Best Buy Earnings Soar on Strong Demand for Home Appliances

U.S. online sales grew 24.1% to $881 million, accounted for 9.8% of total revenue

b1Best Buy Company Inc. (NYSE: BBY), the largest U.S. electronics retailer, announced its Q3 FY17 financial results on November 17th, 2016.

The Richfield, Minnesota-headquartered Company operates through two segments: Domestic and International. Its stores provide consumer electronics, home automation, digital imaging, health and fitness, and portable audio products; computing and mobile phones, entertainment products, and other software products. The company offers its products through stores and websites under the Best Buy, bestbuy.com, Best Buy Mobile, Best Buy Direct, Best Buy Express, Geek Squad, Magnolia Home Theater, Pacific Kitchen and Home, bestbuy.com.ca, bestbuy.com.mx, and Geek Squad brand names, as well as through call centers.

As of January 30th, 2016, it had approximately 1,200 large-format and 400 small-format stores. Read more about Best Buy’s financial results below.

Q3 FY17 financial highlights

During Q3 FY17, Best Buy reported better-than-expected growth in profit and same-store sales helped by higher online revenue and strong demand for TVs, home theaters and wearable devices, partially offset by weaker sales of video game product sales. Bucking the trend of dismal sales reported by other major retailers such as Wal-Mart Stores Inc. (NYSE: WMT), net sales rose 1.4% to $8.95 billion, beating the average estimates of $8.85 billion versus $8.81 billion in the year-ago period due to company’s strong performance in both of its domestic and international segments.

Sales at U.S. stores open at least a year rose 1.8% compared to 0.8% in the year-ago period, beating the company’s flat target. U.S. online sales grew 24.1% to $881 million during Q3 FY17 and represented the third straight quarter with online growth above 20%, a noteworthy fact given that every other retailer is facing b2competition from online discounters and big box players like Amazon.com Inc. (NASDAQ: AMZN). Online sales growth of 24.1% accounted for 9.8% of total revenue. In Q3 FY15, online sales had accounted for 8% of total revenue. From an overall merchandising perspective, segments such as home theater, mobile, smart wearables, and connected home devices reported growth.

During Q3 FY17, consumer electronics revenue rose 4.9% on a comparable store basis, while sales in the part of the business that sells laptops, tablets and mobile phones grew 1.6%, compared to a decline of 0.9% in the year-ago period. Mobile phone sales grew in Q3 FY17 as Apple Inc.’s (NASDAQ: AAPL) long-awaited iPhone 7 was launched in September 2016.

Sales of appliances, which have also been helped by the housing market recovery, rose 3% on a comparable store basis. Best Buy, like home-improvement chains Home Depot Inc. (NYSE: HD) and Lowe’s Inc. (NYSE: LOW), has benefited as a strong labor market and rising wages encourage homeowners to spend on their homes. Overall, consumers have been shifting more of their spending towards home renovations, furnishings and cars, and away from smaller gadgets. For the all-important holiday season, sales are expected to be driven about new products including virtual-reality headsets and connected home products such as home automation and security.

b3During Q3 FY17, Best Buy’s gross profit margins improved to 24.6% from 23.9%, while GAAP operating income as a percentage of sales grew to 3.5% from 2.6%. In all, net income surged 55% to $198 million compared to $144 million a year ago, beating expectations of $150.3 million. Diluted EPS jumped 61% Y-o-Y to $0.61 versus $0.36 in the year-ago period, beating expectations of $0.47. Adjusted earnings came in 50% higher at $0.62 per share during the reporting quarter.

Segmental highlights

Domestic: During Q3 FY17, Best Buy’s Domestic revenue grew 1.3% Y-o-Y to $8.2 billion versus $8.0 billion in the year-ago period. Comparable sales grew 1.8% during the reporting quarter versus 0.8% in the year-ago period, partially offset by the loss of revenue from 14 large format and 23 Best Buy Mobile store closures. Industry revenue in the NPD-tracked categories declined 3.1%. From a merchandising perspective, comparable sales growth in home theater, mobile phones, wearables and connected home was partially offset by declines in gaming.

Best Buy’s Domestic online revenue of $881 million increased 24.1% 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 10.8% versus 8.8% last year.

During Q3 FY17, Best Buy’s Domestic GAAP and non-GAAP gross profit rate improved to 24.7% versus 24.1% last year, due to improved margin rates in the computing and home theater categories, which were partially offset by the mobile category. Domestic SG&A expenses increased to $1.72 billion, or 21.0% of revenue, versus $1.70 billion, or 21.0% of revenue, last year, due to the timing of previously outlined investments.

International: During Q3 FY17, Best Buy’s International revenue grew 3.3% Y-o-Y to $753 million, driven by growth in Canada and Mexico, partially offset by approximately 70 basis points of negative foreign currency impact. On a constant currency basis, International revenue grew 4.0% during the reporting quarter.

During Q3 FY17, Best Buy’s International gross profit rate rose to 24.3% versus 22.5% last year. On a non-GAAP basis, gross profit rate grew to 24.3% versus 22.4% last year. For both the GAAP and non-GAAP gross profit rate, the improvement was primarily driven by a higher year-over-year gross profit rate in Canada due to a more favorable product mix and lapping the disruption and corresponding increased promotional activity last year related to the brand consolidation.

During the reporting quarter, International SG&A expenses were $170 million, or 22.6% of revenue, versus $172 million, or 23.6% of revenue, last year, driven by the positive impact of foreign exchange rates and sales leverage.

The revenue mix for Domestic and International is shown below. b4Other highlights

Cash flow: As of October 29th, 2016, Best Buy had cash and cash equivalents of $1,341 million versus $1,697 million in the year-ago period.

Share repurchases and dividends

b5Best Buy returned a total of $290 million to shareholders through share repurchases and dividends during Q3 FY17 and $931 million on a year-to-date basis. On October 4th, 2016, the company paid a quarterly dividend of $0.28 per common share outstanding, or $89 million. On a year-to-date basis, the company has paid $414 million in regular and special dividends.

On February 25th, 2016, Best Buy announced its plans to repurchase $1 billion of its shares over a two-year period. As part of these plans, Best Buy repurchased 5.4 million shares for $201 million in Q3 FY17 and a total of 15.7 million shares for $517 million on a year-to-date basis. The company’s cumulative share repurchases, net of dilution from equity-based awards, benefitted GAAP and non-GAAP diluted EPS by $0.05 in Q3 FY17.

Guidance for Q4 FY17

In Q4 FY17, Best Buy said that the unavailability of some products due to recalls could drag down sales in the holiday shopping quarter by $200 million, to $13.4 billion to $13.6 billion. The Company anticipates both Enterprise and Domestic comparable sales to rise or fall by 1%. International comparable sales growth is predicted to rise or fall by 2.0%. Best Buy also anticipates Q4 FY17 non-GAAP diluted EPS to be in the range of $1.62 to $1.67, assuming a diluted weighted average share count of approximately 315 million shares and a non-GAAP effective income tax rate in the range of 35.0% to 35.5%.

Stock Performance

b6Best Buy’s stock ended the day at $46.60, 2.08% higher, at the close on Tuesday, November 22nd, 2016, having vacillated between an intraday high of $46.98 and a low of $45.32 during the session. The stock’s trading volume was at 6,449,688 for the day. The Company’s market cap was at $15.18 billion as of Tuesday’s close.

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