10-Q 1 bby-20190504x10q.htm 10-Q 10Q - Q1 FY20 V3



 

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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



For the quarterly period ended May 4, 2019

OR



 

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



 Image - Image1.jpeg

BEST BUY CO., INC.

(Exact name of registrant as specified in its charter)



 

 

Minnesota

 

41-0907483

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)



 

 

7601 Penn Avenue South

 

 

Richfield, Minnesota

 

55423

(Address of principal executive offices)

 

(Zip Code)



(612) 291-1000

(Registrant’s telephone number, including area code)

N/A

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

Securities registered pursuant to Section 12(b) of the Act:



 

 



 

 

Title of each class

Trading Symbol

Name of exchange on which registered

Common Stock, $0.10 par value per share

BBY

New York Stock Exchange



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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  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. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



 

 

 

Large accelerated filer

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 Act).  Yes  No 

The registrant had 267,043,142 shares of common stock outstanding as of June 5, 2019. 

1


 

BEST BUY CO., INC.

FORM 10-Q FOR THE QUARTER ENDED MAY 4, 2019

TABLE OF CONTENTS



 

 

 

Part I — Financial Information

3

Item 1.

 

Financial Statements

3



a)

Condensed Consolidated Balance Sheets as of May 4, 2019, February 2, 2019, and May 5, 2018

3



b)

Condensed Consolidated Statements of Earnings for the three months ended May 4, 2019, and May 5, 2018

4



c)

Condensed Consolidated Statements of Comprehensive Income for the three months ended May 4, 2019, and May 5, 2018

5



d)

Condensed Consolidated Statements of Cash Flows for the three months ended May 4, 2019, and May 5, 2018

6



e)

Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended May 4, 2019, and May 5, 2018

7



f)

Notes to Condensed Consolidated Financial Statements

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

 

Controls and Procedures

32

Part II — Other Information

33

Item 1.

 

Legal Proceedings

33

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 6.

 

Exhibits

34

Signatures

35



 

2


 



PART I — FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

Condensed Consolidated Balance Sheets

$ in millions, except per share amounts (unaudited)



 

 

 

 

 

 

 

 

 

 

 



May 4, 2019

 

February 2, 2019

 

May 5, 2018

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

1,561 

 

 

$

1,980 

 

 

$

1,848 

 

Short-term investments

 

 -

 

 

 

 -

 

 

 

785 

 

Receivables, net

 

833 

 

 

 

1,015 

 

 

 

860 

 

Merchandise inventories

 

5,195 

 

 

 

5,409 

 

 

 

4,964 

 

Other current assets

 

425 

 

 

 

466 

 

 

 

473 

 

Total current assets

 

8,014 

 

 

 

8,870 

 

 

 

8,930 

 

Property and equipment, net

 

2,334 

 

 

 

2,510 

 

 

 

2,385 

 

Operating lease assets

 

2,708 

 

 

 

 -

 

 

 

 -

 

Goodwill

 

915 

 

 

 

915 

 

 

 

425 

 

Other assets

 

579 

 

 

 

606 

 

 

 

342 

 

Total assets

$

14,550 

 

 

$

12,901 

 

 

$

12,082 

 



 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

4,718 

 

 

$

5,257 

 

 

$

4,619 

 

Unredeemed gift card liabilities

 

265 

 

 

 

290 

 

 

 

285 

 

Deferred revenue

 

409 

 

 

 

446 

 

 

 

371 

 

Accrued compensation and related expenses

 

275 

 

 

 

482 

 

 

 

296 

 

Accrued liabilities

 

851 

 

 

 

982 

 

 

 

934 

 

Current portion of operating lease liabilities

 

639 

 

 

 

 -

 

 

 

 -

 

Current portion of long-term debt

 

14 

 

 

 

56 

 

 

 

550 

 

Total current liabilities

 

7,171 

 

 

 

7,513 

 

 

 

7,055 

 

Long-term liabilities

 

659 

 

 

 

750 

 

 

 

815 

 

Long-term operating lease liabilities

 

2,173 

 

 

 

 -

 

 

 

 -

 

Long-term debt

 

1,193 

 

 

 

1,332 

 

 

 

792 

 

Contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

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 - 267 million, 266 million, and 281 million shares, respectively

 

27 

 

 

 

27 

 

 

 

28 

 

Retained earnings

 

3,038 

 

 

 

2,985 

 

 

 

3,082 

 

Accumulated other comprehensive income

 

289 

 

 

 

294 

 

 

 

310 

 

Total equity

 

3,354 

 

 

 

3,306 

 

 

 

3,420 

 

Total liabilities and equity

$

14,550 

 

 

$

12,901 

 

 

$

12,082 

 



NOTE: The Consolidated Balance Sheet as of February 2, 2019, has been condensed from the audited consolidated financial statements.



