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MarketScreener Homepage  >  Equities  >  Nyse  >  Best Buy Co., Inc    BBY

BEST BUY CO., INC

(BBY)
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BEST BUY : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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12/06/2019 | 05:14pm EST
Unless the context otherwise requires, the use of the terms "Best Buy," "we,"
"us" and "our" refers to Best Buy Co., Inc. and its consolidated subsidiaries.
Any references to our website addresses do not constitute incorporation by
reference of the information contained on the websites.

Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide a reader of our financial statements
with a narrative from the perspective of our management on our financial
condition, results of operations, liquidity and certain other factors that may
affect our future results. Unless otherwise noted, transactions and other
factors significantly impacting our financial condition, results of operations
and liquidity are discussed in order of magnitude. Our MD&A is presented in the
following sections:

?Overview

?Business Strategy Update

?Results of Operations

?Liquidity and Capital Resources

?Off-Balance-Sheet Arrangements and Contractual Obligations

?Significant Accounting Policies and Estimates

?New Accounting Pronouncements

?Safe Harbor Statement Under the Private Securities Litigation Reform Act


Our MD&A should be read in conjunction with our Annual Report on Form 10-K for
the fiscal year ended February 2, 2019, (including the information presented
therein under Risk Factors), 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. 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. In the first quarter of
fiscal 2020, we refined our methodology for calculating comparable sales. It now
reflects certain revenue streams previously excluded from the comparable sales
calculation, such as credit card revenue, gift card breakage, commercial sales
and sales of merchandise to wholesalers and dealers, as applicable. The impact
of adopting these changes is immaterial to all periods presented, and therefore
prior-period comparable sales disclosures have not been restated. Our comparable
sales calculation compares revenue from stores, websites and call centers
operating for at least 14 full months, as well as revenue related to certain
other comparable sales channels for a particular period to the corresponding
period in the prior year. Relocated stores, as well as remodeled, expanded and
downsized stores closed more than 14 days, are excluded from the comparable
sales calculation until at least 14 full months after reopening. Acquisitions
are included in the comparable sales calculation beginning with the first full
quarter following the first anniversary of the date of the acquisition. The
calculation of comparable sales excludes the impact of revenue from discontinued
operations and the effect of fluctuations in foreign currency exchange rates
(applicable to our International segment only). On 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 and CST
are excluded from our comparable sales calculation for the periods presented.
The method of calculating comparable sales varies across the retail industry. As
a result, our method of calculating comparable sales may not be the same as
other retailers' methods.

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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 Update

In the third quarter of fiscal 2020, we generated $9.8 billion in revenue and
grew 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 below 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.

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 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.


During the quarter, we completed our third acquisition in support of our health
strategy, grew our Total Tech Support membership, added more In-Home Advisors
and continued to transform 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 create a more seamless customer
experience across all channels including stores, 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.

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Tariffs

We continue to actively address the risks related to increases to current tariff
rates and proposed new tariffs on Chinese imports. In May 2019, the U.S. Trade
Representative ("USTR") increased the tariff on List 3 products imported from
China from 10% to 25%, effective June 15, 2019, and has 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.

Through the third quarter of fiscal 2020, we have been 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
of China. While we are taking additional actions to mitigate the impact 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
and our business and results of operations. Examples of actions we have taken to
mitigate the impact of tariffs include factoring tariffs into our product
assortment decisions, promotional and pricing strategies, sourcing changes and
other strategies in partnership with our vendors.

