BEST BUY CO., INC.
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
• Results of Operations
• Liquidity and Capital Resources
• Critical Accounting Estimates
• New Accounting Pronouncements
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Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
InMarch 2019 , theSEC adopted the final rule under SEC Release No. 33-10618, FAST Act Modernization and Simplification of Regulation S-K ("FAST Act"). The amendment aims to modernize and simplify certain reporting requirements and improve readability and navigability between disclosures. On adoption of this amendment, we omitted analysis of the results of operations and cash flows for the year endedFebruary 2, 2019 , in comparison to the year endedFebruary 3, 2018 . For such omitted disclosures, refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year endedFebruary 2, 2019 , filed with theSEC onMarch 28, 2019 , which Item 7 is incorporated by reference herein.
Overview
Our purpose is to enrich the lives of consumers through technology. We have two reportable segments: Domestic and International. The Domestic segment is comprised of the operations in all states, districts and territories of theU.S. under various brand names includingBest Buy ,Best Buy Business,Best Buy Express,Best Buy Health , CST,Geek Squad ,GreatCall , Lively,Magnolia and Pacific Kitchen and Home and the domain names bestbuy.com and greatcall.com. The International segment is comprised of all operations inCanada andMexico under the brand namesBest Buy ,Best Buy Express,Best Buy Mobile andGeek Squad and the domain names bestbuy.ca and bestbuy.com.mx. Our fiscal year ends on the Saturday nearest the end of January. Fiscal 2020 and fiscal 2019 included 52 weeks, while fiscal 2018 included 53 weeks with the additional week occurring in the fiscal fourth quarter. Our business, like that of many retailers, is seasonal. A large proportion of our revenue and earnings is generated in the fiscal fourth quarter, which includes the majority of the holiday shopping season in theU.S. ,Canada andMexico .
Comparable Sales
Throughout this MD&A, we refer to comparable sales. In the first quarter of fiscal 2020, we refined our methodology for calculating comparable sales. It now reflects certain revenue streams previously excluded from the comparable sales calculation, such as credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. The impact of adopting these changes is immaterial to all periods presented, and therefore prior-period comparable sales disclosures have not been restated. Our comparable sales calculation compares revenue from stores, websites and call centers operating for at least 14 full months, as well as revenue related to certain other comparable sales channels for a particular period to the corresponding period in the prior year. Relocated stores, as well as remodeled, expanded and downsized stores closed more than 14 days, are excluded from the comparable sales calculation until at least 14 full months after reopening. Acquisitions are included in the comparable sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The calculation of comparable sales excludes the impact of revenue from discontinued operations and the effect of fluctuations in foreign currency exchange rates (applicable to our International segment only). 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. OnMarch 1, 2018 , we announced our intent to close all of our 257 remainingBest Buy Mobile stand-alone stores in theU.S. As a result, all revenue related to these stores has been excluded from the comparable sales calculation beginning inMarch 2018 . OnOctober 1, 2018 , we acquired all outstanding shares ofGreatCall, Inc. ("GreatCall") and onMay 9, 2019 , we acquired all outstanding shares ofCritical Signal Technologies, Inc. ("CST"). Consistent with our comparable sales policy, the results ofGreatCall are included in our comparable sales calculation beginning in the fourth quarter of fiscal 2020, and the results of CST are excluded from our comparable sales calculation for the periods presented.
Non-GAAP Financial Measures
This MD&A includes financial information prepared in accordance with accounting principles generally accepted inthe 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 intoU.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 23
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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 Non-GAAP Financial Measures section below for the detailed reconciliation of items that impacted non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS from continuing operations in the presented periods.
Business Strategy In fiscal 2020, we grew our Enterprise comparable sales by 2.1% on top of 4.8% in fiscal 2019, which represents our sixth consecutive year of positive Enterprise comparable sales. We also increased GAAP diluted EPS by 10.6% to$5.75 and increased our non-GAAP diluted EPS by 14.1% to$6.07 . In addition, we recorded annual revenue of$43.6 billion , GAAP operating income of$2.0 billion and non-GAAP operating income of$2.1 billion in fiscal 2020. Compared to fiscal 2019, our fiscal 2020 GAAP and non-GAAP operating income as a percentage of revenue increased approximately 20 basis points and approximately 30 basis points, respectively. From a capital allocation standpoint, we returned$1.5 billion to our shareholders through share repurchases and dividends. We continue to make progress on our Building the New Blue strategy and our purpose 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 to 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. During fiscal 2020 we continued to expand our Total Tech Support program, ending fiscal 2020 with almost 2.3 million members. Having a service that provides members unlimitedGeek Squad support for all their technology no matter where or when they bought it, is a compelling value proposition for our members. We also expanded our In-Home Advisor program from 530 advisors to approximately 720 advisors and provided more than 250,000 free, in-home consultations to customers across the nation. In Health, we continued to advance our initiatives designed to help seniors live longer in their homes with the help of technology. We successfully integrated acquisitions that have given us the capabilities, infrastructure, talent and a base of customer relationships to build from. We continued to elevate the customer experience around product fulfillment, enabled by the advancement of our supply chain transformation. In parallel to the customer experience work, we continued to drive efficiencies and reduce costs in order to fund investments and offset pressures. In addition to these accomplishments, we are proud of our progress in advancing our Corporate Social Responsibility and Sustainability efforts. In fact, we were named to the top 5 onBarron's annual "100 Most Sustainable Companies" list for the third consecutive year.
