Best Buy Co., Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended April 30, 2022. Comparative period: three months ended May 1, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Best Buy operates Domestic and International segments; International operations now consist of Canada following the exit from Mexico. The company notes that its business is seasonal, with a large proportion of revenue and earnings typically generated in the fourth quarter.
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $10,647 | $11,637 |
| Comparable sales change | (8.0)% | 37.2% |
| Gross profit / margin | $2,353 / 22.1% | $2,715 / 23.3% |
| SG&A / percentage of revenue | $1,890 / 17.8% | $1,988 / 17.1% |
| Operating income / margin | $462 / 4.3% | $769 / 6.6% |
| Net earnings | $341 | $595 |
| Diluted EPS | $1.49 | $2.32 |
| Non-GAAP diluted EPS | $1.57 | $2.23 |
Cash flow, liquidity and debt
- Operating cash flow was negative $1,384, versus positive $105 in the prior-year quarter. Management attributed the outflow mainly to earlier inventory purchases and payments, lower inventory turnover, and higher incentive compensation payments, as well as lower earnings.
- Investing cash outflow was $213, including $215 of capital expenditures. Financing cash outflow was $650, including $455 of share repurchases and $199 of dividends paid. Cash, cash equivalents and restricted cash declined $2,245 to $960; unrestricted cash and cash equivalents were $640 at quarter-end.
- Current assets were $8,315 and current liabilities were $8,635; the reported current ratio was 1.0. Merchandise inventory was $6,258, up from $5,965 at fiscal year-end and $5,721 a year earlier.
- Total debt on the balance sheet was $1,185, including the current portion; this included $1,150 principal amount of notes and $41 of finance lease obligations, offset by debt discounts and issuance costs and including swap valuation adjustments. No borrowings were outstanding under the $1.25 billion revolving credit facility, which expires in May 2026.
- Management said available cash, operating cash generation and credit facilities should be sufficient for operations and anticipated investments, repurchases and dividends, while cautioning that cash generation or borrowing access is not assured. Credit ratings were BBB+ (S&P) and A3 (Moody’s), both with stable outlooks.
Changes and management commentary
- Revenue fell 8.5% and comparable sales declined 8.0%, against unusually strong prior-year comparisons that reflected stimulus payments, pandemic-related store closures and elevated stay-at-home demand. Management said macro conditions worsened after its early-March guidance, including higher inflation and the war in Ukraine; sales were below expectations and supply-chain costs were higher than planned.
- Gross margin fell 120 basis points and operating margin fell 230 basis points. Management cited Totaltech membership costs, increased promotions, higher supply-chain expenses and lower sales leverage. Totaltech was approximately 100 basis points of gross-margin pressure; higher credit-card profit-sharing revenue partly offset the pressures.
- Domestic revenue declined 8.7%, with comparable sales down 8.5%; online comparable sales fell 14.9%. Appliances were the only major Domestic product category listed with comparable growth, up 2.9%. International comparable sales decreased 1.4%; its operating margin remained 4.4%.
- Management described ongoing investment in Totaltech, Best Buy Health, new product categories and customer delivery capabilities. It said it remained confident in the business and believed its revenue and operating-income-rate position was stronger than before the pandemic. The filing does not provide a clear numerical full-year revenue or earnings forecast.
- The company reaffirmed plans, as of May 24, 2022, to repurchase approximately $1.5 billion of shares in fiscal 2023. It repurchased 4.5 million shares for $442 million in the quarter and paid a quarterly dividend of $0.88 per share, up from $0.70.
- Best Buy expected to close approximately 20–30 Best Buy stores annually through fiscal 2025 and increase Outlet Centers to approximately 30 by fiscal 2023. There were no material restructuring charges in the quarter; management said no material restructuring liability remained. It noted that future restructuring costs are possible but their timing and magnitude cannot be forecast.
Risks, contingencies and unusual items
Management identified risks including inflation and other macroeconomic uncertainty, consumer demand and confidence, supply-chain disruption, product availability, competition, promotional activity, labor costs, cybersecurity and technology-system risks, and dependence on holiday-quarter cash flows. The company is involved in legal proceedings; the filing provides no clear aggregate quantified exposure and says accruals are recorded where appropriate. The company reported no material subsequent events through issuance and no material changes in internal control over financial reporting. Interim results may not indicate full-year results.
Important facts for investors to verify
- Whether sales, comparable-sales trends and inventory levels stabilize after the sharp year-over-year decline and early inventory build.
- Whether Totaltech benefits, promotions and supply-chain expenses continue to pressure gross margin, and how much credit-card profit sharing offsets those pressures.
- How negative operating cash flow and the working-capital outflow evolve in subsequent quarters.
- Whether the planned $1.5 billion of fiscal 2023 repurchases and the $0.88 quarterly dividend remain consistent with liquidity and investment needs.
- Any later full-year guidance, material legal developments, or changes in macroeconomic, supply-chain and consumer-demand risks.