UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 4, 20192, 2020
OR
| 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 registrantregistrant: (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. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large | Accelerated | Non-accelerated | |
Smaller | 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). Yes ☐ No ☒
The registrant had 267,043,142258,309,045 shares of common stock outstanding as of June 5, 2019.May 22, 2020.
FORM 10-Q FOR THE QUARTER ENDED MAY 4, 20192, 2020
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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24 | ||||||||||
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PART I — FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
$ in millions, except per share amounts (unaudited)
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| May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | May 2, 2020 | February 1, 2020 | May 4, 2019 | ||||||||||||||
Assets |
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Current assets |
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Cash and cash equivalents | $ | 1,561 |
| $ | 1,980 |
| $ | 1,848 |
| $ | 3,919 | $ | 2,229 | $ | 1,561 | |||||||
Short-term investments |
| - |
|
| - |
|
| 785 |
| |||||||||||||
Receivables, net |
| 833 |
|
| 1,015 |
|
| 860 |
| 749 | 1,149 | 833 | ||||||||||
Merchandise inventories |
| 5,195 |
|
| 5,409 |
|
| 4,964 |
| 3,993 | 5,174 | 5,195 | ||||||||||
Other current assets |
| 425 |
|
|
| 466 |
|
|
| 473 |
| 335 | 305 | 425 | ||||||||
Total current assets |
| 8,014 |
|
|
| 8,870 |
|
|
| 8,930 |
| 8,996 | 8,857 | 8,014 | ||||||||
Property and equipment, net |
| 2,334 |
| 2,510 |
| 2,385 |
| 2,291 | 2,328 | 2,334 | ||||||||||||
Operating lease assets |
| 2,708 |
| - |
| - |
| 2,631 | 2,709 | 2,708 | ||||||||||||
Goodwill |
| 915 |
| 915 |
| 425 |
| 986 | 984 | 915 | ||||||||||||
Other assets |
| 579 |
|
|
| 606 |
|
|
| 342 |
| 701 | 713 | 579 | ||||||||
Total assets | $ | 14,550 |
|
| $ | 12,901 |
|
| $ | 12,082 |
| $ | 15,605 | $ | 15,591 | $ | 14,550 | |||||
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Liabilities and equity |
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Current liabilities |
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Accounts payable | $ | 4,718 |
| $ | 5,257 |
| $ | 4,619 |
| $ | 4,428 | $ | 5,288 | $ | 4,718 | |||||||
Unredeemed gift card liabilities |
| 265 |
|
| 290 |
|
| 285 |
| 257 | 281 | 265 | ||||||||||
Deferred revenue |
| 409 |
|
| 446 |
|
| 371 |
| 531 | 501 | 409 | ||||||||||
Accrued compensation and related expenses |
| 275 |
|
| 482 |
|
| 296 |
| 213 | 410 | 275 | ||||||||||
Accrued liabilities |
| 851 |
|
| 982 |
|
| 934 |
| 769 | 906 | 851 | ||||||||||
Short-term debt | 1,250 | - | - | |||||||||||||||||||
Current portion of operating lease liabilities |
| 639 |
|
| - |
|
| - |
| 683 | 660 | 639 | ||||||||||
Current portion of long-term debt |
| 14 |
|
|
| 56 |
|
|
| 550 |
| 673 | 14 | 14 | ||||||||
Total current liabilities |
| 7,171 |
|
|
| 7,513 |
|
|
| 7,055 |
| 8,804 | 8,060 | 7,171 | ||||||||
Long-term liabilities |
| 659 |
| 750 |
| 815 |
| 694 | 657 | 659 | ||||||||||||
Long-term operating lease liabilities |
| 2,173 |
|
| - |
|
| - |
| 2,076 | 2,138 | 2,173 | ||||||||||
Long-term debt |
| 1,193 |
| 1,332 |
| 792 |
| 621 | 1,257 | 1,193 | ||||||||||||
Contingencies (Note 13) |
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Contingencies (Note 10) |
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Equity |
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Preferred stock, $1.00 par value: Authorized - 400,000 shares; Issued and outstanding - none |
| - |
|
| - |
|
| - |
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Common stock, $0.10 par value: Authorized - 1.0 billion shares; Issued and outstanding - 267 million, 266 million, and 281 million shares, respectively |
| 27 |
|
| 27 |
|
| 28 |
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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 - 257 million, 256 million and 267 million shares, respectively | 26 | 26 | 27 | |||||||||||||||||||
Additional paid-in capital | 15 | - | - | |||||||||||||||||||
Retained earnings |
| 3,038 |
|
| 2,985 |
|
| 3,082 |
| 3,126 | 3,158 | 3,038 | ||||||||||
Accumulated other comprehensive income |
| 289 |
|
|
| 294 |
|
|
| 310 |
| 243 | 295 | 289 | ||||||||
Total equity |
| 3,354 |
|
|
| 3,306 |
|
|
| 3,420 |
| 3,410 | 3,479 | 3,354 | ||||||||
Total liabilities and equity | $ | 14,550 |
|
| $ | 12,901 |
|
| $ | 12,082 |
| $ | 15,605 | $ | 15,591 | $ | 14,550 |
NOTE: The Consolidated Balance Sheet as of February 2, 2019,1, 2020, has been condensed from the audited consolidated financial statements.
See Notes to Condensed Consolidated Financial Statements. Statements.
Condensed Consolidated Statements of Earnings
$ and shares in millions, except per share amounts (unaudited)
Three Months Ended | |||||||
May 2, 2020 | May 4, 2019 | ||||||
Revenue | $ | 8,562 | $ | 9,142 | |||
Cost of sales | 6,597 | 6,973 | |||||
Gross profit | 1,965 | 2,169 | |||||
Selling, general and administrative expenses | 1,735 | 1,835 | |||||
Restructuring charges | 1 | - | |||||
Operating income | 229 | 334 | |||||
Other income (expense): | |||||||
Investment income and other | 6 | 14 | |||||
Interest expense | (17) | (18) | |||||
Earnings before income tax expense | 218 | 330 | |||||
Income tax expense | 59 | 65 | |||||
Net earnings | $ | 159 | $ | 265 | |||
Basic earnings per share | $ | 0.61 | $ | 0.99 | |||
Diluted earnings per share | $ | 0.61 | $ | 0.98 | |||
Weighted-average common shares outstanding | |||||||
Basic | 258.3 | 267.6 | |||||
Diluted | 260.4 | 271.5 |
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| Three Months Ended | ||||||
| May 4, 2019 |
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| May 5, 2018 | |||
Revenue | $ | 9,142 |
|
| $ | 9,109 |
|
Cost of goods sold |
| 6,973 |
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|
| 6,984 |
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Gross profit |
| 2,169 |
|
|
| 2,125 |
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Selling, general and administrative expenses |
| 1,835 |
|
|
| 1,830 |
|
Restructuring charges |
| - |
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|
| 30 |
|
Operating income |
| 334 |
|
|
| 265 |
|
Other income (expense): |
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Investment income and other |
| 14 |
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|
| 11 |
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Interest expense |
| (18) |
|
|
| (19) |
|
Earnings before income tax expense |
| 330 |
|
|
| 257 |
|
Income tax expense |
| 65 |
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|
| 49 |
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Net earnings | $ | 265 |
|
| $ | 208 |
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Basic earnings per share | $ | 0.99 |
|
| $ | 0.74 |
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Diluted earnings per share | $ | 0.98 |
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| $ | 0.72 |
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Weighted-average common shares outstanding |
|
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Basic |
| 267.6 |
|
|
| 282.6 |
|
Diluted |
| 271.5 |
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|
| 288.3 |
|
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive Income
$ in millions (unaudited)
Three Months Ended | |||||||
May 2, 2020 | May 4, 2019 | ||||||
Net earnings | $ | 159 | $ | 265 | |||
Foreign currency translation adjustments, net of tax | (52) | (5) | |||||
Comprehensive income | $ | 107 | $ | 260 |
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| Three Months Ended | ||||||
| May 4, 2019 |
| May 5, 2018 | ||||
Net earnings | $ | 265 |
|
| $ | 208 |
|
Foreign currency translation adjustments |
| (5) |
|
|
| (4) |
|
Comprehensive income | $ | 260 |
|
| $ | 204 |
|
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
$ in millions (unaudited)
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| Three Months Ended | Three Months Ended | ||||||||||||
| May 4, 2019 |
| May 5, 2018 | May 2, 2020 | May 4, 2019 | |||||||||
Operating activities |
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Net earnings | $ | 265 |
| $ | 208 |
| $ | 159 | $ | 265 | ||||
Adjustments to reconcile net earnings to total cash provided by operating activities: | Adjustments to reconcile net earnings to total cash provided by operating activities: |
|
|
| Adjustments to reconcile net earnings to total cash provided by operating activities: | |||||||||
Depreciation and amortization |
| 200 |
| 176 |
| 207 | 200 | |||||||
Restructuring charges |
| - |
| 30 |
| |||||||||
Stock-based compensation |
| 36 |
| 32 |
| 15 | 36 | |||||||
Deferred income taxes |
| 13 |
| 9 |
| 15 | 13 | |||||||
Other, net |
| 1 |
| (2) |
| 6 | 1 | |||||||
Changes in operating assets and liabilities, net of acquired assets and liabilities: |
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Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | |||||||||||||
Receivables |
| 182 |
| 189 |
| 383 | 182 | |||||||
Merchandise inventories |
| 207 |
| 243 |
| 1,136 | 207 | |||||||
Other assets |
| (14) |
| (13) |
| (12) | (14) | |||||||
Accounts payable |
| (519) |
| (214) |
| (816) | (519) | |||||||
Income taxes | 31 | 10 | ||||||||||||
Other liabilities |
| (379) |
| (506) |
| (297) | (379) | |||||||
Income taxes |
| 10 |
|
|
| 52 |
| |||||||
Total cash provided by operating activities |
| 2 |
|
|
| 204 |
| 827 | 2 | |||||
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Investing activities |
|
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| |||||||||
Additions to property and equipment |
| (193) |
| (181) |
| (178) | (193) | |||||||
Sales of investments |
| - |
| 1,245 |
| |||||||||
Other, net |
| 1 |
|
|
| 9 |
| (1) | 1 | |||||
Total cash provided by (used in) investing activities |
| (192) |
|
|
| 1,073 |
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Total cash used in investing activities | (179) | (192) | ||||||||||||
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Financing activities |
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Repurchase of common stock |
| (98) |
| (400) |
| (62) | (98) | |||||||
Issuance of common stock |
| 11 |
| 24 |
| |||||||||
Dividends paid |
| (134) |
| (128) |
| (141) | (134) | |||||||
Repayments of debt |
| (4) |
| (11) |
| |||||||||
Borrowings of debt | 1,250 | - | ||||||||||||
Other, net |
| (1) |
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| (1) |
| 2 | 6 | |||||
Total cash used in financing activities |
| (226) |
|
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| (516) |
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Effect of exchange rate changes on cash |
| (1) |
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| (12) |
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Total cash provided by (used in) financing activities | 1,049 | (226) | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (18) | (1) | ||||||||||||
Increase (decrease) in cash, cash equivalents and restricted cash |
| (417) |
|
|
| 749 |
| 1,679 | (417) | |||||
Cash, cash equivalents and restricted cash at beginning of period |
| 2,184 |
|
|
| 1,300 |
| 2,355 | 2,184 | |||||
Cash, cash equivalents and restricted cash at end of period | $ | 1,767 |
|
| $ | 2,049 |
| $ | 4,034 | $ | 1,767 |
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 Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||
Balances at February 1, 2020 | 256 | $ | 26 | $ | - | $ | 3,158 | $ | 295 | $ | 3,479 | ||||||||||||
Net earnings, three months ended May 2, 2020 | - | - | - | 159 | - | 159 | |||||||||||||||||
Other comprehensive loss, net of tax: | |||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | (52) | (52) | |||||||||||||||||
Stock-based compensation | - | - | 15 | - | - | 15 | |||||||||||||||||
Issuance of common stock | 2 | - | 6 | - | - | 6 | |||||||||||||||||
Common stock dividends, $0.55 per share | - | - | 2 | (143) | - | (141) | |||||||||||||||||
Repurchase of common stock | (1) | - | (8) | (48) | - | (56) | |||||||||||||||||
Balances at May 2, 2020 | 257 | $ | 26 | $ | 15 | $ | 3,126 | $ | 243 | $ | 3,410 | ||||||||||||
Balances at February 2, 2019 | 266 | $ | 27 | $ | - | $ | 2,985 | $ | 294 | $ | 3,306 | ||||||||||||
Adoption of ASU 2016-02 | - | - | - | (19) | - | (19) | |||||||||||||||||
Net earnings, three months ended May 4, 2019 | - | - | - | 265 | - | 265 | |||||||||||||||||
Other comprehensive loss, net of tax: | |||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | (5) | (5) | |||||||||||||||||
Stock-based compensation | - | - | 36 | - | - | 36 | |||||||||||||||||
Issuance of common stock | 2 | - | 11 | - | - | 11 | |||||||||||||||||
Common stock dividends, $0.50 per share | - | - | 2 | (136) | - | (134) | |||||||||||||||||
Repurchase of common stock | (1) | - | (49) | (57) | - | (106) | |||||||||||||||||
Balances at May 4, 2019 | 267 | $ | 27 | $ | - | $ | 3,038 | $ | 289 | $ | 3,354 |
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| Common |
| Common |
| Additional |
| Retained |
| Accumulated Other |
| Total | ||||||||||||
Balances at February 2, 2019 |
| 266 |
|
| $ | 27 |
|
| $ | - |
|
| $ | 2,985 |
|
| $ | 294 |
|
| $ | 3,306 |
|
Adoption of ASU 2016-02 |
| - |
|
|
| - |
|
|
| - |
|
|
| (19) |
|
|
| - |
|
|
| (19) |
|
Net earnings, three months ended May 4, 2019 |
| - |
|
|
| - |
|
|
| - |
|
|
| 265 |
|
|
| - |
|
|
| 265 |
|
Other comprehensive loss, net of tax: |
|
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Foreign currency translation adjustments |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5) |
|
|
| (5) |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 36 |
|
|
| - |
|
|
| - |
|
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| 36 |
|
Issuance of common stock |
| 2 |
|
|
| - |
|
|
| 11 |
|
|
| - |
|
|
| - |
|
|
| 11 |
|
Common stock dividends, $0.50 per share |
| - |
|
|
| - |
|
|
| 2 |
|
|
| (136) |
|
|
| - |
|
|
| (134) |
|
Repurchase of common stock |
| (1) |
|
|
| - |
|
|
| (49) |
|
|
| (57) |
|
|
| - |
|
|
| (106) |
|
Balances at May 4, 2019 |
| 267 |
|
| $ | 27 |
|
| $ | - |
|
| $ | 3,038 |
|
| $ | 289 |
|
| $ | 3,354 |
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Balances at February 3, 2018 |
| 283 |
|
| $ | 28 |
|
| $ | - |
|
| $ | 3,270 |
|
| $ | 314 |
|
| $ | 3,612 |
|
Adoption of ASU 2014-09 |
| - |
|
|
| - |
|
|
| - |
|
|
| 73 |
|
|
| - |
|
|
| 73 |
|
Net earnings, three months ended May 5, 2018 |
| - |
|
|
| - |
|
|
| - |
|
|
| 208 |
|
|
| - |
|
|
| 208 |
|
Other comprehensive loss, net of tax: |
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Foreign currency translation adjustments |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
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| (4) |
|
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| (4) |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 32 |
|
|
| - |
|
|
| - |
|
|
| 32 |
|
Issuance of common stock |
| 3 |
|
|
| - |
|
|
| 24 |
|
|
| - |
|
|
| - |
|
|
| 24 |
|
Common stock dividends, $0.45 per share |
| - |
|
|
| - |
|
|
| 2 |
|
|
| (128) |
|
|
| - |
|
|
| (126) |
|
Repurchase of common stock |
| (5) |
|
|
| - |
|
|
| (58) |
|
|
| (341) |
|
|
| - |
|
|
| (399) |
|
Balances at May 5, 2018 |
| 281 |
|
| $ | 28 |
|
| $ | - |
|
| $ | 3,082 |
|
| $ | 310 |
|
| $ | 3,420 |
|
See Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 2, 2019.1, 2020. The first three months of fiscal 20202021 and fiscal 20192020 included 13 weeks.
