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 other 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 . 14 --------------------------------------------------------------------------------
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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.
In March 2020 , the World 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.
On October 1, 2018 , we acquired all outstanding shares of GreatCall, Inc.
("GreatCall") and on May 9, 2019 , we acquired all outstanding shares of Critical
Signal Technologies, Inc. ("CST"). Consistent with our comparable sales policy,
the results of GreatCall are included in our comparable sales calculation for
the three and nine months ended October 31, 2020 , and the results of CST are
included in our comparable sales calculation for the three months ended October
31, 2020 .
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.
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
During the third quarter, our comparable sales grew 23% as we leveraged our
unique capabilities, including our supply chain expertise, flexible store
operating model and ability to shift quickly to digital, to meet what is clearly
elevated demand for products that help customers work, learn, cook, entertain
and connect in their homes. We provided customers with multiple options for how,
when and where they shopped with us to ensure it satisfied their need for safety
and convenience. The current environment has underscored our purpose to enrich
lives through technology, and the capabilities we are strengthening now will
benefit us going forward as we execute our strategy.
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Our better-than-expected sales resulted in significant operating income rate expansion and earnings growth of 33% over the same period last year. Our strong financial performance is allowing us to share our success with the community, our shareholders, and, importantly, our employees. During the quarter, we made a$40 million donation to theBest Buy Foundation to accelerate the progress towards our goal to reach 100 Teen Tech Centers across theU.S. We believe our Teen Tech Centers help to further our commitments towards economic and social justice in our communities by making a measurable difference in the lives of underserved teenswho may not otherwise have access to technology. In addition, we resumed our share repurchase program during the fourth quarter of this fiscal year. For our employees, we reinstated our short-term incentive compensation, paid recognition bonuses to field employees and raised our starting wage to$15 per hour for all employees. In the early days of the pandemic, we established an employee hardship fund that continues to provide emergency funds to our employeeswho are sick, have loved oneswho are sick or are experiencing financial hardship. In addition, in the fourth quarter of fiscal 2021, we resumed our 401(k) employer match and invested further in our employee well-being benefits.
Throughout the pandemic and across all the ways customers can shop, we have continued to adhere to safety protocols that limit store capacity, follow strict social distancing practices and use proper protective equipment, including requiring our employees and customers to wear masks.
This COVID-19 pandemic and the shift in customer buying behavior underscores the importance of our strong multi-channel capabilities. During the third quarter, our Domestic online revenue grew approximately 174% from last year. We believe it is essential to provide options that let customers choose what works best for them. We provide fulfillment options that customers have come to expect from all retailers like fast and free home delivery and in-store-pickup. We also offer curbside pickup, in-store consultations, and home installation of appliances, TVs, fitness equipment and more. In addition, our digital experiences, such as chatting with an expert or leveraging a digital consultation in your home, remain popular options. As we look forward, the environment is still evolving, and our operating model and supporting cost structure are 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. We have also expedited some planned strategic changes that will allow us to emerge from this time even stronger. During the quarter, we made the difficult decision to exit our operations inMexico and took other actions within our Domestic segment to more broadly align our corporate organizational structure in support of our strategy. As a result, we recorded$102 million of charges in our International segment during the third quarter of fiscal 2021, including$36 million of inventory markdowns within cost of sales and$66 million of asset impairments and termination benefits within restructuring charges. We expect to incur additional pre-tax restructuring charges, primarily related to foreign currency translation adjustments, of approximately$50 million to$75 million . In fiscal 2020 ourMexico operations generated annual revenue of approximately$400 million , with an operating loss of approximately$10 million . We expect operations inMexico to be substantially complete during the fourth quarter of fiscal 2021 or early fiscal 2022.
We also recorded
It is possible that we will incur material future restructuring costs, both in our Domestic and International segments, but we are unable to forecast the timing and magnitude of such costs. Refer to Note 2, Restructuring Charges, in the Notes to Condensed Consolidated Financial Statements for additional information.
We believe the following will be permanent and structural implications of the
pandemic relevant to
?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, 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, natural disasters 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
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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.
