<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 May 28, 1994
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)
7075 Flying Cloud Drive 55344
Eden Prairie, Minnesota (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 612/947-2000
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 May 28, 1994, there were 41,857,684 shares of common stock, $.10 par value,
outstanding.
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BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED MAY 28, 1994
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements:
a. Balance sheets as of May 28, 1994, 3-4
February 26, 1994, and May 29, 1993
b. Statements of earnings for the three 5
months ended May 28, 1994, and May 29, 1993
c. Statement of changes in shareholders' equity 6
for the three months ended May 28, 1994
d. Statements of cash flows for the three months 7
ended May 28, 1994, and May 29, 1993
e. Notes to financial statements 8
Item 2. Management's Discussion and Analysis of Financial 9-11
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
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Part I - Financial Information
Item 1. Financial Statements
BEST BUY CO., INC.
BALANCE SHEETS
ASSETS
($ in 000, except per share amounts)
<TABLE>
<CAPTION>
May 28, February 26, May 29,
1994 1994 1993
(Unaudited) (Unaudited)
------------- ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,226 $ 59,872 $ 95,451
Receivables 67,331 52,944 40,172
Merchandise inventories 704,518 637,950 328,453
Deferred income taxes 14,880 13,088 9,346
Prepaid expenses 1,222 756 1,406
------------- ------------ ------------
Total current assets 798,177 764,610 474,828
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 52,871 37,660 2,898
Property under capital leases 17,908 17,870 14,101
Leasehold improvements 64,330 55,279 35,174
Furniture, fixtures, and equipment 125,423 122,683 82,116
------------- ------------ ------------
260,532 233,492 134,289
Less accumulated depreciation and
amortization 68,907 60,768 45,869
------------- ------------ ------------
Total property and equipment 191,625 172,724 88,420
OTHER ASSETS:
Deferred income taxes 6,163 7,078 6,230
Other assets 8,765 8,082 1,039
------------- ------------ ------------
Total other assets 14,928 15,160 7,269
------------- ------------ ------------
TOTAL ASSETS $1,004,730 $952,494 $570,517
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See notes to financial statements.
3
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BEST BUY CO., INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in 000, except per share amounts)
<TABLE>
<CAPTION>
May 28, February 26, May 29,
1994 1994 1993
(Unaudited) (Unaudited)
------------- ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Note payable, bank $ 32,500
Obligations under financing arrangements 13,558 $ 11,156 $ 19,618
Accounts payable 312,664 294,060 160,150
Accrued salaries and related expenses 17,213 19,319 10,654
Other accrued liabilities 40,179 37,754 18,806
Deferred service plan revenue
and warranty reserve 19,909 19,146 12,759
Accrued income taxes 3,717 11,694 1,025
Current portion of long-term debt 9,003 8,899 5,666
------------- ------------ ------------
Total current liabilities 448,743 402,028 228,678
Deferred Service Plan Revenue and Warranty
Reserve 29,667 28,211 26,781
LONG-TERM DEBT 208,711 210,811 49,081
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value;
authorized 400,000 shares; none issued
Common stock, $.10 par value; authorized
120,000,000 shares; issued and
outstanding 41,854,000, 41,742,000,
and 41,283,000 shares, respectively 4,185 2,087 1,376
Additional paid-in capital 223,915 224,089 219,527
Retained earnings 89,509 85,268 45,074
------------- ------------ ------------
Total shareholders' equity 317,609 311,444 265,977
------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,004,730 $952,494 $570,517
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See notes to financial statements.
4
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BEST BUY CO., INC.
STATEMENTS OF EARNINGS
($ in 000, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
May 28, May 29,
1994 1993
-------------- -------------
<S> <C> <C>
Revenues $849,403 $441,919
Cost of goods sold 730,451 367,443
----------- ----------
Gross profit 118,952 74,476
Selling, general and administrative
expenses 107,266 70,802
----------- ----------
Income from operations 11,686 3,674
Interest expense, net 4,676 1,229
----------- ----------
Earnings before income taxes and cumulative
effect of change in accounting principle 7,010 2,445
Income taxes 2,769 929
----------- ----------
Earnings before cumulative effect of change
in accounting principle 4,241 1,516
Cumulative effect of change in accounting
for income taxes (425)
----------- ----------
Net earnings $ 4,241 $ 1,091
----------- ----------
----------- ----------
Earnings per share:
Earnings before cumulative effect of
change in accounting principle $ .10 $ .04
Cumulative effect of change in
accounting for income taxes (.01)
----------- ----------
Net earnings per share $ .10 $ .03
----------- ----------
----------- ----------
Weighted average common shares
outstanding (000) 43,257 36,144
----------- ----------
----------- ----------
</TABLE>
See notes to financial statements.
