UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact name of registrant as specified in its charter)
Minnesota | 41-0907483 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
7601 Penn Avenue South | ||
Richfield, Minnesota | 55423 | |
(Address of principal executive offices) | (Zip Code) |
(612) 291-1000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of exchange on which registered |
Common Stock, $0.10 par value per share | BBY | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, (as defined” and “emerging growth company” in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer | Accelerated Filer | Non-accelerated Filer | |||
Smaller Reporting Company | |||||
Emerging |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The registrant had 269,101,569263,573,258 shares of common stock outstanding as of December 5, 2018.September 4, 2019.
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED
TABLE OF CONTENTS
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed ConsolidatedConsolidated Balance Sheets
$ in millions, except per share and share amounts (unaudited)
August 3, 2019 | February 2, 2019 | August 4, 2018 | |||||||||
Assets | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $ | 1,289 | $ | 1,980 | $ | 1,865 | |||||
Short-term investments | 320 | - | 465 | ||||||||
Receivables, net | 966 | 1,015 | 915 | ||||||||
Merchandise inventories | 5,208 | 5,409 | 5,016 | ||||||||
Other current assets | 409 | 466 | 510 | ||||||||
Total current assets | 8,192 | 8,870 | 8,771 | ||||||||
Property and equipment, net | 2,361 | 2,510 | 2,432 | ||||||||
Operating lease assets | 2,774 | - | - | ||||||||
Goodwill | 965 | 915 | 425 | ||||||||
Other assets | 686 | 606 | 365 | ||||||||
Total assets | $ | 14,978 | $ | 12,901 | $ | 11,993 | |||||
Liabilities and equity | |||||||||||
Current liabilities | |||||||||||
Accounts payable | $ | 5,045 | $ | 5,257 | $ | 5,338 | |||||
Unredeemed gift card liabilities | 264 | 290 | 275 | ||||||||
Deferred revenue | 468 | 446 | 438 | ||||||||
Accrued compensation and related expenses | 343 | 482 | 318 | ||||||||
Accrued liabilities | 799 | 982 | 813 | ||||||||
Current portion of operating lease liabilities | 643 | - | - | ||||||||
Current portion of long-term debt | 14 | 56 | 47 | ||||||||
Total current liabilities | 7,576 | 7,513 | 7,229 | ||||||||
Long-term liabilities | 640 | 750 | 777 | ||||||||
Long-term operating lease liabilities | 2,230 | - | - | ||||||||
Long-term debt | 1,247 | 1,332 | 801 | ||||||||
Contingencies (Note 14) |
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|
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Equity | |||||||||||
Preferred stock, $1.00 par value: Authorized - 400,000 shares; Issued and outstanding - NaN | - | - | - | ||||||||
Common stock, $0.10 par value: Authorized - 1.0 billion shares; Issued and outstanding - 265 million, 266 million, and 276 million shares, respectively | 26 | 27 | 27 | ||||||||
Retained earnings | 2,965 | 2,985 | 2,863 | ||||||||
Accumulated other comprehensive income | 294 | 294 | 296 | ||||||||
Total equity | 3,285 | 3,306 | 3,186 | ||||||||
Total liabilities and equity | $ | 14,978 | $ | 12,901 | $ | 11,993 |
November 3, 2018 | February 3, 2018 | October 28, 2017 | |||||||||
ASSETS | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $ | 1,228 | $ | 1,101 | $ | 1,103 | |||||
Short-term investments | 76 | 2,032 | 2,237 | ||||||||
Receivables, net | 921 | 1,049 | 971 | ||||||||
Merchandise inventories | 8,168 | 5,209 | 6,663 | ||||||||
Other current assets | 508 | 438 | 431 | ||||||||
Total current assets | 10,901 | 9,829 | 11,405 | ||||||||
Property and equipment, net | 2,525 | 2,421 | 2,352 | ||||||||
Goodwill | 921 | 425 | 425 | ||||||||
Other assets | 653 | 374 | 603 | ||||||||
TOTAL ASSETS | $ | 15,000 | $ | 13,049 | $ | 14,785 | |||||
LIABILITIES AND EQUITY | |||||||||||
Current liabilities | |||||||||||
Accounts payable | $ | 7,964 | $ | 4,873 | $ | 6,587 | |||||
Unredeemed gift card liabilities | 281 | 385 | 375 | ||||||||
Deferred revenue | 449 | 453 | 426 | ||||||||
Accrued compensation and related expenses | 349 | 561 | 331 | ||||||||
Accrued liabilities | 844 | 1,001 | 888 | ||||||||
Current portion of long-term debt | 46 | 544 | 545 | ||||||||
Total current liabilities | 9,933 | 7,817 | 9,152 | ||||||||
Long-term liabilities | 775 | 809 | 697 | ||||||||
Long-term debt | 1,280 | 811 | 784 | ||||||||
Contingencies and Commitments (Note 14) | |||||||||||
Equity | |||||||||||
Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none | — | — | — | ||||||||
Common stock, $0.10 par value: Authorized — 1.0 billion shares; Issued and outstanding — 272,000,000, 283,000,000 and 296,000,000 shares, respectively | 27 | 28 | 30 | ||||||||
Retained earnings | 2,685 | 3,270 | 3,818 | ||||||||
Accumulated other comprehensive income | 300 | 314 | 304 | ||||||||
Total equity | 3,012 | 3,612 | 4,152 | ||||||||
TOTAL LIABILITIES AND EQUITY | $ | 15,000 | $ | 13,049 | $ | 14,785 |
NOTE: The Consolidated Balance Sheet as of February 3, 2018,2, 2019, has been condensed from the audited consolidated financial statements.
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Earnings
$ and shares in millions, except per share amounts (unaudited)
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Revenue | $ | 9,536 | $ | 9,379 | $ | 18,678 | $ | 18,488 | |||||||
Cost of goods sold | 7,253 | 7,150 | 14,226 | 14,134 | |||||||||||
Gross profit | 2,283 | 2,229 | 4,452 | 4,354 | |||||||||||
Selling, general and administrative expenses | 1,922 | 1,877 | 3,757 | 3,707 | |||||||||||
Restructuring charges | 48 | 17 | 48 | 47 | |||||||||||
Operating income | 313 | 335 | 647 | 600 | |||||||||||
Other income (expense): | |||||||||||||||
Investment income and other | 10 | 13 | 24 | 24 | |||||||||||
Interest expense | (16) | (19) | (34) | (38) | |||||||||||
Earnings before income tax expense | 307 | 329 | 637 | 586 | |||||||||||
Income tax expense | 69 | 85 | 134 | 134 | |||||||||||
Net earnings | $ | 238 | $ | 244 | $ | 503 | $ | 452 | |||||||
Basic earnings per share | $ | 0.89 | $ | 0.88 | $ | 1.88 | $ | 1.61 | |||||||
Diluted earnings per share | $ | 0.89 | $ | 0.86 | $ | 1.86 | $ | 1.58 | |||||||
Weighted-average common shares outstanding | |||||||||||||||
Basic | 267.1 | 279.0 | 267.4 | 280.8 | |||||||||||
Diluted | 269.4 | 283.7 | 270.9 | 286.0 |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Revenue | $ | 9,590 | $ | 9,320 | $ | 28,078 | $ | 26,788 | |||||||
Cost of goods sold | 7,266 | 7,040 | 21,400 | 20,333 | |||||||||||
Gross profit | 2,324 | 2,280 | 6,678 | 6,455 | |||||||||||
Selling, general and administrative expenses | 2,002 | 1,932 | 5,709 | 5,484 | |||||||||||
Restructuring charges | — | (2 | ) | 47 | — | ||||||||||
Operating income | 322 | 350 | 922 | 971 | |||||||||||
Other income (expense): | |||||||||||||||
Gain on sale of investments | 12 | — | 12 | — | |||||||||||
Investment income and other | 11 | 12 | 35 | 30 | |||||||||||
Interest expense | (15 | ) | (20 | ) | (53 | ) | (57 | ) | |||||||
Earnings from continuing operations before income tax expense | 330 | 342 | 916 | 944 | |||||||||||
Income tax expense | 53 | 104 | 187 | 309 | |||||||||||
Net earnings from continuing operations | 277 | 238 | 729 | 635 | |||||||||||
Gain from discontinued operations (Note 1), net of tax | — | 1 | — | 1 | |||||||||||
Net earnings | $ | 277 | $ | 239 | $ | 729 | $ | 636 | |||||||
Basic earnings per share | $ | 1.01 | $ | 0.80 | $ | 2.62 | $ | 2.09 | |||||||
Diluted earnings per share | $ | 0.99 | $ | 0.78 | $ | 2.57 | $ | 2.05 | |||||||
Weighted-average common shares outstanding | |||||||||||||||
Basic | 274.3 | 299.1 | 278.6 | 304.1 | |||||||||||
Diluted | 279.3 | 305.4 | 283.8 | 310.6 |
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive Income
$ in millions (unaudited)
Three Months Ended | Six Months Ended | ||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||
Net earnings | $ | 238 | $ | 244 | $ | 503 | $ | 452 | |||||
Foreign currency translation adjustments | 5 | (14) | - | (18) | |||||||||
Comprehensive income | $ | 243 | $ | 230 | $ | 503 | $ | 434 |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Net earnings | $ | 277 | $ | 239 | $ | 729 | $ | 636 | |||||||
Foreign currency translation adjustments | 4 | (17 | ) | (14 | ) | 25 | |||||||||
Comprehensive income | $ | 281 | $ | 222 | $ | 715 | $ | 661 |
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
$ in millions (unaudited)
Six Months Ended | |||||||
August 3, 2019 | August 4, 2018 | ||||||
Operating activities | |||||||
Net earnings | $ | 503 | $ | 452 | |||
Adjustments to reconcile net earnings to total cash provided by operating activities: | |||||||
Depreciation and amortization | 401 | 358 | |||||
Restructuring charges | 48 | 47 | |||||
Stock-based compensation | 74 | 63 | |||||
Deferred income taxes | 10 | 5 | |||||
Other, net | 9 | - | |||||
Changes in operating assets and liabilities, net of acquired assets and liabilities: | |||||||
Receivables | 57 | 120 | |||||
Merchandise inventories | 199 | 187 | |||||
Other assets | (29) | (53) | |||||
Accounts payable | (213) | 485 | |||||
Other liabilities | (243) | (430) | |||||
Income taxes | (191) | (126) | |||||
Total cash provided by operating activities | 625 | 1,108 | |||||
Investing activities | |||||||
Additions to property and equipment | (385) | (375) | |||||
Purchases of investments | (319) | - | |||||
Sales of investments | - | 1,565 | |||||
Acquisition of business, net of cash acquired | (125) | - | |||||
Other, net | 1 | 10 | |||||
Total cash provided by (used in) investing activities | (828) | 1,200 | |||||
Financing activities | |||||||
Repurchase of common stock | (328) | (774) | |||||
Issuance of common stock | 27 | 29 | |||||
Dividends paid | (267) | (253) | |||||
Repayments of debt | (8) | (523) | |||||
Other, net | - | (3) | |||||
Total cash used in financing activities | (576) | (1,524) | |||||
Effect of exchange rate changes on cash | (1) | (16) | |||||
Increase (decrease) in cash, cash equivalents and restricted cash | (780) | 768 | |||||
Cash, cash equivalents and restricted cash at beginning of period | 2,184 | 1,300 | |||||
Cash, cash equivalents and restricted cash at end of period | $ | 1,404 | $ | 2,068 |
Nine Months Ended | |||||||
November 3, 2018 | October 28, 2017 | ||||||
Operating activities | |||||||
Net earnings | $ | 729 | $ | 636 | |||
Adjustments to reconcile net earnings to total cash provided by operating activities: | |||||||
Depreciation and amortization | 550 | 500 | |||||
Restructuring charges | 47 | — | |||||
Stock-based compensation | 92 | 97 | |||||
Deferred income taxes | 15 | 4 | |||||
Other, net | (10 | ) | (5 | ) | |||
Changes in operating assets and liabilities, net of acquired assets and liabilities: | |||||||
Receivables | 121 | 413 | |||||
Merchandise inventories | (2,950 | ) | (1,811 | ) | |||
Other assets | (45 | ) | (36 | ) | |||
Accounts payable | 3,085 | 1,530 | |||||
Other liabilities | (400 | ) | (187 | ) | |||
Income taxes | (127 | ) | 62 | ||||
Total cash provided by operating activities | 1,107 | 1,203 | |||||
Investing activities | |||||||
Additions to property and equipment | (619 | ) | (489 | ) | |||
Purchases of investments | — | (4,047 | ) | ||||
Sales of investments | 1,970 | 3,518 | |||||
Acquisition of business, net of cash acquired | (792 | ) | — | ||||
Other, net | 15 | 2 | |||||
Total cash provided by (used in) investing activities | 574 | (1,016 | ) | ||||
Financing activities | |||||||
Repurchase of common stock | (1,144 | ) | (1,138 | ) | |||
Issuance of common stock | 37 | 145 | |||||
Dividends paid | (376 | ) | (310 | ) | |||
Borrowings of debt | 498 | — | |||||
Repayments of debt | (535 | ) | (31 | ) | |||
Other, net | (6 | ) | (1 | ) | |||
Total cash used in financing activities | (1,526 | ) | (1,335 | ) | |||
Effect of exchange rate changes on cash | (16 | ) | 15 | ||||
Increase (decrease) in cash, cash equivalents and restricted cash | 139 | (1,133 | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 1,300 | 2,433 | |||||
Cash, cash equivalents and restricted cash at end of period | $ | 1,439 | $ | 1,300 |
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Changes in Shareholders' Equity
$ and shares in millions, except per share amounts (unaudited)
Common | Common | Additional | Retained | Accumulated Other | Total | ||||||||||||||||||
Balances at May 4, 2019 | 267 | $ | 27 | $ | - | $ | 3,038 | $ | 289 | $ | 3,354 | ||||||||||||
Adoption of ASU 2016-02 | - | - | - | (3) | - | (3) | |||||||||||||||||
Net earnings, three months ended August 3, 2019 | - | - | - | 238 | - | 238 | |||||||||||||||||
Other comprehensive income, net of tax: | |||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | 5 | 5 | |||||||||||||||||
Stock-based compensation | - | - | 38 | - | - | 38 | |||||||||||||||||
Issuance of common stock | 2 | - | 16 | - | - | 16 | |||||||||||||||||
Common stock dividends, $0.50 per share | - | - | 2 | (135) | - | (133) | |||||||||||||||||
Repurchase of common stock | (4) | (1) | (56) | (173) | - | (230) | |||||||||||||||||
Balances at August 3, 2019 | 265 | $ | 26 | $ | - | $ | 2,965 | $ | 294 | $ | 3,285 | ||||||||||||
Balances at February 2, 2019 | 266 | $ | 27 | $ | - | $ | 2,985 | $ | 294 | $ | 3,306 | ||||||||||||
Adoption of ASU 2016-02 | - | - | - | (22) | - | (22) | |||||||||||||||||
Net earnings, six months ended August 3, 2019 | - | - | - | 503 | - | 503 | |||||||||||||||||
Stock-based compensation | - | - | 74 | - | - | 74 | |||||||||||||||||
Issuance of common stock | 4 | - | 27 | - | - | 27 | |||||||||||||||||
Common stock dividends, $1.00 per share | - | - | 4 | (271) | - | (267) | |||||||||||||||||
Repurchase of common stock | (5) | (1) | (105) | (230) | - | (336) | |||||||||||||||||
Balances at August 3, 2019 | 265 | $ | 26 | $ | - | $ | 2,965 | $ | 294 | $ | 3,285 | ||||||||||||
Balances at May 5, 2018 | 281 | $ | 28 | $ | - | $ | 3,082 | $ | 310 | $ | 3,420 | ||||||||||||
Net earnings, three months ended August 4, 2018 | - | - | - | 244 | - | 244 | |||||||||||||||||
Other comprehensive loss, net of tax: | |||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | (14) | (14) | |||||||||||||||||
Stock-based compensation | - | - | 31 | - | - | 31 | |||||||||||||||||
Issuance of common stock | 1 | - | 5 | - | - | 5 | |||||||||||||||||
Common stock dividends, $0.45 per share | - | - | 2 | (127) | - | (125) | |||||||||||||||||
Repurchase of common stock | (6) | (1) | (38) | (336) | - | (375) | |||||||||||||||||
Balances at August 4, 2018 | 276 | $ | 27 | $ | - | $ | 2,863 | $ | 296 | $ | 3,186 | ||||||||||||
Balances at February 3, 2018 | 283 | $ | 28 | $ | - | $ | 3,270 | $ | 314 | $ | 3,612 | ||||||||||||
Adoption of ASU 2014-09 | - | - | - | 73 | - | 73 | |||||||||||||||||
Net earnings, six months ended August 4, 2018 | - | - | - | 452 | - | 452 | |||||||||||||||||
Other comprehensive loss, net of tax: | |||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | (18) | (18) | |||||||||||||||||
Stock-based compensation | - | - | 63 | - | - | 63 | |||||||||||||||||
Issuance of common stock | 4 | - | 29 | - | - | 29 | |||||||||||||||||
Common stock dividends, $0.90 per share | - | - | 4 | (255) | - | (251) | |||||||||||||||||
Repurchase of common stock | (11) | (1) | (96) | (677) | - | (774) | |||||||||||||||||
Balances at August 4, 2018 | 276 | $ | 27 | $ | - | $ | 2,863 | $ | 296 | $ | 3,186 |
Three Months Ended November 3, 2018 | ||||||||||||||||||||||
Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||
Balances at August 4, 2018 | 276 | $ | 27 | $ | — | $ | 2,863 | $ | 296 | $ | 3,186 | |||||||||||
Net earnings | — | — | — | 277 | — | 277 | ||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 4 | 4 | ||||||||||||||||
Stock-based compensation | — | — | 29 | — | — | 29 | ||||||||||||||||
Issuance of common stock | — | — | 8 | — | — | 8 | ||||||||||||||||
Common stock dividends, $0.45 per share | — | — | 1 | (124 | ) | — | (123 | ) | ||||||||||||||
Repurchase of common stock | (4 | ) | — | (38 | ) | (331 | ) | — | (369 | ) | ||||||||||||
Balances at November 3, 2018 | 272 | $ | 27 | $ | — | $ | 2,685 | $ | 300 | $ | 3,012 | |||||||||||
Nine Months Ended November 3, 2018 | ||||||||||||||||||||||
Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||
Balances at February 3, 2018 | 283 | $ | 28 | $ | — | $ | 3,270 | $ | 314 | $ | 3,612 | |||||||||||
Adoption of ASU 2014-09 | — | — | — | 73 | — | 73 | ||||||||||||||||
Net earnings | — | — | — | 729 | — | 729 | ||||||||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (14 | ) | (14 | ) | ||||||||||||||
Stock-based compensation | — | — | 92 | — | — | 92 | ||||||||||||||||
Issuance of common stock | 4 | — | 37 | — | — | 37 | ||||||||||||||||
Common stock dividends, $1.35 per share | — | — | 5 | (379 | ) | — | (374 | ) | ||||||||||||||
Repurchase of common stock | (15 | ) | (1 | ) | (134 | ) | (1,008 | ) | — | (1,143 | ) | |||||||||||
Balances at November 3, 2018 | 272 | $ | 27 | $ | — | $ | 2,685 | $ | 300 | $ | 3,012 | |||||||||||
Three Months Ended October 28, 2017 | ||||||||||||||||||||||
Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||
Balances at July 29, 2017 | 300 | $ | 30 | $ | — | $ | 3,996 | $ | 321 | $ | 4,347 | |||||||||||
Net earnings | — | — | — | 239 | — | 239 | ||||||||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (17 | ) | (17 | ) | ||||||||||||||
Stock-based compensation | — | — | 30 | — | — | 30 | ||||||||||||||||
Issuance of common stock | 2 | 1 | 20 | — | — | 21 | ||||||||||||||||
Common stock dividends, $0.34 per share | — | — | — | (102 | ) | — | (102 | ) | ||||||||||||||
Repurchase of common stock | (6 | ) | (1 | ) | (50 | ) | (315 | ) | — | (366 | ) | |||||||||||
Balances at October 28, 2017 | 296 | $ | 30 | $ | — | $ | 3,818 | $ | 304 | $ | 4,152 | |||||||||||
Nine Months Ended October 28, 2017 | ||||||||||||||||||||||
Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||
Balances at January 28, 2017 | 311 | $ | 31 | $ | — | $ | 4,399 | $ | 279 | $ | 4,709 | |||||||||||
Adoption of ASU 2016-09 | — | — | 10 | (12 | ) | — | (2 | ) | ||||||||||||||
Net earnings | — | — | — | 636 | — | 636 | ||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 25 | 25 | ||||||||||||||||
Stock-based compensation | — | — | 97 | — | — | 97 | ||||||||||||||||
Issuance of common stock | 7 | 1 | 144 | — | — | 145 | ||||||||||||||||
Common stock dividends, $1.02 per share | — | — | — | (311 | ) | — | (311 | ) | ||||||||||||||
Repurchase of common stock | (22 | ) | (2 | ) | (251 | ) | (894 | ) | — | (1,147 | ) | |||||||||||
Balances at October 28, 2017 | 296 | $ | 30 | $ | — | $ | 3,818 | $ | 304 | $ | 4,152 |
See Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.Basis of Presentation
Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” in these Notes to Condensed Consolidated Financial Statements refers to Best Buy Co., Inc. and, as applicable, its consolidated subsidiaries.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”). All adjustments were comprised of normal recurring adjustments, except as noted in these Notes to Condensed Consolidated Financial Statements.
