Enterprise Comparable Sales Increased 1.6%
Diluted EPS of $0.60
MINNEAPOLIS, May 25, 2017 — Best Buy Co., Inc. (NYSE: BBY) today announced results for the first quarter ended April 29, 2017 (“Q1 FY18”), as compared to the first quarter ended April 30, 2016 (“Q1 FY17”). The company reported GAAP diluted earnings per share from continuing operations of $0.60, a decrease of 13% from $0.69 in Q1 FY17, entirely driven by the large CRT settlement proceeds received last year which did not recur in Q1 FY18. Non-GAAP diluted earnings per share from continuing operations were $0.60, an increase of 40% from $0.43 in Q1 FY17. (PDF version here.)
| Q1 FY18 | Q1 FY171 | |
| Revenue ($ in millions)2 | ||
| Enterprise | $8,528 | $8,443 |
| Domestic segment | $7,912 | $7,829 |
| International segment | $616 | $614 |
| Enterprise comparable sales % change | 1.6% | (0.1%) |
| Domestic comparable sales % change | 1.4% | (0.1%) |
| Domestic comparable online sales % change | 22.5% | 23.9% |
| International comparable sales % change | 4.0% | N/A |
| Operating Income: | ||
| GAAP operating income as a % of revenue | 3.5% | 4.4% |
| Non-GAAP operating income as a % of revenue | 3.5% | 2.8% |
| Diluted Earnings per Share (EPS): | ||
| GAAP diluted EPS from continuing operations | $0.60 | $0.69 |
| Non-GAAP diluted EPS from continuing operations | $0.60 | $0.43 |
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For GAAP to non-GAAP reconciliations, please refer to the attached supporting schedule titled “Reconciliation of non-GAAP Financial Measures”. |
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“We are pleased today to report strong top and bottom line results for the first quarter of fiscal 2018,” said Hubert Joly, Best Buy chairman and CEO. “Our Q1 performance reflects the strength of our customer value proposition and continued momentum in the execution of our strategy. I want to thank all our associates across the company for their hard work in delivering these results.”
Joly continued, “We grew our Enterprise comparable sales by 1.6% during the quarter, driven by growth in both the Domestic and International segments. We also continued to drive significant growth in the online channel – with Domestic online comparable sales increasing 22.5%. On the profitability side, at the Enterprise level, we continued to optimize merchandise margins and exercise good expense management.”
Joly continued, “Compared to our expectations going into the quarter, our revenue was higher due to strong performance in gaming, a better-than-expected result in mobile, and the improvement of overall sales trends due to the arrival of delayed federal tax refund checks.”
Joly concluded, “We are energized about our opportunities and the strategy we are pursuing. We believe we are uniquely positioned to help our customers in a meaningful way with our combination of multi-channel assets – including our online, store and in-home capabilities, and I love how our teams are mobilized to deliver on our mission and Build the New Blue.”
Best Buy CFO Corie Barry commented, “Our second quarter guidance reflects the continuation of much of the positive category momentum we saw in the first quarter, as well as the increased level of growth investments included in our initial annual guidance. For the second quarter, we expect Enterprise comparable sales growth in the range of 1.5% to 2.5% and non-GAAP diluted EPS in the range of $0.57 to $0.62.3”
Barry continued, “For the full year, which as a reminder has an extra week, we are updating our topline guidance to reflect the better-than-expected first quarter results and our second quarter guidance. We are now expecting revenue growth of approximately 2.5% versus our original guidance of approximately 1.5%. Before I discuss our non-GAAP operating income growth guidance, I would like to note that due to a change in the non-GAAP treatment of non-restructuring property and equipment impairments, we have recast last year’s FY17 non-GAAP results.1 Therefore, our updated full-year non-GAAP operating income growth guidance is based on the recast FY17 non-GAAP operating income, which is $26 million, or 1.5%, lower than originally reported. In that context, we are expecting full year non-GAAP operating income growth of 3.5% to 8.5% versus our original guidance of 1% to 3% growth.3 We recognize it is early in the year and that historically the first quarter represents approximately 15% of our annual operating income. As such, this outlook range allows for a level of flexibility as we strategically balance our pace of investments, returns from new initiatives, ongoing cost reductions and efficiencies, and ongoing pressures in the business including approximately $60 million of lower profit share revenue.”
