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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 1, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact Name of Registrant as Specified in Charter)
MINNESOTA 41-0907483
(State of Incorporation) (I.R.S. Employer
Identification Number)
7075 FLYING CLOUD DRIVE
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-947-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
8-5/8% SENIOR SUBORDINATED NOTES,
DUE 2000 NEW YORK STOCK EXCHANGE
9% SUBORDINATED EXTENDIBLE NOTES,
DUE 1997 NEW YORK STOCK EXCHANGE
6-1/2% CONVERTIBLE MONTHLY INCOME
PREFERRED SECURITIES NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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
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The aggregate market value of voting stock held by non-affiliates of the
Registrant on May 19, 1997, was approximately $461,378,308. On that date, there
were 43,805,384 shares of Common Stock issued and outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
March 1, 1997 ("Annual Report") are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement dated May 14, 1997 for the regular
meeting of shareholders to be held June 25, 1997 ("Proxy Statement") are
incorporated by reference into Part III.
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PART I
Item 1. BUSINESS
General
Best Buy Co., Inc. (the "Company" or "Best Buy"), is the nation's largest
volume specialty retailer of name brand consumer electronics, home office
equipment, entertainment software and appliances. The Company commenced business
in 1966 as an audio component systems retailer, and in the early 1980s, with the
introduction of the video cassette recorder, expanded into video products. In
1983, the Company changed its marketing strategy to use mass merchandising
techniques for a wider variety of products, and began to operate its stores with
a "superstore" format. In 1989, Best Buy dramatically changed its method of
retailing by introducing its "Concept II" store format, a self-service,
non-commissioned, discount style sales environment designed to give the customer
more control over the purchasing process. The Company determined that an
increasing number of customers had become knowledgeable enough to select
products without the assistance of a commissioned salesperson and preferred to
make purchases in a more convenient and customer friendly environment. With its
innovative retail format, the Company has moved into a leading position
nationally in all of its principal product categories except appliances.
In fiscal 1995, the Company developed a strategy to further enhance its
store format. The strategy, known as "Concept III", features a larger,
redesigned store format created to produce a more informative and exciting
shopping experience for the customer. Through focus group interviews and other
research, the Company determined that customers wanted more product information
and a larger product selection. In order to meet these evolving consumer
preferences, the Company developed an enhanced store format which features more
hands-on demonstrations allowing customers to, among other things, experience
audio and video products such as "surround sound" systems and sample featured
compact discs at approximately 100 private listening stations. Additionally,
these larger stores, generally 45,000 to 58,000 square feet, are designed to
accommodate a larger product selection intended to be as good as or better than
the selection offered by Best Buy's competitors in each of its principal product
categories. Management continues to evaluate and refine the content and features
of these Concept III stores to maximize the revenue and operating profit while
providing customers with the most desirable shopping experience. As of March 1,
1997, 184 of 272 stores were the 45,000 or 58,000 square foot format generally
incorporating the features of a "Concept III" store. To improve the
productivity in its largest stores, the Company intends to test and evaluate new
product lines.
In the last two fiscal years the Company has increased its store count by
33%, adding 68 new stores and, as of March 1, 1997,
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was operating 272 stores from coast to coast. The Company anticipates opening
13 new stores in fiscal 1998 and to be operating approximately 285 stores by the
end of the fiscal year.
Business Strategy
The Company's business strategy is to offer consumers an enjoyable and
convenient shopping experience while maximizing the Company's profitability.
Best Buy believes it offers consumers meaningful advantages in store
environment, product value, selection and service. An objective of this
strategy has been to achieve a dominant share of the markets Best Buy serves.
The Company currently holds a leading, and in some cases dominant, share in its
mature markets. The Company's Concept III store format uses interactive
displays to enhance the customer's shopping experience. As part of its overall
strategy, the Company:
- Offers a self-service, discount style store format, featuring easy to
locate product groupings, emphasizing customer choice and product
information and providing assistance from non-commissioned product
specialists and, in Concept III stores, interactive product displays
and information.
- Provides a large selection of brand name products comparable to
retailers that specialize in the Company's principal product
categories and seeks to ensure a high level of product availability
for customers.
- Seeks to provide customers with the best product value available in
the market area through active comparison shopping programs, daily
price changes, lowest price guarantees and special promotions,
including interest-free financing, performance service plans generally
priced below competitors, and home delivery.
- Provides a variety of services not offered by certain competitors,
including convenient financing programs, product delivery and
installation, computer training and post-sale services including
repair and warranty services and computer upgrades.
- Locates stores at sites that are easily accessible from major highways
and thoroughfares and seeks to create sufficient concentrations of
stores in major markets to maximize the leverage on fixed costs
including advertising and operations management.
- Controls costs and enhances operating efficiency by centrally
controlling all buying, merchandising and
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distribution, and vertically integrating certain support functions
such as advertising.
Best Buy's store format is a key component of its business strategy. The
Company believes that because customers are familiar with most of the products
the Company sells and are accustomed to discount shopping formats, they
increasingly resist efforts to direct their choice of product and appreciate
controlling the purchase decision. However, as new technology, such as digital
technology, is introduced, particularly in consumer electronics and
communications products, the Company intends to offer consumers a higher level
of service to help them better understand the features and benefits of the
advanced technology.
Best Buy continuously evaluates the retail environment and regularly uses
focus groups to assess customer preferences. Through these processes, Best Buy
concluded that customers want access to more product information in order to be
more confident about their buying decisions. As a result, Best Buy's
Concept III store format features interactive product displays and information
including, in selected locations, Answer Center kiosks enabling customers to
immediately access product information from touch screen monitors that display
informative and entertaining full motion videos. All Concept III stores contain
a demonstration area for television "surround sound" systems so that customers
can hear for themselves how different configurations of audio components enhance
sound quality; a simulated, life-size car display that demonstrates differences
in car stereo sound resulting from different speaker configurations; speaker
rooms featuring a wide variety of music allowing customers to compare speaker
quality while listening to their choice of music; approximately 100 private
listening posts where customers can sample featured music software. Best Buy
believes that these features further differentiate it from competing retailers
and should also provide an advantage for the Company relative to competitors
such as catalog and on-line services and television shopping networks.
The Company's stores are in large, open buildings with high ceilings. Best
Buy's stores average approximately 43,000 square feet. The Concept III stores
feature specialty areas such as larger viewing rooms for large screen and
projection televisions and larger speaker rooms. The Company expects that all
of the new stores opened will be the 45,000 square foot format to best leverage
the cost of operations and maximize productivity.
Best Buy's merchandising strategy differs from many other retailers selling
comparable merchandise. Best Buy's merchandise is displayed at eye level next
to signs identifying the products' major features, with the boxed products
available above or below the display model. The Company's salaried product
specialists, who are knowledgeable about the operation and features of the
merchandise on display, are dedicated to a particular product area for customers
who desire assistance. This convenient, self service
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format allows the customer to carry merchandise directly to the check-out lanes,
pay for it and leave the store thus avoiding the time-consuming process used at
traditional superstores and catalog showrooms. Certain of the Company's
competitors with the traditional superstore format use commissioned sales staffs
and generally only have display models on the selling floor with boxed
merchandise stored in a back room. This traditional superstore design allows
sales personnel to direct the customer to products selected by the salesperson.
At these stores, a salesperson is able to promote products yielding the greatest
sales commissions. In addition, unlike Best Buy, these traditional superstores
generally apply pressure to the consumer to promote the sale of extended service
plans and have trained their sales staffs to maximize the sale of these plans.
The Company offers performance service plans, generally at lower prices than its
competitors, and intends to place increased emphasis on the no pressure
presentation of these plans to consumers in fiscal 1998.
The Company believes that its advertising strategy continues to contribute
to its increasing market share and brand image. Best Buy spends over 3% of
store sales on advertising, including the distribution of about 31 million
newspaper inserts weekly. The Company has vertically integrated advertising and
promotion capabilities and operates its own in-house advertising agency. This
capability allows the Company to respond rapidly to competitors in a cost
effective manner. In many of its markets, the Company is able to secure and
deliver merchandise to its stores and to create, produce and run an
advertisement all within a period of less than one week.
Print advertising generally consists of four-color weekly inserts,
generally of 16 to 20 pages, that emphasize a variety of product categories and
feature extensive name brand selection and price range. The Company also
produces all of its television commercials, each with a specific marketing
message. Television commercials account for approximately 31% of total
advertising expenditures. The Company is reimbursed by vendors for a
substantial portion of advertising expenditures through cooperative advertising
arrangements. In fiscal 1998, the Company will introduce a national brand image
program that is expected to move Best Buy's image beyond that of a low price
specialty retailer by promoting the customer's shopping experience.
Product service and repair are important aspects of Best Buy's marketing
strategy, providing the opportunity to differentiate itself from warehouse clubs
and other discount stores which generally do not provide such services.
Virtually all products sold by the Company, with the exception of software,
carry manufacturers' warranties. The Company generally offers to service and
repair all of the products it sells, except major appliances in certain markets,
and has been designated by substantially all of its major suppliers as an
authorized service center. In addition, the Company conducts computer software
training classes at selected
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stores and makes its in-store technical support staff available to assist
customers with the custom configuration of personal computers and peripheral
products. The Company also delivers and installs major appliances and large
electronics products and installs car stereos and security systems.
Product Selection and Merchandising
Best Buy provides a broad selection of name brand models within each
product line in order to provide customers with greater choice. The Company
currently offers approximately 6,200 products, exclusive of entertainment
software titles and accessories, in its four principal product categories. In
addition, the Company offers a selection of accessories supporting its principal
product categories, which typically yield a higher margin than most of the
Company's other products. The Company believes that this assortment of
accessories builds customer traffic for its other products.
The home office category, Best Buy's largest product category, includes
personal computers and related peripheral equipment, telephones, cellular
phones, answering machines, fax machines, copiers and calculators. The Company
was among the first consumer electronics retailers to carry an extensive
assortment of personal computer products and related software. Sales in this
category are largely comprised of the sale of personal computers. The retail
market for personal computers continues to be promotional and competitive. The
Company's operating results can be affected by significant changes in
promotional activity as well as product demand for and availability of personal
computers and the timing of computer model transitions by manufacturers. The
Company believes that it is well positioned to withstand increased competition
in the retail market for personal computer products, traditionally low margin
items, due to its early entry and experience in the market, its broad product
lines, including those that generate higher profit margins, and its relatively
low cost structure. In addition, the Company believes that the related services
it offers, such as computer training, configuration, maintenance and upgrade,
are distinct advantages compared to other discount and mail order computer
retailers. The Company also believes that changing technology and hardware
requirements necessary to support new software, including on-line services, will
continue to be a primary factor in the growth in sales of personal computers and
related products in the future. The Company's home office products category
includes brand names such as Acer, Apple, AT&T, Canon, Compaq, Epson, Hewlett
Packard, IBM, Motorola, NEC, Packard Bell, Panasonic, Sharp and Toshiba. The
Company had also offered a broad assortment of office products and school
supplies such as paper, pens, and other consumables to complement home office
equipment. In the third quarter of fiscal 1997, the Company decided to narrow
the office supply product assortment to more closely reflect the shopping
patterns of the home user rather than small business.
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Best Buy's second largest product category is consumer electronics,
consisting of video and audio equipment. Video products include televisions,
video cassette recorders, camcorders and satellite dishes that receive direct
broadcast satellite television. Audio products include audio components, audio
systems, portable audio equipment, car stereos and security systems. The
Company continues to expand its product selection in consumer electronics by
offering higher end products and components that have greater appeal to audio
and video enthusiasts. In March 1997, the Company was the first national
retailer to launch the new Digital Versatile Disk (DVD) hardware and related
software. The higher introductory price points for DVD and limited number of
software titles are likely to lead to only a modest contribution to total sales
in fiscal 1998. However, the Company anticipates that with the availability of
better picture and sound quality through direct broadcast satellite and digital
technology, it will have more opportunities to sell higher end equipment such as
home theaters, "surround sound" systems and in-wall components in the future.
The Company sells consumer electronics with brand names such as Aiwa, Bose,
Cambridge Soundworks, Eosone, General Electric, Infinity, JBL, JVC, Magnavox,
Panasonic, Pioneer, RCA, Sanyo, Samsung, Sharp, Sony, Technics and Toshiba.
Best Buy's entertainment software category includes compact discs,
pre-recorded audio and video cassettes, computer software and video game
hardware and software. The Company is one of the few large consumer electronics
retailers that sells a broad selection of entertainment software in all of its
stores. The Company intends to offer from 25,000 to approximately 50,000 titles
in its stores and had offered as many as 80,000 titles in its largest Concept
III stores in fiscal 1997. Due to the slow rate of inventory turn of some of the
deep catalogue recorded music titles, the Company decided to narrow its
assortment of recorded music in fiscal 1998 to improve inventory productivity.
This reduction in titles will occur primarily in the 45,000 and 58,000 square
foot stores. Best Buy will continue to customize a portion of the music software
assortment for particular stores. The video game hardware and software products
include popular games by manufactures such as Sony and Nintendo. Activity in
this category is impacted by changes in technology such as, for example, the
introduction of the Sony Playstation and Nintendo 64 formats in the second half
of fiscal 1997.
The major appliance category includes microwave ovens, washing machines,
dryers, air conditioners, dishwashers, refrigerators, freezers, ranges and
vacuum cleaners. Products in this category include brand names such as Amana,
Eureka, Frigidaire, General Electric, GE Profile, Hoover, Hotpoint, Maytag,
Roper, Sharp, Tappan, and White-Westinghouse. The Company also carries an
assortment of fully featured, high end small electrics from manufacturers such
as Braun, Cuisinart, DeLonghi, Oster and Waring Professional. The appliance
department was further enhanced in fiscal 1997 by the addition of designer
cookware and kitchen
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gadgets. The appliance department is merchandised to give consumers a
presentation that looks and feels like a kitchen rather than simply rows of
appliances.
The Company also sells cameras and other photographic equipment and ready
to assemble furniture designed for use with computer and audio/video equipment.
The Company intends to test market new products in its larger stores in
fiscal 1998. While some of the products to be tested may not fit in the
Company's four major product categories, they will be items that appeal to the
demographics of the Company's existing customer base. Additionally, as a result
of the increasing lack of differentiation between certain products in the
consumer electronics and personal computer categories, the Company expects to
reduce the depth of its product offerings in fiscal 1998. Management believes it
is no longer necessary to offer consumers a larger number of competing products
at the same price point. The Company plans to evaluate the individual product
profitability of items offered and narrow its selection to those items
generating an adequate profit margin while still offering consumers a meaningful
selection of products at each price point.
