items, not a failure of the basic business model. Operating income was a positive $1.1 billion, and the loss is explained as follows (from the 2012 annual report):

Fiscal 2012 included a net loss of $1.2 billion from total operations (including both continuing and discontinued operations), compared to net earnings of $1.3 billion in fiscal 2011. The net loss in fiscal 2012 was primarily due to our decision to buy out of the Best Buy Mobile profit share agreement for $1.3 billion (the “Mobile buy-out”), as well as the resulting $1.2 billion goodwill impairment in our Best Buy Europe reporting unit.

Cash flow has actually remained quite healthy (at least through the latest full-year annual results):

Free cash flow has averaged about $640 million/year over the last 14 years. With a market cap of $6.0 billion at the current stock price, that gives a price-to-free-cash-flow ratio of 9.4. If the business itself is, in fact, sustainable, $640 million probably understates the sustainable free cash flow, since capital expenditures have far exceeded maintenance, as evidenced by the clearly rising trend in operating cash flow.

So the question is whether the business model is in fact sustainable. I haven't read the company filings yet, and have only watched the popular press casually, but I would hazard a guess that the current problems are more a case of overexpansion and poor customer service, both of which are serious but fixable, rather than the end of bricks and mortar.