Enterprise Comparable Sales Increased 4.4%
Diluted EPS of $0.78 Increased 30%
Raising FY18 Financial Outlook
MINNEAPOLIS–(BUSINESS WIRE)–Best Buy Co., Inc. (NYSE: BBY) today announced results for the third quarter ended October 28, 2017 (“Q3 FY18”), as compared to the third quarter ended October 29, 2016 (“Q3 FY17”). The company reported diluted earnings per share from continuing operations of $0.78, an increase of 30% from $0.60 in Q3 FY17.
|Q3 FY18||Q3 FY171|
|Revenue ($ in millions)2|
|Enterprise comparable sales % change||4.4%||1.8%|
|Domestic comparable sales % change||4.5%||1.8%|
|Domestic comparable online sales % change||22.3%||24.1%|
|International comparable sales % change||3.8%||N/A|
|GAAP operating income as a % of revenue||3.8%||3.5%|
|Non-GAAP operating income as a % of revenue||3.7%||3.5%|
|Diluted Earnings per Share (EPS):|
|GAAP diluted EPS from continuing operations||$0.78||$0.60|
|Non-GAAP diluted EPS from continuing operations||$0.78||$0.60|
For GAAP to non-GAAP reconciliations, please refer to the attached supporting schedule titled “Reconciliation of non-GAAP Financial Measures”.
“In the third quarter, we delivered strong top and bottom line results with 4.4% comparable sales growth and 30% EPS growth,” said Hubert Joly, Best Buy chairman and CEO. “Technology innovation is fueling demand and our strategy is resonating with our customers. We are also making significant progress against our Best Buy 2020 strategy and are excited about the opportunities for long-term value creation. And while we are investing in key initiatives and capabilities, we are also able to generate significant returns for our shareholders through the growth of our EPS and our capital allocation strategy.”
Joly continued, “Our Q3 results include the negative impact of two significant factors. First, despite our moderate expectations for mobile phone launches in the quarter, revenue in the mobile category was materially lower than expected. This was due to the fact that a major new phone did not launch until November, which is in our Q4. The related revenue impact in the quarter was more than $100 million. Second, like most retailers, we felt the impact of the natural disasters in south Texas, Florida, Puerto Rico and Mexico. We estimate the loss of revenue impacted our Enterprise comparable sales by 15 to 20 basis points, and that the related costs negatively impacted our EPS by approximately $0.03.”
Joly concluded, “Looking ahead, we are very excited about our plans for holiday, including a curated assortment of great new technology products, free shipping with no minimums, and a range of new capabilities such as our new in-home advisor program, an updated gift center, and same-day delivery in 40 cities. We believe we are well positioned for a successful season and therefore, we are raising our financial outlook for the fourth quarter and for the year. I would like to thank all of our associates for their work this last quarter, and for what they will do this holiday season.”
Best Buy CFO Corie Barry commented, “Today we are raising our full year revenue growth outlook to 4.0% to 4.8% versus our previous outlook of approximately 4.0% and raising our non-GAAP operating income growth outlook to 7.0% to 9.5%3 versus our previous outlook of 4.0% to 9.0%.”
Barry continued, “As a result, we are raising our Q4 outlook versus what was implied in the expectations provided on our last earnings call. Our Q4 guidance reflects a number of factors. First, as we discussed last quarter, we made strategic decisions to proactively make additional investments in the back half of the year to continue to drive the Best Buy 2020 strategy forward. Those additional investments are in areas such as customer choice in shipping, eCommerce and our long-term strategic vision for supply chain. Second, the outlook includes approximately $20 million, or $0.04 per share, of lower profit sharing benefit than we received in Q4 FY17. Third, our fourth quarter and full year performance is expected to result in higher incentive compensation expenses in the fourth quarter compared to last Q4. This higher incentive compensation is due to both better performance this year, and the fact that we are lapping a reversal of incentive compensation expense in Q4 FY17 that adjusted accruals from earlier quarters of the year. Fourth, the extra week in the quarter adds approximately $100 million of additional SG&A expense.”
Barry concluded, “So far this year we have returned $1.45 billion in cash to our shareholders, including $1.14 billion in share repurchases and $310 million in dividends. We are pleased to announce that we are planning to spend approximately $2 billion on share repurchases this fiscal year, versus our original expectation of $1.5 billion.”
FY18 Financial Guidance
Note: FY18 has 53 weeks compared to 52 weeks in FY17. The extra week occurs in Q4 FY18.
