<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended November 27, 1993
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
BEST BUY CO., INC.
(Exact Name of Registrant as Specified in Charter)
Minnesota 41-0907483
(State of Incorporation) (IRS Employer Identification Number)
4400 West 78th Street 55435
Bloomington, Minnesota (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 612/896-2300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
At November 27, 1993, there were 20,854,005 shares of common stock, $.10 par
value, outstanding.
<PAGE>
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 27, 1993
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements:
a. Balance sheets as of November 27, 1993,
February 27, 1993, and November 28, 1992 3-4
b. Statements of operations for the three and
nine months ended November 27, 1993, 5
and November 28, 1992
c. Statement of changes in shareholders' equity
for the nine months ended November 27, 1993 6
d. Statements of cash flows for the nine months
ended November 27, 1993, and November 28, 1992 7
e. Notes to financial statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
BEST BUY CO., INC.
BALANCE SHEETS
ASSETS
(unaudited)
<TABLE>
<CAPTION>
November 27, February 27, November 28,
1993 1993 1992
---------------- ------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 74,977,000 $ 7,138,000 $ 13,852,000
Receivables 86,196,000 37,968,000 73,978,000
Merchandise inventories 823,875,000 249,991,000 411,120,000
Deferred income taxes 10,368,000 9,497,000 7,928,000
Prepaid expenses 3,044,000 332,000 4,780,000
-------------- ------------- -------------
Total current assets 998,460,000 304,926,000 511,658,000
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 28,093,000 45,676,000 41,051,000
Property under capital leases 15,478,000 14,163,000 5,675,000
Leasehold improvements 49,637,000 33,222,000 23,814,000
Furniture, fixtures, and equipment 115,356,000 76,806,000 86,881,000
-------------- ------------- -------------
208,564,000 169,867,000 157,421,000
Less accumulated depreciation and 56,017,000 43,425,000 39,100,000
amortization -------------- ------------- -------------
Property and equipment, net 152,547,000 126,442,000 118,321,000
OTHER ASSETS:
Deferred income taxes 6,882,000 6,284,000 5,607,000
Other assets 10,863,000 1,490,000 1,144,000
-------------- ------------- -------------
Total other assets 17,745,000 7,774,000 6,751,000
-------------- ------------- -------------
TOTAL ASSETS $1,168,752,000 $439,142,000 $636,730,000
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See notes to financial statements.
3
<PAGE>
BEST BUY CO., INC.
BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
November 27, February 27, November 28,
1993 1993 1992
-------------- ------------- -------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Note payable, bank $ 3,700,000 $ 46,800,000
Obligations under financing
arrangements $ 36,324,000 4,871,000 58,490,000
Accounts payable 521,027,000 118,338,000 245,001,000
Accrued salaries and related expenses 17,304,000 12,350,000 11,705,000
Other accrued liabilities 34,062,000 18,221,000 23,268,000
Deferred revenue and warranty
obligations--short term 17,891,000 16,240,000 18,101,000
Accrued income tax 5,918,000 6,545,000 1,795,000
Current portion of long term debt 7,302,000 5,740,000 4,330,000
-------------- ------------ ------------
Total current liabilities 639,828,000 186,005,000 409,490,000
DEFERRED REVENUE AND WARRANTY
OBLIGATIONS-long term 26,796,000 22,724,000 18,261,000
LONG TERM DEBT, less current portion 212,504,000 48,130,000 40,553,000
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value;
authorized 400,000 shares; none
issued
Common stock, $.10 par value;
authorized 30,000,000 shares;
issued and outstanding 20,854,000,
17,242,000, and 16,997,000 shares,
respectively 2,085,000 1,149,000 1,133,000
Additional paid-in capital 223,710,000 137,151,000 134,086,000
Retained earnings 63,829,000 43,983,000 33,207,000
-------------- ------------ ------------
Total shareholders' equity 289,624,000 182,283,000 168,426,000
-------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,168,752,000 $439,142,000 $636,730,000
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
See notes to financial statements.