See Notes to Condensed Consolidated Financial Statements. 



3


 

Condensed Consolidated Statements of Earnings

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







 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended



May 4, 2019

 

 

May 5, 2018

Revenue

$

9,142 

 

 

$

9,109 

 

Cost of goods sold

 

6,973 

 

 

 

6,984 

 

Gross profit

 

2,169 

 

 

 

2,125 

 

Selling, general and administrative expenses

 

1,835 

 

 

 

1,830 

 

Restructuring charges

 

 -

 

 

 

30 

 

Operating income

 

334 

 

 

 

265 

 

Other income (expense):

 

 

 

 

 

 

 

Investment income and other

 

14 

 

 

 

11 

 

Interest expense

 

(18)

 

 

 

(19)

 

Earnings before income tax expense

 

330 

 

 

 

257 

 

Income tax expense

 

65 

 

 

 

49 

 

Net earnings

$

265 

 

 

$

208 

 



 

 

 

 

 

 

 

Basic earnings per share

$

0.99 

 

 

$

0.74 

 

Diluted earnings per share

$

0.98 

 

 

$

0.72 

 



 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

Basic

 

267.6 

 

 

 

282.6 

 

Diluted

 

271.5 

 

 

 

288.3 

 



See Notes to Condensed Consolidated Financial Statements.

 

4


 



Condensed Consolidated Statements of Comprehensive Income

$ in millions (unaudited)





 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended



May 4, 2019

 

May 5, 2018

Net earnings

$

265 

 

 

$

208 

 

Foreign currency translation adjustments

 

(5)

 

 

 

(4)

 

Comprehensive income

$

260 

 

 

$

204 

 



See Notes to Condensed Consolidated Financial Statements.

 

5


 

Condensed Consolidated Statements of Cash Flows

$ in millions (unaudited)



 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended



May 4, 2019

 

May 5, 2018

Operating activities

 

 

 

 

 

 

 

Net earnings

$

265 

 

 

$

208 

 

Adjustments to reconcile net earnings to total cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

200 

 

 

 

176 

 

Restructuring charges

 

 -

 

 

 

30 

 

Stock-based compensation

 

36 

 

 

 

32 

 

Deferred income taxes

 

13 

 

 

 

 

Other, net

 

 

 

 

(2)

 

Changes in operating assets and liabilities, net of acquired assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

182 

 

 

 

189 

 

Merchandise inventories

 

207 

 

 

 

243 

 

Other assets

 

(14)

 

 

 

(13)

 

Accounts payable

 

(519)

 

 

 

(214)

 

Other liabilities

 

(379)

 

 

 

(506)

 

Income taxes

 

10 

 

 

 

52 

 

Total cash provided by operating activities

 

 

 

 

204 

 



 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Additions to property and equipment

 

(193)

 

 

 

(181)

 

Sales of investments

 

 -

 

 

 

1,245 

 

Other, net

 

 

 

 

 

Total cash provided by (used in) investing activities

 

(192)

 

 

 

1,073 

 



 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Repurchase of common stock

 

(98)

 

 

 

(400)

 

Issuance of common stock

 

11 

 

 

 

24 

 

Dividends paid

 

(134)

 

 

 

(128)

 

Repayments of debt

 

(4)

 

 

 

(11)

 

Other, net

 

(1)

 

 

 

(1)

 

Total cash used in financing activities

 

(226)

 

 

 

(516)

 

Effect of exchange rate changes on cash

 

(1)

 

 

 

(12)

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

(417)

 

 

 

749 

 

Cash, cash equivalents and restricted cash at beginning of period

 

2,184 

 

 

 

1,300 

 

Cash, cash equivalents and restricted cash at end of period

$

1,767 

 

 

$

2,049 

 



See Notes to Condensed Consolidated Financial Statements.

