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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.
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.
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.
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.
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 | % |
| (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.
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 | % |
| (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
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 | % |
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:
| 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.
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.
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 | $ | 1,953 | $ | 1,733 | |||||
| Effective tax rate | 22.4 | % | 45.0 | % | 33.5 | % | |||||
| Restructuring charges(2) | (0.1 | )% | — | % | 0.1 | % | |||||
| Tax reform - repatriation tax(4) | 1.1 | % | (11.5 | )% | — | % | |||||
| Tax reform - deferred tax rate change(4) | 0.3 | % | (4.1 | )% | — | % | |||||
| Tax reform-related item - employee bonus(4) | — | % | 0.3 | % | — | % | |||||
| Tax reform-related item - charitable contribution(4) | — | % | 0.1 | % | — | % | |||||
| Net CRT/LCD settlements(5) | — | % | — | % | (0.5 | )% | |||||
| Non-GAAP effective tax rate | 23.7 | % | 29.8 | % | 33.1 | % | |||||
| Diluted earnings per share from continuing operations | $ | 5.20 | $ | 3.26 | $ | 3.74 | |||||
| Restructuring charges(2) | 0.16 | 0.03 | 0.12 | ||||||||
| Intangible asset amortization(3) | 0.08 | — | — | ||||||||
| Acquisition-related transaction costs(3) | 0.05 | — | — | ||||||||
| Tax reform - repatriation tax(4) | (0.07 | ) | 0.68 | — | |||||||
| Tax reform - deferred tax rate change(4) | (0.02 | ) | 0.24 | — | |||||||
| Tax reform-related item - employee bonus(4) | 0.02 | 0.26 | — | ||||||||
| Tax reform-related item - charitable contribution(4) | — | 0.07 | — | ||||||||
| Net CRT/LCD settlements(5) | — | — | (0.50 | ) | |||||||
| Other Canada brand consolidation charges - SG&A(6) | — | — | 0.01 | ||||||||
| (Gain) loss on sale of investments, net(7) | (0.04 | ) | 0.02 | (0.01 | ) | ||||||
| Income tax impact of non-GAAP adjustments(8) | (0.06 | ) | (0.14 | ) | 0.15 | ||||||
| Non-GAAP diluted earnings per share from continuing operations | $ | 5.32 | $ | 4.42 | $ | 3.51 |
| (1) | Beginning in the first quarter of fiscal 2018, we no longer exclude non-restructuring property and equipment impairment charges from our non-GAAP financial measures. To ensure our financial results are comparable, we have recast fiscal 2017 balances to conform to this presentation. Refer to the Overview section within this MD&A for more information. |
| (2) | Refer to Note 9, Restructuring Charges, in 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 regarding the nature of these charges. For fiscal 2019, $47 million related to the U.S. and a benefit of $1 million related to Canada. For fiscal 2018, $9 million related to the U.S. and $1 million related to Canada. For fiscal 2017, $31 million related to the U.S. and $8 million related to Canada. |
| (3) | Represents charges associated with the acquisition of GreatCall, including (1) the non-cash amortization of definite-lived intangible assets, including customer relationships, tradenames and technology, and (2) acquisition-related transaction costs primarily comprised of professional fees. Refer to Note 2, Acquisition, in 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. |
| (4) | Represents charges and subsequent adjustments resulting from the Tax Act enacted into law in the fourth quarter of fiscal 2018, including amounts associated with a deemed repatriation tax and the revaluation of deferred tax assets and liabilities, as well as tax reform-related items announced in response to future tax savings created by the Tax Act, including a one-time bonus for certain employees and a one-time contribution to the Best Buy Foundation. |
| (5) | Represents CRT and LCD litigation settlements reached related to the U.S., net of related legal fees and costs. The settlements related to products purchased and sold in prior fiscal years. |
| (6) | Represents charges related to the Canadian brand consolidation initiated in the first quarter of fiscal 2016, primarily due to retention bonuses and other store-related costs that were a direct result of the consolidation but did not qualify as restructuring charges. |
| (7) | Represents (gain) loss on sale of investments and investment impairments included in Investment income and other on our Consolidated Statements of Earnings. |
| (8) | Represents the summation of the calculated income tax charge related to each non-GAAP non-income tax adjustment. The non-GAAP adjustments relate primarily to adjustments in the U.S. and Canada. As such, the income tax charge is calculated using the statutory tax rates for the U.S. (24.5%, 36.7% and 38.0% for fiscal 2019, fiscal 2018 and fiscal 2017, respectively) and Canada (26.9%, 26.6% and 26.6% for fiscal 2019, fiscal 2018 and fiscal 2017, respectively), applied to the non-GAAP adjustments of each country. |
Non-GAAP operating income for fiscal 2019 increased $35 million compared to fiscal 2018, primarily driven by strong revenue performance in both our Domestic and International segments in nearly all product categories and decreases in SG&A, primarily due to cost reductions and the absence of the extra week in fiscal 2019. The increase in non-GAAP operating income resulted in a year-over-year increase in non-GAAP diluted earnings per share from continuing operations in fiscal 2019 compared to fiscal 2018, which also benefited from a lower weighted-average diluted share count and a lower tax rate.
