Business context and reporting period
Best Buy Co., Inc. operates in the U.S., Canada and Mexico through Domestic and International segments. This Form 10-Q covers the second quarter and first six months of fiscal 2019, ended August 4, 2018; comparative periods ended July 29, 2017. Interim results are seasonal and not necessarily indicative of the full year.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | First six months FY2019 | First six months FY2018 |
|---|---|---|---|---|
| Revenue | $9.379bn | $8.940bn | $18.488bn | $17.468bn |
| Comparable sales growth | 6.2% | 5.4% | 6.6% | 3.5% |
| Gross profit | $2.229bn | $2.153bn | $4.354bn | $4.175bn |
| Gross margin | 23.8% | 24.1% | 23.6% | 23.9% |
| Operating income | $335m | $321m | $600m | $621m |
| Net earnings | $244m | $209m | $452m | $397m |
| Diluted EPS | $0.86 | $0.67 | $1.58 | $1.27 |
Q2 operating margin was 3.6%, unchanged year over year; first-half operating margin fell to 3.2% from 3.6%. Reported diluted EPS excludes no adjustments; management’s non-GAAP diluted EPS was $0.91 for Q2 and $1.72 for the first half, versus $0.69 and $1.28, respectively, in the prior-year periods.
First-half operating cash flow was $1.108bn, compared with $692m. Investing activities provided $1.200bn, including $1.565bn of investment sales, while capital expenditures were $375m. Financing activities used $1.524bn, including $774m for share repurchases, $253m of dividends and repayment of $523m of debt. Cash, cash equivalents and short-term investments totaled $2.330bn at quarter-end. Total debt, including current debt, was $848m; the $500m notes due in August 2018 were repaid on August 1. The $1.25bn revolving facility was undrawn, and the company reported covenant compliance. The current ratio was 1.2.
Material changes and management commentary
- Revenue increased 4.9% in Q2 and 5.8% in the first half. Domestic comparable sales grew 6.0% in Q2; International comparable sales grew 7.6%. Online revenue in Domestic rose 10.1% on a comparable basis in Q2.
- Gross margin declined 0.3 percentage points in both Q2 and the first half. Management cited higher supply-chain and transportation costs, Total Tech Support launch economics, and mobile-phone margin pressure. Lower SG&A rates partly offset these factors.
- Net earnings and EPS benefited from lower income tax rates following U.S. tax reform and share repurchases; diluted weighted-average shares declined year over year.
- Best Buy closed all 257 remaining U.S. Best Buy Mobile stand-alone stores during Q2. Related restructuring charges were $17m in Q2 and $47m in the first half.
- Management described Q2 performance as broad-based, citing positive comparable sales across channels and geographies, improving customer scores and market-share gains. It highlighted the national Total Tech Support rollout, a Fire TV Edition product partnership, and continued investment in technology, staff and supply chain.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management said available liquidity and expected operating cash flows should support operations, capital expenditures, repurchases, dividends and strategic initiatives, while noting that weaker cash generation or reduced borrowing access could require spending limits.
- On August 15, 2018, Best Buy signed an agreement to acquire GreatCall for $800m in cash, with closing expected by the end of fiscal Q3, subject to regulatory approval and customary conditions.
- First-quarter adoption of the new revenue-recognition standard increased opening retained earnings by $73m net of tax. The filing reports a $1m reduction in Q2 net earnings and a $2m reduction in first-half net earnings from adoption; management expects the ongoing effect to be immaterial.
- The company is still evaluating the tax accounting effects of the Tax Act, including GILTI. It expects adoption of the new lease standard in fiscal 2020 to materially increase balance-sheet assets and liabilities; the earnings impact remains under evaluation.
- Risks identified include consumer demand and confidence, competition and promotional pricing, product availability and vendor terms, supply-chain costs, labor retention, foreign exchange, tax developments, cybersecurity and execution of strategic initiatives and acquisitions.
- Best Buy disclosed ongoing securities litigation related to historical earnings guidance; it stated that reasonably possible losses, if any, cannot be estimated. Other ordinary-course legal matters were not expected to have a material effect.
Important facts for investors to verify
- Whether comparable-sales growth and positive customer trends continue, particularly as prior-year online comparable growth was higher.
- Whether gross-margin pressure from logistics costs and new services is offset by product margins, productivity and sales leverage.
- Cash-flow sustainability: first-half operating cash flow improved partly because of working-capital timing, while the period also included substantial repurchases and debt repayment.
- GreatCall transaction closing, purchase funding, integration costs and expected operating contribution.
- Final Tax Act and GILTI accounting, and the balance-sheet and disclosure effects of lease-standard adoption.
- Developments in the securities litigation and other disclosed contingencies.