UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE
- --- ACT OF 1934
For the quarterly period ended November 29, 1997May 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------__________ to__________
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact Name of Registrant as Specified in Charter)
Minnesota 41-0907483
(State of Incorporation) (IRS Employer Identification Number)
7075 Flying Cloud Drive 55344
Eden Prairie, Minnesota (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 612/947-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
At November 29, 1997,May 30, 1998, there were 43,906,017100,310,000 shares of common stock, $.10 par value,
outstanding.
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 29, 1997MAY 30, 1998
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
a. Consolidated balance sheets as of November 29, 1997, 3-4
March 1, 1997 and November 30, 1996
b. Consolidated statements of operations for the 5
three and nine months ended November 29, 1997
and November 30, 1996
c. Consolidated statement of changes in shareholders' 6
equity for the nine months ended November 29, 1997
d. Consolidated statements of cash flows for the 7
nine months ended November 29, 1997 and
November 30, 1996
e. Notes to consolidated financial statements 8
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
a. Consolidated balance sheets as of May 30, 1998, 3-4
February 28, 1998 and May 31, 1997
b. Consolidated statements of operations for the 5
three months ended May 30, 1998 and May 31, 1997
c. Consolidated statement of changes in shareholders' 6
equity for the three months ended May 30, 1998
d. Consolidated statements of cash flows for the 7
three months ended May 30, 1998 and May 31, 1997
e. Notes to consolidated financial statements 8-9
Item 2. Management's Discussion and Analysis of Financial 9-13
Condition and
Results of Operations and Financial Condition 10-13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
Part I - Financial Information
Item 1. Consolidated Financial Statements
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
($ in 000, except per share amounts)
November 29, March 1, NovemberMay 30, February 28, May 31,
1998 1998 1997
1997 1996
(Unaudited) (Unaudited)
----------- ----------- -----------(unaudited) (unaudited)
---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 122,060397,298 $ 89,808520,127 $ 43,19594,909
Receivables 185,885 79,581 217,10675,563 95,702 84,423
Recoverable costs from developed
properties 36,883 53,485 91,42025,917 8,215 56,786
Merchandise inventories 1,679,721 1,132,059 1,844,782
Deferred1,101,144 1,060,788 1,110,017
Refundable and refundabledeferred income taxes 10,058 25,560 32,47819,445 16,650 27,847
Prepaid expenses 13,537 4,542 13,763
----------- ----------- -----------10,342 8,795 8,043
---------- ---------- ----------
Total current assets 2,048,144 1,385,035 2,242,7441,629,709 1,710,277 1,382,025
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 18,00621,200 19,977 18,000 17,738
Leasehold improvements 157,177 148,168 140,842161,797 160,202 149,738
Furniture, fixtures, and equipment 360,967 324,333 306,530380,907 372,314 329,151
Property under capital leases 29,079 29,326 29,138
----------- ----------- -----------
565,229 519,827 494,24829,079 29,079
---------- ---------- ----------
592,983 581,572 525,968
Less accumulated depreciation and
amortization 238,269 188,194 173,783
----------- ----------- -----------265,345 248,648 204,647
---------- ---------- ----------
Net property and equipment 326,960 331,633 320,465327,638 332,924 321,321
OTHER ASSETS 14,635 17,639 12,838
----------- ----------- -----------9,948 13,145 17,335
---------- ---------- ----------
TOTAL ASSETS $2,389,739 $1,734,307 $2,576,047
----------- ----------- -----------
----------- ----------- -----------$1,967,295 $2,056,346 $1,720,681
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
3
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in 000, except per share amounts)
November 29, March 1, NovemberMay 30, February 28, May 31,
1998 1998 1997
1997 1996
(Unaudited) (Unaudited)
----------- ----------- -----------(unaudited) (unaudited)
---------- ---------- ----------
CURRENT LIABILITIES:
NoteAccounts payable bank $ -661,629 $ -727,087 $ 271,500520,354
Obligations under financing 50,238 127,510 124,632
arrangements Accounts payable 1,152,821 487,802 1,047,94141,672 35,565 84,215
