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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 FEBRUARY 28, 1998.
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
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 April 30, 1998, was approximately $1,897,607,472. On that date,
there were 50,088,010 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
---
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
February 28, 1998 ("Annual Report") are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement dated May 22, 1998 for the regular
meeting of shareholders to be held June 25, 1998 ("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. The standard size for the Concept III stores is now
45,000 square feet and is designed to accommodate a 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.
In the last two fiscal years the Company has increased its store count by
13%, with a net addition of 33 new stores and, as of February 28, 1998, was
operating 284 stores from coast to coast. The rate of expansion in fiscal 1998
and 1997 was significantly slower than the previous three years when the Company
opened a total of 140 stores. The slower growth was dictated by the need to
focus on improving the Company's operations and financial performance. The
Company anticipates opening approximately 25 new
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stores in fiscal 1999 and to be operating approximately 309 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 store format features interactive displays, and for
certain product categories, a high level of customer assistance, all designed to
enhance the customer's shopping experience. As part of its overall strategy, the
Company:
- Generally offers a retail format similar to a self service discount
store for many products that consumers are familiar with and provides
a higher level of customer service and product explanation for more
complex products.
- Provides a 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 generally familiar with many 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. For products that are relatively easy for
consumers to understand and purchase, the Company employs a self-service,
discount style store format, featuring easy to locate product groupings,
emphasizing customer choice and product information. For certain new technology
products such as digital cameras and phones and digital satellite systems, the
Company provides dedicated and specially trained sales assistance. Sales staff
in these product categories help customers understand the features and benefits
of new technology and can assist customers in the purchase of accessories and
registration for service with providers.
Best Buy continuously evaluates the retail environment and regularly uses
focus groups and customer surveys 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. Most
stores contain a demonstration area for television "surround sound" systems; a
simulated, life-size car display; and audio speaker rooms. These demonstration
areas allow customers to hear for themselves how different configurations of
audio components enhance sound quality at home or in the car. The speaker rooms
feature a wide variety of music allowing customers to compare speaker quality
while listening to their choice of music. 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 approximately 40,000 - 45,000 square feet 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 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 format for many of the products the
Company sells allows the
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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.
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 33 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 20 to 24 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 29% 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 introduced 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 and the
Company's responsiveness to consumers' needs.
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 entertainment
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 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 5,600 products, exclusive of entertainment
software titles and accessories, in its
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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
timing of significant new software releases can also impact sales of personal
computers. 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 experience in the market and its
significantly improved ability to manage inventories in this category. The
Company also believes that its broad product lines, including those that
generate higher profit margins, and its relatively low cost structure contribute
to its ability to compete in this category. 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. Changing technology and hardware requirements
necessary to support new software, including on-line services, are expected to
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, AT&T, Canon, Compaq, CTX, Epson, Hewlett
Packard, IBM, Motorola, Packard Bell, Panasonic, Sharp and Toshiba.
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. The introduction of digital satellite systems (DSS) in fiscal 1997
and Digital Versatile Disc (DVD) and MiniDisc in fiscal 1998 marked the initial
stages of the transition of the consumer electronics category into digital
technology. While sales of analog technology in both audio and video products
remain soft, sales of digital technology continue to accelerate. The replacement
of existing
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analog technology with digital products in the future represents a significant
opportunity for the Company, although the transition could impact sales of
current products. Manufacturers have introduced High Definition Television
(HDTV), and broadcast transmission of digital signals is planned in 10 major
markets beginning in November 1998. Similar to recent technology introductions
in consumer electronics, introductory price points are expected to be high,
resulting in a lag time between product introduction and significant sales
volumes. The Company sells consumer electronics with brand names such as Aiwa,
Bose, Cambridge Soundworks, Eosone, General Electric, Infinity, JBL, JVC,
Magnavox, Nakamichi, Panasonic, Pioneer, RCA, Sanyo, Samsung, Sharp, Sony,
Technics, Toshiba and Yamaha.
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 offers from 7,000 to approximately 40,000 titles in its
largest Concept III stores. Due to the slow rate of inventory turn of some of
the deep catalogue recorded music titles, the Company narrowed its assortment of
recorded music in fiscal 1998 to improve inventory productivity. This reduction
in titles occurred 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 increase in sales of DVD players in fiscal 1998 and
significant expansion of the number of movie titles available in DVD format led
to growth in the entertainment software category. Further growth is anticipated
in fiscal 1999 as the number of movie titles is expected to increase to 1,500 by
the end of calendar 1998. The Company will be allocating additional space in the
stores to accommodate the wider selection. The video game hardware and software
products include popular games by manufacturers 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. During fiscal 1998 this category included brand names such as
Amana, Eureka, Frigidaire, General Electric, GE Profile, Hoover, Hotpoint,
Maytag, Panasonic, Roper, Sanyo, Sharp, Tappan and White-Westinghouse. The
addition of the Whirlpool line of appliances in fiscal 1999 is expected to
complete the Company's product assortment and increase the Company's market
share in the appliance retailing industry.
The Company also sells cameras and other photographic equipment and ready
to assemble furniture designed for use with computer and audio/video equipment.
In fiscal 1998, the Company utilized a portion of the space created by the
reduction in
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recorded music to introduce books, magazines and fitness equipment to its
product assortment.
The Company intends to continue test marketing and evaluating new products
in its larger stores during fiscal 1999. 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.
The following table sets forth the approximate percentages of store sales
from each of Best Buy's principal product lines.
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------
March 2, 1996 March 1, 1997 February 28 1998
------------- ------------- ----------------
<S> <C> <C> <C>
Home Office 41% 39% 38%
Consumer Electronics:
Video 18 17 15
Audio 13 12 11
Entertainment
Software 17 18 20
Major Appliances 7 9 9
Other (1) 4 5 7
---- ---- ----
Total 100% 100% 100%
---- ---- ----
---- ---- ----
</TABLE>
(1) Includes, among other things, 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 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 have been expensed in the year the store is opened.
During fiscal 1998, the Company opened 13 stores, and expanded or relocated
five stores to larger facilities. Based on the Company's
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improved financial performance in fiscal 1998 Best Buy is increasing its store
expansion program in fiscal 1999. The Company expects to open 25 new stores in
fiscal 1999, which includes entry into markets of Nashville and Knoxville,
Tennessee; Wausau, Wisconsin; Charleston, South Carolina; Reno, Nevada; and the
New England states. The remainder of the new stores will be opened in existing
markets. The Company also plans to expand or relocate another five stores in
fiscal 1999. With the planned opening of the Dinuba, California distribution
center, the Company believes it has the necessary distribution capacity and
management information systems as well as management experience and depth to
support its fiscal 1999 expansion plans.
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 1999 year end.
<TABLE>
<CAPTION>
Planned Anticipated
Number of Stores at Fiscal Year End For at Fiscal
----------------------------------- Fiscal 1999
1996 1997 1998 1999 Year End
---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C>
Texas 34 34 35 1 36
Illinois 32 32 32 -- 32
California 19 22 24 4 28
Florida 12 17 19 2 21
Ohio 18 18 19 -- 19
Michigan 16 16 17 -- 17
Minnesota 15 15 14 -- 14
Wisconsin 11 11 11 1 12
Georgia 10 10 10 -- 10
Maryland 8 9 9 1 10
Missouri 10 10 10 -- 10
Pennsylvania -- 4 9 1 10
Arizona 7 8 8 -- 8
Colorado 7 8 8 -- 8
Indiana 8 8 8 -- 8
North 7 7 7 1 8
Carolina
Virginia 6 7 7 -- 7
Tennessee -- 1 1 5 6
Iowa 5 5 5 -- 5
Kansas 5 5 5 -- 5
South 4 4 4 1 5
Carolina
New Jersey -- 3 4 -- 4
Arkansas 3 3 3 -- 3
Massachusetts -- -- -- 3 3
Nebraska 3 3 3 -- 3
Nevada 1 2 2 1 3
New Hampshire -- -- -- 3 3
Oklahoma 3 3 3 -- 3
Kentucky 2 2 2 -- 2
Alabama 1 1 1 -- 1
Delaware 1 1 1 -- 1
Maine -- -- -- 1 1
New Mexico 1 1 1 -- 1
North Dakota 1 1 1 -- 1
South Dakota 1 1 1 -- 1
---- ---- ---- ---- ----
Total 251 272 284 25 309
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
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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 1998, Best Buy's 20 largest suppliers accounted for approximately 55% of
the merchandise purchased by the Company, with five suppliers, Compaq,
Hewlett-Packard, Packard Bell, Panasonic, and Sony representing approximately
28% 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 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 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.