Results of Operations
In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of ourMexico operations on a one-month lag. Consistent with such consolidation, the financial and non-financial information presented in our MD&A relative to these operations is also presented on a lag. Our policy is to accelerate the recording of events occurring in the lag period that significantly affect our consolidated financial statements. Other than the restructuring charges incurred related to our decision to exit our operations inMexico , no such events were identified for the periods presented.
Consolidated Performance Summary
Selected consolidated financial data was as follows ($ in millions, except per share amounts):
Three Months Ended Nine Months Ended
October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Revenue $ 11,853 $ 9,764 $ 30,325 $ 28,442
Revenue % change 21.4 % 1.8 % 6.6 % 1.3 %
Comparable sales % change 23.0 % 1.7 % 8.1 % 1.5 %
Gross profit $ 2,795 $ 2,361 $ 7,030 $ 6,813
Gross profit as a % of revenue(1) 23.6 % 24.2 % 23.2 % 24.0 %
SG&A $ 2,123 $ 1,973 $ 5,560 $ 5,730
SG&A as a % of revenue(1) 17.9 % 20.2 % 18.3 % 20.1 %
Restructuring charges $ 111 $ (7) $ 112 $ 41
Operating income $ 561 $ 395 $ 1,358 $ 1,042
Operating income as a % of revenue 4.7 % 4.0 % 4.5 % 3.7 %
Net earnings $ 391 $ 293 $ 982 $ 796
Diluted earnings per share $ 1.48 $ 1.10 $ 3.74 $ 2.96
(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 third quarter and first nine months of fiscal 2021, we generated $11.9
billion and $30.3 billion in revenue and our comparable sales increased 23.0%
and 8.1%, respectively. The impact of the pandemic continued to drive strong
customer demand for products to help them work, learn, cook, entertain and
connect in their homes. Our strong sales performance resulted in operating
income rate expansion of 70 basis points and 80 basis points during the third
quarter and first nine months of fiscal 2021, respectively, compared to prior
year periods, allowing us to share our success with employees, the community and
our shareholders. During the third quarter of fiscal 2021, we re-instated
short-term incentive compensation and made a $40 million donation to the Best
Buy Foundation to accelerate the progress towards our goal to reach 100 Teen
Tech Centers across the U.S. Revenue, gross profit rate, SG&A and operating income rate changes in the third quarter and first nine 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 third quarter of fiscal 2021 due to an
increase in pre-tax earnings. Our effective tax rate ("ETR") increased to 29.6%
in the third quarter of fiscal 2021 compared to 24.8% in the third quarter of
fiscal 2020, primarily due to an increase in losses for which tax benefits were
not recognized.
Income tax expense increased in the first nine 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 26.4% in the first
nine months of fiscal 2021 compared to 22.5% in the first nine months of fiscal
2020, primarily due to an increase in losses for which tax benefits were not
recognized, a decrease in the tax benefit from stock-based compensation and the
impact of higher 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 Nine Months Ended
October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Revenue $ 10,850 $ 8,964 $ 27,893 $ 26,266
Revenue % change 21.0 % 2.4 % 6.2 % 1.8 %
Comparable sales % change(1) 22.6 % 2.0 % 7.5 % 1.8 %
Gross profit $ 2,604 $ 2,181 $ 6,509 $ 6,303
Gross profit as a % of revenue 24.0 % 24.3 % 23.3 % 24.0 %
SG&A $ 1,948 $ 1,800 $ 5,087 $ 5,233
SG&A as a % of revenue 18.0 % 20.1 % 18.2 % 19.9 %
Restructuring charges $ 44 $ (7) $ 45 $ 41
Operating income $ 612 $ 388 $ 1,377 $ 1,029
Operating income as a % of revenue 5.6 % 4.3 % 4.9 % 3.9 %
Selected Online Revenue Data
Total online revenue $ 3,823 $ 1,397 $ 12,014 $ 4,122
Online revenue as a % of total
segment revenue 35.2 % 15.6 % 43.1 % 15.7 %
Comparable online sales growth(1) 173.7 % 15.0 % 191.4 % 15.6 %
(1)Online sales are included in the comparable sales calculation.
