BEST BUY CO INC. Management’s Discussion and Analysis of the Financial Position and Results of Operations (Form 10-Q)
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
? Main accounting principles and estimates
? New accounting statements
? 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 is now comprised of operations inCanada . 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.
At
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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 transaction 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.
Update of the commercial strategy
Throughout the third quarter of fiscal 2022, we provided customers multiple ways to interact with us depending on their needs, preference and comfort. Similar to the first half 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 before the pandemic. Online sales were 31% of Domestic revenue compared to 16% in the third quarter of fiscal 2020, growing by more than$2 billion during that time. During the third quarter, we reached our fastest small-product delivery times ever as same-day delivery was up 400% and we nearly doubled the percentage of products delivered within one day compared to last year. Product availability continued to improve throughout the quarter. While we had areas of product constraints, we do not believe this materially limited our overall sales growth. We are proactively navigating supply chain challenges, including delays and higher costs, by making strategic sourcing and inventory decisions earlier in the year to set us up well heading into holiday, pulling up product flow, adjusting store assortment based on availability and acquiring additional, alternative transportation. In addition, we believe the deep, longstanding relationships we have with our transportation and logistics partners and our product vendors have been instrumental in helping us manage through the difficult supply chain environment.
We believe we have made the right investment decisions to position ourselves as a leader in omnichannel retail. We also believe that there are even more opportunities ahead of us and that it is important to capitalize on our position of strength to become even more customer-centric, digitally-focused and efficient.
During the quarter, we launched our new membership program,Best Buy TotaltechTM, nationally and online. Totaltech leverages our strengths across merchandising, fulfillment, installation, tech support and product repair and is designed to give our customers the confidence that whatever their technology needs are, we will be there to help. Members receive product discounts and priority access to certain in-demand products, free delivery and standard installation, free technical support, up to 24 months of product protection on most purchases with active membership and other benefits. The goal of Totaltech is to create a membership experience that customers will love, and in turn, to generate a higher customer lifetime value and drive a larger share of consumer electronics spending toBest Buy . We also continued to conduct several store tests and pilots during the quarter to continue our omnichannel evolution in a way that provides equal focus on all the ways customers shop with us. At the same time, we are piloting and evolving our labor models to meet our customers' changing shopping behaviors. That means leveraging technology in stores that do not have as much labor and developing a much more flexible workforce. This is a workforce that not only provides expert help across product categories both in-store and virtually, but also flexes into other activities like curbside fulfillment, and this approach also empowers employees with the flexibility to pick up shifts at other stores or at our distribution centers. 16 -------------------------------------------------------------------------------- Table of
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We continue to believe that 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.
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. No such events were identified for the reported periods.
Consolidated performance summary
The selected consolidated financial data was as follows (in millions of dollars, except per share amounts):
Three Months Ended Nine Months Ended
October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020
Revenue $ 11,910 $ 11,853 $ 35,396 $ 30,325
Revenue % change 0.5 % 21.4 % 16.7 % 6.6 %
Comparable sales % change 1.6 % 23.0 % 17.5 % 8.1 %
Gross profit $ 2,802 $ 2,795 $ 8,327 $ 7,030
Gross profit as a % of revenue(1) 23.5 % 23.6 % 23.5 % 23.2 %
SG&A $ 2,133 $ 2,123 $ 6,130 $ 5,560
SG&A as a % of revenue(1) 17.9 % 17.9 % 17.3 % 18.3 %
Restructuring charges $ (1) $ 111 $ (39) $ 112
Operating income $ 670 $ 561 $ 2,236 $ 1,358
Operating income as a % of revenue 5.6 % 4.7 % 6.3 % 4.5 %
Net earnings $ 499 $ 391 $ 1,828 $ 982
Diluted earnings per share $ 2.00 $ 1.48 $ 7.23 $ 3.74
(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, of 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 third quarter and first nine months of fiscal 2022, we generated $11.9
billion and $35.4 billion in revenue, and our comparable sales grew 1.6% and
17.5%, respectively. We continued to experience 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. Our performance resulted in operating income rate increases of
0.9% and 1.8% during the third quarter and first nine months of fiscal 2022,
respectively.