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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. 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 stores. During
fiscal 1999, the Company is constructing a 650,000 square foot distribution
center in Dinuba, California replacing an existing leased facility in Ontario,
California. The Company expects to obtain long term financing on the facility
after its anticipated opening in Spring 1999. The Company believes that its
distribution centers can most effectively service stores within a 600 to 700
mile radius and that its current 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.
The Company has identified critical operational and financial systems as
part of a comprehensive plan to address Year 2000 computer systems issues and
make the required changes to existing systems or replace non-compliant systems,
as appropriate. The Company is also working with its business partners to
mitigate the impact of Year 2000 issues. The Company expects to complete most of
the effort to address these issues in fiscal 1999 at a cost of approximately
$10 million. The Company is also replacing its point of sale system with Year
2000 compliant equipment. The Company does
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not expect to incur material costs beyond this estimate; however, the magnitude
of the effort is difficult to accurately predict and there can be no assurance
that the Company or its business partners will be completely Year 2000 compliant
on a timely basis.
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 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,
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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 35% 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 allow customers to
purchase certain products with repayment terms ranging from 90 days to one year
without a finance charge. The longer financing offers, generally those beyond
six months, typically require minimum monthly payments to avoid the finance
charge. 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 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 growth in the consumer electronics business has slowed
in recent years and the concentration of sales among the top retailers in the
industry has increased. 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 Montgomery Ward and store
closures by other national and regional chains in fiscal 1998. The flat industry
sales are due to market saturation for many consumer electronics products and
the general absence, until recently, of new products in that market. The dollar
volume growth of sales nationally in the home office product category has slowed
as average selling prices decline and household penetration increases. The
Company competes with an increasing number of retailers and alternative channels
of distribution such as mail order and internet shopping services. The Company
is currently testing a "configure to order" sales process to compete
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for the business of the most knowledgeable home office computer buyers. 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
Computer City 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 February 28, 1998, the Company employed approximately 39,000 persons,
of whom approximately 19,500 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.
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 six 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. 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 February 28, 1998, the Company owned one of its operating retail store
locations. Management expects to sell and lease back this property in fiscal
1999.
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
-14-
<PAGE>
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.
<TABLE>
<CAPTION>
THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
YEARS
WITH
THE
NAME AGE POSITION WITH COMPANY COMPANY
---- --- --------------------- -------
<S> <C> <C> <C>
Richard M. Schulze 57 Chairman, Chief Executive Officer and Director 31
Bradbury H. Anderson 48 President, Chief Operating Officer and Director 24
Allen U. Lenzmeier 54 Executive Vice President and Chief Financial Officer 13
Wade R. Fenn 39 Executive Vice President - Marketing 17
Julie M. Engel 37 Senior Vice President - Advertising 16
Robert C. Fox 47 Senior Vice President - Finance and Treasurer 12
Kevin P. Freeland 40 Senior Vice President - Inventory Management 2
Marc D. Gordon 37 Senior Vice President - MIS & Chief Information Officer -
Wayne R. Inouye 45 Senior Vice President - Marketing, Computers and Home Office 2
Michael P. Keskey 43 Senior Vice President - Sales 10
Richard L. Lewis 58 Senior Vice President - Human Resources -
George Z. Lopuch 48 Senior Vice President - Strategic Planning & Development -
Joseph T. Pelano 50 Senior Vice President - Retail Store Operations 9
Lowell W. Peters 57 Senior Vice President - Services -
Philip J. Schoonover 38 Senior Vice President - Marketing, Consumer Electronics 3
Kenneth R. Weller 49 Senior Vice President - Sales 4
</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.
-15-
<PAGE>
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.
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.
MARC D. GORDON joined the Company in April 1998 as Senior Vice President -
MIS & Chief Information Officer. Mr. Gordon brings 13 years experience in the
retail information systems area most recently as CIO for West Marine Products, a
West Coast-based specialty retailer/wholesaler of marine products. Other
positions have included senior manager with Andersen Consulting, principal with
a Boston IS consulting firm and Vice President of Information Systems with the
Timberland Company.
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.
RICHARD L. LEWIS joined the Company in July 1997 as Senior Vice President -
Human Resources. Mr. Lewis' career history includes 12 years with Limited
Express where he held various positions, most recently as Executive Vice
President of Human Resources. Lewis also served as Vice President of Human
Resources for the car rental divisions of Republic Industries.
GEORGE Z. LOPUCH joined the Company in March 1998 as Senior Vice President
- - Strategic Planning & Development. Mr. Lopuch brings to Best Buy more than 18
years of retail industry
-16-
<PAGE>
experience. Most recently he served as Senior Vice President of Corporate
Strategic Planning and Research at SuperValu.
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.
LOWELL W. PETERS joined the Company in September 1997 as Senior Vice
President - Service. Mr. Peters' career spans 34 years with Sears, where he held
various positions in their service organization, most recently as Vice President
Parts, Product Services.
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
22 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 17 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 18 through
22 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.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Consolidated balance sheets as of February 28, 1998
and March 1, 1997 23
For the fiscal years ended February 28, 1998,
March 1, 1997, and March 2, 1996
Consolidated statements of earnings 24
Consolidated statements of cash flows 25
Consolidated statements of shareholders'
equity 26
Independent auditor's report 26
Notes to consolidated financial statements 27-31
</TABLE>
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 8 of the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" on
pages 9 through 16 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 8 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>
<TABLE>
<CAPTION>
3. Exhibits:
Method
of
Number Description filing
------ ----------- ------
<S> <C> <C>
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 (2,4,5,9)
4.1 Note Purchase Agreement with Principal (6)
Mutual Life Insurance Company, dated as
of July 30, 1992
4.2 Amended and Restated Credit Agreement (12)
with First Bank National Association
dated May 13, 1997
4.3 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
4.4 Amended and Restated Agreement of (2)
Limited Partnership of Best Buy
Capital, L.P., dated as of November 3,
1994
4.5 Indenture between Best Buy, Best Buy (2)
Capital, 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
4.6 Guarantee Agreement related to 6-1/2% (2)
Convertible Monthly Income Preferred
Securities of Best Buy Capital, L.P.,
dated November 3, 1994
4.7 Deposit Agreement with respect to Best (2)
Buy Series A Cumulative Convertible
Preferred Stock, dated November 3, 1994
10.1 1987 Employee Non-Qualified Stock Option (7)
Plan, as amended
-20-
<PAGE>
10.2 1987 Directors' Non-Qualified Stock (2)
Option Plan, as amended
10.3 Best Buy Co., Inc. Deferred Compensation (11)
Plan
10.4 Resolutions of the Board of Directors (10)
dated April 24, 1998 amending the bonus
program for senior officers
10.5 1997 Employee Non-Qualified Stock Option (10)
Plan, as amended
10.6 1997 Directors' Non-Qualified Stock (8)
Option Plan
10.7 Amended and Restated 1994 Full-Time (8)
Employee Non-Qualified Stock Option Plan
13.1 1998 Annual Report to Shareholders (1)
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Ernst & Young LLP (1)
27.1 1998 Fiscal Year End Financial Data (1)
Schedule
27.2 1998 Fiscal Quarters 1, 2 and 3 (1)
Financial Data Schedules
27.3 1997 Fiscal Year End and Fiscal Quarters (1)
1, 2, and 3 Financial Data Schedules
27.4 1996 Fiscal Year End Financial Data (1)
Schedule
</TABLE>
(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.
-21-
<PAGE>
(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) 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.
(7) 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.
(8) 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.
(9) Exhibits so marked were filed with the Securities and Exchange
Commission on May 28, 1997, 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 April 30, 1998, as exhibits to the preliminary Proxy
Statement of Best Buy Co., Inc., and are incorporated herein by
reference and made a part hereof.
