Best Buy Reports Better-Than-Expected First Quarter Results
May 21st 2013 7:22AM
Updated May 21st 2013 8:35AM
Best Buy Reports Better-Than-Expected First Quarter Results
Non-GAAP EPS from continuing operations of $0.32
GAAP EPS from continuing operations of $0.29
$175 million in additional Renew Blue cost reductions
MINNEAPOLIS--(BUSINESS WIRE)-- Best Buy Co., Inc. (NYS: BBY) today announced results for the 13-week first quarter ("Q1 FY14") ended May 4, 2013, as compared to the 14-week first quarter ("Q1 FY13") ended May 5, 2012.
As announced on April 30, 2013, the company has entered into a definitive agreement for the sale of its 50% interest in Best Buy Europe. As a result of this agreement, results from European operations are now presented as discontinued operations. All information regarding the company's results, unless otherwise noted, pertains to its continuing operations.
|Revenue||Q1 FY14||Q1 FY13|
|Revenue ($ in millions)||$9,380||$10,373|
|Comparable store sales % change1||(1.3%)||(5.2%)|
|Comparable store sales % change1||(1.1%)||(3.7%)|
|Comparable online sales % change2||16.3%||10.0%|
|Comparable store sales % change1||(2.8%)||(13.4%)|
Diluted EPS, Operating Income and
Return on Invested Capital (ROIC)
|Q1 FY14||Q1 FY13||Q1 FY14||Q1 FY13|
|Operating income as a % of revenue||1.8%||2.5%||2.0%||3.9%|
|Diluted EPS from continuing operations||$0.29||$0.49||$0.32||$0.76|
Please see the table titled "Reconciliation of Non-GAAP Financial Measures" attached to this release for more detail.
Hubert Joly, Best Buy president and CEO, commented, "In the first quarter, we continued to make substantial progress on our Renew Blue priorities. This progress included (1) driving a 16% increase in Domestic comparable online sales; (2) improving our customer Net Promoter Score by over 300 basis points over the last five months; (3) reaching an agreement with Samsung to establish Samsung Experience Shops in our retail stores and beginning their roll out; (4) negotiating overall rent reductions for a number of stores and closing one large format store; and (5) eliminating $175 million in annualized SG&A and supply chain costs in addition to $150 million eliminated last quarter. In addition, we are pleased that we were able to reach a definitive agreement to sell our 50% interest in our European business."
Joly continued, "As expected, first quarter Domestic comparable store sales were down 1.1%. This was the result of the Super Bowl shifting into last year's fourth quarter as well as our decision to reduce sales in certain non-core businesses. Excluding these impacts, Domestic comparable store sales were flat for the quarter despite no new major product launches and late deliveries in the smartphone category, and we delivered a better-than-expected non-GAAP diluted EPS of $0.32."
"Looking ahead, we remain focused on making progress on our Renew Blue priorities announced last November and reiterated in March. During the second quarter, we will, in particular, complete the deployment of the Samsung Experience Shops and make significant progress in our efforts to optimize the allocation of our retail floor space to more attractive product categories, so as to increase revenue and operating profit per square foot," Joly concluded.
Sharon McCollam, Best Buy EVP, CAO and CFO, commented, "While non-GAAP diluted EPS was better-than-expected, it was below last year. This was primarily driven by (1) one less week during the quarter versus fiscal 2013 and the shift in timing of the Super Bowl; (2) a greater investment in price competitiveness; and (3) the impact of high-velocity product launches that occurred in the first quarter of last year that did not occur this year."
McCollam continued, "As we look forward to the second quarter, while not providing financial guidance, we believe that the ongoing investment in price competitiveness that contributed to our gross profit and EPS declines in the first quarter will continue into the second quarter. Additionally, disruptions caused by the physical deployment of the Samsung Experience Shops and the optimization of our retail floor space are expected to have operational impacts during the second quarter. We also expect to see a greater negative impact from our Renew Blue capital and SG&A investments in the second quarter in the areas of (1) online; (2) mobile; (3) the multi-channel customer experience; and (4) the replatforming of bestbuy.com for which financial benefits are not expected to be realized until fiscal 2015 and beyond."