Historically, we have generated a large proportion of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. The interim financial statements and the related notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018.2, 2019. The first
In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations on a one-month lag. Our policy is to accelerate recording the effect of events occurring in the lag period that significantly affect our condensed consolidated financial statements. No such events were identified for the reported periods.
In preparing the accompanying condensed consolidated financial statements, we evaluated the period from November 4, 2018,August 3, 2019, through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. NoOther
than as disclosed in Note 15, Subsequent Event, no such events were identified for the reported periods.
Unadopted Accounting Pronouncements
In February 2016,January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02,
In JulyAugust 2018, the FASB approved an amendmentissued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements for fair value measurements. We do not believe the updated guidance, which is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, will have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance requires companies to apply the internal-use software guidance in Accounting Standards Codification (“ASC”) 350-40 to implementation costs incurred in a hosting arrangement that is a service contract to determine whether to capitalize certain implementation costs or expense them as incurred. We do not believe the new guidance, that allows companieswhich is effective for fiscal years beginning after December 15, 2019, will have a material impact on our consolidated financial statements.
Adopted Accounting Pronouncements
In February 2016, the optionFASB issued ASU 2016-02, Leases, which requires the recognition of usingoperating lease assets and lease liabilities on the effective datebalance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new standard, asdisclosures are required to enable users of financial statements to assess the initial application (at the beginningamount, timing and uncertainty of the period in which is it adopted, rather than at the beginningcash flows arising from leases.
In the first quarter of fiscal 2020, we adopted ASU 2016-02 using the “Comparatives Under 840 Option” approach to transition. Under this method, financial information related to periods prior to adoption will be as originally reported under the previous standard – ASC 840, Leases. The effects of adopting the new standard (ASC 842, Leases) in fiscal 2020 were recognized as a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal first quarter. We elected the package of practical expedients permitted under the transition electionguidance within the new standard, which, among other things, allows us to not restate comparative periodscarry forward the historical lease classification as operating or capital leases. We also elected to combine lease and are in process of implementing required upgradesnon-lease components and to our existing lease systems. While we expect adoption to lead to a material increase in the assets and liabilities recorded onexclude short-term leases from our consolidated balance sheetsheets. We did not elect the hindsight practical expedient in determining the lease term for existing leases as of February 3, 2019.
The most significant impact of adoption was the recognition of operating lease assets and an increase tooperating lease liabilities of $2.7 billion and $2.8 billion, respectively, while our footnote disclosures related to leases, we are still evaluating the impact on our consolidated statement of earnings. We also expect that adoption of the new standard will require changes to our internal controls over financial reporting.
The cumulative effect of the changes made to our Condensed Consolidated Balance Sheets on February 4, 2018, for the adoption of this standard was as follows ($ in millions):
February 2, 2019 | ASU 2016-02 Adjustment on February 3, 2019 | February 3, 2019 | |||||||||
Assets | |||||||||||
Other current assets | $ | 466 | $ | (65) | (a) | $ | 401 | ||||
Net property and equipment | 2,510 | (173) | (b) | 2,337 | |||||||
Operating lease assets | - | 2,732 | (c) | 2,732 | |||||||
Other assets | 606 | 5 | (d) | 611 | |||||||
Liabilities | |||||||||||
Accrued liabilities | 982 | (28) | (e) | 954 | |||||||
Current portion of operating lease liabilities | - | 712 | (f) | 712 | |||||||
Current portion of long-term debt | 56 | (43) | (b) | 13 | |||||||
Long-term liabilities | 750 | (115) | (e) | 635 | |||||||
Long-term operating lease liabilities | - | 2,135 | (f) | 2,135 | |||||||
Long-term debt | 1,332 | (140) | (b) | 1,192 | |||||||
Equity | |||||||||||
Retained earnings | 2,985 | (22) | (g) | 2,963 |
February 3, 2018 As Reported | ASU 2014-09 Adjustment on February 4, 2018 | February 4, 2018 Adjusted | |||||||||
Assets | |||||||||||
Other assets | $ | 374 | $ | (19 | ) | $ | 355 | ||||
Liabilities | |||||||||||
Unredeemed gift card liabilities | 385 | (69 | ) | 316 | |||||||
Deferred revenue | 453 | (26 | ) | 427 | |||||||
Accrued liabilities | 864 | (3 | ) | 861 | |||||||
Accrued income taxes | 137 | 6 | 143 | ||||||||
Equity | |||||||||||
Retained earnings | 3,270 | 73 | 3,343 |
(a)Represents the reclassification of prepaid rent and leasehold acquisition costs to Operating lease assets.
(b)Represents the derecognition of financing obligations and reclassification to Operating lease assets.
(c)Represents the capitalization of operating lease assets and the reclassification of prepaid rent and leasehold acquisition costs, offset by the reclassification of straight-line rent accruals, tenant improvement allowances and vacant space reserves.
(d)Represents the deferred tax impact of adopting this standard on our Condensed Consolidated Balance Sheets asthe on-adoption adjustments.
(e)Represents the reclassification of November 3, 2018,straight-line rent accruals, tenant improvement allowances and our Condensed Consolidated Statementsvacant space reserves to Operating lease assets.
(f)Represents the recognition of Earnings foroperating lease liabilities.
(g)Represents the threenet-of-tax retained earnings impact of impairment charges and nine months ended November 3, 2018 ($ in millions, except per share amounts):
November 3, 2018 | |||||||||||
Impact of Changes to Condensed Consolidated Balance Sheets | As Reported | Balances without Adoption of ASU 2014-09 | Effect of Change Higher/(Lower)(1) | ||||||||
Assets | |||||||||||
Other current assets | $ | 508 | $ | 459 | $ | 49 | |||||
Other assets | 653 | 672 | (19 | ) | |||||||
Liabilities | |||||||||||
Unredeemed gift card liabilities | 281 | 349 | (68 | ) | |||||||
Deferred revenue | 449 | 472 | (23 | ) | |||||||
Accrued liabilities | 823 | 777 | 46 | ||||||||
Accrued income taxes | 21 | 15 | 6 | ||||||||
Equity | |||||||||||
Retained earnings | 2,685 | 2,616 | 69 |
Three Months Ended November 3, 2018 | |||||||||||
Impact of Changes to Condensed Consolidated Statements of Earnings | As Reported | Balances without Adoption of ASU 2014-09 | Effect of Change Higher/(Lower) | ||||||||
Revenue | $ | 9,590 | $ | 9,575 | $ | 15 | |||||
Cost of goods sold | 7,266 | 7,250 | 16 | ||||||||
Gross profit | 2,324 | 2,325 | (1 | ) | |||||||
Operating income | 322 | 323 | (1 | ) | |||||||
Income tax expense | 53 | 53 | — | ||||||||
Net earnings | 277 | 278 | (1 | ) | |||||||
Basic earnings per share | $ | 1.01 | $ | 1.01 | $ | — | |||||
Diluted earnings per share | $ | 0.99 | $ | 0.99 | $ | — |
Nine Months Ended November 3, 2018 | |||||||||||
Impact of Changes to Condensed Consolidated Statements of Earnings | As Reported | Balances without Adoption of ASU 2014-09 | Effect of Change Higher/(Lower) | ||||||||
Revenue | $ | 28,078 | $ | 28,043 | $ | 35 | |||||
Cost of goods sold | 21,400 | 21,361 | 39 | ||||||||
Gross profit | 6,678 | 6,682 | (4 | ) | |||||||
Operating income | 922 | 926 | (4 | ) | |||||||
Income tax expense | 187 | 188 | (1 | ) | |||||||
Net earnings | 729 | 732 | (3 | ) | |||||||
Basic earnings per share | $ | 2.62 | $ | 2.63 | $ | (0.01 | ) | ||||
Diluted earnings per share | $ | 2.57 | $ | 2.58 | $ | (0.01 | ) |
Total Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the totaltotals shown within the Condensed Consolidated Statements of Cash Flows was as of November 3, 2018, February 3, 2018, and October 28, 2017follows ($ in millions):
August 3, 2019 | August 4, 2018 | ||||||||||
Cash and cash equivalents | $ | 1,289 | $ | 1,865 | |||||||
Restricted cash included in Other current assets | 115 | 203 | |||||||||
Total cash, cash equivalents and restricted cash | $ | 1,404 | $ | 2,068 |
November 3, 2018 | February 3, 2018 | October 28, 2017 | |||||||||
Cash and cash equivalents | $ | 1,228 | $ | 1,101 | $ | 1,103 | |||||
Restricted cash included in Other current assets | 211 | 199 | 197 | ||||||||
Total cash, cash equivalents and restricted cash | $ | 1,439 | $ | 1,300 | $ | 1,300 |
Amounts included in restricted cash are pledged as collateral or restricted to use for workers’ compensation and general liability insurance and workers' compensation insurance.claims.
2. Acquisition
Critical Signal Technologies, Inc.
On October 1, 2018,May 9, 2019, we acquired all of the outstanding shares of GreatCall,Critical Signal Technologies, Inc. ("GreatCall"(“CST”), a health services company, for net cash consideration of $792$125 million. GreatCall, a leading connected health services provider for aging consumers, offers easy-to-use mobile products and connected devices, tailored for seniors. These products are combined with a range of services, including a simple, one-touch connection to U.S.-based, specially-trained agents who can connect the user to family caregivers, provide concierge services and dispatch emergency personnel. The acquisition of GreatCallCST is aligned with our strategy to address health and wellness with a focus on aging consumersseniors and how technology can help them live a more independent life.
The acquisition was accounted for using the acquisition method of accounting for business combinations. Accordingly, the cost was allocated to the underlying net assets based on their respective fair values. Thevalues, and the excess of the purchase price over the
Current assets | $ | 34 | |
Goodwill | 496 | ||
Intangible assets(1) | 371 | ||
Other assets | 27 | ||
Total assets acquired | 928 | ||
Accrued liabilities | 56 | ||
Long-term liabilities | 72 | ||
Total liabilities assumed | 128 | ||
Total purchase price | 800 | ||
Less: Cash acquired | 8 | ||
Total purchase price, net of cash acquired | $ | 792 |
November 3, 2018 | February 4, 2018 | ||||||
Receivables, net of an allowance for doubtful accounts of $15 and $24, respectively | $ | 588 | $ | 674 | |||
Short-term contract liabilities included in: | �� | ||||||
Unredeemed gift cards | 281 | 316 | |||||
Deferred revenue | 449 | 408 | |||||
Accrued liabilities | 149 | 151 | |||||
Long-term contract liabilities included in: | |||||||
Long-term liabilities | 12 | 22 |
Allowance for Doubtful Accounts | |||
Balance at February 4, 2018 | $ | 24 | |
Charged to expenses or other accounts | 27 | ||
Other(1) | (36 | ) | |
Balance at November 3, 2018 | $ | 15 |
Nine Months Ended | |||
November 3, 2018 | |||
Revenue recognized that was included in the contract liability balance(s) as of February 4, 2018 | $ | 729 | |
Revenue recognized from performance obligations satisfied in previous periods | — | ||
Increase due to acquisition(1) | 14 | ||
Adjustments(2) | 2 |
November 3, 2018(1) | |||
Remainder of fiscal 2019 | $ | 6 | |
Fiscal 2020 | 14 | ||
Fiscal 2021 | 6 | ||
Fiscal 2022 | 2 | ||
Fiscal 2023 and thereafter | 1 |
3. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1
— Unadjusted quoted prices that are available in active markets forLevel 2
— Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in non-active markets;
Inputs other than quoted prices that are observable for the asset or liability; and
Inputs that are derived principally from or corroborated by other observable market data.
