Best Buy Co., Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2020, ended November 2, 2019; comparable periods ended November 3, 2018. Best Buy operates in the U.S., Canada and Mexico through Domestic and International segments. Results are seasonal, with a significant share of revenue and earnings typically generated in the fiscal fourth quarter.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $9.764 billion | $9.590 billion | $28.442 billion | $28.078 billion |
| Comparable sales growth | 1.7% | 4.3% | 1.5% | 5.8% |
| Gross profit | $2.361 billion | $2.324 billion | $6.813 billion | $6.678 billion |
| Gross margin | 24.2% | 24.2% | 24.0% | 23.8% |
| Operating income | $395 million | $322 million | $1.042 billion | $922 million |
| Operating margin | 4.0% | 3.4% | 3.7% | 3.3% |
| Net earnings | $293 million | $277 million | $796 million | $729 million |
| Diluted EPS | $1.10 | $0.99 | $2.96 | $2.57 |
| Non-GAAP diluted EPS | $1.13 | $0.93 | $3.23 | $2.65 |
For the first nine months, cash provided by operating activities was $937 million, versus $1.107 billion a year earlier. Capital expenditures were $586 million. Investing activities used $727 million, including $319 million of investment purchases and $145 million for acquisitions; financing activities used $1.060 billion. Cash, cash equivalents and restricted cash ended the period at $1.332 billion, down $852 million from the beginning of the period.
At November 2, 2019, cash and cash equivalents were $1.205 billion; current assets were $10.175 billion and current liabilities $9.726 billion, for a 1.0 current ratio. Long-term debt, including its current portion, totaled $1.253 billion; no revolving-credit borrowings were outstanding and $1.25 billion of facility capacity was undrawn. The company also reported $2.844 billion of operating lease liabilities and $39 million of finance lease liabilities. Its debt-to-trailing-12-month-net-earnings ratio was 0.8.
Material changes and operating drivers
- Q3 revenue rose 1.8%, but comparable-sales growth slowed to 1.7% from 4.3%. Domestic comparable sales increased 2.0%; International comparable sales declined 1.9%, with foreign exchange also weighing on reported International revenue.
- Domestic online revenue was $1.397 billion, up 15.0% on a comparable basis. Domestic appliance and services comparable sales increased 12.5% and 12.9%, respectively; entertainment fell 20.8%, primarily due to gaming.
- Q3 operating margin improved 60 basis points. Management attributed operating-income improvement mainly to lower SG&A as a share of sales, reflecting lower incentive compensation and expense management. Q3 gross margin was flat, with mix toward lower-margin products offset in part by GreatCall.
- Income tax expense was $96 million in Q3 versus $53 million; the effective tax rate rose to 24.8% from 16.1%, primarily reflecting prior-year Tax Act-related adjustments and higher current-period pretax earnings.
- Best Buy adopted the new lease standard in fiscal 2020, recognizing operating lease assets and liabilities; adoption reduced retained earnings by $22 million. The company expects the ongoing earnings and cash-flow effects to be immaterial.
Outlook, commentary and risks
The filing provides no specific full-year revenue or earnings guidance. Management said it was progressing on its strategy to combine technology and customer service, grow health-related services and Total Tech Support, expand In-Home Advisors, and improve delivery through supply-chain changes. It also set a target of $1 billion in cost reductions and efficiencies over the next five years.
Tariffs remain a key uncertainty. Management said it had mitigated impacts through purchasing, vendor coordination, sourcing changes, assortment decisions, and pricing and promotional actions, but noted uncertainty around U.S.-China trade negotiations and the effects on consumers and results. Tariffs effective in 2019 affected products including televisions, smart watches and headphones; further listed tariffs on computing, mobile phones and gaming consoles were scheduled for December 15, 2019.
Other risks include intense retail and e-commerce competition, vendor and product availability, consumer demand and product cycles, technology and cybersecurity risks, supply-chain disruptions, labor and real-estate costs, foreign exchange, and reliance on holiday-quarter cash generation. The company reported legal proceedings and related contingencies but did not provide a clear quantified exposure in this filing. It stated that it was in compliance with credit-facility financial covenants. Share repurchases and dividends totaled $499 million in Q3; $2.3 billion remained available under the $3.0 billion authorization at quarter-end.
Important facts for investors to verify
- Whether comparable-sales momentum and online growth continue, especially given weaker International results and the sharp decline in entertainment sales.
- How tariffs, vendor sourcing changes, and any consumer price or demand response affect margins and holiday-period performance.
- Whether operating cash flow and liquidity remain adequate amid seasonal working-capital needs, lease obligations, dividends, acquisitions and share repurchases.
- Progress against the five-year $1 billion cost-reduction target and the company’s health-services and customer-support strategy.
- Any material developments in legal contingencies, credit ratings or financing conditions; the filing does not clearly quantify potential legal exposure.