Edgar Filing: BEST BUY CO INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 29, 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-9595

BEST BUY CO., INC.

(Exact name of registrant as specified in its charter)



Minnesota		41-0907483
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7601 Penn Avenue South
Richfield, Minnesota		55423
(Address of principal executive offices)		(Zip Code)

(612) 291-1000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).



Large accelerated filer x	Accelerated filer ¨		Non-accelerated filer ¨

Smaller reporting company ¨		Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The registrant had 304,962,371 shares of common stock outstanding as of June 1, 2017.

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BEST BUY CO., INC.

FORM 10-Q FOR THE QUARTER ENDED APRIL 29, 2017

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Part I — Financial Information			3
Item 1.		Financial Statements	3
	a)	Condensed Consolidated Balance Sheets as of April 29, 2017, January 28, 2017, and April 30, 2016	3
	b)	Condensed Consolidated Statements of Earnings for the three months ended April 29, 2017, and April 30, 2016	4
	c)	Condensed Consolidated Statements of Comprehensive Income for the three months ended April 29, 2017, and April 30, 2016	5
	d)	Condensed Consolidated Statements of Cash Flows for the three months ended April 20, 2017, and April 30, 2016	6
	e)	Condensed Consolidated Statements of Change in Shareholders' Equity for the three months ended April 29, 2017, and April 30, 2016	7
	f)	Notes to Condensed Consolidated Financial Statements	8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.		Controls and Procedures	36
Part II — Other Information			37
Item 1.		Legal Proceedings	37
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 6.		Exhibits	38
Signatures			39

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PART I — FINANCIAL INFORMATION


Item 1.	Financial Statements

Condensed Consolidated Balance Sheets

$ in millions, except per share and share amounts (unaudited)



	April 29, 2017		January 28, 2017		April 30, 2016
Assets
Current assets
Cash and cash equivalents	$	1,651	$	2,240	$	1,845
Short-term investments	1,948		1,681		1,220
Receivables, net	1,011		1,347		1,097
Merchandise inventories	4,637		4,864		4,719
Other current assets	409		384		401
Total current assets	9,656		10,516		9,282
Property and equipment, net	2,287		2,293		2,332
Goodwill	425		425		425
Other assets	587		622		831
Non-current assets held for sale	—		—		31
Total assets	$	12,955	$	13,856	$	12,901

Liabilities and equity
Current liabilities
Accounts payable	$	4,599	$	4,984	$	4,397
Unredeemed gift card liabilities	389		427		379
Deferred revenue	371		418		349
Accrued compensation and related expenses	274		358		277
Accrued liabilities	699		865		791
Accrued income taxes	93		26		97
Current portion of long-term debt	45		44		44
Total current liabilities	6,470		7,122		6,334
Long-term liabilities	684		704		807
Long-term debt	1,302		1,321		1,334
Equity
Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none	—		—		—
Common stock, $0.10 par value: Authorized — 1.0 billion shares; Issued and outstanding — 306,000,000, 311,000,000 and 324,000,000 shares, respectively	31		31		32
Retained earnings	4,202		4,399		4,078
Accumulated other comprehensive income	266		279		316
Total equity	4,499		4,709		4,426
Total liabilities and equity	$	12,955	$	13,856	$	12,901

NOTE: The Consolidated Balance Sheet as of January 28, 2017, has been condensed from the audited consolidated financial statements.

See Notes to Condensed Consolidated Financial Statements.

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Condensed Consolidated Statements of Earnings

$ and shares in millions, except per share amounts (unaudited)



	Three Months Ended
	April 29, 2017			April 30, 2016
Revenue	$	8,528		$	8,443
Cost of goods sold	6,506			6,298
Gross profit	2,022			2,145
Selling, general and administrative expenses	1,722			1,744
Restructuring charges	—			29
Operating income	300			372
Other income (expense)
Gain on sale of investments	—			2
Investment income and other	11			6
Interest expense	(19		)	(20		)
Earnings from continuing operations before income tax expense	292			360
Income tax expense	104			134
Net earnings from continuing operations	188			226
Gain from discontinued operations (Note 2), net of tax benefit of $- and $3, respectively	—			3
Net earnings	$	188		$	229

Basic earnings per share
Continuing operations	$	0.61		$	0.70
Discontinued operations	—			0.01
Basic earnings per share	$	0.61		$	0.71

Diluted earnings per share
Continuing operations	$	0.60		$	0.69
Discontinued operations	—			0.01
Diluted earnings per share	$	0.60		$	0.70

Dividends declared per common share	$	0.34		$	0.73

Weighted-average common shares outstanding
Basic	309.2			323.6
Diluted	315.0			326.7

See Notes to Condensed Consolidated Financial Statements.

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Condensed Consolidated Statements of Comprehensive Income

$ in millions (unaudited)



	Three Months Ended
	April 29, 2017			April 30, 2016
Net earnings	$	188		$	229
Foreign currency translation adjustments	(13		)	45
Comprehensive income	$	175		$	274

See Notes to Condensed Consolidated Financial Statements.

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Condensed Consolidated Statements of Cash Flows

$ in millions (unaudited)



	Three Months Ended
	April 29, 2017			April 30, 2016
Operating activities
Net earnings	$	188		$	229
Adjustments to reconcile net earnings to total cash provided by operating activities:
Depreciation	161			162
Restructuring charges	—			29
Stock-based compensation	31			31
Deferred income taxes	12			8
Other, net	(1		)	(3		)
Changes in operating assets and liabilities:
Receivables	333			73
Merchandise inventories	223			365
Other assets	(25		)	(30		)
Accounts payable	(382		)	(73		)
Other liabilities	(364		)	(211		)
Income taxes	67			(88		)
Total cash provided by operating activities	243			492

Investing activities
Additions to property and equipment	(153		)	(136		)
Purchases of investments	(1,134		)	(591		)
Sales of investments	863			683
Other, net	1			4
Total cash used in investing activities	(423		)	(40		)

Financing activities
Repurchase of common stock	(373		)	(52		)
Repayments of debt	(10		)	(362		)
Dividends paid	(105		)	(238		)
Issuance of common stock	75			21
Other, net	—			10
Total cash used in financing activities	(413		)	(621		)
Effect of exchange rate changes on cash	(6		)	40
Decrease in cash, cash equivalents and restricted cash	(599		)	(129		)
Cash, cash equivalents and restricted cash at beginning of period	2,433			2,161
Cash, cash equivalents and restricted cash at end of period	$	1,834		$	2,032

See Notes to Condensed Consolidated Financial Statements.

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Condensed Consolidated Statements of Change in Shareholders' Equity

$ and shares in millions, except per share amounts (unaudited)



	Common Shares		Common Stock			Prepaid Share Repurchase			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances at January 28, 2017	311		$	31		$	—		$	—		$	4,399		$	279		$	4,709
Adoption of ASU 2016-09	—		—			—			10			(12		)	—			(2		)
Net earnings, three months ended April 29, 2017	—		—			—			—			188			—			188
Other comprehensive loss, net of tax:
Foreign currency translation adjustments	—		—			—			—			—			(13		)	(13		)
Stock-based compensation	—		—			—			31			—			—			31
Restricted stock vested and stock options exercised	3		—			—			72			—			—			72
Issuance of common stock under employee stock purchase plan	—		—			—			3			—			—			3
Common stock dividends, $0.34 per share	—		—			—			—			(105		)	—			(105		)
Repurchase of common stock	(8	)	—			—			(116		)	(268		)	—			(384		)
Balances at April 29, 2017	306		$	31		$	—		$	—		$	4,202		$	266		$	4,499

Balances at January 30, 2016	324		$	32		$	(55	)	$	—		$	4,130		$	271		$	4,378
Net earnings, three months ended April 30, 2016	—		—			—			—			229			—			229
Other comprehensive income, net of tax:
Foreign currency translation adjustments	—		—			—			—			—			45			45
Stock-based compensation	—		—			—			31			—			—			31
Restricted stock vested and stock options exercised	3		1			—			17			—			—			18
Settlement of accelerated share repurchase	—		—			55			—			—			—			55
Issuance of common stock under employee stock purchase plan	—		—			—			3			—			—			3
Tax benefit from stock options exercised, restricted stock vesting and employee stock purchase plan	—		—			—			6			—			—			6
Common stock dividends, $0.73 per share	—		—			—			—			(238		)	—			(238		)
Repurchase of common stock	(3	)	(1		)	—			(57		)	(43		)	—			(101		)
Balances at April 30, 2016	324		$	32		$	—		$	—		$	4,078		$	316		$	4,426

See Notes to Condensed Consolidated Financial Statements.

