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Best Buy Audit PlanErick Olsen, Duy Nguyen, Justin Banks,
Richard Johnson, Leon Mangru
It’s a Trap CPA, LLC
$42 billion in revenue 1055 Best Buy stores in the US, 406 Best Buy
Mobile stores◦ 137 future stores
Recently closed operation in Europe, Turkey, China Headquarter in Richfield, MN To increase revenue, Best Buy is attempting new
strategies◦ Wedding registry kiosks◦ “Local” distribution centers◦ Stores-in-stores
Best Buy
Hubert Joly, CEO, 1 year Sharon McCollam, CAO & CFO, 1 year Sheri Ballard, Chief HR, 21 years Jude Buckley, Chief Commercial, 7 years R. Michael Mohan, Chief Merchandising, 10 years Keith Nelson, General Counsel and Secretary, 8
years
Board of Directors
Hatim A. Tyabji J. Patrick Doyle Russell P. Fradin Thomas L. Millner Gerard R. Vittecoq
Audit Committee
2 fundamental problems◦ Declining comparable store sales◦ Shrinking margins
Renew Blue:◦ Reinvigorate and rejuvenate customer experience◦ Attract/Inspire leaders and employees◦ Work with vendors to innovate and drive values◦ Increase returns on investment capital◦ Positively impact our world
Best Buy Strategy
Nature of revenue◦ Sales of merchandise
Consumer Electronics Phones Entertainment Appliances
◦ Stores in stores concept (rent)◦ Geek Squad (Services)
Best Buy Operations
Profit Margins
Best Buy Amazon
2014 Fiscal Year◦ Net Profit: 1.6%◦ Gross Margin: 22.8%
2013 Fiscal Year◦ Net Profit: 1.2%◦ Gross Margin: 23.3%
2014 Fiscal Year◦ Net Profit: 0.27%◦ Gross Margin: 29.5%
2013 Fiscal Year◦ Net Profit: 0.37%◦ Gross Margin: 27.2%
2014 fiscal year: ◦ $2.7 billion of cash & cash equivalents◦ $3.0 billion in working capital◦ $1.1 billion in operating cash flow (decrease)
Sources of Liquidity◦ $500 million 364-day unsecured revolving credit
facility◦ $1.5 billion 5-year unsecured revolving credit
facility◦ $162 million available unsecured revolving
demand facilities for International operations
Liquidity and Capital Resources
CONSOLIDATED BALANCE SHEETS (USD $)Feb. 01, 2014 Feb. 02, 2013In Millions, unless otherwise specified Horizontal
AnalysisCURRENT ASSETS ' 'Cash and cash equivalents $2,678 47% $1,826 Short-term investments 223 0Receivables, net 1,308 -52% 2,704Merchandise inventories 5,376 -18% 6,571Other current assets 900 -5% 946Total current assets 10,485 -13% 12,047Property and Equipment ' 'Land and buildings 758 0% 756Leasehold improvements 2,182 -9% 2,386Fixtures and equipment 4,515 -12% 5,120Property under capital lease 120 6% 113Property and equipment, gross 7,575 -10% 8,375Less accumulated depreciation 4,977 -3% 5,105Net property and equipment 2,598 -21% 3,270Goodwill 425 -20% 528Intangibles, Net 101 -70% 334Other Assets 404 -34% 608Total Assets 14,013 -17% 16,787
Horizontal Analysis: Balance Sheet 2014
CURRENT LIABILITIES Feb. 01, 2014 Feb. 02, 2013Accounts payable 5,122 -26% 6,951Unredeemed gift card liabilities 406 -5% 428Deferred revenue 399 -12% 451
Accrued compensation and related expenses 444 -15% 520Accrued liabilities 873 -27% 1,188Accrued income taxes 147 14% 129Short-term debt 0 -100% 596Current portion of long-term debt 45 -92% 547Total current liabilities 7,436 -31% 10,810Long-Term Liabilities 976 -12% 1,109Long-Term Debt 1,612 40% 1,153
Common stock, $0.10 par value: Authorized — 1.0 billion shares; Issued and outstanding — 346,751,000 and 338,276,000 shares, respectively 35 3% 34Additional paid-in capital 300 456% 54Retained earnings 3,159 10% 2,861
Accumulated other comprehensive income 492 339% 112
