Business context and reporting period
Best Buy Co., Inc. filed this Form 10-K for fiscal 2017, the 52 weeks ended January 28, 2017. The technology retailer operates Domestic (U.S.) and International (Canada and Mexico) segments, selling products and services through stores, websites, mobile applications and Geek Squad. Fiscal 2018 is expected to include 53 weeks.
Financial performance and liquidity
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Revenue | $39.403 billion | $39.528 billion |
| Comparable sales | +0.3% | +0.5% |
| Gross profit / rate | $9.440 billion / 24.0% | $9.191 billion / 23.3% |
| Operating income / margin | $1.854 billion / 4.7% | $1.375 billion / 3.5% |
| Continuing-operations net earnings | $1.207 billion | $807 million |
| Diluted EPS, continuing operations | $3.74 | $2.30 |
| Operating cash flow | $2.545 billion | $1.322 billion |
Fiscal 2017 revenue declined 0.3%; higher comparable sales were offset by foreign exchange and non-comparable sales. Cash and short-term investments were $3.921 billion at year-end, versus $3.281 billion a year earlier. The current ratio was 1.5. Reported debt, including its current portion, was $1.365 billion, down from $1.734 billion; the company also had $1.25 billion of undrawn revolving capacity and reported compliance with facility covenants. Capital expenditures were $582 million.
Domestic revenue was $36.248 billion, down 0.3%, with operating income of $1.764 billion. Domestic online revenue grew 20.8% on a comparable basis to $4.8 billion, or 13.4% of segment revenue. International revenue was $3.155 billion, down 0.3%, and segment operating income improved to $90 million from a $210 million loss.
Prior-period and fourth-quarter comparisons
Operating income rose $479 million year over year, driven mainly by a 0.7 percentage-point improvement in gross margin and lower restructuring charges. Fiscal 2017 operating results included $161 million of net CRT/LCD litigation settlements, related to prior-year products; management’s non-GAAP reconciliation excludes these settlements and reports operating income of $1.759 billion and diluted continuing-operations EPS of $3.56. Fiscal 2016 included $201 million of restructuring charges, primarily related to the Canadian brand consolidation.
In fiscal Q4 2017, revenue was $13.482 billion versus $13.623 billion in Q4 2016; comparable sales were down 0.7% versus down 1.7%. Operating income increased to $881 million from $771 million, and continuing-operations net earnings rose to $607 million from $477 million. Fiscal Q4 diluted EPS from continuing operations was $1.91 versus $1.39. International comparable sales were 0.9% in Q4; the company resumed reporting this metric after the Canadian consolidation had disrupted comparisons.
Outlook, management commentary and risks
Management’s Best Buy 2020 strategy targets gradual revenue growth, recurring revenue streams, customer experience improvements, cost savings and growth in services and International operations. Fiscal 2017 priorities included multi-channel execution, cost reduction and testing new growth concepts. The company reported $350 million of cumulative savings toward a three-year $400 million cost-reduction target. It expects to continue testing concepts and expand selected initiatives in fiscal 2018.
No quantified fiscal 2018 revenue or earnings guidance is provided in the filing text. Management estimates fiscal 2018 cash capital expenditures of approximately $650 million to $700 million, focused on stores, e-commerce and information technology. After year-end, the company announced a 21% increase in its regular quarterly dividend to $0.34 per share and an intention to repurchase $3 billion of shares over two years, under a new $5 billion authorization.
Key risks include intense price and online competition, pressure on margins, rapid product obsolescence and changing consumer preferences, dependence on major vendors and mobile carriers, supply-chain disruption, service execution and labor costs, cybersecurity and IT outages, foreign-exchange exposure, and lease commitments. The 20 largest suppliers represented about 77% of merchandise purchases, and five suppliers about 53%. Approximately 23% of fiscal 2017 revenue was transacted using branded cards; the company earns profit-share income from the third-party bank programs. Legal proceedings include securities litigation for which reasonably possible losses could not be estimated; the CRT litigation was settled and is resolved.
Other items to note: discontinued operations generated a $21 million gain in fiscal 2017, primarily from sale of remaining Five Star property assets. The auditor issued unqualified opinions on the financial statements and internal control; management reported effective internal controls and no material weaknesses.
Most important facts for investors to verify
- Whether core earnings improvement persists after excluding the $161 million net CRT/LCD settlement benefit and other adjustments; compare GAAP and non-GAAP measures.
- Whether Domestic comparable sales, online growth and gross-margin improvement continue, particularly amid declines in entertainment, computing/mobile and services categories.
- Whether International profitability is sustainable following the Canadian brand consolidation and whether currency movements materially affect reported results.
- Cash conversion and working-capital timing: fiscal 2017 operating cash flow benefited partly from later holiday inventory purchasing and payment timing.
- Capital allocation plans, including the announced buyback and dividend increase, relative to investment needs, lease obligations and operating performance.
- Potential effects of tax uncertainties, litigation, supplier concentration, lease commitments and cybersecurity or supply-chain disruptions.