(11) Exhibit so marked was filed on April 3, 1998, as an exhibit to the
Registration Statement on Form S-8 (Registration No. 333-49371) of
Best Buy Co., Inc., and is incorporated herein by reference and made a
part hereof.
(12) Exhibit so marked was filed with the Securities and Exchange
Commission on July 11, 1997, as an exhibit to Form 10-Q of Best Buy
Co., Inc., and is 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 27, 1998
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 27, 1998.
/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)
- -------------------------- Director
Culver Davis, Jr.
- -------------------------- Director
Yvonne R. Jackson
/s/ Elliot S. Kaplan
- -------------------------- Director
Elliot S. Kaplan
/s/ David Stanley
- -------------------------- Director
David Stanley
/s/ Frank D. Trestman
- -------------------------- Director
Frank D. Trestman
- -------------------------- Director
Hatim A. Tyabji
- -------------------------- Director
James C. Wetherbe
-24-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
FISCAL PERIOD(1) 1998 1997 1996 1995 1994(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data
Revenues $ 8,358,212 $ 7,770,683 $ 7,217,448 $ 5,079,557 $ 3,006,534
Gross profit 1,332,138 1,058,881 936,571 690,393 456,925
Selling, general and administrative expenses 1,145,280 1,005,675 813,988 568,466 379,747
Operating income 186,858 53,206 122,583 121,927 77,178
Earnings before cumulative effect of accounting
change 94,453 1,748 48,019 57,651 41,710
Net earnings 94,453 1,748 48,019 57,651 41,285
Per Share Data(3)
Earnings before cumulative
effect of accounting change - Diluted $ 1.04 $ .02 $ .55 $ .64 $ .51
Net earnings - Diluted 1.04 .02 .55 .64 .50
Common stock price: High 30 19/32 13 1/8 14 13/16 22 5/8 15 23/32
Low 4 5/16 3 15/16 6 3/8 11 1/16 5 27/64
Operating and Other Data
Comparable store sales change(4) 2% (5%) 6% 20% 27%
Number of stores (end of period) 284 272 251 204 151
Average revenues per store(5) $ 29,700 $ 29,300 $ 31,100 $ 28,400 $ 22,600
Gross profit percentage 15.9% 13.6% 13.0% 13.6% 15.2%
Selling, general and administrative expense
percentage 13.7% 12.9% 11.3% 11.2% 12.6%
Operating income percentage 2.2% .7% 1.7% 2.4% 2.6%
Inventory turns(6) 5.6x 4.6x 4.8x 4.7x 5.0x
Balance Sheet Data (at period end)
Working capital $ 676,601 $ 567,456 $ 586,841 $ 609,049 $ 362,582
Total assets 2,056,346 1,734,307 1,890,832 1,507,125 952,494
Long-term debt, including current portion 225,322 238,016 229,855 240,965 219,710
Convertible preferred securities 229,854 230,000 230,000 230,000
Shareholders' equity 557,746 438,315 431,614 376,122 311,444
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS TABLE SHOULD BE READ IN CONJUNCTION WITH 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 SFAS 109, RESULTING IN A CUMULATIVE
EFFECT ADJUSTMENT OF ($425) OR ($.01) PER SHARE.
(3) PER SHARE DATA REFLECTS THE REQUIREMENTS OF SFAS 128 AND IS RESTATED FOR A
TWO-FOR-ONE STOCK SPLIT IN MAY 1998.
(4) COMPARABLE STORES ARE STORES OPEN AT LEAST 14 FULL MONTHS.
(5) AVERAGE REVENUES PER STORE ARE BASED UPON TOTAL REVENUES FOR THE PERIOD
DIVIDED BY THE WEIGHTED AVERAGE NUMBER OF STORES OPEN DURING SUCH PERIOD.
(6) INVENTORY TURNS ARE CALCULATED BASED UPON A MONTHLY AVERAGE OF INVENTORY
BALANCES.
Best Buy Co., Inc. 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Fiscal 1998 was a pivotal year for the Company, as initiatives to improve
inventory management and streamline processes at its retail stores resulted in a
251% increase in operating income, compared to fiscal 1997. A significant
improvement in the gross profit margin was the main reason for the improved
overall financial performance. Sales were 8% higher than the previous year, and
selling, general and administrative expenses increased as a percentage of sales.
Interest expense, which was lower as a result of faster-turning inventory, also
contributed to the Company's overall improvement in results for the year.
Earnings in fiscal 1998 were $94.5 million, compared to $1.7 million in fiscal
1997 and $48.0 million in fiscal 1996. Earnings per share on a diluted basis
were $1.04 in fiscal 1998, $.02 in fiscal 1997 and $.55 in fiscal 1996 and have
been adjusted to reflect a two-for-one stock split in May 1998.
REVENUES
The following table presents selected revenue data for each of the last three
fiscal years ($ in thousands).
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 8,358,212 $ 7,770,683 $7,217,448
Percentage increase in revenues 8% 8% 42%
Comparable store sales change 2% (5%) 6%
Average revenues per store $ 29,700 $ 29,300 $ 31,100
</TABLE>
Sales in fiscal 1998 were $8.358 billion compared to $7.771 billion in fiscal
1997, as comparable store sales increased 2% and results for the year included
13 new stores and a full year of operations at the 21 stores opened in fiscal
1997. The comparable store sales increase, which followed a 5% decrease in
comparable store sales in fiscal 1997, was driven by several factors. Consumer
demand, particularly in the second half of the year, as well as improved selling
strategies at retail, contributed to improving comparable store sales
performance throughout the year. Increased sales of entertainment software due
to new technology in video games and consumer demand for new titles in both
recorded music and computer software also led to the comparable store sales
increase for the year. Increased emphasis on the sale of Performance Service
Plans (PSPs), accessories and an expanded "ready-to-assemble" furniture
assortment also contributed to the comparable store sales increase. Comparable
store sales were adversely impacted by the continued decline in the average
selling prices of personal computers and general softness in the consumer
electronics category as it approaches the transition to digital technology.
Competition also eased somewhat as consolidation of specialty retailers in the
Company's product lines continued, although competition from mass merchants and
alternative methods of retailing such as mail order and Internet increased. New
stores opened in fiscal 1998 included entry into the new market of Pittsburgh,
Pennsylvania, with four stores. The remaining stores opened in existing markets.
In fiscal 1998 the Company closed one of its 28,000-square-foot stores where the
lease had expired.
In the second half of fiscal 1998 the Company introduced a new sales strategy
which provides customers with additional sales assistance to help them
understand the newer digital technology products. The Company refers to this
area of the store as the "high touch" area. In addition to providing enhanced
product explanation, the specially trained sales staff dedicated to this area of
the store assists customers with service activation and selection of appropriate
accessories. Products sold in this area of the store include digital cameras,
cellular and digital phones, digital satellite systems and personal digital
assistants. As a result of this additional focus on sales assistance, comparable
store sales for the products in this area more than doubled in the fourth
quarter. Management believes that there is potential future application for this
strategy as the consumer electronics category moves toward digital technology.
Fiscal 1997 sales were 8% higher than the $7.217 billion reported in fiscal
1996. Sales from the 21 new stores opened in fiscal 1997 and a full year of
operations at the 47 stores opened in fiscal 1996 offset a 5% decline in
comparable store sales. The comparable store sales decline in fiscal 1997 was
primarily due to the same industry factors in personal computers and consumer
electronics that negatively impacted comparable store sales in most of fiscal
1998.
The following table sets forth the Company's retail store sales mix by major
product category for each of the past three fiscal years.
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Home Office 38% 39% 41%
Consumer Electronics - Video 15% 17% 18%
Consumer Electronics - Audio 11% 12% 13%
Entertainment Software 20% 18% 17%
Appliances 9% 9% 7%
Other 7% 5% 4%
- -----------------------------------------------------------------------
Total 100% 100% 100%
</TABLE>
Sales in the home office category in fiscal 1998 continued to be impacted by
lower average selling prices of personal computers. Unit sales of personal
computers increased in fiscal 1998 as lower prices brought more consumers into
the marketplace, although the increase in units did not offset the 15-20% price
declines until the fourth quarter. The percentage of products offered at price
points below $1,000 continued to increase through the last half of the year.