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 May 4, 2019,2, 2020, through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. Other
than as disclosed in Note 14, Subsequent Event, noNo such events were identified for the reported periods.
UnadoptedCOVID-19
In March 2020, the World Health Organization declared the outbreak of novel coronavirus disease ("COVID-19") as a pandemic. Except where otherwise directed by state and local authorities, on March 22, 2020, we made the decision for the health and safety of our customers and employees to move our stores to a contactless, curbside-only operating model. We also suspended in-home delivery, repair and consultation services on March 22, 2020, and resumed these offerings on April 27, 2020, after implementing new safety guidelines.
In light of the uncertainty surrounding the impact of COVID-19 and to maximize liquidity, we executed a short-term draw on the full amount of our $1.25 billion five year senior unsecured revolving credit facility on March 19, 2020. See Note 4, Debt, for additional information. We also suspended all share repurchases.
Since the pandemic had a significant impact on our store operations, we concluded this was a triggering event to review for potential impairments of our store assets. As a result of this analysis, we recorded an immaterial asset impairment charge for a small number of stores within Selling, general and administrative (“SG&A”) expenses for the three months ended May 2, 2020.
We have goodwill in 2 reporting units – Best Buy Domestic and Best Buy Health – with carrying values as of May 2, 2020, of $444 million and $542 million, respectively. We test goodwill for impairment annually in the fiscal fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. Our most recent goodwill impairment analysis, completed during the fourth quarter of fiscal 2020, indicated an excess of fair value over carrying value for both reporting units. As a result of the impact of COVID-19 on our business, we completed a review for potential impairments of our goodwill in the first quarter of fiscal 2021. As a result of this analysis, we concluded that 0 impairment had occurred.
On March 27, 2020, in response to the COVID-19 pandemic, the U.S. Congress enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which among other things, contains provisions for deferral of the employer portion of social security taxes incurred through the end of calendar 2020 and an employee retention credit, a refundable payroll credit for 50% of wages and health benefits paid to employees not providing services due to the COVID-19 pandemic. As a result of the CARES Act, we intend to defer qualified payroll taxes and claim the employee retention credit, which will be treated as a government subsidy to offset related operating expenses. Based on our preliminary analysis of the CARES Act, we reduced our SG&A expenses for the three months ended May 2, 2020, by $69 million for employee retention credits. We will continue to assess our treatment of the CARES Act to the extent additional guidance and regulations are issued.
The COVID-19 pandemic remains a rapidly evolving situation. The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and spread of the outbreak within the markets in which we operate and the related impact on consumer confidence and spending, all of which are highly uncertain.
Adopted Accounting Pronouncements
In January 2017,the first quarter of fiscal 2021, we prospectively adopted the following Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board, ("FASB") issued Accounting Standards Update ("ASU") No.all of which had an immaterial impact on our results of operations, cash flows and financial position.
ASU 2016-13, Measurement of Credit Losses on Financial Instruments
ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). We do not believe the new guidance, which is effective for fiscal years beginning after December 15, 2019, will have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements for fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of adopting the updated provisions.
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 are currently evaluating the impact of adopting the updated provisions, which is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.t
Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, which requires the recognition of operating lease assets and lease liabilities on the balance 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, disclosures are required to enable users of financial statements to assess the amount, timing and uncertainty of cash 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
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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 guidance within the new standard, which among other things, allows us to carry forward the historical lease classification as operating or capital leases. We also elected to combine lease and non-lease components and to exclude short-term leases from our consolidated balance sheets. 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 operating lease liabilities of $2.7 billion and $2.8 billion, respectively, while our accounting for existing capital leases (now referred to as finance leases) remained substantially unchanged. The cumulative impact of these changes decreased retained earnings by $19 million. We expect the impact of adoption to be immaterial to our consolidated statements of earnings and consolidated statements of cash flows on an ongoing basis. As part of our adoption, we also modified our control procedures and processes, none of which materially affected our internal control over financial reporting. See Note 3, Leases, for additional information regarding our accounting policy for leases and additional disclosures.
The cumulative effect of the changes made to our Condensed Consolidated Balance Sheets on February 3, 2019, for the adoption of this standard was as follows ($ in millions):
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| February 2, 2019 |
| ASU 2016-02 |
| February 3, 2019 | ||||||
Assets |
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Other current assets | $ | 466 |
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| $ | (65) | (a) |
| $ | 401 |
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Net property and equipment |
| 2,510 |
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| (173) | (b) |
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| 2,337 |
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Operating lease assets |
| - |
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| 2,736 | (c) |
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| 2,736 |
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Other assets |
| 606 |
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| 4 | (d) |
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| 610 |
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Liabilities |
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Accrued liabilities |
| 982 |
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| (28) | (e) |
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| 954 |
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Current portion of operating lease liabilities |
| - |
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| 712 | (f) |
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| 712 |
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Current portion of long-term debt |
| 56 |
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| (43) | (b) |
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| 13 |
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Long-term liabilities |
| 750 |
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| (115) | (e) |
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| 635 |
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Long-term operating lease liabilities |
| - |
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| 2,135 | (f) |
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| 2,135 |
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Long-term debt |
| 1,332 |
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| (140) | (b) |
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| 1,192 |
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Equity |
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Retained earnings |
| 2,985 |
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| (19) | (g) |
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| 2,966 |
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(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 the on-adoption adjustments.
(e)Represents the reclassification of straight-line rent accruals, tenant improvement allowances and vacant space reserves to Operating lease assets.
(f)Represents the recognition of operating lease liabilities.
(g)Represents the net-of-tax retained earnings impact of impairment charges and the derecognition of financing obligations.
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 May 4, 2019, February 2, 2019, and May 5, 2018follows ($ in millions):
May 2, 2020 | February 1, 2020 | May 4, 2019 | |||||||||
Cash and cash equivalents | $ | 3,919 | $ | 2,229 | $ | 1,561 | |||||
Restricted cash included in Other current assets | 115 | 126 | 206 | ||||||||
Total cash, cash equivalents and restricted cash | $ | 4,034 | $ | 2,355 | $ | 1,767 |
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| May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | ||||||
Cash and cash equivalents | $ | 1,561 |
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| $ | 1,980 |
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| $ | 1,848 |
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Restricted cash included in Other current assets |
| 206 |
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| 204 |
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| 201 |
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Total cash, cash equivalents and restricted cash | $ | 1,767 |
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| $ | 2,184 |
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| $ | 2,049 |
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Amounts included in restricted cash are pledged as collateral or restricted to use for workers’ compensation and general liability insurance claims.
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Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price)measurements are reported in the principal or most advantageous market for the asset or liability in an orderly transaction between market participantsone of three levels based on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
lowest level of significant input used: Level 1 — Unadjusted (unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.
markets); Level 2 — Significant other observable (observable market 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;1); and
Inputs that are derived principally from or corroborated by other observable market data.
Level 3 — Significant unobservable (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.data).
Assets and Liabilities Measured atRecurring Fair Value on a Recurring BasisMeasurements
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.
The following table sets forth our financialFinancial assets and liabilities that were accounted for at fair value on a recurring basiswere as of May 4, 2019, February 2, 2019, and May 5, 2018, by level within the fair value hierarchy asfollows ($ in millions):
Fair Value at | ||||||||||||||||||
Balance Sheet Location(1) | Fair Value Hierarchy | May 2, 2020 | February 1, 2020 | May 4, 2019 | ||||||||||||||
Assets | ||||||||||||||||||
Money market funds(2) | Cash and cash equivalents | Level 1 | $ | 1,153 | $ | 524 | $ | 18 | ||||||||||
Commercial paper(2) | Cash and cash equivalents | Level 2 | - | 75 | - | |||||||||||||
Time deposits(3) | Cash and cash equivalents | Level 2 | 465 | 185 | 60 | |||||||||||||
Money market funds(2) | Other current assets | Level 1 | 6 | 16 | 93 | |||||||||||||
Time deposits(3) | Other current assets | Level 2 | 101 | 101 | 102 | |||||||||||||
Foreign currency derivative instruments(4) | Other current assets | Level 2 | 6 | 1 | - | |||||||||||||
Interest rate swap derivative instruments(4) | Other current assets | Level 2 | 11 | - | - | |||||||||||||
Marketable securities that fund deferred compensation(5) | Other assets | Level 1 | 45 | 48 | 46 | |||||||||||||
Interest rate swap derivative instruments(4) | Other assets | Level 2 | 107 | 89 | 28 | |||||||||||||
Liabilities | ||||||||||||||||||
Interest rate swap derivative instruments(4) | Long-term liabilities | Level 2 | - | - | 6 |
(1)Balance sheet location is determined by the valuation techniques we usedlength to determinematurity from the fair value ($ in millions):current period-end date.
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| Fair Value at | ||||||||||
| Fair Value |
| May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | ||||||||
Assets |
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Cash and cash equivalents: |
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Money market funds |
| Level 1 |
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| $ | 18 |
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| $ | 98 |
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| $ | 19 |
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Time deposits |
| Level 2 |
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| 60 |
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| 300 |
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| 200 |
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Short-term investments: |
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Commercial paper |
| Level 2 |
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| - |
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| - |
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| 100 |
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Time deposits |
| Level 2 |
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| - |
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| - |
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| 685 |
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Other current assets: |
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Money market funds |
| Level 1 |
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| 93 |
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| 82 |
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| 58 |
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Time deposits |
| Level 2 |
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| 102 |
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| 101 |
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| 101 |
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Foreign currency derivative instruments |
| Level 2 |
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| - |
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| - |
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| 3 |
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Interest rate swap derivative instruments |
| Level 2 |
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| - |
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| - |
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| 5 |
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Other assets: |
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Marketable securities that fund deferred compensation |
| Level 1 |
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| 46 |
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| 44 |
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| 99 |
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Interest rate swap derivative instruments |
| Level 2 |
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| 28 |
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| 26 |
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| - |
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Liabilities |
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Accrued liabilities: |
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Foreign currency derivative instruments |
| Level 2 |
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| - |
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| - |
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| 1 |
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Long-term liabilities: |
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Interest rate swap derivative instruments |
| Level 2 |
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| 6 |
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| 1 |
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| 15 |
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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(2)Valued at fair value as they trade in an active market using quoted market prices and, therefore, were classified as Level 1.prices.
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(3)Valued at face value plus accrued interest, which approximates fair value, and are classified as Level 2.value.
Commercial 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 forward contracts, our foreign currency derivative instruments were measured at fair value(4)Valued using readily observable market inputs, such as quotations on forward foreign exchange points and foreign interest rates. Our foreign currency derivative instruments were classified as Level 2 as theseinputs. These instruments are custom, over-the-counter contracts with various bank counterparties that are not traded inon an active market.
Interest rate swap derivative instruments. Our interest rate swap contracts were measured at fair value(5)Valued 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.
Marketable 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 fundsperformance that trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
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, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value on our Condensed Consolidated Balance Sheets. For these assets, we do not periodically adjust 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”) expenses on our Condensed Consolidated Statements of Earnings for non-restructuring charges.
The following table summarizes the fair value remeasurements of property and equipment impairments recorded during the three months ended May 4, 2019, and May 5, 2018 ($ in millions):
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| Impairments |
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| Three Months Ended |
| Remaining Net Carrying Value(2) | ||||||||||||
| May 4, 2019 |
| May 5, 2018 |
| May 4, 2019 |
| May 5, 2018 | ||||||||
Property and equipment (non-restructuring)(1) | $ | 2 |
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| $ | 2 |
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| $ | 2 |
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| $ | - |
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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, short-term debt and other payables approximated their carrying values because of the short-term nature of these instruments. IfWith the exception of short-term debt, if these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy.hierarchy; short-term debt would be classified as Level 2. Fair values for other
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investments held at cost are not readily available, but we estimate that the carrying values for these investments approximate their fair value. See Note 6, Debt, for information about the fairvalues.
Long-term debt is presented at carrying value of our long-term debt.
3. 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 the 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 overSheets. If our long-term debt were recorded at fair value, it would be classified as Level 2 in 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 presentfair value of future payments over the lease term at commencement date. We use a collateralized incremental borrowing rate based on the information available at commencement date, including 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 as of May 4, 2019, related to our leases washierarchy. Long-term debt balances were as follows ($ in millions):
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May 2, 2020 | February 1, 2020 | May 4, 2019 | |||||||||||||||||||||||||
Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||||||||||||
Long-term debt(1) | $ | 1,315 | $ | 1,268 | $ | 1,322 | $ | 1,239 | $ | 1,213 | $ | 1,173 |
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(1)Excludes debt discounts, issuance costs and finance lease obligations.
The components
3. Goodwill and Intangible Assets
See Note 1, Basis of our total lease costPresentation, for impairment considerations for the three months ended May 4, 2019,2, 2020, due to COVID-19. NaN impairment charges were recorded during the fiscal periods presented.