The following table sets forth the approximate percentages of store sales
from each of Best Buy's principal product lines.
Fiscal Years Ended
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February 25, 1995 March 2, 1996 March 1, 1997
----------------- ------------- -------------
Home Office 37% 41% 39%
Consumer Electronics:
Video 20 18 17
Audio 14 13 12
Entertainment
Software (1) 18 17 18
Major Appliances 8 7 9
Other (2) 3 4 5
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Total 100% 100% 100%
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(1) Fiscal 1996 and 1995 restated to include video game products, previously
included in Other.
(2) Includes photographic equipment, blank audio and video tapes, furniture and
accessories and performance service plans.
Store Locations and Expansion
The Company's expansion strategy generally has been to enter major
metropolitan areas with the simultaneous opening of several stores and then to
expand into contiguous non-metropolitan markets. Currently, approximately
one-third of the Company's stores are in non-metropolitan markets. The entry
into a new market is preceded by a detailed market analysis which includes a
review of competitors, demographics and economic data. Best Buy's store location
strategy enables it to increase the effectiveness of advertising expenditures
and to create a high level of consumer awareness. In addition, the clustering
of stores allows the
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Company to maintain more effective management control, enhance asset
utilization, and utilize its distribution facilities more efficiently.
When entering a major metropolitan market, the Company establishes a
district office, service center and major appliance warehouse. Each new store
requires approximately $3 million of working capital, depending on the size of
the store, for merchandise inventory (net of vendor financing), leasehold
improvements, fixtures and equipment. Pre-opening costs of approximately
$300,000 per store are incurred in hiring and training new employees and in
advertising and are expensed in the year the store is opened.
During fiscal 1997, the Company opened 21 stores, an 8% increase in its
store base. The Company also expanded or relocated 10 stores to larger
facilities. Due to an anticipated industry wide softness in the growth of the
Company's product categories, Best Buy is slowing its store expansion program in
fiscal 1998. The Company expects to open 13 new stores in fiscal 1998, which
includes entry into the new markets of Pittsburgh, Pennsylvania; Knoxville,
Tennessee; and Palm Desert, California. The remainder of the new stores will be
opened in existing markets. To further implement the Concept III store format,
the Company also plans to expand or relocate another five stores in fiscal 1998.
The Company believes it has the necessary distribution capacity and management
information systems as well as management experience and depth to support its
fiscal 1998 expansion plans.
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The following table presents the number and location of stores
operated by the Company at the end of each of the last three fiscal years and
anticipated stores at fiscal 1998 year end.
Planned Anticipated
Number of Stores at Fiscal Year End For at Fiscal
----------------------------------- Fiscal 1998
1995 1996 1997 1998 Year End
---- ---- ---- ---- --------
Texas 32 34 34 1 35
Illinois 31 32 32 -- 32
California 7 19 22 1 23
Florida 3 12 17 3 20
Ohio 12 18 18 1 19
Michigan 14 16 16 1 17
Minnesota 15 15 15 -- 15
Wisconsin 11 11 11 -- 11
Georgia 9 10 10 -- 10
Missouri 10 10 10 -- 10
Maryland 4 8 9 -- 9
Arizona 7 7 8 -- 8
Colorado 6 7 8 -- 8
Indiana 8 8 8 -- 8
Pennsylvania -- -- 4 4 8
North Carolina 3 7 7 -- 7
Virginia 5 6 7 -- 7
Iowa 5 5 5 -- 5
Kansas 5 5 5 -- 5
New Jersey -- -- 3 1 4
South Carolina 3 4 4 -- 4
Arkansas 3 3 3 -- 3
Nebraska 3 3 3 -- 3
Oklahoma 3 3 3 -- 3
Kentucky 1 2 2 -- 2
Nevada 1 1 2 -- 2
Tennessee -- -- 1 1 2
Alabama -- 1 1 -- 1
Delaware -- 1 1 -- 1
New Mexico 1 1 1 -- 1
North Dakota 1 1 1 -- 1
South Dakota 1 1 1 -- 1
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Total 204 251 272 13 285
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Suppliers, Purchasing and Distribution
The Company's marketing strategy depends, in part, upon its ability to
offer a meaningful selection of name brand products to its customers and is,
therefore, dependent upon satisfactory and stable supplier relationships. In
fiscal 1997, Best Buy's 20 largest suppliers accounted for approximately 58% of
the merchandise purchased by the Company, with five suppliers, Acer, Compaq
Computer Corp., Hewlett-Packard, Packard Bell, and Sony representing
approximately 29% of the Company's total purchases. The loss of or disruption of
supply, including disruptions in supply due to manufacturers' product quality
issues, from any one of these major suppliers could have a material adverse
effect on the Company's sales. Certain suppliers have, at times, limited or
discontinued their supply of products to the Company. Best Buy
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generally does not have long-term written contracts with its major suppliers and
does not currently have any indication that any current suppliers will
discontinue selling merchandise to the Company. The Company has not experienced
difficulty in maintaining satisfactory sources of supply, and management expects
that adequate sources of supply will continue to exist for the types of
merchandise sold in its stores.
Best Buy's centralized buying staff purchases substantially all of the
Company's merchandise. The buying staff within the Company's Marketing
Department is responsible for product acquisition, promotion planning and
product pricing. An inventory management staff in the Marketing Department is
responsible for overall inventory management including allocations of inventory
and replenishment of store inventory. Generally, with the exception of certain
entertainment software, there are no agreements with suppliers for the return of
unsold inventory. Merchandise remaining at the time of new product introduction
is generally sold on a close-out basis and may be subject to a reduction in
selling price to levels at or below the Company's cost. Revenues from the sale
of close-out merchandise have been insignificant.
The Company has made product availability a high priority and continues to
make investments in facilities, personnel and systems to assure that its
in-stock position will be among the highest in the industry. The Company
utilizes an automatic replenishment system for restocking its stores and is able
to deliver products to its stores as required. Replenishment of store
inventories is based on inventory levels, historical and projected sales trends,
promotions and seasonality. The Company utilizes an extensive merchandise
planning and daily inventory monitoring system to manage inventory turns. The
Company has engaged Andersen Consulting LLP in fiscal 1998 to assist in the
design and implementation of systems and practices to improve the Company's
assortment planning, inventory management, product sourcing and advertising
effectiveness.
The majority of the Company's merchandise, except for major appliances, is
shipped directly from manufacturers to the Company's distribution centers in
California, Ohio, Minnesota, Oklahoma and Virginia. In addition, the Company
operates a dedicated distribution center for entertainment software in
Minnesota. Major appliances are shipped to satellite warehouses in each of the
Company's major markets. Beginning in fiscal 1997, the Company expanded its
appliance distribution capacity to support the additional product assortment.
This capacity will be further expanded in fiscal 1998. In order to meet release
dates for selected computer products and entertainment software titles, certain
merchandise is shipped directly to the stores from manufacturers and
distributors. The Company is, however, dependent upon the distribution centers
for inventory storage and shipment of most merchandise to stores. The Company
primarily uses contract carriers to ship merchandise from its distribution
centers to its
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stores. The Company believes that its distribution centers can most effectively
service stores within a 600 to 700 mile radius and that its six distribution
centers will accommodate the Company's expansion plans for the next year. The
Company plans to continue investing in new systems and purchasing material
handling equipment to reduce labor costs, improve accuracy in filling orders and
enhance space utilization.
Management Information Systems
Best Buy has developed proprietary software that provides daily information
on sales, gross margins and inventory levels by store and by stockkeeping unit.
These systems allow the Company to compare current performance against
historical performance and the current year's budget. Best Buy uses
point-of-sale bar code scanning from which sales information is polled at the
end of each day. The Company uses EDI (Electronic Data Interchange) with
selected suppliers for the more efficient transmittal of purchase orders,
shipping notices and invoices. The Company believes that the systems it has
developed have the ability to continue to improve customer service, operational
efficiency, and management's ability to monitor critical performance factors.
Best Buy is continuing to make investments in designing new systems, modifying
existing systems and increasing processing capacity, particularly with respect
to inventory management.
Store Operations
Best Buy has developed a standardized and detailed system for operating its
stores. The system includes procedures for inventory management, transaction
processing, customer relations, store administration and merchandise display.
The Company's store operations are organized into divisions. Each division is
divided into regions and is under the supervision of a senior vice president who
oversees store performance through several regional managers, each of whom has
responsibility for a number of districts within the region. District managers
monitor store operations closely and meet regularly with store managers to
discuss merchandising and new product introductions, sales promotions, customer
feedback and requests and store operating performance. Similar meetings are
conducted at the corporate level with divisional and regional management. A
senior vice president of retail operations has overall responsibility for retail
store processing and operations. Each district also has a loss prevention
manager, with product security controllers employed at each store to control
inventory shrinkage. Advertising, pricing and inventory policies are controlled
at corporate headquarters. The Company's training, consumer affairs, human
resources and store merchandising functions are also centralized at corporate
headquarters.
The Company's stores are open seven days and six evenings a week. A store
is typically staffed by one manager, four assistant
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managers, and an average staff ranging from 70 to 140 persons depending on store
size. Approximately 60% of a store's staff, which includes product specialists
and a support staff of cashiers and customer service and stock handling
employees, is employed on a part-time basis. Store managers are paid a salary
and have the opportunity to earn bonuses if their stores exceed sales and gross
margin quotas, meet certain budget criteria in controlling expenses, and achieve
certain administrative goals.
The Company has an employee development department which provides
managers with a variety of tools to teach employees the core skills they need
to meet their performance objectives. In the stores, Sales, Inventory,
Operations and Merchandising managers undergo comprehensive training in their
specialty areas, which include store operations, selling, managerial,
training and communications skills. The retail selling and sales support
teams receive a thorough orientation to the Company's industry and its
business objectives. Sales personnel are trained to ask specific questions
of customers to determine their needs and to present products, accessories
and services that meet those expressed needs. Stores hold monthly "team
meetings" to review store performance, Company focus and changes and
modifications in operating procedures. Specialized product training is also
conducted at these monthly meetings. The Company's policy is to staff store
management positions with personnel promoted from within each store and to
staff new stores from its pool of trained managers. However, as Best Buy
expands into new markets, it also recruits local management personnel who
have valuable knowledge about the new market.
Credit Policy
Approximately 32% of store revenues are paid for in cash, with the
remainder paid for by either major credit cards or the Best Buy private label
credit card. In recent years, the Company has utilized special financing offers
to stimulate sales. Generally, these financing offers allowed customers to defer
all payments interest-free for 90 days or six months, depending on the price of
the product, or to defer payments for approximately one year or longer on the
purchase of selected products. Late in fiscal 1997, the Company determined that
the longer term financing offers had become increasingly expensive and were not
as effective as they had been in generating incremental profitable business. In
the fourth quarter, the Company generally changed its strategy to offer the
promotions with shorter terms and monthly payments and limited the offers to
those products that generated sufficient profit margin to warrant the cost of
the offer. The special financing offers are only provided to customers who
qualify for Best Buy's private label credit card. The private label credit card
allows these customers to obtain financing on purchases of merchandise at Best
Buy stores through arrangements between the Company and independent banks and
consumer credit programs. The Company is generally able to qualify a new
customer for credit on the spot, typically in less than five
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minutes. Receivables from private label credit card sales are sold, without
recourse to the Company, to unaffiliated third party institutions. The Company
receives payment from these institutions within 2 to 3 days following the sale.
Competition
Retailing in each of the Company's product categories is highly
competitive. The overall consumer electronics business has slowed in the last
year and the concentration of sales among the top retailers in the industry has
increased significantly. The industry's consolidation has been evidenced in
recent years by the liquidation and consolidation of a number of competitors,
including the closing of Tandy Corp.'s Incredible Universe stores and selected
Computer City stores, stores operated by Musicland and the increased rate of
consolidation and store closures by other national and regional chains in fiscal
1997. The flat industry sales are due to market saturation for many consumer
electronics products and the general absence of new products in that market. The
growth of sales nationally in the home office product category has begun to slow
and the Company competes with an increasing number of retailers and alternative
channels of distribution. In addition, the Company believes that consumers
continue to become more knowledgeable and value conscious, thereby putting
pressure on profit margins. Management believes that its store format
distinguishes the Company from most of its competitors by offering customers a
friendlier and less pressured shopping experience. In addition, the Company
competes by aggressively advertising and emphasizing a meaningful product
selection, low prices, financing alternatives and service.
Best Buy competes in most of its markets against Circuit City, Sears and
Montgomery Ward and in selected markets against computer superstores such as the
remaining Computer City stores and CompUSA and entertainment software
superstores operated by Musicland and Tower Records. Certain of these
competitors have significantly greater financial resources than the Company.
The Company also competes against independent dealers, discount stores,
wholesale clubs, office products superstores and mass merchandisers.
Employees
As of March 1, 1997, the Company employed approximately 36,300 persons, of
whom approximately 19,000 were part-time or seasonal employees. The Company has
never experienced a strike or work stoppage, and management believes that its
employee relations are good. There are currently no collective bargaining
agreements covering any of the Company's employees.
-14-
<PAGE>
Item 2. PROPERTIES
The Company's stores, most of which are leased, include sales space,
inventory storage, management offices and employee areas. All of the leases
provide for a fixed minimum rent with scheduled escalation dates and amounts.
Leases for eight of the stores have a percentage rent provision equal to from
.75% to 4% of gross sales at each location in excess of certain specified sales
amounts. Currently, percentage rent is paid for only three stores. The initial
terms of the leases range from 5 to 20 years and generally allow the Company to
renew for up to three additional five-year terms. The terms of a majority of
the leases, including renewal options, extend beyond the year 2020. At March 1,
1997 the Company owned five of its operating retail store locations and three
locations under development. Management expects to sell and lease back these
properties in fiscal 1998.
The Company leases over 3 million square feet of distribution facilities
including brown goods centers in Bloomington, Minnesota; Ardmore, Oklahoma;
Staunton, Virginia; Ontario, California; and Findlay, Ohio, and a software
distribution center in Edina, Minnesota. The Company also operates leased
satellite warehouses for major appliances in its major markets. The Company's
corporate offices are located in a 290,000 square foot facility it owns in Eden
Prairie, Minnesota.
