What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-09-06 compared with 2024-06-07 · 113 added, 73 removed, 257 unchanged (42% of the section changed)

49 unchanged sentences

Business Strategy Update

In the first quarter of fiscal 2025, we continued to manage our profitability through strong execution, while at the same time preparing for future growth.

We made progress on our fiscal 2025 priorities, grew our paid membership base, implemented previously announced restructuring actions and drove improvements in our prioritized customer experiences.

While macroeconomic factors continued to create a challenging sales environment during the quarter, we will continue to navigate this fluctuating environment and its impact on customer demand while remaining focused and energized about our purpose to enrich lives through technology.

We expect fiscal 2025 to be a year of increasing industry stabilization as the pace of innovation increases and consumers begin to upgrade and replace technology products bought early in the pandemic.

To ensure we are in the best position possible to benefit, we are focused on the following four priorities:

In the second quarter of fiscal 2025, we continued to manage our profitability through strong execution, while at the same time preparing for future growth.

We made progress on our fiscal 2025 priorities, grew our paid membership base, continued to implement previously announced restructuring actions and drove improvements in our prioritized customer experiences.

We delivered sales growth in our Domestic tablet and computing categories as our market position, expert sales associates and compelling merchandising allowed us to capitalize on demand driven by our customers’ desire to replace or upgrade their products combined with new innovation.

Our enterprise comparable sales declined 2.3% in the second quarter of fiscal 2025, compared to a comparable sales decline of 6.1% in the first quarter of fiscal 2025.

We believe the second quarter sequential improvement in comparable sales supports our belief that this will be a year of further stabilization in the consumer electronics industry.

To ensure we are in the best position possible to benefit from these industry developments, we are focused on the following four priorities:

(1) invigorate and progress targeted customer experiences;

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and (4) explore, pilot and drive incremental revenue streams.

In the first quarter of fiscal 2025, we focused on providing increasingly personalized, highly relevant and motivational content to our App users to drive higher engagement.

Each of our App users’ home screens will eventually look different based on their personal preferences and a number of factors like current location, shopping history, membership status and what we know they care about the most based on their activity.

We are also driving speed improvements on the product pages and in checkout in the mobile experience to drive customer experience and sales performance.

In our stores, we plan to make enhancements to every store in the chain in some fashion throughout the second and third quarters, improving both our merchandising and ease of shopping for customers.

In the second quarter of fiscal 2025, we completed the roll-out of personalized, relevant and motivational content to our App users to drive higher engagement.

Each of our App users’ home screens now look different based on their personal preferences and a number of factors like current location, shopping history, membership status and what we know they care about the most based on their activity.

In our stores, we are making enhancements to every store in the chain in some fashion throughout the second and third quarters, improving both our merchandising and ease of shopping for customers.

This includes working with many of our vendors to implement new and enhanced in-store experiences across the store.

To continue to elevate the expert service we provide customers, we are adding fully dedicated labor expertise to our in-store computing, home theater and major appliances departments in hundreds of stores.

To continue to elevate the expert service we provide customers, we have added fully dedicated labor expertise to our in-store computing and have begun the process of doing so in our home theater and major appliances departments in hundreds of stores.

These changes are in addition to the actions taken throughout the past year to streamline our leadership model, allowing us to invest in more customer-facing sales associate hours in our stores.

While we elevate our customer experiences, we are simultaneously executing on our longstanding commitment to drive operational effectiveness and efficiencies and identify cost reductions, as this is paramount to help offset inflationary pressures in our business and fund investment capacity.

For example, in fiscal 2025 we are focused on driving further efficiencies across forward and reverse supply chain, our Geek Squad repair operations, and our customer care experience.

For example, in fiscal 2025 we are focused on driving further efficiencies across our forward and reverse supply chain, our Geek Squad repair operations and our customer care experience.

We will continue to lean heavily on analytics and technology to achieve these efficiencies.

Our third key priority for the year is to continue our disciplined approach to capital allocation.

This will include striking the appropriate balance of prioritizing areas that best position us for the future while prudently dealing with the near-term uncertainty in the consumer electronics industry.

This includes striking the appropriate balance of prioritizing areas that best position us for the future, while prudently dealing with the near-term uncertainty in the consumer electronics industry.

Our fourth key priority for fiscal 2025 is longer-term in focus.

We will continue to explore opportunities that leverage our scale and capabilities to drive incremental profitable revenue streams over time.

We believe we are starting to see the pace of technology innovation increase as computing devices powered by artificial intelligence are expected to launch this summer.

We are the largest consumer electronics specialty retailer with what we believe to be a unique range of product assortment and expert services to help humanize tech, especially new innovation, for every stage of our customers’ lives.