Goodwill
Balances related to goodwill were as follows ($ in millions):
May 2, 2020 | February 1, 2020 | May 4, 2019 | |||||||||||||||||||||
Gross Carrying | Cumulative | Gross Carrying | Cumulative | Gross Carrying | Cumulative | ||||||||||||||||||
Domestic | $ | 1,053 | $ | (67) | $ | 1,051 | $ | (67) | $ | 982 | $ | (67) | |||||||||||
International | 608 | (608) | 608 | (608) | 608 | (608) | |||||||||||||||||
Total | $ | 1,661 | $ | (675) | $ | 1,659 | $ | (675) | $ | 1,590 | $ | (675) |
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Indefinite-Lived Intangible Assets
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Other information related to our leases forDuring the three months ended May 4, 2019, was as follows ($ in millions):
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Future lease payments under our non-cancellable leases as of May 4, 2019, were as follows ($ in millions):
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| Operating Leases(1) |
| Finance Leases(1) | ||||
Remainder of fiscal 2020 |
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| $ | 539 |
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| $ | 11 |
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Fiscal 2021 |
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| 708 |
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| 13 |
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Fiscal 2022 |
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| 570 |
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| 8 |
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Fiscal 2023 |
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| 418 |
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| 4 |
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Fiscal 2024 |
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| 293 |
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| 3 |
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Fiscal 2025 |
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| 187 |
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| 2 |
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Thereafter |
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| 378 |
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| 5 |
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Total future undiscounted lease payments |
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| 3,093 |
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| 46 |
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Less imputed interest |
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| (281) |
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| (5) |
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Total reported lease liability |
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| $ | 2,812 |
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| $ | 41 |
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In accordance with2, 2020, we made 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 priordecision 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):
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
13
4. Goodwill and Intangible Assets
Goodwill and Indefinite-Lived Intangible Assets
The following table provides the carrying values of goodwill and indefinite-lived intangible assets, which includesphase out our Pacific Sales tradename forin our U.S. Best Buy stores over the Domestic segmentcoming years. Consequently, we reclassified the tradename from an indefinite-lived intangible asset to a definite-lived intangible asset and have 0 indefinite-lived intangible assets remaining as of May 4, 2019,2, 2020. The carrying value of the tradename was $18 million as of February 2, 2019,1, 2020, and May 5, 2018 ($ in millions):
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|
|
|
|
|
|
|
|
|
| May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | ||||||
Goodwill | $ | 915 |
|
| $ | 915 |
|
| $ | 425 |
|
Indefinite-lived tradename included in Other assets |
| 18 |
|
|
| 18 |
|
|
| 18 |
|
The following table provides the gross carrying amount of goodwill and cumulative goodwill impairment as of May 4, 2019, February 2, 2019,respectively, and May 5, 2018 ($ in millions):
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|
|
| May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | ||||||||||||||||||
| Gross Carrying |
| Cumulative |
| Gross Carrying |
| Cumulative |
| Gross Carrying |
| Cumulative | ||||||||||||
Goodwill | $ | 1,590 |
|
| $ | (675) |
|
| $ | 1,590 |
|
| $ | (675) |
|
| $ | 1,100 |
|
| $ | (675) |
|
Definite-Lived Intangible Assets
We have definite-lived intangible assets related to GreatCall, Inc. (“GreatCall”) included within our Domestic segment, which iswas recorded within Other assets on our Condensed Consolidated Balance Sheets. The following table provides the gross carrying amount and related accumulated amortization of
Definite-Lived Intangible Assets
We have definite-lived intangible assets which are recorded within Other assets on our Condensed Consolidated Balance Sheets as of May 4, 2019, and February 2, 2019follows ($ in millions). We had no definite-lived intangible assets:
May 2, 2020 | February 1, 2020 | May 4, 2019 | Weighted-Average | ||||||||||||||||||||||||
Gross Carrying | Accumulated | Gross Carrying | Accumulated | Gross Carrying | Accumulated | Useful Life Remaining as of May 2, 2020 (in years) | |||||||||||||||||||||
Customer relationships | $ | 339 | $ | 83 | $ | 339 | $ | 70 | $ | 258 | $ | 29 | 6.9 | ||||||||||||||
Tradenames | 81 | 13 | 63 | 10 | 63 | 5 | 5.5 | ||||||||||||||||||||
Developed technology | 56 | 18 | 56 | 15 | 52 | 6 | 3.3 | ||||||||||||||||||||
Total | $ | 476 | $ | 114 | $ | 458 | $ | 95 | $ | 373 | $ | 40 | 6.3 |
Amortization expense was as of May 5, 2018.follows ($ in millions):
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|
| May 4, 2019 |
| February 2, 2019 | ||||||||||||
| Gross Carrying |
| Accumulated |
| Gross Carrying |
| Accumulated | ||||||||
Customer relationships | $ | 258 |
|
| $ | 29 |
|
| $ | 258 |
|
| $ | 16 |
|
Tradename |
| 63 |
|
|
| 5 |
|
|
| 63 |
|
|
| 3 |
|
Developed technology |
| 52 |
|
|
| 6 |
|
|
| 52 |
|
|
| 4 |
|
Total | $ | 373 |
|
| $ | 40 |
|
| $ | 373 |
|
| $ | 23 |
|
Three Months Ended | |||||||||||||
Statement of Earnings Location | May 2, 2020 | May 4, 2019 | |||||||||||
Amortization expense | SG&A | $ | 19 | $ | 17 |
We recorded $17 million and $0 million of aggregate amortization expense related to definite-lived intangible assets during the three months ended May 4, 2019, and May 5, 2018, respectively. The following table provides the amortizationAmortization expense expected to be recognized in future periods is as follows ($ in millions):
Amortization | |||||||||||||||||||||||||||
Remainder of fiscal |
| $ | 61 | ||||||||||||||||||||||||
Fiscal | 80 | ||||||||||||||||||||||||||
Fiscal | 79 | ||||||||||||||||||||||||||
Fiscal | 54 | ||||||||||||||||||||||||||
Fiscal | 16 | ||||||||||||||||||||||||||
Fiscal | 16 | ||||||||||||||||||||||||||
Thereafter | 56 |
4. Debt
Short-Term Debt
We have a $1.25 billion five year senior unsecured revolving credit facility agreement (the “Facility”) with a syndicate of banks. In light of the uncertainty surrounding the impact of COVID-19 and to maximize liquidity, we executed a seven-day draw on the full amount of the Facility on March 19, 2020, and rolled this into a three-month draw on March 26, 2020. The Facility remained fully drawn as of May 2, 2020, at an interest rate of three-month LIBOR plus a margin rate of 1.015%. There were 0 borrowings outstanding as of February 1, 2020, or May 4, 2019.
Information regarding our short-term debt for the three months ended May 2, 2020, was as follows ($ in millions):
Average Amount Outstanding | Maximum Amount Outstanding | Weighted Average Interest Rate | ||||||||||
Short-term debt | $ | 618 | $ | 1,250 | 2.3 | % |
Long-Term Debt
Long-term debt consisted of the following ($ in millions):
May 2, 2020 | February 1, 2020 | May 4, 2019 | ||||||||||||||||||
Notes, 5.50%, due March 15, 2021 | $ | 650 | $ | 650 | $ | 650 | ||||||||||||||
Notes, 4.45%, due October 1, 2028 | 500 | 500 | 500 | |||||||||||||||||
Interest rate swap valuation adjustments | 118 | 89 | 23 | |||||||||||||||||
Subtotal | 1,268 | 1,239 | 1,173 | |||||||||||||||||
Debt discounts and issuance costs | (8) | (6) | (7) | |||||||||||||||||
Finance lease obligations | 34 | 38 | 41 | |||||||||||||||||
Total long-term debt | 1,294 | 1,271 | 1,207 | |||||||||||||||||
Less current portion | 673 | 14 | 14 | |||||||||||||||||
Total long-term debt, less current portion | $ | 621 | $ | 1,257 | $ | 1,193 |
See Note 2, Fair Value Measurements, for the fair value of long-term debt.
5. Revenue
We generate all of our revenue from contracts with customers from the sale of products and services. Contract balances primarily consist of receivables and contract liabilities related to product merchandise not yet delivered to customers, unredeemed gift cards, services not yet completed, and options that provide a material right to customers, such as our customer loyalty programs. Contract balances were as follows ($ in millions):
May 2, 2020 | February 1, 2020 | May 4, 2019 | |||||||||
Receivables, net(1) | $ | 396 | $ | 567 | $ | 484 | |||||
Short-term contract liabilities included in: | |||||||||||
Unredeemed gift cards | 257 | 281 | 265 | ||||||||
Deferred revenue | 531 | 501 | 409 | ||||||||
Accrued liabilities | 45 | 139 | 139 | ||||||||
Long-term contract liabilities included in: | |||||||||||
Long-term liabilities | 8 | 9 | 10 |
(1)Receivables are recorded net of allowances for doubtful accounts of $29 million, $14 million and $12 million as of May 2, 2020, February 1, 2020, and May 4, 2019, respectively.
During the first three months of fiscal 2021 and fiscal 2020, $492 million and $466 million of revenue was recognized, respectively, that was included in the contract liabilities at the beginning of the respective periods.
See Note 9, Segments, for information on our revenue by reportable segment and product category.
We manage our economic and transaction exposure to certain risks by 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 trading or speculative purposes. We have no derivatives that have credit risk-related contingent features, and we mitigate our credit risk by engaging with financial institutions with investment-grade credit ratings as our counterparties.
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
14
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 gainsoperations, 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, prior to their maturity, and currently have swaps outstanding on our $650 million principal amount of notes due March 15, 2021, and our $500 million principal amount of notes due October 1, 2028. Our interest rate swap contracts are considered perfect hedges because the critical terms and notional amounts match those of our fixed-rate debt being hedged and are, therefore, accounted for as fair value hedges using the shortcut method. Under the shortcut method,In addition, we recognize the change in the fair value of the derivatives with an offsetting change to the carrying value of the debt. Accordingly, there is no impact on our Condensed Consolidated Statements of Earnings from the fair value of the derivatives.
Derivatives Not Designated as Hedging Instruments
We use foreign currency forward contracts not designated as hedging instruments to manage the impact of fluctuations in foreign currency exchange rates relative to recognized receivable and payable balances denominated in non-functional currencies. The contracts generally have terms
Our derivative instruments designated as net investment hedges and interest rate swaps are not designated in hedging relationships and, therefore, we record gains and lossesrecorded on these contracts directly to net earnings.
Summary of Derivative Balances
The following tables present theour Condensed Consolidated Balance Sheets at fair value. See Note 2, Fair Value Measurements, for gross fair values of our outstanding derivative instruments and the corresponding classificationfair value classifications.
Notional amounts of our derivative instruments were as of May 4, 2019, February 2, 2019, and May 5, 2018follows ($ in millions):
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|
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|
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| |||||||||||||||||
| Balance Sheet | Assets | |||||||||||||||||||||||
Contract Type | Location | May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | May 2, 2020 | February 1, 2020 | May 4, 2019 | ||||||||||||||||
Derivatives designated as net investment hedges | Other current assets | $ | - |
|
| $ | - |
|
| $ | 3 |
| $ | 126 | $ | 129 | $ | 15 | |||||||
Derivatives designated as interest rate swaps | Other current assets and Other assets |
| 28 |
|
| 26 |
|
| 5 |
| 1,150 | 1,150 | 1,150 | ||||||||||||
No hedge designation (foreign exchange contracts) | 21 | 31 | 44 | ||||||||||||||||||||||
Total |
| $ | 28 |
|
| $ | 26 |
|
| $ | 8 |
| $ | 1,297 | $ | 1,310 | $ | 1,209 |
|
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|
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|
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|
|
|
|
| Balance Sheet | Liabilities | ||||||||||
Contract Type | Location | May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | ||||||
Derivatives designated as net investment hedges | Accrued liabilities | $ | - |
|
| $ | - |
|
| $ | 1 |
|
Derivatives designated as interest rate swaps | Long-term liabilities |
| 6 |
|
|
| 1 |
|
|
| 15 |
|
Total |
| $ | 6 |
|
| $ | 1 |
|
| $ | 16 |
|
The following table presents the effectsEffects of derivative instruments on other comprehensive income ("OCI") for the three months ended May 4, 2019, and May 5, 2018 ($ in millions):
| |||||||||||
|
|
| |||||||||
|
|
|
|
15
The following table presents the effects ofour derivatives not designated as hedging instruments on our Condensed Consolidated Statements of Earnings for the three months ended May 4, 2019, and May 5, 2018 ($ in millions):
|
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|
|
| Gain Recognized | ||||||
|
|
|
|
|
| Three Months Ended | ||||||
Contract Type | Statement of Earnings Location |
| May 4, 2019 |
| May 5, 2018 | |||||||
No hedge designation (foreign exchange contracts) | SG&A |
|
|
|
| $ | 1 |
|
| $ | 1 |
|
The following table presents the 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 months ended May 4, 2019, and May 5, 2018 ($ in millions):
|
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|
|
|
|
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|
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|
|
|
|
|
| Gain (Loss) Recognized | ||||||
|
|
|
|
|
| Three Months Ended | ||||||
Contract Type | Statement of Earnings Location |
| May 4, 2019 |
| May 5, 2018 | |||||||
Interest rate swap contracts | Interest expense |
|
|
|
| $ | (2) |
|
| $ | (5) |
|
Adjustments to carrying value of long-term debt | Interest expense |
|
|
|
|
| 2 |
|
|
| 5 |
|
Total |
|
|
|
|
| $ | - |
|
| $ | - |
|
The following table presents the notional amounts of our derivative instruments as of May 4, 2019, February 2, 2019, and May 5, 2018 ($ in millions):
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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|
|
|
|
| Notional Amount | ||||||||||
Contract Type | May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | ||||||
Derivatives designated as net investment hedges | $ | 15 |
|
| $ | 15 |
|
| $ | 135 |
|
Derivatives designated as interest rate swaps |
| 1,150 |
|
|
| 1,150 |
|
|
| 1,150 |
|
No hedge designation (foreign exchange contracts) |
| 44 |
|
|
| 9 |
|
|
| 39 |
|
Total | $ | 1,209 |
|
| $ | 1,174 |
|
| $ | 1,324 |
|
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 $1.25 billion and expires in April 2023. There were no borrowings outstanding as of May 4, 2019, February 2, 2019, or May 5, 2018.
