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). Online sales are included in comparable sales. Online sales represent those initiated on a website or app, regardless of whether customers choose to pick up product in store, curbside, at an alternative pick-up location or take delivery direct to their homes. All periods presented apply this methodology consistently. InMarch 2020 , theWorld Health Organization declared the outbreak of novel coronavirus disease ("COVID-19") as a pandemic. All stores that were temporarily closed as a result of COVID-19 or operating a curbside-only operating model are included in comparable sales. 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 and six months endedAugust 1, 2020 , and the results of CST are excluded from our comparable sales calculation for the periods presented. We believe comparable sales is a meaningful supplemental metric for investors to evaluate revenue performance resulting from growth in existing stores, websites and call centers versus the portion resulting from opening new stores or closing existing stores. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers' methods. 14 --------------------------------------------------------------------------------
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Interim Sales Data
Within this MD&A, we refer to consolidated sales growth based on interim period
data, which we use to monitor transactional revenue performance on a daily or
weekly interval. For a period in which we may experience significant shifts in
revenue trends as a result of COVID-19-related impacts, we believe interim sales
data provides helpful insight into these trends. The weekly sales growth
estimates represent the year-over-year change compared to the same period in the
prior fiscal year. Weekly sales growth is based on absolute sales dollar changes
and is not presented in accordance with our comparable sales definition. Interim
sales data is unaudited and excludes quarter-end revenue accounting adjustments.
Other companies may track interim period sales data using different methods and
systems, and therefore, the estimated data presented herein may not be
comparable to any data released by other companies.
Non-GAAP Financial Measures
This MD&A includes financial information prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"), as well as certain adjusted or non-GAAP financial measures, such as constant currency, non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted earnings per share ("EPS") from continuing operations. We believe that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors in evaluating current period performance and in assessing future performance. For these reasons, our internal management reporting also includes non-GAAP financial measures. Generally, our non-GAAP financial measures include adjustments for items such as restructuring charges, goodwill impairments, gains and losses on investments, intangible asset amortization, certain acquisition-related costs and the tax effect of all such items. In addition, certain other items may be excluded from non-GAAP financial measures when we believe doing so provides greater clarity to management and our investors. These non-GAAP financial measures should be considered in addition to, and not superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Non-GAAP financial measures as presented herein may not be comparable to similarly titled measures used by other companies. In our discussions of the operating results of our consolidated business and our International segment, we sometimes refer to the impact of changes in foreign currency exchange rates or the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert the International segment's operating results from local currencies intoU.S. dollars for reporting purposes. We also may use the term "constant currency," which represents results adjusted to exclude foreign currency impacts. We calculate those impacts as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period currency exchange rates. We 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
Our store operating model evolved during the quarter as we responded to the changing COVID-19 environment. We ended the first quarter in a curbside-only model with no in-store customer shopping. At the beginning of the second quarter, we started welcoming customers back into our stores by offering an in-store consultation service, by appointment only. OnJune 15, 2020 , we began allowing customers to shop without an appointment at more than 800 stores across theU.S. ByJune 22, 2020 , almost all of our stores were open for shopping. Products that help people work, learn, connect and cook at home, like computing, appliances and tablets, were the largest drivers of our sales growth for the quarter. Trends across most categories and services improved materially throughout the second quarter as we opened our stores more broadly for shopping, especially categories like large appliances and home theater that benefit from more experiential shopping. Based on interim sales data, consolidated sales during the last seven weeks of the second quarter grew approximately 16% compared to the prior-year period and grew 20% for the first three weeks of the third quarter compared to the prior-year period.
Throughout this time period and across all the ways customers can shop, we have continued to adhere to safety protocols that limit capacity, follow strict social distancing practices and use proper protective equipment, including requiring our employees and customers to wear masks.