Item 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising during the normal
course of conducting business. The resolution of those proceedings is not
expected to have a material impact on the Company's financial condition.
-15-
<PAGE>
THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
<TABLE>
<CAPTION>
YEARS
WITH
THE
NAME AGE POSITION WITH COMPANY COMPANY
---- --- --------------------- -------
<S> <C> <C> <C>
Richard M. Schulze 56 Chairman, Chief Executive Officer and Director 30
Bradbury H. Anderson 47 President, Chief Operating Officer and Director 23
Allen U. Lenzmeier 53 Executive Vice President and Chief Financial Officer 12
Wade R. Fenn 38 Executive Vice President - Marketing 16
Julie M. Engel 36 Senior Vice President - Advertising 15
Robert C. Fox 46 Senior Vice President - Finance and Treasurer 11
Kevin P. Freeland 39 Senior Vice President - Inventory Management 1
Wayne R. Inouye 44 Senior Vice President - Marketing, Computers and Home Office 1
Michael P. Keskey 42 Senior Vice President - Sales 9
James P. Mixon 52 Senior Vice President - Logistics 3
Joseph T. Pelano 49 Senior Vice President - Retail Store Operations 8
Philip J. Schoonover 37 Senior Vice President - Marketing, Consumer Electronics and Appliances 2
Kenneth R. Weller 48 Senior Vice President - Sales 3
</TABLE>
_____________________________
RICHARD M. SCHULZE is a founder of the Company. He has served as an
officer and director of the Company from its inception in 1966 and currently
serves as its Chairman and Chief Executive Officer.
BRADBURY H. ANDERSON has been the Company's President and Chief Operating
Officer since April 1991. He has been employed in various other capacities with
the Company since 1973, including retail salesperson, store manager and sales
manager. Mr. Anderson has been a Director of the Company since 1986.
ALLEN U. LENZMEIER was promoted to his present position in April 1991 after
having served as Senior Vice President - Finance and Operations and Treasurer of
the Company from 1986. Mr. Lenzmeier joined the Company in 1984 and has also
served as Vice President - Finance and Operations and Treasurer.
WADE R. FENN was promoted to his present position in August 1995, having
served as a Sr. Vice President - Sales since 1991 and a Regional Vice President
of the Company from 1987. Mr. Fenn joined the Company in 1980 as a salesperson
and has also been employed by the Company as a store and district manager.
JULIE M. ENGEL was promoted to her present position in April 1995. Ms.
Engel joined the Company in July 1981 as Advertising Manager, was promoted to
Advertising Director in 1984 and became Vice-President - Advertising in April
1987.
ROBERT C. FOX was promoted to his present position in April 1994, after
having served as Vice President-Accounting since 1987 and Treasurer since 1993.
Mr. Fox joined the Company in 1985 as Controller.
-16-
<PAGE>
KEVIN R. FREELAND was promoted to his present position in April 1997, after
having served as Vice President - Inventory Management since 1995. Prior to
joining Best Buy, Mr. Freeland spent more than eight years with Payless Shoe
Source, where he held various positions in merchandise management, most recently
as Vice President of Merchandise Distribution.
WAYNE R. INOUYE joined the Company in September 1995 as Senior Vice
President - Marketing for Computers and Home Office. Prior to joining the
Company, Mr. Inouye was with The Good Guys! for 10 years, most recently as Vice
President of Merchandising.
MICHAEL P. KESKEY was promoted to his present position in April 1997,
having served as Vice President - Sales since 1996. Mr. Keskey joined the
Company in 1988 and has held positions as a Store Manager, District Manager and
Regional Manager.
JAMES P. MIXON joined Best Buy in April 1994 as Senior Vice
President-Logistics. Prior to joining the Company, Mr. Mixon held various
distribution management positions with several national retailers, most recently
with Marshalls Stores, Inc.
JOSEPH T. PELANO was promoted to his present position in April 1997, having
served as Vice President - Retail Store Operations since 1996. Mr. Pelano
joined the Company in 1989 as Regional Operations Manager.
PHILIP J. SCHOONOVER joined Best Buy in May 1995 and was promoted to Senior
Vice President - Marketing for Consumer Electronics and Appliances. Mr.
Schoonover's background includes more than eight years as Vice President of
Sales for the eastern region of Sony Corp. of America. Prior to joining the
Company, he was Executive Vice President for TOPS Appliance City for five years.
KENNETH R. WELLER joined the Company in May 1993. Since 1986, he was
Vice President of Sales with The Good Guys!, a San Francisco-based consumer
electronics retailer where he had worked since 1982.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-17-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information set forth under the caption "Common Stock Prices" on page
14 of the Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated
Financial and Operating Data" on page 9 of the Annual Report is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 10 through
14 of the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item, listed below, are contained
in the Annual Report on the pages thereof indicated, and are expressly
incorporated herein by this reference.
Page No.
-------
Consolidated balance sheets as of March 1, 1997
and March 2, 1996 15
For the fiscal years ended March 1, 1997,
March 2, 1996, and February 25, 1995
Consolidated statements of earnings 16
Consolidated statements of cash flows 17
Consolidated statements of shareholders'
equity 18
Independent auditor's report 18
Notes to consolidated financial statements 19-23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-18-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Security Ownership of Certain
Beneficial Owners and Management" and "Nominees and Directors" on pages 4
through 7 of the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" on
pages 8 through 15 of the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" on pages 4 through 6 of the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Nominees and Directors" and
"Certain Transactions" on pages 6 through 7 of the Proxy Statement is
incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements.
All financial statements of the Registrant as set forth under Item 8
of this Report.
2. Financial Statement Schedules:
No schedules have been included since they are either not applicable or the
information is included elsewhere herein.
-19-
<PAGE>
3. Exhibits:
Method
of
Number Description filing
- ------ ----------- ------
3.1 Amended and Restated Articles of (3)
Incorporation, as amended
3.2 Certificate of Designation with respect (2)
to Best Buy Series A Cumulative
Convertible Preferred Stock, filed
November 1, 1994
3.3 Amended and Restated By-Laws, as amended (2,4,5)
3.4 Resolution of the Board of Directors (1)
dated February 13, 1997 amending the
Amended and Restated By-Laws
4.1 Form of Indenture between Best Buy Co., (6)
Inc. and First Trust Company, Inc.,
relating to $30,000,000 Subordinated
Extendible Notes due 1997, dated as of
July 1, 1987
4.2 Note Purchase Agreement with Principal (7)
Mutual Life Insurance Company, dated as
of July 30, 1992
4.3 Amended and Restated Credit Agreement (8)
dated August 25, 1995 with First Bank
National Association ("the Credit Agreement")
4.4 First Amendment to the Credit Agreement (9)
with First Bank National Association, dated
March 1, 1996
4.5 Second Amendment to the Credit Agreement (1)
with First Bank National Association, dated
December 24, 1996
4.6 Indenture between Best Buy Co., Inc. and (3)
Mercantile Bank of St. Louis N.A. relating to
$150,000,000 8-5/8% Senior Subordinated Notes
due 2000, dated as of October 12, 1993
4.7 Amended and Restated Agreement of Limited (2)
Partnership of Best Buy Capital, L.P., dated
as of November 3, 1994
-20-
<PAGE>
4.8 Indenture between Best Buy, Best Buy Capital, (2)
L.P., and Harris Trust and Savings Bank
relating to $288,227,848 6-1/2% Convertible
Subordinated Debentures due 2024, dated as of
November 3, 1994
4.9 Guarantee Agreement related to 6-1/2% (2)
Convertible Monthly Income Preferred Securities
of Best Buy Capital, L.P., dated November 3, 1994
4.10 Deposit Agreement with respect to Best Buy (2)
Series A Cumulative Convertible Preferred Stock,
dated November 3, 1994
10.1 1987 Employee Non-Qualified Stock Option Plan, (9)
as amended
10.2 1987 Directors' Non-Qualified Stock Option (2)
Plan, as amended
10.3 1994 Full-Time Employee Non-Qualified Stock (9)
Option Plan
10.4 Resolutions of the Board of Directors dated (9)
April 19, 1996 establishing the bonus program
for senior officers
10.5 1997 Employee Non-Qualified Stock Option Plan (10)
10.6 1997 Directors' Non-Qualified Stock Option (10)
Plan
10.7 Amended and Restated 1994 Full-Time Employee (10)
Non-Qualified Stock Option Plan
11.1 Computation of Earnings Per Share (1)
13.1 1997 Annual Report to Shareholders (1)
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Ernst & Young LLP (1)
27.1 Financial Data Schedule (1)
-21-
<PAGE>
(1) Document is filed herewith.
(2) Exhibits so marked were filed with the Securities and Exchange
Commission on May 23, 1995, as exhibits to the Form 10-K of Best Buy
Co., Inc. and are incorporated herein by reference and made a part
hereof.
(3) Exhibits so marked were filed with the Securities and Exchange
Commission on May 20, 1994, as exhibits to the Form 10-K of Best Buy
Co., Inc. and are incorporated herein by reference and made a part
hereof.
(4) Exhibit so marked was filed with the Securities and Exchange
Commission on November 12, 1991, as an exhibit to the Registration
Statement on Form S-3 (Registration No. 33-43065) of Best Buy Co.,
Inc., and is incorporated herein by reference and made a part of
hereof.
(5) Exhibit so marked was filed with the Securities and Exchange
Commission on January 13, 1992, as an exhibit to Form 10-Q of Best
Buy Co., Inc., and is incorporated herein by reference and made a
part hereof.
(6) Exhibit so marked was filed with the Securities and Exchange
Commission on June 19, 1987, as an exhibit to the registration
statement on form S-1 (Registration No. 33-15201) of
Best Buy Co., Inc., and are incorporated herein by reference and
made a part hereof.
(7) Exhibits so marked were filed with the Securities and Exchange
Commission on October 12, 1992, as exhibits to Form 10-Q of Best Buy
Co., Inc., and are incorporated herein by reference and made a part
hereof.
(8) Exhibit so marked was filed with the Securities and Exchange
Commission on October 10, 1995, as an exhibit to Form 10-Q of Best
Buy Co., Inc. and is incorporated herein by reference and made a
part hereof.
(9) Exhibits so marked were filed with the Securities and Exchange
Commission on May 29, 1996, as exhibits to the Form 10-K of Best Buy
Co., Inc. and are incorporated herein by reference and made a part
hereof.
(10) Exhibits so marked were filed with the Securities and Exchange
Commission on May 12, 1997, as exhibits to the definitive Proxy
Statement of Best Buy Co., Inc. and are incorporated herein by
reference and made a part hereof.
-22-
<PAGE>
Pursuant to Item 601(b)(4)(iii) of Regulation S-K under the Securities Act
of 1933, the Registrant has not filed as exhibits to the Form 10-K certain
instruments with respect to long-term debt under which the amount of
securities authorized does not exceed 10 percent of the total assets of the
Registrant. The Registrant hereby agrees to furnish copies of all such
instruments to the Commission upon request.
(b) Reports on Form 8-K
None.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ Richard M. Schulze
--------------------------
Chief Executive Officer
Dated: May 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 28, 1997.
/s/ Richard M. Schulze Chairman, Chief Executive Officer
- -------------------------- and Director (principal executive
Richard M. Schulze officer)
/s/ Bradbury H. Anderson President, Chief Operating Officer
- -------------------------- and Director
Bradbury H. Anderson
/s/ Allen U. Lenzmeier Executive Vice President and Chief
- -------------------------- Financial Officer (principal
Allen U. Lenzmeier financial officer)
/s/ Robert C. Fox Sr. Vice President - Finance and
- -------------------------- Treasurer (principal accounting
Robert C. Fox officer)
/s/ Elliot S. Kaplan Director
- --------------------------
Elliot S. Kaplan
/s/ Frank D. Trestman Director
- --------------------------
Frank D. Trestman
/s/ Culver Davis, Jr. Director
- --------------------------
Culver Davis, Jr.
/s/ David Stanley Director
- --------------------------
David Stanley
/s/ James C. Wetherbe Director
- --------------------------
James C. Wetherbe
-24-
<PAGE>
EXHIBIT 3.4
SECRETARY'S CERTIFICATE
I, Elliot S. Kaplan, the Secretary of Best Buy Co., Inc., a Minnesota
corporation (the "Corporation"), do hereby certify that the following
resolution was duly adopted by the Board of Directors of the Corporation at a
meeting held February 13, 1997, and that said resolution is still in full
force and effect:
RESOLVED:
[T]he Board of Directors of this Corporation does hereby amend
Section 1 of Article III of the Amended and Restated By-Laws of the
Corporation, to read as follows:
Section 1
ELECTION OF
DIRECTORS
---------
The business and affairs of this corporation shall be managed by
or under the direction of its Board of Directors which shall be
comprised of up to nine (9) directors, five (5) of whom shall be Class
1 Directors, and four (4) of whom shall be Class 2 Directors. Each
Director shall be elected to serve for a term of two (2) years and
until his/her successor shall have been duly elected and qualified.
Class 1 Directors shall be elected in even numbered years and Class 2
Directors shall be elected in odd numbers years. Except as to the year
in which elected, the powers privileges, duties and responsibilities of
each Class 1 and Class 2 Director shall be alike in every respect.
Dated: May 20, 1997
/s/ Elliot S. Kaplan
----------------------------------------
Elliot S. Kaplan
Secretary
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of
December 24, 1996, and is between BEST BUY CO., INC., a Minnesota corporation
(the "Company"), the lenders party to the Credit Agreement, as hereinafter
defined (such lenders being hereinafter sometimes referred to, collectively, as
the "Banks"), and FIRST BANK NATIONAL ASSOCIATION, as agent for the Banks (in
such capacity, the "Agent").