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Notes to Condensed Consolidated Financial Statements

(unaudited)


1.	Basis of Presentation

Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” in these Notes to Condensed Consolidated Financial Statements refers to Best Buy Co., Inc. and its consolidated subsidiaries.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”). All adjustments were comprised of normal recurring adjustments, except as noted in these Notes to Condensed Consolidated Financial Statements.

Historically, we have generated a higher proportion of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. The interim financial statements and the related notes in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017. The first three months of fiscal 2018 and fiscal 2017 included 13 weeks.

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. Our policy is to accelerate recording the effect of events occurring in the lag period that significantly affect our condensed consolidated financial statements. No such events were identified for the reported periods.

In preparing the accompanying condensed consolidated financial statements, we evaluated the period from April 30, 2017, through the date the financial statements were issued, for material subsequent events requiring recognition or disclosure. No such events were identified for this period.

Unadopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. The new guidance establishes a single comprehensive model for entities to use in accounting for revenue and supersedes most current revenue recognition guidance. It introduces a five-step process for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards under current guidance. It also requires significantly expanded disclosures regarding revenues.

Based on our analysis thus far, we believe the impact of adopting the new guidance will be immaterial to our annual and interim financial statements. We believe that the impact will be limited to minor changes to the timing of recognition of revenues related to gift cards and loyalty programs. We continue to assess the impact on all areas of our revenue recognition, disclosure requirements and changes that may be necessary to our internal controls over financial reporting.

We plan to adopt this standard in the first quarter of our fiscal 2019. Providing we ultimately conclude that the impacts of adoption are immaterial, we would expect to use the modified retrospective method. Under this method, we would recognize the cumulative effect of the changes in retained earnings at the date of adoption, but would not restate prior periods.

In February 2016, the FASB issued ASU 2016-02, Leases. The new guidance was issued to increase transparency and comparability among companies by requiring most leases to be included on the balance sheet and by expanding disclosure requirements. Based on the effective dates, we expect to adopt the new guidance in the first quarter of fiscal 2020 using the modified retrospective method. While we expect adoption to lead to a material increase in the assets and liabilities recorded on our balance sheet and increase our footnote disclosures related to leases, we are still evaluating the impact on our consolidated statement of earnings. We also expect that adoption of the new standard will require changes to our internal controls over financial reporting.

Adopted Accounting Pronouncements

In the first quarter of fiscal 2018, we adopted the following ASUs:

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•	ASU 2015-11, Inventory: Simplifying the Measurement of Inventory. The new guidance replaces the current inventory measurement requirement of lower of cost or market with the lower of cost or net realizable value. The adoption did not have a material impact on our results of operations, cash flows or financial position.

•

ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The new guidance changed certain aspects of accounting for share-based payments including accounting for income taxes, forfeitures and classifications in the statement of cash flows. Beginning with the first quarter of fiscal 2018, excess tax benefits and tax deficiencies are recognized in our provision for income taxes as a discrete event rather than directly to stockholders’ equity. This change is adopted prospectively, with no change to prior periods. We recognized an excess tax benefit of $2 million for the first quarter ended April 29, 2017. In addition, with the adoption of this standard we elected to change our policy for accounting for forfeitures. Previously, we recorded forfeitures (which reduce stock-based compensation expense) based on forward-looking estimates. Beginning this quarter, we have elected to record forfeitures as they occur. The cumulative effect of this policy change amounted to $12 million, net of tax. This was recorded as a reduction of opening retained earnings. We elected to present the statements of cash flows on a retrospective transition method, and prior periods have been adjusted to present excess tax benefits as cash flows from operating activities. See cash flow reconciliation below for prior period impacts.

•

ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, and ASU 2016-18, Statement of Cash Flows: Restricted Cash. ASU 2016-15 provides classification requirements for specific transactions within the statement of cash flows, while ASU 2016-18 requires that restricted cash balances be included in the beginning and ending cash balance within the statement of cash flows. The adoption increased our beginning and ending cash balance within our statement of cash flows, and we have provided a reconciliation of these amounts to the corresponding balance sheet captions, below. The adoption had no other material impacts to our cash flow statement and had no impact on our results of operations or financial position.

The following table reconciles the Condensed Consolidated Statement of Cash Flows line items impacted by the adoption of these standards at April 29, 2017:



	April 30, 2016 Reported			ASU 2016-09 Adjustment			ASU 2016-15 Adjustment		ASU 2016-18 Adjustment		April 30, 2016 Adjusted
Operating activities
Other, net	$	(12	)	$	9		$	—	$	—	$	(3	)
Total cash provided by operating activities	483			9			—		—		492

Investing activities
Change in restricted assets	(2		)	—			—		2		—
Total cash used in investing activities	(42		)	—			—		2		(40		)

Financing activities
Other, net	19			(9		)	—		—		10
Total cash used in financing activities	(612		)	(9		)	—		—		(621		)

Decrease in cash, cash equivalents and restricted cash	(131		)	—			—		2		(129		)
Cash, cash equivalents and restricted cash at beginning of period	1,976			—			—		185		2,161
Cash, cash equivalents and restricted cash at end of period	$	1,845		$	—		$	—	$	187	$	2,032

Total Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheet to the total shown in the Condensed Consolidated Statement of Cash Flows:



	April 29, 2017		January 28, 2017		April 30, 2016
Cash and cash equivalents	$	1,651	$	2,240	$	1,845
Restricted cash included in Other current assets	183		193		187
Total cash, cash equivalents and restricted cash	$	1,834	$	2,433	$	2,032

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Amounts included in restricted cash are pledged as collateral or restricted to use for general liability insurance and workers' compensation insurance.


2.	Discontinued Operations

Discontinued operations are primarily comprised of Jiangsu Five Star Appliance Co., Limited ("Five Star") within our International segment. In February 2015, we completed the sale of Five Star and recognized a gain on sale of $99 million. Following the sale of Five Star, we continued to hold as available for sale one retail property in Shanghai, China. In May 2016, the second quarter of fiscal 2017, we completed the sale of the property and recognized a gain, net of income tax, of $16 million.

The aggregate financial results of discontinued operations were as follows ($ in millions):



	Three Months Ended
	April 29, 2017		April 30, 2016
Income tax benefit	—		3
Net gain from discontinued operations	$	—	$	3


3.	Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:


•	Quoted prices for similar assets or liabilities in active markets;


•	Quoted prices for identical or similar assets or liabilities in non-active markets;


•	Inputs other than quoted prices that are observable for the asset or liability; and


•	Inputs that are derived principally from or corroborated by other observable market data.

Level 3 — Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

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The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis at April 29, 2017, January 28, 2017, and April 30, 2016, according to the valuation techniques we used to determine their fair values ($ in millions):



		Fair Value at
	Fair Value Hierarchy	April 29, 2017		January 28, 2017		April 30, 2016
ASSETS
Cash and cash equivalents
Money market funds	Level 1	$	24	$	290	$	56
Commercial paper	Level 2	260		—		93
Time deposits	Level 2	11		15		454
Short-term investments
Corporate bonds	Level 2	—		—		78
Commercial paper	Level 2	150		349		110
Time deposits	Level 2	1,798		1,332		1,032
Other current assets
Money market funds	Level 1	2		7		—
Commercial paper	Level 2	60		60		—
Foreign currency derivative instruments	Level 2	7		2		—
Time deposits	Level 2	101		100		79
Other assets
Interest rate swap derivative instruments	Level 2	4		13		15
Auction rate securities	Level 3	—		—		2
Marketable securities that fund deferred compensation	Level 1	97		96		96

LIABILITIES
Accrued liabilities
Foreign currency derivative instruments	Level 2	—		3		13
Long-term liabilities
Interest rate swap derivative instruments	Level 2	1		—		—

There were no transfers between levels during the periods presented. During the third quarter of fiscal 2017, our remaining investments in auction rate securities ("ARS") were called at par, which resulted in proceeds of $2 million and no realized gain or loss. As of January 28, 2017, we had no items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3). For the three months ended April 29, 2017, and April 30, 2016, there were no changes in the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3).