In
?to be one of the best companies to work for in the
?to double the number of significant customer relationship events to 50 million, which includes Total Tech Support memberships, homes visited, active digital engagement, customers using our financial services offerings and senior lives supported; and ?to deliver continued top- and bottom-line growth over time, specifically to get to$50 billion in revenue and a 5.0% non-GAAP operating income rate in fiscal 2025. Looking to the future, our priorities will look to build upon our momentum and remain focused on achieving our fiscal 2025 targets. We will continue to bring our deep consumer electronics expertise and ability to partner with vendors to commercialize their new technology, offering customers great products and solutions. Our priorities will also include increasing our Total Tech Support member base, growing our Health business and continuing to expand our In-Home Advisor program. We will also continue to innovate and design multi-channel experiences that solve customer needs across our website, app and other channels in ways that enhance the experience across online and physical shopping and continue with our supply chain transformation, including using automation and process improvements to expand fulfillment options, increase delivery speed and improve delivery and installation. In addition, as has been our brand over the last several years, we will strive to keep driving cost reductions and efficiencies throughout the business.
Impact of COVID-19
We are closely monitoring the impact of COVID-19 on all aspects of our business and in all of our locations. We are making the best decisions we can with two goals in mind: protecting employees, customers and their respective families, while trying our best to serve our customers who rely on us for increasingly vital technology. We have seen increased demand for products that people need to work or learn from home, as well as those products that allow people to refrigerate or freeze food. As we meet the demand for these necessities, we are adjusting how we operate in many ways to improve safety. For example, except where otherwise directed by state and local authorities, onMarch 22, 2020 , we shifted to enhanced curbside service only for all of ourU.S. stores on an interim basis. Customers can also still order online or via theBest Buy app and have their products shipped directly to their homes. Large products, such as appliances, will be delivered where permitted and under strict safety guidelines with doorstep drop-off deliveries only. All in-home installation and repair has been temporarily suspended and all in-home consultations are being conducted virtually. We may further restrict the operations of our stores and distribution facilities and these measures could have a material impact on our revenues and profits. COVID-19 could also lead to significant disruption to our supply chain for products we sell and could trigger a significant deterioration in macroeconomic factors that typically affect us, such as consumer spending. 24
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AllBest Buy employees have been told they do not have to work if they do not feel comfortable and to stay home if they are feeling sick, knowing they will be paid. All field employees whose hours have been eliminated will be paid for two weeks at their normal wage rate based on their average hours worked over the last 10 weeks. It is not possible to predict the likelihood, timing or severity of the aforementioned direct and indirect impacts of COVID-19 on our business. In light of the uncertainty in this fluid environment, onMarch 19, 2020 , we drew the full amount of our$1.25 billion revolving credit facility and temporarily suspended all share repurchases.
Tariffs
During fiscal 2020, we worked to actively address the risks related to increases to tariff rates and proposed new tariffs on Chinese imports. InMay 2019 , theU.S. Trade Representative ("USTR") increased the tariff on List 3 products imported fromChina from 10% to 25%, effectiveJune 15, 2019 . The USTR also implemented a List 4 tariff of 15% on additional products imported fromChina . The List 4 tariffs had two effective dates. The first effective date (List 4A) wasSeptember 1, 2019 , and the most notable affected categories relative toBest Buy on this list are televisions, smart watches and headphones. The second effective date (List 4B) wasDecember 15, 2019 , and the most notable affected categories relative toBest Buy on this list are computing, mobile phones and gaming consoles. OnJanuary 15, 2020 , theU.S. andChina completed a "phase one" trade agreement. Under the agreement, List 4A tariffs were reduced from 15% to 7.5%, effective 30 days later. List 4B tariffs were suspended indefinitely and List 1-3 tariffs of 25% were maintained. There was no timeline given for additional phases (or tariff actions) to begin or to be concluded. Throughout fiscal 2020, we were able to minimize the impact of tariffs on our business by accelerating purchases and working with our vendors, some of which are in the process of migrating their manufacturing out ofChina , factoring tariffs into our product assortment decisions, promotional and pricing strategies, sourcing changes and other strategies in partnership with our vendors. However, future trade disputes withChina or future phases of trade negotiations between theU.S. andChina could lead to the imposition of new tariffs or other adverse consequences for our business.
