UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended February 2, 2019
OR
o | 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 (Zip Code) | |
(Address of principal executive offices) | ||
Registrant's telephone number, including area code 612-291-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $.10 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
____________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No
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 for 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. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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). x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emergency growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o | ||||
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) o Yes x No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of August 3, 2018, was approximately $15.7 billion, computed by reference to the price of $76.08 per share, the price at which the common equity was last sold on August 3, 2018, as reported on the New York Stock Exchange-Composite Index. (For purposes of this calculation all of the registrant's directors and executive officers are deemed affiliates of the registrant.)
As of March 26, 2019, the registrant had 267,804,388 shares of its Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its 2019 Regular Meeting of Shareholders ("Proxy Statement") are incorporated by reference into Part III. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
CAUTIONARY STATEMENT PURSUANT TO THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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 Annual Report on Form 10-K are forward-looking statements and may be identified by the use of words such as "anticipate," "assume," "believe," "estimate," "expect," "intend," "foresee," "outlook," "plan," "project" and other words and terms of similar meaning. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our future results to differ materially from the anticipated results expressed in such forward-looking statements. Readers should review Item 1A, Risk Factors, of this Annual Report on Form 10-K for a description of important factors that could cause our future results to differ materially from those contemplated by the forward-looking statements made in this Annual Report on Form 10-K. Our forward-looking statements speak only as of the date of this report or as of the date they are made, and we undertake no obligation to update our forward-looking statements.
BEST BUY FISCAL 2019 FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business.
Unless the context otherwise requires, the terms "we," "us" and "our" in this Annual Report on Form 10-K refer to Best Buy Co., Inc. and, as applicable, its consolidated subsidiaries. Any references to our website addresses do not constitute incorporation by reference of the information contained on the websites.
Description of Business
We were incorporated in the state of Minnesota in 1966. We strive to enrich the lives of consumers through technology, whether they connect with us online, visit our stores or invite us into their homes. We do this by solving technology problems and addressing key human needs across a range of areas, including entertainment, productivity, communication, food preparation, security and health and wellness. We have operations in the U.S., Canada and Mexico.
Segments and Geographic Areas
We have two reportable segments: Domestic and International. The Domestic segment is comprised of the operations in all states, districts and territories of the U.S. under various brand names including Best Buy, bestbuy.com, Best Buy Direct, Best Buy Express, Best Buy Mobile, Geek Squad, GreatCall, Magnolia and Pacific Kitchen and Home. The International segment is comprised of all operations in Canada and Mexico under the brand names Best Buy, Best Buy Express, Best Buy Mobile, Geek Squad and the domain names bestbuy.ca and bestbuy.com.mx.
On March 1, 2018, we announced our intent to close all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S., and all remaining stores were closed during the second quarter of fiscal 2019. On October 1, 2018, we acquired all of the outstanding shares of GreatCall, Inc. ("GreatCall"), a leading connected health services provider for aging consumers that offers easy-to-use mobile products and connected devices. Additional information on these changes is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 2, Acquisition, and Note 9, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Operations
Our Domestic and International segments are managed by leadership teams responsible for all areas of the business. Both segments operate a multi-channel platform that allows customers to connect with us online, visit our stores or invite us into their homes.
Domestic Segment
Development of merchandise and services offerings, pricing and promotions, procurement and supply chain, online and mobile application operations, marketing and advertising and labor deployment across all channels are centrally managed. In addition, support capabilities (for example, human resources, finance and real estate management) are generally performed at our corporate headquarters. We also have field operations that support retail, services and in-home teams from our corporate headquarters and regional locations. Our retail stores have procedures for inventory management, asset protection, transaction processing, customer relations, store administration, product sales and services, staff training and merchandise display that are largely standardized. All stores generally operate under standard procedures with a degree of flexibility for store management to address certain local market characteristics.
International Segment
Our Canada and Mexico operations are similar to those in our Domestic segment.
Merchandise and Services
Our Domestic and International segments have offerings in six revenue categories: Computing and Mobile Phones, Consumer Electronics, Appliances, Entertainment, Services and Other. These categories provide products and services to our customers that address key human needs across a range of areas, including entertainment, productivity, communication, food preparation, security and health and wellness. The key components of each revenue category are as follows:
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• | Computing and Mobile Phones - computing and peripherals, e-readers, mobile phones (including related mobile network carrier commissions), networking, tablets and wearables (including smartwatches); |
• | Consumer Electronics - digital imaging, health and fitness, home theater, portable audio (including headphones and portable speakers) and smart home; |
• | Appliances - major appliances (including dishwashers, laundry, ovens and refrigerators) and small appliances (including blenders, coffee makers and vacuums); |
• | Entertainment - drones, gaming hardware and software, movies, music, toys, virtual reality and other software; |
• | Services - consultation, delivery, design, installation, memberships, protection plans, repair, set-up, technical support and GreatCall offerings; and |
• | Other - beverages, snacks, sundry items and other product offerings within our International segment (including baby, luggage and sporting goods). |
Distribution
Domestic Segment
Customers who purchase products online have the choice to pick up product at U.S. Best Buy stores or have it delivered directly to them from a distribution center or retail store. Our ship-from-store capability allows us to improve product availability and delivery times for customers. Most merchandise is shipped directly from manufacturers to our distribution centers located throughout the U.S. In order to meet release dates for certain products, merchandise may be shipped directly to our stores from suppliers.
International Segment
Our Canada and Mexico distribution model is similar to that of our Domestic segment.
Suppliers and Inventory
Our Domestic and International segments purchase merchandise from a variety of suppliers. In fiscal 2019, our 20 largest suppliers accounted for approximately 64% of the merchandise we purchased, with five suppliers – Apple, Samsung, Hewlett-Packard, Sony and LG – representing approximately 51% of total merchandise purchased. We generally do not have long-term written contracts with our vendors that would require them to continue supplying us with merchandise or that secure any of the key terms of our arrangements.
We carefully monitor and manage our inventory levels in an effort to match quantities on hand with consumer demand as closely as possible. Key elements to our inventory management process include the following: continuous monitoring of historical and projected consumer demand, continuous monitoring and adjustment of inventory receipt levels and pricing, agreements with vendors relating to reimbursement for the cost of markdowns or sales incentives and agreements with vendors relating to return privileges for certain products.
We also have a global sourcing operation to design, develop, test and contract-manufacture our exclusive brand products.
Store Development
We had 1,187 large-format and 51 small-format stores at the end of fiscal 2019 throughout our Domestic and International segments. Our stores are a vital component of our multi-channel strategy and we believe they are an important competitive advantage. We have the ability to ship from all of our Best Buy stores in the U.S. and all of our large-format stores in Canada. Customers may also elect to pick up orders initiated online in any of our stores. Beginning in 2013, we opened vendor store-within-a-store concepts to allow closer vendor partnerships and a higher quality customer experience. In fiscal 2020 and beyond, we will continue to look for opportunities to optimize our store space, renegotiate leases and selectively open or close locations to support our operations.
Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for tables reconciling our Domestic and International segment stores open at the end of each of the last three fiscal years.
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Intellectual Property
We own or have the right to use valuable intellectual property such as trademarks, service marks and tradenames, including, but not limited to, Best Buy, Best Buy Express, Best Buy Mobile, Dynex, Geek Squad, GreatCall, Insignia, Jitterbug, Lively, Magnolia, Modal, My Best Buy, Pacific Sales, Pacific Kitchen and Home, Platinum, Rocketfish, 5Star and our Yellow Tag logo.
We have secured domestic and international trademark and service mark registrations for many of our brands. We have also secured patents for many of our inventions. We believe our intellectual property has significant value and is an important factor in the marketing of our company, our stores, our products and our websites.
Seasonality
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 the U.S., Canada and Mexico.
Working Capital
We fund our business operations through a combination of available cash and cash equivalents, short-term investments and cash flows generated from operations. In addition, our revolving credit facilities are available for additional working capital needs, for general corporate purposes and investment and growth opportunities. Our working capital needs typically increase in the months leading up to the holiday shopping season as we purchase inventory in advance of expected sales.
Competition
Our competitors are primarily multi-channel retailers, e-commerce businesses, technology service providers, traditional store-based retailers, vendors and mobile network carriers who offer their products and services directly to customers. We believe our ability to help customers online, in stores and in their homes and to connect technology product and solutions with customer needs offers us key competitive advantages. Some of our competitors have lower cost operating structures and seek to compete for sales primarily on price. In the U.S., online-only retailers historically were not generally required to collect sales taxes in certain states. However, a June 2018 Supreme Court decision (South Dakota v. Wayfair) authorized states to require online-only retailers to collect and remit sales taxes. As a result, the online-only sales tax advantage of some of our competitors will continue to erode as more states require online-only retailers to collect sales tax. We carefully monitor pricing offered by other retailers, as maintaining price competitiveness is one of our ongoing priorities. In addition, we have price-matching policies that allow customers to request that we match a price offered by certain retail stores and online operators. In order to allow this, we are focused on maintaining efficient operations and leveraging the economies of scale available to us through our global vendor partnerships. We believe our dedicated and knowledgeable people, our integrated online, retail and in-home assets, our broad and curated product assortment, our strong vendor partnerships, our service and support offerings designed to solve real customer needs, our unique ability to showcase technology in distinct store formats and our supply chain are important ways in which we maintain our competitive advantage.
Environmental and Social Matters
We are an organization built upon values-driven leadership and focused on our purpose to enrich lives through technology. We seek to apply our sense of corporate responsibility and focus on sustainable development to our interactions with all our stakeholders, including our customers, our employees, our vendor partners, our stockholders, the community in which we operate and the environment. Examples of such activities include the following.
For employees, we expanded our benefits to include enhanced mental health coverage, backup childcare, caregiver leave and paid time off for part-time employees. We reinforced our commitment to diversity and inclusion by signing the CEO Action for Diversity & Inclusion Pledge and the Parity Pledge.
We are committed to supporting teens from underserved communities by building brighter futures through technology training and mentorship. The primary way we do this is through our network of Best Buy Teen Tech Centers, which help prepare teens for careers in tech by providing them with opportunities to engage with the latest technology, learn core professional skills and connect with Best Buy employee mentors. We currently have 25 Teen Tech Centers and plan to reach 60 in total over the next few years.
We continuously look for solutions that minimize carbon emissions in our operations and have achieved a significant carbon reduction toward our goal of 60 percent by 2020 (over a 2009 baseline), from both operational reductions and renewable sourcing. We also help our customers live more sustainably by assorting ENERGY STAR® certified products, which help them
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save money on utility bills. In addition, we collected more than 180 million pounds of consumer electronics and appliances for recycling in fiscal 2019.
Please refer to our Best Buy Corporate Responsibility & Sustainability Report on our website for further information on environmental and social performance.
Number of Employees
At the end of fiscal 2019, we employed nearly 125,000 full-time, part-time and seasonal employees in the U.S., Canada and Mexico. We offer our employees a wide array of company-paid benefits that vary within our company due to customary local practices and statutory requirements, which we believe are competitive locally and in the aggregate relative to others in our industry.
Available Information
We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). We make available, free of charge on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. These documents are posted on our website at www.investors.bestbuy.com. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC at www.sec.gov.
We also make available, free of charge on our website, our Amended and Restated Articles of Incorporation, Amended and Restated By-laws, the Corporate Governance Principles of our Board of Directors ("Board") and our Code of Business Ethics adopted by our Board, as well as the charters of all of our Board's committees: Audit Committee; Compensation and Human Resources Committee; Finance and Investment Policy Committee; and Nominating, Corporate Governance and Public Policy Committee. These documents are posted on our website at www.investors.bestbuy.com.
Copies of any of the above-referenced documents will also be made available, free of charge, upon written request to Best Buy Co., Inc. Investor Relations Department at 7601 Penn Avenue South, Richfield, MN 55423-3645.
Item 1A. Risk Factors.
Described below are certain risks that we believe apply to our business and the industry in which we operate. Each of the following risk factors should carefully be considered in conjunction with other information provided in this Annual Report on Form 10-K and in our other public disclosures. The risks described below highlight potential events, trends or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity or access to sources of financing and, consequently, the market value of our common stock and debt instruments. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. The risks described below are not an exhaustive list of all the risks we face. There may be others that we have not identified or that we have deemed to be immaterial. All forward-looking statements made by us or on our behalf are qualified by the risks described below.
We face strong competition from multi-channel retailers, e-commerce businesses, technology service providers, traditional store-based retailers, vendors and mobile network carriers, which directly affects our revenue and profitability.
While we constantly strive to offer consumers the best value, the retail sector is highly competitive. Price is of great importance to most customers, and price transparency and comparability continues to increase, particularly as a result of digital technology. The ability of consumers to compare prices on a real-time basis puts additional pressure on us to maintain competitive prices. We compete with many other local, regional, national and international retailers and technology service providers, as well as some of our vendors and mobile network carriers that market their products directly to consumers. Competition may also result from new entrants into the markets we serve, offering products and/or services that compete with us.
The retail sector continues to experience a trend towards an increase in sales initiated online and using mobile applications, and some online-only businesses have lower operating costs. Online and multi-channel retailers continue to focus on delivery services, with customers increasingly seeking faster, guaranteed delivery times and low-price or free shipping. Our ability to be
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competitive on delivery times and delivery costs depends on many factors, and our failure to successfully manage these factors and offer competitive delivery options could negatively impact the demand for our products and our profit margins. Because our business strategy is based on offering superior levels of customer service and a full range of services to complement the products we offer, our cost structure might be higher than some of our competitors, and this, in conjunction with price transparency, could put pressure on our margins.
