August 28, 2018
Best BuyStaff Writer
Enterprise Comparable Sales Increased 6.2%
GAAP Diluted EPS Increased 28% to $0.86
Non-GAAP Diluted EPS Increased 32% to $0.91
Raising FY19 Financial Guidance
MINNEAPOLIS, August 28, 2018 — Best Buy Co., Inc. (NYSE: BBY) today announced results for the second quarter ended August 4, 2018 (“Q2 FY19”), as compared to the second quarter ended July 29, 2017 (“Q2 FY18”). The company reported Q2 FY19 GAAP diluted earnings per share of $0.86, an increase of 28% from $0.67 in Q2 FY18. Non-GAAP diluted earnings per share for Q2 FY19 were $0.91, an increase of 32% from $0.69 in Q2 FY18.
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Q2 FY19Q2 FY18Revenue ($ in millions):Enterprise$9,379$8,940Domestic segment$8,639$8,272International segment$740$668Enterprise comparable sales % change6.2%5.4%Domestic comparable sales % change6.0%5.4%Domestic comparable online sales % change10.1%31.2%International comparable sales % change7.6%4.7%Operating Income:GAAP operating income as a % of revenue3.6%3.6%Non-GAAP operating income as a % of revenue3.8%3.6%Diluted Earnings per Share (“EPS”):GAAP diluted EPS$0.86$0.67Non-GAAP diluted EPS$0.91$0.69
For GAAP to non-GAAP reconciliations, please refer to the attached supporting schedule titled Reconciliation of Non-GAAP Financial Measures.
“We are happy to report strong top- and bottom-line results for the second quarter that exceeded our expectations,” said Hubert Joly, Best Buy’s chairman and CEO. “Our comparable sales growth was helped by the favorable environment in which we operate and driven by how customers are responding to the unique and elevated experience we are building. We are particularly encouraged with the continued progress of our Net Promoter Scores and our continued market share gains. We are excited about the progress we are making on the implementation of our Best Buy 2020 strategy and the opportunities in front of us.”
Joly continued, “As a result of the strong performance in the first half of the year and our updated expectations for the back half, we are raising our full-year sales and earnings guidance.”
Best Buy CFO Corie Barry said, “For the full year, we now expect FY19 comparable sales growth of 3.5% to 4.5% versus our original guidance of flat to growth of 2.0%, and we are raising our expectation for our non-GAAP diluted EPS to a range of $4.95 to $5.10 versus our original guidance of $4.80 to $5.00.”
Barry added, “We continue to expect a non-GAAP operating income rate of approximately 4.5% for the full year, which is flat to FY18 on a 52-week basis. As we invest in the implementation of our strategy, the profitability profile of our quarters is not completely linear on a year-over-year basis. For example, in the second quarter, we expanded our non-GAAP operating income rate 20 basis points. In the back half, consistent with our annual outlook when we entered the year, we are expecting a non-GAAP operating income rate decline in the third quarter followed by an increase in the fourth quarter to result in our expectation for an approximately flat rate to last year on a full-year basis. Similar to the past several years, we remain focused on managing the business for long-term success rather than ensuring a straight-line quarterly operating income rate performance.”
FY19 Financial Guidance
Note: FY19 has 52 weeks compared to 53 weeks in FY18. The extra week occurred in Q4 FY18 and was approximately $760 million in revenue and approximately $0.20 of non-GAAP diluted EPS.
Best Buy is raising its full-year FY19 financial outlook to the following:
- Enterprise revenue of $42.3 billion to $42.7 billion
- Enterprise comparable sales growth of 3.5% to 4.5%1 versus original guidance of flat to growth of 2.0%
- Enterprise non-GAAP operating income rate of approximately 4.5%2, flat to FY18 on a 52-week basis
- Non-GAAP effective income tax rate of approximately 24.5%2
- Non-GAAP diluted EPS of $4.95 to $5.102, growth of 12% to 15%, versus original guidance of $4.80 to $5.00
Best Buy is providing the following Q3 FY19 financial outlook:
- Enterprise revenue of $9.4 billion to $9.5 billion
- Enterprise comparable sales growth of 2.5% to 3.5%
- Domestic comparable sales growth of 2.5% to 3.5%
- International comparable sales growth of 2.0% to 4.0%
- Non-GAAP effective income tax rate of approximately 25.0%2
- Diluted weighted average share count of approximately 281 million
- Non-GAAP diluted EPS of $0.79 to $0.842, growth of 1% to 8%
Domestic Segment Q2 FY19 Results
Domestic revenue of $8.64 billion increased 4.4% versus last year, driven by comparable sales growth of 6.0%, partially offset by the loss of revenue from 292 Best Buy Mobile and 17 large-format store closures over the past year. The comparable sales growth of 6.0% included an approximate 150-basis point benefit from a calendar shift resulting from the extra week in FY18.