Results of Operations
In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of ourMexico 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 Results
Selected consolidated financial data was as follows ($ in millions, except per share amounts):
Consolidated Performance Summary 2020 2019 2018 Revenue$ 43,638 $ 42,879 $ 42,151 Revenue % increase 1.8 % 1.7 % 7.0 % Comparable sales growth(1) 2.1 % 4.8 % 5.6 % Gross profit$ 10,048 $ 9,961 $ 9,876 Gross profit as a % of revenue(2) 23.0 % 23.2 % 23.4 % SG&A$ 7,998 $ 8,015 $ 8,023 SG&A as a % of revenue 18.3 % 18.7 % 19.0 % Restructuring charges$ 41 $ 46 $ 10 Operating income$ 2,009 $ 1,900 $ 1,843 Operating income as a % of revenue 4.6 % 4.4 % 4.4 %
Net earnings from continuing operations
$ 1,541 $ 1,464 $ 1,000 Diluted earnings per share$ 5.75 $ 5.20 $ 3.26 (1)Comparable sales exclude the impact of the extra week in fiscal 2018. OnMarch 1, 2018 , we announced our intent to close all of our 257 remainingBest Buy Mobile stand-alone stores in theU.S. As a result, all revenue related to these stores has been excluded from the comparable sales calculation beginning inMarch 2018 . OnOctober 1, 2018 , we acquired all outstanding shares ofGreatCall and onMay 9, 2019 , we acquired all outstanding shares of CST. Consistent with our comparable sales policy, the results ofGreatCall are included in our comparable sales calculation beginning in the fourth quarter of fiscal 2020, and the results of CST are excluded from our comparable sales calculation for the periods presented. (2)Because retailers vary in how they record costs of operating their supply chain between cost of sales 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 sales and SG&A, refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
(3)Includes both gain from discontinued operations and net earnings from discontinued operations.
Revenue, gross profit rate, SG&A rate and operating income rate changes in fiscal 2020 were primarily driven by our Domestic segment. For further discussion of each segment's rate changes, see Segment Performance Summary, below.
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Table of Contents Segment Performance Summary Domestic Segment
Selected financial data for the Domestic segment was as follows ($ in millions):
Domestic Segment Performance Summary 2020 2019 2018 Revenue$ 40,114 $ 39,304 $ 38,662 Revenue % increase 2.1 % 1.7 % 6.7 % Comparable sales growth(1) 2.3 % 4.8 % 5.6 % Gross profit$ 9,234 $ 9,144 $ 9,065 Gross profit as % of revenue 23.0 % 23.3 % 23.4 % SG&A$ 7,286 $ 7,300 $ 7,304 SG&A as % of revenue 18.2 % 18.6 % 18.9 % Restructuring charges$ 41 $ 47 $ 9 Operating income$ 1,907 $ 1,797 $ 1,752 Operating income as % of revenue 4.8 % 4.6 % 4.5 % Selected Online Revenue Data Total online revenue$ 7,640 $ 6,528 $
5,991
Online revenue as a % of total segment revenue 19.0 % 16.6 % 15.5 % Comparable online sales growth(1)
17.0 % 10.5 % 21.8 %
(1)Comparable online sales are included in the comparable sales calculation. Comparable sales also exclude the impact of the extra week in fiscal 2018. OnMarch 1, 2018 , we announced our intent to close all of our 257 remainingBest Buy Mobile stand-alone stores in theU.S. As a result, all revenue related to these stores has been excluded from the comparable sales calculation beginning inMarch 2018 . OnOctober 1, 2018 , we acquired all outstanding shares ofGreatCall and onMay 9, 2019 , we acquired all outstanding shares of CST. Consistent with our comparable sales policy, the results ofGreatCall are included in our comparable sales calculation beginning in the fourth quarter of fiscal 2020, and the results of CST are excluded from our comparable sales calculation for the periods presented. The increase in revenue in fiscal 2020 was primarily driven by the comparable sales growth of 2.3% and revenue fromGreatCall prior to its inclusion in comparable sales in the fourth quarter of fiscal 2020. These increases were partially offset by the loss of revenue from store closures. Online revenue increased in fiscal 2020 due to higher average order values, higher conversion rates and increased traffic. Domestic segment stores open at the end of each of the last three fiscal years were as follows: 2018 2019 2020 Total Stores at End Total Stores Total Stores of ?at End of Stores Stores ?at End of Stores Stores Fiscal ?Fiscal Year ?Opened ?Closed ?Fiscal Year ?Opened ?Closed Year Best Buy 1,008 1 (12) 997 - (20) 977Best Buy Mobile stand-alone 257 - (257) - - - - Outlet centers 5 3 - 8 5 (2) 11 Pacific Sales 28 - (7) 21 - - 21 Total Domestic segment stores 1,298 4 (276) 1,026 5 (22) 1,009 We continuously monitor store performance. As we approach the expiration date of our 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:
Revenue Mix Summary Comparable Sales Summary
2020 2019 2020 2019
Computing and Mobile Phones 45 % 44 % 3.2 % 4.2 %
Consumer Electronics 33 % 33 % 1.9 % 3.9 %
Appliances 11 % 10 % 13.0 % 9.9 %
Entertainment 6 % 8 % (18.5) % 4.7 %
Services 5 % 5 % 6.8 % 7.7 %
Total 100 % 100 % 2.3 % 4.8 %
Notable comparable sales changes in our Domestic segment by revenue category were as follows:
• Computing and Mobile Phones: The 3.2% comparable sales growth was driven primarily by tablets, computing, wearables and mobile phones.
