BEST BUY CO., INC. Unless the context otherwise requires, the use of the terms "Best Buy ," "we," "us" and "our" refers toBest Buy Co., Inc. and its consolidated subsidiaries. Any references to our website addresses do not constitute incorporation by reference of the information contained on the websites. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 (including the information presented therein under Risk Factors), as well as our other reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited.
Overview
We are driven by our purpose to enrich lives through technology and our vision to personalize and humanize technology solutions for every stage of life. We accomplish this by leveraging our combination of technology and a human touch to meet our customers' everyday needs, whether they come to us online, visit our stores or invite us into their homes. We have two reportable segments: Domestic and International. The Domestic segment is comprised of our operations in all states, districts and territories of theU.S. and ourBest Buy Health business. All of our former stores inMexico were closed as of the end of the first quarter of fiscal 2022, and our International segment is now comprised of all our operations inCanada . Our fiscal year ends on the Saturday nearest the end of January. Our business, like that of many retailers, is seasonal. A large proportion of our revenue and earnings is generated in the fiscal fourth quarter, which includes the majority of the holiday shopping season.
Comparable Sales
Throughout this MD&A, we refer to comparable sales. Comparable sales is a metric used by management to evaluate the performance of our existing stores, websites and call centers by measuring the change in net sales for a particular period over the comparable prior-period of equivalent length. Comparable sales includes revenue from stores, websites and call centers operating for at least 14 full months. Revenue from online sales is included in comparable sales and represents sales initiated on a website or app, regardless of whether customers choose to pick up product in store, curbside, at an alternative pick-up location or take delivery direct to their homes. Revenue from acquisitions is included in comparable sales beginning with the first full quarter following the first anniversary of the date of the acquisition. Comparable sales also includes credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. Revenue from stores closed more than 14 days, including but not limited to relocated, remodeled, expanded and downsized stores, or stores impacted by natural disasters, is excluded from comparable sales until at least 14 full months after reopening. Comparable sales excludes the impact of revenue from discontinued operations and the effect of fluctuations in foreign currency exchange rates (applicable to our International segment only). All periods presented apply this methodology consistently. OnNovember 2, 2021 , we acquired all outstanding shares ofCurrent Health Ltd. ("Current Health "). OnNovember 4, 2021 , we acquired all outstanding shares ofTwo Peaks, LLC d/b/aYardbird Furniture ("Yardbird"). Consistent with our comparable sales policy, the results ofCurrent Health and Yardbird are excluded from our comparable sales calculation until the first quarter of fiscal 2024. We believe comparable sales is a meaningful supplemental metric for investors to evaluate revenue performance resulting from growth in existing stores, websites and call centers versus the portion resulting from opening new stores or closing existing stores. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers' methods. 14 --------------------------------------------------------------------------------
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Non-GAAP Financial Measures
This MD&A includes financial information prepared in accordance with accounting
principles generally accepted in the U.S. ("GAAP"), as well as certain adjusted
or non-GAAP financial measures, such as constant currency, non-GAAP operating
income, non-GAAP effective tax rate and non-GAAP diluted earnings per share
("EPS"). We believe that non-GAAP financial measures, when reviewed in
conjunction with GAAP financial measures, provide additional useful information
for evaluating current period performance and assessing future performance. For
these reasons, internal management reporting, including budgets and forecasts,
and financial targets used for short-term incentives are based on non-GAAP
financial measures. Generally, our non-GAAP financial measures include
adjustments for items such as restructuring charges, goodwill and intangible
impairments, price-fixing settlements, gains and losses on certain investments,
intangible asset amortization, certain acquisition-related costs and the tax
effect of all such items. In addition, certain other items may be excluded from
non-GAAP financial measures when we believe doing so provides greater clarity to
management and our investors. We provide reconciliations of the most comparable
financial measures presented in accordance with GAAP to presented non-GAAP
financial measures that enable investors to understand the adjustments made in
arriving at the non-GAAP financial measures and to evaluate performance using
the same metrics as management. These non-GAAP financial measures should be
considered in addition to, and not superior to or as a substitute for, GAAP
financial measures. We strongly encourage investors and shareholders to review
our financial statements and publicly-filed reports in their entirety and not to
rely on any single financial measure. Non-GAAP financial measures may be
calculated differently from similarly titled measures used by other companies,
thereby limiting their usefulness for comparative purposes.
