Best Buy Co., Inc. — Q3 Fiscal 2021 10-Q
Reporting period: Three and nine months ended October 31, 2020; comparable periods ended November 2, 2019. Amounts are unaudited. The company is a seasonal consumer-electronics retailer operating Domestic and International segments; management notes that interim results may not indicate full-year performance.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $11.853B | $9.764B | $30.325B | $28.442B |
| Comparable sales growth | 23.0% | 1.7% | 8.1% | 1.5% |
| Gross profit / margin | $2.795B / 23.6% | $2.361B / 24.2% | $7.030B / 23.2% | $6.813B / 24.0% |
| Operating income / margin | $561M / 4.7% | $395M / 4.0% | $1.358B / 4.5% | $1.042B / 3.7% |
| Net earnings | $391M | $293M | $982M | $796M |
| Diluted EPS | $1.48 | $1.10 | $3.74 | $2.96 |
- Q3 Domestic revenue rose 21.0% to $10.850B; International revenue rose 25.4% to $1.003B. International reported a $51M operating loss, including Mexico-exit-related charges.
- Domestic online revenue was $3.823B, up 173.7% on a comparable basis, and represented 35.2% of segment revenue versus 15.6% a year earlier.
- Cash from operations was $3.907B for the first nine months, versus $937M. Management attributed the increase primarily to working-capital improvement and lower income-tax payments. Investing used $1.153B; financing provided $170M.
- Cash and cash equivalents were $5.136B and short-term investments $545M at October 31, 2020. The current ratio was 1.1. Total debt, including current debt, was approximately $1.926B; debt-to-trailing-12-month net earnings was 1.1, versus 0.8 at the prior fiscal year-end.
Changes and notable items
- Revenue growth and earnings gains reflected elevated demand for technology supporting work, learning, cooking, entertainment and connectivity at home. SG&A as a share of revenue fell to 17.9% from 20.2%, helping lift operating margin despite lower gross margin.
- Gross margin pressure reflected higher supply-chain costs associated with online sales mix and lower private-label and co-branded credit-card profit-sharing revenue; a more favorable promotional environment partly offset these effects.
- The company recorded $147M of total Q3 restructuring-related charges: $36M of Mexico inventory markdowns in cost of sales and $111M in restructuring charges. It decided to exit Mexico and reorganize parts of its corporate structure. It expects another $50M–$75M of pre-tax charges and expects Mexico operations to be substantially complete in Q4 FY2021 or early FY2022. Fiscal 2020 Mexico revenue was approximately $400M, with an operating loss of approximately $10M.
- Q3 GAAP diluted EPS was $1.48; company-reported non-GAAP diluted EPS was $2.06, excluding specified restructuring and intangible-amortization items, among other adjustments. These non-GAAP measures are not substitutes for GAAP results.
- In October, Best Buy issued $650M of 1.95% notes due 2030; net proceeds of $642M are intended to replace $650M of notes due March 2021, which the company expects to retire at par. The $1.25B revolver draw made in March was repaid in July; no revolver borrowings were outstanding at quarter-end.
- Nine-month dividends paid were $426M. Share repurchases were suspended from March and resumed in Q4 FY2021; $56M was repurchased during the nine-month period.
Outlook, risks and contingencies
- No quantified sales, earnings or margin guidance is provided in the filing. Management said the environment remained dynamic and uncertain, while expressing confidence in its execution and customer-focused investments in choice, speed and safety.
- Management expects pandemic-driven shopping behavior to remain more digital and is adapting its workforce, store design, operating model and digital investments. It cited ongoing uncertainty around COVID-19 resurgences, consumer confidence and spending, unemployment, government stimulus, supply constraints, and economic shutdowns.
- Key disclosed risks include product shortages or vendor allocation and pricing, supply-chain disruption and higher fulfillment costs, online capacity or IT interruption, cybersecurity and privacy incidents, reduced store traffic, lower-margin channel mix, credit-card profit-sharing pressure, and pandemic-related operating costs and litigation exposure.
- The filing describes legal proceedings but provides no clear quantified exposure; accruals are recorded where appropriate, while some matters are not accrued because loss is not considered probable or cannot be reasonably estimated. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether unusually strong pandemic-driven demand and online growth persist, and how channel mix affects gross margin and fulfillment costs.
- Actual costs, timing and completion of the Mexico exit and corporate reorganization, including the anticipated additional $50M–$75M charge.
- Execution of the planned March 2021 note retirement, and liquidity and capital-return plans as the company resumes repurchases.
- Inventory availability, vendor terms, supply-chain capacity, and the effect of pandemic developments on stores, employees and customers.
- Seasonality: the company says a large share of annual revenue and earnings typically occurs in fiscal Q4, so nine-month results should not be treated as a full-year forecast.