Enterprise Comparable Sales Increased 4.4%
Diluted EPS of $0.78 Increased 30%
Raising FY18 Financial Outlook
MINNEAPOLIS, November 16, 2017 — Best Buy Co., Inc. (NYSE: BBY) today announced results for the third quarter ended October 28, 2017 (“Q3 FY18”), as compared to the third quarter ended October 29, 2016 (“Q3 FY17”). The company reported diluted earnings per share from continuing operations of $0.78, an increase of 30% from $0.60 in Q3 FY17. (PDF version here.)
| Q3 FY18 | Q3 FY171 | |
| Revenue ($ in millions)2 | ||
| Enterprise | $9,320 | $8,945 |
| Domestic segment | $8,491 | $8,192 |
| International segment | $829 | $753 |
| Enterprise comparable sales % change | 4.4% | 1.8% |
| Domestic comparable sales % change | 4.5% | 1.8% |
| Domestic comparable online sales % change | 22.3% | 24.1% |
| International comparable sales % change | 3.8% | N/A |
| Operating Income: | ||
| GAAP operating income as a % of revenue | 3.8% | 3.5% |
| Non-GAAP operating income as a % of revenue | 3.7% | 3.5% |
| Diluted Earnings per Share (EPS): | ||
| GAAP diluted EPS from continuing operations | $0.78 | $0.60 |
| Non-GAAP diluted EPS from continuing operations | $0.78 | $0.60 |
|
For GAAP to non-GAAP reconciliations, please refer to the attached supporting schedule titled “Reconciliation of non-GAAP Financial Measures”. |
||
“In the third quarter, we delivered strong top and bottom line results with 4.4% comparable sales growth and 30% EPS growth,” said Hubert Joly, Best Buy chairman and CEO. “Technology innovation is fueling demand and our strategy is resonating with our customers. We are also making significant progress against our Best Buy 2020 strategy and are excited about the opportunities for long-term value creation. And while we are investing in key initiatives and capabilities, we are also able to generate significant returns for our shareholders through the growth of our EPS and our capital allocation strategy.”
Joly continued: “Our Q3 results include the negative impact of two significant factors. First, despite our moderate expectations for mobile phone launches in the quarter, revenue in the mobile category was materially lower than expected. This was due to the fact that a major new phone did not launch until November, which is in our Q4. The related revenue impact in the quarter was more than $100 million. Second, like most retailers, we felt the impact of the natural disasters in south Texas, Florida, Puerto Rico and Mexico. We estimate the loss of revenue impacted our Enterprise comparable sales by 15 to 20 basis points, and that the related costs negatively impacted our EPS by approximately $0.03.”
Joly concluded: “Looking ahead, we are very excited about our plans for holiday, including a curated assortment of great new technology products, free shipping with no minimums, and a range of new capabilities such as our new In-Home Advisor program, an updated gift center, and same-day delivery in 40 cities. We believe we are well positioned for a successful season and therefore, we are raising our financial outlook for the fourth quarter and for the year. I would like to thank all of our associates for their work this last quarter, and for what they will do this holiday season.”
Best Buy CFO Corie Barry commented, “Today we are raising our full year revenue growth outlook to 4.0% to 4.8% versus our previous outlook of approximately 4.0% and raising our non-GAAP operating income growth outlook to 7.0% to 9.5%3 versus our previous outlook of 4.0% to 9.0%.”
Barry continued: “As a result, we are raising our Q4 outlook versus what was implied in the expectations provided on our last earnings call. Our Q4 guidance reflects a number of factors. First, as we discussed last quarter, we made strategic decisions to proactively make additional investments in the back half of the year to continue to drive the Best Buy 2020 strategy forward. Those additional investments are in areas such as customer choice in shipping, eCommerce and our long-term strategic vision for supply chain. Second, the outlook includes approximately $20 million, or $0.04 per share, of lower profit sharing benefit than we received in Q4 FY17. Third, our fourth quarter and full year performance is expected to result in higher incentive compensation expenses in the fourth quarter compared to last Q4. This higher incentive compensation is due to both better performance this year, and the fact that we are lapping a reversal of incentive compensation expense in Q4 FY17 that adjusted accruals from earlier quarters of the year. Fourth, the extra week in the quarter adds approximately $100 million of additional SG&A expense.