4
<PAGE>
BEST BUY CO., INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- --------------------------------
November 27, November 28, November 27, November 28,
1993 1992 1993 1992
-------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES $808,476,000 $474,442,000 $1,813,375,000 $1,006,353,000
COST OF GOODS SOLD 687,368,000 396,640,000 1,523,593,000 825,078,000
------------ ------------ -------------- --------------
GROSS PROFIT 121,108,000 77,802,000 289,782,000 181,275,000
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 100,259,000 67,977,000 252,169,000 164,262,000
------------ ------------ -------------- --------------
INCOME FROM OPERATIONS 20,849,000 9,825,000 37,613,000 17,013,000
INTEREST EXPENSE, NET 2,560,000 1,409,000 4,509,000 2,372,000
------------ ------------ -------------- --------------
INCOME BEFORE INCOME
TAXES 18,289,000 8,416,000 33,104,000 14,641,000
INCOME TAXES 7,128,000 3,196,000 12,833,000 5,562,000
------------ ------------ -------------- --------------
EARNINGS BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 11,161,000 5,220,000 20,271,000 9,079,000
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
FOR INCOME TAXES (425,000)
------------ ------------ -------------- --------------
NET EARNINGS $ 11,161,000 $ 5,220,000 $ 19,846,000 $ 9,079,000
------------ ------------ -------------- --------------
------------ ------------ -------------- --------------
EARNINGS PER COMMON
SHARE BEFORE
ACCOUNTING CHANGE $ .52 $ .30 $ 1.00 $ .53
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
FOR INCOME TAXES (.02)
------------ ------------ -------------- --------------
NET EARNINGS PER
SHARE $ .52 $ .30 $ .98 $ .53
------------ ------------ -------------- --------------
------------ ------------ -------------- --------------
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 21,558,000 17,368,000 20,353,000 17,253,000
------------ ------------ -------------- --------------
------------ ------------ -------------- --------------
</TABLE>
See notes to financial statements.
5
<PAGE>
BEST BUY CO., INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED NOVEMBER 27, 1993
(unaudited)
<TABLE>
<CAPTION>
Additional
Common paid in Retained
stock capital earnings
---------- ------------ -----------
<S> <C> <C> <C>
BALANCE, February 27, 1993 $1,149,000 $137,151,000 $43,983,000
STOCK OPTIONS EXERCISED 8,000 1,961,000
SALE OF COMMON STOCK 234,000 85,294,000
ADJUSTMENT TO REFLECT 3-FOR-2
STOCK SPLIT 694,000 (696,000)
NET EARNINGS, nine months ended
November 27, 1993 19,846,000
----------- ------------- -----------
BALANCE, November 27, 1993 $2,085,000 $223,710,000 $63,829,000
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
See notes to financial statements.
6
<PAGE>
BEST BUY CO., INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
November 27, November 28,
1993 1992
------------- ------------
<S> <C> <C>
OPERATIONS:
Net earnings $ 19,846,000 $ 9,079,000
Charges to earnings not affecting cash:
Depreciation and amortization 15,055,000 9,982,000
Loss on disposal of property and equipment 909,000 169,000
Cumulative effect of change in accounting 425,000
----------- ------------
36,235,000 19,230,000
Changes in operating assets and liabilities:
Receivables (48,228,000) (57,997,000)
Merchandise inventories (573,884,000) (275,282,000)
Deferred income taxes and prepaid expenses (4,606,000) (4,265,000)
Accounts payable 402,689,000 176,331,000
Accrued salaries and related expenses 4,954,000 3,781,000
Other current liabilities 10,275,000 11,977,000
Deferred revenue and warranty obligations 5,723,000 3,546,000
----------- ------------
Total cash used in operations (166,842,000) (122,679,000)
INVESTMENT ACTIVITIES:
Additions to property and equipment (71,521,000) (70,066,000)
Sale of property and equipment 44,506,000 46,000
Increase in other assets (9,373,000) (834,000)
----------- ------------
Total cash used in investment activities (36,388,000) (70,854,000)
FINANCING ACTIVITIES:
Common stock issued 87,495,000 1,779,000
Borrowings on revolving credit line 79,500,000 200,100,000
Payments on revolving credit line (83,200,000) (153,300,000)
Long term debt borrowings 160,311,000 25,000,000
Long term debt payments (4,490,000) (33,299,000)
Increase in obligations under financing
arrangements 31,453,000 54,316,000
----------- ------------
Total cash provided by financing activities 271,069,000 94,596,000
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 67,839,000 (98,937,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,138,000 112,789,000
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 74,977,000 $ 13,852,000
----------- ------------
----------- ------------
Amounts in this statement are presented on a cash basis and therefore may
differ from those shown in other sections of this quarterly report.
