Enterprise Comparable Sales Increased 5.4%
GAAP Diluted EPS of $0.67 Increased 20%
Non-GAAP Diluted EPS of $0.69 Increased 21%
MINNEAPOLIS, August 29, 2017 — Best Buy Co., Inc. (NYSE: BBY) today announced results for the second quarter ended July 29, 2017 (“Q2 FY18”), as compared to the second quarter ended July 30, 2016 (“Q2 FY17”). The company reported GAAP diluted earnings per share from continuing operations of $0.67, an increase of 20% from $0.56 in Q2 FY17. Non-GAAP diluted earnings per share from continuing operations were $0.69, an increase of 21% from $0.57 in Q2 FY17. (PDF version here.)
| Q2 FY18 | Q2 FY171 | |
| Revenue ($ in millions)2 | ||
| Enterprise | $8,940 | $8,533 |
| Domestic segment | $8,272 | $7,889 |
| International segment | $668 | $644 |
| Enterprise comparable sales % change | 5.4% | 0.8% |
| Domestic comparable sales % change | 5.4% | 0.8% |
| Domestic comparable online sales % change | 31.2% | 23.7% |
| International comparable sales % change | 4.7% | N/A |
| Operating Income: | ||
| GAAP operating income as a % of revenue | 3.6% | 3.4% |
| Non-GAAP operating income as a % of revenue | 3.6% | 3.4% |
| Diluted Earnings per Share (EPS): | ||
| GAAP diluted EPS from continuing operations | $0.67 | $0.56 |
| Non-GAAP diluted EPS from continuing operations | $0.69 | $0.57 |
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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 growth for the second quarter of fiscal 2018,” said Hubert Joly, Best Buy chairman and CEO. “Our higher-than-expected comparable sales of 5.4% were driven by stronger consumer demand for technology products and by the strong execution of our strategy. Against a backdrop of continued healthy consumer confidence, we believe broad-based product innovation is resonating with consumers and driving higher spend. And, with our effective merchandising and marketing activities, combined with our expert advice and service available online, in-store and in-home – we are garnering an increasing share of those dollars.”
Joly continued, “I want to thank all our associates across the U.S., Canada and Mexico for their hard work, dedication and customer focus as we Build the New Blue. Without them, none of this is possible.”
Best Buy CFO Corie Barry commented, “Today we are raising our topline guidance and are now expecting full year FY18 revenue growth of approximately 4.0% versus our previous outlook of 2.5%. On the profitability side, we are now expecting full year non-GAAP operating income growth3 of 4.0% to 9.0% versus our previous outlook of 3.5% to 8.5% growth. This updated guidance reflects stronger-than-originally-expected second half revenue performance with profitability roughly in line with our previous expectations. The increased topline expectations are being driven by the anticipation of continued positive industry and consumer momentum, coupled with the impact of product launches. From a profitability perspective, while our original full year guidance anticipated an increased level of investments for FY18, we have made strategic decisions to proactively make additional Q3 and Q4 investments to continue to drive our Best Buy 2020 strategy forward.”
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 Q3 FY18 financial outlook:
- Enterprise revenue of $9.3 billion to $9.4 billion
- Enterprise comparable sales growth of 4.5% to 5.5%
- Domestic comparable sales growth of 4.5% to 5.5%
- International comparable sales change of flat to 3.0%
- Non-GAAP effective income tax rate of 32.0% to 32.5%3
- Diluted weighted average share count of approximately 305 million
- Non-GAAP diluted EPS of $0.75 to $0.803
Best Buy is updating its full year FY18 financial outlook to the following:
- Enterprise revenue growth of approximately 4.0%
- Enterprise non-GAAP operating income growth rate of 4.0% to 9.0%3
- Enterprise non-GAAP effective income tax rate of approximately 34.5%3
- On a 52-week basis, Enterprise revenue growth of approximately 2.5%
- On a 52-week basis, Enterprise non-GAAP operating income growth rate of 2.0% to 6.0%3
Domestic Segment Second Quarter Results
Domestic Revenue
Domestic revenue of $8.3 billion increased 4.9% versus last year driven by comparable sales growth of 5.4%, partially offset by the loss of revenue from 11 large format and 42 Best Buy Mobile store closures.
