UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~August 30,~~November 29, 2003

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 1-9595




BEST BUY CO., INC.
(Exact name of registrant as specified in its charter)

Minnesota				41-0907483
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

7601 Penn Avenue South Richfield, Minnesota				55423
(Address of principal executive offices)				(Zip Code)

(612) 291-1000
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.10 Par Value — ~~323,627,000~~324,671,000 shares outstanding as of ~~August 30,~~November 29, 2003.

BEST BUY CO., INC.

FORM 10-Q FOR THE QUARTER ENDED ~~AUGUST 30,~~NOVEMBER 29, 2003

INDEX

				Page No.

Part I —	Financial Information		3

	Item 1.	Consolidated Financial Statements:	3

	a)	Consolidated condensed balance sheets as of ~~August 30,~~November 29, 2003; March 1, 2003; and ~~August 31,~~November 30, 2002	3

	b)	Consolidated statements of earnings for the three and ~~six~~nine months ended ~~August 30,~~November 29, 2003, and ~~August 31,~~November 30, 2002	5

	c)	Consolidated statement of changes in shareholders’ equity for the ~~six~~nine months ended ~~August 30,~~November 29, 2003	6

	d)	Consolidated statements of cash flows for the ~~six~~nine months ended ~~August 30,~~November 29, 2003, and ~~August 31,~~November 30, 2002	7

	e)	Notes to consolidated condensed financial statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2223

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3335

	Item 4.	Controls and Procedures	3335

Part II —	Other Information		3436

	Item 4.1.	~~Submission of Matters to a Vote of Security Holders~~Legal Proceedings	3436

	Item 6.	Exhibits and Reports on Form 8-K	3436

Signatures			3537

PART I — — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BEST BUY CO., INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

ASSETS

($ in millions, except per share amounts)

	August 30, 2003		March 1, 2003		August 31, 2002		November 29, 2003		March 1, 2003		November 30, 2002
	(Unaudited)				(Unaudited)		(Unaudited)				(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	1,734	$	1,914	$	1,114	$	1,827	$	1,914	$	1,149
Receivables	302		312		235		678		312		575
Recoverable costs from developed properties	4		10		58		4		10		35
Merchandise inventories	2,641		2,077		2,133		4,428		2,077		3,423
Other current assets	205		188		125		207		188		131
Current assets of discontinued operations	—		397		459		—		397		605
Total current assets	4,886		4,898		4,124		7,144		4,898		5,918

PROPERTY AND EQUIPMENT
Property and equipment	3,417		3,089		2,824		3,520		3,089		3,000
Less accumulated depreciation and amortization	1,188		1,027		907		1,259		1,027		975
Net property and equipment	2,229		2,062		1,917		2,261		2,062		2,025

GOODWILL, NET	459		429		410		489		429		407

INTANGIBLE ASSETS	36		33		—		38		33		32

OTHER ASSETS	120		115		92		151		115		96

NONCURRENT ASSETS OF DISCONTINUED OPERATIONS	—		157		261		—		157		260

TOTAL ASSETS	$	7,730	$	7,694	$	6,804	$	10,083	$	7,694	$	8,738

NOTE: The consolidated balance sheet as of March 1, 2003, has been condensed from the audited financial statements.

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

($ in millions, except per share amounts)

	August 30, 2003		March 1, 2003		August 31, 2002		November 29, 2003		March 1, 2003		November 30, 2002
	(Unaudited)				(Unaudited)		(Unaudited)				(Unaudited)
CURRENT LIABILITIES
Accounts payable	$	2,590	$	2,195	$	2,081	$	4,501	$	2,195	$	3,674
Accrued compensation and related expenses	173		174		155		225		174		175
Accrued liabilities	855		760		614		1,018		760		726
Accrued income taxes	43		374		96		99		374		122
Dividends payable							97		—		—
Current portion of long-term debt	14		1		6		14		1		2
Current liabilities of discontinued operations	—		320		391		—		320		533
Total current liabilities	3,675		3,824		3,343		5,954		3,824		5,232

LONG-TERM LIABILITIES	281		287		296		276		287		276

LONG-TERM DEBT	840		828		821		836		828		822

NONCURRENT LIABILITIES OF DISCONTINUED OPERATIONS	—		25		18		—		25		19

SHAREHOLDERS’ EQUITY
Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none	—		—		—		—		—		—
Common stock, $.10 par value: Authorized — 1 billion shares; Issued and outstanding — 323,627,000, 321,966,000 and 321,579,000 shares, respectively	32		32		32
Common stock, $.10 par value: Authorized — 1 billion shares; Issued and outstanding — 324,671,000, 321,966,000 and 321,725,000 shares, respectively							32		32		32
Additional paid-in capital	828		778		771		849		778		774
Retained earnings	2,007		1,893		1,523		2,032		1,893		1,582
Accumulated other comprehensive income	67		27		—		104		27		1
Total shareholders’ equity	2,934		2,730		2,326		3,017		2,730		2,389

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	7,730	$	7,694	$	6,804	$	10,083	$	7,694	$	8,738

NOTE: The consolidated balance sheet as of March 1, 2003, has been condensed from the audited financial statements.

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF EARNINGS

($ in millions, except per share amounts)

(Unaudited)

	Three Months Ended						Six Months Ended						Three Months Ended							Nine Months Ended
	August 30, 2003			August 31, 2002			August 30, 2003			August 31, 2002			November 29, 2003			November 30, 2002				November 29, 2003				November 30, 2002
Revenue	$	5,396		$	4,624		$	10,064		$	8,826		$	6,034		$	5,131			$		16,098		$	13,957
Cost of goods sold	4,024			3,471			7,507			6,593			4,536			3,881				12,043				10,474
Gross profit	1,372			1,153			2,557			2,233			1,498			1,250				4,055				3,483
Selling, general and administrative expenses	1,143			1,024			2,214			1,975			1,296			1,110				3,510				3,085
Operating income	229			129			343			258			202			140				545				398
Net interest expense	3			2			5			1			4			—				9				1

Earnings from continuing operations before income tax expense	226			127			338			257			198			140				536				397
Income tax expense	86			48			129			99			76			54				205				153

Earnings from continuing operations	140			79			209			158			122			86				331				244
Loss from discontinued operations, net of tax	(5		)	(17		)	(29		)	(347		)	—			(27			)	(29			)	(374			)
Gain (loss) on disposal of discontinued operations, net of tax	4			—			(66		)	—
Loss on disposal of discontinued operations, net of tax													—			—				(66			)	—
Cumulative effect of change in accounting principle for goodwill, net of $24 tax	—			—			—			(40		)	—			—				—				(40			)
Cumulative effect of change in accounting principle for vendor allowances, net of $26 tax	—			—			—			(42		)	—			—				—				(42			)

Net earnings (loss)	$	139		$	62		$	114		$	(271	)	$	122		$	59			$		236		$	(212		)

Basic earnings (loss) per share:
Continuing operations	$	0.43		$	0.24		$	0.65		$	0.49		$	0.38		$	0.27			$		1.02		$	0.76
Discontinued operations	(0.01		)	(0.05		)	(0.09		)	(1.08		)	—			(0.08			)	(0.09			)	(1.17			)
Gain (loss) on disposal of discontinued operations	0.01			—			(0.20		)	—
Loss on disposal of discontinued operations													—			—				(0.20			)	—
Cumulative effect of accounting changes	—			—			—			(0.25		)	—			—				—				(0.25			)
Basic earnings (loss) per share	$	0.43		$	0.19		$	0.35		$	(0.85	)	$	0.38		$	0.18			$		0.73		$	(0.66		)

Diluted earnings (loss) per share:
Continuing operations	$	0.42		$	0.24		$	0.64		$	0.48		$	0.37		$	0.27			$		1.01		$	0.75
Discontinued operations	(0.01		)	(0.05		)	(0.09		)	(1.07		)	—			(0.08			)	(0.09			)	(1.15			)
Gain (loss) on disposal of discontinued operations	0.01			—			(0.20		)	—
Loss on disposal of discontinued operations													—			—				(0.20			)	—
Cumulative effect of accounting changes	—			—			—			(0.25		)	—			—				—				(0.25			)
Diluted earnings (loss) per share	$	0.42		$	0.19		$	0.35		$	(0.83	)	$	0.37		$	0.18			$		0.72		$	(0.65		)

Dividends declared per common share													$		0.30	$		—		$	0.30			$		—

Basic weighted average common shares outstanding (in millions)	322.9			321.3			322.4			320.7			324.2			321.5				323.0				320.9

Diluted weighted average common shares outstanding (in millions)	327.8			324.5			326.5			325.4			330.5			324.1				327.8				324.9

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE ~~SIX~~NINE MONTHS ENDED ~~AUGUST 30,~~NOVEMBER 29, 2003

($ and shares in millions)

(Unaudited)

	Common Shares	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total		Common Shares		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balances at March 1, 2003	322	$	32	$	778	$	1,893	$	27	$	2,730	322		$	32	$	778		$	1,893		$	27	$	2,730

Net earnings, six months ended August 30, 2003	—	—		—		114		—		114
Other comprehensive income, net of tax:
Net earnings, nine months ended November 29, 2003												—		—		—			236			—		236
Foreign currency translation adjustments	—	—		—		—		37		37		—		—		—			—			77		77
Other	—	—		—		—		3		3
Total comprehensive income	—	—		—		114		40		154		—		—		—			236			77		313

Common stock dividends, $0.30 per share												—		—		—			(97		)	—		(97		)

Stock options exercised	2	—		37		—		—		37		4		—		94			—			—		94

Repurchase of common stock												(1	)	—		(60		)	—			—		(60		)

Tax benefit from stock options exercised	—	—		13		—		—		13		—		—		35			—			—		35
Balances at August 30, 2003	324	$	32	$	828	$	2,007	$	67	$	2,934

Vesting of restricted stock awards												—		—		2			—			—		2

Balances at November 29, 2003												325		$	32	$	849		$	2,032		$	104	$	3,017

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)

	Six Months Ended						Nine Months Ended
	August 30, 2003			August 31, 2002			November 29, 2003			November 30, 2002
OPERATING ACTIVITIES
Net earnings (loss)	$	114		$	(271	)	$	236		$	(212	)
Loss from discontinued operations, net of tax	29			347			29			374
Loss on disposal of discontinued operations, net of tax	66			—			66			—
Cumulative effect of change in accounting principles, net of tax	—			82			—			82
Earnings from continuing operations	209			158			331			244
Adjustments to reconcile earnings from continuing operations to net cash provided by (used in) operating activities from continuing operations:
Adjustments to reconcile earnings from continuing operations to cash provided by (used in) operating activities from continuing operations:
Depreciation	190			146			283			225
Impairment of technology assets							19			—
Deferred income taxes	(9		)	(9		)	(14		)	(14		)
Other	6			10			(1		)	15

Changes in operating assets and liabilities:
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Receivables	12			(14		)	(362		)	(354		)
Merchandise inventories	(549		)	(322		)	(2,308		)	(1,612		)
Other assets	(17		)	(21		)	(20		)	(32		)
Accounts payable	380			(125		)	2,263			1,465
Other liabilities	74			(4		)	287			95
Income taxes	(165		)	(114		)	(91		)	(71		)
Total net cash provided by (used in) operating activities from continuing operations	131			(295		)
Total cash provided by (used in) operating activities from continuing operations							387			(39		)

INVESTING ACTIVITIES
Additions to property and equipment	(292		)	(403		)	(449		)	(598		)
Decrease in recoverable costs from developed properties	6			21			6			44
Other							(1		)	(3		)
Total cash used in investing activities from continuing operations	(286		)	(382		)	(444		)	(557		)

FINANCING ACTIVITIES
Issuance of common stock							94			39
Repurchase of common stock							(60		)	—
Long-term debt payments							(13		)	(12		)
Net proceeds from issuance of long-term debt	—			10			—			15
Long-term debt payments	(8		)	(4		)
Issuance of common stock	36			36
Total cash provided by financing activities from continuing operations	28			42			21			42

EFFECT OF EXCHANGE RATE CHANGES ON CASH							2			—
NET CASH USED IN DISCONTINUED OPERATIONS	(53		)	(112		)	(53		)	(158		)

DECREASE IN CASH AND CASH EQUIVALENTS	(180		)	(747		)	(87		)	(712		)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	1,914			1,861			1,914			1,861

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,734		$	1,114		$	1,827		$	1,149

NON-CASH TRANSACTION:

During ~~the second quarter of~~ fiscal 2004, we purchased $26 million of point-of-sale equipment which was financed pursuant to a capital lease.

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation:

~~The~~In the opinion of management, the accompanying audited and unaudited consolidated condensed financial statements contain all adjustments necessary for a fair presentation. Adjustments were comprised of normal recurring adjustments, except as noted in the Notes to Consolidated Condensed Financial Statements. Our business is seasonal in nature, and interim results are not necessarily indicative of results for a full year. Historically, we have realized more of our revenue and net earnings in the fiscal fourth quarter, which includes the majority of the holiday selling season, than any other fiscal quarter. These interim financial statements and the related notes should be read in conjunction with the
financial statements and notes included in our Annual Report to Shareholders for the fiscal year ended March 1, 2003. The Annual Report to Shareholders is incorporated by reference into our Annual Report on Form 10-K for the fiscal year ended March 1, 2003. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no impact on net earnings (loss) or total shareholders’ equity.

Cost of goods sold includes the total cost of products sold, certain vendor allowances, costs of services provided, customer delivery expenses, in-bound freight expenses and inventory shrink. Selling, general and administrative expenses ~~includes~~(SG&A) include all payroll and ~~benefit costs,~~benefits costs; occupancy ~~costs, depreciation, warehousing, advertising,~~costs; depreciation; long-lived asset impairment charges; warehousing; advertising; vendor allowances that are a reimbursement of specific, incremental and identifiable costs to promote a vendor’s ~~products~~products; and outside service fees. Vendor allowances included in ~~selling, general and administrative expenses~~SG&A approximate 7% of total vendor allowances.

2. Discontinued Operations:

During the fourth quarter of fiscal 2003, we determined to sell our interest in The Musicland Group, Inc. (Musicland), a wholly owned, indirect subsidiary. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, Musicland’s financial results are reported separately as discontinued operations for all periods presented.

On June 16, 2003, we ~~completed the sale of~~sold our interest in Musicland to an affiliate of Sun Capital Partners Inc. The affiliate of Sun Capital Partners Inc. assumed all of Musicland’s liabilities, including approximately $500 million in lease obligations, in exchange for all of the capital stock of Musicland and paid no cash consideration. The transaction also resulted in the transfer of all of Musicland’s assets, other than the distribution center in Franklin, Indiana, and selected non-operating assets. InThe loss from discontinued operations for the ~~first quarter~~nine months ended November 29, 2003, includes a loss on the disposal of ~~fiscal 2004, we recorded an estimated impairment loss~~discontinued operations (which was primarily non-cash) of ~~$70~~$66 million, net of tax, related to the sale of Musicland. Adjustments of $4 million, net of tax, related to the sale are included in our fiscal 2004 second-quarter results of discontinued operations and reduce the year-to-date, after-tax loss on disposal of discontinued operations to $66 million. In connection with the sale, Musicland is purchasing transition support services from us for up to one year from the date of the sale, until Musicland is able to develop long-term ~~solutions~~service providers for these services.