Total Best Buy Co., Inc. shareholders' equity 3,986 30% 3,061Noncontrolling interests 3 -100% 654Total equity 3,989 7% 3,715Total Liabilities and Equity $14,013 -17% $16,787
Horizontal Analysis: Balance Sheet 2014
CONSOLIDATED BALANCE SHEETS (USD $)
Feb. 02, 2013 Horizontal Analysis Mar. 03, 2012 In Millions, unless otherwise specified
CURRENT ASSETSCash and cash equivalents $ 1,826 52% $ 1,199 Receivables 2,704 18% 2,288 Merchandise inventories 6,571 15% 5,731 Other current assets 946 -12% 1,079 Total current assets 12,047 17% 10,297 Property and EquipmentLand and buildings 756 -2% 775 Leasehold improvements 2,386 1% 2,367 Fixtures and equipment 5,120 3% 4,981 Property under capital lease 113 -12% 129 Property, Plant and Equipment, Gross 8,375 1% 8,252 Less accumulated depreciation 5,105 7% 4,781 Net property and equipment 3,270 -6% 3,471 GOODWILL 528 -60% 1,335 Intangibles 334 -7% 359 OTHER ASSETS 608 12% 543 TOTAL ASSETS 16,787 5% 16,005
Horizontal Analysis: Balance Sheet 2013
CURRENT LIABILITIES Feb. 02, 2013 Mar. 03, 2012
Accounts payable 6,951 30% 5,364 Unredeemed gift card liabilities 428 -6% 456 Accrued compensation and related expenses 520 -4% 539 Accrued liabilities 1,639 -3% 1,685 Accrued income taxes 129 -55% 288 Short-term debt 596 24% 480 Current portion of long-term debt 547 1172% 43 Total current liabilities 10,810 22% 8,855 LONG-TERM LIABILITIES 1,109 1% 1,099 LONG-TERM DEBT 1,153 -32% 1,685
Common stock, $0.10 par value: Authorized — 1.0 billion shares; Issued and outstanding — 338,276,000 and 341,400,000 shares, respectively 34 0% 34 Additional paid-in capital 54 - Retained earnings 2,861 -21% 3,621 Accumulated other comprehensive income 112 24% 90 Total Best Buy Co., Inc. shareholders' equity 3,061 -18% 3,745 Noncontrolling interests 654 5% 621 Total equity 3,715 -15% 4,366 TOTAL LIABILITIES AND EQUITY $ 16,787 5% $ 16,005
Horizontal Analysis: Balance Sheet 2013
CONSOLIDATED BALANCE SHEETS (USD $)Feb. 01, 2014 Feb. 02, 2013
In Millions, unless otherwise specifiedCURRENT ASSETS ' 'Cash and cash equivalents $2,678 19.11% $1,826 10.88%Short-term investments 223 1.59% 0 0.00%Receivables, net 1,308 9.33% 2,704 16.11%Merchandise inventories 5,376 38.36% 6,571 39.14%Other current assets 900 6.42% 946 5.64%Total current assets 10,485 74.82% 12,047 71.76%Property and Equipment ' 'Land and buildings 758 5.41% 756 4.50%Leasehold improvements 2,182 15.57% 2,386 14.21%Fixtures and equipment 4,515 32.22% 5,120 30.50%Property under capital lease 120 0.86% 113 0.67%Property and equipment, gross 7,575 54.06% 8,375 49.89%Less accumulated depreciation 4,977 35.52% 5,105 30.41%Net property and equipment 2,598 18.54% 3,270 19.48%Goodwill 425 3.03% 528 3.15%Intangibles, Net 101 0.72% 334 1.99%Other Assets 404 2.88% 608 3.62%Total Assets 14,013 100.00% 16,787 100.00%
Vertical Analysis: Balance Sheet 2013 & 2014
CURRENT LIABILITIES Feb. 1, 2014 Feb. 2, 2014Accounts payable 5,122 36.55% 6,951 41.41%Unredeemed gift card liabilities 406 2.90% 428 2.55%Deferred revenue 399 2.85% 451 2.69%Accrued compensation and related expenses
444 3.17% 520 3.10%Accrued liabilities 873 6.23% 1,188 7.08%Accrued income taxes 147 1.05% 129 0.77%Short-term debt 0 0.00% 596 3.55%Current portion of long-term debt 45 0.32% 547 3.26%Total current liabilities 7,436 53.07% 10,810 64.40%Long-Term Liabilities 976 6.96% 1,109 6.61%Long-Term Debt 1,612 11.50% 1,153 6.87%Contingencies and Commitments (Note 13)
' ' Best Buy Co., Inc. Shareholders’ Equity