Supplemental cash flow information:
Non-cash investing and financing activities:
Leased asset additions $ 1,415,000 $ 202,000
Purchased land and building on contract for deed 8,700,000
Payables for property and equipment 4,939,000
Cash paid during the period for:
Interest, net of amount capitalized $ 2,477,000 $ 3,698,000
Income taxes 2,562,000 3,201,000
</TABLE>
See notes to financial statements.
7
<PAGE>
BEST BUY CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The balance sheets as of November 27, 1993, and November 28, 1992, the
related statements of operations and cash flows for the three and nine months
ended November 27, 1993, and November 28, 1992, and the statement of changes in
shareholders' equity for the nine months ended November 27, 1993, are unaudited;
in the opinion of management all adjustments necessary for a fair presentation
of such financial statements have been included and were normal and recurring in
nature. Interim results are not necessarily indicative of results for a full
year. The financial statements and notes thereto should be read in conjunction
with the financial statements and notes included in the Company's annual report
to shareholders for the fiscal year ended February 27, 1993.
2. CHANGE IN ACCOUNTING PRINCIPLE:
Effective February 28, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method required by
FASB Statement No. 109, "Accounting for Income Taxes." As permitted under the
new rules, prior years' financial statements have not been restated.
The cumulative effect of adopting Statement 109 as of February 28, 1993,
was to decrease net earnings in the first quarter by $425,000, or $.02 per
share. Application of the new rules did not change earnings before cumulative
effect of change in accounting principle for the first nine months.
3. ISSUANCE OF SENIOR NOTES:
In October, the Company completed the sale of $150 million principal amount
of 8 5/8% Senior Subordinated Notes due 2000.
4. PUBLIC STOCK OFFERING:
In May, the Company completed the sale of 3,375,000 shares of its common
stock at $25.67 per share. In June, the underwriters of this offering exercised
their overallotment option and an additional 135,000 shares were issued.
Proceeds from the offering were $85,528,000 after deducting the underwriting
costs and offering expenses.
8
<PAGE>
BEST BUY CO., INC.
NOTES TO FINANCIAL STATEMENTS, (Cont.)
5. STOCK SPLIT:
In July, the Company's Board of Directors declared a three-for-two stock
split payable in the form of a stock dividend, effective September 1, 1993, to
the shareholders of record on July 30, 1993. Except as otherwise indicated, all
common share and per share amounts herein have been adjusted to give retroactive
effect to the stock split, with the adjustment within shareholders' equity shown
net of amounts paid for redemption of fractional shares.
6. BANK REVOLVING LINE OF CREDIT:
In September, the Company increased its bank line of credit to allow
seasonal borrowings of up to $125 million.
9
<PAGE>
BEST BUY CO., INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three and nine months ended November 27, 1993 and November 28, 1992:
Earnings for the third quarter increased 114% to $11.2 million, or 52
cents per share. This compares to earnings of $5.2 million, or 30 cents per
share, for the comparable quarter last year. For the first nine months of
fiscal 1994, earnings have increased 123% to $20.3 million, or $1.00 per share,
before a cumulative effect adjustment relating to a change in accounting for
income taxes. Earnings for the first nine months of last year were $9.1
million, or 53 cents per share. Per share amounts reflect a three-for-two stock
split effective on September 1, 1993. The improved earnings reflect the
operating leverage the Company has achieved through increased sales per store
and an increased number of stores.