The financial results of Musicland, included in discontinued operations, were as follows ~~(in~~($ in millions):

	Three Months Ended						Six Months Ended						Three Months Ended					Nine Months Ended
	August 30, 2003(1)			August 31, 2002			August 30, 2003(1)			August 31, 2002(2)			November 29, 2003		November 30, 2002			November 29, 2003(1)			November 30, 2002(2)
Revenue	$	54		$	384		$	354		$	768		$	—	$	374		$	354		$	1,142
Loss before income tax benefit	(7		)	(27		)	(46		)	(50		)	—		(44		)	(46		)	(94		)
Loss before the disposal and the cumulative effect of accounting changes, net of tax	(5		)	(17		)	(29		)	(31		)	—		(27		)	(29		)	(58		)
Loss from discontinued operations, net of tax	(1		)	(17		)	(95		)	(347		)	—		(27		)	(95		)	(374		)

(1) ~~We recorded an estimated $70 million after-tax impairment charge in~~Loss from discontinued operations, net of tax, for the ~~first quarter~~nine months ended November 29, 2003, includes a loss on disposal of ~~fiscal 2004 related to the sale~~discontinued operations (which was primarily non-cash) of ~~Musicland. The impairment charge included estimated transaction fees, employee severance and other expenses associated with the sale. Adjustments of $4~~$66 million, net of tax, related to the sale ~~are included in our fiscal 2004 second-quarter results~~ of discontinued operations and reduce the year-to-date, after-tax loss on disposal of discontinued operations to $66 million. In conjunction with the disposition of Musicland, we have provided for a valuation allowance of $25 million against a previously recorded deferred tax asset because of the uncertainties regarding realization of the benefit.Musicland.

3.Impairment of Technology Assets:

We recorded technology asset impairment charges of $13 million and $19 million, pretax, for the three and nine months ended November 29, 2003, respectively. The impairment charges related to corporate technology assets that were taken out of service based on changes in our business. The charges are included in SG&A in our Domestic segment. There were no technology asset impairment charges for the three or nine months ended November 30, 2002.

4. Net Interest Expense:

Net interest expense was comprised of the following ~~(in~~($ in millions):

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	August 30, 2003			August 31, 2002			August 30, 2003			August 31, 2002			November 29, 2003			November 30, 2002			November 29, 2003			November 30, 2002
Interest expense	$	8		$	8		$	16		$	15		$	8		$	7		$	24		$	22
Capitalized interest	—			(1		)	(1		)	(2		)	—			(1		)	(1		)	(3		)
Interest income	(5		)	(4		)	(10		)	(10		)	(4		)	(5		)	(14		)	(15		)
Net interest expense	3			3			5			3			4			1			9			4
Interest expense allocated to discontinued operations	—			(1		)	—			(2		)	—			(1		)	—			(3		)
Net interest expense from continuing operations	$	3		$	2		$	5		$	1		$	4		$	—		$	9		$	1

We allocated interest expense to discontinued operations based upon debt that was attributable to Musicland’s operations.

4.5. Income Taxes:

Income taxes are provided on an interim basis based upon our estimate of the annual effective income tax rate. Our effective income tax rate decreased to 38.3% for the ~~second~~third quarter and first ~~six~~nine months of fiscal 2004, down from 38.7% for the corresponding periods of fiscal 2003, mainly due to a lower effective state income tax rate in the current year.

5.6. Earnings Per Share:

The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share from continuing operations ~~(in~~($ and shares in millions, except per share amounts):

	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	August 30, 2003		August 31, 2002		August 30, 2003		August 31, 2002		November 29, 2003		November 30, 2002		November 29, 2003		November 30, 2002
Numerator:
Earnings from continuing operations	$	140	$	79	$	209	$	158	$	122	$	86	$	331	$	244

Denominator:
Weighted average common shares outstanding	322.9		321.3		322.4		320.7		324.2		321.5		323.0		320.9
Effect of dilutive securities:
Employee stock options and restricted stock	4.9		3.2		4.1		4.7
Employee stock options and other									6.3		2.6		4.8		4.0
Weighted average common shares outstanding, assuming dilution	327.8		324.5		326.5		325.4		330.5		324.1		327.8		324.9

Basic earnings per share – continuing operations	$	0.43	$	0.24	$	0.65	$	0.49	$	0.38	$	0.27	$	1.02	$	0.76
Diluted earnings per share – continuing operations	$	0.42	$	0.24	$	0.64	$	0.48	$	0.37	$	0.27	$	1.01	$	0.75

~~Potentially dilutive~~Dilutive shares of common stock include employee stock options, ~~convertible debentures (assuming certain criteria are met) and~~ unvested restricted stock awards ~~granted~~and shares issuable under ~~stock-based compensation plans. The~~our employee stock purchase plan. Potentially issuable shares ~~related to~~based on the terms of our convertible debentures were not included in our diluted earnings per share computation for any of the periods presented above as the criteria for conversion of the debentures were not met.

The following employee stock options were excluded from the diluted earnings per share calculation because the option exercise price for those options exceeded the average stock price for those periods (shares in millions):

	Three Months Ended		Nine Months Ended
	November 29, 2003	November 30, 2002	November 29, 2003	November 30, 2002
Employee stock options	3.6	25.8	16.3	25.1

7. Stock-Based Compensation:

We continue to apply Accounting Principles Board (APB) Opinion ~~(APB)~~ No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for stock-based compensation plans. Accordingly, no compensation expense has not been recognized for employee stock ~~option plans~~options as the exercise price equals the stock price on the date of grant. In addition, compensation expense has not been recognized for our employee stock purchase plan as it is intended to be a plan that qualifies under Section 423 of the Internal Revenue Code of 1986, as amended. The table below illustrates the effect on net earnings (loss) and earnings (loss) per share as if we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation ~~(in~~($ in millions, except per share amounts).

	Three Months Ended						Nine Months Ended
	November 29, 2003			November 30, 2002			November 29, 2003			November 30, 2002
Net earnings (loss), as reported	$	122		$	59		$	236		$	(212	)
Add: Stock-based employee compensation expense included in reported net earnings (loss), net of tax	2			—			2			—
Deduct: Stock-based compensation expense determined under fair value method for all plans, net of tax	(27		)	(21		)	(71		)	(64		)
Net earnings (loss), pro forma	$	97		$	38		$	167		$	(276	)

Earnings (1oss) per share:
Basic – as reported	$	0.38		$	0.18		$	0.73		$	(0.66	)
Basic – pro forma	$	0.30		$	0.12		$	0.52		$	(0.86	)
Diluted – as reported	$	0.37		$	0.18		$	0.72		$	(0.65	)
Diluted – pro forma	$	0.30		$	0.12		$	0.52		$	(0.86	)

Three Months Ended

Six Months Ended

August 30,
2003

August 31,
2002

August 30,
2003

August 31,
2002

Net earnings (loss), as reported

$
139

$
62

$
114

$
(271
)
Add: Stock-based employee compensation expense included in reported net earnings (loss), net of tax

—

—

—

—

Deduct: Stock-based compensation expense determined under fair value method for all awards, net of tax

(22
)
(22
)
(44
)
(43
)
Net earnings (loss), pro forma

$
117

$
40

$
70

$
(314
)

Earnings (1oss) per share:

Basic – as reported

$
0.43

$
0.19

$
0.35

$
(0.85
)
Basic – pro forma

$
0.36

$
0.12

$
0.22

$
(0.98
)
Diluted – as reported

$
0.42

$
0.19

$
0.35

$
(0.83
)
Diluted – pro forma

$
0.36

$
0.12

$
0.22

$
(0.98
)

Our shareholders approved the Best Buy Co., Inc. 2003 Employee Stock Purchase Plan (the Plan) at our 2003 Regular Meeting of Shareholders. Five million shares have been reserved for issuance under the Plan. The Plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. The Plan permits employees to purchase shares of our common stock during semi-annual purchase periods beginning on the first Friday of April and October of each year. The shares are purchased at a price equal to the lesser of 85% of the fair market value of the common stock, as measured by the closing price on the New York Stock Exchange, at the beginning or at the end of the purchase period. No shares of common stock have been issued under the Plan in fiscal 2004 since the initial purchase period will end on April 1, 2004. As of November 29, 2003, Plan participants have accumulated approximately $9 million to purchase our common stock on April 1, 2004.

Our long-term incentive program, initiated in November of fiscal 2004, provides for the granting of non-qualified stock options and restricted shares. The non-qualified options are issuable from our 1997 Employee Non-Qualified Stock Option Plan, as amended and restated, and vest ratably over a four-year period beginning on the first anniversary after the date of grant. Restricted shares are issuable from our 2000 Restricted Stock Award Plan, as amended and restated. Shares of restricted stock vest at the end of a three-year incentive period based on our total return to shareholders compared with companies that comprise the S&P 500. The restricted stock awards result in compensation expense each reporting period based on the number of shares expected to ultimately vest, our stock price and the vesting period. For the three and nine months ended November 29, 2003, we recognized $1 million, before tax, in compensation expense related to the restricted shares issued pursuant to the long-term incentive program.

7.8. Comprehensive Income (Loss):

Comprehensive income (loss) is net earnings (loss) plus certain other items that are recorded directly to shareholders’ equity. The only significant item currently applicable to us is foreign currency translation adjustments. Comprehensive income (loss) was ~~$130~~$159 million and ~~$51~~$60 million for the three months ended ~~August 30,~~November 29, 2003, and ~~August 31,~~November 30, 2002, respectively; and ~~$154~~$313 million and ($~~265)~~205) million for the ~~six~~nine months ended ~~August 30,~~November 29, 2003, and ~~August 31,~~November 30, 2002, respectively.

9. Segments:

We operate two reportable segments: Domestic and International. The Domestic segment is comprised of the operations of U.S. Best Buy and Magnolia Audio Video (formerly operating as Magnolia Hi-Fi). The International segment is comprised of Future Shop and Best Buy operations in Canada.

Revenue by reportable segment from continuing operations was as follows ~~(in~~($ in millions):

	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	August 30, 2003		August 31, 2002		August 30, 2003		August 31, 2002		November 29, 2003		November 30, 2002		November 29, 2003		November 30, 2002
Domestic	$	4,910	$	4,286	$	9,190	$	8,185	$	5,430	$	4,707	$	14,619	$	12,892
International	486		338		874		641		604		424		1,479		1,065
Total revenue	$	5,396	$	4,624	$	10,064	$	8,826	$	6,034	$	5,131	$	16,098	$	13,957

Operating income (loss) from continuing operations by reportable segment and the reconciliation to earnings from continuing operations before income tax expense ~~are~~were as follows ~~(in~~($ in millions):

Three Months Ended

Six Months Ended

August 30,
2003

August 31,
2002

August 30,
2003

August 31,
2002

Domestic

$
230

$
130

$
353

$
265

International

(1
)
(1
)
(10
)
(7
)
Total operating income

229

129

343

258

Net interest expense

3

2

5

1

Earnings from continuing operations before income tax expense

$
226

$
127

$
338

$
257

	Three Months Ended					Nine Months Ended
	November 29, 2003		November 30, 2002			November 29, 2003			November 30, 2002
Domestic	$	202	$	146		$	555		$	411
International	—		(6		)	(10		)	(13		)
Total operating income	202		140			545			398

Net interest expense	4		—			9			1
Earnings from continuing operations before income tax expense	$	198	$	140		$	536		$	397

Assets by operating segment for continuing operations were as follows ~~(in~~($ in millions):

	August 30, 2003		March 1, 2003		August 31, 2002		November 29, 2003		March 1, 2003		November 30, 2002
Domestic	$	6,671	$	6,282	$	5,328	$	8,766	$	6,282	$	6,943
International	1,059		858		756		1,317		858		930
Total assets	$	7,730	$	7,140	$	6,084	$	10,083	$	7,140	$	7,873

Goodwill by operating segment for continuing operations was as follows ~~(in~~($ in millions):

	August 30, 2003		March 1, 2003		August 31, 2002		November 29, 2003		March 1, 2003		November 30, 2002
Domestic	$	3	$	3	$	—	$	3	$	3	$	3
International	456		426		410		486		426		404
Goodwill, net	$	459	$	429	$	410	$	489	$	429	$	407

Changes in the International segment’s goodwill balance from March 1, 2003, and November 30, 2002, were the result of ~~fluctuations in foreign currency exchange rates. Changes from August 31, 2002, were due to the finalization of the purchase price allocation for Future Shop and~~ fluctuations in foreign currency exchange rates.

Intangible assets totaled ~~$36,~~$38, $33, and $0$32 million at ~~August 30, 2003,~~November 29, 2003; March 1, ~~2003,~~2003; and ~~August 31,~~November 30, 2002, respectively. The only significant identifiable intangible asset included in our balance sheet is an indefinite-lived intangible trade name related to Future Shop, which is included in the International segment. ~~Based on~~Changes in the intangible asset balance, from March 1, 2003, and November 30, 2002, were the result of fluctuations in foreign currency exchange rates.

The annual impairment test of our ~~preliminary allocation of the purchase price related to the acquisition of Future Shop, we assigned no value to the Future Shop~~International segment’s goodwill and trade name at August 31, 2002. Value was assigned to the Future Shop trade name in the final allocation of the purchase price in the third quarter of fiscal 2003, based on our decision to operate stores in Canada under both the Best Buy and Future Shop trade names.

~~We expect to complete our annual goodwill and intangible assets impairment testing~~will be completed during the fourth quarter of fiscal 2004, in accordance with SFAS No. 142. While the ~~current~~results of the annual impairment test will not be known until the end of our fiscal ~~year.~~fourth quarter, we do not believe either the goodwill or trade name is impaired.

10. ~~Extended Service Contract Liabilities~~Commitments and Contingencies:

We have been served with four purported class action lawsuits on behalf of persons who purchased the securities of Best Buy Co., Inc. between January 9, 2002, and August 7, 2002. The lawsuits name Best Buy Co., Inc., its Chairman and its Chief Executive Officer as defendants. The plaintiffs allege that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making material misrepresentations between January 9, 2002, and August 7, 2002, which resulted in artificially inflated prices of the Company’s common stock. Plaintiffs seek compensatory damages, costs and expenses. We believe the allegations are without merit and intend to defend these actions vigorously.

We adopted FASB Interpretation (FIN) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, in fiscal 2003. FIN No. 45 provides guidance on the recognition and disclosure of certain types of guarantees, including product warranties. We assumed a liability for certain extended service contracts when we acquired Future Shop in the third quarter of fiscal 2002. We established an accrued liability for the acquired extended service contracts based on historical trends in product failure rates and the expected material and labor costs necessary to provide the services. The remaining terms of these extended service contracts vary by product and generally extend up to four years. The estimated remaining liability for extended service contracts at ~~August 30,~~November 29, 2003, was ~~$23~~$21 million. Subsequent to the acquisition, any new extended service contracts were sold on behalf of an unrelated third party, without recourse.

The following table reconciles the changes in our liability for extended service contracts for the ~~six~~nine months ended ~~August 30,~~November 29, 2003 ~~(in~~($ in millions):

Balance at March 1, 2003	$	28		$	28
Service charges	(7		)	(10		)
Foreign currency exchange rate fluctuation	2			3
Balance at August 30, 2003	$	23
Balance at November 29, 2003				$	21

~~10.~~11.Repurchase of Common Stock:

In fiscal 2000, our Board of Directors authorized the purchase of up to $400 million of our common stock from time to time through open market purchases. This share repurchase program has no stated expiration date. On October 21, 2003, we announced the intention to resume buying back shares under this program. In the fiscal third quarter and first nine months of fiscal 2004, 1.0 million shares had been purchased and retired at a cost of $60 million. Since the Board of Directors authorized the share repurchase program in fiscal 2000, 3.9 million shares have been purchased and retired at a cost of $160 million.

12. New Accounting Standards:

In March 2003, we adopted SFAS No. 143, Asset Retirement Obligations. SFAS No. 143 ~~required~~requires us to recognize the fair value of a liability associated with the cost we would be obligated to incur in order to retire an asset at some point in the future. The adoption of this standard did not have a significant impact on our net earnings or financial position.