WITNESSETH THAT:
WHEREAS, the Company, the Banks and the Agent are parties to an Amended and
Restated Credit Agreement dated as of August 25, 1995, as amended by a First
Amendment to Credit Agreement dated as of March 1, 1996 (as so amended, the
"Credit Agreement"); and
WHEREAS, the Company, the Banks and the Agent have agreed to amend the
Credit Agreement as provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. CERTAIN DEFINED TERMS. Each capitalized term used herein without
being defined that is defined in the Credit Agreement shall have the meaning
given to it in the Credit Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is amended as
follows:
(a) Section 1.01 is amended to add the following definitions in the
appropriate alphabetical order:
"ADDITIONAL MARGIN": as of any date of determination, the
applicable percentage based on the Interest Coverage Ratio for the
period of twelve consecutive months ending on the applicable "Margin
Measurement Date" (as defined below), as set forth below:
Applicable Letter of
- --------------------------------------------------------------------------------
Interest Coverage Ratio Applicable Margin Credit Fee Percentage
- ----------------------- ----------------- ---------------------
Greater than 1.45 : 1.00 0 0
1.401 : 1.00-1.45 : 1.00 0.25% 0.125%
1.351 : 1.00-1.40 : 1.00 0.50% 0.25%
1.35 : 1.00 or less 0.75% 0.375%
With respect to each date of determination during any period beginning
on the tenth day of any month and continuing through the ninth day of
the following month (e.g., February 10 - March 9), the Margin
Measurement Date shall be the last day of the second fiscal month
preceding the month in which such period begins (e.g., January3). To
the extent the financial statements required under Section 5.01(b) as
of, and for the period ending on, any Margin Measurement Date, and the
accompanying Compliance Certificate, are not delivered to the Agent
within thirty (30) days after such Margin Measurement
1
<PAGE>
Date, the Interest Coverage Ratio as of such Margin Measurement Date
shall, for purposes of this definition, be deemed to be less than 1.35
: 1.00.
"BB PROPERTY": BB Property Company, a Nebraska general
partnership.
"BB PROPERTY LEASE AGREEMENT": the Lease Agreement dated as of
April 15, 1993 between BB Property and the Company, as the same may be
amended, restated, supplemented or otherwise modified and in effect
from time to time, and any other agreement between BB Property and the
Company relating to the Lease of any real property.
"BB PROPERTY LEASE DOCUMENTS": the BB Property Lease Agreement,
together with any agreement, document or instrument entered into in
connection with any credit extended to BB Property and secured by such
Lease Agreement, other agreement or the properties covered thereby,
including, without limitation, the Note Purchase Agreement dated as of
April 15, 1993 among BB Property, the Company and Teachers Insurance
and Annuity Association of America, and the "Deed of Trust" and the
"Assignment" (as defined in such Note Purchase Agreement).
"CONQUEST DOCUMENTS": the Agreement for Lease, the Master Lease
Agreement, any agreement, document or instrument executed or delivered
in connection therewith, any "Credit Agreement" (as defined in the
Master Lease Agreement), any other agreement relating to Indebtedness
of BBC or Conquest secured by or otherwise related to the Agreement to
Lease, the Master Lease Agreement or any property covered thereby, and
any agreement, document or instrument executed or delivered in
connection with any such Credit Agreement or other agreement.
"DESIGNATION PERIOD": as such term is defined in Section 2.16.
(b) Section 1.01 is further amended to restate the following
definitions as follows:
"APPLICABLE LETTER OF CREDIT FEE PERCENTAGE": as of any date of
determination, (a) with respect to Letters of Credit having a
scheduled expiration date not more than six months after the date of
issuance, the applicable percentage based on the Performance Level, as
set forth below:
PERFORMANCE LEVEL APPLICABLE PERCENTAGE
I 0.75%
II 0.75%
III 1.25%
IV 1.75%
and (b) with respect to Letters of Credit having a scheduled
expiration date more than six months after the date of issuance, the
applicable percentage based on the Performance Level, as set forth
above, plus one-quarter of one percent (0.25%), in each case PLUS the
Additional Margin.
"APPLICABLE MARGIN": as of any date of determination, the
applicable percentage based on the Performance Level, as set forth
below:
2
<PAGE>
Performance Eurodollar Swing-Line
Reference
LEVEL RATE ADVANCES LOANSRATE ADVANCES
I 0.75% -0.75% -0.50%
II 1.00% -0.75% -0.50%
III 1.50% -0.375% 0
IV 2.00% 0 0.50%
in each case PLUS the Additional Margin. The Applicable Margin for
any Eurodollar Advance during any Interest Period applicable thereto
shall be the Applicable Margin in effect on the first day of such
Interest Period; PROVIDED, that the Applicable Margin for any such
Interest Period shall be adjusted to account for any change in the
Additional Margin on and as of the effective date of such change.
"BORROWING BASE": as of a date of determination, the 71 43/100%
of the following amount MINUS (A) the amount of any unsecured
Indebtedness incurred by the Company pursuant to Section 5.13(g) and
(B) $30,000,000:
55% of the lower of: (a) cost (as determined on a first-in,
first-out basis) of Eligible Inventory LESS (i) the amount of
Indebtedness of the Company or any Subsidiary secured by Liens on
inventory and (ii) the amount accrued for losses due to missing
inventory (shrink accrual) or (b) market value of Eligible
Inventory LESS (i) the amount of Indebtedness of the Company or
any Subsidiary secured by Liens on inventory and (ii) the amount
accrued for losses due to missing inventory (shrink accrual).
"DESIGNATED AMOUNT": with respect to any Bank for any
Designation Period, such Bank's Pro Rata Share of the amount of the
Aggregate Seasonal Commitment Amount designated by the Company as
available pursuant to Section 2.16.
(c) Section 2.06(c) is amended to delete clause (ii) thereof and
substitute the following therefor:
(ii) otherwise, at a rate per annum equal to the sum of the
Reference Rate PLUS the Applicable Margin PLUS 2.00%.
(d) Section 2.16 is restated in its entirety to read as follows:
Section 2.16 DESIGNATION OF AVAILABLE AMOUNT OF SEASONAL COMMITMENT.
Not less than five nor more than ten days prior to the first Business
Day of each month from July through December of each year, the Company
may by written notice to the Agent designate all or any portion of the
Aggregate Seasonal Commitment Amount as available for the period from
the first Business Day of the following month until the day before the
first Business Day of the second following month (each such period, a
"Designation Period"). If the Company shall fail to make such
designation as provided in the preceding sentence, the Designated
Amount of each Bank for the following Designation Period shall be the
same as the Designated Amount for the preceding Designation Period or,
in the case of the first Designation Period occurring during each
year, shall be zero, subject to adjustment
3
<PAGE>
pursuant to the second paragraph of this Section 2.16. The Agent
shall notify each Bank in writing, within one Business Day after its
receipt of any such designation, of such designation and such Bank's
Designated Amount for the following Designation Period. The Agent
shall also notify each Bank in writing, within one Business Day after
the expiration of the time for the Company to make a designation under
this Section2.16 for any Designation Period, if no such designation
has been made.
Notwithstanding the foregoing, the Company may increase the Aggregate
Designated Amount for any particular Designation Period during such
Designation Period by requesting Loans pursuant to Section 2.02 and/or
Letters of Credit pursuant to Section 2.09 that would cause Total
Outstandings to exceed the Aggregate Available Amount, but not the
Aggregate Commitment Amount. Each Bank shall make its Loan in its Pro
Rata Share of the requested Loans in accordance with the provisions of
Section 2.02 so long as all other terms of lending under this
Agreement have been satisfied. In each such case the Company shall
specify in its request to borrow the aggregate amount by which the
requested Loans will cause the Total Outstandings to exceed the
Aggregate Available Amount (and thus the amount by which the Aggregate
Designated Amount shall be increased) for such Designation Period and
the Agent shall include such information in the notification provided
to each Bank pursuant to Section 2.02. The Company shall pay to the
Agent, for the account of the Banks, for the period from and including
the first calendar day of the Designation Period in which the
requested Loans are made through the last calendar day thereof, a fee
in an amount equal to three-eights of one percent (0.375%) per annum
of the aggregate amount by which such requested Loans will cause the
Total Outstandings to exceed the Aggregate Available Amount (and thus
the amount by which the Aggregate Designated Amount will be
increased). Such fee shall be in lieu of the Commitment Fee under
Section 2.18 otherwise applicable to such excess amount during such
Designation Period and shall be payable quarterly in arrears on the
first day of the following calendar quarter and on the Termination
Date. The Designated Amount of each Bank shall be increased by its
Pro Rata Share of the amount by which the Aggregate Designated Amount
shall be increased pursuant to this Section.
(e) Section 5.24 is restated in its entirety to read as follows:
Section 5.24 INTEREST COVERAGE RATIO. Not permit the Interest
Coverage Ratio to be less than (a) for the Measurement Periods ending
on or about February 28, 1997, May 31, 1997 and August 31, 1997, 1.30
to 1.00, and (b) for all other Measurement Periods, 1.70 to 1.00.
(f) Section 6.01 is amended to delete the period at the end of
subsection (k) thereof and substitute "; or " therefor, and to add the
following after such subsection (k):
(l) BB Property, any lender to BB Property, or any trustee, agent
or other representative of any lender to, or the holders of any
securities issued by, BB Property, shall exercise, give any
required formal written notice of intent to exercise, or
otherwise express in writing any present or unconditional intent
to exercise, any remedy it may have with respect to
4
<PAGE>
any default occurring under any of the BB Property Lease
Documents, unless all remedies exercised, or that are the subject
of such written notice, if exercised, would not materially affect
the Company's or any Subsidiary's operations at any leased
property or require the Company or any Subsidiary to pay any
lease payment prior to its scheduled due date or make any
termination or other extraordinary payment; or
(m) the Company's independent certified public accountants shall
qualify their opinion with respect to the Company's financial
statements in any respect as a result of any default or event
that could, with the passage of time, the giving of notice or
otherwise, become a default under any Conquest Document or BB
Property Lease Document, or any such default or event asserted to
have occurred thereunder (whether or not such default or event
has actually occurred); or
(n) lessors under leases of real property with an aggregate fair
market value (determined under the most recent available
appraisals thereof) in excess of $ 10,000,000 to which the
Company or any Subsidiary is a party, any lender to any such
lessor(s), or any trustee, agent or other representatives of any
lender to, or the holders of any securities issued by, any such
lessor(s), shall exercise, give any required formal written
notice of intent to exercise, or otherwise express in writing any
present or unconditional intent to exercise, any remedy they may
have against the Company, any Subsidiary or any leased property
that involves (i) payment by the Company or any Subsidiary of an
amount in excess of $5,000,000 or (ii) any material interference
with the Company's or any Subsidiary's operations at any leased
property; or
(o) (i) Conquest, any lender to Conquest or BBC, or any trustee,
agent or other representative of any lender to, or the holders of
any securities issued by, Conquest or BBC, shall exercise, give
any required formal written notice of intent to exercise, or
otherwise express in writing any present or unconditional intent
to exercise, any remedy it may have with respect to any default
occurring under any of the Conquest Documents unless all remedies
exercised, or that are the subject of such written notice, if
exercised, would not materially affect the Company's or any
Subsidiary's operations at any leased property or require the
Company or any Subsidiary to pay any lease payment prior to its
scheduled due date or make any termination or other extraordinary
payment; (ii) any litigation shall be commenced with respect to
the question of whether the Company's failure to comply with
Section 5.24 of this Agreement for the period ending November 30,
1996 constitutes a default under any of the Conquest Documents,
or (iii) any amendment to any of the Conquest Documents shall be
entered into that has the effect, directly or indirectly, of
effectively ending the term of the "Credit Agreement" (as defined
in the Master Lease Agreement) in effect on November 30, 1996
prior to September30, 1998.
(g) Exhibits A and B to the Credit Agreement are replaced in their
entirety with Exhibits A and B hereto.
Section 3. DEFAULT WAIVER.
5
<PAGE>
3.1 INTEREST COVERAGE ON DEFAULT. Under Section 5.24 of the Credit
Agreement as in effect prior to this Amendment, the Company agreed to maintain
an Interest Coverage Ratio for each Measurement Period of not less than 1.70 to
1.00.
3.2 WAIVER. The Banks hereby waive compliance by the Company with the
requirements described in Section 3.1 hereof for the period ending November 30,
1996. The Company agrees that the waiver set forth in this Section 3.2 shall be
limited to the precise meaning of the words as written herein and shall not be
deemed (a) to be a consent to any waiver or modification of any other term or
condition of the Credit Agreement, or of the terms or conditions described in
Section 3.1 hereof for any period ending on any date except November 30, 1996,
or (b) to prejudice any right or remedy that the Agent or the Banks may now have
or may in the future have under or in connection with the Credit Agreement. The
Company acknowledges and agrees that the waivers set forth in this Section 3.2
are provided by the Banks as an accommodation to the Company. The waivers set
forth herein shall not be deemed to be, a course of dealing with respect thereto
upon which the Company may rely in the future, and the Company hereby expressly
waives any claim to such effect.
4. EFFECTIVENESS OF AMENDMENT. This Amendment shall be deemed effective
as of the date first above written, but only upon delivery to the Agent of this
Amendment duly executed by the Company and the Majority Banks, and when each of
the following conditions precedent has been satisfied:
(a) no material action, suit or proceeding (including, without
limitation, any inquiry or investigation) shall be pending or threatened
with respect to the Company that could have a material adverse affect on
the Company;
(b) no material adverse change in the business assets, financial
condition or prospects of the Company shall have occurred since March 2,
1996;
(c) payment shall have been made to, and received by, the Agent of
(i) an amendment fee in the amount of $275,000, for the account of the
Banks in accordance with their respective Pro Rata Shares (determined under
clause (a) of the definition thereof), and (ii) all amounts payable to the
Agent under the Credit Agreement or this Amendment, including, without
limitation, all expenses of the Agent and the fees and expenses of counsel
to the Agent incurred on or prior to the effective date of this Amendment,
in the amounts requested by the Agent;
(d) the representations and warranties contained in Article IV of the
Credit Agreement, as amended hereby, are correct on and as of the effective
date of this Amendment as though made on and as of such date; and
(e) after giving effect to the waiver set forth in Section 3.2 of
this Amendment, no Event of Default or Unmatured Event of Default has
occurred and is continuing, or would result from the execution and delivery
of this Amendment or the consummation of the transactions contemplated
hereby; and
(f) except for the default under Section 18(c) of the BB Property
Lease Agreement, no default or event that could, with the passage of time,
the giving of notice or both, become a default exists under any material
agreement (whether or not relating to Indebtedness) to which the Company or
any Subsidiary is a party or by which the Company, any Subsidiary or any of
their respective properties is bound.
