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Best Buy Q2 - Beats & Guides Up

August 29, 2017

Best Buy reported results for the second quarter ended July 29, 2017 (“Q2 FY18”), as compared to the second quarter ended July 30, 2016 (“Q2 FY17”). The company reported GAAP diluted earnings per share from continuing operations of $0.67, an increase of 20% from $0.56 in Q2 FY17. Non-GAAP diluted earnings per share from continuing operations were $0.69, an increase of 21% from $0.57 in Q2 FY17.

Investors only sought  63 cents per share in diluted earnings. Revenue was reported at $8.94 billion versus the Wall Street estimate of $8.66 billion. Same-store sales rose 5.4 percent, higher than the 2.2 percent growth which was sought.

“We are pleased today to report strong top and bottom line growth for the second quarter of fiscal 2018,” said Hubert Joly, Best Buy chairman and CEO. “Our higher-than-expected comparable sales of 5.4% were driven by stronger consumer demand for technology products and by the strong execution of our strategy. Against a backdrop of continued healthy consumer confidence, we believe broad-based product innovation is resonating with consumers and driving higher spend. And, with our effective merchandising and marketing activities, combined with our expert advice and service available online, in-store and in-home – we are garnering an increasing share of those dollars.”

Joly continued, “I want to thank all our associates across the U.S., Canada and Mexico for their hard work, dedication and customer focus as we Build the New Blue. Without them, none of this is possible.”

Best Buy CFO Corie Barry commented, “Today we are raising our topline guidance and are now expecting full year FY18 revenue growth of approximately 4.0% versus our previous outlook of 2.5%. On the profitability side, we are now expecting full year non-GAAP operating income growth3 of 4.0% to 9.0% versus our previous outlook of 3.5% to 8.5% growth. This updated guidance reflects stronger-than-originally-expected second half revenue performance with profitability roughly in line with our previous expectations. The increased topline expectations are being driven by the anticipation of continued positive industry and consumer momentum, coupled with the impact of product launches. From a profitability perspective, while our original full year guidance anticipated an increased level of investments for FY18, we have made strategic decisions to proactively make additional Q3 and Q4 investments to continue to drive our Best Buy 2020 strategy forward.”

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 Q3 FY18 financial outlook:

  • Enterprise revenue of $9.3 billion to $9.4 billion
  • Enterprise comparable sales growth of 4.5% to 5.5%
  • Domestic comparable sales growth of 4.5% to 5.5%
  • International comparable sales change of flat to 3.0%
  • Non-GAAP effective income tax rate of 32.0% to 32.5%
  • Diluted weighted average share count of approximately 305 million
  • Non-GAAP diluted EPS of $0.75 to $0.80

Best Buy is updating its full year FY18 financial outlook to the following:

  • Enterprise revenue growth of approximately 4.0%
  • Enterprise non-GAAP operating income growth rate of 4.0% to 9.0%
  • Enterprise non-GAAP effective income tax rate of approximately 34.5%
  • On a 52-week basis, Enterprise revenue growth of approximately 2.5%
  • On a 52-week basis, Enterprise non-GAAP operating income growth rate of 2.0% to 6.0%

Domestic Segment Second Quarter Results

Domestic Revenue
Domestic revenue of $8.3 billion increased 4.9% versus last year driven by comparable sales growth of 5.4%, partially offset by the loss of revenue from 11 large format and 42 Best Buy Mobile store closures.

From a merchandising perspective, comparable sales growth in computing, wearables, smart home, mobile phones and appliances was partially offset by declines in tablets.

Domestic online revenue of $1.1 billion increased 31.2% on a comparable basis primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased 260 basis points to 13.2% versus 10.6% last year.

Domestic Gross Profit Rate
Domestic GAAP and non-GAAP gross profit rates were flat versus last year at 24.0% as improved margin rates across multiple categories, particularly in appliances, tablets and home theater, were offset by (1) margin pressure in the mobile category; (2) the negative impact of higher sales in the lower-margin wearables category; and (3) an approximately 10-basis point negative impact from lapping the $11 million Q2 FY17 periodic profit sharing benefit from our service plan portfolio.

Domestic Selling, General and Administrative Expenses (“SG&A”)
Domestic GAAP and non-GAAP SG&A expenses were $1.67 billion, or 20.2% of revenue, versus $1.61 billion, or 20.4% of revenue, last year. GAAP and non-GAAP SG&A both increased $61 million primarily due to (1) expected increases in growth investments; (2) higher incentive compensation 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 Second Quarter Results

International Revenue
International revenue of $668 million increased 3.7% driven primarily by comparable sales growth of 4.7% due to growth in both Canada and Mexico. The comparable sales growth was partially offset by approximately 220 basis points of negative foreign currency impact.

International Gross Profit Rate
International GAAP and non-GAAP gross profit rate was 25.1% versus 25.9% last year. The 80-basis point decline was primarily driven by a lower year-over-year gross profit rate in Canada due to lower rates in the computing and appliance categories.

International SG&A
International SG&A expenses were $161 million, or 24.1% of revenue, versus $165 million, or 25.6% of revenue, last year. Non-GAAP SG&A expenses were $161 million, or 24.1% of revenue, versus $164 million, or 25.5% of revenue, last year. The GAAP and non-GAAP decreases were primarily driven by slightly lower payroll and benefits costs. The rate decrease was primarily driven by sales leverage.

Share Repurchases and Dividends

During Q2 FY18, the company returned a total of $501 million to shareholders through share repurchases and dividends. On a year-to-date basis, the company has returned a total of $979 million to shareholders through share repurchases and dividends.

On March 1, 2017, the company announced the intent to repurchase $3 billion of its shares over a two-year period. In Q2 FY18, the company repurchased 7.3 million shares for a total of $398 million. On a year-to-date basis, the company has repurchased 15.4 million shares for a total of $771 million. The company’s cumulative share repurchases, net of dilution from equity based awards, positively benefitted GAAP and non-GAAP diluted EPS by approximately $0.02 in Q2 FY18.

On July 6, 2017, the company paid a quarterly dividend of $0.34 per common share outstanding, or $103 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 Q2 FY18 was a benefit of approximately $2 million, or $0.01 of non-GAAP diluted EPS. The year-to-date impact as of Q2 FY18 was a benefit of approximately $4 million, or $0.01 of 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 and, based on current projections, is the primary driver of the lower FY18 non-GAAP effective income tax rate of approximately 34.5% that the company guided today, versus previous guidance of 35.5%.

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