Best Buy is providing the following Q4 FY18 financial outlook:
- Enterprise revenue of $14.2 billion to $14.5 billion
- Enterprise comparable sales growth of 1.0% to 3.0%
- Domestic comparable sales growth of 1.0% to 3.0%
- International comparable sales change of flat to 3.0%
- Non-GAAP effective income tax rate of 36.0% to 36.5%3
- Diluted weighted average share count of approximately 296 million
- Non-GAAP diluted EPS of $1.89 to $1.993
Best Buy is raising its full year FY18 financial outlook to the following:
- Enterprise revenue of $41.0 billion to $41.3 billion, or growth of 4.0% to 4.8%
- Enterprise non-GAAP operating income growth rate of 7.0% to 9.5%3
- Enterprise non-GAAP effective income tax rate of approximately 34.5%3
- On a 52-week basis, Enterprise revenue growth of approximately 3.0%
- On a 52-week basis, Enterprise non-GAAP operating income growth rate of 3.0% to 6.5%3
Domestic Segment Third Quarter Results
Domestic revenue of $8.5 billion increased 3.6% versus last year driven by comparable sales growth of 4.5%, partially offset by the loss of revenue from 10 large format and 44 Best Buy Mobile store closures.
From a merchandising perspective, the company generated growth across almost all of its categories, with the largest drivers of comparable sales being appliances, computing and smart home.
Domestic online revenue of $1.1 billion increased 22.3% on a comparable basis primarily due to higher conversion rates and higher average order values. As a percentage of total Domestic revenue, online revenue increased 190 basis points to 12.7% versus 10.8% last year.
Domestic Gross Profit Rate
Domestic gross profit rate was flat versus last year at 24.7%. Improved margin rates across multiple categories were offset by an approximately 25-basis point negative impact from lapping the $25 million Q3 FY17 periodic profit sharing benefit from the company’s service plan portfolio.4
Domestic Selling, General and Administrative Expenses (“SG&A”)
Domestic SG&A expenses were $1.75 billion, or 20.6% of revenue, versus $1.72 billion, or 21.0% of revenue, last year. SG&A increased $31 million primarily due to (1) expected increases in growth investments; (2) higher advertising expenses; and (3) higher variable costs due to increased revenue. These increases were partially offset by the flow-through of cost reductions. The rate decrease was driven by sales leverage.
International Segment Third Quarter Results
International revenue of $829 million increased 10.1%. This increase was primarily driven by (1) approximately 530 basis points of positive foreign currency impact; and (2) comparable sales growth of 3.8% due to growth in both Canada and Mexico.
International Gross Profit Rate
International gross profit rate was 22.2% versus 24.3% last year. The 210-basis point decline was primarily driven by a lower year-over-year gross profit rate in Canada due to lower sales in the higher-margin services category primarily driven by the launch of Canada’s total tech support offer, a long-term recurring revenue model.
International SG&A expenses were $181 million, or 21.8% of revenue, versus $170 million, or 22.6% of revenue, last year. The increase of $11 million was primarily driven by the negative impact of foreign exchange rates. The rate decrease was primarily driven by sales leverage.
Share Repurchases and Dividends
During Q3 FY18, the company returned a total of $469 million to shareholders through share repurchases and dividends. On a year-to-date basis, the company has returned a total of $1.45 billion to shareholders through share repurchases and dividends.
On March 1, 2017, the company announced the intent to spend $3 billion on share repurchases over a two-year period. In Q3 FY18, the company repurchased 6.4 million shares for a total of $367 million. On a year-to-date basis, the company has repurchased 21.8 million shares for a total of $1.14 billion. The company’s cumulative share repurchases, net of dilution from equity based awards, positively benefitted diluted EPS by approximately $0.04 in Q3 FY18.
On October 10, 2017, the company paid a quarterly dividend of $0.34 per common share outstanding, or $102 million.
Income Taxes – Adoption of Stock-Based Compensation Accounting Changes
In Q1 FY18, the company adopted Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which now requires all differences between the tax value and the book value for stock-based compensation to be recognized as either income tax expense or benefit as the shares vest or options are exercised or cancelled. The impact of this change on Q3 FY18 was a benefit of approximately $14 million, or $0.05 of GAAP and non-GAAP diluted EPS. The year-to-date benefit is approximately $19 million, or $0.06 of GAAP and non-GAAP diluted EPS. Future impacts could be positive or negative depending on the stock price, shares vested, or options exercised or cancelled in a given quarter. The company’s current expectation is that the full year impact will be a benefit to income tax expense.