FY18 Financial Guidance
Note: FY18 has 53 weeks compared to 52 weeks in FY17. The extra week occurs in Q4 FY18.
Best Buy is providing the following Q2 FY18 financial outlook:
- Enterprise revenue in the range of $8.6 billion to $8.7 billion
- Enterprise comparable sales change in the range of 1.5% to 2.5%
- Domestic comparable sales change in the range of 1.5% to 2.5%
- International comparable sales change in the range of flat to 3.0%
- Non-GAAP effective income tax rate of 36.5% to 37.0%3
- Diluted weighted average share count of approximately 310 million
- Non-GAAP diluted EPS of $0.57 to $0.623
Best Buy is updating its full year FY18 financial outlook to the following:
- Enterprise revenue growth of approximately 2.5%
- Enterprise non-GAAP operating income growth rate in the range of 3.5% to 8.5%, based on the recast FY17 non-GAAP operating income of $1.733 billion as detailed in the note below1,3
- Enterprise non-GAAP effective income tax rate of approximately 35.5%3
- On a 52-week basis, Enterprise revenue growth of approximately 1.0%
- On a 52-week basis, Enterprise non-GAAP operating income growth rate in the range of 1.5% to 5.5%, based on the recast FY17 non-GAAP operating income of $1.733 billion as detailed in the note below1,3
Note: The company’s full year non-GAAP operating income growth rate on both a 53-week and 52-week basis is based on a recast fiscal 2017 non-GAAP operating income of $1.733 billion, which is $26 million, or 1.5%, lower than originally reported. The recast was done for comparability purposes as the company is no longer excluding non-restructuring property and equipment impairment charges from its non-GAAP results beginning in Q1 FY18. For additional details on the recast financials, please refer to the attached supporting schedule titled “FY16 and FY17 Recast Non-GAAP Segment Information”.1
Domestic Segment First Quarter Results
Domestic Revenue
Domestic revenue of $7.9 billion increased 1.1% versus last year driven by comparable sales growth of 1.4%, partially offset by the loss of revenue from 12 large format and 40 Best Buy Mobile store closures.
From a merchandising perspective, comparable sales growth in computing, connected home and gaming was partially offset by declines in tablets.
Domestic online revenue of $1.02 billion increased 22.5% on a comparable basis primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased 230 basis points to 12.9% versus 10.6% last year.
Domestic Gross Profit Rate
Domestic gross profit rate was 23.6% versus 25.4% last year. On a non-GAAP basis, gross profit rate was 23.6% versus 23.0% last year. Both the GAAP and non-GAAP gross profit rates increased by approximately 60 basis points primarily due to (1) improved margin rates across multiple categories, particularly in appliances and home theater, and (2) legal settlement proceeds of $8 million, or 10 basis points, in the services category. These increases were partially offset by margin pressure in the mobile category and the negative impact of higher sales in the lower-margin gaming category. Additionally, the GAAP gross profit rate in Q1 FY17 was inflated by approximately 240 basis points due to $183 million in CRT settlement proceeds that did not recur in Q1 FY18.
Domestic Selling, General and Administrative Expenses (“SG&A”)
Domestic SG&A expenses were $1.57 billion, or 19.9% of revenue, versus $1.59 billion, or 20.3% of revenue, last year. On a non-GAAP basis, SG&A expenses were $1.57 billion, or 19.9% of revenue, versus $1.57 billion, or 20.0% of revenue, last year. GAAP and non-GAAP SG&A both increased $8 million primarily due to slightly higher incentive compensation expenses. Additionally, GAAP SG&A in Q1 FY17 was higher by $22 million due to CRT settlement legal fees that did not recur this year.
International Segment First Quarter Results
International Revenue
International revenue of $616 million increased 0.3% driven primarily by comparable sales growth of 4.0% due to growth in both Canada and Mexico. The comparable sales growth was partially offset by an approximately 215-basis point negative impact from lapping the $13 million Q1 FY17 periodic profit sharing benefit from our services plan portfolio4 and approximately 150 basis points of negative foreign currency impact.