6


 

Condensed Consolidated Statements of Changes in Shareholders' Equity

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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Common
Shares

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated Other
Comprehensive
Income (Loss)

 

Total

Balances at February 2, 2019

 

266 

 

 

$

27 

 

 

$

 -

 

 

$

2,985 

 

 

$

294 

 

 

$

3,306 

 

Adoption of ASU 2016-02

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

(19)

 

 

 

 -

 

 

 

(19)

 

Net earnings, three months ended May 4, 2019

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

265 

 

 

 

 -

 

 

 

265 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

(5)

 

 

 

(5)

 

Stock-based compensation

 

 -

 

 

 

 -

 

 

 

36 

 

 

 

 -

 

 

 

 -

 

 

 

36 

 

Issuance of common stock

 

 

 

 

 -

 

 

 

11 

 

 

 

 -

 

 

 

 -

 

 

 

11 

 

Common stock dividends, $0.50 per share

 

 -

 

 

 

 -

 

 

 

 

 

 

(136)

 

 

 

 -

 

 

 

(134)

 

Repurchase of common stock

 

(1)

 

 

 

 -

 

 

 

(49)

 

 

 

(57)

 

 

 

 -

 

 

 

(106)

 

Balances at May 4, 2019

 

267 

 

 

$

27 

 

 

$

 -

 

 

$

3,038 

 

 

$

289 

 

 

$

3,354 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at February 3, 2018

 

283 

 

 

$

28 

 

 

$

 -

 

 

$

3,270 

 

 

$

314 

 

 

$

3,612 

 

Adoption of ASU 2014-09

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

73 

 

 

 

 -

 

 

 

73 

 

Net earnings, three months ended May 5, 2018

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

208 

 

 

 

 -

 

 

 

208 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

(4)

 

 

 

(4)

 

Stock-based compensation

 

 -

 

 

 

 -

 

 

 

32 

 

 

 

 -

 

 

 

 -

 

 

 

32 

 

Issuance of common stock

 

 

 

 

 -

 

 

 

24 

 

 

 

 -

 

 

 

 -

 

 

 

24 

 

Common stock dividends, $0.45 per share

 

 -

 

 

 

 -

 

 

 

 

 

 

(128)

 

 

 

 -

 

 

 

(126)

 

Repurchase of common stock

 

(5)

 

 

 

 -

 

 

 

(58)

 

 

 

(341)

 

 

 

 -

 

 

 

(399)

 

Balances at May 5, 2018

 

281 

 

 

$

28 

 

 

$

 -

 

 

$

3,082 

 

 

$

310 

 

 

$

3,420 

 



See Notes to Condensed Consolidated Financial Statements. 

7


 

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.   Basis of Presentation



Unless the context otherwise requires, the use of the terms “Best Buy,” “we,” “us” and “our” in these Notes to Condensed Consolidated Financial Statements refers to Best Buy Co., Inc. and, as applicable, 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 large proportion of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Mexico. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. The interim financial statements and the related notes included 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 February 2, 2019. The first three months of fiscal 2020 and fiscal 2019 included 13 weeks.



In order to align our fiscal reporting periods and comply with statutory filing requirements, we consolidate the financial results of our Mexico operations on a one-month lag. Our policy is to accelerate recording the effect of events occurring in the lag period that significantly affect our condensed consolidated financial statements. No such events were identified for the reported periods.



In preparing the accompanying condensed consolidated financial statements, we evaluated the period from May 4, 2019, through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. Other

than as disclosed in Note 14, Subsequent Event, no such events were identified for the reported periods.



Unadopted Accounting Pronouncements



In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). We do not believe the new guidance, which is effective for fiscal years beginning after December 15, 2019, will have a material impact on our consolidated financial statements.



In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements for fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of adopting the updated provisions.



In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance requires companies to apply the internal-use software guidance in Accounting Standards Codification (“ASC”) 350-40 to implementation costs incurred in a hosting arrangement that is a service contract to determine whether to capitalize certain implementation costs or expense them as incurred. We are currently evaluating the impact of adopting the updated provisions, which is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.



