Business context and reporting period
Best Buy Co., Inc. filed this unaudited Form 10-Q for the quarter ended July 30, 2016, the second quarter of fiscal 2017. The six-month comparison periods each comprised 26 weeks. The retailer operates Domestic and International segments and notes that results are seasonal, with a greater share of revenue and earnings typically generated in the fiscal fourth quarter.
Financial performance and liquidity
| Metric | Three months ended July 30, 2016 | Six months ended July 30, 2016 |
|---|---|---|
| Revenue | $8.533 billion, up 0.1% year over year | $16.976 billion, down 0.6% |
| Comparable sales | Up 0.8% | Up 0.4% |
| Gross profit / margin | $2.062 billion / 24.2% | $4.207 billion / 24.8% |
| Operating income / margin | $289 million / 3.4% | $661 million / 3.9% |
| Continuing-operations net earnings | $182 million | $408 million |
| Diluted EPS from continuing operations | $0.56 | $1.26 |
| Net earnings, including discontinued operations | $198 million | $427 million |
| Operating cash flow | $1.288 billion for the first six months |
Quarterly gross margin fell 0.4 percentage points year over year, while the six-month margin rose 0.6 points. SG&A was $1.773 billion for the quarter and $3.517 billion for the half-year; SG&A as a share of revenue declined 0.4 and 0.2 points, respectively. The effective tax rate was 34.8% for the quarter and 36.2% for the half-year.
At July 30, 2016, cash and cash equivalents were $1.861 billion and short-term investments were $1.590 billion, totaling $3.451 billion. Total debt, including current debt and lease obligations, was $1.384 billion. The current ratio was 1.4. Best Buy had no borrowings on its new $1.25 billion revolving facility, which runs through June 2021, and reported compliance with its financial covenants. Six-month investing cash outflow was $495 million and financing cash outflow was $933 million. The company paid $328 million in dividends and repurchased $322 million of shares during the period.
Material changes versus the prior comparable period
- Quarterly revenue was nearly flat; Domestic comparable sales increased 0.8%, led by online comparable sales growth of 23.7%. Domestic operating income declined $20 million to $289 million, mainly because of lower gross margin, partly offset by lower SG&A.
- International revenue fell 1.0% in the quarter as reported, but grew 4.1% on a constant-currency basis. International operating income was break-even versus a $21 million loss a year earlier. For the first half, the segment was also break-even versus a $239 million loss.
- First-half operating income increased $287 million year over year. A key factor was restructuring expense of $29 million, compared with $177 million, alongside stronger gross profit. Prior-year restructuring was primarily associated with the Canadian brand consolidation.
- First-half GAAP diluted continuing-operations EPS rose to $1.26 from $0.57. The current period included $161 million of net CRT litigation settlement proceeds; the prior period included $75 million. Best Buy excludes these settlements in its non-GAAP measures. Non-GAAP diluted continuing-operations EPS was $1.01 for the first half versus $0.86.
- Current-period net earnings also included a $16 million after-tax gain on sale of a Shanghai property, reported in discontinued operations. Six-month discontinued-operations earnings were $19 million, compared with $92 million in the prior year, which included the sale of the Five Star business.
Outlook, management commentary and risks
Management said it was encouraged by execution and first-half performance but provided no clear company-wide revenue or earnings guidance in the supplied filing text. It expected mobile-phone sales trends to improve in the second half as new products launch and prior-year declines are lapped; services comparable sales were expected to be flat to slightly positive in the second half. The company did not expect virtual reality to have a material financial impact in fiscal 2017.
Best Buy’s Renew Blue Phase 2 program targets $400 million of cost reductions and gross-profit optimization over three years; management reported $250 million achieved to date, including $50 million in the quarter. Management cautioned that appliance delivery and installation improvements caused short-term disruption to quarterly comparable-sales growth.
Risks identified include consumer demand and confidence, competitive pricing and promotions, product availability and launches, online-sales trends, foreign-exchange movements, execution of cost reductions and strategic initiatives, employee retention, supply-chain disruption, cybersecurity and data protection, and tax developments. The company reported an ongoing securities action relating to fiscal 2011 public statements; the court of appeals reversed class certification, and any reasonably possible loss could not be estimated. The CRT antitrust matter was resolved through settlements. Other legal proceedings were not expected to have a material effect, based on management’s assessment.
Important facts for investors to verify
- Assess underlying earnings and margin trends separately from CRT settlement proceeds, restructuring items and the Shanghai property gain; compare GAAP and company-defined non-GAAP measures.
- Check whether online growth and Domestic comparable-sales momentum continue, and monitor weaker categories including mobile phones, gaming, entertainment and services.
- Evaluate cash-flow quality: management attributed much of the first-half operating cash-flow increase to working-capital timing and seasonal factors.
- Track delivery of the $400 million Renew Blue Phase 2 target, related implementation costs, and whether expected second-half category trends materialize.
- Review the securities litigation and the revolving-credit facility’s covenants, alongside the company’s substantial lease obligations and continued share repurchases and dividends.