Best Buy Tops Forecasts

November 20, 2018

Best Buy reported results for the third quarter ended November 3, 2018 (“Q3 FY19”). Q3 net income went up to $277 million from $239 million, with total revenue hitting $9.59 billion, up 2.9 percent. Not counting certain items, Best Buy earned 93 cents per share. Investors were looking for 85 cents per share and revenue of $9.57 billion.

The firm guided up full-year adjusted earnings of between $5.09 and $5.19 per share, from $4.95 to $5.10 per share.

“Our team just delivered another strong quarter with 4.3% comparable sales growth and better-than-expected earnings growth,” said Hubert Joly, Best Buy chairman and CEO. “Similar to the first half of the year, our topline performance was helped by a favorable environment and driven by how customers are responding to the unique and elevated experience we are building. We have continued to make significant progress against our Best Buy 2020: Building the New Blue strategy, including expanding our In-Home Advisor program, growing our Total Tech Support members and completing the acquisition of GreatCall, a leading connected health services provider for aging consumers. We are energized by our continued momentum and overall performance and see significant value-generation opportunity ahead of us by successfully enriching lives with technology and providing services and solutions that solve real customer needs.”

Joly continued, “The holiday season is here, and our team has put together a best-in-class assortment, prepared an amazing set of deals, and ensured we have great inventory availability across all the product categories we carry. In addition, we have continued to enhance our digital shopping experience and further improved our shipping speed, allowing us to delight customers with fast and free delivery. Customers can come to us online and use our Gift Center or talk to any of our Blue Shirt Associates, Geek Squad Agents or In-Home Advisors for help finding the perfect gift for everyone on their list this holiday.”

Best Buy CFO Corie Barry commented, “We are raising our full-year guidance for revenue and EPS to reflect the outperformance in the third quarter. Our guidance for Q4 is consistent with the expectations that were implied in the full-year guidance we provided last quarter. We expect comparable sales growth to be flat to up 3% and non-GAAP EPS in the range of $2.48 to $2.58.”

FY19 Financial Guidance

Note: FY19 has 52 weeks compared to 53 weeks in FY18. The extra week occurred in Q4 FY18 and was approximately $760 million in revenue and approximately $0.20 of non-GAAP diluted EPS.

Best Buy is raising its full-year FY19 financial outlook to the following:

  • Enterprise revenue of $42.5 billion to $42.9 billion
  • Enterprise comparable sales growth of 4.0% to 5.0%1
  • Enterprise non-GAAP operating income rate of approximately 4.5%2, flat to FY18 on a 52-week basis
  • Non-GAAP effective income tax rate of approximately 24.0%2
  • Non-GAAP diluted EPS of $5.09 to $5.192, growth of 15% to 17%, versus previous guidance of $4.95 to $5.10

Best Buy is providing the following Q4 FY19 financial outlook:

  • Enterprise revenue of $14.4 billion to $14.8 billion
  • Enterprise comparable sales growth of 0.0% to 3.0%
  • Domestic comparable sales growth of 0.0% to 3.0%
  • International comparable sales growth of 0.0% to 3.0%
  • Non-GAAP effective income tax rate of approximately 25.0%2
  • Diluted weighted average share count of approximately 275 million
  • Non-GAAP diluted EPS of $2.48 to $2.582

Domestic Segment Q3 FY19 Results

Domestic Revenue

Domestic revenue of $8.76 billion increased 3.1% versus last year, driven by comparable sales growth of 4.3%, partially offset by the loss of revenue from 287 Best Buy Mobile and 19 large-format store closures over the past year. The comparable sales growth of 4.3% included an approximate 70-basis point negative impact from a calendar shift resulting from the extra week in FY18.

From a merchandising perspective, the company generated comparable sales growth across multiple categories, with the largest drivers being mobile phones, gaming, appliances, wearables, headphones and smart home. These positive drivers were partially offset by a decline in the tablet category.

Domestic online revenue of $1.21 billion increased 12.6% on a comparable basis, primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased 110 basis points to 13.8% versus 12.7% last year.

Domestic Gross Profit Rate

Domestic gross profit rate was 24.4% versus 24.7% last year. The gross profit rate decline of approximately 30 basis points was driven primarily by higher supply chain costs, including both investments and higher transportation costs, and the national rollout of the Total Tech Support offer. These pressures were partially offset by improved product margin rates, which included the benefit of gross profit optimization initiatives.

Domestic Selling, General and Administrative Expenses (“SG&A”)

Domestic GAAP SG&A expenses were $1.82 billion, or 20.8% of revenue, versus $1.75 billion, or 20.6% of revenue, last year. On a non-GAAP basis, SG&A expenses were $1.81 billion, or 20.6% of revenue, versus $1.75 billion, or 20.6% of revenue, last year. Both GAAP and non-GAAP SG&A increased primarily due to: (1) growth investments, including specialty labor and depreciation; (2) higher incentive compensation; (3) GreatCall operating expenses; and (4) higher variable costs due to increased revenue. These increases were partially offset by cost reductions. Additionally, GAAP SG&A expenses in Q3 FY19 were higher by $18 million due to expenses related to the GreatCall acquisition, which included $13 million related to one-time transaction costs and $5 million related to the amortization of intangible assets.

International Segment Q3 FY19 Results

International Revenue

International revenue of $834 million increased 0.6% versus last year. This increase was primarily driven by comparable sales growth of 3.7%, due to both Canada and Mexico, and sales from six new large-format store locations opened in Mexico in the past year. These items were partially offset by approximately 460 basis points of negative foreign currency impact.

International Gross Profit Rate

International gross profit rate of 22.2% was flat to last year.

International SG&A

International SG&A was $178 million, or 21.3% of revenue, versus $181 million, or 21.8% of revenue, last year. SG&A decreased primarily due to the favorable impact of foreign exchange rates.

GreatCall Acquisition

On October 1, 2018, the company completed the acquisition of GreatCall, Inc. for net cash consideration of $792 million. GreatCall financial results are consolidated and reported within the Domestic segment for the approximately five-week stub period.

Dividends and Share Repurchases

In Q3 FY19, the company returned a total of $493 million to shareholders through dividends of $123 million and share repurchases of $370 million, or 4.8 million shares. On a year-to-date basis, the company has returned a total of $1.52 billion to shareholders through dividends of $376 million and share repurchases of $1.14 billion, or 15.4 million shares. On March 1, 2018, the company announced the intent to spend $1.5 billion on share repurchases during FY19.

Income Taxes

In Q3 FY19, the GAAP effective tax rate was 16.1% versus 30.4% last year. On a non-GAAP basis, the effective tax rate was 22.7% versus 30.4% last year. Both the GAAP and non-GAAP effective tax rates were lower due to the impacts from the Tax Cuts and Jobs Act of 2017, which included a reduction in the U.S. statutory corporate tax rate, partially offset by a decrease in excess tax benefits associated with stock-based compensation recorded in the current year period. Additionally, the GAAP effective tax rate included a benefit of approximately 690 basis points due to adjustments made to provisional tax expense recorded in Q4 FY18 associated with the enactment of the Tax Cuts and Jobs Act.

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