As these and related competitive factors evolve, we may experience material adverse pressure on our revenue and profitability.
Our strategy to expand into new products, services and technologies brings new business, financial and regulatory risks.
As we introduce new products and services, using new technologies and applications, we may have limited experience in these newer market segments and our customers may not like our new value propositions. These offerings may present new and difficult technology challenges, and we may be subject to claims if customers of these offerings experience service disruptions, failures or other issues. For example, as our value proposition evolves to support the healthcare industry with technology, we may be subject to privacy and information security rules, such as the Health Insurance Portability and Accountability Act, and/or subject to increased potential liability risk.
This expanded risk increases the complexity of our business and places significant responsibility on our management, employees, operations, systems, technical expertise, financial resources, and internal financial and regulatory control and reporting functions. In addition, new initiatives we test through trials and pilots may not scale or grow effectively or as we expected, which could limit our growth and negatively affect our operating results. They may also involve significant laws or regulations that are beyond our current expertise.
As a part of our strategy to enrich lives through technology, we are entering the health area, growing organically as well as inorganically. In fiscal 2019 we acquired GreatCall, which provides emergency concierge and monitoring services to subscribed customers. Such services might expose us to liability risk resulting from failures in the fulfillment of our services. In addition, the services and systems used could expose us to customer data information security as well as business or system interruption risks. These and other related issues could have a material adverse impact on our financial results.
Our focus on services as a strategic priority exposes us to certain risks that could have a material adverse impact on our revenue and profitability as well as our reputation.
We offer a full range of services that complement our product offerings, including consultation, delivery, design, installation, memberships, protection plans, repair, set-up, technical support, and health, safety and caregiving monitoring and support. Designing, marketing and executing these services is subject to incremental risks. These risks include, for example:
• | increased labor expense to fulfill our customer promises, which may be higher than the related revenue; |
• | increased risk of errors or omissions in the fulfillment of services; |
• | unpredictable extended warranty failure rates and related expenses; |
• | employees in transit using company vehicles to visit customer locations and employees being present in customer homes, which may increase our scope of liability; |
• | the potential for increased scope of liability relating to managed services offerings; |
• | employees having access to customer devices, including the information held on those devices, which may increase our responsibility for the security of those devices and the data they hold; |
• | the engagement of third parties to assist with some aspects of construction and installation, and the potential responsibility for the actions they withtake, and for compliance with building codes and related regulations; and |
• | increased risk of non-compliance with new laws and regulations applicable to these services. |
Our reliance on key vendors and mobile network carriers subjects us to various risks and uncertainties which could affect our revenue and profitability.
We source the products we sell from a wide variety of domestic and international vendors. In fiscal 2019, our 20 largest suppliers accounted for approximately 64% of the merchandise we purchased (70% in fiscal 2018), with five suppliers - Apple, Samsung, Hewlett-Packard, Sony and LG - representing approximately 51% of total merchandise purchased (56% in fiscal 2018). We generally do not have long-term written contracts with our vendors that would require them to continue supplying us with merchandise. Our profitability depends on us securing acceptable terms with our vendors for, among other things, the price of merchandise we purchase from them, funding for various forms of promotional programs, payment terms, allocations of merchandise, development of compelling assortments of products, operation of vendor-focused shopping experiences within our stores and terms covering returns and factory warranties. While we believe we offer capabilities that these vendors value
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and depend upon, to varying degrees, our vendors may be able to leverage their competitive advantages - for example, their financial strength, the strength of their brands with customers, their own stores or online channels or their relationships with other retailers - to our commercial disadvantage. The potential adverse impact of these factors can be amplified by price transparency (which can limit our flexibility to modify selling prices) and a highly competitive retail environment. Generally, our ability to negotiate favorable terms with our vendors is more difficult with vendors where our purchases represent a smaller proportion of their total revenues and/or when there is less competition. In addition, vendors may decide to cease allowing us to offer certain categories, focus their marketing efforts on alternative channels or make unfavorable changes to our commissions or other terms.
We are also dependent on a relatively small number of mobile carriers to allow us to offer mobile devices with carrier connections. The competitive strategies utilized by mobile network carriers can have a material impact on our business, especially with ongoing consolidation in the mobile industry. For example, if carriers change the structure of customer contracts, customer upgrade terms, customer qualification requirements, monthly fee plans, cancellation fees or service levels, the volume of upgrades and new contracts we sign with customers may be reduced, adversely affecting our revenue and profitability. In addition, our carriers also may serve customers through their own stores, websites, mobile applications and call centers or through other competing retail channels.
If we fail to attract, retain and engage appropriately qualified employees, including employees in key positions, our operations and profitability may be harmed. Changes in market compensation rates may adversely affect our profitability.
Our performance is highly dependent on attracting, retaining and engaging appropriately qualified employees in our stores, service centers, distribution centers, field and corporate offices. Our strategy of offering high-quality services and assistance for our customers requires a highly trained and engaged workforce. The turnover rate in the retail sector is relatively high, and there is an ongoing need to recruit and train new employees. Factors that affect our ability to maintain sufficient numbers of qualified employees include employee morale, our reputation, unemployment rates, competition from other employers, availability of qualified personnel and our ability to offer appropriate compensation and benefit packages. Failure to recruit or retain qualified employees in the future may impair our efficiency and effectiveness and our ability to pursue growth opportunities. In addition, a significant amount of turnover of our executive team or other employees in key positions with specific knowledge relating to us, our operations and our industry, may negatively impact our operations.
We operate in a competitive labor market and there is a risk that market increases in compensation could have a material adverse effect on our profitability. Market increases to field employee hourly wage rates, along with our ability to implement corresponding adjustments within our labor model and wage rates, could have a material impact to the profitability of our business.
We are subject to certain statutory, regulatory and legal developments which could have a material adverse impact on our business.
Our statutory, regulatory and legal environments expose us to complex compliance and litigation risks that could have a material adverse effect on our operations. Some of the most significant compliance and litigation risks we face are:
• | the difficulty of complying with sometimes conflicting statutes and regulations in local, national or international jurisdictions; |
• | the potential for unexpected costs related to compliance with new or existing environmental legislation or international agreements affecting energy, carbon emissions, electronics recycling and water or product materials; |
• | ensuring compliance with applicable product compliance laws and regulations with respect to both the products we sell and contract to manufacture, including laws and regulations related to product safety and product transport; |
• | the financial, operational and business impact of new regulations governing data privacy and security, such as the California Consumer Privacy Act ("CCPA"). When it goes into effect on January 1, 2020, the regulation will provide new consumer data privacy rights for California residents and will require companies to provide new disclosures to California consumers, allowing them to opt-out of certain uses of their personal information. However, legislators have stated that they intend to propose amendments to the CCPA, and it remains unclear what, if any, modifications will be made to the CCPA or how it will be interpreted. We cannot yet predict the impact of the CCPA on our business or operations, but it may require us to modify our data processing practices and policies and incur incremental expenses in an effort to comply. |
• | the impact of other new or changing statutes and regulations, including, but not limited to, financial reform; National Labor Relations Board rule changes; healthcare reform; corporate governance matters; escheatment rules; rules governing pricing, content, distribution, copyright, mobile communications, electronic device certification or payment |
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services; and/or other as yet unknown legislation that could affect how we operate and execute our strategies as well as alter our expense structure;
• | the impact of the potential implementation of more restrictive trade policies, higher tariffs or the renegotiation of existing trade agreements in the U.S. or countries where we sell our products and services or procure products; |
• | the impact of potential changes in U.S. or other countries' tax laws and regulations or evolving interpretations of existing laws, including additional guidance and legislation related to the Tax Cuts and Jobs Act; and |
• | the impact of litigation trends, including class action lawsuits involving consumers and shareholders, and labor and employment matters. |
Regulatory activity focused on the retail sector has grown in recent years, increasing the risk of fines and additional operating costs associated with compliance. Additionally, defending against lawsuits and other proceedings may involve significant expense and divert management's attention and resources from other matters.
Macroeconomic pressures in the markets in which we operate could adversely affect consumer spending and our financial results.
To varying degrees, our products and services are sensitive to changes in macroeconomic conditions that impact consumer spending. As a result, consumers may be affected in many different ways, including, for example:
• | whether or not they make a purchase; |
• | their choice of brand, model or price-point; |
• | how frequently they upgrade or replace their devices; and |
• | their appetite for complementary services (for example, protection plans). |
Real GDP growth, consumer confidence, inflation, employment levels, oil prices, interest rates, tax rates, availability of consumer financing, housing market conditions, foreign currency exchange rate fluctuations, costs for items such as fuel and food and other macroeconomic trends can adversely affect consumer demand for the products and services that we offer. Geopolitical issues around the world and how our markets are positioned might also impact the macroeconomic conditions and could have a material adverse impact on our financial results.
Failure to effectively manage our costs could have a material adverse effect on our profitability.
As discussed above, our revenues are susceptible to volatility from various sources, which can lead to periods of flat or declining revenues. However, some of our operating costs are fixed and/or are subject to multi-year contracts. Some elements of our costs may be higher than our competitors' because of, for example, our extended retail footprint and structure, our differential service offerings or our levels of customer service. Accordingly, our ongoing drive to reduce costs and increase efficiency represents a strategic imperative. Failure to successfully manage our costs could have a material adverse impact on our profitability and curtail our ability to fund our growth or other critical initiatives.
We rely heavily on our information technology systems for our key business processes. Any failure or interruption in these systems could have a material adverse impact on our business.
The effective and efficient operation of our business is dependent on our information technology systems and those of our information technology vendors. We rely heavily on these information technology systems to manage all key aspects of our business, including demand forecasting, purchasing, supply chain management, point-of-sale processing, services fulfillment, staff planning and deployment, financial management, reporting and forecasting and safeguarding critical and sensitive information.
Our information technology systems and those of our partners are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, worms, other malicious computer programs, denial-of-service attacks, security breaches (through cyber-attacks and other malicious actions), catastrophic events (such as fires, tornadoes, earthquakes and hurricanes) and usage errors by our employees. The failure or interruption of these information systems, data centers or their backup systems could significantly disrupt our business and cause higher costs and lost revenues and could threaten our ability to remain in operation.
We also utilize complex information technology platforms to operate our websites and mobile applications. If we fail to secure these systems against attacks or fail to effectively upgrade and maintain our hardware, software, network and system infrastructure and improve the efficiency and resiliency of our systems, it could cause system interruptions and delays. Disruptions to these services, such as those caused by unforeseen traffic levels, malicious attacks, other technical difficulties or
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events outside of our control, such as natural disasters, power or telecommunications failures or loss of critical data, could prevent us from accepting and fulfilling customer orders for products or services, which could cause us to forgo material revenues, incur material costs and adversely affect our reputation.
Failure to prevent or effectively respond to a breach of the privacy or security of our customer, employee, vendor or company information could expose us to substantial costs and reputational damage, as well as litigation and enforcement actions.
Our business involves the collection, use and storage of customer information, including payment card information, as well as confidential information regarding our employees, vendors and other company information. We also share confidential information with suppliers and other third parties, as well as use third-party technology and systems which transmit customer information for a variety of activities. While we take significant steps to protect this information, external criminal activity, such as cyber-attacks, lapses in our controls or the intentional or negligent actions of employees, business associates or third parties, may undermine our privacy and security measures and unauthorized parties may obtain access to our data systems and misappropriate employee, customer and other confidential data. Furthermore, because the methods used to obtain unauthorized access change frequently and may not be immediately detected, we may be unable to anticipate such attacks or promptly and effectively respond to them. Any compromise of our customer information or other confidential information could have a material adverse effect on our reputation or our relationships with our customers and partners, which may in turn have a negative impact on our revenue and may expose us to material costs, penalties and claims.
Sensitive customer data may also be present on customer-owned devices entrusted to us for service and repair. Vulnerable code on products sold or serviced, including our exclusive brands, may also result in a compromise of customer privacy or security. Our efforts to protect against such compromises and ensure appropriate handling of customer data on devices we manufacture, sell and service may not be effective, resulting in potential liability and damage to our customer relationships.
Increasing costs associated with information security and customer data privacy, such as increased investment in technology and qualified staff, costs of compliance, costs resulting from fraud, and costs of cyber and privacy insurance, could cause our business and results of operations to suffer materially. Additionally, new laws, like the General Data Protection Regulation and CCPA, are expanding company obligations to protect the privacy of customer data, requiring additional resources and creating incremental risk of potential breach. In addition, any compromise of our data security may materially increase the costs we incur to protect against such breaches and could subject us to additional legal risk.
Failure to effectively manage strategic ventures, alliances or acquisitions could have a negative impact on our business.
We may decide to enter into new joint ventures, partnerships, alliances or acquisitions with third parties (collectively, "new ventures"). Assessing the viability of new ventures is typically subject to significant uncertainty and the success of such new ventures can be adversely affected by many factors, including, for example:
• | different and incremental business risks of the new venture; |
• | failure to motivate and retain key employees of the new venture; |
• | uncertainty of forecasting financial performance; |
• | failure to integrate aspects of the new venture into our existing business, such as new product or service offerings or information technology systems; |
• | failure to maintain appropriate internal control over financial reporting; |
• | failure to generate expected synergies, such as cost reductions; |
• | unforeseen changes in the business environment of the new venture; |
• | disputes or strategic differences with other third-party participants in the new venture; and |
• | adverse impacts on relationships with vendors and other key partners of our existing business or the new venture. |
If new ventures are unsuccessful, our liquidity and profitability could be materially adversely affected, and we may be required to recognize material impairments to goodwill and other assets acquired. New ventures may also divert our financial resources and management's attention from other important areas of our business.