• Consumer Electronics: The 1.9% comparable sales growth was driven primarily by headphones, offset by declines in home theater and digital imaging.
• Appliances: The 13.0% comparable sales growth was driven by both large and small appliances.
• Entertainment: The 18.5% comparable sales decline was driven primarily by gaming.
• Services: The 6.8% comparable sales growth was primarily driven by our support business.
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Our gross profit rate decreased in fiscal 2020, primarily driven by lower
product margin rates, partially offset by the higher gross profit rate of
Our SG&A rate decreased in fiscal 2020, primarily driven by lower incentive
compensation, partially offset by expenses associated with
Restructuring charges in fiscal 2020 related to ourU.S. retail operating model changes. Refer to Note 9, Restructuring, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Our operating income rate increased in fiscal 2020, primarily driven by the decrease in SG&A rate, partially offset by the decrease in gross profit rate described above.
International Segment
Selected financial data for the International segment was as follows ($ in millions):
International Segment Performance Summary 2020 2019 2018 Revenue$ 3,524 $ 3,575 $ 3,489 Revenue % change (1.4) % 2.5 % 10.6 % Comparable sales % change(1) (0.5) % 4.6 % 6.3 Gross profit$ 814 $ 817 $ 811 Gross profit as % of revenue 23.1 % 22.9 % 23.2 % SG&A$ 712 $ 715 $ 719 SG&A as % of revenue 20.2 % 20.0 % 20.6 % Operating income$ 102 $ 103 $ 91 Operating income as % of revenue 2.9 % 2.9 % 2.6 %
(1)Comparable sales exclude the impact of the extra week in fiscal 2018.
The decrease in revenue in fiscal 2020 was primarily driven by the negative impact of foreign currency exchange rate fluctuations and the comparable sales decline of 0.5%, both primarily related to our Canadian operations.
International segment stores open at the end of each of the last three fiscal
years were as follows:
2018 2019 2020
Total Stores Total Stores Total Stores
?at End of Stores Stores ?at End of Stores Stores ?at End of
?Fiscal Year ?Opened Closed ?Fiscal Year ?Opened ?Closed ?Fiscal Year
Canada
Best Buy 134 - (2) 132 - (1) 131
Best Buy Mobile 51 - (6) 45 - (3) 42
Mexico
Best Buy 25 4 - 29 6 - 35
Best Buy Express 6 - - 6 8 - 14
Total
International
segment stores 216 4 (8) 212 14 (4) 222
International segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:
Revenue Mix Summary Comparable Sales Summary
2020 2019 2020 2019
Computing and Mobile Phones 45 % 46 % 0.6 % 2.7 %
Consumer Electronics 33 % 31 % 1.4 % 2.0 %
Appliances 9 % 9 % 0.7 % 20.5 %
Entertainment 6 % 7 % (20.0) % 1.6 %
Services 6 % 5 % 9.3 % 10.3 %
Other 1 % 2 % (14.1) % 30.3 %
Total 100 % 100 % (0.5) % 4.6 %
Notable comparable sales changes in our International segment by revenue category were as follows:
• Computing and Mobile Phones: The 0.6% comparable sales growth was driven primarily by tablets.
• Consumer Electronics: The 1.4% comparable sales growth was driven primarily by headphones and health and fitness, partially offset by home theater and digital imaging.
• Appliances: The 0.7% comparable sales growth was primarily driven by small appliances.
• Entertainment: The 20.0% comparable sales decline was driven primarily by gaming.
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• Services: The 9.3% comparable sales growth was driven primarily by warranty revenue.
• Other: The 14.1% comparable sales decline was driven primarily by luggage and baby products.
Our gross profit rate increased in fiscal 2020, primarily due to increased revenue in the higher margin services category, primarily related to our Canadian operations.
Our SG&A rate increased in fiscal 2020, primarily due to sales de-leverage, as SG&A dollars decreased due to the favorable impact of foreign currency exchange rates primarily related toCanada . Our operating income rate remained flat in fiscal 2020, primarily driven by the increase in gross profit rate, partially offset by the increase in SG&A rate described above.
