Best Buy Co., Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended February 3, 2018, including a 53rd week in Q4; the prior fiscal year had 52 weeks. Results are for continuing operations unless noted. Best Buy sells technology products and services through stores and digital channels in the U.S., Canada and Mexico. Its reportable segments are Domestic and International.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $42.151 billion | $39.403 billion |
| Comparable sales growth | 5.6% | 0.3% |
| Gross profit / rate | $9.876 billion / 23.4% | $9.440 billion / 24.0% |
| Operating income / rate | $1.843 billion / 4.4% | $1.854 billion / 4.7% |
| Net earnings from continuing operations | $999 million | $1.207 billion |
| Diluted EPS from continuing operations | $3.26 | $3.74 |
| Cash from operating activities | $2.141 billion | $2.557 billion |
| Capital expenditures | $688 million | $580 million |
FY2018 revenue increased 7.0%, including approximately $760 million from the extra week; comparable sales contributed 5.3 percentage points to reported revenue growth. Domestic revenue was $38.662 billion, up 6.7%, and International revenue was $3.489 billion, up 10.6% (including favorable currency effects). U.S. online revenue was $6.0 billion and grew 21.8% on a comparable basis.
Cash and cash equivalents plus short-term investments totaled $3.133 billion at year-end, down from $3.921 billion. Total debt, including current debt and lease obligations, was $1.355 billion; the company had no borrowings on its $1.25 billion revolving facility. The current ratio was 1.3, versus 1.5. The $500 million notes due August 2018 were classified as current debt. Operating cash flow declined, primarily reflecting inventory purchasing and payment timing. Management said existing liquidity and operating cash flow were sufficient for operations, investments, repurchases and dividends.
Material changes and notable items
- Revenue and comparable sales strengthened materially, while gross margin fell 0.6 percentage point and operating income declined $11 million. Lower warranty-plan profit-share revenue and prior-year CRT settlement proceeds contributed to the margin pressure.
- Net earnings from continuing operations fell 17% and diluted EPS declined from $3.74 to $3.26, principally reflecting $283 million of provisional tax expense from the Tax Cuts and Jobs Act. The charge included $209 million for deemed repatriation and $74 million primarily for deferred-tax remeasurement; the final tax impact remained subject to refinement.
- FY2018 included $80 million of one-time employee bonuses and a $20 million Best Buy Foundation contribution related to tax reform. Non-GAAP operating income was $1.953 billion and non-GAAP diluted EPS was $4.42; these are management-defined measures, not substitutes for GAAP results.
- The company repurchased 35.1 million shares for approximately $2.0 billion. On March 1, 2018, it announced a 32% increase in the quarterly dividend to $0.45 per share and plans to repurchase $1.5 billion of shares in FY2019.
- Q4 revenue was $15.363 billion, comparable sales grew 9.0%, operating income was $872 million and continuing-operations net earnings were $364 million. The extra week and holiday seasonality affect year-over-year comparability.
Outlook, risks and contingencies
Management launched its “Best Buy 2020: Building the New Blue” strategy, emphasizing services, customer experience, digital capabilities and supply-chain investment. FY2019 cash capital expenditures were estimated at $850–$900 million. The filing does not provide a clear full-year revenue or earnings guidance figure. Best Buy announced plans to close all 257 U.S. Best Buy Mobile stand-alone stores, mostly in the first half of FY2019, and expected total pre-tax restructuring charges of $55–$65 million.
Key risks include intense price and online competition, rapid product obsolescence and shifting consumer demand, dependence on a concentrated supplier base (five suppliers represented approximately 56% of merchandise purchases), holiday-season concentration, and potential disruption to supply chains, technology systems or cybersecurity. Other exposures include labor and lease costs, promotional financing and third-party service providers, and tax-law uncertainty. A shareholder securities action remained pending; the company said reasonably possible losses, if any, could not be estimated. Other ordinary-course legal proceedings were not expected to have a material effect. Deloitte issued unqualified opinions on the financial statements and internal controls; management reported no material weaknesses.
Important facts for investors to verify
- How much of sales growth reflects underlying demand versus the extra week, currency, and changing category mix.
- Whether gross-margin pressure and declining warranty profit-share revenue persist, and whether service initiatives improve profitability.
- The final accounting and cash-tax effects of tax reform, including the provisional $283 million charge.
- Execution costs and savings from the Best Buy Mobile closures, and the company’s ability to fund planned investment and shareholder returns while maintaining liquidity.
- Progress against FY2019 capital-spending plans and the August 2018 note maturity; the filing gives no full-year earnings guidance.