Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 28, 2017
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact name of registrant as specified in its charter)
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| | |
Minnesota | | 41-0907483 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
7601 Penn Avenue South | | |
Richfield, Minnesota | | 55423 |
(Address of principal executive offices) | | (Zip Code) |
(612) 291-1000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
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| | | |
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ |
| | | |
Smaller reporting company ¨ | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The registrant had 292,326,497 shares of common stock outstanding as of November 28, 2017.
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED OCTOBER 28, 2017
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
| |
Item 1. | Financial Statements |
Condensed Consolidated Balance Sheets
$ in millions, except per share and share amounts (unaudited)
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
Assets | |
| | |
| | |
Current assets | | | | | |
Cash and cash equivalents | $ | 1,103 |
| | $ | 2,240 |
| | $ | 1,341 |
|
Short-term investments | 2,237 |
| | 1,681 |
| | 1,777 |
|
Receivables, net | 971 |
| | 1,347 |
| | 1,174 |
|
Merchandise inventories | 6,663 |
| | 4,864 |
| | 6,331 |
|
Other current assets | 431 |
| | 384 |
| | 398 |
|
Total current assets | 11,405 |
| | 10,516 |
| | 11,021 |
|
Property and equipment, net | 2,352 |
| | 2,293 |
| | 2,298 |
|
Goodwill | 425 |
| | 425 |
| | 425 |
|
Other assets | 603 |
| | 622 |
| | 798 |
|
Total assets | $ | 14,785 |
| | $ | 13,856 |
| | $ | 14,542 |
|
| | | | | |
Liabilities and equity | | | | | |
Current liabilities | |
| | |
| | |
|
Accounts payable | $ | 6,587 |
| | $ | 4,984 |
| | $ | 6,233 |
|
Unredeemed gift card liabilities | 375 |
| | 427 |
| | 377 |
|
Deferred revenue | 426 |
| | 418 |
| | 380 |
|
Accrued compensation and related expenses | 331 |
| | 358 |
| | 308 |
|
Accrued liabilities | 808 |
| | 865 |
| | 782 |
|
Accrued income taxes | 80 |
| | 26 |
| | 43 |
|
Current portion of long-term debt | 545 |
| | 44 |
| | 43 |
|
Total current liabilities | 9,152 |
| | 7,122 |
| | 8,166 |
|
Long-term liabilities | 697 |
| | 704 |
| | 791 |
|
Long-term debt | 784 |
| | 1,321 |
| | 1,324 |
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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 — 296,000,000, 311,000,000 and 313,000,000 shares, respectively | 30 |
| | 31 |
| | 31 |
|
Retained earnings | 3,818 |
| | 4,399 |
| | 3,953 |
|
Accumulated other comprehensive income | 304 |
| | 279 |
| | 277 |
|
Total equity | 4,152 |
| | 4,709 |
| | 4,261 |
|
Total liabilities and equity | $ | 14,785 |
| | $ | 13,856 |
| | $ | 14,542 |
|
NOTE: The Consolidated Balance Sheet as of January 28, 2017, has been condensed from the audited consolidated financial statements.
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Earnings
$ and shares in millions, except per share amounts (unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Revenue | $ | 9,320 |
| | $ | 8,945 |
| | $ | 26,788 |
| | $ | 25,921 |
|
Cost of goods sold | 7,040 |
| | 6,742 |
| | 20,333 |
| | 19,511 |
|
Gross profit | 2,280 |
| | 2,203 |
| | 6,455 |
| | 6,410 |
|
Selling, general and administrative expenses | 1,932 |
| | 1,890 |
| | 5,484 |
| | 5,407 |
|
Restructuring charges | (2 | ) | | 1 |
| | — |
| | 30 |
|
Operating income | 350 |
| | 312 |
| | 971 |
| | 973 |
|
Other income (expense) | |
| | |
| | | | |
Gain on sale of investments | — |
| | — |
| | — |
| | 2 |
|
Investment income and other | 12 |
| | 8 |
| | 30 |
| | 22 |
|
Interest expense | (20 | ) | | (16 | ) | | (57 | ) | | (54 | ) |
Earnings from continuing operations before income tax expense | 342 |
| | 304 |
| | 944 |
| | 943 |
|
Income tax expense | 104 |
| | 112 |
| | 309 |
| | 343 |
|
Net earnings from continuing operations | 238 |
| | 192 |
| | 635 |
| | 600 |
|
Gain from discontinued operations (Note 2), net of tax expense of $0, $0, $0 and $7, respectively | 1 |
| | 2 |
| | 1 |
| | 21 |
|
Net earnings | $ | 239 |
| | $ | 194 |
| | $ | 636 |
| | $ | 621 |
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| | | | | | | |
Basic earnings per share | |
| | |
| | | | |
Continuing operations | $ | 0.80 |
| | $ | 0.61 |
| | $ | 2.09 |
| | $ | 1.87 |
|
Discontinued operations | — |
| | — |
| | — |
| | 0.07 |
|
Basic earnings per share | $ | 0.80 |
| | $ | 0.61 |
| | $ | 2.09 |
| | $ | 1.94 |
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| | | | | | | |
Diluted earnings per share | | | | | | | |
Continuing operations | $ | 0.78 |
| | $ | 0.60 |
| | $ | 2.05 |
| | $ | 1.85 |
|
Discontinued operations | — |
| | 0.01 |
| | — |
| | 0.07 |
|
Diluted earnings per share | $ | 0.78 |
| | $ | 0.61 |
| | $ | 2.05 |
| | $ | 1.92 |
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| | | | | | | |
Dividends declared per common share | $ | 0.34 |
| | $ | 0.28 |
| | $ | 1.02 |
| | $ | 1.29 |
|
| | | | | | | |
Weighted-average common shares outstanding | |
| | |
| | | | |
Basic | 299.1 |
| | 316.2 |
| | 304.1 |
| | 320.2 |
|
Diluted | 305.4 |
| | 320.0 |
| | 310.6 |
| | 323.6 |
|
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive Income
$ in millions (unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Net earnings | $ | 239 |
| | $ | 194 |
| | $ | 636 |
| | $ | 621 |
|
Foreign currency translation adjustments | (17 | ) | | (19 | ) | | 25 |
| | 6 |
|
Comprehensive income | $ | 222 |
| | $ | 175 |
| | $ | 661 |
| | $ | 627 |
|
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
$ in millions (unaudited)
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| | | | | | | |
| Nine Months Ended |
| October 28, 2017 | | October 29, 2016 |
Operating activities | | | |
Net earnings | $ | 636 |
| | $ | 621 |
|
Adjustments to reconcile net earnings to total cash provided by operating activities: | | | |
Depreciation | 500 |
| | 491 |
|
Restructuring charges | — |
| | 30 |
|
Stock-based compensation | 97 |
| | 82 |
|
Deferred income taxes | 4 |
| | 28 |
|
Other, net | (5 | ) | | (22 | ) |
Changes in operating assets and liabilities: | | | |
Receivables | 413 |
| | 79 |
|
Merchandise inventories | (1,811 | ) | | (1,369 | ) |
Other assets | (36 | ) | | (18 | ) |
Accounts payable | 1,530 |
| | 1,801 |
|
Other liabilities | (187 | ) | | (192 | ) |
Income taxes | 62 |
| | (124 | ) |
Total cash provided by operating activities | 1,203 |
| | 1,407 |
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| | | |
Investing activities | |
| | |
|
Additions to property and equipment | (489 | ) | | (445 | ) |
Purchases of investments | (4,047 | ) | | (2,149 | ) |
Sales of investments | 3,518 |
| | 1,685 |
|
Proceeds from property disposition | 2 |
| | 56 |
|
Other, net | — |
| | 5 |
|
Total cash used in investing activities | (1,016 | ) | | (848 | ) |
| | | |
Financing activities | |
| | |
|
Repurchase of common stock | (1,138 | ) | | (472 | ) |
Repayments of debt | (31 | ) | | (384 | ) |
Dividends paid | (310 | ) | | (417 | ) |
Issuance of common stock | 145 |
| | 66 |
|
Other, net | (1 | ) | | 8 |
|
Total cash used in financing activities | (1,335 | ) | | (1,199 | ) |