In our discussions of the operating results of our consolidated business and our
International segment, we sometimes refer to the impact of changes in foreign
currency exchange rates or the impact of foreign currency exchange rate
fluctuations, which are references to the differences between the foreign
currency exchange rates we use to convert the International segment's operating
results from local currencies into U.S. dollars for reporting purposes. We also
may use the term "constant currency," which represents results adjusted to
exclude foreign currency impacts. We calculate those impacts as the difference
between the current period results translated using the current period currency
exchange rates and using the comparable prior period currency exchange rates. We
believe the disclosure of revenue changes in constant currency provides useful
supplementary information to investors in light of significant fluctuations in
currency rates.
Refer to the Non-GAAP Financial Measures section below for detailed reconciliations of items impacting non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS in the presented periods.
Business Strategy Update
One of our greatest strengths is our ability to adapt to rapidly changing and challenging environments, whether due to changes in technology, macroeconomic trends or a pandemic. We are currently operating in an unpredictable consumer electronics industry. As previously stated, we assumed the consumer electronics industry would be lower following two years of elevated growth driven by unusually strong demand for technology products and services and fueled partly by stimulus dollars. In addition, we expected to see some impact on our business as customers broadly shifted their spending back into experience areas, such as travel and entertainment. We did not expect these impacts to be compounded by a changing macro environment where consumers are dealing with sustained and record high levels of inflation in some of the most fundamental parts of their daily lives, like food. While these factors have led to an uneven sales environment, they have not deterred us from continuing to make progress on our initiatives. During the quarter we drove broad customer satisfaction improvements even compared to pre-pandemic levels, particularly in installation and repair. We signed up newBest Buy Totaltech members and increased our delivery speed, delivering almost one-third of customer online orders in one day. We also completed store remodels, opened new outlet stores and began implementing newly signed deals with healthcare companies. In this environment, we are managing thoughtfully and carefully while still investing in our future. This includes managing our inventory levels and actively assessing further actions to evolve our operating model, manage profitability and iterate on our growth initiatives. We have proactively managed our inventory levels and believe they continue to reflect a healthy and evolving mix of products that enables us to positively react to ever-changing consumer needs. We are planning for lower store payroll expenses and reducing spending in discretionary areas by increasing our rigor around backfilling corporate roles, capital expenditures and travel. During the quarter, we also commenced an enterprise-wide restructuring initiative to better align our spending with critical strategies and operations, as well as to optimize our cost structure. While we remain confident in our strategy, the current macroeconomic backdrop has changed in ways that we and many others were not expecting. We fundamentally believe that technology is more important than ever in our everyday lives, and as a result of the past few years, consumers have even more technology devices in their homes that will need to be updated, upgraded and supported over time. As our vendor partners continue to innovate and the world becomes increasingly more digital in all aspects, we will be there to uniquely help customers in our stores, online, virtually and directly in their homes. 15 --------------------------------------------------------------------------------
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Results of Operations
Consolidated Results
Selected consolidated financial data was as follows ($ in millions, except per
share amounts):
Three Months Ended Six Months Ended
July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Revenue $ 10,329 $ 11,849 $ 20,976 $ 23,486
Revenue % change (12.8) % 19.6 % (10.7) % 27.1 %
Comparable sales % change (12.1) % 19.6 % (10.1) % 27.7 %
Gross profit $ 2,287 $ 2,810 $ 4,640 $ 5,525
Gross profit as a % of revenue(1) 22.1 % 23.7 % 22.1 % 23.5 %
SG&A $ 1,882 $ 2,009 $ 3,772 $ 3,997
SG&A as a % of revenue(1) 18.2 % 17.0 % 18.0 % 17.0 %
Restructuring charges $ 34 $ 4 $ 35 $ (38)
Operating income $ 371 $ 797 $ 833 $ 1,566
Operating income as a % of revenue 3.6 % 6.7 % 4.0 % 6.7 %
Net earnings $ 306 $ 734 $ 647 $ 1,329
Diluted earnings per share $ 1.35 $ 2.90 $ 2.85 $ 5.22
(1)Because retailers vary in how they record costs of operating their supply
chain between cost of sales and SG&A, our gross profit rate and SG&A rate may
not be comparable to other retailers' corresponding rates. For additional
information regarding costs classified in cost of sales and SG&A, refer to Note
1, Summary of Significant Accounting Policies, of the Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the fiscal
year ended January 29, 2022 .