McCollam continued, "These Renew Blue SG&A investments, however, are expected to be substantially offset by the fiscal 2014 realization of our Renew Blue annualized cost reduction initiatives, including the $175 million eliminated in the first quarter, the $150 million eliminated in the previous quarter, and the additional reductions that we expect to announce over the balance of the year."
Domestic Segment First Quarter Results
Domestic revenue of $7.98 billion declined 9.6% versus last year. Excluding the additional week last year (which contributed approximately $660 million in revenue to Q1 FY13), revenue declined 2.2%. This 2.2% decline was driven by (1) the loss of revenue from 49 large format stores that were closed last year; and (2) a comparable store sales decline of 1.1%. Comparable store sales were negatively impacted by (1) an estimated 80 basis points impact from the shift of the Super Bowl into last year's fourth quarter; and (2) an estimated 30 basis point impact from our decision to reduce sales in certain non-core businesses.
Domestic online revenue of $498 million increased 7.1% versus last year. Excluding the additional week last year, comparable online sales increased 16.3% due to increased traffic and higher conversion across our multiple online platforms.
From a merchandising perspective, strong growth in mobile phone and appliances was more than offset by declines in home theater and gaming.
Gross Profit Rate
Domestic gross profit rate was 23.4% versus 25.3% last year. This 190 basis point decline was primarily driven by (1) a greater investment in price competitiveness, including higher promotional activity in mobile and computing; (2) higher inventory shrinkage; and (3) increased product warranty-related costs. These impacts were partially offset by proceeds from legal settlements.
Selling, General and Administrative Expenses ("SG&A")
Domestic SG&A expenses were $1.65 billion or 20.7% of revenue versus $1.81 billion or 20.5% of revenue last year. On a non-GAAP basis, Domestic SG&A expenses were $1.64 billion or 20.6% of revenue versus $1.80 billion or 20.4% of revenue last year. Excluding the impact of the additional week in Q1 FY13, the Q1 FY14 SG&A expense as a percentage of revenue declined approximately 10 basis points, primarily driven by lower payroll and incentive compensation costs and tighter expense management discipline throughout the company.
International Segment First Quarter Results
International revenue of $1.40 billion declined 9.6% versus last year. Excluding the additional week (which contributed approximately $75 million in revenue to Q1 FY13), revenue declined 5.1%. This 5.1% decline was driven by (1) the loss of revenue from 15 large format stores that were closed last year in Canada; and (2) a comparable store sales decline of 2.8%. Comparable store sales were negatively impacted by ongoing competitive pressure in Canada, partially offset by effective promotions that drove positive comparable store sales in China.
Gross Profit Rate
International gross profit rate was 21.3% versus 22.6% last year. This 130 basis point rate decline was primarily driven by (1) a higher mix of China revenue that carries a lower gross profit rate; and (2) a more promotional environment in China.
International SG&A expenses were $348 million or 24.8% of revenue versus $382 million or 24.6% of revenue last year. On a non-GAAP basis, International SG&A expenses were $340 million or 24.3% of revenue versus $381 million or 24.6% of revenue last year. This 30 basis point rate decline was primarily driven by SG&A leverage in China. The impact of the additional week in Q1 FY13 was immaterial to International SG&A as a percent of revenue.
Renew Blue Cost Reduction Initiatives Update
Since our last earnings release on March 1, the company has eliminated $175 million in annualized costs ($145 million in SG&A and $30 million in supply chain). These reductions are primarily being driven by (1) various efficiency improvements, including the optimization of the organizational structure to reduce costs and enhance accountability; (2) the continued take-out of management layers; and (3) supply chain efficiencies. Together with the $150 million previously announced last quarter, the company has eliminated a total of $325 million in annualized costs ($295 million in SG&A and $30 million in supply chain) out of the $725 million North American opportunity that was presented at the company's Analyst Day in November 2012.
Sale of Stake in European Business
As previously announced, Best Buy has entered into a definitive agreement for the sale of its 50% interest in Best Buy Europe, the joint venture it created in 2008 with Carphone Warehouse Group plc (CPW). The sale price of £500 million (approximately $775 million as of April 29, 2013) is comprised of £420 million in cash (including £50 million in deferred cash) and £80 million in CPW stock subject to a 12-month lock-up restriction. In conjunction with the transaction, Best Buy has agreed to pay CPW £29 million (approximately $45 million as of April 29, 2013) in satisfaction of obligations under existing agreements, including the parties' Global Connect partnership, which will be terminated at closing. The transaction is expected to close by the end of June 2013.
