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 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 endedJanuary 30, 2021 (including the information presented therein under Risk Factors), 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 lives through technology. We do this by leveraging our unique combination of tech expertise and human touch to meet our customers' everyday needs, whether they come to us online, visit our stores or invite us into their homes. We have two reportable segments: Domestic and International. The Domestic segment is comprised of operations, including ourBest Buy Health business, in all states, districts and territories of theU.S. The International segment is comprised of all operations inCanada andMexico . During the third quarter of fiscal 2021, we made the decision to exit our operations inMexico . All stores inMexico were closed as of the end of the first quarter of fiscal 2022, and our International segment will be comprised of operations inCanada going forward. Refer to Note 2, Restructuring, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q, for additional information. 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. OnMay 9, 2019 , we acquired all outstanding shares ofCritical Signal Technologies, Inc. ("CST"). Consistent with our comparable sales policy, the results of CST are included in our comparable sales calculation beginning in the third quarter of fiscal 2021. 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.
On
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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"). 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, price-fixing settlements, 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 when there are significant fluctuations in currency rates. Refer to the Consolidated Non-GAAP Financial Measures section below for detailed reconciliations of items impacting non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS in the presented periods.
Business Strategy Update
Throughout the second quarter of fiscal 2022, we provided customers multiple ways to interact with us depending on their needs, preference and comfort. Similar to the first quarter of fiscal 2022, customers migrated back into our stores to touch and feel products and to seek in-person expertise and service. At the same time, they continued to interact with us digitally at a significantly higher rate than pre-pandemic, as online sales were 32% of Domestic revenues compared to 16% in the second quarter of fiscal 2020. Phone and chat volume also remained high compared to pre-pandemic levels, and sales via these channels continued to climb. In addition, we are continuing to interact with customers in their homes - making large-product deliveries, installing solutions, repairing products and providing sales consultations. For customers purchasing online, we delivered product with speed and convenience. Online sales package delivery was not only faster than the second quarter of last year, when our online sales increased 242%, but faster than the second quarter of fiscal 2020 as well. We continued to roll out and run several tests and pilots during the quarter as we determine the best path forward to become even more customer-centric, digitally-focused and efficient. We believe this is crucial to thriving in a new and different environment where customers expect to seamlessly interact with physical and digital channels throughout the shopping journey as they seek inspiration, research, convenience and support. One of these pilots was a new membership program. Based on the positive pilot results, we plan to scale the program nationally in stores and online at the end of the third quarter of fiscal 2022 under the nameBest Buy Totaltech. Totaltech is designed to give our customers the confidence that whatever their technology needs are, we will be there to help. The goal is to create a membership experience that customers will love, which in turn results in a higher customer lifetime value and drives a larger share of consumer electronics spend toBest Buy . Over the longer term, we are fundamentally in a stronger position than we expected to be in just two years ago. We believe there has been a structural increase in the need for technology, and that we now serve a larger install base of consumer electronics with customerswho have an elevated appetite to upgrade due to constant technology innovation and needs that reflect structural life changes, like hybrid work and streaming entertainment content. We believe our significant omnichannel assets, including our ability to inspire what is possible across the breadth of consumer electronics, as well as our ability to keep it all working together the way customers want, truly differentiate us going forward in this new landscape. 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 reported periods.
Consolidated Performance Summary
Selected consolidated financial data was as follows ($ in millions, except per
share amounts):
Three Months Ended Six Months Ended
July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020
Revenue $ 11,849 $ 9,910 $ 23,486 $ 18,472
Revenue % change 19.6 % 3.9 % 27.1 % (1.1) %
Comparable sales % change 19.6 % 5.8 % 27.7 % 0.4 %
Gross profit $ 2,810 $ 2,270 $ 5,525 $ 4,235
Gross profit as a % of revenue(1) 23.7 % 22.9 % 23.5 % 22.9 %
SG&A $ 2,009 $ 1,702 $ 3,997 $ 3,437
SG&A as a % of revenue(1) 17.0 % 17.2 % 17.0 % 18.6 %
Restructuring charges $ 4 $ - $ (38) $ 1
Operating income $ 797 $ 568 $ 1,566 $ 797
Operating income as a % of revenue 6.7 % 5.7 % 6.7 % 4.3 %
Net earnings $ 734 $ 432 $ 1,329 $ 591
Diluted earnings per share $ 2.90 $ 1.65 $ 5.22 $ 2.26
(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 January 30, 2021 .
