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Best Buy Reports Third Quarter Results

The following excerpt is from the company's SEC filing.

Domestic Segment Revenue Increased 1.2%

Non-GAAP Diluted EPS from Continuing Operations Increased 21% to $0.41

GAAP Diluted EPS from Continuing Operations Increased 12% to $0.37

MINNEAPOLIS, November 19, 2015 -- Best Buy Co., Inc. (NYSE: BBY) today announced results for the third quarter (“Q3 FY16”) ended October 31, 2015 as compared to the third quarter (“Q3 FY15”) ended November 1, 2014.

Enterprise Revenue

($ in millions)

$8,819

$9,032

Domestic segment

$8,090

$7,992

International segment

$1,040

Enterprise Comparable Sales % Change:

Excluding the estimated benefit of installment billing

Estimated benefit of installment billing

Comparable sales % change

Domestic Comparable Sales % Change:

Comparable online sales % change

Operating Income:

operating income as a % of revenue

Diluted Earnings per Share (EPS):

GAAP diluted EPS from continuing operations

Impact of non-restructuring SG&A charges

Impact of restructuring charges

Impact of gain on investments, net

$(0.01)

Income tax impact of Non-GAAP adjustments

Non-GAAP diluted EPS from continuing operations

Hubert Joly, Best Buy chairman and CEO, commented, “We have delivered another quarter of Domestic comparable sales growth and operating income expansion. At the Enterprise level, on revenue of $8.8 billion, we increased our non-GAAP operating income rate by 40 basis points to 2.8% and our non-GAAP diluted EPS by $0.07 to $0.41, an increase of 21%.”

Joly continued, “In the Domestic business, our comparable sales, excluding the impact of installment billing, increased 0.5%. Online comparable sales increased 18% as our new mobile site and overall enhanced dotcom capabilities continued to drive higher conversion rates and increased traffic. These results were achieved in a context where industry sales in the NPD-tracked categories were down 4.3%.

Joly continued, “We are excited by what we are offering and delivering to our customers during this Holiday shopping season. First, we have created an expansive assortment of amazing technology products, especially in 4K TVs, health & wearables, connected or smart devices, drones, and many other giftable items. These products will be offered at very attractive prices to our customers throughout the Holiday shopping season.

“Second, we have built some terrific new capabilities since last year, including (1) a range of new digital capabilities, especially Blue Assist which provides the ability to call on Blue Shirt advice from our new mobile app; (2) an additional 1,100 stores-within-a-store which come on top of the over 3,700 we had a year ago; (3) the increasing expertise and proficiency of our sales people; (4) our enhanced multi-channel delivery capabilities, illustrated by faster shipping enabled by ship-from-store and a better in-store pickup experience; (5) the optimization of our supply chain to enable earlier store replenishments and higher order fill rates; and (6) a range of services offered to our customers, including free Geek Squad setup on top tech gifts and the ability for customers to give a gift of a Geek Squad agent’s time. Also, from a marketing perspective, we believe we are entering the quarter with a high-performing media campaign, a significantly greater social media presence and more refined personalization capabilities through our investments in our Athena database.”

Joly continued, “We of course recognize that we are up against a strong performance in the fourth quarter of last year and that the NPD industry declines that we saw in the third quarter, both sequentially and year-over-year, may continue throughout this year’s fourth quarter. We have also made incremental investments in services pricing and SG&A that are putting pressure on our fourth quarter earnings outlook.”

Joly concluded, “Irrespective, one thing we are certain about is our team’s ability to execute exceptionally well throughout the Holiday. We are going into the Holiday clear on our priorities and our plan, and with a better trained, engaged and most importantly, highly determined team. I am grateful for what they have accomplished so far this year and extremely proud of their capabilities and passion to win.”

Sharon McCollam, Best Buy EVP, CAO and CFO, commented, “As Hubert said, we are excited about our Holiday plans and new capabilities, and we are confident in our ability to execute our plan. This gives us a positive outlook on our Domestic performance versus the industry. However, the 4.3% decline we saw in the NPD-reported categories got progressively worse throughout the quarter, which adds a level of caution to our outlook. With that, our year-over-year non-GAAP outlook for Q4 FY16 is as follows. In the Domestic business we are expecting (1) near flat revenue assuming an approximate 4% industry decline in the NPD-reported categories, in line with Q3, and the timing of the Super Bowl shifts approximately 40 basis points of sales out of Q4 into Q1 FY17; and (2) a non-GAAP operating income rate decline of 20 to 35 basis points driven by gross profit rate pressure and higher SG&A. The gross profit rate pressure is primarily driven by (1) a 25-basis point investment in services pricing; (2) higher distribution costs associated with our growth in the online channel and the appliance and large-screen television categories; and (3) product mix and product cycle pressures. Largely offsetting these gross profit pressures is an expected 55-basis point periodic profit sharing benefit from our externally-managed extended service plan portfolio. The higher SG&A is due to our investment in growth initiatives, partially offset by cost savings. In the International business, due to the ongoing impacts of the Canadian brand consolidation, foreign currency fluctuations and softness in the Canadian market, we are expecting (1) an International revenue decline of approximately 30%; and (2) an International non-GAAP operating income rate in the range of positive 2% to 3%.