6
<PAGE>
5. ACKNOWLEDGEMENT. The Banks and the Company each acknowledge that, as
amended hereby, the Credit Agreement, as amended by this Amendment, remains in
full force and effect with respect to the Company, the Banks and the Agent. The
Company confirms and acknowledges that it will continue to comply with the
covenants set out in the Credit Agreement, as amended hereby, and that its
representations and warranties set out in the Credit Agreement, as amended
hereby, are true and correct as of the date of this Amendment. The Company
further represents and warrants that (i) the execution, delivery and performance
of this Amendment by the Company is within its corporate powers and has been
duly authorized by all necessary corporate action, (ii) this Amendment has been
duly executed and delivered by the Company and constitutes the legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms (subject to limitations as to enforceability which might result
from bankruptcy, insolvency or other similar laws affecting creditors' rights
generally) and (iii) no Events of Default or events which, with the giving of
notice or passage of time, would be an Event of Default, exist under the Credit
Agreement.
6. COUNTERPARTS. This Amendment may be signed by the parties hereto on
different counterparts with the same effect as if the signatures hereto were on
the same instrument.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
BEST BUY CO., INC.
By Robert C. Fox
Its Senior Vice President - Finance
FIRST BANK NATIONAL ASSOCIATION
By
Its Senior Vice President
BANK ONE, DAYTON, NATIONAL ASSOCIATION
By John B. Middelberg
Its Vice President
THE BANK OF TOKYO-MITSUBISHI
LTD., CHICAGO BRANCH
By J.R. Arnold
Its Vice President
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By
Its
S-8
<PAGE>
THE LONG TERM CREDIT BANK OF JAPAN, LTD.
By
Its
THE BANK OF NOVA SCOTIA
By J.H. Youssef
Its Senior Manager Finance & Administration
YASUDA TRUST AND BANKING CO., LTD.
By Joseph C. Meek
Its Deputy General Manager
THE SUMITOMO BANK, LIMITED
By John W. Howard, Jr Michael J. Phillippe
Its Vice President Vice President & Manager
MERCANTILE BANK OF ST. LOUIS NATIONAL
ASSOCIATION
By
Its
S-9
<PAGE>
COMERICA BANK
By
Its
WELLS FARGO BANK
By
Its
BANK OF AMERICA ILLINOIS
By
Its
BANQUE NATIONALE DE PARIS
By
Its
THE DAI-ICHI KANGYO BANK, LTD., CHICAGO BRANCH
By Seiichiro Ino
Its Vice President
THE SAKURA BANK, LIMITED
By Shunji Sakurai
Its Joint General Manager
S-10
<PAGE>
THE SANWA BANK, LIMITED, CHICAGO BRANCH
By Gordon P. Holtley
Its Vice President & Manager
UNITED STATES NATIONAL BANK OF OREGON
By Roger H. Weis
Its Vice President
S-11
<PAGE>
EXHIBIT A
FORM OF
BORROWING BASE CERTIFICATE
Company: Best Buy Co., Inc. Date Report #
A. INVENTORY
1. Total Perpetual Inventory (FIFO) as of $
2. Less: Ineligible Inventory
a. Defective Center Inventory (Devo) $
b. Service Center Invetory $
c. Close-out Inventory $
3. Total (2 a + b + c) $
4. Eligible Inventory (Line 1 - Line 3) $
5. Less:
a. Secured Vendor Payables $
b. Floor Plan Liability $
c. Shrink Accrual $
6. Total (5 a + b + c) $
7. Eligible Inventory Net of Financing Obligations
and Shrink Accrual (Line 4 -Line 6) $
8. Eligible Loan Value @ 55% of Line 7 $
B. BORROWING BASE
1. Total Available Inventory
(Line A.8) $
2. Total Borrowing Base (71 43/100% of Line B.1) $
3. Unsecured Indebtedness under Section
5.13(g) $
-----
4. Conquest Reserve ($30,000,000) $30,000,000_
5. Net Borrowing Base $
- -----
C. LOAN STATUS
1. Total Outstandings (includes Letter of Credit Usage) $
<PAGE>
2. Borrowing Base Excess (Deficiency)
(Line B.5 - Line C.1) $
D. OTHER ASSETS
1. General Ledger Cash Balance $
2. Total Accounts Receivable
(including Credit Card Receivables) $
We certify that to our best knowledge and belief the information
contained in this report is true and accurate.
BEST BUY CO., INC.
By
Its
<PAGE>
EXHIBIT B
FORM OF
COMPLIANCE CERTIFICATE
TO: First Bank National Association, as Agent
THE UNDERSIGNED HEREBY CERTIFIES THAT:
(1) I am the duly elected chief financial officer of Best Buy Co.,
Inc. (the "Company"), a Minnesota corporation, or have been designated by such
chief financial officer to submit this Compliance Certificate on his behalf;
(2) I have reviewed the terms of the Credit Agreement dated as of
August 25, 1995, among the Company, the Banks party thereto, First Bank National
Association, as Agent and The Bank of Nova Scotia, Bank One, Dayton, National
Association, and Bank of America Illinois, as Co-Agents (as heretofore amended,
referred to herein and in the attachment hereto as the "Credit Agreement"), and
I have made, or have caused to be made under my supervision, a detailed review
of the transactions and conditions of the Company during the accounting period
covered by the attachment hereto;
(3) The examinations described in paragraph (2) did not disclose, and
I have no knowledge of, whether arising out of such examinations or otherwise,
the existence of any condition or event which constitutes an Event of Default or
Unmatured Event of Default (as such terms are defined in the Credit Agreement)
during or at the end of the accounting period covered by the attachment hereto
or as of the date of this Certificate, except as described below (or in a
separate attachment to this Certificate). The exceptions, listing in detail the
nature of the condition or event, the period during which it has existed and the
action which Company has taken, is taking or proposes to take with respect to
each such condition or event, are as follows:
The foregoing certifications, together with the computations set forth
in the attachment hereto and the financial statements delivered with this
Certificate in support hereof, are made and delivered this day of , 199_,
pursuant to Section 5.01(c) of the Credit Agreement.
BEST BUY CO., INC.
By
Its
<PAGE>
ATTACHMENT
TO COMPLIANCE CERTIFICATE
AS OF , 19__, WHICH PERTAINS
TO THE PERIOD FROM , 19__,
TO , 19__
Terms defined in the Credit Agreement are used herein as defined
therein and Section references herein refer to the Sections of the Credit
Agreement.
1. MAXIMUM PERMISSIBLE SALE OR LEASE OF ASSETS:
(prescribed by Section 5.11(c))
(a) Maximum aggregate book value of assets
of the Company and Subsidiaries that
may be disposed of during such fiscal
year under Section 5.11(c): $
(b) Actual aggregate book value of all assets of
the Company and Subsidiaries disposed of
during the fiscal year encompassing the
period covered hereby: $
2. LIMITATION ON GENERAL CAPITAL EXPENDITURES:
(prescribed by Section 5.17)
(a) Maximum aggregate amount of General
Capital Expenditures permitted under
Section 5.17 for the fiscal year including
the period covered hereby: $150,000,000
(b) Actual General Capital Expenditures on a
year-to-date basis for the fiscal year
including the period covered
hereby: $
3. CONSOLIDATED NET WORTH:
(prescribed by Section 5.21)
(a) Minimum Tangible Net Worth
required under Section 5.21
for the period covered hereby: $
(b) Actual Tangible Net Worth: $
4. LEVERAGE RATIO:
(prescribed by Section 5.22; measured at fiscal
year-end only)
(a) (i) Indebtedness of the Company and
Subsidiaries: $
<PAGE>
MINUS
(ii) Cash and Short-term Investments $
Total $
(b) Tangible Net Worth: $
(c) Maximum Leverage Ratio permitted
under Section 5.22: 2.00 to 1.00
(d) Actual ratio ((a) to (b)): to 1.00
---
5. INVENTORY TURNOVER RATIO:
(prescribed by Section 5.23)
(a) Minimum Inventory Turnover Ratio
required under Section 5.23 for
the Measurement Period covered hereby: 4.50 to 1.00
(b) Actual Inventory Turnover Ratio
for the Measurement Period covered
hereby:
(i) Cost of inventory sold during
Measurement Period: $
to
(ii) Average Cost of inventory held at
the end of each month during the
Measurement Period: $
Ratio of (i) to (ii): to 1.00
6. INTEREST COVERAGE RATIO:
(prescribed by Section 5.24)
(a) Minimum Interest Coverage Ratio
required under Section 5.24 for the
Measurement Period covered hereby: to 1.00/(1)
------
(b) Actual Interest Coverage Ratio for the
Measurement Period covered hereby:
Ratio of:
- ---------------------------
(1) 1.30 to 1.00 for Measurement Periods ending February, May and in August,
1997; 1.70 to 1.00 for all other periods
<PAGE>
(i) Earnings Before Interest, Income
Taxes and Depreciation $
PLUS
Rental and Lease Expense $
PLUS
MIPS Distributions deducted
from Net Income but excluded
from Interest Expense $
------
Total: $
to
(ii) Rental and Lease Expense $
PLUS
Consolidated Net Interest Expense $
PLUS
MIPS Distributions excluded from
Interest Expense $
------
Total: $
Ratio of (i) to (ii): to 1.00
7. LIMITATION ON OWNED LAND AND BUILDINGS
(prescribed by Section 5.25)
(a) Maximum amount of owned land
and buildings permitted under
Section 5.25: $150,000,000
(b) Actual amount of owned land and
buildings as of measurement date: $
<PAGE>
EXHIBIT 11.1
BEST BUY CO., INC.
------------------
COMPUTATION OF NET EARNINGS PER COMMON SHARE
--------------------------------------------
<TABLE>
<CAPTION>
March 1, March 2, February 25,
For the years ended: 1997 1996 1995
----- ----- -----
Earnings:
<S> <C> <C> <C>
Net earnings available
to common shares $ 1,748,000 $48,019,000 $57,651,000
------------ ----------- -----------
Shares:
Weighted average common 43,171,000 42,620,000 42,013,000
shares outstanding
Adjustments:
Assumed issuance of shares
purchased under stock option plans 411,000 1,020,000 1,458,000
------------ ----------- -----------
Total common equivalent shares 43,582,000 43,640,000 43,471,000
------------ ----------- -----------
------------ ----------- -----------
Earnings per share:
Net earnings per common share $ .04 $ 1.10 $ 1.33
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
Note: The computation of earnings per common share assuming full dilution is
substantially the same as set forth above or is anti-dilutive.
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA ($ in thousands, except per share amounts)
FISCAL PERIOD(1) 1997 1996 1995 1994(2) 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Revenues $ 7,770,683 $ 7,217,448 $ 5,079,557 $ 3,006,534 $ 1,619,978
Gross profit 1,058,881 936,571 690,393 456,925 284,034
Selling, general and
administrative expenses 1,005,675 813,988 568,466 379,747 248,126
Operating income 53,206 122,583 121,927 77,178 35,908
Earnings before cumulative
effect of accounting change 1,748 48,019 57,651 41,710 19,855
Net earnings 1,748 48,019 57,651 41,285 19,855
PER SHARE DATA
Earnings before cumulative
effect of accounting change $ .04 $ 1.10 $ 1.33 $ 1.01 $ .57
Net earnings .04 1.10 1.33 1.00 .57
Common stock price: High 26 1/4 29 5/8 45 1/4 31 7/16 15 23/32
Low 7 7/8 12 3/4 22 1/8 10 27/32 4 23/32
Weighted average
shares outstanding (000s) 43,582 43,640 43,471 41,336 34,776
OPERATING AND OTHER DATA
Comparable store sales change(3) (5%) 6% 20% 27% 19%
Number of stores (end of period) 272 251 204 151 111
Average revenues per store(4) $ 29,300 $ 31,100 $ 28,400 $ 22,600 $ 17,600
Gross profit percentage 13.6% 13.0% 13.6% 15.2% 17.5%
Selling, general and administrative
expense percentage 12.9% 11.3% 11.2% 12.6% 15.3%
Operating income percentage .7% 1.7% 2.4% 2.6% 2.2%
Inventory turns(5) 4.6x 4.8x 4.7x 5.0x 4.8x
BALANCE SHEET DATA (at period end)
Working capital $ 567,456 $ 586,841 $ 609,049 $ 362,582 $ 118,921
Total assets 1,734,307 1,890,832 1,507,125 952,494 439,142
Long-term debt, including current portion 238,016 229,855 240,965 219,710 53,870
Convertible preferred securities 230,000 230,000 230,000
Shareholders' equity 438,315 431,614 376,122 311,444 182,283
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
This table should be read in conjunction with the Management's Discussion and
Analysis of Results of Operations and Financial Condition and the Consolidated
Financial Statements and Notes thereto.
(1) Fiscal 1996 contained 53 weeks. All other periods
presented contained 52 weeks.
(2) During fiscal 1994, the Company adopted FAS 109,
resulting in a cumulative effect adjustment of ($425)
or ($.01) per share.
(3) Comparable stores are stores open at least 14 full months.
(4) Average revenues per store are based upon total revenues for the period
divided by the weighted average number of stores open during such period.
(5) Inventory turns are calculated based upon a rolling
12-month average of inventory balances.
Best Buy Co., Inc. 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
In fiscal 1997, Best Buy made progress on initiatives to build a base it expects
will provide future profitability. Unfortunately, a difficult environment in the
retail consumer electronics and personal computer segments significantly
impacted the Company's financial performance for the year, overshadowing the
benefit of gross margin improvement. A lack of new products and technology with
widespread consumer appeal in the consumer electronics industry, combined with a
sharp decline in personal computer selling prices during the peak holiday
season, applied pressure on revenues and profit margins. The resulting slower
rate of total sales growth, due to a 5% comparable store sales decline in fiscal
1997, also caused an increase in the Company's operating expense ratio, further
impacting profits. Earnings for the fiscal year were $1.7 million, compared to
$48.0 million in fiscal 1996 and $57.7 million in fiscal 1995. Earnings per
share were $.04, $1.10 and $1.33, in fiscal 1997, 1996 and 1995, respectively.
REVENUES
The following table presents selected revenue data for each of the last three
fiscal years ($ in thousands).
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 7,770,683 $ 7,217,448 $ 5,079,557
Percentage increase in revenues 8% 42% 69%
Comparable store sales change (5%) 6% 20%
Average revenues per store $ 29,300 $ 31,100 $ 28,400
</TABLE>
Sales of $7.771 billion for fiscal 1997 were 8% above last year's $7.217
billion, principally due to the addition of 21 new stores during the year, as
well as a full year of operations at the 47 stores opened in fiscal 1996.
