Business context and reporting period
Best Buy Co., Inc. filed this unaudited Form 10-Q for the second quarter and first six months of fiscal 2021, ended August 1, 2020. The company operates Domestic and International segments and notes that its results are seasonal, with a large share of revenue and earnings typically generated in the holiday-season fourth quarter.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $9.910 billion | $9.536 billion | $18.472 billion | $18.678 billion |
| Comparable sales growth | 5.8% | 1.6% | 0.4% | 1.4% |
| Gross profit | $2.270 billion | $2.283 billion | $4.235 billion | $4.452 billion |
| Gross margin | 22.9% | 23.9% | 22.9% | 23.8% |
| Operating income | $568 million | $313 million | $797 million | $647 million |
| Operating margin | 5.7% | 3.3% | 4.3% | 3.5% |
| Net earnings | $432 million | $238 million | $591 million | $503 million |
| Diluted EPS | $1.65 | $0.89 | $2.26 | $1.86 |
Q2 revenue rose 3.9% year over year, while six-month revenue fell 1.1%. Q2 Domestic online revenue increased 242.2% to $4.849 billion and represented 53.1% of Domestic revenue. Computing and mobile phones and appliances were key growth categories; services and consumer electronics declined on a comparable-sales basis.
For the six months, cash provided by operating activities was $3.788 billion, versus $625 million a year earlier. Management attributed the increase primarily to working-capital improvement, including later inventory payments, lower inventory, lower income-tax payments, and receivables collection timing. Investing activities used $383 million, including $340 million of capital expenditures. Financing activities used $332 million. Cash and cash equivalents were $5.305 billion at August 1, 2020.
Current assets were $10.683 billion and current liabilities were $10.080 billion; management reported a current ratio of 1.1. Total debt, including current portion and finance lease obligations as presented in the debt note, was $1.313 billion; the company also reported $1.150 billion principal amount of notes outstanding. The $650 million notes due March 15, 2021 were classified largely as current debt. The $1.25 billion revolving facility drawn in March was repaid in full on July 27; no facility borrowings remained at quarter-end. The company paid $284 million in dividends during the six months and suspended share repurchases amid pandemic uncertainty.
Material changes and management commentary
- Stores shifted from curbside-only service to appointments and then broader in-store shopping; by June 22, almost all stores were open for shopping. Curbside pickup and other contactless options continued.
- Operating income margin improved despite lower gross margin, mainly because SG&A fell. Management cited lower store payroll, advertising, incentive compensation, and medical claims. SG&A also benefited from CARES Act employee retention credits of $12 million in Q2 and $81 million in the first six months.
- Higher online sales increased supply-chain costs and generally carry lower gross margins than store sales. Lower profit-sharing revenue from the private-label and co-branded credit-card arrangement also pressured Domestic gross margin.
- International Q2 revenue increased 9.4% and comparable sales increased 15.1%; segment operating income was $44 million versus $4 million a year earlier. Currency movements reduced reported revenue.
Outlook, risks and unusual items
The filing provides no formal financial guidance. Management reported estimated year-over-year consolidated sales growth of approximately 16% in the final seven weeks of Q2 and 20% in the first three weeks of Q3; these unaudited interim sales estimates are not guidance and are not calculated using the company’s comparable-sales methodology. Management said the pandemic could permanently accelerate digital shopping and lead to changes in workforce, store design, operating models, and digital investment.
COVID-19-related uncertainties include renewed store closures or restrictions, changing consumer demand and confidence, product shortages and supply-chain disruption, higher shipping costs, online capacity and technology risks, cybersecurity exposure, and pressure on profitability from channel mix, store costs, and credit-card defaults. The company also cited wildfires, hurricanes, civil unrest, unemployment, and changing government stimulus as uncertainties. Beginning August 2, 2020, it increased hourly store employee pay by 4%, with a $15-per-hour starting wage for employees below that level.
Other notable items: the company entered into $325 million of Treasury Rate Lock contracts to hedge interest-rate variability on a potential refinancing of its 2021 notes. It recorded no goodwill impairment. It began phasing out the Pacific Sales tradename over coming years and reclassified it as a definite-lived intangible asset. Management disclosed legal proceedings but the filing text does not provide a clear quantified exposure. The company said its disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the sharp online-sales growth and strong comparable sales continued, and how the resulting channel mix affected gross margin and fulfillment costs.
- How much of the exceptional operating cash flow reflected temporary working-capital timing rather than recurring cash generation.
- The repayment and refinancing plan for the $650 million notes due in March 2021, including the effect of the rate-lock contracts.
- The sustainability of lower SG&A and the effect of CARES Act credits, employee pay increases, and other pandemic-related costs.
- Whether supply constraints, renewed restrictions, consumer demand, and credit-card program performance materially changed after quarter-end.