Best Buy Co., Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended May 2, 2020; comparison period ended May 4, 2019. Amounts are in U.S. dollars. Results were materially affected by the COVID-19 pandemic and are not necessarily indicative of the full fiscal year, given the company’s seasonality.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $8.562 billion | $9.142 billion |
| Comparable sales change | (5.3%) | 1.1% |
| Gross profit / margin | $1.965 billion / 23.0% | $2.169 billion / 23.7% |
| Operating income / margin | $229 million / 2.7% | $334 million / 3.7% |
| Net earnings | $159 million | $265 million |
| Diluted EPS | $0.61 | $0.98 |
| Operating cash flow | $827 million | $2 million |
Non-GAAP diluted EPS was $0.67, down from $1.02; non-GAAP operating margin was 2.9%, versus 3.8%. These company-defined measures exclude specified items and should be considered alongside GAAP results. The effective tax rate rose to 27.4% from 19.8%.
Operating cash flow increased primarily from working-capital movements, including lower inventory receipts, vendor payment terms, and receivables collections. Investing cash outflow was $179 million, including $178 million of capital expenditures. Financing cash flow was $1.049 billion, including the $1.25 billion revolving-credit draw, offset in part by dividends and share repurchases.
Liquidity, debt, and capital allocation
Cash and cash equivalents were $3.919 billion at May 2, 2020, compared with $2.229 billion at February 1, 2020. Restricted cash was an additional $115 million. Total current assets were $8.996 billion and current liabilities were $8.804 billion; the current ratio was 1.0.
Debt included $1.25 billion drawn under the revolving credit facility, $650 million principal of notes due March 2021, and $500 million principal of notes due October 2028. The $650 million notes were classified as current. The company suspended share repurchases on March 21; $1.935 billion remained under its authorization. It paid $141 million in dividends, or $0.55 per share.
Material changes and operating developments
- COVID-19 drove a shift to contactless curbside store operations on March 22 and suspension of in-home services; those services resumed April 27 under new safety procedures. Domestic online comparable sales grew 155.4%, reaching 42.2% of Domestic revenue, versus 15.4% a year earlier.
- Demand was strong in computing, gaming, and small appliances, while consumer electronics and services declined. Domestic comparable sales fell 5.7%; International comparable sales increased 0.2%.
- Gross margin pressure reflected higher supply-chain costs from the increased online mix and lower private-label credit-card profit-sharing revenue. Management expected continued credit-card profit-sharing pressure as defaults could rise.
- International operating results shifted to a $12 million loss from $2 million of income, mainly due to lower gross margin and a higher SG&A rate.
- The company recorded a $69 million CARES Act employee-retention credit as a reduction to SG&A. It also reported an immaterial impairment charge for a small number of stores and no goodwill impairment.
Outlook, risks, and contingencies
The filing provides no formal financial guidance. Management said the full-year effect of COVID-19 was highly uncertain and depended on the pandemic’s duration, consumer confidence and spending, government stimulus, supply availability, and the evolution of store and online operating models. Management described liquidity and profitability management as priorities while seeking to preserve longer-term strategic investments.
As of May 21, nearly 700 Domestic stores were operating by appointment, most remaining stores were curbside-only, and approximately 40 were fully closed. Approximately 51,000 Domestic hourly store employees had been furloughed. Risks include further demand declines, product shortages and supply-chain disruption, lower-margin online mix, additional operating costs or store impairments, cybersecurity and IT disruption, litigation, and access to financing. Legal proceedings are described generally; the filing does not provide a clear quantified exposure.
Important facts for investors to verify
- Subsequent quarterly sales, margins, and cash generation as store access and services change.
- Whether the $69 million employee-retention credit remains supportable as CARES Act guidance evolves.
- Facility repayment or rollover, the March 2021 note maturity, and liquidity needs if operating cash flow weakens.
- Online fulfillment costs, credit-card profit-sharing revenue and defaults, and any further store impairment charges.
- Developments in COVID-19-related operational, supply-chain, employment, and legal risks.