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 28,~~November 27, 2004

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 — ~~324,397,000~~328,075,000 shares outstanding as of ~~August 28,~~November 27, 2004.

BEST BUY CO., INC.

FORM 10-Q FOR THE QUARTER ENDED ~~AUGUST 28,~~NOVEMBER 27, 2004

INDEX

Part I —	Financial Information			3

	Item 1.		Consolidated Financial Statements:	3

		a)	Consolidated condensed balance sheets as of ~~August 28,~~November 27, 2004; February 28, 2004; and ~~August 30,~~November 29, 2003	3

		b)	Consolidated statements of earnings for the three and ~~six~~nine months ended ~~August 28,~~November 27, 2004, and ~~August 30,~~November 29, 2003	5

		c)	Consolidated statement of changes in shareholders’ equity for the ~~six~~nine months ended ~~August 28,~~November 27, 2004	6

		d)	Consolidated statements of cash flows for the ~~six~~nine months ended ~~August 28,~~November 27, 2004, and ~~August 30,~~November 29, 2003	7

		e)	Notes to consolidated condensed financial statements	8

	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	2324

	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	3334

	Item 4.		Controls and Procedures	3334

Part II —	Other Information			34

	Item 1.		Legal Proceedings	34

	Item 2.		~~Changes in~~Unregistered Sales of Equity Securities and Use of Proceeds	34

	~~Item 4.~~		~~Submission of Matters to a Vote of Security Holders~~	35

	Item 6.		Exhibits ~~and Reports on Form 8-K~~	3635

Signatures	37			36

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 28, 2004		February 28, 2004		August 30, 2003		November 27, 2004		February 28, 2004		November 29, 2003
	(Unaudited)				(Unaudited)		(Unaudited)				(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	1,962	$	2,600	$	1,734	$	2,435	$	2,600	$	1,827
Short-term investments	7		—		—		78		—		—
Receivables	328		343		302		742		343		678
Merchandise inventories	2,987		2,607		2,641		4,826		2,607		4,428
Other current assets	312		174		209		251		174		211
Total current assets	5,596		5,724		4,886		8,332		5,724		7,144

PROPERTY AND EQUIPMENT
Property and equipment	3,773		3,574		3,417		3,910		3,574		3,520
Less accumulated depreciation and amortization	1,522		1,330		1,188		1,591		1,330		1,259
Net property and equipment	2,251		2,244		2,229		2,319		2,244		2,261

GOODWILL, NET	485		477		459		540		477		489

INTANGIBLE ASSET	38		37		36		42		37		38

LONG-TERM INVESTMENTS	41		—		—		141		—		—

OTHER ASSETS	233		170		120		248		170		151

TOTAL ASSETS	$	8,644	$	8,652	$	7,730	$	11,622	$	8,652	$	10,083

NOTE: The consolidated balance sheet as of February 28, 2004, 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 28, 2004		February 28, 2004		August 30, 2003		November 27, 2004		February 28, 2004		November 29, 2003
	(Unaudited)				(Unaudited)		(Unaudited)				(Unaudited)
CURRENT LIABILITIES
Accounts payable	$	2,806	$	2,535	$	2,590	$	5,150	$	2,535	$	4,501
Unredeemed gift card liabilities	280		300		198		316		300		233
Accrued compensation and related expenses	192		269		173		220		269		225
Accrued liabilities	736		649		657		856		649		785
Accrued income taxes	283		380		43		342		380		99
Dividends payable							—		—		97
Current portion of long-term debt	11		368		14		8		368		14
Total current liabilities	4,308		4,501		3,675		6,892		4,501		5,954

LONG-TERM LIABILITIES	257		247		281		292		247		276

LONG-TERM DEBT	478		482		840		478		482		836

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 — 324,397,000, 324,648,000 and 323,627,000 shares, respectively	32		32		32
Common stock, $.10 par value: Authorized — 1 billion shares; Issued and outstanding — 328,075,000, 324,648,000 and 324,671,000 shares, respectively							33		32		32
Additional paid-in capital	802		836		828		945		836		849
Retained earnings	2,667		2,468		2,007		2,780		2,468		2,032
Accumulated other comprehensive income	100		86		67		202		86		104
Total shareholders’ equity	3,601		3,422		2,934		3,960		3,422		3,017

