March 1, 2018
Best BuyStaff Writer
Enterprise Comparable Sales Increased 9.0%
GAAP Diluted EPS of $1.23
Non-GAAP Diluted EPS of $2.42
Announces FY19 Non-GAAP Diluted EPS Guidance of $4.80 to $5.00
MINNEAPOLIS, March 1, 2018 — Best Buy Co., Inc. (NYSE: BBY) today announced results for the 14-week fourth quarter (“Q4 FY18”) and 53-week year ended February 3, 2018 (“FY18”), as compared to the 13-week fourth quarter (“Q4 FY17”) and 52-week year ended January 28, 2017 (“FY17”). The company reported Q4 FY18 GAAP diluted earnings per share from continuing operations of $1.23, which included the negative impact from items related to the Tax Cuts and Jobs Act of 2017 (“tax reform”) of approximately $1.17 in diluted earnings per share. Non-GAAP diluted earnings per share from continuing operations for Q4 FY18 were $2.42, an increase of 25% from $1.93 in Q4 FY17. (Click here for a PDF version. Click here to view full release and statements.)
Revenue ($ in millions)2Enterprise$15,363$13,482$42,151$39,403Domestic segment$13,987$12,338$38,662$36,248International segment$1,376$1,144$3,489$3,155Enterprise comparable sales % change9.0%(0.7%)5.6%0.3%Domestic comparable sales % change9.0%(0.9%)5.6%0.2%Domestic comparable online sales % change17.9%17.5%21.8%20.8%International comparable sales % change9.9%0.9%6.3%N/AOperating IncomeGAAP operating income as a % of revenue5.7%6.5%4.4%4.7%Non-GAAP operating income as a % of revenue6.4%6.6%4.6%4.4%Diluted Earnings per Share (EPS)GAAP diluted EPS from continuing operations$1.23$1.91$3.26$3.74Non-GAAP diluted EPS from continuing operations$2.42$1.93$4.42$3.51
For GAAP to non-GAAP reconciliations, please refer to the attached supporting schedule titled “Reconciliation of Non-GAAP Financial Measures.”
“We are excited to report strong results for the fourth quarter and the year,” said Hubert Joly, Best Buy chairman and CEO. “We are especially proud of our 9.0% comparable sales growth in the quarter, which brings our annual comparable sales growth to 5.6% for the year. Customers are responding very positively to our Best Buy 2020 strategy, and I want to enthusiastically thank all our associates for their great work in delivering these results. The level of energy and dedication to serving customers that I see across the company is truly inspiring.”
Best Buy’s CFO, Corie Barry, commented, “The comparable sales growth of 9.0% in the quarter is the result of the strong execution of our strategy combined with better product availability, a continued healthy consumer confidence and positive macro conditions, strength in the gaming category, and a favorable competitive environment, as we benefitted from the exit or decline of certain competitors.”
Barry continued, “From a profitability standpoint, in the Domestic segment, which makes up over 90% of the Enterprise operating income in Q4 FY18, the operating income rate declined. We delivered a flat gross profit rate while our SG&A expenses, excluding tax reform-related expenses, grew slightly more than the revenue growth rate. This is due to the increase in the incentive compensation expense for more than 85,000 store and corporate employees as a result of the very strong performance throughout the year, and to the investments we’ve made in the business. These expenses were partially offset by efficiencies and cost savings. As it relates to tax rate impacts in the quarter, the GAAP tax rate was higher than we expected primarily due to tax reform-related items. The non-GAAP tax rate was lower than we expected due to both the change in the effective annual tax rate as a result of tax reform and other discrete items.”
Barry continued, “For the full year FY19, we are expecting comparable sales to be flat to growth of 2% on top of the 5.6% growth we delivered in FY18. As we continue to invest in our Best Buy 2020 strategy, we are expecting the operating income rate to be approximately 4.5%, which is flat to FY18 on a comparable 52-week basis. Our non-GAAP diluted EPS is expected to increase in the range of 9% to 13% due to a lower tax rate as a result of tax reform and a lower share count as we continue to return capital to shareholders through share repurchases.”