5
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BEST BUY CO., INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MAY 28, 1994
($ in 000)
(unaudited)
<TABLE>
<CAPTION>
Additional
paid in Retained
Common stock capital earnings
------------ ------------ ----------
<S> <C> <C> <C>
Balance, February 26, 1994 $2,087 $224,089 $85,268
Stock options exercised 9 1,915
Effect of two-for-one stock split 2,089 (2,089)
Net Earnings, three months ended
May 28, 1994 4,241
------ -------- -------
Balance, May 28, 1994 $4,185 $223,915 $89,509
------ -------- -------
------ -------- -------
</TABLE>
See notes to financial statements.
6
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BEST BUY CO., INC.
STATEMENTS OF CASH FLOWS
($ in 000)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
May 28, May 29,
1994 1993
-------------- -------------
<S> <C> <C>
OPERATIONS:
Net earnings $ 4,241 $ 1,091
Charges to earnings not affecting cash:
Depreciation and amortization 8,139 4,476
Loss on disposal of property and equipment 206
Cumulative effect of change in accounting for
income taxes 425
------- -------
12,380 6,198
Changes in operating assets and liabilities:
Receivables (14,387) (2,204)
Merchandise inventories (66,568) (78,462)
Prepaid income taxes and expenses (1,343) (1,294)
Accounts payable 18,604 41,812
Accrued salaries and related expenses (2,106) (1,696)
Other current liabilities (5,661) (4,935)
Deferred service plan revenue and warranty 2,219 576
reserve ------- -------
Total cash used in operations (56,862) (40,005)
INVESTING ACTIVITIES:
Additions to property and equipment (31,572) (11,165)
Proceeds from sale/leasebacks 4,700 44,505
(Increase)decrease in other assets (683) 451
------- -------
Total cash provided by (used in) investing
activities (27,555) 33,791
FINANCING ACTIVITIES:
Common stock issued 1,924 82,603
Borrowings on revolving credit line 58,800 59,300
Payments on revolving credit line (26,300) (63,000)
Borrowings (payments) on long-term debt (2,055) 877
Increase in obligations under
financing arrangements 2,402 14,747
Total cash provided by ------- -------
financing activities 34,771 94,527
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (49,646) 88,313
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 59,872 7,138
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,226 $95,451
------- -------
------- -------
</TABLE>
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:
<TABLE>
<S> <C> <C>
Cash paid during the period for:
Interest $ 6,765 $ 743
Income taxes $10,470 $ 6,495
</TABLE>
See notes to financial statements.
7
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BEST BUY CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The balance sheets as of May 28, 1994, and May 29, 1993, the related statements
of earnings and cash flows for the three months ended May 28, 1994, and May 29,
1993, and the statement of changes in shareholders' equity for the three months
ended May 28, 1994, 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 26, 1994.
2. INCOME TAXES:
Income taxes are provided based upon management's estimate of the annual
effective tax rate.
3. STOCK SPLIT:
The Company effected a two-for-one stock split in the form of a stock dividend
in April 1994. All common share and per share data reflect this stock split. In
September 1993 the Company effected a three-for-two stock split and per share
information for fiscal 1994 has also been adjusted to reflect that split.
8
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BEST BUY CO., INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Earnings for the three months ended May 28, 1994 were $4.2 million, or $.10 per
share, compared to $1.5 million, or $.04 per share, for the three months ended
May 29, 1993. Prior year amounts are before the cumulative effect of a change in
accounting for income taxes. The increase in earnings is the result of a
comparable store sales increase of 37% for the quarter, the addition of 37
stores opened during the past twelve months and increased leverage of selling,
general and administrative expenses. Operating income in the first quarter of
fiscal 1995 improved to 1.4% of sales compared to .8% in the first quarter of
fiscal 1994. The change in accounting for income taxes reduced net earnings by
$425,000, or $.01 per share, in the first quarter of fiscal 1994.
Revenues increased 92% over the same period last year to $849 million. The
increase was due to the 37 new stores and the substantial comparable store sales
increase experienced in the first quarter of the current year. The comparable
store sales growth benefitted from sales of several new personal computer name
brands the Company introduced in the second quarter of the prior fiscal year.
Sales contributed by the home office and personal computer category increased
from 29% of store sales in the first quarter of last year to 37% of sales in the
first quarter of the current year. While the addition of the new brand names has
contributed to the year over year growth in the sales of personal computers, the
rate of growth in comparable store sales of that product line is expected to
decline as these products have now been available for over one year.
Additionally, as consumers await the next generation of personal computer
technology, growth in this category could slow in the coming months. In June
1993, the Company introduced a new financing program which management believes
has also contributed to increased sales since its introduction. In addition, the
Company believes that its sales growth has been aided by an increase in the
inventory levels it is maintaining in the stores, which provide a better
in-stock position for the consumer to make a selection from. Comparable store
sales also increased due to increasing sales of entertainment software (compact
discs, pre-recorded audio and video tapes and computer software) as product
assortment in this category has been significantly expanded in the past year.
The entertainment software category contributed 14% of store sales in the first
quarter, compared to 11% of sales for the same period last year.