As a result of entering into a definitive agreement for the sale of its 50% interest in Best Buy Europe, results from European operations are now presented as discontinued operations. The Q1 FY14 loss per share from discontinued operations was $0.53 versus a loss per share of $0.03 last year. The non-GAAP Q1 FY14 earnings per share from discontinued operations were $0.04, compared to a loss per share of $0.02 last year. Please see the table titled "Reconciliation of Non-GAAP Financial Measures" attached to this release for more detail.
The company has recast financial statements for fiscal 2012 and fiscal 2013 to reflect the results from European operations as discontinued operations. These are available on the company's investor relations website, www.investors.bestbuy.com.
On April 11, 2013, the company paid a quarterly dividend of $0.17 per common share outstanding, or $58 million.
Best Buy is scheduled to conduct an earnings conference call at 8:00 a.m. Eastern Time (7:00 a.m. Central Time) on May 21, 2013. A webcast of the call is expected to be available on its website at www.investors.bestbuy.comboth live and after the call. A telephone replay is also available starting at approximately 11:00 a.m. Eastern Time (10:00 a.m. Central Time) on May 21 through May 27, 2013. The dial-in number for the replay is 800-406-7325 (domestic) or 303-590-3030 (international), and the access code is 4617853.
(1) Best Buy's comparable store sales is comprised of revenue at stores, call centers, and websites operating for at least 14 full months as well as revenue related to other comparable sales channels. Relocated stores, as well as remodeled, expanded and downsized stores closed more than 14 days, are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores and businesses are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The portion of the calculation of the comparable store sales percentage change attributable to the International segment excludes the effect of fluctuations in foreign currency exchange rates. The calculation of comparable store sales excludes the impact of the additional week of revenue in Q1 FY13, as well as revenue from discontinued operations. The method of calculating comparable store sales varies across the retail industry. As a result, Best Buy's method of calculating comparable store sales may not be the same as other retailers' methods. Online revenue is included in Best Buy's same store sales calculation.
(2) Beginning in Q1 FY14, the company is now providing Domestic segment comparable online sales growth. The calculation of comparable sales excludes the impact of the additional week of revenue in Q1 FY13. Previously, the company provided only total Domestic segment online revenue growth, which did not exclude the impact of the additional week of revenue in Q1 FY13.
(3) The company defines non-GAAP SG&A, non-GAAP operating income and non-GAAP diluted earnings per share for the periods presented as its SG&A, operating income and diluted earnings per share for those periods calculated in accordance with accounting principles generally accepted in the U.S. ("GAAP") adjusted to exclude the effects of restructuring charges and non-restructuring asset impairments.
These non-GAAP financial measures provide investors with an understanding of the diluted earnings per share adjusted to exclude the effect of the items described above. These non-GAAP financial measures assist investors in making a ready comparison of the company's SG&A, operating income and diluted earnings per share for its fiscal quarter ended May 4, 2013, against the company's results for the respective prior-year periods and against third party estimates of the company's SG&A, operating income and diluted earnings per share for those periods that may not have included the effect of such items. Additionally, management uses these non-GAAP financial measures as an internal measure to analyze trends, allocate resources, and analyze underlying operating performance. These non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, GAAP financial measures and may differ from similar measures used by other companies. Please see "Reconciliation of Non-GAAP Financial Measures" attached to this release for more detail.
(4) The company defines non-GAAP return on invested capital ("ROIC") as non-GAAP net operating profit after taxes divided by average invested capital for the periods presented (including both continuing and discontinued operations). Non-GAAP net operating profit after taxes is defined as our operating income for the periods presented calculated in accordance with GAAP adjusted to exclude the effects of: (i) operating lease interest; (ii) investment income; (iii) net earnings attributable to noncontrolling interests; (iv) income taxes; (v) all restructuring charges in costs of goods sold and operating expenses, goodwill and tradename impairments, and BBE transaction costs; and (vi) the noncontrolling interest impact of the restructuring charges, Best Buy Europe transaction costs and the purchase of CPW's share of the Best Buy Mobile profit share agreement. Average invested capital is defined as the average of our total assets for the trailing four quarters in relation to the periods presented adjusted to: (i) exclude excess cash and cash equivalent and short-term investments; (ii) include capitalized operating lease obligations calculated using a multiple of eight times rental expenses; (iii) exclude our total liabilities, less our outstanding debt; and (iv) exclude equity of noncontrolling interests.