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Money market funds. Our money market fund investments were measured at fair value as they trade in an active market using quoted market prices and, therefore, were classified as Level 1.

Commercial paper. Our investments in commercial paper were measured using inputs based upon quoted prices for similar instruments in active markets and, therefore, were classified as Level 2.

Time deposits. Our time deposits are balances held with banking institutions that cannot be withdrawn for specified terms without a penalty. Time deposits are held at face value plus accrued interest, which approximates fair value, and are classified as Level 2.

Corporate bonds. Our corporate bond investments were measured at fair value using quoted market prices. They were classified as Level 2 as they trade in a non-active market for which bond prices are readily available.

Foreign currency derivative instruments. Comprised primarily of foreign currency forward contracts and foreign currency swap contracts, our foreign currency derivative instruments were measured at fair value using readily observable market inputs, such as quotations on forward foreign exchange points and foreign interest rates. Our foreign currency derivative

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instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

Interest rate swap derivative instruments. Our interest rate swap contracts were measured at fair value using readily observable inputs, such as the LIBOR interest rate. Our interest rate swap derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

Auction rate securities. Our investments in ARS were classified as Level 3 as quoted prices were unavailable. Due to limited market information, we utilized a discounted cash flow ("DCF") model to derive an estimate of fair value. The assumptions we used in preparing the DCF model included estimates with respect to the amount and timing of future interest and principal payments, forward projections of the interest rate benchmarks, the probability of full repayment of the principal considering the credit quality and guarantees in place and the rate of return required by investors to own such securities given the current liquidity risk associated with ARS.

Marketable securities that fund deferred compensation. The assets that fund our deferred compensation consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible fixed assets, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value on our Condensed Consolidated Balance Sheets. For these assets, we do not periodically adjust carrying value to fair value, except in the event of impairment. When we determine that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded within operating income in our Condensed Consolidated Statements of Earnings.

The following table summarizes the fair value remeasurements for non-restructuring and restructuring property and equipment impairments recorded during the three months ended April 29, 2017, and April 30, 2016 ($ in millions):



	Impairments				Remaining Net Carrying Value⁽¹⁾
	Three Months Ended
	April 29, 2017		April 30, 2016		April 29, 2017		April 30, 2016
Property and equipment (non-restructuring)	$	5	$	5	$	—	$	—
Property and equipment (restructuring)⁽²⁾	—		7		—		—
Total	$	5	$	12	$	—	$	—


(1)	Remaining net carrying value approximates fair value. Because assets subject to long-lived asset impairment are not measured at fair value on a recurring basis, certain fair value measurements presented in the table may reflect values at earlier measurement dates and may no longer represent the fair values at April 29, 2017, and April 30, 2016.


(2)	See Note 5, Restructuring Charges, for additional information.

All of the fair value remeasurements included in the table above were based on significant unobservable inputs (Level 3). Fixed asset fair values were derived using a DCF model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate. In the case of assets for which the impairment was the result of restructuring activities, no future cash flows have been assumed as the assets will cease to be used and expected sale values are nominal.

Fair Value of Financial Instruments

Our financial instruments, other than those presented in the disclosures above, include cash, receivables, other investments, accounts payable, other payables and long-term debt. The fair values of cash, receivables, accounts payable and other payables approximated carrying values because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy. Fair values for other investments held at cost are not readily available, but we estimate that the carrying values for these investments approximate fair value. See Note 6, Debt, for information about the fair value of our long-term debt.

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4.	Goodwill and Intangible Assets

The carrying values of goodwill and indefinite-lived tradenames for the Domestic segment were $425 million and $18 million, respectively, at April 29, 2017, $425 million and $18 million, respectively, at January 28, 2017, and $425 million and $18 million, respectively, at April 30, 2016.

The following table provides the gross carrying amount of goodwill and cumulative goodwill impairment ($ in millions):



	April 29, 2017					January 28, 2017					April 30, 2016
	Gross Carrying Amount		Cumulative Impairment			Gross Carrying Amount		Cumulative Impairment			Gross Carrying Amount		Cumulative Impairment
Goodwill	$	1,100	$	(675	)	$	1,100	$	(675	)	$	1,100	$	(675	)


5.	Restructuring Charges

Charges incurred in the three months ended April 29, 2017, and April 30, 2016, for our restructuring activities were as follows ($ in millions):



	Three Months Ended
	April 29, 2017		April 30, 2016
Renew Blue Phase 2	$	—	$	27
Canadian brand consolidation	—		(1		)
Renew Blue⁽¹⁾	—		3
Other restructuring activities⁽²⁾	—		—
Total restructuring charges	$	—	$	29

(1)

Represents activity related to our remaining vacant space liability, primarily in our International segment, for our Renew Blue restructuring program, which began in the fourth quarter of fiscal 2013. We may continue to incur immaterial adjustments to the liability for changes in sublease assumptions or potential lease buyouts. In addition, lease payments for vacated stores will continue until leases expire or are terminated. The remaining vacant space liability was $8 million at April 29, 2017.

(2)

Represents activity related to our remaining vacant space liability for U.S. large-format store closures in fiscal 2013. We may continue to incur immaterial adjustments to the liability for changes in sublease assumptions or potential lease buyouts. In addition, lease payments for vacated stores will continue until leases expire or are terminated. The remaining vacant space liability was $11 million at April 29, 2017.

Renew Blue Phase 2

In the first quarter of fiscal 2017, we took several strategic actions to eliminate and simplify certain components of our operations and restructure certain field and corporate teams as part of our Renew Blue Phase 2 plan. No charges were incurred in the first quarter of fiscal 2018, while in the first quarter of fiscal 2017, we incurred $27 million of charges, which primarily consisted of employee termination benefits and property and equipment impairments.

All restructuring charges related to this plan are from continuing operations and are presented in Restructuring charges in our Condensed Consolidated Statements of Earnings.

The composition of the restructuring charges we incurred for Renew Blue Phase 2 during the three months ended April 29, 2017, and April 30, 2016, as well as the cumulative amount incurred through April 29, 2017, was as follows ($ in millions):



	Domestic
	Three Months Ended				Cumulative Amount
	April 29, 2017		April 30, 2016		Cumulative Amount
Property and equipment impairments	$	—	$	7	$	8
Termination benefits	—		20		18
Total Renew Blue Phase 2 restructuring charges	$	—	$	27	$	26

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As of April 29, 2017, and January 28, 2017, there was no restructuring accrual balance. The restructuring accrual activity related to termination benefits was as follows for the three months ended April 30, 2016 ($ in millions):



	Termination Benefits
Balances at January 30, 2016	$	—
Charges	19
Cash payments	(4		)
Balances at April 30, 2016	$	15

Canadian Brand Consolidation

In the first quarter of fiscal 2016, we consolidated the Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in the permanent closure of 66 Future Shop stores and the conversion of the remaining 65 Future Shop stores to the Best Buy brand.

The composition of total restructuring charges we incurred for the Canadian brand consolidation in the three months ended April 29, 2017, and April 30, 2016, as well as the cumulative amount incurred through April 29, 2017, was as follows ($ in millions):



	Three Months Ended					Cumulative Amount
	April 29, 2017		April 30, 2016			Cumulative Amount
Inventory write-downs	$	—	$	—		$	3
Property and equipment impairments	—		—			30
Tradename impairment	—		—			40
Termination benefits	—		—			25
Facility closure and other costs	—		(1		)	105
Total Canadian brand consolidation restructuring charges	$	—	$	(1	)	$	203

The following tables summarize our restructuring accrual activity during the three months ended April 29, 2017, and April 30, 2016, related to termination benefits and facility closure and other costs associated with the Canadian brand consolidation ($ in millions):



	Termination Benefits		Facility Closure and Other Costs			Total
Balances at January 28, 2017	$	—	$	34		$	34
Cash payments	—		(6		)	(6		)
Changes in foreign currency exchange rates	—		(1		)	(1		)
Balances at April 29, 2017	$	—	$	27		$	27



	Termination Benefits			Facility Closure and Other Costs			Total
Balances at January 30, 2016	$	2		$	64		$	66
Cash payments	(1		)	(11		)	(12		)
Adjustments⁽¹⁾	—			(1		)	(1		)
Changes in foreign currency exchange rates	—			6			6
Balances at April 30, 2016	$	1		$	58		$	59


(1)	Adjustments to facility closure and other costs represent changes in sublease assumptions. Adjustments to termination benefits represent changes in retention assumptions.

