Finanzas: Best Buy Reports Better-Than-Expected Second Quarter Results

 

Best Buy Co., Inc. (NYSE: BBY) announced results for the second quarter ended July 30, 2016 (“Q2 FY17”), as compared to the second quarter ended August 1, 2015 (“Q2 FY16”). The company reported GAAP diluted earnings per share from continuing operations of $0.56, an increase of 22% from $0.46 in Q2 FY16. Non-GAAP diluted earnings per share from continuing operations were $0.57, an increase of 16% from $0.49 in Q2 FY16.
For GAAP to non-GAAP reconciliations, please refer to the attached supporting schedule titled “Reconciliation of non-GAAP Financial Measures.”

“Our teams delivered a strong second quarter, with better-than-expected revenue and profitability in both our Domestic and International businesses,” said Best Buy (BBY) Chairman and CEO Hubert Joly. “In our Domestic business, we are reporting comparable sales growth of 0.8% versus guidance of approximately flat. This is on top of comparable sales growth of 3.8% last year. We saw continued positive momentum in our online sales – delivering a second straight quarter of nearly 24% growth. We also continued to deliver cost savings and drive efficiencies in the business, a discipline that is critical to our ability to invest in our future.”

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Joly continued, “We are encouraged by the quality of our execution, the momentum in our business and the strength of our first half financial results. We are excited by our mission to help customers live their lives and pursue their passions with the help of technology and the growth opportunities this mission creates for us. I want to thank our associates across the company for their focus and work to deliver every day on this mission.”

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Corie Barry, Best Buy CFO, commented, “For our Q3 FY17 guidance, we are expecting Enterprise revenue in the range of $8.8 billion to $8.9 billion, or flat to 1% growth. We anticipate both Enterprise and Domestic comparable sales growth of approximately 1%. We expect International revenue to be approximately flat to down 5% on a reported basis and to be approximately flat on a constant currency basis. We anticipate our Q3 non-GAAP diluted earnings per share to be in the range of $0.43 to $0.47, assuming a diluted weighted average share count of approximately 319 million shares and a non-GAAP effective income tax rate in the range of 37.5% to 38.0%.3”

Barry continued, “As it relates to our full year financial outlook, we are reaffirming our expectation of approximately flat revenue and raising our full year non-GAAP operating income3 outlook. We continue to expect the slight revenue decline in the first half to be offset by slight growth in the back half and in light of our first half performance, we are now expecting a full year non-GAAP operating income3 growth rate in the low-single digits versus our previous expectation of approximately flat. This includes lapping the significant periodic profit sharing benefits from our services plan portfolio that we earned in fiscal 2016. As we discussed on our previous earnings calls, our full year outlook assumes (1) a relatively better mobile cycle; (2) a trend in the NPD-tracked categories consistent with the last two quarters; and (3) delivering our cost reduction and gross profit optimization initiatives.”

Domestic Segment Second Quarter Results

Domestic Revenue

Domestic revenue of $7.9 billion increased 0.1% versus last year driven by comparable sales growth of 0.8%, partially offset by the loss of revenue from 12 large format and 22 Best Buy Mobile store closures. Industry revenue in the NPD-tracked categories declined 3.2%.4

From a merchandising perspective, comparable sales growth in health & wearables, home theater, major appliances and computing was partially offset by declines in mobile phones and gaming.

Domestic online revenue of $835 million increased 23.7% on a comparable basis primarily due to increased traffic, higher average order values and higher conversion rates. As a percentage of total Domestic revenue, online revenue increased 200 basis points to 10.6% versus 8.6% last year.

Domestic Gross Profit Rate

Domestic gross profit rate was 24.0% versus 24.7% last year. On a non-GAAP basis, gross profit rate was 24.0% versus 24.6% last year. The 60-basis point decline in the GAAP and non-GAAP gross profit rate was primarily due to (1) the net negative impact of approximately 20 basis points from lapping the periodic profit sharing benefit from our services plan portfolio and an extended warranty deferred revenue adjustment in Q2 FY16; (2) investments in services pricing; and (3) the impact of inventory availability in the high margin digital imaging category caused by the Japanese earthquakes in April. Additionally, the GAAP gross profit rate declined another 10 basis points driven by a prior-year CRT settlement proceed which did not recur this year.

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

Domestic SG&A expenses were $1.61 billion, or 20.4% of revenue, versus $1.64 billion, or 20.8% of revenue, last year. On a non-GAAP basis, SG&A expenses were $1.61 billion, or 20.3% of revenue, versus $1.62 billion, or 20.6% of revenue, last year. This $18 million, or 30-basis point, decrease in GAAP and non-GAAP SG&A was primarily driven by the flow through of cost reductions which were partially offset by strategic investments. Additionally, GAAP SG&A was impacted by a year-over-year decline of $10 million primarily due to lower non-restructuring asset impairments.

International Segment Second Quarter Results

International Revenue

International revenue of $644 million declined 1.0%. This decline was driven by approximately 510 basis points of negative foreign currency impact. On a constant currency basis, International revenue increased 4.1% driven by growth in both Canada and Mexico.2

International Gross Profit Rate

International gross profit rate was 25.9% versus 23.4% last year. On a non-GAAP basis, gross profit rate was 25.9% versus 22.9% last year. Three hundred basis points of the GAAP and non-GAAP gross profit rate improvement was primarily driven by a higher year-over-year gross profit rate in Canada as the company lapped the significant disruption and corresponding increased promotional activity related to last year’s brand consolidation. The GAAP gross profit rate increase was partially offset by 50 basis points due to a prior-year restructuring charge adjustment which did not recur this year.

International SG&A

International SG&A expenses were $165 million, or 25.6% of revenue, versus $175 million, or 26.9% of revenue, last year. On a non-GAAP basis, SG&A expenses were $164 million, or 25.5% of revenue, versus $170 million, or 26.2% of revenue, last year. This $6 million decrease in GAAP and non-GAAP SG&A was primarily driven by the positive impact of foreign exchange rates. Additionally, GAAP SG&A was impacted by a year-over-year decline of $4 million primarily due to lower non-restructuring asset impairments.

Share Repurchases and Dividends

During Q2 FY17, the company returned a total of $309 million to shareholders through share repurchases and dividends. On a year-to-date basis, the company has returned a total of $641 million to shareholders through share repurchases and dividends.

On February 25, 2016, the company announced the intent to repurchase $1 billion of its shares over a two-year period. In Q2 FY17, the company repurchased 7.1 million shares for a total of $219 million. On a year-to-date basis, the company has repurchased 10.3 million shares for a total of $316 million. The company’s cumulative share repurchases, net of dilution from equity based awards, positively benefitted GAAP and non-GAAP diluted EPS by $0.05 in Q2 FY17.

On July 5, 2016, the company paid a quarterly dividend of $0.28 per common share outstanding, or $90 million. On a year-to-date basis, the company has paid $325 million in regular and special dividends.

Q3 FY17 Financial Guidance

Best Buy is providing the following Q3 FY17 financial guidance:

Enterprise revenue in the range of $8.8 billion to $8.9 billion, a change of flat to 1% growth
International revenue change of flat to (5%)
Enterprise and Domestic comparable sales of approximately 1%
Non-GAAP effective income tax rate of approximately 37.5% to 38.0% versus 37.1% last year3
Diluted weighted average share count of 319 million versus 349 million last year, resulting in a positive $0.04 year-over-year non-GAAP EPS impact
Non-GAAP diluted EPS of $0.43 to $0.47 versus $0.41 last year3
Note: Enterprise comparable sales are currently equal to Domestic comparable sales due to the impacts of the Canadian brand consolidation.1

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