Accrued salaries and related 37,688 33,663 33,686
expenses 40,702 48,772 31,881
Accrued liabilities 170,221 122,611 149,373147,960 188,352 127,411
Deferred service plan revenue 21,596 24,602 26,08616,114 18,975 24,906
Current portion of long-term debt 18,287 21,391 17,249
----------- ----------- -----------14,390 14,925 21,181
---------- ---------- ----------
Total current liabilities 1,450,851 817,579 1,670,467922,467 1,033,676 809,948
DEFERRED INCOME TAXES 7,005 7,095 3,578 3,578 -
DEFERRED REVENUE AND OTHER LIABILITIES 18,862 28,210 33,12719,182 17,578 24,457
LONG-TERM DEBT 211,624 216,625 212,768207,247 210,397 212,609
CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY 671 229,854 230,000 230,000 230,000
SUBSIDIARY
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized 400,000
shares; none issued
Common stock, $.10 par value; authorized 120,000,000 shares;
issued and outstanding 43,906,000,
43,287,000,100,310,000, 89,260,000, and 43,273,00087,612,000
shares, respectively 4,391 4,329 4,32710,031 4,463 4,381
Additional paid-in capital 247,320 241,300 241,196497,828 266,144 245,661
Retained earnings 223,113 192,686 184,162
----------- ----------- -----------302,864 287,139 190,047
---------- ---------- ----------
Total shareholders' equity 474,824 438,315 429,685
----------- ----------- -----------810,723 557,746 440,089
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,389,739 $1,734,307 $2,576,047
----------- ----------- -----------
----------- ----------- -----------$1,967,295 $2,056,346 $1,720,681
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
4
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000, except per share amounts)
(Unaudited)
Three Months Ended
Nine Months Ended
---------------------------- --------------------------
November 29, NovemberMay 30, November 29, November 30,May 31,
1998 1997
1996 1997 1996
------------ ------------ ------------ ---------------------- ----------
Revenues $2,106,361 $2,007,324 $5,506,116 $5,423,148$1,943,664 $1,606,551
Cost of goods sold 1,768,471 1,758,556 4,631,435 4,690,064
----------- ----------- ----------- -----------1,589,445 1,358,668
---------- ----------
Gross profit 337,890 248,768 874,681 733,084354,219 247,883
Selling, general &and administrative
expenses 284,971 251,878 796,620 703,558
----------- ----------- ----------- -----------326,154 242,667
---------- ----------
Operating income (loss) 52,919 (3,110) 78,061 29,52628,065 5,216
Interest expense, net 9,601 14,883 28,171 40,639
----------- ----------- ----------- -----------2,495 9,540
---------- ----------
Earnings (loss) before income taxes 43,318 (17,993) 49,890 (11,113)25,570 (4,324)
Income tax benefit (expense) benefit (16,900) 7,020 (19,463) 4,337
----------- ----------- ----------- -----------(9,845) 1,685
---------- ----------
Net earnings (loss) $ 26,41815,725 $ (10,973) $ 30,427 $ (6,776)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------(2,639)
---------- ----------
---------- ----------
Net earnings (loss) per share
Basic $ .57.16 $ (.25)(.03)
Diluted $ .69.16 $ (.16)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average(.03)
Average common shares outstanding (000)
50,526 43,251 44,352 43,119
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------Basic 95,787 87,118
Diluted 99,885 87,118
See notes to consolidated financial statements.
5
BEST BUY CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINETHREE MONTHS ENDED NOVEMBER 29, 1997MAY 30, 1998
($ in 000)
(unaudited)
Additional
paid-in Retained
Common stock capital earnings
------------ ----------- -----------
Balance, March 1, 1997 $4,329 $241,300 $192,686
Stock options exercised 62 6,020
Net earnings
30,427
--------- --------- ---------
Balance, November 29, 1997 $4,391 $247,320 $223,113
--------- --------- ---------
--------- --------- ---------
Additional
paid-in Retained
Common stock capital earnings
------------ ---------- --------
Balance, February 28, 1998 $ 4,463 $266,144 $287,139
Stock options exercised 43 6,357
Tax benefit from stock options exercised 8,447
Conversion of Preferred Securities, net 509 221,896
Two-for-one stock split 5,016 (5,016)
Net earnings, three months ended
May 30, 1998 15,725
-------- -------- --------
Balance, May 30, 1998 $ 10,031 $497,828 $302,864
-------- -------- --------
-------- -------- --------
See notes to consolidated financial statements.