This pandemic and the swift shift in customer buying behavior underscores the
importance of our strong multi-channel capabilities. For the full quarter, our
Domestic online revenue grew approximately 240% from last year. Even when stores
opened for customer shopping, online sales growth continued to be strong. We
believe it is essential to provide options that let customers choose what works
best for them. We provide fulfillment options customers have come to expect from
all retailers like fast and free home delivery and buy online and pick up in
store. We also offer curbside pickup, in-store consultations, and of course,
home installation of appliances, TVs, fitness equipment and more. And our
digital experiences, such as chatting with an expert or leveraging a digital
consultation in your home, remain popular options.
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As we look forward, the environment is still evolving, and our operating model and supporting cost structure is evolving as well. The pandemic has accelerated the evolution of retail and compelled us to change our operating model in the best interest of our employees and customers. It has also allowed us to expedite some planned strategic changes that will set us up to emerge from this time even stronger.
We believe the following will be permanent and structural implications of the pandemic:
?Customer shopping behavior will be permanently changed in a way that is even more digital and puts customers entirely in control to shop how they want. Our strategy is to embrace that reality, and lead, not follow.
?Our workforce will need to evolve in a way that meets the needs of customers while also providing more flexible opportunities for our people.
?Technology is playing an even more crucial role in people's lives due to the pandemic, and, as a result, our purpose to enrich lives through technology has never been more important. Said differently, people are using technology to address their needs in ways they never contemplated before, and we play a vital role in bringing tech to life for both customers and our vendor partners. These implications are extensive and interdependent and have been considered as we have made decisions throughout the course of the pandemic and will help shape our strategy for our future store design, our operating models and our digital investments. From the very start of the pandemic, we have been focused on guiding the business with two goals in mind: first, ensuring the health and safety of our customers and employees while protecting the employee experience as much as possible; and second, making certain we come out of this a strong, innovative company. Clearly, we are still operating in a dynamic environment, and much uncertainty remains around future outbreaks, government stimulus efforts and the economic impacts of sustained high unemployment levels and ongoing shut-downs that vary by industry. In addition, we continue to navigate the impacts of inventory constraints, wildfires, hurricanes and civil unrest. We are cognizant of all of these factors. At the same time we are encouraged by our clarity of purpose and our momentum, which has guided and will continue to guide our operating model changes and investments. Our purpose to enrich lives through technology is more relevant than it has ever been, and we are confident regarding our execution, adaptability and the opportunities ahead. We will continue to invest in those capabilities that focus on the customer experience over the long term - and that are designed to provide choice, speed and now safety. In the wake ofGeorge Floyd's death and the subsequent protests,Best Buy is committed to doing better when it comes to taking action to address racial inequities and injustices. We have created a diverse task force within the company to help us define and create meaningful change and we will provide visibility to our corresponding commitments in the near future. We have also committed to creating more than 100 Teen Tech Centers to help bridge the opportunity gap and digital divide for teens in disinvested communities across the country. And we are one of the leaders of a new public-private partnership, called ConnectedMN, that will provide computers and internet access to thousands of youth in our home state. Finally, we have signed on as a founding member of the Parity.org ParityPledge in Support of People of Color. This is a public commitment to interview at least one qualified person of color for every open leadership role that is at the vice president level or higher, including the C-suite and board of directors. 16 --------------------------------------------------------------------------------
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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 Six Months Ended
August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019
Revenue $ 9,910 $ 9,536 $ 18,472 $ 18,678
Revenue % change 3.9 % 1.7 % (1.1) % 1.0 %
Comparable sales % change 5.8 % 1.6 % 0.4 % 1.4 %
Gross profit $ 2,270 $ 2,283 $ 4,235 $ 4,452
Gross profit as a % of revenue(1) 22.9 % 23.9 % 22.9 % 23.8 %
SG&A $ 1,702 $ 1,922 $ 3,437 $ 3,757
SG&A as a % of revenue(1) 17.2 % 20.2 % 18.6 % 20.1 %
Restructuring charges $ - $ 48 $ 1 $ 48
Operating income $ 568 $ 313 $ 797 $ 647
Operating income as a % of revenue 5.7 % 3.3 % 4.3 % 3.5 %
Net earnings $ 432 $ 238 $ 591 $ 503
Diluted earnings per share $ 1.65 $ 0.89 $ 2.26 $ 1.86
(1)Because retailers vary in how they record costs of operating their supply
chain between cost of 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 ended February 1, 2020 .