In the second quarter and first six months of fiscal 2023, we generated $10.3
billion and $21.0 billion in revenue and our comparable sales decreased 12.1%
and 10.1%, respectively, as we lapped strong comparable sales last year, which
were driven by the timing of government stimulus payments, temporary store
closures due to the COVID-19 pandemic and heightened demand for stay-at-home
focused purchases. In addition, we faced macroeconomic pressures, including high
inflation, that have resulted in overall softness in customer demand within the
consumer electronics industry.
Revenue, gross profit rate, SG&A and operating income rate changes in the second
quarter and first six months of fiscal 2023 were primarily driven by our
Domestic segment. For further discussion of each segment's rate changes, see
Segment Performance Summary, below.
Income Tax Expense
Income tax expense decreased in the second quarter of fiscal 2023 primarily due
to a decrease in pre-tax earnings, partially offset by the prior year resolution
of certain discrete tax matters. Our effective tax rate ("ETR") increased to
15.6% in the second quarter of fiscal 2023 compared to 8.0% in the second
quarter of fiscal 2022, primarily due to the prior year resolution of certain
discrete tax matters, partially offset by the impact of lower pre-tax earnings
in the current year.
Income tax expense decreased in the first six months of fiscal 2023 primarily
due to a decrease in pre-tax earnings, partially offset by the prior year
resolution of certain discrete tax matters. Our ETR increased to 20.5% in the
first six months of fiscal 2023 compared to 15.1% in the first six months of
fiscal 2022, primarily due to the prior year resolution of certain discrete tax
matters, partially offset by the impact of lower pre-tax earnings in the current
year. Refer to Note 10, Income Taxes, of the Notes to Condensed Consolidated
Financial Statements, included in this Quarterly Report on Form 10-Q for
additional information.
Our tax provision for interim periods is determined using an estimate of our
annual ETR, adjusted for discrete items, if any, that are taken into account in
the relevant period. We update our estimate of the annual ETR each quarter and
we make a cumulative adjustment if our estimated tax rate changes. Our quarterly
tax provision and our quarterly estimate of our annual ETR are subject to
variation due to several factors, including our ability to accurately forecast
our pre-tax and taxable income and loss by jurisdiction, tax audit developments,
recognition of excess tax benefits or deficiencies related to stock-based
compensation, foreign currency gains (losses), changes in laws or regulations,
and expenses or losses for which tax benefits are not recognized. Our ETR can be
more or less volatile based on the amount of pre-tax earnings. For example, the
impact of discrete items and non-deductible losses on our ETR is greater when
our pre-tax earnings are lower.
On August 16, 2022 , the U.S. enacted the Inflation Reduction Act of 2022, which,
among other things, implements a 15% minimum tax on book income of certain large
corporations, a 1% excise tax on net stock repurchases and several tax
incentives to promote clean energy. Based on our current analysis of the
provisions, we do not believe this legislation will have a material impact on
our consolidated financial statements.
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Segment Performance Summary
Domestic Segment
Selected financial data for the Domestic segment was as follows ($ in millions):
Three Months Ended Six Months Ended
July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Revenue $ 9,569 $ 11,011 $ 19,463 $ 21,852
Revenue % change (13.1) % 20.6 % (10.9) % 28.2 %
Comparable sales % change(1) (12.7) % 20.8 % (10.6) % 28.7 %
Gross profit $ 2,109 $ 2,606 $ 4,279 $ 5,132
Gross profit as a % of revenue 22.0 % 23.7 % 22.0 % 23.5 %
SG&A $ 1,732 $ 1,849 $ 3,473 $ 3,685
SG&A as a % of revenue 18.1 % 16.8 % 17.8 % 16.9 %
Restructuring charges $ 34 $ - $ 34 $ (44)
Operating income $ 343 $ 757 $ 772 $ 1,491
Operating income as a % of revenue 3.6 % 6.9 % 4.0 % 6.8 %
Selected Online Revenue Data
Total online revenue $ 2,975 $ 3,486 $ 6,034 $ 7,082
Online revenue as a % of total
segment revenue 31.0 % 31.7 % 31.0 % 32.4 %
Comparable online sales %
change(1) (14.7) % (28.1) % (14.8) % (13.5) %
(1)Online sales are included in the comparable sales calculation.
The decrease in revenue in the second quarter and first six months of fiscal 2023 was primarily driven by comparable sales declines across most of our product categories, particularly computing and home theater. Online revenue of$3.0 billion and$6.0 billion in the second quarter and first six months of fiscal 2023 decreased 14.7% and 14.8% on a comparable basis, respectively. These decreases in revenue were primarily due to the reasons described above.
