UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One) |
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 2, 2019August 1, 2020
OR
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact name of registrant as specified in its charter)
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Minnesota |
| 41-0907483 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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7601 Penn Avenue South |
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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:
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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.
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Large Accelerated Filer | Accelerated Filer | Non-accelerated Filer |
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Smaller Reporting Company | Emerging Growth Company |
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 258,777,447258,832,143 shares of common stock outstanding as of December 4, 2019.August 27, 2020.
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 2, 2019AUGUST 1, 2020
TABLE OF CONTENTS
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Part I — Financial Information | 3 |
Item 1. |
| Financial Statements | 3 |
| a) | Condensed Consolidated Balance Sheets as of November 2,August 1, 2020, February 1, 2020, and August 3, 2019 February 2, 2019, and November 3, 2018 | 3 |
| b) | Condensed Consolidated Statements of Earnings for the three and ninesix months ended November 2,August 1, 2020, and August 3, 2019 and November 3, 2018 | 4 |
| c) | Condensed Consolidated Statements of Comprehensive Income for the three and ninesix months ended November 2,August 1, 2020, and August 3, 2019 and November 3, 2018 | 5 |
| d) | Condensed Consolidated Statements of Cash Flows for the ninesix months ended November 2,August 1, 2020, and August 3, 2019 and November 3, 2018 | 6 |
| e) | Condensed Consolidated Statements of Changes in Shareholders' Equity for the three and ninesix months ended November 2,August 1, 2020, and August 3, 2019 and November 3, 2018 | 7 |
| f) | Notes to Condensed Consolidated Financial Statements | 8 |
Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 2214
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Item 3. |
| Quantitative and Qualitative Disclosures About Market Risk | 3224
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Item 4. |
| Controls and Procedures | 3324
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Part II — Other Information | 3325
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Item 1. |
| Legal Proceedings | 3325
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Item 2.1A. |
| Unregistered Sales of Equity Securities and Use of ProceedsRisk Factors
| 3325
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Item 6. |
| Exhibits | 3426
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Signatures | 3527
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
$ in millions, except per share amounts (unaudited)
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| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| February 1, 2020 |
| August 3, 2019 |
Assets |
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Current assets |
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Cash and cash equivalents | $ | 1,205 |
| $ | 1,980 |
| $ | 1,228 |
| $ | 5,305 |
| $ | 2,229 |
| $ | 1,289 |
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Short-term investments |
| - |
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| - |
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| 76 |
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| - |
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| - |
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| 320 |
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Receivables, net |
| 1,056 |
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| 1,015 |
|
| 921 |
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| 906 |
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| 1,149 |
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| 966 |
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Merchandise inventories |
| 7,569 |
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| 5,409 |
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| 8,168 |
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| 4,136 |
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| 5,174 |
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| 5,208 |
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Other current assets |
| 345 |
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| 466 |
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| 508 |
|
| 336 |
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| 305 |
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|
| 409 |
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Total current assets |
| 10,175 |
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| 8,870 |
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| 10,901 |
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| 10,683 |
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| 8,857 |
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| 8,192 |
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Property and equipment, net |
| 2,359 |
| 2,510 |
| 2,525 |
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| 2,277 |
| 2,328 |
| 2,361 |
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Operating lease assets |
| 2,751 |
| - |
| - |
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| 2,770 |
| 2,709 |
| 2,774 |
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Goodwill |
| 982 |
| 915 |
| 921 |
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| 986 |
| 984 |
| 965 |
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Other assets |
| 659 |
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| 606 |
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| 653 |
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| 696 |
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| 713 |
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| 686 |
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Total assets | $ | 16,926 |
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| $ | 12,901 |
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| $ | 15,000 |
| $ | 17,412 |
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| $ | 15,591 |
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| $ | 14,978 |
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Liabilities and equity |
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Current liabilities |
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Accounts payable | $ | 7,232 |
| $ | 5,257 |
| $ | 7,964 |
| $ | 6,613 |
| $ | 5,288 |
| $ | 5,045 |
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Unredeemed gift card liabilities |
| 271 |
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| 290 |
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| 281 |
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| 267 |
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| 281 |
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| 264 |
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Deferred revenue |
| 445 |
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| 446 |
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| 449 |
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| 699 |
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| 501 |
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| 468 |
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Accrued compensation and related expenses |
| 351 |
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| 482 |
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| 349 |
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| 253 |
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| 410 |
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| 343 |
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Accrued liabilities |
| 769 |
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| 982 |
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| 844 |
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| 893 |
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| 906 |
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| 799 |
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Current portion of operating lease liabilities |
| 644 |
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| - |
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| - |
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| 674 |
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| 660 |
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| 643 |
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Current portion of long-term debt |
| 14 |
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| 56 |
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| 46 |
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| 681 |
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| 14 |
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| 14 |
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Total current liabilities |
| 9,726 |
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| 7,513 |
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| 9,933 |
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| 10,080 |
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| 8,060 |
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| 7,576 |
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Long-term liabilities |
| 636 |
| 750 |
| 775 |
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| 716 |
| 657 |
| 640 |
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Long-term operating lease liabilities |
| 2,200 |
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| - |
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| - |
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| 2,206 |
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| 2,138 |
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| 2,230 |
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Long-term debt |
| 1,239 |
| 1,332 |
| 1,280 |
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| 632 |
| 1,257 |
| 1,247 |
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Contingencies (Note 14) |
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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 - NaN |
| - |
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| - |
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| - |
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| - |
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| - |
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| - |
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Common stock, $0.10 par value: Authorized - 1.0 billion shares; Issued and outstanding - 260 million, 266 million, and 272 million shares, respectively |
| 26 |
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| 27 |
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| 27 |
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Common stock, $0.10 par value: Authorized - 1.0 billion shares; Issued and outstanding - 258 million, 256 million and 265 million shares, respectively | |
| 26 |
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| 26 |
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| 26 |
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Additional paid-in capital | |
| 83 |
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| - |
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| - |
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Retained earnings |
| 2,809 |
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| 2,985 |
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| 2,685 |
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| 3,413 |
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| 3,158 |
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| 2,965 |
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Accumulated other comprehensive income |
| 290 |
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| 294 |
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| 300 |
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| 256 |
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| 295 |
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| 294 |
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Total equity |
| 3,125 |
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| 3,306 |
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| 3,012 |
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| 3,778 |
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| 3,479 |
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| 3,285 |
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Total liabilities and equity | $ | 16,926 |
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| $ | 12,901 |
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| $ | 15,000 |
| $ | 17,412 |
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| $ | 15,591 |
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| $ | 14,978 |
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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.
Condensed Consolidated Statements of Earnings
$ and shares in millions, except per share amounts (unaudited)
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| Three Months Ended |
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| Nine Months Ended |
| Three Months Ended |
| Six Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Revenue | $ | 9,764 |
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| $ | 9,590 |
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| $ | 28,442 |
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| $ | 28,078 |
| $ | 9,910 |
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| $ | 9,536 |
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| $ | 18,472 |
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| $ | 18,678 |
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Cost of goods sold |
| 7,403 |
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| 7,266 |
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| 21,629 |
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| 21,400 |
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Cost of sales | |
| 7,640 |
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| 7,253 |
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| 14,237 |
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| 14,226 |
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Gross profit |
| 2,361 |
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| 2,324 |
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| 6,813 |
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| 6,678 |
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| 2,270 |
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| 2,283 |
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| 4,235 |
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| 4,452 |
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Selling, general and administrative expenses |
| 1,973 |
| 2,002 |
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| 5,730 |
| 5,709 |
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| 1,702 |
| 1,922 |
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| 3,437 |
| 3,757 |
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Restructuring charges |
| (7) |
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| - |
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| 41 |
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| 47 |
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| - |
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| 48 |
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| 1 |
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| 48 |
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Operating income |
| 395 |
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|
| 322 |
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| 1,042 |
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| 922 |
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| 568 |
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| 313 |
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|
| 797 |
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| 647 |
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Other income (expense): |
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Gain on sale of investments |
| 1 |
| 12 |
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| 1 |
| 12 |
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Other income (expense) | |
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Investment income and other |
| 9 |
| 11 |
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| 33 |
| 35 |
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| 8 |
| 10 |
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| 14 |
| 24 |
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Interest expense |
| (16) |
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| (15) |
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| (50) |
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| (53) |
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| (15) |
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| (16) |
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| (32) |
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| (34) |
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Earnings before income tax expense |
| 389 |
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|
| 330 |
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|
| 1,026 |
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|
| 916 |
|
| 561 |
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|
| 307 |
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|
| 779 |
|
|
| 637 |
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Income tax expense |
| 96 |
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|
| 53 |
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|
| 230 |
|
|
| 187 |
|
| 129 |
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|
| 69 |
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|
| 188 |
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|
| 134 |
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Net earnings | $ | 293 |
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| $ | 277 |
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| $ | 796 |
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| $ | 729 |
| $ | 432 |
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| $ | 238 |
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| $ | 591 |
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| $ | 503 |
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Basic earnings per share | $ | 1.11 |
| $ | 1.01 |
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| $ | 2.99 |
| $ | 2.62 |
| $ | 1.67 |
| $ | 0.89 |
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| $ | 2.28 |
| $ | 1.88 |
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Diluted earnings per share | $ | 1.10 |
| $ | 0.99 |
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| $ | 2.96 |
| $ | 2.57 |
| $ | 1.65 |
| $ | 0.89 |
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| $ | 2.26 |
| $ | 1.86 |
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Weighted-average common shares outstanding |
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Basic |
| 263.2 |
| 274.3 |
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| 266.0 |
| 278.6 |
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| 259.5 |
| 267.1 |
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| 259.0 |
| 267.4 |
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Diluted |
| 265.2 |
| 279.3 |
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| 269.1 |
| 283.8 |
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| 262.1 |
| 269.4 |
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| 261.4 |
| 270.9 |
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See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive Income
$ in millions (unaudited)
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| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Net earnings | $ | 293 |
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| $ | 277 |
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| $ | 796 |
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| $ | 729 |
| $ | 432 |
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| $ | 238 |
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| $ | 591 |
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| $ | 503 |
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Foreign currency translation adjustments |
| (4) |
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| 4 |
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| (4) |
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| (14) |
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Foreign currency translation adjustments, net of tax | |
| 17 |
| 5 |
| (35) |
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| - |
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Cash flow hedges | |
| (4) |
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|
| - |
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| (4) |
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| - |
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Comprehensive income | $ | 289 |
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| $ | 281 |
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| $ | 792 |
|
| $ | 715 |
| $ | 445 |
|
| $ | 243 |
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| $ | 552 |
|
| $ | 503 |
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See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
$ in millions (unaudited)
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| Nine Months Ended | Six Months Ended |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
Operating activities |
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Net earnings | $ | 796 |
| $ | 729 |
| $ | 591 |
| $ | 503 |
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Adjustments to reconcile net earnings to total cash provided by operating activities: | Adjustments to reconcile net earnings to total cash provided by operating activities: |
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| Adjustments to reconcile net earnings to total cash provided by operating activities: |
