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:
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•
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Liquidity and Capital Resources
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•
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Critical Accounting Estimates
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•
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New Accounting Pronouncements
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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 are a leading provider of technology products, services and solutions. We offer these products and services to the customers who visit our stores, engage with Geek Squad agents or use our websites or mobile applications. We have operations in the U.S., Canada and Mexico. We operate two reportable segments: Domestic and International. The Domestic segment is
comprised of all operations within the U.S. and its districts and territories. The International segment is comprised of all operations outside the U.S. and its territories.
Throughout this MD&A, we refer to comparable sales. Our comparable sales calculation compares revenue from stores, websites and call centers operating for at least 14 full months, as well as revenue related to certain other comparable sales channels for a particular period to the corresponding period in the prior year. Relocated stores, as well as remodeled, expanded and downsized stores closed more than 14 days, are excluded from the comparable sales calculation until at least 14 full months after reopening. Acquisitions are included in the comparable sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The calculation of comparable sales excludes the impact of revenue from discontinued operations and the effect of fluctuations in foreign currency exchange rates (applicable to our International segment only). The Canadian brand consolidation, which includes 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, has a material impact on a year-over-year basis on the remaining Canadian retail stores and the website. As such, all Canadian store and website revenue has been removed from the comparable sales base and the International segment no longer has a comparable metric in fiscal 2016 and the Enterprise comparable sales equals the Domestic segment comparable sales. Enterprise comparable sales for periods presented prior to fiscal 2016 include revenue from our International segment.
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.
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. The impact of foreign currency exchange rate fluctuations is typically calculated as the difference between current period activity translated using the current period’s currency exchange rates and the comparable prior-year period’s currency exchange rates. We use this method to calculate the impact of changes in foreign currency exchange rates for all countries where the functional currency is not the U.S. dollar.
In our discussions of the operating results below, we sometimes refer to the impact of net new stores on our results of operations. The key factors that dictate the impact that the net new stores have on our operating results include: (i) store opening and closing decisions; (ii) the size and format of new stores, as we operate stores ranging from approximately 1,000 square feet to approximately 50,000 square feet; (iii) the length of time the stores were open during the period; and (iv) the overall success of new store launches.
When assessing our performance in consumer electronics categories against other retailers, we often reference The NPD Group's ("NPD") Weekly Tracking Service for the appropriate period. NPD defines the consumer electronics industry as including televisions, desktop and notebook computers, tablets not including Kindle, digital imaging and other categories. Sales of these products represent approximately 65% of our Domestic segment revenue in fiscal 2016. The data does not include mobile phones, appliances, services, gaming, Apple watch, movies or music.
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 non-GAAP operating income, non-GAAP effective tax rate, non-GAAP net earnings from continuing operations, non-GAAP diluted earnings per share from continuing operations and adjusted debt to earnings before goodwill impairment, interest, income taxes, depreciation, amortization and rent ("EBITDAR") ratio. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.
We believe that the non-GAAP measures described above provide meaningful supplemental information to assist shareholders in understanding our financial results and assessing our prospects for future performance. Management believes adjusted operating income, adjusted effective tax rate, adjusted net earnings from continuing operations and adjusted diluted earnings per share from continuing operations are important indicators of our operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results and provide a baseline for analyzing trends in our underlying businesses. Management makes standard adjustments for items such as restructuring charges, goodwill impairments, non-restructuring asset impairments and gains or losses on investments, as well as adjustments for other items that may arise during the period and have a meaningful impact on comparability. Refer to the
Non-GAAP Financial Measures
section below for the detailed reconciliation of items that impacted the non-GAAP measures in the presented periods. Management believes our
adjusted debt to EBITDAR ratio is an important indicator of our creditworthiness. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These non-GAAP financial measures are an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures within our discussion of consolidated performance below, provide a more complete understanding of our business. 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.
Business Strategy
On a full year basis, fiscal 2016 marked the second year in a row we increased our Domestic segment revenue and expanded our operating margin. We also continued to make significant progress against our
Renew Blue
strategy. During the year, we continued to gain share in appliances and nearly all of our traditional consumer electronics categories. We grew the Domestic segment online revenue 13% to over $4 billion, or 11% of total Domestic segment revenue in fiscal 2016. We increased our Net Promoter Score ("NPS") by over 300 basis points. We continued to improve our employee engagement scores and decreased employee turnover. We deepened our partnerships with the top tech companies in the world. We delivered $150 million against our $400 million
Renew Blue
Phase 2 cost reduction and gross profit optimization program. We consolidated brands and embarked on a significant transformation in Canada, including the closure of 68 stores. And finally, in one year, we returned $1.5 billion in cash to our shareholders, including $1 billion in share repurchases, which was originally planned to be completed over three years.
Fiscal 2017 Priorities
Turning to fiscal 2017, we are entering the next phase of our
Renew Blue
strategy. Our purpose from a customer standpoint is to build a company that does a unique job of helping customers learn about and enjoy the latest technology. As we begin this next phase in fiscal 2017, we will focus on the following priorities: (1) building on our strong industry position and multi-channel capabilities to drive the existing business; (2) driving cost reduction and efficiencies; and (3) advancing key initiatives to drive future growth and differentiation.
Our first priority is to build on our strong industry position and multi-channel capabilities to drive the existing business. More specifically, we plan to implement a number of initiatives across merchandising, marketing, digital, stores, services, and supply chain.
Our second priority for fiscal 2017 is to reduce cost and drive efficiencies throughout the business. Reducing costs is essential for us to be able to fund our investments, build our resilience to product cycles and increase our profitability over time. Furthermore, based on current economic factors and softness in the consumer electronics industry, it is essential that we be proactive on the cost reduction front.
A key element of our approach to achieving this is to simplify our core business processes to simultaneously improve the customer experience and drive costs out. As an example, we have a project focused on reducing the amount of open box appliances we take into our stores by addressing root cause issues. This project has the potential to not only improve the customer experience but also to drive material savings through lower markdowns, lower transportation costs and better use of labor in our stores and distribution centers.
More broadly, we aspire to deliver world-class operational performance, defined in terms of quality, service and cost. This focus has to be a way of life, especially given our margin structure and the volatility of our industry. In fiscal 2016, we announced a specific cost reduction and gross profit optimization program called
Renew Blue
Phase 2, with a goal of $400 million over three years on top of the $1 billion we eliminated as part of Phase 1 in fiscal 2015.
Against that goal, in fiscal 2016, we achieved $150 million of annualized savings leaving us with $250 million remaining. In light of our increased focus on cost and productivity, we believe there are incremental savings that can be achieved above and beyond our current goal. Partially offsetting these savings, however, will be our expected future investments in the areas of labor expertise, services pricing and key growth initiatives. In fiscal 2016, these investments totaled approximately $100 million and we expect a similar level in fiscal 2017, which again will be funded by our cost savings.
Our third priority is to advance key initiatives to more deeply transform our company in order to drive future growth and differentiation. While there may be short-term pressures, we continue to believe we operate in an opportunity rich environment. The Internet of Things is providing a new technology wave and is making our operating model increasingly relevant to customers.
We are investing to be the leading technology expert who makes it easy to learn about and confidently enjoy the best technology. In this context, we believe we have ongoing growth opportunities around key product categories, as well as from increasing our share of wallet with existing customers and acquiring new customers within our target segment who are passionate about technology and need help with it. Our Services capabilities and Geek Squad are key building blocks of this strategy. While it is not visible in our services top line results today, we are making progress to bring these opportunities to life.
Over the last two years, we have improved many aspects of our extended service plan and repair operations. We have also had to adjust our pricing of our extended service plans. We are seeing the results of our efforts through substantial increases in NPS, higher total customer interactions and from a financial point of view, the periodic profit sharing payments we earned this year. We are also beginning to see improving attach rates as we enter fiscal 2017.
Building on this foundational work, we will continue our work to improve the customer experience and enhance our service offering and capabilities, in support of our mission to help customers learn about and enjoy the latest technology. While we are energized by the potential of this opportunity, the work necessary to capture it takes time. Thus, fiscal 2017 will be another year of gradual and incremental improvement, with more meaningful results expected in fiscal 2018.
Fiscal 2017 Trends
We believe that the consumer electronics industry will continue to be characterized by product innovation cycles. We are undeterred by this fact - as we believe there will always be technology innovation. Our imperative is, that in these cycles, we continue to deliver superior execution against what is in our control, recognizing that the cycles rarely align at any point in time.
In fiscal 2017, we are focused on continuing to build on our foundation to both drive and capitalize on these technology cycles. In parallel, we are focused on building the key initiatives outlined above that we believe will result in stronger relationships with our customers, provide profitable revenue even during down cycles and continue to create long-term shareholder value.
Over time, as the fruit of these key initiatives materialize, we expect to accelerate our revenue and operating income growth by taking advantage of opportunities provided by ongoing technology innovation and the need customers have for help. In the short-term, we expect to be characterized by our strong cash flow generating capabilities and our intent to regularly return excess free cash flow to shareholders.
From a financial outlook perspective, for fiscal 2017, based on current industry dynamics and how we see the various product cycles playing out in our Domestic segment, we are expecting revenue declines in the first half followed by growth in the back half. We also expect that our strong execution and operational capabilities will allow us to continue to gain market share. In this context we are targeting flat Domestic segment revenue for the full fiscal year due to continued growth in appliances, connected home and home theater in particular, but recognize that it will be challenging without a strong mobile cycle and improvements in the NPD-reported categories overall.
Despite the soft revenue environment, we will target approximately flat operating income, including the lapping of the significant periodic profit sharing benefits from our services plan portfolio that we earned in fiscal 2016. A key element to achieve this will be the delivery of our cost reduction and gross profit optimization initiatives. In addition, we intend to reward our shareholders by being a premium dividend payer and increasing our EPS through ongoing share repurchases.
After three consecutive years of strong cash flow generation under
Renew Blue
, we believe now is an ideal time to provide a view of our long-term capital allocation strategy. This strategy is based on our strong cash position today and our ongoing confidence in our future cash-flow generation. At the core of this strategy is our intent to first fund our operations and growth investments, including potential acquisitions, and then to return the remaining excess free cash flow to our shareholders, over time, through dividends and share repurchases, while maintaining investment grade credit metrics. This strategy targets the return of excess free cash flow to shareholders through a 35% to 45% non-GAAP dividend payout ratio (defined as dividends divided by non-GAAP net earnings) and regular share repurchases with a minimum annual expectation of offsetting dilution from equity compensation.
In line with this strategy, our fiscal 2017 return of capital plan includes (1) a 22% increase in the regular quarterly dividend to $0.28 per share; (2) the intent to repurchase $1 billion worth of shares over the next two years; and (3) a special dividend of $0.45 per share, or approximately $145 million. This is in addition to the $1.5 billion in cash we returned to shareholders in fiscal 2016.
Results of Operations
In order to align our fiscal reporting periods and comply with statutory filing requirements in certain foreign jurisdictions, we consolidate the financial results of our Mexico operations, as well as our discontinued China and Europe 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. There were no significant intervening events which would have materially affected our financial condition, results of operations, liquidity or other factors had they been recorded during fiscal 2016.
Discontinued Operations Presentation
The results of mindSHIFT Technologies, Inc. ("mindSHIFT") in our Domestic segment and Best Buy Europe and Five Star in our International segment are presented as discontinued operations in our Consolidated Statements of Earnings. Unless otherwise stated, financial results discussed herein refer to continuing operations.
Domestic Segment Installment Billing Plans
In April 2014, we began to sell installment billing plans offered by mobile carriers to our customers to complement the more traditional two-year plans. While the two types of contracts have broadly similar overall economics, installment billing plans typically generate higher revenues due to higher proceeds for devices and higher cost of sales due to lower device subsidies. As we increase our mix of installment billing plans, there is an associated increase in revenue and cost of goods sold and a decrease in gross profit rate, with gross profit dollars relatively unaffected. This change in plan offer does not impact our International segment.
The following table presents our Domestic and Enterprise comparable sales and the estimated benefit of installment billing for fiscal 2016 and 2015:
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January 30, 2016
(1)
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January 31, 2015
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Domestic
|
|
|
|
Comparable sales % gain
|
0.5
|
%
|
|
1.0
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%
|
Estimated benefit of installment billing
|
0.6
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%
|
|
0.5
|
%
|
Comparable sales % gain (decline) excluding estimated impact of installment billing
|
(0.1
|
)%
|
|
0.5
|
%
|
|
|
|
|
Enterprise
|
|
|
|
Comparable sales % gain
|
0.5
|
%
|
|
0.5
|
%
|
Estimated benefit of installment billing
|
0.6
|
%
|
|
0.5
|
%
|
Comparable sales % gain (decline) excluding estimated impact of installment billing
|
(0.1
|
)%
|
|
—
|
%
|
|
|
(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, has a material impact on a year-over-year basis on the remaining Canadian retail stores and the website. As such, all Canadian store and website revenue has been removed from the comparable sales base and the International segment no longer has a comparable metric in fiscal 2016 and the Enterprise comparable sales equals the Domestic segment comparable sales. Enterprise comparable sales for periods presented prior to fiscal 2016 include revenue from our International segment.
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Consolidated Results
Fiscal
2016
Summary
|
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•
|
Fiscal
2016
included net earnings from continuing operations of
$0.8 billion
, compared to
$1.2 billion
in fiscal
2015
. Net earnings in fiscal
2016
included $201 million of restructuring charges, while fiscal
2015
included a $353 million discrete tax benefit related to reorganizing certain European legal entities. Earnings per diluted share from continuing operations was
$2.30
in fiscal
2016
, compared to
$3.53
in fiscal
2015
.
|
|
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•
|
Revenue was
$39.5 billion
in fiscal
2016
a decrease of $811 million compared to fiscal 2015. The decrease was driven by the International segment and related to the negative impact of foreign currency exchange fluctuations and the negative impact of Canadian store closures.
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•
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Our gross profit rate increased by
0.9%
of revenue to
23.3%
of revenue in fiscal
2016
. The increase was primarily due to a periodic profit sharing benefit based on performance of our externally-managed extended service plan portfolio and cathode ray tube and liquid crystal display ("CRT/LCD") related legal settlements received.
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|
|
•
|
We generated $1.3 billion in operating cash flow in fiscal
2016
, compared to $1.9 billion in fiscal
2015
, and we ended fiscal
2016
with $3.3 billion of cash, cash equivalents and short-term investments, compared to $3.9 billion at the end of fiscal
2015
.
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|
•
|
During fiscal
2016
, we made four dividend payments totaling $1.43 per share, or $499 million in the aggregate.
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The following table presents selected consolidated financial data for each of the past three fiscal years ($ in millions, except per share amounts):
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Consolidated Performance Summary
|
|
2016
|
|
2015
|
|
2014
|
Revenue
|
|
$
|
39,528
|
|
|
$
|
40,339
|
|
|
$
|
40,611
|
|
Revenue % gain (decline)
|
|
(2.0
|
)%
|
|
(0.7
|
)%
|
|
6.2
|
%
|
Comparable sales % gain (decline)
(1)
|
|
0.5
|
%
|
|
0.5
|
%
|
|
(1.0
|
)%
|
Comparable sales % gain (decline), excluding estimated impact of installment billing
(1)(2)
|
|
(0.1
|
)%
|
|
—
|
%
|
|
(1.0
|
)%
|
Restructuring charges - cost of goods sold
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gross profit
|
|
$
|
9,191
|
|
|
$
|
9,047
|
|
|
$
|
9,399
|
|
Gross profit as a % of revenue
(3)
|
|
23.3
|
%
|
|
22.4
|
%
|
|
23.1
|
%
|
SG&A
|
|
$
|
7,618
|
|
|
$
|
7,592
|
|
|
$
|
8,106
|
|
SG&A as a % of revenue
|
|
19.3
|
%
|
|
18.8
|
%
|
|
20.0
|
%
|
Restructuring charges
|
|
$
|
198
|
|
|
$
|
5
|
|
|
$
|
149
|
|
Operating income
|
|
$
|
1,375
|
|
|
$
|
1,450
|
|
|
$
|
1,144
|
|
Operating income as a % of revenue
|
|
3.5
|
%
|
|
3.6
|
%
|
|
2.8
|
%
|
Net earnings from continuing operations
|
|
$
|
807
|
|
|
$
|
1,246
|
|
|
$
|
695
|
|
Gain (loss) from discontinued operations
(4)
|
|
$
|
90
|
|
|
$
|
(13
|
)
|
|
$
|
(163
|
)
|
Net earnings attributable to Best Buy Co., Inc. shareholders
|
|
$
|
897
|
|
|
$
|
1,233
|
|
|
$
|
532
|
|
Diluted earnings per share from continuing operations
|
|
$
|
2.30
|
|
|
$
|
3.53
|
|
|
$
|
2.00
|
|
Diluted earnings per share
|
|
$
|
2.56
|
|
|
$
|
3.49
|
|
|
$
|
1.53
|
|
|
|
(1)
|
Enterprise comparable sales for fiscal 2015 and fiscal 2014 includes revenue from continuing operations in the the International segment. Excluding the International segment, Enterprise comparable sales for fiscal 2015 and fiscal 2014, excluding the impact of installment billing, would have been 0.5% and (0.4%), respectively, or equal to Domestic comparable sales excluding the impact of installment billing, for the same period.
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(2)
|
Represents comparable sales excluding the estimated revenue benefit from installment billing.
|
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(3)
|
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.
|
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(4)
|
Includes both gain (loss) from discontinued operations and net (earnings) loss from discontinued operations attributable to noncontrolling interests.
|
Fiscal
2016
Results Compared With Fiscal
2015
The components of the
2.0%
revenue decrease in fiscal
2016
were as follows:
|
|
|
|
Impact of foreign currency exchange rate fluctuations
|
(1.3
|
)%
|
Non-comparable sales
(1)
|
(1.1
|
)%
|
Comparable sales impact
|
0.4
|
%
|
Total revenue decrease
|
(2.0
|
)%
|
|
|
(1)
|
Non-comparable sales reflects the impact of net store opening and closing activity, including the Canadian brand consolidation activity, as well as, the impact of revenue streams not included within our comparable sales calculation, such as profit sharing benefits, certain credit card revenue, gift card breakage and sales of merchandise to wholesalers and dealers, as applicable.
|
Our gross profit rate increased
0.9%
of revenue in fiscal
2016
. Our Domestic segment contributed a rate increase of 0.9% of revenue and there was no change in our International segment. For further discussion of each segment's gross profit rate changes, see
Segment Performance Summary
, below.
The SG&A rate increased
0.5%
of revenue in fiscal
2016
. Our Domestic segment contributed a rate increase of 0.5% of revenue and there was no change in our International segment. For further discussion of each segment's SG&A rate changes, see
Segment Performance Summary,
below.
SG&A restructuring charges increased from $5 million in fiscal 2015 to $198 million in fiscal 2016. Our International segment drove this increase. For further discussion of each segment's SG&A restructuring charges, see
Segment Performance Summary,
below.
Our operating income decreased
$75 million
, and our operating income as a percent of revenue decreased to
3.5%
of revenue in fiscal
2016
, compared to operating income of
3.6%
of revenue in fiscal
2015
. The decrease in our operating income was primarily due to an increase in restructuring charges partially offset by net CRT/LCD legal settlement proceeds received in fiscal 2016.
Fiscal
2015
Results Compared With Fiscal
2014
The components of the
0.7%
revenue decrease in fiscal
2015
were as follows:
|
|
|
|
Impact of foreign currency exchange rate fluctuations
|
(0.7
|
)%
|
Net store changes
|
(0.2
|
)%
|
Non-comparable sales
(1)
|
(0.2
|
)%
|
Comparable sales impact
|
0.4
|
%
|
Total revenue decrease
|
(0.7
|
)%
|
|
|
(1)
|
Non-comparable sales reflects the impact of revenue streams not included within our comparable sales calculation, such as certain credit card revenue, gift card breakage and sales of merchandise to wholesalers and dealers, as applicable.
|
Our gross profit rate decreased
0.7%
of revenue in fiscal
2015
. Our Domestic and International segments contributed a rate decrease of 0.6% of revenue and 0.1% of revenue, respectively. For further discussion of each segment's gross profit rate changes, see
Segment Performance Summary
, below.
The SG&A rate decreased
1.2%
of revenue in fiscal
2015
. Our Domestic and International segments contributed a rate decrease of 1.1% of revenue and 0.1% of revenue, respectively. For further discussion of each segment's SG&A rate changes, see
Segment Performance Summary,
below.
We recorded restructuring charges of
$149 million
in fiscal 2014, comprised of $123 million in our Domestic segment and $26 million in our International segment. These restructuring charges resulted in a decrease in our operating income in fiscal 2014 of 0.4% of revenue. We recorded an immaterial amount of restructuring charges in fiscal 2015. For further discussion of each segment’s restructuring charges, see
Segment Performance Summary
, below.
Our operating income increased $306 million, and our operating income as a percent of revenue increased to 3.6% of revenue in fiscal
2015
, compared to operating income of 2.8% of revenue in fiscal
2014
. The increase in our operating income was due to a decrease in SG&A and restructuring charges, partially offset by LCD legal settlement proceeds received in fiscal 2014.
Segment Performance Summary
Domestic Segment
The following table presents selected financial data for our Domestic segment for each of the past three fiscal years ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Segment Performance Summary
|
2016
|
|
2015
|
|
2014
|
Revenue
|
$
|
36,365
|
|
|
$
|
36,055
|
|
|
$
|
35,831
|
|
Revenue gain %
|
0.9
|
%
|
|
0.6
|
%
|
|
7.9
|
%
|
Comparable sales % gain (decline)
(1)
|
0.5
|
%
|
|
1.0
|
%
|
|
(0.4
|
)%
|
Comparable sales % gain (decline) excluding the estimated impact of installment billing
(1)(2)
|
(0.1
|
)%
|
|
0.5
|
%
|
|
(0.4
|
)%
|
Gross profit
|
$
|
8,484
|
|
|
$
|
8,080
|
|
|
$
|
8,274
|
|
Gross profit as % of revenue
|
23.3
|
%
|
|
22.4
|
%
|
|
23.1
|
%
|
SG&A
|
$
|
6,897
|
|
|
$
|
6,639
|
|
|
$
|
7,006
|
|
SG&A as % of revenue
|
19.0
|
%
|
|
18.4
|
%
|
|
19.6
|
%
|
Restructuring charges
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
123
|
|
Operating income
|
$
|
1,585
|
|
|
$
|
1,437
|
|
|
$
|
1,145
|
|
Operating income as % of revenue
|
4.4
|
%
|
|
4.0
|
%
|
|
3.2
|
%
|
|
|
|
|
|
|
Selected Online Revenue Data:
|
|
|
|
|
|
Online revenue as a % of total segment revenue
|
11.0
|
%
|
|
9.8
|
%
|
|
8.5
|
%
|
Comparable online sales % gain
(1)
|
13.5
|
%
|
|
16.7
|
%
|
|
19.8
|
%
|
|
|
(1)
|
Comparable online sales gain is included in the total comparable sales gain (decline) above.
|
|
|
(2)
|
Represents comparable sales excluding the estimated revenue benefit from installment billing.
|
The following table reconciles our Domestic segment stores open at the end of each of the last three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2014
|
|
Fiscal 2015
|
|
Fiscal 2016
|
|
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
|
1,055
|
|
|
—
|
|
|
(5
|
)
|
|
1,050
|
|
|
—
|
|
|
(13
|
)
|
|
1,037
|
|
Best Buy Mobile stand-alone
|
406
|
|
|
1
|
|
|
(40
|
)
|
|
367
|
|
|
—
|
|
|
(17
|
)
|
|
350
|
|
Pacific Sales
|
30
|
|
|
—
|
|
|
(1
|
)
|
|
29
|
|
|
—
|
|
|
(1
|
)
|
|
28
|
|
Magnolia Audio Video
|
4
|
|
|
—
|
|
|
(2
|
)
|
|
2
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Total Domestic segment stores
|
1,495
|
|
|
1
|
|
|
(48
|
)
|
|
1,448
|
|
|
—
|
|
|
(33
|
)
|
|
1,415
|
|
We continuously monitor store performance. As we approach the expiration date of our stores leases, we evaluate various options for each location, including whether a store should remain open.
Fiscal
2016
Results Compared With Fiscal
2015
We offer extended protection plans that are managed by third party insurers. We may also be eligible to receive profit-sharing payments, depending on the performance of the portfolio. When performance of the portfolio is strong and the cost to the third party insurer declines, we are entitled to share in the excess profits. In fiscal 2016, we recognized $148 million of such profit-share revenue, with an equal impact to gross profit and operating income. We exclude such profit-share revenue from comparable sales calculations. The amount recognized in fiscal 2016 was substantially higher than for prior periods. The unusually strong performance of the portfolio for fiscal 2016, which particularly related to mobile phones, was due to changes to the design of our extended service plans, improvements to our repair and fulfillment operations and industry trends. These trends have also led to lower revenues from repairs we undertake on behalf of the insurers, as discussed further below. The premiums we pay to insurers are periodically adjusted to reflect such trends and consequently we do not expect profit share payments to continue at this level in future periods.