Barry concluded: “So far this year we have returned $1.45 billion in cash to our shareholders, including $1.14 billion in share repurchases and $310 million in dividends. We are pleased to announce that we are planning to spend approximately $2 billion on share repurchases this fiscal year, versus our original expectation of $1.5 billion.”
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 Q4 FY18 financial outlook:
- Enterprise revenue of $14.2 billion to $14.5 billion
- Enterprise comparable sales growth of 1.0% to 3.0%
- Domestic comparable sales growth of 1.0% to 3.0%
- International comparable sales change of flat to 3.0%
- Non-GAAP effective income tax rate of 36.0% to 36.5%3
- Diluted weighted average share count of approximately 296 million
- Non-GAAP diluted EPS of $1.89 to $1.993
Best Buy is raising its full year FY18 financial outlook to the following:
- Enterprise revenue of $41.0 billion to $41.3 billion, or growth of 4.0% to 4.8%
- Enterprise non-GAAP operating income growth rate of 7.0% to 9.5%3
- Enterprise non-GAAP effective income tax rate of approximately 34.5%3
- On a 52-week basis, Enterprise revenue growth of approximately 3.0%
- On a 52-week basis, Enterprise non-GAAP operating income growth rate of 3.0% to 6.5%3
Domestic Segment Third Quarter Results
Domestic Revenue
Domestic revenue of $8.5 billion increased 3.6% versus last year driven by comparable sales growth of 4.5%, partially offset by the loss of revenue from 10 large format and 44 Best Buy Mobile store closures.
From a merchandising perspective, the company generated growth across almost all of its categories, with the largest drivers of comparable sales being appliances, computing and smart home.
Domestic online revenue of $1.1 billion increased 22.3% on a comparable basis primarily due to higher conversion rates and higher average order values. As a percentage of total Domestic revenue, online revenue increased 190 basis points to 12.7% versus 10.8% last year.
Domestic Gross Profit Rate
Domestic gross profit rate was flat versus last year at 24.7%. Improved margin rates across multiple categories were offset by an approximately 25-basis point negative impact from lapping the $25 million Q3 FY17 periodic profit sharing benefit from the company’s service plan portfolio.4
Domestic Selling, General and Administrative Expenses (“SG&A”)
Domestic SG&A expenses were $1.75 billion, or 20.6% of revenue, versus $1.72 billion, or 21.0% of revenue, last year. SG&A increased $31 million primarily due to (1) expected increases in growth investments; (2) higher advertising 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 Third Quarter Results
International Revenue
International revenue of $829 million increased 10.1%. This increase was primarily driven by (1) approximately 530 basis points of positive foreign currency impact; and (2) comparable sales growth of 3.8% due to growth in both Canada and Mexico.
International Gross Profit Rate
International gross profit rate was 22.2% versus 24.3% last year. The 210-basis point decline was primarily driven by a lower year-over-year gross profit rate in Canada due to lower sales in the higher-margin services category primarily driven by the launch of Canada’s total tech support offer, a long-term recurring revenue model.
International SG&A
International SG&A expenses were $181 million, or 21.8% of revenue, versus $170 million, or 22.6% of revenue, last year. The increase of $11 million was primarily driven by the negative impact of foreign exchange rates. The rate decrease was primarily driven by sales leverage.
Share Repurchases and Dividends
During Q3 FY18, the company returned a total of $469 million to shareholders through share repurchases and dividends. On a year-to-date basis, the company has returned a total of $1.45 billion to shareholders through share repurchases and dividends.
On March 1, 2017, the company announced the intent to spend $3 billion on share repurchases over a two-year period. In Q3 FY18, the company repurchased 6.4 million shares for a total of $367 million. On a year-to-date basis, the company has repurchased 21.8 million shares for a total of $1.14 billion. The company’s cumulative share repurchases, net of dilution from equity based awards, positively benefitted diluted EPS by approximately $0.04 in Q3 FY18.
On October 10, 2017, the company paid a quarterly dividend of $0.34 per common share outstanding, or $102 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 Q3 FY18 was a benefit of approximately $14 million, or $0.05 of GAAP and non-GAAP diluted EPS. The year-to-date benefit is approximately $19 million, or $0.06 of GAAP and 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.
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 November 16, 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 is no longer 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 Q3 FY17, the Domestic business recorded a $25 million periodic profit sharing benefit from its services plan portfolio. In Q3 FY18, there was no 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 Q3 FY18 Best Buy financial results, click here.