Domestic segment stores open at the beginning and end of the second quarters of fiscal 2023 and fiscal 2022 were as follows:
Fiscal 2023 Fiscal 2022
Total Stores Total Stores
Total Stores at at End of Total Stores at at End of
Beginning of Stores Stores Second Beginning of Stores Stores Second
Second Quarter Opened Closed Quarter Second Quarter Opened Closed Quarter
Best Buy 931 1 (2) 930 946 2 (1) 947
Outlet Centers 16 2 - 18 14 1 - 15
Pacific Sales 21 - - 21 21 - - 21
Yardbird 9 4 - 13 - - - -
Total 977 7 (2) 982 981 3 (1) 983
We continuously monitor store performance as part of a market-driven,
omnichannel strategy. As we approach the expiration of leases, we evaluate
various options for each location, including whether a store should remain open.
We currently expect to close approximately 15 to 20 Best Buy stores in fiscal
2023 and to increase the number of Outlet Centers to approximately 30 by the end
of fiscal 2024.
Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:
Revenue Mix Comparable Sales
Three Months Ended Three Months Ended
July 30, 2022 July 31, 2021 July 30, 2022July 31, 2021 Computing and Mobile Phones 42 % 43 % (16.6) % 11.4 % Consumer Electronics 30 % 31 % (14.7) % 27.4 % Appliances 17 % 16 % (1.2) % 31.1 % Entertainment 5 % 5 % (9.2) % 36.4 % Services 5 % 5 % (8.5) % 23.6 % Other 1 % - % 15.6 % N/A Total 100 % 100 % (12.7) % 20.8 % 17
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Notable comparable sales changes by revenue category were as follows:
?Computing and Mobile Phones: The 16.6% comparable sales decline was driven primarily by computing, tablets and wearables.
?Consumer Electronics: The 14.7% comparable sales decline was driven primarily by home theater, headphones and portable speakers.
?Appliances: The 1.2% comparable sales decline was driven primarily by large appliances.
?Entertainment: The 9.2% comparable sales decline was driven primarily by gaming.
?Services: The 8.5% comparable sales decline was driven primarily by the launch of our Totaltech membership offering that includes benefits that were previously stand-alone revenue-generating services, such as warranty. Our gross profit rates decreased in the second quarter and first six months of fiscal 2023, primarily due to lower services margin rates, which resulted in approximately 100 basis points of margin pressure on a weighted basis in both the second quarter and first six months of fiscal 2023. Our Totaltech membership offering was the primary driver of the lower services margin rates, which is primarily due to incremental customer benefits, and associated costs, compared to our previous Total Tech Support offer. Lower product margin rates, including increased promotions, and higher supply chain costs also contributed to the decreases in our gross profit rates. These decreases were partially offset by higher profit-sharing revenue from our private label and co-branded credit card arrangement in the second quarter and first six months of fiscal 2023. Our SG&A decreased in the second quarter and first six months of fiscal 2023, primarily due to lower incentive compensation expense of approximately$135 million and$265 million , respectively, compared to prior-year periods. We currently expect to be below required financial thresholds for short-term incentive compensation performance metrics in the current year while lapping short-term incentive payments near maximum levels in the prior year. The restructuring charges incurred in the second quarter and first six months of fiscal 2023 primarily related to termination benefits related to an enterprise-wide restructuring initiative that commenced in the second quarter of fiscal 2023 to better align our spending with critical strategies and operations, as well as to optimize our cost structure. Refer to Note 2, Restructuring, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for additional information. Our operating income rates decreased in the second quarter and first six months of fiscal 2023, primarily due to the unfavorable gross profit rates and decreased leverage from lower sales volume on our fixed expenses, which resulted in unfavorable SG&A rates.
