Best Buy Reports Better-Than-Expected Q1 FY20 Earnings

By Best Buy May 23, 2019

Enterprise Comparable Sales Increased 1.1%

GAAP Diluted EPS Increased 36% to $0.98

Non-GAAP Diluted EPS Increased 24% to $1.02

MINNEAPOLIS, May 23, 2019 — Best Buy Co., Inc. (NYSE: BBY) today announced results for the 13-week first quarter ended May 4, 2019 (“Q1 FY20”), as compared to the 13-week first quarter ended May 5, 2018 (“Q1 FY19”).

(Click here for a PDF version. Click here to view full release and statements.)

For GAAP to non-GAAP reconciliations of the measures referred to in the above table, please refer to the attached supporting schedule Reconciliation of Non-GAAP Financial Measures.

“Q1 was a strong quarter and a good start to the year,” said Hubert Joly, Best Buy chairman and CEO. “We reported comparable sales growth at the high end of our guidance and delivered better-than-expected profitability. In addition to these strong financial results, we continued to make significant progress implementing our Best Buy 2020 strategy to enrich lives through technology and further develop our competitive differentiation.”

Joly continued, “As you know, we made an exciting announcement last month. On June 11, 2019, Corie Barry will become the fifth CEO in Best Buy’s 53-year history. At that time, I will transition to the newly created role of executive chairman of the board. I am very proud of the seamless transition we have decided to implement, as it reflects positively on our momentum as well as our focus on executive development and succession planning.”

Best Buy’s CFO and Strategic Transformation Officer Corie Barry commented, “I am deeply grateful to Hubert and the rest of the board of directors for their confidence in me and their clear belief that this leadership evolution is in the best interests of Best Buy and all its stakeholders. As I think about my new role, I could not be more fortunate to have Mike Mohan at my side as our new president and COO. Our strategy is the right one and is resonating with customers. I am so excited to work with the entire leadership team in this next chapter as we continue to implement the strategy that we helped build together.”

Barry continued, “We are pleased with our Q1 performance. As we look to the full year, we are reiterating the guidance we provided at the beginning of the year. This outlook balances our better-than-expected Q1 earnings, the fact that it is early in the year and our best estimate of the impact associated with the recent increase in tariffs on goods imported from China. Specifically, I am referring to the increase in tariffs from 10% to 25% on the products on the $200 billion List 3 that originally went into effect last September.”

FY20 Financial Guidance

Best Buy is providing the following Q2 FY20 financial outlook:

• Enterprise revenue of $9.5 billion to $9.6 billion
• Enterprise comparable sales growth of 1.5% to 2.5%
• Non-GAAP effective income tax rate of approximately 24.5%²
• Diluted weighted average share count of approximately 269 million
• Non-GAAP diluted EPS of $0.95 to $1.00²

Best Buy is reiterating the following full-year FY20 financial outlook provided on February 27, 2019:

• Enterprise revenue of $42.9 billion to $43.9 billion
• Enterprise comparable sales growth of 0.5% to 2.5%
• Enterprise non-GAAP operating income rate of approximately 4.6%², which is flat to FY19
• Non-GAAP effective income tax rate of approximately 24.5%²
• Non-GAAP diluted EPS of $5.45 to $5.65²

Domestic Segment Q1 FY20 Results

Domestic Revenue

Domestic revenue of $8.48 billion increased 0.8% versus last year. The increase was driven by comparable sales growth of 1.3% and revenue from GreatCall, Inc. (“GreatCall”), which was acquired in Q3 FY19, partially offset by the loss of revenue from 105 Best Buy Mobile and 12 large-format store closures in the past year.

From a merchandising perspective, the largest comparable sales growth drivers were appliances, wearables and tablets. These drivers were partially offset by declines in the entertainment category.

Domestic online revenue of $1.31 billion increased 14.5% on a comparable basis primarily due to higher average order values and increased traffic. As a percentage of total Domestic revenue, online revenue increased approximately 180 basis points to 15.4% versus 13.6% last year.

Domestic Gross Profit Rate

Domestic gross profit rate was 23.7% versus 23.3% last year. The gross profit rate increase of approximately 40 basis points was primarily driven by the impact of GreatCall’s higher gross profit rate and improved product margin rates, which include the benefit of gross profit optimization initiatives. These favorable items were partially offset by higher supply chain costs.