Sales increased 70% in the third quarter to $808 million from $474 million
last year, and increased 80% to $1.8 billion for the nine-month period. The
Company operated 149 stores at November 27, 1993. Third quarter sales
benefitted from the Company's entry into three new major metropolitan markets.
The Company opened six stores at the end of the second quarter in Detroit and
opened six stores each in Atlanta and Phoenix in the third quarter. A total of
38 new stores have been opened in the current year through November. Two
additional stores opened in the metropolitan Chicago area in December, where
Best Buy now operates 23 stores. Comparable store sales increased 21% in both
the quarter and nine-month period, contributing $77 million and $187 million of
the sales increase for the respective periods. The Company attributes its
comparable store sales increases to its distinctive retailing strategy and
continued sales growth in the personal computer product line. Average sales per
store have risen to $20.2 million for the trailing twelve-month period. In
addition, the Company's new private label credit card program, introduced near
the beginning of the second quarter, made special financing offers more
attractive and available to consumers.
The gross profit margin was 15.0% for the third quarter and 16.0% for the
nine-month period. These compare to 16.4% and 18.0% for the respective periods
last year. The changes in margin reflect a reduced emphasis on the sale of
higher margin extended service plans and the impact of increased competition and
the promotional product pricing associated with the opening of stores in new
markets. The increased volume of personal computers in the Company's sales mix
also has contributed to the change in gross profit margin.
10
<PAGE>
BEST BUY CO., INC.
RESULTS OF OPERATIONS, cont.
Sales of extended service plans represented less than 1.0% of retail sales
in both the quarter and year to date periods. This compares to 1.1% and 1.5%,
respectively, for the same periods in fiscal 1993. Pretax profit from extended
service plans, before allocation of any selling, general and administrative
expenses, other than direct selling expenses, was $3.2 million and $9.4 million
for the quarter and year to date periods, respectively, as compared to $3.0
million and $8.9 million in the third quarter and year to date periods of fiscal
1993.
Selling, general and administrative expense as a percentage of sales was
12.4% for the quarter and 13.9% for the nine-month period. This is an
improvement of 1.9% and 2.0% of sales, respectively, as compared to the same
periods last year. Improvement in this expense percentage continues to exceed
the change in gross profit margin. Higher sales per store have resulted in
increased productivity at the stores and in the corporate support areas.
Additionally, the growth in sales volume and number of stores have enabled the
Company to enhance the efficiency of its advertising expenditures. The
Company's operating income margins of 2.6% for the third quarter and 2.1% for
the nine-month period represent improvements of .5% and .4% of revenues,
respectively, compared to the same periods last year.
The Company's effective tax rates of 39.0% and 38.8% for the quarter and
year to date periods, respectively, are up slightly from the 38% rate in the
same periods last year. This increase reflects the new tax legislation which
increased the statutory federal tax rate.
The Company's net earnings were reduced in the first quarter of fiscal 1994
by $425,000, or 2 cents per share, due to the one-time cumulative effect
adjustment resulting from the adoption of the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", as of the beginning of the
current fiscal year.
11
<PAGE>
BEST BUY CO., INC.
FINANCIAL CONDITION
Total assets were $1.2 billion at November 27, 1993, with $359 million in
working capital, compared to working capital of $119 million at February 27,
1993, and $102 million at November 28, 1992. Inventories have increased since
February 1993 as a result of the increased number of stores, the seasonal
increase to support higher holiday sales levels, the expansion of the personal
computer product line, the increased selling space at certain existing stores,
and to support the increased sales trend being experienced by the Company.
Inventory growth has been funded by increases in accounts payable, obligations
under financing arrangements and the proceeds from the financing transactions
discussed below. The increase in receivables from February 1993 is primarily
the result of the volume of credit card sales during the Thanksgiving weekend.
These receivables were collected in the first week of December. Receivables
arising out of the Company's private label credit card program are sold to a
third party financial institution without recourse.
In April 1993, the Company completed the sale and leaseback of 17 stores.