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6. Debt

Long-term debt consisted of the following ($ in millions):



	April 29, 2017			January 28, 2017			April 30, 2016
2018 Notes	$	500		$	500		$	500
2021 Notes	650			650			650
Interest rate swap valuation adjustments	3			13			15
Subtotal	1,153			1,163			1,165
Debt discounts and issuance costs	(4		)	(5		)	(6		)
Financing lease obligations	171			177			184
Capital lease obligations	27			30			35
Total long-term debt	1,347			1,365			1,378
Less: current portion	(45		)	(44		)	(44		)
Total long-term debt, less current portion	$	1,302		$	1,321		$	1,334

The fair value of total long-term debt, excluding debt discounts and issuance costs and financing and capital lease obligations, approximated $1,229 million, $1,240 million and $1,249 million at April 29, 2017, January 28, 2017, and April 30, 2016, respectively, based primarily on the market prices quoted from external sources, compared with carrying values of $1,153 million, $1,163 million and $1,165 million, respectively. If long-term debt was measured at fair value in the financial statements, it would be classified primarily as Level 2 in the fair value hierarchy.

See Note 5, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017, for additional information regarding the terms of our debt facilities, debt instruments and other obligations.


7.	Derivative Instruments

We manage our economic and transaction exposure to certain risks through the use of foreign currency and interest rate swap derivative instruments. Our objective in holding derivatives is to reduce the volatility of net earnings, cash flows and net asset value associated with changes in foreign currency exchange rates and interest rates. We do not hold derivative instruments for trading or speculative purposes. We have no derivatives that have credit risk-related contingent features, and we mitigate our credit risk by engaging with major financial institutions as our counterparties.

We record all derivative instruments on our Condensed Consolidated Balance Sheets at fair value and evaluate hedge effectiveness prospectively and retrospectively when electing to apply hedge accounting. We formally document all hedging relations at inception for derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transaction. In addition, we have derivatives which are not designated as hedging instruments.

Net Investment Hedges

We use foreign exchange forward contracts to hedge against the effect of Canadian dollar exchange rate fluctuations on a portion of our net investment in our Canadian operations. The contracts have terms up to 12 months. For a net investment hedge, we recognize changes in the fair value of the derivative as a component of foreign currency translation within other comprehensive income to offset a portion of the change in translated value of the net investment being hedged, until the investment is sold or liquidated. We limit recognition in net earnings of amounts previously recorded in other comprehensive income to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. We report the ineffective portion of the gain or loss, if any, in net earnings.

Interest Rate Swaps

We use "receive fixed-rate, pay variable-rate" interest rate swaps to mitigate the effect of interest rate fluctuations on our 2018 Notes and a portion of our 2021 Notes. Our interest rate swap contracts are considered perfect hedges because the critical terms and notional amounts match those of our fixed-rate debt being hedged and are, therefore, accounted as fair value hedges using the shortcut method. Under the shortcut method, we recognize the change in the fair value of the derivatives with an offsetting

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change to the carrying value of the debt. Accordingly, there is no impact on our Condensed Consolidated Statements of Earnings from the fair value of the derivatives.

Derivatives Not Designated as Hedging Instruments

We use foreign currency forward contracts to manage the impact of fluctuations in foreign currency exchange rates relative to recognized receivable and payable balances denominated in non-functional currencies and on certain forecast inventory purchases denominated in non-functional currencies. The contracts generally have terms of up to 12 months. These derivative instruments are not designated as hedging relationships, and, therefore, we record gains and losses on these contracts directly to net earnings.

Summary of Derivative Balances

The following table presents the gross fair values for outstanding derivative instruments and the corresponding classification at April 29, 2017, January 28, 2017, and April 30, 2016 ($ in millions):



	April 29, 2017				January 28, 2017				April 30, 2016
Contract Type	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Derivatives designated as net investment hedges⁽¹⁾	$	6	$	—	$	2	$	2	$	—	$	11
Derivatives designated as interest rate swaps⁽²⁾	4		1		13		—		15		—
No hedge designation (foreign exchange forward contracts)⁽¹⁾	1		—		—		1		—		2
Total	$	11	$	1	$	15	$	3	$	15	$	13


(1)	The fair value is recorded in Other current assets or Accrued liabilities.


(2)	The fair value is recorded in Other assets or Long-term liabilities.

The following table presents the effects of derivative instruments on other comprehensive income ("OCI") and on our Condensed Consolidated Statements of Earnings for the three months ended April 29, 2017, and April 30, 2016 ($ in millions):



	Three Months Ended
	April 29, 2017				April 30, 2016
Contract Type	Pre-tax Gain Recognized in OCI		Gain(Loss) Reclassified from Accumulated OCI to Earnings (Effective Portion)		Pre-tax Loss Recognized in OCI			Gain(Loss) Reclassified from Accumulated OCI to Earnings (Effective Portion)
Derivatives designated as net investment hedges	$	8	$	—	$	(22	)	$	—

The following tables present the effects of derivative instruments on our Condensed Consolidated Statements of Earnings for the three months ended April 29, 2017, and April 30, 2016 ($ in millions):



	Gain (Loss) Recognized within SG&A
	Three Months Ended
Contract Type	April 29, 2017		April 30, 2016
No hedge designation (foreign exchange forward contracts)	$	1	$	(5	)



	Gain (Loss) Recognized within Interest expense
	Three Months Ended
Contract Type	April 29, 2017			April 30, 2016
Interest rate swap loss	$	(10	)	$	(10	)
Adjustments to carrying value of long-term debt	10			10
Net impact	$	—		$	—

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The following table presents the notional amounts of our derivative instruments at April 29, 2017, January 28, 2017, and April 30, 2016 ($ in millions):



	Notional Amount
Contract Type	April 29, 2017		January 28, 2017		April 30, 2016
Derivatives designated as net investment hedges	$	206	$	205	$	204
Derivatives designated as interest rate swaps	825		750		750
No hedge designation (foreign exchange forward contracts)	36		43		95
Total	$	1,067	$	998	$	1,049


8.	Earnings per Share

We compute our basic earnings per share based on the weighted-average number of common shares outstanding and our diluted earnings per share based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued. Potentially dilutive securities include stock options, nonvested share awards and shares issuable under our employee stock purchase plan. Nonvested market-based share awards and nonvested performance-based share awards are included in the average diluted shares outstanding for each period if established market or performance criteria have been met at the end of the respective periods.

The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share from continuing operations for the three months ended April 29, 2017, and April 30, 2016 ($ and shares in millions, except per share amounts):



	Three Months Ended
	April 29, 2017		April 30, 2016
Numerator
Net earnings from continuing operations	$	188	$	226

Denominator
Weighted-average common shares outstanding	309.2		323.6
Effect of potentially dilutive securities:
Dilutive effect of stock compensation plan awards	5.8		3.1
Weighted-average common shares outstanding, assuming dilution	315.0		326.7

Net earnings per share from continuing operations
Basic	$	0.61	$	0.70
Diluted	$	0.60	$	0.69

The computation of weighted-average common shares outstanding, assuming dilution, excluded options to purchase 0.7 million and 9.1 million shares of common stock for the three months ended April 29, 2017, and April 30, 2016, respectively. These amounts were excluded as the options’ exercise prices were greater than the average market price of our common stock for the periods presented, and, therefore, the effect would be anti-dilutive (i.e., including such options would result in higher earnings per share).

