NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of The Home Depot, Inc. and its subsidiaries (the "Company," "Home Depot," "we," "our" or "us") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2019 Form 10-K.
Impact of COVID-19
The outbreak of the novel coronavirus COVID-19, which was declared a global pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S. and global economies and has impacted our supply chain, operations, and customer demand. The pandemic could further affect our operations and the operations of our suppliers and vendors as a result of shelter-in-place orders, facility closures, travel and logistics restrictions, and other factors.
During the first quarter of 2020, we expanded our associate benefits in response to COVID-19 to provide additional paid time off, weekly bonuses, overtime pay and other benefits. These expanded benefits resulted in $848 million of expense included in SG&A in the Consolidated Statements of Earnings for the three months ended May 3, 2020 and $517 million in accrued salaries and related expenses in the Consolidated Balance Sheets as of May 3, 2020.
We assess the recoverability of goodwill and other indefinite-lived intangibles in the third quarter of each year, or more often if indicators warrant. During the first quarter of 2020, we performed an additional assessment to determine if there were any indicators of impairment as a result of the operating conditions resulting from COVID-19. We concluded that while there have been events and circumstances in the macro-environment that have impacted us, we have not experienced any entity-specific indicators of impairment for goodwill and other indefinite-lived intangibles that would require an impairment test.
We evaluate our long-lived assets each quarter for indicators of potential impairment. Indicators of impairment include current period losses combined with a history of losses, our decision to relocate or close a store or other location before the end of its previously estimated useful life, or when changes in other circumstances indicate the carrying amount of an asset may not be recoverable. We performed our quarterly assessment of long-lived assets and did not record any material long-lived asset impairments.
Also in response to COVID-19, we took steps to further solidify our liquidity position by expanding our commercial paper program and corresponding revolving credit facility capacity, as well as issuing senior notes in March 2020. See Note 4 for further discussion.
Reclassifications
Effective February 3, 2020, we reclassified cash flows relating to book overdrafts from financing to operating activities for all periods presented in the Consolidated Statements of Cash Flows. The amounts of these reclassifications were not material.
There were no significant changes to our significant accounting policies as disclosed in the 2019 Form 10-K.
Recently Adopted Accounting Pronouncements
ASU No. 2018-15. In August 2018, the FASB issued ASU No. 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,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. On February 3, 2020, we adopted ASU No. 2018-15 with no material impact to our consolidated financial position, results of operations or cash flows.
ASU No. 2017-04. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for
impairment. The amendments in ASU No. 2017-04 require goodwill impairment to be measured using the difference between the carrying amount and the fair value of the reporting unit and require the loss recognized to not exceed the total amount of goodwill allocated to that reporting unit. On February 3, 2020, we adopted ASU No. 2017-04 with no material impact to our consolidated financial position, results of operations or cash flows.
ASU No. 2016-13. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost. The model replaces the probable, incurred loss model for those assets and broadens the information an entity must consider in developing its expected credit loss estimate for assets measured at amortized cost. On February 3, 2020, we adopted ASU No. 2016-13 with no material impact to our consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements
ASU 2020-04. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting,” which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. ASU No. 2020-04 is effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020. We will adopt this standard when LIBOR is discontinued. We are evaluating the effect it will have on our consolidated financial statements and related disclosures and do not anticipate a material impact.
Recent accounting pronouncements pending adoption not discussed above or in the 2019 Form 10-K are either not applicable or will not have or are not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.
