Best Buy reports better-than-expected fourth-quarter results, will close mobile stores

Best Buy reported 9% comparable sales growth in the fourth quarter, bringing the total to 5.6% for the year.

The chain also filed an 8K document revealing it will close all remaining 257 Best Buy Mobile standalone stores in the United States by May 31, 2018.

The earnings release is reproduced below:

Best Buy reports better-than-expected fourth quarter results

Enterprise Comparable Sales Increased 9.0%

GAAP Diluted EPS of $1.23

Non-GAAP Diluted EPS of $2.42

Announces FY19 Non-GAAP Diluted EPS Guidance of $4.80 to $5.00

Increases Quarterly Dividend 32% to $0.45 per Share

MINNEAPOLIS–(BUSINESS WIRE)–Best Buy Co., Inc. (NYSE: BBY) today announced results for the 14-week fourth quarter (“Q4 FY18”) and 53-week year ended February 3, 2018 (“FY18”), as compared to the 13-week fourth quarter (“Q4 FY17”) and 52-week year ended January 28, 2017 (“FY17”). The company reported Q4 FY18 GAAP diluted earnings per share from continuing operations of $1.23, which included the negative impact from items related to the Tax Cuts and Jobs Act of 2017 (“tax reform”) of approximately $1.17 in diluted earnings per share. Non-GAAP diluted earnings per share from continuing operations for Q4 FY18 were $2.42, an increase of 25% from $1.93 in Q4 FY17.

For GAAP to non-GAAP reconciliations, please refer to the attached supporting schedule titled “Reconciliation of Non-GAAP Financial Measures.”

“We are excited to report strong results for the fourth quarter and the year,” said Hubert Joly, Best Buy chairman and CEO. “We are especially proud of our 9.0% comparable sales growth in the quarter, which brings our annual comparable sales growth to 5.6% for the year. Customers are responding very positively to our Best Buy 2020 strategy, and I want to enthusiastically thank all our associates for their great work in delivering these results. The level of energy and dedication to serving customers that I see across the company is truly inspiring.”

Best Buy’s CFO, Corie Barry, commented, “The comparable sales growth of 9.0% in the quarter is the result of the strong execution of our strategy combined with better product availability, a continued healthy consumer confidence and positive macro conditions, strength in the gaming category, and a favorable competitive environment, as we benefitted from the exit or decline of certain competitors.”

Barry continued, “From a profitability standpoint, in the Domestic segment, which makes up over 90% of the Enterprise operating income in Q4 FY18, the operating income rate declined. We delivered a flat gross profit rate while our SG&A expenses, excluding tax reform-related expenses, grew slightly more than the revenue growth rate. This is due to the increase in the incentive compensation expense for more than 85,000 store and corporate employees as a result of the very strong performance throughout the year, and to the investments we’ve made in the business. These expenses were partially offset by efficiencies and cost savings. As it relates to tax rate impacts in the quarter, the GAAP tax rate was higher than we expected primarily due to tax reform-related items. The non-GAAP tax rate was lower than we expected due to both the change in the effective annual tax rate as a result of tax reform and other discrete items.”

Barry continued, “For the full year FY19, we are expecting comparable sales to be flat to growth of 2% on top of the 5.6% growth we delivered in FY18. As we continue to invest in our Best Buy 2020 strategy, we are expecting the operating income rate to be approximately 4.5%, which is flat to FY18 on a comparable 52-week basis. Our non-GAAP diluted EPS is expected to increase in the range of 9% to 13% due to a lower tax rate as a result of tax reform and a lower share count as we continue to return capital to shareholders through share repurchases.”

Barry continued, “In Q1 FY19, we are expecting comparable sales growth of 1.5% to 2.5% and non-GAAP diluted EPS growth in the range of 13% to 22%. I would like to call out the following factors impacting our Q1 guidance. First, we estimate that the negative impacts from calendar shifts total approximately $100 million in Domestic revenue, with the biggest driver being the timing of the Super Bowl, as related sales were pulled forward into Q4 FY18 versus Q1 FY19. Second, increased investments in supply chain, as well as higher transportation costs, are expected to add approximately 25 basis points of Domestic gross profit pressure. Third, last year’s first quarter included approximately $8 million of Domestic gross profit due to a legal settlement that will not recur. Fourth, we expect the International gross profit rate pressure we saw in Q4 FY18 to continue into the first quarter.”

FY19 Financial Guidance³

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 providing the following full year FY19 financial outlook:

• Enterprise revenue of $41.0 billion to $42.0 billion
• Enterprise comparable sales of flat to 2% growth
• Enterprise non-GAAP operating income rate of approximately 4.5%⁴, which is flat to FY18 on a 52-week basis
• Non-GAAP effective income tax rate of approximately 25.0%⁴
• Non-GAAP diluted EPS of $4.80 to $5.00, growth of 9% to 13%⁴

Best Buy is providing the following Q1 FY19 financial outlook:

• Enterprise revenue of $8.65 billion to $8.75 billion
• Enterprise comparable sales growth of 1.5% to 2.5%
• Domestic comparable sales growth of 1.5% to 2.5%
• International comparable sales of flat to 3.0% growth
• Non-GAAP effective income tax rate of 22.0% to 22.5%⁴
• Diluted weighted average share count of approximately 290 million
• Non-GAAP diluted EPS of $0.68 to $0.73⁴

FY21 Financial Targets³

While it would be premature to update the FY21 Enterprise revenue and operating income targets the company introduced at its Investor Day in September 2017, Best Buy is updating the FY21 non-GAAP EPS target to $5.50 to $5.75⁴ primarily as a result of tax reform.