“Based on the above expectations, our Enterprise level outlook is as follows: (1) a negative low-single digit revenue growth rate; and (2) a non-GAAP operating income rate decline of 25 to 45 basis points. From a tax rate perspective, we expect the non-GAAP effective income tax rate from continuing operations to be in the range of 36% to 37%, versus 34.2% last year, which is expected to result in a negative $0.04 to negative $0.06 year-over-year non-GAAP diluted EPS impact in Q4 FY16.”

Domestic Segment Third Quarter Results

Domestic Revenue

Domestic revenue of $8.1 billion increased 1.2% versus last year. This increase was primarily driven by (1) a comparable sales increase of 0.5%, excluding the estimated 30-basis point benefit associated with the classification of revenue for the mobile carrier installment billing plans

; (2) an estimated 30-basis point benefit associated with installment billing

; and (3) a 30-basis point impact from a periodic profit sharing benefit based on the performance of the company’s externally managed extended service plan portfolio.

From a merchandising perspective, comparable sales growth in computing, major appliances, health & wearables and large-screen televisions was partially offset by declines in tablets, mobile phones and digital imaging. The company also saw continued revenue declines in services, which was almost entirely due to the reduction of frequency and severity of claims on extended warranties, which has reduced repair revenue, and to a much lesser extent, declining attach rates of traditional warranty plans.

Domestic online revenue of $709 million increased 18.3% on a comparable basis primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased 130 basis points to 8.8% versus 7.5% last year.

Domestic Gross Profit Rate

Domestic gross profit rate was 24.1% versus 23.0% last year. This 110-basis point increase was primarily due to (1) the positive impact of changes in mobile warranty plans which resulted in lower costs due to lower claim frequency and severity; (2) an increased mix of higher-margin large screen televisions; (3) a positive mix benefit from significantly decreased revenue in the lower-margin tablet category; (4) a greater portion of vendor funding being recorded as an offset to cost of goods sold rather than SG&A; and (5) a 20-basis point impact from a periodic profit sharing benefit based on the performance of the company’s externally managed extended service plan portfolio. These increases were partially offset by the lapping of a prior year benefit from the receipt of restitution on a legal claim related to an inventory dispute of 15 basis points.

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

Domestic SG&A expenses were $1.70 billion, or 21.0% of revenue, versus $1.63 billion, or 20.4% of revenue, last year. On a non-GAAP basis, SG&A expenses were $1.69 billion, or 20.9% of revenue, versus $1.63 billion, or 20.3% of revenue, last year. This $67 million, or 60 basis-point, increase in non-GAAP SG&A was primarily driven by a greater portion of our vendor funding being recorded as an offset to cost of goods sold rather than SG&A, investments in future growth initiatives and higher incentive compensation. This was partially offset by the flow through of Renew Blue phase two cost reductions.

International Segment Third Quarter Results

International Revenue

International revenue of $729 million declined 29.9% versus last year. This decline was primarily driven by (1) the loss of revenue associated with closed stores as part of the Canadian brand consolidation; (2) a negative foreign currency impact of approximately 1,350 basis points; and (3) ongoing softness in the Canadian economy and consumer electronics industry.

International Gross Profit Rate

International gross profit rate was 22.5% versus 22.6% last year. On a non-GAAP basis, gross profit rate was 22.4% versus 22.6% last year. This 20-basis point decrease was primarily due to a higher mix of sales from our Mexico business which carries a lower gross profit rate.

International SG&A

International SG&A expenses were $172 million, or 23.6% of revenue, versus $234 million, or 22.5% of revenue, last year. On a non-GAAP basis, SG&A expenses were $171 million, or 23.5% of revenue, versus $234 million, or 22.5% of revenue, last year. In dollars, non-GAAP SG&A decreased $63 million primarily driven by the positive impact of foreign exchange rates and the elimination of expenses associated with closed stores as part of the Canadian brand consolidation. From a rate perspective, non-GAAP SG&A increased 100 basis points driven by year-over-year sales deleverage.

Income Taxes

In Q3 FY16, the non-GAAP continuing operations effective income tax rate decreased 100 basis points to 37.1% versus 38.1% last year driven by discrete income tax benefits in the quarter.

For Q4 FY16, the non-GAAP continuing operations effective income tax rate is expected to be in the range of 36% to 37%, versus 34.2% last year, which is expected to result in a negative $0.04 to negative $0.06 year-over-year non-GAAP diluted EPS impact in Q4...


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