Long-Term Debt
Long-term debt consisted of the following as of May 4, 2019, February 2, 2019, and May 5, 2018 ($ in millions):
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | ||||||
Notes, 5.00%, due August 1, 2018 | $ | - |
|
| $ | - |
|
| $ | 500 |
|
Notes, 5.50%, due March 15, 2021 |
| 650 |
|
|
| 650 |
|
|
| 650 |
|
Notes, 4.45%, due October 1, 2028 |
| 500 |
|
|
| 500 |
|
|
| - |
|
Interest rate swap valuation adjustments |
| 23 |
|
|
| 25 |
|
|
| (10) |
|
Subtotal |
| 1,173 |
|
|
| 1,175 |
|
|
| 1,140 |
|
Debt discounts and issuance costs |
| (7) |
|
|
| (7) |
|
|
| (2) |
|
Financing lease obligations (1) |
| - |
|
|
| 181 |
|
|
| 184 |
|
Capital lease obligations (1) |
| - |
|
|
| 39 |
|
|
| 20 |
|
Finance lease obligations (1) |
| 41 |
|
|
| - |
|
|
| - |
|
Total long-term debt |
| 1,207 |
|
|
| 1,388 |
|
|
| 1,342 |
|
Less current portion |
| 14 |
|
|
| 56 |
|
|
| 550 |
|
Total long-term debt, less current portion | $ | 1,193 |
|
| $ | 1,332 |
|
| $ | 792 |
|
|
|
The fair value of total long-term debt, excluding debt discounts and issuance costs and lease obligations, approximated $1,213 million, $1,178 million, and $1,176 million as of May 4, 2019, February 2, 2019, and May 5, 2018, respectively, based primarily on the market prices quoted from external sources, compared with carrying values of $1,173 million, $1,175 million,
16
and $1,140 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.
The $500 million principal amount of notes due August 1, 2018, were repaid using existing cash resources and on September 27, 2018, we issued $500 million principal amount of notes due October 1, 2028.
See Note 6, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, for additional information regarding the terms of our other debt facilities, debt instruments and other obligations.
We generate revenue primarily from the sale of products and services, both as a principal and as an agent. We generate all of our operating revenue from contracts with customers. Our revenue excludes sales and usage-based taxes collected.
Revenue from product sales and services is reported net of sales refunds, which includes an estimate of future returns and contract cancellations based on historical refund rates, with a corresponding reduction to cost of sales. For revenue transactions that involve more than one performance obligation, we defer the revenue associated with any unsatisfied performance obligation until the obligation is satisfied.
Our contract liabilities primarily relate to product merchandise not yet delivered to customers; unredeemed gift cards; services not yet completed; services technical support contracts, where performance is satisfied over the duration of the contract; and options that provide a material right to customers, such as our customer loyalty programs. We do not have any material contract assets.
The following table provides information about receivables and contract liabilities from our contracts with customers, which reflects the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied as of May 4, 2019, February 2, 2019, and May 5, 2018 ($ in millions):
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|
| May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | ||||||
Receivables, net(1) | $ | 484 |
|
| $ | 565 |
|
| $ | 582 |
|
Short-term contract liabilities included in: |
|
|
|
|
|
|
|
|
|
|
|
Unredeemed gift cards |
| 265 |
|
|
| 290 |
|
|
| 285 |
|
Deferred revenue |
| 409 |
|
|
| 446 |
|
|
| 371 |
|
Accrued liabilities |
| 139 |
|
|
| 146 |
|
|
| 139 |
|
Long-term contract liabilities included in: |
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities |
| 10 |
|
|
| 11 |
|
|
| 20 |
|
|
|
We establish allowances for uncollectible receivables based on historical collection trends and write-off history.The following table summarizes our allowance for doubtful accounts activity related to contracts with customers during the three months ended May 4, 2019, and May 5, 2018 ($ in millions):
| |||||||||||
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| ||||||||||
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| |||||||||||
| |||||||||||
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|
(1)Includes bad debt write-offs, recoveries and the effect of foreign currency fluctuations.
17
During the three months ended May 4, 2019, and May 5, 2018, $466 million and $455 million of revenue was recognized, respectively, that was included in the contract liability balance at the beginning of the respective periods. No revenue was recognized from performance obligations satisfied in previous periods.
The following table includes estimated revenue from our contract liability balances expected to be recognized in future periods if performance of the contract is expected to have a duration of more than one year ($ in millions):
| |||||||||||
|
| ||||||||||
| |||||||||||
| |||||||||||
| |||||||||||
|
|
(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 May 4, 2019.
See Note 12, 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.
Charges incurred in the three months ended May 4, 2019, and May 5, 2018, for our restructuring activities were $0 million and $30 million, respectively. All charges incurred in the prior-year period related to Best Buy Mobile. As of May 4, 2019, we have no material liabilities remaining for any restructuring plan.
Best Buy Mobile
On March 1, 2018, we announced our intent to close all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S. This decision was a result of changing economics in the mobile industry since we began opening these stores in 2006, along with the integration of our mobile model into our core stores and online channel, which are more economically compelling today. All restructuring charges related to this plan are from continuing operations and are presented in Restructuring charges on our Condensed Consolidated Statements of Earnings.
The composition of the restructuring charges we incurred for Best Buy Mobile during the three months ended May 5, 2018, as well as the cumulative amount incurred through May 4, 2019, were as follows ($ in millions):
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| |
| Three Months Ended |
| Cumulative Amount | ||||
Property and equipment impairments | $ | - |
|
| $ | 1 |
|
Termination benefits |
| 1 |
|
|
| 6 |
|
Facility closure and other costs |
| 29 |
|
|
| 49 |
|
Total restructuring charges | $ | 30 |
|
| $ | 56 |
|
Gain (Loss) Recognized | |||||||||||
Three Months Ended | |||||||||||
Contract Type | Statement of Earnings Location | May 2, 2020 | May 4, 2019 | ||||||||
Interest rate swap contracts | Interest expense | $ | 29 | $ | (2) | ||||||
Adjustments to carrying value of long-term debt | Interest expense | (29) | 2 | ||||||||
Total | $ | - | $ | - |
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.
18
The following table presents a reconciliationReconciliations of the numerators and denominators of basic and diluted earnings per share for the three months ended May 4, 2019, and May 5, 2018were as follows ($ and shares in millions, except per share amounts):
|
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|
|
|
| |||||||||
| Three Months Ended | Three Months Ended | ||||||||||||
| May 4, 2019 |
| May 5, 2018 | May 2, 2020 | May 4, 2019 | |||||||||
Numerator |
|
|
|
|
|
|
| |||||||
Net earnings | $ | 265 |
|
| $ | 208 |
| $ | 159 | $ | 265 | |||
|
|
|
|
|
|
|
| |||||||
Denominator |
|
|
|
|
| |||||||||
Weighted-average common shares outstanding |
| 267.6 |
| 282.6 |
| 258.3 | 267.6 | |||||||
Dilutive effect of stock compensation plan awards |
| 3.9 |
|
|
| 5.7 |
| 2.1 | 3.9 | |||||
Weighted average common shares outstanding, assuming dilution |
| 271.5 |
|
|
| 288.3 |
| |||||||
Weighted-average common shares outstanding, assuming dilution | 260.4 | 271.5 | ||||||||||||
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Potential shares which were anti-dilutive and excluded from weighted average shares computation |
| 0.8 |
| 0.1 |
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Potential shares which were anti-dilutive and excluded from weighted-average share computations | 0.6 | 0.8 | ||||||||||||
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Basic earnings per share | $ | 0.99 |
| $ | 0.74 |
| $ | 0.61 | $ | 0.99 | ||||
Diluted earnings per share | $ | 0.98 |
| $ | 0.72 |
| $ | 0.61 | $ | 0.98 |
10.
On February 23, 2019, our Board of Directors ("Board") authorized a $3.0 billion share repurchase program. There is no expiration date governing the period over which we can repurchase shares under the February 2019 authorization.
The following table presents informationInformation regarding the shares we repurchased during the three months ended May 4, 2019, and May 5, 2018was as follows ($ and shares in millions, except per share amounts):
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| Three Months Ended | Three Months Ended | ||||||||||||
| May 4, 2019 |
| May 5, 2018 | May 2, 2020 | May 4, 2019 | |||||||||
Total cost of shares repurchased | $ | 106 |
|
| $ | 399 |
| $ | 56 | $ | 106 | |||
Average price per share | $ | 70.77 |
|
| $ | 71.78 |
| $ | 86.30 | $ | 70.77 | |||
Number of shares repurchased |
| 1.5 |
|
| 5.6 |
| 0.6 | 1.5 |
As of May 4, 2019, $2.92, 2020, $1.9 billion of the $3.0 billion share repurchase authorization was available. BetweenOn March 21, 2020, we announced the endsuspension of all share repurchases given the first quarteruncertainty surrounding the impact of fiscal 2020 on May 4, 2019,COVID-19.
9. Segments
Segment and June 5, 2019, we repurchased an incremental 1.2 million shares of our common stock at a cost of $80 million.
Changes in accumulated other comprehensive income, net of tax, wereproduct category revenue information was as follows for the three months ended May 4, 2019, and May 5, 2018 ($ in millions):
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| Three Months Ended | ||||||
| May 4, 2019 |
| May 5, 2018 | ||||
Foreign currency translation adjustments | $ | (5) |
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| $ | (4) |
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Three Months Ended | |||||||||||
May 2, 2020 | May 4, 2019 | ||||||||||
Revenue by reportable segment | |||||||||||
Domestic | $ | 7,915 | $ | 8,481 | |||||||
International | 647 | 661 | |||||||||
Total revenue | $ | 8,562 | $ | 9,142 | |||||||
Revenue by product category | |||||||||||
Domestic | |||||||||||
Computing and Mobile Phones | $ | 3,805 | $ | 3,851 | |||||||
Consumer Electronics | 2,219 | 2,662 | |||||||||
Appliances | 935 | 961 | |||||||||
Entertainment | 510 | 473 | |||||||||
Services | 421 | 497 | |||||||||
Other | 25 | 37 | |||||||||
Total Domestic revenue | $ | 7,915 | $ | 8,481 | |||||||
International | |||||||||||
Computing and Mobile Phones | $ | 309 | $ | 305 | |||||||
Consumer Electronics | 177 | 203 | |||||||||
Appliances | 58 | 59 | |||||||||
Entertainment | 57 | 36 | |||||||||
Services | 32 | 43 | |||||||||
Other | 14 | 15 | |||||||||
Total International revenue | $ | 647 | $ | 661 |
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. Refer to Note 11, Income Taxes, of 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.
Our chief operating decision maker ("CODM") is our Chief Executive Officer. Our business is organized into two 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
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CODM relies on internal management reporting that analyzes enterprise results to the net earnings level and segment results to theSegment 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, which represents the International reportable segment. The accounting policies of the segments are the same.
Revenue by reportable segment and product category were(loss) was as follows for the three months ended May 4, 2019, and May 5, 2018 ($ in millions):
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| Three Months Ended | ||||||
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| May 4, 2019 |
| May 5, 2018 | ||||
Revenue by reportable segment |
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|
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|
|
|
Domestic |
|
|
|
| $ | 8,481 |
|
| $ | 8,412 |
|
International |
|
|
|
|
| 661 |
|
|
| 697 |
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Total revenue |
|
|
|
| $ | 9,142 |
|
| $ | 9,109 |
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|
|
|
|
Revenue by product category (1) |
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|
Domestic |
|
|
|
|
|
|
|
|
|
|
|
Computing and Mobile Phones |
|
|
|
| $ | 3,851 |
|
| $ | 3,899 |
|
Consumer Electronics |
|
|
|
|
| 2,662 |
|
|
| 2,655 |
|
Appliances |
|
|
|
|
| 961 |
|
|
| 883 |
|
Entertainment |
|
|
|
|
| 473 |
|
|
| 548 |
|
Services |
|
|
|
|
| 497 |
|
|
| 393 |
|
Other |
|
|
|
|
| 37 |
|
|
| 34 |
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Total Domestic revenue |
|
|
|
| $ | 8,481 |
|
| $ | 8,412 |
|
International |
|
|
|
|
|
|
|
|
|
|
|
Computing and Mobile Phones |
|
|
|
| $ | 305 |
|
| $ | 331 |
|
Consumer Electronics |
|
|
|
|
| 203 |
|
|
| 206 |
|
Appliances |
|
|
|
|
| 59 |
|
|
| 61 |
|
Entertainment |
|
|
|
|
| 36 |
|
|
| 43 |
|
Services |
|
|
|
|
| 43 |
|
|
| 39 |
|
Other |
|
|
|
|
| 15 |
|
|
| 17 |
|
Total International revenue |
|
|
|
| $ | 661 |
|
| $ | 697 |
|
Three Months Ended | |||||||||||
May 2, 2020 | May 4, 2019 | ||||||||||
Domestic | $ | 241 | $ | 332 | |||||||
International | (12) | 2 | |||||||||
Total operating income | 229 | 334 | |||||||||
Other income (expense): | |||||||||||
Investment income and other | 6 | 14 | |||||||||
Interest expense | (17) | (18) | |||||||||
Earnings before income tax expense | $ | 218 | $ | 330 |
(1)Refer to our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, for additional information regarding the key components of each revenue category.
Operating income (loss) by reportable segment and the reconciliation to earnings before income tax expense were as follows for the three months ended May 4, 2019, and May 5, 2018 ($ in millions):
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|
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|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
|
|
|
|
| May 4, 2019 |
| May 5, 2018 | ||||
Domestic |
|
|
|
| $ | 332 |
|
| $ | 267 |
|
International |
|
|
|
|
| 2 |
|
|
| (2) |
|
Total operating income |
|
|
|
|
| 334 |
|
|
| 265 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Investment income and other |
|
|
|
|
| 14 |
|
|
| 11 |
|
Interest expense |
|
|
|
|
| (18) |
|
|
| (19) |
|
Earnings before income tax expense |
|
|
|
| $ | 330 |
|
| $ | 257 |
|
Assets by reportable segment were as follows as of May 4, 2019, February 2, 2019, and May 5, 2018 ($ in millions):
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| |||||||||||||||
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| |||||||||||||||
| May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | May 2, 2020 | February 1, 2020 | May 4, 2019 | ||||||||||||||
Domestic | $ | 13,332 |
|
| $ | 11,908 |
|
| $ | 10,955 |
| $ | 14,320 | $ | 14,247 | $ | 13,332 | |||||
International |
| 1,218 |
|
|
| 993 |
|
|
| 1,127 |
| 1,285 | 1,344 | 1,218 | ||||||||
Total assets | $ | 14,550 |
|
| $ | 12,901 |
|
| $ | 12,082 |
| $ | 15,605 | $ | 15,591 | $ | 14,550 |
10. Contingencies
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13. 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 probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. We provide disclosure of matters where we believe it is reasonably possible the impact may be material to our Condensed Consolidated Financial Statements.
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. On March 8, 2019, the District Court Judge granted Best Buy’s motion for summary judgment dismissing the remaining claims with prejudice. All appeal periods in IBEW have been exhausted and the matter is closed.
In 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 stayed pending the close of discovery in IBEW. In Tran, the court entered an Order for Dismissal Without Prejudice on March 27, 2019.
The plaintiffs in the above remaining securities actions seek damages, including interest, equitable relief and reimbursement of the costs and expenses they incurred in the lawsuits. As stated above, we believe the allegations in the above securities actions are without merit, and we intend to defend these actions vigorously. Based on our assessment of the facts underlying the claims in the above securities actions, their respective procedural litigation history and the degree to which we intend to defend our company in these matters, the amount or range of reasonably possible losses, if any, cannot be estimated.