Level 3
— Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Financial assets and liabilities that were accounted for at fair value on a recurring basis at
Fair Value | Fair Value at | ||||||||||||||
Hierarchy | August 3, 2019 | February 2, 2019 | August 4, 2018 | ||||||||||||
Assets | |||||||||||||||
Cash and cash equivalents: | |||||||||||||||
Money market funds | Level 1 | $ | 375 | $ | 98 | $ | 334 | ||||||||
Time deposits | Level 2 | - | 300 | - | |||||||||||
Short-term investments: | |||||||||||||||
Commercial paper | Level 2 | 99 | - | - | |||||||||||
Time deposits | Level 2 | 221 | - | 465 | |||||||||||
Other current assets: | |||||||||||||||
Money market funds | Level 1 | 10 | 82 | 74 | |||||||||||
Time deposits | Level 2 | 102 | 101 | 101 | |||||||||||
Foreign currency derivative instruments | Level 2 | - | - | 5 | |||||||||||
Other assets: | |||||||||||||||
Marketable securities that fund deferred compensation | Level 1 | 47 | 44 | 100 | |||||||||||
Interest rate swap derivative instruments | Level 2 | 78 | 26 | - | |||||||||||
Liabilities | |||||||||||||||
Long-term liabilities: | |||||||||||||||
Interest rate swap derivative instruments | Level 2 | - | 1 | 7 |
Fair Value Hierarchy | Fair Value at | ||||||||||||
November 3, 2018 | February 3, 2018 | October 28, 2017 | |||||||||||
Assets | |||||||||||||
Cash and cash equivalents: | |||||||||||||
Money market funds | Level 1 | $ | 126 | $ | 21 | $ | 84 | ||||||
Commercial paper | Level 2 | — | 90 | — | |||||||||
Time deposits | Level 2 | — | 65 | — | |||||||||
Short-term investments: | |||||||||||||
Commercial paper | Level 2 | — | 474 | 588 | |||||||||
Time deposits | Level 2 | 76 | 1,558 | 1,649 | |||||||||
Other current assets: | |||||||||||||
Money market funds | Level 1 | 72 | 3 | 8 | |||||||||
Commercial paper | Level 2 | — | 60 | 60 | |||||||||
Time deposits | Level 2 | 100 | 101 | 100 | |||||||||
Foreign currency derivative instruments | Level 2 | 1 | 2 | 5 | |||||||||
Interest rate swap derivative instruments | Level 2 | — | — | 3 | |||||||||
Other assets: | |||||||||||||
Marketable securities that fund deferred compensation | Level 1 | 100 | 99 | 98 | |||||||||
Liabilities | |||||||||||||
Accrued liabilities: | |||||||||||||
Foreign currency derivative instruments | Level 2 | — | 8 | 5 | |||||||||
Interest rate swap derivative instruments | Level 2 | — | 1 | — | |||||||||
Long-term liabilities: | |||||||||||||
Interest rate swap derivative instruments | Level 2 | 22 | 4 | 3 |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Money market funds.
Our money market fund investments were measured at fair value as they trade in an active market using quoted market prices and, therefore, were classified as Level 1.Time deposits.
Our time deposits are balances held with banking institutions that cannot be withdrawn for specified terms without a penalty. Time deposits are held at face value plus accrued interest, which approximates fair value, andCommercial paper. Our investments in commercial paper were measured using inputs based upon quoted prices for similar instruments in active markets and, therefore, were classified as Level 2.
Foreign currency derivative instruments.
Comprised primarily of foreign currency forwardMarketable securities that fund deferred compensation.
The assets that fund our deferred compensation consist of investments in corporate-owned life insurance, the value of which is based on select mutual fund performance. These investments were classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.Interest rate swap derivative instruments. Our interest rate swap contracts were measured at fair value using readily observable inputs, such as the LIBOR interest rate. Our interest rate swap derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible fixed assets, operating lease assets, goodwill and other intangible assets, which are remeasured when the derived fair value is below the carrying value on our Condensed Consolidated Balance Sheets. For these assets, we do not periodically adjust the carrying value to fair value, except in the event of impairment. When we determine that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded within Selling, general and administrative (“SG&A&A”) expenses or Restructuring charges on our Condensed Consolidated Statements of Earnings for non-restructuring and restructuring charges, respectively.charges.
Fair value remeasurements of property and equipment impairments recorded during the three and nine months ended November 3, 2018, and October 28, 2017operating lease assets were as follows ($ in millions):
Impairments | Remaining | ||||||||||||||||||||||
Three Months Ended | Six Months Ended | Net Carrying Value(1) | |||||||||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||||||||
Property and equipment (non-restructuring) | $ | 8 | $ | 2 | $ | 10 | $ | 4 | $ | 3 | $ | 2 | |||||||||||
Operating lease assets(2) | 1 | - | 1 | - | 1 | - | |||||||||||||||||
Total | $ | 9 | $ | 2 | $ | 11 | $ | 4 | $ | 4 | $ | 2 |
Impairments | Remaining Net Carrying Value(1) | ||||||||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||||||||
Property and equipment (non-restructuring) | $ | 3 | $ | 2 | $ | 8 | $ | 8 | $ | — | $ | — |
(1)Remaining net carrying value approximates fair value. Because assets subject to long-lived asset impairment are not measured at fair value on a recurring basis, certain fair value measurements presented in the table may reflect values at earlier measurement dates and may no longer represent the fair values at August 3, 2019, and August 4, 2018.
(2)Represents activity related to operating lease assets post-adoption of ASC 842, Leases.
All of the fair value remeasurements included in the table above were based on significant unobservable inputs (Level 3). Fixed asset fair values were primarily derived using a discounted cash flow ("DCF") model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate.
Fair Value of Financial Instruments
Our financial instruments, other than those presented in the disclosures above, include cash, receivables, other investments, accounts payable, other payables and long-term debt. The fair values of cash, receivables, accounts payable and other payables approximated carrying values because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy. Fair values for other investments held at cost are not readily available, but we estimate that the carrying values for these investments approximate fair value. See Note 7,
Debt, for information about the fair value of our long-term debt.4. Leases
The majority of our lease obligations are real estate operating leases from which we conduct the majority of our retail and distribution operations. Our finance leases are primarily equipment-related. For any lease with an initial term in excess of 12 months, the related lease assets and liabilities are recognized on our Condensed Consolidated Balance Sheets as either operating or finance leases at the inception of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components. For lease agreements entered into or reassessed after the adoption of ASC 842, Leases, we have elected to combine lease and non-lease components for all classes of assets. Leases with an initial term of 12 months or less are not recorded on our Condensed Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.
Operating lease assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. We use a collateralized incremental borrowing rate based on the information available at the commencement date, including the lease term, in determining the present value of future payments. Our operating leases also typically require payment of real estate taxes, common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. In instances where they are fixed, they are included due to our election to combine lease and non-lease components. Operating lease assets also include prepaid lease payments and initial direct costs, and are reduced by lease incentives. Our lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.
Supplemental balance sheet information related to our leases was as follows ($ in millions):
Balance Sheet Location | August 3, 2019 | ||||||||
Assets | |||||||||
Operating leases | Operating lease assets | $ | 2,774 | ||||||
Finance leases | Property and | 36 | |||||||
Total lease assets | $ | 2,810 | |||||||
Liabilities | |||||||||
Current: | |||||||||
Operating leases | Current portion of operating lease liabilities | $ | 643 | ||||||
Finance leases | Current portion of long-term debt | 14 | |||||||
Non-current: | |||||||||
Operating leases | Long-term operating lease liabilities | 2,230 | |||||||
Finance leases | Long-term debt | 25 | |||||||
Total lease liabilities | $ | 2,912 |
(1)Finance leases are recorded net of accumulated depreciation of $48 million.
Components of our total lease cost were as follows ($ in millions):
Three Months Ended | Six Months Ended | ||||||||
Statement of Earnings Location | August 3, 2019 | August 3, 2019 | |||||||
Operating lease cost(1) | Cost of goods sold and SG&A(2) | $ | 194 | $ | 389 | ||||
Finance lease cost: | |||||||||
Depreciation of lease assets | Cost of goods sold and SG&A(2) | 4 | 7 | ||||||
Interest on lease liabilities | Interest expense | - | 1 | ||||||
Variable lease cost | Cost of goods sold and SG&A(2) | 68 | 135 | ||||||
Sublease income | SG&A | (5) | (9) | ||||||
Total lease cost | $ | 261 | $ | 523 |
(1)Includes short-term leases, which are immaterial.
(2)Supply chain-related amounts are included in Cost of goods sold.
Other information related to our leases was as follows ($ in millions):
Three Months Ended | Six Months Ended | ||||||||
August 3, 2019 | August 3, 2019 | ||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||
Operating cash flows from operating leases | $ | 203 | $ | 404 | |||||
Operating cash flows from finance leases | - | 1 | |||||||
Financing cash flows from finance leases | 4 | 8 | |||||||
Lease assets obtained in exchange for new lease liabilities: | |||||||||
Operating leases | 247 | 394 | |||||||
Finance leases | 2 | 4 | |||||||
August 3, 2019 | |||||||||
Weighted average remaining lease term: | |||||||||
Operating leases | 5.4 years | ||||||||
Finance leases | 5.2 years | ||||||||
Weighted average discount rate: | |||||||||
Operating leases | 3.4 | % | |||||||
Finance leases | 4.4 | % |
Future lease payments under our non-cancellable leases as of August 3, 2019, were as follows ($ in millions):
Operating Leases(1) | Finance Leases(1) | ||||||||||
Remainder of fiscal 2020 | $ | 341 | $ | 8 | |||||||
Fiscal 2021 | 756 | 13 | |||||||||
Fiscal 2022 | 619 | 9 | |||||||||
Fiscal 2023 | 466 | 5 | |||||||||
Fiscal 2024 | 340 | 3 | |||||||||
Fiscal 2025 | 234 | 2 | |||||||||
Thereafter | 407 | 5 | |||||||||
Total future undiscounted lease payments | 3,163 | 45 | |||||||||
Less imputed interest | (290) | (6) | |||||||||
Total reported lease liability | $ | 2,873 | $ | 39 |
(1)Lease payments exclude $30 million of legally binding fixed costs for leases signed but not yet commenced, primarily related to operating leases.
In accordance with the prior guidance, ASC 840, Leases, our leases were previously designated as either capital, financing or operating. Previously designated capital leases are now considered finance leases under the new guidance, ASC 842, Leases, while our previously existing financing leases have been derecognized and reclassified as operating leases. The designation of operating leases remains substantially unchanged under the new guidance. The future minimum lease payments by fiscal year as determined prior to the adoption of ASC 842, Leases, under our previously designated capital, financing and operating leases (not including contingent rent) as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, were as follows ($ in millions):
Capital Leases | Financing Leases | Operating Leases(1) | |||||||||
Fiscal 2020 | $ | 14 | $ | 48 | $ | 700 | |||||
Fiscal 2021 | 11 | 42 | 648 | ||||||||
Fiscal 2022 | 7 | 35 | 513 | ||||||||
Fiscal 2023 | 4 | 24 | 371 | ||||||||
Fiscal 2024 | 2 | 16 | 253 | ||||||||
Thereafter | 7 | 40 | 476 | ||||||||
Total minimum lease payments | 45 | 205 | $ | 2,961 | |||||||
Less amount representing interest | (6) | (24) | |||||||||
Present value of minimum lease payments | 39 | 181 | |||||||||
Less current maturities | (12) | (43) | |||||||||
Present value of minimum lease maturities, less current maturities | $ | 27 | $ | 138 |
(1)Operating lease obligations do not include payments to landlords covering real estate taxes and common area maintenance. These charges, if included, would have increased total operating lease obligations by $0.8 billion at February 2, 2019.
5. Goodwill and Intangible Assets
All goodwill and intangible asset balances relate to our Domestic segment.
Goodwill
The gross carrying amounts and cumulative impairments of goodwill were as follows ($ in millions):
August 3, 2019 | February 2, 2019 | August 4, 2018 | |||||||||||||||||||||
Gross Carrying | Cumulative | Gross Carrying | Cumulative | Gross Carrying | Cumulative | ||||||||||||||||||
Goodwill | $ | 1,640 | $ | (675) | $ | 1,590 | $ | (675) | $ | 1,100 | $ | (675) |
Indefinite-Lived Intangible Assets
We have indefinite-lived intangible assets which includesprimarily related to our Pacific Sales tradename for the Domestic segment as of November 3, 2018, February 3, 2018, and October 28, 2017 ($ in millions):
November 3, 2018 | February 3, 2018 | October 28, 2017 | |||||||||
Goodwill | $ | 921 | $ | 425 | $ | 425 | |||||
Indefinite-lived tradename included in Other assets | 18 | 18 | 18 |
November 3, 2018 | February 3, 2018 | October 28, 2017 | |||||||||||||||||||||
Gross Carrying Amount | Cumulative Impairment | Gross Carrying Amount | Cumulative Impairment | Gross Carrying Amount | Cumulative Impairment | ||||||||||||||||||
Goodwill | $ | 1,596 | $ | 675 | $ | 1,100 | $ | 675 | $ | 1,100 | $ | 675 |
Definite-Lived Intangible Assets
We have definite-lived intangible assets related accumulated amortizationto GreatCall and CST which are recorded within Other assets on our Condensed Consolidated Balance Sheets. Balances of our definite-lived intangible assets were as follows ($ in millions). We had 0 definite-lived intangible assets as of November 3, 2018 ($ in millions). We had no definite-lived intangible assets asAugust 4, 2018.
August 3, 2019 | February 2, 2019 | Weighted-Average Useful | |||||||||||||||||
Gross Carrying | Accumulated | Gross Carrying | Accumulated | Life Remaining as of | |||||||||||||||
Customer relationships | $ | 341 | $ | 42 | $ | 258 | $ | 16 | 7.4 | ||||||||||
Tradename | 63 | 7 | 63 | 3 | 7.2 | ||||||||||||||
Developed technology | 52 | 9 | 52 | 4 | 4.2 | ||||||||||||||
Total | $ | 456 | $ | 58 | $ | 373 | $ | 23 | 7.0 |
14
November 3, 2018 | |||||||
Gross Carrying Amount | Accumulated Amortization | ||||||
Customer relationships | $ | 258 | $ | 4 | |||
Tradename | 61 | 1 | |||||
Developed technology | 52 | 1 | |||||
Total | $ | 371 | $ | 6 |
We recorded $6$18 million and $35 million of aggregate amortization expense related to definite-lived intangible assets during the three and ninesix months ended NovemberAugust 3, 2018,2019, respectively, and $0 million duringfor both the three and ninesix months ended October 28, 2017. The following table provides the amortizationAugust 4, 2018. Amortization expense expected to be recognized in future periods ($ in millions):
Amortization Expense | |||
Remainder of fiscal 2019 | $ | 17 | |
Fiscal 2020 | 67 | ||
Fiscal 2021 | 67 | ||
Fiscal 2022 | 67 | ||
Fiscal 2023 and thereafter | 147 |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Best Buy Mobile | $ | — | $ | — | $ | 47 | $ | — | |||||||
Canadian brand consolidation | — | (2 | ) | — | (3 | ) | |||||||||
Renew Blue | — | — | — | 3 | |||||||||||
Total | $ | — | $ | (2 | ) | $ | 47 | $ | — |
Three Months Ended | Nine Months Ended | Cumulative Amount | |||||||||
November 3, 2018 | November 3, 2018 | November 3, 2018 | |||||||||
Property and equipment impairments | $ | — | $ | — | $ | 1 | |||||
Termination benefits | — | (2 | ) | 6 | |||||||
Facility closure and other costs | — | 49 | 49 | ||||||||
Total | $ | — | $ | 47 | $ | 56 |
Termination Benefits | Facility Closure and Other Costs | Total | |||||||||
Balances at February 3, 2018 | $ | 8 | $ | — | $ | 8 | |||||
Charges | 1 | 49 | 50 | ||||||||
Cash payments | (6 | ) | (48 | ) | (54 | ) | |||||
Adjustments(1) | (3 | ) | — | (3 | ) | ||||||
Balances at November 3, 2018 | $ | — | $ | 1 | $ | 1 |
November 3, 2018 | February 3, 2018 | October 28, 2017 | |||||||||
2018 Notes | $ | — | $ | 500 | $ | 500 | |||||
2021 Notes | 650 | 650 | 650 | ||||||||
2028 Notes | 500 | — | — | ||||||||
Interest rate swap valuation adjustments | (22 | ) | (5 | ) | — | ||||||
Subtotal | 1,128 | 1,145 | 1,150 | ||||||||
Debt discounts and issuance costs | (8 | ) | (3 | ) | (3 | ) | |||||
Financing lease obligations | 189 | 191 | 158 | ||||||||
Capital lease obligations | 17 | 22 | 24 | ||||||||
Total long-term debt | 1,326 | 1,355 | 1,329 | ||||||||
Less: current portion | 46 | 544 | 545 | ||||||||
Total long-term debt, less current portion | $ | 1,280 | $ | 811 | $ | 784 |
Amortization | |||||||||||||||||||||||
Remainder of fiscal 2020 | $ | 37 | |||||||||||||||||||||
Fiscal 2021 | 73 | ||||||||||||||||||||||
Fiscal 2022 | 73 | ||||||||||||||||||||||
Fiscal 2023 | 73 | ||||||||||||||||||||||
Fiscal 2024 | 54 | ||||||||||||||||||||||
Fiscal 2025 | 16 | ||||||||||||||||||||||
Thereafter | 72 |
6. Derivative Instruments
We manage our economic and transaction exposure to certain risks through the use ofby using foreign currency derivative instruments and interest rate swaps. Our objective in holding derivatives is to reduce the volatility of net earnings, cash flows and net asset value associated with changes in foreign currency exchange rates and interest rates. We do not hold derivative instruments for
We record all derivative instruments on our Condensed Consolidated Balance Sheets at fair value and evaluate hedge effectiveness prospectively or retrospectively when electing to apply hedge accounting. We formally document all hedging relations at inception for derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transaction. In addition, we have derivatives which are not designated as hedging instruments.
