Best Buy Co., Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended February 2, 2019 (52 weeks). The filing is an annual report, not a standalone Q4 filing; quarterly results are also shown below. Best Buy operates in the U.S., Canada and Mexico through Domestic and International segments, selling consumer technology products and services through stores, online channels and in-home services.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $42.879 billion | $42.151 billion |
| Comparable sales growth | 4.8% | 5.6% |
| Gross profit / margin | $9.961 billion / 23.2% | $9.876 billion / 23.4% |
| Operating income / margin | $1.900 billion / 4.4% | $1.843 billion / 4.4% |
| Net earnings from continuing operations | $1.464 billion | $999 million |
| Diluted EPS from continuing operations | $5.20 | $3.26 |
| Operating cash flow | $2.408 billion | $2.141 billion |
| Capital expenditures | $819 million | $688 million |
FY2018 included an extra week, contributing approximately $760 million of revenue; consequently, reported FY2019 revenue growth of 1.7% is not directly comparable to the underlying sales trend. FY2019 non-GAAP diluted EPS was $5.32, up 20.4% from $4.42; non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Q4 FY2019: Revenue was $14.801 billion, comparable sales grew 3.0%, operating income was $978 million, net earnings were $735 million and diluted EPS was $2.69. The fourth quarter remains particularly important because of holiday-season sales.
Segments and key operating metrics
- Domestic: Revenue of $39.304 billion, up 1.7%; comparable sales grew 4.8%. Online revenue was $6.528 billion, or 16.6% of segment revenue, with comparable online sales growth of 10.5%. Operating income was $1.797 billion, up from $1.752 billion.
- International: Revenue of $3.575 billion, up 2.5%; comparable sales grew 4.6%. Currency movements reduced reported revenue growth by 1.9 percentage points. Operating income increased to $103 million from $91 million.
- Domestic comparable sales increased across all reported categories; appliances rose 9.9% and services 7.7%. Management attributed growth broadly to execution, consumer conditions and category demand.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.980 billion at year-end, compared with $1.101 billion; FY2018 also had $2.032 billion of short-term investments, versus none in FY2019. The current ratio declined to 1.2 from 1.3.
- Long-term debt, including current portion, was reported at $1.388 billion; principal notes outstanding were $650 million due in 2021 and $500 million due in 2028. The company had no borrowings on its $1.25 billion revolving facility and was compliant with its covenants.
- Operating cash flow increased to $2.408 billion. Cash used for share repurchases was approximately $1.505 billion and dividends paid were $497 million.
- Operating lease obligations totaled $2.961 billion, excluding an estimated $0.8 billion for taxes and common-area maintenance. Total contractual obligations were $7.305 billion.
- The company acquired GreatCall for net cash consideration of $787 million. It repurchased 21.2 million shares during FY2019 and announced a new $3.0 billion repurchase authorization after year-end. The quarterly dividend was raised from $0.45 to $0.50 per share, effective with the announced increase.
Changes, outlook and material items
- Net earnings rose substantially, principally reflecting FY2018’s $283 million Tax Act charge and a lower FY2019 effective tax rate (22.4%, versus 45.0%). FY2019 operating margin remained 4.4%; gross margin declined 0.2 percentage points.
- Best Buy closed all 257 remaining U.S. standalone Best Buy Mobile stores during FY2019, recording $46 million of net restructuring charges. Management said the mobile model was more economically compelling within core stores and online.
- GreatCall was acquired in October 2018 to expand connected health services for aging consumers. The company reported $35 million of acquisition-related transaction costs and intangible amortization combined; the acquisition added $490 million of goodwill after measurement-period adjustments. Management noted greater uncertainty around GreatCall goodwill valuation, although no impairment was recorded.
- Management reported $265 million of annualized cost reductions and efficiencies during FY2019, bringing cumulative reductions to $500 million toward a $600 million goal by the end of FY2021. FY2020 priorities include growing Total Tech Support and Health, expanding In-Home Advisors, improving digital and fulfillment capabilities, and further reducing costs. The filing does not provide a clear quantified FY2020 financial forecast.
- Management said available liquidity should fund operations, anticipated capital expenditures, shareholder returns and strategic initiatives, while cautioning that cash generation and access to financing are not assured. FY2019 capital spending focused on e-commerce, IT, stores and supply chain.
- Unusual items include the acquisition, $46 million restructuring charges, $35 million GreatCall-related charges, $7 million of employee bonuses linked to tax savings, and $25 million of subsequent Tax Act adjustments. The FY2019 adoption of new revenue-recognition guidance increased opening retained earnings by $73 million; its reported-year impact reduced net earnings by $7 million.
Principal risks and contingencies
- Intense price and delivery competition, rapid product changes, margin pressure, and reliance on a concentrated supplier base; the five largest suppliers represented approximately 51% of merchandise purchases.
- Execution and liability risks from expanded services and healthcare offerings, including GreatCall’s emergency and monitoring services, customer data protection and regulatory compliance.
- Cybersecurity, information-system interruptions, privacy regulation, supply-chain disruption, tariffs, labor-cost pressures, and macroeconomic changes could affect operations and profitability.
- Lease commitments and store portfolio decisions may constrain cash flows; the company also identified goodwill impairment risk relating to GreatCall.
- The company disclosed ongoing legal proceedings. A longstanding securities class action was dismissed with prejudice in March 2019; the filing said reasonably possible losses in related remaining matters could not be estimated. Other ordinary-course proceedings were not expected to have a material effect based on management’s assessment.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective controls and no material weaknesses.
Important facts for investors to verify
- Underlying sales momentum and margin trends, separating comparable-sales growth from the effect of FY2018’s extra week, store closures and foreign exchange.
- GreatCall’s contribution to revenue, cash generation and operating results, and assumptions supporting its goodwill valuation.
- Whether cost reductions, service growth and supply-chain investments deliver returns sufficient to offset labor, transportation and price-competition pressures.
- Cash deployment and balance-sheet capacity after share repurchases, dividends, acquisition spending and substantial lease obligations.
- Future developments in tax contingencies, legal proceedings, privacy and cybersecurity exposure, and relevant regulatory or trade changes.