Best Buy Co., Inc. — Q2 FY2020 10-Q
Reporting period: Second quarter ended August 3, 2019; year-to-date period covers the six months ended August 3, 2019. Best Buy operates in the U.S., Canada and Mexico through Domestic and International segments. Results are seasonal, with a substantial share of revenue and earnings typically generated in the holiday-season fourth quarter.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $9.536B | $9.379B | $18.678B | $18.488B |
| Comparable sales growth | 1.6% | 6.2% | 1.4% | 6.6% |
| Gross margin | 23.9% | 23.8% | 23.8% | 23.6% |
| Operating income | $313M | $335M | $647M | $600M |
| Operating margin | 3.3% | 3.6% | 3.5% | 3.2% |
| Net earnings | $238M | $244M | $503M | $452M |
| Diluted EPS | $0.89 | $0.86 | $1.86 | $1.58 |
Q2 non-GAAP diluted EPS was $1.08 versus $0.91 a year earlier; six-month non-GAAP diluted EPS was $2.10 versus $1.72. These company-defined measures exclude specified items, including restructuring charges and acquisition-related amortization and costs.
Cash flow and liquidity: Cash from operations was $625M for the first six months, down from $1.108B. Capital expenditures were $385M. Cash, cash equivalents and short-term investments totaled $1.609B at August 3, 2019. The company reported a current ratio of 1.1 and a $1.25B revolving credit facility with no borrowings outstanding; it was in compliance with the facility’s financial covenants.
Debt and leases: Long-term debt, including finance lease obligations and current maturities, was $1.261B; outstanding notes included $650M due in 2021 and $500M due in 2028. The company adopted the new lease standard during the quarter, recognizing $2.8B of operating lease liabilities and $2.7B of operating lease assets at adoption. At August 3, total reported lease liabilities were $2.912B.
Material changes and business developments
- Revenue rose 1.7% in Q2, but comparable-sales growth slowed materially from the prior-year quarter. Domestic comparable sales increased 1.9%; International comparable sales declined 1.9%, primarily reflecting Canada.
- Domestic online revenue was $1.417B, up 17.3% on a comparable basis. Appliances and Services were growth drivers; Entertainment declined 13.7% in Domestic comparable sales.
- Q2 operating income fell $22M year over year, including $48M of restructuring charges versus $17M. Charges related to U.S. retail operating-model changes, including termination benefits and a voluntary early retirement offer.
- Best Buy acquired Critical Signal Technologies, a health-services company, for $125M on May 9, 2019. It also completed the approximately $21M acquisition of BioSensics’ predictive healthcare technology business on August 7, after quarter-end.
- Share repurchases totaled $336M and dividends paid were $267M in the first half. The company repurchased another 2.2M shares for $146M between quarter-end and September 4.
Outlook, commentary and risks
- No specific company revenue or earnings guidance is stated in the provided filing text. Management said available liquidity was expected to fund operations, anticipated capital expenditures, shareholder returns and strategic initiatives, while cautioning that spending could be limited if liquidity proved insufficient.
- Management reported $155M of annualized cost reductions and efficiencies in Q2, bringing cumulative reductions to $730M and surpassing its $600M target for the end of FY2021.
- Tariffs were a key uncertainty. Management estimated China-sourced purchases at approximately 60% of cost of goods sold, but expected mitigation through accelerated purchasing, vendor sourcing changes, assortment, pricing and promotions. It said the ultimate effect was difficult to predict given trade negotiations and possible tariff changes.
- Other disclosed risks include competition, vendor and product availability, consumer demand, technology and product cycles, supply-chain interruptions, cybersecurity and privacy, labor costs, acquisitions, and foreign-exchange and interest-rate exposure. Management estimated currency movements reduced revenue by $10M in Q2 and $37M in the first half, with no net-earnings impact in either period.
- Contingencies: the filing says other ordinary-course legal proceedings were not expected to materially affect results, and accrued amounts were not material. A previously disclosed securities action and related derivative matters were closed.
Important facts for investors to verify
- Whether slower comparable-sales growth, particularly in International and select product categories, persisted after the quarter.
- The realized effect of tariffs on pricing, product costs, demand and margins, versus management’s mitigation expectations.
- Cash conversion and working-capital trends, which management said drove much of the year-over-year decline in operating cash flow.
- Future restructuring costs and the operating benefits of the U.S. retail-model changes and cost-reduction initiatives.
- Performance and integration costs of CST and BioSensics, along with the economics of ongoing share repurchases and dividends.