Additional Consolidated Results
Other Income (Expense)
Our gain on sale of investments decreased in fiscal 2020, due to the sale of fewer equity investments.
Our investment income and other remained relatively flat in fiscal 2020.
Interest expense decreased in fiscal 2020, primarily due to the derecognition of financing obligations as a result of our adoption of new lease accounting guidance. Refer to Note 1, Summary of Significant Accounting Policies, and Note 10, Leases, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information.
Income Tax Expense
Income tax expense increased in fiscal 2020 primarily as a result of an increase
in pre-tax earnings. Our effective tax rate remained relatively unchanged in
fiscal 2020.
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Non-GAAP Financial Measures
Reconciliations of operating income, effective tax rate and diluted EPS (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): Fiscal Year 2020 2019
2018
Operating income$ 2,009 $ 1,900 $ 1,843 Intangible asset amortization(1) 72 22
-
Restructuring charges(2) 41 46
10
Acquisition-related transaction costs(1) 3 13
-
Tax reform-related item - employee bonus(3) - 7
80
Tax reform-related item - charitable contribution(3) - - 20 Non-GAAP operating income$ 2,125 $ 1,988 $ 1,953 Effective tax rate 22.7 % 22.4 % 45.0 % Intangible asset amortization(1) 0.1 % - % - % Restructuring charges(2) - % (0.1) % - % Tax reform - repatriation tax(3) - % 1.1 % (11.5) % Tax reform - deferred tax rate change(3) - % 0.3 % (4.1) % Tax reform-related item - employee bonus(3) - % - % 0.3 % Tax reform-related item - charitable contribution(3) - % - % 0.1 % Non-GAAP effective tax rate 22.8 % 23.7 % 29.8 % Diluted EPS$ 5.75 $ 5.20 $ 3.26 Intangible asset amortization(1) 0.27 0.08
-
Restructuring charges(2) 0.15 0.16
0.03
Acquisition-related transaction costs(1) 0.01 0.05
-
(Gain) loss on sale of investments, net(4) - (0.04)
0.02
Tax reform - repatriation tax(3) - (0.07)
0.68
Tax reform - deferred tax rate change(3) - (0.02)
0.24
Tax reform-related item - employee bonus(3) - 0.02
0.26
Tax reform-related item - charitable contribution(3) - -
0.07
Income tax impact of non-GAAP adjustments(5) (0.11) (0.06) (0.14) Non-GAAP diluted EPS$ 6.07 $ 5.32 $ 4.42 (1)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 3,Goodwill and Intangible Assets, in the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information regarding the nature of these charges. (2)Represents charges and adjustments associated withU.S. retail operating model changes in fiscal 2020, and the closure ofBest Buy Mobile stand-alone stores in theU.S. in fiscal 2019. Refer to Note 9, Restructuring, in the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information regarding the nature of these charges. (3)Represents charges and subsequent adjustments resulting from the Tax Cuts and Jobs Act of 2017 ("tax reform") enacted into law in the fourth quarter of fiscal 2018, including amounts associated with a deemed repatriation tax and the revaluation of deferred tax assets and liabilities, as well as tax reform-related items announced in response to future tax savings created by tax reform, including a one-time bonus for certain employees and a one-time contribution to theBest Buy Foundation . Refer to Note 11, Income Taxes, in the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information regarding the nature of these charges.
(4)Represents (gain) loss on sale of investments and investment impairments included in Investment income and other on our Consolidated Statements of Earnings.
(5)Represents the summation of the calculated income tax charge related to each non-GAAP non-income tax adjustment. The non-GAAP adjustments relate primarily to adjustments in theU.S. andCanada . As such, the income tax charge is calculated using the statutory tax rates for theU.S. (ranging from 24.5% to 36.7% for the periods presented) andCanada (ranging from 26.6% to 26.9% for the periods presented), applied to the non-GAAP adjustments of each country. Our non-GAAP operating income increased$137 million in fiscal 2020, primarily driven by strong revenue performance in our Domestic segment in nearly all product categories and a decrease in SG&A, primarily due to lower incentive compensation. The increase in non-GAAP operating income resulted in a year-over-year increase in non-GAAP diluted earnings per share in fiscal 2020, which also benefited from a lower weighted-average diluted share count from share repurchases. Our non-GAAP effective tax rate decreased in fiscal 2020, primarily due to increased tax benefits related to stock-based compensation and the resolution of discrete tax matters.
Liquidity and Capital Resources
Summary
We closely manage our liquidity and capital resources. Our liquidity
requirements depend on key variables, including the level of investment required
to support our business strategies, the performance of our business, capital
expenditures, credit facilities, short-term borrowing arrangements and working
capital management. Capital expenditures and share repurchases are a component
of our
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cash flow and capital management strategy which, to a large extent, we can adjust in response to economic and other changes in our business environment. We have a disciplined approach to capital allocation, which focuses on investing in key priorities that support our strategy.