International Gross Profit Rate
International GAAP and non-GAAP gross profit rate was 24.5% versus 25.9% last year. The 140-basis point decline was primarily driven by a lower year-over-year gross profit rate in Canada due to approximately 160 basis points of negative impact from lapping the $13 million Q1 FY17 periodic profit sharing benefit from our services plan portfolio.4
International SG&A
International GAAP and non-GAAP SG&A expenses were $149 million, or 24.2% of revenue, versus $157 million, or 25.6% of revenue, last year. For both GAAP and non-GAAP SG&A, the $8 million decrease was primarily driven by slightly lower administrative and payroll and benefits costs.
Share Repurchases and Dividends
During Q1 FY18, the company returned a total of $478 million to shareholders through share repurchases and dividends.
On March 1, 2017, the company announced the intent to repurchase $3 billion of its shares over a two-year period. In Q1 FY18, the company repurchased 8.1 million shares for a total of $373 million. The company’s cumulative share repurchases, net of dilution from equity based awards, positively benefitted GAAP and non-GAAP diluted EPS by $0.02 in Q1 FY18.
On April 12, 2017, the company paid a quarterly dividend of $0.34 per common share outstanding, or $105 million.
Income Taxes – Adoption of Stock-Based Compensation Accounting Changes
In Q1 FY18, the company adopted Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which now requires all differences between the tax value and the book value for stock-based compensation to be recognized as either income tax expense or benefit as the shares vest or options are exercised or cancelled. The impact of this change on Q1 FY18 was a benefit of approximately $2 million, or $0.01 of non-GAAP diluted EPS. Future impacts could be positive or negative depending on the stock price, shares vested, or options exercised or cancelled in a given quarter. The company’s current expectation is that the full year impact will be a benefit to income tax expense and, based on current projections, is the primary driver of the lower FY18 non-GAAP effective income tax rate of approximately 35.5% that the company guided today, versus previous guidance of 36.5%.3
Conference Call
Best Buy is scheduled to conduct an earnings conference call at 8:00 a.m. Eastern Time (7:00 a.m. Central Time) on May 25, 2017. A webcast of the call is expected to be available at www.investors.bestbuy.com both live and after the call.
(1) Beginning in Q1 FY18, the company will no longer be excluding non-restructuring property and equipment impairment charges from its non-GAAP financial metrics. When the company began to execute its Renew Blue transformation in Q4 FY13, it adopted a change to non-GAAP reporting to exclude non-restructuring property and equipment impairment charges from non-GAAP results. From that point, until Q4 FY17, the company believed that reporting non-GAAP results that excluded these charges provided a supplemental view of the company’s ongoing performance that was useful and relevant to its investors. Now that Renew Blue has ended and Best Buy 2020: Building The New Blue has officially launched, the company believes it is no longer necessary to adjust for non-restructuring property and equipment impairments in its non-GAAP reporting. The company believes that future such impairments will predominantly be immaterial and incurred in the ordinary scope of ongoing operations. Accordingly, commencing in Q1 FY18, the company no longer plans to adjust for non-restructuring property and equipment impairments. Prior-period financial information included herein has been recast to conform with this presentation, including applicable income tax effects. For additional details on the recast financials, please refer to the attached supporting schedule titled “FY16 and FY17 Recast Non-GAAP Segment Information”. A complete GAAP to non-GAAP reconciliation for FY16 and FY17, by quarter, is also attached as Exhibit 99.2 in the company’s 8-K filed on May 25, 2017 and is available on the company’s investor relations website at www.investors.bestbuy.com.
(2) On March 28, 2015, the company consolidated the Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in the permanent closure of 66 Future Shop stores, the conversion of 65 Future Shop stores to Best Buy stores and the elimination of the Future Shop website. The Canadian brand consolidation had a material impact on a year-over-year basis on the Canadian retail stores and the website and, as such, all store and website revenue was removed from the comparable sales base and International (comprised of Canada and Mexico) did not have a comparable metric through Q3 FY17. From Q1 FY16 through Q3 FY17 Enterprise comparable sales were equal to Domestic comparable sales.