Domestic Selling, General and Administrative Expenses (“SG&A”)

Domestic GAAP SG&A was $1.68 billion, or 19.8% of revenue, versus $1.67 billion, or 19.8% of revenue, last year. On a non-GAAP basis, SG&A was $1.66 billion, or 19.6% of revenue, versus $1.66 billion, or 19.7% of revenue, last year. Both GAAP and non-GAAP SG&A increased primarily due to GreatCall operating expenses, which were partially offset by lower incentive compensation expense. Additionally, GAAP SG&A in Q1 FY20 included an additional $17 million of intangible asset amortization related to GreatCall.

International Segment Q1 FY20 Results

International Revenue

International revenue of $661 million decreased 5.2% versus last year. This decline was primarily driven by the impact of approximately 390 basis points of negative foreign currency exchange rates and a comparable sales decline of 1.2%, which was driven by Canada.

International Gross Profit Rate

International gross profit rate was 24.2% versus 23.4% last year. The gross profit rate increase of approximately 80 basis points was primarily due to Canada, which delivered improved gross profit rates in several product categories and increased revenue in the higher margin rate services category.

International SG&A

International GAAP SG&A was $158 million, or 23.9% of revenue, versus $165 million, or 23.7% of revenue, last year. On a non-GAAP basis, SG&A was $158 million, or 23.9% of revenue, versus $164 million, or 23.5% of revenue, last year. Both GAAP and non-GAAP SG&A decreased due to the favorable impact of foreign exchange rates.

Dividends and Share Repurchases

In Q1 FY20, the company returned a total of $232 million to shareholders through share repurchases of $98 million and dividends of $134 million. On February 27, 2019, the company announced the intent to spend between $750 million and $1 billion on share repurchases in FY20.

Adoption of New Lease Accounting Standard

Effective at the beginning of Q1 FY20, the company adopted Accounting Standards Update 2016-02, Leases, using the “Comparatives Under 840 Option” approach to transition. Under this method, financial information related to periods prior to adoption will be as originally reported under the previous standard – Accounting Standards Codification (“ASC”) 840, Leases. The effects of adopting the new standard (ASC 842, Leases) were recognized as a cumulative net of tax adjustment that decreased opening retained earnings by $19 million. The most significant impact of adoption was the recognition of operating lease assets and operating lease liabilities of $2.7 billion and $2.8 billion, respectively. The company expects the impact of adoption to be immaterial to its consolidated statements of earnings and consolidated statements of cash flows on an ongoing basis.

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 23, 2019. A webcast of the call is expected to be available at www.investors.bestbuy.com, both live and after the call.

Notes:

(1) In Q1 FY20, the company refined its methodology for calculating comparable sales. It now reflects certain revenue streams previously excluded from the comparable sales calculation, such as credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. The impact of adopting these changes is immaterial to all periods presented, and therefore prior-period comparable sales disclosures have not been restated.

On March 1, 2018, the company announced its intent to close all of the remaining 257 Best Buy Mobile stand-alone stores in the U.S. As a result, all revenue related to these stores has been excluded from the comparable sales calculation beginning in March 2018.

(2) A reconciliation of the projected non-GAAP operating income, non-GAAP effective income 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; certain acquisition-related costs; 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.

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, operational investments, 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,” “foresee,” “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: competition (including from multi-channel retailers, e-commerce business, technology service providers, traditional store-based retailers, vendors and mobile network carriers), our expansion strategies, our focus on services as a strategic priority, our reliance on key vendors and mobile network carriers, our ability to attract and retain qualified employees, changes in market compensation rates, risks arising from statutory, regulatory and legal developments, macroeconomic pressures in the markets in which we operate, failure to effectively manage our costs, our reliance on our information technology systems, our ability to prevent or effectively respond to a privacy or security breach, our ability to effectively manage strategic ventures, alliances or acquisitions, our dependence on cash flows and net earnings generated during the fourth fiscal quarter, susceptibility of our products to technological advancements, product life cycle preferences and changes in consumer preferences, economic or regulatory developments that might affect our ability to provide attractive promotional financing, interruptions and other supply chain issues, catastrophic events, our ability to maintain positive brand perception and recognition, product safety and quality concerns, changes to labor or employment laws or regulations, our ability to effectively manage our real estate portfolio, constraints in the capital markets or our vendor credit terms, changes in our credit ratings, any material disruption in our relationship with or the services of third-party vendors, risks related to our exclusive brand products and risks associated with vendors that source products outside of the U.S., including trade restrictions or changes in the costs of imports (including existing or new tariffs or duties and changes in the amount of any such tariffs or duties) and risks arising from our international activities.

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 Annual Report on Form 10-K filed with the SEC on March 28, 2019. 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.