Best Buy Co Earnings Call Insights: Price-Matching Program and Free Cash Flow

Best Buy Co Inc (NYSE:BBY) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Price-Matching Program

Kate McShane – Citi: My question is surrounding the price-matching program that you’re going to put in place or best be put in place during holiday. I wondered if you could compare and contrast what we have done during holiday versus what we can expect to see this year and if there were any learnings during holiday that you learned?

Sharon McCollam – EVP, CAO and CFO: Hubert, would you like to take that question?

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Hubert Joly – President and CEO: Yes. The line was not very good. I think your question pertains to our price-matching activities during the holidays and our strategy going forward. So this is a decision we made in October to make sure that we enhance our price competitiveness and fight the so-called showrooming phenomenon. Our Blue Shirts teams in the field have been very excited about this program. The customers have been very engaged in this program, and we believe that it has helped improve our price perception during the program. So, we’ve been very excited about it. In terms of impact on our margins, there was a big concern, right, there in terms of the impact it would have. The impact has really been minimal, because in general terms, actually our prices are quite competitive. And, as you know, we’ve decided to move from the pilot to a policy. So, the situation now is that we’re matching both online and in the stores. We’ve actually expanded the price-matching policy to cover essentially all product categories, including accessories and hardware and software. There is very few exceptions to the policy. The fact that we’re going to make this is a policy and make it permanent may increase the cost a little bit, so that’s a factor that we have in mind. But we are Best Buy and we are determined to be the Best Buy for our customers. And, of course, our value proposition to the customer is not just the price, it’s all of the price customer promises, and we like the response we’re getting from customers.

Free Cash Flow

Anthony Chukumba – BB&T Capital Markets: So, my question was on the free cash flow. You significantly reduced your guidance. I know you’ve reported the holiday sales results and there you came out way, way, way better than that. I was just wondering – I know there was the color in the press release, but if you can give us any additional color, because I know that there was some concern that maybe it was because the vendors were cutting back terms and so I would just love just a little bit of additional color in terms of what you were able to do to almost double your free cash flow guidance.

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Sharon McCollam – EVP, CAO and CFO: Anthony, this is Sharon and I’ll take that question. In order to that, obviously, I have just joined the Company when we released the previous cash flow guidance and we had at the time I joined, we were discussing and the organization was already discussing actions to take that relates to working capital management. So, subsequent to that time, there were several things that we did that drove this and the biggest of them – and then there was one that is not driven, it is a result of a business change in Europe. So, let me walk through them in a little more detail. First of all, the inventory ended lower than we anticipated and a portion of that was the additional sale. But in addition to that, we did an entire study of a layer of our inventory that was very slow moving and that was eligible for return to vendor. So, we had a full core press in the organization on taking this non-productive working capital and returning it to vendors. Now, this is a process that when you think through it, you go from the store to a regional center, from the regional center to the vendor. The paperwork has got to be intact and then you can legitimately deduct that from payables that you would owe to the vendors (of) turning it into cash. So, to have guided a process that we had not historically executed, now of course has become part of our baseline execution would have been probably a little bit premature, but the execution of this yielded well over $300 million of additional cash flow. So, we were thrilled with the execution across the organization, (that was so core press) and that was one driver. The next second driver is that if you recall from my prepared remarks, in Europe, we talked about the fact that they had a significantly higher mix of wholesale sales during the quarter, and as part of this business-to-business sales effort activities being so much higher than anticipated, the payment terms on inventory purchases associated with the B2B business are substantially longer. So, Europe delivered a substantial benefit – International and general delivered, but it was all really came out of Europe and that brought in virtually – actually a slightly more than the balance. And then, of course, because of our stronger performance, we did have some slightly higher receivables which were the offset. So, that is what drove it. It was pure operational execution. And then on top of that, Anthony, the smallest piece, but truly, is aggressive cash management. We, as a company, have not – necessarily have the disciplines in place around that area, and, of course, going forward again, we’re building into our processes a much more thoughtful approach to cash management with all of our vendors, and I’m not just talking about vendors associated with our inventory processes, but our – we do a lot of purchasing as you can tell from our SG&A initiative around (we haven’t done) anything to do with product for resale. So that’s another area that we’ve gone after.

Hubert Joly – President and CEO: Sharon, do you want to touch on the vendor terms? That was a question from Anthony about changing vendor terms or concern about this, which, of course, is not the case. You want to maybe make that point?

Sharon McCollam – EVP, CAO and CFO: Yes, we affirmed that in fiscal ’13, there were no changes in vendor terms. I know that people were trying to get their head around this and they’re trying to understand it, but that has nothing to do with the $500 million. It all had to do with bringing the inventory in earlier because of the calendar and all of the things that we talked about in our last press release were exactly how it came out. Had we not done this aggressive return of slow moving inventory that had return capabilities with the vendors; this number would have been back into that range if you take out the benefit from the shift in revenue in Europe to wholesale.

A Closer Look: Best Buy Earnings Cheat Sheet>>