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Depreciation and amortization |
| 607 |
| 550 |
|
| 414 |
| 401 |
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Restructuring charges |
| 41 |
| 47 |
|
| 1 |
| 48 |
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Stock-based compensation |
| 109 |
| 92 |
|
| 65 |
| 74 |
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Deferred income taxes |
| 20 |
| 15 |
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| 13 |
| 10 |
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Other, net |
| 16 |
| (10) |
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| 9 |
| 9 |
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Changes in operating assets and liabilities, net of acquired assets and liabilities: | Changes in operating assets and liabilities, net of acquired assets and liabilities: |
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| Changes in operating assets and liabilities, net of acquired assets and liabilities: |
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Receivables |
| (36) |
| 121 |
|
| 232 |
| 57 |
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Merchandise inventories |
| (2,159) |
| (2,950) |
|
| 1,014 |
| 199 |
|
Other assets |
| (2) |
| (45) |
|
| (17) |
| (29) |
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Accounts payable |
| 1,984 |
| 3,085 |
|
| 1,343 |
| (213) |
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Income taxes | |
| 108 |
| (191) |
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Other liabilities |
| (292) |
| (400) |
|
| 15 |
|
|
| (243) |
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Income taxes |
| (147) |
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|
| (127) |
| |
Total cash provided by operating activities |
| 937 |
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| 1,107 |
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| 3,788 |
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|
| 625 |
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Investing activities |
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Additions to property and equipment |
| (586) |
| (619) |
|
| (340) |
| (385) |
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Purchases of investments |
| (319) |
| - |
|
| (46) |
| (319) |
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Sales of investments |
| 322 |
| 1,970 |
| |
Acquisitions, net of cash acquired |
| (145) |
|
| (792) |
| |
Acquisition of a business, net of cash acquired | |
| - |
|
| (125) |
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Other, net |
| 1 |
|
|
| 15 |
|
| 3 |
|
|
| 1 |
|
Total cash provided by (used in) investing activities |
| (727) |
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|
| 574 |
| |
Total cash used in investing activities | |
| (383) |
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|
| (828) |
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Financing activities |
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Repurchase of common stock |
| (696) |
| (1,144) |
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| (62) |
| (328) |
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Issuance of common stock |
| 45 |
| 37 |
|
| 22 |
| 27 |
|
Dividends paid |
| (398) |
| (376) |
|
| (284) |
| (267) |
|
Borrowings of debt |
| - |
| 498 |
|
| 1,250 |
| - |
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Repayments of debt |
| (11) |
| (535) |
|
| (1,257) |
| (8) |
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Other, net |
| - |
|
|
| (6) |
|
| (1) |
|
|
| - |
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Total cash used in financing activities |
| (1,060) |
|
|
| (1,526) |
|
| (332) |
|
|
| (576) |
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Effect of exchange rate changes on cash |
| (2) |
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| (16) |
| |
| |
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Effect of exchange rate changes on cash and cash equivalents | |
| (6) |
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| (1) |
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Increase (decrease) in cash, cash equivalents and restricted cash |
| (852) |
|
|
| 139 |
|
| 3,067 |
|
|
| (780) |
|
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 | $ | 1,332 |
|
| $ | 1,439 |
| $ | 5,422 |
|
| $ | 1,404 |
|
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Changes in Shareholders' Equity
$ and shares in millions, except per share amounts (unaudited)
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common
Shares |
| Common
Stock |
| Additional
Paid-In
Capital |
| Retained
Earnings |
| Accumulated Other
Comprehensive
Income (Loss) |
| Total |
Balances at August 3, 2019 |
| 265 |
|
| $ | 26 |
|
| $ | - |
|
| $ | 2,965 |
|
| $ | 294 |
|
| $ | 3,285 |
|
Net earnings, three months ended November 2, 2019 |
| - |
|
|
| - |
|
|
| - |
|
|
| 293 |
|
|
| - |
|
|
| 293 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4) |
|
|
| (4) |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 35 |
|
|
| - |
|
|
| - |
|
|
| 35 |
|
Issuance of common stock |
| - |
|
|
| - |
|
|
| 18 |
|
|
| - |
|
|
| - |
|
|
| 18 |
|
Common stock dividends, $0.50 per share |
| - |
|
|
| - |
|
|
| 2 |
|
|
| (133) |
|
|
| - |
|
|
| (131) |
|
Repurchase of common stock |
| (5) |
|
|
| - |
|
|
| (55) |
|
|
| (316) |
|
|
| - |
|
|
| (371) |
|
Balances at November 2, 2019 |
| 260 |
|
| $ | 26 |
|
| $ | - |
|
| $ | 2,809 |
|
| $ | 290 |
|
| $ | 3,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 2, 2019 |
| 266 |
|
| $ | 27 |
|
| $ | - |
|
| $ | 2,985 |
|
| $ | 294 |
|
| $ | 3,306 |
|
Adoption of ASU 2016-02 |
| - |
|
|
| - |
|
|
| - |
|
|
| (22) |
|
|
| - |
|
|
| (22) |
|
Net earnings, nine months ended November 2, 2019 |
| - |
|
|
| - |
|
|
| - |
|
|
| 796 |
|
|
| - |
|
|
| 796 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4) |
|
|
| (4) |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 109 |
|
|
| - |
|
|
| - |
|
|
| 109 |
|
Issuance of common stock |
| 4 |
|
|
| - |
|
|
| 45 |
|
|
| - |
|
|
| - |
|
|
| 45 |
|
Common stock dividends, $1.50 per share |
| - |
|
|
| - |
|
|
| 6 |
|
|
| (404) |
|
|
| - |
|
|
| (398) |
|
Repurchase of common stock |
| (10) |
|
|
| (1) |
|
|
| (160) |
|
|
| (546) |
|
|
| - |
|
|
| (707) |
|
Balances at November 2, 2019 |
| 260 |
|
| $ | 26 |
|
| $ | - |
|
| $ | 2,809 |
|
| $ | 290 |
|
| $ | 3,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at August 2, 2018 |
| 276 |
|
| $ | 27 |
|
| $ | - |
|
| $ | 2,863 |
|
| $ | 296 |
|
| $ | 3,186 |
|
Net earnings, three months ended November 3, 2018 |
| - |
|
|
| - |
|
|
| - |
|
|
| 277 |
|
|
| - |
|
|
| 277 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4 |
|
|
| 4 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 29 |
|
|
| - |
|
|
| - |
|
|
| 29 |
|
Issuance of common stock |
| - |
|
|
| - |
|
|
| 8 |
|
|
| - |
|
|
| - |
|
|
| 8 |
|
Common stock dividends, $0.45 per share |
| - |
|
|
| - |
|
|
| 1 |
|
|
| (124) |
|
|
| - |
|
|
| (123) |
|
Repurchase of common stock |
| (4) |
|
|
| - |
|
|
| (38) |
|
|
| (331) |
|
|
| - |
|
|
| (369) |
|
Balances at November 3, 2018 |
| 272 |
|
| $ | 27 |
|
| $ | - |
|
| $ | 2,685 |
|
| $ | 300 |
|
| $ | 3,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 3, 2018 |
| 283 |
|
| $ | 28 |
|
| $ | - |
|
| $ | 3,270 |
|
| $ | 314 |
|
| $ | 3,612 |
|
Adoption of ASU 2014-09 |
| - |
|
|
| - |
|
|
| - |
|
|
| 73 |
|
|
| - |
|
|
| 73 |
|
Net earnings, nine months ended November 3, 2018 |
| - |
|
|
| - |
|
|
| - |
|
|
| 729 |
|
|
| - |
|
|
| 729 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (14) |
|
|
| (14) |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 92 |
|
|
| - |
|
|
| - |
|
|
| 92 |
|
Issuance of common stock |
| 4 |
|
|
| - |
|
|
| 37 |
|
|
| - |
|
|
| - |
|
|
| 37 |
|
Common stock dividends, $1.35 per share |
| - |
|
|
| - |
|
|
| 5 |
|
|
| (379) |
|
|
| - |
|
|
| (374) |
|
Repurchase of common stock |
| (15) |
|
|
| (1) |
|
|
| (134) |
|
|
| (1,008) |
|
|
| - |
|
|
| (1,143) |
|
Balances at November 3, 2018 |
| 272 |
|
| $ | 27 |
|
| $ | - |
|
| $ | 2,685 |
|
| $ | 300 |
|
| $ | 3,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common Shares |
| Common Stock |
| Additional Paid-In Capital |
| Retained Earnings |
| Accumulated Other Comprehensive Income (Loss) |
| Total |
Balances at May 2, 2020 |
| 257 |
|
| $ | 26 |
|
| $ | 15 |
|
| $ | 3,126 |
|
| $ | 243 |
|
| $ | 3,410 |
|
Net earnings, three months ended August 1, 2020 |
| - |
|
|
| - |
|
|
| - |
|
|
| 432 |
|
|
| - |
|
|
| 432 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 17 |
|
|
| 17 |
|
Cash flow hedges |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4) |
|
|
| (4) |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 50 |
|
|
| - |
|
|
| - |
|
|
| 50 |
|
Issuance of common stock |
| 1 |
|
|
| - |
|
|
| 16 |
|
|
| - |
|
|
| - |
|
|
| 16 |
|
Common stock dividends, $0.55 per share |
| - |
|
|
| - |
|
|
| 2 |
|
|
| (145) |
|
|
| - |
|
|
| (143) |
|
Balances at August 1, 2020 |
| 258 |
|
| $ | 26 |
|
| $ | 83 |
|
| $ | 3,413 |
|
| $ | 256 |
|
| $ | 3,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 1, 2020 |
| 256 |
|
| $ | 26 |
|
| $ | - |
|
| $ | 3,158 |
|
| $ | 295 |
|
| $ | 3,479 |
|
Net earnings, six months ended August 1, 2020 |
| - |
|
|
| - |
|
|
| - |
|
|
| 591 |
|
|
| - |
|
|
| 591 |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (35) |
|
|
| (35) |
|
Cash flow hedges |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (4) |
|
|
| (4) |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 65 |
|
|
| - |
|
|
| - |
|
|
| 65 |
|
Issuance of common stock |
| 3 |
|
|
| - |
|
|
| 22 |
|
|
| - |
|
|
| - |
|
|
| 22 |
|
Common stock dividends, $1.10 per share |
| - |
|
|
| - |
|
|
| 4 |
|
|
| (288) |
|
|
| - |
|
|
| (284) |
|
Repurchase of common stock |
| (1) |
|
|
| - |
|
|
| (8) |
|
|
| (48) |
|
|
| - |
|
|
| (56) |
|
Balances at August 1, 2020 |
| 258 |
|
| $ | 26 |
|
| $ | 83 |
|
| $ | 3,413 |
|
| $ | 256 |
|
| $ | 3,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at May 4, 2019 |
| 267 |
|
| $ | 27 |
|
| $ | - |
|
| $ | 3,038 |
|
| $ | 289 |
|
| $ | 3,354 |
|
Adoption of ASU 2016-02 |
| - |
|
|
| - |
|
|
| - |
|
|
| (3) |
|
|
| - |
|
|
| (3) |
|
Net earnings, three months ended August 3, 2019 |
| - |
|
|
| - |
|
|
| - |
|
|
| 238 |
|
|
| - |
|
|
| 238 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5 |
|
|
| 5 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 38 |
|
|
| - |
|
|
| - |
|
|
| 38 |
|
Issuance of common stock |
| 2 |
|
|
| - |
|
|
| 16 |
|
|
| - |
|
|
| - |
|
|
| 16 |
|
Common stock dividends, $0.50 per share |
| - |
|
|
| - |
|
|
| 2 |
|
|
| (135) |
|
|
| - |
|
|
| (133) |
|
Repurchase of common stock |
| (4) |
|
|
| (1) |
|
|
| (56) |
|
|
| (173) |
|
|
| - |
|
|
| (230) |
|
Balances at August 3, 2019 |
| 265 |
|
| $ | 26 |
|
| $ | - |
|
| $ | 2,965 |
|
| $ | 294 |
|
| $ | 3,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 2, 2019 |
| 266 |
|
| $ | 27 |
|
| $ | - |
|
| $ | 2,985 |
|
| $ | 294 |
|
| $ | 3,306 |
|
Adoption of ASU 2016-02 |
| - |
|
|
| - |
|
|
| - |
|
|
| (22) |
|
|
| - |
|
|
| (22) |
|
Net earnings, six months ended August 3, 2019 |
| - |
|
|
| - |
|
|
| - |
|
|
| 503 |
|
|
| - |
|
|
| 503 |
|
Stock-based compensation |
| - |
|
|
| - |
|
|
| 74 |
|
|
| - |
|
|
| - |
|
|
| 74 |
|
Issuance of common stock |
| 4 |
|
|
| - |
|
|
| 27 |
|
|
| - |
|
|
| - |
|
|
| 27 |
|
Common stock dividends, $1.00 per share |
| - |
|
|
| - |
|
|
| 4 |
|
|
| (271) |
|
|
| - |
|
|
| (267) |
|
Repurchase of common stock |
| (5) |
|
|
| (1) |
|
|
| (105) |
|
|
| (230) |
|
|
| - |
|
|
| (336) |
|
Balances at August 3, 2019 |
| 265 |
|
| $ | 26 |
|
| $ | - |
|
| $ | 2,965 |
|
| $ | 294 |
|
| $ | 3,285 |
|
See Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” in these Notes to Condensed Consolidated Financial Statements refers to Best Buy Co., Inc. and, as applicable, its consolidated subsidiaries.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”). All adjustments were comprised of normal recurring adjustments, except as noted in these Notes to Condensed Consolidated Financial Statements.
Historically, we have generated a large proportion of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. The interim financial statements and the related notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.1, 2020. The first ninesix months of fiscal 20202021 and fiscal 20192020 included 3926 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 November 2, 2019,August 1, 2020, through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for the reported periods.
Unadopted Accounting PronouncementsCOVID-19
In January 2017,March 2020, the Financial Accounting Standards BoardWorld Health Organization declared the outbreak of novel coronavirus disease ("FASB"COVID-19") issued Accounting Standards Update ("ASU") No. 2017-04, Intangibles-Goodwillas a pandemic. Except where otherwise directed by state and Other (Topic 350): Simplifyinglocal authorities, we made the Testdecision for Goodwill Impairment, which eliminates the requirementhealth and safety of our customers and employees to calculatemove our stores to a contactless, curbside-only operating model in the implied fair value of goodwill (i.e., Step 2fiscal first quarter. We also temporarily suspended in-home delivery, repair and consultation services. At the beginning of the current goodwill impairment test)fiscal second quarter, we started welcoming customers back into our stores by offering an in-store consultation service to measure a goodwill impairment charge. Instead, entities will recordcustomers, by appointment only. On June 15, 2020, we began allowing customers to shop without an impairment charge based onappointment at more than 800 stores across the excessU.S. As of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). June 22, 2020, almost all of our stores were open for shopping. We do not believe the new guidance, which is effectivecontinue to offer contactless curbside pickup and in-store consultations for fiscal years beginning after December 15, 2019, will have a material impact on our consolidated financial statements.customers who prefer to shop that way.
In August 2018,light of the FASB issued ASU 2018-13,uncertainty surrounding the impact of COVID-19 and to maximize liquidity, we suspended all share repurchases. We also executed a short-term draw on the full amount of our $1.25 billion five year senior unsecured revolving credit facility (the “Facility”) on March 19, 2020, that remained outstanding until July 27, 2020, when the Facility was repaid in full. See Note 4, Fair Value Measurement - Disclosure Framework (Topic 820)Debt. The updated guidance improves, for additional information on the disclosure requirements for fair value measurements. We do not believe the updated guidance, which is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, will have a material impact on our consolidated financial statements.Facility.
In August 2018,On March 27, 2020, in response to the FASB issued ASU 2018-15, Intangibles-GoodwillCOVID-19 pandemic, the U.S. Congress enacted the Coronavirus Aid, Relief 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 CodificationEconomic Security Act (“ASC”CARES Act”) 350-40 to implementation costs incurred in a hosting arrangement that is a service contract to determine whether to capitalize certain implementation costs or expense them as incurred. We do not believe the new guidance, which is effective for fiscal years beginning after December 15, 2019, will have a material impact on our consolidated financial statements.
Adopted Accounting Pronouncements
In February 2016, the 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 were as originally reported under the previous standard – ASC 840, Leases. The effects of adopting the new standard (ASC 842, Leases) in fiscal 2020 were recognized as a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal first quarter. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed uscontains 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 carry forwardemployees not providing services due to the historical lease classificationCOVID-19 pandemic. As a result of the CARES Act, we are deferring qualified payroll taxes and claimed the employee retention credit, which was treated as a government subsidy to offset related operating or capital leases. We also elected to combine leaseexpenses. Based on our analysis of the CARES Act, we reduced our SG&A expenses for the three and non-lease componentssix months ended August 1, 2020, by $12 million and to exclude short-term leases from our consolidated balance sheets. We did not elect the hindsight practical expedient in determining the lease term$81 million, respectively, for existing leases as of February 3, 2019.employee retention credits.
The most significant impactCOVID-19 pandemic remains a rapidly evolving situation. The extent 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 $22 million, which includes a $3 million net-of-tax adjustment made during the second quarter of fiscal 2020 related to on-adoption impairment charges. We expect the impact of adoption to be immaterial toCOVID-19 on our consolidated statementsbusiness and financial results will depend on future developments, including the duration and spread of earningsthe outbreak within the markets in which we operate, government stimulus efforts, the economic impacts of sustained high unemployment levels, ongoing shut-downs that vary by industry and consolidated statements of cash flowsthe related impacts on an ongoing basis. As part of our adoption, we also modified our control proceduresconsumer confidence and processes, nonespending, all of which materially affected our internal control over financial reporting. See Note 4, Leases, for additional information regarding our accounting policy for leases and additional disclosures.
The cumulative effect of the changes made to our Condensed Consolidated Balance Sheets for the adoption of this standard was as follows ($ in millions):
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| February 2, 2019
As Reported |
| ASU 2016-02
Adjustment on
February 3, 2019 |
| February 3, 2019
Adjusted |
Assets |
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|
|
|
Other current assets | $ | 466 |
|
| $ | (65) | (a) |
| $ | 401 |
|
Net property and equipment |
| 2,510 |
|
|
| (173) | (b) |
|
| 2,337 |
|
Operating lease assets |
| - |
|
|
| 2,732 | (c) |
|
| 2,732 |
|
Other assets |
| 606 |
|
|
| 5 | (d) |
|
| 611 |
|
Liabilities |
|
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|
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|
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|
|
Accrued liabilities |
| 982 |
|
|
| (28) | (e) |
|
| 954 |
|
Current portion of operating lease liabilities |
| - |
|
|
| 712 | (f) |
|
| 712 |
|
Current portion of long-term debt |
| 56 |
|
|
| (43) | (b) |
|
| 13 |
|
Long-term liabilities |
| 750 |
|
|
| (115) | (e) |
|
| 635 |
|
Long-term operating lease liabilities |
| - |
|
|
| 2,135 | (f) |
|
| 2,135 |
|
Long-term debt |
| 1,332 |
|
|
| (140) | (b) |
|
| 1,192 |
|
Equity |
|
|
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Retained earnings |
| 2,985 |
|
|
| (22) | (g) |
|
| 2,963 |
|
(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.are highly uncertain.
Total Cash, Cash Equivalents and Restricted Cash
The reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the totals shown within the Condensed Consolidated Statements of Cash Flows was as follows ($ in millions):
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| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| February 1, 2020 |
| August 3, 2019 |
Cash and cash equivalents |
|
|
| $ | 1,205 |
|
| $ | 1,228 |
| $ | 5,305 |
|
| $ | 2,229 |
|
| $ | 1,289 |
|
Restricted cash included in Other current assets |
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| 127 |
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| 211 |
|
| 117 |
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| 126 |
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|
| 115 |
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Total cash, cash equivalents and restricted cash |
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|
| $ | 1,332 |
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| $ | 1,439 |
| $ | 5,422 |
|
| $ | 2,355 |
|
| $ | 1,404 |
|
Amounts included in restricted cash are pledged as collateral or restricted to use for workers’ compensation and general liability insurance claims.
2. Acquisitions
Critical Signal Technologies, Inc.
On May 9, 2019, we acquired all of the outstanding shares of Critical Signal Technologies, Inc. (“CST”), a health services company, for net cash consideration of $125 million. The acquisition of CST is aligned with our strategy to address health and wellness with a focus on aging seniors and how technology can help them live longer in their homes.
The acquisition was accounted for using the acquisition method of accounting for business combinations. Accordingly, the cost was allocated to the underlying net assets based on their respective fair values, and the excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. The purchase price allocation for the assets acquired and liabilities assumed is substantially complete, but may be subject to immaterial changes. The acquired assets were primarily comprised of $83 million of customer relationships (amortized over 15 years) recorded within Other assets on our Condensed Consolidated Balance Sheets. Goodwill of $50 million was recorded and assigned to our Health (previously referred to as GreatCall) reporting unit and is not expected to be deductible for income tax purposes. We recorded $3 million of transaction costs related to the acquisition within Selling, general and administrative (“SG&A”) expenses on our Condensed Consolidated Statements of Earnings during the second quarter of fiscal 2020. Results of operations from the date of acquisition were included within our Health (previously referred to as GreatCall) operating segment, Domestic reportable segment and Services revenue category. The acquisition of CST is not material to the results of our operations.
BioSensics, LLC
On August 7, 2019, we acquired the predictive healthcare technology business of BioSensics, LLC (“BioSensics”) for net cash consideration of $20 million, primarily comprised of $19 million of goodwill and $4 million of definite-lived technology (amortized over 3 years). Goodwill, which was assigned to our Domestic reporting unit, is deductible for tax purposes. The acquisition currently supports our health strategy and is included in our Domestic operating and reportable segments. The transaction was accounted for as a business combination and is not material to the results of our operations.
3. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price)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 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.