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9.	Comprehensive Income

The following tables provide a reconciliation of the components of accumulated other comprehensive income, net of tax, attributable to Best Buy Co., Inc. for the three months ended April 29, 2017, and April 30, 2016 ($ in millions):



	Foreign Currency Translation
Balances at January 28, 2017	$	279
Foreign currency translation adjustments	(13		)
Balances at April 29, 2017	$	266

	Foreign Currency Translation
Balances at January 30, 2016	$	271
Foreign currency translation adjustments	45
Balances at April 30, 2016	$	316

The gains and losses on our net investment hedges, which are included in foreign currency translation adjustments, were not material for the periods presented. There is generally no tax impact related to foreign currency translation adjustments, as the earnings are considered permanently reinvested.


10.	Repurchase of Common Stock

Our Board of Directors authorized a $5 billion share repurchase program in February 2017. The program, which became effective on February 27, 2017, terminated and replaced a $5 billion share repurchase program authorized by our Board of Directors in June 2011. There is no expiration governing the period over which we can make our share repurchases under the February 2017 $5 billion share repurchase program.

The following table presents information regarding the shares we repurchased during the three months ended April 29, 2017, and April 30, 2016 ($ and shares in millions, except per share amounts):



	Three Months Ended
	April 29, 2017		April 30, 2016
Total cost of shares repurchased
Open market⁽¹⁾	$	384	$	56
Settlement of January 2016 ASR⁽²⁾	—		45
Total	$	384	$	101

Average price per share
Open market	$	46.3	$	32.41
Settlement of January 2016 ASR⁽²⁾	$	—	$	28.55
Average	$	46.3	$	30.55

Number of shares repurchased and retired
Open market⁽¹⁾	8.3		1.7
Settlement of January 2016 ASR⁽²⁾	—		1.6
Total	8.3		3.3


(1)	As of April 29, 2017, $19 million, or 0.3 million shares, in trades remained unsettled. As of April 30, 2016, $4 million, or 0.1 million shares, in trades remained unsettled. The liability for unsettled trades is included in Accrued liabilities in the Condensed Consolidated Balance Sheets.


(2)	See Note 7, Shareholders' Equity, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017, for additional information regarding the January 2016 ASR.

For the three months ended April 29, 2017, we purchased and retired 0.9 million shares at a cost of $38 million under our June 2011 share repurchase program, and 7.4 million shares at a cost of $346 million under our February 2017 share repurchase program. Approximately $4.7 billion remained available for additional purchases under the February 2017 share repurchase program as of April 29, 2017. Repurchased shares are retired and constitute authorized but unissued shares.

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11.	Segments

Our chief operating decision maker ("CODM") is our Chief Executive Officer. Our business is organized into two segments: Domestic (which is comprised of all operations within the U.S. and its districts and territories) and International (which is comprised of all operations outside the U.S. and its territories). Our CODM has ultimate responsibility for enterprise decisions. Our CODM determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise, the Domestic segment and the International segment. The Domestic segment managers and International segment managers have responsibility for operating decisions, allocating resources and assessing performance within their respective segments. Our CODM relies on internal management reporting that analyzes enterprise results to the net earnings level and segment results to the operating income level.

We aggregate our Canada and Mexico businesses into one International operating segment. Our Domestic and International operating segments also represent our reportable segments. The accounting policies of the segments are the same as those described in 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 28, 2017.

Revenue by reportable segment was as follows ($ in millions):



	Three Months Ended
	April 29, 2017		April 30, 2016
Domestic	$	7,912	$	7,829
International	616		614
Total revenue	$	8,528	$	8,443

Operating income by reportable segment and the reconciliation to earnings from continuing operations before income tax expense were as follows ($ in millions):



	Three Months Ended
	April 29, 2017			April 30, 2016
Domestic	$	298		$	372
International	2			—
Total operating income	300			372
Other income (expense)
Gain on sale of investments	—			2
Investment income and other	11			6
Interest expense	(19		)	(20		)
Earnings from continuing operations before income tax expense	$	292		$	360

Assets by reportable segment were as follows ($ in millions):



	April 29, 2017		January 28, 2017		April 30, 2016
Domestic	$	11,691	$	12,496	$	11,562
International	1,264		1,360		1,339
Total assets	$	12,955	$	13,856	$	12,901


12.	Contingencies

We are involved in a number of legal proceedings. Where appropriate, we have made accruals with respect to these matters, which are reflected in our Condensed Consolidated Financial Statements. However, there are cases where liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. We provide disclosure of matters where we believe it is reasonably possible the impact may be material to our Condensed Consolidated Financial Statements.

Securities Actions

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In February 2011, a purported class action lawsuit captioned, IBEW Local 98 Pension Fund, individually and on behalf of all others similarly situated v. Best Buy Co., Inc., et al., was filed against us and certain of our executive officers in the U.S. District Court for the District of Minnesota. This federal court action alleges, among other things, that we and the officers named in the complaint violated Sections 10(b) and 20A of the Exchange Act and Rule 10b-5 under the Exchange Act in connection with press releases and other statements relating to our fiscal 2011 earnings guidance that had been made available to the public. Additionally, in March 2011, a similar purported class action was filed by a single shareholder, Rene LeBlanc, against us and certain of our executive officers in the same court. In July 2011, after consolidation of the IBEW Local 98 Pension Fund and Rene LeBlanc actions, a consolidated complaint captioned, IBEW Local 98 Pension Fund v. Best Buy Co., Inc., et al., was filed and served. We filed a motion to dismiss the consolidated complaint in September 2011, and in March 2012, subsequent to the end of fiscal 2012, the court issued a decision dismissing the action with prejudice. In April 2012, the plaintiffs filed a motion to alter or amend the court's decision on our motion to dismiss. In October 2012, the court granted plaintiff's motion to alter or amend the court's decision on our motion to dismiss in part by vacating such decision and giving plaintiff leave to file an amended complaint, which plaintiff did in October 2012. We filed a motion to dismiss the amended complaint in November 2012 and all responsive pleadings were filed in December 2012. A hearing was held on April 26, 2013. On August 5, 2013, the court issued an order granting our motion to dismiss in part and, contrary to its March 2012 order, denying the motion to dismiss in part, holding that certain of the statements alleged to have been made were not forward-looking statements and therefore were not subject to the “safe-harbor” provisions of the Private Securities Litigation Reform Act. Plaintiffs moved to certify the purported class. By Order filed August 6, 2014, the court certified a class of persons or entities who acquired Best Buy common stock between 10:00 a.m. EDT on September 14, 2010, and December 13, 2010, and who were damaged by the alleged violations of law. The 8th Circuit Court of Appeals granted our request for interlocutory appeal. On April 12, 2016, the 8th Circuit held the trial court misapplied the law and reversed the class certification order. IBEW petitioned the 8th Circuit for a rehearing en banc, which was denied on June 1, 2016. In October 2016, IBEW advised the trial court it will not seek review by the Supreme Court. The trial court has set a January 2017 conference to discuss next steps. We continue to believe that these allegations are without merit and intend to vigorously defend our company in this matter.

In June 2011, a purported shareholder derivative action captioned, Salvatore M. Talluto, Derivatively and on Behalf of Best Buy Co., Inc. v. Richard M. Schulze, et al., as Defendants and Best Buy Co., Inc. as Nominal Defendant, was filed against both present and former members of our Board of Directors serving during the relevant periods in fiscal 2011 and us as a nominal defendant in the U.S. District Court for the State of Minnesota. The lawsuit alleges that the director defendants breached their fiduciary duty, among other claims, including violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in failing to correct public misrepresentations and material misstatements and/or omissions regarding our fiscal 2011 earnings projections and, for certain directors, selling stock while in possession of material adverse non-public information. Additionally, in July 2011, a similar purported class action was filed by a single shareholder, Daniel Himmel, against us and certain of our executive officers in the same court. In November 2011, the respective lawsuits of Salvatore M. Talluto and Daniel Himmel were consolidated into a new action captioned, In Re: Best Buy Co., Inc. Shareholder Derivative Litigation, and a stay ordered pending the close of discovery in the consolidated IBEW Local 98 Pension Fund v. Best Buy Co., Inc., et al. case. Additionally, in June 2015, a similar purported class action was filed by a single shareholder, Khuong Tran, derivatively on behalf of Best Buy Co., Inc. against us and certain of our executive officers and directors in the same court. The Khuong Tran lawsuit has also been stayed pending the close of discovery in IBEW.