Barry continued, “In Q1 FY19, we are expecting comparable sales growth of 1.5% to 2.5% and non-GAAP diluted EPS growth in the range of 13% to 22%. I would like to call out the following factors impacting our Q1 guidance. First, we estimate that the negative impacts from calendar shifts total approximately $100 million in Domestic revenue, with the biggest driver being the timing of the Super Bowl, as related sales were pulled forward into Q4 FY18 versus Q1 FY19. Second, increased investments in supply chain, as well as higher transportation costs, are expected to add approximately 25 basis points of Domestic gross profit pressure. Third, last year’s first quarter included approximately $8 million of Domestic gross profit due to a legal settlement that will not recur. Fourth, we expect the International gross profit rate pressure we saw in Q4 FY18 to continue into the first quarter.”
FY19 Financial Guidance3
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 providing the following full year FY19 financial outlook:
- Enterprise revenue of $41.0 billion to $42.0 billion
- Enterprise comparable sales of flat to 2% growth
- Enterprise non-GAAP operating income rate of approximately 4.5%4, which is flat to FY18 on a 52-week basis
- Non-GAAP effective income tax rate of approximately 25.0%4
- Non-GAAP diluted EPS of $4.80 to $5.00, growth of 9% to 13%4
Best Buy is providing the following Q1 FY19 financial outlook:
- Enterprise revenue of $8.65 billion to $8.75 billion
- Enterprise comparable sales growth of 1.5% to 2.5%
- Domestic comparable sales growth of 1.5% to 2.5%
- International comparable sales of flat to 3.0% growth
- Non-GAAP effective income tax rate of 22.0% to 22.5%4
- Diluted weighted average share count of approximately 290 million
- Non-GAAP diluted EPS of $0.68 to $0.734
FY21 Financial Targets3
While it would be premature to update the FY21 Enterprise revenue and operating income targets the company introduced at its Investor Day in September 2017, Best Buy is updating the FY21 non-GAAP EPS target to $5.50 to $5.754 primarily as a result of tax reform.
Domestic Segment Q4 FY18 Results
Domestic revenue of $14.0 billion increased 13.4% versus last year driven by comparable sales growth of 9.0% and approximately $715 million of revenue from the extra week, partially offset by the loss of revenue from the closure of 18 large-format stores.
From a merchandising perspective, the company generated comparable sales growth across most of its categories, with the largest drivers being mobile phones, gaming, appliances, smart home, wearables and home theater.
Domestic online revenue of $2.8 billion increased 17.9% 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 140 basis points to 20.0% versus 18.6% last year.
Domestic Gross Profit Rate
Domestic gross profit rate of 22.3% was flat to last year. Rate pressure in mobile phones, the impact of mixing into certain lower-margin products and the approximate 15-basis point negative impact from the lower periodic profit sharing benefit from the company’s services plan portfolio5 were offset by gross profit optimization related to lower store price erosion.
Domestic Selling, General and Administrative Expenses (“SG&A”)
Domestic GAAP SG&A expenses were $2.31 billion, or 16.5% of revenue, versus $1.94 billion, or 15.7% of revenue, last year. On a non-GAAP basis, SG&A expenses were $2.22 billion, or 15.8% of revenue, versus $1.94 billion, or 15.7% of revenue, last year. Both GAAP and non-GAAP SG&A increased primarily due to (1) higher incentive compensation; (2) the impact of the extra week; (3) growth investments; and (4) higher variable costs due to increased revenue. These increases were partially offset by the flow-through of cost reductions. Additionally, GAAP SG&A expense in Q4 FY18 was higher by $95 million due to expenses related to tax reform, which included $75 million related to employee bonus expense and a $20 million charitable donation to the Best Buy Foundation.