Non-GAAP operating income for fiscal 2018 increased $220 million compared to fiscal 2017 and non-GAAP operating income as a percent of revenue increased to 4.6%. The increase was driven primarily by strong revenue performance in both our Domestic and International segments in nearly all product categories and the impact of the extra week in fiscal 2018, offset by increases in SG&A primarily due to higher incentive compensation for store and corporate employees. The increase in non-GAAP operating income resulted in a year-over-year increase in non-GAAP diluted earnings per share from continuing operations in fiscal 2018 compared to fiscal 2017.
Liquidity and Capital Resources
Summary
We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including the level of investment required to support our business strategies, the performance of our business, capital expenditures, credit facilities, short-term borrowing arrangements and working capital management. Capital expenditures and share repurchases are a component of our cash flow and capital management strategy which, to a large extent, we can adjust in response to economic and other changes in our business environment. We have a disciplined approach to capital allocation, which focuses on investing in key priorities that support our strategy.
The following table summarizes our cash and cash equivalents and short-term investments at February 2, 2019, and February 3, 2018 ($ in millions):
| February 2, 2019 | February 3, 2018 | ||||||
| Cash and cash equivalents | $ | 1,980 | $ | 1,101 | |||
| Short-term investments | — | 2,032 | |||||
| Total cash and cash equivalents and short-term investments | $ | 1,980 | $ | 3,133 |
The decrease in cash and cash equivalents and short-term investments in fiscal 2019 was primarily due to share repurchases, investments in capital expenditures, the acquisition of GreatCall and dividends paid, partially offset by cash generated from operations.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years ($ in millions):
| 2019 | 2018 | 2017(1) | |||||||||
| Total cash provided by (used in): | |||||||||||
| Operating activities | $ | 2,408 | $ | 2,141 | $ | 2,557 | |||||
| Investing activities | 508 | (1,002 | ) | (877 | ) | ||||||
| Financing activities | (2,018 | ) | (2,297 | ) | (1,418 | ) | |||||
| Effect of exchange rate changes on cash | (14 | ) | 25 | 10 | |||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | $ | 884 | $ | (1,133 | ) | $ | 272 |
Operating Activities
The increase in cash provided by operating activities in fiscal 2019 compared to fiscal 2018 was primarily due to the timing of inventory receipts and payments and increased earnings. This was partially offset by higher incentive compensation payments, including payouts related to prior-year performance, timing of receivables collections and income tax payments.
The decrease in cash provided by operating activities in fiscal 2018 compared to fiscal 2017 was primarily due to the timing of inventory purchasing and payments and advertising payments. During fiscal 2018, we purchased greater amounts of inventory with shorter payment terms than in fiscal 2017, causing more payments to be made prior to fiscal year-end. This was partially offset by the timing of receivable collections and income tax payments.
Investing Activities
The increase in cash provided by investing activities in fiscal 2019 compared to fiscal 2018 was primarily due to a net decrease in investment purchases in fiscal 2019, partially offset by the acquisition of GreatCall.
The increase in cash used in investing activities in fiscal 2018 compared to fiscal 2017 was primarily due to an increase in capital spending to support our strategic growth initiatives and cash received in fiscal 2017 for the Five Star asset held-for-sale. This was partially offset by a decrease in the net investment in short-term investments during fiscal 2018.
Financing Activities
The decrease in cash used in financing activities in fiscal 2019 compared to fiscal 2018 was primarily due to a decrease in shares repurchased as we reached our $3.5 billion two-year share repurchase plan announced on March 1, 2018. This was partially offset by a decrease in the volume of option exercises and an increase in our regular quarterly dividend rate from $0.34 per share in fiscal 2018 to $0.45 per share in fiscal 2019.