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.
14. Subsequent Event
On April 11, 2019, we signed a definitive agreement to acquire Critical Signal Technologies, Inc. (“CST”), a health services company, for approximately $125 million and the acquisition was completed on May 9, 2019. CST will be included in our GreatCall operating segment and our Domestic reportable segment.
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:
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Overview
Business Strategy and COVID-19 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 2, 2019, (including1, 2020 (“Fiscal 2020 Form 10-K”), the information presented therein under Risk Factors), included in the Fiscal 2020 Form 10-K and in this Form 10-Q, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited.
We striveOur purpose is to enrich the lives of consumers through technology, whether they connect 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.technology. We have 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"). The International segment is comprised of all operations in Canada and Mexico.
Our fiscal year ends on the Saturday nearest the end of January. Our business, like that of many retailers, is seasonal. A large proportion of our revenue and earnings is generated in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico.
Comparable Sales
Throughout this MD&A, we refer to comparable sales. InComparable sales is a metric used by management to evaluate the performance of our existing stores, websites and call centers by measuring the change in net sales for a particular period over the comparable prior-period of equivalent length. Comparable sales includes revenue from stores, websites and call centers operating for at least 14 full months. Stores closed more than 14 days, including but not limited to relocated, remodeled, expanded and downsized stores, or stores impacted by natural disasters, are excluded from comparable sales until at least 14 full months after reopening. Acquisitions are included in comparable sales beginning with the first full quarter following the first anniversary of fiscal 2020, we refined our methodology for calculating comparable sales. It now reflects certain revenue streams previously excluded from the comparabledate of the acquisition. Comparable sales calculation, such asalso includes 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 comparableComparable sales excludes the impact of revenue from discontinued operations and the effect of fluctuations in foreign currency exchange rates (applicable to our International
22
segment only). OnComparable online sales are included in comparable sales. Online sales represent those initiated on a website or app, regardless of whether customers choose to pick up product at a store, at an alternative pick-up location or take delivery direct to their homes. All periods presented apply this methodology consistently.
In March 1, 2018,2020, the World Health Organization declared the outbreak of novel coronavirus disease ("COVID-19") as a pandemic. Except where otherwise directed by state and local authorities, on March 22, 2020, we announcedtransitioned our intentstores to close all of our 257 remaining Best Buy Mobile stand-alonea contactless, curbside-only operating model. All stores in the U.S. Asthat were temporarily closed as a result all revenue related to these stores has been excluded from theof COVID-19 or operating a curbside-only operating model are included in comparable sales calculation beginning in March 2018. sales.
On October 1, 2018, we acquired all outstanding shares of GreatCall.GreatCall, Inc. (“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 are included in our comparable sales calculation for the three months ended May 2, 2020, and the results of CST are excluded from our comparable sales calculation for the periods presented.
We believe comparable sales is a meaningful supplemental metric for investors to evaluate revenue performance resulting from growth in existing stores, websites and call centers versus the portion resulting from opening new stores or closing existing stores. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers' methods.
Interim Sales Data
Within this MD&A, we refer to sales retention based on interim sales data, which we use to monitor transactional revenue performance on a daily or weekly interval. For a period in which we experienced significant shifts in revenue trends as a result of COVID-19 -related impacts, we believe interim sales data provides helpful insight into these trends. The sales retention estimate represents the year-over-year change compared to the same period in the prior fiscal year. Retention is based on absolute sales dollar changes and is not presented in accordance with comparable sales. Interim sales data is unaudited and excludes quarter-end revenue accounting adjustments. Other companies may track interim sales data using different methods and systems, and therefore, the estimated data as presented herein may not be comparable to any data released by other companies.
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 income, non-GAAP effective tax rate and non-GAAP diluted earnings per share ("EPS") from continuing operations. We believe that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors in evaluating current period performance and in assessing future performance. For these reasons, our internal management reporting also includes non-GAAP financial measures. Generally, our non-GAAP financial measures include adjustments for items such as restructuring charges, goodwill impairments, gains and losses on investments, intangible asset amortization, certain acquisition-related costs and the tax effect of all such items. In addition, certain other items may be excluded from non-GAAP financial measures when we believe doing so provides greater clarity to management and our investors. These non-GAAP financial measures should be considered in addition to, and not superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Non-GAAP financial measures as presented herein may not be comparable to similarly titled measures used by other companies.
In our discussions of the operating results of our consolidated business and our International segment, we sometimes refer to the impact of changes in foreign currency exchange rates or the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert the International segment’s operating results from local currencies into U.S. dollars for reporting purposes. We also may use the term "constant currency," which represents results adjusted to exclude foreign currency impacts. We calculate those impacts as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period currency exchange rates. We believe the disclosure of revenue changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates.
Refer to the 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 and COVID-19 Update
In the first quarter of fiscal 2020,2021, we generated $9.1$8.6 billion in revenue and grew our Enterprise comparable sales declined by 1.1%5.3%. We expanded ourOur GAAP operating income rate decreased by 80100 basis points and our non-GAAP operating income rate decreased by 5090 basis points, both compared to the first quarter of fiscal 2019.2020. The decreases in both GAAP and non-GAAP operating income were primarily due to the operational disruptions caused by COVID-19. We deliveredrecorded GAAP diluted EPS of $0.98$0.61 and non-GAAP diluted EPS of $1.02, increases$0.67, decreases of 36%38% and 24%34% compared to the first quarter of fiscal 2019,2020, respectively. FromRefer to the Consolidated Non-GAAP Financial Measures section below for a capital allocation standpoint,detailed reconciliation of items that impacted our non-GAAP operating income and non-GAAP diluted EPS.
The pandemic has changed the way we returned $232 million towork, learn, care for ourselves and connect with each other. Against that backdrop, our shareholders through dividends and share repurchases.
Our purpose as a company is clear -has never been more relevant: to enrich lives through technology. It is because of that purpose that we were, in virtually every jurisdiction with a stay-at-home order in place, designated an essential retailer because of the products and services we offer.
On March 22, 2020, we proactively moved all our Domestic stores to a contactless, curbside-only operating model, allowing us to safely serve customers and comply with government orders and recommendations. We aimalso halted all in-home installation, repair and consultation services. We did this even in jurisdictions where it was not mandated because we believed it was the best way at the time to do this by addressing key human needskeep our customers and employees as safe as possible. This required us to implement a new and highly effective operating model in areas including entertainment, productivity, communication, food preparation, security and health and wellness.a matter of 48 hours across our entire Domestic store base.
DuringAs a result, we retained approximately 81% of last year’s consolidated sales based on interim sales data during the last six weeks of the first quarter of fiscal 2021 as we operated in the new model. This reflects the strength of our multi-channel capabilities and the strategic investments we have been making over the past several years. It is also a testament to the Best Buy culture and our focus on the customer experience as the entire organization pivoted to execute and support the new model. In mid-March 2020, we began to see a surge in demand for the products that people need to work, learn or entertain from home. For the first quarter of fiscal 2021, we saw strong sales growth in computing, gaming and small appliances. Like many other retailers, we saw a sales benefit during the last three weeks of the first fiscal quarter as customers likely chose to spend some of their government stimulus money on the products and services we provide.
As we entered the second quarter of fiscal 2021, we continued to make progressshift our operating model as we responded to the evolving environment. On May 4, 2020, we began welcoming customers back into our stores by appointment only, following strict social-distancing practices and using appropriate protective equipment. This service allows customers who need to purchase more complex items to consult with one of our sales associates and receive advice tailored to their specific technology needs. We started with approximately 200 stores, and as of May 21, 2020, we have almost 700, or 70%, of our Domestic stores operating this way. Most of the remaining stores are still operating in the implementationcurbside-only model, and approximately 40 stores remain completely closed, mainly due to our assessment of employee and customer safety. Customers have responded very positively to this new way of interacting with us in our stores, with 98% of customers surveyed indicating we made them feel safe during the experience. We have also resumed large product delivery, installations and in-home repairs in approximately 80% of U.S. zip codes, while following strict new safety guidelines.
From the very first days of the pandemic we told anyone feeling sick or quarantined that they would keep their job and be paid. We told any employee whose child was home from school that they, too, would be paid. We gave all field employees who were still serving customers or working in our distribution centers a temporary pay increase and, for all others, we paid their normal salaries for a full month as we took the time to determine how to move forward. On April 19, 2020, we furloughed approximately 51,000 Domestic hourly store employees, including nearly all part-time employees. We retained approximately 82% of our Best Buy 2020full-time store and field employees on our payroll, including the vast majority of In-Home Advisors and Geek Squad Agents. Additionally, some corporate employees are participating in voluntary reduced work weeks and resulting pay, as well as voluntary furloughs.
In addition, our Chief Executive Officer is foregoing 50% of her base salary and the members of the Board of Directors are foregoing 50% of their cash retainer fees. Company executives reporting directly to the Chief Executive Officer are taking a 20% reduction in base salary. The money saved from these temporary pay reductions is being added to the employee hardship fund we established with our founder, Dick Schulze.
Despite the disruption and uncertainty related to COVID-19, we remain focused on executing our Building the New Blue strategy. In Health,many ways, recent events have only reinforced our belief in our strategic direction.
Our multi-year supply chain transformation has been focused on moving facilities closer to our customers and using automation and process improvements to expand fulfillment options, increase delivery speed and improve the delivery and installation experience. This has included significantly improving the ability for customers to order online and pick up at one of our stores. These changes, along with innovative digital advancements allowed our teams to quickly stand up a robust and seamless customer experience for both curbside pickup and the new, in-store consultation process. All of this progress is evident bothculminated in termsDomestic online growth of scaling GreatCall consumer devices and services, and advancing our commercial monitoring service, which included our recent acquisition155% for the first quarter of Critical Signal Technologies, Inc. that closed in the second quarter. We also continued to expandfiscal 2021.
While overall interactions with our Total Tech Support program, which provides members unlimited Geek Squad support for all their technology no matter where or when they bought it. We also continued to transform our supply chain to improve the experience for our customers which includes improving our speed of delivery to customers.
In parallel to the customer experience work, we continued to drive efficiencies and reduce costs in order to fund investments and offset pressures. During the first quarter, we achieved $75 million in annualized cost reductions and efficiencies, bringing the cumulative total to $575 million towards our current goal of reaching $600 million by the end of fiscal 2021.
23
Tariffs
Given that a significant number of consumer electronics products are imported from China, we are actively addressing the risks related to increases to current tariff rates and proposed new tariffs on Chinese imports. In September 2018, the U.S. Trade Representation implemented List 3 tariffs of 10% affecting certain products imported from China. These items represent approximately 7% of our cost of goods sold. Thus far, includingwere down in the first quarter of fiscal 2020,2021 compared to last year as our in-store and in-home services were unavailable, our remote technical support provided a critically stable support solution through these challenging times. In addition, we have been ablecross-trained our Geek Squad Agents to minimize work in our call centers, providing crucial phone and chat support to solve a variety of customer needs.
With respect to Best Buy Health, our focus on helping seniors live more independently with our unique combination of tech and touch, has become even more relevant as the world responds to the COVID-19 pandemic. In the first quarter of fiscal 2021, to support our base of over 1 million seniors, we moved quickly to adapt our operations so our caring center agents could support more than 150,000 calls each week while complying with stay-at-home orders.
During the first quarter of fiscal 2021, we also took the following actions to maximize liquidity in light of the uncertainty surrounding the impact of COVID-19:
executed a short-term draw on the full amount of our $1.25 billion five year senior unsecured revolving credit facility (the “Facility”),
suspended share repurchases,
lowered merchandise receipts to match demand,
extended payment terms in partnership with key merchandising vendors,
reduced promotional and marketing spend aligned with the temporary changes in our operating model,
lowered capital spend to focus on mandatory maintenance or high-value strategic areas, and
suspended our 401(k) company matching program.
There are many factors we continue to weigh for the remainder of fiscal 2021, including:
the depth and duration of the pandemic;
the impact of current and potential future government stimulus actions;
the impact on unemployment, consumer confidence and spending;
the evolution of our business by accelerating purchasesvarious operating models; and working
how and where our customers are choosing to interact with our vendors. We expect the administration tous.
Our priority has been and will continue to seek input into potential further tariff developmentsbe the safety of our employees and customers while providing essential products and services. We remain thoughtful about managing our profitability and liquidity, balancing our short-term decisions to navigate this unprecedented situation while preserving the elements of our strategy that will ensure we intend to remain fully engageda vibrant company in this process. We are also looking into a rangethe future.
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 the recording of events occurring in the lag period that significantly affect our consolidated financial statements. No such events were identified for the periods presented.
Consolidated Performance Summary
The following table presents selectedSelected consolidated financial data for the three months ended May 4, 2019, and May 5, 2018was as follows ($ in millions, except per share amounts):
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| Three Months Ended | Three Months Ended | ||||||||||||
| May 4, 2019 |
| May 5, 2018 | May 2, 2020 | May 4, 2019 | |||||||||
Revenue | $ | 9,142 |
|
| $ | 9,109 |
| $ | 8,562 | $ | 9,142 | |||
Revenue % increase |
| 0.4 | % |
| 6.8 | % | ||||||||
Comparable sales growth |
| 1.1 | % |
| 7.1 | % | ||||||||
Revenue % change | (6.3) | % | 0.4 | % | ||||||||||
Comparable sales % change | (5.3) | % | 1.1 | % | ||||||||||
Gross profit | $ | 2,169 |
|
| $ | 2,125 |
| $ | 1,965 | $ | 2,169 | |||
Gross profit as a % of revenue(1) |
| 23.7 | % |
| 23.3 | % | 23.0 | % | 23.7 | % | ||||
SG&A | $ | 1,835 |
|
| $ | 1,830 |
| $ | 1,735 | $ | 1,835 | |||
SG&A as a % of revenue(1) |
| 20.1 | % |
| 20.1 | % | 20.3 | % | 20.1 | % | ||||
Restructuring charges | $ | - |
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| $ | 30 |
| |||||||
Operating income | $ | 334 |
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| $ | 265 |
| $ | 229 | $ | 334 | |||
Operating income as a % of revenue |
| 3.7 | % |
| 2.9 | % | 2.7 | % | 3.7 | % | ||||
Net earnings | $ | 265 |
|
| $ | 208 |
| $ | 159 | $ | 265 | |||
Diluted earnings per share | $ | 0.98 |
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| $ | 0.72 |
| $ | 0.61 | $ | 0.98 |
(1)Because retailers vary in how they record costs of operating their supply chain between cost of goods soldsales 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 soldsales 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 for the fiscal year ended February 2, 2019.1, 2020.
AllRevenue, gross profit rate, SG&A rate and operating income rate changes forin the first three monthsquarter of fiscal 20202021 were primarily driven by our Domestic segment. For further discussion of each segment's rate changes, see the Segment Performance Summary below.