Adopted Accounting Pronouncements



In February 2016, the FASB issued ASU 2016-02, Leases, which requires the recognition of operating lease assets and lease liabilities on the balance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new standard, disclosures are required to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.



In the first quarter of fiscal 2020, we adopted ASU 2016-02 using the “Comparatives Under 840 Option” approach to transition. Under this method, financial information related to periods prior to adoption will be as originally reported under the previous standard – ASC 840, Leases. The effects of adopting the new standard (ASC 842, Leases) in fiscal 2020 were recognized as a

8


 

cumulative-effect adjustment to retained earnings as of the beginning of the fiscal first quarter. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification as operating or capital leases. We also elected to combine lease and non-lease components and to exclude short-term leases from our consolidated balance sheets. We did not elect the hindsight practical expedient in determining the lease term for existing leases as of February 3, 2019.



The most significant impact of adoption was the recognition of operating lease assets and operating lease liabilities of $2.7 billion and $2.8 billion, respectively, while our accounting for existing capital leases (now referred to as finance leases) remained substantially unchanged. The cumulative impact of these changes decreased retained earnings by $19 million. We expect the impact of adoption to be immaterial to our consolidated statements of earnings and consolidated statements of cash flows on an ongoing basis. As part of our adoption, we also modified our control procedures and processes, none of which materially affected our internal control over financial reporting. See Note 3, Leases, for additional information regarding our accounting policy for leases and additional disclosures.



The cumulative effect of the changes made to our Condensed Consolidated Balance Sheets on February 3, 2019, for the adoption of this standard was as follows ($ in millions):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



February 2, 2019
As Reported

 

ASU 2016-02
Adjustment on
February 3, 2019

 

February 3, 2019
Adjusted

Assets

 

 

 

 

 

 

 

 

 

 

 

Other current assets

$

466 

 

 

$

(65)

(a)

 

$

401 

 

Net property and equipment

 

2,510 

 

 

 

(173)

(b)

 

 

2,337 

 

Operating lease assets

 

 -

 

 

 

2,736 

(c)

 

 

2,736 

 

Other assets

 

606 

 

 

 

(d)

 

 

610 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

982 

 

 

 

(28)

(e)

 

 

954 

 

Current portion of operating lease liabilities

 

 -

 

 

 

712 

(f)

 

 

712 

 

Current portion of long-term debt

 

56 

 

 

 

(43)

(b)

 

 

13 

 

Long-term liabilities

 

750 

 

 

 

(115)

(e)

 

 

635 

 

Long-term operating lease liabilities

 

 -

 

 

 

2,135 

(f)

 

 

2,135 

 

Long-term debt

 

1,332 

 

 

 

(140)

(b)

 

 

1,192 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

2,985 

 

 

 

(19)

(g)

 

 

2,966 

 

(a)Represents the reclassification of prepaid rent and leasehold acquisition costs to Operating lease assets.

(b)Represents the derecognition of financing obligations and reclassification to Operating lease assets.

(c)Represents the capitalization of operating lease assets and the reclassification of prepaid rent and leasehold acquisition costs, offset by the reclassification of straight-line rent accruals, tenant improvement allowances and vacant space reserves.

(d)Represents the deferred tax impact of the on-adoption adjustments.

(e)Represents the reclassification of straight-line rent accruals, tenant improvement allowances and vacant space reserves to Operating lease assets.

(f)Represents the recognition of operating lease liabilities.

(g)Represents the net-of-tax retained earnings impact of impairment charges and the derecognition of financing obligations.