International Segment
Selected financial data for the International segment was as follows ($ in
millions):
Three Months Ended Six Months Ended
July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Revenue $ 760 $ 838 $ 1,513 $ 1,634
Revenue % change (9.3) % 7.2 % (7.4) % 14.3 %
Comparable sales % change (4.2) % 5.0 % (2.8) % 15.0 %
Gross profit $ 178 $ 204 $ 361 $ 393
Gross profit as a % of revenue 23.4 % 24.3 % 23.9 % 24.1 %
SG&A $ 150 $ 160 $ 299 $ 312
SG&A as a % of revenue 19.7 % 19.1 % 19.8 % 19.1 %
Restructuring charges $ - $ 4 $ 1 $ 6
Operating income $ 28 $ 40 $ 61 $ 75
Operating income as a % of revenue 3.7 % 4.8 % 4.0 % 4.6 %
The decreases in revenue in the second quarter and first six months of fiscal
2023 were primarily driven by comparable sales declines of 4.2% and 2.8%,
respectively, in
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International segment stores open at the beginning and end of the second quarters of fiscal 2023 and fiscal 2022 were as follows:
Fiscal 2023 Fiscal 2022
Total Stores Total Stores
Total Stores at at End of Total Stores at at End of
Beginning of Second Stores Stores Second Beginning of Stores Stores Second
Quarter Opened Closed Quarter Second Quarter Opened Closed Quarter
Canada
Best Buy 127 - - 127 130 - (1) 129
Best Buy Mobile 33 - - 33 33 - - 33
Total 160 - - 160 163 - (1) 162
International segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:
Revenue Mix Comparable Sales
Three Months Ended Three Months Ended
July 30, 2022 July 31, 2021 July 30,2022 July 31, 2021 Computing and Mobile Phones 43 % 44 % (7.6) % (1.6) % Consumer Electronics 29 % 30 % (4.8) % 11.8 % Appliances 14 % 12 % 6.8 % 11.6 % Entertainment 7 % 7 % (5.8) % 13.7 % Services 5 % 5 % (0.4) % 2.2 % Other 2 % 2 % 12.6 % 10.8 % Total 100 % 100 % (4.2) % 5.0 %
Notable comparable sales changes by revenue category were as follows:
?Computing and Mobile Phones: The 7.6% comparable sales decline was driven primarily by computing, partially offset by comparable sales growth in mobile phones.
?Consumer Electronics: The 4.8% comparable sales decline was driven primarily by home theater.
?Appliances: The 6.8% comparable sales growth was driven primarily by small appliances.
?Entertainment: The 5.8% comparable sales decline was driven primarily by gaming.
?Services: The 0.4% comparable sales decline was driven primarily by warranty services.
?Other: The 12.6% comparable sales growth was driven primarily by sporting goods.
The decrease in our gross profit rate in the second quarter of fiscal 2023 was primarily driven by lower product margin rates. In the first six months of fiscal 2023, the decrease in our gross profit rate was primarily driven by lower product margin rates and a$6 million benefit in the first six months of fiscal 2022 associated with more-favorable-than-expected inventory markdowns related to our decision to exit operations inMexico . The decrease in the first six months of fiscal 2023 was partially offset by a larger percentage of revenue from the higher margin services category inCanada . Our SG&A decreased in the second quarter and first six months of fiscal 2023, primarily due to lower incentive compensation expense and the favorable impact of foreign currency exchange rates, partially offset by higher store payroll expense. Our operating income rates decreased in the second quarter and first six months of fiscal 2023, primarily due to the unfavorable gross profit rates and decreased leverage from lower sales volume on our fixed expenses, which resulted in unfavorable SG&A rates. 19
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Consolidated Non-GAAP Financial Measures
Reconciliations of operating income, effective tax rate and diluted EPS (GAAP
financial measures) to non-GAAP operating income, non-GAAP effective tax rate
and non-GAAP diluted EPS (non-GAAP financial measures) were as follows ($ in
millions, except per share amounts):
Three Months Ended Six Months Ended
July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Operating income $ 371 $ 797 $ 833 $ 1,566
% of revenue 3.6 % 6.7 % 4.0 % 6.7 %
Intangible asset amortization(1) 22 20 44 40
Restructuring charges(2) 34 4 35 (38)
Restructuring - inventory
markdowns(3) - - - (6)
Non-GAAP operating income $ 427 $ 821 $ 912 $ 1,562
% of revenue 4.1 % 6.9 % 4.3 % 6.7 %
Effective tax rate 15.6 % 8.0 % 20.5 % 15.1 %
Intangible asset amortization(1) 0.4 % 0.4 % 0.2 % 0.3 %
Restructuring charges(2) 0.7 % - % 0.1 % (0.3) %
Non-GAAP effective tax rate 16.7 % 8.4 % 20.8 % 15.1 %
Diluted EPS $ 1.35 $ 2.90 $ 2.85 $ 5.22
Intangible asset amortization(1) 0.10 0.08 0.19 0.16
Restructuring charges(2) 0.15 0.02 0.15 (0.15)
Restructuring - inventory
markdowns(3) - - - (0.02)
Income tax impact of non-GAAP
adjustments(4) (0.06) (0.02) (0.08) -
Non-GAAP diluted EPS $ 1.54 $ 2.98 $ 3.11 $ 5.21
(1)Represents the non-cash amortization of definite-lived intangible assets
associated with acquisitions, including customer relationships, tradenames and
developed technology assets.