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
                                    November 2, 2019      November 3, 2018     November 2, 2019     November 3, 2018
Revenue                            $          9,764      $        9,590$        28,442$        28,078
Revenue % increase                              1.8  %              2.9  %                1.3  %               4.8  %
Comparable sales growth                         1.7  %              4.3  %                1.5  %               5.8  %
Gross profit                       $          2,361      $        2,324       $         6,813      $         6,678
Gross profit as a % of revenue(1)              24.2  %             24.2  %               24.0  %              23.8  %
SG&A                               $          1,973      $        2,002       $         5,730      $         5,709
SG&A as a % of revenue(1)                      20.2  %             20.9  %               20.1  %              20.3  %
Restructuring charges              $             (7)     $             -      $            41      $            47
Operating income                   $            395      $          322       $         1,042      $           922
Operating income as a % of revenue              4.0  %              3.4  %                3.7  %               3.3  %
Net earnings                       $            293      $          277       $           796      $           729
Diluted earnings per share         $           1.10      $         0.99       $          2.96      $          2.57


(1)Because retailers vary in how they record costs of operating their supply
chain between cost of goods sold and SG&A, our gross profit rate and SG&A rate
may not be comparable to other retailers' corresponding rates. For additional
information regarding costs classified in cost of goods sold and SG&A, refer to
Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the fiscal
year ended February 2, 2019.

Gross profit rate, SG&A rate and operating income rate changes in the third quarter and first nine months of fiscal 2020 were primarily driven by our Domestic segment. For further discussion of each segment's rate changes, see the Segment Performance Summary below.

Income Tax Expense


Income tax expense increased to $96 million in the third quarter of fiscal 2020,
compared to $53 million in the third quarter of fiscal 2019. Our effective
income tax rate ("ETR") in the third quarter of fiscal 2020 was 24.8% compared
to a rate of 16.1% in the third quarter of fiscal 2019. The increases in tax
expense and the ETR are 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 as an increase in pre-tax earnings in the current year
period.

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Income tax expense increased to $230 million in the first nine 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
primarily 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 in the current year
period, partially offset by increased tax benefits related to stock-based
compensation in the current year period.

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):

                                            Three Months Ended                         Nine Months Ended
                                   November 2, 2019     November 3, 2018     November 2, 2019     November 3, 2018
Revenue                           $         8,964      $          8,756     $         26,266     $        25,807
Revenue % increase                            2.4 %                 3.1 %                1.8 %               4.6 %
Comparable sales growth(1)                    2.0 %                 4.3 %                1.8 %               5.8 %
Gross profit                      $         2,181      $          2,139     $          6,303     $         6,159
Gross profit as a % of revenue               24.3 %                24.4 %               24.0 %              23.9 %
SG&A                              $         1,800      $          1,824     $          5,233     $         5,201
SG&A as a % of revenue                       20.1 %                20.8 %               19.9 %              20.2 %
Restructuring charges             $           (7)      $              -     $             41     $            47
Operating income                  $           388      $            315     $          1,029     $           911
Operating income as a % of
revenue                                       4.3 %                 3.6 %                3.9 %               3.5 %

Selected Online Revenue Data
Total online revenue              $         1,397      $          1,214     $          4,122     $         3,565
Online revenue as a % of total
segment revenue                              15.6 %                13.9 %               15.7 %              13.8 %
Comparable online sales growth(1)            15.0 %                12.6 %               15.6 %              11.5 %


(1)Comparable online sales are included in the comparable sales calculation.


The increases in revenue in the third quarter and first nine months of fiscal
2020 were 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 store closures. Online revenue of $1.4 billion and $4.1 billion in
the third quarter and first nine months of fiscal 2020, respectively, increased
15.0% and 15.6%, respectively, on a comparable basis, primarily due to higher
average order values and increased traffic.

The following table reconciles the number of Domestic stores open at the beginning and end of the third quarters of fiscal 2020 and fiscal 2019:

                                     Fiscal 2020                                            Fiscal 2019
                                                             Total                                                  Total
                 Total Stores                              Stores at    Total Stores                              Stores at
                 at Beginning                               End of      at Beginning                               End of
                   of Third        Stores      Stores        Third        of Third        Stores      Stores        Third
                    Quarter        Opened      Closed       Quarter        Quarter        Opened      Closed       Quarter
Best Buy                995             -        (17)          978           1,007            1         (11)          997
Outlet Centers           11            2            -           13               7             -           -            7
Pacific Sales            21             -           -           21              28             -         (1)           27
Total Domestic
segment stores        1,027            2         (17)        1,012           1,042            1         (12)        1,031

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.

