Business context and reporting period
Best Buy Co., Inc. is a technology retailer operating through Domestic and International segments. This Form 10-Q covers the second quarter and first six months of fiscal 2022, ended July 31, 2021; comparisons are with the periods ended August 1, 2020. The company closed all Mexico stores by the end of fiscal Q1 2022 and expects its International segment to consist of Canada going forward.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | First six months FY2022 | First six months FY2021 |
|---|---|---|---|---|
| Revenue | $11.849 billion | $9.910 billion | $23.486 billion | $18.472 billion |
| Gross profit | $2.810 billion | $2.270 billion | $5.525 billion | $4.235 billion |
| Operating income | $797 million | $568 million | $1.566 billion | $797 million |
| Net earnings | $734 million | $432 million | $1.329 billion | $591 million |
| Diluted EPS | $2.90 | $1.65 | $5.22 | $2.26 |
| Operating cash flow | Not separately reported for the quarter | $864 million | $3.788 billion |
- Q2 revenue increased 19.6%; comparable sales increased 19.6%. First-half revenue grew 27.1%, with comparable sales up 27.7%.
- Q2 gross margin was 23.7%, up from 22.9%; operating margin was 6.7%, up from 5.7%. First-half gross margin was 23.5% versus 22.9%, and operating margin was 6.7% versus 4.3%.
- Domestic Q2 revenue rose 20.6% and comparable sales rose 20.8%. International revenue rose 7.2%, including a favorable 1,070-basis-point foreign-exchange impact; comparable sales rose 5.0%.
- Domestic online revenue was $3.486 billion, down 28.1% on a comparable basis, as customers shifted back toward stores. Online sales remained 31.7% of Domestic revenue, versus 53.1% a year earlier.
- Operating cash flow fell to $864 million from $3.788 billion, primarily reflecting inventory investment and less favorable accounts-payable movements versus the prior-year period; higher earnings partly offset the decline. Capital expenditures were $323 million.
Liquidity, debt, and capital allocation
- At July 31, 2021, cash and cash equivalents were $4.340 billion; current assets were $12.040 billion and current liabilities were $10.357 billion. The reported current ratio was 1.2.
- Total debt on the balance sheet was approximately $1.367 billion, including $110 million of short-term debt and $1.257 billion of long-term debt. The company had $1.15 billion principal amount of notes outstanding and a $110 million solar-related advance due October 2021.
- A new $1.25 billion five-year revolving credit facility, expiring May 2026, replaced the prior facility; no revolver borrowings were outstanding. The company reported $1.25 billion of undrawn capacity.
- First-half financing cash outflows were $1.662 billion, including $1.323 billion of share repurchases and $350 million of dividends. The company repurchased 12.1 million shares during the half and had $3.8 billion remaining under its $5.0 billion authorization at quarter-end.
- On August 24, 2021, Best Buy announced plans to repurchase more than $2.5 billion of shares in fiscal 2022. It also repurchased an additional 1.4 million shares for $160 million between quarter-end and August 27.
Material changes, outlook, and risks
- Management attributed demand to consumers’ continued technology needs at home, strong consumer spending, government stimulus, improving wages, and elevated savings. Q2 operating-income margin expanded by 100 basis points.
- Higher gross margin reflected favorable product margins, fewer promotions, lower supply-chain costs as online mix declined, and higher private-label and co-branded credit-card profit-sharing revenue. SG&A rose with incentive compensation, payroll, advertising, medical claims, 401(k) matching, and technology investment.
- Q2 income tax expense included a $101 million benefit from resolution of discrete tax matters. The effective tax rate was 8.0%, versus 22.9% a year earlier; this tax benefit materially supported reported earnings.
- Management planned to scale its pilot membership program nationally as Best Buy Totaltech at the end of Q3 FY2022. The filing provides no specific revenue or earnings guidance. Management said liquidity should be sufficient for operations, anticipated capital expenditures, dividends, repurchases, and strategic initiatives, while noting spending could be limited if liquidity proves insufficient.
- The company recorded a $44 million first-half restructuring credit, primarily from lower expected termination benefits; Q2 restructuring charges were $4 million, primarily associated with the Mexico exit. Management did not expect material future Mexico-exit charges, but said further strategic realignment could result in material costs with timing and magnitude not forecastable.
- Key risks include COVID-19 and any resurgence, consumer demand and confidence, supply-chain interruptions and product availability, competition, vendor dependence, cyber and technology-system risks, labor costs, macroeconomic conditions, and seasonal reliance on fourth-quarter results. Best Buy also noted that interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether strong comparable-sales growth and expanded margins persist as pandemic-related comparisons normalize and customers continue shifting between online and stores.
- How inventory levels, supplier availability, and working-capital requirements affect operating cash flow after the large first-half inventory investment.
- The durability of earnings excluding the $101 million discrete tax benefit and restructuring adjustments; GAAP diluted EPS was $2.90 versus non-GAAP diluted EPS of $2.98 for Q2.
- Execution and customer adoption of Best Buy Totaltech, including its effect on service revenue, costs, and customer retention.
- The pace of share repurchases and dividends relative to cash generation, liquidity, and the announced fiscal 2022 repurchase plan.
- Legal contingencies: the filing describes proceedings but does not provide a clear quantified aggregate exposure; it states some matters may be reasonably possible to have a material impact.