(2)Represents charges primarily related to termination benefits in the Domestic
segment for the periods ended July 30, 2022 , associated with an enterprise-wide
initiative that commenced in the second quarter of fiscal 2023 to better align
our spending with critical strategies and operations, as well as to optimize our
cost structure. Represents adjustments to previously planned organizational
changes and higher-than-expected retention rates in the Domestic segment and
charges associated with the exit from operations in Mexico in the International
segment for the periods ended July 31, 2021 .
(3)Represents inventory markdown adjustments recorded within cost of sales
associated with the exit from operations in Mexico .
(4)The non-GAAP adjustments primarily relate to the U.S. , the UK and Mexico . As
such, the income tax charge is calculated using the statutory tax rate of 24.5%
for all U.S. non-GAAP items for all periods presented. There is no income tax
charge for the UK and Mexico non-GAAP items, as there was no tax benefit
recognized on these expenses in the calculation of GAAP income tax expense.
Our non-GAAP operating income rate decreased in the second quarter and first six
months of fiscal 2023, primarily driven by our Domestic segment's lower gross
profit rates and decreased leverage from lower sales volume on our fixed
expenses, which resulted in unfavorable SG&A rates.
Our non-GAAP effective tax rate increased in the second quarter and first six
months of fiscal 2023, primarily due to the prior year resolution of certain
discrete tax matters, partially offset by the impact of lower pre-tax earnings
in the current year. Refer to Note 10, Income Taxes, of the Notes to Condensed
Consolidated Financial Statements, included in this Quarterly Report on Form
10-Q for additional information.
Our non-GAAP diluted EPS decreased in the second quarter and first six months of fiscal 2023, primarily driven by the decreases in non-GAAP operating income.
Liquidity and Capital Resources
We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including the level of investment required to support our business strategies, the performance of our business, capital expenditures, credit facilities, short-term borrowing arrangements and working capital management. We modify our approach to managing these variables as changes in our operating environment arise. For example, capital expenditures and share repurchases are a component of our cash flow and capital management strategy, which, to a large extent, we can adjust in response to economic and other changes in our business environment. We have a disciplined approach to capital allocation, which focuses on investing in key priorities that support our strategy.
Cash and cash equivalents were as follows ($ in millions):
July 30, 2022 January 29, 2022 July 31, 2021
Cash and cash equivalents $ 840 $ 2,936 $ 4,340
The decrease in cash and cash equivalents from January 29, 2022 , was primarily
due to lower inventory turnover and the timing and volume of inventory purchases
and payments, higher incentive compensation payments in fiscal 2023 as a result
of strong fiscal 2022 results, share repurchases, capital expenditures and
dividend payments, partially offset by earnings.
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The decrease in cash and cash equivalents fromJuly 31, 2021 , was primarily due to share repurchases, lower inventory turnover and the timing and volume of inventory purchases and payments, capital expenditures, dividend payments and acquisitions, partially offset by earnings.
Cash Flows
Cash flows were as follows ($ in millions):
Six Months Ended
July 30, 2022 July 31, 2021
Total cash provided by (used
in):
Operating activities $ (709) $ 864
Investing activities (484) (358)
Financing activities (861) (1,662)
Effect of exchange rate changes
on cash 1 5
Decrease in cash, cash equivalents and
restricted cash $ (2,053) $ (1,151)
Operating Activities
The increase in cash used in operating activities in the first six months of
fiscal 2023 was primarily driven by lower earnings in the current year period,
lower inventory turnover and the timing and volume of inventory purchases and
payments, which resulted in a higher proportion of inventory purchases having
been paid for compared to the first six months of fiscal 2022. The increase in
cash used in operating activities was also due to higher incentive compensation
payments in the first six months of fiscal 2023 as a result of strong fiscal
2022 results.
Investing Activities
The increase in cash used in investing activities in the first six months of
fiscal 2023 was primarily driven by increased capital spending for initiatives
to support our business.