In the second quarter and first six months of fiscal 2022, we generated $11.8
billion and $23.5 billion in revenue, and our comparable sales grew 19.6% and
27.7%, respectively. We continued to experience high demand for technology
products and services, as consumers continued to leverage technology to meet
their needs, and we provided solutions that help them work, learn, entertain,
cook and connect at home. The demand was also bolstered by overall strong
consumer spending, aided by government stimulus, improving wages and high
savings levels. Our strong sales performance resulted in operating income rate
expansion of 100 basis points and 240 basis points during the second quarter and
first six months of fiscal 2022, respectively.
Revenue, gross profit, SG&A and operating income rate changes in the second quarter and first six months of fiscal 2022 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 decreased in the second quarter of fiscal 2022 primarily due
to the resolution of certain discrete tax matters, partially offset by the
impact of increased pre-tax earnings. Our effective tax rate ("ETR") decreased
to 8.0% in the second quarter of fiscal 2022 compared to 22.9% in the second
quarter of fiscal 2021, primarily due to the resolution of certain discrete tax
matters. Refer to Note 10, Income Taxes, in the Notes to Condensed Consolidated
Financial Statements for additional information.
Income tax expense increased in the first six months of fiscal 2022 primarily
due to an increase in pre-tax earnings, partially offset by the resolution of
certain discrete tax matters. Our ETR decreased to 15.1% in the first six months
of fiscal 2022 compared to 24.2% in the first six months of fiscal 2021,
primarily due to the resolution of certain discrete tax matters.
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
July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020
Revenue $ 11,011 $ 9,128 $ 21,852 $ 17,043
Revenue % change 20.6 % 3.5 % 28.2 % (1.5) %
Comparable sales % change(1) 20.8 % 5.0 % 28.7 % (0.3) %
Gross profit $ 2,606 $ 2,084 $ 5,132 $ 3,905
Gross profit as a % of revenue 23.7 % 22.8 % 23.5 % 22.9 %
SG&A $ 1,849 $ 1,560 $ 3,685 $ 3,139
SG&A as a % of revenue 16.8 % 17.1 % 16.9 % 18.4 %
Restructuring charges $ - $ - $ (44) $ 1
Operating income $ 757 $ 524 $ 1,491 $ 765
Operating income as a % of revenue 6.9 % 5.7 % 6.8 % 4.5 %
Selected Online Revenue Data
Total online revenue $ 3,486 $ 4,849 $ 7,082 $ 8,191
Online revenue as a % of total
segment revenue 31.7 % 53.1 % 32.4 % 48.1 %
Comparable online sales %
change(1) (28.1) % 242.2 % (13.5) % 200.5 %
(1)Online sales are included in the comparable sales calculation.
The increase in revenue in the second quarter and first six months of fiscal 2022 was primarily driven by comparable sales growth across almost all of our product categories, partially offset by the loss of revenue from permanent store closures in the past year. Online revenue of$3.5 billion and$7.1 billion in the second quarter and first six months of fiscal 2022 decreased 28.1% and 13.5%, respectively, on a comparable basis, primarily due to channel shifts in customer shopping behavior as a result of the COVID-19 pandemic and temporary store closures in the prior year. Domestic segment stores open at the beginning and end of the second quarters of fiscal 2022 and fiscal 2021, excluding stores that were temporarily closed as a result of COVID-19, were as follows: Fiscal 2022 Fiscal 2021 Total Total Stores Total Stores Stores at Total Stores at at End of at Beginning End of Beginning of Stores Stores Second of Second Stores Stores Second Second Quarter Opened Closed Quarter Quarter Opened Closed Quarter Best Buy 946 2 (1) 947 971 - (1) 970 Outlet Centers 14 1 - 15 12 2 - 14 Pacific Sales 21 - - 21 21 - - 21 Total 981 3 (1) 983 1,004 2 (1) 1,005 We continuously monitor store performance. As we approach the expiration date of our 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
July 31, 2021 August 1, 2020 July 31, 2021August 1, 2020 Computing and Mobile Phones 43 % 47 % 11.4 % 11.7 % Consumer Electronics 31 % 29 % 27.4 % (3.8) % Appliances 16 % 14 % 31.1 % 14.5 % Entertainment 5 % 5 % 36.4 % (4.4) % Services 5 % 5 % 23.6 % (8.7) % Total 100 % 100 % 20.8 % 5.0 % 18
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Continued strong demand for technology products and services with a focus on the home, including working, learning, entertaining and cooking, contributed to our Domestic comparable sales growth across most of our categories. Notable comparable sales changes were as follows:
?Computing and Mobile Phones: The 11.4% comparable sales gain was driven primarily by computing, mobile phones and wearables.