Domestic segment revenue of $36.4 billion in fiscal 2016 increased 0.9% compared to the prior year. This increase was primarily driven by a comparable sales growth of 0.5%, which included an estimated 0.6% of revenue benefit associated with installment billing and a periodic profit sharing benefit based on performance of our externally managed extended service plan portfolio.
Domestic segment online revenue of $4.0 billion increased 13.5% on a comparable basis primarily due to higher conversion rates and increased traffic. As a percentage of total Domestic revenue, online revenue increased 120 basis points to 11.0% versus 9.8% last year.
The components of the
0.9%
revenue increase in the Domestic segment in fiscal
2016
were as follows:
|
|
|
|
Comparable sales impact
|
0.5
|
%
|
Non-comparable sales
(1)
|
0.4
|
%
|
Total revenue increase
|
0.9
|
%
|
|
|
(1)
|
Non-comparable sales reflects the impact of net store opening and closing activity, as well as the impact of revenue streams not included within our comparable sales calculation, such as profit sharing benefits, credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers.
|
The following table presents the Domestic segment's revenue mix percentages and comparable sales percentage changes by revenue category in fiscal
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Mix Summary
|
|
Comparable Sales Summary
|
|
Year Ended
|
|
Year Ended
|
|
January 30, 2016
|
|
January 31, 2015
|
|
January 30, 2016
|
|
January 31, 2015
|
Consumer Electronics
|
32
|
%
|
|
31
|
%
|
|
4.7
|
%
|
|
3.7
|
%
|
Computing and Mobile Phones
|
46
|
%
|
|
47
|
%
|
|
(2.6
|
)%
|
|
(0.6
|
)%
|
Entertainment
|
8
|
%
|
|
9
|
%
|
|
(3.6
|
)%
|
|
4.5
|
%
|
Appliances
|
8
|
%
|
|
7
|
%
|
|
15.4
|
%
|
|
7.5
|
%
|
Services
|
5
|
%
|
|
5
|
%
|
|
(11.6
|
)%
|
|
(11.1
|
)%
|
Other
|
1
|
%
|
|
1
|
%
|
|
n/a
|
|
|
n/a
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
0.5
|
%
|
|
1.0
|
%
|
The following is a description of the notable comparable sales changes in our Domestic segment by revenue category:
|
|
•
|
Consumer Electronics:
The
4.7%
comparable sales increase was primarily due to an increase in the sales of large screen televisions, the expansion of Magnolia Design Center stores-within-a-store, and expanded assortment of streaming devices. This increase was partially offset by industry declines in point and shoot cameras and lower sales in small and mid-size televisions.
|
|
|
•
|
Computing and Mobile Phones:
The
2.6%
comparable sales decline was primarily due to continued industry declines in tablets and to a lesser extent lower demand for mobile phones.
|
|
|
•
|
Entertainment:
The
3.6%
comparable sales decrease was driven by declines in music and movies due to continued industry declines as well as declines in gaming hardware.
|
|
|
•
|
Appliances:
The
15.4%
comparable sales gain was a result of continued growth in major appliances sales as well as the expansion of Pacific Kitchen & Home stores-within-a-store.
|
|
|
•
|
Services:
The
11.6%
comparable sales decline was primarily due to lower repair revenue from extended protection plan claims. This trend, which primarily related to mobile phones, was a reflection of changes to the design of our extended protection plans, improvements to our repair and fulfillment operations and industry trends.
|
Our Domestic segment experienced an increase in gross profit of
$404 million
, or
5.0%
, in fiscal
2016
compared to fiscal
2015
. Excluding the $88 million of CRT/LCD litigation settlement proceeds received in fiscal 2016, we experienced an increase in gross profit of $316 million, or 3.9%. Refer to Note 12,
Contingencies and Commitments
, 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 for additional information. This rate increase was primarily due to (1) the periodic profit-share revenue described above; (2) rate improvements in computing hardware driven by our more disciplined promotional strategy; (3) an additional positive mix shift due to significantly decreased revenue in the lower-margin tablet category; (4) the positive impact of lower repair revenue
(as discussed above), which typically earns a low gross profit rate; (5) an increased mix of higher-margin large screen televisions; and (6) positive revenue impact related to our credit card portfolio. These increases were partially offset by (1) lower rates related to large appliances; (2) a lower rate in the mobile category driven by increased sales of higher priced iconic mobile phones, which have higher gross profit dollars but carry a lower gross profit rate; (3) decrease in margin for portable audio products; (4) a decreased mix of higher-margin digital imaging products; (5) an increased mix of lower-margin wearable devices; and (6) an investment in services pricing.
Our Domestic segment's SG&A increased
$258 million
, or
3.9%
, in fiscal
2016
compared to fiscal
2015
. In addition, the SG&A rate increased to 19.0% of revenue compared to 18.4% of revenue in the prior year. The increases in SG&A and SG&A rate were primarily driven by investments in growth initiatives, a greater portion of our vendor funding being recorded as an offset to cost of goods sold rather than SG&A and higher incentive compensation. This increase was partially offset by the implementation of
Renew Blue
Phase 2 cost reductions.
Our Domestic segment recorded
$2 million
of restructuring charges in fiscal
2016
and incurred $4 million of restructuring
charges in fiscal
2015
. The restructuring charges had an immaterial impact on our operating income rate in fiscal
2016
and fiscal
2015
. Refer to Note 4,
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
$148 million
in fiscal
2016
compared to fiscal
2015
. In addition, the operating income rate increased to 4.4% of revenue in fiscal 2016 compared to 4.0% of revenue in the prior year. The increase was driven by higher revenue and margin and $75 million in net CRT/LCD litigation settlement proceeds received in fiscal 2016, partially offset by the increase in SG&A as described above.
Fiscal
2015
Results Compared With Fiscal
2014
Domestic segment revenue increased from $35.8 billion in fiscal 2014 to $36.1 billion in fiscal
2015
, primarily driven by comparable sales growth of
1.0%
. Excluding the 0.5% of revenue estimated benefit associated with the classification of the new mobile carrier installment billing plans, comparable sales increased 0.5%. Online revenue was $3.5 billion, and we experienced comparable online sales growth of
16.7%
due to: (1) improved inventory availability made possible by the chain-wide rollout of our ship-from-store capability that was completed in January 2014; (2) higher average order value; and (3) increased traffic driven by greater investment in online digital marketing.
The components of the
0.6%
revenue increase in the Domestic segment in fiscal
2015
were as follows:
|
|
|
|
Comparable sales impact
|
0.9
|
%
|
Non-comparable sales
(1)
|
(0.2
|
)%
|
Net store changes
|
(0.1
|
)%
|
Total revenue increase
|
0.6
|
%
|
|
|
(1)
|
Non-comparable sales reflects the impact of revenue streams not included within our comparable sales calculation, such as credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers.
|
The net store changes did not have a material impact on our revenue in fiscal
2015
, as the majority of closures occurred in the fourth quarter and related to our small-format Best Buy Mobile stand-alone stores. The closing of small-format Best Buy Mobile stores have a significantly smaller impact given their smaller size and limited category focus compared to our large-format stores.
The following table presents the Domestic segment's revenue mix percentages and comparable sales percentage changes by revenue category in fiscal
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Mix Summary
|
|
Comparable Sales Summary
|
|
Year Ended
|
|
Year Ended
|
|
January 31, 2015
|
|
February 1, 2014
|
|
January 31, 2015
|
|
February 1, 2014
|
Consumer Electronics
|
31
|
%
|
|
30
|
%
|
|
3.7
|
%
|
|
(5.6
|
)%
|
Computing and Mobile Phones
|
47
|
%
|
|
48
|
%
|
|
(0.6
|
)%
|
|
4.7
|
%
|
Entertainment
|
9
|
%
|
|
8
|
%
|
|
4.5
|
%
|
|
(16.3
|
)%
|
Appliances
|
7
|
%
|
|
7
|
%
|
|
7.5
|
%
|
|
16.7
|
%
|
Services
|
5
|
%
|
|
6
|
%
|
|
(11.1
|
)%
|
|
0.2
|
%
|
Other
|
1
|
%
|
|
1
|
%
|
|
n/a
|
|
|
n/a
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
1.0
|
%
|
|
(0.4
|
)%
|
The following is a description of the notable comparable sales changes in our Domestic segment by revenue category:
|
|
•
|
Consumer Electronics:
The
3.7%
comparable sales increase was primarily due to growth in televisions, with strong sales increases in Ultra-HD television. This was partially offset by declines in DVD/Blu-ray players, as online streaming continues to increase, and cameras, as device convergence with smartphones and tablets continued.
|
|
|
•
|
Computing and Mobile Phones:
The
0.6%
comparable sales decline primarily resulted from a significant decrease in tablets due to industry declines. This decline was partially offset by an increase in sales of computers, as well as an increase in sales of mobile phones driven by the introduction of mobile carrier installment billing plans and higher year over year selling prices. Excluding the impact of installment billing, mobile phone comparable sales declined.
|
|
|
•
|
Entertainment:
The
4.5%
comparable sales increase was driven primarily by gaming sales from new platforms launched in the fourth quarter of fiscal 2014, partially offset by the continuing declines in movies and music as consumers continue to shift from physical media to online streaming and downloads.
|
|
|
•
|
Appliances:
The
7.5%
comparable sales gain was a result of strong performance throughout fiscal 2015 due to effective promotions, the addition of appliance specialists in select stores and the positive impact of Pacific Kitchen & Home store-within-a-store concepts.
|
|
|
•
|
Services:
The
11.1%
comparable sales decline was primarily due to lower mobile repair revenue and lower sales of extended warranty plans driven by lower attach rates.
|
Our Domestic segment experienced a decrease in gross profit of $
194 million
, or
2.3%
, in fiscal
2015
compared to fiscal
2014
. The most significant driver of the decrease was $314 million of LCD legal settlement proceeds that we received in fiscal 2014. Excluding these LCD settlements, we experienced an increase in gross profit of $120 million, and the gross profit rate increased 0.2% of revenue. The primary drivers of the gross profit rate increase were: (1) the benefit from the realization of our Renew Blue cost reductions and other supply chain cost containment initiatives (including initiatives related to returns, replacements and damages); (2) a more structured and analytical approach to pricing, notably the fourth quarter; and (3) increased revenue in higher-margin large-screen televisions. These increases were offset by a mix shift into lower-margin gaming and computing categories and a highly competitive promotional environment in tablets.
Our Domestic segment's SG&A decreased $
367 million
, or
5.2%
, in fiscal
2015
compared to fiscal
2014
. In addition, the SG&A rate decreased by
1.2%
of revenue compared to the prior year. The decreases in SG&A and SG&A rate were primarily driven by the realization of Renew Blue cost reduction initiatives and the benefit from tighter expense management throughout the company. These declines were partially offset by Renew Blue investments in online growth and our in-store experience, as well as higher incentive compensation.
Our Domestic segment recorded
$4 million
of restructuring charges in fiscal
2015
and incurred
$123 million
of restructuring charges in fiscal
2014
. These restructuring charges had an immaterial impact on our operating income rate in fiscal 2015 and resulted in a decrease in our operating income rate in fiscal 2014 of 0.3% of revenue. Refer to Note 4,
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 $
292 million
, or
0.8%
of revenue, in fiscal
2015
compared to fiscal
2014
. The increase was driven by lower SG&A, a comparable sales gain and lower restructuring charges, partially offset by the decrease in gross profit from the prior-year LCD settlements described above.
International Segment
During the first quarter of fiscal 2016, we consolidated the Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in the permanent closure of 66 Future Shop stores and the conversion of the remaining 65 Future Shop stores to the Best Buy brand. The costs of implementing these changes primarily consisted of lease exit costs, a tradename impairment, property and equipment impairments, employee termination benefits and inventory write-downs. In fiscal 2016, we incurred total pre-tax restructuring charges, other Canadian brand consolidation charges (charges that did not qualify as restructuring charges) and property and equipment impairment of $209 million of out of the previously disclosed expected range of approximately $210 million to $250 million related to those actions. As we continue to solidify our strategy for our Canada transformation, we may incur additional charges of up to $35 million in future periods primarily related to non-restructuring asset impairments.
The following table presents selected financial data for our International segment for each of the past three fiscal years ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Segment Performance Summary
|
|
2016
|
|
2015
|
|
2014
|
Revenue
|
|
$
|
3,163
|
|
|
$
|
4,284
|
|
|
$
|
4,780
|
|
Revenue decline %
|
|
(26.2
|
)%
|
|
(10.4
|
)%
|
|
(5.0
|
)%
|
Comparable sales % decline
(1)
|
|
n/a
|
|
|
(3.5
|
)%
|
|
(5.1
|
)%
|
Restructuring charges - cost of goods sold
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gross profit
|
|
$
|
707
|
|
|
$
|
967
|
|
|
$
|
1,125
|
|
Gross profit as % of revenue
|
|
22.4
|
%
|
|
22.6
|
%
|
|
23.5
|
%
|
SG&A
|
|
$
|
721
|
|
|
$
|
953
|
|
|
$
|
1,100
|
|
SG&A as % of revenue
|
|
22.8
|
%
|
|
22.2
|
%
|
|
23.0
|
%
|
Restructuring charges
|
|
$
|
196
|
|
|
$
|
1
|
|
|
$
|
26
|
|
Operating income (loss)
|
|
$
|
(210
|
)
|
|
$
|
13
|
|
|
$
|
(1
|
)
|
Operating income (loss) as % of revenue
|
|
(6.6
|
)%
|
|
0.3
|
%
|
|
—
|
%
|
|
|
(1)
|
The Canadian brand consolidation has a material impact on a year-over-year basis on the Canadian retail stores and the website. As such, beginning in the first quarter of fiscal 2016, all store and website revenue has been removed from the comparable sales base, and an International segment (comprised of Canada and Mexico) comparable sales metric has not been provided.
|
The following table reconciles our International segment stores open at the end of each of the last three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2014
|
|
Fiscal 2015
|
|
Fiscal 2016
|
|
Total Stores
at End of
Fiscal Year
|
|
Stores
Opened
|
|
Stores
Closed
|
|
Total Stores
at End of
Fiscal Year
|
|
Stores
Opened
|
|
Stores
Closed
|
|
Stores Converted
|
|
Total Stores
at End of
Fiscal Year
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Shop
|
137
|
|
|
1
|
|
|
(5
|
)
|
|
133
|
|
|
—
|
|
|
(68
|
)
|
|
(65
|
)
|
|
—
|
|
Best Buy
|
72
|
|
|
—
|
|
|
(1
|
)
|
|
71
|
|
|
3
|
|
|
(3
|
)
|
|
65
|
|
|
136
|
|
Best Buy Mobile
|
56
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56
|
|
Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Best Buy
|
17
|
|
|
1
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
Express
|
2
|
|
|
3
|
|
|
—
|
|
|
5
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Total International segment stores
|
284
|
|
|
5
|
|
|
(6
|
)
|
|
283
|
|
|
4
|
|
|
(71
|
)
|
|
—
|
|
|
216
|
|
Fiscal
2016
Results Compared With Fiscal
2015
In our International segment, revenue declined
26.2%
to $3.2 billion in fiscal 2016 due to (1) the loss of revenue associated with closed stores as part of the Canadian brand consolidation; (2) a negative foreign currency impact of 12.5%; and (3) ongoing softness in the Canadian economy and consumer electronics industry.
The components of the International segment's
26.2%
revenue decrease in fiscal
2016
were as follows:
|
|
|
|
Non-comparable sales
(1)
|
(13.7
|
)%
|
Impact of foreign currency exchange rate fluctuations
|
(12.5
|
)%
|
Total revenue decrease
|
(26.2
|
)%
|
|
|
(1)
|
Non-comparable sales reflects the impact of net store opening and closing activity, including the Canadian brand consolidation activity, as well as the impact of revenue streams not included within our comparable sales calculation, such as certain credit card revenue, gift card breakage and sales of merchandise to wholesalers and dealers, as applicable.
|
The following table presents the International segment's revenue mix percentages by revenue category in fiscal
2016
and
2015
:
|
|
|
|
|
|
|
|
Revenue Mix Summary
|
|
Year Ended
|
|
January 30, 2016
|
|
January 31, 2015
|
Consumer Electronics
|
31
|
%
|
|
30
|
%
|
Computing and Mobile Phones
|
48
|
%
|
|
49
|
%
|
Entertainment
|
9
|
%
|
|
9
|
%
|
Appliances
|
5
|
%
|
|
5
|
%
|
Services
|
6
|
%
|
|
6
|
%
|
Other
|
1
|
%
|
|
1
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
As noted above, comparable sales information has not been provided for the International segment for fiscal 2016 due to the Canadian brand consolidation. As such, it is also impractical to provide such information on a revenue category basis. However, as noted above, the revenue mix by category has not changed significantly from fiscal 2015.
Our International segment experienced a gross profit decline of
$260 million
, or
26.9%
, in fiscal
2016
compared to fiscal
2015
. Excluding the impact of foreign currency exchange rate fluctuations, the decrease in gross profit was $141 million. The gross profit rate declined to 22.4% of revenue in fiscal 2016 from 22.6% of revenue in fiscal 2015. This decline was primarily due to the disruptive impacts from the Canadian brand consolidation and increased promotional activity in Canada.
Our International segment's SG&A decreased
$232 million
, or
24.3%
, in fiscal
2016
compared to the prior year. Excluding the impact of foreign currency exchange rate fluctuations, the decrease in SG&A was $115 million. However, the SG&A expense rate increased to 22.8% of revenue in fiscal 2016 from 22.2% of revenue in fiscal 2015. The decrease in SG&A expense was driven by the elimination of expenses associated with closed stores as part of the Canadian brand consolidation. The increase in the SG&A rate was driven by year-over-year sales deleverage.
Our International segment recorded $199 million of restructuring charges in fiscal
2016
and incurred
$1 million
of restructuring charges in fiscal
2015
. The fiscal
2016
restructuring charges primarily related to the Canadian brand consolidation and consisted of facility closure costs, tradename impairments, property and equipment impairments, and employee termination benefits. The restructuring charges in fiscal 2015 had an immaterial impact on our operating income rate. Refer to Note 4,
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 loss of
$210 million
in fiscal
2016
compared to income of
$13 million
in the prior-year period. The decline in operating income was driven primarily by a decrease in revenue and gross profit rate and restructuring charges, partially offset by lower SG&A expenses as described above.
Fiscal
2015
Results Compared With Fiscal
2014
Our international segment experienced a decrease in revenue of
10.4%
primarily driven by the negative impact of foreign currency exchange rate fluctuations, a comparable sales decline of
3.5%
, and the loss of revenue from store closures in Canada.
The components of the International segment's
10.4%
revenue decrease in fiscal
2015
were as follows:
|
|
|
|
Impact of foreign currency exchange rate fluctuations
|
(6.4
|
)%
|
Comparable sales impact
|
(3.4
|
)%
|
Net store changes
|
(0.9
|
)%
|
Non-comparable sales
(1)
|
0.3
|
%
|
Total revenue decrease
|
(10.4
|
)%
|
|
|
(1)
|
Non-comparable sales reflects the impact of revenue streams not included within our comparable sales calculation, such as certain credit card revenue, gift card breakage and sales of merchandise to wholesalers and dealers, as applicable.
|
The net closure of large-format stores in Canada contributed to the decrease in revenue associated with net store changes in our International segment in fiscal 2015. The addition of large and small-format stores in Mexico partially offset this decrease.
The following table presents the International segment's revenue mix percentages and comparable sales percentage changes by revenue category in fiscal
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Mix Summary
|
|
Comparable Sales Summary
|
|
Year Ended
|
|
Year Ended
|
|
January 31, 2015
|
|
February 1, 2014
|
|
January 31, 2015
|
|
February 1, 2014
|
Consumer Electronics
|
30
|
%
|
|
29
|
%
|
|
(5.1
|
)%
|
|
(9.7
|
)%
|
Computing and Mobile Phones
|
49
|
%
|
|
50
|
%
|
|
(2.8
|
)%
|
|
(1.7
|
)%
|
Entertainment
|
9
|
%
|
|
10
|
%
|
|
(5.2
|
)%
|
|
(9.3
|
)%
|
Appliances
|
5
|
%
|
|
5
|
%
|
|
(0.5
|
)%
|
|
(1.5
|
)%
|
Services
|
6
|
%
|
|
6
|
%
|
|
(4.7
|
)%
|
|
(6.3
|
)%
|
Other
|
1
|
%
|
|
<1%
|
|
|
n/a
|
|
|
n/a
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
(3.5
|
)%
|
|
(5.1
|
)%
|
The following is a description of the notable comparable sales changes in our International segment by revenue category:
|
|
•
|
Consumer Electronics:
The
5.1%
comparable sales decline was driven primarily by a decrease in sales of digital imaging products, televisions and MP3 devices. The declines in digital imaging products and MP3 devices were a result of device convergence and industry declines. The decrease in sales of televisions was due to overall market softness across the segment and competitive pressures in Canada.
|
|
|
•
|
Computing and Mobile Phones:
The
2.8%
comparable sales decline was caused primarily by a decrease in sales of tablets due to industry declines, partially offset by increased mobile phone sales.
|
|
|
•
|
Entertainment:
The
5.2%
comparable sales decline was driven by a decrease in sales of movies and music as customers continue to shift from physical media to digital consumption, partially offset by gaming sales in Canada due to the release of new gaming platforms in the fourth quarter of fiscal 2014.
|
|
|
•
|
Appliances:
The
0.5%
comparable sales decline was driven by Mexico due to a decrease in sales of kitchen appliances, partially offset by appliance sales increases in Canada from expansion of offerings and assortment.
|
|
|
•
|
Services:
The
4.7%
comparable sales decline was due to a decrease in sales of warranties in Canada driven by the overall comparable sales decline in applicable hardware, particularly tablets and televisions.
|
Our International segment experienced a gross profit decline of $
158 million
, or
14.0%
, in fiscal
2015
compared to fiscal
2014
. Excluding the impact of foreign currency exchange rate fluctuations, the decrease in gross profit was $88 million. The gross profit rate decline of
0.9%
of revenue was driven by Canada due to increased promotional activity and, to a lesser extent, higher revenue in the lower-margin gaming category.
Our International segment's SG&A decreased $
147 million
, or
13.4%
, in fiscal
2015
compared to the prior year. Excluding the impact of foreign currency exchange rate fluctuations, the decrease in SG&A was $81 million. In addition, the SG&A rate decreased by
0.8%
of revenue in fiscal
2015
. The decrease in SG&A and SG&A rate was primarily driven by Renew Blue cost reductions and store closures in Canada.
Our International segment recorded
$1 million
of restructuring charges in fiscal
2015
and
$26 million
of restructuring charges in fiscal
2014
. The restructuring charges had an immaterial impact on our operating income rate in fiscal 2015 and resulted in a
decrease in our operating income rate in fiscal 2014 of 0.5% of revenue. Refer to Note 4,
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 of
$13 million
in fiscal
2015
compared to a loss of
$1 million
in the prior-year period. The improvement in operating income was driven primarily by a decrease in SG&A, partially offset by a decrease in gross profit as described above.
Additional Consolidated Results
Other Income (Expense)
In fiscal 2016, our gain on sale of investments was $2 million compared to $13 million and $20 million in fiscal 2015 and fiscal 2014, respectively. These gains were due to the sale of cost-based investments.
In fiscal 2016, our investment income and other was $13 million, compared to $14 million in the prior year. The decrease in fiscal 2016 was primarily due to lower interest rates in Canada and the unfavorable impact of foreign currency translations. In fiscal 2015, our investment income and other was $14 million, compared to $19 million in fiscal 2014. The decrease in fiscal 2015 was due to lower returns on our deferred compensation assets, partially offset by an increase in interest income driven by higher average cash and cash equivalents and short-term investment balances.
Interest expense was $80 million in fiscal 2016, compared to $90 million in fiscal 2015. The decrease in interest expense was primarily due to swapping a portion of our fixed rate debt to floating rate, which was lower than our fixed rate. Refer to Note 6,
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. Interest expense was $90 million in fiscal 2015, compared to $100 million in fiscal 2014. The decrease in interest expense was primarily due to obtaining a lower interest rate of 5.00% on our 2018 Notes compared to our previously held notes that bore interest at 6.75%.