Cash and cash equivalents were as follows ($ in millions):
February 1, 2020 February 2, 2019
Cash and cash equivalents $ 2,229 $ 1,980
The increase in cash and cash equivalents in fiscal 2020 was primarily due to cash generated from operations, partially offset by share repurchases, investments in capital expenditures and dividends.
Cash Flows
Cash flows from total operations were as follows ($ in millions):
2020 2019 2018
Total cash provided by (used in): Operating activities$ 2,565 $ 2,408 $ 2,141 Investing activities (895) 508 (1,002) Financing activities (1,498) (2,018) (2,297) Effect of exchange rate changes on cash (1) (14)
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Increase (decrease) in cash, cash $ $ $ equivalents and restricted cash 171 884 (1,133) Operating Activities The increase in cash provided by operating activities in fiscal 2020 was primarily due to changes in working capital, primarily due to the timing of receipts and payments on inventory, the timing of deliveries of inventory to customers, increased earnings and lower incentive compensation payments due to a special one-time incentive payment in fiscal 2019. This was partially offset by the timing of collections on receivables and the timing of tax payments.
Investing Activities
The increase in cash used in investing activities in fiscal 2020 was primarily due to decreases in sales and increases in purchases of investments, partially offset by a decrease in cash used in the acquisitions of CST and BioSensics in fiscal 2020 compared to the acquisition ofGreatCall in fiscal 2019.
Financing Activities
The decrease in cash used in financing activities was primarily due to a decrease in shares repurchased during fiscal 2020 and the repayment in fiscal 2019 of our$500 million principal amount of notes dueAugust 1, 2018 . This was partially offset by the issuance in fiscal 2019 of our$500 million principal amount of notes dueOctober 1, 2028 .
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, our credit facilities and other debt arrangements are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures, share repurchases, dividends and strategic initiatives, including business combinations. However, in the event our liquidity is insufficient, we may be required to limit our spending. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms. We have a$1.25 billion five-year senior unsecured revolving credit facility (the "Facility") with a syndicate of banks that expires inApril 2023 . There were no borrowings under the Facility during fiscal 2020. OnMarch 19, 2020 , we drew down the full amount of the Facility to increase our cash position and maximize flexibility in light of the uncertainty surrounding the impact of COVID-19. Refer to Note 6, Debt, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information. Our ability to continue 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. AtFebruary 1, 2020 , we were in compliance with all financial covenants. If an event of default were to occur with respect to any of our other debt, it would likely constitute an event of default under our Facility as well. Our credit ratings and outlook atMarch 18, 2020 , are summarized below. OnOctober 30, 2019 , Fitch affirmed its BBB rating and withdrew all future ratings for commercial reasons. OnMarch 9, 2020 , Moody's concluded their review for upgrade that was initiated onNovember 20, 2019 , and confirmed its current rating of Baa1 and changed its outlook to Stable from Rating Under Review.Standard & Poor's rating and outlook remained unchanged from the prior year. 30
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Rating Agency Rating Outlook Standard & Poor's BBB Stable Moody's Baa1 Stable Credit rating agencies review their ratings periodically, and, therefore, the credit rating assigned to us by each agency may be subject to review 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 Consolidated Balance Sheets, was$126 million and$204 million atFebruary 1, 2020 , andFebruary 2, 2019 , respectively. The decrease was due to a dividend of excess cash from our wholly-owned insurance captive that manages a portion of our self-insured claims.
Capital Expenditures
Our capital expenditures typically include investments in our stores, distribution capabilities and information technology enhancements (including e-commerce). Capital expenditures were as follows ($ in millions):
2020 2019 2018
New stores $ 9 $ 5 $ 5
Store-related projects(1) 229 259 192
E-commerce and information technology 431 448 425 Supply chain
74 107 66
Total capital expenditures(2)
(1)Includes store remodels and various merchandising projects.
(2)Total capital expenditures exclude non-cash capital expenditures of$10 million ,$53 million and$123 million for fiscal 2020, fiscal 2019 and fiscal 2018, respectively. Non-cash capital expenditures are comprised of capitalized leases, as well as additions to property and equipment included in accounts payable.
Debt and Capital
As ofFebruary 1, 2020 , we had$650 million principal amount of notes dueMarch 15, 2021 ("2021 Notes"), and$500 million principal amount of notes dueOctober 1, 2028 ("2028 Notes"), outstanding. Refer to Note 6, Debt, in the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information.
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
Share repurchase and dividend activity were as follows (in millions, except per share amounts):
2020 2019 2018
Total cost of shares repurchased $ 1,009 $ 1,493 $ 2,009
Average price per share $ 72.34 $ 70.28 $ 57.16
Total number of shares repurchased 14.0 21.2 35.1
Regular quarterly cash dividends per share
$ 527 497$ 409 Dividends declared and paid increased in fiscal 2020 due to an increase in the regular quarterly cash dividends per share, partially offset by fewer shares outstanding due to the return of capital to shareholders through share repurchases.