Effect of exchange rate changes on cash | 15 |
| | 13 |
|
Decrease in cash, cash equivalents and restricted cash | (1,133 | ) | | (627 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 2,433 |
| | 2,161 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 1,300 |
| | $ | 1,534 |
|
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Change in Shareholders' Equity
$ and shares in millions, except per share amounts (unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares | | Common Stock | | Prepaid Share Repurchase | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total |
Balances at January 28, 2017 | 311 |
| | $ | 31 |
| | $ | — |
| | $ | — |
| | $ | 4,399 |
| | $ | 279 |
| | $ | 4,709 |
|
Adoption of ASU 2016-09 | — |
| | — |
| | — |
| | 10 |
| | (12 | ) | | — |
| | (2 | ) |
Net earnings, nine months ended October 28, 2017 | — |
| | — |
| | — |
| | — |
| | 636 |
| | — |
| | 636 |
|
Other comprehensive income, net of tax | | | | | | | | | | | | | |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 25 |
| | 25 |
|
Stock-based compensation | — |
| | — |
| | — |
| | 97 |
| | — |
| | — |
| | 97 |
|
Restricted stock vested and stock options exercised | 7 |
| | 1 |
| | — |
| | 137 |
| | — |
| | — |
| | 138 |
|
Issuance of common stock under employee stock purchase plan | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
Common stock dividends, $1.02 per share | — |
| | — |
| | — |
| | — |
| | (311 | ) | | — |
| | (311 | ) |
Repurchase of common stock | (22 | ) | | (2 | ) | | — |
| | (251 | ) | | (894 | ) | | — |
| | (1,147 | ) |
Balances at October 28, 2017 | 296 |
| | $ | 30 |
| | $ | — |
| | $ | — |
| | $ | 3,818 |
| | $ | 304 |
| | $ | 4,152 |
|
| | | | | | | | | | | | | |
Balances at January 30, 2016 | 324 |
| | $ | 32 |
| | $ | (55 | ) | | $ | — |
| | $ | 4,130 |
| | $ | 271 |
| | $ | 4,378 |
|
Net earnings, nine months ended October 29, 2016 | — |
| | — |
| | — |
| | — |
| | 621 |
| | — |
| | 621 |
|
Other comprehensive income, net of tax: | | | | | | | | | | | | | |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | 6 |
|
Stock-based compensation | — |
| | — |
| | — |
| | 82 |
| | — |
| | — |
| | 82 |
|
Restricted stock vested and stock options exercised | 5 |
| | 1 |
| | — |
| | 59 |
| | — |
| | — |
| | 60 |
|
Settlement of accelerated share repurchase | — |
| | — |
| | 55 |
| | — |
| | — |
| | — |
| | 55 |
|
Issuance of common stock under employee stock purchase plan | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
Tax loss from stock options exercised, restricted stock vesting and employee stock purchase plan | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | (3 | ) |
Common stock dividends, $1.29 per share | — |
| | — |
| | — |
| | — |
| | (417 | ) | | — |
| | (417 | ) |
Repurchase of common stock | (16 | ) | | (2 | ) | | — |
| | (145 | ) | | (381 | ) | | — |
| | (528 | ) |
Balances at October 29, 2016 | 313 |
| | $ | 31 |
| | $ | — |
| | $ | — |
| | $ | 3,953 |
| | $ | 277 |
| | $ | 4,261 |
|
See Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” in these Notes to Condensed Consolidated Financial Statements refers to Best Buy Co., Inc. and its consolidated subsidiaries.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”). All adjustments were comprised of normal recurring adjustments, except as noted in these Notes to Condensed Consolidated Financial Statements.
Historically, we have generated a higher proportion of our revenue and earnings in the fourth fiscal quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. The interim financial statements and the related notes in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017. The first nine months of fiscal 2018 and fiscal 2017 included 39 weeks.
In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations on a one-month lag. Our policy is to accelerate recording the effect of events occurring in the lag period that significantly affect our condensed consolidated financial statements. No such events were identified for the reported periods.
In preparing the accompanying condensed consolidated financial statements, we evaluated the period from October 29, 2017, through the date the financial statements were issued, for material subsequent events requiring recognition or disclosure. No such events were identified for this period.
Unadopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. The new guidance establishes a single comprehensive model for entities to use in accounting for revenue and supersedes most current revenue recognition guidance. It introduces a five-step process for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards under current guidance. It also requires significantly expanded disclosures regarding revenues.
Based on our analysis thus far, we believe the impact of adopting the new guidance will be immaterial to our annual and interim financial statements. The primary impacts we have identified thus far are:
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• | Minor changes to the timing of recognition of revenues related to gift cards and loyalty programs; |
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• | Changes to certain immaterial revenues that are currently reported on a gross basis, to be reported on a net basis (with no change in timing of recognition) with consequently no impacts to earnings; and |
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• | The balance sheet presentation of our sales returns reserve, which will be shown as a separate asset and liability versus the current net presentation. |
In addition, we expect adoption to lead to increased footnote disclosures, particularly with regard to revenue related balance sheet accounts and revenue by channel and category. We also expect the adoption and consequent changes to our procedures and methodologies to require adjustments to our internal controls over financial reporting.
As interpretations of the new rules continue to evolve, we will continue to monitor developments and expect to finalize our conclusions in the fourth quarter of fiscal 2018. We plan to adopt this standard in the first quarter of our fiscal 2019. Providing we ultimately conclude that the impacts of adoption are immaterial, we would expect to use the modified retrospective method. Under this method, we would recognize the cumulative effect of the changes in retained earnings at the date of adoption, but would not restate prior periods.
In February 2016, the FASB issued ASU 2016-02, Leases. The new guidance was issued to increase transparency and comparability among companies by requiring most leases to be included on the balance sheet and by expanding disclosure
requirements. Based on the effective dates, we expect to adopt the new guidance in the first quarter of fiscal 2020 using the modified retrospective method. While we expect adoption to lead to a material increase in the assets and liabilities recorded on our balance sheet and an increase to our footnote disclosures related to leases, we are still evaluating the impact on our consolidated statement of earnings. We also expect that adoption of the new standard will require changes to our internal controls over financial reporting.