The plaintiffs in the above securities actions seek damages, including interest, equitable relief and reimbursement of the costs and expenses they incurred in the lawsuits. As stated above, we believe the allegations in the above securities actions are without merit, and we intend to defend these actions vigorously. Based on our assessment of the facts underlying the claims in the above securities actions, their respective procedural litigation history and the degree to which we intend to defend our company in these matters, the amount or range of reasonably possible losses, if any, cannot be estimated.

Other Legal Proceedings

We are involved in various other legal proceedings arising in the normal course of conducting business. For such legal proceedings, we have accrued an amount that reflects the aggregate liability deemed probable and estimable, but this amount is not material to our consolidated financial position, results of operations or cash flows. Because of the preliminary nature of many of these proceedings, the difficulty in ascertaining the applicable facts relating to many of these proceedings, the variable treatment of claims made in many of these proceedings and the difficulty of predicting the settlement value of many of these proceedings, we are not able to estimate an amount or range of any reasonably possible additional losses. However, based upon our historical experience, the resolution of these proceedings is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” in the following refers to Best 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 eight sections:


•	Overview


•	Business Strategy Update


•	Best Buy 2020: Building the New Blue


•	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 ended January 28, 2017 (including the information presented therein under Risk Factors), as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited.

Overview

We are a leading provider of technology products, services and solutions. We offer these products and services to customers who visit our stores, engage with Geek Squad agents or use our websites or mobile applications. We have operations in the U.S., Canada and Mexico. We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all operations within the U.S. and its districts and territories. The International segment is comprised of all operations outside the U.S. and its territories.

Our fiscal year ends on the Saturday nearest the end of January. Fiscal 2018 will include 53 weeks with the additional week included in the fourth quarter and fiscal 2017 included 52 weeks. Our business, like that of many retailers, is seasonal. A higher proportion of our revenue and earnings is generated in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico ("Holiday").

Comparable Sales

Throughout this MD&A, we refer to comparable sales. Our comparable sales calculation compares revenue from stores, websites and call centers operating for at least 14 full months, as well as revenue related to certain other comparable sales channels for a particular period to the corresponding period in the prior year. Relocated stores, as well as remodeled, expanded and downsized stores closed more than 14 days, are excluded from the comparable sales calculation until at least 14 full months after reopening. Acquisitions are included in the comparable sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The calculation of 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). 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.

The Canadian brand consolidation, which included the permanent closure of 66 Future Shop stores, the conversion of 65 Future Shop stores to Best Buy stores and the elimination of the Future Shop website, had a material impact on a year-over-year basis on the remaining Canadian retail stores and the website. As such, from the first quarter of fiscal 2016 through the third quarter of fiscal 2017, all Canadian store and website revenue was removed from the comparable sales base and the International segment no longer had a comparable sales metric. Therefore, Consolidated comparable sales for the first quarter of fiscal 2016 through the third quarter of fiscal 2017 equaled the Domestic segment comparable sales. Beginning in the fourth quarter of fiscal 2017, we resumed reporting International comparable sales as revenue in the International segment was once again

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deemed to be comparable and, as such, Consolidated comparable sales are once again equal to the aggregation of Domestic and International comparable sales.

Non-GAAP Financial Measures

This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), as well as certain adjusted or non-GAAP financial measures such as constant currency, non-GAAP operating income, non-GAAP effective tax rate, non-GAAP net earnings from continuing operations, non-GAAP diluted earnings per share ("EPS") from continuing operations and non-GAAP debt to earnings before interest, income taxes, depreciation, amortization and rent ("EBITDAR") ratio. 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 measures. Generally, our non-GAAP measures include adjustments for items such as restructuring charges, goodwill impairments and gains or losses on investments. In addition, certain other items may be excluded from non-GAAP financial measures when we believe this 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 measures as presented herein may not be comparable to similarly titled measures used by other companies.

In our discussions of the operating results of our consolidated business and our International segment, we sometimes refer to the impact of changes in foreign currency exchange rates or the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert the International segment’s operating results from local currencies into U.S. dollars for reporting purposes. We also use the term "constant currency", which represents results adjusted to exclude foreign currency impacts. We calculate those impacts as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period currency exchange rates. We believe the disclosure of revenue changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates and our inability to report comparable store sales for the International segment from the first quarter of fiscal 2016 through the third quarter of fiscal 2017 as a result of the Canadian brand consolidation.

Beginning in the first quarter of fiscal 2018, we no longer exclude non-restructuring property and equipment impairment charges from our non-GAAP financial metrics. When we began to execute our Renew Blue transformation in the fourth quarter of fiscal 2013, we adopted a change to non-GAAP reporting to exclude non-restructuring property and equipment impairment charges from our non-GAAP results. From that point, through the fourth quarter of fiscal 2017, we believed that reporting non-GAAP results that excluded these charges provided a supplemental view of our ongoing performance that was useful and relevant to our investors. Now that Renew Blue has ended and Best Buy 2020: Building The New Blue has officially launched, we believe it is no longer necessary to adjust for non-restructuring property and equipment impairments in our non-GAAP reporting. We believe that future such impairments will predominantly be immaterial and incurred in the ordinary scope of ongoing operations. Accordingly, commencing in the first quarter of fiscal 2018, we no longer plan to adjust for non-restructuring property and equipment impairments. Impacted prior period non-GAAP financial measures will be recast to conform with this presentation.

Refer to the Non-GAAP Financial Measures section below for the detailed reconciliation of items that impacted the non-GAAP operating income, non-GAAP effective tax rate, non-GAAP net earnings from continuing operations and non-GAAP diluted EPS from continuing operations in the presented periods.

Refer to the Other Financial Measures section below for the detailed reconciliation of items that impacted the non-GAAP debt to EBITDAR ratio. Management believes this ratio is an important indicator of our creditworthiness. Furthermore, we believe that our non-GAAP debt to EBITDAR ratio is important for understanding our financial position and provides meaningful additional information about our ability to service our long-term debt and other fixed obligations and to fund our future growth. We also believe our non-GAAP debt to EBITDAR ratio is relevant because it enables investors to compare our indebtedness to that of retailers who own, rather than lease, their stores. Our decision to own or lease real estate is based on an assessment of our financial liquidity, our capital structure, our desire to own or to lease the location, the owner’s desire to own or to lease the location and the alternative that results in the highest return to our shareholders.

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Business Strategy Update

Our first quarter of fiscal 2018 delivered strong top and bottom line results, with consolidated comparable sales growth of 1.6%.

Domestic segment comparable sales grew by 1.4%, driven by strength in computing, connected home and gaming, partially offset by continued softness in tablets. We also continued to drive significant growth in the online channel with our Domestic segment online comparable sales increasing 22.5% in the first quarter of fiscal 2018 driven by conversion and traffic. Our Domestic segment online revenue was 12.9% of total Domestic segment revenue in the first quarter of fiscal 2018 compared to 10.6% in the first quarter of fiscal 2017.

In the International segment, we delivered a 4.0% comparable sales increase in the first quarter of fiscal 2018 driven by continued growth of online revenue in Canada and Mexico and positive sales lifts associated with the Canadian store redesigns.

Best Buy 2020: Building the New Blue

In our most recent Annual Report, we introduced Best Buy 2020: Building the New Blue, which is focused on shaping our future and creating a company that customers and employees love and that generates a return for our shareholders.

As part of this new strategy, we outlined four priorities that we are pursuing during fiscal 2018. While it is early in our fiscal year, the below highlights our progress thus far.


1.	Explore and pursue growth opportunities around maximizing the multi-channel retail business and providing services and solutions that solve real customer needs and help us build deeper customer relationships.