International Segment Q4 FY18 Results
International revenue of $1.38 billion increased 20.3% versus last year. This increase was primarily driven by (1) comparable sales growth of 9.9% due to growth in both Canada and Mexico; (2) approximately 580 basis points of positive foreign currency impact; and (3) approximately $45 million of revenue from the extra week.
International Gross Profit Rate
International gross profit rate was 22.4% versus 24.6% last year. The 220-basis point decline was primarily driven by a lower year-over-year gross profit rate in Canada due to (1) lower sales in the higher-margin services category primarily driven by the launch of Canada’s total tech support offer, a long-term recurring service revenue model; (2) a decreased gross profit rate in the home theater category; and (3) an approximate 15-basis point negative impact from a lower periodic profit sharing benefit from the company’s service plan portfolio.5
International GAAP SG&A expenses were $228 million, or 16.6% of revenue, versus $200 million, or 17.5% of revenue, last year. On a non-GAAP basis, SG&A expenses were $223 million, or 16.2% of revenue, versus $200 million, or 17.5% of revenue, last year. Both GAAP and non-GAAP SG&A increased primarily due to the negative impact of foreign exchange rates and the impact of the extra week. Additionally, GAAP SG&A expense was $5 million higher due to employee bonus expense related to tax reform.
In Q4 FY18, the company returned a total of $965 million to shareholders through share repurchases of $866 million and dividends of $99 million. In FY18, the company returned a total of $2.4 billion to shareholders through share repurchases of $2.0 billion and dividends of $409 million.
Today, the company announced its Board of Directors approved a 32% increase in the regular quarterly dividend to $0.45 per share, effective immediately, and a share repurchase plan of at least $1.5 billion for FY19, which reflects an updated two-year plan of $3.5 billion compared to the original $3.0 billion two-year plan announced at the beginning of FY18.
The regular quarterly dividend will be payable on April 12, 2018 to shareholders of record as of the close of business on March 22, 2018.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law introducing significant changes to U.S. tax law. Among other things, it reduced the U.S. statutory corporate tax rate from 35% to 21%, effective January 1, 2018, and introduced a one-time mandatory repatriation tax on unremitted earnings of foreign subsidiaries. As a result, the company recorded a provisional income tax expense of $283 million during Q4 FY18. The provisional amount includes $209 million related to the repatriation tax and $74 million due to the revaluation of the company’s deferred tax balances at the lower tax rate.
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 Q4 FY18 was a benefit of approximately $8 million, or $0.03 of GAAP and non-GAAP diluted EPS. The year-to-date benefit is approximately $27 million, or $0.09 of GAAP and non-GAAP diluted EPS.
Best Buy is scheduled to conduct an earnings conference call at 8:00 a.m. Eastern Time (7:00 a.m. Central Time) on March 1, 2018. A webcast of the call is expected to be available at www.investors.bestbuy.com both live and after the call.
(1) In Q1 FY18, the company stopped excluding non-restructuring property and equipment impairment charges from its non-GAAP financial measures. 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. Since Renew Blue ended and Best Buy 2020: Building The New Blue began, the company believes it is no longer necessary to adjust for non-restructuring property and equipment impairments in its non-GAAP reporting. The company expects that any such impairments in the future 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.
Revenue for the 14-week Q4 FY18 and 53-week FY18 includes approximately $715 million and $45 million related to our Domestic and International segments, respectively. Comparable sales for the 14-week Q4 FY18 and 53-week FY18 exclude the impact of the extra week.
(3) In Q1 FY19, the company will adopt Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which establishes a single comprehensive model for entities to use in accounting for revenue and supersedes the most current revenue recognition guidance. The effect of the adoption of the new standard will be immaterial to our revenue and earnings. Forward-looking guidance provided incorporates changes resulting from the new standard.
(4) 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.
(5) In Q4 FY18, the Domestic business recorded a $59 million periodic profit sharing benefit from its services plan portfolio versus a Q4 FY17 benefit of $74 million. The International business recorded a Q4 FY18 benefit of $8 million compared to a $10 million benefit in Q4 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 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, 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.
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