6
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000)
(unaudited)
Nine Months Ended
---------------------------
November 29, November 30,
1997 1996
------------ ------------
OPERATING ACTIVITIES:
Net earnings (loss) $ 30,427 $ (6,776)
Charges to operations not affecting cash:
Depreciation and amortization 52,628 50,743
Inventory write-down - 15,000
---------- ----------
83,055 58,967
Changes in operating assets and liabilities:
Receivables (106,304) (95,668)
Merchandise inventories (547,662) (658,640)
Income taxes and prepaid expenses 8,116 (11,564)
Accounts payable 665,019 374,089
Deferred revenue and other liabilities 39,281 10,712
---------- ----------
Total cash provided by (used in)
operating activities 141,505 (322,104)
INVESTING ACTIVITIES:
Additions to property and equipment (47,955) (60,169)
Recoverable costs from developed properties 16,602 34,817
Decrease(increase) in other assets 3,004 (792)
---------- ----------
Total cash used in investing
activities (28,349) (26,144)
FINANCING ACTIVITIES:
Borrowings on revolving credit line, net - 271,500
(Decrease)increase in obligations under
financing arrangements (77,272) 30,681
Long-term borrowings 10,000 21,542
Payments on long-term debt (18,105) (21,380)
Common stock issued 4,473 2,655
---------- ----------
Total cash (used in) provided by
financing activities (80,904) 304,998
---------- ----------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 32,252 (43,250)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 89,808 86,445
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 122,060 $ 43,195
---------- ----------
---------- ----------
Three Months Ended
---------------------
May 30, May 31,
1998 1997
--------- --------
OPERATING ACTIVITIES:
Net earnings (loss) $ 15,725 $ (2,639)
Charges to earnings not affecting cash:
Depreciation, amortization and other 17,604 17,095
--------- --------
33,329 14,456
Changes in operating assets and liabilities:
Receivables 20,139 (4,842)
Merchandise inventories (40,356) 22,042
Prepaid taxes and expenses 4,105 (4,762)
Accounts payable (65,458) 32,552
Other liabilities (49,809) (431)
--------- --------
Total cash provided by (used in) operating
activities (98,050) 59,015
INVESTING ACTIVITIES:
Additions to property and equipment (12,084) (6,783)
Increase in recoverable costs from developed
properties (17,702) (3,301)
(Increase) decrease in other assets (3,580) 304
--------- --------
Total cash used in investing activities (33,366) (9,780)
FINANCING ACTIVITIES:
Increase (decrease) in obligations under
financing arrangements 6,107 (43,295)
Long-term debt payments (3,685) (4,226)
Common stock issued 6,165 3,387
--------- --------
Total cash provided by (used in)
financing activities 8,587 (44,134)
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (122,829) 5,101
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 520,127 89,808
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 397,298 $ 94,909
--------- --------
--------- --------
Amounts in this statement are presented on a cash basis and therefore may differ
from those shown in other sections of this quarterly report.
Supplemental cash flow information:
Cash paid (received) during the period for:
Interest $ 30,723 $ 41,411
Cash paid(received) during the period for: $ 9,443 $ 12,526
Interest $ 28,891 $ (250)
Income taxes
$ 1,807 $ (3,487)
See notes to consolidated financial statements.
7
BEST BUY CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of November 29,May 30, 1998, and May 31, 1997, and November 30,
1996,
the related consolidated statements of operations for the three and
nine months ended November 29, 1997 and November 30, 1996, the consolidated
statements of cash flows for the
ninethree months ended November 29,May 30, 1998, and May 31, 1997, and
November 30, 1996 and the consolidated
statement of changes in shareholders' equity for the ninethree months ended
November 29, 1997,May 30, 1998, are unaudited; in the opinion of management, all
adjustments necessary for a fair presentation of such financial
statements have been included and were normal and recurring in nature (see note 5).nature.
