Best Buy Co., Inc. (NYSE:BBY), a company which many had written off just a few months ago, has seen its stock rise from a low of $11.20 near the end of 2012 to about $20 in just a few months, a staggering 78% increase. Even after a failed buyout bid from founder Richard Schulze the stock continued its rise, working against the assumption made by many that buyout hopes were the only thing propping up the stock.
At the end of October of last year I wrote an article claiming that Best Buy was far more profitable than a cursory examination of the numbers suggested. I calculated the owner earnings, which I believe is a much better measure for valuation purposes than net income or free cash flow, and showed that the story was not nearly as dismal as many people thought. When the stock fell below $12 per share I bought more, doubling my own stake in the company.
When Best Buy Co., Inc. (NYSE:BBY) released its full year earnings report on Mar. 1 the numbers showed that the turnaround effort, led by CEO Hubert Joly, was making real progress. Comparable store sales in the United States actually increased by 0.9% over the previous year, dragged down by lackluster international results. Online sales grew by 11.2%, a step in the right direction for a company which let itself get woefully behind in online retail. Adjusted free cash flow came in at $965 million, higher than the $500 previously guided for. This difference was mainly due to an aggressive effort at reducing inventory and optimizing working capital. EPS was $-1.21 per share, reflecting various non-cash write-offs and charges.
Data from 8-K
Neither EPS nor free cash flow give an accurate picture of Best Buy’s performance. For that I’ll turn to owner earnings. Best Buy Co., Inc. (NYSE:BBY) recorded $457 million in restructuring charges in the fiscal year as well as $822 million in goodwill impairment. These two charges are the reason that the net income is negative, but clearly these are one-time items and are thus not a result of normal operations. Other non-cash charges which I’ll add back to the net income total $185 million, along with depreciation and amortization charges of $876 million and $41 million respectively. All of this comes out to $2.15 billion.
From this value I’ll subtract capital expenditures of $742 million, yielding owner earnings of about $1.4 billion. On a per-share basis this comes out to $4.14 per share.
The balance sheet also got a lot stronger in the fourth quarter. Some people got worried about Best Buy’s cash position of just $309 million at the end of Q3, but that number has grown to $1.8 billion. With a total debt of about $2.3 billion liquidity isn’t an issue.