In the second quarter and first six months of fiscal 2021, we generated $9.9
billion and $18.5 billion in revenue and our comparable sales increased 5.8% and
0.4%, respectively. Our operating income rate expanded by 240 basis points and
80 basis points during the second quarter and first six months of fiscal 2021,
respectively, due to materially lower SG&A expense, a direct result of decisions
to lower costs in response to the uncertainty of the pandemic and our evolving
operating model. We also recorded diluted EPS of $1.65 and $2.26 in the second
quarter and first six months of fiscal 2021, increases of 85% and 22%,
respectively, compared to the second quarter and first six months of fiscal
2020.
Revenue, gross profit rate, SG&A and operating income rate changes in the second quarter and first six months of fiscal 2021 were primarily driven by our Domestic segment. For further discussion of each segment's performance, see the Segment Performance Summary below.
Income Tax Expense
Income tax expense increased in the second quarter of fiscal 2021 due to an
increase in pre-tax earnings. Our effective tax rate ("ETR") increased to 22.9%
in the second quarter of fiscal 2021 compared to 22.3% in the second quarter of
fiscal 2020, primarily due to the impact of higher pre-tax earnings, partially
offset by an increase in the tax benefit from federal wage tax credits and
stock-based compensation.
Income tax expense increased in the first six months of fiscal 2021 due to an
increase in pre-tax earnings and a decrease in the tax benefit from stock-based
compensation in the current year period. Our ETR increased to 24.2% in the first
six months of fiscal 2021 compared to 21.0% in the first six months of fiscal
2020, primarily due to a decrease in the tax benefit from stock-based
compensation and the impact of higher pre-tax earnings, partially offset by an
increase in the tax benefit from federal wage tax credits.
Our tax provision for interim periods is determined using an estimate of our
annual ETR, adjusted for discrete items, if any, that are taken into account in
the relevant period. We update our estimate of the annual ETR each quarter and
we make a cumulative adjustment if our estimated tax rate changes. Our quarterly
tax provision and our quarterly estimate of our annual ETR are subject to
variation due to several factors, including our ability to accurately forecast
our pre-tax and taxable income and loss by jurisdiction, tax audit developments,
recognition of excess tax benefits or deficiencies related to stock-based
compensation, foreign currency gains (losses), changes in laws or regulations,
and expenses or losses for which tax benefits are not recognized. Our ETR can be
more or less volatile based on the amount of pre-tax earnings. For example, the
impact of discrete items and non-deductible losses on our ETR is greater when
our pre-tax earnings are lower.
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Segment Performance Summary
Domestic
Selected financial data for the Domestic segment was as follows ($ in millions):
Three Months Ended Six Months Ended
August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019
Revenue $ 9,128 $ 8,821 $ 17,043 $ 17,302
Revenue % change 3.5 % 2.1 % (1.5) % 1.5 %
Comparable sales % change(1) 5.0 % 1.9 % (0.3) % 1.6 %
Gross profit $ 2,084 $ 2,113 $ 3,905 $ 4,122
Gross profit as a % of revenue 22.8 % 24.0 % 22.9 % 23.8 %
SG&A $ 1,560 $ 1,756 $ 3,139 $ 3,433
SG&A as a % of revenue 17.1 % 19.9 % 18.4 % 19.8 %
Restructuring charges $ - $ 48 $ 1 $ 48
Operating income $ 524 $ 309 $ 765 $ 641
Operating income as a % of revenue 5.7 % 3.5 % 4.5 % 3.7 %
Selected Online Revenue Data
Total online revenue $ 4,849 $ 1,417 $ 8,191 $ 2,725
Online revenue as a % of total
segment revenue 53.1 % 16.1 % 48.1 % 15.7 %
Online revenue growth(1) 242.2 % 17.3 % 200.5 % 16.0 %
(1)Online sales are included in the comparable sales calculation.