Improved in-stock positions resulting from better inventory management also
helped increase unit volume sales during the year. The Company believes that the
higher unit sales volumes of personal computers contributes to the sales of
additional products and services such as accessories, PSPs and computer
software. Management believes that the downward trend in selling prices of
personal computers will continue, although the rate of decline should moderate.
18 Best Buy Co., Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The introduction of digital satellite systems (DSS) in fiscal 1997 and Digital
Versatile Disc (DVD) and MiniDisc in fiscal 1998 marked the initial stages of
the transition of the consumer electronics category into digital technology.
While sales of analog technology in both audio and video products remains soft,
sales of digital technology continues to accelerate. The growth in sales of
digital products has been driven by falling price points and, in the case of
DVD, an increasing number of software titles. The number of DVD titles grew from
an introductory 23 to more than 500 during fiscal 1998 and is expected to grow
to 1,500 by the end of calendar 1998. Sales of DSS benefited from increased
emphasis on sales presentation in the new "high touch" area in the store. The
replacement of existing analog technology with digital products in the future
represents a significant opportunity for the Company, although the transition
could impact sales of current products. Manufacturers have introduced High
Definition Television (HDTV), and broadcast transmission of digital signals is
planned in 10 major markets for November 1998. Similar to recent technology
introductions in consumer electronics, introductory price points are expected to
be high, resulting in a lag time between product introduction and significant
sales volumes.
Sales of entertainment software, which includes recorded music and movies,
computer software and video games, increased significantly in fiscal 1998. The
increase was principally due to strong demand for video games following the
release of new technology in late fiscal 1997 when the Nintendo 64 and Sony
Playstation formats were introduced. Increased sales of computer software due to
new titles released and a larger installed base of personal computers also
contributed to the gains in the entertainment software category. Recorded music
releases with higher levels of consumer acceptance also led to sales gains in
this category, particularly late in the year.
Sales of major appliances remained relatively flat in fiscal 1998 as competitive
pressure during most of the year resulted in falling price points and limited
comparable store sales growth. The Company experienced significant comparable
store sales growth in fiscal 1997 when the Company greatly expanded its product
assortment with the addition of the Amana, General Electric, Hotpoint, Maytag
and Tappan lines of appliances. In April 1998, the Company announced that it
would begin carrying a full line of Whirlpool home appliances beginning in the
second quarter of fiscal 1999.
The "Other" category of product sales includes sales of PSPs, which grew from
1.9% of sales in fiscal 1997 to 3.0% in fiscal 1998. An increased focus on the
presentation of plans to customers and the higher sales volumes of personal
computers led to the significant increase in PSP sales. Also included in this
category is photographic equipment, an expanded assortment of ready-to-assemble
furniture, as well as books and magazines and exercise equipment, which were
introduced in the stores in the space created by the reduction in the Company's
assortment of recorded music in fiscal 1998.
In fiscal 1999 the Company expects that it can continue to capitalize on the
operational execution improvements made in the past two years with respect to
inventory management and productivity in the retail stores to further improve
the Company's sales performance. A continued healthy economy is expected to
result in a comparable store sales increase for the year. Comparable store sales
gains are expected to be strongest in the early part of the year and moderate in
the second half as the comparisons become more difficult. The Company has
announced plans to open approximately 25 new stores during the year, the most
significant of which is the entry into the New England area with six new stores.
The Company has also announced plans to enter Reno, Nevada; Charleston, South
Carolina; Wausau, Wisconsin and Nashville and Knoxville, Tennessee. The
remaining new stores will be opened in existing markets.
COMPONENTS OF OPERATING INCOME
The following table sets forth selected operating ratios as a percentage of
sales for the last three fiscal years.
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross profit margin 15.9% 13.6% 13.0%
Selling, general and administrative expenses 13.7% 12.9% 11.3%
Operating income 2.2% .7% 1.7%
</TABLE>
Gross profit margin for fiscal 1998 improved to 15.9% compared to 13.6% in
fiscal 1997, a gain that was driven by greatly improved inventory management.
Faster inventory turns and a more profitable product assortment were the major
contributors to the improvement. Through more rapid replenishment of products,
the Company increased inventory turns from 4.6 to 5.6 times and reduced exposure
to margin pressure due to product model transition. This improvement was most
evident in personal computers, where inventory turns increased to 11.5 times
compared to 8.5 times in fiscal 1997, moving this significant product category
from a profit drain to a significant profit contributor. By employing better
product lifecycle management and rapid replenishment, the Company was able to
quickly react to changing consumer demand and timing of model transitions. The
inability to quickly react to changing market conditions resulted in a $15
million inventory write-down related to personal computers that severely
impacted fiscal 1997's operating results. A narrower and more profitable
assortment in consumer electronics also led to more current inventory and higher
overall rates of gross profit margin in that category. The increased
contribution in the Company's sales mix from PSPs also was a significant factor
in the improved gross profit margin for the year. A less promotionally driven
sales environment benefited the Company, as consumer financing promotions were
more selectively used, reducing the costs associated with these offers. A
continuing of the trend of improvement in inventory shrink also added to fiscal
1998 gross profit margin gains.
Best Buy Co., Inc. 19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Gross profit margins of 13.6% in fiscal 1997 improved from 13.0% in fiscal 1996
as increased contributions from higher margin PSPs and appliances in the sales
mix offset the impact of $25 million in inventory write-downs and a highly
promotional environment. The write-downs were primarily due to a rapid decline
in the selling prices of personal computers in the third quarter of 1997 and a
decision to reduce the Company's assortment of recorded music in the fourth
quarter.
Management believes that further refinement in the Company's product assortment,
product lifecycle management and replenishment of products will result in
additional improvement in gross profit margins. Improvement is also anticipated
as a result of an increasing contribution from sales of PSPs. The impact of
these gains is expected to be less significant than was experienced the past
year.
Selling, general and administrative expenses (SG&A) increased to 13.7% of sales
in fiscal 1998 compared to 12.9% in fiscal 1997, primarily as a result of higher
levels of service and compensation. In addition to driving higher sales volumes,
the strength of the economy has created a tight labor market, placing upward
pressure on wages. The addition of the dedicated staff in the "high touch" area
of the stores also added to the Company's overall payroll costs in fiscal 1998.
Also, compensation costs in fiscal 1998 increased over fiscal 1997 as a result
of a higher level of compensation tied to the Company's improved financial
performance. Professional services associated with the strategic initiatives to
improve inventory management and retail operations also contributed to the
increased spending in fiscal 1998. Costs associated with information systems
enhancements, including addressing Year 2000 issues and initial development of
the Company's Internet shopping site, also impacted spending during the year. As
a result of the sale and leaseback of 23 owned properties in the past two years,
rent expense has also increased, although the sale of these properties reduced
interest expense.
The increase in the SG&A expense ratio in fiscal 1997 compared to fiscal 1996
was driven by the loss of leverage on fixed expenses resulting from the
comparable store sales decline. Higher costs associated with new markets entered
in recent years and higher advertising costs due to a more promotional
environment also contributed to the increase.
The strong economy is expected to result in continued pressure on wages, and the
Company anticipates that selling, general and administrative expenses will
continue to increase as a percent of sales. The annualization of the current
year increases in compensation due both to general wage increases and the
addition of the dedicated staffing in the "high touch" area in the second half
of fiscal 1998 will also increase these expenses. Professional fees associated
with the continuation of the Company's strategic initiatives and ongoing
information systems enhancements are also expected to increase.
The Company has identified critical operational and financial systems as part of
a comprehensive plan to address Year 2000 computer systems issues and make the
required changes to existing systems or replace non-compliant systems, as
appropriate. The Company is also working with its business partners to mitigate
the impact of Year 2000 issues. The Company expects to complete most of the
effort to address these issues in fiscal 1999 at a cost of approximately $10
million. The Company is also replacing its point of sale system with Year 2000
compliant equipment. The Company does not expect to incur material costs beyond
this estimate; however, the magnitude of the effort is difficult to accurately
predict and there can be no assurance that the Company or its business partners
will be completely Year 2000 compliant on a timely basis.