' 'Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none
0 0.00% 0 0.00%Common stock, $0.10 par value: Authorized — 1.0 billion shares; Issued and outstanding — 346,751,000 and 338,276,000 shares, respectively
35 0.25% 34 0.20%Additional paid-in capital 300 2.14% 54 0.32%Retained earnings 3,159 22.54% 2,861 17.04%Accumulated other comprehensive income
492 3.51% 112 0.67%Total Best Buy Co., Inc. shareholders' equity
3,986 28.45% 3,061 18.23%Noncontrolling interests 3 0.02% 654 3.90%Total equity 3,989 28.47% 3,715 22.13%Total Liabilities and Equity $14,013 100.00% $16,787 100.00%
Vertical Analysis: BS 2013 & 2014
CONSOLIDATED STATEMENTS OF EARNINGS (USD $) 11 Months EndedIn Millions, except Per Share data, unless otherwise specified Feb. 01, 2014 Feb. 02, 2013 Jan. 28, 2012Revenue $42,410 100% $39,827 100% $41,311 100%Cost of goods sold 32,720 77% 30,528 77% 31,384 76%Restructuring charges cost of goods sold 0 0% 1 0% 19 0%Gross profit 9,690 23% 9,298 23% 9,908 24%Selling, general and administrative expenses 8,391 20% 8,181 21% 7,986 19%Restructuring charges 159 0% 414 1% 24 0%Goodwill impairments 0 0% 822 2% 0 0%Operating income (loss) 1,140 3% -119 0% 1,898 5%Other income (expense) ' ' 'Gain on sale of investments 20 0% 0 0% 55 0%Investment income and other 27 0% 20 0% 23 0%Interest expense -100 0% -99 0% -101 0%Earnings (loss) from continuing operations before income tax expense and equity in income (loss) of affiliates 1,087 3% -198 0% 1,875 5%Income tax expense 398 1% 269 1% 658 2%Net earnings (loss) from continuing operations 689 2% -467 -1% 1,217 3%Gain (loss) from discontinued operations (Note 4), net of tax of $42, $37, $119 and $122 -166 0% 47 0% -1,394 -3%Net earnings (loss) including noncontrolling interests 523 1% -420 -1% -177 0%Net earnings from continuing operations attributable to noncontrolling interests -2 0% -2 0% -3 0%Net (earnings) loss from discontinued operations attributable to noncontrolling interests 11 0% -19 0% -1,245 -3%Net earnings (loss) attributable to Best Buy Co., Inc. shareholders $532 1% ($441) -1% ($1,425) -3%
Vertical Analysis: Income Statement 2012-2014
CONSOLIDATED STATEMENTS OF EARNINGS (USD $) 11 Months EndedIn Millions, except Per Share data, unless otherwise specified
Feb. 01, 2014 Feb. 02, 2013
Jan. 28, 2012
Revenue $42,410 6.49% $39,827 -3.59% $41,311 Cost of goods sold 32,720 7.18% 30,528 -2.73% 31,384Restructuring charges — cost of goods sold 0 -100.00% 1 -94.74% 19Gross profit 9,690 4.22% 9,298 -6.16% 9,908Selling, general and administrative expenses 8,391 2.57% 8,181 2.44% 7,986Restructuring charges 159 -61.59% 414 1625.00% 24Goodwill impairments 0 -100.00% 822 0Operating income (loss) 1,140 1057.98% -119 -106.27% 1,898Other income (expense) ' ' 'Gain on sale of investments 20 0 -100.00% 55Investment income and other 27 35.00% 20 -13.04% 23Interest expense -100 1.01% -99 1.98% -101
Earnings (loss) from continuing operations before income tax expense and equity in income (loss) of affiliates 1,087 648.99% -198 -110.56% 1,875Income tax expense 398 47.96% 269 -59.12% 658Net earnings (loss) from continuing operations 689 247.54% -467 -138.37% 1,217Gain (loss) from discontinued operations (Note 4), net of tax of $42, $37, $119 and $122 -166 -453.19% 47 103.37% -1,394Net earnings (loss) including noncontrolling interests 523 224.52% -420 -137.29% -177Net earnings from continuing operations attributable to noncontrolling interests -2 0.00% -2 33.33% -3Net (earnings) loss from discontinued operations attributable to noncontrolling interests 11 157.89% -19 98.47% -1,245Net earnings (loss) attributable to Best Buy Co., Inc. shareholders $532 220.63% ($441) 69.05% ($1,425)