The increase in cash used in financing activities in fiscal 2018 compared to fiscal 2017 was primarily due to increased share repurchases, driven by an increase in our share price and the number of shares repurchased, and an increase in our regular quarterly dividend rate from $0.28 per share in fiscal 2017 to $0.34 per share in fiscal 2018. These increases were partially offset by the repayment of our 2016 notes due March 15, 2016, in fiscal 2017 and a special dividend payment in fiscal 2017.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, short-term investments, our credit facilities and other debt arrangements are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures, share repurchases, dividends and strategic initiatives, including business combinations. However, in the event our liquidity is insufficient, we may be required to limit our spending. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms.
On April 17, 2018, we entered into a new $1.25 billion five-year senior unsecured revolving credit facility (the "Five-Year Facility Agreement") with a syndicate of banks that expires in April 2023. The Five-Year Facility Agreement replaced the previous $1.25 billion unsecured revolving credit facility, which was originally scheduled to expire in June 2021, but was
terminated on April 17, 2018. At February 2, 2019, and February 3, 2018, we had no borrowings outstanding under these agreements. Refer to Note 6, Debt, 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 credit facility.
Our ability to access our revolving credit facility under the Five-Year Facility Agreement is subject to our compliance with the terms and conditions of the facility, including financial covenants. The financial covenants require us to maintain certain financial ratios. At February 2, 2019, we were compliant with all such financial covenants. If an event of default were to occur with respect to any of our other debt, it would likely constitute an event of default under our facilities as well.
Our credit ratings and outlook at March 26, 2019, are summarized below. In fiscal 2019, Moody's upgraded its outlook from stable to positive and Fitch upgraded its ratings from BBB- to BBB and changed its outlook from positive to stable. Standard & Poor's ratings remained unchanged from the prior year.
| Rating Agency | Rating | Outlook | |
| Standard & Poor's | BBB | Stable | |
| Moody's | Baa1 | Positive | |
| Fitch | BBB | Stable |
Credit rating agencies review their ratings of our company periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the retail and consumer electronics industries, our financial position and changes in our business strategy. If further changes in our credit ratings were to occur, they could impact, among other things, interest costs for certain of our credit facilities, our future borrowing costs, access to capital markets, vendor financing terms and future new-store leasing costs.
Restricted Cash
Our liquidity is also affected by restricted cash balances that are pledged as collateral or restricted to use for workers' compensation and general liability insurance claims. Restricted cash and cash equivalents related to our continuing operations, which are included in Other current assets on our Consolidated Balance Sheets, remained relatively flat at $204 million and $199 million at February 2, 2019, and February 3, 2018, respectively.
Capital Expenditures
Our capital expenditures typically include investments in our stores, distribution capabilities and information technology enhancements (including e-commerce). During fiscal 2019, we invested $819 million in property and equipment, primarily related to upgrading our e-commerce and information technology systems and store-related projects.
The following table presents our capital expenditures for each of the past three fiscal years ($ in millions):
| 2019 | 2018 | 2017 | |||||||||
| New stores | $ | 5 | $ | 5 | $ | 3 | |||||
| Store-related projects(1) | 259 | 192 | 190 | ||||||||
| E-commerce and information technology | 448 | 425 | 347 | ||||||||
| Supply chain | 107 | 66 | 40 | ||||||||
| Total capital expenditures(2) | $ | 819 | $ | 688 | $ | 580 |
| (1) | Includes store remodels and various merchandising projects. |
| (2) | Total capital expenditures exclude non-cash capital expenditures of $53 million, $123 million and $48 million for fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Non-cash capital expenditures are comprised of capitalized leases, as well as additions to property and equipment included in accounts payable. |
Debt and Capital
As of February 2, 2019, we had $650 million principal amount of notes due March 15, 2021 (the "2021 Notes") and $500 million principal amount of notes due October 1, 2028 (the "2028 Notes") outstanding. Refer to Note 6, Debt, in 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 2021 Notes and 2028 Notes.
Share Repurchases and Dividends
We repurchase our common stock and pay dividends pursuant to programs approved by our Board of Directors ("Board"). Our long-term capital allocation strategy is to first fund operations and investments in growth and then return excess cash over time to shareholders through dividends and share repurchases while maintaining investment-grade credit metrics.
On February 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. 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. Repurchased shares are retired and constitute authorized but unissued shares.