Gross profit margin was 14.0% of sales compared to 16.9% in the first quarter
of last year; however, it was unchanged from the margin achieved in the fourth
quarter of last year. The change in gross profit margin from the first quarter
9
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of fiscal 1994 is primarily due to the competitive conditions encountered in
new markets entered and increased competition in existing markets. Margin
declines experienced in recent quarters have moderated as competitive
conditions have begun to stabilize and the impact of the growth of lower margin
personal computers in the Company's sales mix has become less significant.
Selling, general and administrative expenses (SG&A) for the first quarter were
12.6% of sales compared to 16.0% for the same period last year. Improvement in
the SG&A ratio in the quarter exceeded the decline in gross profit margin. This
improvement of 3.4% of sales is mainly a result of increased sales per store and
higher leverage of the costs of operations. In addition, advertising
expenditures have become more efficient due to a reduction in the size of some
of the Company's weekly newspaper inserts and a higher concentration of stores
within selected markets. The first quarter of last year also included expenses
related to the conversion of some of the Company's traditional superstores to
the current store format totaling approximately $550,000.
Extended service plan revenues represented .7% and 1.2% of revenues for the
first quarter of 1995 and 1994, respectively. Profit earned on extended service
plans contributed $3.7 million and $2.9 million to the Company's operating
income in the first quarter of fiscal 1995 and 1994, respectively. This profit
is before the allocation of any selling, general or administrative expenses,
except for direct selling expenses.
Net interest expense increased to $4.7 million for the first quarter, up from
$1.2 million in the first quarter of last year. This increase is the result of
the interest expense on the $150 million of senior subordinated notes issued in
October 1993.
Income taxes are provided for at the rate of 39.5% which is an increase over
the 38.0% in the first quarter of fiscal 1994. The increase is primarily due to
the increase in the statutory federal rate enacted in the second quarter of
fiscal 1994 and a lower level of tax-exempt investment income this year.
FINANCIAL CONDITION
Total assets at the end of the first quarter were slightly more than $1 billion
and working capital of $349 million was essentially unchanged from that at
fiscal 1994 year end. Inventories increased ten percent during the quarter as a
result of new store openings and seasonal increases in video products, car
stereos, and air-conditioners. The increased inventory level was funded by
borrowings under the Company's line of credit and vendor credit. Cash flows in
the first quarter of fiscal 1994 reflect the proceeds of a
10
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$44 million sale/leaseback transaction and $82 million from a common stock
offering.
Two new stores were opened in the first quarter and the Company expects to open
a total of approximately 50 stores during fiscal 1995. Management also plans to
expand or relocate approximately 25 stores during the year to accommodate
increasing product selection. A 200,000 square foot expansion of the Company's
distribution center in Oklahoma was completed in May and construction has begun
on a new 700,000 square foot distribution center in Virginia. The Company is
also leasing a 300,000 square foot distribution facility in California and a
240,000 square foot entertainment software facility in Minnesota. Management
expects that store development and other capital projects will aggregate
approximately $220 million for the year, of which about 70% will be developed or
financed through long term financing arrangements. At May 28, 1994, the Company
had in excess of $45 million in development costs that are expected to be
recouped through those financing arrangements in fiscal 1995.
The Company currently has a revolving credit facility that allows for seasonal
borrowings of up to $125 million. Management is in the process of negotiating an
increase of this credit facility to approximately $400 million to support the
cash requirements for inventory financing during the holiday selling season.
Management believes that the increased credit facilities combined with the
store development financing through long term lease arrangements and cash
generated from operations will provide sufficient resources to meet the
Company's financing needs for the current fiscal year.
11
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BEST BUY CO., INC.
Part II - Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits: METHOD OF FILING
11.1 Computation of Earnings
per Common Share Filed herewith
b. Reports on Form 8-K:
A Form 8-K was filed on April 4, 1994 reporting a two-for-one
stock split effective on April 28, 1994.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
Date: July 7, 1994 By: /s/ ALLEN U. LENZMEIER
------------------------------------------
Allen U. Lenzmeier, Executive Vice
President & Chief Financial Officer
(principal financial officer)
By: /s/ ROBERT C. FOX
------------------------------------------
Robert C. Fox, Senior Vice President-
Finance & Treasurer (principal accounting
officer)
13
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EXHIBIT 11.1
BEST BUY CO., INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
($ in 000, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
May 28, May 29,
1994 1993
-------------- -------------
<S> <C> <C>
Earnings:
Earnings before cumulative effect of
change in accounting principle $4,241 $1,516
Cumulative effect of change in
accounting for income taxes (425)
------ ------
Net earnings available to common shares $4,241 $1,091
------ ------
------ ------
Shares (000):
Weighted average common shares
outstanding 41,783 35,169
Adjustments:
Assumed issuance of shares purchased
under stock option plans 1,474 975
------ ------
Total common equivalent shares 43,257 36,144
------ ------
------ ------
Earnings per common share:
Earnings before cumulative effect of
change in accounting principle $ .10 $ .04
Cumulative effect of change in
accounting for income taxes (.01)
------ ------
Net earnings per common share $ .10 $ .03
------ ------
------ ------
</TABLE>
Note: The computation of earnings per common share assuming full dilution is
substantially the same as set forth above.