Adopted Accounting Pronouncements
In the first quarter of fiscal 2018, we adopted the following ASUs:
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• | ASU 2015-11, Inventory: Simplifying the Measurement of Inventory. The adoption did not have a material impact on our results of operations, cash flows or financial position. |
| |
• | ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. Excess tax benefits and tax deficiencies are now recognized in our provision for income taxes as a discrete event rather than as a component of stockholders’ equity. In addition, we elected to account for forfeitures as they occur. The cumulative effect of this policy change amounted to $12 million, net of tax, and was recorded as a reduction to our retained earnings opening balance. Finally, we elected to present the Condensed Consolidated Statements of Cash Flows on a retrospective transition method, and prior periods have been adjusted to present excess tax benefits as cash flows from operating activities. |
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• | ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, and ASU 2016-18, Statement of Cash Flows: Restricted Cash. The retrospective adoption increased our beginning and ending cash balance within our statement of cash flows. The adoption had no other material impacts to our cash flow statement and had no impact on our results of operations or financial position. |
The following table reconciles the Condensed Consolidated Statement of Cash Flows line items impacted by the adoption of these standards at October 29, 2016:
|
| | | | | | | | | | | | | | | | | | | |
| October 29, 2016 Reported | | ASU 2016-09 Adjustment | | ASU 2016-15 Adjustment | | ASU 2016-18 Adjustment | | October 29, 2016 Adjusted |
Operating activities | | | | | | | | | |
Other, net | $ | (34 | ) | | $ | 12 |
| | $ | — |
| | $ | — |
| | $ | (22 | ) |
Changes in operating assets and liabilities: | | | | | | | | | |
Receivables | 80 |
| | — |
| | (1 | ) | | — |
| | 79 |
|
Merchandise inventories | (1,370 | ) | | — |
| | 1 |
| | — |
| | (1,369 | ) |
Total cash provided by operating activities | 1,395 |
| | 12 |
| | — |
| | — |
| | 1,407 |
|
| | | | | | | | | |
Investing activities | | | | | | | | | |
Change in restricted assets | (8 | ) | | — |
| | — |
| | 8 |
| | — |
|
Total cash used in investing activities | (856 | ) | | — |
| | — |
| | 8 |
| | (848 | ) |
| | | | | | | | | |
Financing activities | | | | | | | | | |
Other, net | 20 |
| | (12 | ) | | — |
| | — |
| | 8 |
|
Total cash used in financing activities | (1,187 | ) | | (12 | ) | | — |
| | — |
| | (1,199 | ) |
| | | | | | | | | |
Decrease in cash, cash equivalents and restricted cash | (635 | ) | | — |
| | — |
| | 8 |
| | (627 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 1,976 |
| | — |
| | — |
| | 185 |
| | 2,161 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 1,341 |
| | $ | — |
| | $ | — |
| | $ | 193 |
| | $ | 1,534 |
|
Total Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheet to the total shown in the Condensed Consolidated Statement of Cash Flows:
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
Cash and cash equivalents | $ | 1,103 |
| | $ | 2,240 |
| | $ | 1,341 |
|
Restricted cash included in Other current assets | 197 |
| | 193 |
| | 193 |
|
Total cash, cash equivalents and restricted cash | $ | 1,300 |
| | $ | 2,433 |
| | $ | 1,534 |
|
Amounts included in restricted cash are pledged as collateral or restricted to use for general liability insurance and workers' compensation insurance.
| |
2. | Discontinued Operations |
Discontinued operations are primarily comprised of Jiangsu Five Star Appliance Co., Limited ("Five Star") within our International segment. In February 2015, we completed the sale of Five Star. Following the sale, we continued to hold as available for sale one retail property in Shanghai, China. In May 2016, we completed the sale of the property and recognized a gain. The gain on sale of the property is included in Other, net within the operating activities section of the Condensed Consolidated Statements of Cash Flows.
The aggregate financial results of discontinued operations were as follows ($ in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Gain from discontinued operations before income tax expense | $ | 1 |
| | $ | 2 |
| | $ | 1 |
| | $ | 28 |
|
Income tax expense | — |
| | — |
| | — |
| | 7 |
|
Net gain from discontinued operations | $ | 1 |
| | $ | 2 |
| | $ | 1 |
| | $ | 21 |
|
| |
3. | Fair Value Measurements |
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, we use a three-tier valuation hierarchy based upon observable and non-observable inputs:
Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.
Level 2 — Significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
| |
• | Quoted prices for similar assets or liabilities in active markets; |
| |
• | Quoted prices for identical or similar assets or liabilities in non-active markets; |
| |
• | Inputs other than quoted prices that are observable for the asset or liability; and |
| |
• | Inputs that are derived principally from or corroborated by other observable market data. |
Level 3 — Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The following table sets forth our financial assets and liabilities that were accounted for at fair value on a recurring basis at October 28, 2017, January 28, 2017, and October 29, 2016, by level within the fair value hierarchy as determined by the valuation techniques we used to determine the fair value ($ in millions):
|
| | | | | | | | | | | | | |
| Fair Value Hierarchy | | Fair Value at |
| | October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
ASSETS | | | |
| | |
| | |
|
Cash and cash equivalents | | | |
| | |
| | |
|
Money market funds | Level 1 | | $ | 84 |
| | $ | 290 |
| | $ | 97 |
|
Time deposits | Level 2 | | — |
| | 15 |
| | 11 |
|
Short-term investments | | | | | | | |
Commercial paper | Level 2 | | 588 |
| | 349 |
| | 250 |
|
Time deposits | Level 2 | | 1,649 |
| | 1,332 |
| | 1,527 |
|
Other current assets | | | |
| | | | |
Money market funds | Level 1 | | 8 |
| | 7 |
| | 3 |
|
Commercial paper | Level 2 | | 60 |
| | 60 |
| | 60 |
|
Foreign currency derivative instruments | Level 2 | | 5 |
| | 2 |
| | 5 |
|
Interest rate swap derivative instruments | Level 2 | | 3 |
| | — |
| | — |
|
Time deposits | Level 2 | | 100 |
| | 100 |
| | 100 |
|
Other assets | | | | | | | |
Marketable securities that fund deferred compensation | Level 1 | | 98 |
| | 96 |
| | 96 |
|
Interest rate swap derivative instruments | Level 2 | | — |
| | 13 |
| | 13 |
|
| | | | | | | |
LIABILITIES | | | |
| | |
| | |
|
Accrued liabilities | | | |
| | |
| | |
|
Foreign currency derivative instruments | Level 2 | | 5 |
| | 3 |
| | 3 |
|
Long-term liabilities | | | | | | | |
Interest rate swap derivative instruments | Level 2 | | 3 |
| | — |
| | — |
|
There were no transfers between levels during the periods presented. During the third quarter of fiscal 2017, our remaining investments in auction rate securities ("ARS"), which were classified as Level 3, were called at par, which resulted in proceeds of $2 million and no realized gain or loss. Other than as described, there were no changes in the beginning and ending balances of items measured at fair value on a recurring basis in the tables above that used significant unobservable inputs (Level 3) for the periods presented.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Money market funds. Our money market fund investments were measured at fair value as they trade in an active market using quoted market prices and, therefore, were classified as Level 1.
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.
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.
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.
Marketable securities that fund deferred compensation. The assets that fund our deferred compensation consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible fixed assets, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value on our Condensed Consolidated Balance Sheets. For these assets, we do not periodically adjust carrying value to fair value, except in the event of impairment. When we determine that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is recorded within Selling, general and administrative expenses and Restructuring charges in our Condensed Consolidated Statements of Earnings for non-restructuring and restructuring charges, respectively.
The following table summarizes the fair value remeasurements for property and equipment impairments recorded during the three and nine months ended October 28, 2017, and October 29, 2016 ($ in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Impairments | | Remaining Net Carrying Value(1) |
| Three Months Ended | | Nine Months Ended | | | | |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Property and equipment (non-restructuring) | $ | 2 |
| | $ | 8 |
| | $ | 8 |
| | $ | 16 |
| | $ | — |
| | $ | — |
|
Property and equipment (restructuring)(2) | — |
| | 1 |
| | — |
| | 8 |
| | — |
| | — |
|
Total | $ | 2 |
| | $ | 9 |
| | $ | 8 |
| | $ | 24 |
| | $ | — |
| | $ | — |
|
| |
(1) | Remaining net carrying value approximates fair value. Because assets subject to long-lived asset impairment are not measured at fair value on a recurring basis, certain fair value measurements presented in the table may reflect values at earlier measurement dates and may no longer represent the fair values at October 28, 2017, and October 29, 2016. |
| |
(2) | See Note 5, Restructuring Charges, for additional information. |
All of the fair value remeasurements included in the table above were based on significant unobservable inputs (Level 3). Fixed asset fair values were derived using a discounted cash flow ("DCF") model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate. In the case of assets for which the impairment was the result of restructuring activities, no future cash flows have been assumed as the assets will cease to be used and expected sale values are nominal.
