BEST BUY CO INC 10-Q

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” 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 should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 3, 2024 (including the information presented therein under Risk Factors ), as well as our other reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited. Overview We are driven by our purpose to enrich lives through technology and our vision to personalize and humanize technology solutions for every stage of life . We accomplish this by leveraging our combination of technology and a human touch to meet our customers’ everyday needs, whether they come to us online, visit our stores or invite us into their homes. We have two reportable segments: Domestic and International. The Domestic segment is comprised of our operations in all states, districts and territories of the U.S. and our Best Buy Health business. The International segment is comprised of all our operations in Canada. Our fiscal year ends on the Saturday nearest the end of January. Our business, like that of many retailers, is seasonal. A large proportion of our revenue and earnings is generated in the fiscal fourth quarter, which includes the majority of the holiday shopping season. Comparable Sales Throughout this MD&A, we refer to comparable sales. Comparable sales is a metric used by management to evaluate the performance of our existing stores, websites and call centers by measuring the change in net sales for a particular period over the comparable prior period of equivalent length. Comparable sales includes revenue from stores, websites and call centers operating for at least 14 full months. Revenue from online sales is included in comparable sales and represents sales initiated on a website or app, regardless of whether customers choose to pick up product in store, curbside, at an alternative pick-up location or take delivery direct to their homes. Revenue from acquisitions is included in comparable sales beginning with the first full quarter following the first anniversary of the date of the acquisition. Comparable sales also includes credit card revenue, gift card breakage, commercial sales and sales of merchandise to wholesalers and dealers, as applicable. Revenue from stores closed more than 14 days, including but not limited to relocated, remodeled, expanded and downsized stores, or stores impacted by natural disasters, is excluded from comparable sales until at least 14 full months after reopening. Comparable sales excludes the impact of certain periodic warranty-related profit-share revenue, the effect of fluctuations in foreign currency exchange rates (applicable to our International segment only) and the impact of the 53 rd week (applicable in 53-week fiscal years only). Comparable sales is based on our fiscal calendar and is not adjusted to align calendar weeks. All periods presented apply this methodology consistently. We believe comparable sales is a meaningful supplemental metric for investors to evaluate revenue performance resulting from growth in existing stores, websites and call centers versus the portion resulting from opening new stores or closing existing stores. 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. 15 Table of Contents Non-GAAP Financial Measures This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”), as well as certain adjusted or non-GAAP financial measures, such as non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted earnings per share (“EPS”). We believe that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, provide additional useful information for evaluating current period performance and assessing future performance. For these reasons, internal management reporting, including budgets, forecasts and financial targets used for short-term incentives are based on non-GAAP financial measures. Generally, our non-GAAP financial measures include adjustments for items such as restructuring charges, goodwill and intangible asset impairments, price-fixing settlements, gains and losses on sales of subsidiaries and certain investments, intangible asset amortization, certain acquisition-related costs and the tax effect of all such items. In addition, certain other items may be excluded from non-GAAP financial measures when we believe doing so provides greater clarity to management and our investors. We provide reconciliations of the most comparable financial measures presented in accordance with GAAP to presented non-GAAP financial measures that enable investors to understand the adjustments made in arriving at the non-GAAP financial measures and to evaluate performance using the same metrics as management. These non-GAAP financial measures should be considered in addition to, and not superior to or as a substitute for, GAAP financial measures. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Non-GAAP financial measures may be calculated differently from similarly titled measures used by other companies, thereby limiting their usefulness for comparative purposes. In our discussions of the operating results of our consolidated business and our International segment, we sometimes refer to the impact of changes in foreign currency exchange rates or the impact of foreign currency exchange rate fluctuations, which are references to the differences between the foreign currency exchange rates we use to convert the International segment’s operating results from local currencies into U.S. dollars for reporting purposes. We also may use the term “constant currency,” which represents results adjusted to exclude foreign currency impacts. We calculate those impacts as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period currency exchange rates. We believe the disclosure of revenue changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates. Refer to the Non-GAAP Financial Measures section below for detailed reconciliations of items impacting non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS in the presented periods. Business Strategy Update In the second quarter of fiscal 2025, we continued to manage our profitability through strong execution, while at the same time preparing for future growth. We made progress on our fiscal 2025 priorities, grew our paid membership base, continued to implement previously announced restructuring actions and drove improvements in our prioritized customer experiences. We delivered sales growth in our Domestic tablet and computing categories as our market position, expert sales associates and compelling merchandising allowed us to capitalize on demand driven by our customers’ desire to replace or upgrade their products combined with new innovation. Our enterprise comparable sales declined 2.3% in the second quarter of fiscal 2025, compared to a comparable sales decline of 6.1% in the first quarter of fiscal 2025. We believe the second quarter sequential improvement in comparable sales supports our belief that this will be a year of further stabilization in the consumer electronics industry. To ensure we are in the best position possible to benefit from these industry developments, we are focused on the following four priorities: (1) invigorate and progress targeted customer experiences; (2) drive operational effectiveness and efficiency; (3) continue our disciplined approach to capital allocation; and (4) explore, pilot and drive incremental revenue streams. In the second quarter of fiscal 2025, we completed the roll-out of personalized, relevant and motivational content to our App users to drive higher engagement. Each of our App users’ home screens now look different based on their personal preferences and a number of factors like current location, shopping history, membership status and what we know they care about the most based on their activity. In our stores, we are making enhancements to every store in the chain in some fashion throughout the second and third quarters, improving both our merchandising and ease of shopping for customers. This includes working with many of our vendors to implement new and enhanced in-store experiences across the store. To continue to elevate the expert service we provide customers, we have added fully dedicated labor expertise to our in-store computing and have begun the process of doing so in our home theater and major appliances departments in hundreds of stores. These changes are in addition to the actions taken throughout the past year to streamline our leadership model, allowing us to invest in more customer-facing sales associate hours in our stores. While we elevate our customer experiences, we are simultaneously executing on our longstanding commitment to drive operational effectiveness and efficiencies and identify cost reductions, as this is paramount to help offset inflationary pressures in our business and fund investment capacity. For example, in fiscal 2025 we are focused on driving further efficiencies across our forward and reverse supply chain, our Geek Squad repair operations and our customer care experience. We will continue to lean heavily on analytics and technology to achieve these efficiencies. 