On
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Other Financial Measures
Our current ratio, calculated as current assets divided by current liabilities, was 1.1 as ofFebruary 1, 2020 , compared to 1.2 as ofFebruary 2, 2019 . Our debt to earnings ratio, calculated as total debt (including current portion) divided by net earnings from continuing operations, was 0.8 as ofFebruary 1, 2020 , compared to 0.9 as ofFebruary 2, 2019 . The decline in both ratios was primarily due to the adoption of new lease accounting guidance in the first quarter of fiscal 2020 that resulted in the recognition of operating lease assets and operating lease liabilities on the balance sheet. Refer to Note 1, Summary of Significant Accounting Policies, and Note 10, Leases, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for additional information regarding this adoption.
Off-Balance-Sheet Arrangements and Contractual Obligations
We do not have outstanding off-balance-sheet arrangements. Contractual
obligations as of
Payments Due by Period
Contractual Less Than More Than
Obligations Total ?1 Year 1-3 Years 3-5 Years ?5 Years
Long-term debt $ $ $ $ $
obligations(1) 1,150 - 650 - 500
Interest payments(2) 159 50 32 26 51
Finance lease
obligations(3) 43 15 18 5 5
Operating lease
obligations(3)(4) 3,060 738 1,199 667 456
Purchase
obligations(5) 2,090 1,977 86 23 4
Unrecognized tax
benefits(6) 318 - - - -
Deferred
compensation(7) 22 - - - -
Total $ 6,842 $ 2,780 $ 1,985 $ 721 $ 1,016
Note: For additional information refer to Note 5, Derivative Instruments;
Note 6, Debt; Note 10, Leases; Note 11, Income Taxes; and Note 13, Contingencies
and Commitments, of the Notes to Consolidated Financial Statements, included in
Item 8, Financial Statements and Supplementary Data, of this Annual Report on
Form 10-K.
(1)Represents principal amounts only and excludes interest rate swap valuation adjustments.
(2)Interest payments related to our 2021 Notes and 2028 Notes include the variable interest rate payments included in our interest rate swap.
(3)Lease obligations exclude
(4)Operating lease obligations exclude payments to landlords covering real
estate taxes and common area maintenance. These charges, if included, would
increase total operating lease obligations by
(5)Purchase obligations include agreements to purchase goods or services that are enforceable, are legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include agreements that are cancelable without penalty. Additionally, although they do not contain legally binding purchase commitments, we included open purchase orders in the table above. Substantially all open purchase orders are fulfilled within 30 days. (6)Unrecognized tax benefits relate to uncertain tax positions. As we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the "Payments Due by Period" section of the table. (7)Included in Long-term liabilities on our Consolidated Balance Sheets atFebruary 1, 2020 , was a$22 million obligation for deferred compensation. As the specific payment dates for deferred compensation are unknown, the related balances have not been reflected in the "Payments Due by Period" section of the table. Additionally, we had$1.25 billion in undrawn capacity on our credit facility atFebruary 1, 2020 . OnMarch 19, 2020 , we drew down the full amount of the facility to increase our cash position and maximize flexibility in light of the uncertainty surrounding the impact of COVID-19. The proceeds and resulting liability from the facility will be included in Cash and cash equivalents and Short-term debt, respectively, on our Consolidated Balance Sheets.
Critical Accounting Estimates
The preparation of our financial statements requires us to make assumptions and
estimates about future events and apply judgments that affect the reported
amounts of assets, liabilities, revenue, expenses and the related disclosures.
We base our assumptions, estimates and judgments on historical experience,
current trends and other factors believed to be relevant at the time our
consolidated financial statements are prepared. Because future events and their
effects cannot be determined with certainty, actual results could differ from
our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1, Summary of
Significant Accounting Policies, of the Notes to Consolidated Financial
Statements, included in Item 8, Financial Statements and Supplementary Data, of
this Annual Report on Form 10-K. Other than our adoption of ASU 2016-02, Leases,
in the first quarter of fiscal 2020, and our adoption of ASU 2014-09, Revenue
from Contracts with Customers, in the first quarter of fiscal 2019, we have not
made any material changes to our accounting policies or methodologies during the
past three fiscal years. We believe that the following accounting estimates are
the most critical to aid in fully understanding and evaluating our reported
financial results. These estimates require our most difficult, subjective or
complex judgments and generally incorporate significant uncertainty.
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Table of Contents Vendor Allowances Description We receive funds from our merchandise vendors through a variety of programs and arrangements, primarily in the form of purchases-based or sales-based volumes and for product advertising and placement in our stores. We recognize these funds as a reduction of cost of sales when the associated inventory is sold. If the funds are not specifically related to purchase or sales volumes, the funds are recognized ratably over the performance period as the product promotion or placement is completed. Funds that are determined to be a reimbursement of specific, incremental and identifiable costs incurred to sell a vendor's products are recorded as an offset to the related expense when incurred.