Fair Value of Financial Instruments
Our financial instruments, other than those presented in the disclosures above, include cash, receivables, other investments, accounts payable, other payables and long-term debt. The fair values of cash, receivables, accounts payable and other payables approximated carrying values because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy. Fair values for other investments held at cost are not readily available, but we estimate that the carrying values for these investments approximate fair value. See Note 6, Debt, for information about the fair value of our long-term debt.
| |
4. | Goodwill and Intangible Assets |
The following table provides the carrying values of goodwill and indefinite-lived tradenames for the Domestic segment ($ in millions):
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
Goodwill | $ | 425 |
| | $ | 425 |
| | $ | 425 |
|
Intangible assets included in Other assets | 18 |
| | 18 |
| | 18 |
|
The following table provides the gross carrying amount of goodwill and cumulative goodwill impairment ($ in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
| Gross Carrying Amount | | Cumulative Impairment | | Gross Carrying Amount | | Cumulative Impairment | | Gross Carrying Amount | | Cumulative Impairment |
Goodwill | $ | 1,100 |
| | $ | 675 |
| | $ | 1,100 |
| | $ | 675 |
| | $ | 1,100 |
| | $ | 675 |
|
Charges incurred in the three and nine months ended October 28, 2017, and October 29, 2016, for our restructuring activities were as follows ($ in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Renew Blue Phase 2 | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 26 |
|
Canadian brand consolidation | (2 | ) | | (2 | ) | | (3 | ) | | (1 | ) |
Renew Blue(1) | — |
| | 1 |
| | 3 |
| | 4 |
|
Other restructuring activities(2) | — |
| | 1 |
| | — |
| | 1 |
|
Total restructuring charges | $ | (2 | ) | | $ | 1 |
| | $ | — |
| | $ | 30 |
|
| |
(1) | Represents activity related to our remaining vacant space liability, primarily in our International segment, for our Renew Blue restructuring program, which began in the fourth quarter of fiscal 2013. We may continue to incur immaterial adjustments to the liability for changes in sublease assumptions or potential lease buyouts. In addition, lease payments for vacated stores will continue until leases expire or are terminated. The remaining vacant space liability was $11 million at October 28, 2017. |
| |
(2) | Represents activity related to our remaining vacant space liability for U.S. large-format store closures in fiscal 2013. We may continue to incur immaterial adjustments to the liability for changes in sublease assumptions or potential lease buyouts. In addition, lease payments for vacated stores will continue until leases expire or are terminated. The remaining vacant space liability was $7 million at October 28, 2017. |
Renew Blue Phase 2
In the first quarter of fiscal 2017, we took several strategic actions to eliminate and simplify certain components of our operations and restructure certain field and corporate teams as part of our Renew Blue Phase 2 plan. No charges were incurred in the three and nine months ended October 28, 2017. We incurred charges of $1 million and $26 million related to Phase 2 of the plan during the three and nine months ended October 29, 2016, respectively. The charges incurred consisted of employee termination benefits and property and equipment impairments. All restructuring charges related to this plan are from continuing operations and are presented in Restructuring charges in our Condensed Consolidated Statements of Earnings.
The composition of the restructuring charges we incurred for Renew Blue Phase 2 during the three and nine months ended October 28, 2017, and October 29, 2016, as well as, the cumulative amount incurred through October 28, 2017, was as follows ($ in millions):
|
| | | | | | | | | | | | | | | | | | | |
| Domestic |
| Three Months Ended | | Nine Months Ended | | Cumulative Amount |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 | | October 28, 2017 |
Property and equipment impairments | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 8 |
| | $ | 8 |
|
Termination benefits | — |
| | — |
| | — |
| | 18 |
| | 18 |
|
Total restructuring charges | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 26 |
| | $ | 26 |
|
As of October 28, 2017, and January 28, 2017, there was no restructuring accrual balance. The restructuring accrual activity related to termination benefits was as follows for the nine months ended October 29, 2016 ($ in millions):
|
| | | |
| Termination Benefits |
Balances at January 30, 2016 | $ | — |
|
Charges | 19 |
|
Cash payments | (16 | ) |
Adjustments(1) | (2 | ) |
Balances at October 29, 2016 | $ | 1 |
|
| |
(1) | Adjustments to termination benefits represent changes in retention assumptions. |
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. All restructuring charges related to this plan are from continuing operations and are presented in Restructuring charges in our Condensed Consolidated Statements of Earnings.
The composition of total restructuring charges we incurred for the Canadian brand consolidation in the three and nine months ended October 28, 2017, and October 29, 2016, as well as, the cumulative amount incurred through October 28, 2017, was as follows ($ in millions):
|
| | | | | | | | | | | | | | | | | | | |
| International |
| Three Months Ended | | Nine Months Ended | | Cumulative Amount |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 | | October 28, 2017 |
Inventory write-downs | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
Property and equipment impairments | — |
| | — |
| | — |
| | — |
| | 30 |
|
Tradename impairment | — |
| | — |
| | — |
| | — |
| | 40 |
|
Termination benefits | — |
| | — |
| | — |
| | — |
| | 25 |
|
Facility closure and other costs | (2 | ) | | (2 | ) | | (3 | ) | | (1 | ) | | 102 |
|
Total restructuring charges | $ | (2 | ) | | $ | (2 | ) | | $ | (3 | ) | | $ | (1 | ) | | $ | 200 |
|
The following tables summarize our restructuring accrual activity during the nine months ended October 28, 2017, and October 29, 2016, related to termination benefits and facility closure and other costs associated with the Canadian brand consolidation ($ in millions):
|
| | | | | | | | | | | |
| Termination Benefits | | Facility Closure and Other Costs | | Total |
Balances at January 28, 2017 | $ | — |
| | $ | 34 |
| | $ | 34 |
|
Cash payments | — |
| | (14 | ) | | (14 | ) |
Adjustments(1) | — |
| | (3 | ) | | (3 | ) |
Changes in foreign currency exchange rates | — |
| | 1 |
| | 1 |
|
Balances at October 28, 2017 | $ | — |
| | $ | 18 |
| | $ | 18 |
|
| | | | | |
Balances at January 30, 2016 | $ | 2 |
| | $ | 64 |
| | $ | 66 |
|
Charges | — |
| | 1 |
| | 1 |
|
Cash payments | (2 | ) | | (29 | ) | | (31 | ) |
Adjustments(1) | — |
| | (2 | ) | | (2 | ) |
Changes in foreign currency exchange rates | — |
| | 3 |
| | 3 |
|
Balances at October 29, 2016 | $ | — |
| | $ | 37 |
| | $ | 37 |
|
| |
(1) | Adjustments to facility closure and other costs represent changes in sublease assumptions. |
6. Debt
Long-term debt consisted of the following ($ in millions):
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
2018 Notes | $ | 500 |
| | $ | 500 |
| | $ | 500 |
|
2021 Notes | 650 |
| | 650 |
| | 650 |
|
Interest rate swap valuation adjustments | — |
| | 13 |
| | 13 |
|
Subtotal | 1,150 |
| | 1,163 |
| | 1,163 |
|
Debt discounts and issuance costs | (3 | ) | | (5 | ) | | (5 | ) |
Financing lease obligations | 158 |
| | 177 |
| | 180 |
|
Capital lease obligations | 24 |
| | 30 |
| | 29 |
|
Total long-term debt | 1,329 |
| | 1,365 |
| | 1,367 |
|
Less: current portion | 545 |
| | 44 |
| | 43 |
|
Total long-term debt, less current portion | $ | 784 |
| | $ | 1,321 |
| | $ | 1,324 |
|
Our 2018 Notes, due August 1, 2018, are classified within our Current portion of long-term debt as of October 28, 2017. The fair value of total long-term debt, excluding debt discounts and issuance costs and financing and capital lease obligations, approximated $1,219 million, $1,240 million and $1,260 million at October 28, 2017, January 28, 2017, and October 29, 2016, respectively, based primarily on the market prices quoted from external sources, compared with carrying values of $1,150 million, $1,163 million and $1,163 million, respectively. If long-term debt was measured at fair value in the financial statements, it would be classified primarily as Level 2 in the fair value hierarchy.
See Note 5, Debt, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017, for additional information regarding the terms of our debt facilities, debt instruments and other obligations.