2.NET SALES
No sales to an individual customer accounted for more than 10% of net sales during the three months ended May 3, 2020 and May 5, 2019. Net sales, classified by geography, follow:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
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|
|
in millions
|
|
|
|
|
May 3,
2020
|
|
May 5,
2019
|
Net sales – in the U.S.
|
|
|
|
|
$
|
26,418
|
|
|
$
|
24,453
|
|
Net sales – outside the U.S.
|
|
|
|
|
1,842
|
|
|
1,928
|
|
Net sales
|
|
|
|
|
$
|
28,260
|
|
|
$
|
26,381
|
|
Net sales by products and services follow:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
in millions
|
|
|
|
|
May 3,
2020
|
|
May 5,
2019
|
Net sales – products
|
|
|
|
|
$
|
27,305
|
|
|
$
|
25,232
|
|
Net sales – services
|
|
|
|
|
955
|
|
|
1,149
|
|
Net sales
|
|
|
|
|
$
|
28,260
|
|
|
$
|
26,381
|
|
Major product lines and the related merchandising departments (and related services) follow:
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|
|
|
|
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|
Major Product Line
|
|
Merchandising Departments
|
Building Materials
|
|
Building Materials, Electrical/Lighting, Lumber, Millwork, and Plumbing
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|
Décor
|
|
Appliances, Décor/Storage, Flooring, Kitchen and Bath, and Paint
|
|
Hardlines
|
|
Hardware, Indoor Garden, Outdoor Garden, and Tools
|
|
Net sales by major product lines (and related services) follow:
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|
|
|
|
|
|
|
|
|
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|
Three Months Ended
|
|
|
in millions
|
May 3,
2020
|
|
May 5,
2019
|
Building Materials
|
$
|
9,816
|
|
|
$
|
9,404
|
|
Décor
|
9,306
|
|
|
8,745
|
|
Hardlines
|
9,138
|
|
|
8,232
|
|
Net sales
|
$
|
28,260
|
|
|
$
|
26,381
|
|
3.PROPERTY AND LEASES
Net Property and Equipment
Net property and equipment includes accumulated depreciation and amortization of $22.4 billion as of May 3, 2020 and $22.1 billion as of February 2, 2020.
Leases
We lease certain retail locations, office space, warehouse and distribution space, equipment, and vehicles. We consider various factors such as market conditions and the terms of any renewal options that may exist to determine whether we will renew or replace the lease. A substantial majority of our leases have remaining lease terms of one to 20 years, typically with the option to extend the leases for up to five years. Some of our leases may include the option to terminate in less than five years. In the event we are reasonably certain to exercise the option to extend a lease, we will include the extended terms in the related lease assets and liabilities. Real estate taxes, insurance, maintenance, and operating expenses applicable to the leased property are generally our obligations under the lease agreements.
Certain of our property lease agreements contain residual value guarantees which generally become due at the expiration of the lease term and are estimated as the greater of the fair value of the leased asset or a set minimum value. These residual value guarantees are primarily related to leases of facilities whose construction was funded by industrial revenue bonds.
Our lease agreements do not contain any material restrictive covenants. Further, certain lease agreements include rental payments based on an index or rate and others include rental payments based on a percentage of sales.
The Consolidated Balance Sheet location of assets and liabilities related to operating and finance leases follow:
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|
|
|
|
in millions
|
Consolidated Balance Sheet Caption
|
May 3,
2020
|
|
February 2,
2020
|
Assets:
|
|
|
|
|
Operating lease assets
|
Operating lease right-of-use assets
|
$
|
5,634
|
|
|
$
|
5,595
|
|
Finance lease assets (1)
|
Net property and equipment
|
1,191
|
|
|
934
|
|
Total lease assets
|
|
$
|
6,825
|
|
|
$
|
6,529
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Current:
|
|
|
|
|
Operating lease liabilities
|
Current operating lease liabilities
|
$
|
853
|
|
|
$
|
828
|
|
Finance lease liabilities
|
Current installments of long-term debt
|
99
|
|
|
84
|
|
Long-term:
|
|
|
|
|
Operating lease liabilities
|
Long-term operating lease liabilities
|
5,075
|
|
|
5,066
|
|
Finance lease liabilities
|
Long-term debt, excluding current installments
|
1,326
|
|
|
1,081
|
|
Total lease liabilities
|
|
$
|
7,353
|
|
|
$
|
7,059
|
|
—————
(1) Finance lease assets are recorded net of accumulated amortization of $670 million as of May 3, 2020 and $644 million as of February 2, 2020.