Interim results are not necessarily indicative of results for a full
year. These interim financial statements and notes thereto should be
read in conjunction with the financial statements and notes included in
the Company's Annual Report to Shareholders for the fiscal year ended
March 1, 1997.February 28, 1998.
2. RECLASSIFICATION:
Certain prior year amounts have been reclassified to conform to current
year presentation.
3. INCOME TAXES:
Income taxes are provided on an interim basis based upon management's
estimate of the annual effective tax rate.
4. EARNINGS PER SHARE:
EarningsThe Company applies the requirements of Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings per Share." Prior year
earnings (loss) per share relate to fullyhave been restated as necessary. This
restatement did not have an impact on earnings (loss) per share.
Following is a reconciliation of the numerators and denominators of
basic and diluted earnings (loss) per share.
Earnings
Three Months Ended
------------------
May 30, 1998 May 31, 1997
------------ ------------
Numerator:
Net earnings (loss) (000) $ 15,725 $ (2,639)
--------- --------
--------- --------
Denominator:
Average common shares outstanding (000) 95,787 87,118
Effect of dilutive securities:
Employee stock options 4,098 -
--------- --------
Average common shares outstanding assuming dilution 99,885 87,118
--------- --------
--------- --------
Basic earnings (loss) per share $ .16 $ (.03)
Diluted earnings (loss) per share $ .16 $ (.03)
8
In May 1998, the Company effected a two-for-one stock split in the form
of a stock dividend. All common share and per share for the three months ended November 29, 1997information has been
adjusted to reflect the dilutive
impacttwo-for-one stock split.
5. CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY:
In April 1998, over 99% of the Company's 6.5% Convertible Monthly Income
Preferred Securities. This results in
the assumptionSecurities were converted into approximately 10.2 million
post-split shares of approximately 5.1common stock, increasing shareholders' equity by
over $222 million additional shares outstanding
and requires the addbacknet of $2.28$6.8 million in after tax cost ofdeferred offering costs. The
conversion reduces the Company's annual interest expense on such securities duringby
approximately $15 million.
6. CREDIT FACILITY:
In May 1998, the period. All other periods presented
do not reflect such dilution asCompany entered into a new, unsecured $220 million
revolving credit facility, replacing the result would be antidilutive.
5. INVENTORY WRITE-DOWN:$365 million facility which
was scheduled to mature in June 1998. The results of operations for the three and nine month periods ended
November 30, 1996 include a $15 million pretax charge to adjust certain
inventories, primarily personal computers, to their expected net realizable
values.
8new facility matures in June
2000.
9
BEST BUY CO., INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
NetThe Company had net earnings of $15.7 million, or $.16 per share, on a
diluted basis, for the thirdfirst quarter of fiscal 1999 ended May 30, 1998. In
the first quarter of fiscal 1998, were a record $26,418,000, or
$.57 per share on a fully diluted basis, compared to a loss of $10,973,000 or
$.25 per share, inended May 31, 1997, the comparable period last year. For the first nine months of
the current fiscal year net earnings were a record $30,427,000 or $.69 per share
compared toCompany had a net
loss of $6,776,000,$2.6 million, or $.16$.03 per share. Per share for the same period last
year. Results for the prior year periods were impacted byamounts reflect a
$15 million pre-tax
inventory writedowntwo-for-one stock split on May 26, 1998. The significant improvement in
the third quarter. Exclusive of the inventory writedown,
current year results for the quarter and year-to-date periods, as comparedwas due to the prior year, reflect modest increases in revenues, significantly improvedhigher sales volumes, a higher gross profit marginsmargin rate and lower
interest expense. HigherSomewhat reducing the impact of these gains was an increase
in selling, general and administrative expenses as a percentage of sales offset a portion of those
gains.
Revenues in the third quarter increased 5% to $2.106 billion compared to $2.007
billion in the third quarter last year.year's
first quarter.