?Consumer Electronics: The 27.4% comparable sales gain was driven primarily by home theater, digital imaging, headphones and portable speakers.
?Appliances: The 31.1% comparable sales gain was primarily driven by large appliances.
?Entertainment: The 36.4% comparable sales gain was driven primarily by gaming and virtual reality.
?Services: The 23.6% comparable sales gain was primarily driven by support and warranty services.
Our gross profit rate increased in the second quarter and first six months of fiscal 2022, primarily driven by favorable product margin rates, including reduced promotions, and rate improvement from supply chain costs resulting from a lower mix of online revenue compared to the prior year. Our gross profit also increased in the second quarter of fiscal 2022 due to higher profit-sharing revenue from our private label and co-branded credit card arrangement. Our SG&A increased in the second quarter and first six months of fiscal 2022, primarily due to pandemic-related actions last year, which resulted in higher costs this year for short-term incentive compensation, store payroll, advertising, medical claims and our 401(k) employer match. In addition, SG&A increased due to investments in support of our technology initiatives. The restructuring credit in the first six months of fiscal 2022 primarily related to a reduction in termination benefits resulting from adjustments to previously planned organizational changes and higher-than-expected retention rates. Refer to Note 2, Restructuring, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q, for additional information. Our operating income rate increased in the second quarter and first six months of fiscal 2022, primarily driven by the favorability in gross profit rate described above and increased leverage from higher sales volume on our fixed expenses, which resulted in favorable SG&A rates.
International
Selected financial data for the International segment was as follows ($ in
millions):
Three Months Ended Six Months Ended
July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020
Revenue $ 838 $ 782 $ 1,634 $ 1,429
Revenue % change 7.2 % 9.4 % 14.3 % 3.9 %
Comparable sales % change 5.0 % 15.1 % 15.0 % 8.0 %
Gross profit $ 204 $ 186 $ 393 $ 330
Gross profit as a % of revenue 24.3 % 23.8 % 24.1 % 23.1 %
SG&A $ 160 $ 142 $ 312 $ 298
SG&A as a % of revenue 19.1 % 18.2 % 19.1 % 20.9 %
Restructuring charges $ 4 $ - $ 6 $ -
Operating income $ 40 $ 44 $ 75 $ 32
Operating income as a % of revenue 4.8 % 5.6 % 4.6 % 2.2 %
The increase in revenue in the second quarter of fiscal 2022 was primarily
driven by the benefit of 1,070 basis points of favorable foreign currency
exchange rate fluctuations and comparable sales growth of 5.0%. In the first six
months of fiscal 2022, revenue increased primarily from comparable sales growth
of 15.0% and the benefit of 1,040 basis points of favorable foreign currency
exchange rate fluctuations. These increases were partially offset by lower
revenue in Mexico in the second quarter and first six months of fiscal 2022 of
$60 million and $129 million , respectively, as a result of our decision in the
third quarter of fiscal 2021 to exit operations.
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International segment stores open at the beginning and end of the second quarters of fiscal 2022 and fiscal 2021, excluding stores that were temporarily closed as a result of COVID-19, were as follows:
Fiscal 2022 Fiscal 2021
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 130 - (1) 129 131 - - 131
Best Buy Mobile 33 - - 33 41 - (1) 40
Mexico
Best Buy - - - - 35 - (1) 34
Best Buy Express - - - - 14 - - 14
Total 163 - (1) 162 221 - (2) 219
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
July 31, 2021 August 1, 2020 July 31,2021 August 1, 2020 Computing and Mobile Phones 44 % 49 % (1.6) % 31.0 % Consumer Electronics 30 % 27 % 11.8 % (4.7) % Appliances 12 % 12 % 11.6 % 13.4 % Entertainment 7 % 6 % 13.7 % 44.5 % Services 5 % 4 % 2.2 % (11.1) % Other 2 % 2 % 10.8 % 12.0 % Total 100 % 100 % 5.0 % 15.1 % Similar to the Domestic segment, continued strong demand for technology products and services with a focus on the home, including working, learning, entertaining and cooking, contributed to our International segment's comparable sales growth across most of our categories. Notable comparable sales changes were as follows:
?Computing and Mobile Phones: The 1.6% comparable sales decline was driven primarily by computing.
