Business context and reporting period
Best Buy Co., Inc. reported its first quarter of fiscal 2024, the 13 weeks ended April 29, 2023, compared with the 13 weeks ended April 30, 2022. The retailer operates Domestic and International segments; International consists of Canada. Results are seasonal, with a large share of revenue and earnings typically generated in the fiscal fourth quarter.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Revenue | $9.467 billion | $10.647 billion |
| Comparable sales change | (10.1)% | (8.0)% |
| Gross profit / margin | $2.150 billion / 22.7% | $2.353 billion / 22.1% |
| Operating income / margin | $311 million / 3.3% | $462 million / 4.3% |
| Net earnings | $244 million | $341 million |
| Diluted EPS | $1.11 | $1.49 |
| Operating cash flow | $(331) million | $(1.384) billion |
| Capital expenditures | $204 million | $215 million |
Gross margin improved 60 basis points, while operating margin declined 100 basis points. Management attributed the gross-margin improvement mainly to membership economics, product margins and credit-card profit sharing; lower sales volume reduced fixed-cost leverage and weighed on operating margin. Adjusted non-GAAP diluted EPS was $1.15 versus $1.57 a year earlier.
At April 29, cash and cash equivalents were $1.030 billion; cash, cash equivalents and restricted cash totaled $1.432 billion. Current assets were $7.762 billion and current liabilities $7.908 billion; the reported current ratio was 1.0. Total debt, including the current portion, was $1.170 billion, including $500 million of notes due 2028 and $650 million due 2030. No revolver borrowings were outstanding. The new five-year revolving facility provides $1.25 billion of capacity through April 2028. Cash and cash equivalents declined from $1.874 billion at fiscal year-end, primarily due to working-capital timing, capital spending and dividends.
Cash used in operating activities improved by $1.053 billion year over year, mainly reflecting the timing and volume of inventory purchases and payments and lower incentive-compensation payments, partly offset by lower earnings. Financing cash use was $281 million, including $202 million of dividends and $81 million of repurchases. The quarterly dividend was $0.92 per share.
Material changes and management commentary
- Revenue declined 11.1% and comparable sales declined 10.1%. Domestic revenue fell 11.0% and comparable sales 10.4%; International revenue fell 11.6%, with a 5.5% comparable-sales decline and an approximately 610-basis-point foreign-exchange headwind to revenue.
- Domestic weakness was broad, particularly in computing and mobile phones, appliances and home theater. Domestic services comparable sales rose 12.0%; entertainment rose 3.8%, primarily on gaming. International comparable sales increased only in entertainment among the listed major categories, rising 12.0%.
- Management cited inflation, rising interest rates and cautious consumer behavior as pressures, and expected consumer-electronics industry sales to decline again during fiscal 2024. It expects technology replacement cycles and vendor innovation to support an eventual industry recovery, but gave no specific revenue, earnings or EPS guidance in this filing.
- Fiscal 2024 plans include closing 20–30 large-format Best Buy stores, remodeling eight Experience stores and opening approximately 10 Outlet stores. Management expects fiscal-year capital expenditures of approximately $850 million and additional share repurchases.
- Membership changes taking effect in the second quarter are expected by management to offer customers more choice and reduce the cost to serve. Credit-card profit-sharing revenue, a recent margin benefit, is expected to have a slightly negative year-over-year impact on revenue and gross and operating margins for the remainder of fiscal 2024.
Risks, contingencies and unusual items
- The quarter included a $9 million reduction in restructuring charges, primarily reflecting higher-than-expected employee retention; cumulative charges for the fiscal 2023 resource-optimization initiative were $136 million. Management does not expect material future charges for that initiative.
- Legal proceedings are ongoing. The filing says accruals were recorded where appropriate, but does not provide a clear quantified estimate of reasonably possible material exposure.
- Accounts payable included $490 million associated with suppliers’ optional early-payment participation in the supply-chain-financing program.
- Key stated risks include prolonged weak consumer demand, inflation and interest rates, competition, vendor and supply-chain dependence, labor costs and staffing, foreign exchange, cybersecurity and privacy, and execution of store, membership and other strategic changes. The company also noted that lower earnings increased its trailing-twelve-month debt-to-earnings ratio to 0.9 from 0.5 a year earlier.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether consumer-electronics demand and comparable-sales trends stabilize, particularly in computing, appliances and home theater.
- Whether planned store changes, membership-program revisions and cost actions deliver the expected efficiency and margin benefits.
- Whether fiscal 2024 capital expenditures remain near $850 million and how dividends and repurchases affect cash and debt levels.
- How credit-card profit sharing, foreign exchange and restricted-cash requirements affect future margins and liquidity.
- Any material developments in legal proceedings, restructuring obligations or the company’s ability to maintain its credit ratings and meet facility covenants.