Business context and reporting period
Best Buy Co., Inc. filed this Form 10-Q for the 13-week quarter ended May 1, 2021, the first quarter of fiscal 2022. The comparison is with the quarter ended May 2, 2020. Best Buy operates Domestic and International segments; after closing all Mexico stores by quarter-end, its International business is expected to consist of Canada. The business is seasonal, with a large share of revenue and earnings typically generated in the fourth quarter.
Financial results
| Metric | Quarter ended May 1, 2021 | Prior-year quarter |
|---|---|---|
| Revenue | $11.637 billion | $8.562 billion |
| Comparable sales growth | 37.2% | (5.3)% |
| Gross profit / gross margin | $2.715 billion / 23.3% | $1.965 billion / 23.0% |
| Operating income / operating margin | $769 million / 6.6% | $229 million / 2.7% |
| Net earnings | $595 million | $159 million |
| Diluted EPS | $2.32 | $0.61 |
| Cash from operating activities | $105 million | $827 million |
Revenue increased 35.9% year over year. Domestic revenue was $10.841 billion, up 37.0%; International revenue was $796 million, up 23.0%, including an approximately 1,000-basis-point favorable currency effect. Management also noted revenue and diluted EPS were up 27.3% and 136.7%, respectively, versus fiscal 2020’s first quarter.
Cash and cash equivalents were $4.278 billion, with another $60 million in short-term investments. Total debt was approximately $1.354 billion, comprising $110 million of short-term debt and $1.244 billion of long-term debt, including its current portion. The current ratio was 1.2. Capital expenditures were $161 million. Cash used in financing was $1.089 billion, including $927 million of share repurchases and $175 million of dividends.
Material changes and management commentary
- Results benefited from strong demand for technology and home-related products and services, supported by consumers’ continued focus on the home, government stimulus, and a strong housing environment. The prior-year comparison was unusual: stores had been shifted to curbside-only service, and in-home services were temporarily suspended for part of that period.
- Operating margin expanded 390 basis points. Management attributed improvement principally to stronger product margins, fewer promotions, supply-chain cost rate improvement, and better fixed-cost leverage on higher sales. Higher installation and delivery costs partially offset gross-margin gains.
- Product availability constraints, stemming from high demand and production and distribution disruptions, could continue in future quarters. Management provided no quantified financial guidance in this filing.
- Best Buy recorded a $48 million restructuring credit, including a $44 million Domestic credit primarily from revised organizational plans and higher-than-expected employee retention, and a $6 million benefit from Mexico-related inventory markdowns. Management did not expect material additional Mexico-exit charges, but said further strategic realignment could result in material future costs whose timing and size could not be forecast.
- The board authorized a new $5.0 billion repurchase program; $4.2 billion remained available at May 1. On May 27, the company announced plans to repurchase $2.5 billion of shares in fiscal 2022. The company also entered a new $1.25 billion, five-year revolving credit facility on May 18, replacing its prior facility.
Liquidity, risks and contingencies
Operating cash flow fell to $105 million from $827 million, principally because of working-capital movements: inventory receipts increased to meet demand after unusually low prior-year receipts, while accounts payable and other liabilities also used cash. Management said available cash, operating cash generation, and credit facilities should be sufficient for operations, anticipated capital expenditures, shareholder returns, and strategic initiatives, while cautioning that cash generation and access to financing are not assured.
Key stated risks include ongoing supply-chain and product-availability issues, the duration and effects of COVID-19, changing consumer demand and economic conditions, competition, vendor dependence, labor costs and retention, cybersecurity and technology-system risks, and foreign-exchange and interest-rate exposure. Legal proceedings are ongoing; the filing does not provide a clear aggregate exposure value and says some matters may not be accrued when liability is not probable or cannot be reasonably estimated. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether exceptional demand and margin improvement persist as pandemic-related demand and comparison periods normalize.
- Whether supply constraints affect sales, product mix, margins, or service delivery in subsequent quarters.
- Cash conversion and working-capital trends, particularly inventory and accounts payable, alongside the elevated pace of repurchases and dividends.
- Execution and remaining costs of the Mexico exit and broader strategic realignment.
- Terms and covenant compliance under the replacement revolving credit facility, and any updates to legal contingencies or fiscal 2022 outlook.