Financial assets and liabilities accounted for at fair value were as follows ($ in millions):
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| Fair Value |
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| Fair Value at |
| Hierarchy |
| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 |
Assets |
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Cash and cash equivalents: |
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Money market funds |
| Level 1 |
|
| $ | 21 |
|
| $ | 98 |
|
| $ | 126 |
|
Time deposits |
| Level 2 |
|
|
| 85 |
|
|
| 300 |
|
|
| - |
|
Short-term investments: |
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Time deposits |
| Level 2 |
|
|
| - |
|
|
| - |
|
|
| 76 |
|
Other current assets: |
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Money market funds |
| Level 1 |
|
|
| 20 |
|
|
| 82 |
|
|
| 72 |
|
Time deposits |
| Level 2 |
|
|
| 100 |
|
|
| 101 |
|
|
| 100 |
|
Foreign currency derivative instruments |
| Level 2 |
|
|
| - |
|
|
| - |
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|
| 1 |
|
Other assets: |
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Marketable securities that fund deferred compensation |
| Level 1 |
|
|
| 47 |
|
|
| 44 |
|
|
| 100 |
|
Interest rate swap derivative instruments |
| Level 2 |
|
|
| 70 |
|
|
| 26 |
|
|
| - |
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Liabilities |
|
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Long-term liabilities: |
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|
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative instruments |
| Level 2 |
|
|
| - |
|
|
| 1 |
|
|
| 22 |
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| Fair Value at |
|
| Balance Sheet Location(1) | Fair Value Hierarchy |
| August 1, 2020 |
| February 1, 2020 |
| August 3, 2019 |
Assets |
|
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|
Money market funds(2) |
| Cash and cash equivalents |
|
| Level 1 |
|
| $ | 1,729 |
|
| $ | 524 |
|
| $ | 375 |
|
Commercial paper(2) |
| Cash and cash equivalents |
|
| Level 2 |
|
|
| - |
|
|
| 75 |
|
|
| - |
|
Time deposits(3) |
| Cash and cash equivalents |
|
| Level 2 |
|
|
| 390 |
|
|
| 185 |
|
|
| - |
|
Commercial paper(2) |
| Short-term investments |
|
| Level 2 |
|
|
| - |
|
|
| - |
|
|
| 99 |
|
Time deposits(3) |
| Short-term investments |
|
| Level 2 |
|
|
| - |
|
|
| - |
|
|
| 221 |
|
Money market funds(2) |
| Other current assets |
|
| Level 1 |
|
|
| 7 |
|
|
| 16 |
|
|
| 10 |
|
Time deposits(3) |
| Other current assets |
|
| Level 2 |
|
|
| 101 |
|
|
| 101 |
|
|
| 102 |
|
Foreign currency derivative instruments(4) |
| Other current assets |
|
| Level 2 |
|
|
| 1 |
|
|
| 1 |
|
|
| - |
|
Interest rate swap derivative instruments(4) |
| Other current assets |
|
| Level 2 |
|
|
| 18 |
|
|
| - |
|
|
| - |
|
Marketable securities that fund deferred compensation(5) |
| Other assets |
|
| Level 1 |
|
|
| 49 |
|
|
| 48 |
|
|
| 47 |
|
Interest rate swap derivative instruments(4) |
| Other assets |
|
| Level 2 |
|
|
| 115 |
|
|
| 89 |
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| 78 |
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Liabilities |
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Cash flow hedge derivative instruments(4) |
| Accrued liabilities |
|
| Level 2 |
|
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| 4 |
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| - |
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| - |
|
(1)Balance sheet location is determined by the length to maturity from the current period-end date.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:(2)Valued at quoted market prices.
Money market funds.(3) Our money market fund investments were measured at fair value as they trade in an active market using quoted market prices and, therefore, were classified as Level 1.
Time deposits. Our time deposits are balances held with banking institutions that cannot be withdrawn for specified terms without a penalty. Time deposits are heldValued at face value plus accrued interest, which approximates fair value, and were classified as Level 2.value.
Foreign currency derivative instruments. (4)Comprised primarily of foreign currency forward contracts, our foreign currency derivative instruments were measured at fair valueValued 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. See Note 6, Derivative Instruments, for additional information.
Marketable securities that fund deferred compensation.(5) The assets that fund our deferred compensation consist of investments in corporate-owned life insurance, the value of which is based onValued using 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.
Interest rate swap derivative instruments. Our interest rate swap contracts were measured at fair value using readily observable inputs, such as the LIBOR interest rate. Our interest rate swap derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible fixed assets, operating lease assets, goodwill and other intangible assets, which are remeasured when the derived fair value is below the carrying value on our Condensed Consolidated Balance Sheets. For these assets, we do not periodically adjust the carrying value to fair value, except in the event of impairment. When we determine that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded within Selling, general and administrative (“SG&A”) expenses on our Condensed Consolidated Statements of Earnings for non-restructuring charges.
Fair value remeasurements of property and equipment and operating lease assets were as follows ($ in millions):
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| Impairments |
| Remaining |
| Three Months Ended |
| Nine Months Ended |
| Net Carrying Value(1) |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 |
Property and equipment (non-restructuring) | $ | 9 |
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| $ | 3 |
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| $ | 19 |
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| $ | 8 |
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| $ | - |
|
| $ | - |
|
Operating lease assets(2) |
| 1 |
|
|
| - |
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| 2 |
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| - |
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| - |
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| - |
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Total | $ | 10 |
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| $ | 3 |
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| $ | 21 |
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| $ | 8 |
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| $ | - |
|
| $ | - |
|
(1)Remaining net carrying value of assets impaired during the three months ended November 2, 2019, and November 3, 2018, approximates fair value as of November 2, 2019, and November 3, 2018.
(2)Represents activity related to operating lease assets post-adoption of ASC 842, Leases.
All of the fair value remeasurements included in the table above were based on significant unobservable inputs (Level 3). Fixed asset fair values were primarily derived using a discounted cash flow ("DCF") model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate.
Fair Value of Financial Instruments
Our financial instruments, other than those presented in the disclosures above, include cash, receivables, other investments, accounts payable, other payables and long-term debt. The fair values of cash, receivables, accounts payable and other payables approximated their carrying values because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy. Fair values for other investments held at cost are not readily available, but we estimate that the carrying values for these investments approximate their fair value. See Note 7, Debt, for information about the fair value of our long-term debt.
4. Leasesvalues.
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 recognizedLong-term debt is presented at carrying value on our Condensed Consolidated Balance SheetsSheets. If our long-term debt were recorded at fair value, it would be classified as either operating or finance leases atLevel 2 in the inception of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components. For lease agreements entered into or reassessed after the adoption of ASC 842, Leases, we have elected to combine lease and non-lease components for all classes of assets. Leases with an initial term of 12 months or less are not recorded on our Condensed Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.fair value hierarchy. Long-term debt balances were as follows ($ in millions):
Operating lease assets represent
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| August 1, 2020 |
| February 1, 2020 |
| August 3, 2019 |
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|
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| Fair Value |
| Carrying Value |
| Fair Value |
| Carrying Value |
| Fair Value |
| Carrying Value |
Long-term debt(1) | $ | 1,386 |
|
| $ | 1,283 |
|
| $ | 1,322 |
|
| $ | 1,239 |
|
| $ | 1,295 |
|
| $ | 1,228 |
|
(1)Includes the right to use an underlying asset for the lease termcurrent portion of long-term debt and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. We use a collateralized incremental borrowing rate based on the information available at the commencement date, including the lease term, in determining the present value of future payments. Our operating leases also typically require payment of real estate taxes, common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. In instances where they are fixed, they are included due to our election to combine lease and non-lease components. Operating lease assets also include prepaid lease payments and initial directexcludes debt discounts, issuance costs and are reduced byfinance 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. obligations.
Supplemental balance sheet information related to our leases was as follows ($ in millions):
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| Balance Sheet Location
|
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| November 2, 2019
|
Assets
|
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|
|
|
Operating leases
| Operating lease assets
|
|
|
|
|
| $
| 2,751
|
|
Finance leases
| Property and equipment, net(1)
|
|
|
|
|
|
| 36
|
|
Total lease assets
|
|
|
|
|
|
| $
| 2,787
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current:
|
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|
|
|
|
|
|
|
|
Operating leases
| Current portion of operating lease liabilities
|
|
|
|
|
| $
| 644
|
|
Finance leases
| Current portion of long-term debt
|
|
|
|
|
|
| 14
|
|
Non-current:
|
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|
|
|
|
|
|
|
|
Operating leases
| Long-term operating lease liabilities
|
|
|
|
|
|
| 2,200
|
|
Finance leases
| Long-term debt
|
|
|
|
|
|
| 25
|
|
Total lease liabilities
|
|
|
|
|
|
| $
| 2,883
|
|
(1)Finance leases are recorded net of accumulated depreciation of $51 million.
Components of our total lease cost were as follows ($ in millions):
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|
| Three Months Ended |
| Nine Months Ended |
| Statement of Earnings Location |
| November 2, 2019 |
| November 2, 2019 |
Operating lease cost(1) | Cost of goods sold and SG&A(2) |
| $ | 196 |
|
| $ | 585 |
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
Depreciation of lease assets | Cost of goods sold and SG&A(2) |
|
| 3 |
|
|
| 10 |
|
Interest on lease liabilities | Interest expense |
|
| - |
|
|
| 1 |
|
Variable lease cost | Cost of goods sold and SG&A(2) |
|
| 66 |
|
|
| 201 |
|
Sublease income | SG&A |
|
| (3) |
|
|
| (12) |
|
Total lease cost |
|
| $ | 262 |
|
| $ | 785 |
|
(1)Includes short-term leases, which are immaterial.
(2)Supply chain-related amounts are included in Cost of goods sold.
Other information related to our leases was as follows ($ in millions):
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| Three Months Ended |
| Nine Months Ended |
|
|
| November 2, 2019 |
| November 2, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: |
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|
|
Operating cash flows from operating leases |
| $ | 204 |
|
| $ | 608 |
|
Operating cash flows from finance leases |
|
| - |
|
|
| 1 |
|
Financing cash flows from finance leases |
|
| 3 |
|
|
| 11 |
|
Lease assets obtained in exchange for new lease liabilities: |
|
|
|
|
|
|
|
|
Operating leases |
|
|
| 157 |
|
|
| 551 |
|
Finance leases |
|
|
| 4 |
|
|
| 8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 2, 2019 |
Weighted average remaining lease term: |
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
| 5.4 years |
|
Finance leases |
|
|
|
|
|
|
| 5.2 years |
|
Weighted average discount rate: |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
| 3.4 | % |
Finance leases |
|
|
|
|
|
|
| 4.2 | % |
Future lease payments under our non-cancellable leases as of November 2, 2019, were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Leases(1) |
| Finance Leases(1) |
Remainder of fiscal 2020 |
|
|
|
| $ | 139 |
|
| $ | 4 |
|
Fiscal 2021 |
|
|
|
|
| 777 |
|
|
| 14 |
|
Fiscal 2022 |
|
|
|
|
| 646 |
|
|
| 10 |
|
Fiscal 2023 |
|
|
|
|
| 494 |
|
|
| 6 |
|
Fiscal 2024 |
|
|
|
|
| 369 |
|
|
| 3 |
|
Fiscal 2025 |
|
|
|
|
| 260 |
|
|
| 2 |
|
Thereafter |
|
|
|
|
| 440 |
|
|
| 5 |
|
Total future undiscounted lease payments |
|
|
|
|
| 3,125 |
|
|
| 44 |
|
Less imputed interest |
|
|
|
|
| 281 |
|
|
| 5 |
|
Total reported lease liability |
|
|
|
| $ | 2,844 |
|
| $ | 39 |
|
(1)Lease payments exclude $19 million of legally binding fixed costs for leases signed but not yet commenced, primarily related to operating leases.
In accordance with the prior guidance, ASC 840, Leases, our leases were previously designated as either capital, financing or operating. Previously designated capital leases are now considered finance leases under the new guidance, ASC 842, Leases, while our previously existing financing leases have been derecognized and reclassified as operating leases. The designation of operating leases remains substantially unchanged under the new guidance. The future minimum lease payments by fiscal year as determined prior to the adoption of ASC 842, Leases, under our previously designated capital, financing and operating leases (not including contingent rent) as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capital Leases |
| Financing Leases |
| Operating Leases(1) |
Fiscal 2020 | $ | 14 |
|
| $ | 48 |
|
| $ | 700 |
|
Fiscal 2021 |
| 11 |
|
|
| 42 |
|
|
| 648 |
|
Fiscal 2022 |
| 7 |
|
|
| 35 |
|
|
| 513 |
|
Fiscal 2023 |
| 4 |
|
|
| 24 |
|
|
| 371 |
|
Fiscal 2024 |
| 2 |
|
|
| 16 |
|
|
| 253 |
|
Thereafter |
| 7 |
|
|
| 40 |
|
|
| 476 |
|
Total minimum lease payments |
| 45 |
|
|
| 205 |
|
| $ | 2,961 |
|
Less amount representing interest |
| (6) |
|
|
| (24) |
|
|
|
|
|
Present value of minimum lease payments |
| 39 |
|
|
| 181 |
|
|
|
|
|
Less current maturities |
| (12) |
|
|
| (43) |
|
|
|
|
|
Present value of minimum lease maturities, less current maturities | $ | 27 |
|
| $ | 138 |
|
|
|
|
|
(1)Operating lease obligations do not include payments to landlords covering real estate taxes and common area maintenance. These charges, if included, would have increased total operating lease obligations by $0.8 billion at February 2, 2019.
5.3. Goodwill and Intangible Assets
Goodwill
Balances related to goodwill were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 |
| Gross Carrying
Amount |
| Cumulative
Impairment |
| Gross Carrying
Amount |
| Cumulative
Impairment |
| Gross Carrying
Amount |
| Cumulative
Impairment |
Goodwill | $ | 1,657 |
|
| $ | (675) |
|
| $ | 1,590 |
|
| $ | (675) |
|
| $ | 1,596 |
|
| $ | (675) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| August 1, 2020 |
| February 1, 2020 |
| August 3, 2019 |
| Gross Carrying
Amount |
| Cumulative
Impairment |
| Gross Carrying
Amount |
| Cumulative
Impairment |
| Gross Carrying
Amount |
| Cumulative
Impairment |
Domestic | $ | 1,053 |
|
| $ | (67) |
|
| $ | 1,051 |
|
| $ | (67) |
|
| $ | 1,032 |
|
| $ | (67) |
|
International |
| 608 |
|
|
| (608) |
|
|
| 608 |
|
|
| (608) |
|
|
| 608 |
|
|
| (608) |
|
Total | $ | 1,661 |
|
| $ | (675) |
|
| $ | 1,659 |
|
| $ | (675) |
|
| $ | 1,640 |
|
| $ | (675) |
|
No impairment charges were recorded during the fiscal periods presented.
Indefinite-Lived Intangible Assets
We have indefinite-lived intangible assets primarily relatedIn the first quarter of fiscal 2021, we made the decision to phase out our Pacific Sales tradename which arein our U.S. Best Buy stores over the coming 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 August 1, 2020. The carrying value of the tradename was $18 million as of February 1, 2020, and August 3, 2019, respectively, and was recorded within Other assets on our Condensed Consolidated Balance Sheets. The carrying value of indefinite-lived intangible assets was $18 million as of November 2, 2019, February 2, 2019, and November 3, 2018.
Definite-Lived Intangible Assets
We have definite-lived intangible assets which are recorded within Other assets on our Condensed Consolidated Balance Sheets. Balances of our definite-lived intangible assets wereSheets as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 |
| Weighted-Average | August 1, 2020 |
| February 1, 2020 |
| August 3, 2019 |
| Weighted-Average |
| Gross Carrying
Amount |
| Accumulated
Amortization |
| Gross Carrying
Amount |
| Accumulated
Amortization |
| Gross Carrying
Amount |
| Accumulated
Amortization |
| Useful Life Remaining as of November 2, 2019 (in years) | Gross Carrying
Amount |
| Accumulated
Amortization |
| Gross Carrying
Amount |
| Accumulated
Amortization |
| Gross Carrying
Amount |
| Accumulated
Amortization |
| Useful Life Remaining as of August 1, 2020 (in years) |
Customer relationships | $ | 341 |
|
| $ | 56 |
|
| $ | 258 |
|
| $ | 16 |
|
| $ | 258 |
|
| $ | 4 |
|
|
| 7.3 |
| $ | 339 |
|
| $ | 97 |
|
| $ | 339 |
|
| $ | 70 |
|
| $ | 341 |
|
| $ | 42 |
|
|
| 6.8 |
|
Tradename |
| 63 |
| 9 |
| 63 |
| 3 |
| 61 |
| 1 |
| 6.9 |
| |
Tradenames | |
| 81 |
| 17 |
| 63 |
| 10 |
| 63 |
| 7 |
| 5.3 |
|
Developed technology |
| 56 |
|
|
| 11 |
|
|
| 52 |
|
|
| 4 |
|
|
| 52 |
|
|
| 1 |
|
|
| 3.8 |
|
| 56 |
|
|
| 21 |
|
|
| 56 |
|
|
| 15 |
|
|
| 52 |
|
|
| 9 |
|
|
| 3.1 |
|
Total | $ | 460 |
|
| $ | 76 |
|
| $ | 373 |
|
| $ | 23 |
|
| $ | 371 |
|
| $ | 6 |
|
|
| 6.8 |
| $ | 476 |
|
| $ | 135 |
|
| $ | 458 |
|
| $ | 95 |
|
| $ | 456 |
|
| $ | 58 |
|
|
| 6.1 |
|
We recorded $18 million and $53 million of aggregate amortizationAmortization expense related to definite-lived intangible assets during the three and nine months ended November 2, 2019, respectively, and $6 million for both the three and nine months ended November 3, 2018. was as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
|
|
| Statement of Earnings Location |
| August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Amortization expense | SG&A |
|
| $ | 20 |
|
| $ | 18 |
|
| $ | 40 |
|
| $ | 35 |
|
Amortization expense expected to be recognized in future periods is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization Expense |
Remainder of fiscal 20202021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 19
|
|
Fiscal 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7441
|
|
Fiscal 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7480
|
|
Fiscal 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7479
|
|
Fiscal 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 54 |
|
Fiscal 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 16 |
|
Fiscal 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 16 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7355
|
|
4. Debt
Short-Term Debt
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 $1.25 billion Facility on March 19, 2020, which remained outstanding until July 27, 2020, when the Facility was repaid in full. There were 0 borrowings outstanding under the Facility as of August 1, 2020, February 1, 2020, or August 3, 2019.