Beginning in Q4 FY17, the company resumed reporting International comparable sales and as such, Enterprise comparable sales are once again equal to the aggregation of Domestic and International comparable sales.
(3) A reconciliation of the projected non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS, which are forward-looking non-GAAP financial measures, to the most directly comparable GAAP financial measures, is not provided because the company is unable to provide such reconciliation without unreasonable effort. The inability to provide a reconciliation is due to the uncertainty and inherent difficulty predicting the occurrence, the financial impact and the periods in which the non-GAAP adjustments may be recognized. These GAAP measures may include the impact of such items as restructuring charges; litigation settlements; goodwill impairments, gains and losses on investments; and the tax effect of all such items. Historically, the company has excluded these items from non-GAAP financial measures. The company currently expects to continue to exclude these items in future disclosures of non-GAAP financial measures and may also exclude other items that may arise (collectively, “non-GAAP adjustments”). The decisions and events that typically lead to the recognition of non-GAAP adjustments, such as a decision to exit part of the business or reaching settlement of a legal dispute, are inherently unpredictable as to if or when they may occur. For the same reasons, the company is unable to address the probable significance of the unavailable information, which could be material to future results.
(4) In Q1 FY18, the International business did not record a periodic profit sharing benefit from its services plan portfolio as compared to a $13 million benefit recorded in Q1 FY17.
Forward-Looking and Cautionary Statements:
This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that reflect management’s current views and estimates regarding future market conditions, company performance and financial results, business prospects, new strategies, the competitive environment and other events. You can identify these statements by the fact that they use words such as “anticipate,” “believe,” ”assume,” “estimate,” “expect,” “intend,” “project,” “guidance,” “plan,” “outlook,” and other words and terms of similar meaning. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the potential results discussed in the forward-looking statements. Among the factors that could cause actual results and outcomes to differ materially from those contained in such forward-looking statements are the following: macro-economic conditions (including fluctuations in housing prices, oil markets and jobless rates), conditions in the industries and categories in which we operate, changes in consumer preferences or confidence, changes in consumer spending and debt levels, the mix of products and services offered for sale in our physical stores and online, credit market changes and constraints, product availability, trade restrictions or changes in the costs of imports, competitive initiatives of competitors (including pricing actions and promotional activities), strategic and business decisions of our vendors (including actions that could impact promotional support, product margin and/or supply), the success of new product launches, the impact of pricing investments and promotional activity, weather, natural or man-made disasters, attacks on our data systems, the company’s ability to prevent or react to a disaster recovery situation, changes in law or regulations, changes in tax rates, changes in taxable income in each jurisdiction, tax audit developments and resolution of other discrete tax matters, foreign currency fluctuation, the company’s ability to manage its property portfolio, the impact of labor markets, the company’s ability to retain qualified employees and management, failure to achieve anticipated expense and cost reductions, disruptions in our supply chain, the costs of procuring goods the company sells, failure to achieve anticipated revenue and profitability increases from operational and restructuring changes (including investments in our multi-channel capabilities), inability to secure or maintain favorable vendor terms, failure to accurately predict the duration over which we will incur costs, development of new businesses, failure to complete or achieve anticipated benefits of announced transactions, and our ability to protect information relating to our employees and customers. A further list and description of these risks, uncertainties and other matters can be found in the company’s annual report and other reports filed from time to time with the Securities and Exchange Commission (“SEC”), including, but not limited to, Best Buy’s Report on Form 10-K filed with the SEC on March 24, 2017. Best Buy cautions that the foregoing list of important factors is not complete, and any forward-looking statements speak only as of the date they are made, and Best Buy assumes no obligation to update any forward-looking statement that it may make.
Investor Contact: Media Contact:
Mollie O’Brien Jeff Shelman
(612) 291-7735 or mollie.obrien@bestbuy.com (612) 291-6114 or Jeffrey.shelman@bestbuy.com
To view the full Q1 FY18 Best Buy financial results, click here.