Revenues for the year to date periodfirst quarter were $5.506$1.94 billion, an increase of 2%21% over
the $1.61 billion reported in the first quarter last year. The increase was
driven by a comparable nine month period
fromstore sales increase of 15% compared to an 8%
comparable store sales decrease in the first quarter last year. Comparable
store sales for the quartergains were essentially flat
comparedexperienced in all product categories as a strong
economy continued to last year and for the year to date declined 4%. Revenuesdrive consumer spending. Sales were also impacted by the
contribution from the 13 new stores openedCompany's progress in improving inventory management leading to better
merchandise in-stock positions, as well as better execution in the past twelve
months, asretail
stores. The Company's "high touch" area in the Company operated 285 stores at November 29, 1997 compared to 272
a year ago. The comparable store, sales decline forwhich was introduced in
the year to date was driven
by lower average selling prices, particularly in personal computers where
average selling prices have declined approximately 15% compared to the first
nine monthsthird quarter of last year primarily due to the increased popularityprovide consumers with a greater level of
sub-$1,000
units. An increase in personal computer unit sales was not sufficientproduct assistance and explanation, continues to offset
the lower selling prices.
The entertainment software category, which includes pre-recorded music and
videos as well as video games, continued to build strength in the quarter. Video
game products in particular performed extremely well, withproduce significant
comparable store sales increases continuing since a year ago when the Nintendo
64 and Sony Playstation formats were introduced. The Company's new DSS/Cellular
area, introduced in the stores early in the third quarter, resulted in
significant comparable store sales increasesgains in cellular phones, digital satellite systems
and digital cameras. This new area,Comparable store sales gains in Consumer Electronics,
Appliances and Entertainment Software were particularly strong throughout the
quarter. Sales in the Home Office category, which includes personal
computers, were strong early in the quarter and then softened as consumers
awaited the introduction of Windows-Registered Trademark- 98 software in June
and supplies of lower price point products were limited. Although the average
selling price of personal computers was created from a portionapproximately 15% lower than the
first quarter of last year, the decline was offset by an increase in the
number of units sold. Management expects that comparable store sales gains
will not be as strong in the remainder of the space vacated by a refinementyear due to more difficult
comparisons with the prior year.
The Company operated 289 stores as of May 30, 1998, an increase of fifteen
stores as compared to May 31, 1997, contributing to the Company's music assortment, has a
dedicatedincrease in sales staff assisting customers with product explanation and service
registration. As is currently being experienced industry wide,versus
last year's first quarter. During the consumer
electronics business continues to be soft as consumers await new technology and
the distribution of audio and video products through mass merchants continues to
expand.
9
In the third quarter the Company introduced an assortment of books and magazines
and exercise equipment, further utilizing the space created by the tailoring of
the music assortment. While these new products are not expected to make a
significant contribution to current year revenues, they, along with an expanded
assortment of ready to assemble furniture, are expected to grow to 2% of sales
next year.
In the third quarter, the Company opened five of
twenty-five new stores includingplanned for fiscal 1999. New stores opened in the quarter
included two stores in the Philadelphia, Pittsburgh andMiami, FL; one store each in Los Angeles, markets. These openings completed
the Company's planned store openings for fiscal 1998 with a total of 13 new
stores. The Company also relocated or expanded five stores to larger facilities
this year. The Company's announced expansion plans for the next fiscal year,
which begins in March 1998, include 20 to 25 new stores includingCA and
Philadelphia, PA; and entry into Knoxville, TN. The remaining twenty stores are
scheduled to open in the Boston market.third fiscal quarter.