Income Tax Expense
Income tax expense increased to $503 million in fiscal 2016, compared to a tax expense of $141 million in the prior year, primarily due to a $353 million discrete benefit related to reorganizing certain European legal entities in the prior year period, as well as a lower mix of pre-tax earnings from foreign operations in fiscal 2016, partially offset by a decrease in pre-tax earnings in fiscal 2016. Our effective income tax rate ("ETR") for fiscal 2016 was 38.4%, compared to a rate of 10.1% in fiscal 2015. Excluding the impact of reorganizing certain European legal entities, the ETR would have been 35.6% in fiscal 2015. Refer to Note 10,
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 $141 million in fiscal 2015, compared to a tax expense of $388 million in the fiscal 2014, primarily due to a $353 million discrete benefit related to reorganizing certain European legal entities, partially offset by an increase in pre-tax earnings in the current-year period. Our ETR was 10.1% in fiscal 2015, compared to 35.8% in fiscal 2014.
Our consolidated ETR is impacted by the statutory income tax rates applicable to each of the jurisdictions in which we operate. As our foreign earnings are generally taxed at lower statutory rates than the 35% U.S. federal statutory rate, changes in the proportion of our consolidated taxable earnings originating in foreign jurisdictions impact our consolidated effective rate. Our foreign earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax.
Discontinued Operations
Discontinued operations consists primarily of Best Buy Europe and Five Star in our International segment, as well as mindSHIFT in our Domestic segment.
The earnings from discontinued operations was $90 million in fiscal 2016 compared to a loss of $11 million and $172 million in fiscal 2015 and fiscal 2014, respectively. Earnings in fiscal 2016 were due to the gain recognized on the sale of Five Star. The loss from discontinued operations of $11 million in fiscal 2015 was driven by charges related to Five Star. The loss from discontinued operation of $172 million in fiscal 2014 was primarily due to the impairment of our investment in Best Buy Europe, as well as the loss on the sale of mindSHIFT.
Non-GAAP Financial Measures
The periods used for analysis of non-GAAP financial performance represent the periods that management used internally to assess performance.
The following table reconciles operating income, effective income tax rate, net earnings and diluted earnings per share for the periods presented from continuing operations (GAAP financial measures) to non-GAAP operating income, non-GAAP effective income tax rate, non-GAAP net earnings and non-GAAP diluted earnings per share from continuing operations (non-GAAP financial measures) for the periods presented ($ in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2016
|
|
2015
|
|
2014
|
Operating income
|
$
|
1,375
|
|
|
$
|
1,450
|
|
|
$
|
1,144
|
|
Net CRT/LCD settlements
(1)
|
(77
|
)
|
|
—
|
|
|
(229
|
)
|
Restructuring charges - COGS
|
3
|
|
|
—
|
|
|
—
|
|
Other Canada brand consolidation charges - SG&A
(2)
|
6
|
|
|
—
|
|
|
—
|
|
Non-restructuring asset impairments - SG&A
|
61
|
|
|
42
|
|
|
99
|
|
Restructuring charges
|
198
|
|
|
5
|
|
|
149
|
|
Non-GAAP operating income
|
$
|
1,566
|
|
|
$
|
1,497
|
|
|
$
|
1,163
|
|
|
|
|
|
|
|
Income tax expense
|
$
|
503
|
|
|
$
|
141
|
|
|
$
|
388
|
|
Effective tax rate
|
38.4
|
%
|
|
10.1
|
%
|
|
35.8
|
%
|
Income tax impact of Best Buy Europe sale
(5)
|
—
|
|
|
—
|
|
|
(18
|
)
|
Income tax impact of Europe legal entity reorganization
(3)
|
—
|
|
|
353
|
|
|
—
|
|
Income tax impact of Non-GAAP adjustments
(4)
|
30
|
|
|
11
|
|
|
(8
|
)
|
Non-GAAP Income tax expense
|
$
|
533
|
|
|
$
|
505
|
|
|
$
|
362
|
|
Non-GAAP Effective tax rate
|
35.4
|
%
|
|
35.5
|
%
|
|
33.5
|
%
|
|
|
|
|
|
|
Net earnings from continuing operations
|
$
|
807
|
|
|
$
|
1,246
|
|
|
$
|
695
|
|
Net CRT/LCD settlements
(1)
|
(77
|
)
|
|
—
|
|
|
(229
|
)
|
Restructuring charges - COGS
|
3
|
|
|
—
|
|
|
—
|
|
Other Canada brand consolidation charges - SG&A
(2)
|
6
|
|
|
—
|
|
|
—
|
|
Non-restructuring asset impairments - SG&A
|
61
|
|
|
42
|
|
|
99
|
|
Restructuring charges
|
198
|
|
|
5
|
|
|
149
|
|
(Gain) loss on sale of investments
|
5
|
|
|
(11
|
)
|
|
(19
|
)
|
Income tax impact of Best Buy Europe sale
(5)
|
—
|
|
|
—
|
|
|
18
|
|
Income tax impact of Europe legal entity reorganization
(3)
|
—
|
|
|
(353
|
)
|
|
—
|
|
Income tax impact of Non-GAAP adjustments
(4)
|
(30
|
)
|
|
(11
|
)
|
|
8
|
|
Adjusted net earnings from continuing operations
|
$
|
973
|
|
|
$
|
918
|
|
|
$
|
721
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations
|
$
|
2.30
|
|
|
$
|
3.53
|
|
|
$
|
2.00
|
|
Per share impact of net CRT/LCD settlements
(1)
|
(0.22
|
)
|
|
—
|
|
|
(0.66
|
)
|
Per share impact of restructuring charges - COGS
|
0.01
|
|
|
—
|
|
|
—
|
|
Per share impact of other Canada brand consolidation charges - SG&A
(2)
|
0.02
|
|
|
—
|
|
|
—
|
|
Per share impact of non-restructuring asset impairments - SG&A
|
0.17
|
|
|
0.12
|
|
|
0.29
|
|
Per share impact of restructuring charges
|
0.58
|
|
|
0.01
|
|
|
0.43
|
|
Per share impact of (gain) loss on sale of investments
|
0.01
|
|
|
(0.03
|
)
|
|
(0.06
|
)
|
Per share income tax impact of Best Buy Europe sale
(5)
|
—
|
|
|
—
|
|
|
0.05
|
|
Per share income tax effect of Europe legal entity reorganization
(3)
|
—
|
|
|
(1.00
|
)
|
|
—
|
|
Per share income tax impact of Non-GAAP adjustments
(4)
|
(0.09
|
)
|
|
(0.03
|
)
|
|
0.02
|
|
Adjusted diluted earnings per share from continuing operations
|
$
|
2.78
|
|
|
$
|
2.60
|
|
|
$
|
2.07
|
|
|
|
(1)
|
Represents CRT/LCD litigation settlements reached in each reported period, net of related legal fees and costs.
|
|
|
(2)
|
Represents charges related to the Canadian brand consolidation, primarily due to retention bonuses and other store-related costs, that did not qualify as restructuring charges.
|
|
|
(3)
|
Represents the acceleration of a non-cash tax benefit of $353 million as a result of reorganizing certain European legal entities to simplify our overall structure in the first quarter of fiscal 2015.
|
|
|
(4)
|
Income tax impact of Non-GAAP adjustments is the summation of the calculated income tax charge related to each non-GAAP non-income tax adjustment. Income tax charge is calculated using the statutory tax rates in effect during the period of the related non-GAAP adjustment.
|
|
|
(5)
|
Represents the tax impact of the Best Buy Europe sale and resulting required tax allocation between continuing and discontinued operations.
|
Non-GAAP operating income for fiscal 2016 increased $69 million compared to fiscal 2015. The increase was driven by increased revenue in the Domestic segment, increased Enterprise gross profit rate and continued SG&A cost reductions in both segments primarily due to the realization of our
Renew Blue
cost reduction initiatives and tighter expense management. The increase in non-GAAP operating income resulted in a year-over-year increase in non-GAAP net earnings from continuing operations and non-GAAP diluted earnings per share from continuing operations in fiscal 2016 compared to fiscal 2015.
Non-GAAP operating income for fiscal 2015 increased $334 million compared to fiscal 2014, and non-GAAP operating income as a percent of revenue increased to 3.7%. The increase in non-GAAP operating income was driven by SG&A cost reductions in both segments primarily due to the realization of our
Renew Blue
cost reduction initiatives and tighter expense management, partially offset by a decline in revenue in our International segment. The increase in non-GAAP operating income resulted in a year-over-year increase in non-GAAP net earnings from continuing operations and non-GAAP diluted earnings per share from continuing operations in fiscal 2015 compared to fiscal 2014.
Liquidity and Capital Resources
Summary
We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including the level of investment required to support our business strategies, the performance of our business, capital expenditures, credit facilities and short-term borrowing arrangements and working capital management. Capital expenditures are a component of our cash flow and capital management strategy which, to a large extent, we can adjust in response to economic and other changes in our business environment. We have a disciplined approach to capital allocation, which focuses on investing in key priorities that support our Renew Blue transformation.
The following table summarizes our cash and cash equivalents and short-term investments at January 30, 2016, and January 31, 2015 ($ in millions):
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
|
January 31, 2015
|
|
Cash and cash equivalents
|
$
|
1,976
|
|
|
$
|
2,432
|
|
Short-term investments
|
1,305
|
|
|
1,456
|
|
Total cash and cash equivalents and short-term investments
|
$
|
3,281
|
|
|
$
|
3,888
|
|
The decrease in cash and cash equivalents from January 31, 2015, was primarily due to a resumption of share repurchases, a special dividend and an increase in the regular quarterly dividend. This was partially offset by cash generated from operating activities.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Total cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
$
|
1,322
|
|
|
$
|
1,935
|
|
|
$
|
1,094
|
|
Investing activities
|
(419
|
)
|
|
(1,712
|
)
|
|
(517
|
)
|
Financing activities
|
(1,515
|
)
|
|
(223
|
)
|
|
319
|
|
Effect of exchange rate changes on cash
|
(38
|
)
|
|
(52
|
)
|
|
(44
|
)
|
Increase (decrease) in cash and cash equivalents
|
$
|
(650
|
)
|
|
$
|
(52
|
)
|
|
$
|
852
|
|
Operating Activities
The decrease in cash provided by operating activities in fiscal
2016
compared to fiscal
2015
was primarily due to the timing of inventory receipts and income tax payments. During fiscal 2016, we decided to bring Holiday inventory in early and the Super Bowl shifted to the first quarter of fiscal 2017, which caused us to hold our inventory longer and settle our accounts payable related to that inventory prior to year-end. In addition, we paid more income taxes in fiscal 2016 primarily due to the timing of when payments were made.
The increase in cash provided by operating activities in fiscal 2015 compared to fiscal
2014
was primarily due to improved management of working capital in fiscal 2015. Additionally, in fiscal 2014 there were larger cash outflows from accounts payable, following unusually high balances at the end of fiscal 2013 due to timing of inventory receipts.
Investing Activities
The decrease in cash used in investing activities in fiscal
2016
compared to fiscal
2015
was primarily due to increased sales of short-term investments partially offset by capital expenditures (see
Capital Expenditures
below).
The increase in cash used in investing activities in fiscal 2015 compared to fiscal
2014
was primarily due to increased purchases of short-term investments in fiscal 2015.
Financing Activities
The increase in cash used by financing activities in fiscal
2016
compared to fiscal
2015
was primarily due to share repurchases and dividend payments. In fiscal 2016, we purchased $1.0 billion of common stock as part of our June 2011 share repurchase program. In addition, we increased our normal dividend from 2015 to 2016 and paid a special dividend in 2016.
The decrease in cash provided by financing activities in fiscal 2015 compared to fiscal 2014 was primarily due to decreased borrowing and decreased proceeds from the issuance of common stock, primarily from the exercise of employee stock options.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, short-term investments, our credit facilities, and other debt arrangements and trade payables are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to sustain operations and to finance anticipated capital investments and strategic initiatives. 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 June 30, 2014, 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 June 2019. The Five-Year Facility Agreement replaced the previous $1.5 billion unsecured revolving credit facility, which was originally scheduled to expire in October 2016, but was terminated on June 30, 2014. At January 31, 2015, and January 30, 2016, we had no borrowings outstanding under the Five-Year Facility Agreement. Refer to Note 5,
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 facilities.
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
January 30, 2016
, we were in compliance 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.
An interest coverage ratio represents the ratio of pre-tax earnings before fixed charges (interest expense and the interest portion of rent expense) to fixed charges. Our interest coverage ratio, calculated as reported in Exhibit No. 12.1 of this Annual Report on Form 10-K, was
5.16
and
5.08
in fiscal
2016
and fiscal
2015
, respectively.
Our credit ratings and outlooks at
March 21, 2016
, are summarized below. On August 15, 2015, Standard & Poor's Rating Services ("Standard & Poor's") upgraded its long-term credit rating from BB to BB+ with a Stable outlook. On August 24, 2015, Moody's Investors Service, Inc. ("Moody's") upgraded its long-term credit rating from Baa2 to Baa1 with a Stable
outlook. On August 26, 2015, Fitch Ratings Limited ("Fitch") upgraded its long-term credit rating from BB to BBB- with a Stable outlook.
|
|
|
|
|
|
Rating Agency
|
|
Rating
|
|
Outlook
|
Standard & Poor's
|
|
BB+
|
|
Stable
|
Moody's
|
|
Baa1
|
|
Stable
|
Fitch
|
|
BBB-
|
|
Stable
|
Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether our current credit ratings will remain as disclosed above. 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 general liability insurance and workers' compensation insurance. Restricted cash and cash equivalents related to our continuing operations, which are included in other current assets, remained flat at $185 million and $184 million at
January 30, 2016
, and
January 31, 2015
, respectively.
Capital Expenditures
Our capital expenditures typically include investments in our stores, distribution capabilities and information technology enhancements (including e-commerce). During fiscal 2016, we invested $649 million in property and equipment, primarily related to upgrading our information technology systems and capabilities, and store-related projects.
The following table presents our capital expenditures for each of the past three fiscal years ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
New stores
|
$
|
5
|
|
|
$
|
3
|
|
|
$
|
8
|
|
Store-related projects
(1)
|
241
|
|
|
177
|
|
|
110
|
|
E-commerce and information technology
|
390
|
|
|
355
|
|
|
350
|
|
Other
|
13
|
|
|
16
|
|
|
9
|
|
Total capital expenditures
(2)(3)
|
$
|
649
|
|
|
$
|
551
|
|
|
$
|
477
|
|
|
|
(1)
|
Includes store remodels and various merchandising projects.
|
|
|
(2)
|
Excludes
$10 million
and
$70 million
for fiscal
2015
and
2014
, respectively, related to Five Star and Best Buy Europe.
|
|
|
(3)
|
Total capital expenditures exclude non-cash capital expenditures of
$92 million
,
$14 million
and
$13 million
for fiscal
2016
, fiscal
2015
and
2014
, respectively. Non-cash capital expenditures are comprised of capitalized leases, as well as additions to property and equipment included in accounts payable.
|
In fiscal 2017, we estimate cash capital expenditures of approximately $650 million to $700 million, with the focus on retail store, e-commerce and information technology projects.
Debt and Capital
We have $350 million principal amount of notes due March 15, 2016 (the “2016 Notes”), $500 million principal amount of notes due August 1, 2018 (the “2018 Notes”) and $650 million principal amount of notes due March 15, 2021 (the “2021 Notes”). Refer to Note 5,
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 2016 Notes, 2018 Notes and 2021 Notes. In March 2016, we paid the balance of the 2016 Notes using existing cash resources.
Other
At
January 30, 2016
and
January 31, 2015
, we had
$178 million
and
$69 million
, respectively, outstanding under financing lease obligations. The increase in financing lease obligations was primarily due to renewals on existing leases.
Share Repurchases and Dividends
We repurchase our common stock in the open market pursuant to programs approved by our Board. We may repurchase our common stock for a variety of reasons, such as acquiring shares to offset dilution related to equity-based incentives, including stock options and our employee stock purchase plan, and optimizing our capital structure. We consider several factors in determining whether to make share repurchases including, among other things, our cash needs, the availability of funding, our future business plans and the market price of our stock. If we decide to make future share repurchases, we expect that cash provided by future operating activities, as well as available cash and cash equivalents, will be the sources of funding for our share repurchases.
We have a $5.0 billion share repurchase program that was authorized by our Board in June 2011. There is no expiration date governing the period over which we can repurchase shares under the June 2011 share repurchase program.
At the end of fiscal 2015, $4.0 billion under this program was available for share repurchases. In fiscal
2016
we repurchased and retired 32.8 million shares at a cost of $1.0 billion, which included the use of an accelerated share repurchase ("ASR") contract. Refer to Note 7,
Shareholders' Equity
, 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 regarding the ASR. At the end of fiscal
2016
, $3.0 billion of the
$5.0 billion
share repurchase program authorized by our Board in June 2011 was available for future share repurchases. Repurchased shares have been retired and constitute authorized but unissued shares.
In fiscal 2004, our Board initiated the payment of a regular quarterly cash dividend on our 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. During fiscal
2016
, we made four cash dividend payments totaling $1.43 per share, or $499 million in the aggregate. During fiscal 2015, we made four cash dividend payments totaling $0.72 per share, or $251 million in the aggregate.
On February 25, 2016, we announced a plan to return capital to shareholders. The plan includes a special dividend of $0.45 per share, or approximately $145 million, and a 22% increase in our regular quarterly dividend to $0.28 per share. We plan to continue share repurchases under the June 2011 program, with the intent to repurchase $1.0 billion in shares over the next two years.
Other Financial Measures
Our current ratio, calculated as current assets divided by current liabilities, was 1.4 as of January 30, 2016, compared to 1.5 at the end of fiscal 2015. The lower current ratio in fiscal 2016 was driven by an increase in current liabilities due to our 2016 Notes being due in fiscal 2017 and a decrease in current assets due to a lower cash balance.
Our debt to earnings ratio was
2.1
as of
January 30, 2016
, compared to
1.3
as of
January 31, 2015
, due primarily to a decrease in net earnings from continuing operations in fiscal 2016 compared to the same period in the prior year. Our adjusted debt to EBITDAR ratio, which includes capitalized operating lease obligations in its calculation, was
2.6
and
2.8
as of
January 30, 2016
and
January 31, 2015
, respectively. The decrease in the ratio was due to a decrease in capitalized operating lease obligations and an increase in EBITDAR.
Our adjusted debt to EBITDAR ratio is considered a non-GAAP financial measure and should be considered in addition to, rather than as a substitute for, the most directly comparable ratio determined in accordance with GAAP. We have included this information in our MD&A as we view the adjusted debt to EBITDAR ratio as an important indicator of our creditworthiness. Furthermore, we believe that our adjusted debt to EBITDAR ratio is important for understanding our financial position and provides meaningful additional information about our ability to service our long-term debt and other fixed obligations and to fund our future growth. We also believe our adjusted debt to EBITDAR ratio is relevant because it enables investors to compare our indebtedness to that of retailers who own, rather than lease, their stores. Our decision to own or lease real estate is based on an assessment of our financial liquidity, our capital structure, our desire to own or to lease the location, the owner’s desire to own or to lease the location, and the alternative that results in the highest return to our shareholders.
Our adjusted debt to EBITDAR ratio is calculated as follows:
|
|
|
|
Adjusted debt to EBITDAR =
|
Adjusted debt
|
|
EBITDAR
|
|
The most directly comparable GAAP financial measure to our adjusted debt to EBITDAR ratio is our debt to net earnings ratio, which excludes capitalized operating lease obligations from debt in the numerator of the calculation and does not adjust net earnings in the denominator of the calculation.
The following table presents a reconciliation of our debt to net earnings ratio to our adjusted debt to EBITDAR ratio for continuing operations ($ in millions):
|
|
|
|
|
|
|
|
|
|
2016
(1)
|
|
2015
(1)
|
Debt (including current portion)
|
$
|
1,734
|
|
|
$
|
1,613
|
|
Capitalized operating lease obligations (8 times rental expense)
(2)
|
6,266
|
|
|
6,653
|
|
Adjusted debt
|
$
|
8,000
|
|
|
$
|
8,266
|
|
|
|
|
|
Net earnings from continuing operations
|
$
|
807
|
|
|
$
|
1,246
|
|
Interest expense, net
|
65
|
|
|
63
|
|
Income tax expense
|
503
|
|
|
141
|
|
Depreciation and amortization expense
(3)
|
656
|
|
|
689
|
|
Rental expense
|
783
|
|
|
832
|
|
Restructuring charges and other
(4)
|
263
|
|
|
—
|
|
EBITDAR
|
$
|
3,077
|
|
|
$
|
2,971
|
|
|
|
|
|
Debt to net earnings ratio
|
2.1
|
|
|
1.3
|
|
Adjusted debt to EBITDAR ratio
|
2.6
|
|
|
2.8
|
|
|
|
(1)
|
Debt is reflected as of the balance sheet dates for each of the respective fiscal periods, while rental expense and the other components of EBITDAR represent activity for the 12 months ended
January 30, 2016
and
January 31, 2015
.
|
|
|
(2)
|
The multiple of eight times annual rental expense in the calculation of our capitalized operating lease obligations is the multiple used for the retail sector by one of the nationally recognized credit rating agencies that rate our creditworthiness, and we consider it to be an appropriate multiple for our lease portfolio.
|
|
|
(3)
|
Depreciation and amortization expense includes impairments of fixed assets, investments and intangible assets (including impairments associated with our fiscal restructuring activities).
|
|
|
(4)
|
Includes the impact of restructuring charges, non-restructuring asset impairments and CRT litigation settlements.
|
Off-Balance-Sheet Arrangements and Contractual Obligations
Other than operating leases, we do not have any off-balance-sheet financing. 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 8,
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 by fiscal year ($ 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)
|
|
$
|
1,518
|
|
|
$
|
350
|
|
|
$
|
513
|
|
|
$
|
—
|
|
|
$
|
655
|
|
Capital lease obligations
|
|
46
|
|
|
14
|
|
|
15
|
|
|
5
|
|
|
12
|
|
Financing lease obligations
|
|
212
|
|
|
42
|
|
|
64
|
|
|
40
|
|
|
66
|
|
Interest payments
|
|
242
|
|
|
59
|
|
|
107
|
|
|
76
|
|
|
—
|
|
Operating lease obligations
(2)
|
|
3,363
|
|
|
813
|
|
|
1,280
|
|
|
749
|
|
|
521
|
|
Purchase obligations
(3)
|
|
2,033
|
|
|
1,944
|
|
|
73
|
|
|
16
|
|
|
—
|
|
Unrecognized tax benefits
(4)
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
(5)
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,917
|
|
|
$
|
3,222
|
|
|
$
|
2,052
|
|
|
$
|
886
|
|
|
$
|
1,254
|
|
Note: For additional information refer to Note 5,
Debt
; Note 8,
Leases
; Note 10,
Income Taxes;
and Note 12,
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)
|
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 $1.1 billion at
January 30, 2016
.
|
|
|
(3)
|
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 are not legally binding agreements, we included open purchase orders in the table above. Substantially all open purchase orders are fulfilled within 30 days.
|
|
|
(4)
|
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.
|
|
|
(5)
|
Included in Long-term liabilities on our Consolidated Balance Sheet at
January 30, 2016
, was a $
34 million
obligation for deferred compensation. As the specific payment dates for the 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 facilities at
January 30, 2016
, which if drawn upon, would be included as short-term debt in our Consolidated Balance Sheets.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. 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 that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, 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. 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, because they relate to matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board.
Except where noted, we have not made any material changes to the accounting methodologies for the areas described below.
Inventory
We value our inventory at the lower of cost or market through the establishment of markdown and inventory loss adjustments. Markdown adjustments reflect the excess of cost over the net proceeds we expect to realize from the ultimate sale or other
disposal of inventory and establish a new cost basis. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded markdowns or an increase in that newly established cost basis. Markdown adjustments involve uncertainty because the calculations require management to make assumptions and to apply judgment regarding factors such as forecast consumer demand, the promotional environment and technological obsolescence.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our markdown adjustments. However, if actual outcomes are different than we anticipated, we may be exposed to losses or gains that could be material. A 10% change in our markdown adjustment at
January 30, 2016
, would have affected net earnings by approximately $9 million in fiscal
2016
.
Vendor Allowances
We receive allowances from certain vendors through a variety of programs and arrangements. We treat a substantial majority of these allowances as an offset to the cost of the product or services provided. Sell-through allowances are collected when inventory is sold to customers and recognized as a reduction in cost of sales at that time. Certain other types of funding, most notably receipt-based allowances, are collected when we take receipt of inventory and deferred as a reduction of inventory until inventory is sold. The estimation of the deferral for these types of funding is complex and requires detailed analysis of factors such as product and vendor mix, inventory turn and a large range of diverse allowance programs.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our vendor funding deferral. A 10% difference in our vendor funding deferral at
January 30, 2016
, would have affected net earnings by approximately $21 million in fiscal
2016
.
We also receive vendor allowances for achieving certain volume targets. These vendor allowances are accrued as earned over the incentive period, based on estimates of purchases. Amounts accrued throughout the program year could require adjustment if actual purchase volumes differ from projected purchase volumes, especially in the case of programs that provide for increased funding when graduated volume tiers are met. We believe that our estimate of vendor allowances earned based on expected volume of purchases over the incentive period is an accurate reflection of the ultimate allowances to be received from our vendors. Since most volume-based programs apply to a calendar year or our fiscal year, the amount of judgment required as of any fiscal year end is minimal.