The components of lease cost follow:
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|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
in millions
|
Consolidated Statement of Earnings Caption
|
May 3,
2020
|
|
May 5,
2019
|
|
|
|
|
Operating lease cost
|
Selling, general and administrative
|
$
|
195
|
|
|
$
|
210
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization of leased assets
|
Depreciation and amortization
|
31
|
|
|
21
|
|
|
|
|
|
Interest on lease liabilities
|
Interest expense
|
26
|
|
|
23
|
|
|
|
|
|
Short-term lease cost
|
Selling, general and administrative
|
18
|
|
|
25
|
|
|
|
|
|
Variable lease cost
|
Selling, general and administrative
|
61
|
|
|
58
|
|
|
|
|
|
Sublease income
|
Selling, general and administrative
|
(3)
|
|
|
(3)
|
|
|
|
|
|
Net lease cost
|
|
$
|
328
|
|
|
$
|
334
|
|
|
|
|
|
When the rate implicit in the contract is not readily determinable, we use a secured incremental borrowing rate as the discount rate for the present value of lease payments. We determine a secured rate on a quarterly basis and update the weighted average discount rate accordingly. Lease terms and discount rates follow:
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|
|
|
|
|
|
|
|
|
|
|
|
May 3,
2020
|
|
February 2,
2020
|
Weighted Average Remaining Lease Term (Years):
|
|
|
|
Operating leases
|
10
|
|
10
|
Finance leases
|
13
|
|
12
|
|
|
|
|
Weighted Average Discount Rate:
|
|
|
|
Operating leases
|
3.0
|
%
|
|
3.1
|
%
|
Finance leases
|
8.9
|
%
|
|
10.4
|
%
|
The approximate future minimum lease payments under operating and finance leases as of May 3, 2020 follow:
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|
|
|
|
|
|
|
|
|
|
|
in millions
|
Operating
Leases
|
|
Finance
Leases
|
Fiscal 2020
|
$
|
728
|
|
|
$
|
145
|
|
Fiscal 2021
|
901
|
|
|
194
|
|
Fiscal 2022
|
795
|
|
|
193
|
|
Fiscal 2023
|
698
|
|
|
187
|
|
Fiscal 2024
|
601
|
|
|
170
|
|
Thereafter
|
2,964
|
|
|
1,189
|
|
Total lease payments
|
6,687
|
|
|
2,078
|
|
Less imputed interest
|
759
|
|
|
653
|
|
Present value of lease liabilities
|
$
|
5,928
|
|
|
$
|
1,425
|
|
—————
Note: Amounts presented do not include payments relating to immaterial leases excluded from the Consolidated Balance Sheets. Additionally, future minimum lease payments do not include approximately $1.4 billion of leases (undiscounted basis) that have not yet commenced. These leases will commence between fiscal 2020 and fiscal 2021 with lease terms of one to 20 years.
Other lease information follows:
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
in millions
|
May 3,
2020
|
|
May 5,
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows - operating leases
|
$
|
253
|
|
|
$
|
249
|
|
Operating cash flows - finance leases
|
26
|
|
|
23
|
|
Financing cash flows - finance leases
|
27
|
|
|
14
|
|
Lease assets obtained in exchange for new operating lease liabilities
|
294
|
|
|
166
|
|
Lease assets obtained in exchange for new finance lease liabilities
|
306
|
|
|
1
|
|
4.DEBT AND DERIVATIVE INSTRUMENTS
Short-Term Debt
In March 2020, we expanded our commercial paper programs from $3.0 billion to $6.0 billion. All of our short-term borrowings in the first three months of fiscal 2020 were under these commercial paper programs, and the maximum amount outstanding at any time was $1.0 billion. In connection with these programs, we have back-up credit facilities with a consortium of banks for borrowings up to $6.5 billion, which consist of (1) a 364-day $3.5 billion credit facility that was entered into in March 2020 in connection with the expanded commercial paper program and is scheduled to expire in March 2021, (2) a five-year $2.0 billion credit facility scheduled to expire in December 2022, and (3) a 364-day $1.0 billion credit facility scheduled to expire in December 2020.