See the segment performance summary below for a discussion of the performance of our domestic and international segments.
Income tax expense
Income tax expense remained relatively unchanged in the third quarter of fiscal
2022. Our effective tax rate ("ETR") decreased to 25.1% in the third quarter of
fiscal 2022 compared to 29.6% in the third quarter of fiscal 2021, primarily due
to a decrease in losses for which tax benefits were not recognized.
Income tax expense increased in the first nine months of fiscal 2022, primarily
due to an increase in pre-tax earnings, partially offset by the resolution of
certain discrete tax matters which occurred during the second quarter of fiscal
2022. Our ETR decreased to 18.1% in the first nine months of fiscal 2022
compared to 26.4% in the first nine months of fiscal 2021, primarily due to the
resolution of certain discrete tax matters which occurred during the second
quarter of fiscal 2022, as well as a decrease in losses for which tax benefits
were not recognized. Refer to Note 10, Income Taxes, of the Notes to Condensed
Consolidated Financial Statements, included in this Quarterly Report on Form
10-Q, for additional information.
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 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020
Revenue $ 10,985 $ 10,850 $ 32,837 $ 27,893
Revenue % change 1.2 % 21.0 % 17.7 % 6.2 %
Comparable sales % change(1) 2.0 % 22.6 % 18.3 % 7.5 %
Gross profit $ 2,571 $ 2,604 $ 7,703 $ 6,509
Gross profit as a % of revenue 23.4 % 24.0 % 23.5 % 23.3 %
SG&A $ 1,962 $ 1,948 $ 5,647 $ 5,087
SG&A as a % of revenue 17.9 % 18.0 % 17.2 % 18.2 %
Restructuring charges $ - $ 44 $ (44) $ 45
Operating income $ 609 $ 612 $ 2,100 $ 1,377
Operating income as a % of revenue 5.5 % 5.6 % 6.4 % 4.9 %
Selected Online Revenue Data
Total online revenue $ 3,436 $ 3,823 $ 10,518 $ 12,014
Online revenue as a % of total
segment revenue 31.3 % 35.2 % 32.0 % 43.1 %
Comparable online sales %
change(1) (10.1) % 173.7 % (12.5) % 191.4 %
(1) Online sales are included in the calculation of comparable sales.
The increase in revenue in the third quarter and first nine months of fiscal 2022 was 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$3.4 billion and$10.5 billion in the third quarter and first nine months of fiscal 2022 decreased 10.1% and 12.5%, respectively, on a comparable basis, primarily due to channel shifts in customer shopping behavior as a result of the COVID-19 pandemic. Domestic segment stores open at the beginning and end of the third 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 at Total Stores at Beginning Total Stores Beginning of Stores Stores at End of of Third Stores Stores at End of Third Quarter Opened Closed Third Quarter Quarter Opened Closed Third Quarter Best Buy 947 - (9) 938 970 - (14) 956 Outlet Centers 15 1 - 16 14 - - 14 Pacific Sales 21 - - 21 21 - - 21 Total 983 1 (9) 975 1,005 - (14) 991 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.
The domestic segment revenue composition percentages and comparable sales percentage changes by revenue category were as follows:
Revenue Mix Comparable Sales
Three Months Ended Three Months Ended
October 31,
October 30, 2021 October 31, 2020 October 30, 2021 2020
Computing and Mobile
Phones 45 % 47 % (2.4) % 21.5 %
Consumer Electronics 30 % 29 % 5.5 % 21.1 %
Appliances 15 % 14 % 10.9 % 39.3 %
Entertainment 5 % 5 % 4.1 % 17.5 %
Services 5 % 5 % (5.6) % 12.7 %
Total 100 % 100 % 2.0 % 22.6 %
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The notable changes in comparable sales were as follows:
Computers & Cell Phones: The 2.4% drop in like-for-like sales was primarily driven by computers, networks and tablets, partially offset by an increase in comparable sales in mobile phones.