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 Sheets to the total shown within the Condensed Consolidated Statements of Cash Flows as of May 4, 2019, February 2, 2019, and May 5, 2018 ($ in millions):







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



May 4, 2019

 

February 2, 2019

 

May 5, 2018

Cash and cash equivalents

$

1,561 

 

 

$

1,980 

 

 

$

1,848 

 

Restricted cash included in Other current assets

 

206 

 

 

 

204 

 

 

 

201 

 

Total cash, cash equivalents and restricted cash

$

1,767 

 

 

$

2,184 

 

 

$

2,049 

 



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

 

9


 

2.   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 as of May 4, 2019, February 2, 2019, and May 5, 2018, by level within the fair value hierarchy as determined by the valuation techniques we used to determine the fair value ($ in millions):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair Value at



Fair Value
Hierarchy

 

May 4, 2019

 

February 2, 2019

 

May 5, 2018

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

Level 1

 

 

$

18 

 

 

$

98 

 

 

$

19 

 

Time deposits

 

Level 2

 

 

 

60 

 

 

 

300 

 

 

 

200 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Level 2

 

 

 

 -

 

 

 

 -

 

 

 

100 

 

Time deposits

 

Level 2

 

 

 

 -

 

 

 

 -

 

 

 

685 

 

Other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

Level 1

 

 

 

93 

 

 

 

82 

 

 

 

58 

 

Time deposits

 

Level 2

 

 

 

102 

 

 

 

101 

 

 

 

101 

 

Foreign currency derivative instruments

 

Level 2

 

 

 

 -

 

 

 

 -

 

 

 

 

Interest rate swap derivative instruments

 

Level 2

 

 

 

 -

 

 

 

 -

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities that fund deferred compensation

 

Level 1

 

 

 

46 

 

 

 

44 

 

 

 

99 

 

Interest rate swap derivative instruments

 

Level 2

 

 

 

28 

 

 

 

26 

 

 

 

 -

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency derivative instruments

 

Level 2

 

 

 

 -

 

 

 

 -

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivative instruments

 

Level 2

 

 

 

 

 

 

 

 

 

15 

 



10


 

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, 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 corporate-owned life insurance, the value of which is based on select mutual fund performance. 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 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 (“SG&A”) expenses on our Condensed Consolidated Statements of Earnings for non-restructuring charges.



The following table summarizes the fair value remeasurements of property and equipment impairments recorded during the three months ended May 4, 2019, and May 5, 2018 ($ in millions):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Impairments

 

 

 

 

 

 

 

 



Three Months Ended

 

Remaining Net Carrying Value(2)



May 4, 2019

 

May 5, 2018

 

May 4, 2019

 

May 5, 2018

Property and equipment (non-restructuring)(1)

$

 

 

$

 

 

$

 

 

$

 -

 

(1)

Balances exclude immaterial amounts associated with operating lease assets.

(2)

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 May 4, 2019, and May 5, 2018.



All of the fair value remeasurements included in the table above were based on significant unobservable inputs (Level 3). Fixed asset fair values were primarily 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.



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

11


 

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.

 

3.   Leases



The majority of our lease obligations are real estate operating leases from which we conduct the majority of our retail and distribution operations. Our finance leases are primarily equipment-related. For any lease with an initial term in excess of 12 months, the related lease assets and liabilities are recognized on the Condensed Consolidated Balance Sheets as either operating or finance leases at the inception of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components. For lease agreements entered into or reassessed after the adoption of ASC 842, Leases, we have elected to combine lease and non-lease components for all classes of assets. Leases with an initial term of 12 months or less are not recorded on our Condensed Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.

Operating lease assets represent the right to use an underlying asset for the lease term, and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. We use a collateralized incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments. Our operating leases also typically require payment of real estate taxes, common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. In instances where they are fixed, they are included due to our election to combine lease and non-lease components. Operating lease assets also include prepaid lease payments and initial direct costs, and are reduced by lease incentives. Our lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term. 



Supplemental balance sheet information as of May 4, 2019, related to our leases was as follows ($ in millions):





 

 

 

 

 



 

 

 

 

 



Balance Sheet Location

 

May 4, 2019

Assets

 

 

 

 

 

Operating leases

Operating lease assets

 

$

2,708 

 

Finance leases

Property and equipment, net(1)

 

 

41 

 

Total lease assets

 

 

$

2,749 

 

Liabilities

 

 

 

 

 

Current:

 

 

 

 

 

Operating leases

Current portion of operating lease liabilities

 

$

639 

 

Finance leases

Current portion of long-term debt

 

 

14 

 

Non-current:

 

 

 

 

 

Operating leases

Long-term operating lease liabilities

 

 

2,173 

 

Finance leases

Long-term debt

 

 

27 

 

Total lease liabilities

 

 

$

2,853 

 



(1)

Finance leases are recorded net of accumulated depreciation of $41 million as of May 4, 2019.