Property and Equipment Impairments
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 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. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable asset, the new cost basis is depreciated over the remaining useful life of that asset.
When reviewing property and equipment assets for impairment, we group assets with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets deployed at store locations, we review for impairment at the individual store level. These reviews involve comparing the carrying value of all property and equipment located at each store to the net cash flow projections for each store. In addition, we conduct separate impairment reviews at other levels as appropriate. For example, a shared asset such as a distribution center would be evaluated by reference to the aggregate assets and projected cash flows of all areas of the businesses utilizing those shared assets.
Our impairment loss calculations require management to make assumptions and to apply judgment in order to estimate fair values, including estimating cash flows and useful lives and selecting a discount rate that reflects the risk inherent in future cash flows. If actual results are not consistent with our estimates and assumptions we may be exposed to impairments that could be material. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate property and equipment asset impairment losses.
Goodwill
Goodwill is not amortized but is evaluated for impairment annually in the fiscal fourth quarter or whenever events or changes in circumstances indicate the carrying value may not be recoverable.
We test for goodwill impairment at the reporting unit level, which is one level below the operating segment level. Our detailed impairment testing involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit and is based on discounted cash flows or relative market-based approaches. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.
The carrying value of goodwill at
January 30, 2016
, was $425 million, which related entirely to our Domestic segment. In fiscal
2016
, we determined that the excess of fair value over carrying value was substantial. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.
Tax Contingencies
Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of income and deductions and the allocation of income among various tax jurisdictions. At any time, many tax years are subject to audit by 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 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 filing positions.
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.
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 and would be recognized in the period of resolution.
Revenue Recognition
The following accounting estimates relating to revenue recognition contain uncertainty because they require management to make assumptions and to apply judgment regarding the effects of future events.
Returns –
We recognize revenue, net of estimated returns, at the time the customer takes possession of merchandise or receives services. We estimate the liability for sales returns with a corresponding reduction to revenue and cost of sales based on historical return data. We believe that our estimate for sales returns, which represents the estimated gross margin impact of returns, is a reasonable reflection of future returns and financial impacts. However, if our estimates are significantly below or above the actual return amounts, our reported revenue and cost of sales could be impacted. A 10% difference in our returns reserve at January 30, 2016, would have affected net earnings by approximately $2 million i
n fiscal 2016.
Gift Card Breakage –
We sell gift cards to customers in our retail stores, through our websites and through select third parties. A liability is initially established for the value of the gift card when sold. We recognize revenue from gift cards when the card is redeemed by the customer. For unredeemed gift cards we recognize breakage when the likelihood of the gift card being redeemed by the customer is deemed remote and we determine that we do not have a legal obligation to remit the value of the unredeemed gift cards to a relevant jurisdiction. We determine the breakage rate based on historical redemption patterns, which show that after 24 months, we can reasonably estimate breakage. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to record breakage. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.
Customer Loyalty Programs
–
We have customer loyalty programs which allow members to earn points for each purchase completed or when using our co-branded credit cards. Points earned enable members to receive a certificate that may be redeemed on future purchases. The value of points earned by our loyalty program members is included in accrued liabilities and recorded as a reduction in revenue at the time the points are earned, based on the value of points that are projected to be redeemed. Our estimate of the amount and timing of redemptions of certificates is based primarily on historical data. A 10% difference in our customer loyalty point liability at January 30, 2016, would have affected net earnings by approximately $13 million in fiscal 2016.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions of our revenue recognition critical accounting estimates. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
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.
Item 8. Financial Statements and Supplementary Data.
Management's Report on the Consolidated Financial Statements
Our management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial statements and the related financial information. The consolidated financial statements have been prepared in conformity with GAAP and necessarily include certain amounts that are based on estimates and informed judgments. Our management also prepared the related financial information included in this Annual Report on Form 10-K and is responsible for its accuracy and consistency with the consolidated financial statements.
The accompanying consolidated financial statements have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, which conducted its audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). The independent registered public accounting firm's responsibility is to express an opinion as to the fairness with which such financial statements present our financial position, results of operations and cash flows in accordance with GAAP.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is designed under the supervision of our principal executive officer and principal financial officer, and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that:
|
|
(1)
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets;
|
|
|
(2)
|
Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that our receipts and expenditures are being made only in accordance with authorizations of our management and Board; and
|
|
|
(3)
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting as of
January 30, 2016
, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control — Integrated Framework (2013).
Based on our assessment, we have concluded that our internal control over financial reporting was effective as of
January 30, 2016
. During our assessment, we did not identify any material weaknesses in our internal control over financial reporting. Deloitte & Touche LLP, the independent registered public accounting firm that audited our consolidated financial statements for the year ended
January 30, 2016
, included in Item 8,
Financial Statements and Supplementary Data,
of this Annual Report on Form 10-K, has issued an unqualified attestation report on our internal control over financial reporting as of
January 30, 2016
.
|
|
|
|
|
|
|
Hubert Joly
Chairman and Chief Executive Officer
(duly authorized and principal executive officer)
|
|
Sharon L. McCollam
Chief Administrative Officer and Chief Financial Officer
(duly authorized and principal financial officer)
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Best Buy Co., Inc.
Richfield, Minnesota
We have audited the accompanying consolidated balance sheets of Best Buy Co., Inc. and subsidiaries (the “Company”) as of January 30, 2016 and January 31, 2015 and the related consolidated statements of earnings, comprehensive income, cash flows, and changes in shareholders’ equity for each of the three years in the period ended January 30, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Best Buy Co., Inc. and subsidiaries as of January 30, 2016 and January 31, 2015, and the results of their operations and their cash flows for each of the three years ended January 30, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 30, 2016, based on the criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 23, 2016, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Minneapolis, Minnesota
March 23, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Best Buy Co., Inc.:
Richfield, Minnesota
We have audited the internal control over financial reporting of Best Buy Co., Inc. and subsidiaries (the “Company”), as of January 30, 2016, based on criteria established in
Internal Control -Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 30, 2016, based on the criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the fiscal year ended January 30, 2016, of the Company and our report dated March 23, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule.
Minneapolis, Minnesota
March 23, 2016
Consolidated Balance Sheets
$ in millions, except per share and share amounts
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
January 31, 2015
|
Assets
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,976
|
|
|
$
|
2,432
|
|
Short-term investments
|
|
1,305
|
|
|
1,456
|
|
Receivables, net
|
|
1,162
|
|
|
1,280
|
|
Merchandise inventories
|
|
5,051
|
|
|
5,174
|
|
Other current assets
|
|
392
|
|
|
449
|
|
Current assets held for sale
|
|
—
|
|
|
681
|
|
Total current assets
|
|
9,886
|
|
|
11,472
|
|
Property and Equipment
|
|
|
|
|
Land and buildings
|
|
613
|
|
|
611
|
|
Leasehold improvements
|
|
2,220
|
|
|
2,201
|
|
Fixtures and equipment
|
|
5,002
|
|
|
4,729
|
|
Property under capital and financing leases
|
|
272
|
|
|
119
|
|
|
|
8,107
|
|
|
7,660
|
|
Less accumulated depreciation
|
|
5,761
|
|
|
5,365
|
|
Net property and equipment
|
|
2,346
|
|
|
2,295
|
|
Goodwill
|
|
425
|
|
|
425
|
|
Intangibles, Net
|
|
18
|
|
|
57
|
|
Other Assets
|
|
813
|
|
|
829
|
|
Non-current assets held for sale
|
|
31
|
|
|
167
|
|
Total Assets
|
|
$
|
13,519
|
|
|
$
|
15,245
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
4,450
|
|
|
$
|
5,030
|
|
Unredeemed gift card liabilities
|
|
409
|
|
|
411
|
|
Deferred revenue
|
|
357
|
|
|
326
|
|
Accrued compensation and related expenses
|
|
384
|
|
|
372
|
|
Accrued liabilities
|
|
802
|
|
|
782
|
|
Accrued income taxes
|
|
128
|
|
|
230
|
|
Current portion of long-term debt
|
|
395
|
|
|
41
|
|
Current liabilities held for sale
|
|
—
|
|
|
585
|
|
Total current liabilities
|
|
6,925
|
|
|
7,777
|
|
Long-Term Liabilities
|
|
877
|
|
|
881
|
|
Long-Term Debt
|
|
1,339
|
|
|
1,572
|
|
Contingencies and Commitments (Note 12)
|
|
|
|
|
Long-Term Liabilities held for sale
|
|
—
|
|
|
15
|
|
Equity
|
|
|
|
|
Best Buy Co., Inc. Shareholders' Equity
|
|
|
|
|
Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none
|
|
—
|
|
|
—
|
|
Common stock, $0.10 par value: Authorized — 1.0 billion shares; Issued and outstanding — 323,779,000 and 351,468,000 shares, respectively
|
|
32
|
|
|
35
|
|
Prepaid share repurchase
|
|
(55
|
)
|
|
—
|
|
Additional paid-in capital
|
|
—
|
|
|
437
|
|
Retained earnings
|
|
4,130
|
|
|
4,141
|
|
Accumulated other comprehensive income
|
|
271
|
|
|
382
|
|
Total Best Buy Co., Inc. shareholders' equity
|
|
4,378
|
|
|
4,995
|
|
Noncontrolling interests
|
|
—
|
|
|
5
|
|
Total equity
|
|
4,378
|
|
|
5,000
|
|
Total Liabilities and Equity
|
|
$
|
13,519
|
|
|
$
|
15,245
|
|
See Notes to Consolidated Financial Statements.
Consolidated Statements of Earnings
$ in millions, except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
January 30, 2016
|
|
January 31, 2015
|
|
February 1, 2014
|
Revenue
|
|
$
|
39,528
|
|
|
$
|
40,339
|
|
|
$
|
40,611
|
|
Cost of goods sold
|
|
30,334
|
|
|
31,292
|
|
|
31,212
|
|
Restructuring charges — cost of goods sold
|
|
3
|
|
|
—
|
|
|
—
|
|
Gross profit
|
|
9,191
|
|
|
9,047
|
|
|
9,399
|
|
Selling, general and administrative expenses
|
|
7,618
|
|
|
7,592
|
|
|
8,106
|
|
Restructuring charges
|
|
198
|
|
|
5
|
|
|
149
|
|
Operating income
|
|
1,375
|
|
|
1,450
|
|
|
1,144
|
|
Other income (expense)
|
|
|
|
|
|
|
Gain on sale of investments
|
|
2
|
|
|
13
|
|
|
20
|
|
Investment income and other
|
|
13
|
|
|
14
|
|
|
19
|
|
Interest expense
|
|
(80
|
)
|
|
(90
|
)
|
|
(100
|
)
|
Earnings from continuing operations before income tax expense
|
|
1,310
|
|
|
1,387
|
|
|
1,083
|
|
Income tax expense
|
|
503
|
|
|
141
|
|
|
388
|
|
Net earnings from continuing operations
|
|
807
|
|
|
1,246
|
|
|
695
|
|
Gain (loss) from discontinued operations (Note 2), net of tax benefit (expense) of $(1), $0 and $31
|
|
90
|
|
|
(11
|
)
|
|
(172
|
)
|
Net earnings including noncontrolling interests
|
|
897
|
|
|
1,235
|
|
|
523
|
|
Net (earnings) loss from discontinued operations attributable to noncontrolling interests
|
|
—
|
|
|
(2
|
)
|
|
9
|
|
Net earnings attributable to Best Buy Co., Inc. shareholders
|
|
$
|
897
|
|
|
$
|
1,233
|
|
|
$
|
532
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share attributable to Best Buy Co., Inc. shareholders
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.33
|
|
|
$
|
3.57
|
|
|
$
|
2.03
|
|
Discontinued operations
|
|
0.26
|
|
|
(0.04
|
)
|
|
(0.47
|
)
|
Basic earnings per share
|
|
$
|
2.59
|
|
|
$
|
3.53
|
|
|
$
|
1.56
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share attributable to Best Buy Co., Inc. shareholders
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.30
|
|
|
$
|
3.53
|
|
|
$
|
2.00
|
|
Discontinued operations
|
|
0.26
|
|
|
(0.04
|
)
|
|
(0.47
|
)
|
Diluted earnings per share
|
|
$
|
2.56
|
|
|
$
|
3.49
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (in millions)
|
|
|
|
|
|
|
Basic
|
|
346.5
|
|
|
349.5
|
|
|
342.1
|
|
Diluted
|
|
350.7
|
|
|
353.6
|
|
|
347.6
|
|
See Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
$ in millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
January 30, 2016
|
|
January 31, 2015
|
|
February 1, 2014
|
Net earnings including noncontrolling interests
|
|
$
|
897
|
|
|
$
|
1,235
|
|
|
$
|
523
|
|
Foreign currency translation adjustments
|
|
(44
|
)
|
|
(103
|
)
|
|
(147
|
)
|
Unrealized gain (loss) on available-for-sale investments
|
|
—
|
|
|
(3
|
)
|
|
6
|
|
Reclassification of foreign currency translations adjustments into earnings due to sale of business
|
|
(67
|
)
|
|
—
|
|
|
654
|
|
Reclassification of (gains) losses on available-for-sale investments into earnings
|
|
—
|
|
|
(4
|
)
|
|
2
|
|
Comprehensive income including noncontrolling interests
|
|
786
|
|
|
1,125
|
|
|
1,038
|
|
Comprehensive income attributable to noncontrolling interests
|
|
—
|
|
|
(2
|
)
|
|
(126
|
)
|
Comprehensive income attributable to Best Buy Co., Inc. shareholders
|
|
$
|
786
|
|
|
$
|
1,123
|
|
|
$
|
912
|
|
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
$ in millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
January 30, 2016
|
|
January 31, 2015
|
|
February 1, 2014
|
Operating Activities
|
|
|
|
|
|
|
|
Net earnings including noncontrolling interests
|
|
$
|
897
|
|
|
$
|
1,235
|
|
|
$
|
523
|
|
Adjustments to reconcile net earnings to total cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
657
|
|
|
656
|
|
|
701
|
|
Amortization of definite-lived intangible assets
|
|
—
|
|
|
—
|
|
|
15
|
|
Restructuring charges
|
|
201
|
|
|
23
|
|
|
259
|
|
(Gain) Loss on sale of business
|
|
(99
|
)
|
|
(1
|
)
|
|
143
|
|
Stock-based compensation
|
|
104
|
|
|
87
|
|
|
90
|
|
Deferred income taxes
|
|
49
|
|
|
(297
|
)
|
|
(28
|
)
|
Other, net
|
|
38
|
|
|
8
|
|
|
62
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Receivables
|
|
123
|
|
|
(19
|
)
|
|
7
|
|
Merchandise inventories
|
|
86
|
|
|
(141
|
)
|
|
597
|
|
Other assets
|
|
36
|
|
|
29
|
|
|
(70
|
)
|
Accounts payable
|
|
(536
|
)
|
|
434
|
|
|
(986
|
)
|
Other liabilities
|
|
(140
|
)
|
|
(164
|
)
|
|
(273
|
)
|
Income taxes
|
|
(94
|
)
|
|
85
|
|
|
54
|
|
Total cash provided by operating activities
|
|
1,322
|
|
|
1,935
|
|
|
1,094
|
|
Investing Activities
|
|
|
|
|
|
|
Additions to property and equipment, net of $92, $14 and $13 of non-cash capital expenditures
|
|
(649
|
)
|
|
(561
|
)
|
|
(547
|
)
|
Purchases of investments
|
|
(2,281
|
)
|
|
(2,804
|
)
|
|
(230
|
)
|
Sales of investments
|
|
2,427
|
|
|
1,580
|
|
|
50
|
|
Proceeds from sale of business, net of cash transferred
|
|
103
|
|
|
39
|
|
|
206
|
|
Change in restricted assets
|
|
(47
|
)
|
|
29
|
|
|
5
|
|
Other, net
|
|
28
|
|
|
5
|
|
|
(1
|
)
|
Total cash used in investing activities
|
|
(419
|
)
|
|
(1,712
|
)
|
|
(517
|
)
|
Financing Activities
|
|
|
|
|
|
|
Repurchase of common stock
|
|
(1,000
|
)
|
|
—
|
|
|
—
|
|
Prepayment of accelerated share repurchase
|
|
(55
|
)
|
|
—
|
|
|
—
|
|
Issuance of common stock
|
|
47
|
|
|
50
|
|
|
171
|
|
Dividends paid
|
|
(499
|
)
|
|
(251
|
)
|
|
(233
|
)
|
Repayments of debt
|
|
(28
|
)
|
|
(24
|
)
|
|
(2,033
|
)
|
Proceeds from issuance of debt
|
|
—
|
|
|
—
|
|
|
2,414
|
|
Other, net
|
|
20
|
|
|
2
|
|
|
—
|
|
Total cash provided by (used in) financing activities
|
|
(1,515
|
)
|
|
(223
|
)
|
|
319
|
|
Effect of Exchange Rate Changes on Cash
|
|
(38
|
)
|
|
(52
|
)
|
|
(44
|
)
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
(650
|
)
|
|
(52
|
)
|
|
852
|
|
Cash and Cash Equivalents at Beginning of Period, Excluding Held for Sale
|
|
2,432
|
|
|
2,678
|
|
|
1,826
|
|
Cash and Cash Equivalents Held for Sale at Beginning of Period
|
|
194
|
|
|
—
|
|
|
—
|
|
Cash and Cash equivalents at End of Period
|
|
1,976
|
|
|
2,626
|
|
|
2,678
|
|
Cash and Cash Equivalents Held for Sale at End of Period
|
|
—
|
|
|
(194
|
)
|
|
—
|
|
Cash and Cash Equivalents at End of Period, Excluding Held for Sale
|
|
$
|
1,976
|
|
|
$
|
2,432
|
|
|
$
|
2,678
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
550
|
|
|
$
|
355
|
|
|
$
|
332
|
|
Interest paid
|
|
77
|
|
|
81
|
|
|
82
|
|
See Notes to Consolidated Financial Statements.
Consolidated Statements of Changes in Shareholders' Equity
$ and shares in millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
Common
Stock
|
|
|
Prepaid Share Repurchase
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
|
Total Best
Buy Co., Inc.
Shareholders'
Equity
|
|
|
Non
controlling
Interests
|
|
|
Total
Equity
|
|
Balances at February 2, 2013
|
338
|
|
|
34
|
|
|
—
|
|
|
54
|
|
|
2,861
|
|
|
112
|
|
|
3,061
|
|
|
654
|
|
|
3,715
|
|
Net earnings (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
532
|
|
|
—
|
|
|
532
|
|
|
(9
|
)
|
|
523
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(136
|
)
|
|
(136
|
)
|
|
(11
|
)
|
|
(147
|
)
|
Unrealized gains (losses) on available-for-sale investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
7
|
|
|
(1
|
)
|
|
6
|
|
Reclassification of foreign currency translation adjustments into earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
508
|
|
|
508
|
|
|
146
|
|
|
654
|
|
Reclassification of losses on available-for-sale investments into earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
2
|
|
Sale of noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(776
|
)
|
|
(776
|
)
|
Dividend distribution
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Tax loss from stock options canceled or exercised, restricted stock vesting and employee stock purchase plan
|
—
|
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
|
—
|
|
|
(22
|
)
|
Issuance of common stock under employee stock purchase plan
|
1
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
13
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
97
|
|
|
—
|
|
|
—
|
|
|
97
|
|
|
—
|
|
|
97
|
|
Restricted stock vested and stock options exercised
|
8
|
|
|
1
|
|
|
—
|
|
|
158
|
|
|
—
|
|
|
—
|
|
|
159
|
|
|
—
|
|
|
159
|
|
Common stock dividends, $0.68 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(234
|
)
|
|
—
|
|
|
(234
|
)
|
|
—
|
|
|
(234
|
)
|
Balances at February 1, 2014
|
347
|
|
|
35
|
|
|
—
|
|
|
300
|
|
|
3,159
|
|
|
492
|
|
|
3,986
|
|
|
3
|
|
|
3,989
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,233
|
|
|
—
|
|
|
1,233
|
|
|
2
|
|
|
1,235
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(103
|
)
|
|
(103
|
)
|
|
—
|
|
|
(103
|
)
|
Unrealized losses on available-for-sale investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
Reclassification of gains on available-for-sale investments into earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Issuance of common stock under employee stock purchase plan
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
87
|
|
|
—
|
|
|
—
|
|
|
87
|
|
|
—
|
|
|
87
|
|
Restricted stock vested and stock options exercised
|
5
|
|
|
—
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
42
|
|
Common stock dividends, $0.72 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(251
|
)
|
|
—
|
|
|
(251
|
)
|
|
—
|
|
|
(251
|
)
|
Balances at January 31, 2015
|
352
|
|
|
35
|
|
|
—
|
|
|
437
|
|
|
4,141
|
|
|
382
|
|
|
4,995
|
|
|
5
|
|
|
5,000
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
897
|
|
|
—
|
|
|
897
|
|
|
—
|
|
|
897
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(44
|
)
|
|
(44
|
)
|
|
—
|
|
|
(44
|
)
|
Reclassification of foreign currency translation adjustments into earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(67
|
)
|
|
(67
|
)
|
|
—
|
|
|
(67
|
)
|
Sale of noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(5
|
)
|
Prepaid repurchase of common stock
|
—
|
|
|
—
|
|
|
(55
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(55
|
)
|
|
—
|
|
|
(55
|
)
|
Issuance of common stock under employee stock purchase plan
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
104
|
|
|
—
|
|
|
104
|
|
Restricted stock vested and stock options exercised
|
5
|
|
|
—
|
|
|
—
|
|
|
40
|
|
|
—
|
|
|
—
|
|
|
40
|
|
|
—
|
|
|
40
|
|
Tax benefits from stock options exercised, restricted stock vesting and employee stock purchase plan
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Common stock dividends, $1.43 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
(504
|
)
|
|
—
|
|
|
(501
|
)
|
|
—
|
|
|
(501
|
)
|
Repurchase of common stock
|
(33
|
)
|
|
(3
|
)
|
|
—
|
|
|
(593
|
)
|
|
(404
|
)
|
|
—
|
|
|
(1,000
|
)
|
|
—
|
|
|
(1,000
|
)
|
Balances at January 30, 2016
|
324
|
|
|
$
|
32
|
|
|
$
|
(55
|
)
|
|
$
|
—
|
|
|
$
|
4,130
|
|
|
$
|
271
|
|
|
$
|
4,378
|
|
|
$
|
—
|
|
|
$
|
4,378
|
|
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Unless the context otherwise requires, the use of the terms "Best Buy," "we," "us" and "our" in these Notes to Consolidated Financial Statements refers to Best Buy Co., Inc. and, as applicable, its consolidated subsidiaries.
Discontinued Operations
On June 26, 2013, we sold our
50%
ownership interest in Best Buy Europe Distributions Limited ("Best Buy Europe"). On February 1, 2014, we sold mindSHIFT Technologies, Inc. ("mindSHIFT"). On February 13, 2015, we sold Jiangsu Five Star Appliance Co., Limited ("Five Star"). The results of Best Buy Europe, mindSHIFT and Five Star are presented as discontinued operations for all periods. See Note 2,
Discontinued Operations
, for further information.
Description of Business
We are a leading provider of technology products, services and solutions. We offer these products and services to the customers who visit our stores, engage with Geek Squad agents or use our websites or mobile applications. We have operations in the U.S., Canada and Mexico. We 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 Mobile, Best Buy Direct, Best Buy Express, Geek Squad, Magnolia Home Theater and Pacific Kitchen and Home. The International segment is comprised of all operations in Canada and Mexico under the brand names Best Buy, bestbuy.com.ca, bestbuy.com.mx, Best Buy Express, Best Buy Mobile and Geek Squad.
Basis of Presentation
The consolidated financial statements include the accounts of Best Buy Co., Inc. and its consolidated subsidiaries. All intercompany balances and transactions are eliminated upon consolidation.
In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations, as well as our discontinued Europe and China operations, on a
one
-month lag. Our policy is to accelerate recording the effect of events occurring in the lag period that significantly affect our consolidated financial statements. No significant intervening event occurred in these operations that would have materially affected our financial condition, results of operations, liquidity or other factors had it been recorded during fiscal 2016, 2015 or 2014.
In preparing the accompanying consolidated financial statements, we evaluated the period from January 31, 2016, through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. Other than as described in Note 5,
Debt
, and Note 7,
Shareholders' Equity
, no such events were identified for this period.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP") requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts in the consolidated financial statements, as well as the disclosure of contingent liabilities. Future results could be materially affected if actual results were to differ from these estimates and assumptions.
Fiscal Year
Our fiscal year ends on the Saturday nearest the end of January. Fiscal 2016, 2015, and 2014 each included
52
weeks.
New Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-18,
Reporting Discontinued Operations and Disclosures of Components of an Entity.
The new guidance amends the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. We adopted the new guidance in the first quarter of fiscal 2016, and the adoption of the new guidance did not have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
as a new Topic. Accounting Standards Codification (ASC) Topic 606. The new guidance provides a comprehensive framework for the analysis of revenue transactions and will apply to all of our revenue streams. Based on the current effective dates, the new guidance would first apply in the first quarter of our fiscal 2019. While we are still in the process of evaluating the effect of adoption on our financial statements, we do not currently expect a material impact on our results of operations, cash flows or financial position.
In February 2016, the FASB issued ASU 2016-02,
Leases.
The new guidance was issued to increase transparency and comparability among companies by requiring most leases be included on the balance sheet and by expanding disclosure requirements. Based on the current effective dates, the new guidance would first apply in the first quarter of our fiscal 2020. We are still in the process of evaluating the effect of adoption on our financial statements.
Changes in Accounting Principles
In the fourth quarter of fiscal 2016, we adopted the following ASUs:
|
|
•
|
The FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
in April 2015
and ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
in August 2015. The new guidance aligns the treatment of debt issuance costs, with the exception of debt issuance costs related to lines of credit, with the treatment of debt discounts, so that the debt issuance costs are presented on the balance sheet as a direct deduction from the carrying amount of that debt liability. In the fourth quarter of fiscal 2016, we retrospectively adopted ASU 2015-03 and ASU 2015-15. The adoption did not have a material impact on our results of operations, cash flows or financial position.
|
|
|
•
|
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes.
The new guidance is part of the simplification initiative and requires all deferred income tax liabilities and assets to be classified as non-current. In the fourth quarter of fiscal 2016, we retrospectively adopted ASU 2015-17. The adoption did not have a material impact on our results of operations, cash flows or financial position.
|
The following table reconciles the balance sheet line items impacted by the adoption of these two standards for fiscal 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
2015 Reported
|
|
ASU 2015-03 & 2015-15 Adjustments
|
|
ASU 2015-17 Adjustments
|
|
2015 Adjusted
|
Other current assets
|
$
|
703
|
|
|
$
|
(2
|
)
|
|
$
|
(252
|
)
|
|
$
|
449
|
|
Current assets held for sale
|
684
|
|
|
—
|
|
|
(3
|
)
|
|
681
|
|
Other assets
|
583
|
|
|
(6
|
)
|
|
252
|
|
|
829
|
|
Total assets
|
$
|
15,256
|
|
|
$
|
(8
|
)
|
|
$
|
(3
|
)
|
|
$
|
15,245
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
$
|
1,580
|
|
|
$
|
(8
|
)
|
|
$
|
—
|
|
|
$
|
1,572
|
|
Long-term liabilities held for sale
|
18
|
|
|
—
|
|
|
(3
|
)
|
|
15
|
|
Total liabilities & equity
|
$
|
15,256
|
|
|
$
|
(8
|
)
|
|
$
|
(3
|
)
|
|
$
|
15,245
|
|
Cash and Cash Equivalents
Cash primarily consists of cash on hand and bank deposits. Cash equivalents consist of money market funds, treasury bills, commercial paper, corporate bonds and deposits with an original maturity of
3
months or less when purchased. The amounts of cash equivalents at
January 30, 2016
, and
January 31, 2015
, were
$1,208 million
and
$1,660 million
, respectively, and the weighted-average interest rates were
0.5%
and
0.4%
, respectively.
Receivables
Receivables consist principally of amounts due from mobile phone network operators for commissions earned; banks for customer credit card and debit card transactions; and vendors for various vendor funding programs.
We establish allowances for uncollectible receivables based on historical collection trends and write-off history. Our allowances for uncollectible receivables were
$49 million
and
$59 million
at
January 30, 2016
, and
January 31, 2015
, respectively.
Merchandise Inventories
Merchandise inventories are recorded at the lower of cost, using the average cost, or market. In-bound freight-related costs from our vendors are included as part of the net cost of merchandise inventories. Also included in the cost of inventory are certain vendor allowances that are not a reimbursement of specific, incremental and identifiable costs to promote a vendor's products. Other costs associated with acquiring, storing and transporting merchandise inventories to our retail stores are expensed as incurred and included in cost of goods sold.
Our inventory valuation reflects adjustments for anticipated physical inventory losses (e.g., theft) that have occurred since the last physical inventory. Physical inventory counts are taken on a regular basis to ensure that the inventory reported in our consolidated financial statements is properly stated.
Our inventory valuation also reflects markdowns for the excess of the cost over the amount we expect to realize from the ultimate sale or other disposal of the inventory. Markdowns establish a new cost basis for our inventory. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded markdowns or an increase in the newly established cost basis.
Restricted Assets
Restricted cash totaled
$185 million
at
January 30, 2016
and is included in other current assets. Restricted cash totaled
$292 million
at
January 31, 2015
, of which
$184 million
is related to continuing operations and included in other current assets and
$108 million
is included in current assets held for sale in our Consolidated Balance Sheet. Such balances are pledged as collateral or restricted to use for general liability insurance and workers' compensation insurance.
Property and Equipment
Property and equipment are recorded at cost. We compute depreciation using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the period from the date the assets are placed in service to the end of the lease term, which includes optional renewal periods if they are reasonably assured. Accelerated depreciation methods are generally used for income tax purposes.
When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from our Consolidated Balance Sheets and any resulting gain or loss is reflected in our Consolidated Statements of Earnings.
Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated.
Costs associated with the acquisition or development of software for internal use are capitalized and amortized over the expected useful life of the software, generally from three to seven years. A subsequent addition, modification or upgrade to internal-use software is capitalized to the extent that it enhances the software's functionality or extends its useful life. Capitalized software is included in fixtures and equipment. Software maintenance and training costs are expensed in the period incurred.
Property under capital and financing leases is comprised of buildings and equipment used in our operations. The related depreciation for capital and financing leases assets is included in depreciation expense. The carrying value of property under capital and financing leases was
$165 million
and
$44 million
at
January 30, 2016
, and
January 31, 2015
, respectively, net of accumulated depreciation of
$107 million
and
$75 million
, respectively.
Estimated useful lives by major asset category are as follows:
|
|
|
|
Asset
|
|
Life
(in years)
|
Buildings
|
|
35
|
Leasehold improvements
|
|
3-25
|
Fixtures and equipment
|
|
3-20
|
Property under capital and financing leases
|
|
2-20
|
Impairment of Long-Lived Assets and Costs Associated With Exit Activities
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Factors considered important that could result in an impairment review include, but are not limited to, significant under-performance relative to historical or planned operating results, significant changes in the manner of use or expected life of the assets, or significant changes in our business strategies. An impairment loss is recognized when the estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from the disposition of the asset (if any) are less than the carrying value of the asset net of other liabilities. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value using valuation techniques such as discounted cash flow analysis.
When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For example, long-lived assets deployed at store locations are reviewed for impairment at the individual store level, which involves comparing the carrying value of all land, buildings, leasehold improvements, fixtures and equipment located at each store to the net cash flow projections for each store. In addition, we conduct separate impairment reviews at other levels as appropriate, for example, to evaluate potential impairment of assets shared by several areas of operations, such as information technology systems. Refer to Note 3,
Fair Value Measurements
, for further information associated with the long-lived assets impairments, including valuation techniques used, impairment charges incurred, and remaining carrying values.
The present value of costs associated with vacated properties, primarily future lease costs (net of expected sublease income), are charged to earnings when we cease using the property. We accelerate depreciation on property and equipment we expect to retire when a decision is made to abandon a property.
At
January 30, 2016
, and
January 31, 2015
, the obligation associated with vacant properties included in accrued liabilities in our Consolidated Balance Sheets was
$44 million
and
$26 million
, respectively, and the obligation associated with vacant properties included in long-term liabilities in our Consolidated Balance Sheets was
$54 million
and
$43 million
, respectively. The obligation associated with vacant properties at
January 30, 2016
, and
January 31, 2015
, included amounts associated with our restructuring activities as further described in Note 4,
Restructuring Charges
.
Leases
We conduct the majority of our retail and distribution operations from leased locations. The leases generally require payment of real estate taxes, insurance and common area maintenance, in addition to rent. The terms of our new lease agreements for large-format stores are generally less than
10
years, although we have existing leases with terms up to
20
years. Small-format stores generally have lease terms that are half the length of large-format stores. Most of the leases contain renewal options and escalation clauses, and certain store leases require contingent rents based on factors such as specified percentages of revenue or the consumer price index.
For leases that contain predetermined fixed escalations of the minimum rent, we recognize the related rent expense on a straight-line basis from the date we take possession of the property to the end of the initial lease term. We record any difference between the straight-line rent amounts and amounts payable under the leases as part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.
Cash or lease incentives received upon entering into certain store leases ("tenant allowances") are recognized on a straight-line basis as a reduction to rent from the date we take possession of the property through the end of the initial lease term. We record the unamortized portion of tenant allowances as a part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.
At
January 30, 2016
, and
January 31, 2015
, deferred rent included in accrued liabilities in our Consolidated Balance Sheets was
$36 million
and
$31 million
, respectively, and deferred rent included in long-term liabilities in our Consolidated Balance Sheets was
$139 million
and
$195 million
, respectively.
In addition, we have financing leases for agreements when we are deemed the owner of the leased buildings, typically due to significant involvement during the construction period, and do not qualify for sales recognition under the sale-leaseback accounting guidance. We record the cost of the building in property and equipment, with the related liability recorded in long-term debt. At
January 30, 2016
and
January 31, 2015
, we had
$178 million
and
$69 million
, respectively, outstanding under financing lease obligations. The increase in financing lease obligations was primarily due to renewals on existing leases.
Assets acquired under capital and financing leases are depreciated over the shorter of the useful life of the asset or the lease term, including renewal periods, if reasonably assured.
Goodwill and Intangible Assets
Goodwill
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. We test goodwill for impairment annually, as of the first day of the fiscal fourth quarter, or when indications of potential impairment exist. We monitor the existence of potential impairment indicators throughout the fiscal year. We test for goodwill impairment at the reporting unit level and our reporting units are the components of operating segments which constitute businesses for which discrete financial information is available and is regularly reviewed by segment management. No components were aggregated in arriving at our reporting units. Our only reporting unit with a goodwill balance at the beginning of fiscal 2016 was our Domestic segment.
Our detailed impairment testing involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit and is based on discounted cash flows or relative market-based approaches. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit's goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. No goodwill impairment was recorded in fiscal 2015. In fiscal 2016, we determined that the fair value of the Best Buy Domestic reporting unit exceeded its carrying value, and as a result, no goodwill impairment was recorded in fiscal 2016.
Tradenames
We include our tradenames and customer relationships within intangibles, net in our Consolidated Balance Sheets. We have an indefinite-lived tradename related to Pacific Sales included within our Domestic segment. As of the end of fiscal 2016, we have no indefinite-lived tradenames within our International segment.
Our valuation of identifiable intangible assets acquired is based on information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value. We do not amortize our indefinite-lived tradenames, but test for impairment annually, or when indications of potential impairment exist. We utilize the relief from royalty method to determine the fair value of each of our indefinite-lived tradenames. If the carrying value exceeds the fair value, we recognize an impairment loss in an amount equal to the excess. As a part of the Canada brand restructuring, we fully impaired the indefinite-lived Future Shop tradename during fiscal 2016. Refer to Note 4,
Restructuring Charges
, for additional information. No other impairments were identified during fiscal 2016.
The changes in the carrying amount of goodwill and indefinite-lived tradenames by segment were as follows in fiscal
2016
,
2015
and
2014
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Indefinite-Lived Tradenames
|
|
Domestic
|
|
International
|
|
Total
|
|
Domestic
|
|
International
|
|
Total
|
Balances at February 2, 2013
|
$
|
528
|
|
|
$
|
—
|
|
|
$
|
528
|
|
|
$
|
19
|
|
|
$
|
112
|
|
|
$
|
131
|
|
Sale of business
(1)
|
(103
|
)
|
|
—
|
|
|
(103
|
)
|
|
—
|
|
|
(22
|
)
|
|
(22
|
)
|
Impairments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
Changes in foreign currency exchange rates
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
Balances at February 1, 2014
|
425
|
|
|
—
|
|
|
425
|
|
|
19
|
|
|
82
|
|
|
101
|
|
Sale of business
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
(37
|
)
|
|
(37
|
)
|
Impairments
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Changes in foreign currency exchange rates
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
Balances at January 31, 2015
|
425
|
|
|
—
|
|
|
425
|
|
|
18
|
|
|
39
|
|
|
57
|
|
Canada brand restructuring
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40
|
)
|
|
(40
|
)
|
Changes in foreign currency exchange rates
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Balances at January 30, 2016
|
$
|
425
|
|
|
$
|
—
|
|
|
$
|
425
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
|
(1)
|
Represents goodwill written off as a result of the sale of mindSHIFT in fiscal 2014 and indefinite-lived tradenames written off as a result of the sale of Best Buy Europe in fiscal 2014.
|
|
|
(2)
|
Primarily represents the Five Star indefinite-lived tradenames classified as held for sale at January 31, 2015.
|
|
|
(3)
|
Represents the Future Shop tradename impaired as a result of the Canada brand restructuring in the first quarter of fiscal 2016. See Note 4,
Restructuring Charges
, for further discussion.
|
The following table provides the gross carrying amount of goodwill and cumulative goodwill impairment losses ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
January 31, 2015
|
|
Gross Carrying
Amount
|
|
Cumulative
Impairment
|
|
Gross Carrying
Amount
(1)
|
|
Cumulative
Impairment
(1)
|
Goodwill
|
$
|
1,100
|
|
|
$
|
(675
|
)
|
|
$
|
1,100
|
|
|
$
|
(675
|
)
|
|
|
(1)
|
Excludes the gross carrying amount and cumulative impairment related to Five Star, which was held for sale at the end of fiscal 2015. The sale of Five Star was completed on February 13, 2015.
|
Insurance
We are self-insured for certain losses related to health, workers' compensation and general liability claims; however, we obtain third-party insurance coverage to limit our exposure to these claims. A portion of these self-insured losses are managed through a wholly-owned insurance captive. We estimate our self-insured liabilities using a number of factors, including historical claims experience, an estimate of incurred but not reported claims, demographic and severity factors, and valuations provided by independent third-party actuaries. Our self-insured liabilities included in the Consolidated Balance Sheets were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
January 31, 2015
|
Accrued liabilities
|
$
|
62
|
|
|
$
|
60
|
|
Long-term liabilities
|
54
|
|
|
53
|
|
Total
|
$
|
116
|
|
|
$
|
113
|
|
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry-forwards. We
record a valuation allowance to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.
In determining our provision for income taxes, we use an annual effective income tax rate based on annual income, permanent differences between book and tax income, and statutory income tax rates. The effective income tax rate also reflects our assessment of the ultimate outcome of tax audits. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available. Discrete events, such as audit settlements or changes in tax laws, are recognized in the period in which they occur.
Our income tax returns are periodically audited by U.S. federal, state and local and foreign tax authorities. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the tax benefits associated with our various tax filing positions, we record a tax benefit for uncertain tax positions using the highest cumulative tax benefit that is more likely than not to be realized. A number of years may elapse before a particular matter, for which we have established a liability, is audited and effectively settled. We adjust our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. We include our liability for unrecognized tax benefits, including accrued penalties and interest, in accrued income taxes and long-term liabilities on our Consolidated Balance Sheets and in income tax expense in our Consolidated Statements of Earnings.
Accrued Liabilities
The major components of accrued liabilities at
January 30, 2016
, and
January 31, 2015
, were state and local tax liabilities, rent-related liabilities including accrued real estate taxes, loyalty program liabilities and self-insurance reserves.
Long-Term Liabilities
The major components of long-term liabilities at
January 30, 2016
, and
January 31, 2015
, were unrecognized tax benefits, rent-related liabilities, deferred compensation plan liabilities, self-insurance reserves and deferred revenue.
Foreign Currency
Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at our consolidated balance sheet date. For operations reported on a
one
-month lag, we use the exchange rates in effect
one
month prior to our consolidated balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on the translation of assets and liabilities is included as a component of shareholders' equity in accumulated other comprehensive income. Gains and losses from foreign currency transactions, which are included in SG&A, have not been significant in any of the periods presented.
Revenue Recognition
We recognize revenue when the sales price is fixed or determinable, collection is reasonably assured and the customer takes possession of the merchandise, or in the case of services, the service has been provided. Revenue excludes sales taxes collected. Revenue from merchandise sales and services is reported net of sales returns, which includes an estimate of future returns based on historical return rates, with a corresponding reduction to cost of sales. Our sales returns reserve, which represents the estimated gross margin impact of returns, was
$25 million
and
$25 million
at
January 30, 2016
, and
January 31, 2015
, respectively.
For revenue transactions that involve multiple deliverables, we defer the revenue associated with any undelivered elements. The amount of revenue deferred in connection with the undelivered elements is determined using the relative fair value of each element, which is generally based on each element's relative retail price.
Our deferred revenues primarily relate to merchandise not yet delivered to customers, services not yet completed and technical support contracts not yet completed. At
January 30, 2016
, short-term deferred revenue was
$357 million
. At
January 31, 2015
, short-term deferred revenue was
$376 million
, of which
$50 million
is included in current liabilities held for sale in relation to the sale of Five Star. At
January 30, 2016
, and
January 31, 2015
, deferred revenue included within long-term liabilities in our Consolidated Balance Sheets was
$45 million
and
$49 million
, respectively.
Merchandise revenue
Revenue is recognized for store sales when the customer receives and pays for merchandise. In the case of items paid for in store but subsequently delivered to the customer, revenue is recognized once delivery has been completed.
For transactions initiated online, customers choose whether to collect merchandise from one of our stores (“in-store pick up”) or have it delivered to them (typically using third party parcel delivery companies). For in-store pick up, we recognize revenue once the customer has taken possession of merchandise. For items delivered directly to the customer, we recognize revenue when delivery has been completed. Any fees charged to customers for delivery are also recognized when delivery has been completed.
Services
Revenue related to consultation, design, installation, set-up, repair and educational classes are recognized once the service is complete. We sell various protection plans with extended warranty coverage for merchandise and technical support to assist customers in using their devices. Such plans have terms typically ranging from one month to five years. For extended warranty protection, third party insurers assume all risk associated with the coverage and are deemed to be the legal obligor. We record the net commissions we receive (the amount charged to the customer less the amount remitted to the insurer) as revenue when the corresponding merchandise revenue is recognized.
For technical support contracts, we assume responsibility for fulfilling the support to customers and we recognize the associated revenue either on a straight-line basis over the life of the contracts, or, if sufficient history is available, on a consumption basis.
Credit card revenue
We offer promotional financing and credit cards issued by third-party banks that manage and directly extend credit to our customers. The banks are the sole owners of the accounts receivable generated under the program and accordingly, we do not hold any consumer receivables related to these programs. We are eligible to receive a profit share from our banking partners based on the performance of the programs. We record such profit share as revenue once the portfolio period to which it relates is complete and we have sufficient evidence to estimate the amount.
Gift cards
We sell gift cards to our customers in our retail stores, online and through select third parties. We do not charge administrative fees on unused gift cards and our gift cards do not have an expiration date. We recognize revenue from gift cards when: (i) the gift card is redeemed by the customer, or (ii) the likelihood of the gift card being redeemed by the customer is remote ("gift card breakage"), and we determine that we do not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. We determine our gift card breakage rate based upon historical redemption patterns. Based on our historical information, the likelihood of a gift card remaining unredeemed can be determined
24
months after the gift card is issued. Gift card breakage income is included in revenue in our Consolidated Statements of Earnings. Gift card breakage income was
$65 million
,
$19 million
and
$53 million
in fiscal
2016
,
2015
and
2014
, respectively.
Sales Incentives
We frequently offer sales incentives that entitle our customers to receive a gift card at time of purchase or a reduction in the price of a product or service either at the point of sale or by submitting a claim for a refund (for example coupons, rebates, etc.). For sales incentives issued to the customer in conjunction with a sale of merchandise or services, the reduction in revenue is recognized at the time of sale, based on the expected retail value of the incentive expected to be redeemed.
Customer Loyalty Programs
We have customer loyalty programs which allow members to earn points for each qualifying purchase. Points earned enable members to receive a certificate that may be redeemed on future purchases at our Best Buy branded stores. Depending on the customer's membership level within our loyalty program, certificates expirations typically range from
2
to
12
months from the date of issuance. The retail value of points earned by our loyalty program members is included in accrued liabilities and recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed.
We recognize revenue when: (i) a certificate is redeemed by the customer; (ii) a certificate expires, or (iii) the likelihood of a certificate being redeemed by a customer is remote ("certificate breakage"). We determine our certificate breakage rate based upon historical redemption patterns.
Cost of Goods Sold and Selling, General and Administrative Expenses
The following table illustrates the primary costs classified in each major expense category:
|
|
|
|
|
|
Cost of Goods Sold
|
•
|
|
Total cost of products sold including:
|
|
|
—
|
|
Freight expenses associated with moving merchandise inventories from our vendors to our distribution centers;
|
|
|
—
|
|
Vendor allowances that are not a reimbursement of specific, incremental and identifiable costs; and
|
|
|
—
|
|
Cash discounts on payments to merchandise vendors;
|
•
|
|
Cost of services provided including:
|
|
|
—
|
|
Payroll and benefits costs for services employees; and
|
|
|
—
|
|
Cost of replacement parts and related freight expenses;
|
•
|
|
Physical inventory losses;
|
•
|
|
Markdowns;
|
•
|
|
Customer shipping and handling expenses;
|
•
|
|
Costs associated with operating our distribution network, including payroll and benefit costs, occupancy costs and depreciation; and
|
•
|
|
Freight expenses associated with moving merchandise inventories from our distribution centers to our retail stores.
|
|
|
|
|
|
|
SG&A
|
•
|
|
Payroll and benefit costs for retail and corporate employees;
|
•
|
|
Occupancy and maintenance costs of retail, services and corporate facilities;
|
•
|
|
Depreciation and amortization related to retail, services and corporate assets;
|
•
|
|
Advertising costs;
|
•
|
|
Vendor allowances that are a reimbursement of specific, incremental and identifiable costs to promote a vendor's products;
|
•
|
|
Tender costs, including bank charges and costs associated with credit and debit card interchange fees;
|
•
|
|
Charitable contributions;
|
•
|
|
Outside and outsourced service fees;
|
•
|
|
Long-lived asset impairment charges; and
|
•
|
|
Other administrative costs, such as supplies, travel and lodging.
|
Vendor Allowances
We receive allowances from certain vendors through a variety of programs and arrangements intended to offset our costs of promoting and selling merchandise inventories. Vendor allowances are primarily in the form of receipt-based funds or sell-through credits. Receipt-based funds are generally determined at an agreed percentage of purchases and are initially deferred and recorded as a reduction of merchandise inventories. The deferred amounts are then included as a reduction of cost of goods sold when the related product is sold. Sell-through credits are generally determined at an agreed percentage of sales and are recognized when the related product is sold. Vendor allowances provided as a reimbursement of specific, incremental and identifiable costs, such as specialized store labor or training costs, are included in SG&A as an expense reduction when the cost is incurred.
Advertising Costs
Advertising costs, which are included in SG&A, are expensed the first time the advertisement runs. Advertising costs consist primarily of digital, print and television advertisements, as well as promotional events. Advertising expenses were
$742 million
,
$711 million
and
$757 million
in fiscal
2016
,
2015
and
2014
, respectively.
Stock-Based Compensation
We apply the fair value recognition provisions of accounting guidance as they relate to our stock-based compensation, which require us to recognize expense for the fair value of our stock-based compensation awards. We recognize compensation
expense on a straight-line basis over the requisite service period of the award (or to an employee's eligible retirement date, if earlier).
2. Discontinued Operations
Discontinued operations comprise the following:
Domestic Segment
During the fourth quarter of fiscal 2014, we completed the sale of mindSHIFT to Ricoh Americas Corporation, at which time we recorded an
$18 million
pre-tax loss.
International Segment
Five Star -
During the fourth quarter of fiscal 2015, we entered into a definitive agreement to sell our Five Star business to Yingtan City Xiangyuan Investment Limited Partnership and Zhejiang Jiayuan Real Estate Group Co. On February 13, 2015, we completed the sale of Five Star and recognized a gain on sale of $99 million. Following the sale of Five Star, we continue to hold one retail property in Shanghai, China, which remains held for sale at January 30, 2016, as we continue to actively market the property. The assets of this property are classified as held for sale in the Consolidated Balance Sheets and were
$31 million
as of January 30, 2016. The presentation of discontinued operations has been retrospectively applied to all prior periods presented.