Financing Activities
The decrease in cash used in financing activities in the first six months of
fiscal 2023 was primarily driven by lower share repurchases.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents,
our credit facilities and other debt arrangements are our most significant
sources of liquidity. We believe our sources of liquidity will be sufficient to
fund operations and anticipated capital expenditures, share repurchases,
dividends and strategic initiatives, including business combinations. However,
in the event our liquidity is insufficient, we may be required to limit our
spending. There can be no assurance that we will continue to generate cash flows
at or above current levels or that we will be able to maintain our ability to
borrow under our existing credit facilities or obtain additional financing, if
necessary, on favorable terms.
We have a $1.25 billion , five year senior unsecured revolving credit facility
agreement (the "Five-Year Facility Agreement") with a syndicate of banks. The
Five-Year Facility Agreement permits borrowings of up to $1.25 billion and
expires in May 2026 . There were no borrowings outstanding under the Five-Year
Facility Agreement as of July 30, 2022 , January 29, 2022 , or July 31, 2021 .
Our credit ratings and outlook as of
Rating Agency Rating Outlook
Standard & Poor> BBB+ Stable
Moody> A3 Stable
Credit rating agencies review their ratings periodically, and, therefore, the
credit rating assigned to us by each agency may be subject to revision at any
time. Factors that can affect our credit ratings include changes in our
operating performance, the economic environment, conditions in the retail and
consumer electronics industries, our financial position and changes in our
business strategy. If changes in our credit ratings were to occur, they could
impact, among other things, interest costs for certain of our credit facilities,
our future borrowing costs, access to capital markets, vendor financing terms
and future new-store leasing costs.
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Restricted Cash
Our liquidity is also affected by restricted cash balances that are primarily
restricted to cover product protection plans provided under our Totaltech
membership offering and self-insurance liabilities. Restricted cash, which is
included in Other current assets on our Condensed Consolidated Balance Sheets,
was $312 million , $269 million and $134 million at July 30, 2022 ,
January 29, 2022 , and July 31, 2021 , respectively. The increases in restricted
cash from January 29, 2022 , and July 31, 2021 , were primarily due to the
national launch of our Totaltech membership offering in October 2021 and growth
in the membership base, partially offset by a decrease in restricted cash for
self-insurance liabilities.
Debt and Capital
As of July 30, 2022 , we had $500 million principal amount of notes due October
1, 2028 , and $650 million principal amount of notes due October 1, 2030 . Refer
to Note 6, Debt, of the Notes to Condensed Consolidated Financial Statements,
included in this Quarterly Report on Form 10-Q, and Note 8, Debt, of the Notes
to Consolidated Financial Statements included in our Annual Report on Form 10-K
for the fiscal year ended January 29, 2022 , for additional information about our
outstanding debt.
Share Repurchases and Dividends
We repurchase our common stock and pay dividends pursuant to programs approved
by our Board of Directors ("Board"). The payment of cash dividends is also
subject to customary legal and contractual restrictions. Our long-term capital
allocation strategy is to first fund operations and investments in growth and
then return excess cash over time to shareholders through dividends and share
repurchases while maintaining investment-grade credit metrics.
On February 28, 2022 , our Board approved a new $5.0 billion share repurchase
program, which replaced the $5.0 billion share repurchase program authorized on
February 16, 2021 . There is no expiration date governing the period over which
we can repurchase shares under this authorization. Share repurchases were paused
during the second quarter of fiscal 2023.
Share repurchase and dividend activity was as follows ($ and shares in millions,
except per share amounts):
Three Months Ended Six Months Ended
July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Total cost of shares
repurchased $ 10 $ 416 $ 452 $ 1,331
Average price per share $ 83.71 $ 112.75 $ 96.83 $ 109.92
Number of shares repurchased 0.1 3.7 4.6 12.1
Regular quarterly cash dividend
per share $ 0.88 $ 0.70 $ 1.76 $ 1.40
Cash dividends declared and
paid $ 198 $ 175 $ 397 $ 350
The total cost of shares repurchased decreased in the second quarter and first six months of fiscal 2023, primarily due to decreases in the volume of repurchases. Cash dividends declared and paid increased in the second quarter and first six months of fiscal 2023, primarily due to increases in the regular quarterly cash dividend per share.