10
Retail store sales mix by major product category for the thirdfirst quarter of the
current and nine
month periodprior fiscal year was as follows:
Third Quarter Ended Nine Months Ended
--------------------- --------------------
11/29/97 11/30/96 11/29/97 11/30/96
--------------------- --------------------
Home Office 40% 41% 40% 41%
Consumer Electronics
Video 16 17 15 17
Audio 10 11 11 12
Entertainment Software 18 17 18 16
Appliances 9 9 10 9
Other 7 5 6 5
---- ---- ---- ----
Total 100% 100% 100% 100%
---- ---- ---- ----
---- ---- ---- ----
Quarter Ended
---------------------------
May 30, 1998 May 31, 1997
------------ ------------
Home Office 37% 40%
Consumer Electronics
Audio 11% 11%
Video 15% 14%
Entertainment Software 19% 19%
Appliances 9% 9%
Other 9% 7%
--- ---
Total 100% 100%
--- ---
--- ---
Gross profit margin was 16.0% of sales in the third quarter of this year and
15.9% for the first nine months, compared to 12.4% and 13.5%, respectively, in
the comparable periods last year. The inventory writedown in the third quarter last year, which was principally due to declines in value of personal computer
inventories in advance of new technology, reduced margins for the quarter and
nine month periods by .7% and .3%improved from 15.4% of sales respectively. Exclusive of the
impact of the inventory writedown, gross profit margins improved 2.9% of sales
and 2.1% of sales for the quarter and year to date period, respectively. The
higher gross profit margins resulted from better product margins and a more
profitable sales mix. Gains in product margins were impacted by enhanced buying
and selling strategies, including improved product life cycle management of
personal computers. Inventory turns for personal computers have increased to
approximately 10 times, reducing the Company's exposure to significant markdowns
during model and technology transitions. The increase in gross margins due to18.2%,
as a more profitable sales mix and better margins within product categories led
to the significant increase. The Company's more profitable sales mix was driven by anthe
result of a shift away from the Home Office category to higher margin
categories. An increase in the salecontribution of performance service plans (PSPs)
from 2.9% of sales to 3.7% was one of the factors in the Company'smore profitable sales
mix. The increase in sales of PSPs 10
represented 3.2%and other higher margin products was due, in
part, to improved execution of selling strategies in the retail stores. Improved
inventory management has resulted in a higher margin assortment of products
within categories. Better management of model transitions has also led to lower
levels of close-out inventory and exposure to inventory markdowns. A reduction
in inventory shrink resulting from better execution at the retail stores also
contributed to the year over year improvement in gross profit margin. Management
believes there is opportunity to further improve gross margin rates; however,
changes in sales mix due to seasonal factors, the impact of new product
introductions in the Home Office category, and the level of promotional activity
in the marketplace, will affect overall gross profit margins. The margin rate
realized in the first quarter may not be indicative of the rate to be achieved
for the year as a whole.
Selling, general and administrative expenses (S,G & A) increased to 16.8% of
sales in the third quarter, this year compared to 2.1%15.1% in the thirdfirst quarter last year. ForThe
increase was due primarily to two factors. The first factor was an increase in
employee compensation in the yearretail stores due to date PSPs represented 3.0%higher rates of base
compensation resulting from competition for labor and hiring higher caliber
staff in areas such as the "high touch" sales compared to 1.8% of sales forarea. The "high touch" area
staffing increases were implemented in the first nine monthssecond half of last year. Increased
sales of the higher margin productsperformance based pay as well as an increase in the new DSS/Cellular area also increased
the overall profitability of the Company's sales mix. The promotional
environment during the third quarter was also less intense than last year as a
number of the Company's competitors have closed storesmanagers in
the past year. As a
result of the less competitive conditions the Company used fewer and less
aggressive consumer financing offers, contributingtraining to the profit margin
improvement. Management expects that gross profit margins for the fourth
quarter, while still significantly above last years levels, will be slightly
lower than the margins reported in the third quarter, due in part, to
the traditional shift in the Company's sales mix during the holiday selling
season.
Selling, general and administrative (SG&A) expenses were 13.5% of sales for the
third quarter and 14.5% for the nine month period of the current year. These
compare to SG&A expense ratios for the third quarter and nine month period last
year of 12.5% and 13.0%, respectively. In the third quarter SG&A expenses were
impacted by the staffing associated with the DSS/Cellular area. Generally higher
compensation costs due to market conditions and improved operating performancesupport increased expansion plans also contributed to increased
labor costs. The Company believes that the change in its operating model to
invest in higher payroll costs as comparedlevels of higher quality labor in the stores has been a
significant factor leading to last year. In addition,
SG&A expenses for the quarter and the year to date were impacted by higher
professional fees associated withincreased rates of gross profit margin.