The increase in revenue in the second quarter of fiscal 2021 was primarily driven by comparable sales growth, partially offset by the loss of revenue from 25 permanent store closures in the past year. The decrease in revenue in the first six months of fiscal 2021 was primarily driven by the loss of revenue from permanent store closures in the past year and a comparable sales decline primarily due to temporary store closures and stores operating a curbside-only model as a result of COVID-19 during the first quarter of fiscal 2021. Online revenue of$4.8 billion and$8.2 billion in the second quarter and first six months of fiscal 2021 increased 242.2% and 200.5%, respectively, primarily due to higher conversion rates and increased traffic as we continue to see a channel shift in our customer shopping behavior as a result of COVID-19. Domestic segment stores open at the beginning and end of the second quarters of fiscal 2021 and fiscal 2020, excluding stores that were temporarily closed as a result of COVID-19, were as follows: Fiscal 2021 Fiscal 2020 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 971 - (1) 970 995 - - 995 Outlet Centers 12 2 - 14 10 1 - 11 Pacific Sales 21 - - 21 21 - - 21 Total 1,004 2 (1) 1,005 1,026 1 - 1,027
We continuously monitor store performance. As we approach the expiration date of our store leases, we evaluate various options for each location, including whether a store should remain open.
Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:
Revenue Mix Comparable Sales
Three Months Ended Three Months Ended
August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019
Computing and Mobile
Phones 47 % 44 % 11.7 % 0.6 %
Consumer Electronics 29 % 32 % (3.8) % 1.0 %
Appliances 14 % 13 % 14.5 % 14.0 %
Entertainment 5 % 5 % (4.4) % (13.7) %
Services 5 % 6 % (8.7) % 10.7 %
Total 100 % 100 % 5.0 % 1.9 %
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Strong demand in categories that help our customers work, learn, connect and cook from home contributed to our Domestic comparable sales changes across most of our categories. Notable comparable sales changes by revenue category were as follows:
?Computing and Mobile Phones: The 11.7% comparable sales gain was driven primarily by computing and tablets, offset by declines in mobile phones.
?Consumer Electronics: The 3.8% comparable sales decline was driven primarily by digital imaging. Home theater was essentially flat to last year, as comparable sales gains in televisions were offset by declines in accessories.
?Appliances: The 14.5% comparable sales gain was driven by small and large appliances.
?Entertainment: The 4.4% comparable sales decline was driven primarily by movies, partially offset by gains in drones.
?Services: The 8.7% comparable sales decline was due to declines in our repair and support services, due to a higher mix of online sales, which has a lower attach rate than in store sales. Our gross profit rate decreased in the second quarter and first six months of fiscal 2021, primarily driven by higher supply chain costs from the increased mix of online revenue and lower profit sharing revenue from our private label and co-branded credit card arrangement, which negatively impacted our Domestic gross profit rate by approximately 20 basis points in the second quarter and first six months of fiscal 2021 compared to last year. Our SG&A decreased in the second quarter of fiscal 2021, primarily due to lower store payroll expense, lower advertising expense, lower incentive compensation expense as we did not pay or accrue short-term incentive expense for both field and corporate employees, and lower medical claims expense. Our SG&A decreased in the first six months of fiscal 2021, primarily due to lower store payroll expense, lower incentive compensation expense, lower advertising expense and lower medical claims expense. The decreases due to lower store payroll expense included employee retention credits of$12 million and$81 million in the second quarter and first six months of fiscal 2021, respectively, as a result of the Federal Coronavirus Aid, Relief and Economic Security Act. The employee retention credit is a refundable payroll credit for 50% of wages and health benefits paid to employees not providing services due to the COVID-19 pandemic. Our operating income rate increased in the second quarter and first six months of fiscal 2021, primarily driven by lower SG&A, partially offset by the decreases in gross profit rate described above. Our operating income rate in the first six months of fiscal 2021 also increased due to the absence of restructuring charges compared to last year.