We are highly dependent on the cash flows and net earnings we generate during our fourth fiscal quarter, which includes the majority of the holiday shopping season.
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 the U.S., Canada and Mexico. In addition, the holiday shopping season also incorporates many other unpredictable factors, such as the level of competitive promotional activity and customer buying patterns, which makes it
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difficult to forecast and react to these factors quickly. Unexpected events or developments, such as natural or man-made disasters, changes in consumer demand, economic factors, product sourcing issues, cyber-attacks, failure or interruption of management information systems or disruptions in services or systems provided or managed by third-party vendors could significantly disrupt our operations. As a result of these factors, there is a risk that our fourth quarter and annual results could be adversely affected.
Many of the products we sell are highly susceptible to technological advancement, product life cycle fluctuations and changes in consumer preferences.
We operate in a highly and increasingly dynamic industry sector fueled by constant technology innovation and disruption. This manifests itself in a variety of ways: emergence of new products and categories, rapid maturation of categories, cannibalization of categories, declining price points and product replacement and upgrade cycles.
This rapid pace of change can be hard to predict and manage, and there is no guarantee we can effectively do this all the time. If we fail to interpret, predict and react to these changes in a timely and effective manner, the consequences can include: failure to offer the products and services that our customers want; having excess inventory, which may require heavy discounting or liquidation; inability to secure adequate access to brands or products for which consumer demand exceeds supply; delays in adapting our merchandising, marketing or supply chain capabilities to accommodate changes in product trends; and damage to our brand and reputation.
These and other similar factors could have a material adverse impact on our revenue and profitability.
Economic, regulatory and other developments could adversely affect our ability to offer attractive promotional financing to our customers and adversely affect the profits we generate from these programs.
We offer promotional financing and credit cards issued by third-party banks that manage and directly extend credit to our customers. Customers choosing promotional financing can receive extended payment terms and low- or no-interest financing on qualifying purchases. We believe our financing programs generate incremental revenue from customers who prefer the financing terms to other available forms of payment or otherwise need access to financing in order to make purchases. Approximately 25% of our fiscal 2019 revenue was transacted using one of the company's branded cards. In addition, we earn profit-share income and share in any losses from certain of our banking partners based on the performance of the programs. The income or loss we earn in this regard is subject to numerous factors, including the volume and value of transactions, the terms of promotional financing offers, bad debt rates, interest rates, the regulatory and competitive environment and expenses of operating the program. Adverse changes to any of these factors could impair our ability to offer these programs to customers and reduce customer purchases and our ability to earn income from sharing in the profits or losses of the programs.
Interruptions and other factors affecting our supply chain, including in-bound deliveries from our vendors, may adversely affect our business.
Our supply chain is a critical part of our operations, particularly in light of industry trends and initiatives, such as ship-from-store and the emphasis on fast delivery when purchasing online. We depend on our vendors' abilities to deliver products to us at the right location, right time and in the right quantities. We also depend on third parties for the operation of certain aspects of our supply chain network. The factors that can adversely affect these aspects of our operations include:
• | interruptions to our delivery capabilities; |
• | failure of third parties to meet our standards or commitments; |
• | disruptions to our systems and the need to implement new systems; |
• | limitations in capacity; |
• | consolidation or business failures in the transportation and distribution sectors; |
• | labor strikes or slow-downs impacting ports or any other aspect of our supply chain; |
• | damages or other loss to products; and |
• | increasing transportation costs. |
It is important that we maintain optimal levels of inventory in each store and distribution center and respond rapidly to shifting demands. Any disruption to, or inefficiency in, our supply chain network could damage our revenue and profitability. The risks associated with our dependence on third parties are greater for small parcel home deliveries because of the relatively small number of carriers with the scope and capacity required by our business. The continuing growth of online purchases for delivery increases our exposure to these risks. If we fail to manage these risks effectively, we could experience a material adverse impact on our reputation, revenue and profitability.
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Catastrophic events could adversely affect our operating results.
The risk or actual occurrence of various catastrophic events could have a material adverse effect on our financial performance. Such events may be caused by, for example:
• | natural disasters or extreme weather events; |
• | diseases or epidemics that may affect our employees, customers or partners; |
• | floods, fires or other catastrophes affecting our properties; or |
• | terrorism, civil unrest or other conflicts. |
In recent years, we have observed an increase in the number and severity of certain events in many of our markets. Such events can adversely affect our work force and prevent employees and customers from reaching our stores and properties and can disrupt or disable portions of our supply chain and distribution network. They can also affect our information technology systems, resulting in disruption to various aspects of our operations, including our ability to transact with customers and fulfill orders. As a consequence of these or other catastrophic events, we may endure interruption to our operations or losses of property, equipment or inventory, which would adversely affect our revenue and profitability.
Demand for the products and services we sell could decline if we fail to maintain positive brand perception and recognition.
We operate a portfolio of brands with a commitment to customer service and innovation. We believe that recognition and the reputation of our company and our brands are key to our success. Operational factors such as, for example, failure to deliver high quality services, uncompetitive pricing, failure to meet delivery promises or business interruptions could damage our reputation. External factors, such as negative public remarks or accusations, could also be damaging. The ubiquity of social media means that customer feedback and other information about our company are shared with a broad audience in a manner that is easily accessible and rapidly disseminated. Damage to the perception or reputation of our brands could result in, among other things, declines in revenues and customer loyalty, decreases in gift card and service plan sales, lower employee retention and productivity and vendor relationship issues, all of which could materially adversely affect our revenue and profitability.
Product safety and quality concerns could have a material adverse impact on our revenue and profitability.
If the products we sell fail to meet applicable safety standards or our customers' expectations regarding safety and quality, we could be exposed to increased legal risk and our reputation may be damaged. Failure to take appropriate actions in relation to product recalls could lead to breaches of laws and regulations and leave us susceptible to government enforcement actions or private litigation. Recalls of products, particularly when combined with lack of available alternatives or our difficulty in sourcing sufficient volumes of replacement products, could also have a material adverse impact on our revenue and profitability.
Changes to labor or employment laws or regulations could have an adverse impact on our costs and impair the viability of our operating model.
As an employer of nearly 125,000 people in a large number of different jurisdictions, we are subject to risks related to employment laws and regulations including, for example:
• | the organization of unions and related regulations that affect the nature of labor relations, changes to which the National Labor Relations Board continually considers; |
• | laws that impact the relationship between the company and independent contractors; and |
• | laws that impact minimum wage, sick time, paid leave and scheduling requirements could directly or indirectly increase our payroll costs and/or impact the level of service we are able to provide. |
Changes to laws and regulations such as these could adversely impact our reputation, our ability to continue operations and our profitability.
In addition, although as of February 2, 2019, none of our U.S. operations had employees represented by labor unions or working under collective bargaining agreements, any future organizing activity could adversely affect our costs and our results of operations.
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Failure to effectively manage our real estate portfolio may negatively impact our operating results.
Effective management of our real estate portfolio is critical to our multi-channel strategy. Failure to identify and secure suitable locations for our stores and other facilities could impair our ability to compete successfully and our profitability. Most of our properties are leased, of which some are subject to long-term leases. As such, it is essential that we effectively evaluate a range of factors that may influence the success of our long-term real estate strategy. Such factors include, for example:
• | changing patterns of customer consumption and behavior, particularly in light of an evolving multi-channel environment; |
• | the location and appropriate number of stores in our portfolio; |
• | the interior layout, format and size of our stores; |
• | the products and services we offer at each store; |
• | the local competitive positioning, trade area demographics and economic factors for each of our stores; |
• | the primary term lease commitment and long-term lease option coverage for each store; |
• | the occupancy cost of our stores relative to market rents; and |
• | our supply chain service location network strategy. |
If we fail to effectively evaluate these factors or negotiate appropriate terms or if unforeseen changes arise, the consequences could include, for example:
• | closing stores and abandoning the related assets, while retaining the financial commitments of the leases; |
• | incurring significant costs to remodel or transform our stores; |
• | operating stores, supply chain or service locations that no longer meet the needs of our business; and |
• | bearing excessive lease expenses. |
These consequences could have a material adverse impact on our profitability, cash flows and liquidity.
For leased property, the financial impact of exiting a location can vary greatly depending on, among other factors, the terms of the lease, the condition of the local real estate market, demand for the specific property, our relationship with the landlord and the availability of potential sub-lease tenants. It is difficult for us to influence some of these factors and the costs of exiting a property can be significant. In addition to rent, we are still responsible for taxes, insurance and common area maintenance charges for vacant properties until the lease commitment expires or is terminated. Similarly, when we enter into a contract with a tenant to sub-lease property, we usually retain our obligations as the master lessee. This leaves us at risk for any remaining liability in the event of default by the sub-lease tenant.
Constraints in the capital markets or our vendor credit terms may have a material adverse impact on our liquidity.
We need sufficient sources of liquidity to fund our working capital requirements, service our outstanding indebtedness and finance business opportunities. Without sufficient liquidity, we could be forced to curtail our operations or we may not be able to pursue business opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash and liquid investments, credit facilities, other debt arrangements and trade payables. Our liquidity could be materially adversely impacted if our vendors reduce payment terms and/or impose tighter credit limits. If our sources of liquidity do not satisfy our requirements, we may need to seek additional financing. The future availability of financing will depend on a variety of factors, such as economic and market conditions, the regulatory environment for banks and other financial institutions, the availability of credit, our credit ratings and our reputation with potential lenders. These factors could have a material adverse effect on our costs of borrowing, our ability to pursue business opportunities and threaten our ability to meet our obligations as they become due.
Changes in our credit ratings may limit our access to capital and materially increase our borrowing costs.
Any future downgrades to our credit ratings and outlook could negatively impact the perception of our credit risk and thus our access to capital markets, borrowing costs, vendor terms and lease terms. Our credit ratings are based upon information furnished by us or obtained by a rating agency from its own sources and are subject to revision, suspension or withdrawal by one or more rating agencies at any time. Rating agencies may change the ratings assigned to us due to developments that are beyond our control, including the introduction of new rating practices and methodologies.
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We utilize third-party vendors for certain aspects of our operations, and any material disruption in our relationship or their services might have an impact to our business.
We engage key third-party business partners to support various functions of our business, including but not limited to, information technology, web hosting and cloud-based services, human resource operations, customer loyalty programs, promotional financing and customer loyalty credit cards, gift cards, customer warranty, delivery and installation, technical support, transportation and insurance programs. Any material disruption in our relationship with key third-party business partners or any disruption in the services or systems provided or managed by third parties could impact our revenues and cost structure and hinder our operations, particularly if a disruption occurs during peak revenue periods.
Our exclusive brands products are subject to several additional product, supply chain and legal risks that could affect our operating results.
Sales of our exclusive brands products, which include Dynex, Insignia, Modal, Platinum and Rocketfish branded products, represent an important component of our product offerings and our revenue and profitability. Most of these products are manufactured by contract manufacturers based in southeast Asia. This arrangement exposes us to the following additional potential risks, which could have a material adverse effect on our operating results:
• | we have greater exposure and responsibility to consumers for warranty replacements and repairs as a result of exclusive brand product defects, and our recourse to contract manufacturers for such warranty liabilities may be limited in foreign jurisdictions; |
• | we may be subject to regulatory compliance and/or product liability claims relating to personal injury, death or property damage caused by exclusive brand products, some of which may require us to take significant actions, such as product recalls; |
• | we may experience disruptions in manufacturing or logistics due to inconsistent and unanticipated order patterns, our inability to develop long-term relationships with key manufacturers or unforeseen natural disasters; |
• | we may not be able to locate manufacturers that meet our internal standards, whether for new exclusive brand products or for migration of the manufacturing of products from an existing manufacturer; |
• | we may be subject to a greater risk of inventory obsolescence as we do not generally have return to vendor rights; |
• | we are subject to developing and often-changing labor and environmental laws for the manufacture of products in foreign countries, and we may be unable to conform to new rules or interpretations in a timely manner; |
• | we may be subject to claims by technology or other intellectual property owners if we inadvertently infringe upon their patents or other intellectual property rights, or if we fail to pay royalties owed on our exclusive brand products; |
• | our operations may be disrupted by trade disputes or excessive tariffs and we may not be able to source alternatives quickly enough to avoid interruptions in product supply; |
• | we may be unable to obtain or adequately protect patents and other intellectual property rights on our exclusive brand products or manufacturing processes; and |
• | regulations regarding disclosure of efforts to identify the country of origin of “conflict minerals” in certain portions of our supply chain could increase the cost of doing business and, depending on the findings of our country of origin inquiry, could have an adverse effect on our reputation. |
Maintaining consistent quality, availability and competitive pricing of our exclusive brand products helps us build and maintain customer loyalty, generate revenue and achieve acceptable margins. Failure to maintain these factors could have a significant adverse impact on the demand for exclusive brand products and the profits we are able to generate from them.
We are subject to risks associated with vendors that source products outside of the U.S.