Consumer electronics: The 5.5% same-store sales increase was primarily attributable to home theaters, portable headphones and speakers, and health and fitness.
? Appliances: The 10.9% same-store sales increase was primarily attributable to major appliances.
? Entertainment: The same-store sales gain of 4.1% is mainly attributable to games.
?Services: The 5.6% comparable sales decline was driven primarily by the launch of our Totaltech membership offering that includes benefits that were previously stand-alone revenue-generating services, such as warranty and installation. Our gross profit rate decreased in the third quarter of fiscal 2022, primarily driven by lower product margin rates due to lapping low levels of promotions, product damages and product returns last year, as well as increased inventory shrink primarily due to theft. Our gross profit rate also decreased from lower services margin rates, which included rate pressure associated with our Totaltech membership offering that includes incremental customer benefits, and associated costs, compared to our previous Total Tech Support offer. These decreases were partially offset by higher profit-sharing revenue from our private label and co-branded credit card arrangement.
Our gross margin rate increased in the first nine months of fiscal 2022, mainly due to the improved product margin rate resulting from supply chain costs resulting from a lower mix of revenues. in line compared to the previous year, increased profit sharing income from our private label and branded credit card co-arrangement and favor of reduced promotions. These increases were partially offset by lower service margin rates.
Our SG&A increased in the third quarter of fiscal 2022, primarily due to higher advertising expenses and increased technology investments, which were partially offset by lapping last year's$40 million donation to theBest Buy Foundation and lower incentive compensation. Our SG&A increased in the first nine months of fiscal 2022, primarily due to higher short-term incentive compensation, technology investments, advertising expenses and store payroll expenses, which included$81 million of employee retention credits in the prior year period as a result of the Federal Coronavirus Aid, Relief and Economic Security Act. This was partially offset by lapping last year's$40 million donation to theBest Buy Foundation . The 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. The restructuring credit in the first nine months of fiscal 2022 primarily related to subsequent adjustments to termination benefits resulting from changes in our 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 decreased in the third quarter of fiscal 2022, primarily driven by the unfavorable gross profit rate described above, partially offset by lower restructuring charges and increased leverage from higher sales volume on our fixed expenses, which resulted in a favorable SG&A rate. Our operating income rate increased in the first nine 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 a favorable SG&A rate.
International
The financial data selected for the International sector were as follows (in millions of dollars):
Three Months Ended Nine Months Ended
October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020
Revenue $ 925 $ 1,003 $ 2,559 $ 2,432
Revenue % change (7.8) % 25.4 % 5.2 % 11.8 %
Comparable sales % change (3.0) % 27.3 % 7.7 % 15.1 %
Gross profit $ 231 $ 191 $ 624 $ 521
Gross profit as a % of revenue 25.0 % 19.0 % 24.4 % 21.4 %
SG&A $ 171 $ 175 $ 483 $ 473
SG&A as a % of revenue 18.5 % 17.4 % 18.9 % 19.4 %
Restructuring charges $ (1) $ 67 $ 5 $ 67
Operating income (loss) $ 61 $ (51) $ 136 $ (19)
Operating income (loss) as a % of
revenue 6.6 % (5.1) % 5.3 % (0.8) %
The decrease in revenue in the third quarter of fiscal 2022 was primarily driven
by lower revenue in Mexico as a result of our decision in the third quarter of
fiscal 2021 to exit operations and a comparable sales decline of 3.0% in Canada .
These decreases were partially offset by the benefit of approximately 4.5% of
favorable foreign currency exchange rates.
