<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 June 1, 1996
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 June 1, 1996, there were 43,123,795 shares of common stock, $.10 par value,
outstanding.
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BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 1, 1996
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
a. Consolidated balance sheets as of June 1, 1996, 3-4
March 2, 1996 and May 27, 1995
b. Consolidated statements of earnings for the three 5
months ended June 1, 1996, and May 27, 1995
c. Consolidated statement of changes in shareholders' 6
equity for the three months ended June 1, 1996
d. Consolidated statements of cash flows for the 7
three months ended June 1, 1996, and
May 27, 1995
e. Notes to consolidated financial statements 8
Item 2. Management's Discussion and Analysis of Financial 9-11
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
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Part I - Financial Information
Item 1. Consolidated Financial Statements
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
($ in 000, except per share amounts)
June 1, March 2, May 27,
1996 1996 1995
(Unaudited) (Unaudited)
----------- ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 20,604 $ 86,445 $ 51,669
Receivables 104,732 121,438 100,005
Recoverable costs from developed
properties 122,773 126,237 103,523
Merchandise inventories 1,368,959 1,201,142 1,002,391
Deferred income taxes 21,191 20,165 16,218
Prepaid expenses 15,070 5,116 5,439
----------- ----------- -----------
Total current assets 1,653,329 1,560,543 1,279,245
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 16,559 16,423 15,414
Property under capital leases 29,421 29,421 28,146
Leasehold improvements 135,466 131,289 97,770
Furniture, fixtures, and equipment 278,083 266,582 208,708
----------- ----------- -----------
459,529 443,715 350,038
Less accumulated depreciation and
amortization 149,449 132,676 100,785
----------- ----------- -----------
Net property and equipment 310,080 311,039 249,253
OTHER ASSETS:
Deferred income taxes 2,977 7,204 9,940
Other assets 12,183 12,046 19,604
----------- ----------- -----------
Total other assets 15,160 19,250 29,544
----------- ----------- -----------
TOTAL ASSETS $ 1,978,569 $ 1,890,832 $ 1,558,042
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
3
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BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in 000, except per share amounts)
<TABLE>
<CAPTION>
June 1, March 2, May 27,
1996 1996 1995
(Unaudited) (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Note payable, bank $ 185,000 $ 50,000
Obligations under financing arrangements 142,456 $ 93,951 41,367
Accounts payable 515,297 673,852 435,406
Accrued salaries and related expenses 28,183 26,890 24,127
Other accrued liabilities 140,709 125,582 77,953
Deferred service plan revenue
and warranty reserve 29,469 30,845 26,759
Accrued income taxes 3,443
Current portion of long-term debt 23,362 23,568 13,664
----------- ----------- -----------
Total current liabilities 1,064,476 974,688 672,719
Deferred Service Plan Revenue and Warranty
Reserve, Long-Term 41,409 48,243 45,197
Long-Term Debt 207,855 206,287 224,723
Convertible Preferred Securities of Subsidiary 230,000 230,000 230,000
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 43,124,000, 42,842,000,
and 42,594,000 shares, respectively 4,312 4,284 4,259
Additional paid-in capital 239,170 236,392 233,553
Retained earnings 191,347 190,938 147,591
----------- ----------- -----------
Total shareholders' equity 434,829 431,614 385,403
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,978,569 $ 1,890,832 $ 1,558,042
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
5
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BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
($ in 000, except per share amounts)
(Unaudited)
Three Months Ended
----------------------------
June 1, May 27,
1996 1995
---------- ----------
Revenues $1,637,184 $1,274,696
Cost of goods sold 1,404,534 1,092,408
---------- ----------
Gross profit 232,650 182,288
Selling, general and administrative
expenses 219,698 165,925
---------- ----------
Operating income 12,952 16,363
Interest expense, net 12,281 8,616
---------- ----------
Earnings before income taxes 671 7,747
Income taxes 262 3,075
---------- ----------
Net earnings $ 409 $ 4,672
---------- ----------
---------- ----------
Net earnings per share $ .01 $ .11
---------- ----------
---------- ----------
Weighted average common shares
outstanding (000) 43,564 43,423
---------- ----------
---------- ----------
See notes to consolidated financial statements.
6
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BEST BUY CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 1, 1996
($ in 000)
(unaudited)
Additional
paid-in Retained
Common stock capital earnings
------------ ---------- --------
Balance, March 2, 1996 $4,284 $236,392 $190,938
Stock options exercised 28 2,778
Net earnings, three months ended
June 1, 1996 409
------ -------- --------
Balance, June 1, 1996 $4,312 $239,170 $191,347
------ -------- --------
------ -------- --------
See notes to consolidated financial statements.