Information regarding our short-term debt for the six months ended August 1, 2020, was as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average Amount Outstanding |
| Maximum Amount Outstanding |
| Weighted Average Interest Rate |
Short-term debt |
| $ | 893 |
|
| $ | 1,250 |
|
|
| 1.4 | % |
Long-Term Debt
Long-term debt consisted of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| August 1, 2020 |
| February 1, 2020 |
| August 3, 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 |
|
| 133 |
|
|
| 89 |
|
|
| 78 |
|
Subtotal |
|
|
| 1,283 |
|
|
| 1,239 |
|
|
| 1,228 |
|
Debt discounts and issuance costs |
|
| (5) |
|
|
| (6) |
|
|
| (6) |
|
Finance lease obligations |
|
| 35 |
|
|
| 38 |
|
|
| 39 |
|
Total long-term debt |
|
| 1,313 |
|
|
| 1,271 |
|
|
| 1,261 |
|
Less current portion |
|
| 681 |
|
|
| 14 |
|
|
| 14 |
|
Total long-term debt, less current portion |
| $ | 632 |
|
| $ | 1,257 |
|
| $ | 1,247 |
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| August 1, 2020 |
| February 1, 2020 |
| August 3, 2019 |
Receivables, net(1) | $ | 567 |
|
| $ | 567 |
|
| $ | 561 |
|
Short-term contract liabilities included in: |
|
|
|
|
|
|
|
|
|
|
|
Unredeemed gift card liabilities |
| 267 |
|
|
| 281 |
|
|
| 264 |
|
Deferred revenue |
| 699 |
|
|
| 501 |
|
|
| 468 |
|
Accrued liabilities |
| 60 |
|
|
| 139 |
|
|
| 149 |
|
Long-term contract liabilities included in: |
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities |
| 7 |
|
|
| 9 |
|
|
| 9 |
|
(1)Receivables are recorded net of allowances for doubtful accounts of $28 million, $14 million and $13 million as of August 1, 2020, February 1, 2020, and August 3, 2019, respectively.
During the first six months of fiscal 2021 and fiscal 2020, $662 million and $638 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.
6. Derivative Instruments
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 strategies for undertaking the hedge transaction. In addition, we have derivatives which are not designated as hedging instruments.
Net Investment Hedges
We use foreign exchange forward contracts to hedge against the effect of Canadian dollar exchange rate fluctuations on a portion of our net investment in our Canadian operations. The contracts have terms of up to 12 months. For a net investment hedge, we recognize changes in the fair value of the derivative as a component of foreign currency translation within other comprehensive income to offset a portion of the change in translated value of the net investment being hedged, until the investment is sold or liquidated. We limit recognition in net earnings of amounts previously recorded in other comprehensive income to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. We report the gains and losses, if any, related to the amount excluded from the assessment of hedge effectiveness in net earnings.
Interest Rate Swaps
We utilized "receive fixed-rate, pay variable-rate"also use 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 (“2021 Notes”), 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 of up to 12 months. These derivative instruments are not designated in hedging relationships and, therefore, we record gains and losses on these contracts directly to net earnings.
SummaryDuring the second quarter of Derivative Balancesfiscal 2021, we entered into Treasury Rate Lock ("T-Lock") contracts with an aggregate notional amount of $325 million to hedge the base interest rate variability on a portion of a potential refinancing of our maturing 2021 Notes. The T-Lock contracts are designated as cash flow hedges of interest rate risk. The fair value of the T-Lock contracts is
recognized as an asset or liability with an offsetting position in Accumulated other comprehensive income (“AOCI”) on our Condensed Consolidated Balance Sheets. The T-Lock contracts would be cash settled to the extent new debt is issued at which time a pro-rata amount from AOCI will be released and recorded in Interest expense on our Condensed Consolidated Statements of Earnings as interest is accrued.
GrossOur derivative instruments designated as net investment hedges, interest rate swaps and cash flow hedges are recorded on our Condensed Consolidated Balance Sheets at fair value. See Note 2, Fair Value Measurements, for gross fair values of our outstanding derivative instruments and the corresponding classificationsfair value classifications.
Notional amounts of our derivative instruments were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Assets |
Contract Type | Balance Sheet Location |
|
|
|
| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 |
Derivatives designated as net investment hedges | Other current assets |
|
|
|
| $ | - |
|
| $ | - |
|
| $ | 1 |
|
Derivatives designated as interest rate swaps | Other assets |
|
|
|
|
| 70 |
|
|
| 26 |
|
|
| - |
|
Total |
|
|
|
|
|
|
|
|
|
| $ | 70 |
|
| $ | 26 |
|
| $ | 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
Contract Type | Balance Sheet Location |
|
|
| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 |
|
| August 1, 2020 |
| February 1, 2020 |
| August 3, 2019 |
Derivatives designated as net investment hedges | |
|
| $ | 68 |
|
| $ | 129 |
|
| $ | 23 |
|
Derivatives designated as interest rate swaps | Long-term liabilities |
|
|
| $ | - |
|
| $ | 1 |
|
| $ | 22 |
|
|
|
| 1,150 |
|
| 1,150 |
|
| 1,150 |
|
Derivatives designated as cash flow hedges | |
|
|
| 325 |
|
| - |
|
| - |
|
No hedge designation (foreign exchange contracts) | |
|
|
| 37 |
|
|
| 31 |
|
|
| 33 |
|
Total | |
|
| $ | 1,580 |
|
| $ | 1,310 |
|
| $ | 1,206 |
|
Effects of derivative instruments on other comprehensive income ("OCI") were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
Derivatives designated as net investment hedges |
|
|
|
|
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 |
Pre-tax gain recognized in OCI |
|
|
|
|
| $ | - |
|
| $ | 2 |
|
| $ | - |
|
| $ | 21 |
|
Effects ofour derivatives not designated as hedging instruments on our Condensed Consolidated Statements of Earnings were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gain Recognized
|
| Gain Recognized
|
|
|
|
|
|
| Three Months Ended
|
| Nine Months Ended
|
Contract Type
| Statement of Earnings Location
| November 2, 2019
|
| November 3, 2018
|
| November 2, 2019
|
| November 3, 2018
|
No hedge designation (foreign exchange contracts)
| SG&A
| $
| -
|
|
| $
| -
|
|
| $
| -
|
|
| $
| 2
|
|
Effects of interest rate derivatives and adjustments to the carrying value of long-term debt on our Condensed Consolidated Statements of Earnings were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gain (Loss) Recognized |
| Gain (Loss) Recognized |
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
Contract Type | Statement of Earnings Location | November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 |
Interest rate swap contracts | Interest expense | $ | (8) |
|
| $ | (15) |
|
| $ | 45 |
|
| $ | (16) |
|
Adjustments to carrying value of long-term debt | Interest expense |
| 8 |
|
|
| 15 |
|
|
| (45) |
|
|
| 16 |
|
Total |
|
|
|
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Notional amounts of our derivative instruments were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notional Amount |
Contract Type |
|
|
|
|
|
|
|
|
|
| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 |
Derivatives designated as net investment hedges |
|
|
|
|
|
|
|
|
|
| $ | 30 |
|
| $ | 15 |
|
| $ | 16 |
|
Derivatives designated as interest rate swaps |
|
|
|
|
|
|
|
|
|
|
| 1,150 |
|
|
| 1,150 |
|
|
| 1,150 |
|
No hedge designation (foreign exchange contracts) |
|
|
|
|
|
|
| 62 |
|
|
| 9 |
|
|
| 67 |
|
Total |
|
|
|
|
|
|
|
|
|
| $ | 1,242 |
|
| $ | 1,174 |
|
| $ | 1,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gain (Loss) Recognized |
| Statement of | Three Months Ended |
| Six Months Ended |
| Earnings Location | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Interest rate swap contracts | Interest expense | $ | 15 |
|
| $ | 55 |
|
| $ | 44 |
|
| $ | 53 |
|
Adjustments to carrying value of long-term debt | Interest expense |
| (15) |
|
|
| (55) |
|
|
| (44) |
|
|
| (53) |
|
Total |
|
|
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
7. Debt
Short-Term Debt
We have a $1.25 billion five year senior unsecured revolving credit facility agreement with a syndicate of banks. The agreement permits borrowings of up to $1.25 billion and expires in April 2023. There were 0 borrowings outstanding as of November 2, 2019, February 2, 2019, or November 3, 2018.
Long-Term Debt
Long-term debt consisted of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 |
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 |
| 70 |
|
|
| 25 |
|
|
| (22) |
|
Subtotal |
| 1,220 |
|
|
| 1,175 |
|
|
| 1,128 |
|
Debt discounts and issuance costs |
| (6) |
|
|
| (7) |
|
|
| (8) |
|
Financing lease obligations (1) |
| - |
|
|
| 181 |
|
|
| 189 |
|
Capital lease obligations (1) |
| - |
|
|
| 39 |
|
|
| 17 |
|
Finance lease obligations (1) |
| 39 |
|
|
| - |
|
|
| - |
|
Total long-term debt |
| 1,253 |
|
|
| 1,388 |
|
|
| 1,326 |
|
Less current portion |
| 14 |
|
|
| 56 |
|
|
| 46 |
|
Total long-term debt, less current portion | $ | 1,239 |
|
| $ | 1,332 |
|
| $ | 1,280 |
|
(1)See Note 4, Leases, for additional information regarding our lease obligations.
The fair value of total long-term debt, excluding debt discounts and issuance costs and lease obligations, approximated $1,288 million, $1,178 million, and $1,133 million as of November 2, 2019, February 2, 2019, and November 3, 2018, respectively, based primarily on market prices quoted from external sources, compared with carrying values of $1,220 million, $1,175 million, and $1,128 million, respectively. If long-term debt were measured at fair value in the financial statements, it would be classified primarily as Level 2 in the fair value hierarchy.
See Note 6, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, for additional information regarding the terms of our other debt facilities, debt instruments and other obligations.
8. Revenue Recognition
We generate revenue primarily from the sale of products and services, both as a principal and as an agent. We generate all of our operating revenue from contracts with customers. Our revenue excludes sales and usage-based taxes collected.
Revenue from product sales and services is reported net of sales refunds, which includes an estimate of future returns and contract cancellations based on historical refund rates, with a corresponding reduction to cost of sales. For revenue transactions that involve more than one performance obligation, we defer the revenue associated with any unsatisfied performance obligation until the obligation is satisfied.
Our contract liabilities primarily relate to product merchandise not yet delivered to customers; unredeemed gift cards; services not yet completed; and options that provide a material right to customers, such as our customer loyalty programs. We do not have any material contract assets.
Information about our contracts with customers, which reflects the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied, was as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 |
Receivables, net(1) | $ | 591 |
|
| $ | 565 |
|
| $ | 588 |
|
Short-term contract liabilities included in: |
|
|
|
|
|
|
|
|
|
|
|
Unredeemed gift cards |
| 271 |
|
|
| 290 |
|
|
| 281 |
|
Deferred revenue |
| 445 |
|
|
| 446 |
|
|
| 449 |
|
Accrued liabilities |
| 145 |
|
|
| 146 |
|
|
| 149 |
|
Long-term contract liabilities included in: |
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities |
| 9 |
|
|
| 11 |
|
|
| 12 |
|
(1)Receivables are recorded net of allowances for doubtful accounts of $13 million, $13 million, and $15 million as of November 2, 2019, February 2, 2019, and November 3, 2018, respectively.
During the first nine months of fiscal 2020 and 2019, $762 million and $729 million of revenue was recognized, respectively, that was included in the contract liabilities at the beginning of the respective periods. NaN revenue was recognized from performance obligations satisfied in previous periods.
Revenue from our contract liabilities expected to be recognized in future periods if performance of the contract is expected to have a duration of more than one year is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 2, 2019(1)
|
Remainder of fiscal 2020
|
|
|
|
|
|
|
|
| $
| 3
|
|
Fiscal 2021
|
|
|
|
|
|
|
|
|
| 8
|
|
Fiscal 2022
|
|
|
|
|
|
|
|
|
| 4
|
|
Fiscal 2023
|
|
|
|
|
|
|
|
|
| 1
|
|
Thereafter
|
|
|
|
|
|
|
|
|
| -
|
|
(1)Amounts exclude unsatisfied performance obligations from contract liability balances with a duration of one year or less. The estimated transaction price revenue disclosed above also does not include amounts of variable consideration attributable to contracts where the consideration is constrained at November 2, 2019.
See Note 13, Segments, for a disaggregation of revenue by reportable segment and product category, which represents how our chief operating decision maker reviews information internally to evaluate our financial performance and to make resource allocation and other decisions for the enterprise.
9. Restructuring Charges
Restructuring charges incurred in the third quarter and first nine months of fiscal 2020 were $(7) million and $41 million, respectively, related to U.S. retail operating model changes. Restructuring charges incurred in the third quarter and first nine months of fiscal 2019 were $0 million and $47 million, respectively, related to Best Buy Mobile.
U.S. Retail Operating Model
In the second quarter of fiscal 2020, we made changes primarily related to our U.S. retail operating model to increase organization effectiveness and create a more seamless customer experience across all channels. All charges incurred relate to termination benefits from continuing operations and are presented in Restructuring charges on our Condensed Consolidated Statements of Earnings.
The following table summarizes our restructuring accrual activity during the first nine months of fiscal 2020 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Termination Benefits
|
Balance at February 2, 2019
|
|
|
|
|
|
|
|
|
| $
| -
|
|
Charges
|
|
|
|
|
|
|
|
|
|
| 48
|
|
Cash payments
|
|
|
|
|
|
|
|
|
|
| (23)
|
|
Adjustments(1)
|
|
|
|
|
|
|
|
|
|
| (7)
|
|
Balance at November 2, 2019
|
|
|
|
|
|
|
|
|
| $
| 18
|
|
(1)Adjustments are related to higher-than-expected employee retention, and therefore lower severance expenses.
Best Buy Mobile
On March 1, 2018, we announced our intent to close all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S. This decision was a result of changing economics in the mobile industry since we began opening these stores in 2006, along with the integration of our mobile model into our core stores and online channel, which are more economically compelling today. All restructuring charges related to this plan are from continuing operations and are presented in Restructuring charges on our Condensed Consolidated Statements of Earnings.
Restructuring charges incurred were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended
November 3, 2018 |
| Nine Months Ended
November 3, 2018 |
| Cumulative Amount
as of November 2, 2019 |
Property and equipment impairments |
| $ | - |
|
| $ | - |
|
| $ | 1 |
|
Termination benefits |
|
| - |
|
|
| (2) |
|
|
| 6 |
|
Facility closure and other costs |
|
| - |
|
|
| 49 |
|
|
| 49 |
|
Total restructuring charges |
| $ | - |
|
| $ | 47 |
|
| $ | 56 |
|
The following table summarizes our restructuring accrual activity during the first nine months of fiscal 2019 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Termination Benefits |
| Facility Closures
and Other Costs |
| Total |
Balances at February 3, 2018 |
| $ | 8 |
|
| $ | - |
|
| $ | 8 |
|
Charges |
|
| 1 |
|
|
| 49 |
|
|
| 50 |
|
Cash payments |
|
| (6) |
|
|
| (48) |
|
|
| (54) |
|
Adjustments(1) |
|
| (3) |
|
|
| - |
|
|
| (3) |
|
Balances at November 3, 2018 |
| $ | - |
|
| $ | 1 |
|
| $ | 1 |
|
(1)Adjustments represent changes in retention assumptions.
10. Earnings per Share
We compute our basic earnings per share based on the weighted-average number of common shares outstanding and our diluted earnings per share based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued. Potentially dilutive securities include stock options, nonvested share awards, dividend equivalents attached to nonvested share awards that are settled in shares of Best Buy common stock and shares issuable under our employee stock purchase plan. Nonvested market-based share awards and nonvested performance-based share awards are included in the average diluted shares outstanding for each period, if established market or performance criteria have been met at the end of the respective periods.
Reconciliations of the numerators and denominators of basic and diluted earnings per share were as follows ($ and shares in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings | $ | 293 |
|
| $ | 277 |
|
| $ | 796 |
|
| $ | 729 |
| $ | 432 |
|
| $ | 238 |
|
| $ | 591 |
|
| $ | 503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
| 263.2 |
| 274.3 |
| 266.0 |
| 278.6 |
|
| 259.5 |
| 267.1 |
| 259.0 |
| 267.4 |
|
Dilutive effect of stock compensation plan awards |
| 2.0 |
|
|
| 5.0 |
|
|
| 3.1 |
|
|
| 5.2 |
|
| 2.6 |
|
|
| 2.3 |
|
|
| 2.4 |
|
|
| 3.5 |
|
Weighted-average common shares outstanding, assuming dilution |
| 265.2 |
|
|
| 279.3 |
|
|
| 269.1 |
|
|
| 283.8 |
|
| 262.1 |
|
|
| 269.4 |
|
|
| 261.4 |
|
|
| 270.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential shares which were anti-dilutive and excluded from weighted-average share computations |
| 1.1 |
| 0.1 |
|
|
| 0.9 |
| 0.1 |
|
| 0.1 |
| 0.9 |
|
|
| 0.5 |
| 0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share | $ | 1.11 |
| $ | 1.01 |
|
| $ | 2.99 |
| $ | 2.62 |
| $ | 1.67 |
| $ | 0.89 |
|
| $ | 2.28 |
| $ | 1.88 |
|
Diluted earnings per share | $ | 1.10 |
| $ | 0.99 |
|
| $ | 2.96 |
| $ | 2.57 |
| $ | 1.65 |
| $ | 0.89 |
|
| $ | 2.26 |
| $ | 1.86 |
|
11.8. Repurchase of Common Stock
On February 23, 2019, our Board of Directors ("Board") authorized a $3.0 billion share repurchase program. There is no expiration date governing the period over which we can repurchase shares under the February 2019 authorization. On March 21, 2020, we announced the suspension of all share repurchases given the uncertainty surrounding the impact of COVID-19.