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The increase in revenue in the first nine months of fiscal 2022 was primarily driven by the benefit of approximately 8.0% of favorable foreign currency exchange rates and comparable sales growth of 7.7%. These increases were partially offset by lower revenue inMexico as a result of our decision in the third quarter of fiscal 2021 to exit operations. International segment stores open at the beginning and end of the third 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 at Total Stores Total Stores at Total Stores Beginning of Third Stores Stores at End
from the beginning of the stores of the stores to the end of
Quarter Opened Closed Third Quarter Third Quarter Opened Closed Third QuarterCanada Best Buy 129 - - 129 131 - - 131 Best Buy Mobile 33 - - 33 40 - (3) 37 Mexico Best Buy - - - - 34 - (3) 31 Best Buy Express - - - - 14 - - 14 Total 162 - - 162 219 - (6) 213
The international segment revenue composition percentages and comparable sales percentage changes by revenue category were as follows:
Revenue Mix Comparable Sales
Three Months Ended Three Months Ended
October 30, October 31,
October 30, 2021 October 31, 2020 2021 2020
Computing and Mobile
Phones 50 % 53 % (6.7) % 35.7 %
Consumer Electronics 27 % 27 % (0.8) % 13.3 %
Appliances 9 % 9 % (1.8) % 40.1 %
Entertainment 6 % 5 % 15.0 % 35.6 %
Services 6 % 5 % (2.2) % 4.3 %
Other 2 % 1 % 17.0 % 22.0 %
Total 100 % 100 % (3.0) % 27.3 %
The notable changes in comparable sales were as follows:
“Computers and mobile phones: The 6.7% drop in like-for-like sales is mainly due to IT.
Consumer electronics: The 0.8% drop in same-store sales was primarily driven by digital imaging and portable headphones and speakers.
Appliances: The 1.8% drop in same-store sales was mainly due to major appliances.
? Entertainment: The same-store sales gain of 15.0% is mainly attributable to games and virtual reality.
? Services: The 2.2% drop in comparable store sales is mainly due to our repair services.
The increases in our gross profit rate in the third quarter and first nine months of fiscal 2022 were primarily driven by improved product margin rates inCanada and sales mixing out ofMexico , which had a lower gross profit rate thanCanada . The increases were also driven by$36 million of inventory markdowns incurred in the prior year associated with our decision to exit operations inMexico . Our SG&A decreased in the third quarter of fiscal 2022, primarily due to lower expenses inMexico as a result of our decision to exit operations, partially offset by the unfavorable impact of foreign currency exchange rates and increased store payroll expense inCanada . Our SG&A increased in the first nine months of fiscal 2022, primarily due to the unfavorable impact of foreign currency exchange rates and increased incentive compensation and store payroll expense inCanada , partially offset by lower expenses inMexico as a result of our decision to exit operations. The restructuring charges for all periods presented primarily related to our decision to exit operations inMexico . Refer to Note 2, Restructuring, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q, for additional information.
Our operating profit rate increased in the third quarter of fiscal 2022, primarily due to lower restructuring charges and the favorable gross margin rate described above.
Our operating income rate increased in the first nine months of fiscal 2022,
primarily due to the favorability in gross profit rate described above, lower
restructuring charges and increased leverage from higher sales volume on our
fixed expenses, which resulted in a favorable SG&A rate.