The following table presents our share repurchase history for each of the past three fiscal years (in millions, except per share amounts):
| 2019 | 2018 | 2017 | |||||||||
| Total cost of shares repurchased | $ | 1,493 | $ | 2,009 | $ | 751 | |||||
| Average price per share | $ | 70.28 | $ | 57.16 | $ | 33.54 | |||||
| Total number of shares repurchased | 21.2 | 35.1 | 21.1 |
In fiscal 2004, our Board initiated the payment of a regular quarterly cash dividend on common stock. A quarterly cash dividend has been paid in each subsequent quarter. The payment of cash dividends is subject to customary legal and contractual restrictions. The following table presents our dividend activity for each of the past three fiscal years ($ in millions, except per share amounts):
| 2019 | 2018 | 2017 | |||||||||
| Regular quarterly cash dividends per share | $ | 1.80 | $ | 1.36 | $ | 1.12 | |||||
| Special cash dividends per share(1) | — | — | 0.45 | ||||||||
| Total cash dividends per share | $ | 1.80 | $ | 1.36 | $ | 1.57 | |||||
| Cash dividends declared and paid | $ | 497 | $ | 409 | $ | 505 |
| (1) | Special cash dividends are authorized by our Board and issued upon their discretion. Dividends paid in fiscal 2017 are related to the net after-tax proceeds from certain legal settlements and asset disposals. |
Dividends declared and paid in fiscal 2019 increased from fiscal 2018 due to an increase in the regular quarterly dividend per share from $0.34 in fiscal 2018 to $0.45 in fiscal 2019. Dividends declared and paid in fiscal 2018 decreased from fiscal 2017 primarily due to the absence of a special cash dividend in fiscal 2018, partially offset by an increase in the regular quarterly dividend per share from $0.28 in fiscal 2017 to $0.34 in fiscal 2018.
On February 23, 2019, our Board authorized an 11% increase in the regular quarterly dividend to $0.50 per share.
Other Financial Measures
Our current ratio, calculated as current assets divided by current liabilities, was 1.2 as of February 2, 2019, compared to 1.3 as of February 3, 2018. The lower current ratio in fiscal 2019 was driven by a decrease in cash and cash equivalents, primarily from share repurchases, investments in capital expenditures and the acquisition of GreatCall, partially offset by a decrease in the current portion of long-term debt related to the repayment of our $500 million principal amount of notes due August 2018, which were included in the current portion of long-term debt at February 3, 2018.
Our debt to earnings ratio, calculated as total debt (including current portion) divided by net earnings from continuing operations, was 0.9 as of February 2, 2019, compared to 1.4 as of February 3, 2018, primarily due to higher earnings in the current year driven by a decrease in tax expense associated with the Tax Act.
Off-Balance-Sheet Arrangements and Contractual Obligations
Other than operating leases, we do not have any off-balance-sheet arrangements. A summary of our operating lease obligations by fiscal year is included in the "Contractual Obligations" table below. Additional information regarding our operating leases is
available in Item 2, Properties, and Note 10, Leases, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
The following table presents information regarding our contractual obligations as of February 2, 2019, with payments due by period ($ in millions):
| Payments Due by Period | |||||||||||||||||||
| Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||
| Long-term debt obligations(1) | $ | 1,150 | $ | — | $ | 650 | $ | — | $ | 500 | |||||||||
| Capital lease obligations | 45 | 14 | 18 | 6 | 7 | ||||||||||||||
| Financing lease obligations | 205 | 48 | 77 | 40 | 40 | ||||||||||||||
| Interest payments(2) | 281 | 62 | 86 | 39 | 94 | ||||||||||||||
| Operating lease obligations(3) | 2,961 | 700 | 1,161 | 624 | 476 | ||||||||||||||
| Purchase obligations(4) | 2,340 | 2,164 | 101 | 75 | — | ||||||||||||||
| Unrecognized tax benefits(5) | 300 | ||||||||||||||||||
| Deferred compensation(6) | 23 | ||||||||||||||||||
| Total | $ | 7,305 | $ | 2,988 | $ | 2,093 | $ | 784 | $ | 1,117 |
Note: For additional information refer to Note 6, Debt; Note 10, Leases; Note 11, Income Taxes; and 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.