Horizontal Analysis: Income Statement
Horizontal Analysis: Cash Flow OperatingCONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified Feb. 01, 2014 Feb. 02, 2013 Jan. 28, 2012OPERATING ACTIVITIES ' ' 'Net earnings (loss) including noncontrolling interests
$523 224.52% ($420) 137.29% ($177)Adjustments to reconcile net earnings (loss) to total cash provided by operating activities ' ' 'Depreciation 701 -11.71% 794 -2.10% 811Amortization of definite-lived intangible assets
15 -60.53% 38 -9.52% 42Restructuring charges 259 -42.32% 449 60.36% 280Goodwill impairments
0 -100.00% 822 -31.90% 1,207Loss on sale of business 143 0.00% 0 0.00% 0Stock-based compensation 90 -15.89% 107 -2.73% 110Realized gain on sale of investment
0 0.00% 0 -100.00% -55Deferred income taxes
-28 -47.37% -19 -117.27% 110Other, net
62 51.22% 41 105.00% 20Changes in operating assets and liabilities, net of assets and liabilities acquired or sold: ' ' 'Receivables 7 101.27% -551 61.11% -342Merchandise inventories
597 165.46% -912 -14.53% -1,067Other assets
-70 -7.69% -65 -324.14% 29Accounts payable
-986 -156.83% 1,735 -17.18% 2,095Other liabilities
-273 19.47% -339 -513.41% 82Income taxes
54 123.89% -226 370.83% -48Total cash provided by operating activities
1,094 -24.76% 1,454 -53.05% 3,097
Horizontal Analysis: Cash Flow Investing
INVESTING ACTIVITIESFeb. 01, 2014 Feb. 02, 2014 Jan. 28, 2012
Additions to property and equipment, net of $13, $29, $13 and $18 non-cash capital expenditures
-547 22.41% -705 -0.56% -709Purchases of investments
-230 -1669.23% -13 -88.29% -111Sales of investments 50 -27.54% 69 -76.21% 290Acquisition of businesses, net of cash acquired
0 100.00% -31 -82.18% -174Proceeds from sale of business, net of cash transferred
206 724.00% 25 2400.00% 1Change in restricted assets 5 -95.05% 101 74.14% 58Other, net
-1 -106.25% 16 -900.00% -2Total cash used in investing activities
-517 3.90% -538 -16.85% -647
Horizontal Analysis: Cash Flow Financing
FINANCING ACTIVITIES Feb. 01, 2014 Feb. 02, 2013 Jan. 28, 2012Repurchase of common stock 0 100.00% -122 -91.08% -1,368Issuance of common stock under employee stock purchase plan and for the exercise of stock options
171 584.00% 25 -62.12% 66Dividends paid -233 -4.02% -224 -1.75% -228Repayments of debt -2,033 -25.96% -1,614 -49.44% -3,192Proceeds from issuance of debt 2,414 38.66% 1,741 -55.48% 3,911Payment to noncontrolling interest (Note 3)
0 0.00% 0 -100.00% -1,303Other, net 0 100.00% -17 -37.04% -27Total cash provided by (used in) financing activities
319 251.18% -211 -90.14% -2,141Effect of Exchange Rate Changes on Cash
-44 -1000.00% -4 -33.33% -6Increase in Cash and Cash Equivalents 852 21.54% 701 131.35% 303Adjustment for Fiscal Year-end Change (Note 2)
0 100.00% -74 1380.00% -5Increase in Cash and Cash Equivalents After Adjustment
852 35.89% 627 110.40% 298Cash and Cash Equivalents at Beginning of Year
1,826 52.29% 1,199 8.70% 1,103Cash and Cash Equivalents at End of Year
2,678 46.66% 1,826 30.34% 1,401Supplemental Disclosure of Cash Flow Information
' 'Income taxes paid 332 -30.54% 478 0.42% 476Interest paid $82 -22.64% $106 23.26% $86
Discontinued Operations Goodwill Short-term and long-term debt Long-term leases Revenue Comprehensive income Inventory
Problematic Accounts
Account Concern Evidence Assertion