~~In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148,~~ ~~Accounting for Stock-Based Compensation~~ - ~~Transition and Disclosure.~~ ~~SFAS No. 148 amends SFAS No. 123~~to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. SFAS No. 148 also requires additional disclosures about the effects of our accounting policy on reported earnings (loss) and earnings (loss) per share. As discussed in note 6, of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q, we apply APB No. 25 and related Interpretations in accounting for stock-based compensation plans and have adopted the disclosure-only alternative of SFAS No. 123. We adopted the disclosure provisions of SFAS No. 148 at the end of fiscal 2003.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, which requires the consolidation of and disclosures about variable interest entities (VIEs). VIEs are entities for which control is achieved through means other than voting rights. ~~The consolidation requirements of~~In December 2003, the FASB revised FIN No. 46 to incorporate all decisions, including those in previously issued FASB Staff Positions, into one Interpretation. The revised Interpretation supercedes the original Interpretation. Generally, the requirements were ~~applicable~~effective immediately tofor all VIEs in which an interest was acquired after January 31, 2003. For ~~VIEs~~variable interests in special purpose entities in which an interest was acquired before February 1, 2003, the ~~consolidation~~ requirements are effective at the end of ~~FIN No. 46~~our fiscal 2004. Requirements for non-special purpose entities acquired before February 1, 2003, are ~~generally~~ effective ~~beginning with our third~~at the end of the first quarter of fiscal ~~2004.~~2005. FIN No. 46 has not had, and is not expected to have, a significant impact on our consolidated financial statements.

~~11.~~13. Condensed Consolidating Financial Information:

Our convertible debentures are guaranteed by certain of our wholly owned subsidiaries. The aggregate principal amount at maturity of these convertible debentures is $894 million. The carrying value of the convertible debentures at ~~August 30,~~November 29, 2003, was ~~$752~~$754 million. Additional information regarding the convertible debentures is included in note 4 of the Notes to Consolidated Financial Statements of our Annual Report to Shareholders for the fiscal year ended March 1, 2003.

On June 16, 2003, we ~~completed the sale of~~sold our interest in Musicland. InThe statement of earnings for the ~~first quarter~~nine months ended November 29, 2003, includes a loss on disposal of ~~fiscal 2004, we recorded an estimated impairment loss~~discontinued operations (which was primarily non-cash) of ~~$70~~$66 million, net of tax, related to the sale of Musicland. Upon completion of the sale, the year-to-date loss was adjusted to $66 million, net of tax. The $4 million adjustment was included in our fiscal 2004 second-quarter as a gain on disposal of discontinued operations. In addition, approximately ~~$236~~$198 million of Musicland’s intercompany indebtedness to Best Buy Co., Inc. was eliminated in the first ~~quarter of fiscal 2004. Upon completion of the transaction, the amount of intercompany indebtedness eliminated was subsequently adjusted by $38 million in the second quarter~~nine months of fiscal 2004. This resulted in a year-to-date loss of $198 million that was recorded in Best Buy Co., Inc. with an offsetting $198 million gain recorded in the Non-Guarantor Subsidiaries, which included Musicland. The elimination of intercompany indebtedness had no impact on our consolidated net earnings, financial position or cash flows. Additional information regarding Musicland is included in note 2 of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.

Effective on March 2, 2003, we revised our legal entity structure. This change resulted in including certain assets and liabilities, operating results and cash flows in the Non-Guarantor Subsidiaries column that in prior periods had been recorded in the Best Buy Co., Inc. or Guarantor Subsidiaries columns. The change had no impact on our consolidated net earnings, financial position or cash flows. The Condensed Consolidating Financial ~~statements~~Statements for periods prior to March 2, 2003, have not been revised to reflect ~~for~~ this change.

We file a consolidated U.S. federal income tax return. Beginning with fiscal 2004, income taxes are allocated in accordance with our tax allocation agreement. U.S. affiliates receive no tax benefit for taxable losses, but are allocated taxes at ~~our overall~~the required effective tax rate if they have taxable income.

The following tables present condensed consolidating balance sheets as of ~~August 30,~~November 29, 2003; March 1, 2003; and ~~August 31,~~November 30, 2002; condensed consolidating statements of earnings for the three and ~~six~~nine months ended ~~August 30,~~November 29, 2003; and ~~August 31,~~November 30, 2002; and condensed consolidating statements of cash flows for the ~~six~~nine months ended ~~August 30,~~November 29, 2003; and ~~August 31,~~November 30, 2002:

1213

Condensed Consolidating Balance Sheets
As of ~~August 30,~~November 29, 2003
(Unaudited)
$ in millions

Best Buy
Co., Inc.

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Assets

Current Assets

Cash and cash equivalents

$
1,640

$
21

$
73

$
—

$
1,734

Receivables

2

266

34

—

302

Recoverable costs from developed properties

—

4

—

—

4

Merchandise inventories

—

2,541

299

(199
)
2,641

Income taxes receivable

—

5

—

(5
)
—

Other current assets

59

50

96

—

205

Intercompany receivable

—

—

1,905

(1,905
)
—

Intercompany note receivable

535

—

—

(535
)
—

Total current assets

2,236

2,887

2,407

(2,644
)
4,886

Net Property and Equipment

290

1,389

553

(3
)
2,229

Goodwill, Net

—

3

456

—

459

Intangible Assets

—

—

36

—

36

Other Assets

28

82

58

(48
)
120

Investments in Subsidiaries

1,705

—

—

(1,705
)
—

Total Assets

$
4,259

$
4,361

$
3,510

$
(4,400
)
$
7,730

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts payable

$
—

$
—

$
2,590

$
—

$
2,590

Accrued compensation and related expenses

1

119

53

—

173

Accrued liabilities

20

601

234

—

855

Accrued income taxes

—

—

48

(5
)
43

Current portion of long-term debt

1

13

—

—

14

Intercompany payable

195

1,713

—

(1,908
)
—

Intercompany note payable

—

500

35

(535
)
—

Total current liabilities

217

2,946

2,960

(2,448
)
3,675

Long-Term Liabilities

148

164

17

(48
)
281

Long-Term Debt

761

68

11

—

840

Shareholders’ Equity

3,133

1,183

522

(1,904
)
2,934

Total Liabilities and Shareholders’ Equity

$
4,259

$
4,361

$
3,510

$
(4,400
)
$
7,730

~~Condensed Consolidating Balance Sheets~~
~~As of March 1, 2003~~

~~$ in millions~~

	Best Buy Co., Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated		Best Buy Co., Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents	$	1,863	$	37	$	14		$	—		$	1,914	$	1,625	$	101	$	101	$	—		$	1,827
Receivables	216		50		46			—			312		3		641		34		—			678
Recoverable costs from developed properties	10		—		—			—			10		—		4		—		—			4
Merchandise inventories	—		1,859		221			(3		)	2,077		—		4,147		531		(250		)	4,428
Income taxes receivable													—		7		—		(7		)	—
Other current assets	182		48		39			(81		)	188		55		55		97		—			207
Current assets of discontinued operations	—		—		397			—			397
Intercompany receivable	1,617		—		—			(1,617		)	—		—		—		3,727		(3,727		)	—
Intercompany note receivable	500		—		—			(500		)	—		500		—		—		(500		)	—
Total current assets	4,388		1,994		717			(2,201		)	4,898		2,183		4,955		4,490		(4,484		)	7,144

Net Property and Equipment	498		1,390		174			—			2,062		245		1,429		590		(3		)	2,261

Goodwill, Net	—		3		426			—			429		—		3		486		—			489

Intangible Assets	—		—		33			—			33		—		—		38		—			38

Other Assets	71		78		48			(82		)	115		108		78		66		(101		)	151

Noncurrent Assets of Discontinued Operations	—		—		157			—			157

Investments in Subsidiaries	1,055		—		—			(1,055		)	—		1,955		—		—		(1,955		)	—

Total Assets	$	6,012	$	3,465	$	1,555		$	(3,338	)	$	7,694	$	4,491	$	6,465	$	5,670	$	(6,543	)	$	10,083

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	1,997	$	—	$	198		$	—		$	2,195	$	—	$	—	$	4,501	$	—		$	4,501
Accrued compensation and related expenses	80		75		19			—			174		4		135		86		—			225
Accrued liabilities	180		500		80			—			760		26		745		247		—			1,018
Accrued income taxes	—		274		181			(81		)	374		56		—		50		(7		)	99
Dividends payable													97		—		—		—			97
Current portion of long-term debt	—		—		1			—			1		1		13		—		—			14
Current liabilities of discontinued operations	—		—		320			—			320
Intercompany payable	—		780		837			(1,617		)	—		84		3,647		—		(3,731		)	—
Intercompany note payable	—		500		—			(500		)	—		—		500		—		(500		)	—
Total current liabilities	2,257		2,129		1,636			(2,198		)	3,824		268		5,040		4,884		(4,238		)	5,954

Long-Term Liabilities	264		79		26			(82		)	287		195		165		17		(101		)	276

Long-Term Debt	758		59		11			—			828		762		63		11		—			836

Noncurrent Liabilities of Discontinued Operations	—		—		25			—			25

Shareholders’ Equity (Deficit)	2,733		1,198		(143		)	(1,058		)	2,730
Shareholders’ Equity													3,266		1,197		758		(2,204		)	3,017

Total Liabilities and Shareholders’ Equity	$	6,012	$	3,465	$	1,555		$	(3,338	)	$	7,694	$	4,491	$	6,465	$	5,670	$	(6,543	)	$	10,083

Condensed Consolidating Balance Sheets
As of March 1, 2003

$ in millions

	Best Buy Co., Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents	$	1,863	$	37	$	14		$	—		$	1,914
Receivables	216		50		46			—			312
Recoverable costs from developed properties	10		—		—			—			10
Merchandise inventories	—		1,859		221			(3		)	2,077
Other current assets	182		48		39			(81		)	188
Current assets of discontinued operations	—		—		397			—			397
Intercompany receivable	1,617		—		—			(1,617		)	—
Intercompany note receivable	500		—		—			(500		)	—
Total current assets	4,388		1,994		717			(2,201		)	4,898

Net Property and Equipment	498		1,390		174			—			2,062

Goodwill, Net	—		3		426			—			429

Intangible Assets	—		—		33			—			33

Other Assets	71		78		48			(82		)	115

Noncurrent Assets of Discontinued Operations	—		—		157			—			157

Investments in Subsidiaries	1,055		—		—			(1,055		)	—

Total Assets	$	6,012	$	3,465	$	1,555		$	(3,338	)	$	7,694

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	1,997	$	—	$	198		$	—		$	2,195
Accrued compensation and related expenses	80		75		19			—			174
Accrued liabilities	180		500		80			—			760
Accrued income taxes	—		274		181			(81		)	374
Current portion of long-term debt	—		—		1			—			1
Current liabilities of discontinued operations	—		—		320			—			320
Intercompany payable	—		780		837			(1,617		)	—
Intercompany note payable	—		500		—			(500		)	—
Total current liabilities	2,257		2,129		1,636			(2,198		)	3,824

Long-Term Liabilities	264		79		26			(82		)	287

Long-Term Debt	758		59		11			—			828

Noncurrent Liabilities of Discontinued Operations	—		—		25			—			25

Shareholders’ Equity (Deficit)	2,733		1,198		(143		)	(1,058		)	2,730

Total Liabilities and Shareholders’ Equity	$	6,012	$	3,465	$	1,555		$	(3,338	)	$	7,694

Condensed Consolidating Balance Sheets
As of ~~August 31,~~November 30, 2002
(Unaudited)
$ in millions

Best Buy
Co., Inc.

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Assets

Current Assets

Cash and cash equivalents

$
1,086

$
24

$
4

$
—

$
1,114

Receivables

211

5

19

—

235

Recoverable costs from developed properties

58

—

—

—

58

Merchandise inventories

—

1,897

239

(3
)
2,133

Other current assets

724

3

5

(607
)
125

Current assets of discontinued operations

—

—

459

—

459

Intercompany receivable

1,277

—

—

(1,277
)
—

Intercompany note receivable

500

—

—

(500
)
—

Total current assets

3,856

1,929

726

(2,387
)
4,124

Net Property and Equipment

761

1,004

152

—

1,917

Goodwill, Net

—

—

410

—

410

Other Assets

57

21

54

(40
)
92

Noncurrent Assets of Discontinued Operations

—

—

261

—

261

Investments in Subsidiaries

762

—

—

(762
)
—

Total Assets

$
5,436

$
2,954

$
1,603

$
(3,189
)
$
6,804

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts payable

$
1,849

$
—

$
232

$
—

$
2,081

Accrued compensation and related expenses

74

63

18

—

155

Accrued liabilities

181

380

53

—

614

Accrued income taxes

—

437

266

(607
)
96

Current portion of long-term debt

1

—

5

—

6

Current liabilities of discontinued operations

—

—

391

—

391

Intercompany payable

—

587

690

(1,277
)
—

Intercompany note payable

—

500

—

(500
)
—

Total current liabilities

2,105

1,967

1,655

(2,384
)
3,343

Long-Term Liabilities

236

82

16

(38
)
296

Long-Term Debt

764

51

6

—

821

Noncurrent Liabilities of Discontinued Operations

—

—

18

—

18

Shareholders’ Equity (Deficit)

2,331

854

(92
)
(767
)
2,326

Total Liabilities and Shareholders’ Equity

$
5,436

$
2,954

$
1,603

$
(3,189
)
$
6,804

~~Condensed Consolidating Statements of Earnings~~
~~For the Three Months Ended August 30, 2003~~
~~(Unaudited)~~
~~$ in millions~~

Best Buy
Co., Inc.

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Revenue

$
4

$
4,882

$
5,511

$
(5,001
)
$
5,396

Cost of goods sold

—

3,927

4,976

(4,879
)
4,024

Gross profit

4

955

535

(122
)
1,372

Selling, general and administrative expenses

8

917

288

(70
)
1,143

Elimination of intercompany indebtedness

38

—

(38
)
—

—

Operating income (loss)

34

38

209

(52
)
229

Net interest expense (income)

—

4

(1
)
—

3

Equity in earnings of subsidiaries

124

—

—

(124
)
—

Earnings from continuing operations before income tax expense

158

34

210

(176
)
226

Income tax (benefit) expense

(33
)
19

100

—

86

Earnings from continuing operations

191

15

110

(176
)
140

Loss from discontinued operations, net of tax

—

—

(5
)
—

(5
)

Gain on disposal of discontinued operations, net of tax

—

—

4

—

4

Net earnings

$
191

$
15

$
109

$
(176
)
$
139

	Best Buy Co., Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents	$	1,051	$	94	$	4		$	—		$	1,149
Receivables	512		23		40			—			575
Recoverable costs from developed properties	35		—		—			—			35
Merchandise inventories	—		3,081		350			(8		)	3,423
Other current assets	742		6		6			(623		)	131
Current assets of discontinued operations	—		—		605			—			605
Intercompany receivable	2,456		—		—			(2,456		)	—
Intercompany note receivable	500		—		—			(500		)	—
Total current assets	5,296		3,204		1,005			(3,587		)	5,918

Net Property and Equipment	848		1,011		166			—			2,025

Goodwill, Net	—		3		404			—			407

Intangible Asset	—		—		32			—			32

Other Assets	59		23		77			(63		)	96

Noncurrent Assets of Discontinued Operations	—		—		260			—			260

Investments in Subsidiaries	803		—		—			(803		)	—

Total Assets	$	7,006	$	4,241	$	1,944		$	(4,453	)	$	8,738

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	3,329	$	—	$	345		$	—		$	3,674
Accrued compensation and related expenses	82		74		19			—			175
Accrued liabilities	221		428		77			—			726
Accrued income taxes	—		463		285			(626		)	122
Current portion of long-term debt	1		—		1			—			2
Current liabilities of discontinued operations	—		—		533			—			533
Intercompany payable	—		1,742		714			(2,456		)	—
Intercompany note payable	—		500		—			(500		)	—
Total current liabilities	3,633		3,207		1,974			(3,582		)	5,232

Long-Term Liabilities	223		84		31			(62		)	276

Long-Term Debt	755		56		11			—			822

Noncurrent Liabilities of Discontinued Operations	—		—		19			—			19

Shareholders’ Equity (Deficit)	2,395		894		(91		)	(809		)	2,389

Total Liabilities and Shareholders’ Equity	$	7,006	$	4,241	$	1,944		$	(4,453	)	$	8,738

~~Condensed Consolidating Statements of Earnings~~
~~For the Six Months Ended~~ ~~August 30, 2003~~
~~(Unaudited)~~
~~$ in millions~~

Best Buy
Co., Inc.