| (1) | Represents principal amounts only and excludes interest rate swap valuation adjustments. |
| (2) | Interest payments related to our 2021 Notes and 2028 Notes include the variable interest rate payments included in our interest rate swap. For additional information 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. |
| (3) | Operating lease obligations do not include payments to landlords covering real estate taxes and common area maintenance. These charges, if included, would increase total operating lease obligations by $0.8 billion at February 2, 2019. |
| (4) | Purchase obligations include agreements to purchase goods or services that are enforceable, are legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include agreements that are cancelable without penalty. Additionally, although they do not contain legally binding purchase commitments, we included open purchase orders in the table above. Substantially all open purchase orders are fulfilled within 30 days. |
| (5) | Unrecognized tax benefits relate to uncertain tax positions. As we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the "Payments Due by Period" section of the table. |
| (6) | Included in Long-term liabilities on our Consolidated Balance Sheets at February 2, 2019, was a $23 million obligation for deferred compensation. As the specific payment dates for deferred compensation are unknown, the related balances have not been reflected in the "Payments Due by Period" section of the table. |
Additionally, we have $1.25 billion in undrawn capacity on our credit facility at February 2, 2019, which if drawn upon, would be included as short-term debt on our Consolidated Balance Sheets.
Critical Accounting Estimates
The preparation of our financial statements requires us to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors believed to be relevant at the time our consolidated financial statements are prepared. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in 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. Other than our adoption of ASU 2014-09, Revenue from Contracts with Customers, in the first quarter of fiscal 2019, we have not made any material changes to our accounting policies or methodologies during the past three fiscal years. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results. These estimates require our most difficult, subjective or complex judgments and generally incorporate significant uncertainty.
Inventory Markdown
Description
Our merchandise inventories were $5.4 billion at February 2, 2019. We value our inventory at the lower of cost or net realizable value through the establishment of inventory markdown adjustments. Markdown adjustments reflect the excess of cost over the net recovery we expect to realize from the ultimate sale or other disposal of inventory and establish a new cost basis.
Judgments and uncertainties involved in the estimate
Markdown adjustments involve uncertainty because the calculations require management to make assumptions and to apply judgment about the expected recovery rates due to factors such as product type and condition, forecasted consumer demand, product lifecycles, the promotional environment, vendor return rights and the expected sales channel of ultimate disposition. We also apply judgment in the assumptions about other components of net realizable value, such as direct vendor allowances and selling costs.
Effect if actual results differ from assumptions
A 10% change in our markdown adjustment at February 2, 2019, would have affected net earnings by approximately $11 million in fiscal 2019.
Vendor Allowances
Description
We receive funds from our merchandise vendors through a variety of programs and arrangements, primarily in the form of purchases-based or sales-based volumes and for product advertising and placement in our stores. We recognize these funds as a reduction of cost of sales when the associated inventory is sold. If the funds are not specifically related to purchase or sales volumes, the funds are recognized ratably over the performance period as the product promotion or placement is completed. Funds that are determined to be a reimbursement of specific, incremental and identifiable costs incurred to sell a vendor's products are recorded as an offset to the related expense when incurred.
Judgments and uncertainties involved in the estimate
Due to the quantity and diverse nature of our vendor agreements, estimates are made to determine the amount of funding to be recognized in earnings or deferred as an offset to inventory. These estimates require a detailed analysis of complex factors, including (1) proper classification of the type of funding received; and (2) the methodology to estimate the portion of purchases-based funding that should be recognized in cost of sales, which considers factors such as inventory turn by product category and actual sell-through of inventory.
Effect if actual results differ from assumptions
A 10% change in our vendor funding deferral at February 2, 2019, would have affected net earnings by approximately $28 million in fiscal 2019.
Property and Equipment Impairments
Description
Property and equipment assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating property and equipment assets with impairment indicators for potential impairment, we first compare the carrying value of the asset to its estimated undiscounted future cash flows. If the sum of the estimated undiscounted future cash flows is less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to its estimated fair value, which is typically based on estimated discounted future cash flows. We recognize an impairment loss if the amount of the asset's carrying value exceeds the asset's estimated fair value.
We evaluate locations for triggering events on a quarterly basis. For store locations, our primary indicator that asset carrying values may not be recoverable is negative store operating income for the most recent 12-month period. We also monitor other factors when evaluating store locations for impairment, including significant changes in the manner of use or expected life of the assets or significant changes in our business strategies.
Judgments and uncertainties involved in the estimate
Our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred. Our impairment loss calculations require us to make assumptions and to apply judgment in order to estimate future cash flows,
including estimated sales, margin and expenses, as well as considering lease changes and growth rates. We also apply judgment in forecasting useful lives of the assets and selecting a discount rate that reflects the risk inherent in future cash flows.