This non-GAAP financial measure provides investors with a supplemental measure to evaluate how effectively the company is investing its capital and deploying its assets. Management uses this non-GAAP financial measure to assist in allocating resources, and trends in the measure may fluctuate over time as management balances long-term initiatives with possible short-term impacts. Our ROIC calculation utilizes total operations in order to provide a measure that includes the results of and capital invested in all operations, including those businesses that are no longer continuing operations. This non-GAAP financial measure should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, GAAP financial measures and may differ from similar measures used by other companies. Please see "Reconciliation of Non-GAAP Financial Measures" attached to this release for more detail.
Forward-Looking and Cautionary Statements:
This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that reflect management's current views and estimates regarding future market conditions, company performance and financial results, business prospects, new strategies, the competitive environment and other events. You can identify these statements by the fact that they use words such as "anticipate," "believe," "assume," "estimate," "expect," "intend," "project," "guidance," "plan," "outlook," and other words and terms of similar meaning. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the potential results discussed in the forward-looking statements. Among the factors that could cause actual results and outcomes to differ materially from those contained in such forward-looking statements are the following: general economic conditions, changes in consumer preferences, credit market constraints, acquisitions and development of new businesses, divestitures and dispositions, product availability, sales volumes, pricing actions and promotional activities of competitors, profit margins, weather, natural or man-made disasters, changes in law or regulations, foreign currency fluctuation, availability of suitable real estate locations, the company's ability to react to a disaster recovery situation, the impact of labor markets and new product introductions on overall profitability, failure to achieve anticipated benefits of announced transactions, integration challenges relating to new ventures and unanticipated costs associated with previously announced or future restructuring activities. A further list and description of these risks, uncertainties and other matters can be found in the company's annual report and other reports filed from time to time with the Securities and Exchange Commission, including, but not limited to, Best Buy's Annual Report on Form 10-K filed with the SEC on March 27, 2013. Best Buy cautions that the foregoing list of important factors is not complete, and any forward-looking statements speak only as of the date they are made, and Best Buy assumes no obligation to update any forward-looking statement that it may make.
BEST BUY CO., INC.
|CONSOLIDATED STATEMENTS OF EARNINGS|
|($ in millions, except per share amounts)|
|(Unaudited and subject to reclassification)|
|Three Months Ended|
|May 4, 2013||May 5, 2012|
|Cost of goods sold||7,210||7,789|
|Gross profit %||23.1%||24.9%|
|Selling, general and administrative expenses||1,996||2,193|
|Operating income %||1.8%||2.5%|
|Other income (expense):|
|Investment income and other||5||3|
|Earnings from continuing operations before income tax||146||239|
|Income tax expense||49||70|
|Effective tax rate||33.4%||29.1%|
|Net earnings from continuing operations||97||169|
|Loss from discontinued operations, net of tax||(170)||(17)|
|Net earnings (loss) including noncontrolling interest||(73)||152|
|Net (earnings) loss from discontinued operations attributable to
|Net earnings (loss) attributable to Best Buy Co., Inc. shareholders||$||(81)||$||158|
|Amounts attributable to Best Buy Co., Inc. shareholders|
|Net earnings from continuing operations||$||97||$||169|
|Net loss from discontinued operations||(178)||(11)|
|Net earnings (loss) attributable to Best Buy Co., Inc. shareholders||$||(81)||$||158|
|Basic earnings (loss) per share attributable to Best Buy Co., Inc. shareholders|
|Basic earnings (loss) per share||$||(0.24)||$||0.46|
|Diluted earnings (loss) per share attributable to Best Buy Co., Inc. shareholders|
|Diluted earnings (loss) per share||$||(0.24)||$||0.46|
|Dividends declared per Best Buy Co., Inc. common share||$||0.17||$||0.16|
|Weighted average Best Buy Co., Inc. common shares outstanding (in millions)|