Our ability to find qualified vendors who can supply products in a timely and efficient manner that meet our internal standards of quality and safety can be difficult, especially with respect to goods sourced from outside the U.S. Risks such as political or economic instability, cross-border trade restrictions or tariffs, merchandise quality issues, product safety concerns, work stoppages, port delays, foreign currency exchange rate fluctuations, transportation capacity and costs, inflation, civil unrest, natural disasters, outbreaks of pandemics and other factors relating to foreign trade are beyond our control. Vendors may also fail to invest adequately in design, production or distribution facilities, and may reduce their customer incentives, advertising and promotional activities or change their pricing policies.
These and other related issues could have a material adverse impact on our financial results.
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Our international activities are subject to many of the same risks as described above, as well as to risks associated with the legislative, judicial, regulatory, political, economic and cultural factors specific to the countries or regions in which we operate.
We operate retail locations in Canada and Mexico. In addition, most of our exclusive brand products are manufactured by contract manufacturers based in southeast Asia. We also have wholly owned legal entities registered in various other foreign countries, including Barbados, Bermuda, China, Hong Kong, Luxembourg, the Republic of Mauritius, Turks and Caicos and the U.K. During fiscal 2019, our International segment's operations generated 8% of our revenue. In general, the risk factors identified above also have relevance to our International operations. In addition, our International operations also expose us to other risks, including those related to, for example:
• | political conditions and geopolitical events, including war and terrorism; |
• | economic conditions, including monetary and fiscal policies and tax rules, as well as foreign exchange rate risk; |
• | rules governing international trade and potential changes to trade policies or trade agreements and ownership of foreign entities; |
• | cultural differences that we may be unable to anticipate or respond to appropriately; |
• | different rules or practices regarding employee relations, including the existence of works councils or unions; |
• | difficulties in enforcing intellectual property rights; and |
• | difficulties encountered in exerting appropriate management oversight to operations in remote locations. |
These factors could significantly disrupt our International operations and have a material adverse effect on our revenue and profitability and could lead us to incur material impairments and other exit costs.
Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in a decline in our stock price.
We may provide public guidance on our expected financial results or other forward-looking information for future periods. Although we believe that this guidance provides investors and analysts with a better understanding of management's expectations for the future and is useful to our existing and potential shareholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not be in line with guidance we have provided. We may not be able to accurately forecast our growth rate and profit margins. We base our expense levels and investment plans on sales estimates. A significant portion of our expenses and investments are fixed and we may not be able to adjust our spending quickly enough if our sales are less than expected. Our revenue growth may not be sustainable and our percentage growth rates may decrease. Our revenue and operating profit growth depends on the continued growth of demand for the products and services offered by us, and our business is affected by general economic and business conditions worldwide. If our financial results for a particular period do not meet our guidance or the expectations of market participants, or if we reduce our guidance for future periods, the market price of our common stock may decline.
Item 1B. Unresolved Staff Comments.
Not applicable.
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Item 2. Properties.
Stores, Distribution Centers, Service Centers and Corporate Facilities
Domestic Segment
The following table summarizes the location and total square footage of our Domestic segment stores and outlet centers at the end of fiscal 2019:
U.S. Best Buy Stores | U.S. Best Buy Outlet Centers | Pacific Sales Stores | |||||||
Alabama | 12 | — | — | ||||||
Alaska | 2 | — | — | ||||||
Arizona | 22 | — | — | ||||||
Arkansas | 8 | — | — | ||||||
California | 116 | 2 | 21 | ||||||
Colorado | 21 | — | — | ||||||
Connecticut | 12 | — | — | ||||||
Delaware | 3 | — | — | ||||||
District of Columbia | 1 | — | — | ||||||
Florida | 64 | — | — | ||||||
Georgia | 28 | — | — | ||||||
Hawaii | 2 | — | — | ||||||
Idaho | 5 | — | — | ||||||
Illinois | 43 | 1 | — | ||||||
Indiana | 23 | — | — | ||||||
Iowa | 11 | — | — | ||||||
Kansas | 8 | — | — | ||||||
Kentucky | 9 | — | — | ||||||
Louisiana | 16 | — | — | ||||||
Maine | 3 | — | — | ||||||
Maryland | 21 | — | — | ||||||
Massachusetts | 23 | — | — | ||||||
Michigan | 32 | — | — | ||||||
Minnesota | 19 | — | — | ||||||
Mississippi | 8 | — | — | ||||||
Missouri | 18 | — | — | ||||||
Montana | 3 | — | — | ||||||
Nebraska | 5 | — | — | ||||||
Nevada | 10 | — | — | ||||||
New Hampshire | 6 | — | — | ||||||
New Jersey | 25 | — | — | ||||||
New Mexico | 5 | — | — | ||||||
New York | 52 | — | — | ||||||
North Carolina | 32 | 1 | — | ||||||
North Dakota | 4 | — | — | ||||||
Ohio | 35 | — | — | ||||||
Oklahoma | 13 | — | — | ||||||
Oregon | 11 | — | — | ||||||
Pennsylvania | 36 | — | — | ||||||
Puerto Rico | 3 | — | — | ||||||
Rhode Island | 1 | — | — | ||||||
South Carolina | 13 | — | — | ||||||
South Dakota | 2 | — | — | ||||||
Tennessee | 16 | — | — | ||||||
Texas | 103 | 2 | — | ||||||
Utah | 11 | — | — | ||||||
Vermont | 1 | — | — | ||||||
Virginia | 34 | — | — | ||||||
Washington | 19 | 1 | — | ||||||
West Virginia | 5 | — | — | ||||||
Wisconsin | 21 | 1 | — | ||||||
Wyoming | 1 | — | — | ||||||
Total Domestic store count | 997 | 8 | 21 | ||||||
Square footage (in thousands) | 38,658 | 271 | 571 | ||||||
Average square feet per store (in thousands) | 39 | 34 | 27 | ||||||
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The following table summarizes the ownership status of our Domestic segment stores and outlet centers at the end of fiscal 2019:
U.S. Best Buy Stores | U.S. Best Buy Outlet Centers | Pacific Sales Stores | |||||||
Owned store locations | 25 | — | — | ||||||
Owned buildings and leased land | 35 | — | — | ||||||
Leased store locations | 937 | 8 | 21 | ||||||
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers, service centers, care centers, corporate and field offices of our Domestic segment at the end of fiscal 2019:
Square Footage (in thousands) | ||||||||
Location | Leased | Owned | ||||||
Distribution centers | 23 locations in 17 states | 9,503 | 3,168 | |||||
Geek Squad service center(1) | Louisville, Kentucky | 237 | — | |||||
Principal corporate headquarters(2) | Richfield, Minnesota | — | 1,452 | |||||
Territory field offices | 11 locations throughout the U.S. | 87 | — | |||||
GreatCall care centers and corporate office space | 3 locations in 2 states | 136 | — | |||||
Pacific Sales corporate office space | Torrance, California | 16 | — | |||||
(1) | The leased space utilized by our Geek Squad operations is used primarily to service notebook and desktop computers. |
(2) | Our principal corporate headquarters consists of four interconnected buildings. Certain vendors who provide us with a variety of corporate services occupy a portion of our principal corporate headquarters. We also sublease a portion of the office space to unaffiliated third parties. |
International Segment
The following tables summarize the location and total square footage of our International segment stores at the end of fiscal 2019:
Best Buy Stores | Best Buy Mobile Stores | Best Buy Express Stores | ||||||
Canada | ||||||||
Alberta | 18 | 8 | — | |||||
British Columbia | 22 | 8 | — | |||||
Manitoba | 4 | — | — | |||||
New Brunswick | 3 | — | — | |||||
Newfoundland | 1 | — | — | |||||
Nova Scotia | 3 | 1 | — | |||||
Ontario | 54 | 23 | — | |||||
Prince Edward Island | 1 | — | — | |||||
Quebec | 22 | 5 | — | |||||
Saskatchewan | 4 | — | — | |||||
Total Canada store count | 132 | 45 | — | |||||
Square footage (in thousands) | 3,743 | 42 | — | |||||
Average square feet per store (in thousands) | 28 | 1 | — | |||||
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Best Buy Stores | Best Buy Mobile Stores | Best Buy Express Stores | ||||||
Mexico | ||||||||
Chihuahua | 1 | — | — | |||||
Ciudad de México | 8 | — | 4 | |||||
Coahuila | — | — | 1 | |||||
Estado de México | 3 | — | — | |||||
Guanajuato | 1 | — | — | |||||
Jalisco | 4 | — | — | |||||
Michoacan | 1 | — | — | |||||
Morelos | 1 | — | — | |||||
Nuevo León | 3 | — | 1 | |||||
Paseo Interlomas | 1 | — | — | |||||
Puebla | 1 | — | — | |||||
Queretaro | 1 | — | — | |||||
Quintana Roo | 1 | — | — | |||||
San Luis Potosí | 1 | — | — | |||||
Veracruz | 1 | — | — | |||||
Yucatan | 1 | — | — | |||||
Total Mexico store count | 29 | — | 6 | |||||
Square footage (in thousands) | 810 | — | 12 | |||||
Average square feet per store (in thousands) | 28 | — | 2 | |||||
Total International store count | 161 | 45 | 6 | |||||
The following table summarizes the ownership status of our International segment store locations at the end of fiscal 2019:
Canada | Mexico | ||||||||||
Best Buy Stores | Best Buy Mobile Stores | Best Buy Stores | Best Buy Express Stores | ||||||||
Owned store locations | 3 | — | — | — | |||||||
Leased store locations | 129 | 45 | 29 | 6 | |||||||
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers and corporate offices of our International segment at the end of fiscal 2019:
Square Footage (in thousands) | Square Footage (in thousands) | ||||||||||||||
Distribution Centers | Leased | Owned | Principal Corporate Offices | Leased | Owned | ||||||||||
Canada | Brampton, Ontario | 1,057 | — | Burnaby, British Columbia | 141 | — | |||||||||
Vancouver, British Columbia | 439 | — | |||||||||||||
Mexico | Estado de Mexico, Mexico | 89 | — | Distrito Federal, Mexico | 32 | — | |||||||||
Exclusive Brands
We lease approximately 56,000 square feet of office space in China to support our exclusive brands operations.
Operating Leases
Additional information regarding our operating leases is available in Note 1, Summary of Significant Accounting Policies, and Note 10, Leases, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Item 3. Legal Proceedings.
For a description of our legal proceedings, see Note 13, Contingencies and Commitments, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures.
Not applicable.
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Executive Officers of the Registrant
(As of March 26, 2019)
Name | Age | Position with the Company | Years with the Company | |||
Hubert Joly | 59 | Chairman and Chief Executive Officer | 6 | |||
Corie Barry | 44 | Chief Financial Officer & Strategic Transformation Officer | 19 | |||
Kamy Scarlett | 55 | Chief Human Resources Officer & President, U.S. Retail Stores | 5 | |||
R. Michael (Mike) Mohan | 51 | Chief Operating Officer, Best Buy U.S. | 15 | |||
Keith J. Nelsen | 55 | General Counsel and Secretary | 13 | |||
Brian Tilzer | 48 | Chief Digital and Technology Officer | 1 | |||
Mathew R. Watson | 48 | Senior Vice President, Controller and Chief Accounting Officer | 13 | |||
Hubert Joly is our Chairman and Chief Executive Officer. He was appointed as President and Chief Executive Officer and a Director in September 2012 and as Chairman in June 2015. Mr. Joly was previously the president and chief executive officer of Carlson, Inc., a worldwide hospitality and travel company based in Minneapolis, Minnesota, from 2008 until he joined Best Buy. Prior to becoming chief executive officer of Carlson, Mr. Joly was president and chief executive officer of Carlson Wagonlit Travel, a business travel management company, from 2004 until 2008. He held several senior executive positions with Vivendi S.A., a French multinational media and telecommunications company, from 1999 to 2004. Prior to that time, Mr. Joly worked in the technology sector at Electronic Data Systems (now part of Hewlett-Packard Co.) from 1996 to 1999 and at McKinsey & Company, Inc. from 1983 to 1996. Mr. Joly is currently a member of the board of directors of Ralph Lauren Corp., a leader in the design, marketing and retailing of premier lifestyle products. He also serves on the executive committees of the Business Council, the Retail Industry Leaders Association and the Minnesota Business Partnership, and on the board of trustees of the Minneapolis Institute of Arts and the Minnesota Orchestra. Mr. Joly previously served as a director of Carlson, Inc.; chair of the board of directors of the Rezidor Hotel Group; chair of the board of directors of Carlson Wagonlit Travel; chair of the Travel Facilitation Sub-Committee of the U.S. Department of Commerce Travel and Tourism Advisory Board; on the executive committee of the World Travel and Tourism Council; and on the board of overseers of the Carlson School of Management.
Corie Barry was appointed our Chief Financial Officer in June 2016 and also our Chief Strategic Transformation Officer in September 2018. In this role, she is responsible for overseeing all aspects of strategic transformation and growth, digital and technology, global finance, investor relations, enterprise risk and compliance, integration management, and Best Buy Health, which includes GreatCall. Ms. Barry joined Best Buy in 1999 and has held a variety of financial and operational roles within the organization, both in the field and at corporate. Prior to her current role she was the company’s chief strategic growth officer and the interim leader of Best Buy’s services organization from 2015 until 2016. Prior to that dual-role, she served as senior vice president of domestic finance from 2013 to 2015; vice president, chief financial officer and business development of our home business group from 2012 to 2013; and vice president, finance of the home customer solutions group from 2010 to 2012. Prior to Best Buy, Ms. Barry worked at Deloitte & Touche, LLP. She also serves on the board of directors of Domino’s Pizza, Inc.