Other Financial Measures
Our current ratio, calculated as current assets divided by current liabilities, was 1.0 as ofJuly 30, 2022 , andJanuary 29, 2022 , and 1.2 as ofJuly 31, 2021 . The decrease fromJuly 31, 2021 , was primarily driven by lower cash and cash equivalents. Our debt to earnings ratio, calculated as total debt (including current portion) divided by net earnings over the trailing twelve months increased to 0.7 as ofJuly 30, 2022 , compared to 0.5 as ofJanuary 29, 2022 , andJuly 31, 2021 , primarily due to lower net earnings.
Off-Balance-Sheet Arrangements and Contractual Obligations
Our liquidity is not dependent on the use of off-balance-sheet financing arrangements other than in connection with our$1.25 billion in undrawn capacity on our Five-Year Facility Agreement as ofJuly 30, 2022 , which, if drawn upon, would be included in either short-term or long-term debt on our Condensed Consolidated Balance Sheets. There has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 2022. See our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 , for additional information regarding our off-balance-sheet arrangements and contractual obligations. 22 -------------------------------------------------------------------------------- Table of
Contents
Significant Accounting Policies and Estimates
We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, and our critical accounting estimates in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 . There have been no significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2022.
New Accounting Pronouncements
We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements.
Safe Harbor Statement Under the Private Securities Litigation Reform Act
Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
provide a "safe harbor" for forward-looking statements to encourage companies to
provide prospective information about their companies. With the exception of
historical information, the matters discussed in this Quarterly Report on Form
10-Q are forward-looking statements and may be identified by the use of words
such as "anticipate," "assume," "believe," "estimate," "expect," "guidance,"
"intend," "outlook," "plan," "project" and other words and terms of similar
meaning. Such statements reflect our current views and estimates with respect to
future market conditions, company performance and financial results, operational
investments, business prospects, new strategies, the competitive environment and
other events. These statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from the potential results
discussed in such forward-looking statements. Readers should review Item 1A,
Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended
January 29, 2022 , for a description of important factors that could cause our
actual results to differ materially from those contemplated by the
forward-looking statements made in this Quarterly Report on Form 10-Q. Among the
factors that could cause actual results and outcomes to differ materially from
those contained in such forward-looking statements are the following: levels of
consumer confidence; macroeconomic pressures in the markets in which we operate
(including but not limited to the effects of COVID-19; increased inflation
rates; increased levels of inventory loss due to organized crime, petty theft or
otherwise, fluctuations in housing prices, energy markets, and jobless rates and
those related to the conflict in Ukraine ); supply chain issues; any material
disruption in our relationship with or the services of third-party vendors,
risks related to our exclusive brand products and risks associated with vendors
that source products outside of the U.S. ; the duration and scope of the COVID-19
pandemic and its resurgences and the impact on demand for our products and
services; catastrophic events, health crises and pandemics; susceptibility of
our products to technological advancements, product life cycles and launches;
conditions in the industries and categories in which we operate; changes in
consumer preferences, spending and debt; competition (including from
multi-channel retailers, e-commerce business, technology service providers,
traditional store-based retailers, vendors and mobile network carriers); our
ability to attract and retain qualified employees; changes in market
compensation rates; our expansion strategies; our focus on services as a
strategic priority; our reliance on key vendors and mobile network carriers
(including product availability); our ability to maintain positive brand
perception and recognition; our company transformation; our mix of products and
services; our ability to effectively manage strategic ventures, alliances or
acquisitions; our ability to effectively manage our real estate portfolio; trade
restrictions or changes in the costs of imports (including existing or new
tariffs or duties and changes in the amount of any such tariffs or duties); our
reliance on our information technology systems; our dependence on internet and
telecommunications access and capabilities; our ability to prevent or
effectively respond to a cyber-attack, privacy or security breach; product
safety and quality concerns; changes to labor or employment laws or regulations;
risks arising from statutory, regulatory and legal developments (including tax
statutes and regulations); risks arising from our international activities
(including those related to the conflict in Ukraine ); failure to effectively
manage our costs; our dependence on cash flows and net earnings generated during
the fourth fiscal quarter; pricing investments and promotional activity;
economic or regulatory developments that might affect our ability to provide
attractive promotional financing; constraints in the capital markets; changes to
our vendor credit terms; changes in our credit ratings; and general economic
uncertainty in key global markets and worsening of global economic conditions or
low levels of economic growth. We caution that the foregoing list of important
factors is not complete. Any forward-looking statements speak only as of the
date they are made and we assume no obligation to update any forward-looking
statement that we may make.
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