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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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09/06/2019 | 04:04pm 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


We strive to enrich the lives of consumers through technology, whether they
connect with us online, visit our stores or invite us into their homes. We do
this by solving technology problems and addressing key human needs across a
range of areas, including entertainment, productivity, communication, food
preparation, security and health and wellness. We have operations in the U.S.,
Canada and Mexico. We have two reportable segments: Domestic and International.
The Domestic segment is comprised of the operations in all states, districts and
territories of the U.S., including GreatCall. 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.

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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, 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.

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 second quarter of fiscal 2020, we generated $9.5 billion in revenue and
grew our Enterprise comparable sales by 1.6%. Our GAAP operating income rate
decreased by 30 basis points and our non-GAAP operating income rate expanded by
20 basis points, both compared to the second quarter of fiscal 2019. We
delivered GAAP diluted EPS of $0.89 and non-GAAP diluted EPS of $1.08, increases
of 3% and 19% compared to the second quarter of fiscal 2019, respectively. Refer
to the 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 $363 million to our shareholders through dividends
and share repurchases.

During the quarter, we continued to make progress on our Building the New Blue
strategy and our purpose to enrich lives through technology. We expanded our
commitment to health and wellness through expanded assortment and a second
acquisition, grew our Total Tech Support membership, added In-Home Advisors and
continued to transform our supply chain to

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improve our speed of delivery to customers. We also made strategic changes to
our field operations to accelerate growth and to create a more seamless customer
experience across all channels including stores, home and online.



In parallel to the customer experience developments, we continued to drive
efficiencies and reduce costs in order to fund investments and offset pressures.
During the second quarter of fiscal 2020, we achieved $155 million in annualized
cost reductions and efficiencies, bringing the cumulative total to $730 million,
and exceeded our goal of reaching $600 million by the end of fiscal 2021. We
have now successfully delivered on three considerable cost reduction targets in
the last seven years, totaling more than $2 billion.

Tariffs


We are actively addressing the risks related to increases to current tariff
rates and proposed new tariffs on Chinese imports. In May 2019, the U.S. Trade
Representative ("USTR") increased the tariff on List 3 products imported from
China from 10% to 25%, effective June 15, 2019, and has since proposed a further
increase of this rate to 30%, effective October 1, 2019. Recently, the USTR
implemented the List 4 tariff of 15% on additional products imported from China.
The List 4 tariffs have two effective dates. The first effective date (List 4A)
was September 1, 2019, and the most notable affected categories relative to Best
Buy on this list are televisions, smart watches and headphones. The second
effective date (List 4B) is December 15, 2019, and the most notable affected
categories relative to Best Buy on this list are computing, mobile phones and
gaming consoles.

Through the second quarter of fiscal 2020, we have been able to minimize the
impact of the 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. Further, we are taking additional actions to mitigate the impacts
of tariffs, including factoring tariffs into our product assortment decisions,
promotional and pricing strategies, sourcing changes and other strategies in
partnership with our vendors. While we estimate that purchases from China
currently represent approximately 60% of our total cost of goods sold, in light
of these mitigating factors, we expect the impact of these tariffs on our
business to be smaller than this number would otherwise imply. However, due to
the uncertainty surrounding these factors, the ongoing U.S.-China trade
negotiations and the potential for further changes to the scope, magnitude and
timing of tariffs, it is difficult to predict the impact of tariffs on
consumers, the financial markets and our business and results of operations.

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                     Six Months Ended
                                    August 3, 2019     August 4, 2018     August 3, 2019     August 4, 2018
Revenue                            $       9,536$       9,379$      18,678$      18,488
Revenue % increase                           1.7  %             4.9  %             1.0  %             5.8  %
Comparable sales growth                      1.6  %             6.2  %             1.4  %             6.6  %
Gross profit                       $       2,283$       2,229$       4,452$       4,354
Gross profit as a % of revenue(1)           23.9  %            23.8  %            23.8  %            23.6  %
SG&A                               $       1,922$       1,877$       3,757$       3,707
SG&A as a % of revenue(1)                   20.2  %            20.0  %            20.1  %            20.1  %
Restructuring charges              $          48      $          17      $          48      $          47
Operating income                   $         313      $         335      $         647      $         600
Operating income as a % of revenue           3.3  %             3.6  %             3.5  %             3.2  %
Net earnings                       $         238      $         244      $         503      $         452
Diluted earnings per share         $        0.89$        0.86$        1.86$        1.58


(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 second quarter and first six 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.

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Income Tax Expense

Income tax expense decreased to $69 million in the second quarter of fiscal
2020, compared to $85 million in the second quarter of fiscal 2019. The lower
tax expense is primarily due to increased tax benefits related to stock-based
compensation and the resolution of discrete matters in the current year period,
as well as a decrease in pre-tax earnings. Our effective income tax rate ("ETR")
in the second quarter of fiscal 2020 was 22.3% compared to a rate of 25.7% in
the second quarter of fiscal 2019. The decrease in the ETR was primarily due to
increased tax benefits related to stock-based compensation and the resolution of
discrete matters in the current year period.

Income tax expense remained flat at $134 million in the first six months of
fiscal 2020 compared to the prior year period, as increased tax expense
resulting from an increase in pre-tax earnings was offset by increased tax
benefits related to stock-based compensation and the resolution of discrete
matters in the current year period. Our ETR in the first six months of fiscal
2020 was 21.0% compared to a rate of 22.8% in the first six months of fiscal
2019. The decrease in the ETR was primarily due to increased tax benefits
related to stock-based compensation and the resolution of discrete matters in
the current year period.

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 income. For example, the
impact of discrete items and non-deductible losses on our ETR is greater when
our pre-tax income is lower.

Segment Performance Summary

Domestic

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

                                          Three Months Ended                     Six Months Ended
                                   August 3, 2019     August 4, 2018     August 3, 2019     August 4, 2018
Revenue                           $       8,821$       8,639$       17,302$       17,051
Revenue % increase                          2.1 %              4.4 %               1.5 %              5.4 %
Comparable sales growth(1)                  1.9 %              6.0 %               1.6 %              6.6 %
Gross profit                      $       2,113$       2,058$        4,122$        4,020
Gross profit as a % of revenue             24.0 %             23.8 %              23.8 %             23.6 %
SG&A                              $       1,756$       1,712$        3,433$        3,377
SG&A as a % of revenue                     19.9 %             19.8 %              19.8 %             19.8 %
Restructuring charges             $          48      $          17      $           48     $           47
Operating income                  $         309      $         329      $          641     $          596
Operating income as a % of
revenue                                     3.5 %              3.8 %               3.7 %              3.5 %

Selected Online Revenue Data
Total online revenue              $       1,417$       1,208$        2,725$        2,350
Online revenue as a % of total
segment revenue                            16.1 %             14.0 %              15.7 %             13.8 %
Comparable online sales growth(1)          17.3 %             10.1 %              16.0 %             11.0 %


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


The increases in revenue in the second quarter and first six months of fiscal
2020 were primarily driven by the comparable sales growth of 1.9% and 1.6%,
respectively, and revenue from GreatCall, which was acquired in the third
quarter of fiscal 2019. These increases were partially offset by the losses of
revenue from store closures. Online revenue of $1.4 billion and $2.7 billion in
the second quarter and first six months of fiscal 2020, respectively, increased
17.3% and 16.0%, respectively, on a comparable basis, primarily due to higher
average order values and increased traffic.

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The following table reconciles the number of Domestic stores open at the beginning and end of the second 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 Second       Stores       Stores        Second        of Second       Stores      Stores       Second
                    Quarter        Opened       Closed        Quarter        Quarter        Opened      Closed       Quarter
Best Buy                995             -             -          995           1,007             -           -        1,007
Best Buy Mobile
stand-alone                -            -             -             -            105             -       (105)             -
Outlet Centers           10            1              -           11               5            2            -            7
Pacific Sales            21             -             -           21              28             -           -           28
Total Domestic
segment stores        1,026            1              -        1,027           1,145            2        (105)        1,042


We continuously monitor store performance. As we approach the expiration date of
our store leases, we evaluate various options for each location, including
whether a store should remain open. On March 1, 2018, we announced our intent to
close

all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S., of which 105 were closed during the second quarter of fiscal 2019. Refer to Note 9, Restructuring Charges, in the Notes to Condensed Consolidated Financial Statements for additional information.

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
                                                      August 4,                            August 4,
                                   August 3, 2019        2018        August 3, 2019           2018
Computing and Mobile Phones               44  %             45  %            0.6  %             4.2  %
Consumer Electronics                      32  %             32  %            1.0  %             6.8  %
Appliances                                13  %             12  %           14.0  %            10.3  %
Entertainment                              5  %              7  %          (13.7) %             8.5  %
Services                                   6  %              4  %           10.7  %             6.6  %
Total                                    100  %            100  %            1.9  %             6.0  %

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

?Computing and Mobile Phones: The 0.6% comparable sales gain was primarily driven by tablets and wearables, partially offset by slight declines in computing and mobile phones.

?Consumer Electronics: The 1.0% comparable sales gain was driven primarily by headphones and smart home, partially offset by declines in home theater and digital imaging.

?Appliances: The 14.0% comparable sales gain was driven by both large and small appliances.

?Entertainment: The 13.7% comparable sales decline was driven primarily by gaming and drones, partially offset by gains in virtual reality.

?Services: The 10.7% comparable sales gain was driven primarily by growth in our support business.

Our gross profit rate increased in the second quarter and first six months of fiscal 2020, primarily driven by the higher gross profit rate of GreatCall, partially offset by higher supply chain costs.


Our SG&A rate increased in the second quarter of fiscal 2020, primarily due to
GreatCall expenses and higher advertising expenses, partially offset by lower
incentive compensation. Our SG&A rate remained flat in the first six months of
fiscal 2020, primarily due to sales leverage, as SG&A increased $56 million,
primarily due to GreatCall expenses, partially offset by lower incentive
compensation.

Restructuring charges for the second quarter and first six months of fiscal 2020
related to our U.S. retail operating model changes. Restructuring charges for
the second quarter and first six 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 decreased in the second quarter of fiscal 2020, primarily driven by the increase in restructuring charges described above. During the first six months of fiscal 2020, our operating income rate increased primarily driven by the increase in gross profit rate.

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International

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

                                           Three Months Ended                     Six Months Ended
                                    August 3, 2019     August 4, 2018     August 3, 2019     August 4, 2018
Revenue                            $        715$        740$       1,376$       1,437
Revenue % change                           (3.4) %            10.8  %             (4.2) %            11.9  %
Comparable sales % change                  (1.9) %             7.6  %             (1.6) %             7.0  %
Gross profit                       $        170$        171       $         330      $         334
Gross profit as a % of revenue             23.8  %            23.1  %             24.0  %            23.2  %
SG&A                               $        166$        165       $         324      $         330
SG&A as a % of revenue                     23.2  %            22.3  %             23.5  %            23.0  %
Operating income                   $          4       $          6       $           6      $           4
Operating income as a % of revenue          0.6  %             0.8  %              0.4  %             0.3  %


The decrease in revenue in the second quarter of fiscal 2020 was primarily
driven by the comparable sales decline of 1.9% and the negative impact of
foreign currency exchange rate fluctuations, both primarily related to our
Canadian operations. The decrease in revenue in the first six months of fiscal
2020 was primarily driven by the negative impact of foreign currency exchange
rate fluctuations and the comparable sales decline of 1.6%, both primarily
related to our Canadian operations.