Net Investment Hedges
We use foreign exchange forward contracts to hedge against the effect of Canadian dollar exchange rate fluctuations on a portion of our net investment in our Canadian operations. The contracts have terms of up to 12 months. For a net investment hedge, we recognize changes in the fair value of the derivative as a component of foreign currency translation within other comprehensive income to offset a portion of the change in translated value of the net investment being hedged, until the investment is sold or liquidated. We limit recognition in net earnings of amounts previously recorded in other comprehensive income to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. We report the gains and losses, if any, related to the amount excluded from the assessment of hedge effectiveness in net earnings.
Interest Rate Swaps
We utilized "receive fixed-rate, pay variable-rate" interest rate swaps to mitigate the effect of interest rate fluctuations on our $500 million principal amount of notes due August 1, 2018, Notes, prior to their maturity, and currently have swaps outstanding on our $650 million principal amount of notes due March 15, 2021, Notes and 2028 Notes.$500 million principal amount of notes due October 1, 2028. Our interest rate swap contracts are considered perfect hedges because the critical terms and notional amounts match those of our fixed-rate debt being hedged and are, therefore, accounted for as fair value hedges using the shortcut method. Under the shortcut method, we recognize the change in the fair value of the derivatives with an offsetting change to the carrying value of the debt. Accordingly, there is no impact on our Condensed Consolidated Statements of Earnings from the fair value of the derivatives.
Derivatives Not Designated as Hedging Instruments
We use foreign currency forward contracts to manage the impact of fluctuations in foreign currency exchange rates relative to recognized receivable and payable balances denominated in non-functional currencies. The contracts generally have terms of up to 12 months. These derivative instruments are not designated in hedging relationships and, therefore, we record gains and losses on these contracts directly to net earnings.
Summary of Derivative Balances
Gross fair values of our outstanding derivative instruments and the corresponding classification at November 3, 2018, February 3, 2018, and October 28, 2017classifications were as follows ($ in millions):
Assets | ||||||||||||||
Contract Type | Balance Sheet Location | August 3, 2019 | February 2, 2019 | August 4, 2018 | ||||||||||
Derivatives designated as net investment hedges | Other current assets | $ | - | $ | - | $ | 5 | |||||||
Derivatives designated as interest rate swaps | Other current assets and Other assets | 78 | 26 | - | ||||||||||
Total | $ | 78 | $ | 26 | $ | 5 |
Liabilities | ||||||||||||||
Contract Type | Balance Sheet Location | August 3, 2019 | February 2, 2019 | August 4, 2018 | ||||||||||
Derivatives designated as interest rate swaps | Long-term liabilities | $ | - | $ | 1 | $ | 7 |
Assets | ||||||||||||
Contract Type | Balance Sheet Location | November 3, 2018 | February 3, 2018 | October 28, 2017 | ||||||||
Derivatives designated as net investment hedges | Other current assets | $ | 1 | $ | 2 | $ | 3 | |||||
Derivatives designated as interest rate swaps | Other current assets and Other assets | — | — | 3 | ||||||||
No hedge designation (foreign exchange forward contracts) | Other current assets | — | — | 2 | ||||||||
Total | $ | 1 | $ | 2 | $ | 8 |
Liabilities | ||||||||||||
Contract Type | Balance Sheet Location | November 3, 2018 | February 3, 2018 | October 28, 2017 | ||||||||
Derivatives designated as net investment hedges | Accrued liabilities | $ | — | $ | 7 | $ | 5 | |||||
Derivatives designated as interest rate swaps | Accrued liabilities and Long-term liabilities | 22 | 5 | 3 | ||||||||
No hedge designation (foreign exchange forward contracts) | Accrued liabilities | — | 1 | — | ||||||||
Total | $ | 22 | $ | 13 | $ | 8 |
Effects of derivative instruments on other comprehensive income ("OCI") for the three and nine months ended November 3, 2018, and October 28, 2017were as follows ($ in millions):
Three Months Ended | Six Months Ended | |||||||||||||||||||
Derivatives designated as net investment hedges | August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||||||
Pre-tax gain recognized in OCI | $ | - | $ | 3 | $ | - | $ | 19 |
Three Months Ended | Nine Months Ended | ||||||||||||||
Derivatives designated as net investment hedges | November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | |||||||||||
Pre-tax gain (loss) recognized in OCI | $ | 2 | $ | 8 | $ | 21 | $ | (3 | ) |
Effects of derivatives not designated as hedging instruments on our Condensed Consolidated Statements of Earnings for the three and nine months ended November 3, 2018, and October 28, 2017were as follows ($ in millions):
Gain (Loss) Recognized | Gain (Loss) Recognized | |||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||
Contract Type | Statement of Earnings Location | August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | |||||||||||||||
No hedge designation (foreign exchange contracts) | SG&A | $ | (1) | $ | 1 | $ | - | $ | 1 |
Gain (Loss) Recognized | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
Contract Type | Statement of Earnings Location | November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | |||||||||||
No hedge designation (foreign exchange contracts) | SG&A | $ | — | $ | 2 | $ | 2 | $ | (1 | ) |
Effects of interest rate derivatives and adjustments to the carrying value of long-term debt on our Condensed Consolidated Statements of Earnings for the three and nine months ended November 3, 2018, and October 28, 2017were as follows ($ in millions):
Gain (Loss) Recognized | Gain (Loss) Recognized | |||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||
Contract Type | Statement of Earnings Location | August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | |||||||||||||||
Interest rate swap contracts | Interest expense | $ | 55 | $ | 3 | $ | 53 | $ | (1) | |||||||||||
Adjustments to carrying value of long-term debt | Interest expense | (55) | (3) | (53) | 1 | |||||||||||||||
Total | $ | - | $ | - | $ | - | $ | - |
Gain (Loss) Recognized | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
Contract Type | Statement of Earnings Location | November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | |||||||||||
Interest rate swap contracts | Interest expense | $ | (15 | ) | $ | 16 | $ | (16 | ) | $ | 13 | |||||
Adjustments to carrying value of long-term debt | Interest expense | 15 | (16 | ) | 16 | (13 | ) | |||||||||
Total | $ | — | $ | — | $ | — | $ | — |
Notional amounts of our derivative instruments at November 3, 2018, February 3, 2018, and October 28, 2017were as follows ($ in millions):
Notional Amount | ||||||||||||||
Contract Type | August 3, 2019 | February 2, 2019 | August 4, 2018 | |||||||||||
Derivatives designated as net investment hedges | $ | 23 | $ | 15 | $ | 59 | ||||||||
Derivatives designated as interest rate swaps | 1,150 | 1,150 | 650 | |||||||||||
No hedge designation (foreign exchange contracts) | 33 | 9 | 41 | |||||||||||
Total | $ | 1,206 | $ | 1,174 | $ | 750 |
7. Debt
Short-Term Debt
We have a $1.25 billion five year senior unsecured revolving credit facility agreement with a syndicate of banks. The agreement permits borrowings of up to $1.25 billion and expires in April 2023. There were 0 borrowings outstanding as of August 3, 2019, February 2, 2019, or August 4, 2018.
Notional Amount | |||||||||||
Contract Type | November 3, 2018 | February 3, 2018 | October 28, 2017 | ||||||||
Derivatives designated as net investment hedges | $ | 16 | $ | 462 | $ | 240 | |||||
Derivatives designated as interest rate swap contracts | 1,150 | 1,150 | 1,150 | ||||||||
No hedge designation (foreign exchange forward contracts) | 67 | 33 | 64 | ||||||||
Total | $ | 1,233 | $ | 1,645 | $ | 1,454 |
Long-Term Debt
Long-term debt consisted of the following ($ in millions):
August 3, 2019 | February 2, 2019 | August 4, 2018 | |||||||||
Notes, 5.50%, due March 15, 2021 | $ | 650 | $ | 650 | $ | 650 | |||||
Notes, 4.45%, due October 1, 2028 | 500 | 500 | - | ||||||||
Interest rate swap valuation adjustments | 78 | 25 | (7) | ||||||||
Subtotal | 1,228 | 1,175 | 643 | ||||||||
Debt discounts and issuance costs | (6) | (7) | (2) | ||||||||
Financing lease obligations (1) | - | 181 | 188 | ||||||||
Capital lease obligations (1) | - | 39 | 19 | ||||||||
Finance lease obligations (1) | 39 | - | - | ||||||||
Total long-term debt | 1,261 | 1,388 | 848 | ||||||||
Less current portion | 14 | 56 | 47 | ||||||||
Total long-term debt, less current portion | $ | 1,247 | $ | 1,332 | $ | 801 |
(1)See Note 4, Leases, for additional information regarding our lease obligations.
The fair value of total long-term debt, excluding debt discounts and issuance costs and lease obligations, approximated $1,295 million, $1,178 million, and $673 million as of August 3, 2019, February 2, 2019, and August 4, 2018, respectively, based primarily on market prices quoted from external sources, compared with carrying values of $1,228 million, $1,175 million, and $643 million, respectively. If long-term debt were measured at fair value in the financial statements, it would be classified primarily as Level 2 in the fair value hierarchy.
See Note 6, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, for additional information regarding the terms of our other debt facilities, debt instruments and other obligations.
8. Revenue Recognition
We generate revenue primarily from the sale of products and services, both as a principal and as an agent. We generate all of our operating revenue from contracts with customers. Our revenue excludes sales and usage-based taxes collected.
Revenue from product sales and services is reported net of sales refunds, which includes an estimate of future returns and contract cancellations based on historical refund rates, with a corresponding reduction to cost of sales. For revenue transactions that involve more than one performance obligation, we defer the revenue associated with any unsatisfied performance obligation until the obligation is satisfied.
Our contract liabilities primarily relate to product merchandise not yet delivered to customers; unredeemed gift cards; services not yet completed; services technical support contracts, where performance is satisfied over the duration of the contract; and options that provide a material right to customers, such as our customer loyalty programs. We do not have any material contract assets.
Information about our contracts with customers, which reflects the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied, was as follows ($ in millions):
August 3, 2019 | February 2, 2019 | August 4, 2018 | |||||||||
Receivables, net(1) | $ | 561 | $ | 565 | $ | 584 | |||||
Short-term contract liabilities included in: | |||||||||||
Unredeemed gift cards | 264 | 290 | 275 | ||||||||
Deferred revenue | 468 | 446 | 438 | ||||||||
Accrued liabilities | 149 | 146 | 148 | ||||||||
Long-term contract liabilities included in: | |||||||||||
Long-term liabilities | 9 | 11 | 15 |
(1)Receivables are recorded net of allowances for doubtful accounts of $13 million, $13 million, and $15 million as of August 3, 2019, February 2, 2019, and August 4, 2018, respectively.
During the first six months of fiscal 2020 and 2019, $638 million and $605 million of revenue was recognized, respectively, that was included in the contract liability balance at the beginning of the respective periods. NaN revenue was recognized from performance obligations satisfied in previous periods.
Revenue from our contract liability balances expected to be recognized in future periods if performance of the contract is expected to have a duration of more than one year is as follows ($ in millions):
August 3, 2019(1) | |||||||||||
Remainder of fiscal 2020 | $ | 6 | |||||||||
Fiscal 2021 | 8 | ||||||||||
Fiscal 2022 | 4 | ||||||||||
Fiscal 2023 | 1 | ||||||||||
Thereafter | - |
(1)Amounts exclude unsatisfied performance obligations from contract liability balances with a duration of one year or less. The estimated transaction price revenue disclosed above also does not include amounts of variable consideration attributable to contracts where the consideration is constrained at August 3, 2019.
See Note 13, Segments, for a disaggregation of revenue by reportable segment and product category, which represents how our chief operating decision maker reviews information internally to evaluate our financial performance and to make resource allocation and other decisions for the enterprise.
9. Restructuring Charges
Restructuring charges incurred in the second quarter and first six months of fiscal 2020 were $48 million, related to U.S. retail operating model changes. Restructuring charges incurred in the second quarter and first six months of fiscal 2019 were $17 million and $47 million, respectively, related to Best Buy Mobile.
U.S. Retail Operating Model
In the second quarter of fiscal 2020, we made changes primarily related to our U.S. retail operating model to increase organization effectiveness and create a more seamless customer experience across all channels. As a result, we incurred $48 million of charges related to termination benefits, including $10 million related to a voluntary early retirement offer. All charges incurred are from continuing operations and are presented in Restructuring charges on our Condensed Consolidated Statements of Earnings.
The following table summarizes our restructuring accrual activity during the first six months of fiscal 2020 related to U.S. retail operating model changes ($ in millions):
Termination Benefits | |||||||||||||||
Balance at February 2, 2019 | $ | - | |||||||||||||
Charges | 48 | ||||||||||||||
Cash payments | (8) | ||||||||||||||
Balance at August 3, 2019 | $ | 40 |
Best Buy Mobile
On March 1, 2018, we announced our intent to close all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S. This decision was a result of changing economics in the mobile industry since we began opening these stores in 2006, along with the integration of our mobile model into our core stores and online channel, which are more economically compelling today. All restructuring charges related to this plan are from continuing operations and are presented in Restructuring charges on our Condensed Consolidated Statements of Earnings.
Restructuring charges incurred for Best Buy Mobile were as follows ($ in millions):
Three Months Ended | Six Months Ended | Cumulative Amount | |||||||||||||
Property and equipment impairments | $ | - | $ | - | $ | 1 | |||||||||
Termination benefits | (3) | (2) | 6 | ||||||||||||
Facility closure and other costs | 20 | 49 | 49 | ||||||||||||
Total restructuring charges | $ | 17 | $ | 47 | $ | 56 |
The following table summarizes our restructuring accrual activity during the first six months of fiscal 2019 related to Best Buy Mobile ($ in millions):
Termination Benefits | Facility Closures | Total | |||||||||||||
Balances at February 3, 2018 | $ | 8 | $ | - | $ | 8 | |||||||||
Charges | 1 | 49 | 50 | ||||||||||||
Cash payments | (5) | (46) | (51) | ||||||||||||
Adjustments(1) | (3) | (1) | (4) | ||||||||||||
Balances at August 4, 2018 | $ | 1 | $ | 2 | $ | 3 |
(1)Adjustments to termination benefits represent changes in retention assumptions. Adjustments to facility closure and other costs represent changes in sublease assumptions.
10. Earnings per Share
We compute our basic earnings per share based on the weighted-average number of common shares outstanding and our diluted earnings per share based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued. Potentially dilutive securities include stock options, nonvested share awards, dividend equivalents attached to nonvested share awards that are settled in shares of Best Buy common stock and shares issuable under our employee stock purchase plan. Nonvested market-based share awards and nonvested performance-based share awards are included in the average diluted shares outstanding for each period, if established market or performance criteria have been met at the end of the respective periods.