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Consolidated non-GAAP financial measures
Reconciliations of operating income, effective tax rate and diluted EPS (GAAP
financial measures) to non-GAAP operating income, non-GAAP effective tax rate
and non-GAAP diluted EPS (non-GAAP financial measures) were as follows ($ in
millions, except per share amounts):
Three Months Ended Nine Months Ended
October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020
Operating income $ 670 $ 561 $ 2,236 $ 1,358
% of revenue 5.6 % 4.7 % 6.3 % 4.5 %
Intangible asset amortization(1) 20 20 60 60
Acquisition-related transaction
costs(1) 5 - 5 -
Restructuring charges(2) (1) 111 (39) 112
Restructuring - inventory
markdowns(3) - 36 (6) 36
Non-GAAP operating income $ 694 $ 728 $ 2,256 $ 1,566
% of revenue 5.8 % 6.1 % 6.4 % 5.2 %
Effective tax rate 25.1 % 29.6 % 18.1 % 26.4 %
Intangible asset amortization(1) (0.1) % (1.5) % 0.1 % (1.1) %
Restructuring charges(2) - % (3.2) % (0.1) % (0.8) %
Non-GAAP effective tax rate 25.0 % 24.9 % 18.1 % 24.5 %
Diluted EPS $ 2.00 $ 1.48 $ 7.23 $ 3.74
Intangible asset amortization(1) 0.08 0.08 0.24 0.23
Acquisition-related transaction
costs(1) 0.02 - 0.02 -
Restructuring charges(2) - 0.42 (0.15) 0.43
Restructuring - inventory
markdowns(3) - 0.14 (0.03) 0.13
Income tax impact of non-GAAP
adjustments(4) (0.02) (0.06) (0.02) (0.10)
Non-GAAP diluted EPS $ 2.08 $ 2.06 $ 7.29 $ 4.43
(1)Represents charges associated with acquisitions, including: (1) the non-cash
amortization of definite-lived intangible assets, including customer
relationships, tradenames and developed technology; and (2) acquisition-related
transaction and due diligence costs, primarily comprised of professional fees.
(2)Represents charges and subsequent adjustments related to actions taken in the
Domestic segment to better align the company's organizational structure with its
strategic focus and the decision to exit operations in Mexico in the
International segment.
(3) Represents inventory markdown adjustments recorded in cost of sales associated with the decision to cease 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 profit rate decreased in the third quarter of fiscal 2022, primarily due to a lower gross margin rate in our home segment.
Our non-GAAP operating income rate increased in the first nine months of fiscal 2022, primarily driven by a higher gross profit rate due to favorable supply chain costs resulting from a lower mix of online revenue compared to the prior year, and increased leverage from higher sales volume on our fixed expenses, which resulted in a favorable SG&A rate. Our non-GAAP effective tax rate remained relatively unchanged in the third quarter of fiscal 2022. Our non-GAAP effective tax rate decreased in the first nine months of fiscal 2022, primarily due to the resolution of certain discrete tax matters which occurred during the second quarter of fiscal 2022. Refer to Note 10, Income Taxes, of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q, for additional information.
Our diluted non-GAAP EPS increased in the third quarter of fiscal 2022, primarily due to a decrease in the weighted average common shares outstanding resulting from share purchases.
Our diluted non-GAAP EPS increased in the first nine months of fiscal 2022, primarily due to higher non-GAAP operating income, lower effective non-GAAP tax rate and lower weighted average weighted common shares outstanding from share purchases.
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.
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Cash, cash equivalents and short-term investments are as follows (in millions of dollars):
October 30, 2021 January 30, 2021 October 31, 2020
Cash and cash equivalents $ 3,465 $ 5,494 $ 5,136
Short-term investments - - 545
Total cash, cash equivalents
and short-term investments $ 3,465 $ 5,494 $ 5,681
The decrease in cash and cash equivalents of
The decrease in cash, cash equivalents and short-term investments fromOctober 31, 2020 , was primarily due to increases in share repurchases, the repayment of our$650 million principal amount of notes dueMarch 15, 2021 , capital expenditures and dividend payments. This was partially offset by positive cash flows from operations, primarily driven by earnings.
Cash flow
The cash flow from total operations is as follows (in millions of dollars):
Nine months ended
October 30, 2021 October 31, 2020 Total cash provided by (used in): Operating activities $ 1,061 $ 3,907 Investing activities (707) (1,153) Financing activities (2,347) 170 Effect of exchange rate changes on cash 6 (8) Increase (decrease) in cash, cash equivalents and restricted cash $ (1,987) $ 2,916 Operating Activities The decrease in cash provided by operating activities in the first nine months of fiscal 2022 compared to the prior-year period was primarily due to the timing and volume of inventory purchases and payments, reflecting an earlier and more pronounced build of inventory for the holiday season in fiscal 2022, as we sought to manage supply chain challenges and sustained strong demand in most product categories. As a result, our inventory balance at the end of the third quarter of fiscal 2022 was materially higher than fiscal 2021, and a larger proportion of inventory purchases had been paid for by the end of the quarter. 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 nine months of fiscal 2022 compared to the prior-year period was primarily driven by a decrease in purchases of short-term investments.