The composition of assets and liabilities disposed of as a result of the sale of Five Star was as follows ($ in millions):
|
|
|
|
|
|
February 13, 2015
|
Cash and cash equivalents
|
$
|
125
|
|
Receivables
|
113
|
|
Merchandise inventories
|
252
|
|
All other assets
|
461
|
|
Total assets
|
$
|
951
|
|
|
|
Accounts payable
|
$
|
478
|
|
All other liabilities
|
128
|
|
Total liabilities
|
$
|
606
|
|
Best Buy Europe –
During the second quarter of fiscal 2014, we completed the sale of our
50%
ownership interest in Best Buy Europe to CPW in return for the following consideration upon closing: net cash of
£341 million
(
$526 million
);
£80 million
(
$123 million
) of ordinary shares of CPW;
£25 million
(
$39 million
), plus
2.5%
interest, to be paid by CPW on June 26, 2014; and
£25 million
(
$39 million
), plus
2.5%
interest, to be paid by CPW on June 26, 2015. We subsequently sold the ordinary shares of CPW for
$123 million
on July 3, 2013. We received the first such deferred cash payment on June 26, 2014 and the second deferred cash payment on June 26, 2015.
In conjunction with our agreement to sell our 50% ownership interest in Best Buy Europe, we entered into a deal-contingent foreign currency forward contract to hedge
£455 million
of the total
£471 million
of net proceeds. The contract was settled in cash following the completion of the sale on June 26, 2013, and we recognized a
$2 million
loss in gain (loss) from discontinued operations on our Consolidated Statements of Earnings in fiscal 2014.
The aggregate financial results of all discontinued operations for fiscal
2016
,
2015
and
2014
were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Revenue
|
$
|
217
|
|
|
$
|
1,564
|
|
|
$
|
4,615
|
|
Restructuring charges
(1)
|
1
|
|
|
18
|
|
|
110
|
|
Loss from discontinued operations before income tax benefit (expense)
(2)
|
(8
|
)
|
|
(12
|
)
|
|
(235
|
)
|
Income tax benefit (expense)
(3)
|
(1
|
)
|
|
—
|
|
|
31
|
|
Gain on sale of discontinued operations
(4)
|
99
|
|
|
1
|
|
|
32
|
|
Net earnings (loss) from discontinued operations including noncontrolling interests
|
90
|
|
|
(11
|
)
|
|
(172
|
)
|
Net (earnings) loss from discontinued operations attributable to noncontrolling interests
|
—
|
|
|
(2
|
)
|
|
9
|
|
Net earnings (loss) from discontinued operations attributable to Best Buy Co., Inc. shareholders
|
$
|
90
|
|
|
$
|
(13
|
)
|
|
$
|
(163
|
)
|
|
|
(1)
|
See Note 4,
Restructuring Charges
, for further discussion of the restructuring charges associated with discontinued operations.
|
|
|
(2)
|
Includes a
$175 million
impairment to write down the book value of our investment in Best Buy Europe to fair value in fiscal 2014.
|
|
|
(3)
|
Income tax benefit for fiscal 2014 includes a
$27 million
benefit related to a tax allocation between continuing and discontinued operations and a
$15 million
benefit related to the impairment of our investment in Best Buy Europe. The fiscal 2014 effective tax rate for discontinued operations differs from the statutory tax rate primarily due to the previously mentioned tax allocation, sale of mindSHIFT, restructuring charges and the impairment of our investment in Best Buy Europe. The sale of mindSHIFT, restructuring charges and impairment generally included no related tax benefit. The deferred tax assets related to the sale of mindSHIFT and restructuring charges generally resulted in an increase in the valuation allowance in an equal amount, of which the investment impairment is not tax deductible.
|
|
|
(4)
|
Gain in fiscal 2014 is primarily comprised of the following:
$28 million
gain (with no tax impact) from sale of Best Buy Europe fixed-line business in Switzerland in the first quarter;
$24 million
gain (with no tax impact) from the sale of Best Buy Europe in the second quarter; and loss of
$18 million
from sale of mindSHIFT in the fourth quarter. Gain in fiscal 2016 of
$99 million
is from sale of Five Star in the first quarter.
|
3. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1
— Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
Level 2
— Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
|
|
•
|
Quoted prices for similar assets or liabilities in active markets;
|
|
|
•
|
Quoted prices for identical or similar assets in non-active markets;
|
|
|
•
|
Inputs other than quoted prices that are observable for the asset or liability; and
|
|
|
•
|
Inputs that are derived principally from or corroborated by other observable market data.
|
Level 3
— Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The following table sets forth by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis at
January 30, 2016
, and
January 31, 2015
, according to the valuation techniques we used to determine their fair values ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Fair Value Hierarchy
|
|
January 30, 2016
|
|
January 31, 2015
|
Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
Money market funds
|
Level 1
|
|
$
|
51
|
|
|
$
|
265
|
|
Corporate bonds
|
Level 2
|
|
—
|
|
|
13
|
|
Commercial paper
|
Level 2
|
|
265
|
|
|
165
|
|
Time deposits
|
Level 2
|
|
306
|
|
|
100
|
|
Short-term investments
|
|
|
|
|
|
Corporate bonds
|
Level 2
|
|
193
|
|
|
276
|
|
Commercial paper
|
Level 2
|
|
122
|
|
|
306
|
|
Time deposits
|
Level 2
|
|
990
|
|
|
874
|
|
Other current assets
|
|
|
|
|
|
Foreign currency derivative instruments
|
Level 2
|
|
18
|
|
|
30
|
|
Time deposits
|
Level 2
|
|
79
|
|
|
83
|
|
Other assets
|
|
|
|
|
|
Interest rate swap derivative instruments
|
Level 2
|
|
25
|
|
|
1
|
|
Auction rate securities
|
Level 3
|
|
2
|
|
|
2
|
|
Marketable securities that fund deferred compensation
|
Level 1
|
|
96
|
|
|
97
|
|
Assets held for sale
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
Money market funds
|
Level 1
|
|
—
|
|
|
16
|
|
Time deposits
|
Level 2
|
|
—
|
|
|
124
|
|
Liabilities
|
|
|
|
|
|
Accrued Liabilities
|
|
|
|
|
|
Foreign currency derivative instruments
|
Level 2
|
|
1
|
|
|
—
|
|
There were no transfers between levels during fiscal 2016 and 2015. In addition, there were no changes in the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) for fiscal 2016 and 2015.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Money Market Funds.
Our money market fund investments were measured at fair value as they trade in an active market using quoted market prices and, therefore, are classified as Level 1.
Corporate Bonds.
Our corporate bond investments were measured at fair value using quoted market prices. They were classified as Level 2 as they trade in a non-active market for which bond prices are readily available.
Commercial Paper.
Our investments in commercial paper were measured using inputs based upon quoted prices for similar instruments in active markets and, therefore, were classified as Level 2.
Time Deposits.
Our time deposits are balances held with banking institutions that cannot be withdrawn for specified terms without a penalty. Time deposits are held at face value plus accrued interest, which approximates fair value, and are classified as Level 2.
Foreign Currency Derivative Instruments.
Comprised primarily of foreign currency forward contracts and foreign currency swap contracts, our foreign currency derivative instruments were measured at fair value using readily observable market inputs, such as quotations on forward foreign exchange points and foreign interest rates. Our foreign currency derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
Interest Rate Swap Derivative Instruments.
Our interest rate swap contracts were measured at fair value using readily observable inputs, such as the LIBOR interest rate. Our interest rate swap derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
Auction Rate Securities.
Our investments in auction rate securities ("ARS") were classified as Level 3 as quoted prices were unavailable. Due to limited market information, we utilized a DCF model to derive an estimate of fair value. The assumptions we used in preparing the DCF model include estimates with respect to the amount and timing of future interest and principal payments, forward projections of the interest rate benchmarks, the probability of full repayment of the principal considering the credit quality and guarantees in place, and the rate of return required by investors to own such securities given the current liquidity risk associated with ARS.
Marketable Securities that Fund Deferred Compensation.
The assets that fund our deferred compensation consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible fixed assets, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value on our Consolidated Balance Sheets. For these assets, we do not periodically adjust carrying value to fair value except in the event of impairment. When we determine that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded within operating income in our Consolidated Statements of Earnings.
The following table summarizes the fair value remeasurements for non-restructuring property and equipment impairments and restructuring activities recorded in fiscal
2016
and
2015
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Impairments
|
|
Remaining Net
Carrying Value
(1)
|
|
Impairments
|
|
Remaining Net
Carrying Value
(1)
|
Continuing operations
|
|
|
|
|
|
|
|
Property and equipment (non-restructuring)
|
$
|
61
|
|
|
$
|
15
|
|
|
$
|
42
|
|
|
$
|
19
|
|
Restructuring activities
(2)
|
|
|
|
|
|
|
|
Property and equipment
|
30
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Tradename
|
40
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
131
|
|
|
$
|
15
|
|
|
$
|
43
|
|
|
$
|
19
|
|
Discontinued operations
(3)
|
|
|
|
|
|
|
|
Property and equipment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
|
(1)
|
Remaining net carrying value approximates fair value.
|
|
|
(2)
|
See Note 4,
Restructuring Charges
, for additional information.
|
|
|
(3)
|
Property and equipment and tradename impairments associated with discontinued operations are recorded within loss from discontinued operations in our Consolidated Statements of Earnings.
|
All of the fair value remeasurements included in the table above were based on significant unobservable inputs (Level 3). Fixed asset fair values were derived using a DCF model to estimate the present value of net cash flows that the asset or asset group is expected to generate. The key inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate. In the case of
assets for which the impairment was the result of restructuring activities, no future cash flows have been assumed as the assets will cease to be used and expected sale values are nominal.
Fair Value of Financial Instruments
Our financial instruments, other than those presented in the disclosures above, include cash, receivables, short-term investments, other investments, accounts payable, other payables and long-term debt. The fair values of cash, receivables, short-term investments, accounts payable and other payables approximated carrying values because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy. Short-term investments other than those disclosed in the tables above represent time deposits. Fair values for other investments held at cost are not readily available, but we estimate that the carrying values for these investments approximate fair value. See Note 5,
Debt
, for information about the fair value of our long-term debt.
4. Restructuring Charges
Summary
Restructuring charges incurred in fiscal
2016
,
2015
, and
2014
were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Continuing operations
|
|
|
|
|
|
Canadian brand consolidation
|
$
|
200
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Renew Blue
|
(2
|
)
|
|
11
|
|
|
155
|
|
Other restructuring activities
(1)
|
3
|
|
|
(6
|
)
|
|
(6
|
)
|
Total continuing operations
|
201
|
|
|
5
|
|
|
149
|
|
Discontinued operations
|
|
|
|
|
|
Renew Blue
|
—
|
|
|
18
|
|
|
10
|
|
Other restructuring activities
(2)
|
—
|
|
|
—
|
|
|
100
|
|
Total
|
$
|
201
|
|
|
$
|
23
|
|
|
$
|
259
|
|
(1) Represents activity related to our remaining vacant space liability for U.S. large-format store closures in fiscal 2013. We may continue to incur immaterial adjustments to the liability for changes in sublease assumptions or potential lease buyouts. In addition, lease payments for vacated stores will continue until leases expire or are terminated. The remaining vacant space liability was
$18 million
at January 30, 2016.
(2) Activity primarily relates to our fiscal 2013 Best Buy Europe restructuring program, which is included in discontinued operations due to the sale of our
50%
ownership interest in Best Buy Europe in fiscal 2014. Restructuring charges primarily consist of property and equipment impairments and employee termination benefits.
Canadian Brand Consolidation
In the first quarter of fiscal 2016, we consolidated the Future Shop and Best Buy stores and websites in Canada under the Best Buy brand. This resulted in the permanent closure of
66
Future Shop stores and the conversion of the remaining
65
Future Shop stores to the Best Buy brand. In fiscal 2016, we incurred
$200 million
of restructuring charges related to implementing these changes, which primarily consisted of lease exit costs, a tradename impairment, property and equipment impairments, employee termination benefits and inventory write-downs. The inventory write-downs related to our Canadian brand consolidation are presented in restructuring charges – cost of goods sold in our Consolidated Statements of Earnings, and the remainder of the restructuring charges are presented in restructuring charges in our Consolidated Statements of Earnings.
The composition of total restructuring charges we incurred for the Canadian brand consolidation in fiscal 2016 was as follows ($ in millions):
|
|
|
|
|
|
International
|
Continuing operations
|
|
Inventory write-downs
|
$
|
3
|
|
Property and equipment impairments
|
30
|
|
Tradename impairment
|
40
|
|
Termination benefits
|
25
|
|
Facility closure and other costs
|
102
|
|
Total continuing operations
|
$
|
200
|
|
The following tables summarize our restructuring accrual activity during the fiscal
2016
, related to termination benefits and facility closure and other costs associated with Canadian brand consolidation ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
Benefits
|
|
Facility
Closure and
Other Costs
|
|
Total
|
Balances at January 31, 2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges
|
28
|
|
|
113
|
|
|
141
|
|
Cash payments
|
(24
|
)
|
|
(47
|
)
|
|
(71
|
)
|
Adjustments
(1)
|
(2
|
)
|
|
5
|
|
|
3
|
|
Changes in foreign currency exchange rates
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Balances at January 30, 2016
|
$
|
2
|
|
|
$
|
64
|
|
|
$
|
66
|
|
(1) The adjustments related to termination benefits relate to higher-than-expected employee retention. Adjustments to facility closure and other costs represent changes in sublease assumptions.
Renew Blue
In the fourth quarter of fiscal 2013, we launched the
Renew Blue
strategy, which included initiatives intended to improve operating performance and reduce costs. These initiatives included focusing on core business activities, reducing headcount, updating our store operating model and optimizing our real estate portfolio. These cost reduction initiatives represented one of the key
Renew Blue
priorities. We incurred
$2 million
of favorable adjustments related to
Renew Blue
initiatives in fiscal 2016. Of the total adjustments,
$1 million
related to our Domestic segment, which consisted primarily of changes in retention assumptions used to estimate employee termination benefits. The remaining
$1 million
adjustment related to our International segment and consisted of facility closure and other costs. We expect to continue to implement cost reduction initiatives throughout fiscal 2017 as we further analyze our operations and strategies.
We incurred
$29 million
of charges related to
Renew Blue
initiatives during fiscal 2015. Of the total charges,
$10 million
related to our Domestic segment, which consisted primarily of employee termination benefits. The remaining
$19 million
of charges related to our International segment and consisted of employee termination benefits, property and equipment impairments and facility closure and other costs.
For continuing operations, the inventory write-downs related to our
Renew Blue
restructuring activities are presented in restructuring charges – cost of goods sold in our Consolidated Statements of Earnings and the remainder of the restructuring charges are presented in restructuring charges. The restructuring charges from discontinued operations related to this plan are presented in discontinued operations.
The composition of the restructuring charges we incurred for this program in fiscal
2016
,
2015
and
2014
, as well as the cumulative amount incurred through the end of fiscal
2016
, was as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
International
|
|
Total
|
|
2016
|
|
2015
|
|
2014
|
|
Cumulative Amount
|
|
2016
|
|
2015
|
|
2014
|
|
Cumulative Amount
|
|
2016
|
|
2015
|
|
2014
|
|
Cumulative Amount
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory write-downs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Property and equipment impairments
|
—
|
|
|
—
|
|
|
7
|
|
|
14
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
25
|
|
|
—
|
|
|
1
|
|
|
8
|
|
|
39
|
|
Termination benefits
|
(2
|
)
|
|
9
|
|
|
106
|
|
|
159
|
|
|
—
|
|
|
5
|
|
|
24
|
|
|
38
|
|
|
(2
|
)
|
|
14
|
|
|
130
|
|
|
197
|
|
Investment impairments
|
—
|
|
|
—
|
|
|
16
|
|
|
43
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
43
|
|
Facility closure and other costs
|
1
|
|
|
1
|
|
|
—
|
|
|
5
|
|
|
(1
|
)
|
|
(5
|
)
|
|
1
|
|
|
50
|
|
|
—
|
|
|
(4
|
)
|
|
1
|
|
|
55
|
|
Total continuing operations
|
(1
|
)
|
|
10
|
|
|
129
|
|
|
222
|
|
|
(1
|
)
|
|
1
|
|
|
26
|
|
|
113
|
|
|
(2
|
)
|
|
11
|
|
|
155
|
|
|
335
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment impairments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
4
|
|
|
16
|
|
|
—
|
|
|
12
|
|
|
4
|
|
|
16
|
|
Facility closure and other costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
5
|
|
|
11
|
|
|
—
|
|
|
6
|
|
|
5
|
|
|
11
|
|
Total discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
10
|
|
|
28
|
|
|
—
|
|
|
18
|
|
|
10
|
|
|
28
|
|
Total
|
$
|
(1
|
)
|
|
$
|
10
|
|
|
$
|
129
|
|
|
$
|
222
|
|
|
$
|
(1
|
)
|
|
$
|
19
|
|
|
$
|
36
|
|
|
$
|
141
|
|
|
$
|
(2
|
)
|
|
$
|
29
|
|
|
$
|
165
|
|
|
$
|
363
|
|
The following table summarizes our restructuring accrual activity during fiscal
2016
and
2015
related to termination benefits and facility closure and other costs associated with this program ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Benefits
|
|
Facility
Closure and
Other Costs
|
|
Total
|
Balance at February 1, 2014
|
$
|
111
|
|
|
$
|
51
|
|
|
$
|
162
|
|
Charges
|
47
|
|
|
16
|
|
|
63
|
|
Cash payments
|
(121
|
)
|
|
(22
|
)
|
|
(143
|
)
|
Adjustments
(1)
|
(21
|
)
|
|
(14
|
)
|
|
(35
|
)
|
Changes in foreign currency exchange rates
|
—
|
|
|
(8
|
)
|
|
(8
|
)
|
Balance at January 31, 2015
|
16
|
|
|
23
|
|
|
39
|
|
Charges
|
—
|
|
|
—
|
|
|
—
|
|
Cash payments
|
(7
|
)
|
|
(9
|
)
|
|
(16
|
)
|
Adjustments
(1)
|
(7
|
)
|
|
(5
|
)
|
|
(12
|
)
|
Changes in foreign currency exchange rates
|
—
|
|
|
1
|
|
|
1
|
|
Balance at January 30, 2016
|
$
|
2
|
|
|
$
|
10
|
|
|
$
|
12
|
|
|
|
(1)
|
Adjustments to termination benefits were due to higher-than-expected employee retention. Adjustments to facility closure and other costs represent changes in sublease assumptions and reductions in our remaining lease obligations.
|
5. Debt
Short-Term Debt
U.S. Revolving Credit Facilities
On June 30, 2014, we entered into a
$1.25 billion
five-year senior unsecured revolving credit facility agreement (the "Five-Year Facility Agreement") with a syndicate of banks. The Five-Year Facility Agreement replaced the previous
$1.5 billion
senior
unsecured revolving credit facility with a syndicate of banks, which was originally scheduled to expire in October 2016, but was terminated on June 30, 2014.
The interest rate under the Five-Year Facility Agreement is variable and is determined at our option as: (i) the sum of (a) the greatest of (1) JPMorgan's prime rate, (2) the federal funds rate plus
0.5%
, and (3) the one-month London Interbank Offered Rate (“LIBOR”) plus
1.0%
, and (b) a variable margin rate (the “ABR Margin”); or (ii) the LIBOR plus a variable margin rate (the “LIBOR Margin”). In addition, a facility fee is assessed on the commitment amount. The ABR Margin, LIBOR Margin and the facility fee are based upon the registrant's current senior unsecured debt rating. Under the Five-Year Facility Agreement, the ABR Margin ranges from
0.0%
to
0.925%
, the LIBOR Margin ranges from
1.000%
to
1.925%
, and the facility fee ranges from
0.125%
to
0.325%
. At
January 30, 2016
, and
January 31, 2015
, there were
no
borrowings outstanding and at
January 30, 2016
,
$1.25 billion
was available under the Five-Year Facility Agreement.
The Five-Year Facility Agreement is guaranteed by specified subsidiaries of Best Buy Co., Inc. and contains customary affirmative and negative covenants. Among other things, these covenants restrict Best Buy Co., Inc. and certain of its subsidiaries' ability to incur certain types or amounts of indebtedness, incur liens on certain assets, make material changes in corporate structure or the nature of its business, dispose of material assets, engage in a change in control transaction, make certain foreign investments, enter into certain restrictive agreements, or engage in certain transactions with affiliates. The Five-Year Facility Agreement also contains financial covenants that require us to maintain a maximum cash flow leverage ratio and a minimum interest coverage ratio (both ratios measured quarterly for the previous 12 months). The Five-Year Facility Agreement contains default provisions including, but not limited to, failure to pay interest or principal when due and failure to comply with covenants.
Long-Term Debt
Long-term debt consisted of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
January 31, 2015
|
2016 Notes
|
$
|
350
|
|
|
$
|
350
|
|
2018 Notes
|
500
|
|
|
500
|
|
2021 Notes
|
650
|
|
|
650
|
|
Interest rate swap valuation adjustments
|
25
|
|
|
1
|
|
Other debt
|
—
|
|
|
1
|
|
Subtotal
|
1,525
|
|
|
1,502
|
|
Debt discounts and issuance costs
|
(7
|
)
|
|
(10
|
)
|
Financing lease obligations
|
178
|
|
|
69
|
|
Capital lease obligations
|
38
|
|
|
52
|
|
Total long-term debt
|
1,734
|
|
|
1,613
|
|
Less: current portion
|
(395
|
)
|
|
(41
|
)
|
Total long-term debt, less current portion
|
$
|
1,339
|
|
|
$
|
1,572
|
|
2018 Notes
On July 16, 2013, we completed the sale of
$500 million
principal amount of notes due August 1, 2018 (the “2018 Notes”). The 2018 Notes bear interest at a fixed rate of
5.00%
per year, payable semi-annually on February 1 and August 1 of each year, beginning on February 1, 2014. Net proceeds from the sale of the 2018 Notes were
$495 million
, after underwriting and issue discounts totaling
$5 million
.
We may redeem some or all of the 2018 Notes at any time, at a redemption price equal to the greater of (1)
100%
of the principal amount of the 2018 Notes to be redeemed and (2) the sum of the present values of each remaining scheduled payment of principal and interest on the 2018 Notes to be redeemed discounted to the redemption date on a semi-annual basis at the Treasury Rate plus
50
basis points. Furthermore, if a change of control triggering event occurs, we will be required to offer to purchase the remaining unredeemed 2018 Notes at a price equal to
101%
of their principal amount, plus accrued and unpaid interest to the purchase date.
The 2018 Notes are unsecured and unsubordinated obligations and rank equally with all of our other unsecured and unsubordinated debt. The 2018 Notes contain covenants that, among other things, limit our ability and the ability of our subsidiaries to incur debt secured by liens and enter into sale and lease-back transactions.
2016 and 2021 Notes
In March 2011, we issued
$350 million
principal amount of notes due March 15, 2016 (the “2016 Notes”) and
$650 million
principal amount of notes due March 15, 2021 (the “2021 Notes” and, together with the 2016 Notes, the “Notes”). In March 2016, we repaid the 2016 Notes using existing cash resources. The 2016 Notes bore interest at a fixed rate of
3.75%
per year, while the 2021 Notes bear interest at a fixed rate of
5.50%
per year. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year, beginning on September 15, 2011. The Notes were issued at a slight discount to par, which when coupled with underwriting discounts of
$6 million
, resulted in net proceeds from the sale of the Notes of
$990 million
.
We may redeem some or all of the Notes at any time at a redemption price equal to the greater of (i)
100%
of the principal amount and (ii) the sum of the present values of each remaining scheduled payment of principal and interest discounted to the redemption date on a semiannual basis, plus accrued and unpaid interest on the principal amount to the redemption date as described in the indenture (including the supplemental indenture) relating to the Notes. Furthermore, if a change of control triggering event occurs, we will be required to offer to purchase the remaining unredeemed Notes at a price equal to
101%
of their principal amount, plus accrued and unpaid interest to the purchase date.
The Notes are unsecured and unsubordinated obligations and rank equally with all of our other unsecured and unsubordinated debt. The Notes contain covenants that, among other things, limit our ability to incur debt secured by liens or to enter into sale and lease-back transactions.
Fair Value and Future Maturities
The fair value of long-term debt, excluding debt discounts and issuance costs and financing and capital lease obligations, approximated
$1,543 million
and
$1,494 million
at
January 30, 2016
, and
January 31, 2015
, respectively, based primarily on the quoted market prices, compared to carrying values of
$1,525 million
and
$1,502 million
, respectively. If our long-term debt was recorded at fair value, it would be classified as Level 2 in the fair value hierarchy.
