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Best Buy Co., Inc. Message Board

  • easydialect easydialect Feb 9, 2013 7:54 PM Flag

    Free Cash Flow Calculation

    I usually consider FCF calculations by adding back D&A. (Depreciation and amortization expense(4) 968 million for 2012.) If you assume a similar D&A expense for 2013 and if you add dividends to that which can be saved in a buyout deal - not too bad for investors.

    (2) Best Buy defines free cash flow as total cash provided by (used in) operating activities less additions to property and equipment.

    I could be wrong, but in my point of view USD 500million understates a realistic FCF scenario in any deal calculation. Also, there are ways to stretch accounts payable again and to change the inventory mix in the future. Any comments by Accounting Experts?

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    • Capital expenditures are, to some extent, discretionary. Normally, after a buy-out, CAPEX will be reduced to a minimum to conserve cash. Look at Sears (SHLD). Eddie Lampert is a hedge fund manager. He have not invested much on store renovations, fixtures, etc. Having said that, cutting CAPEX should be considered a short-term measure only.

      Working capital management is a tough subject. Every company talks about it but none has done well. The reason is, every company I have worked for, the key objectives are SALES and INCOME. No many people understand the balance sheet (nor do they want to ...). For Best Buy, I just looked at its financials for 10 minutes. It appears its accounts payable is funding its inventory. This is good. There is a fair amount of accounts receivable. I don't quite understand why on a first pass. Best Buy is mainly a retail business. It should not carry a sizeble receivable. In any event, it looks like Best Buy runs a working capital deficit. When it grows, it consumes cash. This is good. Why? Because when it shrinks, it releases cash. Most people are saying Best Buy is shrinking. In other words, its working capital cash flow should improve.

      When I was looking at the numbers, I noticed one thing. In Q4 2012, there was a huge REPORTED LOSS due to goodwill impairment. Don't know what it is - don't care either. My point is, when the Q4 2013 numbers are released, it will show a HUGE IMPROVEMENT versus 2012. I am assuming management will not write down the remaining goodwill. If they are in their right mind, they should not do it. The huge improvement is just an accounting thing of course, nothing in substance. But, I think what it will do is to highlight Best Buy is still PROFITABLE.

      There is something that even I was surprised when I checked out the numbers. That is, BEST BUY IS MORE PROFITABLE THAN AMAZON.

      The market cap of Amazon is 25 times that of Best Buy. There is a poster here (someone named holly, I think) who thinks the Amazon internet model is superior because of its low cost. Well, I do not understand the economics enough because Amazon is a non-transparent company run by a former investor banker (quasi hedge fund manager). If the Amazon model is so efficient, why is it NOT MAKING MONEY NOW?

      To sum up, to the eyes of the right person, Best Buy could be worth more than what it is trading now. The old man has created the Best Buy brand and he knows. I don't know how much debt financing he can arrange, but if he can do a 25% equity vs. 75% debt deal, given the low interest rate environment today, he could potentially make a killing in 5 years. Meantime, the cash flow of this business will be more than sufficient to service the debt.

      • 4 Replies to oldtimer2013
      • Thanks oldtimer! Nice work! I agree, any clever manager or PE will be able to generate enough free cash flow this business is still generating once it is private. Assuming they take the right steps to transform the old business model and a little help from a recovering housing market in the next 3-5 years boosting US GDP, BBY might be a very profitable investment for Mr. Schulze and PEs indeed.

        Don't mind holly, we need people like her on any good board ;)

        Sentiment: Hold

      • I believe Amazon is making a good loss (which can only grow) on their physical retail side of the business, but the part of the business where they are more just collecting a commission (like eBooks, movies, third party sellers, cloud) is helping them keep the lights on.

        Disclaimer: If you see @hollyannatexas replying to this message I have her on ignore and I advise you do the same. GLTL!

        Sentiment: Buy

      • @holly

        HaHa. For a person who has never had a real job, you are the only one who dares to touch on subjects such as cash flow and working capital. Go ahead, say something stupid about cash flow. Make me laugh. HeHe.

      • For a guy that confuses "business model" with "intrinsic value", I don't want to take the effort to dissect your post. However, you are way off the mark on Amazon, told you this before. They are taking a considerable amount of profits and funding the expansion of their business without a revolver. Hence, the net income is smaller, for now. Read about it. The more you prop up Schulze and drink the Kool-Aid ........ Just ask the longs back in August. The BIZ MODEL IS DEAD. : )

        Sentiment: Strong Sell

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