Although total sales increased, comparable store sales declined 5% for the year
due to significant reductions in the average selling price of personal
computers, particularly during the seasonally higher volume second half of the
year, and continued weakness in the consumer electronics and recorded music
industries. In fiscal 1997, the Company slowed its rate of expansion, opening
fewer than half the number of stores than each of the previous two years. Slower
industry growth and competition applied pressure on profitability, reducing the
Company's ability to continue the recent pace of store openings. New store
openings in fiscal 1997 included the new markets of Philadelphia, Pennsylvania;
Tampa, Florida; Fresno and Santa Rosa, California; Memphis, Tennessee; and
Tucson, Arizona. The Company also remodeled or relocated 10 stores to larger
facilities. Sales in fiscal 1996 were 42% above fiscal 1995 sales of $5.080
billion and comparable store sales increased 6%. The increase in sales in fiscal
1996 was mainly due to the opening of 47 new stores and a full year of
operations at the 53 new stores opened in fiscal 1995. The combined 100 stores
opened in fiscal 1996 and 1995 greatly expanded the Company's presence
nationwide, with the entrance into the markets of Cincinnati and Cleveland,
Ohio; Miami, Florida; Los Angeles, California; Baltimore, Maryland; Washington,
D.C.; and the Carolinas.
The following table sets forth the Company's retail store sales mix by major
product category for each of the past three fiscal years.
1997 1996 1995
- ---------------------------------------------------------------
Home Office 39% 41% 37%
Consumer Electronics - Video 17% 18% 20%
Consumer Electronics - Audio 12% 13% 14%
Entertainment Software* 18% 17% 18%
Appliances 9% 7% 8%
Other 5% 4% 3%
- ---------------------------------------------------------------
Total 100% 100% 100%
*Fiscal 1996 and 1995 restated to include video game products, previously
included in Other.
A general absence in recent years of widely accepted new products in the
consumer electronics category and a continued increase in the channels of
distribution led to a continued softening of sales in this category in fiscal
1997. Comparable store sales in this category declined for the second
consecutive year as price declines and soft demand impacted year over year
sales. Digital Satellite Systems (DSS) provided some renewed interest in the
video category in fiscal 1997, although its impact was not sufficient to
mitigate weakness in more traditional video products. Digital Versatile Disc
(DVD) is being introduced in the first quarter of fiscal 1998. This technology
is the most significant advance in this category in the past several years, and
along with other new technology in development such as digital, High Definition
Television (HDTV), represents opportunity to generate new interest in this
category in the years ahead. However, the higher introductory price points for
DVD and a limited number of software titles are likely to lead to only a modest
contribution to total sales in fiscal 1998.
Pressure on selling prices due to model transition in personal computers
resulted in rapidly falling prices to the consumer during the high-volume
holiday season. Due to this transition, combined with the impact of lower-priced
entry-level models, the average selling price of computers at year end was
nearly 20% below fiscal 1996 year-end levels. Despite increases in volume of
other peripheral products in the home office category, comparable store sales in
this category declined,
Best Buy Co., Inc. 10
<PAGE>
mainly due to the lower selling prices, as well as difficult comparisons with
sales volumes reported in the highly promotional environment of fiscal 1996.
The appliance category increased from 7% of total Company sales in fiscal 1996
to 9% in fiscal 1997, as a result of a considerable increase in the Company's
assortment of major appliances. The addition of the Amana, General Electric,
Hotpoint, Maytag and Tappan name-brand products and a revitalized presentation
of the appliance department with high-end small appliances and electrics
enhanced the appearance and appeal of Best Buy's product offering in this
category. The entertainment software category showed mixed results, as the
recorded music industry had a weak year, generally due to the lack of acceptance
of new titles by consumers. Video games and computer software performed better
than the prior year, as new video game formats and new computer software titles
were introduced. A change in the Company's marketing strategy and an increase in
the focus of sales presentation at the retail stores resulted in an increase in
the sale of the Company's Performance Service Plans (PSPs) from less than 1% of
total store sales in fiscal 1996 to 1.9% in fiscal 1997.
Management expects that because the Company's most significant categories are
expected to remain soft in fiscal 1998, comparable store sales are likely to
decline again for the year. Due to more difficult comparisons with the first
half of fiscal 1997, the declines are expected to be more pronounced in the
first half of the year and moderate in the second half. As a result of the
higher comparable store sales decline and seasonally slower volumes, the Company
anticipates reporting a loss in the first half of the year; however, improved
earnings are expected for the year as a whole.
COMPONENTS OF OPERATING INCOME
The following table sets forth selected operating ratios as a percentage of
sales for the last three fiscal years.
1997 1996 1995
- -------------------------------------------------------
Gross profit margin 13.6% 13.0% 13.6%
Selling, general and
administrative expenses 12.9% 11.3% 11.2%
Operating income .7% 1.7% 2.4%
The gross profit margin for fiscal 1997 was 13.6%, compared to 13.0% in fiscal
1996, as the Company began to benefit from a change in sales mix through
increased margin contributions from sales of PSPs and major appliances. Both of
these products carry profit margins above the Company's overall average. In the
fourth quarter of fiscal 1996 the Company began insuring its PSPs with an
unrelated third party. This change resulted in the Company recognizing the
revenues and profits from the sale of PSPs at the time the plan was sold. Prior
to that time, revenues and profits from these plans were recognized over the
lives of the contracts. An extremely competitive environment in the personal
computer market put pressure on profit margins through the holiday selling
season. In anticipation of the January 1997 introduction of MMX-TM- technology,
retailers reduced selling prices on the existing technology products as it
became evident that the new technology was going to be priced lower than
originally expected. This reduction in selling prices resulted in the Company
recording a $15 million pre-tax charge to earnings in the third quarter,
principally to adjust carrying values of personal computer inventories to
expected net realizable values. In the fourth quarter, in an effort to more
productively deploy retail selling space, the Company made a decision to reduce
its assortment of recorded music, resulting in a $10 million addition to the
markdown reserve. Gross profit margins were also adversely impacted by the costs
of consumer financing offers due to the promotional environment during much of
the year. However, a reduction in the level of financing promotions in the
fourth quarter of fiscal 1997 offset some of the impact on profit margins for
the year as a whole. Improved control over inventory shrink also helped improve
profit margins as compared to fiscal 1996.
The improvement in gross profit margins in fiscal 1997 ended the trend in margin
declines experienced over the last several years. Prior to 1997, the margin
declines had been principally caused by the higher levels of contribution in the
Company's sales mix from the lower-margin personal computer category and an
increasingly intense promotional environment in the categories in which the
Company competes.
Management believes that while industry consolidation of specialty retailers is
expected to continue, competition from alternative sources of retailing such as
mail order and Internet retailers, as well as mass merchandise retailers, will
result in an ongoing competitive environment. In fiscal 1998, the Company
intends to focus on continued gross profit improvement. Management expects to
continue to build on the progress made in fiscal 1997 with respect to sales of
PSPs and major appliances. The Company also intends to more selectively utilize
consumer financing offers, reducing its promotional costs. In addition,
management believes there is opportunity to improve profit margins through
increased dedication of selling space to products which generate the highest
overall gross profit margins, while continuing to offer consumers a meaningful
assortment of products in each of the Company's categories. The Company has
engaged Andersen Consulting LLP to assist with the implementation of systems and
methodologies to improve inventory management, assortment planning, strategic
sourcing and advertising effectiveness.
Best Buy Co., Inc. 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Selling, general and administrative (SG&A) expenses were 12.9% of sales in
fiscal 1997, compared to 11.3% in fiscal 1996. The decline in comparable store
sales and average revenues per store resulted in a loss of leverage on the fixed
components of the Company's operating costs such as facilities, distribution and
support functions. Additionally, as the Company has added larger stores in
generally more expensive markets in the past several years, operating costs as a
percentage of sales have increased. The competitive and promotional environment
in fiscal 1997 also contributed to higher net advertising costs as compared to
the prior year. The nature of the higher operating costs experienced in fiscal
1997 also contributed to the year-over-year increase in SG&A comparing fiscal
1996 to fiscal 1995. Management expects that, due to the expected continued
comparable store sales declines, the SG&A ratio will increase as compared to
fiscal 1997.
Interest expense in fiscal 1997 increased over fiscal 1996 due to generally
higher levels of investment in completed properties during most of the year.
Interest expense in fiscal 1996 increased over fiscal 1995 due to a full year of
interest expense on the convertible preferred securities issued in November 1994
and higher levels of investment in inventory and store development.
The Company's effective tax rate was approximately 39% in each of the last three
fiscal years, as the loss of the benefit from the jobs tax credit, which expired
in December 1994, was offset by slightly lower state income taxes due to the mix
of states in which the Company does business.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1997, the Company curtailed the pace of expansion to a level that
could be reasonably supported by internally generated funds. The rapid pace of
growth and store openings in the two previous years was funded with funds
generated from the public securities and bank debt markets. The funds from a
securities offering in November 1994 and the Company's bank-financed master
lease facility provided the majority of the financing to rapidly open stores and
increase distribution capacity. Due to the reduced profits available to support
a high level of store growth, the Company substantially reduced the number of
new store openings in fiscal 1997.
The following table indicates the number of stores, by prototype, operated by
the Company at the end of the last three fiscal years.
STORE PROTOTYPE 1997 1996 1995
- ------------------------------------------------------------------
28,000 square feet 54 61 67
36,000 square feet 34 36 48
45,000 square feet 132 112 75
58,000 square feet 52 42 14
- ------------------------------------------------------------------
Total number of stores at year en 272 251 204
Average store size (in square feet) 42,800 41,400 37,700
Cash flow from operations in fiscal 1997, before changes in working capital, was
impacted by the decline in earnings. After adjusting for the $25 million in
non-cash inventory charges, cash flow from operations, before working capital
changes, was $94 million, compared to $104 million in fiscal 1996 and $97
million in fiscal 1995. Changes in the components of working capital, after
adjusting for markdown reserves, included a $44 million decrease in inventories
in fiscal 1997, despite the addition of 21 new stores, due to improved inventory
management. Inventories increased $293 million in fiscal 1996 and $270 million
in fiscal 1995 due to the higher levels of business expansion in those years.
Working capital financing provided by accounts payable and financing
arrangements was reduced by $152 million in fiscal 1997 and increased by $291
million and $178 million in fiscal 1996 and 1995, respectively, reflecting the
change in activity levels at each of the respective year ends. Accounts
receivable, which consists principally of credit card and vendor-related
receivables, decreased in fiscal 1997, due to lower activity levels at year end
as compared to the prior fiscal year end. Receivables from sales on the
Company's private-label credit card are sold to unrelated third-party financial
institutions, without recourse, and the Company does not carry any risk of loss
due to default on these receivables. Deferred revenues decreased in fiscal 1997
as revenues from sales of PSPs prior to the fourth quarter of fiscal 1996 were
recognized. The deferred tax assets related to the deferred revenues are also
being reduced as the revenue is recognized. Management believes that the
remaining net deferred tax assets will be realized through future taxable
income.
Cash used in investing activities was $20 million in fiscal 1997, compared to
$159 million in fiscal 1996 and $192 million in fiscal 1995. Due to the slower
rate of growth in fiscal 1997, capital spending was $88 million, compared to
approximately $120 million in each of the two previous years. Cash flows from
property development were a positive $73 million in fiscal 1997 as the Company
generated over $100 million in proceeds from the sale of 12 retail locations and
a distribution
Best Buy Co., Inc. 12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
center, and property development slowed significantly as compared to the two
prior years. At fiscal 1997 year end, the Company owned five completed retail
locations and three locations that were under development for opening in fiscal
1998. All of these locations are expected to be sold in fiscal 1998. Proceeds
from the sale of developed properties were nearly $90 million in fiscal 1996 and
$43 million in fiscal 1995. Management expects that capital spending and
investment in property development will decline further in fiscal 1998 as the
number of store openings is reduced.
In fiscal 1997, the Company completed several intermediate-term equipment
financings generating approximately $21 million. The Company also refinanced the
$8.7 million contract for deed on its corporate headquarters facility with a $12
million, 15-year mortgage loan. The $230 million public offering of the
Company's convertible preferred securities in fiscal 1995 generated funds to
support property development and store openings in fiscal 1995 and 1996. These
securities pay monthly distributions at an annual rate of 6.5% per year and are
convertible into the Company's common stock. In fiscal 1995, the Company also
entered into a master lease agreement, which provided approximately $125 million
in real-estate financing for retail store and distribution center development.
That financing has since been reduced to $116 million through the sale of
property. The bank credit facility supporting the master lease facility
currently matures in September 1998.
At March 1, 1997, the Company's revolving credit facility provided for unsecured
borrowings of up to $250 million, which increased on a seasonal basis to $550
million, as limited to certain percentages of inventories. The facility requires
that borrowings are limited to $50 million for a period of 45 days following the
holiday season. This facility matures in June 1998. In addition, the credit
facility, as well as the credit facility supporting the master lease, contain
financial covenants regarding, among other things, the maintenance of certain
operating ratios. In the third quarter of fiscal 1997, the Company violated the
interest coverage ratio covenant as a result of the inventory write-down and
weak operating performance. This violation was waived by the participants in the
credit facilities and the covenant was amended through the second quarter of
fiscal 1998, at which time the covenant reverts to its original level. The
Company intends to reduce the level of commitment to approximately $365 million
on a seasonal basis due to lower expected borrowing resulting from slower growth
and improved inventory management. In addition to the working capital credit
facility, the Company has an inventory financing facility provided by a
commercial credit facility that provides for financing of up to $200 million,
increasing to $325 million on a seasonal basis.
For fiscal 1998, the Company currently plans to open 13 new stores, including
entry into the new markets of Pittsburgh, Pennsylvania; Palm Desert, California;
and Knoxville, Tennessee. Since the introduction of the Company's Concept III
store format, new stores and remodeled or relocated stores have been either the
45,000 or 58,000 square-foot prototype. In fiscal 1998, all stores opened will
be the 45,000 square-foot prototype. The Company also expects to remodel or
relocate five existing stores to the 45,000 square foot prototype. The Company
intends to use the larger existing stores to test new products and merchandising
strategies. Each new store requires approximately $3 million in working capital
for merchandise inventory (net of vendor financing), fixtures and leasehold
improvements. Management expects that capital spending for fiscal 1998 will
approximate $65 million, exclusive of property development. Net cash flows from
property development are expected to be positive, as currently owned properties
are expected to be sold and the investment in new stores declines. Management
also intends to continue to reduce the size of the master lease through the sale
of property to third parties. The timing of property sales and ability to
complete sale/leaseback transactions are dependent upon the market for retail
real estate.