At
January 30, 2016
, the future maturities of long-term debt, excluding debt discounts and issuance costs and financing and capital lease obligations (see Note 8,
Leases
, for the future lease obligation maturities), consisted of the following ($ in millions):
|
|
|
|
|
|
Fiscal Year
|
|
|
2017
|
|
$
|
350
|
|
2018
|
|
—
|
|
2019
|
|
517
|
|
2020
|
|
—
|
|
2021
|
|
—
|
|
Thereafter
|
|
658
|
|
Total long-term debt
|
|
$
|
1,525
|
|
6. Derivative Instruments
We manage our economic and transaction exposure to certain risks through the use of foreign currency derivative instruments and interest rate swaps. Our objective in holding derivatives is to reduce the volatility of net earnings, cash flows and net asset value associated with changes in foreign currency exchange rates and interest rates. We do not hold derivative instruments for trading or speculative purposes. We have no derivatives that have credit risk-related contingent features, and we mitigate our credit risk by engaging with financial institutions with investment grade credit ratings as our counterparties.
We record all derivative instruments on our Consolidated Balance Sheet at fair value and evaluate hedge effectiveness prospectively and retrospectively when electing to apply hedge accounting. We formally document all hedging relations at the inceptions for derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transaction. In addition, we have derivatives which are not designated as hedging instruments.
Net Investment Hedges
We use foreign exchange forward contracts to hedge against the effect of Canadian dollar exchange rate fluctuations on a portion of our net investment in our Canadian operations. The contracts have terms up to 12 months. For a net investment hedge, we recognize changes in the fair value of the derivative as a component of foreign currency translation within other comprehensive income to offset a portion of the change in translated value of the net investment being hedged, until the investment is sold or liquidated. We limit recognition in net earnings of amounts previously recorded in other comprehensive income to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. We report the ineffective portion of the gain or loss, if any, in net earnings.
Interest Rate Swaps
We use "receive fixed-rate, pay variable-rate" interest rate swaps to mitigate the effect of interest rate fluctuations on a portion of our 2018 Notes and 2021 Notes. Our interest rate swap contracts are considered perfect hedges because the critical terms and notional amounts match those of our fixed-rate debt being hedged and are therefore accounted as a fair value hedge using the shortcut method. Under the shortcut method, we recognize the change in the fair value of the derivatives with an offsetting change to the carrying value of the debt. Accordingly, there is no impact on our Consolidated Statements of Earnings from the fair value of the derivatives.
Derivatives Not Designated as Hedging Instruments
We use foreign currency forward contracts to manage the impact of fluctuations in foreign currency exchange rates relative to recognized receivable and payable balances denominated in non-functional currencies. The contracts generally have terms of up to 12 months. These derivative instruments are not designated in hedging relationships and, therefore, we record gains and losses on these contracts directly to net earnings.
Summary of Derivative Balances
The following table presents the gross fair values for outstanding derivative instruments and the corresponding classification at
January 30, 2016
and
January 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
January 31, 2015
|
Contract Type
|
Assets
|
Liabilities
|
|
Assets
|
Liabilities
|
Derivatives designated as net investment hedges
(1)
|
$
|
15
|
|
$
|
1
|
|
|
$
|
19
|
|
$
|
—
|
|
Derivatives designated as interest rate swaps
(2)
|
25
|
|
—
|
|
|
1
|
|
—
|
|
No hedge designation (foreign exchange forward contracts)
(1)
|
3
|
|
—
|
|
|
11
|
|
—
|
|
Total
|
$
|
43
|
|
$
|
1
|
|
|
$
|
31
|
|
$
|
—
|
|
|
|
(1)
|
The fair value is recorded in other current assets or accrued liabilities.
|
|
|
(2)
|
The fair value is recorded in other assets or long-term liabilities.
|
The following table presents the effects of derivative instruments on Other Comprehensive Income ("OCI") and on our Consolidated Statements of Earnings for fiscal
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Contract Type
|
Pre-tax Gain(Loss) Recognized in OCI
|
|
Gain(Loss) Reclassified from Accumulated OCI to Earnings (Effective Portion)
|
|
Pre-tax Gain(Loss) Recognized in OCI
|
|
Gain(Loss) Reclassified from Accumulated OCI to Earnings (Effective Portion)
|
Derivatives designated as net investment hedges
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
—
|
|
The following table presents the effects of derivatives not designated as hedging instruments on our consolidated statements of earnings for fiscal
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized within SG&A
|
Contract Type
|
2016
|
|
2015
|
No hedge designation (foreign exchange forward contracts)
|
$
|
4
|
|
|
$
|
12
|
|
The following table presents the notional amounts of our derivative instruments at
January 30, 2016
and
January 31, 2015
:
|
|
|
|
|
|
|
|
Notional Amount
|
Contract Type
|
January 30, 2016
|
|
January 31, 2015
|
Derivatives designated as net investment hedges
|
208
|
|
|
197
|
|
Derivatives designated as interest rate swaps
|
750
|
|
|
145
|
|
No hedge designation (foreign exchange forward contracts)
|
94
|
|
|
212
|
|
Total
|
1,052
|
|
|
554
|
|
7. Shareholders' Equity
Stock Compensation Plans
Our 2014 Omnibus Incentive Plan (the "Omnibus Plan") authorizes us to grant or issue non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other equity awards up to a total of
22.5 million
shares. We have not granted incentive stock options under the Omnibus Plan. Under the terms of the Omnibus Plan, awards may be granted to our employees, officers, advisers, consultants and directors. Awards issued under the Omnibus Plan vest as determined by the Compensation and Human Resources Committee of our Board of Directors at the time of grant. Awards granted, forfeited or canceled under the previous plan, the 2004 Omnibus Stock and Incentive Plan, after February 1, 2014 adjust the amount available under the Omnibus Plan. At
January 30, 2016
, a total of
19.6 million
shares were available for future grants under the Omnibus Plan.
Upon adoption and approval of the Omnibus Plan, all of our previous equity incentive compensation plans were terminated. However, existing awards under those plans continued to vest in accordance with the original vesting schedule and will expire at the end of their original term.
Our outstanding stock options have a
10
-year term. Outstanding stock options issued to employees generally vest over a
three or four
-year period, and outstanding stock options issued to directors vest immediately upon grant. Share awards vest based either upon attainment of specified goals or upon continued employment. Outstanding share awards that are not time-based vest at the end of a three-year incentive period based upon our total shareholder return ("TSR") compared to the TSR of companies that comprise Standard & Poor's 500 Index ("market-based"). We have time-based share awards that vest in their entirety at the end of
three
-year periods, time-based share awards where
25%
of the award vests on the date of grant and
25%
vests on each of the
three
anniversary dates thereafter, and time-based share awards to directors vest one year from the grant date.
During fiscal 2014, our Employee Stock Purchase Plan was amended. The Plan permits employees to purchase our common stock at a
5%
discount from the market price at the end of semi-annual purchase periods and is non-compensatory. During fiscal 2013 (11-month), the Plan permitted our employees to purchase our common stock at a
15%
discount from the market price of the stock at the beginning or at the end of a semi-annual purchase period, whichever is less, and was considered compensatory. Employees are required to hold the common stock purchased for 12 months. In fiscal
2016
,
2015
and
2014
,
0.2 million
,
0.3 million
and
0.6 million
shares, respectively, were purchased through our employee stock purchase plans. At
January 30, 2016
, and
January 31, 2015
, plan participants had accumulated
$2 million
and
$1 million
, respectively, to purchase our common stock pursuant to these plans.
Stock-based compensation expense was as follows in fiscal
2016
,
2015
and
2014
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Stock options
|
$
|
15
|
|
|
$
|
17
|
|
|
$
|
25
|
|
Share awards
|
|
|
|
|
|
Market-based
|
16
|
|
|
10
|
|
|
9
|
|
Time-based
|
73
|
|
|
60
|
|
|
62
|
|
Employee stock purchase plans
|
—
|
|
|
—
|
|
|
1
|
|
Total
|
$
|
104
|
|
|
$
|
87
|
|
|
$
|
97
|
|
Stock Options
Stock option activity was as follows in fiscal
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
Weighted-Average Exercise Price per Share
|
|
Weighted-Average Remaining Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
(in millions)
|
Outstanding at January 31, 2015
|
17,342,000
|
|
|
$
|
36.81
|
|
|
|
|
|
|
Granted
|
1,267,000
|
|
|
$
|
40.68
|
|
|
|
|
|
|
Exercised
|
(1,432,000
|
)
|
|
$
|
28.24
|
|
|
|
|
|
|
Forfeited/Canceled
|
(2,935,000
|
)
|
|
$
|
44.15
|
|
|
|
|
|
|
Outstanding at January 30, 2016
|
14,242,000
|
|
|
$
|
36.51
|
|
|
4.7
|
|
$
|
20
|
|
Vested or expected to vest at January 30, 2016
|
13,986,000
|
|
|
$
|
36.47
|
|
|
4.6
|
|
$
|
20
|
|
Exercisable at January 30, 2016
|
11,668,000
|
|
|
$
|
37.09
|
|
|
3.8
|
|
$
|
18
|
|
The weighted-average grant-date fair value of stock options granted during fiscal
2016
,
2015
and
2014
was
$11.59
,
$9.09
and
$7.77
, respectively, per share. The aggregate intrinsic value of our stock options (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) exercised during fiscal
2016
,
2015
and
2014
, was
$14 million
,
$13 million
and
$39 million
, respectively. At
January 30, 2016
, there was
$15 million
of unrecognized compensation expense related to stock options that is expected to be recognized over a weighted-average period of
1.2
years.
Net cash proceeds from the exercise of stock options were
$40 million
,
$42 million
and
$158 million
in fiscal
2016
,
2015
and
2014
, respectively.
There was
$5 million
,
$5 million
and
$13 million
of income tax benefits realized from stock option exercises in fiscal
2016
,
2015
and
2014
, respectively.
In fiscal
2016
,
2015
and
2014
, we estimated the fair value of each stock option on the date of grant using a lattice or Black Scholes valuation model (for certain individuals) with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Valuation Assumptions
(1)
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
(2)
|
|
0.1% – 2.1%
|
|
|
0.1% – 2.4%
|
|
|
0.1% – 1.8%
|
|
Expected dividend yield
|
|
2.3
|
%
|
|
2.5
|
%
|
|
2.0
|
%
|
Expected stock price volatility
(3)
|
|
37
|
%
|
|
40
|
%
|
|
46
|
%
|
Expected life of stock options (in years)
(4)
|
|
6.0
|
|
|
6.0
|
|
|
5.9
|
|
|
|
(1)
|
Forfeitures are estimated using historical experience and projected employee turnover.
|
|
|
(2)
|
Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of our stock options.
|
|
|
(3)
|
In projecting expected stock price volatility, we consider both the historical volatility of our stock price as well as implied volatilities from exchange-traded options on our stock.
|
|
|
(4)
|
We estimate the expected life of stock options based upon historical experience.
|
Market-Based Share Awards
The fair value of market-based share awards is determined using Monte-Carlo simulation. A summary of the status of our nonvested market-based share awards at
January 30, 2016
, and changes during fiscal
2016
, is as follows:
|
|
|
|
|
|
|
|
|
Market-Based Share Awards
|
|
Shares
|
|
Weighted-Average Fair Value per Share
|
Outstanding at January 31, 2015
|
|
1,704,000
|
|
|
$
|
24.16
|
|
Granted
|
|
758,000
|
|
|
$
|
31.48
|
|
Vested
|
|
(914,000
|
)
|
|
$
|
16.73
|
|
Forfeited/Canceled
|
|
(86,000
|
)
|
|
$
|
28.85
|
|
Outstanding at January 30, 2016
|
|
1,462,000
|
|
|
$
|
32.33
|
|
At
January 30, 2016
, there was
$19 million
of unrecognized compensation expense related to nonvested market-based share awards that we expect to recognize over a weighted-average period of
1.8
years.
Time-Based Share Awards
The fair value of time-based share awards is determined based on the closing market price of our stock on the date of grant. This value is reduced by the present value of expected dividends during vesting when the employee is not entitled to dividends.
A summary of the status of our nonvested time-based share awards at
January 30, 2016
, and changes during fiscal
2016
, is as follows:
|
|
|
|
|
|
|
|
|
Time-Based Share Awards
|
|
Shares
|
|
Weighted-Average Fair Value per Share
|
Outstanding at January 31, 2015
|
|
5,543,000
|
|
|
$
|
24.40
|
|
Granted
|
|
2,683,000
|
|
|
$
|
38.72
|
|
Vested
|
|
(2,503,000
|
)
|
|
$
|
23.10
|
|
Forfeited/Canceled
|
|
(620,000
|
)
|
|
$
|
29.98
|
|
Outstanding at January 30, 2016
|
|
5,103,000
|
|
|
$
|
31.89
|
|
At
January 30, 2016
, there was
$85 million
of unrecognized compensation expense related to nonvested time-based share awards that we expect to recognize over a weighted-average period of
1.8
years.
Earnings per Share
We compute our basic earnings per share based on the weighted-average number of common shares outstanding, and our diluted earnings per share based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive securities include stock options, nonvested share awards and shares issuable under our employee stock purchase plan. Nonvested market-based share awards and nonvested performance-based share awards are included in the average diluted shares outstanding each period if established market or performance criteria have been met at the end of the respective periods.
At
January 30, 2016
, options to purchase
14.2 million
shares of common stock were outstanding as follows (shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
Unexercisable
|
|
Total
|
|
Shares
|
|
%
|
|
Weighted-
Average Price
per Share
|
|
Shares
|
|
%
|
|
Weighted-
Average Price
per Share
|
|
Shares
|
|
%
|
|
Weighted-
Average Price
per Share
|
In-the-money
|
4.2
|
|
|
36
|
%
|
|
$
|
24.73
|
|
|
1.3
|
|
|
52
|
%
|
|
$
|
27.45
|
|
|
5.5
|
|
|
39
|
%
|
|
$
|
25.37
|
|
Out-of-the-money
|
7.5
|
|
|
64
|
%
|
|
$
|
44.15
|
|
|
1.2
|
|
|
48
|
%
|
|
$
|
40.51
|
|
|
8.7
|
|
|
61
|
%
|
|
$
|
43.62
|
|
Total
|
11.7
|
|
|
100
|
%
|
|
$
|
37.09
|
|
|
2.5
|
|
|
100
|
%
|
|
$
|
33.87
|
|
|
14.2
|
|
|
100
|
%
|
|
$
|
36.51
|
|
The computation of dilutive shares outstanding excludes the out-of-the-money stock options because such outstanding options' exercise prices were greater than the average market price of our common shares and, therefore, the effect would be anti-dilutive (i.e., including such options would result in higher earnings per share).
The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share from continuing operations attributable to Best Buy Co., Inc. in fiscal
2016
,
2015
and
2014
($, except per share amounts, and shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Numerator (in millions):
|
|
|
|
|
|
Net earnings from continuing operations attributable to Best Buy Co., Inc., shareholders
|
$
|
807
|
|
|
$
|
1,246
|
|
|
$
|
695
|
|
Denominator (in millions):
|
|
|
|
|
|
Weighted-average common shares outstanding
|
346.5
|
|
|
349.5
|
|
|
342.1
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
Stock options and other
|
4.2
|
|
|
4.1
|
|
|
5.5
|
|
Weighted-average common shares outstanding, assuming dilution
|
350.7
|
|
|
353.6
|
|
|
347.6
|
|
Net earnings per share from continuing operations attributable to Best Buy Co., Inc. shareholders
|
|
|
|
|
|
Basic
|
$
|
2.33
|
|
|
$
|
3.57
|
|
|
$
|
2.03
|
|
Diluted
|
$
|
2.30
|
|
|
$
|
3.53
|
|
|
$
|
2.00
|
|
Repurchase of Common Stock
In June 2011, our Board of Directors authorized a
$5.0 billion
share repurchase program. There is no expiration date governing the period over which we can repurchase shares under the June 2011 share repurchase program.
On January 22, 2016, we entered into a variable notional accelerated share repurchase agreement ("ASR") with a third party financial institution to repurchase
$150 million
to
$175 million
of our common stock. Under the agreement, we paid
$175 million
at the beginning of the contract and received an initial delivery of
4.4 million
shares on January 25, 2016. We retired these shares and recorded a
$120 million
reduction to stockholders' equity. As of January 30, 2016 the remaining
$55 million
was included as a reduction of stockholders' equity in "Prepaid Share Repurchase". We accounted for the variable component of shares to be delivered under the ASR as a forward contract indexed to our common stock, which met all of the criteria for equity classification, and therefore, was not accounted for as a derivative instrument but instead was accounted for as a component of equity. The ASR continued to meet the requirements for equity classification as of January 30, 2016.
The delivery of
4.4 million
shares reduced our outstanding shares used to determine our weighted average common shares outstanding for purposes of calculating basic and diluted earnings per share for the twelve months ended January 30, 2016. We evaluated the ASR agreement for potential dilutive effects of any shares remaining to be received or owed upon settlement and determined the additional shares to be received would be anti-dilutive, and therefore they were not included in our calculation of diluted earnings per share for the the twelve months ended January 30, 2016.
The ASR was settled on February 17, 2016 for a final notional amount of
$165 million
. Accordingly we received
1.6 million
shares, which were retired, and a
$10 million
cash payment from our counter-party equal to the difference between the
$175 million
up-front payment and the final notional amount. The final notional amount was determined based upon the volume-weighted average share price of our common stock during the term of the ASR agreement. The number of shares delivered was based upon the final notional amount and the volume-weighted average share price of our common stock during the term of the agreement, less an agreed-upon discount.
The following table presents information regarding the shares we repurchased and retired in fiscal
2016
, noting that we had no repurchases and retirements in fiscal
2015
and
2014
($, except per share amounts, and shares in millions):
|
|
|
|
|
|
|
|
2016
|
Total cost of shares repurchased
|
|
|
Open market
|
|
$
|
880
|
|
January 2016 ASR
|
|
120
|
|
Total
|
|
$
|
1,000
|
|
|
|
|
Average price per share
|
|
|
Open market
|
|
$
|
31.03
|
|
January 2016 ASR
|
|
$
|
27.28
|
|
Average
|
|
$
|
30.53
|
|
|
|
|
Number of shares repurchased and retired
|
|
|
Open market
|
|
28.4
|
|
January 2016 ASR
|
|
4.4
|
|
Total
|
|
32.8
|
|
At
January 30, 2016
,
$3.0 billion
remained available for additional purchases under the June 2011 share repurchase program. Repurchased shares have been retired and constitute authorized but unissued shares.
Comprehensive Income (Loss)
Comprehensive income (loss) is computed as net earnings (loss) plus certain other items that are recorded directly to shareholders' equity. In addition to net earnings (loss), the significant components of comprehensive income (loss) include foreign currency translation adjustments and unrealized gains and losses, net of tax, on available-for-sale marketable equity securities. Foreign currency translation adjustments do not include a provision for income tax expense when earnings from foreign operations are considered to be indefinitely reinvested outside the U.S.
The following table provides a reconciliation of the components of accumulated other comprehensive income, net of tax, attributable to Best Buy Co., Inc. shareholders for fiscal
2016
,
2015
, and
2014
, respectively ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Available-For-Sale Investments
|
|
Total
|
Balances at February 2, 2013
|
$
|
113
|
|
|
$
|
(1
|
)
|
|
$
|
112
|
|
Foreign currency translation adjustments
|
(136
|
)
|
|
—
|
|
|
(136
|
)
|
Unrealized gains on available-for-sale investments
|
—
|
|
|
7
|
|
|
7
|
|
Reclassification of foreign currency translation adjustments into earnings due to sale of business
|
508
|
|
|
—
|
|
|
508
|
|
Reclassification of losses on available-for-sale investments into earnings
|
—
|
|
|
1
|
|
|
1
|
|
Balances at February 1, 2014
|
$
|
485
|
|
|
$
|
7
|
|
|
$
|
492
|
|
Foreign currency translation adjustments
|
(103
|
)
|
|
—
|
|
|
(103
|
)
|
Unrealized losses on available-for-sale investments
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Reclassification of gains on available-for-sale investments into earnings
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
Balances at January 31, 2015
|
$
|
382
|
|
|
$
|
—
|
|
|
$
|
382
|
|
Foreign currency translation adjustments
|
(44
|
)
|
|
—
|
|
|
(44
|
)
|
Reclassification of foreign currency translation adjustments into earnings
|
(67
|
)
|
|
—
|
|
|
(67
|
)
|
Balances at January 30, 2016
|
$
|
271
|
|
|
$
|
—
|
|
|
$
|
271
|
|
There is generally no tax impact related to foreign currency translation adjustments, as the earnings are considered permanently reinvested. In addition, there were no material tax impacts related to gains or losses on available-for-sale investments in the periods presented.
8. Leases
The composition of net rent expense for all operating leases, including leases of property and equipment, was as follows in fiscal
2016
,
2015
and
2014
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Minimum rentals
|
$
|
797
|
|
|
$
|
848
|
|
|
$
|
864
|
|
Contingent rentals
|
1
|
|
|
2
|
|
|
2
|
|
Total rent expense
|
798
|
|
|
850
|
|
|
866
|
|
Less: sublease income
|
(15
|
)
|
|
(18
|
)
|
|
(18
|
)
|
Net rent expense
|
$
|
783
|
|
|
$
|
832
|
|
|
$
|
848
|
|
The future minimum lease payments under our capital, financing and operating leases by fiscal year (not including contingent rentals) at
January 30, 2016
, were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Capital
Leases
|
|
Financing
Leases
|
|
Operating
Leases
(1)
|
2017
|
|
$
|
14
|
|
|
$
|
42
|
|
|
$
|
813
|
|
2018
|
|
9
|
|
|
35
|
|
|
708
|
|
2019
|
|
6
|
|
|
29
|
|
|
572
|
|
2020
|
|
3
|
|
|
23
|
|
|
439
|
|
2021
|
|
2
|
|
|
17
|
|
|
310
|
|
Thereafter
|
|
12
|
|
|
66
|
|
|
521
|
|
Total minimum lease payments
|
|
46
|
|
|
212
|
|
|
$
|
3,363
|
|
Less amount representing interest
|
|
(8
|
)
|
|
(34
|
)
|
|
|
Present value of minimum lease payments
|
|
38
|
|
|
178
|
|
|
|
Less current maturities
|
|
(12
|
)
|
|
(33
|
)
|
|
|
|
Present value of minimum lease maturities, less current maturities
|
|
$
|
26
|
|
|
$
|
145
|
|
|
|
|
|
|
(1)
|
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
$1.1 billion
at
January 30, 2016
.
|
Total minimum lease payments have not been reduced by minimum sublease rent income of approximately
$72 million
due under future noncancelable subleases.
9. Benefit Plans
We sponsor retirement savings plans for employees meeting certain eligibility requirements. Participants may choose from various investment options, including a fund comprised of our company stock. Participants can contribute up to
50%
of their eligible compensation annually as defined by the plan document, subject to Internal Revenue Service ("IRS") limitations. We match
100%
of the first
3%
of participating employees' contributions and
50%
of the next
2%
. Employer contributions vest immediately. The total employer contributions were
$53 million
,
$60 million
and
$65 million
in fiscal
2016
,
2015
and
2014
, respectively.
We have a non-qualified, unfunded deferred compensation plan for highly compensated employees and members of our Board of Directors. Amounts contributed and deferred under our deferred compensation plan are credited or charged with the performance of investment options offered under the plan and elected by the participants. In the event of bankruptcy, the assets of the plan are available to satisfy the claims of general creditors. The liability for compensation deferred under the plan was
$34 million
and
$44 million
at
January 30, 2016
, and
January 31, 2015
, respectively, and is included in long-term liabilities. We manage the risk of changes in the fair value of the liability for deferred compensation by electing to match our liability under
the plan with investment vehicles that offset a substantial portion of our exposure. The fair value of the investment vehicles, which includes funding for future deferrals, was
$96 million
and
$97 million
at
January 30, 2016
, and
January 31, 2015
, respectively, and is included in other assets.
10. Income Taxes
The following is a reconciliation of the federal statutory income tax rate to income tax expense in fiscal
2016
,
2015
and
2014
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Federal income tax at the statutory rate
|
$
|
458
|
|
|
$
|
485
|
|
|
$
|
379
|
|
State income taxes, net of federal benefit
|
38
|
|
|
43
|
|
|
26
|
|
(Benefit) expense from foreign operations
|
5
|
|
|
(23
|
)
|
|
(23
|
)
|
Other
|
2
|
|
|
(11
|
)
|
|
6
|
|
Legal entity reorganization
|
—
|
|
|
(353
|
)
|
|
—
|
|
Income tax expense
|
$
|
503
|
|
|
$
|
141
|
|
|
$
|
388
|
|
Effective income tax rate
|
38.4
|
%
|
|
10.1
|
%
|
|
35.8
|
%
|
Legal Entity Reorganization
In the fourth quarter of fiscal 2012, we purchased CPW’s interest in the Best Buy Mobile profit share agreement for
$1.3 billion
(the “Mobile buy-out”). The Mobile buy-out completed by our U.K. subsidiary resulted in the
$1.3 billion
purchase price being assigned, for U.S. tax purposes only, to an intangible asset. The Mobile buy-out did not, however, result in a similar intangible asset in the U.K., as the Mobile buy-out was considered part of a tax-free equity transaction for U.K. tax purposes.