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Revenue

$
8

$
9,135

$
9,682

$
(8,761
)
$
10,064

Cost of goods sold

—

7,196

8,632

(8,321
)
7,507

Gross profit

8

1,939

1,050

(440
)
2,557

Selling, general and administrative expenses

14

1,869

574

(243
)
2,214

Elimination of intercompany indebtedness

(198
)
—

198

—

—

Operating (loss) income

(204
)
70

674

(197
)
343

Net interest (income) expense

(2
)
8

(1
)
—

5

Equity in earnings of subsidiaries

337

—

—

(337
)
—

Earnings from continuing operations before income tax expense

135

62

675

(534
)
338

Income tax (benefit) expense

(187
)
36

280

—

129

Earnings from continuing operations

322

26

395

(534
)
209

Loss from discontinued operations, net of tax

—

—

(29
)
—

(29
)

Loss on disposal of discontinued operations, net of tax

(11
)
—

(55
)
—

(66
)

Net earnings

$
311

$
26

$
311

$
(534
)
$
114

Condensed Consolidating Statements of Earnings
For the Three Months Ended ~~August 31, 2002~~November 29, 2003
(Unaudited)
$ in millions

	Best Buy Co., Inc.				Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated			Best Buy Co., Inc.			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Revenue	$		—		$	4,402	$	507		$	(285	)	$	4,624		$	4		$	5,390	$	7,055	$	(6,415	)	$	6,034

Cost of goods sold	—				3,340		331			(200		)	3,471			—			4,334		6,487		(6,285		)	4,536

Gross profit	—				1,062		176			(85		)	1,153			4			1,056		568		(130		)	1,498

Selling, general and administrative expenses	(1			)	999		111			(85		)	1,024			4			1,016		356		(80		)	1,296

Operating income	1				63		65			—			129			—			40		212		(50		)	202

Net interest (income) expense	(4			)	5		1			—			2
Net interest expense																—			4		—		—			4

Equity in earnings of subsidiaries	48				—		—			(48		)	—			143			—		—		(143		)	—

Earnings from continuing operations before income tax expense	53				58		64			(48)			127			143			36		212		(193		)	198

Income tax expense	2				22		24			—			48

Earnings from continuing operations	51				36		40			(48)			79

Earnings (loss) from discontinued operations, net of tax	11				—		(28		)	—			(17		)
Income tax (benefit) expense																(29		)	22		83		—			76

Net earnings	$	62			$	36	$	12		$	(48	)	$	62		$	172		$	14	$	129	$	(193	)	$	122

Condensed Consolidating Statements of Earnings
For the Nine Months Ended November 29, 2003
(Unaudited)
$ in millions

	Best Buy Co., Inc.			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	12		$	14,525	$	16,737		$	(15,176	)	$	16,098

Cost of goods sold	—			11,530		15,119			(14,606		)	12,043

Gross profit	12			2,995		1,618			(570		)	4,055

Selling, general and administrative expenses	18			2,885		930			(323		)	3,510

Elimination of intercompany indebtedness	198			—		(198		)	—			—

Operating (loss) income	(204		)	110		886			(247		)	545

Net interest (income) expense	(2		)	12		(1		)	—			9

Equity in earnings of subsidiaries	498			—		—			(498		)	—

Earnings from continuing operations before income tax expense	296			98		887			(745		)	536

Income tax (benefit) expense	(198		)	58		345			—			205

Earnings from continuing operations	494			40		542			(745		)	331

Loss from discontinued operations, net of tax	—			—		(29		)	—			(29		)

Loss on disposal of discontinued operations, net of tax	(11		)	—		(55		)	—			(66		)

Net earnings	$	483		$	40	$	458		$	(745	)	$	236

Condensed Consolidating Statements of Earnings
For the ~~Six~~Three Months Ended ~~August 31,~~November 30, 2002
(Unaudited)
$ in millions

Best Buy
Co., Inc.

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Revenue

$
1

$
8,408

$
971

$
(554
)
$
8,826

Cost of goods sold

—

6,350

635

(392
)
6,593

Gross profit

1

2,058

336

(162
)
2,233

Selling, general and administrative expenses

(11
)
1,936

212

(162
)
1,975

Operating income

12

122

124

—

258

Net interest (income) expense

(9
)
9

1

—

1

Equity in loss of subsidiaries

(308
)
—

—

308

—

(Loss) earnings from continuing operations before income tax expense

(287
)
113

123

308

257

Income tax expense

9

43

47

—

99

(Loss) earnings from continuing operations

(296
)
70

76

308

158

Earnings (loss) from discontinued operations, net of tax

25

—

(372
)
—

(347
)

Cumulative effect of change in accounting principle for goodwill, net of tax

—

—

(40
)
—

(40
)

Cumulative effect of change in accounting principle for vendor allowances, net of tax

—

(40
)
(2
)
—

(42
)

Net (loss) earnings

$
(271
)
$
30

$
(338
)
$
308

$
(271
)

	Best Buy Co., Inc.				Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$		1		$	4,832	$	612		$	(314	)	$	5,131

Cost of goods sold	—				3,695		402			(216		)	3,881

Gross profit	1				1,137		210			(98		)	1,250

Selling, general and administrative expenses	6				1,071		131			(98		)	1,110

Operating (loss) income	(5			)	66		79			—			140

Net interest (income) expense	(5			)	5		—			—			—

Equity in earnings of subsidiaries	41				—		—			(41		)	—

Earnings from continuing operations before income tax expense	41				61		79			(41		)	140

Income tax (benefit) expense	(1			)	24		31			—			54

Earnings from continuing operations	42				37		48			(41		)	86

Earnings (loss) from discontinued operations, net of tax	17				—		(44		)	—			(27		)

Net earnings	$	59			$	37	$	4		$	(41	)	$	59

Condensed Consolidating Statements of Earnings
For the Nine Months Ended November 30, 2002
(Unaudited)
$ in millions

	Best Buy Co., Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	2		$	13,240		$	1,583		$	(868	)	$	13,957

Cost of goods sold	—			10,045			1,037			(608		)	10,474

Gross profit	2			3,195			546			(260		)	3,483

Selling, general and administrative expenses	(1		)	3,004			342			(260		)	3,085

Operating income	3			191			204			—			398

Net interest (income) expense	(14		)	14			1			—			1

Equity in loss of subsidiaries	(265		)	—			—			265			—

(Loss) earnings from continuing operations before income tax expense	(248		)	177			203			265			397

Income tax expense	6			69			78			—			153

(Loss) earnings from continuing operations	(254		)	108			125			265			244

Earnings (loss) from discontinued operations, net of tax	42			—			(416		)	—			(374		)

Cumulative effect of change in accounting principle for goodwill, net of tax	—			—			(40		)	—			(40		)

Cumulative effect of change in accounting principle for vendor allowances, net of tax	—			(40		)	(2		)	—			(42		)

Net (loss) earnings	$	(212	)	$	68		$	(333	)	$	265		$	(212	)

Condensed Consolidating Statements of Cash Flows
For the ~~Six~~Nine Months Ended ~~August 30,~~November 29, 2003
(Unaudited)
$ in millions

	Best Buy Co., Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated			Best Buy Co., Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Total cash provided by (used in) operating activities from continuing operations	$	7		$	(302	)	$	623		$	(197	)	$	131		$	81		$	(2,006	)	$	2,558		$	(246	)	$	387

Investing activities
Additions to property and equipment	(32		)	(156		)	(104		)	—			(292		)	(45		)	(224		)	(180		)	—			(449		)
Decrease in recoverable costs from developed properties	—			6			—			—			6			—			6			—			—			6
Other																1			—			(2		)	—			(1		)
Total cash used in investing activities from continuing operations	(32)			(150		)	(104		)	—			(286		)	(44		)	(218		)	(182		)	—			(444		)

Financing activities
Issuance of common stock																94			—			—			—			94
Repurchase of common stock																(60		)	—			—			—			(60		)
Long-term debt payments	—			(8		)	—			—			(8		)	—			(13		)	—			—			(13		)
Issuance of common stock	36			—			—			—			36
Change in intercompany receivable/payable	(234		)	444			(407		)	197			—			(309		)	2,301			(2,238		)	246			—
Total cash (used in) provided by financing activities from continuing operations	(198		)	436			(407		)	197			28			(275		)	2,288			(2,238		)	246			21

Effect of exchange rate changes on cash																—			—			2			—			2
Net cash used in discontinued operations	—			—			(53		)	—			(53		)	—			—			(53		)	—			(53		)

(Decrease) increase in cash and cash equivalents	(223		)	(16		)	59			—			(180		)	(238		)	64			87			—			(87		)
Cash and cash equivalents at beginning of period	1,863			37			14			—			1,914			1,863			37			14			—			1,914
Cash and cash equivalents at end of period	$	1,640		$	21		$	73		$	—		$	1,734		$	1,625		$	101		$	101		$	—		$	1,827

2021

Condensed Consolidating Statements of Cash Flows
For the ~~Six~~Nine Months Ended ~~August 31,~~November 30, 2002
(Unaudited)
$ in millions

	Best Buy Co., Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated			Best Buy Co., Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Total cash (used in) provided by operating activities from continuing operations	$	(372	)	$	303		$	(226	)	$	—	$	(295	)
Total cash provided by (used in) operating activities from continuing operations															$	867		$	(723	)	$	(183	)	$	—	$	(39	)

Investing activities
Additions to property and equipment	(213		)	(160		)	(30		)	—		(403		)	(324		)	(220		)	(54		)	—		(598		)
Decrease in recoverable costs from developed properties	21			—			—			—		21			44			—			—			—		44
Other															—			(3		)	—			—		(3		)
Total cash used in investing activities from continuing operations	(192		)	(160		)	(30		)	—		(382		)	(280		)	(223		)	(54		)	—		(557		)

Financing activities
Issuance of common stock															39			—			—			—		39
Long-term debt payments															(11		)	—			(1		)	—		(12		)
Net proceeds from issuance of long-term debt	—			10			—			—		10			—			15			—			—		15
Long-term debt payments	(1		)	—			(3		)	—		(4		)
Issuance of common stock	36			—			—			—		36
Change in intercompany receivable/payable	(208		)	(158		)	366			—		—			(1,387		)	996			391			—		—
Total cash (used in) provided by financing activities from continuing operations	(173		)	(148		)	363			—		42			(1,359		)	1,011			390			—		42

Net cash used in discontinued operations	—			—			(112		)	—		(112		)	—			—			(158		)	—		(158		)

Decrease in cash and cash equivalents	(737		)	(5		)	(5		)	—		(747		)
(Decrease) increase in cash and cash equivalents															(772		)	65			(5		)	—		(712		)
Cash and cash equivalents at beginning of period	1,823			29			9			—		1,861			1,823			29			9			—		1,861
Cash and cash equivalents at end of period	$	1,086		$	24		$	4		$	—	$	1,114		$	1,051		$	94		$	4		$	—	$	1,149

2122

BEST BUY CO., INC.

ITEM 2.2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Best Buy Co., Inc. is a specialty retailer of consumer electronics, home-office equipment, entertainment software and appliances. We operate two reportable segments: Domestic and International. The Domestic segment is comprised of the operations of U.S. Best Buy and Magnolia Audio Video (formerly operating as Magnolia Hi-Fi). The International segment is comprised of Future Shop and Best Buy operations in Canada. For additional information regarding segments, refer to note 89 of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.

Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. Historically, we have realized more of our revenue and net earnings in the fiscal fourth quarter, which includes the majority of the holiday selling season, than in any other fiscal quarter.

On June 16, 2003, we ~~completed the sale of~~sold our interest in Musicland to an affiliate of Sun Capital Partners Inc. The affiliate of Sun Capital Partners Inc. assumed all of Musicland’s liabilities, including approximately $500 million in lease obligations, in exchange for all of the capital stock of Musicland and paid no cash consideration. The transaction also resulted in the transfer of all of Musicland’s assets, other than the distribution center in Franklin, Indiana, and selected non-operating assets. ~~In the first quarter of fiscal 2004, we recorded an estimated impairment loss (which was primarily non-cash) of $70 million, net of tax, related to the~~The sale of ~~Musicland. Adjustments of $4 million, net of tax, related to the completion of the sale are included~~our interest in ~~our fiscal 2004 second-quarter results of discontinued operations and reduce the year-to-date,~~Musicland resulted in an after-tax loss on the disposal of discontinued operations tototaling $66 million. In connection with the sale, Musicland is purchasing transition support services from us for up to one year from the date of the sale, until Musicland is able to develop long-term service providers for these services. For additional information regarding discontinued operations, see the “Discontinued Operations” section of this Management’s Discussion and Analysis and refer to note 2 of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.

Results of Operations

Unless otherwise noted, the following discussion relates only to results from continuing operations.

~~Second-Quarter~~Third-Quarter Summary

• Earnings from continuing operations increased ~~78%~~42% to ~~$140~~$122 million, or ~~$0.42~~$0.37 per diluted share, compared with ~~$79~~$86 million, or ~~$0.24~~$0.27 per diluted share, for the ~~second~~third quarter of fiscal 2003. The increase in earnings from continuing operations was driven by a combination of revenue gains, an improved gross profit rate, and, to a lesser extent, a lower selling, general and administrative expenses (SG&A) rate.

• Revenue increased ~~17%~~18% to ~~$5.40~~$6.0 billion, compared with ~~$4.62~~$5.1 billion for the ~~second~~third quarter of fiscal 2003, driven by a comparable store sales gain of ~~7.5%~~8.6% and the addition of 7472 stores in the past 12 months.

• The gross profit rate increased ~~0.5%~~0.4% of revenue to ~~25.4%~~24.8% of revenue, up from ~~24.9%~~24.4% of revenue for the ~~second~~third quarter of fiscal 2003. The increase was primarily due to ~~a more profitable~~gross profit rate improvements within most major product ~~assortment, cost savings from product-sourcing initiatives,~~categories and a less promotional environment in the Domestic segment compared with the same period one year ~~ago~~ago. The gross profit rate improvements were a result of specific company initiatives to improve gross profit rates, including reducing markdowns, reducing product procurement and ~~improved management tools that enabled our stores to manage markdowns~~supply chain costs, improving product assortments and developing more ~~effectively.~~effective promotions. These factors were partially offset by costs ~~related to~~associated with Reward Zone, ~~a new~~our customer loyalty program launched during the second quarter of fiscal 2004, and a more promotional environment in the International segment.

• The SG&A rate declined ~~1.0%~~0.1% of revenue to ~~21.2%~~21.5% of revenue, down from ~~22.2%~~21.6% of revenue for the ~~second~~third quarter of fiscal 2003. The ~~change~~rate improvement was primarily due to expense leverage from the ~~7.5%~~8.6% comparable store sales gain and the addition of 7472 stores in the past 12 months, as well as the realization of cost savings from our Efficient Enterprise strategy. In addition, our fiscal 2004 third quarter SG&A rate benefited from the sale of stock acquired in connection with a vendor co-marketing agreement. These factors were partially offset by ~~the impact of~~investments made in our Customer Centricity initiative, increased incentive compensation expenses, a $13 million asset impairment charge and reduced funding from vendor alliance programs and incremental expenses associated with investments in the past 12 months to support growth initiatives, including investments in new technology, our new corporate campus and a new distribution center.programs.