Information regarding the shares we repurchased was as follows ($ and shares in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Total cost of shares repurchased | $ | 371 |
|
| $ | 369 |
|
| $ | 707 |
|
| $ | 1,143 |
| $ | - |
|
| $ | 230 |
|
| $ | 56 |
|
| $ | 336 |
|
Average price per share | $ | 67.28 |
|
| $ | 76.04 |
| $ | 68.56 |
|
| $ | 74.10 |
| $ | - |
|
| $ | 69.71 |
| $ | 86.30 |
|
| $ | 70.04 |
|
Number of shares repurchased |
| 5.5 |
|
| 4.8 |
| 10.3 |
|
| 15.4 |
|
| - |
|
| 3.3 |
| 0.6 |
|
| 4.8 |
|
As of November 2, 2019, $2.3August 1, 2020, $1.9 billion of the $3.0 billion share repurchase authorization was available. Between the end of the third quarter of fiscal 2020 on November 2, 2019, and December 4, 2019, we repurchased an incremental 1.4 million shares of our common stock at a cost of $108 million.
12. Comprehensive Income
Changes in accumulated other comprehensive income, net of tax were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 |
Foreign currency translation adjustments | $ | (4) |
|
| $ | 4 |
|
| $ | (4) |
|
| $ | (14) |
|
See Note 6, Derivative Instruments, for information on gains and losses on our net investment hedges, which are included in foreign currency translation adjustments. 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.
13.9. Segments
Our chief operating decision maker ("CODM") is our Chief Executive Officer. Our business is organized into 2 reportable segments: Domestic (which is comprised of all states, districts and territories of the U.S.) and International (which is comprised of all operations in Canada and Mexico). Our CODM has ultimate responsibility for enterprise decisions. Our CODM determines, in particular, resource allocation for, and monitors the performance of, the consolidated enterprise, the Domestic segment and the International segment. The Domestic segment managers and International segment managers have responsibility for operating decisions, allocating resources and assessing performance within their respective segments. Our CODM relies on internal management reporting that analyzes enterprise results to the net earnings level and segment results to the operating income level.
We aggregate our Domestic and Health (previously referred to as 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 segmentSegment and product category revenue information was as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
|
| Three Months Ended |
| Six Months Ended |
|
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 |
|
|
| August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Revenue by reportable segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 8,964 |
| $ | 8,756 |
|
| $ | 26,266 |
| $ | 25,807 |
|
|
|
| $ | 9,128 |
| $ | 8,821 |
|
| $ | 17,043 |
| $ | 17,302 |
|
International |
|
| 800 |
|
|
| 834 |
|
|
| 2,176 |
|
|
| 2,271 |
|
|
|
|
| 782 |
|
|
| 715 |
|
|
| 1,429 |
|
|
| 1,376 |
|
Total revenue |
| $ | 9,764 |
|
| $ | 9,590 |
|
| $ | 28,442 |
|
| $ | 28,078 |
|
|
|
| $ | 9,910 |
|
| $ | 9,536 |
|
| $ | 18,472 |
|
| $ | 18,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenue by product category (1) |
|
|
|
|
|
|
|
|
|
| |
Revenue by product category | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Mobile Phones |
| $ | 4,238 |
| $ | 4,125 |
|
| $ | 12,006 |
| $ | 11,947 |
|
|
|
| $ | 4,306 |
| $ | 3,917 |
|
| $ | 8,111 |
| $ | 7,768 |
|
Consumer Electronics |
|
| 2,659 |
| 2,665 |
|
|
| 8,101 |
| 8,091 |
|
|
|
|
| 2,634 |
| 2,780 |
|
|
| 4,853 |
| 5,442 |
|
Appliances |
|
| 1,071 |
| 964 |
|
|
| 3,170 |
| 2,860 |
|
|
|
|
| 1,290 |
| 1,138 |
|
|
| 2,225 |
| 2,099 |
|
Entertainment |
|
| 441 |
| 558 |
|
|
| 1,353 |
| 1,617 |
|
|
|
|
| 411 |
| 439 |
|
|
| 921 |
| 912 |
|
Services |
|
| 519 |
| 409 |
|
|
| 1,526 |
| 1,185 |
|
|
|
|
| 462 |
| 510 |
|
|
| 883 |
| 1,008 |
|
Other |
|
| 36 |
|
|
| 35 |
|
|
| 110 |
|
|
| 107 |
|
|
|
|
| 25 |
|
|
| 37 |
|
|
| 50 |
|
|
| 73 |
|
Total Domestic revenue |
| $ | 8,964 |
|
| $ | 8,756 |
|
| $ | 26,266 |
|
| $ | 25,807 |
|
|
|
| $ | 9,128 |
|
| $ | 8,821 |
|
| $ | 17,043 |
|
| $ | 17,302 |
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Mobile Phones |
| $ | 407 |
| $ | 425 |
|
| $ | 1,020 |
| $ | 1,092 |
|
|
|
| $ | 382 |
| $ | 308 |
|
| $ | 691 |
| $ | 613 |
|
Consumer Electronics |
|
| 229 |
| 221 |
|
|
| 663 |
| 644 |
|
|
|
|
| 212 |
| 231 |
|
|
| 388 |
| 434 |
|
Appliances |
|
| 67 |
| 69 |
|
|
| 209 |
| 215 |
|
|
|
|
| 91 |
| 83 |
|
|
| 150 |
| 142 |
|
Entertainment |
|
| 37 |
| 55 |
|
|
| 109 |
| 140 |
|
|
|
|
| 49 |
| 36 |
|
|
| 106 |
| 72 |
|
Services |
|
| 50 |
| 46 |
|
|
| 138 |
| 127 |
|
|
|
|
| 35 |
| 45 |
|
|
| 67 |
| 88 |
|
Other |
|
| 10 |
|
|
| 18 |
|
|
| 37 |
|
|
| 53 |
|
|
|
|
| 13 |
|
|
| 12 |
|
|
| 27 |
|
|
| 27 |
|
Total International revenue |
| $ | 800 |
|
| $ | 834 |
|
| $ | 2,176 |
|
| $ | 2,271 |
|
|
|
| $ | 782 |
|
| $ | 715 |
|
| $ | 1,429 |
|
| $ | 1,376 |
|
(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.
OperatingSegment operating income by reportable segment and the reconciliation to earnings before income tax expense was as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
|
| Three Months Ended |
| Six Months Ended |
|
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 |
|
|
| August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Domestic |
| $ | 388 |
|
| $ | 315 |
|
| $ | 1,029 |
|
| $ | 911 |
|
|
|
| $ | 524 |
|
| $ | 309 |
|
| $ | 765 |
|
| $ | 641 |
|
International |
|
| 7 |
|
|
| 7 |
|
|
| 13 |
|
|
| 11 |
|
|
|
|
| 44 |
|
|
| 4 |
|
|
| 32 |
|
|
| 6 |
|
Total operating income |
|
| 395 |
|
|
| 322 |
|
|
| 1,042 |
|
|
| 922 |
|
|
|
|
| 568 |
|
|
| 313 |
|
|
| 797 |
|
|
| 647 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
| |
Gain on sale of investments |
| 1 |
| 12 |
|
|
| 1 |
| 12 |
| |
Other income (expense) | |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income and other |
| 9 |
| 11 |
|
|
| 33 |
| 35 |
|
|
|
| 8 |
| 10 |
|
|
| 14 |
| 24 |
|
Interest expense |
|
| (16) |
|
|
| (15) |
|
|
| (50) |
|
|
| (53) |
|
|
|
|
| (15) |
|
|
| (16) |
|
|
| (32) |
|
|
| (34) |
|
Earnings before income tax expense |
| $ | 389 |
|
| $ | 330 |
|
| $ | 1,026 |
|
| $ | 916 |
|
|
|
| $ | 561 |
|
| $ | 307 |
|
| $ | 779 |
|
| $ | 637 |
|
Assets by reportable segment were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| February 1, 2020 |
| August 3, 2019 |
Domestic |
|
|
|
| $ | 15,442 |
|
| $ | 11,908 |
|
| $ | 13,812 |
| $ | 15,964 |
|
| $ | 14,247 |
|
| $ | 13,714 |
|
International |
|
|
|
| 1,484 |
|
|
| 993 |
|
|
| 1,188 |
|
| 1,448 |
|
|
| 1,344 |
|
|
| 1,264 |
|
Total assets |
|
|
|
| $ | 16,926 |
|
| $ | 12,901 |
|
| $ | 15,000 |
| $ | 17,412 |
|
| $ | 15,591 |
|
| $ | 14,978 |
|
14.
10. 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.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” refers to Best Buy Co., Inc. and its consolidated subsidiaries. Any references to our website addresses do not constitute incorporation by reference of the information contained on the websites.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A is presented in the following sections:
Overview
Business Strategy 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.
Overview
Our 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 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. 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 segment only). 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 in store, curbside, at an alternative pick-up location or take delivery direct to their homes. All periods presented apply this methodology consistently.
In March 2020, the World Health Organization declared the outbreak of novel coronavirus disease ("COVID-19") as a pandemic. All stores that were temporarily closed as a result of COVID-19 or operating a curbside-only operating model are included in comparable sales.
On October 1, 2018, we acquired all outstanding shares of 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 and six months ended August 1, 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 consolidated sales growth based on interim period data, which we use to monitor transactional revenue performance on a daily or weekly interval. For a period in which we may experience 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 weekly sales growth estimates represent the year-over-year change compared to the same period in the prior fiscal year. Weekly sales growth is based on absolute sales dollar changes and is not presented in accordance with our comparable sales definition. Interim sales data is unaudited and excludes quarter-end revenue accounting adjustments. Other companies may track interim period sales data using different methods and systems, and therefore, the estimated data 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
InOur store operating model evolved during the third quarter as we responded to the changing COVID-19 environment. We ended the first quarter in a curbside-only model with no in-store customer shopping. At the beginning of fiscalthe second quarter, we started welcoming customers back into our stores by offering an in-store consultation service, by appointment only. On June 15, 2020, we generated $9.8 billion in revenue and grewbegan allowing customers to shop without an appointment at more than 800 stores across the U.S. By June 22, 2020, almost all of our Enterprise comparable sales by 1.7%, which is on top of 4.3% comparable sales growth in the third quarter of fiscal 2019. Our GAAP operating income rate increased by 60 basis points and our non-GAAP operating income rate increased by 70 basis points, both compared to the third quarter of fiscal 2019. We recorded GAAP diluted EPS of $1.10 and non-GAAP diluted EPS of $1.13, increases of 11% and 22% compared to the third quarter of fiscal 2019, respectively. Refer to the Consolidated Non-GAAP Financial Measures section belowstores were open for a detailed reconciliation of items that impacted our non-GAAP operating income and non-GAAP diluted EPS. We also returned $499 million to our shareholders in the third quarter of fiscal 2020, and $1.1 billion year-to-date, through share repurchases and dividends.shopping.
We continueProducts that help people work, learn, connect and cook at home, like computing, appliances and tablets, were the largest drivers of our sales growth for the quarter. Trends across most categories and services improved materially throughout the second quarter as we opened our stores more broadly for shopping, especially categories like large appliances and home theater that benefit from more experiential shopping. Based on interim sales data, consolidated sales during the last seven weeks of the second quarter grew approximately 16% compared to make progress on our Building the New Blue strategyprior-year period and our purposegrew 20% for the first three weeks of the third quarter compared to enrich lives through technology. Our strategy is to leverage our unique combination of tech and touch to meet every day human needs and build more and deeper relationships with customers. We believe our strategy will translate into an economic model that delivers results by better serving existing customers, capturing new demand, entering new spaces and building capabilities while maintaining profitability over time.the prior-year period.
DuringThroughout this time period and across all the quarter,ways customers can shop, we completedhave continued to adhere to safety protocols that limit capacity, follow strict social distancing practices and use proper protective equipment, including requiring our third acquisitionemployees and customers to wear masks.
This pandemic and the swift shift in supportcustomer buying behavior underscores the importance of our health strategy,strong multi-channel capabilities. For the full quarter, our Domestic online revenue grew our Total Tech Support membership, added more In-Home Advisors andapproximately 240% from last year. Even when stores opened for customer shopping, online sales growth continued to transformbe strong. We believe it is essential to provide options that let customers choose what works best for them. We provide fulfillment options customers have come to expect from all retailers like fast and free home delivery and buy online and pick up in store. We also offer curbside pickup, in-store consultations, and of course, home installation of appliances, TVs, fitness equipment and more. And our supply chain to improve our speed of delivery to customers. Earlier this year, we also made strategic changes to our field operations to accelerate growth and to createdigital experiences, such as chatting with an expert or leveraging a more seamless customer experience across all channels including stores,digital consultation in your home, and online.
In addition to these accomplishments, we continued to drive efficiencies and reduce costs to help fund investments. We have now successfully delivered cost reduction and efficiency targets totaling more than $2 billion over the last seven years. During the third quarter, we made progress against the new target we shared at our Investor Update meeting in September 2019 of $1 billion in cost reductions and efficiencies over the next five years.remain popular options.
TariffsAs we look forward, the environment is still evolving, and our operating model and supporting cost structure is evolving as well. The pandemic has accelerated the evolution of retail and compelled us to change our operating model in the best interest of our employees and customers. It has also allowed us to expedite some planned strategic changes that will set us up to emerge from this time even stronger.
We continuebelieve the following will be permanent and structural implications of the pandemic:
Customer shopping behavior will be permanently changed in a way that is even more digital and puts customers entirely in control to activelyshop how they want. Our strategy is to embrace that reality, and lead, not follow.
Our workforce will need to evolve in a way that meets the needs of customers while also providing more flexible opportunities for our people.
Technology is playing an even more crucial role in people’s lives due to the pandemic, and, as a result, our purpose to enrich lives through technology has never been more important. Said differently, people are using technology to address the risks relatedtheir needs in ways they never contemplated before, and we play a vital role in bringing tech to increases to current tariff rateslife for both customers and proposed new tariffs on Chinese imports. In May 2019, the U.S. Trade Representative (“USTR”) increased the tariff on List 3 products imported from China from 10% to 25%, effective June 15, 2019, and has further increased this rate to 30%, but the effective date of this increase has not yet been determined. The USTR has also implemented a List 4 tariff of 15% on additional products imported from China. The List 4 tariffs have two effective dates. The first effective date (List 4A) was September 1, 2019, and the most notable affected categories relative to Best Buy on this list are televisions, smart watches and headphones. The second effective date (List 4B) is December 15, 2019, and the most notable affected categories relative to Best Buy on this list are computing, mobile phones and gaming consoles.our vendor partners.
ThroughThese implications are extensive and interdependent and have been considered as we have made decisions throughout the third quartercourse of fiscal 2020,the pandemic and will help shape our strategy for our future store design, our operating models and our digital investments.
From the very start of the pandemic, we have been ablefocused on guiding the business with two goals in mind: first, ensuring the health and safety of our customers and employees while protecting the employee experience as much as possible; and second, making certain we come out of this a strong, innovative company. Clearly, we are still operating in a dynamic environment, and much uncertainty remains around future outbreaks, government stimulus efforts and the economic impacts of sustained high unemployment levels and ongoing shut-downs that vary by industry. In addition, we continue to minimizenavigate the impactimpacts of tariffsinventory constraints, wildfires, hurricanes and civil unrest. We are cognizant of all of these factors. At the same time we are encouraged by our clarity of purpose and our momentum, which has guided and will continue to guide our operating model changes and investments. Our purpose to enrich lives through technology is more relevant than it has ever been, and we are confident regarding our execution, adaptability and the opportunities ahead. We will continue to invest in those capabilities that focus on the customer experience over the long term – and that are designed to provide choice, speed and now safety.
In the wake of George Floyd’s death and the subsequent protests, Best Buy is committed to doing better when it comes to taking action to address racial inequities and injustices. We have created a diverse task force within the company to help us define and create meaningful change and we will provide visibility to our business by accelerating purchases and working with our vendors, some of which arecorresponding commitments in the process of migrating their manufacturing out of China. Whilenear future. We have also committed to creating more than 100 Teen Tech Centers to help bridge the opportunity gap and digital divide for teens in disinvested communities across the country. And we are taking additional actionsone of the leaders of a new public-private partnership, called ConnectedMN, that will provide computers and internet access to mitigate the impactthousands of tariffs, the uncertainty of ongoing U.S.-China trade negotiations makes it difficult to predict the impact of tariffs on consumers, the financial markets andyouth in our business and results of operations. Examples of actionshome state. Finally, we have takensigned on as a founding member of the Parity.org ParityPledge in Support of People of Color. This is a public commitment to mitigateinterview at least one qualified person of color for every open leadership role that is at the impactvice president level or higher, including the C-suite and board of tariffs include factoring tariffs into our product assortment decisions, promotional and pricing strategies, sourcing changes and other strategies in partnership with our vendors.directors.