Reconciliations of the numerators and denominators of basic and diluted earnings per share from continuing operations for the three and nine months ended November 3, 2018, and October 28, 2017were as follows ($ and shares in millions, except per share amounts):
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Numerator | |||||||||||||||
Net earnings | $ | 238 | $ | 244 | $ | 503 | $ | 452 | |||||||
Denominator | |||||||||||||||
Weighted-average common shares outstanding | 267.1 | 279.0 | 267.4 | 280.8 | |||||||||||
Dilutive effect of stock compensation plan awards | 2.3 | 4.7 | 3.5 | 5.2 | |||||||||||
Weighted-average common shares outstanding, assuming dilution | 269.4 | 283.7 | 270.9 | 286.0 | |||||||||||
Potential shares which were anti-dilutive and excluded from weighted-average share computations | 0.9 | 0.1 | 0.9 | 0.1 | |||||||||||
Basic earnings per share | $ | 0.89 | $ | 0.88 | $ | 1.88 | $ | 1.61 | |||||||
Diluted earnings per share | $ | 0.89 | $ | 0.86 | $ | 1.86 | $ | 1.58 |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Numerator | |||||||||||||||
Net earnings from continuing operations | $ | 277 | $ | 238 | $ | 729 | $ | 635 | |||||||
Denominator | |||||||||||||||
Weighted-average common shares outstanding | 274.3 | 299.1 | 278.6 | 304.1 | |||||||||||
Dilutive effect of stock compensation plan awards | 5.0 | 6.3 | 5.2 | 6.5 | |||||||||||
Weighted-average common shares outstanding, assuming dilution | 279.3 | 305.4 | 283.8 | 310.6 | |||||||||||
Anti-dilutive securities excluded from Weighted-average common shares outstanding, assuming dilution | 0.1 | 0.0 | 0.1 | 0.0 | |||||||||||
Net earnings per share from continuing operations | |||||||||||||||
Basic | $ | 1.01 | $ | 0.80 | $ | 2.62 | $ | 2.09 | |||||||
Diluted | $ | 0.99 | $ | 0.78 | $ | 2.57 | $ | 2.05 |
11. Repurchase of Common Stock
On February 23, 2019, our annual broad grantBoard of restricted stockDirectors ("Board") authorized a $3.0 billion share repurchase program. There is no expiration date governing the period over which we can repurchase shares under the February 2019 authorization.
Information regarding the shares we repurchased was as follows ($ and restricted stock unitsshares in March 2018,millions, except per share amounts):
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Total cost of shares repurchased | $ | 230 | $ | 375 | $ | 336 | $ | 774 | |||||||
Average price per share | $ | 69.71 | $ | 74.80 | $ | 70.04 | $ | 73.21 | |||||||
Number of shares repurchased | 3.3 | 5.0 | 4.8 | 10.6 |
As of August 3, 2019, $2.7 billion of the $3.0 billion share repurchase authorization was available. Between the end of the second quarter of fiscal 2020 on August 3, 2019, and September 4, 2019, we attach dividend equivalents to our restricted stock and restricted stock units equal to dividends payable on the same number ofrepurchased an incremental 2.2 million shares of Best Buyour common stock during the applicable period. Dividend equivalents, settled in additional sharesat a cost of Best Buy common stock, accrue on restricted stock and restricted stock unit awards during the vesting period. No dividend equivalents are paid on any restricted stock or restricted stock units that are forfeited prior to the vesting date.$146 million.
12. Comprehensive Income
Changes in accumulated other comprehensive income, net of tax were as follows for the three and nine months ended November 3, 2018, and October 28, 2017 ($ in millions):
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Foreign currency translation adjustments | $ | 5 | $ | (14) | $ | - | $ | (18) |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Foreign currency translation adjustments | $ | 4 | $ | (17 | ) | $ | (14 | ) | $ | 25 |
The gains and losses on our net investment hedges, which are included in foreign currency translation adjustments, were not material for the periods presented. Foreign currency translation adjustments do not include a provision for income tax expense when earnings from foreign operations are considered to be indefinitely reinvested outside the U.S. At this time, we are still evaluating the earnings that are indefinitely reinvested outside the U.S. Refer to Note 10,
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Total cost of shares repurchased | $ | 369 | $ | 366 | $ | 1,143 | $ | 1,147 | |||||||
Average price per share | $ | 76.04 | $ | 57.14 | $ | 74.10 | $ | 52.35 | |||||||
Number of shares repurchased | 4.8 | 6.4 | 15.4 | 21.9 |
13. Segments
Our chief operating decision maker ("CODM") is our Chief Executive Officer. Our business is organized into two2 reportable segments: Domestic (which is comprised of all states, districts and territories of the U.S., including GreatCall) and International (which is comprised of all operations in Canada and Mexico). Our CODM has ultimate responsibility for enterprise decisions. Our CODM determines, in particular, resource allocation for, and monitors the performance of, the consolidated enterprise, the Domestic segment and the International segment. The Domestic segment managers and International segment managers have responsibility for operating decisions, allocating resources and assessing performance within their respective segments. Our CODM relies on internal management reporting that analyzes enterprise results to the net earnings level and segment results to the operating income level.
We aggregate our Domestic and GreatCall operating segments into one Domestic reportable segment. We also aggregate our Canada and Mexico businesses into one International operating segment. Our Domestic andsegment, which represents the International operating segments also represent our reportable segments.segment. The accounting policies of the segments are the same.
Revenue by reportable segment and product category werewas as follows for the three and nine months ended November 3, 2018, and October 28, 2017 ($ in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | |||||||||||||
Revenue by reportable segment | ||||||||||||||||
Domestic | $ | 8,821 | $ | 8,639 | $ | 17,302 | $ | 17,051 | ||||||||
International | 715 | 740 | 1,376 | 1,437 | ||||||||||||
Total revenue | $ | 9,536 | $ | 9,379 | $ | 18,678 | $ | 18,488 | ||||||||
Revenue by product category (1) | ||||||||||||||||
Domestic | ||||||||||||||||
Computing and Mobile Phones | $ | 3,917 | $ | 3,923 | $ | 7,768 | $ | 7,822 | ||||||||
Consumer Electronics | 2,780 | 2,770 | 5,442 | 5,426 | ||||||||||||
Appliances | 1,138 | 1,013 | 2,099 | 1,895 | ||||||||||||
Entertainment | 439 | 512 | 912 | 1,059 | ||||||||||||
Services | 510 | 384 | 1,008 | 777 | ||||||||||||
Other | 37 | 37 | 73 | 72 | ||||||||||||
Total Domestic revenue | $ | 8,821 | $ | 8,639 | $ | 17,302 | $ | 17,051 | ||||||||
International | ||||||||||||||||
Computing and Mobile Phones | $ | 308 | $ | 335 | $ | 613 | $ | 666 | ||||||||
Consumer Electronics | 231 | 217 | 434 | 423 | ||||||||||||
Appliances | 83 | 86 | 142 | 147 | ||||||||||||
Entertainment | 36 | 43 | 72 | 85 | ||||||||||||
Services | 45 | 41 | 88 | 81 | ||||||||||||
Other | 12 | 18 | 27 | 35 | ||||||||||||
Total International revenue | $ | 715 | $ | 740 | $ | 1,376 | $ | 1,437 |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Revenue by reportable segment | |||||||||||||||
Domestic | $ | 8,756 | $ | 8,491 | $ | 25,807 | $ | 24,675 | |||||||
International | 834 | 829 | 2,271 | 2,113 | |||||||||||
Total revenue | $ | 9,590 | $ | 9,320 | $ | 28,078 | $ | 26,788 | |||||||
Revenue by product category(1) | |||||||||||||||
Domestic: | |||||||||||||||
Computing and Mobile Phones | $ | 4,125 | $ | 4,097 | $ | 11,947 | $ | 11,532 | |||||||
Consumer Electronics | 2,665 | 2,590 | 8,091 | 7,782 | |||||||||||
Appliances | 964 | 884 | 2,860 | 2,575 | |||||||||||
Entertainment | 558 | 508 | 1,617 | 1,572 | |||||||||||
Services | 409 | 382 | 1,185 | 1,120 | |||||||||||
Other | 35 | 30 | 107 | 94 | |||||||||||
Total Domestic revenue | $ | 8,756 | $ | 8,491 | $ | 25,807 | $ | 24,675 | |||||||
International: | |||||||||||||||
Computing and Mobile Phones | $ | 425 | $ | 431 | $ | 1,092 | $ | 1,040 | |||||||
Consumer Electronics | 221 | 227 | 644 | 616 | |||||||||||
Appliances | 69 | 63 | 215 | 165 | |||||||||||
Entertainment | 55 | 49 | 140 | 129 | |||||||||||
Services | 46 | 42 | 127 | 118 | |||||||||||
Other | 18 | 17 | 53 | 45 | |||||||||||
Total International revenue | $ | 834 | $ | 829 | $ | 2,271 | $ | 2,113 |
(1)Refer to |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Domestic | $ | 315 | $ | 345 | $ | 911 | $ | 959 | |||||||
International | 7 | 5 | 11 | 12 | |||||||||||
Total operating income | 322 | 350 | 922 | 971 | |||||||||||
Other income (expense): | |||||||||||||||
Gain on sale of investments | 12 | — | 12 | — | |||||||||||
Investment income and other | 11 | 12 | 35 | 30 | |||||||||||
Interest expense | (15 | ) | (20 | ) | (53 | ) | (57 | ) | |||||||
Earnings from continuing operations before income tax expense | $ | 330 | $ | 342 | $ | 916 | $ | 944 |
November 3, 2018 | February 3, 2018 | October 28, 2017 | |||||||||
Domestic | $ | 13,812 | $ | 11,553 | $ | 13,140 | |||||
International | 1,188 | 1,496 | 1,645 | ||||||||
Total assets | $ | 15,000 | $ | 13,049 | $ | 14,785 |
Operating income by reportable segment and the reconciliation to earnings before income tax expense was as follows ($ in millions):
Three Months Ended | Six Months Ended | |||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | |||||||||||||
Domestic | $ | 309 | $ | 329 | $ | 641 | $ | 596 | ||||||||
International | 4 | 6 | 6 | 4 | ||||||||||||
Total operating income | 313 | 335 | 647 | 600 | ||||||||||||
Other income (expense): | ||||||||||||||||
Investment income and other | 10 | 13 | 24 | 24 | ||||||||||||
Interest expense | (16) | (19) | (34) | (38) | ||||||||||||
Earnings before income tax expense | $ | 307 | $ | 329 | $ | 637 | $ | 586 |
Assets by reportable segment were as follows ($ in millions):
August 3, 2019 | February 2, 2019 | August 4, 2018 | ||||||||||||||
Domestic | $ | 13,714 | $ | 11,908 | $ | 10,912 | ||||||||||
International | 1,264 | 993 | 1,081 | |||||||||||||
Total assets | $ | 14,978 | $ | 12,901 | $ | 11,993 |
14. Contingencies
We are involved in a number of legal proceedings. Where appropriate, we have made accruals with respect to these matters, which are reflected on our Condensed Consolidated Financial Statements. However, there are cases where liability is not
Securities Actions
In February 2011, a purported class action lawsuit captioned,
IBEW Local 98 Pension Fund, individually and on behalf of all others similarly situated v. Best Buy Co., Inc., et al., was filed against us and certain of our executive officers in the U.S. District Court for the District of Minnesota. This federal court action alleges, among other things, that we and the officers named in the complaint violated Sections 10(b) and 20A of the Exchange Act and Rule 10b-5 under the Exchange Act in connection with press releases and other statements relating to our fiscal 2011 earnings guidance that had been made available to the public. Additionally, in March 2011, a similar purported class action was filed by a single shareholder, Rene LeBlanc, against us and certain of our executive officers in the same court. In July 2011, after consolidation of the IBEW Local 98 Pension Fund and Rene LeBlanc actions, a consolidated complaint captioned, IBEW Local 98 Pension Fund v. Best Buy Co., Inc., et al., was filed and served. Following discovery and motion practice Plaintiffs moved to certify the purported class. By Order filed August 6, 2014, the court certified a class of persons or entities who acquired Best Buy common stock between 10:00 a.m. EDT on September 14, 2010, and December 13, 2010, and who were damaged by the alleged violations of law. The 8th Circuit Court of Appeals granted our request for interlocutory appeal. On April 12, 2016, the 8th Circuit held the trial court misapplied the law and reversed the class certification order. IBEW petitioned the 8th Circuit for a rehearing en banc, which was denied on June 1, 2016. On June 23, 2017, the trial court denied plaintiff's request to file a new Motion for Class Certification. On October 30, 2017, plaintiffs filed a motion for leave to file a second amended class action complaint which the Magistrate Judge denied on July 11, 2018. On August 24, 2018, the District Court Judge overruled plaintiff’s objections to that ruling, affirming the Magistrate Judge’s denial of leave to amend. OnIn June 2011, a purported shareholder derivative action captioned,
Salvatore M. Talluto, Derivatively and on Behalf of Best Buy Co., Inc. v. Richard M. Schulze, et al., as Defendants and Best Buy Co., Inc. as Nominal Defendant, was filed against both present and former members of our Board serving during the relevant periods in fiscal 2011 and us as a nominal defendant in the U.S. District Court for the State of Minnesota. The lawsuit alleges that the director defendants breached their fiduciary duty, among other claims, including violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in failing to correct public misrepresentations and material misstatements and/or omissions regarding our fiscal 2011 earnings projections and, for certain directors, selling stock while in possession of material adverse non-public information. Additionally, in July 2011, a similar purported class action was filed by a single shareholder, Daniel Himmel, against us and certain of our executive officers in the same court. In November 2011, the respective lawsuits of Salvatore M. Talluto and Daniel Himmel were consolidated into a new action captioned, In Re: Best Buy Co., Inc. Shareholder Derivative Litigation, and a stay ordered pending the close of discovery in the consolidated IBEW Local 98 Pension Fund v. Best Buy Co., Inc., et al. case. Additionally, in June 2015, a similar purported class action was filed by a single shareholder, Khuong Tran, derivatively on behalf of Best Buy Co., Inc. against us and certain of our executive officers and directors in the same court. The Khuong Tran lawsuit has also been stayedpending the close of discovery in IBEW.
Other Legal Proceedings
We are involved in various other legal proceedings arising in the normal course of conducting business. For such legal proceedings, we have accrued an amount that reflects the aggregate liability deemed probable and estimable, but this amount is not material to our consolidated financial position, results of operations or cash flows. Because of the preliminary nature of many of these proceedings, the difficulty in ascertaining the applicable facts relating to many of these proceedings, the variable treatment of claims made in many of these proceedings and the difficulty of predicting the settlement value of many of these proceedings, we are not able to estimate an amount or range of any reasonably possible additional losses. However, based upon our historical experience, the resolution of these proceedings is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.
15. Subsequent Event
On July 23, 2019, we signed a definitive agreement to acquire the predictive healthcare technology business of BioSensics, LLC (“BioSensics”), for approximately $21 million, and the acquisition was completed on August 7, 2019.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” refers to Best 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 is presented in the following sections:
Overview
Business Strategy Update
Results of Operations
Liquidity and Capital Resources
Off-Balance-Sheet Arrangements and Contractual Obligations
Significant Accounting Policies and Estimates
New Accounting Pronouncements
Safe Harbor Statement Under the Private Securities Litigation Reform Act
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 3, 2018,2, 2019, (including the information presented therein under
Overview
We strive to enrich the lives of consumers through technology, whether they come toconnect with us online, visit our stores or invite us into their homes. We do this by solving technology problems and addressing key human needs across a range of areas, including entertainment, productivity, communication, food preparation, security and health and wellness. We have operations in the U.S., Canada and Mexico. We operatehave two reportable segments: Domestic and International. The Domestic segment is comprised of the operations in all states, districts and territories of the U.S., including GreatCall, Inc. ("GreatCall").GreatCall. The International segment is comprised of all operations in Canada and Mexico.
Our fiscal year ends on the Saturday nearest the end of January. Fiscal 2019 will include 52 weeks and fiscal 2018 included 53 weeks, with the additional week included in the fourth quarter. 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 in the U.S., Canada and Mexico.
Comparable Sales
Throughout this MD&A, we refer to comparable sales. In the first quarter of fiscal 2020, we refined our methodology for calculating comparable sales. It now reflects certain revenue streams previously excluded from the comparable sales calculation, such as credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. The impact of adopting these changes is immaterial to all periods presented, and therefore prior-period comparable sales disclosures have not been restated. Our comparable sales calculation compares revenue from stores, websites and call centers operating for at least 14 full months, as well as revenue related to certain other comparable sales channels for a particular period to the corresponding period in the prior year. Relocated stores, as well as remodeled, expanded and downsized stores closed more than 14 days, are excluded from the comparable sales calculation until at least 14 full months after reopening. Acquisitions are included in the comparable sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The calculation of 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). On March 1, 2018, we announced our intent to close all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S. As a result, all revenue related to these stores has been excluded from the comparable sales calculation beginning in March 2018. On October 1, 2018, we acquired all outstanding shares of GreatCall.GreatCall, and on May 9, 2019, we acquired all outstanding shares of Critical Signal Technologies, Inc. (“CST”). Consistent with our comparable sales policy, the results of GreatCall and CST are excluded from our comparable sales calculation for the third quarter and first nine months of fiscal 2019.periods presented. 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.