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Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:

                                               Revenue Mix                           Comparable Sales
                                           Three Months Ended                       Three Months Ended
                                                        November 3,                              November 3,
                                   November 2, 2019         2018         November 2, 2019           2018
Computing and Mobile Phones                 47  %               47  %              3.0  %              3.1  %
Consumer Electronics                        30  %               31  %               0.0 %              3.7  %
Appliances                                  12  %               11  %             12.5  %              8.4  %
Entertainment                                5  %                6  %            (20.8) %             12.4  %
Services                                     6  %                5  %             12.9  %              1.9  %
Total                                      100  %              100  %              2.0  %              4.3  %

The following is a description of the notable comparable sales changes in our Domestic segment by revenue category:

?Computing and Mobile Phones: The 3.0% comparable sales gain was driven primarily by tablets, computing and mobile phones.

?Consumer Electronics: The comparable sales change was flat driven primarily by gains in headphones, offset by declines in home theater.

?Appliances: The 12.5% comparable sales gain was driven by both large and small appliances.

?Entertainment: The 20.8% comparable sales decline was driven primarily by gaming.

?Services: The 12.9% comparable sales gain was driven primarily by growth in our support business.


Our gross profit rate decreased in the third quarter of fiscal 2020, primarily
driven by mix into lower-margin products, partially offset by the higher gross
profit rate of GreatCall. During the first nine months of fiscal 2020, our gross
profit rate increased, primarily driven by the higher gross profit rate of
GreatCall, partially offset by higher supply chain costs.

Our SG&A rate decreased in the third quarter and first nine months of fiscal 2020, primarily driven by lower incentive compensation and strong expense management, partially offset by GreatCall expenses.


Restructuring charges for 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.

Our operating income rate increased in the third quarter of fiscal 2020,
primarily driven by the decrease in SG&A rate described above. During the first
nine months of fiscal 2020, our operating income rate increased, primarily
driven by the increase in gross profit rate and decrease in SG&A rate described
above.

International

Selected financial data for the International segment was as follows ($ in
millions):

                                                Three Months Ended                           Nine Months Ended
                                    November 2, 2019         November 3, 2018      November 2, 2019      November 3, 2018
Revenue                            $           800          $           834       $           2,176     $          2,271
Revenue % change                             (4.1) %                    0.6 %                 (4.2) %                7.5 %
Comparable sales % change                    (1.9) %                    3.7 %                 (1.7) %                5.8 %
Gross profit                       $           180          $           185       $             510     $            519
Gross profit as a % of revenue                22.5 %                   22.2 %                  23.4 %               22.9 %
SG&A                               $           173          $           178       $             497     $            508
SG&A as a % of revenue                        21.6 %                   21.3 %                  22.8 %               22.4 %
Operating income                   $             7          $             7       $              13     $             11
Operating income as a % of revenue             0.9 %                   0.8  %                   0.6 %                0.5 %


The decreases in revenue in the third quarter and first nine months of fiscal
2020 were primarily driven by the comparable sales declines of 1.9% and 1.7%,
respectively, and the negative impact of foreign currency exchange rate
fluctuations, both primarily related to our Canadian operations.