We intend to strengthen our position in key categories like computing, home theater and major appliances through our differentiated experiences, pointed marketing spend and competitive pricing.

We believe we are putting ourselves in the best position for fiscal 2025 and beyond.

Results of Operations

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Three Months Ended

April 29, 2023

Six Months Ended

August 3, 2024

July 29, 2023

August 3, 2024

July 29, 2023

Revenue % change

1 unchanged sentence

Gross profit as a % of revenue (1)

Selling, general and administrative expense ("SG&A")

SG&A as a % of revenue (1)

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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 February 3, 2024.

In the first quarter of fiscal 2025, we generated $8.8 billion in revenue and our comparable sales declined 6.1% as we continued to operate in a consumer electronics industry that is challenged by various macroeconomic pressures, including high inflation, increased spending outside the home in areas such as travel and entertainment and lower levels of product innovation.

Revenue, gross profit rate, SG&A and operating income rate changes in the first quarter of fiscal 2025 were primarily driven by our Domestic segment.

In the second quarter and first six months of fiscal 2025, we generated $9.3 billion and $18.1 billion in revenue, respectively, and our comparable sales sequentially improved from the first quarter of fiscal 2025 to a decline of 2.3% and a decline of 4.2%, respectively, as we continued to operate in a challenged consumer electronics industry.

Despite comparable sales declines in the second quarter of fiscal 2025 in categories such as appliances, home theater and gaming, we delivered comparable sales growth in our tablet and computing categories, driven by customers’ desire to replace or upgrade their products combined with new product innovation.

Revenue, gross profit rate, SG&A and operating income rate changes in the second quarter and first six months of fiscal 2025 were primarily driven by our Domestic segment.

For further discussion of our Domestic and International segments, see Segment Performance Summary , below.

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Stores open by reportable segment were as follows:

April 29, 2023

August 3, 2024

July 29, 2023

Outlet Centers

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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 10 to 15 Domestic Best Buy stores in fiscal 2025.

We currently expect to close a total of approximately 10 to 15 Domestic Best Buy stores in fiscal 2025.

Income Tax Expense

Income tax expense increased in the first quarter of fiscal 2025, primarily due to reduced benefits from the resolution of tax matters and stock-based compensation .

Our effective tax rate (“ETR”) increased to 24.7% in the first quarter of fiscal 2025 compared to 23.3% in the first quarter of fiscal 2024, primarily due to reduced tax benefits from the resolution of tax matters and stock-based compensation, partially offset by benefits from green energy incentives.

Income tax expense increased in the second quarter of fiscal 2025, primarily due to an increase in pre-tax earnings.

Our effective tax rate (“ETR”) decreased to 25.8% in the second quarter of fiscal 2025 compared to 26.1% in the second quarter of fiscal 2024, primarily due to increased tax benefits from green energy incentives.

Income tax expense increased in the first six months of fiscal 2025, primarily due to an increase in pre-tax earnings.

Our ETR increased to 25.3% in the first six months of fiscal 2025 compared to 24.8% in the first six months of fiscal 2024, primarily due to reduced tax benefits from the resolution of tax matters and stock-based compensation, partially offset by increased tax benefits from green energy incentives.

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.

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Three Months Ended

April 29, 2023

Six Months Ended

August 3, 2024

July 29, 2023

August 3, 2024

July 29, 2023

Revenue % change

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(1) Comparable online sales are included in the comparable sales calculation.

Domestic revenue decreased in the first quarter of fiscal 2025, primarily driven by comparable sales declines in appliances, home theater, gaming and mobile phones.

These drivers were partially offset by comparable sales growth in services and laptops.

Online revenue of $2.5 billion decreased 6.1% on a comparable basis in the first quarter of fiscal 2025.

Domestic segment revenue declines were also due to the factors described within the Consolidated Results section, above.

Domestic revenue decreased in the second quarter of fiscal 2025, primarily driven by comparable sales declines in the appliances, home theater and gaming categories, partially offset by comparable sales growth in the tablets, computing and services categories.

In the first six months of fiscal 2025, Domestic revenue decreased, primarily driven by comparable sales declines in the appliances, home theater and gaming categories, partially offset by comparable sales growth in the services, tablets and computing categories.

Online revenue of $2.7 billion and $5.2 billion in the second quarter and first six months of fiscal 2025 decreased 1.6% and 3.8%, respectively, on a comparable basis.

Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:

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Three Months Ended

April 29, 2023

August 3, 2024

July 29, 2023

August 3, 2024

July 29, 2023

Computing and Mobile Phones

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 Computing and Mobile Phones:

The 2.2% comparable sales decline was driven primarily by declines in mobile phones and wearables, partially offset by comparable sales growth in laptops.