• Net earnings from continuing and discontinued operations were ~~$139~~$122 million, or ~~$0.42~~$0.37 per diluted share, compared with net earnings of ~~$62~~$59 million, or ~~$0.19~~$0.18 per diluted share, for the ~~second~~third quarter of fiscal 2003. Net earnings for the ~~second~~third quarter of fiscal 2004 do not include results from discontinued operations as our interest in Musicland was sold on June 16, 2003, during our second fiscal quarter. Net earnings for the third quarter of fiscal 2003 included a ~~net~~ loss from discontinued operations of $1$27 million, net of tax, compared with a $17 million net loss from discontinued operations for the second quarter of fiscal 2003. The net loss from discontinued operations for the second quarter of fiscal 2004 included a $5 million operating loss, net of tax, and a $4 million gain on disposal, net of tax, as a result of adjustments related to the sale of Musicland. The results of discontinued operations for the second quarter of fiscal 2004 are included through the date of the sale, June 16, 2003. Fiscal 2003 second-quarter results from discontinued operations are for the entire quarter.tax.

2223

• On ~~September~~December 17, 2003, we ~~raised~~provided initial guidance for our fiscal 2004 fourth-quarter earnings from continuing operations of $1.34 to $1.39 per diluted share. We also reiterated our fiscal 2004 full-year estimate for earnings from continuing operations ~~to a new range~~ of $2.35 to $2.40 per diluted share.

Consolidated

The following table presents unaudited selected consolidated financial data ($ in millions, except per share amounts):

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	August 30, 2003			August 31, 2002			August 30, 2003			August 31, 2002			November 29, 2003			November 30, 2002			November 29, 2003			November 30, 2002
Revenue	$	5,396		$	4,624		$	10,064		$	8,826		$	6,034		$	5,131		$	16,098		$	13,957
Comparable store sales % change (1)	7.5		%	2.6		%	5.0		%	4.4		%	8.6		%	0.7		%	5.8		%	3.1		%
Gross profit as a % of revenue	25.4		%	24.9		%	25.4		%	25.3		%	24.8		%	24.4		%	25.2		%	25.0		%
SG&A as a % of revenue	21.2		%	22.2		%	22.0		%	22.4		%	21.5		%	21.6		%	21.8		%	22.1		%
Operating income	$	229		$	129		$	343		$	258		$	202		$	140		$	545		$	398
Operating income as a % of revenue	4.2		%	2.8		%	3.4		%	2.9		%	3.3		%	2.8		%	3.4		%	2.9		%
Earnings from continuing operations	$	140		$	79		$	209		$	158		$	122		$	86		$	331		$	244
Loss from discontinued operations, net of tax (2)	(5		)	(17		)	(29		)	(347		)	—			(27		)	(95		)	(374		)
Gain (loss) on disposal of discontinued operations, net of tax (3)	4			—			(66		)	—
Cumulative effect of change in accounting principles, net of tax (4)	—			—			—			(82		)
Cumulative effect of change in accounting principles, net of tax (3)													—			—			—			(82		)
Net earnings (loss)	$	139		$	62		$	114		$	(271	)	$	122		$	59		$	236		$	(212	)
Diluted earnings per share — continuing operations	$	0.42		$	0.24		$	0.64		$	0.48		$	0.37		$	0.27		$	1.01		$	0.75
Diluted earnings (loss) per share	$	0.42		$	0.19		$	0.35		$	(0.83	)	$	0.37		$	0.18		$	0.72		$	(0.65	)

Note: All periods presented reflect the classification of Musicland’s financial results as discontinued operations.

(1) Comprised of revenue at stores and Internet sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of acquisition. The calculation of the comparable store sales percentage change excludes the impact of fluctuations in foreign currency exchange rates.

In the third quarter of fiscal 2004, we refined our methodology for calculating our comparable store sales percentage change. It now reflects the impact of non-point-of-sale (non-POS) revenue transactions, including delivery revenue, mail-in rebates and costs associated with Reward Zone, our customer loyalty program. Previously, our comparable store sales calculation was based on store POS revenue. The comparable store sales percentage changes for the third quarter and nine-month period ended November 29, 2003, have been computed based on the refined methodology. We refined our comparable store sales calculation methodology in light of changes in our business. Comparable store sales for the prior fiscal year periods have not been computed using the refined methodology. Refining the methodology for calculating our comparable store sales percentage change did not impact previously reported revenue, earnings or cash flow.

(2) In the first quarter of fiscal 2003, we recorded an after-tax, non-cash impairment charge of $308 million for the full write-off of goodwill related to our acquisition of Musicland, resulting from the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, effective on March 3, 2002. In addition, we recorded an after-tax, non-cash charge of $8 million for the change in our method of accounting for vendor allowances in accordance with the adoption of Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor.

(3) In the first quarter of fiscal 2004, we recorded an estimated impairment loss (which was primarily non-cash) of $70 million, net of tax, related to the sale of Musicland. Adjustments of $4 million, net of tax, related to the sale are included in our fiscal 2004 second-quarter results of discontinued operations and reduce the year-to-date, after-tax loss on disposal of discontinued operations to $66 million.

~~(4)~~ In the first quarter of fiscal 2003, we recorded an after-tax, non-cash impairment charge of $40 million for the full write-off of goodwill related to our acquisition of Magnolia Audio Video, resulting from the adoption of SFAS No. 142, effective on March 3, 2002. Also effective on March 3, 2002, we changed our method of accounting for vendor allowances in accordance with EITF No. 02-16, resulting in an after-tax, non-cash charge of $42 million.

Earnings from continuing operations were ~~$140~~$122 million for the third quarter of fiscal 2004, or $0.37 per diluted share, a 42% increase from $86 million, or ~~$0.42~~$0.27 per diluted share, for the ~~second quarter of fiscal 2004, a 78% increase from $79 million, or $0.24 per diluted share, for the second~~third quarter of fiscal 2003. For the first ~~six~~nine months of fiscal 2004, earnings from continuing operations were ~~$209~~$331 million, or ~~$0.64~~$1.01 per diluted share, compared with ~~$158~~$244 million, or ~~$0.48~~$0.75 per diluted share, for the same period one year ago. For the quarter, the increase in earnings from continuing operations reflects an increase in revenue, including a comparable store sales gain of ~~7.5%~~8.6%, an increase in the gross profit rate and, to a lesser extent, a decrease in the SG&A rate. For the ~~six-month~~nine-month period, the increase in earnings from continuing operations is primarily due to revenue growth, including a comparable store sales gain of ~~5.0%~~5.8%, and to a 0.3% of revenue decrease in the SG&A ~~rate of 0.4% of revenue.~~rate.

2324

Revenue for the ~~second~~third quarter of fiscal 2004 increased ~~17%~~18% to ~~$5.40~~$6.0 billion, compared with ~~$4.62~~$5.1 billion for the ~~second~~third quarter of the prior fiscal year. For the first ~~six~~nine months of fiscal 2004, revenue increased ~~14%~~15% to ~~$10.06~~$16.1 billion, compared with ~~$8.83~~$14.0 billion for the same period inof fiscal 2003. The ~~addition of 74 stores in the past 12 months~~comparable store sales gains accounted for approximately half of the revenue increase for the quarter and approximately ~~three-fifths~~two-fifths of the revenue increase for the ~~six-month~~nine-month period. The addition of 72 stores in the past 12 months accounted for approximately two-fifths of the revenue increase for the quarter and approximately half of the revenue increase for the first nine months of fiscal 2004. The remainder of the revenue increase for both the quarter and ~~six-month~~nine-month period was due to ~~the comparable store sales gains and~~ the effect of changes in foreign currency ~~translation~~exchange rates. The ~~second~~ fiscal ~~quarter~~third-quarter comparable store sales gain was driven by higher customer traffic in our stores, primarily due to increased consumer confidence, demand for digital products ~~federal tax refunds,~~and effective promotions, ~~and~~all of which contributed to our fiscal third-quarter market share gains. Products having the largest impact on our ~~second~~ fiscal third quarter comparable store sales gain included notebook and desktop computers, ~~with strong sales during the back-to-school selling season,~~digital televisions, DVD movies, digital cameras, CDs, digital camcorders and MP3 players. The increase in notebook computers and desktop computers reflects market share gains as well as ~~selected~~customers’ increased desire to upgrade their home computers. The increase in digital products ~~including digital televisions, digital cameras and digital camcorders, reflecting~~reflects the continued consumer migration to, and increased affordability of, digital products. Digital products accounted for ~~24%~~27% of the revenue mix for the ~~second~~third quarter of fiscal 2004, up from ~~20%~~23% for the same period ~~one-year~~one year ago. Domestic and International segment revenue increased 15% and ~~44%~~42%, respectively, for the ~~second~~third quarter of fiscal 2004 compared with the prior year.

Our gross profit rate improved to ~~25.4%~~24.8% of revenue for the ~~second~~third quarter of fiscal 2004, compared with ~~24.9%~~24.4% of revenue for the ~~second~~third quarter of the prior fiscal year. For the first ~~six~~nine months of fiscal 2004, our gross profit rate increased slightly to ~~25.4%~~25.2% of revenue, compared with ~~25.3%~~25.0% of revenue for the same period in the prior fiscal year. For the ~~second~~third quarter, the ~~gross profit rate improvement~~increase was primarily due to ~~a more profitable~~gross profit rate improvements within most major product ~~assortment, cost savings from product-sourcing initiatives,~~categories and a less promotional environment in the Domestic ~~segment~~segment. The gross profit rate improvements were primarily the result of specific company initiatives to improve gross profit rates, including reducing markdowns, reducing product procurement and ~~improved management tools that enabled our stores to manage markdowns~~supply chain costs, improving product assortments and developing more ~~effectively.~~effective promotions. These factors were partially offset by ~~the impact of~~costs associated with Reward Zone, ~~a new~~our customer loyalty program that was introduced nationally during the second quarter of fiscal 2004, and a more promotional environment in the International segment. For the ~~six-month~~nine-month period ended ~~August 30,~~November 29, 2003, the ~~modest~~0.2% of revenue increase in the gross profit rate was primarily due to the same factors ~~impacting~~affecting the ~~second~~third quarter, offset by a more promotional environment in both the Domestic and International segments in the first quarter of the current fiscal year.

During the second quarter of fiscal 2004, we launched Reward Zone, ~~a new~~our customer loyalty program. ~~Members generally~~Under the terms of the program members earn $5points for ~~every $125 they spend~~each purchase completed at U.S. Best Buy ~~stores and~~stores. After earning the required point total, members are ~~automatically mailed~~awarded a $5 certificate that may be redeemed on future purchases. Certificates awarded to Reward Zone members expire 90 days after ~~90 days.~~issuance. In accordance with EITF No. 00-22, Accounting for “Points” and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future, points earned by Reward Zone members are recorded as a liability and a reduction of revenue. EITF No. 00-22 requires companies to obtain a reasonable amount of history prior to adjusting the liability for the percentage of incentive offers that will not be redeemed. Our fiscal 2004 second-quarter revenue and earnings were reduced by the redemption value of all points earned during the quarter as we did not yet have sufficient history to estimate the percentage of certificates that ~~will not~~would be redeemed ~~within~~prior to expiration.

During the ~~90-day~~third quarter of fiscal 2004, we obtained a reasonable amount of Reward Zone redemption ~~period. Revenue, gross profit rates~~history and ~~earnings in future periods will reflect rewards~~adjusted the liability for the percentage of points that are projected to be redeemed prior to expiration. The adjustment related to Reward Zone points earned ~~adjusted for our actual redemption experience, including refinement of the amount recorded in~~during the second quarter ~~of fiscal 2004. The $9.99 annual enrollment fee to participate in the program is included in~~favorably impacted third-quarter revenue, ~~ratably beginning with the month of enrollment~~gross profit and ~~did not have a significant impact on revenue for the second quarter or first six months of fiscal 2004.~~operating income by approximately $8 million, before tax.

The SG&A rate decreased to ~~21.2%~~21.5% of revenue for the ~~second~~third quarter of fiscal 2004, compared with ~~22.2%~~21.6% of revenue for the ~~second~~third quarter of the prior fiscal year. For the first ~~six~~nine months of fiscal 2004, the SG&A rate decreased to ~~22.0%~~21.8% of revenue, compared with ~~22.4%~~22.1% of revenue for the same period of fiscal 2003. ~~The decrease in~~For the third quarter and first nine months of fiscal 2004, the SG&A rate for both the second quarter and first six months of fiscal 2004 reflected a rate decrease in both the Domestic and International segments. The improvement in the Domestic segment SG&A rate for the second quarter and first six months of fiscal 2004 was primarily due tobenefited from expense leverage generated from the comparable store sales gains and new stores opened in the past 12 months, as well as the realization of cost savings from our Efficient Enterprise strategy. The SG&A rates for the third quarter and the first nine months of fiscal 2004 also benefited from a one-time gain of approximately $5 million, before tax, associated with the sale of stock received in connection with a vendor co-marketing agreement. These factors were partially offset by ~~the impact of reduced funding from vendor alliance programs and incremental expenses associated with~~ investments ~~to support growth initiatives, including investments~~made in ~~new technology,~~ our ~~new corporate campus and a new distribution center. The International segment SG&A rate decreased primarily~~Customer Centricity initiative; increased incentive compensation as a result of ~~initiatives~~improved year-over-year financial performance and restricted stock grants awarded pursuant to ~~improve corporate efficiency~~our new long-term incentive compensation program; an asset impairment charge of approximately $13 million, before tax; and ~~expense leverage associated with a larger base of stores.~~reduced funding received from vendor alliance programs.

24The asset impairment charge of approximately $13 million, before tax, was related to certain supply chain management software. During the third quarter of fiscal 2004, we completed a thorough assessment of our ongoing needs and the capabilities of the current software. Based on the assessment, we elected to replace the software that had been used with software that we believe provides greater functionality.

On August 21, 2003, we announced the launch of a new long-term incentive program for certain U.S. employees designed to help us attract and retain the best employees and to better align employee interests with those of our shareholders. Under the terms of the new program, which began in November 2003, eligible employees may receive a mix of restricted stock and stock options issued pursuant to existing shareholder-approved plans. Shares of restricted stock vest at the end of a three-year incentive period based on our total return to shareholders compared with companies that comprise the S&P 500. In accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, compensation expense under the new program is recognized each reporting period based on the number of shares expected to ultimately vest, our stock price and the vesting period. For the third quarter of fiscal 2004, we recognized $1 million, before tax, in compensation expense associated with restricted stock awards granted pursuant to the new long-term incentive program. Stock options are also accounted for in accordance with APB Opinion No. 25, consistent with the accounting treatment for options previously granted pursuant to our stock options plans. Accordingly, no compensation expense is recognized for stock options as the exercise price equals the stock price on the date of grant. The new program is expected to result in less shareholder dilution for existing shareholders.

Segment Performance

Domestic

The following table presents unaudited selected financial data for the Domestic segment ($ in millions):

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	August 30, 2003			August 31, 2002			August 30, 2003			August 31, 2002			November 29, 2003			November 30, 2002			November 29, 2003			November 30, 2002
Revenue	$	4,910		$	4,286		$	9,190		$	8,185		$	5,430		$	4,707		$	14,619		$	12,892
Revenue as a % of total Company revenue	91		%	93		%	91		%	93		%	90		%	92		%	91		%	92		%
Comparable stores sales % change (1)	7.8		%	2.6		%	5.2		%	4.4		%	9.0		%	0.7		%	6.0		%	3.1		%
Gross profit as a % of revenue	25.6		%	24.9		%	25.5		%	25.3		%	24.9		%	24.4		%	25.3		%	25.0		%
SG&A as a % of revenue	20.9		%	21.9		%	21.7		%	22.1		%	21.2		%	21.2		%	21.5		%	21.8		%
Operating income	$	230		$	130		$	353		$	265		$	202		$	146		$	555		$	411
Operating income as a % of revenue	4.7		%	3.0		%	3.8		%	3.2		%	3.7		%	3.1		%	3.8		%	3.2		%

In the third quarter of fiscal 2004, we refined our methodology for calculating our comparable store sales percentage change. It now reflects the impact of non-POS revenue transactions, including delivery revenue, mail-in rebates and costs associated with Reward Zone, our customer loyalty program. Previously, our comparable store sales calculation was based on store POS revenue. The comparable store sales percentage changes for the third quarter and nine-month period ended November 29, 2003, have been computed based on the refined methodology. We refined our comparable store sales calculation methodology in light of changes in our business. Comparable store sales for the prior fiscal year periods have not been computed using the refined methodology. Refining the methodology for calculating our comparable store sales percentage change did not impact previously reported revenue, earnings or cash flow.