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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:


                                       Fiscal 2020                                                Fiscal 2019
                 Total Stores at                            Total Stores    Total Stores at                            Total Stores
                  Beginning of       Stores      Stores       at End of     

Beginning of Stores Stores at End of

                  Third Quarter      Opened      Closed     Third Quarter    Third Quarter      Opened      Closed     Third Quarter
Canada
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:

                                              Revenue Mix                        Comparable Sales
                                          Three Months Ended                    Three Months Ended
                                                        November 3,                            November 3,
                                   November 2, 2019         2018         November 2, 2019         2018
Computing and Mobile Phones                   51  %             51  %               (0.3) %          2.0  %
Consumer Electronics                          29  %             26  %                1.2  %         (0.6) %
Appliances                                     8  %              8  %               (1.5) %         11.7  %
Entertainment                                  5  %              7  %              (31.1) %         10.8  %
Services                                       6  %              6  %               11.5  %         15.0  %
Other                                          1  %              2  %              (28.2) %         43.8  %
Total                                        100  %            100  %               (1.9) %          3.7  %

The following is a description of the notable comparable sales changes in our International segment by revenue category:

?Computing and Mobile Phones: The 0.3% comparable sales decline was driven primarily by networking, computing and mobile phones, partially offset by gains in tablets.


?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% comparable sales decline was 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% comparable sales gain was driven primarily by repair and warranty services.

?Other: The 28.2% comparable sales decline was driven primarily by baby products and luggage.


Our gross profit rate increased in the third quarter and first nine months of
fiscal 2020, primarily due to increased revenue in the higher margin services
category in Canada.

Our SG&A rate increased in the third quarter and first nine months of fiscal
2020, primarily due to sales de-leverage, as SG&A decreased $5 million and $11
million, respectively, due to the favorable impact of foreign currency exchange
rates related primarily to Canada.

Our operating income rate increased in the third quarter and first nine months
of fiscal 2020, primarily driven by higher gross profit rates, partially offset
by higher SG&A rates described above.

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Consolidated Non-GAAP Financial Measures


The following table reconciles consolidated operating income, effective tax rate
and diluted EPS for the periods presented (GAAP financial measures) to non-GAAP
operating income, non-GAAP effective tax rate and non-GAAP diluted EPS (non-GAAP
financial measures) ($ in millions, except per share amounts):

                                             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


(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)Represents adjustments to the provisional tax expense recorded in the fourth
quarter of fiscal 2018 resulting from the Tax Act, including 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.

(4)The non-GAAP adjustments relate primarily to adjustments in the U.S. As such,
the income tax charge is calculated using the statutory tax rate for the U.S. of
24.5% for all periods presented.

Non-GAAP operating income increased in the third quarter and first nine months of fiscal 2020, primarily driven by decreases in SG&A from lower incentive compensation and strong expense management.


Our non-GAAP effective tax rate increased in the third quarter of fiscal 2020,
primarily due to the resolution of certain discrete tax matters in the prior
year period. During the first nine months of fiscal 2020, our non-GAAP effective
tax rate decreased primarily due to increased tax benefits related to
stock-based compensation in the current year period.

Non-GAAP diluted EPS increased in the third quarter and first nine months of
fiscal 2020, 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.



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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):


                                                    November 2, 2019       February 2, 2019       November 3, 2018
Cash and cash equivalents                         $           1,205      $           1,980      $           1,228
Short-term investments                                             -                      -                    76
Total cash, cash equivalents and
short-term investments                            $           1,205      $           1,980      $           1,304


The decreases from prior periods were primarily due to share repurchases and acquisitions.


Cash Flows

Cash flows from total operations were as follows ($ in millions):

                                                                            Nine Months Ended
                                                                                           November 3,
                                                                    November 2, 2019           2018
Total cash provided by (used in):
Operating activities                                              $             937        $    1,107
Investing activities                                                           (727)              574
Financing activities                                                         (1,060)           (1,526)
Effect of exchange rate changes
on cash                                                                          (2)              (16)
Increase (decrease) in cash, cash equivalents and restricted
cash                                                              $            (852)       $      139


Operating Activities

The decrease in cash provided by operating activities in fiscal 2020 was
primarily due to changes in working capital, which were primarily due to timing
of receipts and payments for inventory and collections of receivables. This was
partially offset by lower incentive compensation payments due to a special
one-time incentive payment in fiscal 2019 and the timing of indirect 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 to fund acquisitions. Refer to Note 2,
Acquisitions, of the Notes to Condensed Consolidated Financial Statements for
additional information.