Domestic Segment Q4 FY18 Results

Domestic Revenue

Domestic revenue of $14.0 billion increased 13.4% versus last year driven by comparable sales growth of 9.0% and approximately $715 million of revenue from the extra week, partially offset by the loss of revenue from the closure of 18 large-format stores.

From a merchandising perspective, the company generated comparable sales growth across most of its categories, with the largest drivers being mobile phones, gaming, appliances, smart home, wearables and home theater.

Domestic online revenue of $2.8 billion increased 17.9% 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 140 basis points to 20.0% versus 18.6% last year.

Domestic Gross Profit Rate

Domestic gross profit rate of 22.3% was flat to last year. Rate pressure in mobile phones, the impact of mixing into certain lower-margin products and the approximate 15-basis point negative impact from the lower periodic profit sharing benefit from the company’s services plan portfolio⁵ were offset by gross profit optimization related to lower store price erosion.

Domestic Selling, General and Administrative Expenses (“SG&A”)
Domestic GAAP SG&A expenses were $2.31 billion, or 16.5% of revenue, versus $1.94 billion, or 15.7% of revenue, last year. On a non-GAAP basis, SG&A expenses were $2.22 billion, or 15.8% of revenue, versus $1.94 billion, or 15.7% of revenue, last year. Both GAAP and non-GAAP SG&A increased primarily due to (1) higher incentive compensation; (2) the impact of the extra week; (3) growth investments; and (4) higher variable costs due to increased revenue. These increases were partially offset by the flow-through of cost reductions. Additionally, GAAP SG&A expense in Q4 FY18 was higher by $95 million due to expenses related to tax reform, which included $75 million related to employee bonus expense and a $20 million charitable donation to the Best Buy Foundation.

International Segment Q4 FY18 Results

International Revenue
International revenue of $1.38 billion increased 20.3% versus last year. This increase was primarily driven by (1) comparable sales growth of 9.9% due to growth in both Canada and Mexico; (2) approximately 580 basis points of positive foreign currency impact; and (3) approximately $45 million of revenue from the extra week.

International Gross Profit Rate
International gross profit rate was 22.4% versus 24.6% last year. The 220-basis point decline was primarily driven by a lower year-over-year gross profit rate in Canada due to (1) lower sales in the higher-margin services category primarily driven by the launch of Canada’s total tech support offer, a long-term recurring service revenue model; (2) a decreased gross profit rate in the home theater category; and (3) an approximate 15-basis point negative impact from a lower periodic profit sharing benefit from the company’s service plan portfolio.⁵

International SG&A
International GAAP SG&A expenses were $228 million, or 16.6% of revenue, versus $200 million, or 17.5% of revenue, last year. On a non-GAAP basis, SG&A expenses were $223 million, or 16.2% of revenue, versus $200 million, or 17.5% of revenue, last year. Both GAAP and non-GAAP SG&A increased primarily due to the negative impact of foreign exchange rates and the impact of the extra week. Additionally, GAAP SG&A expense was $5 million higher due to employee bonus expense related to tax reform.

Increased Dividends and Share Repurchases

In Q4 FY18, the company returned a total of $965 million to shareholders through share repurchases of $866 million and dividends of $99 million. In FY18, the company returned a total of $2.4 billion to shareholders through share repurchases of $2.0 billion and dividends of $409 million.

Today, the company announced its Board of Directors approved a 32% increase in the regular quarterly dividend to $0.45 per share, effective immediately, and a share repurchase plan of at least $1.5 billion for FY19, which reflects an updated two-year plan of $3.5 billion compared to the original $3.0 billion two-year plan announced at the beginning of FY18.

The regular quarterly dividend will be payable on April 12, 2018 to shareholders of record as of the close of business on March 22, 2018.

Income Taxes

Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law introducing significant changes to U.S. tax law. Among other things, it reduced the U.S. statutory corporate tax rate from 35% to 21%, effective January 1, 2018, and introduced a one-time mandatory repatriation tax on unremitted earnings of foreign subsidiaries. As a result, the company recorded a provisional income tax expense of $283 million during Q4 FY18. The provisional amount includes $209 million related to the repatriation tax and $74 million due to the revaluation of the company’s deferred tax balances at the lower tax rate.

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 Q4 FY18 was a benefit of approximately $8 million, or $0.03 of GAAP and non-GAAP diluted EPS. The year-to-date benefit is approximately $27 million, or $0.09 of GAAP and non-GAAP diluted EPS