From a merchandising perspective, comparable sales growth in computing, wearables, smart home, mobile phones and appliances was partially offset by declines in tablets.
Domestic online revenue of $1.1 billion increased 31.2% on a comparable basis primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased 260 basis points to 13.2% versus 10.6% last year.
Domestic Gross Profit Rate
Domestic GAAP and non-GAAP gross profit rates were flat versus last year at 24.0% as improved margin rates across multiple categories, particularly in appliances, tablets and home theater, were offset by (1) margin pressure in the mobile category; (2) the negative impact of higher sales in the lower-margin wearables category; and (3) an approximately 10-basis point negative impact from lapping the $11 million Q2 FY17 periodic profit sharing benefit from our service plan portfolio.4
Domestic Selling, General and Administrative Expenses (“SG&A”)
Domestic GAAP and non-GAAP SG&A expenses were $1.67 billion, or 20.2% of revenue, versus $1.61 billion, or 20.4% of revenue, last year. GAAP and non-GAAP SG&A both increased $61 million primarily due to (1) expected increases in growth investments; (2) higher incentive compensation expenses; and (3) higher variable costs due to increased revenue. These increases were partially offset by the flow-through of cost reductions. The rate decrease was driven by sales leverage.
International Segment Second Quarter Results
International Revenue
International revenue of $668 million increased 3.7% driven primarily by comparable sales growth of 4.7% due to growth in both Canada and Mexico. The comparable sales growth was partially offset by approximately 220 basis points of negative foreign currency impact.
International Gross Profit Rate
International GAAP and non-GAAP gross profit rate was 25.1% versus 25.9% last year. The 80-basis point decline was primarily driven by a lower year-over-year gross profit rate in Canada due to lower rates in the computing and appliance categories.
International SG&A
International SG&A expenses were $161 million, or 24.1% of revenue, versus $165 million, or 25.6% of revenue, last year. Non-GAAP SG&A expenses were $161 million, or 24.1% of revenue, versus $164 million, or 25.5% of revenue, last year. The GAAP and non-GAAP decreases were primarily driven by slightly lower payroll and benefits costs. The rate decrease was primarily driven by sales leverage.
Share Repurchases and Dividends
During Q2 FY18, the company returned a total of $501 million to shareholders through share repurchases and dividends. On a year-to-date basis, the company has returned a total of $979 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 Q2 FY18, the company repurchased 7.3 million shares for a total of $398 million. On a year-to-date basis, the company has repurchased 15.4 million shares for a total of $771 million. The company’s cumulative share repurchases, net of dilution from equity based awards, positively benefitted GAAP and non-GAAP diluted EPS by approximately $0.02 in Q2 FY18.
On July 6, 2017, the company paid a quarterly dividend of $0.34 per common share outstanding, or $103 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 Q2 FY18 was a benefit of approximately $2 million, or $0.01 of non-GAAP diluted EPS. The year-to-date impact as of Q2 FY18 was a benefit of approximately $4 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 34.5% that the company guided today, versus previous guidance of 35.5%.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 August 29, 2017. A webcast of the call is expected to be available at www.investors.bestbuy.com both live and after the call.
Investor Day
Best Buy is hosting an investor day on September 19, 2017, from 2:00 to 6:00 p.m. Eastern Time (1:00 to 5:00 p.m. Central Time) at its corporate campus to provide more detail regarding the next phase of Best Buy’s transformation: Best Buy 2020: Building the New Blue. A webcast of the presentations and question and answer session will be available at www.investors.bestbuy.com both live and after the event.
(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 began to no longer 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. A complete GAAP to non-GAAP reconciliation for FY16 and FY17, by quarter, 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 from Q1 FY16 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 Q2 FY17, the Domestic business recorded an $11 million periodic profit sharing benefit from its services plan portfolio. In Q2 FY18, there was no equivalent profit sharing benefit recorded.
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 the company operates, 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 the company 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.