Financing Activities

The decrease in cash used in financing activities in fiscal 2020 was primarily
due to a decrease 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.

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.

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We have a $1.25 billion five year senior unsecured revolving credit facility
(the "facility") with a syndicate of banks that expires 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. There have been no borrowings 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 event of default were to occur
with respect to any of our other debt, it would likely constitute an event of
default under our facility as well.

Our credit ratings and outlook as of December 4, 2019, are summarized below. On
October 30, 2019, Fitch affirmed its BBB rating and withdrew all future ratings
for commercial reasons. On November 20, 2019, Moody's placed its current rating
of Baa1 on Review for Upgrade and changed its outlook to Rating Under Review
from Positive.

Rating Agency               Rating          Outlook
Standard & Poor's         BBB            Stable
Moody's                 Baa1     Rating Under Review


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 million, $204 million, and
$211 million at November 2, 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, we had $650 million principal amount of notes due March
15, 2021, and $500 million principal amount of notes due October 1, 2028,
outstanding. 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 further information about our outstanding notes.

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, $2.3 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.

Share repurchase activity was as follows ($ and shares in millions, except per share amounts):


                                              Three Months Ended                            Nine Months Ended
                                   November 2, 2019       November 3, 2018       November 2, 2019       November 3, 2018
Total cost of shares repurchased  $         371         $             369      $             707      $           1,143
Average price per share           $       67.28         $           76.04      $           68.56      $           74.10
Number of shares repurchased                5.5                       4.8                   10.3                   15.4


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Dividend activity was as follows ($ in millions, except per share amounts):


                                              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           $            0.45      $       1.50          $            1.35
Cash dividends declared and paid  $       131           $             123      $        398          $             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, and 1.1 as of
November 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.

Our debt to earnings ratio, calculated as total debt (including current portion)
divided by net earnings from continuing operations over the trailing twelve
months, was 0.8 as of November 2, 2019, 0.9 as of February 2, 2019, and 1.2 as
of November 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.

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.

Other than the changes related to the adoption of the new lease accounting
standard as described in Note 4, Leases, in the Notes to Condensed Consolidated
Financial Statements, there has been no material change in our contractual
obligations other than in the ordinary course of business since the end of
fiscal 2019. See our Annual Report on Form 10-K for the fiscal year ended
February 2, 2019, for additional information regarding our off-balance-sheet
arrangements and contractual obligations.



Significant Accounting Policies and Estimates


We describe our significant accounting policies in Note 1, Summary of
Significant Accounting Policies, of the Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K for the fiscal year ended
February 2, 2019. 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. There have been no other significant changes
in our significant accounting policies or critical accounting estimates since
the end of fiscal 2019.


New Accounting Pronouncements


For a description of new applicable accounting pronouncements, see Note 1, Basis
of Presentation, of the Notes to Condensed Consolidated Financial Statements,
included in this Quarterly Report on Form 10-Q.



Safe Harbor Statement Under the Private Securities Litigation Reform Act


Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
provide a "safe harbor" for forward-looking statements to encourage companies to
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

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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, 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: 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, our ability to provide attractive promotional financing,
interruptions and other supply chain issues, catastrophic events, our ability to
maintain positive brand perception and recognition, product safety and quality
concerns, changes to labor or employment laws or regulations, our ability to
effectively manage our real estate portfolio, constraints in the capital
markets, changes to our vendor credit terms, changes in our credit ratings, any
material disruption in our relationship with or the services of third-party
vendors, risks related to our exclusive brand products and risks associated with
vendors that source products outside of the U.S., trade restrictions or changes
in the costs of imports (including existing or new tariffs or duties and changes
in the amount of any such tariffs or duties) and risks arising from our
international activities. 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.

© Edgar Online, source Glimpses

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