The following table presents the ~~second quarter~~third-quarter Domestic comparable store sales percent change for the past two fiscal years:

	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	August 30, 2003		August 31, 2002		August 30, 2003		August 31, 2002		November 29, 2003		November 30, 2002		November 29, 2003		November 30, 2002
U.S. Best Buy stores	7.8	%	2.7	%	5.2	%	4.5	%	9.0	%	0.7	%	6.1	%	3.1	%
Magnolia Audio Video stores	(5.9	)%	(3.6	)%	(3.4	)%	(7.1	)%	5.8	%	2.9	%	0.5	%	(3.6	)%
Total	7.8	%	2.6	%	5.2	%	4.4	%	9.0	%	0.7	%	6.0	%	3.1	%

The following table reconciles Domestic stores open at the beginning and end of the ~~second~~third quarter of fiscal 2004:

	Total Stores at Beginning of Second Quarter Fiscal 2004	Stores Opened	Stores Closed	Total Stores at End of Second Quarter Fiscal 2004	Total Stores at Beginning of Third Quarter Fiscal 2004	Stores Opened	Stores Closed	Total Stores at End of Third Quarter Fiscal 2004
U.S. Best Buy stores	552	14	—	566	566	34	—	600
Magnolia Audio Video stores	19	1	—	20	20	2	—	22
Total	571	15	—	586	586	36	—	622

Note: During the ~~second~~third quarter of fiscal 2004, ~~one~~two U.S. Best Buy stores were relocated and one store was remodeled or expanded. In addition, Magnolia Audio Video remodeled or expanded eight stores during the third quarter of fiscal 2004.

The following table reconciles Domestic stores open at the beginning and end of the third quarter of fiscal 2003:

	Total Stores at Beginning of Third Quarter Fiscal 2003	Stores Opened	Stores Closed	Total Stores at End of Third Quarter Fiscal 2003
U.S. Best Buy stores	515	31	—	546
Magnolia Audio Video stores	16	3	—	19
Total	531	34	—	565

Note: During the third quarter of fiscal 2003, two U.S. Best Buy stores were relocated and one store was remodeled or expanded. Magnolia Audio Video did not relocate, remodel or expand any stores during the ~~second quarter of fiscal 2004.~~

~~The following table reconciles Domestic stores open at the beginning and end of the second quarter of fiscal 2003:~~

Total Stores at
Beginning of
Second Quarter
Fiscal 2003

Stores
Opened

Stores
Closed

Total Stores at
End of
Second Quarter
Fiscal 2003

U.S. Best Buy stores

493

22

—

515

Magnolia Audio Video stores

16

—

—

16

Total

509

22

—

531

Note: During the second quarter of fiscal 2003, one U.S. Best Buy stores was relocated and two stores were remodeled or expanded. Magnolia Audio Video did not relocate, remodel or expand any stores during the secondthird quarter of fiscal 2003.

For the ~~second~~third quarter of fiscal 2004, Domestic operating income increased to ~~$230~~$202 million, or ~~4.7%~~3.7% of revenue, compared with ~~$130~~$146 million, or ~~3.0%~~3.1% of revenue, for the ~~second~~third quarter of the prior fiscal year. For the first ~~six~~nine months of fiscal 2004, Domestic operating income was ~~$353~~$555 million, or 3.8% of revenue, compared with ~~$265~~$411 million, or 3.2% of revenue, for the same period of fiscal 2003. The Domestic segment operating income ~~rate~~ improvement for the ~~second~~third quarter was ~~primarily due to~~driven by a decrease in the SG&A rate, resulting from revenue that grew at a faster rate than expenses, and cost savings from our Efficient Enterprise strategy. In addition, the second fiscal quarter operating income rate benefited from a 0.7%combination of revenue ~~increase~~gains and a 0.5% of revenue improvement in the gross profit rate. The Domestic segment third-quarter SG&A rate was unchanged at 21.2% of revenue compared with the same quarter of the prior fiscal year. The improvement in the operating income rate for the first ~~six~~nine months of fiscal 2004 was primarily due to revenue growth and improvements in both the ~~improvement in~~gross profit rate and the SG&A ~~rate and a modest improvement in the gross profit~~ rate.

Domestic revenue was ~~$4.91~~$5.4 billion for the ~~second~~third quarter of fiscal 2004, a 15% increase compared with fiscal 2003 ~~second-quarter~~third-quarter revenue of ~~$4.29~~$4.7 billion. For the first ~~six~~nine months of fiscal 2004, Domestic revenue increased ~~12%~~13% to ~~$9.19~~$14.6 billion, compared with ~~$8.19~~$12.9 billion for the same period inof the prior fiscal year. For the quarter, ~~slightly more than half~~approximately three-fifths of the revenue increase was due to the ~~7.8%~~9.0% comparable store sales gain. The remainder of the revenue increase resulted from the addition of 5154 U.S. Best Buy stores and ~~four~~three Magnolia Audio Video stores in the past 12 months. The second fiscal quarter comparable store sales gain was driven by higher customer traffic in our stores, which was primarily due to increased consumer confidence, demand for digital products, federal tax refunds, more effective promotions and market share gains. By major product category, home office, driven by sales of computers during the back-to-school selling season, and consumer electronics, driven by continued consumer migration to, and increased affordability of, digital products, generated the largest comparable sales gains. The products driving our second fiscal quarter comparable stores gain included notebook computers, digital televisions, digital cameras, DVD movies, desktop computers and digital camcorders. These gains were offset in part by declining sales of analog televisions, video game hardware and CDs. While sales trends for the appliance category improved throughout the second quarter of fiscal 2004, the category posted a comparable store sales decline in the low-single digits for the quarter. For the ~~six-month~~nine-month period, approximately three-fifths of the revenue increase was due to the addition of new stores, while the remainder of the increase was attributable to the ~~5.2%~~6.0% comparable store sales gain. Revenue and comparable store sales for the third fiscal quarter and first nine months of fiscal 2004 also benefited from revenue gains at our Domestic Internet sites.

The fiscal third-quarter comparable store sales gain was driven by higher customer traffic both in our stores and on our Internet sites, which was primarily due to increased consumer confidence, demand for digital products and effective promotions, all of which contributed to our fiscal third-quarter market share gains. All four major product categories experienced positive comparable store sales gains for the third quarter. The low double-digit comparable store sales gain in the home office category for the fiscal third quarter was primarily driven by sales of personal computers, computer networking products and MP3 players, partially offset by softer sales of printers, PDAs and scanners. An increase in revenue from notebook computers and networking products reflects consumers’ growing preference for portability, while the increase in desktop computers reflects the customers’ increased desire to upgrade their home computers. For the fiscal third quarter, the entertainment software category had a high single-digit comparable store sales gain, fueled by our new-releases and improved assortments in both DVD movies and CDs, partially offset by a comparable store sales decline in video game hardware. The mid-single digit comparable store sales gain in consumer electronics was primarily driven by sales of digital TVs, cameras and camcorders, reflecting continued consumer migration to, and increased affordability of, digital products, partially offset by declines in sales of analog TVs. The appliance category posted a comparable store sales gain in the low-single digits for the quarter, the first quarterly comparable store sales increase since the fourth quarter of fiscal 2000, primarily benefiting from an increased assortment in higher-end laundry products, refrigerators and dishwashers, as well as effective promotions.

The ~~second-quarter~~third-quarter Domestic gross profit rate increased to ~~25.6%~~24.9% of revenue in fiscal 2004, compared with ~~24.9%~~24.4% of revenue for the same period in fiscal 2003. For the first ~~six~~nine months of fiscal 2004, the Domestic gross profit rate was ~~25.5%~~25.3% of revenue, an increase from ~~25.3%~~25.0% of revenue for the same period in the prior fiscal year. For the quarter, the ~~0.7% of revenue~~ increase in the gross profit rate was primarily ~~resulted from a more profitable product assortment~~due to gross profit rate improvements within most major product categories ~~including specific product groups such as digital cameras~~ and ~~notebook computers, cost savings from product-sourcing initiatives,~~ a less promotional environment compared with the same period one year ago. The gross profit rate improvements were primarily the result of specific company initiatives to improve gross profit rates, including reducing markdowns, reducing product procurement and ~~improved management tools that enabled our stores to manage markdowns~~supply chain costs, improving product assortments and developing more ~~effectively.~~effective promotions. These factors were partially offset by ~~the impact of~~costs associated with Reward Zone, our ~~new~~ customer loyalty ~~program.~~program launched during the second quarter of fiscal 2004. For the ~~six-month~~nine-month period, the gross profit rate increase of ~~0.2%~~0.3% of revenue was due to the same factors ~~impacting~~affecting the ~~second~~third quarter, offset by a more promotional environment in the first quarter of the current fiscal year.

During the third quarter of fiscal 2004, we adjusted the Reward Zone liability for the percentage of certificates that are projected to be redeemed prior to expiration. The adjustment related to Reward Zone points earned during the second quarter favorably impacted third-quarter revenue, gross profit and operating income by approximately $8 million, before tax.

The Domestic SG&A rate ~~declined to 20.9%~~was unchanged at 21.2% of revenue for the ~~second~~third quarter of fiscal 2004 compared with ~~21.9% of revenue for~~ the ~~second~~third quarter of the prior fiscal year. For the first ~~six~~nine months of fiscal 2004, the SG&A rate declined to ~~21.7%~~21.5% of revenue compared with ~~22.1%~~21.8% of revenue for the same period one year ago. For the quarter, the SG&A rate ~~decreased primarily due to~~benefited from expense leverage resulting from the ~~7.8%~~9.0% comparable store sales gain, the addition of 5154 U.S. Best Buy stores and ~~four~~three Magnolia Audio Video stores in the past 12 months, and the realization of cost savings from our Efficient Enterprise strategy. In addition, the sale of stock acquired in connection with a vendor co-marketing agreement reduced the fiscal 2004 third quarter SG&A rate by approximately 0.1% of revenue. These factors were ~~partially~~ offset by ~~the impact of reduced funding from vendor alliance programs and incremental~~ expenses associated with ~~investments made in the past 12 months~~our Customer Centricity initiative, increased incentive compensation as a result of improved year-over-year financial performance and restricted stock grants awarded pursuant to ~~support growth initiatives, including investments in new technology,~~ our new ~~corporate campus and a new distribution center.~~long-term incentive compensation program, as well as the $13 million, before tax, asset impairment charge. For the ~~six-month~~nine-month period, ~~the decrease in~~ the SG&A rate ~~compared with the first six months of fiscal 2003~~ was ~~primarily due to~~impacted by the same factors impacting the ~~second quarter, but~~third quarter. However, the nine-month period SG&A rate decreased by 0.3% of revenue, compared with ~~less expense leverage on a year-to-date basis~~the same period of the prior fiscal year, primarily due to the ~~more modest comparable store sales increase for~~reduced impact Customer Centricity expenses and incentive compensation expenses had on the ~~first quarter of the current fiscal year.~~nine-month period.

International

The following table presents unaudited selected financial data for the International segment ($ in millions):

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	August 30, 2003			August 31, 2002			August 30, 2003			August 31, 2002			November 29, 2003			November 30, 2002			November 29, 2003			November 30, 2002
Revenue	$	486		$	338		$	874		$	641		$	604		$	424		$	1,479		$	1,065
Revenue as a % of total Company revenue	9		%	7		%	9		%	7		%	10		%	8		%	9		%	8		%
Comparable stores sales % change (1)	4.1		%	6.9		%	2.2		%	8.0		%	4.0		%	3.8		%	3.0		%	6.4		%
Gross profit as a % of revenue	24.1		%	25.3		%	24.3		%	25.5		%	24.3		%	24.4		%	24.3		%	25.0		%
SG&A as a % of revenue	24.4		%	25.6		%	25.5		%	26.5		%	24.3		%	25.7		%	25.0		%	26.2		%
Operating loss	$	(1	)	$	(1	)	$	(10	)	$	(7	)	$	0		$	(6	)	$	(10	)	$	(13	)
Operating loss as a % of revenue	(0.3		)%	(0.3		)%	(1.1		)%	(1.1		)%	0.0		%	(1.3		)%	(0.7		)%	(1.2		)%

In the third quarter of fiscal 2004, we refined our methodology for calculating our comparable store sales percentage change. It now reflects the impact of non-POS revenue transactions, including delivery revenue and mail-in rebates. Previously, our comparable store sales calculation was based on store POS revenue. The comparable store sales percentage changes for the third quarter and nine-month period ended November 29, 2003, have been computed based on the refined methodology. We refined our comparable store sales calculation methodology in light of changes in our business. Comparable store sales for the prior fiscal year periods have not been computed using the refined methodology. Refining the methodology for calculating our comparable store sales percentage change did not impact previously reported revenue, earnings or cash flow.

The following table reconciles International stores open at the beginning and end of the ~~second~~third quarter of fiscal 2004:

	Total Stores at Beginning of Second Quarter Fiscal 2004	Stores Opened	Stores Closed	Total Stores at End of Second Quarter Fiscal 2004	Total Stores at Beginning of Third Quarter Fiscal 2004	Stores Opened	Stores Closed	Total Stores at End of Third Quarter Fiscal 2004
Future Shop stores	104	2	—	106	106	2	—	108
Canadian Best Buy stores	10	4	—	14	14	5	—	19
Total	114	6	—	120	120	7	—	127

Note: Five Future Shop stores were relocated during the third quarter of fiscal 2004. No other stores in the International segment were relocated, remodeled or expanded during the ~~second~~third quarter of fiscal 2004.

The following table reconciles International stores open at the beginning and end of the ~~second~~third quarter of fiscal 2003:

	Total Stores at Beginning of Second Quarter Fiscal 2003	Stores Opened	Stores Closed	Total Stores at End of Second Quarter Fiscal 2003	Total Stores at Beginning of Third Quarter Fiscal 2003	Stores Opened	Stores Closed	Total Stores at End of Third Quarter Fiscal 2003
Future Shop stores	97	3	—	100	100	4	—	104
Canadian Best Buy stores	—	1	—	1	1	7	—	8
Total	97	4	—	101	101	11	—	112

Note: ~~Two~~Four Future Shop stores were relocated during the ~~second~~third quarter of fiscal 2003. No other stores in the International segment were relocated, remodeled or expanded during the ~~second~~third quarter of fiscal 2003.

The International segment ~~incurred~~broke even for the third quarter of fiscal 2004, compared with a ~~second-quarter~~third-quarter operating loss of ~~$1 million in fiscal 2004, consistent with a second-quarter operating loss of $1~~$6 million in fiscal 2003. For the first ~~six~~nine months of fiscal 2004, the International segment incurred an operating loss of $10 million, compared with an operating loss of $7$13 million for the same period last fiscal year. ~~For~~The operating loss rate for the ~~second~~third quarter and ~~six-month~~first nine months of fiscal 2004 improved by 1.3% of revenue and 0.5% of revenue, respectively, compared with the same periods of fiscal 2003. The improvement in operating performance for the third quarter and nine-month period ~~the impact of~~resulted from revenue gains and a reduction in the SG&A rate, ~~were~~partially offset by a lower gross profit rate. ~~The~~Foreign currency exchange rates did not have a significant impact on the International segment’s operating results. Due to the seasonal nature of its business, the International segment generally ~~incurs losses in the second fiscal quarter and first six months of its fiscal year, and~~ derives a high proportion of its annual earnings in the fiscal fourth ~~fiscal~~ quarter.