We manage our economic and transaction exposure to certain risks through the use of foreign currency and interest rate swap derivative instruments. Our objective in holding derivatives is to reduce the volatility of net earnings, cash flows and net asset value associated with changes in foreign currency exchange rates and interest rates. We do not hold derivative instruments for trading or speculative purposes. We have no derivatives that have credit risk-related contingent features, and we mitigate our credit risk by engaging with major financial institutions as our counterparties.
We record all derivative instruments on our Condensed Consolidated Balance Sheets at fair value and evaluate hedge effectiveness prospectively and retrospectively when electing to apply hedge accounting. We formally document all hedging relations at inception for derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transaction. In addition, we have derivatives which are not designated as hedging instruments.
Net Investment Hedges
We use foreign exchange forward contracts to hedge against the effect of Canadian dollar exchange rate fluctuations on a portion of our net investment in our Canadian operations. The contracts have terms up to 12 months. For a net investment hedge, we recognize changes in the fair value of the derivative as a component of foreign currency translation within other comprehensive income to offset a portion of the change in translated value of the net investment being hedged, until the investment is sold or liquidated. We limit recognition in net earnings of amounts previously recorded in other comprehensive income to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. We report the ineffective portion of the gain or loss, if any, in net earnings.
Interest Rate Swaps
We use "receive fixed-rate, pay variable-rate" interest rate swaps to mitigate the effect of interest rate fluctuations on our 2018 Notes and our 2021 Notes. Our interest rate swap contracts are considered perfect hedges because the critical terms and notional amounts match those of our fixed-rate debt being hedged and are, therefore, accounted as fair value hedges using the
shortcut method. Under the shortcut method, we recognize the change in the fair value of the derivatives with an offsetting change to the carrying value of the debt. Accordingly, there is no impact on our Condensed Consolidated Statements of Earnings from the fair value of the derivatives.
Derivatives Not Designated as Hedging Instruments
We use foreign currency forward contracts to manage the impact of fluctuations in foreign currency exchange rates relative to recognized receivable and payable balances denominated in non-functional currencies and on certain forecast inventory purchases denominated in non-functional currencies. The contracts generally have terms of up to 12 months. These derivative instruments are not designated as hedging relationships, and, therefore, we record gains and losses on these contracts directly to net earnings.
Summary of Derivative Balances
The following table presents the gross fair values for outstanding derivative instruments and the corresponding classification at October 28, 2017, January 28, 2017, and October 29, 2016 ($ in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
| Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities |
Derivatives designated as net investment hedges(1) | $ | 3 |
| | $ | 5 |
| | $ | 2 |
| | $ | 2 |
| | $ | 4 |
| | $ | 3 |
|
Derivatives designated as interest rate swaps(2) | 3 |
| | 3 |
| | 13 |
| | — |
| | 13 |
| | — |
|
No hedge designation (foreign exchange forward contracts)(1) | 2 |
| | — |
| | — |
| | 1 |
| | 1 |
| | — |
|
Total | $ | 8 |
| | $ | 8 |
| | $ | 15 |
| | $ | 3 |
| | $ | 18 |
| | $ | 3 |
|
| |
(1) | The fair value is recorded in Other current assets or Accrued liabilities. |
| |
(2) | As of October 28, 2017, the fair value of the interest rate swaps related to our 2018 Notes is recorded in Other current assets or Accrued liabilities, while the interest rate swaps related to our 2021 Notes is recorded in Other assets or Long-term liabilities. For all previous periods, the fair value is recorded in Other assets or Long-term liabilities. |
The following table presents the effects of derivative instruments by contract type on other comprehensive income ("OCI") and on our Condensed Consolidated Statements of Earnings for the three and nine months ended October 28, 2017, and October 29, 2016 ($ in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Derivatives designated as net investment hedges | | | | | | | |
Pre-tax gain (loss) recognized in OCI | $ | 8 |
| | $ | 6 |
| | $ | (3 | ) | | $ | (10 | ) |
| | | | | | | |
Derivatives designated as interest rate swaps | | | | | | | |
Gain (loss) recognized within Interest expense | | | | | | | |
Interest rate swap gain | $ | 16 |
| | $ | 14 |
| | $ | 13 |
| | $ | 12 |
|
Long-term debt loss | (16 | ) | | (14 | ) | | (13 | ) | | (12 | ) |
Net impact | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | |
No hedge designation (foreign exchange forward contracts) | | | | | | |
Gain (loss) recognized within Selling, general and administrative expenses | $ | 2 |
| | $ | 1 |
| | $ | (1 | ) | | $ | (2 | ) |
The following table presents the notional amounts of our derivative instruments at October 28, 2017, January 28, 2017, and October 29, 2016 ($ in millions):
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
Derivatives designated as net investment hedges | $ | 240 |
| | $ | 205 |
| | $ | 203 |
|
Derivatives designated as interest rate swaps | 1,150 |
| | 750 |
| | 750 |
|
No hedge designation (foreign exchange forward contracts) | 64 |
| | 43 |
| | 59 |
|
Total | $ | 1,454 |
| | $ | 998 |
| | $ | 1,012 |
|
We compute our basic earnings per share based on the weighted-average number of common shares outstanding and our diluted earnings per share based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued. Potentially dilutive securities include stock options, nonvested share awards and shares issuable under our employee stock purchase plan. Nonvested market-based share awards and nonvested performance-based share awards are included in the average diluted shares outstanding for each period, if established market or performance criteria have been met at the end of the respective periods.
The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share from continuing operations for the three and nine months ended October 28, 2017, and October 29, 2016 ($ and shares in millions, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Numerator | |
| | |
| | | | |
Net earnings from continuing operations | $ | 238 |
| | $ | 192 |
| | $ | 635 |
| | $ | 600 |
|
| | | | | | | |
Denominator | | | | | | | |
Weighted-average common shares outstanding | 299.1 |
| | 316.2 |
| | 304.1 |
| | 320.2 |
|
Dilutive effect of stock compensation plan awards | 6.3 |
| | 3.8 |
| | 6.5 |
| | 3.4 |
|
Weighted-average common shares outstanding, assuming dilution | 305.4 |
| | 320.0 |
| | 310.6 |
| | 323.6 |
|
| | | | | | | |
Net earnings per share from continuing operations | | | | | | | |
Basic | $ | 0.80 |
| | $ | 0.61 |
| | $ | 2.09 |
| | $ | 1.87 |
|
Diluted | $ | 0.78 |
| | $ | 0.60 |
| | $ | 2.05 |
| | $ | 1.85 |
|
The computation of weighted-average common shares outstanding, assuming dilution, excluded options to purchase zero shares and 6.3 million shares of common stock for the three months ended October 28, 2017, and October 29, 2016, respectively, and options to purchase zero shares and 6.9 million shares of common stock for the nine months ended October 28, 2017, and October 29, 2016, respectively. These amounts were excluded as the options’ exercise prices were greater than the average market price of our common stock for the periods presented, and, therefore, the effect would be anti-dilutive (i.e., including such options would result in higher earnings per share).
The following tables provide a reconciliation of the components of accumulated other comprehensive income, net of tax, attributable to Best Buy Co., Inc. for the three and nine months ended October 28, 2017, and October 29, 2016 ($ in millions):
|
| | | |
| Foreign Currency Translation |
Balances at July 29, 2017 | $ | 321 |
|
Foreign currency translation adjustments | (17 | ) |
Balances at October 28, 2017 | $ | 304 |
|
| |
Balances at January 28, 2017 | $ | 279 |
|
Foreign currency translation adjustments | 25 |
|
Balances at October 28, 2017 | $ | 304 |
|
| |
Balances at July 30, 2016 | $ | 296 |
|
Foreign currency translation adjustments | (19 | ) |
Balances at October 29, 2016 | $ | 277 |
|
| |
Balances at January 30, 2016 | $ | 271 |
|
Foreign currency translation adjustments | 6 |
|
Balances at October 29, 2016 | $ | 277 |
|
The gains and losses on our net investment hedges, which are included in foreign currency translation adjustments, were not material for the periods presented. There is generally no tax impact related to foreign currency translation adjustments, as the earnings are considered permanently reinvested.
| |
10. | Repurchase of Common Stock |
Our Board of Directors authorized a $5.0 billion share repurchase program in February 2017. The program, which became effective on February 27, 2017, terminated and replaced a $5.0 billion share repurchase program authorized by our Board of Directors in June 2011. There is no expiration governing the period over which we can make our share repurchases under the February 2017 $5.0 billion share repurchase program.