International
Selected financial data for the International segment was as follows ($ in
millions):
Three Months Ended Six Months Ended
August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019
Revenue $ 782 $ 715 $ 1,429 $ 1,376
Revenue % change 9.4 % (3.4) % 3.9 % (4.2) %
Comparable sales % change 15.1 % (1.9) % 8.0 % (1.6) %
Gross profit $ 186 $ 170 $ 330 $ 330
Gross profit as a % of revenue 23.8 % 23.8 % 23.1 % 24.0 %
SG&A $ 142 $ 166 $ 298 $ 324
SG&A as a % of revenue 18.2 % 23.2 % 20.9 % 23.5 %
Operating income $ 44 $ 4 $ 32 $ 6
Operating income as a % of revenue 5.6 % 0.6 % 2.2 % 0.4 %
The increases in revenue in the second quarter and first six months of fiscal
2021 were primarily driven by comparable sales gains, partially offset by the
negative impact of foreign currency exchange rate fluctuations primarily related
to our Canadian operations.
International segment stores open at the beginning and end of the second quarters of fiscal 2021 and fiscal 2020, excluding stores that were temporarily closed as a result of COVID-19, were as follows:
Fiscal 2021 Fiscal 2020
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 131 - - 131 132 - - 132
Best Buy Mobile 41 - (1) 40 44 - (1) 43
Mexico
Best Buy 35 - (1) 34 29 1 - 30
Best Buy Express 14 - - 14 9 - - 9
Total 221 - (2) 219 214 1 (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
August 1, 2020 August 3, 2019 August 1,2020 August 3, 2019 Computing and Mobile Phones 49 % 43 % 31.0 % (4.4) % Consumer Electronics 27 % 32 % (4.7) % 1.0 % Appliances 12 % 12 % 13.4 % 11.5 % Entertainment 6 % 5 % 44.5 % (20.1) % Services 4 % 6 % (11.1) % 4.6 % Other 2 % 2 % 12.0 % (24.0) % Total 100 % 100 % 15.1 % (1.9) % Similar to the Domestic segment, strong demand in categories that help our customers work, learn, connect, cook and entertain from home contributed to our International comparable sales changes across most of our categories. Notable comparable sales changes by revenue category were as follows:
?Computing and Mobile Phones: The 31.0% comparable sales gain was driven primarily by computing and tablets, partially offset by declines in mobile phones.
?Consumer Electronics: The 4.7% comparable sales decline was driven primarily by digital imaging and home theater.
?Appliances: The 13.4% comparable sales gain was primarily driven by small appliances.
?Entertainment: The 44.5% comparable sales gain was driven primarily by gaming and virtual reality.
?Services: The 11.1% comparable sales decline was primarily due to a higher mix of online sales, which has a lower attach rate than in store sales.
?Other: The 12.0% comparable sales gain was driven primarily by baby products.
Our gross profit rate remained flat in the second quarter of fiscal 2021. During the first six months of fiscal 2021, our gross profit rate decreased 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. Our SG&A decreased in the second quarter and first six months of fiscal 2021, primarily due to lower store payroll expense inCanada and the favorable impact of foreign currency exchange rates. Our operating income rate increased in the second quarter and first six months of fiscal 2021, primarily driven by lower SG&A, partially offset by lower gross profit rates 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 Six Months Ended
August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019
Operating income $ 568 $ 313 $ 797 $ 647
% of revenue 5.7 % 3.3 % 4.3 % 3.5 %
Intangible asset amortization(1) 20 18 40 35
Acquisition-related transaction
costs(1) - 3 - 3
Restructuring charges(2) - 48 1 48
Non-GAAP operating income $ 588 $ 382 $ 838 $ 733
% of revenue 5.9 % 4.0 % 4.5 % 3.9 %
Effective tax rate 22.9 % 22.3 % 24.2 % 21.0 %
Intangible asset amortization(1) 0.1 % 0.1 % - % 0.2 %
Restructuring charges(2) - % 0.4 % - % 0.3 %
Non-GAAP effective tax rate 23.0 % 22.8 % 24.2 % 21.5 %
Diluted EPS $ 1.65 $ 0.89 $ 2.26 $ 1.86
Intangible asset amortization(1) 0.08 0.06 0.16 0.13
Acquisition-related transaction
costs(1) - 0.01 - 0.01
Restructuring charges(2) - 0.18 - 0.18
Income tax impact of non-GAAP
adjustments(3) (0.02) (0.06) (0.04) (0.08)
Non-GAAP diluted EPS $ 1.71 $ 1.08 $ 2.38 $ 2.10
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(1)Represents charges associated with acquisitions, including (1) the non-cash amortization of definite-lived intangible assets, including customer relationships, tradenames and developed technology, and (2) acquisition-related transaction costs primarily comprised of professional fees.