International revenue increased ~~44%~~42% for the ~~second~~third quarter of fiscal 2004 to ~~$486~~$604 million, compared with ~~$338~~$424 million for the ~~second~~third quarter of fiscal 2003. Excluding the effect of changes in foreign currency exchange rates, International revenue would have increased 21% for the third quarter of fiscal 2004 compared with the same period of the prior fiscal year. The addition of ~~six~~four Future Shop stores and 1311 Canadian Best Buy stores in the past 12 months accounted for ~~more than half~~approximately four-fifths of the revenue increase for the ~~second quarter~~third-quarter of fiscal ~~2004. Approximately one-third~~2004, excluding the effect of changes in foreign currency exchange rates. The remainder of the ~~second fiscal-quarter~~fiscal third quarter revenue ~~gain was due to~~increase, excluding the effect of changes in foreign currency exchange rates, ~~with the remainder~~was due to the ~~4.1%~~4.0% comparable store sales gain. Comparable store sales for the ~~second~~third quarter of fiscal 2004 were primarily driven by strength in sales of DVD movies, notebook computers and digital ~~televisions, digital cameras and home office products.~~televisions. For the first ~~six~~nine months of fiscal 2004, International revenue increased ~~36%~~39% to ~~$874 million,~~$1.5 billion, compared with ~~$641 million~~$1.1 billion for the same period inof fiscal 2003. ~~For the first six months of fiscal 2004, slightly more than half of the revenue increase was due to new store additions, approximately one-third was due to~~Excluding the effect of changes in foreign currency exchange rates, International revenue would have increased 22% for the first nine months of fiscal 2004 compared with the same period last fiscal year. For the first nine months of fiscal 2004, more than four-fifths of the revenue increase, excluding the effect of changes in foreign currency exchange rates, was due to new store additions and the remainder resulted from the ~~2.2%~~3.0% comparable store sales gain. Revenue and comparable store sales for the ~~second~~third fiscal quarter and first ~~six~~nine months of fiscal 2004 also benefited from revenue gains at our International Internet site.

The International gross profit rate was ~~24.1%~~24.3% of revenue for the ~~second~~third quarter of fiscal 2004, down slightly from ~~25.3%~~24.4% of revenue for the ~~second~~third quarter of fiscal 2003. For the ~~six-month~~nine-month period, the International gross profit rate decreased to 24.3% of revenue compared ~~to 25.5%~~with 25.0% of revenue for the same period in the prior fiscal year. The decline in the gross profit ~~rate~~rates for both the quarter and ~~six-month~~nine-month period ~~was~~were primarily due to ~~a continued~~increased promotional ~~environment,~~activity compared with the same periods of the prior fiscal year, including ~~the use of~~higher customer financing ~~offers at a higher discount rate than the prior year, and a higher proportion of revenue from home office products, which generally carry a lower gross profit rate.~~expenses. In ~~reaction~~response to the opening of Best Buy stores in Canada, our International segment competitors increased their promotional offerings, resulting in additional pressure on our gross profit rate.

The International SG&A rate declined to ~~24.4%~~24.3% of revenue for the ~~second~~third quarter of fiscal 2004, compared with ~~25.6%~~25.7% of revenue for the ~~second~~third quarter of fiscal 2003. For the first ~~six~~nine months of fiscal 2004, the International SG&A rate was ~~25.5%~~25.0% of revenue, a decrease from ~~26.5%~~26.2% of revenue for the same period of fiscal 2003. The SG&A rate decline for both the ~~second~~third quarter and ~~six-month~~nine-month period was primarily driven by expense leverage as a result of ~~decreased use of outside consulting and professional services, coupled with initiatives to improve efficiency.~~the higher revenue base. In addition, the International segment realized ~~expense leverage as a result~~improved operating efficiencies and reduced its use of ~~its larger store base.~~outside consulting services.

Discontinued Operations

The following table presents unaudited selected financial data for Discontinued Operations ($ in millions):

	Three Months Ended						Six Months Ended						Three Months Ended					Nine Months Ended
	August 30, 2003			August 31, 2002			August 30, 2003			August 31, 2002			November 29, 2003		November 30, 2002			November 29, 2003			November 30, 2002
Revenue	$	54		$	384		$	354		$	768		$	—	$	374		$	354		$	1,142
Operating loss	(7		)	(26		)	(46		)	(48		)	—		(43		)	(46		)	(91		)
Interest expense	—			(1		)	—			(2		)	—		(1		)	—			(3		)
Loss before income tax benefit	(7		)	(27		)	(46		)	(50		)	—		(44		)	(46		)	(94		)
Income tax benefit	2			10			17			19			—		17			17			36
Loss before gain (loss) on disposal of discontinued operations and the cumulative effect of accounting changes, net of tax	(5		)	(17		)	(29		)	(31		)
Gain (loss) on disposal of discontinued operations, net of tax (1)	4			—			(66		)	—
Loss before loss on disposal of discontinued operations and the cumulative effect of accounting changes, net of tax													—		(27		)	(29		)	(58		)
Loss on disposal of discontinued operations, net of tax													—		—			(66		)	—
Cumulative effect of changes in accounting principles, net of tax ~~(2)~~(1)	—			—			—			(316		)	—		—			—			(316		)
Loss from discontinued operations, net of tax	$	(1	)	$	(17	)	$	(95	)	$	(347	)	$	—	$	(27	)	$	(95	)	$	(374	)

(1) In the first quarter of fiscal 2004, we recorded an estimated impairment loss (which was primarily non-cash) of $70 million, net of tax, related to the sale of Musicland. Adjustments of $4 million, net of tax, related to the sale are included in our fiscal 2004 second-quarter results of discontinued operations and reduce the year-to-date, after-tax loss on disposal of discontinued operations to $66 million.

~~(2)~~ In the first quarter of fiscal 2003, we recorded an after-tax, non-cash impairment charge of $308 million for the full write-off of goodwill related to our acquisition of Musicland, resulting from the adoption of SFAS No. 142, effective on March 3, 2002. In addition, we recorded an after-tax, non-cash charge of $8 million for the change in our method of accounting for vendor allowances in accordance with EITF No. 02-16.

The operating loss from discontinued operations for the second quarter of fiscal 2004 was $5 million, net of tax, compared to a $17 million operating loss, net of tax, for the same period one year ago. The results of discontinued operations for the second quarter of fiscal 2004 are included through the date of the sale, June 16, 2003. Fiscal 2003 second-quarter results from discontinued operations are for the entire quarter. See the Overview section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding the sale of our interest in Musicland.

Strategic Priorities

During fiscal 2003, we formalized four strategic priorities that we believe will further enhance our business model over the next several years. The following is an update on our progress with each of the four strategic priorities.

Customer Centricity – The Customer Centricity strategy includes tailoring our store experience to the specific product needs of our customers. We want to leverage our customer knowledge and tailor product and service offerings to meet our customers’ specific needs. In the first quarter of fiscal 2004, we piloted four Customer Centricity stores and in the second quarter of fiscal 2004 transformed four additional stores in a second market. We recently transformed 11 stores in a third market and will expand the program with 13 additional pilot stores for the holiday selling season, for a total of 32 stores in three markets. The holiday results at these pilot stores, based on a larger sample size, will give us an indication of the potential of this initiative. In addition to the pilot stores, we also launched Reward Zone, our new customer loyalty program, at U.S. Best Buy stores designed to reward customers who shop the Best Buy brand. To date, enrollment in this program has surpassed our original projections and we anticipate total enrollment to approach 2 million customers by the end of the current fiscal year.

Efficient Enterprise – This strategy includes leveraging our existing investments and continually managing our expense structure to ensure it meets the current and future needs of our business. We have attained measurable results with our Efficient Enterprise initiative, and we remain focused on further improving our operating efficiency. We continue to streamline and flatten our organization as evidenced by the approximately 8% reduction in our corporate and field office headcount compared with last year’s second quarter.

Win the Home with Service – This strategy focuses on creating a market-leadership position in delivering lifestyle-based solutions for customers, including selection, installation and integration of multiple technologies. We believe we have made measurable strides in our Win the Home with Service initiative. For example, the average turn-around time for computer service in our U.S. Best Buy stores declined to just over half a day in the second quarter of fiscal 2004 compared with 10 to 14 days one year ago. In addition, we recently added another top national builder to the roster participating in our Networked Home Solutions program, bringing the total to eight, including five of the top 10 builders nationally. Finally, we continue to roll out Geek Squad service, which we expect to be available in seven markets by the end of the third fiscal quarter. The Geek Squad, which we acquired in fiscal 2003, offers consumers complete personal computer services in the home or at work, 24 hours per day.

Win Entertainment – The Win Entertainment strategy includes supporting the development and delivery of new entertainment-related products through multiple distribution channels and increasing our market share. The least defined of our four strategic initiatives, the Win Entertainment strategy continues to evolve, particularly in light of the sale of Musicland in the second quarter of fiscal 2004. Some of our successes to date on this front include: added labor to the entertainment software departments in our U.S. Best Buy stores and increased in-stock levels, which we believe strengthens our position for the holidays; market-share gains in the second quarter of fiscal 2004; and a new alliance with Real Networks to launch Rhapsody, a music downloading service, in the second quarter of fiscal 2004, our first venture in providing digital streaming of entertainment to our customers.

Consolidated

Net Interest Expense

Net interest expense was $3$4 million and $5$9 million for the ~~second~~third quarter and the first ~~six~~nine months of fiscal 2004, respectively, compared with net interest expense of $2$0 million and $1 million for the ~~second~~third quarter and first ~~six~~nine months, respectively, of fiscal 2003. ~~Net~~The increase in net interest expense for the ~~second~~third quarter and first ~~six~~nine months of fiscal 2004 was ~~essentially even compared with the same periods~~primarily a result of ~~the prior fiscal year, as~~ the impact of lower interest income resulting from lower short-term investment yields, ~~was~~partially offset by higher average cash balances. In addition, interest related to the construction of our new corporate campus was capitalized during fiscal 2003. For additional information regarding net interest expense, refer to note 34 of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.

Effective Income Tax Rate

Our effective income tax rate decreased to 38.3% for the ~~second~~third quarter and first ~~six~~nine months of fiscal 2004, down from 38.7% for the corresponding periods of fiscal 2003, mainly due to aour lower effective state income tax rate in the current fiscal year.

Liquidity and Capital Resources

Summary

~~At the end of the second quarter, we~~

We believe our financial condition remained ~~strong.~~strong at the end of the third quarter of fiscal 2004. Cash and cash equivalents totaled ~~$1.7~~$1.8 billion, compared with $1.9 billion at the end of fiscal 2003 and $1.1 billion at the end of last year’s ~~second~~third fiscal quarter. Our current ratio, calculated as current assets divided by current liabilities, was ~~1.33~~1.20 compared with 1.28 at the end of fiscal 2003 and ~~1.23~~1.13 one year ago. Our long-term debt-to-capitalization ratio was 22% at the end of the ~~second~~third quarter of fiscal 2004, a decrease from 23% at the end of fiscal 2003 and ~~down~~ from 26% at the end of the ~~second~~third quarter of fiscal 2003. The decrease in the long-term debt-to-capitalization ratio at the end of the third quarter of fiscal 2004 was primarily due to an increase in shareholders’ equity resulting from higher net earnings, partially offset by accrued dividends and share repurchases.

Cash Flows

Cash provided by operating activities ~~during~~for the first ~~six~~nine months of fiscal 2004 totaled ~~$131~~$387 million compared with ~~$295~~$39 million used in operating activities for the same period last year. The improvement is primarily due to an increase in earnings from continuing operations and a decrease in cash used by changes in operating assets and ~~liabilities and an increase in earnings from continuing operations.~~liabilities. Earnings from continuing operations were ~~$209~~$331 million for the first ~~six~~nine months of fiscal 2004, an increase from ~~$158~~$244 million for the first ~~six~~nine months of fiscal 2003. Substantially all of the changes in operating assets and liabilities were due to changes in merchandise inventories, accounts payable and other liabilities. Inventory levels increased primarily due to the addition of new stores and changes in product mix, including expanded assortments of digital televisions and notebook computers. ~~The decrease~~In addition, the increased inventory levels reflect both our efforts to improve our in-stock positions in ~~accrued income taxes was primarily due to the timing~~product categories that have been driving our growth as well as our anticipation of ~~estimated income tax payments. The increase in accounts~~a robust holiday selling season. Accounts payable ~~was~~increased primarily due to the increase in ~~inventory,~~inventory; however, the timing of vendor payments also impacted accounts payable. Accrued compensation and related expenses increased primarily due to growth of the business, higher incentive compensation resulting from our improved operating performance and increased payroll withholdings associated with our new employee stock purchase plan. Accrued liabilities increased primarily due to growth of the business. The increase in dividends payable reflects the accrual of our first-ever cash dividend. Income taxes payable decreased primarily due to the tax benefits resulting from the sale of our interest in Musicland, partially offset by increased tax expense resulting from our improved financial performance.

Cash used in investing activities was ~~$286~~$444 million for the first ~~six~~nine months of fiscal 2004, compared with ~~$382~~$557 million for the first ~~six~~nine months of the prior fiscal year. The change was primarily due to reduced capital spending for the first ~~six~~nine months of fiscal 2004 as a result of completing construction of our new corporate campus in April 2003 and the timing of new store development. ~~Capital expenditures for fiscal 2004 are expected to be approximately $700 million, compared with $725 million for fiscal 2003.~~

Cash provided by financing activities was ~~$28~~$21 million for the first ~~six~~nine months of fiscal 2004, compared with $42 million for the same period in the prior fiscal year. The change iswas primarily due to ~~net~~increased proceeds from ~~a master lease program which was used for~~ the ~~purpose~~issuance of ~~constructing and leasing new retail locations~~common stock in connection with employee equity-based compensation programs, offset by $60 million of common stock repurchases during the first ~~six months of fiscal 2003 and the retirement of certain debt instruments acquired as part of the Musicland acquisition during the first six~~nine months of fiscal 2004.

Sources of Liquidity

Funds generated by operations and existing cash and cash equivalents continue to be our most significant sources of liquidity. Based on current levels of operations, we believe funds generated from the expected results of continuing operations and available cash and cash equivalents will be sufficient to finance our anticipated expansion plans, ~~and~~ growth initiatives ~~for fiscal 2004.~~and quarterly dividend payments. In addition, our revolving credit facilities are available for additional working capital needs and investment opportunities. There can be no assurance, however, that we will continue to generate cash flow at or above current levels or that we will be able to maintain our ability to borrow under the revolving credit facilities. Our liquidity is not dependent on the use of off-balance sheet financing arrangements other than in connection with our operating leases.

Pursuant to the terms of the Musicland sale agreement, an affiliate of Sun Capital Partners Inc. acquired all of Musicland’s liabilities, including approximately $500 million in lease obligations. ~~In addition, during~~During the second quarter of fiscal 2004, we purchased new point-of-sale equipment totaling $26 million financed pursuant to a capital lease agreement. Other than the aforementioned assumption of lease obligations by the buyer of Musicland and the new capital lease agreement, there have been no significant ~~change~~changes in our contractual obligations since the end of fiscal 2003.

We have a $200 million unsecured revolving credit facility scheduled to mature in March 2005. We also have a $200 million inventory financing line. Borrowings under this line are collateralized by a security interest in certain merchandise inventories approximating the outstanding borrowings. In addition, we have a $37 million unsecured credit facility related to International operations that matured in September 2003. The lender has agreed to extend the terms of the original credit facility agreement ~~through December 2003~~to June 30, 2004, while we negotiate the renewal of the $37 million unsecured credit facility.