The components of our total lease cost for the three months ended May 4, 2019, were as follows ($ in millions):





 

 

 

 

 



 

 

 



Statement of Earnings Location

 

Three Months Ended
May 4, 2019

Operating lease cost(1)

Cost of goods sold and SG&A(2)

 

$

195 

 

Finance lease cost:

 

 

 

 

 

Depreciation of lease assets

Cost of goods sold and SG&A(2)

 

 

 

Interest on lease liabilities

Interest expense

 

 

 

Variable lease cost

Cost of goods sold and SG&A(2)

 

 

67 

 

Sublease income

SG&A

 

 

(4)

 

Total lease cost

 

 

$

262 

 



(1)

Includes short-term leases, which are immaterial.

(2)

Supply chain-related amounts are included in Cost of goods sold.



12


 

Other information related to our leases for the three months ended May 4, 2019, was as follows ($ in millions):





 

 

 

 

 



 

 

 

 

 



 

 

Three Months Ended
May 4, 2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash flows from operating leases

 

$

201 

 

Operating cash flows from finance leases

 

 

 

Financing cash flows from finance leases

 

 

 

Lease assets obtained in exchange for new lease liabilities:

 

 

 

 

Operating leases

 

 

 

147 

 

Finance leases

 

 

 

 



 

 

 

 

 

Weighted average remaining lease term:

 

 

 

 

Operating leases

 

 

 

5.4 years

 

Finance leases

 

 

 

5.3 years

 

Weighted average discount rate:

 

 

 

 

 

Operating leases

 

 

 

3.4 

%

Finance leases

 

 

 

4.4 

%



Future lease payments under our non-cancellable leases as of May 4, 2019, were as follows ($ in millions):







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Operating Leases(1)

 

Finance Leases(1)

Remainder of fiscal 2020

 

 

 

 

$

539 

 

 

$

11 

 

Fiscal 2021

 

 

 

 

 

708 

 

 

 

13 

 

Fiscal 2022

 

 

 

 

 

570 

 

 

 

 

Fiscal 2023

 

 

 

 

 

418 

 

 

 

 

Fiscal 2024

 

 

 

 

 

293 

 

 

 

 

Fiscal 2025

 

 

 

 

 

187 

 

 

 

 

Thereafter

 

 

 

 

 

378 

 

 

 

 

Total future undiscounted lease payments

 

 

 

 

 

3,093 

 

 

 

46 

 

Less imputed interest

 

 

 

 

 

(281)

 

 

 

(5)

 

Total reported lease liability

 

 

 

 

$

2,812 

 

 

$

41 

 



(1)

Lease payments exclude $51 million of legally binding fixed costs for leases signed but not yet commenced, primarily related to operating leases.



In accordance with the prior guidance, ASC 840, Leases, our leases were previously designated as either capital, financing or operating. Previously designated capital leases are now considered finance leases under the new guidance, ASC 842, Leases, while our previously existing financing leases have been derecognized and reclassified as operating leases. The designation of operating leases remains substantially unchanged under the new guidance. The future minimum lease payments by fiscal year as determined prior to the adoption of ASC 842, Leases, under our previously designated capital, financing and operating leases (not including contingent rent) as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, were as follows ($ in millions):



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Capital Leases

 

Financing Leases

 

Operating Leases(1)

Fiscal 2020

$

14 

 

 

$

48 

 

 

$

700 

 

Fiscal 2021

 

11 

 

 

 

42 

 

 

 

648 

 

Fiscal 2022

 

 

 

 

35 

 

 

 

513 

 

Fiscal 2023

 

 

 

 

24 

 

 

 

371 

 

Fiscal 2024

 

 

 

 

16 

 

 

 

253 

 

Thereafter

 

 

 

 

40 

 

 

 

476 

 

Total minimum lease payments

 

45 

 

 

 

205 

 

 

$

2,961 

 

Less amount representing interest

 

(6)

 

 

 

(24)

 

 

 

 

 

Present value of minimum lease payments

 

39 

 

 

 

181 

 

 

 

 

 

Less current maturities

 

(12)