Results of Operations
In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations on a one-month lag. Consistent with such consolidation, the financial and non-financial information presented in our MD&A relative to these operations is also presented on a lag. Our policy is to accelerate 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
Selected consolidated financial data was as follows ($ in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Revenue | $ | 9,764 |
|
| $ | 9,590 |
|
| $ | 28,442 |
|
| $ | 28,078 |
| $ | 9,910 |
|
| $ | 9,536 |
|
| $ | 18,472 |
|
| $ | 18,678 |
|
Revenue % increase |
| 1.8 | % |
| 2.9 | % |
|
| 1.3 | % |
| 4.8 | % | |
Comparable sales growth |
| 1.7 | % |
| 4.3 | % |
|
| 1.5 | % |
| 5.8 | % | |
Revenue % change | |
| 3.9 | % |
| 1.7 | % |
|
| (1.1) | % |
| 1.0 | % |
Comparable sales % change | |
| 5.8 | % |
| 1.6 | % |
|
| 0.4 | % |
| 1.4 | % |
Gross profit | $ | 2,361 |
|
| $ | 2,324 |
|
| $ | 6,813 |
|
| $ | 6,678 |
| $ | 2,270 |
|
| $ | 2,283 |
|
| $ | 4,235 |
|
| $ | 4,452 |
|
Gross profit as a % of revenue(1) |
| 24.2 | % |
| 24.2 | % |
|
| 24.0 | % |
| 23.8 | % |
| 22.9 | % |
| 23.9 | % |
|
| 22.9 | % |
| 23.8 | % |
SG&A | $ | 1,973 |
|
| $ | 2,002 |
|
| $ | 5,730 |
|
| $ | 5,709 |
| $ | 1,702 |
|
| $ | 1,922 |
|
| $ | 3,437 |
|
| $ | 3,757 |
|
SG&A as a % of revenue(1) |
| 20.2 | % |
| 20.9 | % |
|
| 20.1 | % |
| 20.3 | % |
| 17.2 | % |
| 20.2 | % |
|
| 18.6 | % |
| 20.1 | % |
Restructuring charges | $ | (7) |
|
| $ | - |
|
| $ | 41 |
|
| $ | 47 |
| $ | - |
|
| $ | 48 |
|
| $ | 1 |
|
| $ | 48 |
|
Operating income | $ | 395 |
|
| $ | 322 |
|
| $ | 1,042 |
|
| $ | 922 |
| $ | 568 |
|
| $ | 313 |
|
| $ | 797 |
|
| $ | 647 |
|
Operating income as a % of revenue |
| 4.0 | % |
| 3.4 | % |
|
| 3.7 | % |
| 3.3 | % |
| 5.7 | % |
| 3.3 | % |
|
| 4.3 | % |
| 3.5 | % |
Net earnings | $ | 293 |
|
| $ | 277 |
|
| $ | 796 |
|
| $ | 729 |
| $ | 432 |
|
| $ | 238 |
|
| $ | 591 |
|
| $ | 503 |
|
Diluted earnings per share | $ | 1.10 |
|
| $ | 0.99 |
|
| $ | 2.96 |
|
| $ | 2.57 |
| $ | 1.65 |
|
| $ | 0.89 |
|
| $ | 2.26 |
|
| $ | 1.86 |
|
(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.
GrossIn the second quarter and first six months of fiscal 2021, we generated $9.9 billion and $18.5 billion in revenue and our comparable sales increased 5.8% and 0.4%, respectively. Our operating income rate expanded by 240 basis points and 80 basis points during the second quarter and first six months of fiscal 2021, respectively, due to materially lower SG&A expense, a direct result of decisions to lower costs in response to the uncertainty of the pandemic and our evolving operating model. We also recorded diluted EPS of $1.65 and $2.26 in the second quarter and first six months of fiscal 2021, increases of 85% and 22%, respectively, compared to the second quarter and first six months of fiscal 2020.
Revenue, gross profit rate, SG&A rate and operating income rate changes in the thirdsecond quarter and first ninesix months of fiscal 20202021 were primarily driven by our Domestic segment. For further discussion of each segment's rate changes,performance, see the Segment Performance Summary below.
Income Tax Expense
Income tax expense increased to $96 million in the thirdsecond quarter of fiscal 2020, compared2021 due to $53 millionan increase in the third quarter of fiscal 2019.pre-tax earnings. Our effective income tax rate (“ETR”) increased to 22.9% in the thirdsecond quarter of fiscal 2020 was 24.8%2021 compared to a rate of 16.1%22.3% in the thirdsecond quarter of fiscal 2019. The increases in tax expense and the ETR are2020, primarily due to the impact of adjustments made in the third quarter of fiscal 2019 to the provisional expense recorded during the fourth quarter of fiscal 2018 related to the deemed repatriation tax and the revaluation of deferred tax assets in connection with the Tax Cuts and Jobs Act (“Tax Act”), as well ashigher pre-tax earnings, partially offset by an increase in pre-tax earnings in the current year period.tax benefit from federal wage tax credits and stock-based compensation.
Income tax expense increased to $230 million in the first ninesix months of fiscal 2020, compared to $187 million in the prior year period. Our ETR in the first nine months of fiscal 2020 was 22.5% compared to a rate of 20.4% in the first nine months of fiscal 2019. The increases in tax expense and the ETR are primarily2021 due to the impact of the Tax Act recorded in the prior year period described above, as well as an increase in pre-tax earnings and a decrease in the current year period, partially offset by increased tax benefits related tobenefit from stock-based compensation in the current year period. Our ETR increased to 24.2% in the first six months of fiscal 2021 compared to 21.0% in the first six months of fiscal 2020, primarily due to a decrease in the tax benefit from stock-based compensation and the impact of higher pre-tax earnings, partially offset by an increase in the tax benefit from federal wage tax credits.
Our tax provision for interim periods is determined using an estimate of our annual ETR, adjusted for discrete items, if any, that are taken into account in the relevant period. We update our estimate of the annual ETR each quarter and we make a cumulative adjustment if our estimated tax rate changes. Our quarterly tax provision and our quarterly estimate of our annual ETR are subject to variation due to several factors, including our ability to accurately forecast our pre-tax and taxable income and loss by jurisdiction, tax audit developments, recognition of excess tax benefits or deficiencies related to stock-based compensation, foreign currency gains (losses), changes in laws or regulations, and expenses or losses for which tax benefits are not recognized. Our ETR can be more or less volatile based on the amount of pre-tax earnings. For example, the impact of discrete items and non-deductible losses on our ETR is greater when our pre-tax earnings are lower.
Segment Performance Summary
Domestic
Selected financial data for the Domestic segment was as follows ($ in millions):
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| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Revenue | $ | 8,964 |
|
| $ | 8,756 |
|
| $ | 26,266 |
|
| $ | 25,807 |
| $ | 9,128 |
|
| $ | 8,821 |
|
| $ | 17,043 |
|
| $ | 17,302 |
|
Revenue % increase |
| 2.4 | % |
| 3.1 | % |
|
| 1.8 | % |
| 4.6 | % | |
Comparable sales growth(1) |
| 2.0 | % |
| 4.3 | % |
|
| 1.8 | % |
| 5.8 | % | |
Revenue % change | |
| 3.5 | % |
| 2.1 | % |
|
| (1.5) | % |
| 1.5 | % |
Comparable sales % change(1) | |
| 5.0 | % |
| 1.9 | % |
|
| (0.3) | % |
| 1.6 | % |
Gross profit | $ | 2,181 |
|
| $ | 2,139 |
|
| $ | 6,303 |
|
| $ | 6,159 |
| $ | 2,084 |
|
| $ | 2,113 |
|
| $ | 3,905 |
|
| $ | 4,122 |
|
Gross profit as a % of revenue |
| 24.3 | % |
| 24.4 | % |
|
| 24.0 | % |
| 23.9 | % |
| 22.8 | % |
| 24.0 | % |
|
| 22.9 | % |
| 23.8 | % |
SG&A | $ | 1,800 |
|
| $ | 1,824 |
|
| $ | 5,233 |
|
| $ | 5,201 |
| $ | 1,560 |
|
| $ | 1,756 |
|
| $ | 3,139 |
|
| $ | 3,433 |
|
SG&A as a % of revenue |
| 20.1 | % |
| 20.8 | % |
|
| 19.9 | % |
| 20.2 | % |
| 17.1 | % |
| 19.9 | % |
|
| 18.4 | % |
| 19.8 | % |
Restructuring charges | $ | (7) |
|
| $ | - |
|
| $ | 41 |
|
| $ | 47 |
| $ | - |
|
| $ | 48 |
|
| $ | 1 |
|
| $ | 48 |
|
Operating income | $ | 388 |
|
| $ | 315 |
|
| $ | 1,029 |
|
| $ | 911 |
| $ | 524 |
|
| $ | 309 |
|
| $ | 765 |
|
| $ | 641 |
|
Operating income as a % of revenue |
| 4.3 | % |
| 3.6 | % |
|
| 3.9 | % |
| 3.5 | % |
| 5.7 | % |
| 3.5 | % |
|
| 4.5 | % |
| 3.7 | % |
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| |
Selected Online Revenue Data |
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Total online revenue | $ | 1,397 |
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| $ | 1,214 |
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| $ | 4,122 |
|
| $ | 3,565 |
| $ | 4,849 |
|
| $ | 1,417 |
|
| $ | 8,191 |
|
| $ | 2,725 |
|
Online revenue as a % of total segment revenue |
| 15.6 | % |
| 13.9 | % |
|
| 15.7 | % |
| 13.8 | % |
| 53.1 | % |
| 16.1 | % |
|
| 48.1 | % |
| 15.7 | % |
Comparable online sales growth(1) |
| 15.0 | % |
| 12.6 | % |
|
| 15.6 | % |
| 11.5 | % | |
Online revenue growth(1) | |
| 242.2 | % |
| 17.3 | % |
|
| 200.5 | % |
| 16.0 | % |
(1)Comparable onlineOnline sales are included in the comparable sales calculation.
The increasesincrease in revenue in the thirdsecond quarter and first nine months of fiscal 2020 were2021 was primarily driven by the comparable sales growth, of 2.0% and 1.8%, respectively, 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 25 permanent store closures.closures in the past year. The decrease in revenue in the first six months of fiscal 2021 was primarily driven by the loss of revenue from permanent store closures in the past year and a comparable sales decline primarily due to temporary store closures and stores operating a curbside-only model as a result of COVID-19 during the first quarter of fiscal 2021. Online revenue of $1.4$4.8 billion and $4.1$8.2 billion in the thirdsecond quarter and first ninesix months of fiscal 2020, respectively,2021 increased 15.0%242.2% and 15.6%200.5%, respectively, on a comparable basis, primarily due to higher average order valuesconversion rates and increased traffic.traffic as we continue to see a channel shift in our customer shopping behavior as a result of COVID-19.
The following table reconciles the number of Domestic segment stores open at the beginning and end of the thirdsecond 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 Third Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of Third Quarter |
| Total Stores at Beginning of Third Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of Third Quarter | Total Stores at Beginning of Second Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of Second Quarter |
| Total Stores at Beginning of Second Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of Second Quarter |
Best Buy |
| 995 |
|
|
| - |
|
|
| (17) |
|
|
| 978 |
|
|
| 1,007 |
|
|
| 1 |
|
|
| (11) |
|
|
| 997 |
|
| 971 |
|
|
| - |
|
|
| (1) |
|
|
| 970 |
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|
| 995 |
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|
| - |
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|
| - |
|
|
| 995 |
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Outlet Centers |
| 11 |
| 2 |
| - |
| 13 |
| 7 |
| - |
| - |
| 7 |
|
| 12 |
| 2 |
| - |
| 14 |
| 10 |
| 1 |
| - |
| 11 |
|
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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| (1) |
|
|
| 27 |
|
| 21 |
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|
| - |
|
|
| - |
|
|
| 21 |
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|
| 21 |
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|
| - |
|
|
| - |
|
|
| 21 |
|
Total Domestic segment stores |
| 1,027 |
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| 2 |
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| (17) |
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| 1,012 |
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|
| 1,042 |
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| 1 |
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| (12) |
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|
| 1,031 |
| |
Total | |
| 1,004 |
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| 2 |
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| (1) |
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|
| 1,005 |
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|
| 1,026 |
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| 1 |
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|
| - |
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|
| 1,027 |
|
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.
Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:
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| Revenue Mix |
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| Comparable Sales |
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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 |
|
| Three Months Ended |
|
|
| Three Months Ended |
|
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Computing and Mobile Phones |
| 47 | % |
|
| 47 | % |
|
| 3.0 | % |
|
| 3.1 | % |
| 47 | % |
|
| 44 | % |
|
| 11.7 | % |
|
| 0.6 | % |
Consumer Electronics |
| 30 | % |
| 31 | % |
| 0.0 | % |
| 3.7 | % |
| 29 | % |
| 32 | % |
| (3.8) | % |
| 1.0 | % |
Appliances |
| 12 | % |
| 11 | % |
| 12.5 | % |
| 8.4 | % |
| 14 | % |
| 13 | % |
| 14.5 | % |
| 14.0 | % |
Entertainment |
| 5 | % |
| 6 | % |
| (20.8) | % |
| 12.4 | % |
| 5 | % |
| 5 | % |
| (4.4) | % |
| (13.7) | % |
Services |
| 6 | % |
|
| 5 | % |
| 12.9 | % |
| 1.9 | % |
| 5 | % |
|
| 6 | % |
| (8.7) | % |
| 10.7 | % |
Total |
| 100 | % |
|
| 100 | % |
| 2.0 | % |
| 4.3 | % |
| 100 | % |
|
| 100 | % |
| 5.0 | % |
| 1.9 | % |
The following is a description of the notableStrong demand in categories that help our customers work, learn, connect and cook from home contributed to our Domestic comparable sales changes inacross most of our Domestic segmentcategories. Notable comparable sales changes by revenue category:category were as follows:
Computing and Mobile Phones: The 3.0%11.7% comparable sales gain was driven primarily by tablets, computing and tablets, offset by declines in mobile phones.
Consumer Electronics: The 3.8% comparable sales changedecline was flat driven primarily by digital imaging. Home theater was essentially flat to last year, as comparable sales gains in headphones,televisions were offset by declines in home theater.accessories.
Appliances: The 12.5%14.5% comparable sales gain was driven by bothsmall and large and small appliances.
Entertainment: The 20.8%4.4% comparable sales decline was driven primarily by gaming.movies, partially offset by gains in drones.
Services: The 12.9%8.7% comparable sales gaindecline was driven primarily by growthdue to declines in our repair and support business.services, due to a higher mix of online sales, which has a lower attach rate than in store sales.
Our gross profit rate decreased in the thirdsecond quarter of fiscal 2020, primarily driven by mix into lower-margin products, partially offset by the higher gross profit rate of GreatCall. During theand first ninesix months of fiscal 2020, our gross profit rate increased,2021, primarily driven by the higher gross profit rate of GreatCall, partially offset by higher supply chain costs.costs from the increased mix of online revenue and lower profit sharing revenue from our private label and co-branded credit card arrangement, which negatively impacted our Domestic gross profit rate by approximately 20 basis points in the second quarter and first six months of fiscal 2021 compared to last year.
Our SG&A rate decreased in the thirdsecond quarter of fiscal 2021, primarily due to lower store payroll expense, lower advertising expense, lower incentive compensation expense as we did not pay or accrue short-term incentive expense for both field and corporate employees, and lower medical claims expense. Our SG&A decreased in the first six months of fiscal 2021, primarily due to lower store payroll expense, lower incentive compensation expense, lower advertising expense and lower medical claims expense. The decreases due to lower store payroll expense included employee retention credits of $12 million and $81 million in the second quarter and first ninesix months of fiscal 2020, primarily driven by lower incentive compensation2021, respectively, as a result of the Federal Coronavirus Aid, Relief and strong expense management, partially offset by GreatCall expenses.
Restructuring chargesEconomic Security Act. The employee retention credit is a refundable payroll credit for 50% of wages and health benefits paid to employees not providing services due to the third quarter and first nine months of fiscal 2020 related to our U.S. retail operating model changes. Restructuring charges for the first nine months of fiscal 2019 related to our Best Buy Mobile stand-alone store closures. Refer to Note 9, Restructuring Charges, in the Notes to Condensed Consolidated Financial Statements for additional information.COVID-19 pandemic.
Our operating income rate increased in the thirdsecond quarter and first six months of fiscal 2020,2021, primarily driven by the decrease inlower SG&A, rate described above. During the first nine months of fiscal 2020, our operating income rate increased, primarily drivenpartially offset by the increasedecreases in gross profit rate and decreasedescribed above. Our operating income rate in SG&A rate described above.the first six months of fiscal 2021 also increased due to the absence of restructuring charges compared to last year.