The following table presents information regarding the shares we repurchased during the three and nine months ended October 28, 2017, and October 29, 2016 ($ and shares in millions, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Total cost of shares repurchased | | | | | | | |
Open market(1) | $ | 366 |
| | $ | 206 |
| | $ | 1,147 |
| | $ | 483 |
|
Settlement of January 2016 ASR(2) | — |
| | — |
| | — |
| | 45 |
|
Total | $ | 366 |
| | $ | 206 |
| | $ | 1,147 |
| | $ | 528 |
|
| | | | | | | |
Average price per share | | | | | | | |
Open market | $ | 57.14 |
| | $ | 37.67 |
| | $ | 52.35 |
| | $ | 33.52 |
|
Settlement of January 2016 ASR(2) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 28.55 |
|
Average | $ | 57.14 |
| | $ | 37.67 |
| | $ | 52.35 |
| | $ | 33.03 |
|
| | | | | | | |
Number of shares repurchased and retired | | | | | | | |
Open market(1) | 6.4 |
| | 5.5 |
| | 21.9 |
| | 14.4 |
|
Settlement of January 2016 ASR(2) | — |
| | — |
| | — |
| | 1.6 |
|
Total | 6.4 |
| | 5.5 |
| | 21.9 |
| | 16.0 |
|
| |
(1) | As of October 28, 2017, $17 million, or 0.3 million shares, in trades remained unsettled. As of October 29, 2016, $11 million, or 0.3 million shares, in trades remained unsettled. The liability for unsettled trades is included in Accrued liabilities in the Condensed Consolidated Balance Sheets. |
| |
(2) | See Note 7, Shareholders' Equity, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017, for additional information regarding the January 2016 ASR. |
Approximately 3.9 billion shares remained available for additional purchases under the February 2017 share repurchase program as of October 28, 2017. Between the end of the third quarter of fiscal 2018 and November 30, 2017, we repurchased an incremental 4.5 million shares of our common stock at a cost of $256 million. Repurchased shares are retired and constitute authorized but unissued shares.
Our chief operating decision maker ("CODM") is our Chief Executive Officer. Our business is organized into two segments: Domestic (which is comprised of all operations within the U.S. and its districts and territories) and International (which is comprised of all operations within Canada and Mexico). Our CODM has ultimate responsibility for enterprise decisions. Our CODM determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise, the Domestic segment and the International segment. The Domestic segment managers and International segment managers have responsibility for operating decisions, allocating resources and assessing performance within their respective segments. Our CODM relies on internal management reporting that analyzes enterprise results to the net earnings level and segment results to the operating income level.
We aggregate our Canada and Mexico businesses into one International operating segment. Our Domestic and International operating segments also represent our reportable segments. The accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.
Revenue by reportable segment was as follows ($ in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Domestic | $ | 8,491 |
| | $ | 8,192 |
| | $ | 24,675 |
| | $ | 23,910 |
|
International | 829 |
| | 753 |
| | 2,113 |
| | 2,011 |
|
Total revenue | $ | 9,320 |
| | $ | 8,945 |
| | $ | 26,788 |
| | $ | 25,921 |
|
Operating income by reportable segment and the reconciliation to earnings from continuing operations before income tax expense were as follows ($ in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
Domestic | $ | 345 |
| | $ | 298 |
| | $ | 959 |
| | $ | 959 |
|
International | 5 |
| | 14 |
| | 12 |
| | 14 |
|
Total operating income | 350 |
| | 312 |
| | 971 |
| | 973 |
|
Other income (expense) | | | | | | | |
Gain on sale of investments | — |
| | — |
| | — |
| | 2 |
|
Investment income and other | 12 |
| | 8 |
| | 30 |
| | 22 |
|
Interest expense | (20 | ) | | (16 | ) | | (57 | ) | | (54 | ) |
Earnings from continuing operations before income tax expense | $ | 342 |
| | $ | 304 |
| | $ | 944 |
| | $ | 943 |
|
Assets by reportable segment were as follows ($ in millions):
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
Domestic | $ | 13,140 |
| | $ | 12,496 |
| | $ | 13,115 |
|
International | 1,645 |
| | 1,360 |
| | 1,427 |
|
Total assets | $ | 14,785 |
| | $ | 13,856 |
| | $ | 14,542 |
|
We are involved in a number of legal proceedings. Where appropriate, we have made accruals with respect to these matters, which are reflected in our Condensed Consolidated Financial Statements. However, there are cases where liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. We provide disclosure of matters where we believe it is reasonably possible the impact may be material to our Condensed Consolidated Financial Statements.
Securities Actions
In February 2011, a purported class action lawsuit captioned, IBEW Local 98 Pension Fund, individually and on behalf of all others similarly situated v. Best Buy Co., Inc., et al., was filed against us and certain of our executive officers in the U.S. District Court for the District of Minnesota. This federal court action alleges, among other things, that we and the officers named in the complaint violated Sections 10(b) and 20A of the Exchange Act and Rule 10b-5 under the Exchange Act in connection with press releases and other statements relating to our fiscal 2011 earnings guidance that had been made available to the public. Additionally, in March 2011, a similar purported class action was filed by a single shareholder, Rene LeBlanc, against us and certain of our executive officers in the same court. In July 2011, after consolidation of the IBEW Local 98 Pension Fund and Rene LeBlanc actions, a consolidated complaint captioned, IBEW Local 98 Pension Fund v. Best Buy Co., Inc., et al., was filed and served. We filed a motion to dismiss the consolidated complaint in September 2011, and in March 2012, subsequent to the end of fiscal 2012, the court issued a decision dismissing the action with prejudice. In April 2012, the plaintiffs filed a motion to alter or amend the court's decision on our motion to dismiss. In October 2012, the court granted plaintiff's motion to alter or amend the court's decision on our motion to dismiss in part by vacating such decision and giving plaintiff leave to file an amended complaint, which plaintiff did in October 2012. We filed a motion to dismiss the amended complaint in November 2012 and all responsive pleadings were filed in December 2012. A hearing was held on April 26, 2013. On August 5, 2013, the court issued an order granting our motion to dismiss in part and, contrary to its March 2012 order, denying the motion to dismiss in part, holding that certain of the statements alleged to have been made were not forward-looking statements and therefore were not subject to the “safe-harbor” provisions of the Private Securities Litigation Reform Act. Plaintiffs moved to certify the purported class. By Order filed August 6, 2014, the court certified a class of persons or entities who acquired Best Buy common stock between 10:00 a.m. EDT on September 14, 2010, and December 13, 2010, and who were damaged by the alleged violations of law. The 8th Circuit Court of Appeals granted our request for interlocutory appeal. On April 12, 2016, the 8th Circuit held the trial court misapplied the law and reversed the class certification order. IBEW petitioned the 8th Circuit for a rehearing en banc, which was denied on June 1, 2016. In October 2016, IBEW advised the trial court it will not seek review by the Supreme Court. On June 23, 2017, the trial court denied plaintiff's request to file a new Motion for Class Certification. On October 30, 2017, plaintiffs filed with the trial court a motion for leave to file a second amended class action complaint which Best Buy opposed in a filing on November 6, 2017. That motion is pending. We continue to believe that the remaining individual plaintiff's allegations are without merit and intend to vigorously defend our company in this matter.