Kamy Scarlett was appointed our Chief Human Resources Officer in June 2017, and also our President, U.S. Retail Stores in January 2019. In this role, she oversees talent development and the health and well-being of the nearly 125,000 Best Buy employees worldwide, and the execution and operation of all domestic Best Buy store locations. Ms. Scarlett joined Best Buy in 2014. She has served in a variety of retail operations, marketing and human resources leadership roles since beginning her career in retail more than 30 years ago. Most recently, she was senior vice president of retail and chief human resources officer for Best Buy Canada from 2014 to May 2017. She was responsible for sales and profits in more than 180 stores in addition to enacting the human resources and talent management strategies for the company. Prior to joining Best Buy, Ms. Scarlett was the chief operating officer from 2012 to 2014 at Grafton-Fraser Inc., a leading Canadian retailer of men’s apparel. She also previously held leadership roles at Loblaw Cos., Hudson’s Bay Co. and Dylex Inc. Ms. Scarlett serves on the board of directors of Greater MSP and The Best Buy Foundation.
R. Michael (Mike) Mohan has served as our Chief Operating Officer, Best Buy U.S. since September 2018. His responsibilities include oversight over all customer channels for Best Buy’s domestic business, including retail, ecommerce and customer experience, services, home and Best Buy Direct. In addition, he leads category management, merchandising, marketing, supply chain and real estate for Best Buy’s core U.S. business. Prior to his current role, he served as senior executive vice president and chief merchandising and marketing officer from 2017 until September 2018; chief merchandising officer from 2014 to 2017; president, home from 2013 to 2014; senior vice president, general manager - home business group
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from 2011 to 2013; senior vice president, home theatre from 2008 to 2011; and vice president, home entertainment from 2006 to 2008. Prior to joining Best Buy in 2004 as vice president, digital imaging, Mr. Mohan was vice president and general merchandising manager for Good Guys, an audio/video specialty retailer in the western U.S. Mr. Mohan also previously worked at Future Shop in Canada from 1988 to 1997, prior to our acquisition of the company, where he served in various merchandising roles. Mr. Mohan serves on the board of directors for Bloomin’ Brands, a hospitality industry company that owns several American casual dining restaurant chains, and as a national trustee for the Boys & Girls Clubs of America.
Keith J. Nelsen has served as our General Counsel and Secretary since 2011. In this role, he manages our enterprise legal function and acts as Secretary to our Board of Directors. Previously, in addition to his current role, he also served as chief risk officer from 2012 to 2013. He was appointed executive vice president, general counsel in May 2011 and secretary of the company in June 2011 and served as senior vice president, commercial and international general counsel from 2008 until his current appointment. Mr. Nelsen joined Best Buy in 2006 as vice president, operations and international general counsel. Prior to joining us, he worked at Danka Business Systems PLC, an office products supplier, from 1997 to 2006 and served in various roles, including chief administration officer and general counsel. Prior to his time at Danka, Mr. Nelsen held the role of vice president, legal from 1995 to 1997 at NordicTrack, Inc., a provider of leisure equipment products. Mr. Nelsen began his career in 1989 as a practicing attorney with Best and Flanagan, LLP, a law firm located in Minneapolis, Minnesota. Mr. Nelsen is a member of the board of directors of NuShoe, Inc., a privately held shoe repair facility in San Diego, California.
Brian Tilzer has served as our Chief Digital and Technology Officer since May 2018. In this role, he is responsible for all aspects of information technology and digital at Best Buy to create a seamless and superior multichannel customer experience in support of the company’s Best Buy 2020 growth strategy. With more than 25 years of experience in strategic business development, operations and information technology, Mr. Tilzer has deep expertise in understanding, defining and delivering the technology necessary to provide a superior customer experience in a multichannel environment. Prior to joining Best Buy, he served as chief digital officer at CVS Health, the largest pharmacy healthcare provider in the U.S. He also has served as senior vice president of e-commerce for Staples and senior vice president of strategy and business development for Linens ’n Things. Before that, he held leadership roles with Accenture, including helping Best Buy with several growth and performance-improvement programs. Mr. Tilzer serves on the board of directors for Signet Jewelers, the largest retail jewelry chain in the U.S., Canada and United Kingdom.
Mathew R. Watson was appointed our Senior Vice President, Controller and Chief Accounting Officer in October 2017. He previously served as our vice president, controller and chief accounting officer from April 2015 until his current role. Mr. Watson is responsible for our controllership, financial operations and external reporting functions. Mr. Watson has served in the role of vice president, finance - controller since 2014. Prior to that role, he was vice president - finance, domestic controller from 2013 to 2014. Mr. Watson was also senior director, external reporting and corporate accounting from 2010 to 2013 and director, external reporting and corporate accounting beginning in 2007. Prior to joining us in 2005, Mr. Watson worked at KPMG, a professional audit, advisory and tax firm, from 1995 to 2005. He serves on the boards of directors of AchieveMpls and The Best Buy Foundation.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Dividends
Our common stock is traded on the New York Stock Exchange ("NYSE") under the ticker symbol BBY. In fiscal 2004, our Board initiated the payment of a regular quarterly cash dividend with respect to shares of our common stock. A quarterly cash dividend has been paid in each subsequent quarter. In addition, our Board approved a special dividend that was declared and paid in the first quarter of each of fiscal 2016 and fiscal 2017. On February 28, 2019, we announced an increase in our regular quarterly dividend from $0.45 per share to $0.50 per share. Future dividend payments will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board.
Holders
As of March 26, 2019, there were 267,804,388 holders of record of our common stock.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On February 23, 2019, our Board authorized a new $3.0 billion share repurchase program that superseded the previous $5.0 billion authorization from February 2017, which had $1.5 billion remaining as of February 2, 2019. There is no expiration date governing the period over which we can repurchase shares under the February 2019 authorization. During fiscal 2019, we repurchased and retired 21.2 million shares at a cost of $1.5 billion. Between the end of fiscal 2019 and March 26, 2019, we repurchased an incremental 0.9 million shares of our common stock at a cost of $62 million.
The following table presents the total number of shares of our common stock that we purchased during the fourth quarter of fiscal 2019, the average price paid per share, the number of shares that we purchased as part of our publicly announced repurchase program and the approximate dollar value of shares that may yet be purchased at the end of the applicable fiscal period, pursuant to our February 2017 $5.0 billion share repurchase program:
Fiscal Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1) | |||||||||
Nov. 4, 2018 through Dec. 1, 2018 | 2,222,495 | $ | 65.88 | 2,222,495 | $ | 1,739,000,000 | |||||||
Dec. 2, 2018 through Jan. 5, 2019 | 2,393,284 | $ | 56.10 | 2,393,284 | $ | 1,604,000,000 | |||||||
Jan. 6, 2019 through Feb. 2, 2019 | 1,184,372 | $ | 57.43 | 1,184,372 | $ | 1,536,000,000 | |||||||
Total fiscal 2019 fourth quarter | 5,800,151 | $ | 60.12 | 5,800,151 | $ | 1,536,000,000 | |||||||
(1) | At the beginning of the fourth quarter of fiscal 2019, there was $1.9 billion available for share repurchases under our February 2017 $5.0 billion share repurchase program. The "Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program" column reflects the $349 million we purchased in the fourth quarter of fiscal 2019 pursuant to such program. For additional information, see Note 7, Shareholders' Equity, of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. |
Best Buy Stock Comparative Performance Graph
The information contained in this Best Buy Stock Comparative Performance Graph section shall not be deemed to be "soliciting material" or "filed" or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
The graph below compares the cumulative total shareholder return on our common stock for the last five fiscal years with the cumulative total return on the Standard & Poor's 500 Index ("S&P 500"), of which we are a component, and the Standard & Poor's Retailing Group Industry Index ("S&P Retailing Group"), of which we are also a component. The S&P Retailing Group is a capitalization-weighted index of domestic equities traded on the NYSE and NASDAQ and includes high-capitalization stocks representing the retail sector of the S&P 500.
The graph assumes an investment of $100 at the close of trading on February 1, 2014, the last trading day of fiscal 2014, in our common stock, the S&P 500 and the S&P Retailing Group.
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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Best Buy Co., Inc., the S&P 500 and the S&P Retailing Group
Fiscal Years Ended | February 1, 2014 | January 31, 2015 | January 30, 2016 | January 28, 2017 | February 3, 2018 | February 2, 2019 | |||||||||||||||||
Best Buy Co., Inc. | $ | 100.00 | $ | 153.08 | $ | 126.20 | $ | 205.59 | $ | 345.38 | $ | 290.98 | |||||||||||
S&P 500 | 100.00 | 114.22 | 113.46 | 136.20 | 172.17 | 168.19 | |||||||||||||||||
S&P Retailing Group | 100.00 | 119.10 | 140.73 | 167.11 | 241.08 | 256.26 | |||||||||||||||||
* Cumulative total return assumes dividend reinvestment.
Source: Research Data Group, Inc.
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Item 6. Selected Financial Data.
The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Five-Year Financial Highlights
$ in millions, except per share amounts
Fiscal Year | 2019(1) | 2018(2)(3) | 2017(4) | 2016(5) | 2015(6) | ||||||||||||||
Consolidated Statements of Earnings Data | |||||||||||||||||||
Revenue | $ | 42,879 | $ | 42,151 | $ | 39,403 | $ | 39,528 | $ | 40,339 | |||||||||
Operating income | 1,900 | 1,843 | 1,854 | 1,375 | 1,450 | ||||||||||||||
Net earnings from continuing operations | 1,464 | 999 | 1,207 | 807 | 1,246 | ||||||||||||||
Gain (loss) from discontinued operations | — | 1 | 21 | 90 | (11 | ) | |||||||||||||
Net earnings including noncontrolling interests | 1,464 | 1,000 | 1,228 | 897 | 1,235 | ||||||||||||||
Net earnings attributable to Best Buy Co., Inc. shareholders | 1,464 | 1,000 | 1,228 | 897 | 1,233 | ||||||||||||||
Per Share Data | |||||||||||||||||||
Net earnings from continuing operations | $ | 5.20 | $ | 3.26 | $ | 3.74 | $ | 2.30 | $ | 3.53 | |||||||||
Net gain (loss) from discontinued operations | — | — | 0.07 | 0.26 | (0.04 | ) | |||||||||||||
Net earnings | 5.20 | 3.26 | 3.81 | 2.56 | 3.49 | ||||||||||||||
Cash dividends declared and paid | 1.80 | 1.36 | 1.57 | 1.43 | 0.72 | ||||||||||||||
Operating Statistics | |||||||||||||||||||
Comparable sales growth(7) | 4.8 | % | 5.6 | % | 0.3 | % | 0.5 | % | 0.5 | % | |||||||||
Gross profit rate | 23.2 | % | 23.4 | % | 24.0 | % | 23.3 | % | 22.4 | % | |||||||||
Selling, general and administrative expenses rate | 18.7 | % | 19.0 | % | 19.2 | % | 19.3 | % | 18.8 | % | |||||||||
Operating income rate | 4.4 | % | 4.4 | % | 4.7 | % | 3.5 | % | 3.6 | % | |||||||||
Year-End Data | |||||||||||||||||||
Current ratio(8) | 1.2 | 1.3 | 1.5 | 1.4 | 1.5 | ||||||||||||||
Total assets | $ | 12,901 | $ | 13,049 | $ | 13,856 | $ | 13,519 | $ | 15,245 | |||||||||
Debt, including current portion | 1,388 | 1,355 | 1,365 | 1,734 | 1,613 | ||||||||||||||
Total equity | 3,306 | 3,612 | 4,709 | 4,378 | 5,000 | ||||||||||||||
Number of stores | |||||||||||||||||||
Domestic(9) | 1,026 | 1,298 | 1,369 | 1,416 | 1,449 | ||||||||||||||
International | 212 | 216 | 212 | 216 | 283 | ||||||||||||||
Total | 1,238 | 1,514 | 1,581 | 1,632 | 1,732 | ||||||||||||||
Retail square footage (in thousands) | |||||||||||||||||||
Domestic(9) | 39,500 | 40,360 | 41,039 | 41,234 | 41,734 | ||||||||||||||
International | 4,607 | 4,602 | 4,511 | 4,543 | 6,470 | ||||||||||||||
Total | 44,107 | 44,962 | 45,550 | 45,777 | 48,204 | ||||||||||||||
(1) | Included within operating income, net earnings from continuing operations and net earnings attributable to Best Buy Co., Inc. shareholders for fiscal 2019 is $46 million ($35 million net of taxes) of restructuring charges from continuing operations related to measures we took to restructure our business; $35 million ($28 million net of taxes) of charges associated with the acquisition of GreatCall, including acquisition-related transaction costs and the non-cash amortization of definite-lived intangible assets; and $7 million ($5 million net of taxes) related to a one-time bonus for certain employees in response to future tax savings created by the Tax Cuts and Jobs Act ("tax reform" or "Tax Act") enacted into law in fiscal 2018. Also included in net earnings from continuing operations and net earnings attributable to Best Buy Co., Inc. shareholders for fiscal 2019 is $25 million of subsequent adjustments resulting from the Tax Act. Refer to Note 9, Restructuring Charges, Note 2, Acquisition, and Note 11, Income Taxes, in the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. |
(2) | Fiscal 2018 included 53 weeks. All other periods presented included 52 weeks. |
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(3) | Included within operating income, net earnings from continuing operations and net earnings attributable to Best Buy Co., Inc. shareholders for fiscal 2018 is $80 million ($51 million net of taxes) related to a one-time bonus for certain employees and $20 million ($13 million net of taxes) related to a one-time contribution to the Best Buy Foundation in response to future tax savings created by the Tax Act. Also included in net earnings from continuing operations and net earnings attributable to Best Buy Co., Inc. shareholders for fiscal 2018 is $283 million of charges resulting from the Tax Act. Refer to Note 11, Income Taxes, in the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. |
(4) | Included within net earnings from continuing operations and net earnings attributable to Best Buy Co., Inc. shareholders for fiscal 2017 includes $161 million ($100 million net of taxes) due to cathode ray tube ("CRT") and LCD litigation settlements reached, net of related legal fees and costs. Settlements relate to products purchased and sold in prior fiscal years. |
(5) | Included within operating income and net earnings from continuing operations for fiscal 2016 is $201 million ($159 million net of taxes) of restructuring charges from continuing operations recorded in fiscal 2016 related to measures we took to restructure our business. Net earnings attributable to Best Buy Co., Inc. shareholders for fiscal 2016 includes restructuring charges (net of tax and noncontrolling interest) from continuing operations. |
(6) | Included within net earnings from continuing operations and net earnings attributable to Best Buy Co., Inc. shareholders for fiscal 2015 includes $353 million due to a discrete benefit related to reorganizing certain European legal entities. |
(7) | 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 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 metric. Therefore, Consolidated comparable sales equaled the Domestic segment comparable sales. Beginning in the fourth quarter of fiscal 2017, we resumed reporting International comparable sales as revenue and the International segment was once again deemed to be comparable and, as such, Consolidated comparable sales are once again equal to the aggregation of Domestic and International comparable sales. Comparable sales also exclude the impact of the extra week in fiscal 2018. On March 1, 2018, we announced our intent to close all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S. As a result, all revenue related to these stores has been excluded from the comparable sales calculation beginning in March 2018. On October 1, 2018, we acquired all outstanding shares of GreatCall. Consistent with our comparable sales policy, the results of GreatCall are excluded from our comparable sales calculation for fiscal 2019. |
(8) | The current ratio is calculated by dividing total current assets by total current liabilities. |
(9) | Includes Best Buy Outlet Centers for all fiscal years presented. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 |
• | Results of Operations |
• | Liquidity and Capital Resources |
• | Critical Accounting Estimates |
• | New Accounting Pronouncements |
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Overview
We strive to enrich the lives of consumers through technology, whether they connect with us online, visit our stores or invite us into their homes. We do this by solving technology problems and addressing key human needs across a range of areas, including entertainment, productivity, communication, food preparation, security and health and wellness. We have operations in the U.S., Canada and Mexico. We have two reportable segments: Domestic and International. The Domestic segment is comprised of the operations in all states, districts and territories of the U.S., including GreatCall. The International segment is comprised of all operations in Canada and Mexico.