Management believes that, as a result of lower levels of investment in property
development and improvement in inventory management resulting in faster
inventory turns, the Company's working capital borrowing requirements will be
lower in fiscal 1998 than in fiscal 1997. The ability of the Company to meet the
covenants required by its credit facilities is dependent upon future operating
results. While there can be no assurance that the Company will be able to
achieve the required performance necessary to remain in compliance, management
believes that sufficient alternative sources of working capital financing are
available to support the Company's planned operations for fiscal 1998.
Best Buy Co., Inc. 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
QUARTERLY RESULTS AND SEASONALITY
Similar to most retailers, the Company's business is seasonal. Revenues and
earnings are lower during the first half of each fiscal year and are greater
during the second half, which includes the year-end holiday selling season. The
timing of new store openings and general economic conditions may affect future
quarterly results of the Company.
The following table sets forth the Company's unaudited quarterly operating
results for each quarter of fiscal 1997 and 1996. Results for the quarter ended
Nov. 30, 1996, include a $15 million pre-tax charge related to the write-down of
certain inventories, primarily personal computers, to expected net realizable
values. Results for the quarter ended March 1, 1997, include a $10 million
pre-tax charge mainly as a result of the Company's decision to reduce its
assortment of recorded music. Results subsequent to Nov. 25, 1995, reflect the
benefit from the Company's change to a third party to insure its Performance
Service Plans.
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fiscal 1997 JUNE 1 AUG. 31 NOV. 30 MARCH 1
1996 1996 1996 1997
- ------------------------------------------------------------------------------------------
Revenues $1,637,184 $1,778,640 $2,007,324 $2,347,535
Gross profit 232,650 251,666 248,768 325,797
Operating income (loss) 12,952 19,684 (3,110) 23,680
Net earnings (loss) 409 3,788 (10,973) 8,524
Net earnings (loss) per share .01 .09 (.25) .20
Fiscal 1996 May 27 Aug. 26 Nov. 25 March 2
1995 1995 1995 1996
- ------------------------------------------------------------------------------------------
Revenues $1,274,696 $1,437,911 $1,929,277 $2,575,564
Gross profit 182,288 196,621 242,883 314,779
Operating income 16,363 19,203 42,588 44,429
Net earnings 4,672 5,714 17,802 19,831
Net earnings per share .11 .13 .41 .46
</TABLE>
COMMON STOCK PRICES
QUARTER 1st 2nd 3rd 4th
- ------------------------------------------------------------------------
Fiscal 1997
High $23 $26 1/4 $23 3/4 $14 3/8
Low 16 3/8 17 3/8 12 1/8 7 7/8
Fiscal 1996
High $27 3/8 $29 $29 5/8 $22 3/8
Low 20 1/4 22 3/4 20 3/4 12 3/4
Best Buy's common stock is traded on the New York Stock Exchange, symbol BBY. As
of March 31, 1997, there were 2,716 holders of record of Best Buy common stock.
The Company has not paid cash dividends on its common stock and does not
presently intend to pay any dividends on its common stock for the foreseeable
future.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies. With the exception of historical information,
the matters discussed in the Annual Report are forward-looking statements that
involve risks and uncertainties. Such risks and uncertainties include, among
other things, the Company's ability to comply with covenants in its borrowing
facilities and the availability of sufficient funds to provide working capital
financing. Reference is made to the Company's Current Report on Form 8-K,
wherein the Company has identified additional important factors that could cause
actual results to differ materially from those contemplated by the statements
made herein.
Best Buy Co., Inc. 14
<PAGE>
CONSOLIDATED BALANCE SHEETS ($ in thousands, except per share amounts)
ASSETS MARCH 1 March 2
1997 1996
------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 89,808 $ 86,445
Receivables 79,581 121,438
Recoverable costs from
developed properties 53,485 126,237
Merchandise inventories 1,132,059 1,201,142
Refundable and deferred income taxes 25,560 21,531
Prepaid expenses 4,542 3,750
-------------------------------
Total current assets 1,385,035 1,560,543
PROPERTY AND EQUIPMENT
Land and buildings 18,000 16,423
Leasehold improvements 148,168 131,289
Furniture, fixtures and equipment 324,333 266,582
Property under capital leases 29,326 29,421
-------------------------------
519,827 443,715
Less accumulated depreciation
and amortization 188,194 132,676
-------------------------------
Net property and equipment 331,633 311,039
OTHER ASSETS
Other assets 17,639 12,046
Deferred income taxes 7,204
------------------------------
Total other assets 17,639 19,250
------------------------------
TOTAL ASSETS $ 1,734,307 $ 1,890,832
-----------------------------
-----------------------------
LIABILITIES AND MARCH 1 March 2
SHAREHOLDERS' EQUITY 1997 1996
- -------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 487,802 $ 673,852
Obligations under
financing arrangements 127,510 93,951
Accrued salaries and related expenses 33,663 26,890
Accrued liabilities 122,611 124,596
Deferred service plan revenue 24,602 30,845
Current portion of long-term debt 21,391 23,568
---------------------------------
Total current liabilities 817,579 973,702
DEFERRED INCOME TAXES 3,578
DEFERRED REVENUE AND
OTHER LIABILITIES 28,210 49,229
LONG-TERM DEBT 216,625 206,287
CONVERTIBLE PREFERRED
SECURITIES OF SUBSIDIARY 230,000 230,000
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value:
Authorized - 400,000 shares;
Issued and outstanding - none
Common stock, $.10 par value:
Authorized - 120,000,000 shares;
Issued and outstanding 43,287,000
and 42,842,000 shares, respectively 4,329 4,284
Additional paid-in capital 241,300 236,392
Retained earnings 192,686 190,938
---------------------------------
Total shareholders' equity 438,315 431,614
---------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,734,307 $1,890,832
---------------------------------
---------------------------------
See notes to consolidated financial statements.
Best Buy Co., Inc. 15
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS ($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED MARCH 1 March 2 Feb. 25
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $7,770,683 $ 7,217,448 $ 5,079,557
Cost of goods sold 6,711,802 6,280,877 4,389,164
-------------------------------------------
Gross profit 1,058,881 936,571 690,393
Selling, general and administrative expenses 1,005,675 813,988 568,466
-------------------------------------------
Operating income 53,206 122,583 121,927
Interest expense, net 50,338 43,594 27,876
-------------------------------------------
Earnings before income taxes 2,868 78,989 94,051
Income taxes 1,120 30,970 36,400
Net Earnings $1,748 $48,019 $57,651
-------------------------------------------
-------------------------------------------
Earnings Per Share $.04 $1.10 $1.33
-------------------------------------------
-------------------------------------------
Weighted Average Common Shares Outstanding (000S) 43,582 43,640 43,471
-------------------------------------------
-------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Best Buy Co., Inc. 16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)
FOR THE FISCAL YEARS ENDED MARCH 1 March 2 Feb. 25
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 1,748 $ 48,019 $ 57,651
Charges to earnings not affecting cash:
Depreciation and amortization 66,844 54,862 38,570
Loss on disposal of property and equipment 468 1,267 760
----------------------------------------------
69,060 104,148 96,981
Changes in operating assets and liabilities:
Receivables 41,857 (36,998) (31,496)
Merchandise inventories 69,083 (293,465) (269,727)
Income taxes and prepaid expenses 8,174 (16,273) (5,929)
Accounts payable (186,050) 278,515 106,920
Other current liabilities 4,788 50,599 46,117
Deferred revenue and other liabilities (27,262) 12,994 19,723
----------------------------------------------
Total cash (used in) provided by operating activities (20,350) 99,520 (37,411)
----------------------------------------------
INVESTING ACTIVITIES
Additions to property and equipment (87,593) (126,201) (118,118)
Decrease (increase) in recoverable costs from developed properties 72,752 (40,015) (86,222)
(Increase) decrease in other assets (5,593) 7,712 (11,676)
Proceeds from sale/leasebacks 24,060
----------------------------------------------
Total cash used in investing activities (20,434) (158,504) (191,956)
----------------------------------------------
FINANCING ACTIVITIES
Increase in obligations under financing arrangements 33,559 12,196 70,599
Long-term debt borrowings 33,542 21,429
Long-term debt payments (25,694) (14,600) (10,199)
Common stock issued 2,740 3,133 2,366
Proceeds from issuance of convertible preferred securities 230,000
----------------------------------------------
Total cash provided by financing activities 44,147 729 314,195
----------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,363 (58,255) 84,828
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 86,445 144,700 59,872
----------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 89,808 $ 86,445 $ 144,700
----------------------------------------------
----------------------------------------------
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($ in thousands)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
- --------------------------------------------------------------------------------
BALANCES AT
FEB. 26, 1994 $ 2,087 $ 224,089 $ 85,268
Stock options exercised 45 2,321
Tax benefit from
stock options exercised 4,661
Effect of 2-for-1 stock split 2,089 (2,089)
Net earnings 57,651
-----------------------------------------
BALANCES AT
FEB. 25, 1995 4,221 228,982 142,919
Stock options exercised 63 3,070
Tax benefit from
stock options exercised 4,340
Net earnings 48,019
-----------------------------------------
BALANCES AT
MARCH 2, 1996 4,284 236,392 190,938
Stock options exercised 45 2,695
Tax benefit from
stock options exercised 2,213
Net earnings 1,748
-----------------------------------------
BALANCES AT
MARCH 1, 1997 $ 4,329 $ 241,300 $ 192,686
-----------------------------------------
-----------------------------------------
See notes to consolidated financial statements.
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
Best Buy Co., Inc.
We have audited the accompanying consolidated balance sheets of Best Buy Co.,
Inc. as of March 1, 1997, and March 2, 1996, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended March 1, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Best Buy Co., Inc.
at March 1, 1997, and March 2, 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 1, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
April 8, 1997
Best Buy Co., Inc. 18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share
amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
The Company sells personal computers and other home office products, consumer
electronics, entertainment software, major appliances and related accessories
through its retail stores.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Best Buy Co., Inc.
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS:
The Company considers all short-term investments with a maturity of three months
or less when purchased to be cash equivalents.
RECOVERABLE COSTS FROM DEVELOPED PROPERTIES:
The costs of acquisition and development of properties which the Company intends
to sell and lease back or recover from landlords within one year are included in
current assets.
MERCHANDISE INVENTORIES:
Merchandise inventories are recorded at the lower of average cost or market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation, including
amortization of property under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets or, in the case of
leasehold improvements, over the shorter of the estimated useful lives or lease
terms.
In fiscal 1996, the Company adopted SFAS 121 "Accounting for the Impairment of
Long-Lived Assets," which requires losses on impairment of long-lived assets
used in operations to be recorded when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. The adoption had no impact on the financial
statements.
PRE-OPENING COSTS:
Costs incurred in connection with the opening of new stores are expensed in the
year the store is opened. Pre-opening costs were $5,809, $10,738 and $13,971 in
fiscal 1997, 1996 and 1995, respectively.
DEFERRED SERVICE PLAN REVENUE:
Beginning in the fourth quarter of fiscal 1996, the Company began selling
Performance Service Plans on behalf of an unrelated third party. The Company
recognizes commission revenue on the sale of the plans at the time of sale.
Revenue from the sale of the plans sold prior to Nov. 26, 1995, net of direct
selling expenses, is recognized straight-line over the life of the plan. Costs
related to servicing these plans are expensed as incurred.
EARNINGS PER SHARE:
Earnings per share is computed based on the weighted average number of common
shares outstanding during each period, adjusted for 410,900, 1,020,000 and
1,458,000 incremental shares assumed issued on the exercise of stock options in
fiscal 1997, 1996 and 1995, respectively. All common share and per share
information has been adjusted for a two-for-one stock split in April 1994. Fully
diluted earnings per share assumes that the convertible preferred securities
were converted into common stock and the interest expense thereon, net of
related taxes, is added back to net income. References to earnings per share
relate to fully diluted earnings per share.
STOCK OPTIONS:
The Company applies APB 25, "Accounting for Stock Issued to Employees" in
accounting for stock options and presents in Note 5 pro forma net earnings as if
the accounting prescribed by SFAS123 "Accounting for Stock-Based Compensation"
had been applied.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the balance sheet and statement of earnings, as
well as the disclosure of contingent liabilities. Actual results could differ
from these estimates.
FISCAL YEAR:
The Company's fiscal year ends on the Saturday nearest the end of February.
Fiscal 1997 and 1995 contained 52 weeks, and fiscal 1996 contained 53 weeks.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to current year
presentation.
Best Buy Co., Inc. 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share
amounts)
2. OBLIGATIONS UNDER FINANCING ARRANGEMENTS
The Company has a $200,000 inventory financing credit line, which increases to
$325,000 on a seasonal basis. Borrowings are collateralized by a security
interest in certain merchandise inventories approximating the outstanding
borrowings. The line has provisions that give the financing source a portion of
the cash discounts provided by the manufacturers.
3. BORROWINGS
MARCH 1 March 2
1997 1996
- --------------------------------------------------------------------------------
Senior subordinated notes $ 150,000 $ 150,000
Subordinated notes 21,904 21,904
Equipment financing loans 39,649 29,982
Obligations under capital leases 14,463 19,269
Corporate headquarters financing 12,000 8,700
-------------------------------
238,016 229,855
Current portion of long-term debt 21,391 23,568
-------------------------------
$ 216,625 $ 206,287
-------------------------------
-------------------------------
CREDIT AGREEMENT:
The Company has a credit agreement (the "Agreement") that contains a revolving
credit facility under which the Company can borrow up to $550,000.
The Agreement provides that up to $250,000 of the facility is available at all
times, and an additional $300,000 is available from July 1 to Dec. 31. The
Agreement expires in June 1998.
Borrowings under the facility are unsecured. Interest on borrowings is at rates
specified in the Agreement, as elected by the Company. The Company also pays
certain commitment and agent fees.
The Agreement contains covenants that require maintenance of certain financial
ratios and place limits on owned real estate and capital expenditures. The
Agreement also provides that once a year, for a period of not less than 45 days
thereafter, the aggregate principal amount outstanding is limited to $50,000.