The 3.9% comparable sales growth was driven primarily by tablets and computing, partially offset by a comparable sales decline in mobile phones.

 Consumer Electronics:

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The 8.5% comparable sales growth was driven primarily by delivery and installation services.

Domestic gross profit rate increased in the first quarter of fiscal 2025, primarily due to improved financial performance from our services category, including our membership offerings, which was partially offset by lower product margin rates and lower profit-sharing revenue from our private label and co-branded credit card arrangement.

Domestic SG&A decreased in the first quarter of fiscal 2025, primarily due to:

(1) lower employee compensation expense, which was primarily store payroll;

(2) reduced vehicle rental costs;

and (3) lower expenses across multiple other areas, such as advertising and credit card fees.

These decreases were partially offset by higher technology expense.

Domestic restructuring charges in the first quarter of fiscal 2025 were primarily related to employee termination benefits associated with an enterprise-wide restructuring initiative that commenced in the fourth quarter of fiscal 2024.

Domestic gross profit rate increased in the second quarter and first six months of fiscal 2025, primarily due to improved financial performance from our services category, including our membership offerings, which was partially offset by lower product margin rates and lower profit-sharing revenue from our private label and co-branded credit card arrangement.

Domestic SG&A decreased in the second quarter of fiscal 2025, primarily due to lower employee compensation expense and lower expenses across multiple other areas, including reduced vehicle rental costs and credit card processing fees .

These decreases were partially offset by higher advertising expense.

Domestic SG&A decreased in the first six months of fiscal 2025, primarily due to lower employee compensation expense, which was primarily store payroll, and lower expenses across multiple other areas, including reduced vehicle rental costs .

These decreases were partially offset by higher advertising and technology expense.

Domestic restructuring charges in the second quarter and first six months of fiscal 2025 were primarily related to employee termination benefits and subsequent adjustments from higher-than-expected employee retention associated with an enterprise-wide restructuring initiative that commenced in the fourth quarter of fiscal 2024.

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.

Domestic operating income rate increased in the first quarter of fiscal 2025, primarily due to favorability in gross profit rate, partially offset by higher restructuring charges and an unfavorable SG&A rate that was driven by decreased leverage from lower sales volume on our fixed expenses.

Domestic operating income rate increased in the second quarter and first six months of fiscal 2025, primarily due to favorability in the gross profit rate.

International Segment

1 unchanged sentence

Three Months Ended

April 29, 2023

Six Months Ended

August 3, 2024

July 29, 2023

August 3, 2024

July 29, 2023

Revenue % change

4 unchanged sentences

Operating income as a % of revenue

International revenue decreased in the first quarter of fiscal 2025, primarily driven by a comparable sales decline in gaming.

International revenue decreased in the second quarter of fiscal 2025, primarily driven by the negative impact of foreign exchange rates and comparable sales declines in gaming and computing, partially offset by comparable sales growth in mobile phones.

International revenue decreased in the first six months of fiscal 2025, primarily driven by comparable sales declines in gaming and computing, as well as the negative impact of foreign exchange rates.

These drivers were partially offset by comparable sales growth in mobile phones.

International segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:

2 unchanged sentences

Three Months Ended

April 29, 2023

August 3, 2024

July 29, 2023

August 3, 2024

July 29, 2023

Computing and Mobile Phones

5 unchanged sentences

 Consumer Electronics:

The 6.6% comparable sales decline was driven primarily by headphones and portable speakers, and home theater.

The 2.1% comparable sales decline was driven primarily by home automation.

 Appliances:

The 2.0% comparable sales growth was driven primarily by small appliances.

The 3.9% comparable sales decline was driven primarily by large appliances.

 Entertainment:

The 22.9% comparable sales decline was driven primarily by gaming.

The 5.0% comparable sales growth was driven primarily by warranty-related services.

International gross profit rate decreased in the first quarter of fiscal 2025, primarily driven by lower product margin rates.

International SG&A in the first quarter of fiscal 2025 was relatively flat to last year.

International operating income rate decreased in the first quarter of fiscal 2025, primarily due to an unfavorable gross profit rate and decreased leverage from lower sales volume on our fixed expenses, which resulted in an unfavorable SG&A rate.

The 20.8% comparable sales decline was driven primarily by gaming, partially offset by comparable sales growth in virtual reality.

The 5.9% comparable sales growth was driven primarily by growth in our membership programs.

International gross profit rate decreased in the second quarter and first six months of fiscal 2025, primarily driven by lower product margin rates and higher supply chain costs, which were partially offset by growth in the higher margin services category.