?Consumer Electronics: The 11.8% comparable sales gain was driven primarily by home theater.
?Appliances: The 11.6% comparable sales gain was primarily driven by large appliances.
?Entertainment: The 13.7% comparable sales gain was driven primarily by gaming, virtual reality and drones.
?Services: The 2.2% comparable sales gain was primarily due to our repair and warranty services.
Our gross profit rate increased in the second quarter and first six months of fiscal 2022, primarily driven by sales mixing out ofMexico , which had a lower gross profit rate thanCanada . Our SG&A increased in the second quarter of fiscal 2022, primarily due to the unfavorable impact of foreign currency exchange rates and increased store payroll and incentive compensation expenses inCanada , partially offset by lower expenses inMexico as a result of our decision to exit operations there. Our SG&A increased in the first six months of fiscal 2022, primarily due to the unfavorable impact of foreign currency exchange rates and increased incentive compensation expense inCanada , partially offset by lower expenses inMexico as a result of our decision to exit operations there. Restructuring charges in the second quarter and first six months of fiscal 2022 primarily related to our decision to exit operations inMexico . Refer to Note 2, Restructuring, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q, for additional information.
Our operating income rate decreased in the second quarter of fiscal 2022, primarily due to the unfavorable SG&A rate and restructuring charges, partially offset by the favorability in gross profit rate described above.
Our operating income rate increased in the first six months of fiscal 2022, primarily due to the favorability in gross profit rate described above and increased leverage from higher sales volume on our fixed expenses, which resulted in a favorable SG&A rate.
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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 Six Months Ended
July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020
Operating income $ 797 $ 568 $ 1,566 $ 797
% of revenue 6.7 % 5.7 % 6.7 % 4.3 %
Intangible asset amortization(1) 20 20 40 40
Restructuring charges(2) 4 - (38) 1
Restructuring - inventory
markdowns(3) - - (6) -
Non-GAAP operating income $ 821 $ 588 $
1,562 $ 838 % of revenue 6.9 % 5.9 % 6.7 % 4.5 % Effective tax rate 8.0 % 22.9 % 15.1 % 24.2 % Intangible asset amortization(1) 0.4 % 0.1 % 0.3 % - % Restructuring charges(2) - % - % (0.3) % - % Non-GAAP effective tax rate 8.4 % 23.0 % 15.1 % 24.2 % Diluted EPS$ 2.90 $ 1.65 $ 5.22 $ 2.26 Intangible asset amortization(1) 0.08 0.08 0.16 0.16 Restructuring charges(2) 0.02 - (0.15) - Restructuring - inventory markdowns(3) - - (0.02) - Income tax impact of non-GAAP adjustments(4) (0.02) (0.02) - (0.04) Non-GAAP diluted EPS$ 2.98 $ 1.71 $ 5.21 $ 2.38
(1)Represents the non-cash amortization of definite-lived intangible assets associated with acquisitions, including customer relationships, tradenames and developed technology.
(2)Represents adjustments to previously planned organizational changes and higher-than-expected retention rates in the Domestic segment and charges and subsequent adjustments associated with the decision to exit operations inMexico in the International segment for the periods endedJuly 31, 2021 . Represents charges associated withU.S. retail operating model changes for the periods endedAugust 1, 2020 .
(3)Represents inventory markdown adjustments recorded within cost of sales
associated with the decision to exit operations in
(4)The non-GAAP adjustments primarily 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. Our non-GAAP operating income rate increased in the second quarter and first six months of fiscal 2022, primarily driven by higher gross profit rates due to favorable product margin rates and rate improvement from supply chain costs, and increased leverage from higher sales volume on our fixed expenses, which resulted in favorable SG&A rates. Our non-GAAP effective tax rate decreased in the second quarter and first six months of fiscal 2022, primarily due to the resolution of certain discrete tax matters. Refer to Note 10, Income Taxes, in the Notes to Condensed Consolidated Financial Statements for additional information. Our non-GAAP diluted EPS increased in the second quarter and first six months of fiscal 2022, primarily driven by the increase in non-GAAP operating income and the lower non-GAAP effective tax rate.