Related Account
Discontinued Operation
Overstated Routine expenses were included in the disposing process in reduce comprehensive income
Cut off: Valuation
Income, Income taxes
Discontinued Operations
Inspection of records and documents◦ Account balances and Disclosures◦ Disposition of assets
Inquiries
Analytical Procedures◦ Scanning
Test of Details/Test of Control
Account Concern Evidence Assertion
Related Accounts
Goodwill Overstated
Goodwill: -19.5%Intangible assets: -69.7%
Valuation, Disclosure
Income, Goodwill
Goodwill
Look at the methods of calculating Goodwill
Recreate the impairment test
Inquiries
Test of Details
Account Concern Evidence Assertion Related Accounts
LT debt Understated H.A ratio:LT debt (less current portion) 39.8%
Valuation, Presentation,Completeness
A/P, Notes Payable, Cash & Cash Equivalents
Long-term debt
Debt-to-Equity ratio LT Debt-to-Equity ratioBest Buy Amazon Best BuyAmazon2014: 2.513 2014: 0.920 2014: 0.288 2014: 0.7692013: 3.227 2013: 0.408 2013: 0.274 2013: 0.327
Obtain analysis of debt and related accounts Vouch borrowing and repayment transactions Test computations of interest
◦ Expense◦ Payable◦ Amortization of discount and premium
Confirm the debt exists◦ Confirmation letters about financing agreements
Get documents supporting authority was given for the debt
Test of Details
Account
Concern Evidence Assertion Related Accounts
Leases Understated
Possible expenses were not incurred properly during 2014. Total rent expenses increased by $1.5 billion
Valuation, Existence, Presentation
Rent expenses, Cash, Income
Lease obligations
Interest CoverageBest Buy Amazon
2014: 10.87 2014: 0.8472013: 2.00 2013: 5.28
Contractual agreements◦ Terms and Condition◦ Duration of the leases
Examine copies of the lease obligation◦ Confirm leases with appropriate third parties
Evaluate whether the debt provisions have been met
Review any lease expenses paid after the balance sheet date
Test the valuation of leases in long-term portion
Test of Details
Account Concern Evidence Assertion
Related Accounts
ACI Overstated V.A ratio: 339% increase from 2013 compare to an average of 11% increase in the previous periods
Valuation, Existence, Disclosure
Comprehensive Income, Equity
Comprehensive Income
ROE NET ROABest Buy Amazon Best BuyAmazon
2014: 17.27% 2014: 2.2% 2014: 4.92% 2014: 0.44%2013: 12.57% 2013: 2.8% 2013: 2.78% 2013: 0.68%
Observe and make inquiries about the process◦ Review historical rate of day of hedging account. ◦ Inspect notes on hand and rate used
Test IT Application Controls◦ Review for errors posted due to foreign currency
translation adjustment. Check for existence
◦ Valuate and check documents and accuracy of hedging account.
Test of Details
Account Concern Evidence Assertion Related Accounts
Inventory Overstated
$1 billion decrease in value,Vendors vs. Best Buy,Possible obsolescence for inventory
Valuation,Rights and Obligations,Existence
Inventory, Sales, COGS
Inventory
Days in InventoryBest Buy Amazon2014: 66.64 Days 2014: 48.27 Days2013: 65.20 Days 2013: 49.93 Days
Inventory TurnoverBest Buy Amazon2014: 6.09 2014: 7.562013: 4.65 2013: 7.31
Doing inspection of source documents to verify ownership◦ Company-owned vs. vendor-owned vs.
consignment Physical count of inventory Valuation of inventory for obsolescence Observation of internal control for shrinkage
Test of Details
In the next few slides, we will include other valuable ratio’s that our audit team found worth looking at.