Income Tax Expense
Income tax expense increased to $65 million fordecreased in the three months ended May 4, 2019, compared to $49 million for the three months ended May 5, 2018. The higher tax expense was primarilyfirst quarter of fiscal 2021 due to an increase in pre-tax earnings. Our effective income tax rate (“ETR”) for the three months ended May 4, 2019, was 19.8% compared to a rate of 19.2% for the three months ended May 5, 2018. The increase in the ETR was primarily due to an increasedecrease in pre-tax earnings, as the impact of discrete items on our ETR is less when our pre-tax earnings are higher, partially offset by an increasea decrease in excessthe tax benefits related tobenefit from stock-based compensation in the current year period. Our effective tax rate (“ETR”) increased to 27.4% in the first quarter of fiscal 2021 compared to 19.8% in the first quarter of fiscal 2020, primarily due to a decrease in the tax benefit from stock-based compensation and the impact of lower pre-tax earnings.
Our tax provision for interim periods is determined using an estimate of our annual ETR, adjusted for discrete items, if any, that are taken into account in the relevant period. We update our estimate of the annual ETR each quarter and we make a cumulative adjustment if our estimated tax rate changes. Our quarterly tax provision and our quarterly estimate of our annual
24
ETR are subject to variation due to several factors, including our ability to accurately forecast our pre-tax and taxable income and loss by jurisdiction, tax audit developments, recognition of excess tax benefits or deficiencies related to stock-based compensation, foreign currency gains (losses), changes in laws or regulations, and expenses or losses for which tax benefits are not recognized. Our ETR can be more or less volatile based on the amount of pre-tax income.earnings. For example, the impact of discrete items and non-deductible losses on our ETR is greater when our pre-tax income isearnings are lower.
Segment Performance Summary
Domestic
The following table presents selectedSelected financial data for the Domestic segment for the three months ended May 4, 2019, and May 5, 2018was as follows ($ in millions):
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| Three Months Ended | Three Months Ended | ||||||||||||
| May 4, 2019 |
| May 5, 2018 | May 2, 2020 | May 4, 2019 | |||||||||
Revenue | $ | 8,481 |
|
| $ | 8,412 |
| $ | 7,915 | $ | 8,481 | |||
Revenue % increase |
| 0.8 | % |
| 6.3 | % | ||||||||
Comparable sales growth(1) |
| 1.3 | % |
| 7.1 | % | ||||||||
Revenue % change | (6.7) | % | 0.8 | % | ||||||||||
Comparable sales % change(1) | (5.7) | % | 1.3 | % | ||||||||||
Gross profit | $ | 2,009 |
|
| $ | 1,962 |
| $ | 1,821 | $ | 2,009 | |||
Gross profit as a % of revenue |
| 23.7 | % |
| 23.3 | % | 23.0 | % | 23.7 | % | ||||
SG&A | $ | 1,677 |
|
| $ | 1,665 |
| $ | 1,579 | $ | 1,677 | |||
SG&A as a % of revenue |
| 19.8 | % |
| 19.8 | % | 19.9 | % | 19.8 | % | ||||
Restructuring charges | $ | - |
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| $ | 30 |
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Operating income | $ | 332 |
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| $ | 267 |
| $ | 241 | $ | 332 | |||
Operating income as a % of revenue |
| 3.9 | % |
| 3.2 | % | 3.0 | % | 3.9 | % | ||||
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Selected Online Revenue Data |
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Total online revenue | $ | 1,308 |
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| $ | 1,143 |
| $ | 3,342 | $ | 1,308 | |||
Online revenue as a % of total segment revenue |
| 15.4 | % |
| 13.6 | % | 42.2 | % | 15.4 | % | ||||
Comparable online sales growth(1) |
| 14.5 | % |
| 12.0 | % | 155.4 | % | 14.5 | % |
(1)Comparable online sales are included in the comparable sales calculation.
The increasedecrease in revenue forin the three months ended May 4, 2019,first quarter of fiscal 2021 was primarily driven by the comparable sales growth of 1.3%decline and revenue from GreatCall, which was acquired in the third quarter of fiscal 2019. These increases were partially offset by the loss of revenue from 24 permanent store closures primarily Best Buy Mobile stand-alone stores.in the past year. Online revenue of $1.3$3.3 billion forin the three months ended May 4, 2019,first quarter of fiscal 2021 increased 14.5%155.4% on a comparable basis, primarily due to higher average order valuesconversion rates and increased traffic. The comparable sales decline and increased mix of online revenue were primarily due to the temporary store closures and stores operating a curbside-only operating model as a result of COVID-19.
The following table reconciles the number of Domestic segment stores open at the beginning and end of the first quarters of fiscal 20202021 and fiscal 2019:2020, excluding stores that were temporarily closed as a result of COVID-19, were as follows:
Fiscal 2021 | Fiscal 2020 | ||||||||||||||||||||||||||||||
Total Stores at Beginning of First Quarter | Stores Opened | Stores Closed | Total Stores at End of First Quarter | Total Stores at Beginning of First Quarter | Stores Opened | Stores Closed | Total Stores at End of First Quarter | ||||||||||||||||||||||||
Best Buy | 977 | - | (6) | 971 | 997 | - | (2) | 995 | |||||||||||||||||||||||
Outlet Centers | 11 | 1 | - | 12 | 8 | 2 | - | 10 | |||||||||||||||||||||||
Pacific Sales | 21 | - | - | 21 | 21 | - | - | 21 | |||||||||||||||||||||||
Total | 1,009 | 1 | (6) | 1,004 | 1,026 | 2 | (2) | 1,026 |
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| Fiscal 2020 |
| Fiscal 2019 | ||||||||||||||||||||||||||||
| Total Stores at Beginning of First Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of First Quarter |
| Total Stores at Beginning of First Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of First Quarter | ||||||||||||||||
Best Buy |
| 997 |
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| - |
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| (2) |
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| 995 |
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| 1,008 |
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| - |
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| (1) |
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| 1,007 |
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Best Buy Mobile stand-alone |
| - |
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| - |
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| - |
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| - |
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| 257 |
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| - |
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| (152) |
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| 105 |
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Outlet Centers |
| 8 |
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| 2 |
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| - |
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| 10 |
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| 6 |
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| - |
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| - |
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| 6 |
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Pacific Sales |
| 21 |
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| - |
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| - |
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| 21 |
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| 28 |
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| - |
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| - |
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| 28 |
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Total Domestic segment stores |
| 1,026 |
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| 2 |
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| (2) |
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| 1,026 |
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|
| 1,299 |
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| - |
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| (153) |
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| 1,146 |
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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 152 were closed during the first quarter of fiscal 2019. Refer to Note 8, Restructuring Charges, in the Notes to Condensed Consolidated Financial Statements for additional information.
25
The following table presents the Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category for the three months ended May 4, 2019, and May 5, 2018:were as follows:
Revenue Mix | Comparable Sales | ||||||||||||||
Three Months Ended | Three Months Ended | ||||||||||||||
May 2, 2020 | May 4, 2019 | May 2, 2020 | May 4, 2019 | ||||||||||||
Computing and Mobile Phones | 48 | % | 46 | % | 0.0 | % | 1.0 | % | |||||||
Consumer Electronics | 28 | % | 31 | % | (15.7) | % | 0.9 | % | |||||||
Appliances | 12 | % | 11 | % | (2.0) | % | 10.5 | % | |||||||
Entertainment | 7 | % | 6 | % | 9.5 | % | (12.7) | % | |||||||
Services | 5 | % | 6 | % | (16.1) | % | 6.8 | % | |||||||
Total | 100 | % | 100 | % | (5.7) | % | 1.3 | % |
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| Revenue Mix |
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| Comparable Sales |
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| Three Months Ended |
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| Three Months Ended |
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| May 4, 2019 |
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| May 5, 2018 |
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| May 4, 2019 |
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| May 5, 2018 |
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Computing and Mobile Phones |
| 46 | % |
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| 46 | % |
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| 1.0 | % |
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| 10.2 | % |
Consumer Electronics |
| 31 | % |
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| 32 | % |
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| 0.9 | % |
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| 2.9 | % |
Appliances |
| 11 | % |
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| 10 | % |
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| 10.5 | % |
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| 13.0 | % |
Entertainment |
| 6 | % |
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| 7 | % |
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| (12.7) | % |
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| (0.8) | % |
Services |
| 6 | % |
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| 5 | % |
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| 6.8 | % |
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| 7.3 | % |
Total |
| 100 | % |
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| 100 | % |
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| 1.3 | % |
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| 7.1 | % |
We continue to believe the strong executionchanges in our operating model as a result of our business strategy, a continued healthy consumer confidence and positive macro conditionsCOVID-19 contributed to our Domestic comparable sales growthchanges across most of our categories. The following is a description of the notableNotable comparable sales changes in our Domestic segment by revenue category:category were as follows:
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Appliances: The 2.0% comparable sales decline was driven by large appliances, partially offset by gains in small appliances.
Entertainment: The 9.5% comparable sales gain was driven primarily by gaming, partially offset by declines in movies.
Services: The 16.1% comparable sales decline was primarily due to store closures as a result of COVID-19 and the corresponding higher mix of online sales, which has a lower attach rate than in store, as well as the suspension of in-home services midway through the quarter.
Our gross profit rate increaseddecreased in the three months ended May 4, 2019,first quarter of fiscal 2021, primarily driven by the higher gross profit rate of GreatCall and improved product margin rates, which included the benefit of gross profit optimization initiatives, partially offset by higher supply chain costs.costs from the increased mix of online revenue as a result of the changes we made in our operating model due to COVID-19. In addition, lower profit sharing revenue from our private label credit card negatively impacted our Domestic gross profit rate by approximately 20 basis points compared to last year. We expect to see continued pressure from lower profit-sharing revenue related to our private label and co-branded credit card arrangement as the economic ramifications of COVID-19 are expected to lead to higher credit card defaults over time.
Our SG&A rate remained relatively flat to last year as a percentage of sales, whereas SG&A dollars decreased in the three months ended May 4, 2019,first quarter of fiscal 2021 by $98 million. The decrease in SG&A dollars was primarily due to sales leverage,reduced incentive compensation expense, as we did not pay or accrue short-term incentive expense for first quarter performance. SG&A increased primarilyalso decreased due to GreatCall expenses, partially offset by lower incentive compensation.store payroll expense when including an employee retention credit of $69 million as a result of the Federal CARES Act. This employee retention credit is a payroll tax credit, which represented approximately 50% of qualified wages and health benefits paid to retained employees not working as a result of COVID-19.
No restructuring charges were incurred for the three months ended May 4, 2019. Restructuring charges for the three months ended May 5, 2018, related to our Best Buy Mobile stand-alone store closures. Refer to Note 8, Restructuring Charges, in the Notes to Condensed Consolidated Financial Statements for additional information.
Our operating income rate increaseddecreased in the three months ended May 4, 2019,first quarter of fiscal 2021, primarily driven by the decrease in restructuring charges and the increase in gross profit rate and relatively flat SG&A rate described above.
International
The following table presents selectedSelected financial data for the International segment for the three months ended May 4, 2019, and May 5, 2018was as follows ($ in millions):
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| Three Months Ended |
| Three Months Ended | ||||||||||
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| May 4, 2019 |
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| May 5, 2018 |
| May 2, 2020 | May 4, 2019 | |||||
Revenue | $ | 661 |
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| $ | 697 |
| $ | 647 | $ | 661 | |||
Revenue % change |
| (5.2) | % |
| 13.1 | % | (2.1) | % | (5.2) | % | ||||
Comparable sales % change |
| (1.2) | % |
| 6.4 | % | 0.2 | % | (1.2) | % | ||||
Gross profit | $ | 160 |
| $ | 163 |
| $ | 144 | $ | 160 | ||||
Gross profit as a % of revenue |
| 24.2 | % |
| 23.4 | % | 22.3 | % | 24.2 | % | ||||
SG&A | $ | 158 |
| $ | 165 |
| $ | 156 | $ | 158 | ||||
SG&A as a % of revenue |
| 23.9 | % |
| 23.7 | % | 24.1 | % | 23.9 | % | ||||
Operating income (loss) | $ | 2 |
| $ | (2) |
| $ | (12) | $ | 2 | ||||
Operating income (loss) as a % of revenue |
| 0.3 | % |
| (0.3) | % | (1.9) | % | 0.3 | % |
The decrease in revenue in the three months ended May 4, 2019,first quarter of fiscal 2021 was primarily driven by the negative impact of foreign currency exchange rate fluctuations andprimarily related to our Canadian operations, partially offset by an increase in revenue from new stores opened in Mexico in the comparablepast year. Comparable sales declinewere essentially flat to last year even though all stores in Canada.Canada were closed to customer traffic for a portion of the quarter, similar to our Domestic stores.