The increases in revenue in the third quarter and first nine months of fiscal 2021 were primarily driven by comparable sales growth across most of our product categories, partially offset by the loss of revenue from permanent store closures in the past year. Online revenue of$3.8 billion and$12.0 billion in the third quarter and first nine months of fiscal 2021 increased 173.7% and 191.4%, respectively, on a comparable basis, 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 third 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 Stores Total Stores Stores at at Beginning Total Stores at Beginning End of of Third Stores Stores at End of of Third Stores Stores Third Quarter Opened Closed Third Quarter Quarter Opened Closed Quarter Best Buy 970 - (14) 956 995 - (17) 978 Outlet Centers 14 - - 14 11 2 - 13 Pacific Sales 21 - - 21 21 - - 21 Total 1,005 - (14) 991 1,027 2 (17) 1,012
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
November 2,
October 31, 2020 November 2, 2019 October 31, 2020 2019
Computing and Mobile
Phones 47 % 47 % 21.5 % 3.0 %
Consumer Electronics 29 % 30 % 21.1 % - %
Appliances 14 % 12 % 39.3 % 12.5 %
Entertainment 5 % 5 % 17.5 % (20.8) %
Services 5 % 6 % 12.7 % 12.9 %
Total 100 % 100 % 22.6 % 2.0 %
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Continued strong demand in categories that help our customers work, learn, cook, entertain and connect 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 21.5% comparable sales gain was driven primarily by computing and tablets, partially offset by declines in mobile phones.
?Consumer Electronics: The 21.1% comparable sales gain was driven primarily by home theater and digital imaging.
?Appliances: The 39.3% comparable sales gain was driven by large and small appliances.
?Entertainment: The 17.5% comparable sales gain was driven primarily by gaming, virtual reality and drones, partially offset by declines in movies.
?Services: The 12.7% comparable sales gain was primarily due to our warranty and support services.
Our gross profit rate decreased in the third quarter and first nine months of fiscal 2021, primarily driven by higher supply chain costs as a result of the increased mix of online revenue and lower profit sharing revenue from our private label and co-branded credit card arrangement, partially offset by a more favorable promotional environment. Our SG&A increased in the third quarter of fiscal 2021, primarily due to higher incentive compensation for corporate and field employees of approximately$75 million , increased variable costs associated with higher sales volume and a$40 million donation to theBest Buy Foundation . These increases were partially offset by lower store payroll expense, primarily from fewer labor hours as a result of lower store revenue, reduced store operating hours and efficiencies in our labor model. The decrease in labor hours was partially offset by higher hourly wage rates, as we raised our starting wage to$15 per hour for all employees. Our SG&A decreased in the first nine months of fiscal 2021, primarily due to lower store payroll expense, lower incentive compensation expense and lower advertising expense. These decreases were partially offset by increases in variable costs associated with higher sales volume and a$40 million donation to theBest Buy Foundation . The decrease due to lower store payroll expense also included employee retention credits of$81 million in the first nine months of fiscal 2021 as a result of the Federal Coronavirus Aid, Relief and Economic Security Act. The employee retention credit is a payroll credit for 50% of wages and health benefits paid to employees not providing services due to the COVID-19 pandemic. Restructuring charges in the third quarter and first nine months of fiscal 2021 primarily related to termination benefits associated with actions taken to more broadly align our corporate organizational structure in support of our strategy. Restructuring charges in the third quarter and first nine months of fiscal 2020 related to termination benefits associated with our fiscal 2020 U.S. retail operating model changes. Refer to Note 2, Restructuring Charges, in the Notes to Condensed Consolidated Financial Statements for additional information. Our operating income rate increased in the third quarter and first nine months of fiscal 2021, primarily driven by increased leverage from higher sales volume on our fixed expenses which resulted in favorable SG&A rates, partially offset by restructuring charges and the decreases in gross profit rates described above. The increase for the first nine months of fiscal 2021 was also driven by lower SG&A as described above.