International SG&A decreased in the second quarter of fiscal 2025, primarily driven by the favorable impact of foreign exchange rates and lower advertising expense, which was partially offset by expenses associated with new Best Buy Express locations as a result of our previously announced collaboration with Bell Canada.

International SG&A decreased in the first six months of fiscal 2025, primarily driven by the favorable impact of foreign exchange rates, lower advertising expense and lower employee compensation expense, which was primarily incentive compensation.

These drivers were partially offset by expenses associated with new Best Buy Express locations and higher technology expense.

International operating income rate decreased in the second quarter of fiscal 2025, primarily due to an unfavorable gross profit rate.

International operating income rate decreased in the first six months of fiscal 2025, primarily due to an unfavorable gross profit rate and decreased leverage from lower sales volume on our fixed expenses, which resulted in an unfavorable SG&A rate.

Consolidated Non-GAAP Financial Measures

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Three Months Ended

April 29, 2023

Six Months Ended

August 3, 2024

July 29, 2023

August 3, 2024

July 29, 2023

Operating income

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Intangible asset amortization (1)

Restructuring charges (2)

Loss on investments

Non-GAAP effective tax rate

1 unchanged sentence

Restructuring charges (2)

Loss on investments

Gain on sale of subsidiary, net (3)

Income tax impact of non-GAAP adjustments (4)

Non-GAAP diluted EPS

For additional information regarding the nature of charges discussed below, refer to Note 2, Restructuring, and Note 3, Goodwill and Intangible Assets , of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.

For additional information regarding the nature of charges discussed below, refer to Note 1, Basis of Presentation , Note 2, Restructuring, and Note 3, Goodwill and Intangible Assets , of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.

(1) Represents the non-cash amortization of definite-lived intangible assets associated with acquisitions, including customer relationships, tradenames and developed technology assets.

(2) Represents restructuring charges related to the Fiscal 2024 Restructuring Initiative and the Fiscal 2023 Resource Optimization Initiative .

(2) Represents charges related to employee termination benefits and subsequent adjustments from higher-than-expected employee retention associated with enterprise-wide restructuring initiatives.

(3) Represents the gain on sale of a Mexico subsidiary subsequent to our exit from operations in Mexico.

(4) The non-GAAP adjustments primarily relate to the U.S.

As such, the income tax charge on the U.S.

As such, the forecasted annual income tax charge on the U.S.

non-GAAP adjustments is calculated using the statutory tax rate of 24.5%.

Non-GAAP operating income rate increased in the first quarter of fiscal 2025, primarily due to a favorable gross profit rate in our Domestic segment.

Non-GAAP effective tax rate increased in the first quarter of fiscal 2025, primarily due to reduced tax benefits from the resolution of tax matters and stock-based compensation, partially offset by benefits from green energy incentives.

Non-GAAP diluted EPS increased in the first quarter of fiscal 2025, primarily due to the increase in non-GAAP operating income.

There is no forecasted annual income tax charge for Mexico non-GAAP items, as there is no forecasted annual tax expense on the income in the calculation of GAAP income tax expense.

Non-GAAP operating income rate increased in the second quarter and first six months of fiscal 2025, primarily due to a favorable gross profit rate in our Domestic segment.

Non-GAAP effective tax rate decreased in the second quarter of fiscal 2025, primarily due to increased tax benefits from green energy incentives.

Non-GAAP effective tax rate increased in the first six months of fiscal 2025, primarily due to reduced tax benefits from the resolution of tax matters and stock-based compensation, partially offset by increased tax benefits from green energy incentives.

Non-GAAP diluted EPS increased in the second quarter and first six months of fiscal 2025, primarily due to the increase in non-GAAP operating income.

Liquidity and Capital Resources

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Cash and cash equivalents were as follows ($ in millions):

August 3, 2024

February 3, 2024

April 29, 2023

July 29, 2023

Cash and cash equivalents

The decrease in cash and cash equivalents from February 3, 2024, was primarily due to the timing and volume of inventory purchases and payments, dividend payments and capital expenditures, partially offset by positive cash flows from operations, primarily driven by earnings.

The increase in cash and cash equivalents from April 29, 2023, was primarily due to positive cash flows from operations, primarily driven by earnings, partially offset by dividend payments, capital expenditures and share repurchases .

The decrease in cash and cash equivalents from February 3, 2024, was primarily due to dividend payments and capital expenditures, partially offset by positive cash flows from operations, primarily driven by earnings.

The increase in cash and cash equivalents from July 29, 2023, was primarily due to positive cash flows from operations, primarily driven by earnings, partially offset by dividend payments, capital expenditures and share repurchases .