Our fiscal year ends on the Saturday nearest the end of January. Fiscal 2019 and fiscal 2017 included 52 weeks, while fiscal 2018 included 53 weeks with the additional week occurring in the fiscal fourth quarter. 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 the U.S., Canada and Mexico.
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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, the effect of fluctuations in foreign currency exchange rates (applicable to our International segment only) and the impact of the extra week in fiscal 2018. 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 metric. Therefore, Consolidated comparable sales equaled the Domestic segment comparable sales. Beginning in the fourth quarter of fiscal 2017, we resumed reporting International comparable sales as revenue and the International segment was once again deemed to be comparable and, as such, Consolidated comparable sales are once again equal to the aggregation of Domestic and International comparable sales. However, we have not provided International comparable sales for fiscal 2017 as the calculation would only include comparable revenue from the fourth quarter of fiscal 2017 and may be misleading in future periods when used for comparison purposes. On March 1, 2018, we announced our intent to close all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S. As a result, all revenue related to these stores has been excluded from the comparable sales calculation beginning in March 2018. On October 1, 2018, we acquired all outstanding shares of GreatCall. Consistent with our comparable sales policy, the results of GreatCall are excluded from our comparable sales calculation for fiscal 2019.
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 and non-GAAP diluted earnings per share ("EPS") from continuing operations. We believe that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors in evaluating current period performance and in assessing future performance. For these reasons, our internal management reporting also includes non-GAAP financial measures. Generally, our non-GAAP financial measures include adjustments for items such as restructuring charges, goodwill impairments, gains and losses on investments, certain acquisition-related costs and the tax effect of all such items. In addition, certain other items may be excluded from non-GAAP financial measures when we believe doing so provides greater clarity to management and our investors. These non-GAAP financial measures should be considered in addition to, and not superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Non-GAAP financial measures as presented herein may not be comparable to similarly titled measures used by other companies.
In our discussions of the operating results of our Consolidated business and our International segment, we sometimes refer to the impact of changes in foreign currency exchange rates or the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert the International segment’s operating results from local currencies into U.S. dollars for reporting purposes. We also may use the term "constant currency," which represents results adjusted to exclude foreign currency impacts. We calculate those impacts as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period currency exchange rates. We believe the disclosure of revenue changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates.
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 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.
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Accordingly, commencing in the first quarter of fiscal 2018, we no longer adjust for non-restructuring property and equipment impairments. Impacted prior period non-GAAP financial measures have been recast to conform with this presentation.
Refer to the Non-GAAP Financial Measures section below for the detailed reconciliation of items that impacted non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS from continuing operations in the presented periods.
Business Strategy
On a full-year basis in fiscal 2019, we grew our Enterprise comparable sales by 4.8% on top of 5.6% in fiscal 2018, increased GAAP diluted EPS by 59.5% to $5.20 and increased our non-GAAP diluted EPS by 20.4% to $5.32. In addition, we recorded annual revenue of $42.9 billion, GAAP operating income of $1.9 billion and non-GAAP operating income of $2.0 billion in fiscal 2019. From a capital allocation standpoint, we returned $2.0 billion to our shareholders through share repurchases and dividends.
Strategically, we made significant progress in implementing our Best Buy 2020 strategy to enrich lives through technology and further develop our competitive differentiation by expanding what we do for our customers and how we interact with them. The first example is the launch of our Total Tech Support program. Having a service that provides members unlimited Geek Squad support for all their technology no matter where or when they bought it, is a compelling value proposition for our members. We also expanded our In-Home Advisor program from 300 advisors to approximately 530 advisors and provided more than 175,000 free, in-home consultations to customers across the nation. In health, we acquired a leading connected health services provider for aging consumers, GreatCall, and took a tangible step forward in our strategy to help seniors live longer in their homes with the help of technology. We continued to elevate the customer experience around product fulfillment, enabled by the advancement of our supply chain transformation.
In parallel to the customer experience work, we continued to drive efficiencies and reduce costs in order to fund investments and offset pressures. During fiscal 2019, we achieved $265 million in annualized cost reductions and efficiencies, bringing the cumulative total to $500 million towards our current goal set in the second quarter of fiscal 2018 to reach $600 million by the end of fiscal 2021.
In addition to these accomplishments, we are proud of our progress in advancing our Corporate Social Responsibility and Sustainability efforts. In fact, we were just named number one on Barron’s annual “100 Most Sustainable Companies” list.
Looking ahead, we are focused on pursuing the opportunities in front of us to enrich lives through technology and provide services and solutions that solve real customer needs and build deeper customer relationships, and the related value creation opportunities that this entails.
In fiscal 2020, our priorities include increasing our Total Tech Support member base, growing our Health business and continuing to expand our In-Home Advisor program. We will also continue to innovate and design multi-channel experiences that solve customer needs across our website, app and other channels in ways that enhance the experience across online and physical shopping and continue with our supply chain transformation, including using automation and process improvements to expand fulfillment options, increase delivery speed and improve delivery and installation. In addition, as has been our brand over the last several years, we will endeavor to keep driving cost reductions and efficiencies throughout the business.
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.
Discontinued operations are primarily comprised of activity related to Jiangsu Five Star Appliance Co., Limited ("Five Star") within our International segment and is presented as discontinued operations on our Consolidated Statements of Earnings. Unless otherwise stated, financial results discussed herein refer to continuing operations.
Fiscal 2019 and fiscal 2017 included 52 weeks and fiscal 2018 included 53 weeks, with the additional week occurring in the fourth quarter.
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Consolidated Results
The following table presents selected consolidated financial data for each of the past three fiscal years ($ in millions, except per share amounts):
Consolidated Performance Summary | 2019 | 2018 | 2017 | ||||||||
Revenue | $ | 42,879 | $ | 42,151 | $ | 39,403 | |||||
Revenue % increase (decrease) | 1.7 | % | 7.0 | % | (0.3 | )% | |||||
Comparable sales growth(1) | 4.8 | % | 5.6 | % | 0.3 | % | |||||
Gross profit | $ | 9,961 | $ | 9,876 | $ | 9,440 | |||||
Gross profit as a % of revenue(2) | 23.2 | % | 23.4 | % | 24.0 | % | |||||
SG&A | $ | 8,015 | $ | 8,023 | $ | 7,547 | |||||
SG&A as a % of revenue | 18.7 | % | 19.0 | % | 19.2 | % | |||||
Restructuring charges | $ | 46 | $ | 10 | $ | 39 | |||||
Operating income | $ | 1,900 | $ | 1,843 | $ | 1,854 | |||||
Operating income as a % of revenue | 4.4 | % | 4.4 | % | 4.7 | % | |||||
Net earnings from continuing operations | $ | 1,464 | $ | 999 | $ | 1,207 | |||||
Gain from discontinued operations(3) | $ | — | $ | 1 | $ | 21 | |||||
Net earnings | $ | 1,464 | $ | 1,000 | $ | 1,228 | |||||
Diluted earnings per share from continuing operations | $ | 5.20 | $ | 3.26 | $ | 3.74 | |||||
Diluted earnings per share | $ | 5.20 | $ | 3.26 | $ | 3.81 | |||||
(1) | 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, beginning in the first quarter of fiscal 2016 through the third quarter of fiscal 2017, all store and website revenue was removed from the comparable sales base, and an International segment (comprised of Canada and Mexico) comparable sales metric for the full year was not provided. Beginning in the fourth quarter of fiscal 2017, we resumed reporting International comparable sales as revenue in the International segment was once again determined to be comparable. Comparable sales also exclude the impact of the extra week in fiscal 2018. Comparable sales also exclude the impact of the extra week in fiscal 2018. On March 1, 2018, we announced our intent to close all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S. As a result, all revenue related to these stores has been excluded from the comparable sales calculation beginning in March 2018. On October 1, 2018, we acquired all outstanding shares of GreatCall. Consistent with our comparable sales policy, the results of GreatCall are excluded from our comparable sales calculation for fiscal 2019. |
(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, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. |
(3) | Includes both gain from discontinued operations and net earnings from discontinued operations. |
Fiscal 2019 Results Compared With Fiscal 2018
Consolidated revenue of $42.9 billion in fiscal 2019 increased 1.7% compared to fiscal 2018. Fiscal 2018 includes approximately $760 million of revenue from the extra week. The components of the 1.7% revenue increase in fiscal 2019 were as follows:
Comparable sales impact | 4.4 | % |
Non-comparable sales impact(1) | (2.5 | )% |
Impact of foreign currency exchange rate fluctuations | (0.2 | )% |
Total revenue increase | 1.7 | % |
(1) | Non-comparable sales reflect the impact of the extra week in fiscal 2018, the impact of net store opening and closing activity, the results of GreatCall, as well as the impact of revenue streams not included within our comparable sales calculation, such as profit-share revenue, certain credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. |
Our gross profit rate and SG&A rate changes in fiscal 2019 were primarily driven by our Domestic segment. Restructuring charges increased from $10 million in fiscal 2018 to $46 million in fiscal 2019, primarily related to our Domestic segment. For further discussion of each segment's rate changes and restructuring charges, see Segment Performance Summary, below.
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Our operating income increased $57 million and our operating income as a percent of revenue remained flat in fiscal 2019 compared to fiscal 2018, primarily due to a decrease in gross profit rate offset by a lower SG&A rate.
Fiscal 2018 Results Compared With Fiscal 2017
Consolidated revenue of $42.2 billion in fiscal 2018 increased 7.0% compared to fiscal 2017. Fiscal 2018 includes approximately $760 million of revenue from the extra week. The components of the 7.0% revenue increase in fiscal 2018 were as follows:
Comparable sales impact | 5.3 | % |
Non-comparable sales impact(1) | 1.5 | % |
Impact of foreign currency exchange rate fluctuations | 0.2 | % |
Total revenue increase | 7.0 | % |
(1) | Non-comparable sales reflect the impact of net store opening and closing activity, the impact of the extra week in fiscal 2018, as well as the impact of revenue streams not included within our comparable sales calculation, such as profit-share revenue, certain credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. |
Our gross profit rate decreased by 0.6% of revenue in fiscal 2018. Our Domestic segment contributed a rate decrease of 0.4% of revenue, while our International segment contributed a rate decrease of 0.2%. For further discussion of each segment's gross profit rate changes, see Segment Performance Summary, below.
The SG&A rate decreased by 0.2% of revenue in fiscal 2018. Our Domestic and International segments both contributed a rate decrease of 0.1% of revenue. For further discussion of each segment's SG&A rate changes, see Segment Performance Summary, below.
Restructuring charges decreased from $39 million in fiscal 2017 to $10 million in fiscal 2018. The fiscal 2018 and fiscal 2017 activity primarily related to our Domestic segment. For further discussion of each segment's restructuring charges, see Segment Performance Summary, below.