International
Selected financial data for the International segment was as follows ($ in
millions):
Three Months Ended Nine Months Ended
October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Revenue $ 1,003 $ 800 $ 2,432 $ 2,176
Revenue % change 25.4 % (4.1) % 11.8 % (4.2) %
Comparable sales % change 27.3 % (1.9) % 15.1 % (1.7) %
Gross profit $ 191 $ 180 $ 521 $ 510
Gross profit as a % of revenue 19.0 % 22.5 % 21.4 % 23.4 %
SG&A $ 175 $ 173 $ 473 $ 497
SG&A as a % of revenue 17.4 % 21.6 % 19.4 % 22.8 %
Restructuring charges $ 67 $ - $ 67 $ -
Operating income (loss) $ (51) $ 7 $ (19) $ 13
Operating income (loss) as a % of
revenue (5.1) % 0.9 % (0.8) % 0.6 %
The increases in revenue in the third quarter and first nine months of fiscal
2021 were primarily driven by comparable sales growth across most of our product
categories, partially offset by the negative impact of foreign currency exchange
rate fluctuations primarily related to our Mexico operations in the third
quarter of fiscal 2021 and both our Canadian and Mexico operations in the first
nine months of fiscal 2021.
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International segment stores open at the beginning and end of the third 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
Third Quarter Opened Closed Third Quarter Third Quarter Opened Closed Third Quarter
Canada
Best Buy 131 - - 131 132 - (1) 131
Best Buy Mobile 40 - (3) 37 43 - - 43
Mexico
Best Buy 34 - (3) 31 30 4 - 34
Best Buy Express 14 - - 14 9 1 - 10
Total 219 - (6) 213 214 5 (1) 218
International segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows:
Revenue Mix Comparable Sales
Three Months Ended Three Months Ended
November 2,
October 31, 2020 November 2, 2019 October 31, 2020 2019
Computing and Mobile
Phones 53 % 51 % 35.7 % (0.3) %
Consumer Electronics 27 % 29 % 13.3 % 1.2 %
Appliances 9 % 8 % 40.1 % (1.5) %
Entertainment 5 % 5 % 35.6 % (31.1) %
Services 5 % 6 % 4.3 % 11.5 %
Other 1 % 1 % 22.0 % (28.2) %
Total 100 % 100 % 27.3 % (1.9) %
Similar to the Domestic segment, strong demand in categories that help our
customers work, learn, cook, entertain and connect 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 35.7% comparable sales gain was driven primarily by computing and tablets.
?Consumer Electronics: The 13.3% comparable sales gain was driven primarily by home theater and health and fitness.
?Appliances: The 40.1% comparable sales gain was driven by large and small appliances.
?Entertainment: The 35.6% comparable sales gain was driven primarily by gaming, virtual reality and drones, partially offset by declines in movies.
?Services: The 4.3% comparable sales gain was primarily due to our warranty services.
?Other: The 22.0% comparable sales gain was driven primarily by baby products.
Our gross profit rate declined in the third quarter and first nine months of fiscal 2021, primarily due to$36 million of inventory markdowns associated with our decision to exit our operations inMexico . During the first nine months of fiscal 2021, our gross profit rate also decreased due toCanada , which was largely driven by a lower mix of higher margin services revenue and higher supply chain costs as a result of the increased mix of online revenue. Our SG&A increased in the third quarter of fiscal 2021 primarily due to higher incentive compensation inCanada . During the first nine months of fiscal 2021, SG&A decreased primarily due to the favorable impact of foreign currency exchange rates and lower store payroll expense inCanada , similar to our Domestic segment. These decreases were partially offset by higher incentive compensation inCanada .
Restructuring charges in the third quarter and first nine months of fiscal 2021
related to asset impairments and termination benefits associated with our
decision to exit our operations in
Our operating loss rate in the third quarter and first nine months of fiscal
2021 was primarily driven by restructuring charges and lower gross profit rates
described above, partially offset by favorable SG&A rates driven by increased
leverage from higher sales volume on our fixed expenses.