International
Selected financial data for the International segment was as follows ($ in millions):
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| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Revenue | $ | 800 |
|
| $ | 834 |
|
| $ | 2,176 |
|
| $ | 2,271 |
| $ | 782 |
|
| $ | 715 |
|
| $ | 1,429 |
|
| $ | 1,376 |
|
Revenue % change |
| (4.1) | % |
| 0.6 | % |
| (4.2) | % |
| 7.5 | % |
| 9.4 | % |
| (3.4) | % |
| 3.9 | % |
| (4.2) | % |
Comparable sales % change |
| (1.9) | % |
| 3.7 | % |
| (1.7) | % |
| 5.8 | % |
| 15.1 | % |
| (1.9) | % |
| 8.0 | % |
| (1.6) | % |
Gross profit | $ | 180 |
|
| $ | 185 |
|
| $ | 510 |
|
| $ | 519 |
| $ | 186 |
|
| $ | 170 |
|
| $ | 330 |
|
| $ | 330 |
|
Gross profit as a % of revenue |
| 22.5 | % |
| 22.2 | % |
| 23.4 | % |
| 22.9 | % |
| 23.8 | % |
| 23.8 | % |
| 23.1 | % |
| 24.0 | % |
SG&A | $ | 173 |
|
| $ | 178 |
|
| $ | 497 |
|
| $ | 508 |
| $ | 142 |
|
| $ | 166 |
|
| $ | 298 |
|
| $ | 324 |
|
SG&A as a % of revenue |
| 21.6 | % |
| 21.3 | % |
| 22.8 | % |
| 22.4 | % |
| 18.2 | % |
| 23.2 | % |
| 20.9 | % |
| 23.5 | % |
Operating income | $ | 7 |
|
| $ | 7 |
|
| $ | 13 |
|
| $ | 11 |
| $ | 44 |
|
| $ | 4 |
|
| $ | 32 |
|
| $ | 6 |
|
Operating income as a % of revenue |
| 0.9 | % |
| 0.8 | % |
| 0.6 | % |
| 0.5 | % |
| 5.6 | % |
| 0.6 | % |
| 2.2 | % |
| 0.4 | % |
The decreasesincreases in revenue in the thirdsecond quarter and first ninesix months of fiscal 20202021 were primarily driven by the comparable sales declines of 1.9% and 1.7%, respectively, andgains, partially offset by the negative impact of foreign currency exchange rate fluctuations both primarily related to our Canadian operations.
International segment stores open at the beginning and end of the second quarters of fiscal 2021 and fiscal 2020, excluding stores that were temporarily closed as a result of COVID-19, were as follows:
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| Fiscal 2021 |
| Fiscal 2020 |
| Total Stores at Beginning of Second Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of Second Quarter |
| Total Stores at Beginning of Second Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of Second Quarter |
Canada |
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Best Buy |
| 131 |
|
|
| - |
|
|
| - |
|
|
| 131 |
|
|
| 132 |
|
|
| - |
|
|
| - |
|
|
| 132 |
|
Best Buy Mobile |
| 41 |
|
|
| - |
|
|
| (1) |
|
|
| 40 |
|
|
| 44 |
|
|
| - |
|
|
| (1) |
|
|
| 43 |
|
Mexico |
|
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|
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|
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|
|
Best Buy |
| 35 |
|
|
| - |
|
|
| (1) |
|
|
| 34 |
|
|
| 29 |
|
|
| 1 |
|
|
| - |
|
|
| 30 |
|
Best Buy Express |
| 14 |
|
|
| - |
|
|
| - |
|
|
| 14 |
|
|
| 9 |
|
|
| - |
|
|
| - |
|
|
| 9 |
|
Total |
| 221 |
|
|
| - |
|
|
| (2) |
|
|
| 219 |
|
|
| 214 |
|
|
| 1 |
|
|
| (1) |
|
|
| 214 |
|
The following table reconciles the number of International stores open at the beginning and end of the third quarters of fiscal 2020 and fiscal 2019:
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| Fiscal 2020 |
| Fiscal 2019 |
| Total Stores at Beginning of Third Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of Third Quarter |
| Total Stores at Beginning of Third Quarter |
| Stores Opened |
| Stores Closed |
| Total Stores at End of Third Quarter |
Canada |
|
|
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|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Best Buy |
| 132 |
|
|
| - |
|
|
| (1) |
|
|
| 131 |
|
|
| 134 |
|
|
| - |
|
|
| - |
|
|
| 134 |
|
Best Buy Mobile |
| 43 |
|
|
| - |
|
|
| - |
|
|
| 43 |
|
|
| 49 |
|
|
| - |
|
|
| (2) |
|
|
| 47 |
|
Mexico |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Best Buy |
| 30 |
|
|
| 4 |
|
|
| - |
|
|
| 34 |
|
|
| 28 |
|
|
| 1 |
|
|
| - |
|
|
| 29 |
|
Best Buy Express |
| 9 |
|
|
| 1 |
|
|
| - |
|
|
| 10 |
|
|
| 6 |
|
|
| - |
|
|
| - |
|
|
| 6 |
|
Total International segment stores |
| 214 |
|
|
| 5 |
|
|
| (1) |
|
|
| 218 |
|
|
| 217 |
|
|
| 1 |
|
|
| (2) |
|
|
| 216 |
|
International segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:
|
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|
|
|
|
|
| Revenue Mix |
| Comparable Sales | Revenue Mix |
| Comparable Sales |
| Three Months Ended |
| Three Months Ended | Three Months Ended |
| Three Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Computing and Mobile Phones |
| 51 | % |
|
| 51 | % |
|
| (0.3) | % |
|
| 2.0 | % |
| 49 | % |
|
| 43 | % |
|
| 31.0 | % |
|
| (4.4) | % |
Consumer Electronics |
| 29 | % |
| 26 | % |
| 1.2 | % |
| (0.6) | % |
| 27 | % |
| 32 | % |
| (4.7) | % |
| 1.0 | % |
Appliances |
| 8 | % |
| 8 | % |
| (1.5) | % |
| 11.7 | % |
| 12 | % |
| 12 | % |
| 13.4 | % |
| 11.5 | % |
Entertainment |
| 5 | % |
| 7 | % |
| (31.1) | % |
| 10.8 | % |
| 6 | % |
| 5 | % |
| 44.5 | % |
| (20.1) | % |
Services |
| 6 | % |
| 6 | % |
| 11.5 | % |
| 15.0 | % |
| 4 | % |
| 6 | % |
| (11.1) | % |
| 4.6 | % |
Other |
| 1 | % |
|
| 2 | % |
| (28.2) | % |
| 43.8 | % |
| 2 | % |
|
| 2 | % |
| 12.0 | % |
| (24.0) | % |
Total |
| 100 | % |
|
| 100 | % |
| (1.9) | % |
| 3.7 | % |
| 100 | % |
|
| 100 | % |
| 15.1 | % |
| (1.9) | % |
The following is a description ofSimilar to the notableDomestic segment, strong demand in categories that help our customers work, learn, connect, cook and entertain from home contributed to our International comparable sales changes inacross most of our International segmentcategories. Notable comparable sales changes by revenue category:category were as follows:
Computing and Mobile Phones: The 0.3%31.0% comparable sales gain was driven primarily by computing and tablets, partially offset by declines in mobile phones.
Consumer Electronics: The 4.7% comparable sales decline was driven primarily by networking, computingdigital imaging and mobile phones, partially offset by gains in tablets.
home theater.Consumer Electronics: The 1.2% comparable sales gain was driven primarily by headphones and health and fitness, partially offset by declines in home theater and digital imaging.
Appliances: The 1.5%13.4% comparable sales declinegain was primarily driven by large appliances, partially offset by gains in small appliances.
Entertainment: The 31.1% comparable sales decline was driven primarily by gaming and drones.
Services: The 11.5%44.5% comparable sales gain was driven primarily by repairgaming and warranty services.virtual reality.
Services: The 11.1% comparable sales decline was primarily due to a higher mix of online sales, which has a lower attach rate than in store sales.
Other: The 28.2%12.0% comparable sales declinegain was driven primarily by baby products and luggage.products.
Our gross profit rate increasedremained flat in the thirdsecond quarter andof fiscal 2021. During the first ninesix months of fiscal 2020,2021, our gross profit rate decreased primarily due to increased revenue in theCanada, which was largely driven by a lower mix of higher margin services category in Canada.revenue and higher supply chain costs from the increased mix of online revenue.
Our SG&A rate increaseddecreased in the thirdsecond quarter and first ninesix months of fiscal 2020,2021, primarily due to sales de-leverage, as SG&A decreased $5 millionlower store payroll expense in Canada and $11 million, respectively, due to the favorable impact of foreign currency exchange rates related primarily to Canada.rates.
Our operating income rate increased in the thirdsecond quarter and first ninesix months of fiscal 2020,2021, primarily driven by higherlower SG&A, partially offset by lower gross profit rates partially offset by higher SG&A rates described above.
Consolidated Non-GAAP Financial Measures
The following table reconciles consolidatedReconciliations of operating income, effective tax rate and diluted EPS for the periods presented (GAAP financial measures) to non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS (non-GAAP financial measures) were as follows ($ in millions, except per share amounts):
|
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|
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|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 |
Operating income | $ | 395 |
|
| $ | 322 |
|
| $ | 1,042 |
|
| $ | 922 |
|
Restructuring charges(1) |
| (7) |
|
|
| - |
|
|
| 41 |
|
|
| 47 |
|
Intangible asset amortization(2) |
| 18 |
|
|
| 5 |
|
|
| 53 |
|
|
| 5 |
|
Acquisition-related transaction costs(2) |
| - |
|
|
| 13 |
|
|
| 3 |
|
|
| 13 |
|
Tax reform related item - employee bonus(3) |
| - |
|
|
| - |
|
|
| - |
|
|
| 7 |
|
Non-GAAP operating income | $ | 406 |
|
| $ | 340 |
|
| $ | 1,139 |
|
| $ | 994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
| 24.8 | % |
|
| 16.1 | % |
|
| 22.5 | % |
|
| 20.4 | % |
Restructuring charges(1) |
| (0.1) | % |
|
| - | % |
|
| - | % |
|
| 0.1 | % |
Intangible asset amortization(2) |
| 0.1 | % |
|
| (0.3) | % |
|
| 0.1 | % |
|
| - | % |
Acquisition-related transaction costs(2) |
| - | % |
|
| (0.6) | % |
|
| - | % |
|
| - | % |
Tax reform - repatriation tax(3) |
| - | % |
|
| 5.4 | % |
|
| - | % |
|
| 1.9 | % |
Tax reform - deferred tax rate change(3) |
| - | % |
|
| 1.5 | % |
|
| - | % |
|
| 0.5 | % |
(Gain) loss on investments, net |
| - | % |
|
| 0.6 | % |
|
| - | % |
|
| - | % |
Non-GAAP effective tax rate |
| 24.8 | % |
|
| 22.7 | % |
|
| 22.6 | % |
|
| 22.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS | $ | 1.10 |
|
| $ | 0.99 |
|
| $ | 2.96 |
|
| $ | 2.57 |
|
Restructuring charges(1) |
| (0.03) |
|
|
| - |
|
|
| 0.15 |
|
|
| 0.17 |
|
Intangible asset amortization(2) |
| 0.07 |
|
|
| 0.02 |
|
|
| 0.20 |
|
|
| 0.02 |
|
Acquisition-related transaction costs(2) |
| - |
|
|
| 0.04 |
|
|
| 0.01 |
|
|
| 0.04 |
|
Tax reform - repatriation tax(3) |
| - |
|
|
| (0.06) |
|
|
| - |
|
|
| (0.06) |
|
Tax reform - deferred tax rate change(3) |
| - |
|
|
| (0.02) |
|
|
| - |
|
|
| (0.02) |
|
Tax reform related item - employee bonus(3) |
| - |
|
|
| - |
|
|
| - |
|
|
| 0.02 |
|
(Gain) loss on investments, net |
| - |
|
|
| (0.04) |
|
|
| - |
|
|
| (0.04) |
|
Tax impact of non-GAAP adjustments(4) |
| (0.01) |
|
|
| - |
|
|
| (0.09) |
|
|
| (0.05) |
|
Non-GAAP diluted EPS | $ | 1.13 |
|
| $ | 0.93 |
|
| $ | 3.23 |
|
| $ | 2.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Operating income | $ | 568 |
|
| $ | 313 |
|
| $ | 797 |
|
| $ | 647 |
|
% of revenue |
| 5.7 | % |
|
| 3.3 | % |
|
| 4.3 | % |
|
| 3.5 | % |
Intangible asset amortization(1) |
| 20 |
|
|
| 18 |
|
|
| 40 |
|
|
| 35 |
|
Acquisition-related transaction costs(1) |
| - |
|
|
| 3 |
|
|
| - |
|
|
| 3 |
|
Restructuring charges(2) |
| - |
|
|
| 48 |
|
|
| 1 |
|
|
| 48 |
|
Non-GAAP operating income | $ | 588 |
|
| $ | 382 |
|
| $ | 838 |
|
| $ | 733 |
|
% of revenue |
| 5.9 | % |
|
| 4.0 | % |
|
| 4.5 | % |
|
| 3.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
| 22.9 | % |
|
| 22.3 | % |
|
| 24.2 | % |
|
| 21.0 | % |
Intangible asset amortization(1) |
| 0.1 | % |
|
| 0.1 | % |
|
| - | % |
|
| 0.2 | % |
Restructuring charges(2) |
| - | % |
|
| 0.4 | % |
|
| - | % |
|
| 0.3 | % |
Non-GAAP effective tax rate |
| 23.0 | % |
|
| 22.8 | % |
|
| 24.2 | % |
|
| 21.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS | $ | 1.65 |
|
| $ | 0.89 |
|
| $ | 2.26 |
|
| $ | 1.86 |
|
Intangible asset amortization(1) |
| 0.08 |
|
|
| 0.06 |
|
|
| 0.16 |
|
|
| 0.13 |
|
Acquisition-related transaction costs(1) |
| - |
|
|
| 0.01 |
|
|
| - |
|
|
| 0.01 |
|
Restructuring charges(2) |
| - |
|
|
| 0.18 |
|
|
| - |
|
|
| 0.18 |
|
Income tax impact of non-GAAP adjustments(3) |
| (0.02) |
|
|
| (0.06) |
|
|
| (0.04) |
|
|
| (0.08) |
|
Non-GAAP diluted EPS | $ | 1.71 |
|
| $ | 1.08 |
|
| $ | 2.38 |
|
| $ | 2.10 |
|
(1)Represents charges associated with U.S. retail operating model changes and the closure of Best Buy Mobile stand-alone stores in the U.S. Refer to Note 9, Restructuring Charges, in the Notes to Condensed Consolidated Financial Statements for additional information.
(2)Represents charges associated with acquisitions, including (1) the non-cash amortization of definite-lived intangible assets, including customer relationships, tradenames and developed technology, and (2) acquisition-related transaction costs primarily comprised of professional fees. Refer to Note 2, Acquisitions, and Note 5, Goodwill and Intangible Assets, in the Notes to Condensed Consolidated Financial Statements for additional information.
(3)(2)Represents adjustments to the provisional tax expense recorded in the fourth quarter of fiscal 2018 resulting from the Tax Act, includingcharges and adjustments associated with a deemed repatriation tax and the revaluation of deferred tax assets and liabilities, as well as adjustments to Tax Act-related items announced in response to future tax savings created by the Tax Act, including a one-time bonus for certain employees.U.S. retail operating model changes.
(4)(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 for the U.S. of 24.5% for all periods presented.
Non-GAAP operating income increased in the thirdsecond quarter of fiscal 2021, primarily driven by lower store payroll expense, lower advertising expense, lower incentive compensation expense and lower medical claims expense, partially offset by higher supply chain costs from the higher mix of online revenue. Non-GAAP operating income increased in the first ninesix months of fiscal 2020,2021, primarily driven by decreases in SG&A fromlower store payroll expense and lower incentive compensation and strong expense, management.partially offset by higher supply chain costs from the higher mix of online revenue.
Our non-GAAP effective tax rate increased in the thirdsecond quarter of fiscal 2020,2021, primarily due to the resolutionimpact of certain discrete tax mattershigher pre-tax earnings, partially offset by an increase in the prior year period. During the first nine months of fiscal 2020, ourtax benefit from federal wage tax credits and stock-based compensation. Our non-GAAP effective tax rate decreasedincreased in the first six months of fiscal 2021, primarily due to increaseda decrease in the tax benefits related tobenefit from stock-based compensation and the impact of higher pre-tax earnings, partially offset by an increase in the current year period.tax benefit from federal wage tax credits.
Non-GAAP diluted EPS increased in the thirdsecond quarter and first ninesix months of fiscal 2020,2021, primarily driven by increases in non-GAAP operating income and lower diluted weighted-average common shares outstanding from share repurchases. Refer to the Share Repurchases and Dividends section below for additional information.
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.
Cash, cash equivalents and short-term investments were as follows ($ in millions):
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
| November 2, 2019 |
| February 2, 2019 |
| November 3, 2018 |
|
|
| August 1, 2020 |
| February 1, 2020 |
| August 3, 2019 |
Cash and cash equivalents |
|
|
| $ | 1,205 |
|
| $ | 1,980 |
|
| $ | 1,228 |
|
|
|
| $ | 5,305 |
|
| $ | 2,229 |
|
| $ | 1,289 |
|
Short-term investments |
|
|
|
| - |
|
|
| - |
|
|
| 76 |
|
|
|
|
| - |
|
|
| - |
|
|
| 320 |
|
Total cash, cash equivalents and short-term investments |
|
|
| $ | 1,205 |
|
| $ | 1,980 |
|
| $ | 1,304 |
|
|
|
| $ | 5,305 |
|
| $ | 2,229 |
|
| $ | 1,609 |
|
The decreasesincreases in cash, cash equivalents and short-term investments from prior periodsFebruary 1, 2020, and August 3, 2019, were primarily due todriven by the increase in operating cash flows and a reduction in share repurchases and acquisitions.repurchases.
