Best Buy Co., Inc. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended July 29, 2023; comparisons are with the periods ended July 30, 2022. Best Buy operates Domestic (U.S., including Best Buy Health) and International (Canada) segments. Results are seasonal, with a large share of revenue and earnings typically generated in the fourth quarter.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | First six months FY2024 | First six months FY2023 |
|---|---|---|---|---|
| Revenue | $9.583B | $10.329B | $19.050B | $20.976B |
| Comparable sales change | (6.2%) | (12.1%) | (8.2%) | (10.1%) |
| Gross profit / gross margin | $2.220B / 23.2% | $2.287B / 22.1% | $4.370B / 22.9% | $4.640B / 22.1% |
| Operating income / margin | $348M / 3.6% | $371M / 3.6% | $659M / 3.5% | $833M / 4.0% |
| Net earnings | $274M | $306M | $518M | $647M |
| Diluted EPS | $1.25 | $1.35 | $2.36 | $2.85 |
Q2 gross margin improved on favorable product margins, membership program economics, and Health initiatives. Operating income declined despite the higher gross margin, reflecting lower sales and expense-rate pressure. Q2 GAAP earnings included a $21M gain from the sale of the Mexico subsidiary; restructuring adjustments were credits of $7M for the quarter and $16M for the half-year. Q2 non-GAAP diluted EPS was $1.22, versus $1.54 a year earlier; first-half non-GAAP diluted EPS was $2.37, versus $3.11.
Cash flow and liquidity: First-half operating cash flow was $181M, compared with cash used of $709M a year earlier. Investing cash outflow was $381M, including $395M of capital expenditures; financing cash outflow was $560M, including $402M of dividends and $158M of share repurchases. Cash and cash equivalents were $1.093B at quarter-end, plus $398M of restricted cash. The current ratio was 1.0. Total debt on the balance sheet was $1.160B, including finance leases; principal notes outstanding were $1.150B. A $1.25B revolving facility expiring in April 2028 had no borrowings outstanding.
Material changes and operating trends
- Revenue fell 7.2% in Q2 and 9.2% for the first half. Management attributed pressure to prior-year demand pull-forward, greater consumer spending outside the home, inflation, and higher interest rates.
- Domestic Q2 comparable sales declined 6.3%; International declined 5.4%, with unfavorable currency translation also reducing International revenue. Domestic digital sales were 31.1% of segment revenue.
- Domestic declines were led by appliances, down 16.1% on a comparable-sales basis, while entertainment grew 9.0% and services grew 7.6%. Management cited paid membership growth and lower costs from membership changes as service and margin benefits.
- First-half operating cash flow improved substantially year over year, primarily from the timing and volume of inventory purchases and payments and lower incentive compensation payments; lower earnings and higher tax payments partially offset the improvement.
- Cash and cash equivalents declined $781M from January 28, 2023, primarily due to inventory timing, dividends, and capital expenditures, partly offset by earnings.
Outlook, risks, and unusual items
- Management expects consumer-electronics industry sales to decline again in fiscal 2024 amid inflation, interest rates, and other economic pressures. It expects industry growth over time from replacement cycles and product innovation; this is not quantified company revenue or EPS guidance.
- Fiscal 2024 capital expenditures are expected to be approximately $850M. Best Buy plans to close 20–30 large-format stores, complete eight Experience store remodels, open about five Outlet Centers, and reach approximately 25 Outlet stores by fiscal year-end.
- Management expects credit-card profit-sharing revenue to be relatively neutral to the full-year gross margin rate versus last year: first-half benefit is expected to turn to slight pressure in the second half. It expects share repurchases to continue, with slightly higher activity in the second half.
- Key disclosed risks include consumer demand and macroeconomic conditions, competition, vendor and supply-chain dependencies, labor costs and retention, technology and product-cycle shifts, cybersecurity and privacy, foreign exchange, and reliance on fourth-quarter cash generation. The filing says liquidity should be sufficient for operations and planned uses, but cautions that cash generation or financing access could weaken.
- The company recorded a $21M gain on the sale of its Mexico subsidiary. Fiscal 2023 restructuring charges were adjusted downward mainly because employee retention exceeded expectations; management does not expect material future charges from that initiative.
- Legal proceedings are ongoing; the filing does not provide a clear quantified exposure. The company disclosed $609M of supplier-finance-program obligations included in accounts payable at quarter-end. No material subsequent events were identified through issuance.
Important facts for investors to verify
- Whether comparable-sales declines stabilize, especially in appliances, home theater, computing, and mobile phones.
- Whether improved gross margins and membership economics can offset lower sales and SG&A deleverage.
- Second-half credit-card profit-sharing trends, capital spending, store closures, and planned share repurchases.
- Cash conversion and inventory/payables timing, alongside dividends and buybacks; quarter-end cash includes restricted cash unavailable for general use.
- Potential exposure from legal proceedings and the scale and terms of supplier-finance obligations.