Cash flows were as follows ($ in millions):

Three Months Ended

April 29, 2023

Six Months Ended

August 3, 2024

July 29, 2023

Total cash provided by (used in):

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Operating Activities

The increase in cash provided by operating activities in the first quarter of fiscal 2025 was primarily driven by the timing and volume of inventory purchases and payments, partially offset by the timing of vendor funding receivables and higher incentive compensation payments in the current year.

The increase in cash provided by operating activities in the first six months of fiscal 2025 was primarily driven by the timing and volume of inventory purchases and payments, partially offset by the timing of vendor funding receivables.

Investing Activities

Cash used in investing activities in the first quarter of fiscal 2025 decreased, primarily driven by lower capital spending.

Cash used in investing activities in the first six months of fiscal 2025 decreased, primarily driven by lower capital spending.

We currently expect capital expenditures to approximate $750 million in fiscal 2025 compared to $795 million in fiscal 2024.

Financing Activities

The decrease in cash used in financing activities in the first quarter of fiscal 2025 was primarily driven by lower share repurchases.

Cash used in financing activities in the first six months of fiscal 2025 remained relatively consistent with the comparable prior-year period.

Sources of Liquidity

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We have a $1.25 billion five-year senior unsecured revolving credit facility agreement (the “Five-Year Facility Agreement”) with a syndicate of banks that expires in April 2028.

There were no borrowings outstanding under the Five-Year Facility Agreement as of May 4, 2024, February 3, 2024, or April 29, 2023 .

There were no borrowings outstanding under the Five-Year Facility Agreement as of August 3, 2024, February 3, 2024, or July 29, 2023 .

Restricted Cash

Our liquidity is also affected by restricted cash balances that are primarily restricted to cover product protection plans provided under our membership offerings and other self-insurance liabilities.

Restricted cash, which is included in Other current assets on our Condensed Consolidated Balance Sheets, was $313 million, $346 million and $402 million at May 4, 2024, February 3, 2024, and April 29, 2023, respectively.

The decrease in restricted cash from April 29, 2023, was primarily due to releases of product protection reserves based on claims and purchasing behaviors of customers participating in our membership offerings.

Our liquidity is also affected by restricted cash balances that are primarily restricted to cover product protection plans provided under our membership offerings and self-insurance liabilities.

Restricted cash, which is included in Other current assets on our Condensed Consolidated Balance Sheets, was $311 million, $346 million and $398 million at August 3, 2024, February 3, 2024, and July 29, 2023, respectively.

The decrease in restricted cash from February 3, 2024, and July 29, 2023, was primarily due to releases of product protection reserves based on claims and purchasing behaviors of customers participating in our membership offerings.

Debt and Capital

As of May 4, 2024, we had $500 million of principal amount of notes due October 1, 2028, and $650 million of principal amount of notes due October 1, 2030.

As of August 3, 2024, we had $500 million of principal amount of notes due October 1, 2028, and $650 million of 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 February 3, 2024, for additional information about our outstanding debt.

9 unchanged sentences

Three Months Ended

April 29, 2023

Six Months Ended

August 3, 2024

July 29, 2023

August 3, 2024

July 29, 2023

Total cost of shares repurchased

3 unchanged sentences

Cash dividends declared and paid

The total cost of shares repurchased decreased in the first quarter of fiscal 2025, primarily due to a decrease in the volume of repurchases.

Cash dividends declared and paid remained consistent during the first quarter of fiscal 2025, due to the increase in the regular quarterly cash dividend per share offset by fewer shares outstanding.

Between the end of the first quarter of fiscal 2025 on May 4, 2024, and June 5, 2024, we repurchased an incremental 0.4 million shares of our common stock at a cost of $34 million.

The total cost of shares repurchased increased in the second quarter of fiscal 2025, primarily due to an increase in the volume of repurchases.

The total cost of shares repurchased remained consistent in the first six months of fiscal 2025, as the decrease in the volume of repurchases was offset by the increase in the average price per share.

Cash dividends declared and paid increased during the second quarter and first six months of fiscal 2025, due to the increase in the regular quarterly cash dividend per share, partially offset by fewer shares outstanding.

Between the end of the second quarter of fiscal 2025 on August 3, 2024, and September 4, 2024, we repurchased an incremental 0.4 million shares of our common stock at a cost of $39 million.

We currently expect total share repurchases of approximately $500 million in fiscal 2025.

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 of May 4, 2024, which, if drawn upon, would be included in either short-term or long-term debt on our Condensed Consolidated Balance Sheets.

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 of August 3, 2024, 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 2024.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis