BEST BUY CO., INC. Unless the context otherwise requires, the use of the terms "Best Buy ," "we," "us" and "our" refers toBest Buy Co., Inc. and its consolidated subsidiaries. Any references to our website addresses do not constitute incorporation by reference of the information contained on the websites. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A is presented in the following sections: ?Overview
?Business Strategy and COVID-19 Update
?Results of Operations
?Liquidity and Capital Resources
?Off-Balance-Sheet Arrangements and Contractual Obligations
?Significant Accounting Policies and Estimates
?New Accounting Pronouncements
?Safe Harbor Statement Under the Private Securities Litigation Reform Act
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 ("Fiscal 2020 Form 10-K"), the Risk Factors included in the Fiscal 2020 Form 10-K and in this Form 10-Q, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited.
Overview
Our purpose is to enrich the lives of consumers through technology. We have two reportable segments: Domestic and International. The Domestic segment is comprised of the operations in all states, districts and territories of theU.S. The International segment is comprised of all operations inCanada andMexico . 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 theU.S. ,Canada andMexico .
Comparable Sales
Throughout this MD&A, we refer to comparable sales. Comparable sales is a metric used by management to evaluate the performance of our existing stores, websites and call centers by measuring the change in net sales for a particular period over the comparable prior-period of equivalent length. Comparable sales includes revenue from stores, websites and call centers operating for at least 14 full months. Stores closed more than 14 days, including but not limited to relocated, remodeled, expanded and downsized stores, or stores impacted by natural disasters, are excluded from comparable sales until at least 14 full months after reopening. Acquisitions are included in comparable sales beginning with the first full quarter following the first anniversary of the date of the acquisition. Comparable sales also includes credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. 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). Comparable online sales are included in comparable sales. Online sales represent those initiated on a website or app, regardless of whether customers choose to pick up product at a store, at an alternative pick-up location or take delivery direct to their homes. All periods presented apply this methodology consistently. InMarch 2020 , theWorld Health Organization declared the outbreak of novel coronavirus disease ("COVID-19") as a pandemic. Except where otherwise directed by state and local authorities, onMarch 22, 2020 , we transitioned our stores to a contactless, curbside-only operating model. All stores that were temporarily closed as a result of COVID-19 or operating a curbside-only operating model are included in comparable sales. OnOctober 1, 2018 , we acquired all outstanding shares ofGreatCall, Inc. ("GreatCall") and onMay 9, 2019 , we acquired all outstanding shares ofCritical Signal Technologies, Inc. ("CST"). Consistent with our comparable sales policy, the results ofGreatCall are included in our comparable sales calculation for the three months endedMay 2, 2020 , and the results of CST are excluded from our comparable sales calculation for the periods presented. We believe comparable sales is a meaningful supplemental metric for investors to evaluate revenue performance resulting from growth in existing stores, websites and call centers versus the portion resulting from opening new stores or closing existing stores. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers' methods. 14 --------------------------------------------------------------------------------
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Interim Sales Data
Within this MD&A, we refer to sales retention based on interim sales data, which
we use to monitor transactional revenue performance on a daily or weekly
interval. For a period in which we experienced significant shifts in revenue
trends as a result of COVID-19 -related impacts, we believe interim sales data
provides helpful insight into these trends. The sales retention estimate
represents the year-over-year change compared to the same period in the prior
fiscal year. Retention is based on absolute sales dollar changes and is not
presented in accordance with comparable sales. Interim sales data is unaudited
and excludes quarter-end revenue accounting adjustments. Other companies may
track interim sales data using different methods and systems, and therefore, the
estimated data as presented herein may not be comparable to any data released by
other companies.
Non-GAAP Financial Measures
This MD&A includes financial information prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"), as well as certain
adjusted or non-GAAP financial measures, such as constant currency, non-GAAP
operating income, non-GAAP effective tax rate and non-GAAP diluted earnings per
share ("EPS") from continuing operations. We believe that non-GAAP financial
measures, when reviewed in conjunction with GAAP financial measures, can provide
more information to assist investors in evaluating current period performance
and in assessing future performance. For these reasons, our internal management
reporting also includes non-GAAP financial measures. Generally, our non-GAAP
financial measures include adjustments for items such as restructuring charges,
goodwill impairments, gains and losses on investments, intangible asset
amortization, certain acquisition-related costs and the tax effect of all such
items. In addition, certain other items may be excluded from non-GAAP financial
measures when we believe doing so provides greater clarity to management and our
investors. These non-GAAP financial measures should be considered in addition
to, and not superior to or as a substitute for, GAAP financial measures. We
strongly encourage investors and shareholders to review our financial statements
and publicly-filed reports in their entirety and not to rely on any single
financial measure. Non-GAAP financial measures as presented herein may not be
comparable to similarly titled measures used by other companies.
In our discussions of the operating results of our consolidated business and our
International segment, we sometimes refer to the impact of changes in foreign
currency exchange rates or the impact of foreign currency exchange rate
fluctuations, which are references to the differences between the foreign
currency exchange rates we use to convert the International segment's operating
results from local currencies into U.S. dollars for reporting purposes. We also
may use the term "constant currency," which represents results adjusted to
exclude foreign currency impacts. We calculate those impacts as the difference
between the current period results translated using the current period currency
exchange rates and using the comparable prior period currency exchange rates. We
believe the disclosure of revenue changes in constant currency provides useful
supplementary information to investors in light of significant fluctuations in
currency rates.
Refer to the Consolidated Non-GAAP Financial Measures section below for a
detailed reconciliation of items that impacted our non-GAAP operating income,
non-GAAP effective tax rate and non-GAAP diluted EPS from continuing operations
in the presented periods.
Business Strategy and COVID-19 Update
In the first quarter of fiscal 2021, we generated$8.6 billion in revenue and our Enterprise comparable sales declined by 5.3%. Our GAAP operating income rate decreased by 100 basis points and our non-GAAP operating income rate decreased by 90 basis points, both compared to the first quarter of fiscal 2020. The decreases in both GAAP and non-GAAP operating income were primarily due to the operational disruptions caused by COVID-19. We recorded GAAP diluted EPS of$0.61 and non-GAAP diluted EPS of$0.67 , decreases of 38% and 34% compared to the first quarter of fiscal 2020, 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. The pandemic has changed the way we work, learn, care for ourselves and connect with each other. Against that backdrop, our purpose has never been more relevant: to enrich lives through technology. It is because of that purpose that we were, in virtually every jurisdiction with a stay-at-home order in place, designated an essential retailer because of the products and services we offer. OnMarch 22, 2020 , we proactively moved all our Domestic stores to a contactless, curbside-only operating model, allowing us to safely serve customers and comply with government orders and recommendations. We also halted all in-home installation, repair and consultation services. We did this even in jurisdictions where it was not mandated because we believed it was the best way at the time to keep our customers and employees as safe as possible. This required us to implement a new and highly effective operating model in a matter of 48 hours across our entire Domestic store base. As a result, we retained approximately 81% of last year's consolidated sales based on interim sales data during the last six weeks of the first quarter of fiscal 2021 as we operated in the new model. This reflects the strength of our multi-channel capabilities and the strategic investments we have been making over the past several years. It is also a testament to theBest Buy culture and our focus on the customer experience as the entire organization pivoted to execute and support the new model. Inmid-March 2020 , we began to see a surge in demand for the products that people need to work, learn or entertain from home. For the first quarter of fiscal 2021, we saw strong sales growth in computing, gaming and small appliances. Like many other retailers, we saw a sales benefit during the last three weeks of the first fiscal quarter as customers likely chose to spend some of their government stimulus money on the products and services we provide. 15 -------------------------------------------------------------------------------- Table of
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As we entered the second quarter of fiscal 2021, we continued to shift our operating model as we responded to the evolving environment. OnMay 4, 2020 , we began welcoming customers back into our stores by appointment only, following strict social-distancing practices and using appropriate protective equipment. This service allows customers who need to purchase more complex items to consult with one of our sales associates and receive advice tailored to their specific technology needs. We started with approximately 200 stores, and as ofMay 21, 2020 , we have almost 700, or 70%, of our Domestic stores operating this way. Most of the remaining stores are still operating in the curbside-only model, and approximately 40 stores remain completely closed, mainly due to our assessment of employee and customer safety. Customers have responded very positively to this new way of interacting with us in our stores, with 98% of customers surveyed indicating we made them feel safe during the experience. We have also resumed large product delivery, installations and in-home repairs in approximately 80% ofU.S. zip codes, while following strict new safety guidelines. From the very first days of the pandemic we told anyone feeling sick or quarantined that they would keep their job and be paid. We told any employee whose child was home from school that they, too, would be paid. We gave all field employees who were still serving customers or working in our distribution centers a temporary pay increase and, for all others, we paid their normal salaries for a full month as we took the time to determine how to move forward. OnApril 19, 2020 , we furloughed approximately 51,000 Domestic hourly store employees, including nearly all part-time employees. We retained approximately 82% of our full-time store and field employees on our payroll, including the vast majority ofIn-Home Advisors and Geek Squad Agents. Additionally, some corporate employees are participating in voluntary reduced work weeks and resulting pay, as well as voluntary furloughs. In addition, our Chief Executive Officer is foregoing 50% of her base salary and the members of the Board of Directors are foregoing 50% of their cash retainer fees. Company executives reporting directly to the Chief Executive Officer are taking a 20% reduction in base salary. The money saved from these temporary pay reductions is being added to the employee hardship fund we established with our founder,Dick Schulze . Despite the disruption and uncertainty related to COVID-19, we remain focused on executing our Building the New Blue strategy. In many ways, recent events have only reinforced our belief in our strategic direction. Our multi-year supply chain transformation has been focused on moving facilities closer to our customers and using automation and process improvements to expand fulfillment options, increase delivery speed and improve the delivery and installation experience. This has included significantly improving the ability for customers to order online and pick up at one of our stores. These changes, along with innovative digital advancements allowed our teams to quickly stand up a robust and seamless customer experience for both curbside pickup and the new, in-store consultation process. All of this culminated in Domestic online growth of 155% for the first quarter of fiscal 2021. While overall interactions with our Total Tech Support customers were down in the first quarter of fiscal 2021 compared to last year as our in-store and in-home services were unavailable, our remote technical support provided a critically stable support solution through these challenging times. In addition, we have cross-trained our Geek Squad Agents to work in our call centers, providing crucial phone and chat support to solve a variety of customer needs. With respect toBest Buy Health , our focus on helping seniors live more independently with our unique combination of tech and touch, has become even more relevant as the world responds to the COVID-19 pandemic. In the first quarter of fiscal 2021, to support our base of over 1 million seniors, we moved quickly to adapt our operations so our caring center agents could support more than 150,000 calls each week while complying with stay-at-home orders.
During the first quarter of fiscal 2021, we also took the following actions to maximize liquidity in light of the uncertainty surrounding the impact of COVID-19:
?executed a short-term draw on the full amount of our
?suspended share repurchases,
?lowered merchandise receipts to match demand,
?extended payment terms in partnership with key merchandising vendors,
?reduced promotional and marketing spend aligned with the temporary changes in our operating model,
?lowered capital spend to focus on mandatory maintenance or high-value strategic areas, and
?suspended our 401(k) company matching program.
There are many factors we continue to weigh for the remainder of fiscal 2021, including:
?the depth and duration of the pandemic;
?the impact of current and potential future government stimulus actions;
?the impact on unemployment, consumer confidence and spending;
?the evolution of our various operating models; and
?how and where our customers are choosing to interact with us.
Our priority has been and will continue to be the safety of our employees and
customers while providing essential products and services. We remain thoughtful
about managing our profitability and liquidity, balancing our short-term
decisions to navigate this unprecedented situation while preserving the elements
of our strategy that will ensure we remain a vibrant company in the future.
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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
May 2, 2020 May 4, 2019
Revenue $ 8,562 $ 9,142
Revenue % change (6.3) % 0.4 %
Comparable sales % change (5.3) % 1.1 %
Gross profit $ 1,965 $ 2,169 Gross profit as a % of revenue(1) 23.0 % 23.7 % SG&A
$ 1,735 $ 1,835 SG&A as a % of revenue(1) 20.3 % 20.1 % Operating income$ 229 $ 334
Operating income as a % of revenue 2.7 % 3.7 % Net earnings
$ 159 $ 265
Diluted earnings per share
(1)Because retailers vary in how they record costs of operating their supply chain between cost of sales and SG&A, our gross profit rate and SG&A rate may not be comparable to other retailers' corresponding rates. For additional information regarding costs classified in cost of sales and SG&A, refer to Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 . Revenue, gross profit rate, SG&A rate and operating income rate changes in the first quarter of fiscal 2021 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 decreased in the first quarter of fiscal 2021 due to a
decrease in pre-tax earnings, partially offset by a decrease in the tax benefit
from stock-based compensation in the current year period. Our effective tax rate
("ETR") increased to 27.4% in the first quarter of fiscal 2021 compared to 19.8%
in the first quarter of fiscal 2020, primarily due to a decrease in the tax
benefit from stock-based compensation and the impact of lower pre-tax earnings.
Our tax provision for interim periods is determined using an estimate of our
annual ETR, adjusted for discrete items, if any, that are taken into account in
the relevant period. We update our estimate of the annual ETR each quarter and
we make a cumulative adjustment if our estimated tax rate changes. Our quarterly
tax provision and our quarterly estimate of our annual 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.
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Segment Performance Summary
Domestic
Selected financial data for the Domestic segment was as follows ($ in millions):
Three Months Ended
May 2, 2020 May 4, 2019
Revenue $ 7,915 $ 8,481
Revenue % change (6.7) % 0.8 %
Comparable sales % change(1) (5.7) % 1.3 %
Gross profit $ 1,821 $ 2,009
Gross profit as a % of revenue 23.0 % 23.7 %
SG&A $ 1,579 $ 1,677
SG&A as a % of revenue 19.9 % 19.8 %
Operating income $ 241 $ 332
Operating income as a % of revenue 3.0 % 3.9 %
Selected Online Revenue Data
Total online revenue $ 3,342 $ 1,308 Online revenue as a % of total segment revenue 42.2 % 15.4 % Comparable online sales growth(1)
155.4 % 14.5 %
(1)Comparable online sales are included in the comparable sales calculation.
The decrease in revenue in the first quarter of fiscal 2021 was primarily driven by the comparable sales decline and the loss of revenue from 24 permanent store closures in the past year. Online revenue of$3.3 billion in the first quarter of fiscal 2021 increased 155.4% on a comparable basis, primarily due to higher conversion rates and increased traffic. The comparable sales decline and increased mix of online revenue were primarily due to the temporary store closures and stores operating a curbside-only operating model as a result of COVID-19. Domestic segment stores open at the beginning and end of the first quarters of fiscal 2021 and fiscal 2020, excluding stores that were temporarily closed as a result of COVID-19, were as follows: Fiscal 2021 Fiscal 2020 Total Total Total Stores Stores at Total Stores Stores at at Beginning End of at Beginning End of of First Stores Stores First of First Stores Stores First Quarter Opened Closed Quarter Quarter Opened Closed Quarter Best Buy 977 - (6) 971 997 - (2) 995
Outlet Centers 11 1 - 12 8 2 - 10 Pacific Sales 21 - - 21 21 - - 21 Total 1,009 1 (6) 1,004 1,026 2 (2) 1,026
We continuously monitor store performance. As we approach the expiration date of our store leases, we evaluate various options for each location, including whether a store should remain open.
Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:
Revenue Mix Comparable Sales
Three Months Ended Three Months Ended
May 2, 2020 May 4, 2019 May 2,2020 May 4, 2019 Computing and Mobile Phones 48 % 46 % 0.0 % 1.0 % Consumer Electronics 28 % 31 %
(15.7) % 0.9 % Appliances 12 % 11 % (2.0) % 10.5 % Entertainment 7 % 6 % 9.5 % (12.7) % Services 5 % 6 % (16.1) % 6.8 % Total 100 % 100 % (5.7) % 1.3 %
We believe the changes in our operating model as a result of COVID-19 contributed to our Domestic comparable sales changes across most of our categories. Notable comparable sales changes in our Domestic segment by revenue category were as follows:
?Computing and Mobile Phones: The comparable sales change was flat driven primarily by gains in computing, offset by declines in mobile phones.
?Consumer Electronics: The 15.7% comparable sales decline was driven primarily by home theater and digital imaging.
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?Appliances: The 2.0% comparable sales decline was driven by large appliances, partially offset by gains in small appliances.
?Entertainment: The 9.5% comparable sales gain was driven primarily by gaming, partially offset by declines in movies.
?Services: The 16.1% comparable sales decline was primarily due to store closures as a result of COVID-19 and the corresponding higher mix of online sales, which has a lower attach rate than in store, as well as the suspension of in-home services midway through the quarter.
Our gross profit rate decreased in the first quarter of fiscal 2021, primarily driven by higher supply chain costs from the increased mix of online revenue as a result of the changes we made in our operating model due to COVID-19. In addition, lower profit sharing revenue from our private label credit card negatively impacted our Domestic gross profit rate by approximately 20 basis points compared to last year. We expect to see continued pressure from lower profit-sharing revenue related to our private label and co-branded credit card arrangement as the economic ramifications of COVID-19 are expected to lead to higher credit card defaults over time. Our SG&A rate remained relatively flat to last year as a percentage of sales, whereas SG&A dollars decreased in the first quarter of fiscal 2021 by$98 million . The decrease in SG&A dollars was primarily due to reduced incentive compensation expense, as we did not pay or accrue short-term incentive expense for first quarter performance. SG&A also decreased due to lower store payroll expense when including an employee retention credit of$69 million as a result of the Federal CARES Act. This employee retention credit is a payroll tax credit, which represented approximately 50% of qualified wages and health benefits paid to retained employees not working as a result of COVID-19.
Our operating income rate decreased in the first quarter of fiscal 2021, primarily driven by the decrease in gross profit rate and relatively flat SG&A rate described above.
International
Selected financial data for the International segment was as follows ($ in
millions):
Three Months Ended
May 2, 2020 May 4, 2019
Revenue $ 647 $ 661
Revenue % change (2.1) % (5.2) %
Comparable sales % change 0.2 % (1.2) %
Gross profit $ 144 $ 160
Gross profit as a % of revenue 22.3 % 24.2 %
SG&A $ 156 $ 158
SG&A as a % of revenue 24.1 % 23.9 %
Operating income (loss) $ (12) $ 2 Operating income (loss) as a % of revenue (1.9) % 0.3 %
The decrease in revenue in the first quarter of fiscal 2021 was primarily driven by the negative impact of foreign currency exchange rate fluctuations primarily related to our Canadian operations, partially offset by an increase in revenue from new stores opened inMexico in the past year. Comparable sales were essentially flat to last year even though all stores inCanada were closed to customer traffic for a portion of the quarter, similar to our Domestic stores. International segment stores open at the beginning and end of the first quarters of fiscal 2021 and fiscal 2020, excluding stores that were temporarily closed as a result of COVID-19, were as follows: Fiscal 2021 Fiscal 2020 Total Stores at Total Stores Total Stores at Total Stores Beginning of Stores Stores at End of
Beginning of Stores Stores at End of
First Quarter Opened Closed First Quarter First Quarter Opened Closed First Quarter
Canada
Best Buy 131 - - 131 132 - - 132
Best Buy Mobile 42 - (1) 41 45 - (1) 44
Mexico
Best Buy 35 - - 35 29 - - 29
Best Buy Express 14 - - 14 6 3 - 9
Total 222 - (1) 221 212 3 (1) 214
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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
May 2, 2020 May 4, 2019 May 2, 2020 May 4, 2019
Computing and Mobile Phones 48 % 46 % 4.6 % (4.0) %
Consumer Electronics 27 % 31 % (12.7) % 2.5 %
Appliances 9 % 9 % 0.1 % (2.0) %
Entertainment 9 % 5 % 58.0 % (14.0) %
Services 5 % 7 % (19.5) % 13.4 %
Other 2 % 2 % 1.1 % 15.3 %
Total 100 % 100 % 0.2 % (1.2) %
We believe the changes in our operating model as a result of COVID-19
contributed to our International comparable sales changes across most of our
categories. Notable comparable sales changes in our International segment by
revenue category were as follows:
?Computing and Mobile Phones: The 4.6% comparable sales gain was driven primarily by computing, partially offset by declines in mobile phones.
?Consumer Electronics: The 12.7% comparable sales decline was driven primarily by home theater and digital imaging.
?Appliances: The 0.1% comparable sales gain was driven by small appliances, partially offset by declines in large appliances.
?Entertainment: The 58.0% comparable sales gain was driven primarily by gaming and virtual reality.
?Services: The 19.5% comparable sales decline was primarily due to store closures as a result of COVID-19 and the corresponding higher mix of online sales, which has a lower attach rate than in store, as well as the suspension of in-home services midway through the quarter.
?Other: The 1.1% comparable sales gain was driven primarily by baby products.
Our gross profit rate decreased in the first quarter of fiscal 2021 primarily due toCanada , which was largely driven by a lower mix of higher margin services revenue and higher supply chain costs from the increased mix of online revenue as a result of the changes we made in our operating model due to COVID-19.
Our SG&A rate increased in the first quarter of fiscal 2021, whereas SG&A
dollars decreased
We incurred an operating loss in the first quarter of fiscal 2021 compared to operating income in fiscal 2020, primarily driven by the lower gross profit rate and higher SG&A rate described above.
Consolidated Non-GAAP Financial Measures
Reconciliations of operating income, effective tax rate and diluted EPS (GAAP
financial measures) to non-GAAP operating income, non-GAAP effective tax rate
and non-GAAP diluted EPS (non-GAAP financial measures) were as follows ($ in
millions, except per share amounts):
Three Months Ended
May 2, 2020 May 4, 2019
Operating income $ 229 $ 334
% of revenue 2.7 % 3.7 %
Intangible asset amortization(1) 20 17
Restructuring charges(2) 1 -
Non-GAAP operating income $ 250 $ 351
% of revenue 2.9 % 3.8 %
Effective tax rate 27.4 % 19.8 %
Intangible asset amortization(1) (0.2) % 0.3 %
Non-GAAP effective tax rate 27.2 % 20.1 %
Diluted EPS $ 0.61 $ 0.98
Intangible asset amortization(1) 0.08 0.06
Income tax impact of non-GAAP adjustments(3) (0.02) (0.02) Non-GAAP diluted EPS
$ 0.67 $ 1.02
(1)Represents the non-cash amortization of definite-lived intangible assets associated with acquisitions, including customer relationships, tradenames and developed technology.
(2)Represents adjustments associated with
(3)The non-GAAP adjustments relate primarily to adjustments in theU.S. As such, the income tax charge is calculated using the statutory tax rate of 24.5% for all periods presented. 20
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Non-GAAP operating income decreased in the first quarter of fiscal 2021, primarily driven by higher supply chain costs from the higher mix of online revenue as a result of the changes we made in our operating model due to COVID-19.
Our non-GAAP effective tax rate increased in the first quarter of fiscal 2021, primarily due to a decrease in the tax benefit from stock-based compensation and the impact of lower pre-tax earnings.
Non-GAAP diluted EPS decreased in the first quarter of fiscal 2021, primarily driven by the decrease in non-GAAP operating income.
Liquidity and Capital Resources
We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including the level of investment required to support our business strategies, the performance of our business, capital expenditures, credit facilities, short-term borrowing arrangements and working capital management. Capital expenditures and share repurchases are a component of our cash flow and capital management strategy which, to a large extent, we can adjust in response to economic and other changes in our business environment. We have a disciplined approach to capital allocation, which focuses on investing in key priorities that support our strategy. During the first quarter of fiscal 2021, we took numerous actions to maximize liquidity in light of the uncertainty surrounding the impact of COVID-19. Refer to the Business Strategy and Impact of COVID-19 section above for a description of actions taken. We will continue to remain thoughtful about managing our profitability and liquidity, balancing our short-term decisions to navigate this unprecedented situation.
Cash and cash equivalents were as follows ($ in millions):
May 2, 2020 February 1, 2020 May 4, 2019
Cash and cash equivalents $ 3,919 $ 2,229 $ 1,561
The increase in cash and cash equivalents from February 1, 2020 , and May 4,
2019 , was primarily due to the $1.25 billion short-term draw on the Facility as
mentioned above. The increase in cash and cash equivalents from May 4, 2019 , was
also driven by a reduction in share repurchases over the past twelve months.
Cash Flows
Cash flows from total operations were as follows ($ in millions):
Three Months Ended
May 2, 2020 May 4, 2019
Total cash provided by (used in):
Operating activities $ 827 $ 2
Investing activities (179) (192)
Financing activities 1,049 (226)
Effect of exchange rate changes on cash and
cash equivalents (18) (1)
Increase (decrease) in cash, cash equivalents
and restricted cash $
1,679
Operating Activities
The increase in cash provided by operating activities in fiscal 2021 was primarily due to changes in working capital, primarily due to decreased receipts and payments on inventory partially resulting from COVID-related product constraints, our efforts to match inventory levels to reduced demand, favorable vendor payment terms and timing of collections on receivables.
Investing Activities
The decrease in cash used in investing activities in fiscal 2021 was primarily due to a decrease in additions to property and equipment.
Financing Activities
The increase in cash provided by financing activities was primarily due to the
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents,
our credit facilities and other debt arrangements are our most significant
sources of liquidity. We believe our sources of liquidity will be sufficient to
fund operations and anticipated capital expenditures, share repurchases,
dividends and strategic initiatives, including business combinations. However,
in the event our liquidity is insufficient, we may be required to limit our
spending. There can be no assurance that we
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will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms. We have a$1.25 billion five year senior unsecured revolving credit facility agreement (the "Facility") with a syndicate of banks. In light of the uncertainty surrounding the impact of COVID-19 and to maximize liquidity, we executed a seven-day draw on the full amount of the Facility onMarch 19, 2020 , and rolled this into a three-month draw onMarch 26, 2020 . The Facility remained fully drawn as ofMay 2, 2020 , at an interest rate of three-month LIBOR plus a margin rate of 1.015%. There were no borrowings outstanding as ofFebruary 1, 2020 , orMay 4, 2019 . Refer to Note 4, Debt, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for additional information regarding the Facility.
Our credit ratings and outlook as of
Rating Agency Rating Outlook Standard & Poor's BBB Stable Moody's Baa1 Stable Credit rating agencies review their ratings periodically, and, therefore, the credit rating assigned to us by each agency may be subject to 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 ,$126 million and$206 million atMay 2, 2020 ,February 1, 2020 , andMay 4, 2019 , respectively. The decrease from the first quarter of fiscal 2020 was due to a dividend of excess cash from our wholly-owned insurance captive that manages a portion of our self-insured claims. Debt and Capital As ofMay 2, 2020 , we had$1.25 billion of short-term borrowings under the Facility,$650 million of principal amount of notes dueMarch 15, 2021 , and$500 million of principal amount of notes dueOctober 1, 2028 , outstanding. Refer to Note 4, Debt, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q and Note 6, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 , for further information about our outstanding debt.
Share Repurchases and Dividends
We repurchase our common stock and pay dividends pursuant to programs approved
by our Board of Directors ("Board"). The payment of cash dividends is also
subject to customary legal and contractual restrictions. Our long-term capital
allocation strategy is to first fund operations and investments in growth and
then return excess cash over time to shareholders through dividends and share
repurchases while maintaining investment grade credit metrics.
On February 23, 2019 , our Board authorized a $3.0 billion share repurchase
program. As of May 2, 2020 , $1.9 billion of the $3.0 billion share repurchase
authorization was available. On March 21, 2020 , we announced the suspension of
all share repurchases given the uncertainty surrounding the impact of COVID-19.
Share repurchase and dividend activity was as follows ($ and shares in millions,
except per share amounts):
Three Months Ended
May 2, 2020 May 4, 2019
Total cost of shares repurchased $ 56 $ 106
Average price per share $ 86.30 $ 70.77
Number of shares repurchased 0.6 1.5
Regular quarterly cash dividends per share
$ 141 $ 134
The increases in cash dividends declared and paid from the first quarter of fiscal 2020 was the result of an increase in the regular quarterly dividend rate, partially offset by fewer shares outstanding due to the return of capital to shareholders through share repurchases.
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Other Financial Measures
Our current ratio, calculated as current assets divided by current liabilities,
was 1.0 as of May 2, 2020 , 1.1 as of February 1, 2020 , and 1.1 as of May 4,
2019 . The slight decline in the ratio at May 2, 2020 , compared to prior periods
was primarily due to the reclassification of our $650 million of principal
amount of notes due March 15, 2021 , to current liabilities.
Our debt to earnings ratio, calculated as total debt (including current portion)
divided by net earnings from continuing operations over the trailing twelve
months, was 1.8 as of May 2, 2020 , 0.8 as of February 1, 2020 , and 0.8 as of May
4, 2019 . The ratio at May 2, 2020 , increased from prior periods primarily due to
the $1.25 billion short-term draw on the Facility.
Off-Balance-Sheet Arrangements and Contractual Obligations
Our liquidity is not dependent on the use of off-balance-sheet financing arrangements.
Other than our short-term draw on the full amount of our$1.25 billion Facility to increase our cash position and maximize liquidity in light of the uncertainty surrounding the impact of COVID-19, there has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 2020. The resulting liability has been included as short-term debt on our Condensed Consolidated Balance Sheets as ofMay 2, 2020 . See our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 , for additional information regarding our off-balance-sheet arrangements and contractual obligations.
Significant Accounting Policies and Estimates
We describe our significant accounting policies in Note 1, Summary of
Significant Accounting Policies, of the Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K for the fiscal year ended
New Accounting Pronouncements
For 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 1, 2020 , and Item 1A, Risk Factors, in this Quarterly Report
on Form 10-Q for a description of important factors that could cause our actual
results to differ materially from those contemplated by the forward-looking
statements made in this Quarterly Report on Form 10-Q. Among the factors that
could cause actual results and outcomes to differ materially from those
contained in such forward-looking statements are the following: the duration and
scope of the COVID-19 pandemic and the impact on demand for our products and
services, levels of consumer confidence and our supply chain; the effects and
duration of steps we take in response to the pandemic, including the
implementation of our interim and evolving operating model; actions governments,
businesses and individuals take in response to the pandemic and their impact on
economic activity and consumer spending; the pace of recovery when the COVID-19
pandemic subsides; general economic uncertainty in key global markets and
worsening of global economic conditions or low levels of economic growth;
competition (including from multi-channel retailers, e-commerce business,
technology service providers, traditional store-based retailers, vendors and
mobile network carriers), our mix of products and services, our expansion
strategies, our focus on services as a strategic priority, our reliance on key
vendors and mobile network carriers (including product availability), pricing
investments and promotional activity, our ability to attract and retain
qualified employees, changes in market compensation rates, risks arising from
statutory, regulatory and legal developments (including tax statutes and
regulations), macroeconomic pressures in the markets in which we operate
(including fluctuations in housing prices, energy markets and jobless rates),
conditions in the industries and categories in which we operate, failure to
effectively manage our costs, our reliance on our information technology
systems, our ability to prevent or effectively respond to a privacy or security
breach, our ability to effectively manage strategic ventures, alliances or
acquisitions, our dependence on cash flows and net earnings generated during the
fourth fiscal quarter, susceptibility of our products to technological
advancements, product life cycles and launches, changes in consumer preferences,
spending and debt, 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
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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 theU.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.
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