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Consolidated Non-GAAP Financial Measures
Reconciliations of operating income, effective tax rate and diluted EPS (GAAP
financial measures) to non-GAAP operating income, non-GAAP effective tax rate
and non-GAAP diluted EPS (non-GAAP financial measures) were as follows ($ in
millions, except per share amounts):
Three Months Ended Nine Months Ended
October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Operating income $ 561 $ 395 $ 1,358 $ 1,042
% of revenue 4.7 % 4.0 % 4.5 % 3.7 %
Restructuring - inventory
markdowns(1) 36 - 36 -
Intangible asset amortization(2) 20 18 60 53
Acquisition-related transaction
costs(2) - - - 3
Restructuring charges(3) 111 (7) 112 41
Non-GAAP operating income $ 728 $ 406 $ 1,566 $ 1,139
% of revenue 6.1 % 4.2 % 5.2 % 4.0 %
Effective tax rate 29.6 % 24.8 % 26.4 % 22.5 %
Intangible asset amortization(2) (1.5) % 0.1 % (1.1) % 0.1 %
Restructuring charges(3) (3.2) % (0.1) % (0.8) % - %
Non-GAAP effective tax rate 24.9 % 24.8 % 24.5 % 22.6 %
Diluted EPS $ 1.48 $ 1.10 $ 3.74 $ 2.96
Restructuring - inventory
markdowns(1) 0.14 - 0.13 -
Intangible asset amortization(2) 0.08 0.07 0.23 0.20
Acquisition-related transaction
costs(2) - - - 0.01
Restructuring charges(3) 0.42 (0.03) 0.43 0.15
Income tax impact of non-GAAP
adjustments(4) (0.06) (0.01) (0.10) (0.09)
Non-GAAP diluted EPS $ 2.06 $ 1.13 $ 4.43 $ 3.23
(1)Represents inventory markdowns recorded within cost of sales associated with
the decision to exit operations in
(2)Represents charges associated with acquisitions, including: (1) the non-cash amortization of definite-lived intangible assets, including customer relationships, tradenames and developed technology; and (2) acquisition-related transaction costs primarily comprised of professional fees. (3)Represents charges related to asset impairments and termination benefits associated with the decision to exit operations inMexico and other actions within our Domestic segment to more broadly align our corporate organizational structure in support of our strategy for the periods endedOctober 31, 2020 . Represents charges and subsequent adjustments related to termination benefits associated withU.S. retail operating model changes for the periods endedNovember 2, 2019 . (4)The non-GAAP adjustments relate to theU.S. andMexico . As such, the income tax charge is calculated using the statutory tax rate of 24.5% for allU.S. non-GAAP items for all periods presented. There is no income tax charge for theMexico non-GAAP items, as there was no tax benefit recognized on these expenses in the calculation of GAAP income tax expense. Non-GAAP operating income rate increased in the third quarter and first nine months of fiscal 2021, primarily driven by increased leverage from higher sales volume on our fixed expenses, which resulted in favorable SG&A rates, partially offset by decreases in gross profit rates. Our non-GAAP effective tax rate remained relatively unchanged in the third quarter of fiscal 2021. Our non-GAAP effective tax rate increased in the first nine 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.
Non-GAAP diluted EPS increased in the third quarter and first nine 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):
October 31, 2020 February 1, 2020 November 2, 2019
Cash and cash equivalents $ 5,136 $ 2,229 $ 1,205
Short-term investments 545 - -
Total cash, cash equivalents and
short-term investments $ 5,681 $ 2,229 $ 1,205
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The increases in cash, cash equivalents and short-term investments fromFebruary 1, 2020 , andNovember 2, 2019 , were primarily driven by the increase in operating cash flows, the issuance of our$650 million principal amount of notes dueOctober 1, 2030 ("2030 Notes"), and a reduction in share repurchases, which were temporarily suspended from March to November of fiscal 2021. These increases were partially offset by increases in capital expenditures and dividends paid.