11
Higher levels of spending on outside services supporting the Company's strategic
initiatives and management information systems enhancements. Higher rent expense resulting from
storesdevelopment was the other most significant
factor in the increased S,G & A. The use of outside consulting firms to assist
the Company in improving inventory management and employee development and
training are expenses that were ownedincurred in the first quarter of the current
year that were not significant components of S,G & A in the first quarter of
last yearyear. The Company's use of an outside firm to assist in addressing Year
2000 systems issues also impacted spending in the quarter as compared to the
prior year. Development of other business initiatives such as "configure to
order" sales of personal computers and leased this year also increased the
Company's SG&A, although thisother projects also resulted in lower interest expense. Thehigher
spending in the quarter. Many of these expenses are expected to continue through
the fiscal year. However, they are not expected to recur to the same extent next
year as the Company expects that the use of outside consultants to date increase was, in part, due to reduced leverage on the Company's
operating expenses resulting from the decline in comparable store sales for the
year to date. Although the SG&A ratio for the yearassist with
strategic initiatives will be higher than last
year, managementreduced and the Year 2000 issues are expected to
be largely addressed by the end of the first quarter of next year. Management
expects to achieve better leverage on operating expenses inthat the S,G & A ratio will be lower during the traditionally higher
volume fourth quartersecond half of the year.year and that the year over year increases in the
ratio will be less.
Net interest expense decreased $5.2 million in the third quarter and
$12.5 million in the first nine monthsquarter was $2.5 million, a decrease of $7
million compared to fiscal 1997.the first quarter last year. The decreases
weredecrease was primarily due
principally to significantly lowerinterest earned on higher cash balances resulting from faster inventory turns
and higher sales volumes. In addition, the conversion of the Company's
convertible preferred securities into equity in the first quarter reduced
interest expense by approximately $2.5 million as compared to last year's first
quarter.
The Company's effective income tax rate for the quarter was 38.5% compared to
39.0% in the first quarter last year and was impacted by levels and fewer
properties held for sale.of tax exempt
interest income resulting from the higher cash balances.
FINANCIAL CONDITION
Working capital of $597 million at November 29, 1997May 30, 1998 was essentially unchanged
from a year ago as lower inventories and costs recovered from developed
properties were used to pay off bank borrowings and increased cash balances. The
Company's net cash position, as measured by cash balances net of bank
borrowings, improved $350$707 million compared to November 30, 1996. As$572 million at May
31, 1997. Cash and cash equivalents increased by $302 million as a result of
improved inventory management and model transition management, as wellearnings of over $110 million in the past
twelve months. Merchandise inventories were $9 million less than May 31, 1997,
despite the addition of fifteen new stores and the higher sales volumes. The
Company's net investment in inventory, inventory net of trade related payables,
was $398 million at May 30, 1998 compared to $505 million at May 31,1997.
Refundable and deferred income taxes decreased as a narrowingresult of product offeringschanges in selected categories, inventory has declined by $165 millionthe
Company's net tax position and the continued reduction of deferred taxes related
to deferred revenues from the self insured service plans. Accruals for payroll
related liabilities increased as compared to last year ago levels
11
even though the Company is operating 13 additional stores. Better timing of
inventory purchases in advanceas a result of the
holiday selling season also resultedincreased levels of compensation. Accrued liabilities increased as a result
of the outside services and generally higher levels of business activity.
12
Capital spending in the first quarter was $12.1 million compared to $6.8 million
in the first quarter of last year, reflecting the increased leveragingnumber of inventory through trade payablesstore
openings planned for fiscal 1999. Recoverable costs from developed properties
were $31 million less than at the end of the quarter. Receivables declined fromfirst quarter last year ago levels due to lower levelsas
essentially all of vendor
advertising receivables atthe Company's owned real estate was sold by the end of the period. Other current assets have
declined,fiscal
1998, offset in part due toby current year property development. The Company is
constructing a reductionnew distribution center in refundable income taxes resultingDinuba, CA, which will replace a
leased facility in Ontario, CA. The costs of development of the real estate for
this facility will be classified as recoverable costs from the improved operating performance compared to a year ago. Deferred revenues,developed properties
and the related deferred taxes, continuefacility is expected to decline as revenues from performance
service plans sold prior to the fourth quarter of fiscal 1996 are recognized
over the lives of the contracts. Revenues from sales subsequent to that time are
recognized at the time of sale as they are insured through a third party.