(2)Represents charges and 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. Non-GAAP operating income increased in the second quarter of fiscal 2021, primarily driven by lower store payroll expense, lower advertising expense, lower incentive compensation expense and lower medical claims expense, partially offset by higher supply chain costs from the higher mix of online revenue. Non-GAAP operating income increased in the first six months of fiscal 2021, primarily driven by lower store payroll expense and lower incentive compensation expense, partially offset by higher supply chain costs from the higher mix of online revenue. Our non-GAAP effective tax rate increased in the second quarter of fiscal 2021, primarily due to the impact of higher pre-tax earnings, partially offset by an increase in the tax benefit from federal wage tax credits and stock-based compensation. Our non-GAAP effective tax rate increased in the first six months of fiscal 2021, primarily due to a decrease in the tax benefit from stock-based compensation and the impact of higher pre-tax earnings, partially offset by an increase in the tax benefit from federal wage tax credits.
Non-GAAP diluted EPS increased in the second quarter and first six months of fiscal 2021, primarily driven by increases in non-GAAP operating income and lower diluted weighted-average common shares outstanding from share repurchases.
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.
Cash, cash equivalents and short-term investments were as follows ($ in millions):
August 1, 2020 February 1, 2020 August 3, 2019
Cash and cash equivalents $ 5,305 $ 2,229 $ 1,289
Short-term investments - - 320
Total cash, cash equivalents and
short-term investments $ 5,305 $
2,229
The increases in cash, cash equivalents and short-term investments fromFebruary 1, 2020 , andAugust 3, 2019 , were primarily driven by the increase in operating cash flows and a reduction in share repurchases.
Cash Flows
Cash flows from total operations were as follows ($ in millions):
Six Months Ended
August 1, 2020 August 3, 2019
Total cash provided by (used in):
Operating activities $ 3,788 $ 625
Investing activities (383) (828)
Financing activities (332) (576)
Effect of exchange rate changes
on cash (6) (1)
Increase (decrease) in cash, cash equivalents
and restricted cash $ 3,067 $ (780)
Operating Activities
The increase in cash provided by operating activities in fiscal 2021 was
primarily due to working capital improvement. This was largely driven by later
payments for inventory and a reduction in inventory driven by higher revenue in
the current year's quarter as well as supply chain constraints. Lower income tax
payments and the timing of collections on receivables also contributed to the
increase.
Investing Activities
The decrease in cash used in investing activities in fiscal 2021 was primarily
due to lower purchases of investments and the absence of acquisitions in the
current year.
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Financing Activities
The decrease in cash used in financing activities in fiscal 2021 was primarily due to lower share repurchases, partially offset by an increase in dividend payments.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, short-term investments, our credit facilities and other debt arrangements are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures, share repurchases, dividends and strategic initiatives, including business combinations. However, in the event our liquidity is insufficient, we may be required to limit our spending. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms. We have a$1.25 billion five year senior unsecured revolving credit facility agreement (the "Facility") with a syndicate of banks. In light of the uncertainty surrounding the impact of COVID-19 and to maximize liquidity, we executed a short-term draw on the full amount of our$1.25 billion Facility onMarch 19, 2020 , that remained outstanding untilJuly 27, 2020 , when the Facility was repaid in full. There were no borrowings outstanding under the Facility as ofAugust 1, 2020 ,February 1, 2020 , orAugust 3, 2019 . Our credit ratings and outlook as ofAugust 27, 2020 , are summarized below. OnApril 22, 2020 , Moody's completed its periodic review and confirmed its current rating of Baa1 and outlook of Stable.Standard & Poor's rating and outlook remained unchanged from the prior year. 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 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$117 million ,$126 million and$115 million atAugust 1, 2020 ,February 1, 2020 , andAugust 3, 2019 , respectively.
