Business context and reporting period
Best Buy Co., Inc. filed this unaudited Form 10-Q for the first quarter of fiscal 2020, the 13 weeks ended May 4, 2019, compared with the 13 weeks ended May 5, 2018. The retailer operates in the U.S., Canada and Mexico through its Domestic and International segments. Results are seasonal, with a large share of revenue and earnings typically generated in the holiday-season fourth quarter.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $9.142 billion | $9.109 billion |
| Comparable sales growth | 1.1% | 7.1% |
| Gross profit / margin | $2.169 billion / 23.7% | $2.125 billion / 23.3% |
| Operating income / margin | $334 million / 3.7% | $265 million / 2.9% |
| Net earnings | $265 million | $208 million |
| Diluted EPS | $0.98 | $0.72 |
| Operating cash flow | $2 million | $204 million |
| Capital expenditures | $193 million | $181 million |
- Non-GAAP diluted EPS was $1.02, up from $0.82; non-GAAP operating income was $351 million versus $302 million. These measures exclude specified items and are not GAAP results.
- Cash and cash equivalents were $1.561 billion at May 4, 2019; restricted cash was an additional $206 million. The $1.25 billion revolving credit facility was undrawn, and the company reported compliance with its covenants.
- Current ratio was 1.1. Long-term debt, including current maturities but excluding operating lease liabilities, was approximately $1.207 billion. Lease accounting adoption added $2.708 billion of operating lease assets and $2.812 billion of operating lease liabilities.
- Financing returned $232 million to shareholders: $134 million in dividends and $98 million of share repurchases in the cash flow statement. The repurchase disclosure reports $106 million of purchases during the quarter; the filing does not explain the difference between these presentations.
Material changes versus the prior comparable period
- Revenue was nearly flat, while comparable-sales growth slowed to 1.1% from 7.1%. Domestic comparable sales rose 1.3%; International comparable sales declined 1.2%.
- Operating income improved by $69 million, reflecting a higher gross margin and no repeat of the prior-year $30 million Best Buy Mobile restructuring charge. Domestic operating income rose to $332 million from $267 million; International improved to $2 million from a $2 million loss.
- Domestic online revenue increased 14.5% on a comparable basis to $1.308 billion. Appliances and services were growth areas; Entertainment comparable sales declined 12.7% domestically.
- Operating cash flow fell to $2 million, primarily due to working-capital timing, including inventory and income-tax receipts and payments. Cash and cash equivalents declined by $417 million during the quarter.
- Best Buy adopted lease accounting guidance, recognizing substantial lease assets and liabilities and recording a $19 million reduction to opening retained earnings. The company said ongoing effects on earnings and cash flows were expected to be immaterial.
Outlook, management commentary, risks and unusual items
- Management cited continued progress on its Best Buy 2020 strategy, including GreatCall and health services, Total Tech Support, and supply-chain improvements. It reported $75 million of annualized cost reductions in the quarter, bringing cumulative savings to $575 million toward a $600 million goal by the end of fiscal 2021.
- The fiscal 2020 outlook includes the impact of List 3 tariffs on Chinese imports rising from 10% to 25%. Affected products represented about 7% of cost of goods sold. Management said it had mitigated impacts through accelerated purchases and vendor work, but could not predict the likelihood or effect of further tariffs.
- On May 9, 2019, after quarter-end, Best Buy completed its approximately $125 million acquisition of Critical Signal Technologies, a health-services company, following an agreement signed April 11.
- Interest-rate sensitivity analysis estimated that a 50-basis-point increase in short-term rates would reduce net interest expense by $2 million; a 50-basis-point decrease would increase it by $2 million. Currency movements reduced reported revenue by an estimated $27 million, with no estimated net-earnings impact.
- The filing identifies risks including competition, product and vendor dependence, consumer demand, technology changes, supply-chain disruption, tariffs, cybersecurity and privacy, and the seasonal reliance on fourth-quarter cash generation. The long-running IBEW securities action was dismissed with prejudice in March 2019 and appeal periods had expired; other legal proceedings were not expected to have a material effect, though potential losses could not always be estimated.
Important facts for investors to verify
- Whether the improvement in earnings and margins is sustainable given nearly flat revenue and substantially slower comparable-sales growth.
- Whether operating cash flow rebounds from $2 million as working-capital timing normalizes, and how lease-related cash obligations affect liquidity.
- How tariff increases and any further trade measures affect costs, pricing, demand and the fiscal 2020 outlook.
- Progress toward the $600 million cost-savings goal and the performance and integration of GreatCall and Critical Signal Technologies.
- Future capital allocation under the $3.0 billion repurchase authorization, alongside dividends, investment needs and debt obligations.