Best Buy Co., Inc. — Form 10-Q Summary
Business context and reporting period. Best Buy operates in the U.S., Canada and Mexico through Domestic and International segments, selling technology products and services through stores and online. This filing covers the 13 weeks ended May 5, 2018 (fiscal 2019 first quarter), compared with the 13 weeks ended April 29, 2017. Results are seasonal; the company says a large share of annual revenue and earnings is typically generated in the holiday-season fourth quarter.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $9.109 billion | $8.528 billion |
| Comparable sales growth | 7.1% | 1.6% |
| Gross profit / margin | $2.125 billion / 23.3% | $2.022 billion / 23.7% |
| Operating income / margin | $265 million / 2.9% | $300 million / 3.5% |
| Net earnings | $208 million | $188 million |
| Diluted EPS | $0.72 | $0.60 |
| Cash from operating activities | $204 million | $243 million |
- Revenue increased 6.8%; comparable sales contributed 6.7 percentage points and foreign exchange 0.4 points, partly offset by non-comparable sales.
- Gross margin contracted 0.4 percentage points, primarily from Domestic mobile-phone margin pressure. Operating margin fell 0.6 points, including $30 million of restructuring charges. SG&A as a share of revenue improved 0.1 points to 20.1%.
- Net earnings rose despite lower operating income, principally as income tax expense fell to $49 million from $104 million. The effective tax rate was 19.2%, versus 35.6%, reflecting the Tax Act and higher excess tax benefits from stock-based compensation.
- Domestic revenue grew 6.3% and comparable sales rose 7.1%; online comparable sales increased 12.0%. International revenue grew 13.1%, including 6.4% comparable sales growth and a 5.0% favorable currency impact, but the segment recorded a $2 million operating loss.
Cash, debt and capital allocation
- At May 5, 2018, cash and cash equivalents were $1.848 billion and short-term investments were $785 million; together they totaled $2.633 billion. The current ratio was 1.3.
- Operating cash flow was $204 million, down from $243 million, mainly due to working-capital timing, including receivable collections and incentive-compensation payments. Investing activities provided $1.073 billion, largely reflecting $1.245 billion of investment sales; financing used $516 million.
- Total debt was $1.342 billion, including $550 million classified as current. The $500 million 2018 Notes mature August 1, 2018. The company was evaluating repayment using cash or new debt. Its new $1.25 billion revolving credit facility, expiring in April 2023, was undrawn; the company reported covenant compliance.
- Best Buy repurchased 5.6 million shares for $399 million and paid $128 million in dividends; the quarterly dividend was $0.45 per share, up from $0.34. Management announced an intent to repurchase at least $1.5 billion of shares in fiscal 2019. It repurchased a further 1.6 million shares for $120 million through June 5, after quarter-end.
Material changes, outlook and risks
- On March 1, 2018, Best Buy announced plans to close all 257 remaining U.S. Best Buy Mobile stand-alone stores as the mobile business economics had changed and the model was less compelling than sales through core stores and online. It closed 152 in the quarter and recorded $30 million in restructuring charges, primarily facility closure costs.
- Management described first-quarter comparable-sales growth as broad-based and attributed performance to consumer confidence, product innovation and its customer value proposition. Its Best Buy 2020 strategy emphasizes expanding offerings, improving online and in-home experiences, investing in technology, people and supply chain, and continuing cost reduction. No specific consolidated financial guidance is provided in the filing.
- Management believes available liquidity and operating cash generation will be sufficient for operations, anticipated capital expenditures, strategic initiatives, repurchases and dividends, while cautioning that weaker cash generation or reduced borrowing access could require spending limits.
- Risks highlighted include consumer and macroeconomic conditions, competitive pricing and promotions, vendor and product availability, execution of growth and cost initiatives, supply-chain disruption, foreign exchange, tax-law uncertainty, data-system security and employee retention. The company reported ongoing securities litigation; it says potential losses cannot be estimated. Other legal proceedings were not expected to have a material effect.
- Adoption of the new revenue-recognition standard increased opening retained earnings by $73 million. Its reported-quarter effect was small: revenue was $9 million higher and net earnings $1 million lower than they would have been without adoption. The company expects the ongoing impact to be immaterial.
Important facts for investors to verify
- Whether sales momentum and online growth persist, and whether mobile-phone margin pressure continues.
- How the $500 million notes due August 2018 are funded and the resulting effect on liquidity and interest expense.
- Execution, remaining costs and expected benefits of the Best Buy Mobile closures and the broader Best Buy 2020 investments.
- Whether operating cash flow improves as working-capital timing reverses; distinguish investment-sale proceeds from recurring operating cash generation.
- Future effects of the Tax Act, including unresolved GILTI accounting, and any material developments in the disclosed litigation.