There were no balances outstanding under the facility at March 1, 1997, or March
2, 1996. The weighted average interest rate under the Company's current and
prior credit agreements was 6.86%, 7.11% and 6.21% for the fiscal years ended
1997, 1996 and 1995, respectively.
SENIOR SUBORDINATED NOTES:
The Company has outstanding $150,000 of senior subordinated notes. The notes
mature on Oct. 1, 2000, and bear interest at 8.63%. The Company may, at its
option, redeem the notes prior to maturity at 102.50% and 101.25% of par in 1998
and 1999, respectively. The Company may be required to offer early redemption in
the event of a change in control, as defined.
The notes are unsecured and subordinate to the prior payment of all senior debt,
which approximates $249,000 at March 1, 1997. The indenture also contains
provisions, which limit the amount of additional borrowings the Company may
incur and limit the Company's ability to pay dividends and make other restricted
payments.
SUBORDINATED NOTES:
The Company has an $18,000 unsecured, subordinated note outstanding which bears
interest at 9.95% and matures on July 30, 1999. In addition, the Company has
$3,904 of unsecured, subordinated notes due June 15, 1997, which bear interest
at 9.00%.
EQUIPMENT FINANCING LOANS:
The equipment financing loans require monthly or quarterly payments and have
maturity dates between March 1997 and April 2003. Interest rates on these loans
range from 5.25% to 9.18%. Furniture and fixtures with a book value of $31,000
are pledged against these loans.
OBLIGATIONS UNDER CAPITAL LEASES:
The present value of future minimum lease payments relating to certain equipment
and a distribution center has been capitalized. The capitalized cost was
approximately $29,000 both at March 1, 1997, and March 2, 1996. The net book
value of assets under capital leases was $14,000 and $18,000 at March 1, 1997,
and March 2, 1996, respectively. Assets acquired under capital leases were $313,
$3,490 and $10,025 in fiscal 1997, 1996 and 1995, respectively.
CORPORATE HEADQUARTERS FINANCING:
Prior to June 1996, the Company's corporate headquarters was financed by an
$8,700 contract for deed with interest at 9.88%. This obligation was repaid in
June 1996. During fiscal 1997, the Company obtained a $12,000, 15-year mortgage
on this facility at an interest rate of 8.40%.
Best Buy Co., Inc. 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share
amounts)
FUTURE MATURITIES OF DEBT:
FISCAL YEAR CAPITAL LEASES OTHER DEBT
- --------------------------------------------------------------------------------
1998 $ 4,688 $ 17,053
1999 2,031 10,728
2000 586 27,109
2001 7,631 155,036
2002 18 3,035
Thereafter 10,592
-----------------------------------
14,954 $223,553
------------
------------
Less amount representing interest 491
----------
Minimum lease payments $14,463
----------
----------
During fiscal 1997, 1996 and 1995, interest paid (net of amounts capitalized)
totaled $50,917, $44,808 and $25,708, respectively. The fair value of the
Company's senior subordinated notes was $141,563 at March 1, 1997, based on
quoted market prices. The fair value of all other financial instruments,
including those with quoted market prices, approximates carrying value.
4. CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY
In November 1994, the Company and Best Buy Capital, L.P. (Best Buy Capital), a
special-purpose limited partnership in which the Company is the sole general
partner, completed the public offering of 4,600,000 convertible monthly income
preferred securities with a liquidation preference of $50 per security. The
underwriting discount and expenses of the offering aggregated $7,680. The
proceeds of the offering were loaned to the Company in exchange for a
subordinated debenture with payment terms substantially similar to the preferred
securities. Distributions on the securities are payable monthly at the annual
rate of 6.50% of the liquidation preference and are included in interest expense
in the consolidated financial statements.
The securities are convertible into shares of the Company's Common Stock at the
rate of 1.111 shares per security (equivalent to a conversion price of $45 per
share). The preferred securities are subject to mandatory redemption in November
2024 at the liquidation preference price. The Company has the option to defer
distributions on the securities for up to 60 months. A deferral of distributions
may result in the conversion of the preferred securities into Series A Preferred
Stock of the Company. The Company has the right to cause the conversion rights
to expire any time after three years from the date of issuance in the event the
Company's common stock price exceeds $54 per share for 20 out of 30 consecutive
trading days.
5. SHAREHOLDERS' EQUITY
STOCK OPTIONS:
The Company sponsors two non-qualified stock option plans for employees and one
non-qualified plan for directors. These plans provide for the issuance of up to
9,650,000 shares. Options may be granted only to employees or directors at
option prices not less than the fair market value of the Company's common stock
on the date of the grant. At March 1, 1997, options to purchase 4,199,000 shares
are outstanding under these plans. In addition, at March 1, 1997, an option to
purchase 26,000 shares is outstanding to an employee, not pursuant to a plan.
In fiscal 1997, the Company adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123 for Stock-Based Compensation
(SFAS123). SFAS 123 encourages entities to adopt a fair value-based method of
accounting for employee stock compensation plans, but allows companies to
continue to account for those plans using the accounting prescribed by APB
Opinion 25, "Accounting for Stock Issued to Employees." The Company has elected
to continue to account for stock based compensation using APB 25, making pro
forma disclosures of net earnings and earnings per share as if the fair
value-based method had been applied.
Accordingly, no compensation expense has been recorded for the stock option
plans. Had compensation expense for the stock option plans been determined based
on the fair value at the date of grant for awards in fiscal 1997 and 1996,
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share for the fiscal years shown below would have been reported as
follows.
1997 1996
- --------------------------------------------------------------------------------
Net earnings - as reported $1,748 $48,019
Net earnings (loss) - pro forma (1,196) 46,052
Earnings per share - as reported .04 1.10
Earnings (loss) per share - pro forma (.03) 1.08
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
1997 1996
- --------------------------------------------------------------------------------
Expected dividend yield 0% 0%
Expected stock price volatility 40% 40%
Risk-free interest rate 6.2% 6.9%
Expected life of options 4.3 years 4.2 years
Best Buy Co., Inc. 21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share
amounts)
The pro forma effect on net income and earnings per share is not representative
of the pro forma net earnings in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1996.
The weighted average fair value for options granted during fiscal 1997 and
fiscal 1996 is $5.04 and $9.74 per share, respectively.
In February 1997, the Company canceled 1,639,000 options, representing
approximately half of the outstanding options granted to employees since April
1993, with exercise prices ranging from $11.20 to $38.19 and granted the same
number of new options with an exercise price of $8.62. Options issued to the
Company's CEO and president were not included in the repricing.
Option activity for the last three years is as follows:
WEIGHTED AVG.
EXERCISE PRICE
SHARES PER SHARE
- --------------------------------------------------------------------------------
OUTSTANDING FEB. 26, 1994 3,170,000 $ 7.73
Granted 1,316,000 32.50
Exercised (472,000) 5.03
Canceled (244,000) 24.37
---------------
OUTSTANDING FEB. 25, 1995 3,770,000 15.64
Granted 1,472,000 23.20
Exercised (625,000) 4.99
Canceled (347,000) 26.26
---------------
OUTSTANDING MARCH 2, 1996 4,270,000 18.94
Granted 2,665,000 12.22
Exercised (446,000) 6.15
Canceled (2,264,000) 22.43
---------------
OUTSTANDING MARCH 1, 1997 4,225,000 14.17
---------------
---------------
EXERCISABLE MARCH 1, 1997 1,465,000 $14.69
---------------
---------------
The following table summarizes information concerning currently outstanding and
exercisable options:
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------
$0 TO $10 2,174,000 3.73 $ 8.07 535,000 $ 6.37
$10 TO $20 974,000 2.28 14.25 503,000 12.45
$20 TO $30 705,000 3.15 23.21 220,000 23.26
$30 to $40 372,000 2.10 32.51 207,000 32.50
- --------------------------------------------------------------------------------
$0 TO $40 4,225,000 3.16 $ 14.17 1,465,000 $ 14.69
6. OPERATING LEASE COMMITMENTS & RELATED PARTY TRANSACTIONS
The Company conducts the majority of its retail and distribution operations from
leased locations. Transaction costs associated with the sale and leaseback of
properties and any gain or loss are recognized over the term of the lease
agreement. Proceeds from the sale/leaseback of stores owned at Feb. 26, 1994,
are shown as such in the accompanying fiscal 1995 statement of cash flows.
Proceeds from the sale/leaseback of properties developed since Feb. 26, 1994,
are included in the net change in recoverable costs from developed properties.
The Company also leases various equipment under operating leases. In addition,
the Company leases 17 stores and a distribution center, along with the related
fixtures and equipment under a master lease agreement. The initial terms of the
leases under this agreement range from one to five years, and rent is variable
based on interest rate options as selected by the Company. The leases require
payment of real estate taxes, insurance and common area maintenance. Most of the
leases contain renewal options and escalation clauses, and several require
contingent rents based on specified percentages of sales. Certain leases also
contain covenants related to maintenance of financial ratios.
Future minimum lease obligations by year (not including percentage rentals) for
all operating leases at March 1, 1997, are as follows:
FISCAL YEAR
- --------------------------------------------------------------------------------
1998 $ 137,715
1999 133,910
2000 134,129
2001 132,594
2002 129,346
Later years 1,127,431
The composition of the total rental expenses for all operating leases during the
last three fiscal years, including leases of buildings and equipment, was as
follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Minimum rentals $139,158 $105,349 $64,716
Percentage rentals 537 537 795
----------------------------------------
$139,695 $105,886 $65,511
----------------------------------------
----------------------------------------
Best Buy Co., Inc. 22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands, except per share
amounts)
Four stores are currently leased from the Company's CEO and principal
shareholder, his spouse, or partnerships in which he is a partner. Rent expense
under these leases during the last three fiscal years and one store, for which
the lease expired in January 1996, was as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Minimum rentals $988 $1,122 $1,120
Percentage rentals 388 388 470
----------------------------------------
$1,376 $1,510 $1,590
----------------------------------------
----------------------------------------
7. RETIREMENT SAVINGS PLAN
The Company has a retirement savings plan for employees meeting certain age and
service requirements. The plan provides for a Company-matching contribution,
which is subject to annual approval. This matching contribution was $2,035,
$1,701 and $1,376 during fiscal 1997, 1996 and 1995, respectively.
8. INCOME TAXES
Following is a reconciliation of the provision for income taxes to the federal
statutory rate:
1997 1996 1995
- --------------------------------------------------------------------------------
Federal income tax at
the statutory rate $1,004 $27,646 $32,918
State income taxes,
net of federal benefit 116 3,717 4,759
Jobs tax credit (574) (1,402)
Other 181 125
----------------------------------------
Provision for income taxes $1,120 $30,970 $36,400
----------------------------------------
----------------------------------------
Effective tax rate 39.0% 39.2% 38.7%
----------------------------------------
----------------------------------------
The provision for income taxes consists of the following:
1997 1996 1995
- --------------------------------------------------------------------------------
Current: Federal $(5,100) $27,401 $32,435
State (581) 6,693 8,044
----------------------------------------
(5,681) 34,094 40,479
----------------------------------------
Deferred: Federal 6,103 (2,904) (3,495)
State 698 (220) (584)
----------------------------------------
6,801 (3,124) (4,079)
----------------------------------------
Provision for income taxes $1,120 $30,970 $36,400
----------------------------------------
----------------------------------------
Deferred taxes are the result of differences between the basis of assets and
liabilities for financial reporting and income tax purposes. Significant
deferred tax assets and liabilities consist of the following:
MARCH 1 March 2
1997 1996
- --------------------------------------------------------------------------------
Deferred service plan revenue $18,811 $30,954
Accrued expenses 7,579 3,885
Compensation and benefits 3,375 2,751
Other - net 159 505
Inventory 4,108
------------------------------
Total deferred tax assets 29,924 42,203
------------------------------
Property and equipment 15,697 13,695
Other - net 3,356 1,139
------------------------------
Total deferred tax liabilities 19,053 14,834
------------------------------
Net deferred tax assets $10,871 $27,369
------------------------------
------------------------------
The Company believes that the interest on the subordinated debenture referred to
in Note 4 is deductible and that Best Buy Capital will be treated as a
partnership for income tax purposes. Income taxes (received) paid were $(8,599),
$45,888 and $32,899 in fiscal 1997, 1996 and 1995, respectively.
9. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising during the normal
course of conducting business. Management believes that the resolution of these
proceedings will not have any material adverse impact on the Company's financial
statements.
23
<PAGE>
EXHIBIT 21.1
BEST BUY CO., INC.
------------------
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Incorporated In
---------------
BBC Property Co. Minnesota
BBC Investment Co. Nevada
Best Buy Concepts, Inc. Nevada
Best Buy Stores, L.P. Delaware
Best Buy Capital, L.P. Minnesota
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 pertaining to the 1987 Employee Non-Qualified Stock Option Plan (Form
33-54871), the 1994 Full-Time Employee Non-Qualified Stock Option Plan (Form
33-54875), and the 1987 Directors' Non-Qualified Stock Option Plan (Form
33-54873) of Best Buy Co., Inc. of our report dated April 8, 1997, with respect
to the consolidated financial statements of Best Buy Co., Inc. incorporated by
reference in the Annual Report (Form 10-K) for the year ended March 1, 1997.
Ernst & Young LLP
Minneapolis, Minnesota
May 27, 1997
<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> 12-MOS
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-START> MAR-03-1996
<PERIOD-END> MAR-01-1997
<CASH> 89,808
<SECURITIES> 0
<RECEIVABLES> 79,581
<ALLOWANCES> 0
<INVENTORY> 1,132,059
<CURRENT-ASSETS> 1,385,035
<PP&E> 519,827
<DEPRECIATION> 188,194
<TOTAL-ASSETS> 1,734,307
<CURRENT-LIABILITIES> 817,579
<BONDS> 216,625
0
0
<COMMON> 4,329
<OTHER-SE> 433,986
<TOTAL-LIABILITY-AND-EQUITY> 1,734,307
<SALES> 7,770,683
<TOTAL-REVENUES> 7,770,683
<CGS> 6,711,802
<TOTAL-COSTS> 6,711,802
<OTHER-EXPENSES> 1,005,675
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,338
<INCOME-PRETAX> 2,868
<INCOME-TAX> 1,120
<INCOME-CONTINUING> 1,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,748
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
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