Best Buy Surges on Strength of Big-ticket Items

U.S. online sales grew 23.7% to $835 million during Q2 FY17

b1Best Buy Company Inc. (NYSE: BBY), the largest U.S. electronics retailer, announced its Q2 FY17 financial results on August 23rd, 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.

Q2 FY17 financial highlights

During Q2 FY17, Best Buy rose above the retail rubble, surpassing expectations on both sales and earnings. The Company recorded slightly higher revenue of $8.53 billion, beating estimates of $8.39 billion and snapping a three-quarter streak of declines. Sales at U.S. stores open at least a year rose 0.8%, beating the company’s flat target. U.S. online sales grew 23.7% to $835 million during Q2 FY17 and represented the second straight quarter with online growth above 20%, a noteworthy fact given that every other retailer is facing competition from online discounters and big box players like Amazon.com Inc. (NASDAQ: AMZN).

Source: Best Buy
Source: Best Buy

During Q2 FY17, sales were boosted mainly from consumer electronics and appliances, which posted same-store sales increases of 4% and 8.2%, respectively. Sales of entertainment products tumbled 18% as digital songs and movies gobble up that business. Sales also grew on the strength of health and wearable items like smartwatches. Best Buy’s customers bought big-ticket items like home theater equipment, computers, refrigerators and dish washers. Those products offset declines in purchases of smartphones and video games. Overall, it appeared that consumers have been shifting more of their spending towards home renovations, furnishings and cars and away from smaller gadgets. Overall, the results bucked a string of weak performances in the electronics category by competitors like Target and Wal-Mart Stores.

The company’s Chief Executive Officer, Hubert Joly, said that he expected mobile phone sales to increase in Q3 FY17 as Apple Inc.’s (NASDAQ: AAPL) long-awaited iPhone 7 is set for launch in September 2016.

In all, Best Buy’s net earnings from continuing operations rose 6.3% to $185 million during Q2 FY17. Net income increased 20.7% to $198 million from $164 million, with EPS of $0.56 per share during the reporting quarter. Diluted EPS came in higher at $0.61 per share versus $0.46 in the prior-year period.

Segmental highlights

Source: Best Buy
Source: Best Buy

Domestic: During Q2 FY17, Best Buy’s Domestic revenue inched up 0.1% to $7.9 billion versus the prior year period, 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. 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.

A noteworthy point is that Domestic online revenue jumped 23.7% to $835 million on a comparable basis in Q2 FY17 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% in the year-ago period, helped by faster shipping and improvements in the checkout process and search functionality.

During Q2 FY17, 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. 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. The decrease in GAAP and non-GAAP SG&A was due to the flow through of cost reductions, partially offset by strategic investments. Additionally, GAAP SG&A was impacted by lower non-restructuring asset impairments.

International: During Q2 FY17, Best Buy’s International revenue declined 1% to $644 million mainly due to 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.

During Q2 FY17, International gross profit rate was 25.9% versus 23.4% last year. On a non-GAAP basis, gross profit rate increased to 25.9% versus 22.9% last year, mainly due to higher Y-o-Y gross profit rate in Canada, partially offset by a prior-year restructuring charge adjustment that did not recur this year. 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. The decrease in GAAP and non-GAAP SG&A was due to the positive impact of foreign exchange rates. Additionally, GAAP SG&A was impacted by a Y-o-Y decline of $4 million primarily due to lower non-restructuring asset impairments. The revenue mix for Domestic and International is shown below.b4

Other highlights

Cash flow: As of July 30th, 2016, Best Buy had cash and cash equivalents of $1,861 million versus $1,800 million in the year-ago period.

Share repurchases and dividends

During Q2 FY17, Best Buy returned a total of $309 million to shareholders through share repurchases and dividends. b5On a year-to-date basis, the company has returned a total of $641 million to shareholders through share repurchases and dividends.

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

Guidance for Q3 FY16 and full year FY16

In Q3 FY17, Best Buy expects Enterprise revenue in the range of $8.8 billion to $8.9 billion, or flat to 1% growth. The Company anticipates both Enterprise and Domestic comparable sales growth of approximately 1%. International revenue is predicted to be approximately flat to down 5% on a reported basis and to be approximately flat on a constant currency basis. Best Buy also anticipates Q3 FY17 non-GAAP diluted EPS 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%.

Stock Performance

b6Best Buy’s stock ended the day at $39.51, 0.03% higher, at the close on Thursday, August 25th, 2016, having vacillated between an intraday high of $39.59 and a low of $38.67 during the session. The stock’s trading volume was at 7,742,223 for the day. The Company’s market cap was at $13.04 billion as of Thursday’s close.

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