In June 2011, a purported shareholder derivative action captioned, Salvatore M. Talluto, Derivatively and on Behalf of Best Buy Co., Inc. v. Richard M. Schulze, et al., as Defendants and Best Buy Co., Inc. as Nominal Defendant, was filed against both present and former members of our Board of Directors serving during the relevant periods in fiscal 2011 and us as a nominal defendant in the U.S. District Court for the State of Minnesota. The lawsuit alleges that the director defendants breached their fiduciary duty, among other claims, including violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in failing to correct public misrepresentations and material misstatements and/or omissions regarding our fiscal 2011 earnings projections and, for certain directors, selling stock while in possession of material adverse non-public information. Additionally, in July 2011, a similar purported class action was filed by a single shareholder, Daniel Himmel, against us and certain of our executive officers in the same court. In November 2011, the respective lawsuits of Salvatore M. Talluto and Daniel Himmel were consolidated into a new action captioned, In Re: Best Buy Co., Inc. Shareholder Derivative Litigation, and a stay ordered pending the close of discovery in the consolidated IBEW Local 98 Pension Fund v. Best Buy Co., Inc., et al. case. Additionally, in June 2015, a similar purported class action was filed by a single shareholder, Khuong Tran, derivatively on behalf of Best Buy Co., Inc. against us and certain of our executive officers and directors in the same court. The Khuong Tran lawsuit has also been stayed pending the close of discovery in IBEW.
The plaintiffs in the above securities actions seek damages, including interest, equitable relief and reimbursement of the costs and expenses they incurred in the lawsuits. As stated above, we believe the allegations in the above securities actions are without merit, and we intend to defend these actions vigorously. Based on our assessment of the facts underlying the claims in the above securities actions, their respective procedural litigation history and the degree to which we intend to defend our company in these matters, the amount or range of reasonably possible losses, if any, cannot be estimated.
Other Legal Proceedings
We are involved in various other legal proceedings arising in the normal course of conducting business. For such legal proceedings, we have accrued an amount that reflects the aggregate liability deemed probable and estimable, but this amount is not material to our consolidated financial position, results of operations or cash flows. Because of the preliminary nature of many of these proceedings, the difficulty in ascertaining the applicable facts relating to many of these proceedings, the variable treatment of claims made in many of these proceedings and the difficulty of predicting the settlement value of many of these proceedings, we are not able to estimate an amount or range of any reasonably possible additional losses. However, based upon our historical experience, the resolution of these proceedings is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” in the following refers to Best Buy Co., Inc. and its consolidated subsidiaries. Any references to our website addresses do not constitute incorporation by reference of the information contained on the websites.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A is presented in the following sections:
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• | Business Strategy Update |
| |
• | Best Buy 2020: Building the New Blue |
| |
• | Liquidity and Capital Resources |
| |
• | Off-Balance-Sheet Arrangements and Contractual Obligations |
| |
• | Significant Accounting Policies and Estimates |
| |
• | New Accounting Pronouncements |
| |
• | Safe Harbor Statement Under the Private Securities Litigation Reform Act |
Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 28, 2017 (including the information presented therein under Risk Factors), as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited.
Overview
We are a leading provider of technology products, services and solutions. We offer these products and services to customers who visit our stores, engage with Geek Squad agents or use our websites or mobile applications. We have operations in the U.S., Canada and Mexico. We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all operations within the U.S. and its districts and territories. The International segment is comprised of all operations in Canada and Mexico.
Our fiscal year ends on the Saturday nearest the end of January. Fiscal 2018 will include 53 weeks with the additional week included in the fourth quarter and fiscal 2017 included 52 weeks. Our business, like that of many retailers, is seasonal. A higher proportion of our revenue and earnings is generated in the fourth fiscal quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico ("Holiday").
Comparable Sales
Throughout this MD&A, we refer to comparable sales. Our comparable sales calculation compares revenue from stores, websites and call centers operating for at least 14 full months, as well as revenue related to certain other comparable sales channels for a particular period to the corresponding period in the prior year. Relocated stores, as well as remodeled, expanded and downsized stores closed more than 14 days, are excluded from the comparable sales calculation until at least 14 full months after reopening. Acquisitions are included in the comparable sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The calculation of comparable sales excludes the impact of revenue from discontinued operations and the effect of fluctuations in foreign currency exchange rates (applicable to our International segment only). The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers' methods.
The Canadian brand consolidation, which included the permanent closure of 66 Future Shop stores, the conversion of 65 Future Shop stores to Best Buy stores and the elimination of the Future Shop website, had a material impact on a year-over-year basis on the remaining Canadian retail stores and the website. As such, from the first quarter of fiscal 2016 through the third quarter of fiscal 2017, all Canadian store and website revenue was removed from the comparable sales base and the International segment no longer had a comparable sales metric. Therefore, Consolidated comparable sales for the first quarter of fiscal 2016 through the third quarter of fiscal 2017 equaled the Domestic segment comparable sales. Beginning in the fourth quarter of fiscal 2017, we resumed reporting International comparable sales and, as such, Consolidated comparable sales are once again equal to the aggregation of Domestic and International comparable sales.
Non-GAAP Financial Measures
This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), as well as certain adjusted or non-GAAP financial measures such as constant currency, non-GAAP operating income, non-GAAP effective tax rate, non-GAAP net earnings from continuing operations, non-GAAP diluted earnings per share ("EPS") from continuing operations and non-GAAP debt to earnings before interest, income taxes, depreciation, amortization and rent ("EBITDAR") ratio. We believe that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors in evaluating current period performance and in assessing future performance. For these reasons, our internal management reporting also includes non-GAAP measures. Generally, our non-GAAP measures include adjustments for items such as restructuring charges, goodwill impairments and gains or losses on investments. In addition, certain other items may be excluded from non-GAAP financial measures when we believe this provides greater clarity to management and our investors. These non-GAAP financial measures should be considered in addition to, and not superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.
In our discussions of the operating results of our Consolidated business and our International segment, we sometimes refer to the impact of changes in foreign currency exchange rates or the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert the International segment’s operating results from local currencies into U.S. dollars for reporting purposes. We also use the term "constant currency", which represents results adjusted to exclude foreign currency impacts. We calculate those impacts as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period currency exchange rates. We believe the disclosure of revenue changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates and our inability to report comparable store sales for the International segment from the first quarter of fiscal 2016 through the third quarter of fiscal 2017 as a result of the Canadian brand consolidation.
Beginning in the first quarter of fiscal 2018, we no longer exclude non-restructuring property and equipment impairment charges from our non-GAAP financial metrics. When we began to execute our Renew Blue transformation in the fourth quarter of fiscal 2013, we adopted a change to non-GAAP reporting to exclude non-restructuring property and equipment impairment charges from our non-GAAP results. From that point, through the fourth quarter of fiscal 2017, we believed that reporting non-GAAP results that excluded these charges provided a supplemental view of our ongoing performance that was useful and relevant to our investors. Now that Renew Blue has ended and Best Buy 2020: Building The New Blue has officially launched, we believe it is no longer necessary to adjust for non-restructuring property and equipment impairments in our non-GAAP reporting. We believe that future such impairments will predominantly be immaterial and incurred in the ordinary scope of ongoing operations. Accordingly, commencing in the first quarter of fiscal 2018, we no longer adjust for non-restructuring property and equipment impairments. Impacted prior period non-GAAP financial measures have been recast to conform with this presentation.
Refer to the Non-GAAP Financial Measures section below for the detailed reconciliation of items that impacted the non-GAAP operating income, non-GAAP effective tax rate, non-GAAP net earnings from continuing operations and non-GAAP diluted EPS from continuing operations in the presented periods.