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 and cash equivalents were as follows ($ in millions):
July 31, 2021 January 30, 2021 August 1, 2020
Cash and cash equivalents $ 4,340 $ 5,494 $ 5,305
The decreases in cash and cash equivalents from July 31, 2021 , compared to
January 30, 2021 , and August 1, 2020 , were primarily due to share repurchases,
which were temporarily suspended from March to November 2020 , partially offset
by the excess of operating cash flows from higher earnings over capital spending
and dividends.
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Cash Flows
Cash flows from total operations were as follows ($ in millions):
Six Months Ended
July 31, 2021 August 1, 2020
Total cash provided by (used
in):
Operating activities $ 864 $ 3,788
Investing activities (358) (383)
Financing activities (1,662) (332)
Effect of exchange rate changes
on cash 5 (6)
Increase (decrease) in cash, cash
equivalents and restricted cash $ (1,151) $ 3,067
Operating Activities
The decrease in cash provided by operating activities in the first half of
fiscal 2022 was primarily due to changes in inventory, which saw a decrease in
receipts in the prior-year period from measures taken in light of COVID-19 and
an increase in receipts in the current-year period to match our inventory levels
to increased demand. Changes in accounts payable also contributed to the
decrease from favorable payment terms with vendors in the prior-year period.
These decreases were partially offset by higher earnings in the current-year
period.
Investing Activities
The decrease in cash used in investing activities in the first half of fiscal 2022 was primarily driven by an increase in sales of short-term investments.
Financing Activities
The increase in cash used in financing activities in the first half of fiscal 2022 was driven primarily by an increase in share repurchases. In fiscal 2021, we temporarily suspended share repurchases from March toNovember 2020 . In addition, we increased the quarterly dividend rate from$0.55 to$0.70 in fiscal 2022. Sources of Liquidity Funds generated by operating activities, available cash and cash equivalents, our credit facilities and other debt arrangements are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures, share repurchases, dividends and strategic initiatives, including business combinations. However, in the event our liquidity is insufficient, we may be required to limit our spending. There can be no assurance that we 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. OnMay 18, 2021 , we entered into a$1.25 billion five year senior unsecured revolving credit facility agreement (the "Five-Year Facility Agreement") with a syndicate of banks. The Five-Year Facility Agreement replaced the previous$1.25 billion senior unsecured revolving credit facility (the "Previous Facility") with a syndicate of banks, which was originally scheduled to expire inApril 2023 , but was terminated onMay 18, 2021 . The Five-Year Facility Agreement permits borrowings of up to$1.25 billion and expires inMay 2026 . In the first quarter of fiscal 2021, 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 Previous Facility onMarch 19, 2020 , which remained outstanding untilJuly 27, 2020 , when the Previous Facility was repaid in full. There were no borrowings outstanding under the Five-Year Facility Agreement as ofJuly 31, 2021 , or the Previous Facility as ofJanuary 30, 2021 , andAugust 1, 2020 . Our credit ratings and outlook as ofAugust 27, 2021 , are summarized below. OnMay 20, 2021 ,Standard & Poor's upgraded its rating to BBB+ and confirmed its outlook of Stable. Moody's rating and outlook remained unchanged from those disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 30, 2021 . Rating Agency Rating Outlook Standard & Poor's BBB+ Stable Moody's A3 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 primarily
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 $134 million , $131 million and $117
million at July 31, 2021 , January 30, 2021 , and August 1, 2020 , respectively.
The increase from August 1, 2020 , was primarily due to the timing of insurance
premium payments.