Interest expense in fiscal 1998 was $33.0 million, a $17.3 million reduction as
compared to fiscal 1997. Faster inventory turns, cash generated from earnings
and lower levels of owned real estate resulted in essentially no borrowings
during the year under the Company's revolving credit facility. The expected
conversion of the Company's convertible preferred securities in the first
quarter of fiscal 1999 will reduce interest expense by approximately $15 million
annually.
The Company's income tax rate in fiscal 1998 was 38.6%, compared to 39.0% in
fiscal 1997 and 39.2% in fiscal 1996, as tax exempt interest income and slightly
lower state income taxes have reduced the Company's overall tax rate.
LIQUIDITY AND CAPITAL RESOURCES
In addition to the positive impact on gross profit margin, the Company's
progress in inventory management led to a significant improvement in the
Company's financial position and liquidity. The Company's cash and cash
equivalents increased by $430 million over the prior year. Cash flow from
operating activities of $542 million and a $45 million reduction in owned
property held for sale resulted in the increased liquidity. At the end of fiscal
1998, the Company had $520 million in cash and short-term investments, compared
to $90 million at the end of 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.
<TABLE>
<CAPTION>
STORE PROTOTYPE 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
28,000 square feet 48 54 61
36,000 square feet 34 34 36
45,000 square feet 150 132 112
58,000 square feet 52 52 42
- -------------------------------------------------------------------------------
Total number of stores at year end 284 272 251
Average store size (in square feet) 43,200 42,800 41,400
</TABLE>
20 Best Buy Co., Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Inventories at the end of fiscal 1998 were $1.06 billion, a decline of $71
million as compared to the end of fiscal 1997 and $140 million below fiscal 1996
year end. The lower levels of inventory, which includes the addition of 33
stores in the past two years, is the result of a faster turning assortment of
products.
Trade receivables at the end of fiscal 1998 were $95.7 million, an increase of
$16.1 million compared to the prior year end, principally due to the significant
increase in volume in the fourth quarter of fiscal 1998, as comparable store
sales increased 17% in that period. Trade receivables include primarily credit
card and vendor-related receivables. Receivables from sales on the Company's
private label credit card are sold to third parties, without recourse, and the
Company does not bear any risk of loss with respect to these receivables.
Refundable and deferred income taxes decreased as a result of the increase in
the Company's taxable income in fiscal 1998. Trade payables, including those
classified as financing obligations, increased as compared to the prior fiscal
year end due to the higher volume of purchases supporting the fiscal 1998
fourth-quarter sales levels and the improved inventory turns. Accrued
liabilities increased compared to the prior year end as a result of expenses
associated with various strategic initiatives, compensation related to the
improved financial performance of the Company and the higher levels of business
activity.
Deferred revenues related to extended service contracts recognized in fiscal
1998 were $24.6 million compared to $30.8 million in fiscal 1997, as the
deferral continues to decline following the Company's decision to insure these
obligations, beginning in the fourth quarter of fiscal 1996. Revenues from that
time forward are recognized at the time of sale, rather than over the life of
the contract. Other long-term liabilities primarily include real estate-related
expenses for the difference between the recognition of rent expense for
accounting purposes and the terms of the leases.
Capital spending in fiscal 1998 was $72 million compared to $88 million in
fiscal 1997 and $126 million in fiscal 1996. The slower rate of store expansion
in fiscal 1998 resulted in a lower level of capital spending as compared to the
preceding years. In addition to the 13 new stores and five remodeled or
relocated stores in fiscal 1998, the Company completed a number of merchandising
projects, including the reduction in square footage allocated to the assortment
of recorded music and the addition of the new "high touch" area in the stores.
In fiscal 1998, the Company also purchased approximately $10 million in
equipment that had been leased through the Company's master lease facility. The
purchase of these assets was financed through a $10 million intermediate-term
loan. In fiscal 1997 the Company obtained intermediate-term equipment financing
totaling $21 million and refinanced its corporate headquarters facility with a
$12 million, 15-year mortgage loan.
Recoverable costs from developed properties declined $45 million in fiscal 1998
as store development slowed and improved conditions for the sale of the
Company's real estate resulted in the sale and leaseback of essentially all
owned operating locations. In the past two years the Company has sold and leased
back 22 retail locations and one distribution center which it had developed. In
addition to the sale of owned property, in fiscal 1998 the Company secured
long-term lease financing of all of the properties in its master lease facility.
This facility, which was used to support the development of approximately $125
million of store and distribution center expansion in fiscal 1995 and 1996, had
an underlying bank credit facility which was scheduled to mature in September
1998.
In May 1997, the Company reduced the capacity of its revolving credit facility
from $550 million to $365 million, based upon lower anticipated usage. The rapid
improvement in inventory turns and higher-than-anticipated sales volumes
resulted in essentially no borrowings under the facility in fiscal 1998. This
facility matures in June 1998. Management intends to have a new $200 to $250
million, 2 year facility in place by the expiration date of the existing
facility.
On March 10, 1998, the Company announced that it was exercising its right to
cause the conversion rights of the Company's $230 million of preferred
securities to expire. These securities pay monthly distributions at an annual
rate of 6.5%. Until April 24, 1998, these securities were convertible into the
equivalent of approximately 10.2 million shares of the Company's common stock,
as adjusted for the two-for-one stock split in May 1998. Through that date, 99%
of the securities had been converted resulting in issuance of 10.1 million
post-split common shares. The Company has the right to redeem the remaining
outstanding preferred securities for $50 in cash per security. As a result of
the conversion, shareholders' equity was increased to nearly $780 million.
The acceleration in store growth to 25 stores, a significant investment in
information systems and construction of a new distribution facility is expected
to increase capital spending in fiscal 1999 to approximately $140 million,
exclusive of amounts expected to be recovered through subsequent sales and
leasebacks. The new distribution center in Dinuba, California replaces a leased
facility. This facility, which will be approximately 650,000 square feet, is
expected to open in March 1999. The Company expects that this level of capital
growth will be funded through earnings and depreciation. Management also
believes that the working capital requirements to support the inventories for
the new stores can be funded through the anticipated further improvement in
inventory turns.
Management believes that the cash generated by expected results of operations
and cash and short-term investments on hand will be sufficient to meet the
Company's anticipated needs for the coming year. The expected new revolving
credit facility would be available for additional working capital needs or
opportunities.
Best Buy Co., Inc. 21
<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 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 1998 and 1997. 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 $10 million
pre-tax charge mainly as a result of the Company's decision to reduce its
assortment of recorded music. Per share amounts are on a diluted basis, and have
been restated to reflect SFAS 128.
<TABLE>
<CAPTION>
($ in thousands, except per share amounts)
FISCAL 1998 MAY 31 AUG. 30 NOV. 29 FEB. 28
1997 1997 1997 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,606,551 $ 1,793,204 $ 2,106,361 $ 2,852,096
Gross profit 247,883 288,908 337,890 457,457
Operating income 5,216 19,926 52,919 108,797
Net earnings (loss) (2,639) 6,648 26,418 64,026
Net earnings (loss) per share (.03) .07 .29 .65
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 .04 (.13) .10
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK PRICES
QUARTER 1ST 2ND 3RD 4TH
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1998
High $ 7 3/16 $ 8 3/4 $ 15 1/8 $ 30 19/32
Low 4 5/16 5 5/8 8 7/16 14 9/16
FISCAL 1997
High $ 11 1/2 $ 13 1/8 $ 11 7/8 $ 7 3/16
Low 8 3/16 8 11/16 6 1/16 3 15/16
</TABLE>
Best Buy's common stock is traded on the New York Stock Exchange, symbol BBY.
As of March 31, 1998, there were 1,508 holders of record of Best Buy common
stock. The Company has not historically paid cash dividends on its common stock.
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 expectations regarding the economy, future sales
volumes, profit margins, the impact of labor markets and new product
introductions on the Company's overall profitability. 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.
PER SHARE AMOUNTS IN THE ABOVE TABLES HAVE BEEN ADJUSTED FOR A TWO-FOR-ONE STOCK
SPLIT IN MAY 1998.