Our operating income decreased $11 million and our operating income as a percent of revenue decreased to 4.4% of revenue in fiscal 2018, compared to operating income of 4.7% of revenue in fiscal 2017. The decrease in our operating income was primarily due to a decrease in our gross profit rate and an increase in SG&A.
Segment Performance Summary
Domestic Segment
The following table presents selected financial data for our Domestic segment for each of the past three fiscal years ($ in millions):
Domestic Segment Performance Summary | 2019 | 2018 | 2017 | ||||||||
Revenue | $ | 39,304 | $ | 38,662 | $ | 36,248 | |||||
Revenue % increase (decrease) | 1.7 | % | 6.7 | % | (0.3 | )% | |||||
Comparable sales growth(1) | 4.8 | % | 5.6 | % | 0.2 | % | |||||
Gross profit | $ | 9,144 | $ | 9,065 | $ | 8,650 | |||||
Gross profit as % of revenue | 23.3 | % | 23.4 | % | 23.9 | % | |||||
SG&A | $ | 7,300 | $ | 7,304 | $ | 6,855 | |||||
SG&A as % of revenue | 18.6 | % | 18.9 | % | 18.9 | % | |||||
Restructuring charges | $ | 47 | $ | 9 | $ | 31 | |||||
Operating income | $ | 1,797 | $ | 1,752 | $ | 1,764 | |||||
Operating income as % of revenue | 4.6 | % | 4.5 | % | 4.9 | % | |||||
Selected Online Revenue Data | |||||||||||
Total online revenue | $ | 6,528 | $ | 5,991 | $ | 4,843 | |||||
Online revenue as a % of total segment revenue | 16.6 | % | 15.5 | % | 13.4 | % | |||||
Comparable online sales growth(1) | 10.5 | % | 21.8 | % | 20.8 | % | |||||
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(1) | Comparable online sales are included in the comparable sales calculation. Comparable sales also exclude the impact of the extra week in fiscal 2018. |
The following table reconciles our Domestic segment stores open at the end of each of the last three fiscal years:
Fiscal 2017 | Fiscal 2018 | Fiscal 2019 | ||||||||||||||||||
Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | ||||||||||||||
Best Buy | 1,026 | — | (18 | ) | 1,008 | 1 | (12 | ) | 997 | |||||||||||
Best Buy Mobile stand-alone | 309 | — | (52 | ) | 257 | — | (257 | ) | — | |||||||||||
Outlet centers | 6 | — | (1 | ) | 5 | 3 | — | 8 | ||||||||||||
Pacific Sales | 28 | — | — | 28 | — | (7 | ) | 21 | ||||||||||||
Total Domestic segment stores | 1,369 | — | (71 | ) | 1,298 | 4 | (276 | ) | 1,026 | |||||||||||
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. On March 1, 2018, we announced our intent to close all of our 257 remaining Best Buy Mobile stand-alone stores in the U.S., and all remaining stores were closed during the second quarter of fiscal 2019. Refer to Note 9, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Fiscal 2019 Results Compared With Fiscal 2018
Domestic segment revenue of $39.3 billion in fiscal 2019 increased 1.7% compared to fiscal 2018. Fiscal 2018 includes approximately $715 million of revenue from the extra week. The components of the 1.7% revenue increase in the Domestic segment in fiscal 2019 were as follows:
Comparable sales impact | 4.4 | % |
Non-comparable sales impact(1) | (2.7 | )% |
Total revenue increase | 1.7 | % |
(1) | Non-comparable sales reflect the impact of the extra week in fiscal 2018, the results of GreatCall, as well as the impact of revenue streams not included within our comparable sales calculation, such as profit-share revenue, certain credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. Non-comparable sales also reflect the impact of net store opening and closing activity of (1.3)% in fiscal 2019. |
The profit-share revenue included in our non-comparable sales relates 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 above certain thresholds, we are entitled to share in the excess profits. In fiscal 2019, we recognized $7 million of such profit-share revenue, with an equal impact to gross profit and operating income. In fiscal 2018, we recognized $59 million of such profit-share revenue. The fiscal 2019 profit-share revenue decrease from fiscal 2018 reflects reductions to the premiums that we pay to the third-party underwriter.
In fiscal 2019, Domestic segment online revenue of $6.5 billion increased 10.5% on a comparable basis, primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased to 16.6% versus 15.5% last year.
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The following table presents the Domestic segment's revenue mix percentages and comparable sales percentage changes by revenue category in fiscal 2019 and 2018:
Revenue Mix Summary | Comparable Sales Summary | ||||||||||
Year Ended | Year Ended | ||||||||||
February 2, 2019 | February 3, 2018 | February 2, 2019 | February 3, 2018 | ||||||||
Computing and Mobile Phones | 44 | % | 45 | % | 4.2 | % | 5.3 | % | |||
Consumer Electronics | 33 | % | 33 | % | 3.9 | % | 3.1 | % | |||
Appliances | 10 | % | 10 | % | 9.9 | % | 11.4 | % | |||
Entertainment | 8 | % | 8 | % | 4.7 | % | 12.6 | % | |||
Services | 5 | % | 4 | % | 7.7 | % | 4.0 | % | |||
Total | 100 | % | 100 | % | 4.8 | % | 5.6 | % | |||
We continue to believe the strong execution of our business strategy, a continued healthy consumer confidence and positive macro conditions contributed to our Domestic comparable sales growth across all of our categories. The following is a description of the notable comparable sales changes in our Domestic segment by revenue category:
• | Computing and Mobile Phones: The 4.2% comparable sales growth was driven primarily by wearables, mobile phones and computing. |
• | Consumer Electronics: The 3.9% comparable sales growth was driven primarily by smart home, home theater and headphones, partially offset by digital imaging. |
• | Appliances: The 9.9% comparable sales growth was driven by both large and small appliances. |
• | Entertainment: The 4.7% comparable sales growth was driven primarily by gaming, partially offset by virtual reality. |
• | Services: The 7.7% comparable sales growth was primarily driven by our support business. |
Our Domestic segment experienced a decrease in gross profit rate to 23.3% in fiscal 2019 from 23.4% in fiscal 2018. This rate decrease was primarily driven by higher supply chain costs, including investments and higher transportation costs, and a decrease in our periodic profit-share revenue as described above. These decreases were partially offset by improved product margin rates, which included the benefit of gross profit optimization initiatives, and the higher gross profit rate of GreatCall.
Our Domestic segment SG&A decreased $4 million and the rate decreased to 18.6% of revenue in fiscal 2019 compared to 18.9% of revenue in fiscal 2018. The decrease was primarily due to cost reductions, the absence of the extra week in fiscal 2019 and one-time expenses related to tax reform recorded in fiscal 2018. These decreases were partially offset by increases in growth investments, higher variable costs associated with increased revenue and increases as a result of the acquisition of GreatCall.
Our Domestic segment incurred $47 million of restructuring charges in fiscal 2019 and $9 million of restructuring charges in fiscal 2018. The restructuring charges in both fiscal years related to the Best Buy Mobile plan that began in the fourth quarter of fiscal 2018. Refer to Note 9, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Our Domestic segment’s operating income increased $45 million in fiscal 2019 compared to fiscal 2018, while the operating income rate remained relatively flat year-over-year. The increase in operating income was primarily driven by the increase in gross profit, partially offset by the increase in restructuring charges described above.
Fiscal 2018 Results Compared With Fiscal 2017
Domestic segment revenue of $38.7 billion in fiscal 2018 increased 6.7% compared to fiscal 2017 and includes approximately $715 million of revenue from the extra week. The components of the 6.7% revenue increase in the Domestic segment in fiscal 2018 were as follows:
Comparable sales impact | 5.3 | % |
Non-comparable sales impact(1) | 1.4 | % |
Total revenue increase | 6.7 | % |
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(1) | Non-comparable sales reflect the impact of the extra week in fiscal 2018, as well as the impact of revenue streams not included within our comparable sales calculation, such as profit-share revenue, certain credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. Non-comparable sales also reflect the impact of net store opening and closing activity of (0.7)% in fiscal 2018. |
The profit-share revenue included in our non-comparable sales relates 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. In fiscal 2018, we recognized $59 million of such profit-share revenue, with an equal impact to gross profit and operating income. In fiscal 2017, we recognized $110 million of such profit-share revenue. The fiscal 2018 profit-share revenue decrease from fiscal 2017 reflects reductions to the premiums that we pay to the third-party underwriter.
In fiscal 2018, Domestic segment online revenue of $6.0 billion increased 21.8% on a comparable basis, primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased to 15.5% versus 13.4% in fiscal 2017.
The following table presents the Domestic segment's revenue mix percentages and comparable sales percentage changes by revenue category in fiscal 2018 and 2017:
Revenue Mix Summary | Comparable Sales Summary | ||||||||||
Year Ended | Year Ended | ||||||||||
February 3, 2018 | January 28, 2017 | February 3, 2018 | January 28, 2017 | ||||||||
Computing and Mobile Phones | 45 | % | 45 | % | 5.3 | % | (1.8 | )% | |||
Consumer Electronics | 33 | % | 34 | % | 3.1 | % | 5.0 | % | |||
Appliances | 10 | % | 9 | % | 11.4 | % | 7.8 | % | |||
Entertainment | 8 | % | 7 | % | 12.6 | % | (13.8 | )% | |||
Services | 4 | % | 5 | % | 4.0 | % | (3.3 | )% | |||
Total | 100 | % | 100 | % | 5.6 | % | 0.2 | % | |||
We believe the strong execution of our business strategy, combined with better product availability, a continued healthy consumer confidence, positive macro conditions and a favorable competitive environment contributed to our Domestic comparable sales growth across most of our categories. The following is a description of the notable comparable sales changes in our Domestic segment by revenue category:
• | Computing and Mobile Phones: The 5.3% comparable sales growth was driven primarily by computing, mobile phones and wearables, partially offset by tablets. |
• | Consumer Electronics: The 3.1% comparable sales growth was driven primarily by smart home, home theater, headphones and voice assistants, partially offset by health and fitness. |
• | Appliances: The 11.4% comparable sales growth was driven primarily by large and small appliances. |
• | Entertainment: The 12.6% comparable sales growth was driven primarily by gaming hardware. |
• | Services: The 4.0% comparable sales growth was primarily driven by continued growth in our warranty business, and higher installation and delivery services. |
Our Domestic segment experienced a decrease in gross profit rate to 23.4% in fiscal 2018 from 23.9% in fiscal 2017. This rate decrease was primarily due to the $183 million of cathode ray tube ("CRT") settlement proceeds recorded in the first quarter of fiscal 2017 and a decrease in our periodic profit-share revenue as described above, partially offset by improved margin rates across multiple categories.
Our Domestic segment SG&A rate remained flat at 18.9% of revenue in fiscal 2018 compared to fiscal 2017. SG&A increased in fiscal 2018 due to (1) higher incentive compensation for store and corporate employees, (2) investments in growth initiatives, (3) the impact of the extra week, (4) one-time expenses related to tax reform, which included $75 million related to employee bonus expense and a $20 million charitable donation to the Best Buy Foundation, and (5) higher variable costs due to increased revenue. These increases were offset by cost reductions and $22 million in CRT settlement legal fees incurred in the first quarter of fiscal 2017 that did not recur in fiscal 2018.
Our Domestic segment incurred $9 million of restructuring charges in fiscal 2018 and $31 million of restructuring charges in fiscal 2017. The restructuring charges in fiscal 2018 related to the Best Buy Mobile plan that began in the fourth quarter of
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fiscal 2018, whereas the charges in fiscal 2017 related primarily to the Renew Blue Phase 2 plan that began in the first quarter of fiscal 2017. Refer to Note 9, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Our Domestic segment’s operating income decreased $12 million in fiscal 2018 compared to fiscal 2017. In addition, the operating income rate decreased to 4.5% of revenue in fiscal 2018 compared to 4.9% of revenue in fiscal 2017. The decrease was primarily driven by the gross profit rate decline and increase in SG&A described above.