Because the U.S. tax basis in the intangible asset was considered under U.S. tax law to be held by our U.K. subsidiary, which was regarded as a foreign corporation for U.S. tax purposes, ASC 740,
Income Taxes
, requires that no deferred tax asset may be recorded in respect of the intangible asset. ASC 740-30-25-9 also precludes the recording of a deferred tax asset on the outside basis difference of the U.K. subsidiary. As a result, the amortization of the U.S. tax basis in the intangible asset only resulted in a periodic income tax benefit by reducing the amount of the U.K. subsidiary’s income, if any, that would otherwise have been subject to U.S. income taxes.
In the first quarter of fiscal 2015, we filed an election with the Internal Revenue Service to treat the U.K. subsidiary as a disregarded entity such that its assets are now deemed to be assets held directly by a U.S. entity for U.S. tax purposes. This tax-only election, which resulted in the liquidation of the U.K. subsidiary for U.S. tax purposes, resulted in the elimination of the Company’s outside basis difference in the U.K. subsidiary. Additionally, the election resulted in the recognition of a deferred tax asset (and corresponding income tax benefit) for the remaining unrecognized inside tax basis in the intangible, in a manner similar to a change in tax status as provided in ASC 740-10-25-32.
Earnings from continuing operations before income tax expense by jurisdiction was as follows in fiscal
2016
,
2015
and
2014
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
1,310
|
|
|
$
|
1,201
|
|
|
$
|
699
|
|
Outside the United States
|
—
|
|
|
186
|
|
|
384
|
|
Earnings from continuing operations before income tax expense
|
$
|
1,310
|
|
|
$
|
1,387
|
|
|
$
|
1,083
|
|
Income tax expense was comprised of the following in fiscal
2016
,
2015
and
2014
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
347
|
|
|
$
|
354
|
|
|
$
|
305
|
|
State
|
48
|
|
|
51
|
|
|
46
|
|
Foreign
|
60
|
|
|
33
|
|
|
55
|
|
|
455
|
|
|
438
|
|
|
406
|
|
Deferred:
|
|
|
|
|
|
Federal
|
65
|
|
|
(275
|
)
|
|
(22
|
)
|
State
|
10
|
|
|
(26
|
)
|
|
1
|
|
Foreign
|
(27
|
)
|
|
4
|
|
|
3
|
|
|
48
|
|
|
(297
|
)
|
|
(18
|
)
|
Income tax expense
|
$
|
503
|
|
|
$
|
141
|
|
|
$
|
388
|
|
Deferred taxes are the result of differences between the bases of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets and liabilities were comprised of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
January 31, 2015
|
Accrued property expenses
|
$
|
175
|
|
|
$
|
129
|
|
Other accrued expenses
|
78
|
|
|
91
|
|
Deferred revenue
|
99
|
|
|
93
|
|
Compensation and benefits
|
99
|
|
|
103
|
|
Stock-based compensation
|
86
|
|
|
94
|
|
Goodwill and intangibles
|
253
|
|
|
287
|
|
Loss and credit carryforwards
|
133
|
|
|
156
|
|
Other
|
86
|
|
|
88
|
|
Total deferred tax assets
|
1,009
|
|
|
1,041
|
|
Valuation allowance
|
(108
|
)
|
|
(143
|
)
|
Total deferred tax assets after valuation allowance
|
901
|
|
|
898
|
|
Property and equipment
|
(296
|
)
|
|
(251
|
)
|
Inventory
|
(69
|
)
|
|
(54
|
)
|
Other
|
(26
|
)
|
|
(27
|
)
|
Total deferred tax liabilities
|
(391
|
)
|
|
(332
|
)
|
Net deferred tax assets
|
$
|
510
|
|
|
$
|
566
|
|
Deferred tax assets and liabilities included in our Consolidated Balance Sheets were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
January 31, 2015
|
Other assets
|
$
|
510
|
|
|
$
|
574
|
|
Long-term liabilities held for sale
|
—
|
|
|
(8
|
)
|
Net deferred tax assets
|
$
|
510
|
|
|
$
|
566
|
|
During the fourth quarter of fiscal 2016, we early adopted ASU 2015-17, which requires that all deferred taxes be presented as non-current on the Consolidated Balance Sheet. Refer to Note 1,
Summary of Significant Accounting Policies
, for further information regarding this balance sheet reclassification.
At
January 30, 2016
, we had total net operating loss carryforwards from international operations of
$96 million
, of which
$89 million
will expire in various years through
2036
and the remaining amounts have no expiration. Additionally, we had acquired
U.S. federal net operating loss carryforwards of
$19 million
which expire between
2023
and
2030
, U.S. federal foreign tax credit carryforwards of
$1 million
which expire between
2023
and
2026
, state credit carryforwards of
$13 million
which expire in
2024
, and state capital loss carryforwards of
$4 million
which expire in
2019
.
At
January 30, 2016
, a valuation allowance of
$108 million
had been established, of which
$1 million
is against U.S. federal foreign tax credit carryforwards,
$9 million
is against U.S. federal and state capital loss carryforwards,
$8 million
is against state credit carryforwards and other state deferred tax assets, and
$90 million
is against certain international net operating loss carryforwards and other international deferred tax assets. The
$35 million
decrease from
January 31, 2015
, is primarily due to the decrease in the valuation allowance against international net operating loss carryforwards.
We have not provided deferred taxes on unremitted earnings attributable to foreign operations that have been considered to be reinvested indefinitely. These earnings relate to ongoing operations and were
$896 million
at
January 30, 2016
. It is not practicable to determine the income tax liability that would be payable if such earnings were not indefinitely reinvested.
The following table provides a reconciliation of changes in unrecognized tax benefits for fiscal
2016
,
2015
and
2014
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of period
|
$
|
410
|
|
|
$
|
370
|
|
|
$
|
383
|
|
Gross increases related to prior period tax positions
|
30
|
|
|
33
|
|
|
38
|
|
Gross decreases related to prior period tax positions
|
(13
|
)
|
|
(88
|
)
|
|
(67
|
)
|
Gross increases related to current period tax positions
|
59
|
|
|
114
|
|
|
34
|
|
Settlements with taxing authorities
|
(9
|
)
|
|
(9
|
)
|
|
(3
|
)
|
Lapse of statute of limitations
|
(8
|
)
|
|
(10
|
)
|
|
(15
|
)
|
Balance at end of period
|
$
|
469
|
|
|
$
|
410
|
|
|
$
|
370
|
|
Unrecognized tax benefits of
$337 million
,
$297 million
and
$228 million
at
January 30, 2016
,
January 31, 2015
, and
February 1, 2014
, respectively, would favorably impact our effective income tax rate if recognized.
We recognize interest and penalties (not included in the "unrecognized tax benefits" above), as well as interest received from favorable tax settlements, as components of income tax expense. Interest expense of
$10 million
was recognized in fiscal
2016
. At
January 30, 2016
,
January 31, 2015
, and
February 1, 2014
, we had accrued interest of
$89 million
,
$78 million
and
$91 million
, respectively, along with accrued penalties of
$1 million
,
$2 million
and
$2 million
at
January 30, 2016
,
January 31, 2015
, and
February 1, 2014
, respectively.
We file a consolidated U.S. federal income tax return, as well as income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal
2005
.
Because existing tax positions will continue to generate increased liabilities for us for unrecognized tax benefits over the next
12
months, and since we are routinely under audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next
12
months. An estimate of the amount or range of such change cannot be made at this time. However, we do not expect the change, if any, to have a material effect on our consolidated financial condition, results of operations or cash flows within the next
12
months.
11. Segment and Geographic Information
Segment Information
Our chief operating decision maker ("CODM") is our Chief Executive Officer. Our business is organized into
two
reportable segments: Domestic (which is comprised of all operations within the U.S. and its territories) and International (which is comprised of all operations outside the U.S. and its districts and territories). Our CODM has ultimate responsibility for enterprise decisions. Our CODM determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise, the Domestic segment and the International segment. The Domestic segment managers and International segment managers have responsibility for operating decisions, allocating resources and assessing performance
within their respective segments. Our CODM relies on internal management reporting that analyzes enterprise results to the net earnings level and segment results to the operating income level.
We aggregate our Canada and Mexico businesses into one International operating segment. Our Domestic and International operating segments also represent our reportable segments. The accounting policies of the segments are the same as those described in Note 1,
Summary of Significant Accounting Policies
.
The following tables present our business segment information in fiscal
2016
,
2015
and
2014
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Revenue
|
|
|
|
|
|
Domestic
|
$
|
36,365
|
|
|
$
|
36,055
|
|
|
$
|
35,831
|
|
International
|
3,163
|
|
|
4,284
|
|
|
4,780
|
|
Total revenue
|
$
|
39,528
|
|
|
$
|
40,339
|
|
|
$
|
40,611
|
|
Percentage of revenue, by revenue category
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
Consumer Electronics
|
32
|
%
|
|
31
|
%
|
|
30
|
%
|
Computing and Mobile Phones
|
46
|
%
|
|
47
|
%
|
|
48
|
%
|
Entertainment
|
8
|
%
|
|
9
|
%
|
|
8
|
%
|
Appliances
|
8
|
%
|
|
7
|
%
|
|
7
|
%
|
Services
|
5
|
%
|
|
5
|
%
|
|
6
|
%
|
Other
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
International:
|
|
|
|
|
|
Consumer Electronics
|
31
|
%
|
|
30
|
%
|
|
29
|
%
|
Computing and Mobile Phones
|
48
|
%
|
|
49
|
%
|
|
50
|
%
|
Entertainment
|
9
|
%
|
|
9
|
%
|
|
10
|
%
|
Appliances
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
Services
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
Other
|
1
|
%
|
|
1
|
%
|
|
< 1%
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Operating income (loss)
|
|
|
|
|
|
Domestic
|
$
|
1,585
|
|
|
$
|
1,437
|
|
|
$
|
1,145
|
|
International
|
(210
|
)
|
|
13
|
|
|
(1
|
)
|
Total operating income
|
1,375
|
|
|
1,450
|
|
|
1,144
|
|
Other income (expense)
|
|
|
|
|
|
Gain on sale of investments
|
2
|
|
|
13
|
|
|
20
|
|
Investment income and other
|
13
|
|
|
14
|
|
|
19
|
|
Interest expense
|
(80
|
)
|
|
(90
|
)
|
|
(100
|
)
|
Earnings from continuing operations before income tax expense
|
$
|
1,310
|
|
|
$
|
1,387
|
|
|
$
|
1,083
|
|
Assets
(1)(2)
|
|
|
|
|
|
Domestic
|
$
|
12,318
|
|
|
$
|
12,987
|
|
|
$
|
11,123
|
|
International
|
1,201
|
|
|
2,258
|
|
|
2,867
|
|
Total assets
|
$
|
13,519
|
|
|
$
|
15,245
|
|
|
$
|
13,990
|
|
Capital expenditures
(2)
|
|
|
|
|
|
Domestic
|
$
|
602
|
|
|
$
|
519
|
|
|
$
|
440
|
|
International
|
47
|
|
|
42
|
|
|
107
|
|
Total capital expenditures
|
$
|
649
|
|
|
$
|
561
|
|
|
$
|
547
|
|
Depreciation
(2)
|
|
|
|
|
|
Domestic
|
$
|
613
|
|
|
$
|
575
|
|
|
$
|
565
|
|
International
|
44
|
|
|
81
|
|
|
136
|
|
Total depreciation
|
$
|
657
|
|
|
$
|
656
|
|
|
$
|
701
|
|
|
|
(1)
|
For fiscal 2015 and 2014, assets are recast to present our retrospective adoption of ASU 2015-17 Balance Sheet Classification of Deferred Taxes, ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15 Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. 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 for further information about our credit facilities.
|
|
|
(2)
|
For fiscal 2015 and 2014, the International segment amounts for assets, capital expenditures and depreciation include amounts from Five Star.
|
Geographic Information
The following table presents our geographic information in fiscal
2016
,
2015
and
2014
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net sales to customers
|
|
|
|
|
|
United States
|
$
|
36,365
|
|
|
$
|
36,055
|
|
|
$
|
35,831
|
|
Canada
|
2,917
|
|
|
4,047
|
|
|
4,522
|
|
Other
|
246
|
|
|
237
|
|
|
258
|
|
Total revenue
|
$
|
39,528
|
|
|
$
|
40,339
|
|
|
$
|
40,611
|
|
Long-lived assets
|
|
|
|
|
|
United States
|
$
|
2,189
|
|
|
$
|
2,100
|
|
|
$
|
2,190
|
|
Canada
|
140
|
|
|
174
|
|
|
244
|
|
China
|
—
|
|
|
—
|
|
|
139
|
|
Other
|
17
|
|
|
21
|
|
|
25
|
|
Total long-lived assets
|
$
|
2,346
|
|
|
$
|
2,295
|
|
|
$
|
2,598
|
|
12. Contingencies and Commitments
Contingencies
We are involved in a number of legal proceedings. Where appropriate, we have made accruals with respect to these matters, which are reflected in our consolidated financial statements. However, there are cases where liability is not probable or the amount cannot be reasonably estimated and therefore accruals have not been made. We provide disclosure of matters where we believe it is reasonably possible the impact may be material to our consolidated financial statements.
Securities Actions
In February 2011, a purported class action lawsuit captioned,
IBEW Local 98 Pension Fund, individually and on behalf of all others similarly situated v. Best Buy Co., Inc., et al.
, was filed against us and certain of our executive officers in the U.S. District Court for the District of Minnesota. This federal court action alleges, among other things, that we and the officers named in the complaint violated Sections 10(b) and 20A of the Exchange Act and Rule 10b-5 under the Exchange Act in connection with press releases and other statements relating to our fiscal 2011 earnings guidance that had been made available to the public. Additionally, in March 2011, a similar purported class action was filed by a single shareholder, Rene LeBlanc, against us and certain of our executive officers in the same court. In July 2011, after consolidation of the IBEW Local 98 Pension Fund and Rene LeBlanc actions, a consolidated complaint captioned, IBEW Local 98 Pension Fund v. Best Buy Co., Inc., et al., was filed and served. We filed a motion to dismiss the consolidated complaint in September 2011, and in March 2012, subsequent to the end of fiscal 2012, the court issued a decision dismissing the action with prejudice. In April 2012, the plaintiffs filed a motion to alter or amend the court's decision on our motion to dismiss. In October 2012, the court granted plaintiff's motion to alter or amend the court's decision on our motion to dismiss in part by vacating such decision and giving plaintiff leave to file an amended complaint, which plaintiff did in October 2012. We filed a motion to dismiss the amended complaint in November 2012 and all responsive pleadings were filed in December 2012. A hearing was held on April 26, 2013. On August 5, 2013, the court issued an order granting our motion to dismiss in part and, contrary to its March 2012 order, denying the motion to dismiss in part, holding that certain of the statements alleged to have been made were not forward-looking statements and therefore were not subject to the “safe-harbor” provisions of the Private Securities Litigation Reform Act (PSLRA). Plaintiffs moved to certify the purported class. By Order filed August 6, 2014, the court certified a class of persons or entities who acquired Best Buy common stock between 10:00 a.m. EDT on September 14, 2010, and December 13, 2010, and who were damaged by the alleged violations of law. The 8th Circuit Court of Appeals granted our request for interlocutory appeal. Oral argument was held in October 2015, and we await a decision. The trial court has stayed proceedings while the appeal is pending. We continue to believe that these allegations are without merit and intend to vigorously defend our company in this matter.
In June 2011, a purported shareholder derivative action captioned,
Salvatore M. Talluto, Derivatively and on Behalf of Best Buy Co., Inc. v. Richard M. Schulze, et al.
, as Defendants and Best Buy Co., Inc. as Nominal Defendant, was filed against both present and former members of our Board of Directors serving during the relevant periods in fiscal 2011 and us as a nominal
defendant in the U.S. District Court for the State of Minnesota. The lawsuit alleges that the director defendants breached their fiduciary duty, among other claims, including violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in failing to correct public misrepresentations and material misstatements and/or omissions regarding our fiscal 2011 earnings projections and, for certain directors, selling stock while in possession of material adverse non-public information. Additionally, in July 2011, a similar purported class action was filed by a single shareholder, Daniel Himmel, against us and certain of our executive officers in the same court. In November 2011, the respective lawsuits of Salvatore M. Talluto and Daniel Himmel were consolidated into a new action captioned, In Re: Best Buy Co., Inc. Shareholder Derivative Litigation, and a stay ordered pending the close of discovery in the consolidated IBEW Local 98 Pension Fund v. Best Buy Co., Inc., et al. case. Additionally, in June 2015, a similar purported class action was filed by a single shareholder, Khuong Tran, derivatively on behalf of Best Buy Co., Inc. against us and certain of our executive officers and directors in the same court. The Tran lawsuit has also been stayed pending the close of discovery in IBEW.
The plaintiffs in the above securities actions seek damages, including interest, equitable relief and reimbursement of the costs and expenses they incurred in the lawsuits. As stated above, we believe the allegations in the above securities actions are without merit, and we intend to defend these actions vigorously. Based on our assessment of the facts underlying the claims in the above securities actions, their respective procedural litigation history, and the degree to which we intend to defend our company in these matters, the amount or range of reasonably possible losses, if any, cannot be estimated.
Cathode Ray Tube Action
On November 14, 2011, we filed a lawsuit captioned
In re Cathode Ray Tube Antitrust Litigation
in the United States District Court for the Northern District of California. We allege that the defendants engaged in price fixing in violation of antitrust regulations relating to cathode ray tubes for the time period between March 1, 1995 through November 25, 2007. No trial date has been set. In connection with this action, we received settlement proceeds net of legal expenses and costs in the amount of
$75 million
during fiscal 2016. We will continue to litigate against the remaining defendants and expect that further settlement discussions will occur as this matter proceeds .
Other Legal Proceedings
We are involved in various other legal proceedings arising in the normal course of conducting business. For such legal proceedings, we have accrued an amount that reflects the aggregate liability deemed probable and estimable, but this amount is not material to our consolidated financial position, results of operations or cash flows. Because of the preliminary nature of many of these proceedings, the difficulty in ascertaining the applicable facts relating to many of these proceedings, the variable treatment of claims made in many of these proceedings and the difficulty of predicting the settlement value of many of these proceedings, we are not able to estimate an amount or range of any reasonably possible additional losses. However, based upon our historical experience, the resolution of these proceedings is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.
Commitments
We engage Accenture LLP ("Accenture") to assist us with improving our operational capabilities and reducing our costs in the information systems and human resources areas. Our contract with Accenture ends during the first quarter of fiscal 2018 and we expect the spending to total
$95 million
up to the end of the contract.
We had outstanding letters of credit and bankers' acceptances for purchase obligations with an aggregate fair value of
$89 million
at
January 30, 2016
.
13. Supplementary Financial Information (Unaudited)
The following tables show selected operating results for each 3-month quarter and full year of fiscal
2016
and
2015
(unaudited) ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
12-Month
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
2016
|
Revenue
|
$
|
8,558
|
|
|
$
|
8,528
|
|
|
$
|
8,819
|
|
|
$
|
13,623
|
|
|
$
|
39,528
|
|
Comparable sales % change
(1)
|
0.6
|
%
|
|
3.8
|
%
|
|
0.8
|
%
|
|
(1.7
|
)%
|
|
0.5
|
%
|
Comparable sales % gain (decline), excluding estimated impact of installment billing
(5)
|
(0.7
|
)%
|
|
2.7
|
%
|
|
0.5
|
%
|
|
(1.8
|
)%
|
|
(0.1
|
)%
|
Gross profit
|
$
|
2,030
|
|
|
$
|
2,098
|
|
|
$
|
2,112
|
|
|
$
|
2,951
|
|
|
$
|
9,191
|
|
Operating income
(2)
|
86
|
|
|
288
|
|
|
230
|
|
|
771
|
|
|
1,375
|
|
Net earnings from continuing operations
|
37
|
|
|
164
|
|
|
129
|
|
|
477
|
|
|
807
|
|
Gain (loss) from discontinued operations, net of tax
|
92
|
|
|
—
|
|
|
(4
|
)
|
|
2
|
|
|
90
|
|
Net earnings including noncontrolling interests
|
129
|
|
|
164
|
|
|
125
|
|
|
479
|
|
|
897
|
|
Net earnings attributable to Best Buy Co., Inc. shareholders
|
129
|
|
|
164
|
|
|
125
|
|
|
479
|
|
|
897
|
|
Diluted earnings (loss) per share
(3)
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.10
|
|
|
$
|
0.46
|
|
|
$
|
0.37
|
|
|
$
|
1.39
|
|
|
$
|
2.30
|
|
Discontinued operations
|
0.26
|
|
|
—
|
|
|
(0.01
|
)
|
|
0.01
|
|
|
0.26
|
|
Diluted earnings per share
|
$
|
0.36
|
|
|
$
|
0.46
|
|
|
$
|
0.36
|
|
|
$
|
1.40
|
|
|
$
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
12-Month
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
2015
|
Revenue
|
$
|
8,639
|
|
|
$
|
8,459
|
|
|
$
|
9,032
|
|
|
$
|
14,209
|
|
|
$
|
40,339
|
|
Comparable sales % gain (decline)
(1)
|
(1.8
|
)%
|
|
(2.2
|
)%
|
|
2.9
|
%
|
|
2.0
|
%
|
|
0.5
|
%
|
Comparable sales % gain (decline), excluding estimated impact of installment billing
(5)(6)
|
(1.8
|
)%
|
|
(2.2
|
)%
|
|
2.2
|
%
|
|
1.3
|
%
|
|
—
|
%
|
Gross profit
|
$
|
1,967
|
|
|
$
|
1,978
|
|
|
$
|
2,076
|
|
|
$
|
3,026
|
|
|
$
|
9,047
|
|
Operating income
(4)
|
210
|
|
|
225
|
|
|
205
|
|
|
810
|
|
|
1,450
|
|
Net earnings from continuing operations
|
469
|
|
|
137
|
|
|
116
|
|
|
524
|
|
|
1,246
|
|
Gain (loss) from discontinued operations, net of tax
|
(8
|
)
|
|
10
|
|
|
(9
|
)
|
|
(4
|
)
|
|
(11
|
)
|
Net earnings including noncontrolling interests
|
461
|
|
|
147
|
|
|
107
|
|
|
520
|
|
|
1,235
|
|
Net earnings attributable to Best Buy Co., Inc. shareholders
|
461
|
|
|
146
|
|
|
107
|
|
|
519
|
|
|
1,233
|
|
Diluted earnings (loss) per share
(3)
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.33
|
|
|
$
|
0.39
|
|
|
$
|
0.33
|
|
|
$
|
1.47
|
|
|
$
|
3.53
|
|
Discontinued operations
|
(0.02
|
)
|
|
0.03
|
|
|
(0.03
|
)
|
|
(0.01
|
)
|
|
(0.04
|
)
|
Diluted earnings per share
|
$
|
1.31
|
|
|
$
|
0.42
|
|
|
$
|
0.30
|
|
|
$
|
1.46
|
|
|
$
|
3.49
|
|
|
|
(1)
|
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 a corresponding period in the prior year. Relocated, as well as remodeled, expanded and downsized stores closed more than
14
days, are excluded from our 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 portion of the calculation of comparable sales attributable to our International segment excludes the effect of fluctuations in foreign currency exchange rates. The calculation of comparable sales excludes the impact of revenue from discontinued operations. Comparable online sales are included in our comparable sales calculation. 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.
|
|
|
(2)
|
Includes
$186 million
,
$(4) million
,
$7 million
and
$12 million
of restructuring charges recorded in the fiscal first, second, third and fourth quarters, respectively, and
$201 million
for the 12 months ended January 30, 2016 related to measures we took to restructure our businesses.
|
|
|
(3)
|
The sum of our quarterly diluted earnings per share does not equal our annual diluted earnings per share due to differences in quarterly and annual weighted-average shares outstanding.
|
|
|
(4)
|
Includes
$2 million
,
$5 million
,
$5 million
and
$(7) million
of restructuring charges recorded in the fiscal first, second, third and fourth quarters, respectively, and
$5 million
for the 12 months ended January 31, 2015 related to measures we took to restructure our businesses.
|
|
|
(5)
|
Represents comparable sales excluding the estimated revenue of installment billing.
|
|
|
(6)
|
Enterprise comparable sales for fiscal 2015 include revenue from continuing operations in the International segment. Excluding the International segment, Enterprise comparable sales, excluding the impact of installment billing, would have been (1.3%) in the first quarter, 2.0% in the second quarter, 2.4% in the third quarter, 0.5% in the fourth quarter and 0.5% for fiscal 2015, or equal to Domestic comparable sales excluding the impact of installment billing, for the same periods.
|