Non-GAAP Financial Measures
This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), as well as certain adjusted or non-GAAP financial measures, such as constant currency, non-GAAP operating
In our discussions of the operating results of our Consolidatedconsolidated 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",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
Consolidated Non-GAAP Financial Measures section below for a detailed reconciliation of items that impacted our non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS from continuing operations in the presented periods.Business Strategy Update
In the second quarter of fiscal 2020, we generated $9.5 billion in revenue and grew our Enterprise comparable sales by 1.6%. Our GAAP operating income rate decreased by 30 basis points and our non-GAAP operating income rate expanded by 20 basis points, both compared to the second quarter of fiscal 2019. We delivered GAAP diluted EPS of $0.89 and non-GAAP diluted EPS of $1.08, increases of 3% and 19% compared to the second quarter of fiscal 2019, respectively. Refer to the
During the third quarter, of fiscal 2019 was broad-based, with positive comparable sales across all channels, countries and most of our product categories. Similar to the first half of the year, our revenue growth was helped by a favorable environment and driven by how customers are responding to the experience we are building.
improve our speed of delivery to customers. We also made strategic changes to our field operations to accelerate growth and to create a more seamless customer experience across all channels including stores, home and online.
In parallel to the acquisitioncustomer experience developments, we continued to drive efficiencies and reduce costs in order to fund investments and offset pressures. During the second quarter of GreatCall, a leading connected health services provider for aging consumers.
Tariffs
We are investing inactively addressing the risks related to increases to current tariff rates and proposed new tariffs on Chinese imports. In May 2019, the U.S. Trade Representative (“USTR”) increased the tariff on List 3 products imported from China from 10% to 25%, effective June 15, 2019, and has since proposed a rangefurther increase of enablers that are necessarythis rate to execute our30%, effective October 1, 2019. Recently, the USTR implemented the List 4 tariff of 15% on additional products imported from China. The List 4 tariffs have two effective dates. The first effective date (List 4A) was September 1, 2019, and the most notable affected categories relative to Best Buy on this list are televisions, smart watches and headphones. The second effective date (List 4B) is December 15, 2019, and the most notable affected categories relative to Best Buy on this list are computing, mobile phones and gaming consoles.
Through the second quarter of fiscal 2020, strategy. Mostwe have been able to minimize the impact of these enablersthe tariffs on our business by accelerating purchases and working with our vendors, some of which are multi-year investments in areas such as specialty labor, enterprise customer relationship management, knowledge management capabilities, our services platform and our supply chain.
Results of Operations
In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations on a one-month lag. Consistent with such consolidation, the financial and non-financial information presented in our MD&A relative to these operations is also presented on a lag. Our policy is to accelerate recording the effectrecording of events occurring in the lag period that significantly affect our condensed consolidated financial statements. No such events were identified for the periods presented.
Consolidated Performance Summary
Selected consolidated financial data for the three and nine months ended November 3, 2018, and October 28, 2017was as follows ($ in millions, except per share amounts):
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Revenue | $ | 9,536 | $ | 9,379 | $ | 18,678 | $ | 18,488 | |||||||
Revenue % increase | 1.7 | % | 4.9 | % | 1.0 | % | 5.8 | % | |||||||
Comparable sales growth | 1.6 | % | 6.2 | % | 1.4 | % | 6.6 | % | |||||||
Gross profit | $ | 2,283 | $ | 2,229 | $ | 4,452 | $ | 4,354 | |||||||
Gross profit as a % of revenue(1) | 23.9 | % | 23.8 | % | 23.8 | % | 23.6 | % | |||||||
SG&A | $ | 1,922 | $ | 1,877 | $ | 3,757 | $ | 3,707 | |||||||
SG&A as a % of revenue(1) | 20.2 | % | 20.0 | % | 20.1 | % | 20.1 | % | |||||||
Restructuring charges | $ | 48 | $ | 17 | $ | 48 | $ | 47 | |||||||
Operating income | $ | 313 | $ | 335 | $ | 647 | $ | 600 | |||||||
Operating income as a % of revenue | 3.3 | % | 3.6 | % | 3.5 | % | 3.2 | % | |||||||
Net earnings | $ | 238 | $ | 244 | $ | 503 | $ | 452 | |||||||
Diluted earnings per share | $ | 0.89 | $ | 0.86 | $ | 1.86 | $ | 1.58 |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Revenue | $ | 9,590 | $ | 9,320 | $ | 28,078 | $ | 26,788 | |||||||
Revenue % growth | 2.9 | % | 4.2 | % | 4.8 | % | 3.3 | % | |||||||
Comparable sales % gain | 4.3 | % | 4.4 | % | 5.8 | % | 3.8 | % | |||||||
Gross profit | $ | 2,324 | $ | 2,280 | $ | 6,678 | $ | 6,455 | |||||||
Gross profit as a % of revenue(1) | 24.2 | % | 24.5 | % | 23.8 | % | 24.1 | % | |||||||
SG&A | $ | 2,002 | $ | 1,932 | $ | 5,709 | $ | 5,484 | |||||||
SG&A as a % of revenue(1) | 20.9 | % | 20.7 | % | 20.3 | % | 20.5 | % | |||||||
Restructuring charges | $ | — | $ | (2 | ) | $ | 47 | $ | — | ||||||
Operating income | $ | 322 | $ | 350 | $ | 922 | $ | 971 | |||||||
Operating income as a % of revenue | 3.4 | % | 3.8 | % | 3.3 | % | 3.6 | % | |||||||
Net earnings | $ | 277 | $ | 239 | $ | 729 | $ | 636 | |||||||
Diluted earnings per share | $ | 0.99 | $ | 0.78 | $ | 2.57 | $ | 2.05 |
(1)Because retailers vary in how they record costs of operating their supply chain between cost of goods sold 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 goods sold and SG&A, refer to Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K |
Three Months Ended | Nine Months Ended | ||||
November 3, 2018 | November 3, 2018 | ||||
Comparable sales impact | 4.0 | % | 5.5 | % | |
Non-comparable sales impact(1) | (0.7 | )% | (0.7 | )% | |
Foreign currency exchange rate fluctuation impact | (0.4 | )% | — | % | |
Total revenue increase | 2.9 | % | 4.8 | % |
Gross profit rate, SG&A rate and operating income rate changes in the thirdsecond quarter and first ninesix months of fiscal 20192020 were primarily driven by our Domestic segment. For further discussion of each segment's rate changes, see the
Income Tax Expense
Income tax expense decreased to $53$69 million in the thirdsecond quarter of fiscal 20192020, compared to $104$85 million in the thirdsecond quarter of fiscal 2018. Our effective income tax rate in the third quarter of fiscal 2019 was 16.1% compared to a rate of 30.4% in the third quarter of fiscal 2018.2019. The decreases inlower tax expense and the effective income tax rate wereis primarily a result of the impact of the Tax Cuts and Jobs Act (“Tax Act”) enacted on December 22, 2017, due to a reduction in the U.S. statutory tax rate and adjustments to the provisional tax expense recorded in the fourth quarter of fiscal 2018, partially offset by a decrease in excessincreased tax benefits related to stock-based compensation and the resolution of discrete matters in the current year period, as well as a decrease in pre-tax earnings. Our effective income tax rate (“ETR”) in the second quarter of fiscal 2020 was 22.3% compared to a rate of 25.7% in the second quarter of fiscal 2019. The decrease in the ETR was primarily due to increased tax benefits related to stock-based compensation and the resolution of discrete matters in the current year period.
Income tax expense remained flat at $134 million in the first six months of fiscal 2020 compared to the prior year period, as increased tax expense resulting from an increase in pre-tax earnings was offset by increased tax benefits related to stock-based compensation and the resolution of discrete matters in the current year period. Refer to Note 13,
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate,ETR, adjusted for discrete items, if any, that are taken into account in the relevant period. We update our estimate of the annual effective tax rateETR each quarter and we make a cumulative adjustment if our estimated tax rate changes. Our quarterly tax provision and our quarterly estimate of our annual effective tax rateETR are subject to variation due to several factors, including our ability to accurately forecast our pre-tax and taxable income and loss by jurisdiction, tax audit developments, recognition of excess tax benefits or deficiencies related to stock-based compensation, foreign currency gains or losses,(losses), changes in laws or regulations, and expenses or losses for which tax benefits are not recognized. Our effective tax rateETR can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items and non-deductible losses on our effective tax rateETR is greater when our pre-tax income is lower.
Segment Performance Summary
Domestic
Selected financial data for the Domestic segment for the three and nine months ended November 3, 2018, and October 28, 2017was as follows ($ in millions):
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Revenue | $ | 8,821 | $ | 8,639 | $ | 17,302 | $ | 17,051 | |||||||
Revenue % increase | 2.1 | % | 4.4 | % | 1.5 | % | 5.4 | % | |||||||
Comparable sales growth(1) | 1.9 | % | 6.0 | % | 1.6 | % | 6.6 | % | |||||||
Gross profit | $ | 2,113 | $ | 2,058 | $ | 4,122 | $ | 4,020 | |||||||
Gross profit as a % of revenue | 24.0 | % | 23.8 | % | 23.8 | % | 23.6 | % | |||||||
SG&A | $ | 1,756 | $ | 1,712 | $ | 3,433 | $ | 3,377 | |||||||
SG&A as a % of revenue | 19.9 | % | 19.8 | % | 19.8 | % | 19.8 | % | |||||||
Restructuring charges | $ | 48 | $ | 17 | $ | 48 | $ | 47 | |||||||
Operating income | $ | 309 | $ | 329 | $ | 641 | $ | 596 | |||||||
Operating income as a % of revenue | 3.5 | % | 3.8 | % | 3.7 | % | 3.5 | % | |||||||
Selected Online Revenue Data | |||||||||||||||
Total online revenue | $ | 1,417 | $ | 1,208 | $ | 2,725 | $ | 2,350 | |||||||
Online revenue as a % of total segment revenue | 16.1 | % | 14.0 | % | 15.7 | % | 13.8 | % | |||||||
Comparable online sales growth(1) | 17.3 | % | 10.1 | % | 16.0 | % | 11.0 | % |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Revenue | $ | 8,756 | $ | 8,491 | $ | 25,807 | $ | 24,675 | |||||||
Revenue % growth | 3.1 | % | 3.6 | % | 4.6 | % | 3.2 | % | |||||||
Comparable sales % gain(1) | 4.3 | % | 4.5 | % | 5.8 | % | 3.8 | % | |||||||
Gross profit | $ | 2,139 | $ | 2,096 | $ | 6,159 | $ | 5,952 | |||||||
Gross profit as a % of revenue | 24.4 | % | 24.7 | % | 23.9 | % | 24.1 | % | |||||||
SG&A | $ | 1,824 | $ | 1,751 | $ | 5,201 | $ | 4,993 | |||||||
SG&A as a % of revenue | 20.8 | % | 20.6 | % | 20.2 | % | 20.2 | % | |||||||
Restructuring charges | $ | — | $ | — | $ | 47 | $ | — | |||||||
Operating income | $ | 315 | $ | 345 | $ | 911 | $ | 959 | |||||||
Operating income as a % of revenue | 3.6 | % | 4.1 | % | 3.5 | % | 3.9 | % | |||||||
Selected Online Revenue Data | |||||||||||||||
Total online revenue | $ | 1,214 | $ | 1,077 | $ | 3,565 | $ | 3,191 | |||||||
Online revenue as a % of total segment revenue | 13.9 | % | 12.7 | % | 13.8 | % | 12.9 | % | |||||||
Comparable online sales % gain(1) | 12.6 | % | 22.3 | % | 11.5 | % | 25.3 | % |
(1)Comparable online sales are included in |
Three Months Ended | Nine Months Ended | ||||
November 3, 2018 | November 3, 2018 | ||||
Comparable sales impact | 4.0 | % | 5.4 | % | |
Non-comparable sales impact(1) | (0.9 | )% | (0.8 | )% | |
Total revenue increase | 3.1 | % | 4.6 | % |
The increases in revenue in the thirdsecond quarter and first ninesix months of fiscal 20192020 were primarily driven by the comparable sales impactgrowth of 4.0%1.9% and 5.4%1.6%, respectively, and revenue from GreatCall, which was acquired in the third quarter of fiscal 2019. These increases were partially offset by the losslosses of revenue from Best Buy Mobile stand-alonestore closures. Online revenue of $1.4 billion and Best Buy store closures$2.7 billion in both periods. In the thirdsecond quarter and first ninesix months of fiscal 2019, online revenue of $1.2 billion and $3.6 billion,2020, respectively, increased 12.6%17.3% and 11.5%16.0%, respectively, on a comparable basis, primarily due to higher conversion rates, increased traffic and higher average order values.values and increased traffic.
The following table reconciles the number of Domestic stores open at the beginning and end of the thirdsecond quarters of fiscal 20192020 and fiscal 2018:2019:
Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||||
Total Stores at Beginning of Second Quarter | Stores Opened | Stores Closed | Total Stores at End of Second Quarter | Total Stores at Beginning of Second Quarter | Stores Opened | Stores Closed | Total Stores at End of Second Quarter | ||||||||||||||||||||||||
Best Buy | 995 | - | - | 995 | 1,007 | - | - | 1,007 | |||||||||||||||||||||||
Best Buy Mobile stand-alone | - | - | - | - | 105 | - | (105) | - | |||||||||||||||||||||||
Outlet Centers | 10 | 1 | - | 11 | 5 | 2 | - | 7 | |||||||||||||||||||||||
Pacific Sales | 21 | - | - | 21 | 28 | - | - | 28 | |||||||||||||||||||||||
Total Domestic segment stores | 1,026 | 1 | - | 1,027 | 1,145 | 2 | (105) | 1,042 |
Fiscal 2019 | Fiscal 2018 | ||||||||||||||||||||||
Total Stores at Beginning of Third Quarter | Stores Opened | Stores Closed | Total Stores at End of Third Quarter | Total Stores at Beginning of Third Quarter | Stores Opened | Stores Closed | Total Stores at End of Third Quarter | ||||||||||||||||
Best Buy | 1,007 | 1 | (11 | ) | 997 | 1,024 | — | (16 | ) | 1,008 | |||||||||||||
Best Buy Mobile stand-alone | — | — | — | — | 292 | — | (5 | ) | 287 | ||||||||||||||
Pacific Sales | 28 | — | (1 | ) | 27 | 28 | — | — | 28 | ||||||||||||||
Total Domestic segment stores | 1,035 | 1 | (12 | ) | 1,024 | 1,344 | — | (21 | ) | 1,323 |
We continuously monitor store performance. As we approach the expiration date of our store leases, we evaluate various options for each location, including whether a store should remain open. On March 1, 2018, we announced our intent to close
all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S., of which all remaining stores105 were closed during the second quarter of fiscal 2019. Refer to Note 6,
Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category for the three months ended November 3, 2018, and October 28, 2017:were as follows:
Revenue Mix | Comparable Sales | ||||||||||||||
Three Months Ended | Three Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Computing and Mobile Phones | 44 | % | 45 | % | 0.6 | % | 4.2 | % | |||||||
Consumer Electronics | 32 | % | 32 | % | 1.0 | % | 6.8 | % | |||||||
Appliances | 13 | % | 12 | % | 14.0 | % | 10.3 | % | |||||||
Entertainment | 5 | % | 7 | % | (13.7) | % | 8.5 | % | |||||||
Services | 6 | % | 4 | % | 10.7 | % | 6.6 | % | |||||||
Total | 100 | % | 100 | % | 1.9 | % | 6.0 | % |
Revenue Mix | Comparable Sales | ||||||||||
Three Months Ended | Three Months Ended | ||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||
Computing and Mobile Phones | 47 | % | 48 | % | 3.1 | % | 3.5 | % | |||
Consumer Electronics | 31 | % | 31 | % | 3.7 | % | 3.5 | % | |||
Appliances | 11 | % | 10 | % | 8.4 | % | 13.5 | % | |||
Entertainment | 6 | % | 6 | % | 12.4 | % | 4.1 | % | |||
Services | 5 | % | 5 | % | 1.9 | % | 3.2 | % | |||
Total | 100 | % | 100 | % | 4.3 | % | 4.5 | % |
The following is a description of the notable comparable sales changes in our Domestic segment by revenue category for the three months ended November 3, 2018:
Computing and Mobile Phones:
TheConsumer Electronics:
TheAppliances:
TheEntertainment:
TheServices:
TheOur gross profit rate decreasedincreased in the thirdsecond quarter and first ninesix months of fiscal 2019,2020, primarily driven by the higher gross profit rate of GreatCall, partially offset by higher supply chain costs, including investments and higher transportation costs, and the national rollout of the Total Tech Support offer, where costs for services and discounts are typically higher at the onset of the membership. These increases were partially offset by improved product margin rates, which included the benefit of gross profit optimization initiatives.