6
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BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
June 1, May 27,
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 409 $ 4,672
Charges to earnings not affecting cash:
Depreciation and amortization 17,042 12,763
--------- ---------
17,451 17,435
Changes in operating assets and liabilities:
Receivables 16,706 (15,565)
Merchandise inventories (167,817) (94,714)
Prepaid income taxes and expenses (5,191) (4,746)
Accounts payable (158,555) 28,724
Other current liabilities 16,420 3,999
Deferred service plan revenue and warranty
reserve (8,210) 4,876
--------- ---------
Total cash used in operating activities (289,196) (59,991)
INVESTING ACTIVITIES:
Additions to property and equipment (16,083) (23,489)
Recoverable costs from developed properties 3,464 (17,301)
(Increase)decrease in other assets (137) 154
--------- ---------
Total cash used in investing activities (12,756) (40,636)
FINANCING ACTIVITIES:
Borrowings on revolving credit line, net 185,000 50,000
Increase(decrease) in obligations under
financing arrangements 48,505 (40,388)
Long-term borrowings 5,000
Payments on long-term debt (3,638) (3,628)
Common stock issued 1,244 1,612
--------- ---------
Total cash provided by
financing activities 236,111 7,596
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (65,841) (93,031)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 86,445 144,700
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,604 $ 51,669
--------- ---------
--------- ---------
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:
Cash paid during the period for:
Interest $ 13,347 $ 11,105
Income taxes $ 1,063 $ 13,273
</TABLE>
See notes to consolidated financial statements.
7
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BEST BUY CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of June 1, 1996, and May 27, 1995, the
related consolidated statements of earnings and cash flows for the three
months ended June 1, 1996, and May 27, 1995, and the consolidated statement
of changes in shareholders' equity for the three months ended June 1, 1996,
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. These interim 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 March 2, 1996.
2. RECLASSIFICATION:
Certain prior year amounts have been reclassified to conform to current
year presentation.
3. INCOME TAXES:
Income taxes are provided on an interim basis based upon management's
estimate of the annual effective tax rate.
4. EARNINGS PER SHARE:
Earnings per share relate to fully diluted earnings per share.
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
Net earnings for the first quarter of fiscal 1997 were $409,000, or $.01 per
share, compared to net earnings of $4,672,000, or $.11 per share, in the
comparable period last year. Operating income compared to the prior year's first
quarter was impacted, in part, by higher selling, general and administrative
expenses. Higher interest expense during the period also applied pressure on
earnings.
Revenues in the quarter increased 28% to $1.637 billion compared to $1.275
billion in the first quarter last year. The increase was due in part to the
contribution from the 47 new stores and sixteen remodeled/relocated stores in
fiscal 1996 and a comparable store sales increase of 4% during the period. The
Company also opened eight new stores during the quarter, including five stores
in the new market of Philadelphia, Pennsylvania, on May 3. Comparable store
sales increases of appliances were strong in comparison to the prior year due to
a significant expansion of product assortment in May. The Company introduced the
Amana, General Electric, Hotpoint, GE Profile and Tappan lines of appliances,
greatly enhancing that category's consumer appeal and the Company's competitive
position. Total Company comparable store sales comparisons are expected to
become more difficult beginning in August due to the high levels of promotional
activity that began in August of last year and continued through much of the
remainder of the year.
Retail store sales mix by major product category for the first quarter was as
follows:
Quarter Ended
--------------------------------
June 1, 1996 May 27, 1995
------------ ------------
Home Office 41% 40%
Consumer Electronics
Audio 12% 13%
Video 17% 18%
Entertainment Software 15% 16%
Appliances 8% 7%
Other 7% 6%
---- ----
Total 100% 100%
---- ----
---- ----
The Company currently plans to open approximately 14 additional new stores
during the remainder of the fiscal year, including entry into the new market of
Tampa, Florida, in the third quarter. Three of the remaining
9
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stores to be opened are expected to open in the second quarter and the remaining
openings anticipated in the third quarter.
Gross profit margin was 14.2% of sales for the first quarter of this year,
compared to 14.3% in the first quarter of last year and 13.0% in fiscal 1996.
Gross profit margin was essentially flat with the first quarter of the prior
year as an increased contribution from the sale of higher margin appliances and
extended service plans helped offset weaker margins in the home office category.
Sales of extended service plans increased to 1.5% of store sales compared to
less than 1% in each of the last three fiscal years. These plans are now
administered by a third party, resulting in recognition of revenue and profit on
the sale of the plans at the time of sale. Prior to the fourth quarter of
fiscal 1996, revenue and profit from extended service plans was recognized over
the term of the contract. Management expects that price competition and
promotional offers to stimulate spending will continue, particularly in personal
computers. While competition and promotions may limit the Company's ability to
increase margins, the Company believes that increased contributions from
appliances and extended service plans provide an opportunity to increase overall
margins in fiscal 1997. Additional employee training programs and other planned
initiatives should result in a further increase in the contribution of extended
service plans. In addition, management anticipates that the appliance category
should continue to increase as a percentage of total Company sales, increasing
to approximately 9% of sales for the fiscal year.
