Best Buy Beats Forecast, Loads Up on Inventory

Published August 30, 2021

Riding the wave of pandemic-fed demand for consumer electronics, US retailer Best Buy reported better-than-expected earnings in its most recent quarter. It raised its outlook for the second half of the year, a good sign for continued strong demand for display products. Best Buy reported net income of $734M on revenues of $11.8B, beating consensus expectations for its second quarter of fiscal 2022, which ended August 1st, 2021.

Best Buy revenues were up 20% Y/Y compared to Q2 2020 and by 25% over the comparable quarter pre-pandemic in 2019. Best Buy made frequent references to compare results with 2019 in its earnings call because its operations were badly distorted by the pandemic in 2020. Most physical stores were closed then, but there was robust demand driven by WFH/LFH and by government stimulus checks. Net income was up 70% Y/Y and up 208% compared to Q2 2019.

Best Buy Income Statement Highlights

Source: Best Buy financial statements, DSCC Analysis
Source: Best Buy financial statements, DSCC Analysis

Best Buy’s gross margins improved to 23.7% compared to 22.9% in the prior year, and Best Buy CFO Matt Bilunas commented that the first half was less promotional and like the trends experienced last year during the pandemic. In July, Best Buy is seeing more promotions and the pattern that they expect for the rest of the year is promotions higher than 2020, but lower than pre-pandemic 2019.

In guidance earlier in the year, Best Buy had been cautious about demand in the second half, expecting that as vaccinations took hold and the US economy opened, some of the demand drivers resulting from the pandemic would fade. Best Buy expected that the “share of wallet” for technology products would be reduced as consumers shifted to services like travel and dining. In the earnings call, Best Buy CEO, Corie Barry, indicated that the company was seeing continued demand for technology products above expectations. The systemic changes resulting from the pandemic resulted in structurally higher demand for CE products.

As a result of the stronger demand and the improved outlook, Best Buy raised its guidance for the second half of its fiscal year (August 2021 to January 2022). The prior guidance was for a revenue decline of high single-digit % compared to 2020, but the revised guidance is for revenues flat to down 3% in the back half of the year. For the third quarter, Best Buy guided to revenues of $11.4B to $11.6B; the midpoint of guidance would be a 3% decline Y/Y. Best Buy expects its gross profit margin to be 30 basis points lower than last year’s 23.6%.

As a concrete measure of its renewed confidence in demand, Best Buy substantially increased its inventory compared to a year ago. Best Buy’s inventory typically follows a seasonal pattern similar to its sales, but of course earlier, with a spike in Q3. Compared to the end of Q2 2020, Best Buy has increased inventory by 55%, or $2.28B, and inventory is 23% higher or $1.2B compared to two years ago. Based on Best Buy’s Q3 guidance for revenues and gross margins, the company had 66 days of forward-looking inventory at the beginning of the quarter, much higher than last year’s 41 days. Barry indicated that the company has taken unusual steps like acquiring additional transportation to deal with issues facing global supply chains. Bilunas commented that while the company is seeing pockets of constrained inventory, Best Buy believes its inventory is at a very healthy level.

Best Buy Balance Sheet Items, 2Q 2019 to 2Q 2021

Source: Best Buy financial statements, DSCC Analysis
Source: Best Buy financial statements, DSCC Analysis

Because Best Buy expects sales in the second half to be flat to down and has higher inventory, it is likely that Best Buy purchases in the second half of 2021 will be down sharply compared to a year ago. In the second half of 2020, Best Buy purchased $23.9B of merchandise across all categories. Based on the midpoint of the company’s guidance, to reach an equivalent year-end inventory position, Best Buy will only need to purchase $21.1B, a 12% decrease Y/Y.

Strong profits and continued revenue growth by the biggest US TV retailer represent generally good news for the display industry. The company’s increased confidence for the second half of 2021 and for the longer term bodes well for display products. For the display industry, however, some of that good news is already behind us, and Best Buy’s higher inventory level will create a demand headwind for the second half.

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Written by

Bob O'Brien