Our credit ratings currently are as follows:

Rating Agency	Rating	Outlook
Fitch (1)	BBB	Stable
Moody’s	Baa3	Stable
Standard & Poor’s	BBB-	Stable

(1) Fitch Ratings affirmed its BBB rating and Stable Rating Outlook on September 18, 2003. Fitch stated that its ratings reflected our strong customer acceptance and market share, solid operating margins and liquid balance sheet. These factors are balanced against the cyclical nature of the consumer electronics industry.

Factors that can impact our future credit ratings include changes in our operating performance, the economic environment, conditions in the retail and consumer electronics industries, our financial position and changes in our business strategy. We do not currently foresee any reasonable circumstances under which our credit ratings would be significantly downgraded. If a downgrade were to occur, it could adversely impact, among other things, our future borrowing costs, access to capital markets, vendor financing terms and future new store operating lease costs. In addition, the conversion rights of the holders of our convertible debentures could be accelerated if our credit ratings were to be downgraded. See our Annual Report on Form 10-K for the year ended March 1, 2003, for additional information regarding our sources of liquidity.

On October 21, 2003, we announced that our Board of Directors had declared a cash dividend of $0.30 per share of outstanding common stock and, thereafter, a quarterly dividend of $0.10 per share, subject to legal and contractual restrictions. The first dividend payment for an aggregate total of $97 million based on 324,804,000 common shares outstanding as of the record date, November 18, 2003, was paid on December 9, 2003. A quarterly dividend of $0.10 per share of outstanding common stock is expected to be paid on January 28, 2004, to shareholders of record as of the close of business on January 7, 2004. Beginning in fiscal 2005, the Company expects to pay a regular quarterly dividend which is currently $0.10 per share of outstanding common stock. Based on the expected number of outstanding shares of common stock and the current dividend rate, we anticipate distributing approximately $130 million in dividends in fiscal 2005. We plan to fund the dividend payments using cash provided by future operating activities and existing cash and cash equivalents, which totaled $1.8 billion at November 29, 2003.

On October 21, 2003, we also announced our intent to commence purchasing shares of our common stock pursuant to the $400 million share repurchase program authorized by the Company’s Board of Directors in fiscal 2000. In the fiscal third quarter and first nine months of fiscal 2004, 1.0 million shares were purchased and retired at a cost of $60 million. Since the Board of Directors authorized the share repurchase program in fiscal 2000, 3.9 million shares have been purchased and retired at a cost of $160 million. We consider several factors in determining when to make share repurchases, including among other things, our cash needs and the market price of the stock. There is no expiration date governing the period over which we can make our share repurchases. Cash provided by future operating activities, as well as existing cash and cash equivalents are the expected sources of funding for the share repurchase program.

Fiscal Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
August 31, 2003 through October 4, 2003	—	$	—	—	$	300,000,000
October 5, 2003 through November 1, 2003	—	—		—	300,000,000
November 2, 2003 through November 29, 2003	1,027,523	58.39		1,027,523	240,000,000
Total Fiscal 2004 Third Quarter	1,027,523	$	58.39	1,027,523	$	240,000,000

Debt and Capital

The increase in the amount of debt outstanding as of ~~August 30,~~November 29, 2003, compared with the end of fiscal 2003, was primarily due to the purchase of new point-of-sale equipment financed pursuant to a capital lease ~~agreement.~~agreement and accretion in value of some of our convertible debentures. See our Annual Report on Form 10-K for the year ended March 1, 2003, for additional information regarding our debt and capital.

Off-Balance Sheet Arrangements

Other than in connection with executing operating leases, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities. We finance a portion of our new store development through sale-leaseback transactions, which involve selling stores to unrelated parties and then leasing the stores back under leases that qualify and are accounted for as operating leases. We do not have any retained or contingent interests in the stores, nor do we provide any guarantees in connection with the sale-leaseback transactions. In accordance with accounting principles generally accepted in the United States, our operating leases are not reflected in our consolidated balance sheets. See our Annual Report on Form 10-K for the fiscal year ending March 1, 2003, for additional information regarding contractual obligations, including operating leases.

Significant Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States, which requires management to make certain estimates and apply judgment that affect reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates and judgments on historical experience, current trends, and other factors that management believes to be important at the time the consolidated financial statements are prepared. On an ongoing basis, management reviews our accounting policies and how they are applied and disclosed in our consolidated financial statements. While management believes that the historical experience, current trends and other factors considered support the preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States, actual results could differ from our estimates, and such differences could be material.

Our significant accounting policies are described in note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended March 1, 2003. A discussion of our critical accounting policies, and the related estimates, are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 1, 2003. There were no significant changes in our accounting policies or estimates since our fiscal year ended March 1, 2003.

Outlook for the Full Year and Fourth Quarter of Fiscal 2004

The following section should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 1, 2003.

On ~~September~~December 17, 2003, we ~~raised~~reiterated our fiscal 2004 full-year estimate for earnings from continuing operations toof $2.35 to $2.40 per diluted share. Our ~~revised~~full-year estimate reflects our performance for the first ~~six~~nine months of fiscal 2004, a ~~stable to improving~~stable-to-improving economic environment, and a continuation of the factors that improved our gross profit rate and reduced our SG&A rate for the first ~~half~~nine months of fiscal 2004.

Looking forward to the ~~third~~fourth quarter, we are projecting earnings from continuing operations of ~~$0.33~~$1.34 to ~~$0.38~~$1.39 per diluted share compared with ~~$0.27~~$1.16 per diluted share for the ~~third~~fourth quarter of fiscal 2003. Due to the seasonality of our business, ~~November~~December operating results have a disproportionate impact on our ~~third-quarter~~fourth-quarter financial results. We are scheduled to release our December revenue results and provide updated guidance, if any, on January 8, 2004.

We expect ~~third-quarter~~fourth-quarter revenue growth from continuing operations of ~~14%~~17% to ~~16%~~19% over the same period last ~~fiscal~~ year, reflecting the impact of new stores and a 6%6.0% to 8%8.0% comparable store sales increase. ~~For our Domestic and International segments, we anticipate third-quarter comparable store sales increases of 6% to 8% and 4% to 6%, respectively.~~

We ~~forecast~~are forecasting that our gross profit rate towill increase by 0.1% to ~~0.2 %~~0.2% of revenue infor the ~~third~~fourth fiscal quarter compared with the same quarter of the prior fiscal year. Our gross profit rate is expected to continue to benefit from ~~customer migration to, and the affordability of, digital products and~~ the same factors that contributed to the gross profit rate improvement infor the first ~~six~~nine months of fiscal 2004. The gross profit rate improvements are expected to be partially offset by costs associated with Reward Zone, our customer loyalty program. However, we expect to generate incremental gross profit dollars as a result of increased revenue driven by our customer loyalty program. ~~Historically, the gross profit rate in the third fiscal quarter is lower than the second fiscal quarter due to Thanksgiving promotional activity.~~

The SG&A rate infor the ~~third~~fourth fiscal quarter is expected to ~~decrease by 0.1% to 0.2% of revenue from~~be essentially flat compared with the ~~third quarter of~~same period in the prior fiscal year ~~primarily due to~~as the ~~leveraging impact of~~expense leverage resulting from the projected comparable store sales increase and larger base of stores is offset by the continued investment in Customer Centricity and higher incentive compensation resulting from the improved operating performance and our ~~ongoing Efficient Enterprise strategy. The reductions~~new long-term incentive program.

In the fourth quarter of fiscal 2004, we anticipate incurring approximately $5 million, before tax, of additional compensation expense associated with restricted stock grants issued pursuant to our new long-term incentive program, which would result in total fiscal 2004 compensation expense of $6 million, before-tax, from the ~~SG&A rate are~~program. As discussed previously, the new long-term incentive program is expected to ~~be partially offset by higher advertising expenses, increased incentive compensation costs, reduced funding from vendor alliance programs and an increase~~result in expenses that support our strategic priorities, including Customer Centricity. Finally, we will be operating a higher percentage of our small-market stores that generally have a higher SG&A rate due to the lower sales volume.less shareholder dilution.

Capital expenditures infor fiscal 2004 are expected to be approximately $650 million, a decrease from our previous guidance of $700 million ~~in line with the earlier guidance~~ outlined in our Annual Report on Form 10-K for the fiscal year ended March 1, 2003.

At the end of the third quarter of fiscal 2004, we had $489 million of goodwill, primarily in our International segment relating to our acquisition of Future Shop. In addition, the International segment also had $38 million of intangible assets relating to the value of the Future Shop trade name. During the fourth quarter of fiscal 2004, in accordance with SFAS No. 142, we began the annual impairment test of our International segment’s goodwill and trade name. While the results of the annual impairment test will not be known until the end of our fiscal fourth quarter, we do not believe either the goodwill or trade name is impaired. However, if unanticipated events impact this segment for an extended period of time, it could result in future impairment charges. In addition, the value of the Future Shop trade name is based on the continuation of our dual-branding strategy in Canada. If we ever were to abandon this strategy and the Future Shop trade name, it would result in future impairment charges.

Our outlook is based on certain assumptions regarding the future economic ~~and geo-political~~ environment. If the actual economic ~~or geo-political environments differ~~environment differs from our assumptions, ~~they~~it could have a material impact on our fiscal 2004 ~~second-half~~fourth-quarter operating results.

On August 21, 2003, we announced the launch of a new long-term incentive program for certain U.S. employees designed to help us attract and retain the best employees, and to better align employee interests with those of our shareholders. Under the terms of the new program, which begins in the third quarter of fiscal 2004, eligible employees may receive a mix of restricted stock and stock options issued pursuant to existing shareholder-approved plans. Shares of restricted stock vest at the end of a three-year incentive period based on the extent to which the Company’s total return to shareholders achieves top-quartile performance among the companies that comprise the S&P 500. Restricted stock awards result in compensation expense each reporting period through vesting of the awards. In accordance with Accounting Principles Board Opinion (APB) No. 25, ~~Accounting for Stock Issued to Employees~~, compensation expense will be measured based on the current stock price at the end of each reporting period multiplied by the number of shares of restricted stock expected to ultimately vest at the end of the three-year incentive period. We currently anticipate the compensation expense associated with restricted stock grants will reduce after-tax earnings from continuing operations by approximately $3 million to $4 million in the second half of fiscal 2004. Stock options are also accounted for in accordance with APB Opinion No. 25, consistent with the accounting treatment for options previously granted pursuant to the Company’s stock options plans. Accordingly, no compensation expense is recognized for stock options as the exercise price equals the stock price on the date of grant. The new program is expected to result in less shareholder dilution for existing shareholders. We continue to monitor the status of the Financial Accounting Standards Board’s stock-based compensation project.

Safe Harbor Statement Under the Private Securities Litigation Reform Act

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide 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 this Quarterly Report on Form 10-Q are forward-looking statements and may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential.” Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our actual results to differ materially from the anticipated results expressed in such forward-looking statements, including, among other things, general economic conditions, acquisitions and development of new businesses, product availability, sales volumes, profit margins, weather, foreign currency fluctuation, availability of suitable real estate locations, and the impact of labor markets and new product introductions on our overall profitability. Readers should review our Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on January 10, 2003, that describes additional important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements made in this Quarterly Report on Form 10-Q.

ITEM 3.3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our debt is not subject to material interest-rate volatility risk. The rates on a substantial portion of our debt may be reset, but may not be more than one percentage point higher than the current rates. If the rates on the debt were to be reset one percentage point higher, our annual interest expense would increase by approximately $8 million. We do not currently manage the risk through the use of derivative instruments.

We have market risk arising from changes in foreign currency exchange rates as a result of our expansion into Canada. At this time, we do not manage the risk through the use of derivative instruments. A 10% adverse change in the foreign currency exchange rate would not have a significant impact on our results of operations or financial position.

ITEM 4.4. CONTROLS AND PROCEDURES

Our management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended, (the ~~“1934 Act”)~~1934 Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the period covered by this report.

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PART II — OTHER INFORMATION

~~ITEM 4.~~ ~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~

~~The Regular Meeting of the Shareholders of the Company was held on June 24, 2003.~~

a.ITEM 1. LEGAL PROCEEDINGS

We have been served with four purported class action lawsuits on behalf of persons who purchased the securities of Best Buy Co., Inc. between January 9, 2002, and August 7, 2002. The ~~individuals named below were elected at~~lawsuits, instituted in U.S. District Court for the ~~meeting~~District of Minnesota on November 20, December 12, December 16 and December 23, 2003, name Best Buy Co., Inc., its Chairman and its Chief Executive Officer as ~~Class 2 directors~~defendants. The plaintiffs allege that the defendants violated Sections 10(b) and 20(a) of the ~~Company, each~~Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making material misrepresentations between January 9, 2002, and August 7, 2002, which resulted in artificially inflated prices of the Company’s common stock. Plaintiffs seek compensatory damages, costs and expenses. We believe the allegations are without merit and intend to ~~serve for a term of two years. Shares voted were as follows:~~defend these actions vigorously.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:

~~Robert T. Blanchard~~a.		Exhibits:
~~Shares For~~	~~235,707,233~~
~~Shares Withheld~~	~~53,729,147~~

~~Elliot S. Kaplan~~
~~Shares For~~	~~275,781,394~~
~~Shares Withheld~~	~~13,654,987~~

~~Richard M. Schulze~~
~~Shares For~~	~~282,920,640~~
~~Shares Withheld~~	~~6,515,740~~

~~Hatim A. Tyabji~~
~~Shares For~~	~~235,694,418~~
~~Shares Withheld~~	~~53,741,962~~

b. The appointment of Ernst & Young LLP as our independent auditor for the fiscal year beginning March 2, 2003 was ratified. There were 234,888,344 votes for, and 52,676,615 votes against, ratification. There were 1,871,270 abstentions.

c. ~~Our 2003 Employee Stock Purchase Plan was approved. There were 284,620,231 votes for, and 2,902,765 votes against, approval. There were 1,913,833 abstentions.~~

~~ITEM 6. EXHIBITS AND~~ ~~REPORTS ON FORM 8-K:~~

a.	~~Exhibits:~~10.1 Best Buy Retirement Savings Plan 2003 Amendment and Restatement

	31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

b.	Reports on Form 8-K:

	(1)	Announcement of ~~fiscal 2004 first-quarter earnings~~the appointment of Matthew H. Paull as a Class 2 director to the registrant’s Board of Directors, and ~~the completion of the sale of our interest in The Musicland Group, Inc.,~~his appointment to serve on its Audit Committee, and Finance and Investment Policy Committee, filed on ~~June 25,~~September 8, 2003.

	(2)	~~Updated~~Announcement of: (i) the registrant’s revenue for the second fiscal quarter and six-month period ended August 30, 2003, and (ii) the registrant’s updated earnings outlook for the second fiscal quarter ~~ending~~ended August 30, 2003, and for the fiscal year ending February 28, 2004, filed on ~~August 7,~~September 8, 2003.

	(3)	~~Pursuant to Regulation FD, supplemental historical financial information was furnished in order to facilitate analysis by investors~~Announcement of the registrant’s results of operations for the second fiscal quarter and ~~other users of our financial statements,~~six-month period ended August 30, 2003, filed on ~~August 14,~~September 23, 2003.

	(4)	Announcement of the declaration of a cash dividend and expected repurchase of shares of the registrant’s common stock under a previously authorized share repurchase program, filed on October 23, 2003.

	(5)	Announcement that the registrant had received notice of and was served with a shareholder lawsuit filed on November 20, 2003, in the U.S. District Court in Minneapolis alleging violations of Sections 10(b) and 20(a), and Rule 10b-5 of the Securities Exchange Act of 1934, filed on November 24, 2003.

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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: ~~October 6, 2003~~January 5, 2004	By:	/s/ Darren R. Jackson
		Darren R. Jackson
		Executive Vice President — Finance
		and Chief Financial Officer (principal financial and accounting officer)

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