Cash Flows
Cash flows from total operations were as follows ($ in millions):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
|
|
|
|
| Six Months Ended |
|
|
|
|
|
| November 2, 2019 |
| November 3, 2018 |
|
|
|
|
| August 1, 2020 |
| August 3, 2019 |
Total cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
|
|
| $ | 937 |
| $ | 1,107 |
|
|
|
|
|
| $ | 3,788 |
| $ | 625 |
|
Investing activities |
|
|
|
|
|
| (727) |
|
| 574 |
|
|
|
|
|
| (383) |
| (828) |
|
Financing activities |
|
|
|
|
|
| (1,060) |
|
| (1,526) |
|
|
|
|
|
| (332) |
| (576) |
|
Effect of exchange rate changes on cash |
|
|
|
|
|
| (2) |
|
|
| (16) |
|
|
|
|
|
|
| (6) |
|
|
| (1) |
|
Increase (decrease) in cash, cash equivalents and restricted cash | Increase (decrease) in cash, cash equivalents and restricted cash |
| $ | (852) |
|
| $ | 139 |
| Increase (decrease) in cash, cash equivalents and restricted cash |
|
|
| $ | 3,067 |
|
| $ | (780) |
|
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 of receipts andimprovement. This was largely driven by later payments for inventory and collections of receivables. This was partially offseta reduction in inventory driven by lower incentive compensationhigher revenue in the current year’s quarter as well as supply chain constraints. Lower income tax payments due to a special one-time incentive payment in fiscal 2019 and the timing of indirect tax payments.collections on receivables also contributed to the increase.
Investing Activities
The increasedecrease in cash used in investing activities in fiscal 20202021 was primarily due to decreases in sales and increases inlower purchases of investments partially offset by a decreaseand the absence of acquisitions in cash used to fund acquisitions. Refer to Note 2, the current year.
Acquisitions
Financing Activities
The decrease in cash used in financing activities in fiscal 20202021 was primarily due to a decreaselower share repurchases, partially offset by an increase in shares repurchased during fiscal 2020. Refer to Note 11, Repurchase of Common Stock, of the Notes to Condensed Consolidated Financial Statements for additional information.dividend payments.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, short-term investments, our credit facilities and other debt arrangements are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures, share repurchases, dividends and strategic initiatives, including business combinations. However, in the event our liquidity is insufficient, we may be required to limit our spending. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms.
We have a $1.25 billion five year senior unsecured revolving credit facility agreement (the “facility”“Facility”) with a syndicate of banksbanks. 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 Facility on March 19, 2020, that expiresremained outstanding until July 27, 2020, when the Facility was repaid in April 2023. Refer to 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.full. There have beenwere no borrowings outstanding under the 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 November 2, 2019, we were in compliance with all financial covenants. If an eventFacility as 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.August 1, 2020, February 1, 2020, or August 3, 2019.
Our credit ratings and outlook as of December 4, 2019,August 27, 2020, are summarized below. On October 30, 2019, Fitch affirmedApril 22, 2020, Moody’s completed its BBB ratingperiodic review and withdrew all future ratings for commercial reasons. On November 20, 2019, Moody’s placedconfirmed its current rating of Baa1 on Review for Upgrade and changed its outlook to Rating Under Reviewof Stable. Standard & Poor’s rating and outlook remained unchanged from Positive.the prior year.
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Rating Agency |
|
|
|
| Rating |
| Outlook |
Standard & Poor's |
|
|
|
|
| BBB |
|
|
| Stable |
|
Moody's |
|
|
|
| Baa1 |
| Rating Under ReviewStable
|
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 workers’ compensation and general liability insurance claims. Restricted cash, which is included in Other current assets on our Condensed Consolidated Balance Sheets, was $127$117 million, $204$126 million and $211$115 million at November 2,August 1, 2020, February 1, 2020, and August 3, 2019, February 2, 2019, and November 3, 2018, respectively. The decreases from prior periods were 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 November 2, 2019,August 1, 2020, we had $650 million of principal amount of notes due March 15, 2021 (“2021 Notes”), and $500 million of principal amount of notes due October 1, 2028, outstanding. During the second quarter of fiscal 2021, we entered into Treasury Rate Lock ("T-Lock") contracts with an aggregate notional amount of $325 million to hedge the base interest rate variability on a portion of a potential refinancing of our maturing 2021 Notes. Refer to Note 6, Derivative Instruments, for further information about our T-lock contracts, and 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 November 2, 2019, $2.3August 1, 2020, $1.9 billion of the $3.0 billion share repurchase authorization was available. BetweenOn March 21, 2020, we announced the endsuspension of all share repurchases given the third quarteruncertainty surrounding the impact of fiscal 2020 on November 2, 2019, and December 4, 2019, we repurchased an incremental 1.4 million sharesCOVID-19.
Share repurchase and dividend activity was as follows ($ and shares in millions, except per share amounts):
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| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 | August 1, 2020 |
| August 3, 2019 |
| August 1, 2020 |
| August 3, 2019 |
Total cost of shares repurchased | $ | 371 |
|
| $ | 369 |
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| $ | 707 |
|
| $ | 1,143 |
| $ | - |
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| $ | 230 |
|
| $ | 56 |
|
| $ | 336 |
Average price per share | $ | 67.28 |
| $ | 76.04 |
| $ | 68.56 |
| $ | 74.10 |
| $ | - |
| $ | 69.71 |
| $ | 86.30 |
| $ | 70.04 |
Number of shares repurchased |
| 5.5 |
| 4.8 |
| 10.3 |
| 15.4 |
|
| - |
| 3.3 |
| 0.6 |
| 4.8 |
Regular quarterly cash dividends per share | | $ | 0.55 |
| $ | 0.50 |
| $ | 1.10 |
| $ | 1.00 |
Cash dividends declared and paid | | $ | 143 |
| $ | 133 |
| $ | 284 |
| $ | 267 |
Dividend activity was as follows ($ in millions, except per share amounts):
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| Three Months Ended |
| Nine Months Ended |
| November 2, 2019 |
| November 3, 2018 |
| November 2, 2019 |
| November 3, 2018 |
Regular quarterly cash dividends per share | $ | 0.50 |
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| $ | 0.45 |
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| $ | 1.50 |
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| $ | 1.35 |
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Cash dividends declared and paid | $ | 131 |
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| $ | 123 |
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| $ | 398 |
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| $ | 376 |
|
The increases in cash dividends declared and paid from prior periods were the result of increases in the regular quarterly dividend rate, partially offset by fewer shares due to the return of capital to shareholders through share repurchases.
Other Financial Measures
Our current ratio, calculated as current assets divided by current liabilities, was 1.0 as of November 2, 2019, 1.2 as of February 2, 2019, andremained unchanged at 1.1 as of NovemberAugust 1, 2020, February 1, 2020, and August 3, 2018. While the ratio at November 2, 2019, remained relatively unchanged compared to November 3, 2018, the decrease from February 2, 2019, was primarily due to share repurchases and the adoption of new lease accounting guidance in the first quarter of fiscal 2020, which brought additional current liabilities onto the balance sheet. See Note 1, Basis of Presentation, and Note 4, Leases, of the Notes to Condensed Consolidated Financial Statements for additional information.2019.
Our debt to earnings ratio, calculated as total debt (including current portion) divided by net earnings from continuing operations over the trailing twelve months, wasremained unchanged at 0.8 as of November 2, 2019, 0.9 as ofAugust 1, 2020, February 2, 2019,1, 2020, and 1.2 as of NovemberAugust 3, 2018. While the ratio at November 2, 2019, remained relatively unchanged from February 2, 2019, the decline from November 3, 2018, was primarily due to higher earnings over the past twelve months primarily driven by a decrease in tax expense associated with the Tax Act.2019.
Off-Balance-Sheet Arrangements and Contractual Obligations
Our liquidity is not dependent on the use of off-balance-sheet financing arrangements other than in connection with our $1.25 billion in undrawn capacity on our credit facility as of November 2, 2019, which, if drawn upon, would be included as short-term debt on our Condensed Consolidated Balance Sheets.
arrangements. Other than the changes related to the adoption of the new lease accounting standard as described in Note 4, Leases,short-term draw on our Facility in the Notes to Condensed Consolidated Financial Statements,first quarter of fiscal 2021 and subsequent full repayment in the second quarter of fiscal 2021, 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. 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. In the first quarter of fiscal 2020, we adopted new lease accounting guidance, as described in Note 1, Basis of Presentation, and Note 4, Leases, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.2020. There have been no other significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2019.2020.
New Accounting Pronouncements
For a description of new applicableWe do not expect any recently issued accounting pronouncements see Note 1, Basis of Presentation, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Reporthave a material effect on Form 10-Q.our financial statements.
Safe Harbor Statement Under the Private Securities Litigation Reform Act
Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements and may be identified by the use of words such as "anticipate," "assume," "believe," "estimate," "expect," "guidance," "intend," "outlook," "plan," "project" and other words and terms of similar meaning. Such statements reflect our current views and estimates with respect to future market conditions, company performance and financial results, operational investments, business prospects, new strategies, the competitive environment and other events. These statements are subject to certain risks and uncertainties that could cause actual results to
differ materially from the potential results discussed in such forward-looking statements. Readers should review Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended 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 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, economic or regulatory developments that might affect our ability to provide attractive promotional financing, interruptions and other supply chain issues, catastrophic events, health crises, pandemics, 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. 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 6,1, Debt, and Note 5, Derivative Instruments,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.
During the second quarter of fiscal 2021, we entered into Treasury Rate Lock ("T-Lock") contracts with an aggregate notional amount of $325 million to hedge the base interest rate variability on a portion of a potential refinancing of our maturing 2021 Notes. The T-Lock contracts are designated as cash flow hedges of interest rate risk. The fair value of the T-Lock contracts is recognized as an asset or liability with an offsetting position in Accumulated other comprehensive income (“AOCI”) on our Condensed Consolidated Balance Sheets. The T-Lock contracts would be cash settled to the extent new debt is issued at which time a pro-rata amount from AOCI will be released and recorded in Interest expense on our Condensed Consolidated Statements of Earnings as interest is accrued.
As of November 2, 2019,August 1, 2020, we had $1.20$5.30 billion of cash and cash equivalents and $1.15 billion of debt that has beenwas swapped to floating rate, and therefore theresulting in a net balance exposed to interest rate changes is not significant.of $4.15 billion. As of August 1, 2020, a 50-basis point increase in short-term interest rates would have led to an estimated $21 million reduction in net interest expense, and conversely a 50-basis point decrease in short-term interest rates would have led to an estimated $21 million increase in net interest expense.
Foreign Currency Exchange Rate Risk
We have market risk arising from changes in foreign currency exchange rates related to our International segment operations. On a limited basis, we utilize foreign exchange forward contracts to manage foreign currency exposure to certain forecast inventory purchases, recognized receivable and payable balances and our investment in our Canadian operations. Our primary 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 6,1, Derivative InstrumentsSummary 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 $13$35 million and $50$56 million on our revenue forin the thirdsecond quarter and first ninesix months of fiscal 2020,2021, respectively. The impact of foreign exchange rate fluctuations on our net earnings for the thirdsecond quarter and first ninesix months of fiscal 20202021 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 in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. The Disclosure Committee meets on a regular quarterly basis and otherwise as needed.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), at November 2, 2019.August 1, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at November 2, 2019,August 1, 2020, our disclosure controls and procedures were effective.
There were no changes in internal control over financial reporting during the fiscal quarter ended November 2, 2019,August 1, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1.Legal Proceedings
For information about our legal proceedings, see Note 14,10, Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(c) Stock RepurchasesItem 1A.Risk Factors
The following table presents information regardingglobal COVID-19 pandemic has had a material impact on our repurchasesbusiness, financial results and liquidity, and such impact could worsen and last for an unknown period of common stocktime.
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: At various times during the third quarterfirst six months of fiscal 2020:2021, the pandemic and the operational changes we have made have resulted in significant reductions in customer visits to, and spending at, our stores. 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 its resurgence; and our ability to successfully navigate those impacts. The pandemic has caused some products and services to be in high demand, and we may not be able to meet this 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.
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Fiscal Period |
| Total Number of
Shares Purchased |
| Average Price Paid
per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Program(1) |
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1) |
August 4, 2019 through August 31, 2019 |
| 1,437,203 |
|
| $ | 66.13 |
|
|
| 1,437,203 |
|
| $ | 2,569,000 |
|
September 1, 2019 through October 5, 2019 |
| 2,586,686 |
|
| $ | 66.20 |
|
|
| 2,586,686 |
|
| $ | 2,398,000 |
|
October 6, 2019 through November 2, 2019 |
| 1,489,539 |
|
| $ | 70.26 |
|
|
| 1,489,539 |
|
| $ | 2,293,000 |
|
Total |
| 5,513,428 |
|
| $ | 67.28 |
|
|
| 5,513,428 |
|
| $ | 2,293,000 |
|
(1)
Risks Related to OperationsPursuant: The pandemic has forced us to make a number of operational changes. Although as of June 22, 2020, almost all of our stores were open for shopping, we continue to offer a contactless, curbside model for those who prefer to shop that way, and we could be required to return to a $3.0 billion share repurchase program that was authorizedcurbside-only model or close stores due to the current or future resurgence of the pandemic. 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 Board in February 2019. There is no expiration date governingcustomers and employees, these measures may not be successful, and we may be required to temporarily close distribution centers or stores from time to time, halt certain services or take other measures. In addition, disruptions to our vendors’ ability or desire to provide products and services to us due to the period over which we can repurchase shares under the February 2019 share repurchase program. For additional information, see Note 11, pandemic, or disruptions to our internal supply chain infrastructure (such as facility closures, governmental orders restricting movement, COVID-19 outbreaks, presRepurchaseent and future restrictions or disruptions of Common Stocktransportation, 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 and have become critical to our growth, the risk of any interruption of our IT system capabilities is heightened, as well as the risk that customer demand exceeds the capacity of our online operations, and any such interruption or capacity constraint 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 Notesfuture. Additionally, while we have continued to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q.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
also incurred 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 increased hourly pay to our field employees working during the pandemic. Beginning August 2, 2020, we implemented a 4% increase in the hourly rate for hourly store employees below the leadership level, and, in addition, employees who were not yet at $15 per hour had their pay increased to the $15 per hour starting wage. 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. In the event 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: Although we repaid in full the amounts we had borrowed under our revolving credit facility, we may find it necessary to increase our cash position and our short-term debt in the future in response to further resurgences of COVID-19. In the event we are required to raise capital, 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 6.Exhibits
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3.1 | Amended and Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Definitive Proxy StatementCurrent Report on Form 8-K filed by Best Buy Co., Inc. on MayJune 12, 2009)2020) |
3.2 | Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Best Buy Co., Inc. on June 14, 2018) |
10.1 | Best Buy Co., Inc. 2020 Omnibus Incentive Plan (incorporated herein by reference to Appendix A to the Definitive Proxy Statement filed by Best Buy Co., Inc. on April 29, 2020) |
10.2 | Form of Best Buy Co., Inc. Long-Term Incentive Program Award Agreement (2020) – Directors |
31.1 | Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) |
101 | The following financial information from our Quarterly Report on Form 10-Q for the thirdsecond quarter of fiscal 2020,2021, filed with the SEC on December 6, 2019,August 31, 2020, formatted in Inline Extensible Business Reporting Language (“iXBRL”): (i) the Condensed Consolidated Balance Sheets at November 2,August 1, 2020, February 1, 2020, and August 3, 2019, February 2, 2019, and November 3, 2018, (ii) the Condensed Consolidated Statements of Earnings for the three and ninesix months ended November 2,August 1, 2020, and August 3, 2019, and November 3, 2018, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and ninesix months ended November 2,August 1, 2020, and August 3, 2019, and November 3, 2018, (iv) the Condensed Consolidated Statements of Cash Flows for the ninesix months ended November 2,August 1, 2020, and August 3, 2019, and November 3, 2018, (v) the Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and ninesix months ended November 2,August 1, 2020, and August 3, 2019, and November 3, 2018, and (vi) the Notes to Condensed Consolidated Financial Statements. |
104 | The cover page from our Quarterly Report on Form 10-Q for the thirdsecond quarter of fiscal 2020,2021, filed with the SEC on December 6, 2019,August 31, 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.
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| BEST BUY CO., INC. |
| (Registrant) |
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Date: December 6, 2019August 31, 2020 | By: | /s/ CORIE BARRY |
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| Corie Barry |
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| Chief Executive Officer |
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Date: December 6, 2019August 31, 2020 | By: | /s/ MATTHEW BILUNAS |
|
| Matthew Bilunas |
|
| Chief Financial Officer |
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Date: December 6, 2019August 31, 2020 | By: | /s/ MATHEW R. WATSON |
|
| Mathew R. Watson |
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| Senior Vice President, Finance – Controller and Chief Accounting Officer |