Best Buy Co., Inc. — Q3 FY2019 Form 10-Q
Reporting period: Quarter ended November 3, 2018; comparisons are with the quarter ended October 28, 2017. The nine-month periods each comprised 39 weeks. Amounts below are in millions of dollars unless stated otherwise.
Business context and performance
Best Buy operates Domestic (U.S., including GreatCall) and International (Canada and Mexico) segments. The company describes its business as seasonal, with a large share of revenue and earnings typically generated in the holiday-season fourth quarter.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $9,590 | $9,320 | $28,078 | $26,788 |
| Comparable sales growth | 4.3% | 4.4% | 5.8% | 3.8% |
| Gross profit / margin | $2,324 / 24.2% | $2,280 / 24.5% | $6,678 / 23.8% | $6,455 / 24.1% |
| Operating income / margin | $322 / 3.4% | $350 / 3.8% | $922 / 3.3% | $971 / 3.6% |
| Net earnings | $277 | $239 | $729 | $636 |
| Diluted EPS | $0.99 | $0.78 | $2.57 | $2.05 |
Q3 revenue increased 2.9% year over year, led by comparable sales; foreign exchange reduced reported growth by 0.4 percentage points. Online revenue in Domestic rose 12.6% on a comparable basis to $1,214 million. Domestic operating income was $315 million versus $345 million; International operating income was $7 million versus $5 million.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $1,107, down from $1,203. Investing activities provided $574, including $1,970 of investment-sale proceeds, partly offset by $619 of capital spending and the $792 GreatCall acquisition. Financing used $1,526, including $1,144 of share repurchases and $376 of dividends.
- At November 3, 2018, cash and cash equivalents were $1,228 and short-term investments were $76; an additional $211 of restricted cash was included in other current assets. Current assets were $10,901 and current liabilities $9,933; the reported current ratio was 1.1.
- Total debt, including current maturities and financing/capital lease obligations, was $1,326. Best Buy repaid $500 of 2018 Notes and issued $500 of 2028 Notes at 4.45%. Its $1.25 billion revolving facility had no borrowings outstanding; the company reported compliance with financial covenants. Non-GAAP debt to EBITDAR was 1.6.
- For the first nine months, Best Buy repurchased 15.4 million shares for $1,143 and paid dividends of $1.35 per share. The board’s fiscal 2019 repurchase plan was $1.5 billion; $1.9 billion remained under the broader authorization at quarter-end.
Material changes and unusual items
- Net earnings and EPS rose despite lower operating income, with the lower effective tax rate and a $12 gain on investment sales contributing. Q3 tax expense was $53 versus $104; the effective tax rate was 16.1% versus 30.4%. For nine months, the rates were 20.4% versus 32.7%, primarily reflecting the U.S. Tax Act.
- Gross margin declined, primarily due to higher supply-chain and transportation costs and early costs of the Total Tech Support rollout. SG&A rate rose in Q3, reflecting growth investment, incentive compensation, GreatCall costs and higher variable costs, partly offset by cost reductions.
- Best Buy acquired GreatCall on October 1 for $792 million net cash consideration. The preliminary allocation included $496 million of goodwill and $371 million of intangible assets. Q3 included $13 million of acquisition transaction costs; GreatCall’s results were included from acquisition date.
- All 257 remaining U.S. Best Buy Mobile stand-alone stores were closed in Q2. Nine-month restructuring charges were $47 million, primarily facility closure costs; none were recorded in Q3.
- Adoption of the new revenue standard increased opening retained earnings by $73 million. The company said ongoing effects on revenue, earnings and cash flow are expected to be immaterial; Q3 reported revenue was $15 million higher and net earnings $1 million lower than under the prior method.
Outlook, commentary and risks
- Management said Q3 performance was broad-based, with positive comparable sales across channels and countries and most product categories. Strategy priorities include the Best Buy 2020 plan, multi-channel shopping, In-Home Advisor expansion, Total Tech Support growth, and investment in services, labor, customer systems and supply chain.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said it did not expect the latest China tariff list, effective September 24, to have a material impact for the remainder of FY2019. That list affects an estimated 7% (about $2.3 billion) of annual cost of goods sold; later-period impacts remain uncertain.
- Management believes available cash, operating cash flow and credit capacity should fund operations, planned investment, repurchases, dividends and strategic initiatives, but cautions that cash generation or access to financing could weaken. The company identified consumer demand, competition, product availability, tariffs, foreign exchange, labor, supply-chain disruption, technology/data risks and acquisition execution among factors that could affect results.
- The company is still evaluating Tax Act accounting, including GILTI. Adoption of the lease standard, expected in FY2020, is expected to materially increase reported assets and liabilities; earnings impact was still being evaluated.
- Best Buy is defending longstanding securities litigation; it said reasonably possible losses, if any, cannot be estimated. Other ordinary-course legal proceedings were not expected to have a material effect, based on the company’s assessment.
Investor verification priorities
- Check whether comparable-sales momentum and online growth persist through the holiday quarter, and whether margin pressure from supply chain, transportation and service investments moderates.
- Track GreatCall integration, acquisition-related costs, and whether the acquired services business contributes as intended.
- Monitor tariff developments and management’s ability to mitigate potential cost increases beyond FY2019.
- Review cash conversion and working-capital swings, liquidity after substantial buybacks and dividends, and debt/lease obligations.
- Verify tax-rate effects and remaining Tax Act adjustments, as well as the balance-sheet and control implications of upcoming lease-standard adoption.