Other Key Ratio’s
Accounts receivable turnover
Best Buy Amazon
2014: 21.142 2013: 18.063
2014: 23.019 2013: 23.370
Price to Earnings Ratio
Best Buy Amazon
3/17/15◦ Basic: 26.75◦ Diluted: 27.275
2013◦ Basic: 19.908◦ Diluted: 19.908
4/8/15◦ Basic: 733.08◦ Diluted: 733.08
2013◦ Basic: 664.65◦ Diluted: 675.92
Debt to EBITDA
Best Buy Amazon
2014: 8.79 2013: 109.85
2014: 0.720 2013: 0.319
Working Capital
Best Buy Amazon
2014: 3,049 2013: 1,237
2014: 3,2382013: 1,645
Current Ratio
Best Buy Amazon
2014: 1.410 2013: 1.114
2014: 1.115 2013: 1.072
A/P Turn
Best Buy Amazon
2014: 5.222 2013: 5.094
2014: 4.029 2013: 3.906
Free Cash Flow
Best Buy Amazon
2014: $610 2013: $602
2014: $1,949 2013: $2,031
Standard & Poor’s: BB rating with a stable outlook.
Moody’s: Baa2 rating with a Negative outlook.
Fitch: BB- Rating with a stable outlook.
BB rating investors face higher risk of default.
Baa2 rating is ninth highest rating for Moody. This rating suggests that Best Buy has moderate credit risk.
Best Buy Credit Rating
Overall, Best Buy is improving financially Pressure to perform well to satisfy
shareholders
Conclusion
Amazon.com, Inc. (2015). Form 10-K 2015. Retrieved from https://www.last10k.com/sec-filings/amzn
Best Buy Co., Inc. (2014). Form 10-K 2014. Retrieved from https://www.last10k.com/sec-filings/BBY/0000764478-14-000011.htm
Best Buy Co., Inc. (n.d). Letter to Shareholders. Burkitt, L. (2014, December 4). Best Buy to Exit
China. http://www.wsj.com/articles/best-buy-to-exit-china-1417678576
BUSINESS INSIGHTS: Best Buy Co., Inc. (2015). Best Buy Co, Inc. Company Profiles.
References
Byrd, S. (2015, February 16). Insider Selling: Best Buy Co major shareholder Sells $27,086,400.00 in Stock (BBY). http://www.dakotafinancialnews.com/insider-selling-best-buy-co-major-shareholder-sells-27086400-00-in-stock-bby/39264/
DATAMONITOR: Best Buy Co., Inc. (2012). Best Buy Co, Inc. SWOT Analysis, 1-12.
D'Innicenzio, A. (2015, February 11). Best Buy launches its first wedding registry. http://finance.yahoo.com/news/best-buy-launches-first-wedding-200056725.html
GLOBALDATA: Best Buy Co., Inc. (2014). Best Buy Co, Inc. – Financial and Strategic Analysis Review. 1-4.
References
REUTERS FUNDAMENTALS: Best Buy Co., Inc. (2015). Best Buy Co, Inc. 1-12.
S&P CAPITAL IG: Best Buy Co., Inc. (2015). Best Buy Co, Inc. 1-12.
Trefis, T. (2015, February 18). Why We Think Best Buy's FY'16 Bets Make a Lot More Sense http://www.forbes.com/sites/greatspeculations/2015/02/17/why-we-think-best-buys-fy16-bets-make-a-lot-more-sense/
Wolf, A. (2014). Shipping Wars Heat Up With Best Buy's Two-Day Deliveries. TWICE: This Week In Consumer Electronics, 29(24), 4.
Wolf, A. (2014). Best Buy Turnaround Gains Traction, Q1 Profits Resurge. TWICE: This Week In Consumer Electronics, 29(11), 4-44.
References