26
The following table reconciles the number of International segment stores open at the beginning and end of the first quarters of fiscal 20202021 and fiscal 2019:2020, excluding stores that were temporarily closed as a result of COVID-19, were as follows:
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| Fiscal 2020 |
| Fiscal 2019 | Fiscal 2021 | Fiscal 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Stores at Beginning of First Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of First Quarter |
| Total Stores at Beginning of First Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of First Quarter | Total Stores at Beginning of First Quarter | Stores Opened | Stores Closed | Total Stores at End of First Quarter | Total Stores at Beginning of First Quarter | Stores Opened | Stores Closed | Total Stores at End of First Quarter | |||||||||||||||||||||||||||||||||||||||
Canada |
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Best Buy |
| 132 |
| - |
| - |
| 132 |
| 134 |
| - |
| - |
| 134 |
| 131 | - | - | 131 | 132 | - | - | 132 | |||||||||||||||||||||||||||||||||||||
Best Buy Mobile |
| 45 |
| - |
| (1) |
| 44 |
| 51 |
| - |
| (2) |
| 49 |
| 42 | - | (1) | 41 | 45 | - | (1) | 44 | |||||||||||||||||||||||||||||||||||||
Mexico |
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Best Buy |
| 29 |
| - |
| - |
| 29 |
| 25 |
| 1 |
| - |
| 26 |
| 35 | - | - | 35 | 29 | - | - | 29 | |||||||||||||||||||||||||||||||||||||
Best Buy Express |
| 6 |
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| 3 |
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| - |
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| 9 |
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| 6 |
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| - |
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| - |
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|
| 6 |
| 14 | - | - | 14 | 6 | 3 | - | 9 | |||||||||||||||||||||||
Total International segment stores |
| 212 |
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| 3 |
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| (1) |
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|
| 214 | �� |
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| 216 |
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| 1 |
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| (2) |
|
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| 215 |
| |||||||||||||||||||||||||||||||
Total | 222 | - | (1) | 221 | 212 | 3 | (1) | 214 |
The following table presents the Table of Contents
International segment'ssegment revenue mix percentages and comparable sales percentage changes by revenue category forwere as follows:
Revenue Mix | Comparable Sales | ||||||||||||||
Three Months Ended | Three Months Ended | ||||||||||||||
May 2, 2020 | May 4, 2019 | May 2, 2020 | May 4, 2019 | ||||||||||||
Computing and Mobile Phones | 48 | % | 46 | % | 4.6 | % | (4.0) | % | |||||||
Consumer Electronics | 27 | % | 31 | % | (12.7) | % | 2.5 | % | |||||||
Appliances | 9 | % | 9 | % | 0.1 | % | (2.0) | % | |||||||
Entertainment | 9 | % | 5 | % | 58.0 | % | (14.0) | % | |||||||
Services | 5 | % | 7 | % | (19.5) | % | 13.4 | % | |||||||
Other | 2 | % | 2 | % | 1.1 | % | 15.3 | % | |||||||
Total | 100 | % | 100 | % | 0.2 | % | (1.2) | % |
We believe the three months ended May 4, 2019, and May 5, 2018:
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| Revenue Mix |
| Comparable Sales | ||||||||||||
| Three Months Ended |
| Three Months Ended | ||||||||||||
| May 4, 2019 |
| May 5, 2018 |
| May 4, 2019 |
| May 5, 2018 | ||||||||
Computing and Mobile Phones |
| 46 | % |
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| 47 | % |
|
| (4.0) | % |
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| 4.4 | % |
Consumer Electronics |
| 31 | % |
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| 30 | % |
|
| 2.5 | % |
|
| 9.4 | % |
Appliances |
| 9 | % |
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| 9 | % |
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| (2.0) | % |
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| 37.7 | % |
Entertainment |
| 5 | % |
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| 6 | % |
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| (14.0) | % |
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| (8.3) | % |
Services |
| 7 | % |
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| 6 | % |
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| 13.4 | % |
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| (6.1) | % |
Other |
| 2 | % |
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| 2 | % |
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| 15.3 | % |
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| (1.9) | % |
Total |
| 100 | % |
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| 100 | % |
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| (1.2) | % |
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| 6.4 | % |
The following ischanges in our operating model as a descriptionresult of the notableCOVID-19 contributed to our International comparable sales changes across most of our categories. Notable comparable sales changes in our International segment by revenue category forwere as follows:
Computing and Mobile Phones: The 4.6% comparable sales gain was driven primarily by computing, partially offset by declines in mobile phones.
Consumer Electronics: The 12.7% comparable sales decline was driven primarily by home theater and digital imaging.
Appliances: The 0.1% comparable sales gain was driven by small appliances, partially offset by declines in large appliances.
Entertainment: The 58.0% comparable sales gain was driven primarily by gaming and virtual reality.
Services: The 19.5% comparable sales decline was primarily due to store closures as a result of COVID-19 and the three months ended May 4, 2019:corresponding higher mix of online sales, which has a lower attach rate than in store, as well as the suspension of in-home services midway through the quarter.
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Other: The 1.1% comparable sales gain was driven primarily by baby products.
Our gross profit rate increaseddecreased in the three months ended May 4, 2019,first quarter of fiscal 2021 primarily due to Canada, which delivered improved gross profit rates in several product categories and increased revenue in thewas largely driven by a lower mix of higher margin services category.revenue and higher supply chain costs from the increased mix of online revenue as a result of the changes we made in our operating model due to COVID-19.
Our SG&A rate increased in the three months ended May 4, 2019, primarily due to sales leverage, asfirst quarter of fiscal 2021, whereas SG&A dollars decreased $7$2 million due to the favorable impact of foreign currency exchange rates related primarily to Canada.
OurWe incurred an operating loss in the first quarter of fiscal 2021 compared to operating income rate increased in the three months ended May 4, 2019,fiscal 2020, primarily driven by a higherthe lower gross profit rate partially offset by aand higher SG&A rate described above.
27
Consolidated Non-GAAP Financial Measures
The following table reconciles consolidatedReconciliations of operating income, effective tax rate and diluted EPS for the periods presented (GAAP financial measures) to non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS for the periods presented(non-GAAP financial measures) were as follows ($ in millions, except per share amounts):
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| May 4, 2019 |
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| May 5, 2018 |
| May 2, 2020 | May 4, 2019 | |||||
Operating income | $ | 334 |
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| $ | 265 |
| $ | 229 | $ | 334 | |||
% of revenue | 2.7 | % | 3.7 | % | ||||||||||
Intangible asset amortization(1) |
| 17 |
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| - |
| 20 | 17 | ||||||
Restructuring charges(2) |
| - |
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| 30 |
| 1 | - | ||||||
Tax reform related item - employee bonus(3) |
| - |
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| 7 |
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Non-GAAP operating income | $ | 351 |
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| $ | 302 |
| $ | 250 | $ | 351 | |||
% of revenue | 2.9 | % | 3.8 | % | ||||||||||
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Effective tax rate |
| 19.8 | % |
| 19.2 | % | 27.4 | % | 19.8 | % | ||||
Intangible asset amortization(1) |
| 0.3 | % |
| - | % | (0.2) | % | 0.3 | % | ||||
Restructuring charges(2) |
| - | % |
| 0.7 | % | ||||||||
Tax reform related item - employee bonus(3) |
| - | % |
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| 0.1 | % | |||||||
Non-GAAP effective tax rate |
| 20.1 | % |
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| 20.0 | % | 27.2 | % | 20.1 | % | |||
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Diluted EPS | $ | 0.98 |
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| $ | 0.72 |
| $ | 0.61 | $ | 0.98 | |||
Intangible asset amortization(1) |
| 0.06 |
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| - |
| 0.08 | 0.06 | ||||||
Restructuring charges(2) |
| - |
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| 0.11 |
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Tax reform related item - employee bonus(3) |
| - |
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| 0.02 |
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Income tax impact of non-GAAP adjustments(4) |
| (0.02) |
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| (0.03) |
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Income tax impact of non-GAAP adjustments(3) | (0.02) | (0.02) | ||||||||||||
Non-GAAP diluted EPS | $ | 1.02 |
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| $ | 0.82 |
| $ | 0.67 | $ | 1.02 |
(1)Represents the non-cash amortization of definite-lived intangible assets associated with acquisitions, including customer relationships, tradenames and developed technology.
(2)Represents adjustments associated with U.S. retail operating model changes. (3)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 of 24.5% for all periods presented. |
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Non-GAAP operating income increased $49 milliondecreased in the three months ended May 4, 2019, compared to the corresponding prior year period. The increase wasfirst quarter of fiscal 2021, primarily driven by higher supply chain costs from the higher mix of online revenue as a decreaseresult of the changes we made in SG&A from lower incentive compensation.our operating model due to COVID-19.
Our non-GAAP effective tax rate remained relatively flatincreased in the three months ended May 4, 2019, comparedfirst quarter of fiscal 2021, primarily due to a decrease in the corresponding prior year period.tax benefit from stock-based compensation and the impact of lower pre-tax earnings.
Non-GAAP diluted EPS increaseddecreased in the three months ended May 4, 2019,first quarter of fiscal 2021, primarily driven by the increasedecrease in non-GAAP operating income and lower diluted weighted-average common shares outstanding driven by share repurchases. Refer to the Share Repurchases and Dividends section below for additional information.income.
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 required 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 are a component of our cash flow and capital management strategy which, to a large extent, we can adjust in response to economic and other changes in our business environment. We have a disciplined approach to capital allocation, which focuses on investing in key priorities that support our strategy.
During the first quarter of fiscal 2021, we took numerous actions to maximize liquidity in light of the uncertainty surrounding the impact of COVID-19. Refer to the Business Strategy and Impact of COVID-19 section above for a description of actions taken. We will continue to remain thoughtful about managing our profitability and liquidity, balancing our short-term decisions to navigate this unprecedented situation.
28
The following table summarizes our cash,Cash and cash equivalents and short-term investmentswere as of May 4, 2019, February 2, 2019, and May 5, 2018follows ($ in millions):
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| May 4, 2019 |
| February 2, 2019 |
| May 5, 2018 | ||||||
Cash and cash equivalents | $ | 1,561 |
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| $ | 1,980 |
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| $ | 1,848 |
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Short-term investments |
| - |
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| - |
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| 785 |
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Total cash, cash equivalents and short-term investments | $ | 1,561 |
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| $ | 1,980 |
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| $ | 2,633 |
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May 2, 2020 | February 1, 2020 | May 4, 2019 | |||||||||||||
Cash and cash equivalents | $ | 3,919 | $ | 2,229 | $ | 1,561 |
The decreaseincrease in total cash and cash equivalents and short-term investments from February 2,1, 2020, and May 4, 2019, was primarily due to capital expendituresthe $1.25 billion short-term draw on the Facility as mentioned above. The increase in cash and dividends. The decreasecash equivalents from May 5, 2018,4, 2019, was primarily due toalso driven by a reduction in share repurchases andover the acquisition of GreatCall.past twelve months.
Cash Flows
The following table summarizes our cashCash flows from total operations for the three months ended May 4, 2019, and May 5, 2018were as follows ($ in millions):
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Total cash provided by (used in): |
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Operating activities |
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| $ | 2 |
| $ | 204 |
| $ | 827 | $ | 2 | |||||||||||||
Investing activities |
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| (192) |
| 1,073 |
| (179) | (192) | |||||||||||||||||
Financing activities |
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| (226) |
| (516) |
| 1,049 | (226) | |||||||||||||||||
Effect of exchange rate changes on cash |
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| (1) |
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| (12) |
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Increase (decrease) in cash and cash equivalents |
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| $ | (417) |
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| $ | 749 |
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Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | (18) | (1) | |||||||||||||||||||||||
Increase (decrease) in cash, cash equivalents and restricted cash | Increase (decrease) in cash, cash equivalents and restricted cash | $ | 1,679 | $ | (417) |
Operating Activities
The decreaseincrease in cash provided by operating activities in fiscal 20202021 was primarily due to changes in working capital, which were primarily due to timing ofdecreased receipts and payments on inventory and income taxes. This was partially offset by lower incentive compensation payments dueresulting from COVID-related product constraints, our efforts to a special one-time incentivematch inventory levels to reduced demand, favorable vendor payment in fiscal 2019terms and timing of indirect tax payments. During fiscal 2019, we had fewer payments occur prior to year-end than the prior year, causing more payments to occur in the first quarter of fiscal 2020.collections on receivables.
Investing Activities
The decrease in cash provided byused in investing activities in fiscal 20202021 was primarily due to a decrease in the sale of investments. All of our short-term investments matured during fiscal 2019.additions to property and equipment.
Financing Activities
The decreaseincrease in cash used inprovided by financing activities was primarily due to a decrease in shares repurchased during fiscal 2020.the $1.25 billion short-term draw on the Facility.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, our credit facilities and other debt arrangements are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures, share repurchases, dividends and strategic initiatives, including business combinations. However, in the event our liquidity is insufficient, we may be required to limit our spending. There can be no assurance that we
will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms.
We have a $1.25 billion five-yearfive year senior unsecured revolving credit facility agreement (the “facility”“Facility”) with a syndicate of banks that expires in April 2023.banks. In light of the uncertainty surrounding the impact of COVID-19 and to maximize liquidity, we executed a seven-day draw on the full amount of the Facility on March 19, 2020, and rolled this into a three-month draw on March 26, 2020. The Facility remained fully drawn as of May 2, 2020, at an interest rate of three-month LIBOR plus a margin rate of 1.015%. There were no borrowings outstanding as of February 1, 2020, or May 4, 2019. Refer to Note 6, 4, Debt, inof the Notes to Condensed Consolidated Financial Statements, included in our Annualthis Quarterly Report on Form 10-K for the fiscal year ended February 2, 2019,10-Q for additional information. There have been no borrowings underinformation regarding the facility.Facility.
Our ability to access the facility is subject to our compliance with its terms and conditions, including financial covenants. The financial covenants require us to maintain certain financial ratios. At May 4, 2019, we were in compliance with all financial
29
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 facility as well.
Our credit ratings and outlook as of June 5, 2019,May 22, 2020, are summarized below.On April 22, 2020, Moody’s completed its periodic review and confirmed its current rating of Baa1 and outlook of Stable. Standard & Poor’s rating and outlook remained unchanged from the prior year.
Rating Agency | Rating | Outlook | |||||||||||||
Standard & Poor's | BBB | Stable | |||||||||||||
Moody's | Baa1 |
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| Stable |
Credit rating agencies review their ratings periodically, and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the retail and consumer electronics industries, our financial position and changes in our business strategy. If 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 new-store leasing costs.
Restricted Cash
Our liquidity is also affected by restricted cash balances that are pledged as collateral or restricted to use for worker’sworkers’ compensation and general liability insurance claims. Restricted cash, and cash equivalents, which areis included in Other current assets on our Condensed Consolidated Balance Sheets, remained relatively flat at $206was $115 million, $204$126 million and $201$206 million at May 2, 2020, February 1, 2020, and May 4, 2019, February 2, 2019, and May 5, 2018, respectively. The decrease from the first quarter of fiscal 2020 was due to a dividend of excess cash from our wholly-owned insurance captive that manages a portion of our self-insured claims.
Debt and Capital
As of May 4, 2019,2, 2020, we had $1.25 billion of short-term borrowings under the Facility, $650 million of principal amount of notes due March 15, 2021, and $500 million of principal amount of notes due October 1, 2028, outstanding. Refer to Note 4, Debt, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q and 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, 2019,1, 2020, for further information about our outstanding notes.debt.
Share Repurchases and Dividends
We repurchase our common stock and pay dividends pursuant to programs approved by our Board of Directors ("Board"). The payment of cash dividends is also subject to customary legal and contractual restrictions. Our long-term capital allocation strategy is to first fund operations and investments in growth and then return excess cash over time to shareholders through dividends and share repurchases while maintaining investment grade credit metrics.
On February 23, 2019, our Board authorized a $3.0 billion share repurchase program. As of May 4, 2019, $2.92, 2020, $1.9 billion of the $3.0 billion share repurchase authorization was available. BetweenOn March 21, 2020, we announced the endsuspension of all share repurchases given the first quarteruncertainty surrounding the impact of fiscal 2020 on May 4, 2019,COVID-19.
Share repurchase and June 5, 2019, we repurchased an incremental 1.2 million shares of our common stock at a cost of $80 million.