16 Table of Contents Our third key priority for the year is to continue our disciplined approach to capital allocation. This includes striking the appropriate balance of prioritizing areas that best position us for the future, while prudently dealing with the near-term uncertainty in the consumer electronics industry. Our fourth key priority for fiscal 2025 is longer-term in focus. We will continue to explore opportunities that leverage our scale and capabilities to drive incremental profitable revenue streams over time. We are the largest consumer electronics specialty retailer with what we believe to be a unique range of product assortment and expert services to help humanize tech, especially new innovation, for every stage of our customers’ lives. We intend to strengthen our position in key categories like computing, home theater and major appliances through our differentiated experiences, pointed marketing spend and competitive pricing. Results of Operations Consolidated Results Selected consolidated financial data was as follows ($ in millions, except per share amounts): Three Months Ended Six Months Ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 Revenue $ 9,288 $ 9,583 $ 18,135 $ 19,050 Revenue % change (3.1) % (7.2) % (4.8) % (9.2) % Comparable sales % change (2.3) % (6.2) % (4.2) % (8.2) % Gross profit $ 2,186 $ 2,220 $ 4,250 $ 4,370 Gross profit as a % of revenue (1) 23.5 % 23.2 % 23.4 % 22.9 % Selling, general and administrative expense ("SG&A") $ 1,810 $ 1,879 $ 3,547 $ 3,727 SG&A as a % of revenue (1) 19.5 % 19.6 % 19.6 % 19.6 % Restructuring charges $ (7) $ (7) $ 8 $ (16) Operating income $ 383 $ 348 $ 695 $ 659 Operating income as a % of revenue 4.1 % 3.6 % 3.8 % 3.5 % Net earnings $ 291 $ 274 $ 537 $ 518 Diluted earnings per share $ 1.34 $ 1.25 $ 2.47 $ 2.36 (1) Because retailers vary in how they record costs of operating their supply chain between cost of sales and SG&A, our gross profit rate and SG&A rate may not be comparable to other retailers’ corresponding rates. For additional information regarding costs classified in cost of sales and SG&A, refer to Note 1, Summary of Significant Accounting Policies , of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024. In the second quarter and first six months of fiscal 2025, we generated $9.3 billion and $18.1 billion in revenue, respectively, and our comparable sales sequentially improved from the first quarter of fiscal 2025 to a decline of 2.3% and a decline of 4.2%, respectively, as we continued to operate in a challenged consumer electronics industry. Despite comparable sales declines in the second quarter of fiscal 2025 in categories such as appliances, home theater and gaming, we delivered comparable sales growth in our tablet and computing categories, driven by customers’ desire to replace or upgrade their products combined with new product innovation. Revenue, gross profit rate, SG&A and operating income rate changes in the second quarter and first six months of fiscal 2025 were primarily driven by our Domestic segment. For further discussion of our Domestic and International segments, see Segment Performance Summary , below. Store Summary Stores open by reportable segment were as follows: August 3, 2024 July 29, 2023 Best Buy 890 907 Outlet Centers 26 20 Pacific Sales 20 20 Yardbird 23 22 Total Domestic stores 959 969 Canada Best Buy stores 129 128 Canada Best Buy Mobile stand-alone stores 32 32 Total International stores 161 160 Total stores 1,120 1,129 We continuously monitor store performance as part of a market-driven, omnichannel strategy. As we approach the expiration of leases, we evaluate various options for each location, including whether a store should remain open. We currently expect to close a total of approximately 10 to 15 Domestic Best Buy stores in fiscal 2025. 17 Table of Contents Income Tax Expense Income tax expense increased in the second quarter of fiscal 2025, primarily due to an increase in pre-tax earnings. Our effective tax rate (“ETR”) decreased to 25.8% in the second quarter of fiscal 2025 compared to 26.1% in the second quarter of fiscal 2024, primarily due to increased tax benefits from green energy incentives. Income tax expense increased in the first six months of fiscal 2025, primarily due to an increase in pre-tax earnings. Our ETR increased to 25.3% in the first six months of fiscal 2025 compared to 24.8% in the first six months of fiscal 2024, primarily due to reduced tax benefits from the resolution of tax matters and stock-based compensation, partially offset by increased tax benefits from green energy incentives. Our tax provision for interim periods is determined using an estimate of our annual ETR, adjusted for discrete items, if any, that are taken into account in the relevant period. We update our estimate of the annual ETR each quarter and we make a cumulative adjustment if our estimated tax rate changes. Our quarterly tax provision and our quarterly estimate of our annual ETR are subject to variation due to several factors, including our ability to accurately forecast our pre-tax and taxable income and loss by jurisdiction, tax audit developments, recognition of excess tax benefits or deficiencies related to stock-based compensation, foreign currency gains (losses), changes in laws or regulations, and expenses or losses for which tax benefits are not recognized. Our ETR can be more or less volatile based on the amount of pre-tax earnings. For example, the impact of discrete items and non-deductible losses on our ETR is greater when our pre-tax earnings are lower. Segment Performance Summary Domestic Segment Selected financial data for the Domestic segment was as follows ($ in millions): Three Months Ended Six Months Ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 Revenue $ 8,623 $ 8,890 $ 16,826 $ 17,691 Revenue % change (3.0) % (7.1) % (4.9) % (9.1) % Comparable sales % change (1) (2.3) % (6.3) % (4.3) % (8.4) % Gross profit $ 2,027 $ 2,052 $ 3,944 $ 4,044 Gross profit as a % of revenue 23.5 % 23.1 % 23.4 % 22.9 % SG&A $ 1,668 $ 1,730 $ 3,266 $ 3,440 SG&A as a % of revenue 19.3 % 19.5 % 19.4 % 19.4 % Restructuring charges $ (8) $ (7) $ 8 $ (15) Operating income $ 367 $ 329 $ 670 $ 619 Operating income as a % of revenue 4.3 % 3.7 % 4.0 % 3.5 % Selected Online Revenue Data Total online revenue $ 2,718 $ 2,763 $ 5,243 $ 5,451 Online revenue as a % of total segment revenue 31.5 % 31.1 % 31.2 % 30.8 % Comparable online sales % change (1) (1.6) % (7.1) % (3.8) % (9.7) % (1) Comparable online sales are included in the comparable sales calculation. Domestic revenue decreased in the second quarter of fiscal 2025, primarily driven by comparable sales declines in the appliances, home theater and gaming categories, partially offset by comparable sales growth in the tablets, computing and services categories. In the first six months of fiscal 2025, Domestic revenue decreased, primarily driven by comparable sales declines in the appliances, home theater and gaming categories, partially offset by comparable sales growth in the services, tablets and computing categories. Online revenue of $2.7 billion and $5.2 billion in the second quarter and first six months of fiscal 2025 decreased 1.6% and 3.8%, respectively, on a comparable basis. Domestic segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows: Revenue Mix Comparable Sales Three Months Ended Three Months Ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 Computing and Mobile Phones 44 % 41 % 3.9 % (6.4) % Consumer Electronics 29 % 30 % (6.2) % (5.7) % Appliances 13 % 16 % (14.9) % (16.1) % Entertainment 6 % 6 % (7.4) % 9.0 % Services 7 % 6 % 8.5 % 7.6 % Other 1 % 1 % 14.4 % 2.4 % Total 100 % 100 % (2.3) % (6.3) % 18 Table of Contents Notable comparable sales changes by revenue category were as follows:  Computing and Mobile Phones: The 3.9% comparable sales growth was driven primarily by tablets and computing, partially offset by a comparable sales decline in mobile phones.  Consumer Electronics: The 6.2% comparable sales decline was driven primarily by home theater.  Appliances: The 14.9% comparable sales decline was driven primarily by large appliances.  Entertainment: The 7.4% comparable sales decline was driven primarily by gaming.  Services: The 8.5% comparable sales growth was driven primarily by delivery and installation services. Domestic gross profit rate increased in the second quarter and first six months of fiscal 2025, primarily due to improved financial performance from our services category, including our membership offerings, which was partially offset by lower product margin rates and lower profit-sharing revenue from our private label and co-branded credit card arrangement. Domestic SG&A decreased in the second quarter of fiscal 2025, primarily due to lower employee compensation expense and lower expenses across multiple other areas, including reduced vehicle rental costs and credit card processing fees . These decreases were partially offset by higher advertising expense. Domestic SG&A decreased in the first six months of fiscal 2025, primarily due to lower employee compensation expense, which was primarily store payroll, and lower expenses across multiple other areas, including reduced vehicle rental costs . These decreases were partially offset by higher advertising and technology expense. Domestic restructuring charges in the second quarter and first six months of fiscal 2025 were primarily related to employee termination benefits and subsequent adjustments from higher-than-expected employee retention associated with an enterprise-wide restructuring initiative that commenced in the fourth quarter of fiscal 2024. Refer to Note 2, Restructuring , of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for additional information. Domestic operating income rate increased in the second quarter and first six months of fiscal 2025, primarily due to favorability in the gross profit rate. International Segment Selected financial data for the International segment was as follows ($ in millions): Three Months Ended Six