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

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

Beginning of Stores Stores Second

                 Second Quarter      Opened      Closed        Quarter      Second Quarter      Opened       Closed         Quarter
Canada
Best Buy                  132             -           -            132               134             -             -            134
Best Buy Mobile            44             -         (1)             43                49             -             -             49
Mexico
Best Buy                   29            1            -             30                26            2              -             28
Best Buy Express            9             -           -              9                 6             -             -              6
Total
International
segment stores            214            1          (1)            214               215            2              -            217

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
                                                      August 4,                          August 4,
                                   August 3, 2019        2018        August 3, 2019         2018
Computing and Mobile Phones                 43  %           45  %             (4.4) %         4.5  %
Consumer Electronics                        32  %           29  %              1.0  %         0.3  %
Appliances                                  12  %           12  %             11.5  %        35.7  %
Entertainment                                5  %            6  %            (20.1) %        14.3  %
Services                                     6  %            6  %              4.6  %        11.3  %
Other                                        2  %            2  %            (24.0) %        51.4  %
Total                                      100  %          100  %             (1.9) %         7.6  %

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

?Computing and Mobile Phones: The 4.4% comparable sales decline was driven primarily by mobile phones and computing, partially offset by gains in tablets.

?Consumer Electronics: The 1.0% comparable sales gain was driven primarily by headphones and health and fitness, partially offset by declines in digital imaging and home theater.

?Appliances: The 11.5% comparable sales gain was driven by both large and small appliances.

?Entertainment: The 20.1% comparable sales decline was driven primarily by gaming and drones, partially offset by gains in virtual reality.

?Services: The 4.6% comparable sales gain was driven primarily by warranty revenue.

?Other: The 24.0% comparable sales decline was driven primarily by baby products.


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

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Our SG&A rate increased in the second quarter of fiscal 2020, primarily due to
sales leverage as SG&A remained relatively flat. During the first six months of
fiscal 2020, our SG&A rate increased primarily due to sales leverage, as SG&A
decreased $6 million due to the favorable impact of foreign currency exchange
rates related to Canada.

Our operating income rate decreased in the second quarter of fiscal 2020,
primarily driven by a higher SG&A rate, partially offset by a higher gross
profit rate, described above. During the first six months of fiscal 2020, our
operating income rate increased, primarily driven by a higher gross profit rate,
partially offset by a higher SG&A rate described above.

Consolidated Non-GAAP Financial Measures


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

                                          Three Months Ended                

Six Months Ended

                                   August 3, 2019     August 4, 2018     August 3, 2019     August 4, 2018
Operating income                  $         313      $         335      $         647      $         600
Restructuring charges(1)                     48                 17                 48                 47
Intangible asset amortization(2)             18                   -                35                   -
Acquisition-related transaction
costs(2)                                      3                   -                 3                   -
Tax reform related item -
employee bonus(3)                              -                  -                  -                 7
Non-GAAP operating income         $         382      $         352      $  

733 $ 654


Effective tax rate                         22.3  %            25.7  %            21.0  %            22.8  %
Restructuring charges(1)                    0.4  %            (0.3) %             0.3  %             0.1  %
Intangible asset amortization(2)            0.1  %                - %             0.2  %                - %
Non-GAAP effective tax rate                22.8  %            25.4  %            21.5  %            22.9  %

Diluted EPS                       $        0.89$        0.86$        1.86$        1.58
Restructuring charges(1)                   0.18               0.06               0.18               0.17
Intangible asset amortization(2)           0.06                   -              0.13                   -
Acquisition-related transaction
costs(2)                                   0.01                   -              0.01                   -
Tax reform related item -
employee bonus(3)                              -                  -                  -              0.02
Tax impact of non-GAAP
adjustments(4)                            (0.06)             (0.01)             (0.08)             (0.05)
Non-GAAP diluted EPS              $        1.08$        0.91$        2.10$        1.72


(1)Represents charges associated with U.S. retail operating model changes and
the closure of Best Buy Mobile stand-alone stores in the U.S. Refer to Note 9,
Restructuring Charges, in the Notes to Condensed Consolidated Financial
Statements for additional information.

(2)Represents charges associated with the acquisitions of GreatCall and CST,
including (1) the non-cash amortization of definite-lived intangible assets,
including customer relationships, tradenames and developed technology, and (2)
acquisition-related transaction costs primarily comprised of professional fees.
Refer to Note 2, Acquisition, and Note 5, Goodwill and Intangible Assets, in the
Notes to Condensed Consolidated Financial Statements for additional information.

(3)Represents final adjustments for amounts paid and associated taxes related to
a one-time bonus for certain employees announced in response to future tax
savings created by the Tax Cuts and Jobs Act of 2017 enacted into law in the
fourth quarter of fiscal 2018.