Long-Term Debt
March 2020 Issuance. In March 2020, we issued four tranches of senior notes.
•The first tranche consisted of $750 million of 2.50% senior notes due April 15, 2027 (the “2027 notes”) at a discount of $4 million. Interest on the 2027 notes is due semi-annually on April 15 and October 15 of each year, beginning October 15, 2020.
•The second tranche consisted of $1.5 billion of 2.70% senior notes due April 15, 2030 (the “2030 notes”) at a discount of $8 million. Interest on the 2030 notes is due semi-annually on April 15 and October 15 of each year, beginning October 15, 2020.
•The third tranche consisted of $1.25 billion of 3.30% senior notes due April 15, 2040 (the "2040 notes") at a discount of $11 million. Interest on the 2040 notes is due semi-annually on April 15 and October 15 of each year, beginning October 15, 2020.
•The fourth tranche consisted of $1.5 billion of 3.35% senior notes due April 15, 2050 (the "2050 notes") at a discount of $17 million (together with the 2027 notes, the 2030 notes and the 2040 notes, the "March 2020 issuance"). Interest on the 2050 notes is due semi-annually on April 15 and October 15 of each year, beginning October 15, 2020.
•Issuance costs totaled $36 million. The net proceeds of the March 2020 issuance will be used for general corporate purposes, including the repayment of outstanding senior notes maturing in June and September 2020.
Redemption. The 2027 notes, 2030 notes, 2040 notes and 2050 notes may be redeemed by us at any time, in whole or in part, at the redemption price plus accrued interest up to the redemption date. The redemption price is equal to the greater of (1) 100% of the principal amount of the notes to be redeemed, or (2) the sum of the present values of the remaining scheduled payments of principal and interest to the Par Call Date, as defined in the respective notes. Additionally, if a Change in Control Triggering Event, as defined in the notes, occurs, holders of all notes have the right to require us to redeem those notes at 101% of the aggregate principal amount of the notes plus accrued interest up to the redemption date. We are generally not limited under the indentures governing the notes in our ability to incur additional indebtedness or required to maintain financial ratios or specified levels of net worth or liquidity. The indentures governing the notes contain various customary covenants; however, none are expected to impact our liquidity or capital resources.
Derivative Instruments
We use derivative and nonderivative financial instruments in the management of our exposure to fluctuations in foreign currency exchange rates and interest rates on certain long-term debt.
We had outstanding interest rate swap agreements with combined notional amounts of $2.1 billion at May 3, 2020 and February 2, 2020. These agreements were accounted for as fair value hedges that swap fixed for variable rate interest to hedge changes in the fair values of certain senior notes. The fair values of these agreements were $244 million at May 3, 2020 and $120 million at February 2, 2020.
We had outstanding foreign currency forward contracts during the quarter, accounted for as cash flow hedges, which hedge the variability of forecasted cash flows associated with certain payments made in our foreign operations. At May 3, 2020 and February 2, 2020, the notional amounts and the fair values of these agreements were not material.
We had outstanding foreign currency forward contracts accounted for as net investment hedges, with a combined notional amount of $1.2 billion at February 2, 2020. These agreements hedged against foreign currency exposure on our net investment in certain subsidiaries. At February 2, 2020, the fair values of these agreements were not material. These foreign currency forward contracts settled during the first quarter of fiscal 2020, resulting in an immaterial gain.