We are continuing to expand several of the new concepts we have been testing related to services and solutions. On May 4, 2017, we publicly announced our plan to offer a new service, Best Buy Smart Home, powered by Vivint, in more than 400 stores by Holiday. Guided by in-store experts, customers select from a suite of leading smart home products - including smart locks, lights, cameras, thermostats and more - and get expert installation, app-based system control and a 24/7 professional monitoring service.

Also in the smart home area, we are curating new product categories across the home. For example, in the first quarter we launched a new Smart Nursery assortment. More broadly, we are very focused on the Smart Home as a key part of our Best Buy 2020 strategy, and we will continue to enhance this category across our stores and websites this year.

We also expanded the test of our new approach to technical support. Last year in Canada we began testing a new service offering that provides 24/7 support for all of the technology products a customer owns, regardless of whether they were bought at Best Buy. It also includes other valuable benefits like discounts on installation services and warranty programs. We expanded that pilot to additional markets in Canada and we are now piloting a version of the program in two U.S. markets.

We expanded the pilot of our in-home advisor program to another major U.S. market. We are currently operating in Atlanta, Austin, Orlando, San Antonio and Washington, D.C. We are now planning to expand the program nationwide later this year.

We continue to drive digital innovation, which is crucial to the success of Best Buy 2020. In the first quarter, our Domestic online revenue reached $1.0 billion for the first time in a non-Holiday quarter. We are pleased with our progress and believe there are plenty of opportunities to more effectively help our customers in their shopping journey.

We are pursuing growth around key product categories by refining how we sell, including around (1) emerging product categories like connected home; (2) appliances where we believe we can continue to grow share and revenue; and (3) mobile. As it relates to mobile, we recently launched an initiative focused on improving the multi-channel shopping experience for mobile phones. The smartphone industry has significantly changed over the past few years especially with installment billing plans, unlimited data plans and the proliferation of pre-paid and unlocked devices. This can make shopping for a smartphone confusing and complicated. In response to this changing landscape, we are improving the experience on BestBuy.com and revamping the mobile departments in many of our stores to create a better, easier, more seamless shopping experience for customers. For the new phone launch in April 2017, for example, we simplified the buying experience and provided clarity of carrier offers and ease of phone selection and saw strong pre-orders in this iconic phone launch. This initiative will include other enhancements such as improvements to the phone

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activation process, the addition of more specially trained mobile associates and enhanced displays. This work will impact several hundred of our stores by the end of the third quarter of fiscal 2018.


2.	Improve our execution in key areas that support our growth strategy.

In our stores, we are very focused on continuing to improve our sales effectiveness. We are doing this by (1) providing systematic coaching, training and certification; (2) increasing tenure in our store leadership roles; and (3) lowering associate turnover. These things are resulting in ongoing NPS improvements related to associate knowledge.

We are also investing in large product fulfillment to both support business growth and materially improve the customer experience. For example, we are collaborating more closely with our vendors to improve inventory availability and in-stock levels, and we are optimizing our supply chain process capabilities through standardization and training. Additionally, we are selectively adding distribution center capacity to support business growth and to get products closer to the customer.

A third area of focus from an execution standpoint is to reduce our exposure to excess and obsolete inventories while improving our recovery rates. By more proactively planning product transitions and better managing clearance pricing across sales channels, we materially improved our at-risk inventory position in the first quarter of fiscal 2018 versus the same period in the prior year, allowing us to re-invest those dollars into the new inventory our customers want.


3.	Continue to reduce costs and drive efficiencies through the business.

In the first quarter of fiscal 2018, we achieved another $50 million in annual cost reductions and gross profit optimization. We have now reached our $400 million target - three fiscal quarters ahead of our original deadline.

In our May 25, 2017, earnings conference call, we announced a new target of $600 million in additional cost reduction and gross profit optimization to be completed by the end of our fiscal 2021. We believe we continue to have significant opportunities to reduce cost, in particular, through the use of a continuous improvement approach, working cross-functionally to re-engineer and pull cost out of complex processes. Consistent with the $400 million plan we just completed, we expect to use these cost reductions to fund investments and to offset ongoing pressures in our business.


4.	Build the capabilities necessary to deliver on the first three priorities, which will involve making investments in people and systems to drive growth, execution and efficiencies.

We have been investing in labor expertise across our sales associates and our Geek Squad agents. We are also in the process of implementing our new warehouse management system and are beginning to improve our customer relationship management capabilities, starting with our in-home advisors.

In summary, we began fiscal 2018 with a strong start and we are energized about our opportunities and the strategy we are pursuing. We believe we are uniquely positioned to help our customers in a meaningful way with our combination of multi-channel assets - including our online, store and in-home capabilities.

Results of Operations

In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations on a one-month lag. Consistent with such consolidation, the financial and non-financial information presented in our MD&A relative to these operations is also presented on a lag. Our policy is to accelerate the recording of events occurring in the lag period that significantly affect our consolidated financial statements. No such events were identified for the periods presented.

The results of Jiangsu Five Star Appliance Co., Limited ("Five Star"), in our International segment, are presented as discontinued operations in our Condensed Consolidated Statements of Earnings. Unless otherwise stated, financial results discussed herein refer to continuing operations.

Consolidated Performance Summary

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The following table presents selected consolidated financial data ($ in millions, except per share amounts):



	Three Months Ended
	April 29, 2017			April 30, 2016
Revenue	$	8,528		$	8,443
Revenue % gain (decline)	1.0		%	(1.3		)%
Comparable sales % gain (decline)⁽¹⁾	1.6		%	(0.1		)%
Gross profit	$	2,022		$	2,145
Gross profit as a % of revenue⁽²⁾	23.7		%	25.4		%
SG&A	$	1,722		$	1,744
SG&A as a % of revenue⁽²⁾	20.2		%	20.7		%
Restructuring charges	$	—		$	29
Operating income	$	300		$	372
Operating income as a % of revenue	3.5		%	4.4		%
Net earnings from continuing operations	$	188		$	226
Earnings from discontinued operations	$	—		$	3
Net earnings	$	188		$	229
Diluted earnings per share from continuing operations	$	0.60		$	0.69
Diluted earnings per share	$	0.60		$	0.70


(1)	Due to the Canadian brand consolidation impact on our International segment comparable sales metric, Consolidated comparable sales for the three months ended April 30, 2016, equal the Domestic segment comparable sales. Refer to the Overview section within this Item 2. MD&A for more information.

(2)

Because retailers vary in how they record costs of operating their supply chain between cost of goods sold 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 goods sold 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 28, 2017.

The components of the 1.0% revenue increase for the first quarter of fiscal 2018 were as follows:



	Three Months Ended
	April 29, 2017
Comparable sales impact	1.5	%
Non-comparable sales⁽¹⁾	(0.4	)%
Impact of foreign currency exchange rate fluctuations	(0.1	)%
Total revenue increase	1.0	%


(1)	Non-comparable sales reflects the impact of net store opening and closing activity, as well as the impact of revenue streams not included within our comparable sales calculation, such as profit sharing benefits, certain credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable.

The gross profit rate decreased by 1.7% of revenue in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017. Our Domestic segment drove a rate decrease of 1.6% of revenue, while our International segment declined 0.1%. For further discussion of each segment’s gross profit rate changes, see Segment Performance Summary below.

The SG&A rate decreased by 0.5% of revenue in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017. Our Domestic segment rate decreased by 0.4% of revenue, while our International segment declined 0.1%. For further discussion of each segment’s SG&A rate changes, see Segment Performance Summary below.

Our operating income rate decreased to 3.5% of revenue in the first quarter of fiscal 2018, compared to 4.4% of revenue the first quarter of fiscal 2017. The decrease in operating income was primarily due to the decrease in our Domestic segment gross profit rate partially offset by a decrease in our Domestic segment restructuring charges. For further discussion of each segment's operating income, see Segment Performance Summary below.

Income Tax Expense

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Income tax expense decreased to $104 million in the first quarter of fiscal 2018 compared to $134 million in the prior-year period, primarily as a result of a decrease in pre-tax earnings. Our effective income tax rate in the first quarter of fiscal 2018 was 35.6% compared to a rate of 37.3% in the first quarter of fiscal 2017. The decrease in the effective income tax rate was primarily due to the recognition of excess tax benefits related to stock-based compensation (as discussed below), a higher mix of forecast taxable income from foreign operations and the resolution of certain tax matters in the current year period.