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

Non-GAAP operating income increased in the second quarter and first six months of fiscal 2020, primarily driven by a decrease in SG&A from lower incentive compensation.

Our non-GAAP effective tax rate decreased in the second quarter and first six months of fiscal 2020, primarily due to increased tax benefits related to stock-based compensation and the resolution of discrete matters.


Non-GAAP diluted EPS increased in the second quarter and first six months of
fiscal 2020, primarily driven by the increase 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):


                                                   August 3, 2019       February 2, 2019      August 4, 2018
Cash and cash equivalents                         $        1,289      $           1,980      $        1,865
Short-term investments                                       320                       -                465
Total cash, cash equivalents and
short-term investments                            $        1,609      $     

1,980 $ 2,330



The decrease in total cash, cash equivalents and short-term investments from
February 2, 2019, was primarily due to share repurchases and the acquisition of
CST. The decrease from August 4, 2018, was primarily due to share repurchases
and the acquisitions of GreatCall and CST.

Cash Flows

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

Six Months Ended

                                                                    August 3, 2019       August 4, 2018
Total cash provided by (used in):
Operating activities                                              $           625      $         1,108
Investing activities                                                         (828)               1,200
Financing activities                                                         (576)              (1,524)
Effect of exchange rate changes
on cash                                                                        (1)                 (16)
Increase (decrease) in cash, cash equivalents
and restricted cash                                               $          (780)     $           768


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 on inventory, income taxes 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 decrease in cash provided by investing activities in fiscal 2020 was primarily due to decreases in sales of investments and the acquisition of CST.

Financing Activities

The decrease in cash used in financing activities was primarily due to the repayment in fiscal 2019 of our $500 million principal amount of notes due August 1, 2018, and a decrease in shares repurchased during fiscal 2020.

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 August 3, 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 September 4, 2019, are summarized below.

Rating Agency                   Rating    Outlook
Standard & Poor's            BBB      Stable
Moody's                      Baa1    Positive
Fitch                             BBB      Stable


Credit rating agencies review their ratings periodically, and, therefore, the
credit rating assigned to us by each agency may be subject to revision at any
time. 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 $115 million, $204 million, and
$203 million at August 3, 2019, February 2, 2019, and August 4, 2018,
respectively. The decrease from prior periods was due to a dividend of excess
cash from our wholly-owned insurance captive that manages a portion of our
self-insured claims.

Debt and Capital


As of August 3, 2019, we had $650 million principal amount of notes due March
15, 2021, and $500 million principal amount of notes due October 1, 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 August 3, 2019, $2.7 billion of the $3.0 billion share repurchase
authorization was available. Between the end of the second quarter of fiscal
2020 on August 3, 2019, and September 4, 2019, we repurchased an incremental 2.2
million shares of our common stock at a cost of $146 million.

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

                                           Three Months Ended                        Six Months Ended
                                   August 3, 2019      August 4, 2018       August 3, 2019      August 4, 2018
Total cost of shares repurchased  $       230         $          375      $           336      $          774
Average price per share           $     69.71$        74.80      $         70.04      $        73.21
Number of shares repurchased              3.3                    5.0                  4.8                10.6


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


                                             Three Months Ended                         Six Months Ended
                                    August 3, 2019        August 4, 2018       August 3, 2019       August 4, 2018
Regular quarterly cash dividends
per share                         $      0.50           $          0.45      $       1.00         $          0.90
Cash dividends declared and paid  $       133           $           125      $        267         $           253


The increases in cash dividends declared and paid for the second quarter and
first six months of fiscal 2020 compared to the same periods in the prior year
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,
remained relatively unchanged at 1.1 as of August 3, 2019, 1.2 as of February 2,
2019, and 1.2 as of August 4, 2018.

Our debt to earnings ratio, calculated as total debt (including current portion)
divided by net earnings from continuing operations over the trailing twelve
months, also remained relatively unchanged at 0.8 as of August 3, 2019, 0.9 as
of February 2, 2019, and 0.8 as of August 4, 2018.

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 August 3, 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 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-

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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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