The Company's investmentopen in property held for sale has declined approximately
$50 million in the past year to $37 million as retail locations developed by the
Company have been sold and leased back under long term leases. At November 29,
1997, the Company owned six retail locations that were held for sale and
leaseback, two of which have been subsequently sold.March 1999. In addition to salesthe opening
of property owned bynew stores and development of the distribution center, the Company intends to
make significant investments in new systems and technology in the Company continues to reduce its master lease
facility as properties are sold by the lessor and leased by the Company under
long term lease agreements. Capital spending for thecurrent year
to date is $48 million
compared to $60 million last year, reflecting fewer store openings. The Company
currentlysupport business requirements. Management expects that total capital spending
for the year will be approximately $65$140 million, exclusive of amounts to be recovered under long term financing such
as financing under sale/leaseback transactions.recoverable costs.
In the first quarter of fiscal 1999, the Company notified holders of the
Company's convertible preferred securities that the conversion rights would
expire on April 24,1998. As of that date, over 99% of the securities were
converted into approximately 10.2 million shares of common stock. This
conversion increased shareholders' equity by over $222 million, net of the
remaining $6.8 million in deferred issuance costs. The conversion reduces
interest expense by approximately $15 million annually. The remaining
outstanding preferred securities were redeemed in June for cash of $671,000.
In May 1997,1998, the Company reduced the seasonal capacity of itsentered into a new, unsecured $220 million revolving
credit facility, from $550 million toreplacing the $365 million as improvementfacility that was scheduled to
mature in June 1998. The Company was able to reduce the size of the facility due
to improved operating performance and better inventory managementmanagement. The new
facility is scheduled to mature on June 30, 2000 and a slower rate of store growth has reduced the Company's borrowing
needswill automatically be
extended for the current year. During the nine month period the Company had only
minimal borrowings under this facility. In August 1997, the Company obtained
$10 million in intermediate term equipment financing.one year if certain conditions are met. Management believes that
funds available through cash flow from operations, including further anticipated improvement in inventory turns, customarycredit from normal vendor terms and inventory financing facilities and the revolvingCompany's new
credit facility will be sufficient to support the Company's working capital needsoperations and
planned expansion for the comingnext year. Management also intends to evaluate its working capital financing needs in
the coming months and determine the appropriate size credit facility to be in
place before the maturity of the current facility in June 1998.
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RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share".
SFAS No. 128 is effective for periods ending after December 15, 1997, and
requires restatement of all prior period EPS data presented. The Company will
adopt SFAS No. 128 in the fourth quarter of the current fiscal year. The
Company's basic and diluted earnings (loss) per common share computed under the
new pronouncement would have been as follows:
Third Quarter Ended Nine Months Ended
---------------------- --------------------
11/29/97 11/30/96 11/29/97 11/30/96
---------------------- --------------------
Basic $.60 $(.25) $.70 $(.16)
Diluted $.57 $(.25) $.68 $(.16)
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
TheOn May 15, 1998, the Company filed a Current Report on Form 8-K on May 8, 1996, with the
Securities and Exchange Commission. The ReportCommission which contains cautionary statements
identifying important factors that could cause the Company's actual results to
differ materially from those projected in forward looking statements made by the
Company herein.
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BEST BUY CO., INC.
Part II - Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits: Method of Filing
----------------
11.1 Computation of net earnings (loss)
per common share10.1 Credit Agreement dated May 22, 1998 Filed herewith
27.1 Financial Data Schedule Filed herewith
b. Reports on Form 8-K:
NoneNotice of MIPS Conversion Rights Expiration
filed March 10, 1998
Two-for-one Stock Split filed April 28, 1998
Appointment of Two New Members of the Board of
Directors filed April 30, 1998
Safe Harbor Provisions filed May 15, 1998
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
Date: January 7,July 6, 1998 By: /s/ ALLEN U. LENZMEIER
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Allen U. Lenzmeier, Executive Vice
President & Chief Financial Officer
(principal financial officer)
By: /s/ ROBERT C. FOX
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Robert C. Fox, Senior Vice
President- Finance & Treasurer
(principal accounting officer)
15