Business context and reporting period
Best Buy Co., Inc. is a technology retailer and services provider operating in the U.S., Canada and Mexico through Domestic and International segments. This unaudited Form 10-Q covers the 13 weeks ended April 29, 2017 (fiscal 2018 first quarter), compared with the 13 weeks ended April 30, 2016. Results are seasonal, with a greater share of revenue and earnings typically in the holiday fourth quarter.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $8.528 billion | $8.443 billion |
| Comparable sales growth | 1.6% | (0.1)% |
| Gross profit / margin | $2.022 billion / 23.7% | $2.145 billion / 25.4% |
| Operating income / margin | $300 million / 3.5% | $372 million / 4.4% |
| Net earnings | $188 million | $229 million |
| Diluted EPS | $0.60 | $0.70 |
| Cash from operations | $243 million | $492 million |
Domestic revenue was $7.912 billion, up 1.1%, with comparable sales up 1.4%; online comparable sales rose 22.5%, and online revenue was 12.9% of Domestic sales. International revenue was $616 million, up 0.3%, with comparable sales up 4.0%; foreign exchange and lower Canadian warranty-plan profit sharing offset some growth.
Cash, cash equivalents and short-term investments totaled $3.599 billion at quarter-end, versus $3.921 billion at fiscal year-end and $3.065 billion a year earlier. Total debt was $1.347 billion, including current debt; the $1.25 billion revolving facility was undrawn, and the company was in compliance with its covenants. Current ratio was 1.5. Investing cash outflow was $423 million, mainly reflecting investment purchases; financing outflow was $413 million, including $384 million of share repurchases and $105 million of dividends paid.
Material changes versus the prior comparable period
- GAAP revenue grew 1.0%, while comparable sales improved to 1.6% growth from a 0.1% decline.
- GAAP gross profit and operating income fell, primarily because the prior-year quarter included $183 million of CRT settlement proceeds and $22 million of related legal fees (a net $161 million operating benefit). The prior period also included $29 million of restructuring charges; none were recorded this quarter.
- On the company’s non-GAAP basis, operating income was $300 million versus $240 million, and diluted EPS was $0.60 versus $0.43. Prior-period adjustments remove the CRT/LCD settlements and restructuring charges.
- Operating cash flow declined to $243 million from $492 million, which management attributed primarily to working-capital timing, including inventory receipts and payments and advertising payments.
- The regular quarterly dividend increased to $0.34 per share from $0.28. Prior-year dividends included a $0.45 special dividend; total dividends declared per share were therefore $0.34 versus $0.73.
Outlook, management commentary, risks and unusual items
Management described the quarter as a strong start and reported completion of its $400 million cost-reduction and gross-profit-optimization target three quarters ahead of schedule. It set a new target of $600 million in additional reductions by the end of fiscal 2021, with savings intended to fund investment and offset business pressures. The filing provides no specific full-year revenue or earnings guidance.
Strategic initiatives include expanding Best Buy Smart Home, powered by Vivint, to more than 400 stores by the holiday season; expanding in-home advisor and technical-support pilots; investing in online capabilities and fulfillment; and improving mobile shopping. Management cited strength in computing, connected home, gaming, appliances and services, with continued softness in tablets.
The company plans $3.0 billion of share repurchases over two years and adopted a new $5.0 billion authorization; approximately $4.7 billion remained available at quarter-end. Management said cash, investments and operating cash flow were sufficient to fund first-quarter repurchases, capital spending and dividends without borrowing. It cautioned that weaker cash generation or reduced borrowing access could require spending limits.
Key risks identified include consumer demand and confidence, competition and promotional pricing, product availability and vendor decisions, supply-chain disruption, foreign-exchange changes, execution of cost reductions and strategic investments, labor and technology risks, and data-system security. The company disclosed ongoing securities litigation for which reasonably possible losses could not be estimated; other ordinary-course legal matters were not expected to materially affect results. Adoption of the new lease standard is expected in fiscal 2020 and to materially increase reported assets and liabilities. The quarter also included adoption of accounting changes for stock compensation and inventory; management said the inventory standard had no material impact.
Important facts for investors to verify
- Whether comparable-sales growth and online momentum persist, particularly in light of tablet weakness and competitive pricing.
- Whether margins recover after the prior-year CRT settlement comparison and whether warranty profit sharing remains volatile.
- Whether the $600 million cost-reduction target is achieved without impairing sales, service or strategic investment.
- How working-capital timing affects operating cash flow and how planned buybacks and dividends affect liquidity and share count.
- Developments in the securities litigation, lease-standard implementation and the company’s ability to maintain credit ratings and facility covenant compliance.