International Segment
The following table presents selected financial data for our International segment for each of the past three fiscal years ($ in millions):
International Segment Performance Summary | 2019 | 2018 | 2017 | ||||||||
Revenue | $ | 3,575 | $ | 3,489 | $ | 3,155 | |||||
Revenue increase (decrease) % | 2.5 | % | 10.6 | % | (0.3 | )% | |||||
Comparable sales growth(1) | 4.6 | % | 6.3 | % | n/a | ||||||
Gross profit | $ | 817 | $ | 811 | $ | 790 | |||||
Gross profit as % of revenue | 22.9 | % | 23.2 | % | 25.0 | % | |||||
SG&A | $ | 715 | $ | 719 | $ | 692 | |||||
SG&A as % of revenue | 20.0 | % | 20.6 | % | 21.9 | % | |||||
Restructuring (benefit) charges | $ | (1 | ) | $ | 1 | $ | 8 | ||||
Operating income | $ | 103 | $ | 91 | $ | 90 | |||||
Operating income as % of revenue | 2.9 | % | 2.6 | % | 2.9 | % | |||||
(1) | 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, beginning in the first quarter of fiscal 2016 through the third quarter of fiscal 2017, all store and website revenue was removed from the comparable sales base, and an International segment (comprised of Canada and Mexico) comparable sales metric for the full year was not provided. Beginning in the fourth quarter of fiscal 2017, we resumed reporting International comparable sales as revenue in the International segment was once again determined to be comparable. Comparable sales also exclude the impact of the extra week in fiscal 2018. |
The following table reconciles our International segment stores open at the end of each of the last three fiscal years:
Fiscal 2017 | Fiscal 2018 | Fiscal 2019 | ||||||||||||||||||
Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | Stores Opened | Stores Closed | Total Stores at End of Fiscal Year | ||||||||||||||
Canada | ||||||||||||||||||||
Best Buy | 134 | — | — | 134 | — | (2 | ) | 132 | ||||||||||||
Best Buy Mobile | 53 | — | (2 | ) | 51 | — | (6 | ) | 45 | |||||||||||
Mexico | ||||||||||||||||||||
Best Buy | 20 | 5 | — | 25 | 4 | — | 29 | |||||||||||||
Express | 5 | 1 | — | 6 | — | — | 6 | |||||||||||||
Total International segment stores | 212 | 6 | (2 | ) | 216 | 4 | (8 | ) | 212 | |||||||||||
Fiscal 2019 Results Compared With Fiscal 2018
International segment revenue of $3.6 billion in fiscal 2019 increased 2.5% compared to fiscal 2018. Fiscal 2018 includes approximately $45 million of revenue from the extra week. The components of the 2.5% revenue increase in the International segment in fiscal 2019 were as follows:
Comparable sales impact | 4.4 | % |
Impact of foreign currency exchange rate fluctuations | (1.9 | )% |
Total revenue increase | 2.5 | % |
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The following table presents the International segment's revenue mix percentages and comparable sales percentage changes by revenue category in fiscal 2019 and 2018:
Revenue Mix Summary | Comparable Sales Summary | ||||||||||
Year Ended | Year Ended | ||||||||||
February 2, 2019 | February 3, 2018 | February 2, 2019 | February 3, 2018 | ||||||||
Computing and Mobile Phones | 46 | % | 46 | % | 2.7 | % | 2.0 | % | |||
Consumer Electronics | 31 | % | 32 | % | 2.0 | % | 7.1 | % | |||
Appliances | 9 | % | 8 | % | 20.5 | % | 41.3 | % | |||
Entertainment | 7 | % | 7 | % | 1.6 | % | 9.3 | % | |||
Services | 5 | % | 5 | % | 10.3 | % | (5.1 | )% | |||
Other | 2 | % | 2 | % | 30.3 | % | 15.4 | % | |||
Total | 100 | % | 100 | % | 4.6 | % | 6.3 | % | |||
The following is a description of the notable comparable sales changes in our International segment by revenue category in fiscal 2019:
• | Computing and Mobile Phones: The 2.7% comparable sales growth was driven primarily by mobile phones and wearables, partially offset by tablets. |
• | Consumer Electronics: The 2.0% comparable sales growth was driven primarily by headphones and smart home, partially offset by digital imaging and home theater. |
• | Appliances: The 20.5% comparable sales growth was driven by both large and small appliances. |
• | Entertainment: The 1.6% comparable sales growth was driven primarily by gaming, partially offset by movies and drones. |
• | Services: The 10.3% comparable sales growth was driven primarily by repair. |
• | Other: The 30.3% comparable sales growth was driven primarily by baby. |
Our International segment gross profit increased $6 million in fiscal 2019 compared to fiscal 2018. However, the gross profit rate decreased to 22.9% in fiscal 2019 from 23.2% in fiscal 2018. The decrease in gross profit rate in fiscal 2019 was primarily due to the unfavorable impact of foreign exchange rates, partially offset by increased revenue in the higher-margin services category.
Our International segment's SG&A decreased $4 million in fiscal 2019 compared to fiscal 2018, and the SG&A rate decreased to 20.0% in fiscal 2019 from 20.6% in fiscal 2018. The decrease in SG&A in fiscal 2019 was primarily driven by the absence of the extra week, the favorable impact of foreign exchange rates and the absence of a one-time employee bonus expense related to tax reform. These decreases were partially offset by higher variable costs associated with increased revenue.
Our International segment recorded a restructuring benefit of $1 million and restructuring charges of $1 million in fiscal 2019 and 2018, respectively. Restructuring activity in both years relates to adjustments to our vacant space liabilities outstanding as a result of the Canadian brand consolidation and the Renew Blue plans. The adjustments were due to changes in estimates related to sublease income. Refer to Note 9, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Our International segment operating income was $103 million in fiscal 2019 compared to $91 million in fiscal 2018. The increase in operating income was primarily driven by increased gross profit and lower SG&A described above.
Fiscal 2018 Results Compared With Fiscal 2017
International segment revenue of $3.5 billion in fiscal 2018 increased 10.6% compared to fiscal 2017 and includes approximately $45 million of revenue from the extra week. The components of the 10.6% revenue increase in the International segment in fiscal 2018 were as follows:
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Comparable sales impact | 6.1 | % |
Impact of foreign currency exchange rate fluctuations | 2.7 | % |
Non-comparable sales impact(1) | 1.8 | % |
Total revenue increase | 10.6 | % |
(1) | Non-comparable sales reflect the impact of net store opening and closing activity, including the Canadian brand consolidation activity in the first three quarters of fiscal 2017, the impact of the extra week in fiscal 2018, as well as the impact of revenue streams not included within our comparable sales calculation, such as certain credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. |
The following table presents the International segment's revenue mix percentages and comparable sales percentage changes by revenue category in fiscal 2018 and 2017:
Revenue Mix Summary | Comparable Sales Summary | |||||||||
Year Ended | Year Ended | |||||||||
February 3, 2018 | January 28, 2017 | February 3, 2018 | January 28, 2017 | |||||||
Computing and Mobile Phones | 46 | % | 48 | % | 2.0 | % | n/a | |||
Consumer Electronics | 32 | % | 31 | % | 7.1 | % | n/a | |||
Appliances | 8 | % | 6 | % | 41.3 | % | n/a | |||
Entertainment | 7 | % | 7 | % | 9.3 | % | n/a | |||
Services | 5 | % | 7 | % | (5.1 | )% | n/a | |||
Other | 2 | % | 1 | % | 15.4 | % | n/a | |||
Total | 100 | % | 100 | % | 6.3 | % | n/a | |||
As noted above, comparable sales information has not been provided for the International segment for fiscal 2017 due to the Canadian brand consolidation. As such, it is also impractical to provide such information on a revenue category basis. Beginning in the fourth quarter of fiscal 2017, we resumed reporting International comparable sales as revenue and the International segment was once again determined to be comparable.
The following is a description of the notable comparable sales changes in our International segment by revenue category in fiscal 2018:
• | Computing and Mobile Phones: The 2.0% comparable sales growth was driven primarily by computing, mobile phones and wearables, partially offset by tablets. |
• | Consumer Electronics: The 7.1% comparable sales growth was driven primarily by smart home, home theater, headphones and voice assistants, partially offset by digital imaging and health and fitness. |
• | Appliances: The 41.3% comparable sales growth was driven primarily by large and small appliances due to the addition of an appliance department within all of our stores in Canada. |
• | Entertainment: The 9.3% comparable sales growth was driven primarily by gaming hardware. |
• | Services: The 5.1% comparable sales decline was driven primarily by technical support and repair, partially offset by installation. |
• | Other: The 15.4% comparable sales growth was driven primarily by other product offerings, including baby and sporting goods. |
Our International segment experienced a gross profit increase of $21 million, or 2.7%, in fiscal 2018 compared to fiscal 2017, primarily related to foreign currency exchange rate fluctuations. Excluding the impact of foreign currency exchange rate fluctuations, the increase in gross profit was $3 million. However, the gross profit rate decreased to 23.2% in fiscal 2018 from 25.0% of revenue in fiscal 2017. This decrease in rate was primarily due to lower year-over-year periodic profit-share revenue and lower sales in the higher-margin services category in Canada. This was primarily driven by the launch of our Total Tech Support offer, an ongoing service revenue model that carries a higher sales-attach rate, but a lower gross profit rate.
Our International segment's SG&A increased $27 million, or 3.9%, in fiscal 2018 compared to fiscal 2017. Excluding the impact of foreign currency exchange rate fluctuations, the increase in SG&A was $12 million. However, the SG&A rate decreased to 20.6% in fiscal 2018 from 21.9% of revenue in fiscal 2017. The increase in SG&A was primarily driven by the impact of the extra week and a one-time employee bonus expense related to tax reform, partially offset by lower payroll and benefits and administrative costs.
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Our International segment recorded $1 million of restructuring charges in fiscal 2018 and $8 million of restructuring charges in fiscal 2017. Restructuring charges in both years relate to adjustments to our vacant space liabilities outstanding as a result of the Canadian brand consolidation and the Renew Blue plans. The adjustments were due to changes in estimates related to sublease income. Refer to Note 9, Restructuring Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our restructuring activities.
Our International segment operating income was $91 million in fiscal 2018 compared to $90 million in fiscal 2017. The slight improvement in operating income was primarily driven by increased gross profit and lower restructuring costs, offset by increased SG&A.
Additional Consolidated Results
Other Income (Expense)
In fiscal 2019, our gain on sale of investments was $12 million compared to $1 million and $3 million in fiscal 2018 and fiscal 2017, respectively. The gains were due to the sale of equity investments without determinable fair values.
In fiscal 2019, our investment income and other was $49 million, compared to $48 million and $31 million in fiscal 2018 and fiscal 2017, respectively. The increases were primarily due to progressively increasing interest rates in the U.S. as well as an increase in cash and investments throughout the year in fiscal 2018.
Interest expense remained relatively flat at $73 million, $75 million and $72 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Refer to Note 5, Derivative Instruments, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information.
Income Tax Expense
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act ("tax reform" or “Tax Act”), which among other things, lowered the U.S. statutory tax rate from 35% to 21% effective January 1, 2018. In addition, the Tax Act imposed a one-time deemed repatriation tax on net unremitted earnings of foreign subsidiaries not previously subject to U.S. income tax, which is payable over a period of eight years. In response to the Tax Act, the Securities and Exchange Commission staff issued a Staff Accounting Bulletin No. 118 (“SAB 118”) that provided guidance on accounting for the impact of the Tax Act. SAB 118 allowed companies to record provisional amounts while the accounting impact of the Tax Act was still under analysis, not to extend beyond the measurement period of one year from the enactment of the Tax Act.
In fiscal 2018, we recorded provisional tax expense of $283 million related to the Tax Act. The $283 million included a $209 million charge associated with the deemed repatriation tax and a $74 million charge primarily related to the revaluation of deferred tax assets and liabilities to reflect the new tax rate. During fiscal 2019 we finalized our calculations under SAB 118 and recorded a $20 million reduction in the deemed repatriation tax and a $3 million reduction in the revaluation of deferred tax assets and liabilities. Refer to Note 11, Income Taxes, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information.
Income tax expense decreased to $424 million in fiscal 2019 compared to $818 million in fiscal 2018, primarily as a result of the $283 million of tax expense associated with the Tax Act recorded in the prior year and the lower U.S. statutory tax rate in the current year, partially offset by the resolution of discrete tax matters in the prior year. Our effective income tax rate (“ETR”) for fiscal 2019 was 22.4%, compared to a rate of 45.0% in fiscal 2018. The decrease in the ETR was primarily due to the impact of the Tax Act recorded in the prior year and the lower U.S. statutory tax rate in the current year, partially offset by the resolution of discrete tax matters in the prior year.
Income tax expense increased to $818 million in fiscal 2018 compared to $609 million in fiscal 2017, primarily as a result of the $283 million of tax expense associated with the Tax Act, partially offset by the impacts from the recognition of excess tax benefits related to stock-based compensation, the lower blended U.S. statutory tax rate of 33.7% and a higher mix of pre-tax income from foreign operations in fiscal 2018. Our ETR for fiscal 2018 was 45.0%, compared to a rate of 33.5% in fiscal 2017. The increase in the ETR was primarily due to the impact of the Tax Act, partially offset by the recognition of excess tax benefits related to stock-based compensation and a higher mix of pre-tax income from foreign operations in fiscal 2018.
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Discontinued Operations
Discontinued operations reflect prior year activity within our International segment. Gain from discontinued operations, net of tax, in fiscal 2018 was $1 million, primarily related to the proceeds attributed to a non-compete clause from the sale of Best Buy Europe to Carphone Warehouse plc. Gain from discontinued operations, net of tax, in fiscal 2017 was $21 million, primarily related to the sale of the remaining Five Star property assets that were held for sale as of January 30, 2016.
Non-GAAP Financial Measures
The following table reconciles operating income, effective tax rate and diluted earnings per share from continuing operations (GAAP financial measures) for the periods presented to non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted earnings per share from continuing operations (non-GAAP financial measures) for the periods presented ($ in millions, except per share amounts):
Fiscal Year | |||||||||||
2019 | 2018 | 2017(1) | |||||||||
Operating income | $ | 1,900 | $ | 1,843 | $ | 1,854 | |||||
Restructuring charges(2) | 46 | 10 | 39 | ||||||||
Intangible asset amortization(3) | 22 | — | — | ||||||||
Acquisition-related transaction costs(3) | 13 | — | — | ||||||||
Tax reform-related item - employee bonus(4) | 7 | 80 | — | ||||||||
Tax reform-related item - charitable contribution(4) | — | 20 | — | ||||||||
Net CRT/LCD settlements(5) | — | — | (161 | ) | |||||||
Other Canada brand consolidation charges - SG&A(6) | — | — | 1 | ||||||||
Non-GAAP operating income | $ | 1,988 | |||||||||