Best Buy Co., Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the 13 weeks ended April 30, 2016; filed June 8, 2016. Comparisons are with the 13 weeks ended May 2, 2015. Results are seasonal, with a greater share of sales and earnings typically generated in the holiday-season fourth quarter.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $8.443 billion | $8.558 billion |
| Comparable sales | -0.1% | +0.6% |
| Gross profit / margin | $2.145 billion / 25.4% | $2.030 billion / 23.7% |
| Operating income / margin | $372 million / 4.4% | $86 million / 1.0% |
| Non-GAAP operating income / margin | $245 million / 2.9% | $219 million / approximately 2.6% |
| Net earnings from continuing operations | $226 million | $37 million |
| Diluted EPS from continuing operations | $0.69 GAAP; $0.44 non-GAAP | $0.10 GAAP; $0.37 non-GAAP |
| Cash from operating activities | $483 million | -$10 million |
Revenue declined 1.3% overall: comparable sales contributed -0.1%, non-comparable sales -0.7%, and foreign exchange -0.5%. The gross margin improvement reflected stronger Domestic and International rates. SG&A was $1.744 billion, or 20.7% of revenue, versus $1.766 billion, or 20.6%.
Domestic revenue was $7.829 billion (-0.8%); comparable online sales increased 23.9% to $832 million, representing 10.6% of Domestic revenue. Appliances comparable sales rose 14.3% and consumer electronics 5.6%; computing and mobile phones fell 3.5%, entertainment fell 11.6%, and services fell 10.7%. International revenue was $614 million (-8.1%), including a 6.9% adverse currency impact; constant-currency revenue declined 1.2%. International operating income was approximately break-even versus a $218 million loss a year earlier.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.845 billion and short-term investments $1.220 billion, totaling $3.065 billion at quarter-end. The current ratio was 1.5.
- Operating cash flow was $483 million; investing activities used $42 million and financing activities used $612 million. Cash and equivalents decreased $131 million during the quarter. Management attributed stronger operating cash flow partly to inventory-payment timing, the Super Bowl calendar shift and income-tax payment timing.
- Total debt, including financing and capital lease obligations, was $1.378 billion. The $350 million 2016 Notes were repaid in March using cash; $500 million of notes mature in 2018 and $650 million in 2021. The $1.25 billion revolving facility was undrawn, and the company reported compliance with its covenants.
- The company repurchased 3.3 million shares for $101 million. It declared and paid a $0.45-per-share special dividend and a $0.28 regular quarterly dividend. Management intended to repurchase $1.0 billion of shares in fiscal 2017 and fiscal 2018; approximately $2.9 billion remained under the existing authorization at quarter-end.
Material changes, outlook and notable items
- GAAP operating income rose $286 million year over year, principally reflecting lower restructuring charges—$29 million versus $178 million—and higher gross profit. Prior-year charges included significant Canadian brand-consolidation costs.
- Current-quarter Domestic operating income benefited from $161 million in net cathode-ray-tube (CRT) litigation settlement proceeds. The company excludes CRT settlements from its non-GAAP results; non-GAAP diluted EPS from continuing operations was $0.44, up from $0.37.
- Management said first-quarter results were better than expected, citing essentially flat Domestic comparable sales versus guidance for a 1%–2% decline and strong online performance. It reaffirmed fiscal 2017 outlook for approximately flat revenue and non-GAAP operating income, with EPS growth driven by share repurchases. It did not raise guidance, noting Q1 represented less than 15% of annual earnings and uncertainty around product launches.
- Renew Blue Phase 2 targets $400 million of cost reductions and gross-profit optimization over three years; management reported $50 million achieved in Q1 and $200 million cumulatively. Q1 charges included $27 million for the program, primarily employee termination benefits and asset impairments.
- Management cited ongoing softness in mobile phones and tablets, while expecting new phone launches could renew category growth. It also described pricing investments and lower extended-warranty repair claims as factors reducing services revenue.
- The CRT matter was resolved with $161 million net proceeds in Q1; $127 million had been received and $34 million was expected by January 2017 or earlier. The company also sold a remaining Shanghai property in May 2016 and expected to recognize a gain in Q2; the filing does not provide a clear amount for that expected gain.
- A securities class action’s certification order was reversed by the appeals court; a rehearing petition was denied June 1, 2016. The company disputes the claims and said reasonably possible losses, if any, could not be estimated. Other ordinary-course proceedings were not expected to have a material effect based on management’s assessment.
Key investor verification points
- Assess how much of the GAAP earnings improvement came from the $161 million CRT settlement and reduced prior-year restructuring, and compare with recurring non-GAAP performance.
- Track whether online growth, appliance strength and Canadian customer retention persist, and whether mobile, tablet and services weakness worsens.
- Monitor progress toward Renew Blue Phase 2’s $400 million target, including costs incurred and whether savings translate into sustainable margins.
- Evaluate cash generation and liquidity after debt repayment, dividends and planned buybacks; review the assumptions underlying the reaffirmed full-year outlook.
- Follow receipt of the remaining CRT settlement proceeds, the Q2 Shanghai property-sale gain, and developments in the securities litigation.