22 Best Buy Co., Inc.
<PAGE>
CONSOLIDATED BALANCE SHEETS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
ASSETS FEB. 28 MARCH 1
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 520,127 $ 89,808
Receivables 95,702 79,581
Recoverable costs from developed properties 8,215 53,485
Merchandise inventories 1,060,788 1,132,059
Refundable and deferred income taxes 16,650 25,560
Prepaid expenses 8,795 4,542
-----------------------------
Total current assets 1,710,277 1,385,035
Property and Equipment
Land and buildings 19,977 18,000
Leasehold improvements 160,202 148,168
Furniture, fixtures and equipment 372,314 324,333
Property under capital leases 29,079 29,326
-----------------------------
581,572 519,827
Less accumulated depreciation and amortization 248,648 188,194
-----------------------------
Net property and equipment 332,924 331,633
Other Assets 13,145 17,639
-----------------------------
Total Assets $2,056,346 $1,734,307
-----------------------------
-----------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND FEB. 28 MARCH 1
SHAREHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 727,087 $ 487,802
Obligations under financing arrangements 35,565 127,510
Accrued salaries and related expenses 48,772 33,663
Accrued liabilities 163,744 122,611
Income taxes payable 24,608
Deferred service plan revenue 18,975 24,602
Current portion of long-term debt 14,925 21,391
-----------------------------
Total current liabilities 1,033,676 817,579
Deferred Income Taxes 7,095 3,578
Deferred Revenue and Other Liabilities 17,578 28,210
Long-Term Debt 210,397 216,625
Convertible Preferred Securities of Subsidiary 229,854 230,000
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 89,252,000
and 86,574,000 shares, respectively 4,463 4,329
Additional paid-in capital 266,144 241,300
Retained earnings 287,139 192,686
-----------------------------
Total shareholders' equity 557,746 438,315
-----------------------------
Total Liabilities and Shareholders' Equity $2,056,346 $1,734,307
-----------------------------
-----------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Best Buy Co., Inc. 23
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED FEB. 28 MARCH 1 MARCH 2
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $8,358,212 $7,770,683 $7,217,448
Cost of goods sold 7,026,074 6,711,802 6,280,877
---------------------------------------------
Gross profit 1,332,138 1,058,881 936,571
Selling, general and administrative expenses 1,145,280 1,005,675 813,988
---------------------------------------------
Operating income 186,858 53,206 122,583
Interest expense, net 33,005 50,338 43,594
---------------------------------------------
Earnings before income taxes 153,853 2,868 78,989
Income taxes 59,400 1,120 30,970
---------------------------------------------
Net Earnings $ 94,453 $ 1,748 $ 48,019
---------------------------------------------
---------------------------------------------
Basic Earnings Per Share $ 1.08 $ .02 $ .56
Diluted Earnings Per Share $ 1.04 $ .02 $ .55
Basic Weighted Average Common Shares Outstanding (000's) 87,708 86,344 85,240
Diluted Weighted Average Common Shares Outstanding (000's) 100,126 87,246 86,966
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24 Best Buy Co., Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
$ IN THOUSANDS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED FEB. 28 MARCH 1 MARCH 2
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net earnings $ 94,453 $ 1,748 $ 48,019
Charges to earnings not affecting cash:
Depreciation and amortization 68,330 66,844 54,862
Other 3,254 468 1,267
---------------------------------------------
166,037 69,060 104,148
Changes in operating assets and liabilities:
Receivables (16,121) 41,857 (36,998)
Merchandise inventories 71,271 69,083 (293,465)
Prepaid taxes and expenses 4,657 8,174 (16,273)
Accounts payable 239,285 (186,050) 278,515
Other liabilities 68,103 4,792 63,589
Income taxes 33,759 3,579 (12,004)
Deferred revenue (24,603) (30,845) 12,008
---------------------------------------------
Total cash provided by (used in) operating activities 542,388 (20,350) 99,520
---------------------------------------------
Investing Activities
Additions to property and equipment (72,063) (87,593) (126,201)
Decrease (increase) in recoverable costs from developed properties 45,270 72,752 (40,015)
Decrease (increase) in other assets 4,494 (5,593) 7,712
---------------------------------------------
Total cash used in investing activities (22,299) (20,434) (158,504)
---------------------------------------------
Financing Activities
(Decrease) increase in obligations under financing arrangements (91,945) 33,559 12,196
Long-term debt borrowings 10,000 33,542
Long-term debt payments (22,694) (25,694) (14,600)
Common stock issued 14,869 2,740 3,133
---------------------------------------------
Total cash (used in) provided by financing activities (89,770) 44,147 729
---------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 430,319 3,363 (58,255)
Cash and Cash Equivalents at Beginning of Period 89,808 86,445 144,700
---------------------------------------------
Cash and Cash Equivalents at End of Period $ 520,127 $ 89,808 $ 86,445
---------------------------------------------
---------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25 Best Buy Co., Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND INDEPENDENT AUDITOR'S REPORT
$ IN THOUSANDS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Stock options exercised 134 14,056
Tax benefit from stock options exercised 10,642
Conversion of preferred securities 146
Net earnings 94,453
------------------------------------------
Balances at
Feb. 28, 1998 $4,463 $266,144 $287,139
------------------------------------------
------------------------------------------
</TABLE>
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 February 28, 1998, and March 1, 1997, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended February 28, 1998. 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 February 28, 1998, and March 1, 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
February 28, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 31, 1998
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26 Best Buy Co., Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
The Company operates in a single business segment, selling 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. Cash equivalents are carried at
cost, which approximates market value.
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. The Company evaluates potential losses on impairment of long-lived assets
used in operations on a location by location basis when indicators of impairment
are present. A loss is recorded when an asset's carrying value exceeds the
undiscounted cash flows from the asset.
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 $3,500, $5,800 and $10,700 in
fiscal 1998, 1997 and 1996, respectively.
ADVERTISING COSTS:
Advertising costs, included in selling, general and administrative expenses, are
expensed as incurred.
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 November 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:
The Company has adopted and retroactively applied the requirements of Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" to all
periods presented. This change did not have a material impact on the computation
of the earnings per share data.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share
includes the incremental shares assumed issued on the exercise of stock options
and assumes that the convertible preferred securities are converted into common
stock and the interest expense thereon, net of related taxes, is added back to
net earnings when such conversion results in dilution All common share and per
share information has been adjusted to reflect a two-for-one stock split in May
1998.
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 1998 and 1997 contained 52 weeks, and fiscal 1996 contained 53 weeks.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to current year
presentation.
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 terms of this arrangement allow the Company to extend the due
dates of invoices beyond their normal terms. Amounts extended generally bear
interest at a rate approximating the prime rate. The line has provisions that
give the financing source a portion of the cash discounts provided by the
manufacturers.
Best Buy Co., Inc. 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
3. Borrowings
<TABLE>
<CAPTION>
FEB. 28 MARCH 1
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Senior subordinated notes $ 150,000 $ 150,000
Subordinated notes 18,000 21,904
Equipment financing loans 35,578 39,649
Corporate headquarters financing 11,619 12,000
Obligations under capital leases 10,125 14,463
------------------------------
225,322 238,016
Current portion of long-term debt 14,925 21,391
------------------------------
$ 210,397 $ 216,625
------------------------------
------------------------------
</TABLE>
CREDIT AGREEMENT:
The Company has a credit agreement (the "Agreement") that contains a bank
revolving credit facility under which the Company can borrow up to $365,000. The
Agreement provides that up to $250,000 of the facility is available at all
times, and an additional $115,000 is available from July 1 to December 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 February 28, 1998, or
March 1, 1997. The weighted average interest rate under the Company's current
and prior credit agreements was 8.67%, 6.86% and 7.11% for the fiscal years
1998, 1997 and 1996, respectively.
SENIOR SUBORDINATED NOTES:
The Company has $150,000 of senior subordinated notes outstanding. The notes
mature on October 1, 2000, and bear interest at 8.63%. The Company may, at its
option, prepay the notes at 102.50% of par after September 30, 1998, or at
101.25% of par after September 30, 1999. 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 $147,800 at February 28, 1998. 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 had
$3,904 of unsecured, subordinated notes bearing interest at 9.00% which matured
and were paid on June 15, 1997.