Effect if actual results differ from assumptions
A 10% change in our non-restructuring property and equipment impairments would have affected net earnings by approximately $1 million in fiscal 2019.
Tax Contingencies
Description
Our income tax returns are periodically audited by U.S. federal, state and local and foreign tax authorities. Tax authorities audit our tax filing positions, including the timing and amount of income and deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with our various tax filing positions, we may record a liability for such exposures. A number of years may elapse before a particular matter, for which we have established a liability, is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax provisions in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
Our effective income tax rate is also affected by changes in tax law, the tax jurisdiction of new stores or business ventures, the level of earnings and the results of tax audits.
Judgments and uncertainties involved in the estimate
Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and apply judgment to estimate the exposures associated with our various tax filing positions. Such assumptions can include complex and uncertain external factors, such as changes in tax law, interpretations of tax law and the timing of such changes, and uncertain internal factors such as taxable earnings by jurisdiction, the magnitude and timing of certain transactions and capital spending.
Effect if actual results differ from assumptions
Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.
To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may reduce our effective income tax rate in the period of resolution.
Gift Card Breakage
Description
We sell Best Buy gift cards to our customers in our retail stores, online and through select third parties. Our gift cards do not expire. We recognize revenue from gift cards when the card is redeemed by the customer. We also recognize revenue for the portion of gift card values that is not expected to be redeemed ("breakage"). We estimate breakage based on historical patterns and other factors, such as laws and regulations applicable to each jurisdiction. We recognize breakage revenue using a method that is consistent with customer redemption patterns. Typically, over 90% of gift card redemptions (and therefore recognition of over 90% of gift card breakage revenue) occur within one year of issuance.
Judgments and uncertainties involved in the estimate
There is judgment in assessing (1) the level at which we group gift cards for analysis of breakage rates, (2) redemption patterns, and (3) the ultimate value of gift cards which we do not expect to be redeemed.
Effect if actual results differ from assumptions
A 10% change in our cumulative estimated gift card breakage rate at February 2, 2019, would have affected net earnings by approximately $51 million in fiscal 2019.
Service Revenue
Description
We sell customers support plans as part of a bundled service offer which may include items such as technical support, extended warranty, anti-virus software and one-time service repairs. We allocate the transaction price to all performance obligations identified in the contract based on their relative fair value. For technical support membership contracts, we typically recognize revenue over time on a usage basis, an input method of measuring progress over the related contract term. This method is based on historical utilization patterns.
Judgments and uncertainties involved in the estimate
There is judgment in (1) determining the level at which we apply a portfolio approach to these contracts; and, (2) measuring the relative standalone selling price for performance obligations within these contracts to the extent that they are only bundled and sold to customers with other performance obligations, or alternatively, using a cost-plus margin approach; and, (3) assessing the pattern of delivery across multiple portfolios of customers, including estimating current and future usage patterns. When insufficient history of usage is available, we generally recognize revenue ratably over the life of the contract.
Effect if actual results differ from assumptions
A 10% change in the amount of services membership deferred revenue as of February 2, 2019, would have affected net earnings by approximately $12 million in fiscal 2019.
Goodwill
Description
Goodwill is not amortized but is evaluated for impairment annually in the fiscal fourth quarter or whenever events or circumstances indicate the carrying value may not be recoverable. The impairment test involves a comparison of the fair value of each reporting unit with its book value. Fair value reflects the price a potential market participant would be willing to pay for the reporting unit in an arms-length transaction.
Judgments and uncertainties involved in the estimate
Determining fair value of a reporting unit is complex and typically requires analysis of discounted cash flows and other market information, such as trading multiples. Cash flow analysis requires judgments regarding many factors, such as revenue growth rates, expenses and capital expenditures. Market information requires judgmental selection of relevant market comparables. We estimate that the fair value of our Domestic reporting unit significantly exceeds carrying value. As our acquisition of GreatCall occurred recently, we estimate the fair value of the GreatCall reporting unit approximates its fair value. There is greater uncertainty surrounding the key assumptions used to estimate the fair value of the GreatCall reporting unit and therefore a greater risk of goodwill impairment in future periods.
Effect if actual results differ from assumptions
A 10% change in the fair value of the GreatCall reporting unit at February 2, 2019, would not have a material affect on our net earnings.
New Accounting Pronouncements
For a description of new applicable accounting pronouncements, see 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.
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