Best Buy Co., Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter ended July 29, 2017; year-to-date period covers 26 weeks. Fiscal 2018 has 53 weeks, with the extra week in the fourth quarter. Results are seasonal, with a larger share of sales and earnings typically in the holiday quarter. Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | First half FY2018 | First half FY2017 |
|---|---|---|---|---|
| Revenue | $8,940 | $8,533 | $17,468 | $16,976 |
| Comparable sales growth | 5.4% | 0.8% | 3.5% | 0.4% |
| Gross profit / margin | $2,153 / 24.1% | $2,062 / 24.2% | $4,175 / 23.9% | $4,207 / 24.8% |
| Operating income / margin | $321 / 3.6% | $289 / 3.4% | $621 / 3.6% | $661 / 3.9% |
| Continuing-operations net earnings | $209 | $182 | $397 | $408 |
| Diluted EPS, continuing operations | $0.67 | $0.56 | $1.27 | $1.26 |
| Operating cash flow | Not separately provided | Not separately provided | $692 | $1,297 |
Q2 non-GAAP diluted EPS was $0.69, up 21% year over year; first-half non-GAAP diluted EPS was $1.28 versus $1.00. These are company-defined non-GAAP measures and should be considered alongside GAAP results.
Segments and operating drivers
- Domestic: Q2 revenue was $8,272 million, up 4.9%; comparable sales rose 5.4%. Online comparable sales grew 31.2%, and online revenue was $1,096 million, or 13.2% of segment revenue. Computing and mobile, entertainment, appliances, and services posted comparable-sales gains; consumer electronics growth was more modest.
- International: Q2 revenue was $668 million, up 3.7%; comparable sales rose 4.7%. Currency movements reduced reported revenue growth. Operating income was $5 million versus break-even a year earlier.
- Q2 consolidated operating margin improved 0.2 percentage points, reflecting lower SG&A as a share of sales and sales leverage. Expenses nevertheless increased with investments in people and systems, higher incentive compensation, and variable costs.
Liquidity, debt and capital allocation
- At July 29, 2017, cash and cash equivalents were $1,365 million and short-term investments were $2,125 million, totaling $3,490 million. Current assets were $10,078 million and current liabilities $7,105 million; the reported current ratio was 1.4.
- Total debt was $1,354 million, including $44 million current; the balance included $500 million of notes due August 2018 and $650 million of notes due March 2021. The company had no borrowings under its $1.25 billion revolving credit facility and reported compliance with its covenants.
- First-half operating cash flow declined to $692 million from $1,297 million, primarily due to working-capital timing, including inventory receipts and payments and advertising payments. Investing activities used $708 million; financing activities used $874 million. Cash, cash equivalents and restricted cash decreased $872 million.
- First-half capital expenditures were $296 million. The company repurchased $781 million of shares and paid $208 million in dividends. The regular quarterly dividend increased to $0.34 per share; the prior-year first half included a $0.45-per-share special dividend.
Material changes, outlook and notable items
- Revenue and comparable sales strengthened substantially year over year in Q2. Management attributed the broad-based growth to stronger consumer demand for technology, product innovation, merchandising and marketing, and service execution. Management cautioned that mid-single-digit comparable-sales growth should not be viewed as a new normal.
- Management said Domestic online sales were on pace to exceed $5 billion in FY2018. It was expanding its in-home advisor program nationally, with free consultations planned across major U.S. cities by the end of September 2017.
- Under Best Buy 2020: Building the New Blue, the company targeted an additional $600 million in annualized cost reductions and gross-profit optimization by the end of FY2021; it reported achieving the first $50 million toward that target in Q2. The savings are intended to fund investments and offset business pressures. No specific consolidated revenue or EPS guidance is provided in this filing.
- First-half FY2017 results included a $161 million net CRT/LCD settlement benefit. This prior-period item, along with lower restructuring charges in the current period, is important context for the year-over-year decline in first-half operating income. The prior-year periods also included a $16 million after-tax gain from sale of a discontinued-operations property; there was no comparable gain in FY2018.
- Q2 restructuring charges were $2 million; the remaining Canadian brand-consolidation facility-closure accrual was $24 million. The company also reported $12 million and $8 million of remaining vacant-space liabilities associated with other restructuring activities.
- Management identified risks including consumer demand and confidence, competitive pricing and promotions, product availability and vendor decisions, foreign exchange, supply-chain disruption, cost-reduction execution, labor and talent, tax matters, data-system security, and property management. The company is defending securities-related litigation; it said reasonably possible losses, if any, could not be estimated. Other ordinary-course proceedings were not expected to have a material effect.
- New lease accounting guidance is expected to materially increase reported assets and liabilities; the company was still evaluating its effect on earnings. Adoption was expected in the first quarter of FY2020.
Important facts for investors to verify
- Whether strong comparable-sales and online growth continue, and how they translate into margins and earnings.
- Whether cash conversion recovers from the first-half working-capital-driven decline and supports planned investment, dividends and repurchases.
- Progress toward the $600 million cost-reduction target and whether savings offset ongoing operating pressures.
- Capital allocation pace and liquidity around the $500 million notes due in August 2018.
- Developments in securities litigation, foreign-exchange exposure, consumer demand, and the financial effects of lease-accounting adoption.