EQUIPMENT FINANCING LOANS:
The equipment financing loans require monthly or quarterly payments and have
maturity dates between March 1998 and March 2001. Interest rates on these loans
range from 5.65% to 9.41%. Furniture and fixtures with a book value of $28,400
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 February 28, 1998, and March 1, 1997. The net book
value of assets under capital leases was $10,200 and $13,900 at February 28,
1998, and March 1, 1997, respectively. Assets acquired under capital leases were
$0, $300 and $3,500 in fiscal 1998, 1997 and 1996, respectively.
CORPORATE HEADQUARTERS FINANCING:
The Company's corporate headquarters is financed with a 15-year mortgage at an
interest rate of 8.40%.
During fiscal 1998, 1997 and 1996, interest paid (net of amounts capitalized)
totaled $37,700, $50,900 and $44,800, respectively. The fair value of the
Company's senior subordinated notes was $153,400 at February 28, 1998, based on
quoted market prices. The fair value of all other financial instruments
approximates carrying value.
<TABLE>
<CAPTION>
FUTURE MATURITIES OF DEBT:
FISCAL YEAR CAPITAL LEASES OTHER DEBT
- ------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 2,031 $ 12,993
2000 586 29,594
2001 7,631 157,767
2002 18 4,251
2003 1,445
Thereafter 9,147
-------------------------------------
10,266 $ 215,197
Less amount representing interest 141 ---------------
---------------- ---------------
Minimum lease payments $ 10,125
----------------
----------------
</TABLE>
28 Best Buy Co., Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
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 $7,700. 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 2.222 shares per security
(equivalent to a conversion price of $22.50 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 $27 per share for 20 out of 30 consecutive trading
days. The common stock met this criteria in March 1998 and the Company issued
notice to holders of the preferred securities that the conversion rights would
expire on April 24, 1998.
5. SHAREHOLDERS' EQUITY
STOCK OPTIONS:
The Company currently 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 13,000,000 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. In addition, two plans expired in fiscal
1998 that still have outstanding options. At February 28, 1998, options to
purchase 8,372,000 shares are outstanding under all of these plans.
Pursuant to Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," the Company has elected to account for its stock
option plans under the provisions of APB Opinion No. 25 "Accounting for Stock
Issued to Employees." Accordingly, no compensation cost has generally been
recognized for the stock option plans. The Company has evaluated the pro forma
effects of Statement 123 and as such, net earnings, basic earnings per share and
diluted earnings per share would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Earnings
As reported $ 94,453 $ 1,748 $ 48,019
Pro forma 88,614 (1,196) 46,052
Basic Earnings Per Share
As reported $ 1.08 $ .02 $ .56
Pro forma 1.01 (.01) .54
Diluted Earnings Per Share
As reported $ 1.04 $ .02 $ .55
Pro forma .98 (.01) .53
</TABLE>
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.8% 6.2% 6.9%
Expected dividend yield 0% 0% 0%
Expected stock price volatility 60% 40% 40%
Expected life of options 4.2 years 4.3 years 4.2 years
</TABLE>
The pro forma effect on net earnings 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 of options granted during fiscal 1998, 1997 and
1996 used in computing pro forma compensation expense was $3.47, $2.52 and
$4.87 per share, respectively.
In February 1997, the Company canceled 3,278,000 options, representing
approximately half of the outstanding options granted to employees since April
1993, with exercise prices ranging from $5.60 to $19.10 and granted the same
number of new options with an exercise price of $4.31. Options issued to the
Company's CEO and president were not included in the repricing.
Best Buy Co., Inc. 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Option activity for the last three fiscal years is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
- -----------------------------------------------------------------------------
<S> <C> <C>
Outstanding February. 25, 1995 7,540,000 $ 7.82
Granted 2,944,000 11.60
Exercised (1,250,000) 2.50
Canceled (694,000) 13.13
-------------
Outstanding March 2, 1996 8,540,000 9.47
Granted 5,330,000 6.11
Exercised (892,000) 3.08
Canceled (4,528,000) 11.22
-------------
Outstanding March 1, 1997 8,450,000 7.09
Granted 3,860,000 6.47
Exercised (2,678,000) 5.56
Canceled (1,260,000) 6.88
-------------
Outstanding February 28, 1998 8,372,000 $ 7.32
-------------
-------------
</TABLE>
Excerscisable options at the end of fiscal 1998, 1997 and 1996 were 2,358,000,
2,930,000 and 4,652,000 respectively. The following table summarizes information
concerning currently outstanding and exercisable options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0 to $5 2,448,000 3.81 $ 4.31 700,000 $ 4.31
$5 to $10 4,208,000 7.81 6.71 612,000 7.09
$10 to $15 1,156,000 2.52 11.60 606,000 11.60
$15 to $20 560,000 1.10 16.22 440,000 16.22
- -----------------------------------------------------------------------------------------------------
$0 to $20 8,372,000 5.46 $ 7.32 2,358,000 $ 9.13
</TABLE>
EARNINGS PER SHARE:
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share," the following table presents a reconciliation of the
numerators and denominators of basic and diluted earnings per common share for
the fiscal years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net earnings $ 94,453 $ 1,748 $ 48,019
Interest on preferred securities, net of tax 9,179
---------------------------------------------
Net earnings per share assuming dilution $ 103,632 $ 1,748 $ 48,019
Denominator:
Average common shares outstanding 87,708,000 86,344,000 85,240,000
Effect of dilutive securities:
Employee stock options 2,202,000 902,000 1,726,000
Preferred securities 10,216,000
---------------------------------------------
Average common shares outstanding
assuming dilution 100,126,000 87,246,000 86,966,000
Basic earnings per share $ 1.08 $ .02 $ .56
Diluted earnings per share $ 1.04 $ .02 $ .55
</TABLE>
6. OPERATING LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company conducts essentially all 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 properties 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 had
leased 17 stores and a distribution center, along with the related fixtures and
equipment under a master lease agreement through February 1998. The initial
terms of the leases under this agreement ranged from one to five years, and rent
was variable based on interest rate options as selected by the Company. The
leases on these properties were terminated in fiscal 1998 and the properties
were re-leased under long-term leases. The Company purchased the fixtures and
equipment from the lessor. 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.
The composition of total rental expenses for all operating leases during the
last three fiscal years, including leases of buildings and equipment, was as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $161,500 $139,200 $105,300
Percentage rentals 400 500 500
------------------------------------------
$161,900 $139,700 $105,800
------------------------------------------
------------------------------------------
</TABLE>
30 Best Buy Co., Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
As of February 28, 1998 three stores are leased from the Company's CEO and
principal shareholder, his spouse, or partnerships in which he is a partner.
Rent under these leases during the last three fiscal years and two additional
stores, for which the leases expired in January 1996 and January 1998, was as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $1,000 $1,000 $1,100
Percentage rentals 300 400 400
-----------------------------------------
$1,300 $1,400 $1,500
-----------------------------------------
-----------------------------------------
</TABLE>
Future minimum lease obligations by year (not including percentage rentals) for
all operating leases at February 28, 1998, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- --------------------------------------------------------------------------
<S> <C>
1999 $ 152,200
2000 153,000
2001 148,500
2002 147,000
2003 143,000
Later years 1,422,500
</TABLE>
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 $2,100,
$2,000 and $1,700 during fiscal 1998, 1997 and 1996, respectively.