From a merchandising perspective, the company generated comparable sales growth across multiple categories, with the largest drivers being home theater, computing, appliances, gaming, mobile phones and smart home. These positive drivers were partially offset by declines in digital imaging and tablets.
Domestic online revenue of $1.21 billion increased 10.1% on a comparable basis, primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased 80 basis points to 14.0% versus 13.2% last year.
Domestic Gross Profit Rate
Domestic gross profit rate was 23.8% versus 24.0% last year. The gross profit rate decline of approximately 20 basis points was driven primarily by higher supply chain costs, including both investments and higher transportation costs, and the national rollout of the Total Tech Support offer. These pressures were partially offset by improved product margin rates, which include the benefit of gross profit optimization initiatives.
Domestic Selling, General and Administrative Expenses (“SG&A”)
Domestic SG&A was $1.71 billion, or 19.8% of revenue, versus $1.67 billion, or 20.2% of revenue, last year. SG&A increased primarily due to growth investments and higher variable costs associated with increased revenue. These increases were partially offset by cost reductions and lower incentive compensation.
International Segment Q2 FY19 Results
International revenue of $740 million increased 10.8% versus last year. This increase was primarily driven by comparable sales growth of 7.6%, due to both Canada and Mexico, sales from six new store locations opened in Mexico in the past year and approximately 60 basis points of positive foreign currency impact.
International Gross Profit Rate
International gross profit rate was 23.1% versus 25.1% last year. The gross profit rate decrease of approximately 200 basis points was mainly due to a lower year-over-year gross profit rate in Canada, which was primarily driven by lower rates in the home theater and mobile phone categories.
International SG&A was $165 million, or 22.3% of revenue, versus $161 million, or 24.1% of revenue, last year. SG&A increased primarily due to higher variable costs associated with increased revenue and the negative impact of foreign exchange rates.
In Q2 FY19, the company returned a total of $499 million to shareholders through dividends of $125 million and share repurchases of $374 million, or 5.0 million shares. On a year-to-date basis, the company has returned a total of $1.03 billion to shareholders through dividends of $253 million and share repurchases of $774 million, or 10.6 million shares. On March 1, 2018, the company announced the intent to spend $1.5 billion on share repurchases during FY19.
In Q2 FY19, the GAAP effective tax rate was 25.7% versus 32.6% last year. On a non-GAAP basis, the effective tax rate was 25.4% versus 32.6% last year. The lower GAAP and non-GAAP effective tax rates were primarily due to the impacts from the Tax Cuts and Jobs Act of 2017, which included a reduction in the U.S. statutory corporate tax rate.
On August 15, 2018, the company announced that it signed a definitive agreement to acquire GreatCall, Inc. for $800 million in cash. The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close by the end of Best Buy’s Q3 FY19. The company expects the impact of the acquisition on its non-GAAP earnings to be neutral in FY19 and FY20 and accretive by FY21.3 The expected impact from the acquisition is not currently reflected in the company’s financial guidance.
Best Buy is scheduled to conduct an earnings conference call at 8 a.m. Eastern Time (7 a.m. Central Time) on Aug. 28, 2018. A webcast of the call is expected to be available at www.investors.bestbuy.com, both live and after the call.
(1) 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; 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.
(3) Non-GAAP earnings exclude the impact of purchase accounting and acquisition-related transaction costs.
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,” “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, the effects of tax reform, 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 (including with respect to the GreatCall transaction, the risks that conditions to the completion of the transaction may not be satisfied, closing of the transaction may not occur or may be delayed, revenues following the transaction may be lower than expected, operating costs, customer loss, and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, and suppliers) may be greater than expected and the company may assume unexpected risks and liabilities from the transaction), 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 April 2, 2018. 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.
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