Debt and Capital
As ofAugust 1, 2020 , we had$650 million of principal amount of notes dueMarch 15, 2021 ("2021 Notes"), and$500 million of principal amount of notes dueOctober 1, 2028 , outstanding. During the second quarter of fiscal 2021, we entered into Treasury Rate Lock ("T-Lock") contracts with an aggregate notional amount of$325 million to hedge the base interest rate variability on a portion of a potential refinancing of our maturing 2021 Notes. Refer to Note 6, Derivative Instruments, for further information about our T-lock contracts, and Note 4, Debt, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q and Note 6, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year 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 August 1, 2020 , $1.9 billion of the $3.0 billion share repurchase
authorization was available. On March 21, 2020 , we announced the suspension of
all share repurchases given the uncertainty surrounding the impact of COVID-19.
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Share repurchase and dividend activity was as follows ($ and shares in millions,
except per share amounts):
Three Months Ended Six Months Ended
August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019
Total cost of shares repurchased $ - $ 230 $ 56 $ 336
Average price per share $ - $ 69.71 $ 86.30 $ 70.04
Number of shares repurchased - 3.3 0.6 4.8
Regular quarterly cash dividends
per share $ 0.55 $ 0.50
$ 1.10 $ 1.00
Cash dividends declared and paid
284 $ 267
Other Financial Measures
Our current ratio, calculated as current assets divided by current liabilities,
remained unchanged at 1.1 as of August 1, 2020 , February 1, 2020 , and August 3,
2019 .
Our debt to earnings ratio, calculated as total debt (including current portion)
divided by net earnings from continuing operations over the trailing twelve
months, remained unchanged at 0.8 as of August 1, 2020 , February 1, 2020 , and
August 3, 2019 .
Off-Balance-Sheet Arrangements and Contractual Obligations
Our liquidity is not dependent on the use of off-balance-sheet financing arrangements. Other than the short-term draw on our Facility in the first quarter of fiscal 2021 and subsequent full repayment in the second quarter of fiscal 2021, there has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 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
We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements.
Safe Harbor Statement Under the Private Securities Litigation Reform Act
Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
provide a "safe harbor" for forward-looking statements to encourage companies to
provide prospective information about their companies. With the exception of
historical information, the matters discussed in this Quarterly Report on
Form 10-Q are forward-looking statements and may be identified by the use of
words such as "anticipate," "assume," "believe," "estimate," "expect,"
"guidance," "intend," "outlook," "plan," "project" and other words and terms of
similar meaning. Such statements reflect our current views and estimates with
respect to future market conditions, company performance and financial results,
operational investments, business prospects, new strategies, the competitive
environment and other events. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from the
potential results discussed in such forward-looking statements. Readers should
review Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal
year ended February 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
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during the fourth fiscal quarter, susceptibility of our products to technological advancements, product life cycles and launches, changes in consumer preferences, spending and debt, economic or regulatory developments that might affect our ability to provide attractive promotional financing, interruptions and other supply chain issues, catastrophic events, health crises, pandemics, our ability to maintain positive brand perception and recognition, product safety and quality concerns, changes to labor or employment laws or regulations, our ability to effectively manage our real estate portfolio, constraints in the capital markets, changes to our vendor credit terms, changes in our credit ratings, any material disruption in our relationship with or the services of third-party vendors, risks related to our exclusive brand products and risks associated with vendors that source products outside of 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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