Months Ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 Revenue $ 665 $ 693 $ 1,309 $ 1,359 Revenue % change (4.0) % (8.8) % (3.7) % (10.2) % Comparable sales % change (1.8) % (5.4) % (2.6) % (5.5) % Gross profit $ 159 $ 168 $ 306 $ 326 Gross profit as a % of revenue 23.9 % 24.2 % 23.4 % 24.0 % SG&A $ 142 $ 149 $ 281 $ 287 SG&A as a % of revenue 21.4 % 21.5 % 21.5 % 21.1 % Operating income $ 16 $ 19 $ 25 $ 40 Operating income as a % of revenue 2.4 % 2.7 % 1.9 % 2.9 % International revenue decreased in the second quarter of fiscal 2025, primarily driven by the negative impact of foreign exchange rates and comparable sales declines in gaming and computing, partially offset by comparable sales growth in mobile phones. International revenue decreased in the first six months of fiscal 2025, primarily driven by comparable sales declines in gaming and computing, as well as the negative impact of foreign exchange rates. These drivers were partially offset by comparable sales growth in mobile phones. International segment revenue mix percentages and comparable sales percentage changes by revenue category were as follows: Revenue Mix Comparable Sales Three Months Ended Three Months Ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 Computing and Mobile Phones 46 % 45 % 1.7 % (2.4) % Consumer Electronics 28 % 28 % (2.1) % (10.4) % Appliances 13 % 13 % (3.9) % (6.1) % Entertainment 6 % 7 % (20.8) % 2.5 % Services 6 % 5 % 5.9 % 4.6 % Other 1 % 2 % (20.1) % (38.1) % Total 100 % 100 % (1.8) % (5.4) % 19 Table of Contents Notable comparable sales changes by revenue category were as follows:  Computing and Mobile Phones: The 1.7% comparable sales growth was driven primarily by mobile phones, partially offset by a comparable sales decline in computing.  Consumer Electronics: The 2.1% comparable sales decline was driven primarily by home automation.  Appliances: The 3.9% comparable sales decline was driven primarily by large appliances.  Entertainment: The 20.8% comparable sales decline was driven primarily by gaming, partially offset by comparable sales growth in virtual reality.  Services: The 5.9% comparable sales growth was driven primarily by growth in our membership programs. International gross profit rate decreased in the second quarter and first six months of fiscal 2025, primarily driven by lower product margin rates and higher supply chain costs, which were partially offset by growth in the higher margin services category. International SG&A decreased in the second quarter of fiscal 2025, primarily driven by the favorable impact of foreign exchange rates and lower advertising expense, which was partially offset by expenses associated with new Best Buy Express locations as a result of our previously announced collaboration with Bell Canada. International SG&A decreased in the first six months of fiscal 2025, primarily driven by the favorable impact of foreign exchange rates, lower advertising expense and lower employee compensation expense, which was primarily incentive compensation. These drivers were partially offset by expenses associated with new Best Buy Express locations and higher technology expense. International operating income rate decreased in the second quarter of fiscal 2025, primarily due to an unfavorable gross profit rate. International operating income rate decreased in the first six months of fiscal 2025, primarily due to an unfavorable gross profit rate and decreased leverage from lower sales volume on our fixed expenses, which resulted in an unfavorable SG&A rate. Consolidated Non-GAAP Financial Measures Reconciliations of operating income, effective tax rate and diluted EPS (GAAP financial measures) to non-GAAP operating income, non-GAAP effective tax rate and non-GAAP diluted EPS (non-GAAP financial measures) were as follows ($ in millions, except per share amounts): Three Months Ended Six Months Ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 Operating income $ 383 $ 348 $ 695 $ 659 % of revenue 4.1 % 3.6 % 3.8 % 3.5 % Intangible asset amortization (1) 5 21 11 41 Restructuring charges (2) (7) (7) 8 (16) Non-GAAP operating income $ 381 $ 362 $ 714 $ 684 % of revenue 4.1 % 3.8 % 3.9 % 3.6 % Effective tax rate 25.8 % 26.1 % 25.3 % 24.8 % Intangible asset amortization (1) - % (0.4) % - % 0.4 % Restructuring charges (2) - % 0.4 % - % (0.1) % Loss on investments - % 0.5 % - % - % Non-GAAP effective tax rate 25.8 % 26.6 % 25.3 % 25.1 % Diluted EPS $ 1.34 $ 1.25 $ 2.47 $ 2.36 Intangible asset amortization (1) 0.03 0.10 0.05 0.18 Restructuring charges (2) (0.03) (0.03) 0.04 (0.07) Loss on investments - - - 0.02 Gain on sale of subsidiary, net (3) - (0.10) - (0.10) Income tax impact of non-GAAP adjustments (4) - - (0.02) (0.02) Non-GAAP diluted EPS $ 1.34 $ 1.22 $ 2.54 $ 2.37 For additional information regarding