In addition to our forward contracts, we also hedge a portion of our foreign currency risk by designating nonderivative foreign-currency-denominated intercompany debt as hedges of our net investment in certain of our foreign operations. We had outstanding intercompany debt with a combined notional value of $1.2 billion as of May 3, 2020 that was designated as hedges of our net investment in our foreign operations. During the quarter, approximately $75 million of foreign currency gains associated with this debt were recorded as foreign currency translation adjustments in accumulated other comprehensive income (loss). As of February 2, 2020, the notional value of our nonderivative hedges and related foreign currency translation adjustments were immaterial.
We generally enter into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, we enter into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain derivative instruments exceeds or falls below contractually established thresholds. Derivative assets and derivative liabilities are presented at their gross fair values in the Consolidated Balance Sheets. As of May 3, 2020, the cash collateral received by the Company related to derivative instruments under our collateral security arrangements was $157 million, which was recorded in other current liabilities in the Consolidated Balance Sheets. We did not receive any cash collateral as of February 2, 2020 or have any cash collateral posted with counterparties as of May 3, 2020 or February 2, 2020.
5.STOCKHOLDERS' EQUITY
Stock Rollforward
A reconciliation of the number of shares of our common stock and dividends per share follows:
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|
|
|
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|
|
|
|
|
|
|
|
|
shares in millions
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
May 3,
2020
|
|
May 5,
2019
|
Common stock:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
|
|
1,786
|
|
|
1,782
|
|
Shares issued under employee stock plans
|
|
|
|
|
2
|
|
|
2
|
|
Balance at end of period
|
|
|
|
|
1,788
|
|
|
1,784
|
|
Treasury stock:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
|
|
(709)
|
|
|
(677)
|
|
Repurchases of common stock
|
|
|
|
|
(3)
|
|
|
(6)
|
|
Balance at end of period
|
|
|
|
|
(712)
|
|
|
(683)
|
|
Shares outstanding at end of period
|
|
|
|
|
1,076
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
|
|
|
$
|
1.50
|
|
|
$
|
1.36
|
|
6.FAIR VALUE MEASUREMENTS
The fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, rather than the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities that are measured at fair value on a recurring basis follow:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at May 3, 2020 Using
|
|
|
|
|
|
Fair Value at February 2, 2020 Using
|
|
|
|
|
in millions
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Derivative agreements – assets
|
$
|
—
|
|
|
$
|
246
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
133
|
|
|
$
|
—
|
|
Derivative agreements – liabilities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
246
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
133
|
|
|
$
|
—
|
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The carrying amounts of cash and cash equivalents, receivables, short-term debt, and accounts payable approximate fair value due to the short-term maturities of these financial instruments.
Long-lived assets and other intangible assets are subject to nonrecurring fair value measurement for the assessment of impairment or as the result of business acquisitions. We did not have any material assets or liabilities that were measured at fair value on a nonrecurring basis as of May 3, 2020 or February 2, 2020, respectively.
The aggregate fair values and carrying values of our senior notes follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 3,
2020
|
|
|
|
February 2,
2020
|
|
|
in millions
|
Fair Value
(Level 1)
|
|
Carrying
Value
|
|
Fair Value
(Level 1)
|
|
Carrying
Value
|
Senior notes
|
$
|
40,219
|
|
|
$
|
34,397
|
|
|
$
|
34,102
|
|
|
$
|
29,344
|
|
7. WEIGHTED AVERAGE COMMON SHARES
The reconciliation of our basic to diluted weighted average common shares follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
in millions
|
|
|
|
|
May 3,
2020
|
|
May 5,
2019
|
Basic weighted average common shares
|
|
|
|
|
1,073
|
|
|
1,101
|
|
Effect of potentially dilutive securities
|
|
|
|
|
4
|
|
|
5
|
|
Diluted weighted average common shares
|
|
|
|
|
1,077
|
|
|
1,106
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded from diluted weighted average common shares
|
|
|
|
|
—
|
|
|
—
|
|
8. COMMITMENTS AND CONTINGENCIES
We are involved in litigation arising in the normal course of business. In management’s opinion, any such litigation is not expected to have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.