BEST BUY CO INC quarterly report, Q3 FY2023

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Best Buy Co., Inc. — Q3 FY2023 Form 10-Q

Reporting period: Third quarter and first nine months ended October 29, 2022; comparisons are with the periods ended October 30, 2021. Amounts are in U.S. dollars.

Financial performance

  • Q3 revenue: $10.587 billion, down 11.1%; comparable sales fell 10.4%.
  • Q3 earnings: Gross profit was $2.332 billion (22.0% of revenue), operating income $365 million (3.4%), and net earnings $277 million. Diluted EPS was $1.22, versus $2.00.
  • Q3 adjusted results: Non-GAAP operating income was $412 million (3.9% margin) and non-GAAP diluted EPS was $1.38, versus $694 million (5.8%) and $2.08, respectively. These company-defined measures exclude specified items.
  • First nine months: Revenue was $31.563 billion, down 10.8%; comparable sales fell 10.2%. Net earnings were $924 million versus $1.828 billion, and diluted EPS was $4.07 versus $7.23. Gross margin was 22.1% versus 23.5%; operating margin was 3.8% versus 6.3%.
  • Cash flow: Nine-month operating cash flow was negative $108 million, compared with positive $1.061 billion. Capital expenditures were $696 million; investing cash outflow was $736 million. Financing cash outflow was $1.058 billion, including $595 million of dividends and $465 million of share repurchases.
  • Liquidity and debt: Cash and cash equivalents were $932 million; restricted cash was $361 million. Current assets of $9.922 billion and current liabilities of $10.170 billion produced a 1.0 current ratio. Debt carrying value, including current maturities and finance leases, was $1.158 billion. The $1.25 billion revolving facility had no borrowings outstanding. Credit ratings were BBB+ (S&P) and A3 (Moody’s), both stable.

Changes and operating drivers

  • Sales and profitability weakened substantially against unusually strong prior-year periods. Management cited the fading of pandemic-era and stimulus-supported demand, consumer spending shifting toward experiences, inflation, and softer consumer-electronics demand.
  • Domestic comparable sales declined 10.5% in Q3; International comparable sales declined 9.3%. Computing/mobile and consumer electronics were key sources of weakness. International revenue also faced unfavorable currency translation.
  • Gross margin pressure reflected increased promotions, lower product and services margins, and higher supply-chain costs. Best Buy said Totaltech membership benefits and associated costs pressured services margins. Lower sales also reduced fixed-cost leverage.
  • Q3 SG&A declined year over year, partly due to lower incentive compensation and store payroll. For the first nine months, incentive compensation expense was approximately $365 million lower than the prior-year period.
  • Cash declined from $2.936 billion at fiscal year-end, primarily reflecting working-capital timing and inventory, capital spending, dividends, repurchases, and incentive-compensation payments. Inventory was $7.294 billion, up from $5.965 billion at fiscal year-end but below $8.553 billion a year earlier.

Outlook, risks, and unusual items

  • The filing provides no clear full-year revenue or EPS guidance. Management described a challenging consumer-electronics environment and said it was managing inventory and costs while continuing investment in digital, stores, Totaltech, and Best Buy Health.
  • Best Buy expected approximately $15 million to $30 million of additional fiscal 2023 charges for its resource-optimization restructuring initiative. It expected approximately $1 billion in fiscal 2023 share repurchases; $4.7 billion remained available under the authorization at quarter-end. From quarter-end through December 2, it repurchased 4.4 million shares for $322 million.
  • Management said its liquidity sources should fund operations, anticipated capital expenditures, dividends, repurchases, and strategic initiatives, while cautioning that weaker cash generation or reduced borrowing access could require spending limits.
  • Risks highlighted include inflation and consumer confidence, competition and product demand, supply-chain and vendor issues, foreign-exchange movements, labor and cost management, cybersecurity, and dependence on holiday-quarter performance. Currency movements reduced Q3 revenue by an estimated $44 million and nine-month revenue by $84 million; their net-earnings impact was not significant.
  • The company reported ongoing legal proceedings but the filing text does not provide a clear description or quantified exposure. Management stated that certain proceedings were accrued where appropriate and that some matters could not be reasonably estimated or were not considered probable. No material subsequent events were identified.
  • Management reported effective disclosure controls as of October 29, 2022, with no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

  • Whether demand and comparable-sales declines stabilize, particularly in computing, home theater, and appliances.
  • Whether promotions, Totaltech costs, and supply-chain expenses continue to pressure gross margin and operating leverage.
  • Whether inventory converts to cash and operating cash flow recovers after the nine-month outflow.
  • Actual restructuring charges and share repurchases versus management’s stated expectations, including the post-quarter repurchase activity.
  • Developments in legal proceedings and any quantified material exposure not detailed in this filing.