Business context and reporting period
Best Buy Co., Inc. filed this Form 10-Q for the third quarter of fiscal 2018, the three months ended October 28, 2017. The company operates Domestic (U.S.) and International (Canada and Mexico) segments. Its business is seasonal, with a larger share of revenue and earnings typically generated in the holiday quarter; fiscal 2018 includes 53 weeks.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $9.320 billion | $8.945 billion | $26.788 billion | $25.921 billion |
| Comparable sales growth | 4.4% | 1.8% | 3.8% | 0.8% |
| Gross margin | 24.5% | 24.6% | 24.1% | 24.7% |
| Operating income | $350 million | $312 million | $971 million | $973 million |
| Operating margin | 3.8% | 3.5% | 3.6% | 3.8% |
| Net earnings | $239 million | $194 million | $636 million | $621 million |
| Diluted EPS | $0.78 | $0.61 | $2.05 | $1.92 |
Q3 revenue growth was 4.2%; nine-month growth was 3.3%. Q3 operating income improved despite a slightly lower gross margin, with management citing lower SG&A as a percentage of revenue. Nine-month operating income was essentially flat; the prior-year period included a net $161 million CRT/LCD settlement benefit, which affected comparisons.
Segments and channels
- Domestic: Q3 revenue rose 3.6% to $8.491 billion; comparable sales increased 4.5%. Online revenue was $1.077 billion, up 22.3% on a comparable basis and 12.7% of segment revenue. Segment operating income increased to $345 million from $298 million.
- International: Q3 revenue rose 10.1% to $829 million, including a 5.3% favorable currency impact; comparable sales increased 3.8%. Operating income declined to $5 million from $14 million, primarily reflecting lower gross margin and Canadian services-category mix.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $1.203 billion, down from $1.407 billion. Management attributed the decline mainly to working-capital timing, including inventory receipts and payments.
- Investing activities used $1.016 billion, including $489 million of capital expenditures and net purchases of investments. Financing activities used $1.335 billion, including $1.138 billion of share repurchases and $310 million of dividends paid.
- At October 28, cash and cash equivalents were $1.103 billion and short-term investments were $2.237 billion, totaling $3.340 billion. Current assets were $11.405 billion and current liabilities $9.152 billion; the reported current ratio was 1.2.
- Total debt was $1.329 billion, including $545 million classified as current. The $500 million 2018 Notes mature August 1, 2018. The company had no revolving-facility borrowings, reported covenant compliance, and had $1.25 billion of available facility capacity.
- Best Buy repurchased 21.9 million shares for $1.147 billion in the first nine months. Management expected approximately $2.0 billion of fiscal 2018 repurchases, above its original $1.5 billion expectation. The quarterly dividend was raised to $0.34 per share.
Outlook, commentary and risks
- Management said Q3 results were within the earnings guidance provided in August, but this filing does not state a new numerical earnings or revenue forecast.
- A major phone launch was delayed until November, contributing to weaker October sales of existing phone models; management estimated the Q3 revenue impact exceeded $100 million. Natural disasters in Texas, Florida, Puerto Rico and Mexico reduced comparable sales by an estimated 15–20 basis points and reduced earnings by approximately $0.03, including related costs.
- For the holiday season, management cited new products, promotional plans, free shipping with no minimum purchase, same-day shipping in 40 cities and nationwide availability of its In-Home Advisor program.
- Best Buy 2020: Building the New Blue includes investments in smart home, services, customer experience and supply chain capabilities. Management set a goal of $600 million in additional annualized cost reductions and gross-profit optimization by the end of fiscal 2021; $100 million had been achieved through Q3.
- Management expects the 2018 Notes to require repayment or refinancing and said it would evaluate funding from cash or new debt. Risks include consumer demand and preferences, competition and promotions, product launches and availability, currency, disasters, supply-chain disruption, execution of cost reductions and strategic investments, and tax matters.
- The company disclosed ongoing securities litigation relating to fiscal 2011 guidance. It intends to defend the claims; reasonably possible losses, if any, could not be estimated. Other ordinary-course legal proceedings were not expected to materially affect results.
Key facts for investors to verify
- Whether holiday-period sales and earnings offset the phone-launch timing impact and disaster-related costs.
- Whether comparable-sales growth can be sustained while protecting gross margins, particularly in International operations.
- Execution and returns on Best Buy 2020 investments, and progress toward the $600 million cost-reduction and gross-profit goal.
- Cash generation, working-capital needs, and the funding plan for the $500 million 2018 Notes maturity.
- Planned share repurchases and dividends relative to investment needs and liquidity.
- Potential developments in the securities litigation and any changes to the company’s stated inability to estimate reasonably possible losses.