8. INCOME TAXES
Following is a reconciliation of the provision for income taxes to the federal
statutory rate:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax
at the statutory rate $53,849 $1,004 $27,646
State income taxes,
net of federal benefit 5,763 116 3,717
Tax exempt interest (1,038)
Jobs tax credit (574)
Other 826 181
------------------------------------------
Provision for income taxes $59,400 $1,120 $30,970
------------------------------------------
------------------------------------------
Effective tax rate 38.6% 39.0% 39.2%
------------------------------------------
------------------------------------------
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current: Federal $ 50,950 $ (5,100) $ 27,401
State 5,487 (581) 6,693
------------------------------------------
56,437 (5,681) 34,094
------------------------------------------
Deferred: Federal 2,687 6,103 (2,904)
State 276 698 (220)
------------------------------------------
2,963 6,801 (3,124)
------------------------------------------
Provision for income taxes $ 59,400 $ 1,120 $ 30,970
------------------------------------------
------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
FEB. 28 MARCH 1
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Accrued expenses $ 13,294 $ 7,579
Deferred service plan revenue 9,125 18,811
Compensation and benefits 2,554 3,375
Inventory 1,872
Other - net 350 159
---------------------------------
Total deferred tax assets 27,195 29,924
---------------------------------
Property and equipment 17,067 15,697
Other - net 573 3,356
---------------------------------
Total deferred tax liabilities 17,640 19,053
---------------------------------
Net deferred tax assets $ 9,555 $ 10,871
---------------------------------
---------------------------------
</TABLE>
The Internal Revenue Service (IRS) has taken a position that interest on
securities such as the subordinated debenture referred to in Note 4 is not
deductible for federal income tax purposes. The Company believes that the
interest is deductible and intends to contest the IRS' position. Income taxes
paid (received) were $12,700, ($8,600) and $45,900 in fiscal 1998, 1997 and
1996, 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.
Best Buy Co., Inc. 31
<PAGE>
EXHIBIT 21.1
BEST BUY CO., INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of Formation
------------------
<S> <C>
BBC Property Co. Minnesota
BBC Investment Co. Nevada
Best Buy Concepts, Inc. Nevada
Best Buy Stores, L.P. Delaware
Best Buy Capital, L.P. Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Registration S-8 pertaining to the Deferred Compensation Plan
(No. 333-49371), the 1997 Directors' Non-Qualified Stock Option Plan
(No. 333-39531), the 1997 Employee Non-Qualified Stock Option Plan
(No. 333-39533), the 1987 Employee Non-Qualified Stock Option Plan
(No. 33-54871), the 1994 Full-Time Employee Non-Qualified Stock Option Plan
(No. 33-54875), and the 1987 Directors' Non-Qualified Stock Option Plan
(No. 33-54873) of Best Buy Co., Inc. of our report dated March 31, 1998, 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
February 28, 1998.
Minneapolis, Minnesota
May 26, 1998
<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> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-02-1997
<PERIOD-END> FEB-28-1998
<CASH> 520,127
<SECURITIES> 0
<RECEIVABLES> 95,702
<ALLOWANCES> 0
<INVENTORY> 1,060,788
<CURRENT-ASSETS> 1,710,277
<PP&E> 581,572
<DEPRECIATION> 248,648
<TOTAL-ASSETS> 2,056,346
<CURRENT-LIABILITIES> 1,033,676
<BONDS> 210,397
0
0
<COMMON> 4,463
<OTHER-SE> 553,283
<TOTAL-LIABILITY-AND-EQUITY> 2,056,346
<SALES> 8,358,212
<TOTAL-REVENUES> 8,358,212
<CGS> 7,026,074
<TOTAL-COSTS> 7,026,074
<OTHER-EXPENSES> 1,145,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,005
<INCOME-PRETAX> 153,853
<INCOME-TAX> 59,400
<INCOME-CONTINUING> 94,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,453
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.04
</TABLE>
<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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> FEB-28-1998 FEB-28-1998 FEB-28-1998
<PERIOD-START> MAR-02-1997 MAR-02-1997 MAR-02-1997
<PERIOD-END> MAY-31-1997 AUG-30-1997 NOV-29-1997
<CASH> 94,909 101,353 122,060
<SECURITIES> 0 0 0
<RECEIVABLES> 84,423 101,470 185,885
<ALLOWANCES> 0 0 0
<INVENTORY> 1,110,017 1,188,361 1,679,721
<CURRENT-ASSETS> 1,382,025 1,481,117 2,048,144
<PP&E> 525,968 546,953 565,229
<DEPRECIATION> 204,647 222,725 238,269
<TOTAL-ASSETS> 1,720,681 1,820,368 2,389,739
<CURRENT-LIABILITIES> 808,417 900,044 1,450,851
<BONDS> 212,609 217,820 211,624
0 0 0
0 0 0
<COMMON> 4,381 4,381 4,391
<OTHER-SE> 435,708 442,460 470,433
<TOTAL-LIABILITY-AND-EQUITY> 1,720,681 1,820,368 2,389,739
<SALES> 1,606,551 3,399,755 5,506,116
<TOTAL-REVENUES> 1,606,551 3,399,755 5,506,116
<CGS> 1,358,668 2,862,964 4,631,435
<TOTAL-COSTS> 1,358,668 2,862,964 4,631,435
<OTHER-EXPENSES> 242,667 511,649 796,620
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 9,540 18,570 28,171
<INCOME-PRETAX> (4,324) 6,572 49,890
<INCOME-TAX> (1,685) 2,563 19,463
<INCOME-CONTINUING> (2,639) 4,009 30,427
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (2,639) 4,009 30,427
<EPS-PRIMARY> (.03) .05 .35
<EPS-DILUTED> (.03) .05 .34
</TABLE>
<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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> MAR-01-1997 MAR-01-1997 MAR-01-1997 MAR-01-1997
<PERIOD-START> MAR-03-1996 MAR-03-1996 MAR-03-1996 MAR-03-1996
<PERIOD-END> JUN-01-1996 AUG-31-1996 NOV-30-1996 MAR-01-1997
<CASH> 20,604 30,670 43,195 89,808
<SECURITIES> 0 0 0 0
<RECEIVABLES> 104,732 125,870 217,106 79,581
<ALLOWANCES> 0 0 0 0
<INVENTORY> 1,368,959 1,447,382 1,844,782 1,132,059
<CURRENT-ASSETS> 1,653,329 1,733,975 2,242,744 1,385,035
<PP&E> 459,529 478,962 494,248 519,827
<DEPRECIATION> 149,449 161,445 173,783 188,194
<TOTAL-ASSETS> 1,978,569 2,064,404 2,576,047 1,734,307
<CURRENT-LIABILITIES> 1,064,476 1,149,113 1,674,386 817,579
<BONDS> 207,855 209,927 212,768 216,625
0 0 0 0
0 0 0 0
<COMMON> 4,312 4,322 4,327 4,329
<OTHER-SE> 430,517 435,609 425,358 433,986
<TOTAL-LIABILITY-AND-EQUITY> 1,978,569 2,064,404 2,576,047 1,734,307
<SALES> 1,637,184 3,415,824 5,423,148 7,770,683
<TOTAL-REVENUES> 1,637,184 3,415,824 5,423,148 7,770,683
<CGS> 1,404,534 2,931,508 4,690,064 6,711,802
<TOTAL-COSTS> 1,404,534 2,931,508 4,690,064 6,711,802
<OTHER-EXPENSES> 219,698 451,680 703,558 1,005,675
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 12,281 25,756 40,639 50,338
<INCOME-PRETAX> 671 6,880 (11,113) 2,868
<INCOME-TAX> 262 2,683 (4,337) 1,120
<INCOME-CONTINUING> 409 4,197 (6,776) 1,748
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 409 4,197 (6,776) 1,748
<EPS-PRIMARY> .01 .05 (.08) .02
<EPS-DILUTED> .01 .05 (.08) .02
</TABLE>
<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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-02-1996
<PERIOD-START> FEB-25-1995
<PERIOD-END> MAR-02-1996
<CASH> 86,445
<SECURITIES> 0
<RECEIVABLES> 121,438
<ALLOWANCES> 0
<INVENTORY> 1,201,142
<CURRENT-ASSETS> 1,560,543
<PP&E> 443,715
<DEPRECIATION> 132,676
<TOTAL-ASSETS> 1,890,832
<CURRENT-LIABILITIES> 973,702
<BONDS> 206,287
0
0
<COMMON> 4,284
<OTHER-SE> 427,330
<TOTAL-LIABILITY-AND-EQUITY> 1,890,832
<SALES> 7,217,448
<TOTAL-REVENUES> 7,217,448
<CGS> 6,280,877
<TOTAL-COSTS> 6,280,877
<OTHER-EXPENSES> 813,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,594
<INCOME-PRETAX> 78,989
<INCOME-TAX> 30,970
<INCOME-CONTINUING> 48,019
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,019
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
</TABLE>