Cash Flows
Cash flows from total operations were as follows ($ in millions):
Nine Months Ended
October 31, 2020 November 2, 2019
Total cash provided by (used in):
Operating activities $ 3,907 $ 937
Investing activities (1,153) (727)
Financing activities 170 (1,060)
Effect of exchange rate changes
on cash (8) (2)
Increase (decrease) in cash, cash equivalents
and restricted cash $ 2,916 $ (852)
Operating Activities
The increase in cash provided by operating activities in fiscal 2021 was
primarily due to working capital improvement. This was primarily due to the
timing of inventory purchasing and payments to meet higher demand while higher
inventory turnover and supply chain constraints continued to impact inventory
levels. Lower income tax payments also contributed to the increase.
Investing Activities
The increase in cash used in investing activities in fiscal 2021 was primarily due to the increase in purchases of short-term investments as a result of our strong cash position, partially offset by acquisitions in the prior year.
Financing Activities
The increase in cash provided by financing activities in fiscal 2021 was primarily due to the issuance of our 2030 Notes and lower share repurchases, which were temporarily suspended from March to November of fiscal 2021.
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 (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 the Facility onMarch 19, 2020 , which remained outstanding untilJuly 27, 2020 , when the Facility was repaid in full. There were no borrowings outstanding under the Facility as ofOctober 31, 2020 ,February 1, 2020 , orNovember 2, 2019 . Our credit ratings and outlook as ofNovember 25, 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. 22 --------------------------------------------------------------------------------
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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 $135 million , $126 million and
$127 million at October 31, 2020 , February 1, 2020 , and November 2, 2019 ,
respectively.
Debt and Capital
As ofOctober 31, 2020 , we had$650 million of principal amount of notes dueMarch 15, 2021 ("2021 Notes"),$500 million of principal amount of notes dueOctober 1, 2028 ("2028 Notes") and$650 million of our 2030 Notes. During the third quarter of fiscal 2021, we issued our 2030 Notes and cash settled the associated Treasury Rate Lock ("T-Lock") contracts entered into during the second quarter of fiscal 2021 to hedge the base interest rate variability on a portion of our then-expected refinancing of our maturing 2021 Notes. The net proceeds from the 2030 Notes will be used to replace our 2021 Notes that mature inMarch 2021 , which we expect to retire during the fourth quarter of fiscal 2021 by exercising our option to redeem the 2021 Notes at par. Refer to Note 7, Derivative Instruments, for further information about our T-Lock contracts, and Note 5, Debt, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q, and Note 6, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 , for further information about our outstanding debt.
Share Repurchases and Dividends
We repurchase our common stock and pay dividends pursuant to programs approved
by our Board of Directors ("Board"). The payment of cash dividends is also
subject to customary legal and contractual restrictions. Our long-term capital
allocation strategy is to first fund operations and investments in growth and
then return excess cash over time to shareholders through dividends and share
repurchases while maintaining investment grade credit metrics.
On
Share repurchase and dividend activity was as follows ($ and shares in millions, except per share amounts):
Three Months Ended Nine Months Ended
October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Total cost of shares repurchased $ - $ 371 $ 56 $ 707
Average price per share $ - $ 67.28 $ 86.30 $ 68.56
Number of shares repurchased - 5.5 0.6 10.3
Regular quarterly cash dividends
per share $ 0.55 $ 0.50 $ 1.65 $ 1.50
Cash dividends declared and paid $ 142 $ 131 $ 426 $ 398
Other Financial Measures
Our current ratio, calculated as current assets divided by current liabilities, remained unchanged at 1.1 as ofOctober 31, 2020 , andFebruary 1, 2020 , and was 1.0 as ofNovember 2, 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 grew to 1.1 as ofOctober 31, 2020 , primarily due to the issuance of our 2030 Notes, compared to 0.8 as ofFebruary 1, 2020 , andNovember 2, 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, and the issuance of our 2030 Notes in the third 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
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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 its resurgence 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 have taken and will continue to take in
response to the pandemic, including the implementation of our interim and
evolving operating model; actions governments, businesses and individuals have
taken and will continue to 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, 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 the U.S. , trade
restrictions or changes in the costs of imports (including existing or new
tariffs or duties and changes in the amount of any such tariffs or duties) and
risks arising from our international activities. We caution that the foregoing
list of important factors is not complete. Any forward-looking statements speak
only as of the date they are made, and we assume no obligation to update any
forward-looking statement that we may make.
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