Our SG&A rate increased in the thirdsecond quarter of fiscal 20192020, primarily due to increases in growth investments, higher incentive compensation, GreatCall transaction costs and operating expenses and higher variable costs associated with increased revenue. These increases wereadvertising expenses, partially offset by cost reductions.lower incentive compensation. Our SG&A rate remained flat in the first ninesix months of fiscal 2019,2020, primarily due to sales leverage, as SG&A increased $208$56 million, primarily due to increases in growth investments, higher variable costs associated with increased revenue, and higher incentive compensation,GreatCall expenses, partially offset by cost reductions.
Restructuring charges were incurred infor the thirdsecond quarter and first six months of fiscal 2019.2020 related to our U.S. retail operating model changes. Restructuring charges infor the second quarter and first ninesix months of fiscal 2019 related to our Best Buy Mobile stand-alone store closures. Refer to Note 6,
Our operating income rate decreased in the thirdsecond quarter of fiscal 2019 due to a lower gross profit rate and a higher SG&A rate as2020, primarily driven by the increase in restructuring charges described above. Operating income decreased inDuring the first ninesix months of fiscal 2019 due to a lower2020, our operating income rate increased primarily driven by the increase in gross profit rate and increases in restructuring charges as described above.rate.
International
Selected financial data for the International segment for the three and nine months ended November 3, 2018, and October 28, 2017was as follows ($ in millions):
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Revenue | $ | 715 | $ | 740 | $ | 1,376 | $ | 1,437 | |||||||
Revenue % change | (3.4) | % | 10.8 | % | (4.2) | % | 11.9 | % | |||||||
Comparable sales % change | (1.9) | % | 7.6 | % | (1.6) | % | 7.0 | % | |||||||
Gross profit | $ | 170 | $ | 171 | $ | 330 | $ | 334 | |||||||
Gross profit as a % of revenue | 23.8 | % | 23.1 | % | 24.0 | % | 23.2 | % | |||||||
SG&A | $ | 166 | $ | 165 | $ | 324 | $ | 330 | |||||||
SG&A as a % of revenue | 23.2 | % | 22.3 | % | 23.5 | % | 23.0 | % | |||||||
Operating income | $ | 4 | $ | 6 | $ | 6 | $ | 4 | |||||||
Operating income as a % of revenue | 0.6 | % | 0.8 | % | 0.4 | % | 0.3 | % |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Revenue | $ | 834 | $ | 829 | $ | 2,271 | $ | 2,113 | |||||||
Revenue % growth | 0.6 | % | 10.1 | % | 7.5 | % | 5.1 | % | |||||||
Comparable sales % gain | 3.7 | % | 3.8 | % | 5.8 | % | 4.2 | % | |||||||
Gross profit | $ | 185 | $ | 184 | $ | 519 | $ | 503 | |||||||
Gross profit as a % of revenue | 22.2 | % | 22.2 | % | 22.9 | % | 23.8 | % | |||||||
SG&A | $ | 178 | $ | 181 | $ | 508 | $ | 491 | |||||||
SG&A as a % of revenue | 21.3 | % | 21.8 | % | 22.4 | % | 23.2 | % | |||||||
Restructuring charges | $ | — | $ | (2 | ) | $ | — | $ | — | ||||||
Operating income | $ | 7 | $ | 5 | $ | 11 | $ | 12 | |||||||
Operating income as a % of revenue | 0.8 | % | 0.6 | % | 0.5 | % | 0.6 | % |
The components of the 0.6% and 7.5% revenue increases for the
Three Months Ended | Nine Months Ended | ||||
November 3, 2018 | November 3, 2018 | ||||
Comparable sales impact | 3.6 | % | 5.7 | % | |
Non-comparable sales impact(1) | 1.6 | % | 1.9 | % | |
Foreign currency exchange rate fluctuation impact | (4.6 | )% | (0.1 | )% | |
Total revenue increase | 0.6 | % | 7.5 | % |
The following table reconciles the number of International stores open at the beginning and end of the thirdsecond quarters of fiscal 20192020 and fiscal 2018:2019:
Fiscal 2020 | Fiscal 2019 | ||||||||||||||||||||||||||||||
Total Stores at Beginning of Second Quarter | Stores Opened | Stores Closed | Total Stores at End of Second Quarter | Total Stores at Beginning of Second Quarter | Stores Opened | Stores Closed | Total Stores at End of Second Quarter | ||||||||||||||||||||||||
Canada | |||||||||||||||||||||||||||||||
Best Buy | 132 | - | - | 132 | 134 | - | - | 134 | |||||||||||||||||||||||
Best Buy Mobile | 44 | - | (1) | 43 | 49 | - | - | 49 | |||||||||||||||||||||||
Mexico | |||||||||||||||||||||||||||||||
Best Buy | 29 | 1 | - | 30 | 26 | 2 | - | 28 | |||||||||||||||||||||||
Best Buy Express | 9 | - | - | 9 | 6 | - | - | 6 | |||||||||||||||||||||||
Total International segment stores | 214 | 1 | (1) | 214 | 215 | 2 | - | 217 |
Fiscal 2019 | Fiscal 2018 | ||||||||||||||||||||||
Total Stores at Beginning of Third Quarter | Stores Opened | Stores Closed | Total Stores at End of Third Quarter | Total Stores at Beginning of Third Quarter | Stores Opened | Stores Closed | Total Stores at End of Third Quarter | ||||||||||||||||
Canada: | |||||||||||||||||||||||
Best Buy | 134 | — | — | 134 | 134 | — | — | 134 | |||||||||||||||
Best Buy Mobile | 49 | — | (2 | ) | 47 | 53 | — | (1 | ) | 52 | |||||||||||||
Mexico: | |||||||||||||||||||||||
Best Buy | 28 | 1 | — | 29 | 22 | 1 | — | 23 | |||||||||||||||
Best Buy Express | 6 | — | — | 6 | 5 | — | — | 5 | |||||||||||||||
Total International segment stores | 217 | 1 | (2 | ) | 216 | 214 | 1 | (1 | ) | 214 |
International segment'ssegment revenue mix percentages and comparable sales percentage changes by revenue category for the three months ended November 3, 2018, and October 28, 2017:
Revenue Mix | Comparable Sales | Revenue Mix | Comparable Sales | |||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | |||||||||||||||||||
Computing and Mobile Phones | 51 | % | 52 | % | 2.0 | % | 0.6 | % | 43 | % | 45 | % | (4.4) | % | 4.5 | % | ||||||||||
Consumer Electronics | 26 | % | 27 | % | (0.6 | )% | 4.5 | % | 32 | % | 29 | % | 1.0 | % | 0.3 | % | ||||||||||
Appliances | 8 | % | 8 | % | 11.7 | % | 49.0 | % | 12 | % | 12 | % | 11.5 | % | 35.7 | % | ||||||||||
Entertainment | 7 | % | 6 | % | 10.8 | % | 7.8 | % | 5 | % | 6 | % | (20.1) | % | 14.3 | % | ||||||||||
Services | 6 | % | 5 | % | 15.0 | % | (15.1 | )% | 6 | % | 6 | % | 4.6 | % | 11.3 | % | ||||||||||
Other | 2 | % | 2 | % | 43.8 | % | n/a | 2 | % | 2 | % | (24.0) | % | 51.4 | % | |||||||||||
Total | 100 | % | 100 | % | 3.7 | % | 3.8 | % | 100 | % | 100 | % | (1.9) | % | 7.6 | % |
The following is a description of the notable comparable sales changes in our International segment by revenue category for the three months ended November 3, 2018:
Computing and Mobile Phones:
TheConsumer Electronics: The 1.0% comparable sales gain was driven primarily by mobile phonesheadphones and wearables,health and fitness, partially offset by computingdeclines in digital imaging and tablets.
Appliances: The 0.6%11.5% comparable sales gain was driven by both large and small appliances.
Entertainment: The 20.1% comparable sales decline was driven primarily by digital imaginggaming and home theater,drones, partially offset by growthgains in headphones and health and fitness.
Services: The 11.7% comparable sales gain was driven by large and small appliances.
Other: The 15.0%24.0% comparable sales gaindecline was driven primarily by repair and technical support.
Our gross profit rate remained flatincreased in the thirdsecond quarter and first six months of fiscal 2020, primarily due to Canada from increased revenue in the higher margin services category.
Our SG&A rate increased in the second quarter of fiscal 2019.2020, primarily due to sales leverage as SG&A remained relatively flat. During the first ninesix months of fiscal 2019,2020, our gross profitSG&A rate decreasedincreased primarily due to home theater and large appliances in Canada.
Our operating income rate increaseddecreased in the thirdsecond quarter of fiscal 20192020, primarily due todriven by a lowerhigher SG&A rate, aspartially offset by a higher gross profit rate, described above. InDuring the first ninesix months of fiscal 2019,2020, our operating income rate decreasedincreased, primarily driven primarily by a lowerhigher gross profit rate, partially offset by a lowerhigher SG&A rate as described above.
Consolidated Non-GAAP Financial Measures
The following table reconciles consolidated operating income, effective tax rate and diluted EPS for the periods presented (GAAP financial measures) to non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS for the periods presented(non-GAAP financial measures) ($ in millions, except per share amounts):
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Operating income | $ | 313 | $ | 335 | $ | 647 | $ | 600 | |||||||
Restructuring charges(1) | 48 | 17 | 48 | 47 | |||||||||||
Intangible asset amortization(2) | 18 | - | 35 | - | |||||||||||
Acquisition-related transaction costs(2) | 3 | - | 3 | - | |||||||||||
Tax reform related item - employee bonus(3) | - | - | - | 7 | |||||||||||
Non-GAAP operating income | $ | 382 | $ | 352 | $ | 733 | $ | 654 | |||||||
Effective tax rate | 22.3 | % | 25.7 | % | 21.0 | % | 22.8 | % | |||||||
Restructuring charges(1) | 0.4 | % | (0.3) | % | 0.3 | % | 0.1 | % | |||||||
Intangible asset amortization(2) | 0.1 | % | - | % | 0.2 | % | - | % | |||||||
Non-GAAP effective tax rate | 22.8 | % | 25.4 | % | 21.5 | % | 22.9 | % | |||||||
Diluted EPS | $ | 0.89 | $ | 0.86 | $ | 1.86 | $ | 1.58 | |||||||
Restructuring charges(1) | 0.18 | 0.06 | 0.18 | 0.17 | |||||||||||
Intangible asset amortization(2) | 0.06 | - | 0.13 | - | |||||||||||
Acquisition-related transaction costs(2) | 0.01 | - | 0.01 | - | |||||||||||
Tax reform related item - employee bonus(3) | - | - | - | 0.02 | |||||||||||
Tax impact of non-GAAP adjustments(4) | (0.06) | (0.01) | (0.08) | (0.05) | |||||||||||
Non-GAAP diluted EPS | $ | 1.08 | $ | 0.91 | $ | 2.10 | $ | 1.72 |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Operating income | $ | 322 | $ | 350 | $ | 922 | $ | 971 | |||||||
Restructuring charges(1) | — | (2 | ) | 47 | — | ||||||||||
Acquisition-related transaction costs(2) | 13 | — | 13 | — | |||||||||||
Intangible asset amortization(2) | 5 | — | 5 | — | |||||||||||
Tax reform related item - employee bonus(3) | — | — | 7 | — | |||||||||||
Non-GAAP operating income | $ | 340 | $ | 348 | $ | 994 | $ | 971 | |||||||
Effective tax rate | 16.1 | % | 30.4 | % | 20.4 | % | 32.7 | % | |||||||
Tax reform - repatriation tax(3) | 5.4 | % | — | % | 1.9 | % | — | % | |||||||
Tax reform - deferred tax rate change(3) | 1.5 | % | — | % | 0.5 | % | — | % | |||||||
Acquisition-related transaction costs(2) | (0.6 | )% | — | % | — | % | — | % | |||||||
Intangible asset amortization(2) | (0.3 | )% | — | % | — | % | — | % | |||||||
(Gain) loss on investments, net | 0.6 | % | 0.1 | % | — | % | 0.1 | % | |||||||
Restructuring charges(1) | — | % | (0.1 | )% | 0.1 | % | — | % | |||||||
Non-GAAP effective tax rate | 22.7 | % | 30.4 | % | 22.9 | % | 32.8 | % | |||||||
Diluted EPS | $ | 0.99 | $ | 0.78 | $ | 2.57 | $ | 2.05 | |||||||
Tax reform - repatriation tax(3) | (0.06 | ) | — | (0.06 | ) | — | |||||||||
Tax reform - deferred tax rate change(3) | (0.02 | ) | — | (0.02 | ) | — | |||||||||
Restructuring charges(1) | — | — | 0.17 | — | |||||||||||
Acquisition-related transaction costs(2) | 0.04 | — | 0.04 | — | |||||||||||
Intangible asset amortization(2) | 0.02 | — | 0.02 | — | |||||||||||
Tax reform related item - employee bonus(3) | — | — | 0.02 | — | |||||||||||
(Gain) loss on investments, net | (0.04 | ) | — | (0.04 | ) | 0.02 | |||||||||
Tax impact of non-GAAP adjustments(4) | — | — | (0.05 | ) | (0.01 | ) | |||||||||
Non-GAAP diluted EPS | $ | 0.93 | $ | 0.78 | $ | 2.65 | $ | 2.06 |
(1)Represents charges associated with U.S. retail operating model changes and the closure of Best Buy Mobile stand-alone stores in the U.S. Refer to Note 9, Restructuring Charges, in the Notes to Condensed Consolidated Financial Statements for additional information.
(2)Represents charges associated with the acquisitions of GreatCall and CST, including (1) the non-cash amortization of definite-lived intangible assets, including customer relationships, tradenames and developed technology, and (2) acquisition-related transaction costs primarily comprised of professional fees. Refer to Note 2, Acquisition, and Note 5, Goodwill and Intangible Assets, in the Notes to Condensed Consolidated Financial Statements for additional information.
(3)Represents final adjustments for amounts paid and associated taxes related to a one-time bonus for certain employees announced in response to future tax savings created by the Tax Cuts and Jobs Act of 2017 enacted into law in the fourth quarter of fiscal 2018.
(4)The non-GAAP adjustments relate primarily to adjustments in the U.S. As such, the income tax charge is calculated using the statutory tax rate for the U.S. of 24.5% for all periods presented.
Non-GAAP operating income decreased $8 million and increased $23 million in the thirdsecond quarter and first ninesix months of fiscal 2019, respectively, compared to the corresponding prior year periods. The decrease in the third quarter of fiscal 2019 was2020, primarily driven by an increasea decrease in SG&A expenses, primarily due to increases in growth investments, higherfrom lower incentive compensation and higher variable costs due to increased revenue, partially offset by strong revenue performance in both the Domestic and International segments. The increase in the first nine months of fiscal 2019 was primarily driven by strong revenue performance in both the Domestic and International segments in nearly all product categories, partially offset by an
Our non-GAAP effective tax rate decreased in the thirdsecond quarter and first six months of fiscal 20192020, primarily due to the impact of the Tax Act, partially offset by a decrease in excessincreased tax benefits related to stock-based compensation inand the current year period. Our non-GAAP effective tax rate decreased in the first nine monthsresolution of fiscal 2019 primarily due to the impact of the Tax Act.
Non-GAAP diluted EPS increased in the thirdsecond quarter and first ninesix months of fiscal 20192020, primarily driven by lowerthe increase in non-GAAP effective tax ratesoperating income and lower diluted weighted-average common shares outstanding driven byfrom share repurchases. Refer to the
Liquidity and Capital Resources
Summary
We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including the level of investment neededrequired to support our business strategies, the performance of our business, capital expenditures, credit facilities, short-term borrowing arrangements and working capital management. Capital expenditures and share repurchases
Cash, cash equivalents and short-term investments at November 3, 2018, February 3, 2018, and October 28, 2017were as follows ($ in millions):
August 3, 2019 | February 2, 2019 | August 4, 2018 | |||||||||||||
Cash and cash equivalents | $ | 1,289 | $ | 1,980 | $ | 1,865 | |||||||||
Short-term investments | 320 | - | 465 | ||||||||||||
Total cash, cash equivalents and short-term investments | $ | 1,609 | $ | 1,980 | $ | 2,330 |
November 3, 2018 | February 3, 2018 | October 28, 2017 | |||||||||
Cash and cash equivalents | $ | 1,228 | $ | 1,101 | $ | 1,103 | |||||
Short-term investments | 76 | 2,032 | 2,237 | ||||||||
Total | $ | 1,304 | $ | 3,133 | $ | 3,340 |
The decreasesdecrease in total cash, cash equivalents and short-term investments from February 3, 2018, and October 28, 2017, were2, 2019, was primarily due to share repurchases and the acquisition of GreatCall.