Debt and Capital
As of July 31, 2021 , we had $500 million of principal amount of notes due
October 1, 2028 , and $650 million of principal amount of notes due October 1,
2030 . Refer to Note 6, Debt, of the Notes to Condensed Consolidated Financial
Statements, included in this Quarterly Report on Form 10-Q, and Note 8, Debt, in
the Notes to Consolidated Financial Statements included in our Annual Report on
Form 10-K for the fiscal year ended January 30, 2021 , for additional 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 16, 2021 , our Board approved a new $5.0 billion share repurchase
program. There is no expiration date governing the period over which we can
repurchase shares under this new authorization. As of July 31, 2021 , $3.8
billion of the $5.0 billion share repurchase authorization was available. On
August 24, 2021 , we announced our plan to repurchase more than $2.5 billion of
shares in fiscal 2022.
Share repurchase and dividend activity was as follows ($ and shares in millions, except per share amounts):
Three Months Ended Six Months Ended
July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020
Total cost of shares repurchased $ 416 $ - $ 1,331 $ 56
Average price per share $ 112.75 $ - $ 109.92 $ 86.30
Number of shares repurchased 3.7 - 12.1 0.6
Regular quarterly cash dividends
per share $ 0.70 $ 0.55 $ 1.40 $ 1.10
Cash dividends declared and paid $ 175 $ 143 $ 350 $ 284
The total cost of shares repurchased increased in fiscal 2022, primarily due to the temporary suspension of all share repurchases from March to November of fiscal 2021 to conserve liquidity in light of COVID-19-related uncertainties. Cash dividends declared and paid increased in fiscal 2022 primarily due to an increase in the regular quarterly cash dividend per share.
Between the end of the second quarter of fiscal 2022 on
Other Financial Measures
Our current ratio, calculated as current assets divided by current liabilities, remained relatively unchanged at 1.2 as ofJuly 31, 2021 , andJanuary 30, 2021 , and 1.1 as ofAugust 1, 2020 . Our debt to earnings ratio, calculated as total debt (including current portion) divided by net earnings over the trailing twelve months decreased to 0.5 as ofJuly 31, 2021 , compared to 0.8 as ofJanuary 30, 2021 , andAugust 1, 2020 , primarily due to higher earnings.
Off-Balance-Sheet Arrangements and Contractual Obligations
Our liquidity is not dependent on the use of off-balance-sheet financing arrangements other than in connection with our$1.25 billion in undrawn capacity on our Five-Year Facility Agreement as ofJuly 31, 2021 , which, if drawn upon, would be included in either short-term or long-term debt on our Condensed Consolidated Balance Sheets. There has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 2021. See our Annual Report on Form 10-K for the fiscal year endedJanuary 30, 2021 , for additional information regarding our off-balance-sheet arrangements and contractual obligations. 23 -------------------------------------------------------------------------------- Table of
Contents
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 endedJanuary 30, 2021 . We discuss our critical accounting estimates in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year endedJanuary 30, 2021 . There have been no significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2021.
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
January 30, 2021 , 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; macroeconomic pressures in the markets in which we operate
(including but not limited to the effects of COVID-19, fluctuations in housing
prices, energy markets and jobless rates); future outbreaks, catastrophic
events, health crises and pandemics; susceptibility of our products to
technological advancements, product life cycles and launches; conditions in the
industries and categories in which we operate; changes in consumer preferences,
spending and debt; competition (including from multi-channel retailers,
e-commerce business, technology service providers, traditional store-based
retailers, vendors and mobile network carriers); our ability to attract and
retain qualified employees; changes in market compensation rates; our expansion
strategies; our focus on services as a strategic priority; our reliance on key
vendors and mobile network carriers (including product availability); our
ability to maintain positive brand perception and recognition; our company
transformation; our mix of products and services; our ability to effectively
manage strategic ventures, alliances or acquisitions; our ability to effectively
manage our real estate portfolio; interruptions and other supply chain issues;
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); our reliance on our information
technology systems; our dependence on internet and telecommunications access and
capabilities; our ability to prevent or effectively respond to a cyber-attack,
privacy or security breach; product safety and quality concerns; changes to
labor or employment laws or regulations; risks arising from statutory,
regulatory and legal developments (including tax statutes and regulations);
risks arising from our international activities; failure to effectively manage
our costs; our dependence on cash flows and net earnings generated during the
fourth fiscal quarter; pricing investments and promotional activity; economic or
regulatory developments that might affect our ability to provide attractive
promotional financing; constraints in the capital markets; changes to our vendor
credit terms; changes in our credit ratings; and general economic uncertainty in
key global markets and worsening of global economic conditions or low levels of
economic growth. 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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