Fundraising activities
The increase in cash used in financing activities in the first nine months of fiscal 2022 compared to the prior-year period was driven primarily by an increase in share repurchases, which were temporarily suspended from March to November of fiscal 2021. Fiscal 2021 also included the issuance of our$650 million principal amount of notes dueOctober 1, 2030 .
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 . There were no borrowings outstanding under the Five-Year Facility Agreement as ofOctober 30, 2021 , or the Previous Facility as ofJanuary 30, 2021 , orOctober 31, 2020 . Our credit ratings and outlook as ofDecember 1, 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 . 22
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Table of Contents 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.
Restricted species
Our liquidity is also affected by restricted cash balances that are primarily restricted to use for workers' compensation and general liability insurance claims, and product protection plans provided under our Totaltech membership offering. Restricted cash, which is included in Other current assets on our Condensed Consolidated Balance Sheets, was$173 million ,$131 million and$135 million atOctober 30, 2021 ,January 30, 2021 , andOctober 31, 2020 , respectively. The increases fromJanuary 30, 2021 , andOctober 31, 2020 , were primarily due to the initial funding related to the national launch of our Totaltech membership offering inOctober 2021 .
Debt and capital
As ofOctober 30, 2021 , we had$500 million of principal amount of notes dueOctober 1, 2028 , and$650 million of principal amount of notes dueOctober 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, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedJanuary 30, 2021 , for additional information about our outstanding debt.
Share buybacks 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 October 30, 2021 , $3.4
billion of the $5.0 billion share repurchase authorization was available. On
August 24, 2021 , we announced our plan to repurchase more than $2.5 billion of
shares in fiscal 2022.
The share and dividend buyback activity was as follows ($ and shares in millions, except per share amounts):
Three Months Ended Nine Months Ended
October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020
Total cost of shares repurchased $ 426 $ - $ 1,757 $ 56
Average price per share $ 115.94 $ - $ 111.33 $ 86.30
Number of shares repurchased 3.7 - 15.8 0.6
Regular quarterly cash dividend
per share $ 0.70 $ 0.55 $ 2.10 $ 1.65
Cash dividends declared and paid $ 172 $ 142 $ 522 $ 426
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 the
increase in the regular quarterly cash dividend per share.
Between the end of the third quarter of fiscal 2022 on
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Table of Contents Other Financial Measures Our current ratio, calculated as current assets divided by current liabilities, remained relatively unchanged at 1.1 as ofOctober 30, 2021 , andOctober 31, 2020 , and 1.2 as ofJanuary 30, 2021 . 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 ofOctober 30, 2021 , compared to 0.8 as ofJanuary 30, 2021 , and 1.1 as ofOctober 31, 2020 , primarily due to higher earnings. The decrease fromOctober 31, 2020 , was also due to the retirement of our$650 million principal amount of notes dueMarch 15, 2021 , inDecember 2020 .
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 ofOctober 30, 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.
Main 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, and 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 statements
We do not expect any recently issued accounting pronouncements to have a material impact on our financial statements.
Safe Harbor Declaration 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 resurgences and the impact
on demand for our products and services; levels of consumer confidence;
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. ; macroeconomic pressures in the markets in which we operate
(including but not limited to the effects of COVID-19, increased levels of
inventory loss due to organized crime, petty theft or otherwise, 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; 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
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economic conditions or low levels of economic growth. We caution that the above list of important factors is not complete. Forward-looking statements speak only as of the date on which they are made and we assume no obligation to update any forward-looking statements we may make.
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