Selling, general and administrative (SG&A) expenses increased to 13.4% of sales
compared to 13.0% in the first quarter of the prior year. This increase is
mainly due to higher occupancy and fixed costs associated with the new and
remodeled or relocated stores in fiscal 1996 and costs attributable to the
rollout of the expanded appliance assortment. Costs associated with improving
sales execution and supporting the expanded appliance assortment will further
increase the Company's SG&A expense ratio in fiscal 1997. Also, as the
Company's rate of sales growth slows in the current fiscal year, both in terms
of the number of new stores opened and comparable store sales increases,
management expects that the SG&A ratio for the year will be higher than fiscal
1996's ratio of 11.3%.
Net interest expense increased $3.7 million compared to the first quarter of
fiscal 1996. The increase was due principally to a higher level of completed
properties held for sale and borrowings to support higher working capital needs.
Additionally, in the first quarter of fiscal 1996 the Company financed working
capital with the proceeds from the $230 million November 1994 preferred
securities offering.
10
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FINANCIAL CONDITION
Working capital of $589 million at June 1, 1996 was unchanged from the prior
fiscal year end as cash, bank borrowings and inventory financing arrangements
were used to support higher inventories and reduce accounts payable.
Inventories increased during the first quarter from a seasonally low point at
the end of the prior fiscal year, due, in part, to the opening of eight new
stores and the increased appliance assortment. Receivables at June 1, 1996
decreased $16.7 million from March 2, 1996 as a result of the change in the
volume of business prior to each period end. Prepaid expenses increased from
March 2, 1996 primarily due to an increase in refundable income taxes.
Deferred service plan revenues are decreasing as revenues from plans sold
prior to the fourth quarter of fiscal 1996 are recognized. Revenues from
extended service plans sold in subsequent periods are recognized at the time
of sale.
At June 1, 1996, the Company owned 12 retail locations and a distribution center
that were available for sale and leaseback and included in recoverable costs
from developed properties. Proceeds from the sale of developed properties were
approximately $7 million in the first quarter. Subsequent to the end of the
quarter, three properties, including the distribution center, were sold
resulting in proceeds of approximately $34 million. The Company plans to sell
and lease back the remaining properties, as well as four additional retail
locations under development for fiscal 1997, during the current fiscal year.
Conditions in the marketplace for retail real estate and the economy in general
may affect the timing of sale/leaseback transactions.
During the first quarter the Company received $5 million in proceeds from a
state government agency loan. In June, the Company repaid the $8.7 million
contract for deed on the corporate headquarters facility. The Company plans to
obtain a long-term mortgage on this facility. The Company currently expects
that capital spending for the fiscal year, exclusive of property development
costs anticipated to be recovered through long-term financing, will approximate
$80 million.
Management expects that funds available through cash flow from operations, the
Company's credit facility, inventory financing facilities and customary vendor
terms, will be sufficient to meet the Company's working capital needs for the
fiscal year.
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The Company filed a Current Report on Form 8-K on May 8, 1996, with the
Securities and Exchange Commission. The Report contains cautionary statements
identifying important factors that could cause the Company's actual results to
differ materially from those projected in forward looking statements made by the
Company herein.
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 net earnings
per common share Filed herewith
27.1 Financial Data Schedule Filed herewith
b. Reports on Form 8-K:
A Current Report on Form 8-K was filed with the Securities
and Exchange Commission on May 8, 1996 in connection with the
"Safe Harbor" of the Private Securities Litigation Reform Act
of 1995.
12
<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: July 12, 1996 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 NET EARNINGS PER COMMON SHARE
(Amounts in 000, except per share amounts)
(unaudited)
Three Months Ended
----------------------
June 1, May 27,
1996 1995
------- -------
Earnings:
Net earnings available to common shares $ 409 $ 4,672
------- -------
------- -------
Shares:
Weighted average common shares
outstanding 42,967 42,379
Adjustments:
Assumed issuance of shares purchased
under stock option plans 597 1,044
------- -------
Total common equivalent shares 43,564 43,423
------- -------
------- -------
Net earnings per common share $ .01 $ .11
------- -------
------- -------
Note: The computation of earnings per common share assuming full dilution
results in anti-dilution.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for the periods indicated and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-START> MAR-03-1996
<PERIOD-END> JUN-01-1996
<CASH> 20,604
<SECURITIES> 0
<RECEIVABLES> 104,732
<ALLOWANCES> 0
<INVENTORY> 1,368,959
<CURRENT-ASSETS> 1,653,329
<PP&E> 459,529
<DEPRECIATION> 149,449
<TOTAL-ASSETS> 1,978,569
<CURRENT-LIABILITIES> 1,064,476
<BONDS> 207,855
0
0
<COMMON> 4,312
<OTHER-SE> 430,517
<TOTAL-LIABILITY-AND-EQUITY> 1,978,569
<SALES> 1,637,184
<TOTAL-REVENUES> 1,637,184
<CGS> 1,404,534
<TOTAL-COSTS> 1,404,534
<OTHER-EXPENSES> 219,698
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,281
<INCOME-PRETAX> 671
<INCOME-TAX> 262
<INCOME-CONTINUING> 409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 409
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