Refer to the Other Financial Measures section below for the detailed reconciliation of items that impacted the non-GAAP debt to EBITDAR ratio. Management believes this ratio is an important indicator of our creditworthiness. Furthermore, we believe that our non-GAAP debt to EBITDAR ratio is important for understanding our financial position and provides meaningful additional information about our ability to service our long-term debt and other fixed obligations and to fund our future growth. We also believe our non-GAAP debt to EBITDAR ratio is relevant because it enables investors to compare our indebtedness to that of retailers who own, rather than lease, their stores. Our decision to own or lease real estate is based on an assessment of our financial liquidity, our capital structure, our desire to own or to lease the location, the owner’s desire to own or to lease the location and the alternative that results in the highest return to our shareholders.
Business Strategy Update
In the third quarter of fiscal 2018, our Consolidated revenue increased 4.2% to $9.3 billion with Consolidated comparable sales growth of 4.4% compared to last year. Diluted earnings per share increased 30.0% to $0.78 compared to $0.60 last year.
These results included the negative impact of two significant factors. First, despite what we previously characterized as moderate expectations for mobile phone launches in the quarter, revenue in the mobile category was materially lower than expected. This was due to the fact that a major new phone did not launch until November, which is the first month of our fourth fiscal quarter. This resulted in significant softness in sales of existing mobile phone models in October as customers delayed their purchases. We estimate the related revenue impact in the quarter was more than $100 million. Second, we felt the impact of the natural disasters in south Texas, Florida, Puerto Rico and Mexico. We estimate the negative impact to our Consolidated comparable sales was 15 to 20 basis points, and that with the related costs, including insurance deductibles, repairs and employee-related pay, our earnings were negatively impacted by approximately $0.03.
Despite these two factors, the results we reported were within the earnings guidance we shared in August. In our most recent Annual Report, we announced the launch of our growth strategy, Best Buy 2020: Building the New Blue. Our Consolidated revenue growth rate was 3.3% for the nine months ended October 28, 2017, compared to the same period in the prior year. We believe that technology innovation is fueling demand and that our strategy is resonating with our customers. While we are investing in key initiatives and capabilities, in the first nine months of fiscal 2018 we increased diluted earnings per share year-over-year and have returned capital to our shareholders through dividends and continued share repurchases.
Looking ahead to Holiday, our teams across all functions are ready and keen to take care of our customers--online, in our stores or in the customer’s home. There are a number of great new products across many categories, including smart home, phones, gaming and tech toys. We believe we have a compelling promotional calendar with strong brand messaging. We are again this year offering free shipping with no minimum purchase. We are also offering a range of new capabilities, including our new in-home advisor program, now available nation-wide, an updated gift center and same-day shipping in 40 cities.
Best Buy 2020: Building the New Blue
We believe there are opportunities in this next chapter to develop deeper and stickier relationships with our customers and to build a strong, vibrant, growing company with significant competitive advantages. We are committed to building a company that can thrive in both today’s and tomorrow’s environment.
As we discussed at our Investor Day in September 2017, Best Buy 2020 is designed to take advantage of key growth opportunities by expanding what we sell and evolving how we sell.
The work we are doing in the smart home space is a great example of how we are expanding what we sell. We plan to build on our position in the smart home market by continuing to expand our curated assortment, demonstrating new technology solutions in a meaningful way and expanding in the solutions and services part of the market. We believe needs-based demonstrations and experiential merchandising are critical, and we have a unique capability to showcase the products, both online and in-store. In this spirit, as we approach Holiday, all of our stores have enhanced smart home departments. In addition, 700 stores have new Alexa and Google experiences developed in collaboration with Amazon and Google, and 450 stores have a Best Buy Smart Home powered by Vivint home automation and security offering. To complement all of this, we have added an incremental 1,500 dedicated smart home store employees to help our customers identify which smart home solution would work best for them.
As we discussed at our Investor Day, as a natural offshoot of our smart home focus, we are testing opportunities to leverage technology to help the rapidly growing segment of aging seniors stay in their homes as long as possible. We are piloting a service called Assured Living, that uses a non-invasive set of smart home connectors and sensors to help adult children remotely check in on the health and safety of their aging parents. Aging parents also benefit from the increased automation in their home, such as connected door locks and smart lighting. While early in our test program, we are piloting the opportunity in the Twin Cities of Minneapolis and St. Paul and in the Denver market.
As it relates to supporting customers, we are also focused on expanding what we sell. We believe that customers’ support needs are not limited to a specific product; the need now is to have all of their technology working together to improve and simplify their lives as promised. Total Tech Support is a new Geek Squad offering that provides support for all of a customer’s technology, no matter where or when they bought it. This support is available to customers 24/7 via online, in-store and phone, and includes significant discounts if in-home services are needed. In September, we expanded the pilot to just over 200 stores across 10 cities in the U.S.
Meanwhile, we are evolving how we sell to focus not only on selling products but also on solving customers’ underlying needs. We see opportunities in our ability to continue to improve the customer experience within and across channels. Almost all of our customers currently use both the store and the online channel, and they have different expectations of what the channels should do for them depending on their mindset. As an example, customers often use the online channel when they are more
certain about their purchase and the store channel when they are less certain. In our online channel, we have made a great deal of progress and have driven innovation. In the third quarter of fiscal 2018, we reported Domestic online sales of $1.1 billion, or 12.7% of our total Domestic revenue, with comparable sales of 22.3% compared to last year. We have also significantly improved the in-store experience, as evidenced by increased NPS scores and our revenue growth.
Going forward, we see continued opportunity in examining how customers use the various channels in their shopping journeys and designing and linking experiences across channels. Ultimately, this makes it easier for customers to start their shopping process online and complete it in the store or vice versa. We are using this approach to more effectively address customer needs in areas where we have significant potential for growth, particularly appliances and mobile phones. In appliances, for example, where a significant portion of sales are the result of broken appliances that need to be replaced, we are making it clear to customers searching online which appliances are available real time at their local store for those customers who would like to replace very quickly. In mobile, we are enhancing the online experience to smooth pre-orders and streamline phone choice, allowing customers to do most of the work online before they pick up their phone in-store for activation. We are also improving the in-store experience to make the various carrier pricing options more clear, reducing the time it takes to activate a phone and using text alerts for clarity on the timing of activation.
We are also focused on building our in-home channel. To that end, in September, we expanded our In-Home Advisor program to all major U.S. markets with 300 advisors. These in-home advisors are professional sales consultants with broad product knowledge who have completed an extensive five week training program. They provide free consultations and serve as the single point of contact for customers covering all technology needs across all vendors. We are pleased with the results of the program so far. In fact, we are planning to expand the number of advisors to 375 by early next year based on initial demand.
To deliver on our strategy, we are investing in a range of enablers. We have built a great set of assets over the past several years. We are expanding on these assets by investing in key capabilities and tools. For example, we are making technology investments in enterprise customer relationship management, a services platform and knowledge management tools. We are investing in our supply chain to build for volume, choice, speed and efficiencies that will help us offset the normal volume-based increases in expense. For example, during the third quarter of fiscal 2018, we opened a new distribution center in Compton, California, just in time for the busy holiday season.
As we have begun work on some of these investments, this is resulting in higher capital and operating expenses this year. This is going to be a multi-year journey, which is why we are committed to creating efficiencies to help fund investments and offset ongoing pressures in the business. After reducing cost by $1.4 billion in the past five years, our current target, established in the second quarter of fiscal 2018, is $600 million in additional annualized cost reductions and gross profit optimization to be completed by the end of fiscal 2021. During the third quarter of fiscal 2018, we achieved $50 million towards our new goal, for a total thus far of $100 million.
In summary, we delivered strong top and bottom line results in the third quarter despite the pressure from the later phone launch and the multiple natural disasters. We believe we have also made significant progress against our Best Buy 2020 strategy to position us well for long-term value creation. Additionally, in the nine months ended October 28, 2017, we returned approximately $1.5 billion in cash to our shareholders through both dividends and stock repurchases. We plan to spend approximately $2.0 billion on share repurchases this fiscal year, ahead of our original expectation of $1.5 billion.
Results of Operations
In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations on a one-month lag. Consistent with such consolidation, the financial and non-f