Judgments and uncertainties involved in the estimate
Due to the quantity and diverse nature of our vendor agreements, estimates are made to determine the amount of funding to be recognized in earnings or deferred as an offset to inventory. These estimates require a detailed analysis of complex factors, including (1) proper classification of the type of funding received; and (2) the methodology to estimate the portion of purchases-based funding that should be recognized in cost of sales, which considers factors such as inventory turn by product category and actual sell-through of inventory.
Effect if actual results differ from assumptions
A 10% change in our vendor funding deferral at
Description
Goodwill is not amortized but is evaluated for impairment annually in the fiscal fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. The impairment test involves a comparison of the fair value of each reporting unit with its carrying value. Fair value reflects the price a potential market participant would be willing to pay for the reporting unit in an arms-length transaction.
Judgments and uncertainties involved in the estimate
Determining fair value of a reporting unit is complex and typically requires analysis of discounted cash flows and other market information, such as trading multiples when applicable. Cash flow analysis requires judgment regarding many factors, such as revenue growth rates, expenses and capital expenditures. Market information requires judgmental selection of relevant market comparables. We have goodwill in two reporting units -Best Buy Domestic and Best Buy Health - with carrying values of$443 million and$541 million , respectively, as ofFebruary 1, 2020 . There is greater uncertainty surrounding the key assumptions used to estimate the fair value of theBest Buy Health reporting unit and therefore a greater degree of complexity and judgment involved in our impairment analysis. In particular, our analysis of theBest Buy Health reporting unit fair value includes estimation of revenue growth rates, capital expenditure requirements and weighted-average cost of capital rates that incorporate significant judgment.
Effect if actual results differ from assumptions
A 10% change in the fair value of the
Inventory Markdown
Description
Our merchandise inventories were$5.2 billion atFebruary 1, 2020 . We value our inventory at the lower of cost or net realizable value through the establishment of inventory markdown adjustments. Markdown adjustments reflect the excess of cost over the net recovery we expect to realize from the ultimate sale or other disposal of inventory and establish a new cost basis. No adjustment is recorded for inventory that we are able to return to our vendors for full credit.
Judgments and uncertainties involved in the estimate
Markdown adjustments involve uncertainty because the calculations require management to make assumptions and to apply judgment about the expected recovery rates. The determination of the expected recovery rates includes the evaluation of historical recovery rates as well as factors such as product type and condition, forecasted consumer demand, product lifecycles, the promotional environment, vendor return rights and the expected sales channel of ultimate disposition. We also apply judgment in the assumptions about other components of net realizable value, such as vendor allowances and selling costs.
Effect if actual results differ from assumptions
A 10% change in our markdown adjustment at
Tax Contingencies
Description
Our income tax returns are periodically audited byU.S. federal, state and local and foreign tax authorities. Tax authorities audit our tax filing positions, including the timing and amount of income and deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with our 33
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various tax filing positions, we may record a liability for such exposures. A number of years may elapse before a particular matter, for which we have established a liability, is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax provisions in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. Our effective income tax rate is also affected by changes in tax law, the tax jurisdiction of new stores or business ventures, the level of earnings and the results of tax audits.
Judgments and uncertainties involved in the estimate
Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and apply judgment to estimate the exposures associated with our various tax filing positions. Such assumptions can include complex and uncertain external factors, such as changes in tax law, interpretations of tax law and the timing of such changes, and uncertain internal factors such as taxable earnings by jurisdiction, the magnitude and timing of certain transactions and capital spending.
Effect if actual results differ from assumptions
Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may reduce our effective income tax rate in the period of resolution. Service Revenue Description We sell customers support plans as part of a bundled service offer which may include items such as technical support, extended warranty, price discounts on future purchases, anti-virus software and one-time service repairs. We allocate the transaction price to all performance obligations identified in the contract based on their relative fair value. For technical support membership contracts, we typically recognize revenue over time on a usage basis, an input method of measuring progress over the related contract term. This method involves the use of expected usage patterns, derived from historic information.
Judgments and uncertainties involved in the estimate
There is judgment in (1) determining the level at which we apply a portfolio approach to these contracts; (2) measuring the relative standalone selling price for performance obligations within these contracts to the extent that they are only bundled and sold to customers with other performance obligations, or alternatively, using a cost-plus margin approach; and (3) assessing the pattern of delivery across multiple portfolios of customers, including estimating current and future usage patterns. When insufficient history of usage is available, we generally recognize revenue ratably over the life of the contract.
Effect if actual results differ from assumptions
A 10% change in the amount of services membership deferred revenue as
of
New Accounting Pronouncements
For a description of new applicable accounting pronouncements, see Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
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