The net proceeds from this transaction were approximately $44 million. In May
1993, the Company completed a public offering of 3,375,000 shares of its common
stock. The offering price was $25.67 per share and the net proceeds to the
Company, including the proceeds from the issuance in June of an additional
135,000 shares pursuant to the underwriters' overallotment option, were $85.5
million. In October 1993, the Company received net proceeds of $146.6 million
from the public offering of $150 million aggregate principal amount of its 8%
Senior Subordinated Notes due 2000. In addition to funding inventory growth,
the proceeds from these financing transactions have supported the Company's
expansion during the current year.
Through the first nine months of the fiscal year, the Company has invested
approximately $72 million in capital expenditures related to new store
expansion, and the relocation and remodeling of existing stores, including the
conversion of the Company's remaining traditional superstores to its current
store format. The Company expects total capital expenditures for the year to be
approximately $110 million, with approximately $20 million of this total for the
purchase of new store locations. Market conditions in certain locations have
made it necessary for the Company to purchase or provide interim financing for
development of some of its store locations. The Company's strategy is to lease,
rather than own, its stores, and it will likely enter into sale/leasebacks of
most of these owned stores in the future. In October 1993, the Company
completed the purchase of an expanded corporate headquarters facility. This
acquisition was financed by the seller on a contract for deed due in 1996.
12
<PAGE>
BEST BUY CO., INC.
FINANCIAL CONDITION, cont.
The Company has an agreement with a bank that provides for an unsecured
revolving credit facility under which up to an aggregate principal amount of
$125 million is available to provide working capital to the Company. The
agreement provides that up to $40 million of the credit facility is available to
the Company at all times and that an additional $85 million is available to fund
seasonal working capital needs between August 1 and December 31 of each year.
The Company's borrowing under this facility during the third quarter was
minimal. The Company also has secured inventory financing credit lines
available through arrangements with two credit corporations. The total amount
available under these lines is approximately $120 million.
Management feels that cash on hand, available credit facilities, and cash
flow from operations will be adequate to meet the Company's cash requirements
for the immediate future.
13
<PAGE>
BEST BUY CO., INC.
Part II - Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits: Method of Filing
----------------
11.1 Computation of Earnings
per Common Share Filed herewith
b. Reports on Form 8-K:
A report on Form 8-K was filed on September 15, 1993, containing
the Company's press release announcing the results of operations
for the quarter ended August 28, 1993. The Form 8-K was filed to
update the preliminary prospectus being used by the Company in the
public offering of its Senior Subordinated Notes.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
Date: January 3, 1994 By: /s/ ALLEN U. LENZMEIER
---------------------------------------------
Allen U. Lenzmeier, Executive Vice President,
and Chief Financial Officer
(Principal Financial Officer)
Date: January 3, 1994 By: /s/ ROBERT C. FOX
---------------------------------------------
Robert C. Fox, Vice President-Controller
and Treasurer (Principal Accounting Officer)
15
<PAGE>
EXHIBIT 11.1
BEST BUY CO., INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------
November 27, November 28, November 27, November 28,
1993 1992 1993 1992
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Earnings:
Net earnings available
to common shares $ 11,161,000 $ 5,220,000 $ 19,846,000 $ 9,079,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares:
Weighted average common shares
outstanding 20,840,000 16,910,000 19,737,000 16,856,000
Adjustments:
Assumed issuance of shares
purchased under stock
option plans 718,000 458,000 616,000 397,000
------------- ------------- ------------- -------------
Total common equivalent
shares 21,558,000 17,368,000 20,353,000 17,253,000
------------- ------------- ------------- -------------
Earnings per common share:
Earnings before cumulative
effect of change in accounting
principle $ .52 $ .30 $ 1.00 $ .53
Cumulative effect of change
in accounting for income
taxes (.02)
------------- ------------- ------------- -------------
Net earnings per share $ .52 $ .30 $ .98 $ .53
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Note: The computation of earnings per common share assuming full dilution is
substantially the same as set forth above.
The share and per share amounts reflect the three-for-two stock split
effective September 1, 1993.
