Best Buy Co., Inc. — Q2 FY2023 Form 10-Q
Reporting period: 13 weeks ended July 30, 2022; comparative quarter ended July 31, 2021. The six-month period ended July 30, 2022 is also presented. Best Buy operates Domestic and International segments; International operations are in Canada. Results are seasonal, with a large proportion of revenue and earnings typically generated in fiscal Q4.
Financial results and liquidity
| Metric | Q2 FY2023 | Q2 FY2022 |
|---|---|---|
| Revenue | $10.329 billion | $11.849 billion |
| Comparable sales change | (12.1)% | 19.6% |
| Gross profit / gross margin | $2.287 billion / 22.1% | $2.810 billion / 23.7% |
| Operating income / margin | $371 million / 3.6% | $797 million / 6.7% |
| Net earnings | $306 million | $734 million |
| Diluted EPS | $1.35 | $2.90 |
For the first six months, revenue was $20.976 billion, down 10.7%; comparable sales declined 10.1%. Net earnings were $647 million versus $1.329 billion, and diluted EPS was $2.85 versus $5.22.
Q2 online revenue was $2.975 billion, or 31.0% of Domestic segment revenue; comparable online sales declined 14.7%. Domestic revenue fell 13.1% and International revenue fell 9.3% in the quarter.
Cash flow and liquidity: In the first six months, operating cash flow was negative $709 million, investing cash flow was negative $484 million, and financing cash flow was negative $861 million. Cash and cash equivalents were $840 million at July 30, 2022, versus $2.936 billion at January 29, 2022; cash, cash equivalents and restricted cash totaled $1.152 billion. Management attributed the cash decline principally to working-capital timing and inventory, incentive payments, capital spending, repurchases and dividends. Current ratio was 1.0.
Debt: Long-term debt, including current portion, was $1.199 billion carrying value; principal notes were $500 million due 2028 and $650 million due 2030. The $1.25 billion revolving credit facility was undrawn. Total cash, cash equivalents and restricted cash exceeded the $500 million of debt swapped to floating rates by $650 million; management estimated a 50-basis-point rate change would affect net interest expense by about $3 million.
Changes and drivers
- Sales declines reflected comparisons with unusually strong prior-year demand, stimulus-related spending and stay-at-home purchases, along with customer spending shifts and inflation-related softness in consumer electronics.
- Gross margin fell 1.6 percentage points in Q2. Management cited lower services margins, including added costs and benefits under Totaltech, increased product promotions and higher supply-chain costs; higher credit-card profit-sharing revenue partly offset pressure.
- Operating margin declined as lower gross margin and reduced fixed-cost leverage from lower sales outweighed lower SG&A dollars. Prior-year tax benefits from resolution of discrete tax matters also contributed to the higher current-period effective tax rate.
- Computing and mobile phones and consumer electronics were notable Domestic sales pressure points. International results were also affected by Canadian-dollar weakness; currency translation reduced revenue by an estimated $35 million in Q2.
Outlook, commentary, risks and unusual items
- The filing provides no specific consolidated revenue, earnings or margin guidance. Management said it was managing inventory, reducing discretionary spending and assessing further actions to adapt its operating model while continuing selected strategic investments.
- Management expected to close approximately 15–20 Best Buy stores in fiscal 2023 and increase Outlet Centers to approximately 30 by the end of fiscal 2024.
- A new enterprise-wide resource optimization initiative generated $34 million of Q2 restructuring charges, primarily termination benefits. Best Buy expected approximately $40–$65 million of additional charges through the remainder of fiscal 2023; $33 million of termination benefits remained payable at July 30.
- Share repurchases were paused during Q2. The company repurchased $452 million of shares in the first six months and paid $397 million in dividends. The quarterly dividend was $0.88 per share.
- The Inflation Reduction Act was enacted after quarter-end, on August 16, 2022; management did not expect a material financial-statement impact based on its current analysis. The filing discloses legal proceedings but provides no specific case-level details in the supplied text.
- Key risks cited include inflation and consumer demand, supply-chain and vendor issues, competition, product availability, labor costs, cybersecurity and privacy, promotional activity, and reliance on holiday-quarter cash generation. Management stated that liquidity sources were expected to fund operations and anticipated investments, but cautioned that cash generation and access to borrowing cannot be assured.
Important facts for investors to verify
- Whether sales and comparable-sales trends stabilize, particularly in computing, home theater and other pressured categories.
- Whether gross-margin pressure from Totaltech, promotions and supply-chain costs eases, and how added membership benefits affect services economics.
- Actual restructuring costs, savings and store closures compared with the stated fiscal 2023 expectations.
- Cash conversion, inventory turnover and working-capital trends, given negative first-half operating cash flow and the reduction in cash balances.
- Future capital allocation, including the duration of the repurchase pause, dividend sustainability and the effects of the new tax-law provisions.