The following table presents our share repurchasedividend activity for the three months ended May 4, 2019, and May 5, 2018was as follows ($ and shares in millions, except per share amounts):
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| May 4, 2019 |
| May 5, 2018 | May 2, 2020 | May 4, 2019 | ||||||||||
Total cost of shares repurchased |
|
|
| $ | 106 |
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| $ | 399 |
| $ | 56 | $ | 106 | ||||
Average price per share |
|
|
| $ | 70.77 |
| $ | 71.78 |
| $ | 86.30 | $ | 70.77 | |||||
Number of shares repurchased |
|
|
| 1.5 |
| 5.6 |
| 0.6 | 1.5 | |||||||||
Regular quarterly cash dividends per share | $ | 0.55 | $ | 0.50 | ||||||||||||||
Cash dividends declared and paid | $ | 141 | $ | 134 |
The payment of cash dividends is subject to customary legal and contractual restrictions. The following table presents our dividend activity for the three months ended May 4, 2019, and May 5, 2018 ($ in millions, except per share amounts):
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| May 5, 2018 | ||||
Regular quarterly cash dividends per share |
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| $ | 0.50 |
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| $ | 0.45 |
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Cash dividends declared and paid |
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| $ | 134 |
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| $ | 128 |
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The increaseincreases in cash dividends declared and paid forfrom the three months ended May 4, 2019, compared to the same period in the prior yearfirst quarter of fiscal 2020 was the result of an increase in the regular quarterly dividend rate, partially offset by fewer shares outstanding 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, was 1.0 as of May 2, 2020, 1.1 as of February 1, 2020, and 1.1 as of May 4, 2019,2019. The slight decline in the ratio at May 2, 2020, compared to 1.2 as of February 2, 2019, and 1.3 as of May 5, 2018. The decrease from February 2, 2019,prior periods was primarily due to the adoption of the new lease accounting standard which brought additional current liabilities onto the balance sheet. The decrease from May 5, 2018, was primarily due to the use of cash for share repurchases and the acquisition of GreatCall as well as the adoption of the new lease accounting standard. This was partially offset by the repaymentreclassification of our $650 million of principal amount of notes due in August 2018 which were included inMarch 15, 2021, to current liabilities as of May 5, 2018.liabilities.
Our debt to earnings ratio, calculated as total debt (including current portion) divided by net earnings from continuing operations over the trailing twelve months, was 1.8 as of May 2, 2020, 0.8 as of February 1, 2020, and 0.8 as of May 4, 2019, compared with 0.9 as of February2019. The ratio at May 2, 2019, and 1.3 as of May 5, 2018. The improvement2020, increased from May 5, 2018, to May 4, 2019, wasprior periods primarily due to higher earnings over the past twelve months primarily driven by a decrease in tax expense associated with$1.25 billion short-term draw on the Tax Cuts and Act of 2017.Facility.
Off-Balance-Sheet Arrangements and Contractual Obligations
Our liquidity is not dependent on the use of off-balance-sheet financing arrangements otherarrangements.
Other than in connection withour short-term draw on the full amount of our $1.25 billion Facility to increase our cash position and maximize liquidity in undrawn capacity on our credit facility at May 4, 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 adoptionlight of the new lease accounting standard as described in Note 3, Leases, inuncertainty surrounding the Notes to Condensed Consolidated Financial Statements,impact of COVID-19, there has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 2019.2020. The resulting liability has been included as short-term debt on our Condensed Consolidated Balance Sheets as of May 2, 2020. See our Annual Report on Form 10-K for the fiscal year ended February 2, 2019,1, 2020, 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 February 2, 2019.1, 2020. We discuss our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. In1, 2020. There have been no significant changes in our significant accounting policies or critical accounting estimates since the first quarterend of fiscal 2020, we adopted2020.
New Accounting Pronouncements
For new leaseapplicable accounting guidance, as described inpronouncements, see Note 1, Basis of Presentation, and Note 3, Leases, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q. There have been no other significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2019.
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 provide prospective information about their companies. With the exception of historical information, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements and may be identified by the use of words such as "anticipate," "assume," "believe," "estimate," "expect," "guidance," "intend," "outlook," "plan," "project" and other words and terms of similar meaning. Such statements reflect our current views and estimates with respect to future market conditions, company performance and financial results, operational investments, business prospects, new strategies, the competitive environment and other events. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the potential results discussed in such forward-looking statements. Readers should review Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019,1, 2020, and Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q for a description of important factors that could cause our actual results to differ materially from those contemplated by the forward-looking statements made in this Quarterly Report on Form 10-Q. Among the factors that could cause actual results and outcomes to differ materially from those contained in such forward-looking statements are the following: the duration and scope of the COVID-19 pandemic and the impact on demand for our products and services, levels of consumer confidence and our supply chain; the effects and duration of steps we take in response to the pandemic, including the implementation of our interim and evolving operating model; actions governments, businesses and individuals take in response to the pandemic and their impact on economic activity and consumer spending; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and worsening of global economic conditions or low levels of economic growth; competition (including from multi-channel retailers, e-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, energy markets and jobless rates), conditions in the industries and categories in which we
31
operate, 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, spending and debt, 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 capital 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 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 risks arising from our international activities.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 2, 2019,1, 2020, 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 floating-rate such that the interest rate expense on this debt will vary with short-term interest rates. Refer to Note 6, Debt, and Note 5, Derivative Instruments,1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019,1, 2020, for further information regarding our interest rate swaps.
As of May 4, 2019,2, 2020, we had $1.6$3.92 billion of cash and cash equivalents and $1.2$2.40 billion of debt, which includes $1.15 billion that has been swapped to floating rate. Therefore, we hadrate and $1.25 billion from the Facility that fluctuates with each new draw or rollover based on LIBOR, resulting in a net cash and cash equivalents of $0.4 billion generating income that isbalance exposed to interest rate changes. changes of $1.52 billion. As of May 4, 2019,2, 2020, a 50 basis-point50-basis point increase in short-term interest rates would have led to an estimated $2$8 million reduction in net interest expense, and conversely a 50 basis-point50-basis point decrease in short-term interest rates would have led to an estimated $2$8 million increase in net interest expense.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 objective in holding derivatives is to reduce the volatility of net earnings and cash flows, as well as net asset value associated with changes in foreign currency exchange rates. Our foreign currency risk management strategy includes both hedging instruments and derivatives that are not designated as hedging instruments, which generally have terms of up to 12 months. Refer to Note 5, Derivative Instruments1, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, for additional information regarding these instruments.
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 lessfewer U.S. dollars. We estimate that foreign currency exchange rate fluctuations had a net unfavorable impact of $27$21 million on our revenue and a $0 millionin the first quarter of fiscal 2021. The impact of foreign exchange rate fluctuations on our net earnings for the three months ended May 4, 2019.first quarter of fiscal 2021 was not significant.
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.
32
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 May 4, 2019.2, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at May 4, 2019,2, 2020, our disclosure controls and procedures were effective.
During the fiscal quarter ended May 4, 2019, we assessed and modified our internal controls in order to facilitate the adoption of the new lease accounting standard, none of which materially affected our internal control over financial reporting. There were no other changes in internal control over financial reporting during the fiscal quarter ended May 4, 2019,2, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
For a description ofinformation about our legal proceedings, see Note 13, 10, Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.
Item 1A.Risk Factors
The global COVID-19 pandemic has had a material impact on our business, financial results and liquidity, and such impact could worsen and last for an unknown period of time.
The COVID-19 pandemic has subjected our business, operations and financial condition to a number of risks, including, but not limited to, those discussed below:
Risks Related to Sales and Customer Demand: The significant reduction in customer visits to, and spending at, our stores since March 2020 as a result of the operational changes we have made in response to the pandemic and reduced customer demand for nonessential products and services, has negatively impacted our sales. The extent to which the pandemic continues to impact our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration of the pandemic; the extent of the impact on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates, consumer discretionary spending and consumer confidence; actions governments, businesses and individuals take in their ongoing response to the pandemic, including the timing and nature of loosening of restrictions imposed in response to the pandemic; and our ability to successfully navigate those impacts. We have tried to mitigate the negative impact of sales declines on our profitability by lowering merchandise receipts to match demand with a focus on essential items for our customers, reducing operating costs, and extending payment terms in partnership with key merchandise vendors, but these measures may not be successful. We may not be able to meet customer demand in all of our categories due to product shortages or decisions by our vendors to allocate products to certain customers due to the circumstances resulting from the pandemic, and our vendors may increase prices, each of which may adversely impact our revenue and profitability. The pandemic has, and may continue to, negatively impact our products and services that historically have been more likely to be purchased in a physical store than online.
Risks Related to Operations: We have made a number of operational changes in light of COVID-19, including temporarily closing all of our domestic U.S. stores to customer traffic and moving them to a contactless, curbside-only model beginning on March 22, 2020. Although beginning on May 4, 2020, we began to welcome a limited number of customers back into some of our stores, many of our stores are still operating in the curbside-only model, and approximately 40 of our stores remain completely closed. Our ability to continue to sell our products and services is highly dependent on our ability to maintain the safety of our customers and those employees who are needed to work at our stores and distribution facilities. The ability of our employees to work may be significantly impacted by individuals contracting or being exposed to COVID-19. While we are following the requirements of governmental authorities and taking preventative and protective measures to prioritize the safety of our customers and employees, these measures may not be successful, and we may be required to temporarily close distribution centers or stores, halt certain services or take other measures. In addition, any disruptions to our vendors’ ability or desire to provide products and services to us due to the pandemic, or disruptions to our internal supply chain infrastructure (such as facility closures, governmental orders restrictions movement, COVID-19 outbreaks, present and future restrictions or disruptions of transportation, such as reduced availability of air transport, port closures, and increased border controls or closures), may materially adversely affect our ability to meet customer demand, other aspects of our operations and our financial results. Further, as our online sales have increased, the risk of any interruption of our IT system capabilities is heightened, and any such interruption could result in a deterioration of our ability to process online sales, provide customer service, or perform other necessary business functions. Having shifted to remote working arrangements for many employees, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on internet and telecommunications access and capabilities. Also, if we do not respond appropriately to the pandemic, or if customers do not perceive our response to be adequate for a particular region or our company as a whole, we could suffer damage to our reputation and our brand, which could adversely affect our business in the future. Additionally, while we have continued to prioritize the health and safety of our employees and customers as we continue to operate during the pandemic, we face an increased risk of litigation related to our operating environments. Preparing for and responding to the continuing pandemic could divert management’s attention from our key strategic priorities, increase costs as we prioritize health and safety matters for our employees and customers, cause us to reduce, delay, alter or abandon initiatives that may otherwise increase our long-term value or otherwise disrupt our business operations.
Risks Related to Profitability: To the extent COVID-19 continues to cause fundamental shifts in the channels in which customers choose to engage us, our profitability and our profitability rate may continue to be adversely impacted. For example, we may need to continue to pay rent for physical stores that are closed and not generating sales, our online mix of products and services generally produces lower gross profit rates than in-store sales, and we offer some products and services that historically are more likely to be purchased in a physical store than online. We also do not offer or have limited digital and online offerings for certain products and services, such as financing and services offerings, which have higher profitability rates. To the extent we are not able to increase the level of customer traffic in our stores or enable a more profitable mix of sales in our digital and online channels, our profitability and profitability rates may be materially negatively impacted. In addition, we expect to see continued pressure from lower profit-sharing revenue related to our private label and co-branded credit card arrangement, as the economic ramifications of COVID-19 are expected to lead to higher credit card defaults over time, which would have an adverse effect on our profitability. We have also incurred significant additional costs due to the operational changes we have made in response to the pandemic, and these costs have adversely impacted our profitability. As a result of disruptions to our supply chain, primarily due to mandatory shutdowns in locations where our products are manufactured, we are experiencing, and may continue to experience, increased costs for shipping and transportation resources. At the same time, we have continued to incur the majority of the costs to operate our stores, including rent and payroll for our employees who continue to work and, in certain cases, increased pay to field employees. If we are unable to manage these costs and supply chain disruptions, our profitability may be adversely impacted. Even after the COVID-19 pandemic subsides, we could experience a longer-term impact on our costs, for example, the need for enhanced health and hygiene requirements in one or more regions in attempts to counteract future outbreaks. As a result of decreased store traffic, certain of our stores may not generate revenue sufficient to meet operating expenses, which could adversely affect the value of our owned and leased properties, potentially requiring us to record more significant non-cash impairment charges in future periods.
Risks Related to Our Debt and Global Financing Markets: As previously disclosed, we have borrowed the full amount available under our $1.25 billion revolving credit facility to increase our cash position and maximize flexibility in light of the uncertainty surrounding the impact of COVID-19, and accordingly, our short-term debt has increased substantially since February 1, 2020, when we had no outstanding borrowings under the facility. The increase in our level of debt may adversely affect our financial
and operating activities or ability to incur additional debt. In addition, as a result of the risks described above, we may be required to raise additional capital, and our access to and cost of financing will depend on, among other things, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, our prospects, our credit ratings, and our business and industry outlook. There is no guarantee that debt or equity financings will be available in the future to fund our obligations, or will be available on terms consistent with our expectations.
COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could also precipitate or aggravate the other risk factors that we identified in our Fiscal 2020 Form 10-K, which in turn could materially adversely affect our business, financial condition, liquidity, results of operations (including revenues and profitability) and/or stock price. Further, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations.
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 first quarter of fiscal 2020:
2021. On March 21,2020, we announced the suspension of all share repurchases given the uncertainty surrounding the impact of COVID-19.
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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) | ||||||||
February 3, 2019 through March 2, 2019 |
| 106,000 |
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| $ | 68.74 |
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| 106,000 |
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| $ | 2,993,000,000 |
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March 3, 2019 through April 6, 2019 |
| 796,500 |
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| $ | 68.69 |
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| 796,500 |
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| $ | 2,938,000,000 |
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April 7, 2019 through May 4, 2019 |
| 592,525 |
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| $ | 73.93 |
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| 592,525 |
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| $ | 2,894,000,000 |
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Total |
| 1,495,025 |
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| $ | 70.77 |
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| 1,495,025 |
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| $ | 2,894,000,000 |
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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) | |||||||||||
February 2, 2020 through February 29, 2020 | 613,936 | $ | 87.96 | 613,936 | $ | 1,937,000,000 | |||||||||
March 1, 2020 through April 4, 2020 | 34,725 | $ | 57.07 | 34,725 | $ | 1,935,000,000 | |||||||||
April 5, 2020 through May 2, 2020 | - | $ | 0.00 | - | $ | 1,935,000,000 | |||||||||
Total | 648,661 | $ | 86.30 | 648,661 | $ | 1,935,000,000 |
(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 10, 8, Repurchase of Common Stock, in the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.
33
Exhibits
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101 | The following financial information from our Quarterly Report on Form 10-Q for the first quarter of fiscal | |
104 | The cover page from our Quarterly Report on Form 10-Q for the first quarter of fiscal 2021, filed with the SEC on May 27, 2020, formatted in iXBRL (included as Exhibit 101). |
____________________________
(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/ |
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Date: | By: | /s/ |
| ||
Chief Financial Officer | ||
Date: | By: | /s/ MATHEW R. WATSON |
Mathew R. Watson | ||
Senior Vice President, Finance – Controller and Chief Accounting Officer |