the nature of charges discussed below, refer to Note 1, Basis of Presentation , Note 2, Restructuring, and Note 3, Goodwill and Intangible Assets , of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q. (1) Represents the non-cash amortization of definite-lived intangible assets associated with acquisitions, including customer relationships, tradenames and developed technology assets. (2) Represents charges related to employee termination benefits and subsequent adjustments from higher-than-expected employee retention associated with enterprise-wide restructuring initiatives. (3) Represents the gain on sale of a Mexico subsidiary subsequent to our exit from operations in Mexico. (4) The non-GAAP adjustments primarily relate to the U.S. and Mexico. As such, the forecasted annual income tax charge on the U.S. non-GAAP adjustments is calculated using the statutory tax rate of 24.5%. There is no forecasted annual income tax charge for Mexico non-GAAP items, as there is no forecasted annual tax expense on the income in the calculation of GAAP income tax expense. 20 Table of Contents Non-GAAP operating income rate increased in the second quarter and first six months of fiscal 2025, primarily due to a favorable gross profit rate in our Domestic segment. Non-GAAP effective tax rate decreased in the second quarter of fiscal 2025, primarily due to increased tax benefits from green energy incentives. Non-GAAP effective tax rate increased in the first six months of fiscal 2025, primarily due to reduced tax benefits from the resolution of tax matters and stock-based compensation, partially offset by increased tax benefits from green energy incentives. Non-GAAP diluted EPS increased in the second quarter and first six months of fiscal 2025, primarily due to the increase in non-GAAP operating income. Liquidity and Capital Resources We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including the level of investment required to support our business strategies, the performance of our business, capital expenditures, dividends, credit facilities, short-term borrowing arrangements and working capital management. We modify our approach to managing these variables as changes in our operating environment arise. For example, capital expenditures and share repurchases are a component of our cash flow and capital management strategy, which, to a large extent, we can adjust in response to economic and other changes in our business environment. Cash and cash equivalents were as follows ($ in millions): August 3, 2024 February 3, 2024 July 29, 2023 Cash and cash equivalents $ 1,387 $ 1,447 $ 1,093 The decrease in cash and cash equivalents from February 3, 2024, was primarily due to dividend payments and capital expenditures, partially offset by positive cash flows from operations, primarily driven by earnings. The increase in cash and cash equivalents from July 29, 2023, was primarily due to positive cash flows from operations, primarily driven by earnings, partially offset by dividend payments, capital expenditures and share repurchases . Cash Flows Cash flows were as follows ($ in millions): Six Months Ended August 3, 2024 July 29, 2023 Total cash provided by (used in): Operating activities $ 817 $ 181 Investing activities (352) (381) Financing activities (557) (560) Effect of exchange rate changes on cash and cash equivalents (3) (2) Decrease in cash, cash equivalents and restricted cash $ (95) $ (762) Operating Activities The increase in cash provided by operating activities in the first six months of fiscal 2025 was primarily driven by the timing and volume of inventory purchases and payments, partially offset by the timing of vendor funding receivables. Investing Activities Cash used in investing activities in the first six months of fiscal 2025 decreased, primarily driven by lower capital spending. We currently expect capital expenditures to approximate $750 million in fiscal 2025 compared to $795 million in fiscal 2024. Financing Activities Cash used in financing activities in the first six months of fiscal 2025 remained relatively consistent with the comparable prior-year period. 21 Table of Contents Sources of Liquidity Funds generated by operating activities, available cash and cash equivalents, our credit facilities, other debt arrangements and trade payables are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to fund operations and anticipated capital expenditures, share repurchases, dividends and strategic initiatives, including business combinations. However, in the event our liquidity is insufficient, we may be required to limit our spending. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms. We have a $1.25 billion five-year senior unsecured revolving credit facility agreement (the “Five-Year Facility Agreement”) with a syndicate of banks that expires in April 2028. There were no borrowings outstanding under the Five-Year Facility Agreement as of August 3, 2024, February 3, 2024, or July 29, 2023 . Restricted Cash Our liquidity is also affected by restricted cash balances that are primarily restricted to cover product protection plans provided under our membership offerings and self-insurance liabilities. Restricted cash, which is included in Other current assets on our Condensed Consolidated Balance Sheets, was $311 million, $346 million and $398 million at August 3, 2024, February 3, 2024, and July 29, 2023, respectively. The decrease in restricted cash from February 3, 2024, and July 29, 2023, was primarily due to releases of product protection reserves based on claims and purchasing behaviors of customers participating in our membership offerings. Debt and Capital As of August 3, 2024, we had $500 million of principal amount of notes due October 1, 2028, and $650 million of principal amount of notes due October 1, 2030. Refer to Note 6, Debt , of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q, and Note 8, Debt , of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024, for additional information about our outstanding debt. Share Repurchases and Dividends We repurchase our common stock and pay dividends pursuant to programs approved by our Board of Directors (“Board”). The payment of cash dividends is also subject to customary legal and contractual restrictions. Our long-term capital allocation strategy is to first fund operations and investments in growth and then return excess cash over time to shareholders through dividends and share repurchases while maintaining investment-grade credit metrics. Our share repurchase plans are evaluated on an ongoing basis, considering factors such as our financial condition and cash flows, our economic outlook, the impact of tax laws, our liquidity needs, and the health and stability of global credit markets. The timing and amount of future repurchases may vary depending on such factors. On February 28, 2022, our Board approved a $5.0 billion share repurchase program. There is no expiration date governing the period over which we can repurchase shares under this authorization. Share repurchase and dividend activity were as follows ($ and shares in millions, except per share amounts): Three Months Ended Six Months Ended August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023 Total cost of shares repurchased $ 98 $ 69 $ 150 $ 150 Average price per share $ 82.57 $ 76.88 $ 80.86 $ 76.48 Total number of shares repurchased 1.1 0.9 1.8 2.0 Regular quarterly cash dividend per share $ 0.94 $ 0.92 $ 1.88 $ 1.84 Cash dividends declared and paid $ 203 $ 200 $ 405 $ 402 The total cost of shares repurchased increased in the second quarter of fiscal 2025, primarily due to an increase in the volume of repurchases. The total cost of shares repurchased remained consistent in the first six months of fiscal 2025, as the decrease in the volume of repurchases was offset by the increase in the average price per share. Cash dividends declared and paid increased during the second quarter and first six months of fiscal 2025, due to the increase in the regular quarterly cash dividend per share, partially offset by fewer shares outstanding. Between the end of the second quarter of fiscal 2025 on August 3, 2024, and September 4, 2024, we repurchased an incremental 0.4 million shares of our common stock at a cost of $39 million. We currently expect total share repurchases of approximately $500 million in fiscal 2025. 22 Table of Contents Off-Balance-Sheet Arrangements and Contractual Obligations Our liquidity is not dependent on the use of off-balance-sheet financing arrangements other than in connection with our $1.25 billion in undrawn capacity on our Five-Year Facility Agreement as of August 3, 2024, which, if drawn upon, would be included in either short-term or long-term debt on our Condensed Consolidated Balance Sheets. There has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 2024. See our Annual Report on Form 10-K for the fiscal year ended February 3, 2024, for additional information regarding our off-balance-sheet arrangements and contractual obligations. Significant Accounting Policies and Estimates We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies , of the Notes to Consolidated Financial Statements, and our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024. There have been no significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2024. New or Recently Issued Accounting Pronouncements For a description of applicable new or recently issued accounting pronouncements, including our assessment of the impact on our financial statements, see Note 1, Basis of Presentation , of the Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q. Safe Harbor Statement Under the Private Securities Litigation Reform Act Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements and may be identified by the use of words such as “anticipate,” “appear,” “approximate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “foresee,” “guidance,” “intend,” “may,” “might,” “outlook,” “plan,” “possible,” “project,” “seek,” “should,” “would,” and other words and terms of similar meaning or the negatives thereof. Such statements reflect our current views and estimates with respect to future market conditions, company performance and financial results, operational investments, business prospects, our operating model, new strategies and growth initiatives, the competitive environment, consumer behavior and other events. These statements involve a number of judgments and are subject to certain risks and uncertainties, many of which are outside the control of the Company, that could cause actual results to differ materially from the potential results discussed in such forward-looking statements. Readers should review Item 1A, Risk Factors , of our most recent Annual Report on Form 10-K, and any updated information in subsequent Quarterly Reports on Form 10-Q, for a description of important factors that could cause our actual results to differ materially from those contemplated by the forward-looking statements made in this Quarterly Report on Form 10-Q. Among the factors that could cause actual results and outcomes to differ materially from those contained in such forward-looking statements are the following: macroeconomic pressures in the markets in which we operate (including but not limited to recession, inflation rates, fluctuations in foreign currency exchange rates, limitations on a government’s ability to borrow and/or spend capital, fluctuations in housing prices, energy markets, jobless rates and effects related to the conflicts in Eastern Europe and the Middle East or other geopolitical events); catastrophic events, health crises and pandemics; susceptibility of the products we sell to technological advancements, product life cycle fluctuations and changes in consumer preferences; competition (including from multi-channel retailers, e-commerce business, technology service providers, traditional store-based retailers, vendors and mobile network carriers and in the provision of delivery speed and options); our ability to attract and retain qualified employees; changes in market compensation rates; our expansion into health and new products, services and technologies; our focus on services as a strategic priority; our reliance on key vendors and mobile network carriers (including product availability); our ability to maintain positive brand perception and recognition; our ability to effectively manage strategic ventures, alliances or acquisitions; our ability to effectively manage our real estate portfolio; inability of vendors or service providers to perform components of our supply chain (impacting our stores or other aspects of our operations) and other various functions of our business; risks arising from and potentially unique to our exclusive brands products; risks associated with vendors that source products outside of the U.S.; our reliance on our information technology systems, internet and telecommunications access and capabilities; our ability to prevent or effectively respond to a cyber-attack, privacy or security breach; product safety and quality concerns; changes to labor or employment laws or regulations; risks arising from statutory, regulatory and legal developments (including statutes and/or regulations related to tax or privacy); evolving corporate governance and public disclosure regulations and expectations (including, but not limited to, cybersecurity and environmental, social and governance matters); risks arising from our international activities (including those related to the conflicts in Eastern Europe and the Middle East or fluctuations in foreign currency exchange rates) and those of our vendors; failure to effectively manage our costs; our dependence on cash flows and net earnings generated during the fourth fiscal quarter; pricing investments and promotional activity; economic or regulatory developments that might affect our ability to provide attractive promotional financing; constraints in the capital markets; changes to our vendor credit terms; changes in our credit ratings; and failure to meet financial-performance guidance or other forward-looking statements. We caution that the foregoing list of important factors is not complete. Any forward-looking statements speak only as of the date they are made and we assume no obligation to update any forward-looking statement that we may make. 23 Table of Contents