Best Buy Co., Inc. — Form 10-Q summary
Reporting period: Third quarter and first nine months of fiscal 2016, ended October 31, 2015; comparisons are with the periods ended November 1, 2014. Best Buy sells technology products and services through Domestic and International segments. Results are seasonal, with a larger share of sales and earnings typically generated in the holiday quarter.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $8.819 billion | $9.032 billion | $25.905 billion | $26.130 billion |
| Gross profit / margin | $2.112 billion / 23.9% | $2.076 billion / 23.0% | $6.240 billion / 24.1% | $6.021 billion / 23.0% |
| Operating income / margin | $230 million / 2.6% | $205 million / 2.3% | $604 million / 2.3% | $640 million / 2.4% |
| Continuing-operations net earnings | $129 million | $116 million | $330 million | $722 million |
| Net earnings attributable to Best Buy shareholders | $125 million | $107 million | $418 million | $714 million |
| Diluted EPS, continuing operations / total | $0.37 / $0.36 | $0.33 / $0.30 | $0.93 / $1.18 | $2.04 / $2.02 |
Q3 revenue declined 2.4%; comparable sales rose 0.8%, or 0.5% excluding the estimated installment-billing benefit. Nine-month revenue declined 0.9%. Domestic Q3 revenue increased 1.2%, while International revenue fell 29.9%, reflecting Canadian store consolidation, currency translation and softness in Canada.
Q3 operating income improved by $25 million, mainly on stronger Domestic gross profit, partly offset by higher SG&A. Nine-month operating income decreased by $36 million, principally because of Canadian consolidation charges; $75 million of net CRT litigation settlements partly offset the decline. Nine-month 2016 restructuring charges were $189 million, compared with $12 million a year earlier.
Cash flow and liquidity: Nine-month operating cash flow was $463 million, versus $774 million; investing cash outflow was $618 million and financing cash outflow was $761 million. Capital expenditures were $493 million. Cash and cash equivalents were $1.697 billion and short-term investments were $1.650 billion at quarter-end. The current ratio was 1.4.
Debt and capital: Total debt was $1.639 billion, including $383 million classified as current, chiefly the $350 million notes due March 15, 2016. The company had no borrowings under its $1.25 billion revolving facility and reported compliance with its covenants. It repurchased 11.3 million shares for $388 million and paid $421 million in dividends during the nine months, including a special dividend. Non-GAAP debt to EBITDAR was 2.6, compared with 3.0 a year earlier.
Material changes and unusual items
- Canada consolidated Future Shop and Best Buy under the Best Buy brand: 66 Future Shop stores closed and 65 converted. Through October 31, the company recorded $189 million in restructuring charges and reported $198 million in total related charges, impairments and other costs. It expected total pre-tax charges of $210 million to $250 million, including about $140 million to $180 million in cash costs.
- Five Star Appliance in China was sold in February 2015 and is presented as discontinued operations. The nine-month result included a $99 million sale gain; discontinued operations contributed $88 million net earnings. The prior-year nine-month tax result included a $353 million benefit from a European legal-entity reorganization, a major reason continuing-operations earnings were lower year over year.
- The company received $88 million in gross CRT settlements and recorded $13 million of related legal costs; it described the proceeds net of legal costs as $75 million. Further recovery is uncertain.
- Q3 Domestic online comparable sales increased 18.3%. Appliance comparable sales rose 16.4%, while computing and mobile phones declined 0.9% and services declined 11.1%.
Outlook, commentary and risks
For Q4 FY2016, management forecast negative low-single-digit Enterprise revenue growth and a 25–45 basis-point decline in non-GAAP operating-income rate year over year. Domestic revenue was expected to be near flat, with a 20–35 basis-point decline in non-GAAP operating-income rate. International revenue was expected to decline about 30%, with a positive 2%–3% non-GAAP operating-income rate. Management assumed roughly 4% declines in NPD-tracked categories; it noted a strong prior-year holiday comparison and ongoing pressure from industry trends.
Management expected services pricing to reduce Q4 gross-profit rate by about 25 basis points, or approximately $40 million, and expected a non-GAAP tax rate of 36%–37%, with a $0.04–$0.06 negative diluted-EPS impact versus the prior year. Renew Blue phase two had eliminated $110 million in annualized costs to date; management expected $100 million of current-year SG&A investment in growth initiatives, partly offsetting savings.
Risks discussed include consumer confidence and discretionary spending, competitive pricing and promotions, product cycles and availability, online-sales trends, currency movements, Canadian market conditions and consolidation execution, supply-chain disruption, tax estimates, and the ability to realize planned savings and growth returns. Management said liquidity sources should fund operations, investments and initiatives for the foreseeable future, while cautioning that future cash generation and access to financing cannot be assured. The company reported that disclosure controls were effective and that no material change in internal control occurred during the quarter.
In a securities class action concerning historical earnings guidance, the company awaits an appellate decision; it says the allegations are without merit, and reasonably possible losses cannot be estimated. Other disclosed proceedings were not expected to have a material effect based on the company’s assessment.
Key facts for investors to verify
- Whether holiday-quarter revenue and non-GAAP margin performance matched management’s Q4 outlook and assumptions.
- How Canadian consolidation costs, store closures and sales trends compare with the remaining expected charge range.
- Whether Domestic gross-profit improvements persist as services investments, promotional activity and category mix evolve.
- Cash generation, inventory and accounts-payable movements, and the planned funding or repayment of the March 2016 notes.
- How much of reported earnings and cash flow reflects unusual items, including the Five Star gain, CRT settlements, restructuring charges and the prior-year tax benefit.
- Developments in the securities litigation and any subsequent CRT settlements or other material contingencies.