In the first quarter of fiscal 2018, the company adopted Accounting Standards Update ("ASU") 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which now requires all differences between the tax value and the book value for stock-based compensation to be recognized as either income tax expense or benefit as the shares vest or options are exercised or cancelled. The impact of this change on the first quarter of fiscal 2018 was a benefit of approximately $2 million.

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. We update our estimate of the annual effective tax rate 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 effective tax rate 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, changes in laws or regulations and expenses or losses for which tax benefits are not recognized. Our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items and non-deductible losses on our effective tax rate is greater when our pre-tax income is lower.

In addition, our consolidated effective tax rate is impacted by the statutory income tax rates applicable to each of the jurisdictions in which we operate. As our foreign earnings are generally taxed at lower statutory rates than the 35% U.S. statutory rate, changes in the proportion of our consolidated taxable earnings originating in foreign jurisdictions impact our consolidated effective rate. Our foreign earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax.

Segment Performance Summary

Domestic

The following table presents selected financial data for the Domestic segment ($ in millions):



	Three Months Ended
	April 29, 2017			April 30, 2016
Revenue	$	7,912		$	7,829
Revenue % gain (decline)	1.1		%	(0.8		)%
Comparable sales % gain (decline)⁽¹⁾	1.4		%	(0.1		)%
Gross profit	$	1,871		$	1,986
Gross profit as a % of revenue	23.6		%	25.4		%
SG&A	$	1,573		$	1,587
SG&A as a % of revenue	19.9		%	20.3		%
Restructuring charges	$	—		$	27
Operating income	$	298		$	372
Operating income as a % of revenue	3.8		%	4.8		%

Selected Online Revenue Data
Online revenue as a % of total segment revenue	12.9		%	10.6		%
Comparable online sales % gain⁽¹⁾	22.5		%	23.9		%


(1)	Comparable online sales is included in the comparable sales calculation.

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The components of our Domestic segment's 1.1% revenue increase for the first quarter of fiscal 2018 were as follows:



	Three Months Ended
	April 29, 2017
Comparable sales impact	1.4	%
Non-comparable sales⁽¹⁾	(0.3	)%
Total revenue increase	1.1	%


(1)	Non-comparable sales reflects the impact of net store opening and closing activity, as well as the impact of revenue streams not included within our comparable sales calculation, such as profit sharing benefits, certain credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable.

The increase in the first quarter of fiscal 2018 Domestic segment revenue was driven by comparable sales growth of 1.4%, partially offset by the loss of revenue from Best Buy and Best Buy Mobile store closures. Domestic segment online revenue of $1.0 billion increased 22.5% on a comparable basis, primarily due to higher conversion rates and increased traffic.

The following table reconciles the number of Domestic stores open at the beginning and end of the first quarters of fiscal 2018 and 2017:



	Fiscal 2018					Fiscal 2017
	Total Stores at Beginning of First Quarter	Stores Opened	Stores Closed		Total Stores at End of First Quarter	Total Stores at Beginning of First Quarter	Stores Opened	Stores Closed		Total Stores at End of First Quarter
Best Buy	1,026	—	(2	)	1,024	1,037	—	(1	)	1,036
Best Buy Mobile stand-alone	309	—	(11	)	298	350	—	(12	)	338
Pacific Sales stand-alone	28	—	—		28	28	—	—		28
Total Domestic segment stores	1,363	—	(13	)	1,350	1,415	—	(13	)	1,402

We continuously monitor store performance. As we approach the expiration date of our store leases, we evaluate various options for each location, including whether a store should remain open.

The following table presents the Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category in the first quarters of fiscal 2018 and 2017:



	Revenue Mix				Comparable Sales
	Three Months Ended				Three Months Ended
	April 29, 2017		April 30, 2016		April 29, 2017		April 30, 2016
Consumer Electronics	33	%	33	%	0.7	%	5.6	%
Computing and Mobile Phones	45	%	47	%	(0.3	)%	(3.5	)%
Entertainment	7	%	6	%	11.3	%	(11.6	)%
Appliances	10	%	9	%	4.6	%	14.3	%
Services	5	%	5	%	4.2	%	(10.7	)%
Other	—	%	—	%	n/a		n/a
Total	100	%	100	%	1.4	%	(0.1	)%

The following is a description of the notable comparable sales changes in our Domestic segment by revenue category:


•	Consumer Electronics: Comparable sales gain was driven primarily by home automation products.


•	Computing and Mobile Phones: Comparable sales decline was driven primarily by declines in tablets, partially offset by gains in computing.


•	Entertainment: Comparable sales gain was driven primarily by gaming hardware.


•	Appliances: Comparable sales gain was driven primarily by large appliances.


•	Services: Comparable sales gain was driven primarily by higher net commissions earned on warranty plan sales as a result of reductions to the premiums that we pay to the third party underwriter.

The gross profit rate of our Domestic segment decreased due to the $183 million in non-recurring cathode ray tube ("CRT") settlement proceeds received in the first quarter of fiscal 2017, which was partially offset by improved margin rates across multiple categories.

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The SG&A rate of our Domestic segment decreased primarily due to the $22 million in non-recurring CRT settlement legal fees incurred in the first quarter of fiscal 2017.

Our Domestic segment restructuring charges in the first quarter of fiscal 2017 related to our Renew Blue Phase 2, which had no activity in the same period of fiscal 2018. Refer to Note 5, Restructuring Charges, in the Notes to the Condensed Consolidated Financial Statements for additional information.

Our Domestic segment operating income rate decreased due to the net $161 million non-recurring CRT settlement, partially offset by lower restructuring charges and improved gross margin rates across multiple categories.

International

The following table presents selected financial data for the International segment ($ in millions):



	Three Months Ended
	April 29, 2017			April 30, 2016
Revenue	$	616		$	614
Revenue % gain (decline)	0.3		%	(8.1		)%
Comparable sales % gain⁽¹⁾	4.0		%	n/a
Gross profit	$	151		$	159
Gross profit as a % of revenue	24.5		%	25.9		%
SG&A	$	149		$	157
SG&A as a % of revenue	24.2		%	25.6		%
Restructuring charges	$	—		$	2
Operating income	$	2		$	—
Operating income as a % of revenue	0.3		%	—		%


(1)	Due to the Canadian brand consolidation impact on our International segment comparable sales metric, we did not report an International segment comparable sales metric for the three months ended April 30, 2016. Refer to the Overview section within this Item 2. MD&A for more information.

The components of our International segment's 0.3% revenue increase for the first quarter of fiscal 2018 were as follows:



	Three Months Ended
	April 29, 2017
Comparable sales	3.8	%
Non-comparable sales⁽¹⁾	(2.0	)%
Impact of foreign currency exchange rate fluctuations	(1.5	)%
Total revenue increase	0.3	%


(1)	Non-comparable sales reflects the impact of net store opening and closing activity, including the Canadian brand consolidation activity, as well as the impact of revenue streams not included within our comparable sales calculation, such as profit sharing benefits, certain credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers.

The increase in the first quarter of fiscal 2018 International segment revenue was driven by comparable sales growth of 4.0% due to growth in both Canada and Mexico, which was partially offset by a $13 million decrease in our periodic profit share in Canada and the negative impact of foreign currency exchange rate fluctuations. The profit-share revenue included in our non-comparable sales relate to our extended warranty protection plans that are managed by a third party underwriter. We may be eligible to receive profit-sharing payments, depending on the performance of the portfolio. When performance of the portfolio is strong and the claims cost to the third party underwriter declines, we are entitled to share in the excess premiums.

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The following table reconciles the number of International stores open at the beginning and end of the first quarters of fiscal 2018 and 2017:

Fiscal 2018

Fiscal 2017

Total Stores at Beginning of First Quarter

Stores Opened

Stores Closed

Total Stores at End of First Quarter

Total Stores at Beginning of First Quarter

Stores Opened

Stores Closed

Total Stores at End of First Quarter

Canada

Best Buy

134