Cash Flows
Cash flows from total operations for the nine months ended November 3, 2018, and October 28, 2017were as follows ($ in millions):
Six Months Ended | |||||||||||||||
August 3, 2019 | August 4, 2018 | ||||||||||||||
Total cash provided by (used in): | |||||||||||||||
Operating activities | $ | 625 | $ | 1,108 | |||||||||||
Investing activities | (828) | 1,200 | |||||||||||||
Financing activities | (576) | (1,524) | |||||||||||||
Effect of exchange rate changes on cash | (1) | (16) | |||||||||||||
Increase (decrease) in cash, cash equivalents and restricted cash | $ | (780) | $ | 768 |
Nine Months Ended | |||||||
November 3, 2018 | October 28, 2017 | ||||||
Total cash provided by (used in): | |||||||
Operating activities | $ | 1,107 | $ | 1,203 | |||
Investing activities | 574 | (1,016 | ) | ||||
Financing activities | (1,526 | ) | (1,335 | ) | |||
Effect of exchange rate changes on cash | (16 | ) | 15 | ||||
Increase (decrease) in cash, cash equivalents and restricted cash | $ | 139 | $ | (1,133 | ) |
Operating Activities
The decrease in cash provided by operating activities in fiscal 2020 was primarily due to changes in working capital from the timing of collections of receivables, higher incentive compensation payments and the timing of income tax payments partially offset bywhich were primarily due to timing of receipts and payments on inventory.
Investing Activities
The increasedecrease in cash provided by investing activities in fiscal 2020 was primarily due to a decrease in purchases of investments, partially offset by a decreasedecreases in sales of investments and the acquisition of GreatCall.
Financing Activities
The increasedecrease in cash used in financing activities was primarily due to a decrease in the issuance of common stock from a decrease in the volume of option exercises, and an increase in our regular quarterly dividend rate from $0.34 per sharerepayment in fiscal 2018 to $0.45 per share in fiscal 2019. The cash used in the repayment2019 of our 2018 Notes and cash provided by the issuance of our $500$500 million principal amount of notes due OctoberAugust 1, 2028 (the "2028 Notes") largely offset.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, short-term investments, 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 new $1.25 billion five-year senior unsecured revolving credit facility (the "Five-Year Facility Agreement"“facility”) with a syndicate of banks that expires in April 2023. The Five-Year Facility Agreement replaced the previous $1.25 billion unsecured revolving credit facility, which was originally scheduled to expire in June 2021, but was terminated on April 17, 2018. Refer to Note 7,
Our ability to access our revolving creditthe facility under the Five-Year Facility Agreement is subject to our compliance with theits terms and conditions, of the facility, including financial covenants. The financial covenants require us to maintain certain financial ratios. At NovemberAugust 3, 2018,2019, we were in compliance with all such financial covenants. If an event of default were to occur with respect to any of our other debt, it would likely constitute an event of default under our facilitiesfacility as well.
Our credit ratings and outlook at December 5, 2018,as of September 4, 2019, are summarized below. On September 24, 2018, Moody's upgraded its outlook from stable to positive. On August 21, 2018, Fitch upgraded its rating from BBB- to BBB and changed its outlook from positive to stable. Standard & Poor's ratings remain unchanged from those reported in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018.
Rating Agency | Rating | Outlook | |||||||||||||
Standard & Poor's | BBB | Stable | |||||||||||||
Moody's | Baa1 | Positive | |||||||||||||
Fitch | BBB | 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. Accordingly, we are not able to predict whether our current credit ratings will remain as disclosed above. 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 further 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 storenew-store leasing costs.
Restricted Cash
Our liquidity is also affected by restricted cash balances that are pledged as collateral or restricted to use for workers’ compensation and general liability insurance and workers’ compensation insurance.claims. Restricted cash, and cash equivalents, which areis included in Other current assets on our Condensed Consolidated Balance Sheets, remained relatively unchanged at $211was $115 million, $199$204 million, and $197$203 million at NovemberAugust 3, 2019, February 2, 2019, and August 4, 2018, February 3, 2018, and October 28, 2017, respectively.
Debt and Capital
As of August 3, 2019, we had $650 million principal amount of notes due March 15, 2021, and $500 million principal amount of notes due October 1, 2018, we repaid our 2018 Notes using existing cash resources and on September 27, 2018, we issued our 2028, Notes.outstanding. Refer to Note 7,
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 2017,23, 2019, our Board authorized a $5.0$3.0 billion share repurchase program that superseded the previous $5.0 billion authorization from 2011. There is no expiration date governing the period over which we can repurchase shares under the February 2017 authorization. On March 1, 2018, we announced our intent to repurchase $1.5program. As of August 3, 2019, $2.7 billion of shares in fiscal 2019, which reflects an updated two-year plan of $3.5the $3.0 billion compared to the original
Share repurchase activity for the
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Total cost of shares repurchased | $ | 230 | $ | 375 | $ | 336 | $ | 774 | |||||||
Average price per share | $ | 69.71 | $ | 74.80 | $ | 70.04 | $ | 73.21 | |||||||
Number of shares repurchased | 3.3 | 5.0 | 4.8 | 10.6 |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Total cost of shares repurchased | $ | 369 | $ | 366 | $ | 1,143 | $ | 1,147 | |||||||
Average price per share | $ | 76.04 | $ | 57.14 | $ | 74.10 | $ | 52.35 | |||||||
Number of shares repurchased | 4.8 | 6.4 | 15.4 | 21.9 |
Dividend activity for the
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Regular quarterly cash dividends per share | $ | 0.50 | $ | 0.45 | $ | 1.00 | $ | 0.90 | |||||||
Cash dividends declared and paid | $ | 133 | $ | 125 | $ | 267 | $ | 253 |
Three Months Ended | Nine Months Ended | ||||||||||||||
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | ||||||||||||
Regular quarterly cash dividends per share | $ | 0.45 | $ | 0.34 | $ | 1.35 | $ | 1.02 | |||||||
Cash dividends declared and paid | $ | 123 | $ | 102 | $ | 376 | $ | 310 |
The increaseincreases in cash dividends declared and paid for the threesecond quarter and ninefirst six months ended November 3, 2018,of fiscal 2020 compared to the same periods in the prior year waswere the result of an increaseincreases in the regular quarterly dividend rate, partially offset by fewer shares due to the return of capital to shareholders through share repurchases.
Other Financial Measures
Our current ratio, calculated as current assets divided by current liabilities, wasremained relatively unchanged at 1.1 at Novemberas of August 3, 2018, compared to 1.3 at2019, 1.2 as of February 3, 2018,2, 2019, and 1.2 at October 28, 2017. The decreases from February 3, 2018, and October 28, 2017, were primarily due to the useas of existing cash to fund share repurchases and the acquisition of GreatCall. This was partially offset by the repayment of our 2018 Notes, which were included in current liabilities at February 3, 2018, and October 28, 2017.
Our debt to earnings ratio, calculated as total debt (including current portion) divided by net earnings ratio was 1.2 at November 3, 2018, compared to 1.4 at February 3, 2018, and 1.1 at October 28, 2017. The changes from February 3, 2018, and October 28, 2017, were primarily due to fluctuations in net earnings.
November 3, 2018(1) | February 3, 2018(1) | October 28, 2017(1) | |||||||||
Debt (including current portion) | $ | 1,326 | $ | 1,355 | $ | 1,329 | |||||
Capitalized operating lease obligations (5 times rental expense)(2) | 3,891 | 3,914 | 3,910 | ||||||||
Non-GAAP debt | $ | 5,217 | $ | 5,269 | $ | 5,239 | |||||
Net earnings from continuing operations | $ | 1,093 | $ | 999 | $ | 1,242 | |||||
Other income (expense) (including interest expense, net) | (5 | ) | 26 | 35 | |||||||
Income tax expense | 696 | 818 | 575 | ||||||||
Depreciation and amortization expense | 733 | 683 | 663 | ||||||||
Rental expense | 778 | 782 | 782 | ||||||||
Restructuring charges(3) | 57 | 10 | 9 | ||||||||
Non-GAAP EBITDAR | $ | 3,352 | $ | 3,318 | $ | 3,306 | |||||
Debt to net earnings ratio | 1.2 | 1.4 | 1.1 | ||||||||
Non-GAAP debt to EBITDAR ratio | 1.6 | 1.6 | 1.6 |
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 operating leases and our $1.25 billion in undrawn capacity on our credit facility at Novemberas of August 3, 2018,2019, which, if drawn upon, would be included as short-term debt on our Condensed Consolidated Balance Sheets.
Other than the changes related to the adoption of the new lease accounting standard as described in Note 4, Leases, in the Notes to Condensed Consolidated Financial Statements, there has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 2018.2019. See our Annual Report on Form 10-K for the fiscal year ended February 3, 2018,2, 2019, for additional information regarding our off-balance-sheet arrangements and contractual obligations.
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 included in our Annual Report on Form 10-K for the fiscal year ended FebruaryNew Accounting Pronouncements
For a description of new applicable accounting pronouncements, see Note 1,
Basis of Presentation, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.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
commerce business, technology service providers, traditional store-based retailers, vendors and mobile network carriers), our mix of products and services, our expansion strategies, our focus on services as a strategic priority, our reliance on key vendors and mobile network carriers (including product availability), pricing investments and promotional activity, our ability to attract and retain qualified employees, changes in market compensation rates, risks arising from statutory, regulatory and legal developments (including tax statutes and regulations), macroeconomic pressures in the markets in which we operate (including fluctuations in housing prices, oilenergy markets and jobless rates), conditions in the industries and categories in which weoperate, failure to effectively manage our costs, our reliance on our information technology systems, our ability to prevent or effectively respond to a privacy or security breach, our ability to effectively manage strategic ventures, alliances or acquisitions, our dependence on cash flows and net earnings generated during the fourth fiscal quarter, susceptibility of our products to technological advancements, product life cycles and launches, changes in consumer preferences, or confidence, changes in consumer spending and debt, levels,our ability to provide attractive promotional financing, interruptions and other supply chain issues, catastrophic events, our ability to maintain positive brand perception and recognition, product safety and quality concerns, changes to labor or employment laws or regulations, our ability to effectively manage our real estate portfolio, constraints in the mixcapital markets, changes to our vendor credit terms, changes in our credit ratings, any material disruption in our relationship with or the services of third-party vendors, risks related to our exclusive brand products and services offered for sale in our physical stores and online, credit market changes and constraints, product availability,risks associated with vendors that source products outside of the U.S., 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) and duties), competitive initiatives of competitors (including pricing actions and promotional activities), strategic and business decisions ofrisks arising from our vendors (including actions that could impact promotional support, product margin and/or supply), the success of new product launches, the impact of pricing investments and promotional activity, weather, natural or man-made disasters, attacks on our data systems, our ability to prevent or react to a disaster recovery situation, changes in laws or regulations, changes in tax rates, changes in taxable income in each jurisdiction, tax audit developments and resolution of other discrete tax matters, the effects of the Tax Act, foreign currency fluctuation, our ability to manage our property portfolio, the impact of labor markets, our ability to retain qualified employees and management, failure to achieve anticipated expense and cost reductions, disruptions in our supply chain, the costs of procuring goods we sell, failure to achieve anticipated revenue and profitability increases from operational and restructuring changes (including investments in our multi-channel capabilities), inability to secure or maintain favorable vendor terms, failure to accurately predict the duration over which we will incur costs, development of new businesses, failure to complete or achieve anticipated benefits of acquisitions or other transactions (including our recent acquisition of GreatCall), including, with respect to such transactions, the risks that revenues following the transactions may be lower than expected, operating costs, customer loss, and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, and suppliers) may be greater than expected and that we may assume unexpected risks and liabilities from the transaction), the success of our strategic initiatives and our ability to protect information relating to our employees and customers.international activities. 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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
As disclosed in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018,2, 2019, in addition to the risks inherent in our operations, we are exposed to certain market risks.
Interest Rate Risk
We are exposed to changes in short-term market interest rates and these changes in rates will impact our net interest expense. Our cash, cash equivalents and short-term investments generate interest income that will vary based on changes in short-term interest rates. In addition, we have swapped our fixed-rate debt to a floating-rate such that the interest rate expense on this debt will vary with short-term interest rates. Refer to Note 5,
As of NovemberAugust 3, 2018,2019, we had $1.3$1.6 billion of cash, cash equivalents and short-term investments and $1.2 billion of debt that has been swapped to floating rate. Therefore, we hadrate, and this net cash and short-term investments of $0.1$0.4 billion generating income that is exposed to interest rate changes. As of NovemberAugust 3, 2018,2019, a 50 basis-point increase in short-term interest rates would leadhave led to an estimated $1$2 million reduction in net interest expense, and conversely a 50 basis-point decrease in short-term interest rates would leadhave led to an estimated $1$2 million increase in net interest expense.
Foreign Currency Exchange Rate Risk
We have market risk arising from changes in foreign currency exchange rates related to our International segment operations. On a limited basis, we utilize foreign exchange forward contracts to manage foreign currency exposure to certain forecast inventory purchases, recognized receivable and payable balances and our investment in our Canadian operations. Our primary
Foreign currency exchange rate fluctuations were primarily driven by the strength of the U.S. dollar compared to the Canadian dollar compared to the prior-year period, which had a negative overall impact on our revenue as these foreign currencies translated into less U.S. dollars. We estimate that foreign currency exchange rate fluctuations had a net unfavorable impact of $38$10 million on our revenue and a $0 million impact on our net earnings for the three months ended November 3, 2018,second quarter of fiscal 2020, and a net unfavorable impact of $3$37 million on our revenue and a $0 million impact on our net earnings for the ninefirst six months ended November 3, 2018.of fiscal 2020.
Item 4.Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. The Disclosure Committee meets on a regular quarterly basis and otherwise as needed.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), at
There waswere no changechanges in internal control over financial reporting during the fiscal quarter ended
PART II — OTHER INFORMATION
Item 1.Legal Proceedings
For a description of our legal proceedings, see Note 14,
Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(c) Stock Repurchases
The following table presents information regarding our repurchases of common stock during the thirdsecond quarter of fiscal 2019:2020:
Fiscal Period | Total Number of | Average Price Paid | Total Number of Shares Purchased as Part of Publicly Announced Program(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1) | |||||||||||
May 5, 2019 through June 1, 2019 | 1,014,719 | $ | 68.44 | 1,014,719 | $ | 2,825,000 | |||||||||
June 2, 2019 through July 6, 2019 | 1,307,061 | $ | 66.99 | 1,307,061 | $ | 2,737,000 | |||||||||
July 7, 2019 through August 3, 2019 | 975,942 | $ | 74.67 | 975,942 | $ | 2,664,000 | |||||||||
Total | 3,297,722 | $ | 69.71 | 3,297,722 | $ | 2,664,000 |
(1)Pursuant to a $3.0 billion share repurchase program that was authorized by our Board in February 2019. There is no expiration date governing the period over which we can repurchase shares under the February 2019 share repurchase program. For additional information, see Note 11, Repurchase of Common Stock, in the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.
Fiscal Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1) | ||||||||||
August 5, 2018 through September 1, 2018 | 1,558,776 | $ | 78.77 | 1,558,776 | $ | 2,132,000,000 | ||||||||
September 2, 2018 through October 6, 2018 | 1,659,266 | $ | 78.00 | 1,659,266 | $ | 2,002,000,000 | ||||||||
October 7, 2018 through November 3, 2018 | 1,641,664 | $ | 71.45 | 1,641,664 | $ | 1,885,000,000 | ||||||||
Total | 4,859,706 | $ | 76.04 | 4,859,706 |
Item 6.Exhibits
101 | ||
The following financial information from our Quarterly Report on Form 10-Q for the |
104 | The |
____________________________
(1)The certifications in Exhibit 32.1 and Exhibit 32.2 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K under the Securities Act of 1933, as amended, the registrant has not filed as exhibits to this Quarterly Report on Form 10-Q certain instruments with respect to long-term debt under which the amount of securities authorized does not exceed 10% of the total assets of the registrant. The registrant hereby agrees to furnish copies of all such instruments to the SEC upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BEST BUY CO., INC. | |||
(Registrant) | |||
Date: | By: | ||
/s/ CORIE BARRY | |||
Corie Barry | |||
Chief Executive Officer | |||
Date: September 6, 2019 | By: | /s/ MATTHEW BILUNAS | |
Matthew Bilunas | |||
Chief Financial Officer | |||
Date: | By: | /s/ MATHEW R. WATSON | |
Mathew R. Watson | |||
Senior Vice President, Finance – Controller and Chief Accounting Officer |
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