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	8,644	$	8,652	$	7,730	$	11,622	$	8,652	$	10,083

NOTE: The consolidated balance sheet as of February 28, 2004, 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 28, 2004		August 30, 2003			August 28, 2004		August 30, 2003			November 27, 2004		November 29, 2003			November 27, 2004		November 29, 2003
Revenue	$	6,080	$	5,396		$	11,555	$	10,064		$	6,646	$	6,032		$	18,206	$	16,099
Cost of goods sold	4,528		4,024			8,614		7,507			5,015		4,546			13,634		12,059
Gross profit	1,552		1,372			2,941		2,557			1,631		1,486			4,572		4,040
Selling, general and administrative expenses	1,310		1,143			2,515		2,214			1,398		1,284			3,913		3,495
Operating income	242		229			426		343			233		202			659		545
Net interest income (expense)	1		(3		)	1		(5		)	6		(4		)	7		(9		)

Earnings from continuing operations before income tax expense	243		226			427		338			239		198			666		536
Income tax expense	93		86			163		129			91		76			254		205

Earnings from continuing operations	150		140			264		209			148		122			412		331
Loss from discontinued operations, net of income tax benefit of $3 and $18, respectively	—		(5		)	—		(29		)
Gain (loss) on disposal of discontinued operations, net of income tax expense of $3 and $0, respectively	—		4			—		(66		)
Loss from discontinued operations, net of income tax benefit of $18											—		—			—		(29		)
Loss on disposal of discontinued operations, net of $0 tax											—		—			—		(66		)

Net earnings	$	150	$	139		$	264	$	114		$	148	$	122		$	412	$	236

Basic earnings (loss) per share:
Continuing operations	$	0.46	$	0.43		$	0.81	$	0.65		$	0.45	$	0.38		$	1.27	$	1.02
Discontinued operations	—		(0.01		)	—		(0.09		)	—		—			—		(0.09		)
Gain (loss) on disposal of discontinued operations	—		0.01			—		(0.20		)
Loss on disposal of discontinued operations											—		—			—		(0.20		)
Basic earnings per share	$	0.46	$	0.43		$	0.81	$	0.35		$	0.45	$	0.38		$	1.27	$	0.73

Diluted earnings (loss) per share:
Continuing operations	$	0.46	$	0.42		$	0.80	$	0.64		$	0.45	$	0.37		$	1.24	$	1.01
Discontinued operations	—		(0.01		)	—		(0.09		)	—		—			—		(0.09		)
Gain (loss) on disposal of discontinued operations	—		0.01			—		(0.20		)
Loss on disposal of discontinued operations											—		—			—		(0.20		)
Diluted earnings per share	$	0.46	$	0.42		$	0.80	$	0.35		$	0.45	$	0.37		$	1.24	$	0.72

Dividends declared per common share	$	0.10	$	—		$	0.20	$	—		$	0.11	$	0.30		$	0.31	$	0.30

Basic weighted average common shares outstanding (in millions)	324.8		322.9			324.7		322.4			326.0		324.2			325.2		323.0

Diluted weighted average common shares outstanding (in millions)	329.3		327.8			329.8		326.5			331.9		330.5			331.2		327.8

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 28,~~NOVEMBER 27, 2004

($ 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 February 28, 2004	325		$	32	$	836		$	2,468		$	86	$	3,422		325		$	32	$	836		$	2,468		$	86	$	3,422

Net earnings, six months ended August 28, 2004	—		—		—			264			—		264
Net earnings, nine months ended November 27, 2004																—		—		—			412			—		412
Foreign currency translation adjustments	—		—		—			—			14		14			—		—		—			—			114		114
Other																—		—		—			—			2		2
Total comprehensive income													278															528

Stock options exercised	2		—		80			—			—		80			6		1		192			—			—		193
Issuance of common stock under employee stock purchase plan	—		—		20			—			—		20			—		—		36			—			—		36
Tax benefit from stock options exercised	—		—		15			—			—		15
Stock option and employee stock purchase plan income tax benefits																—		—		54			—			—		54
Vesting of restricted stock awards	—		—		1			—			—		1			—		—		1			—			—		1
Repurchase of common stock	(3	)	—		(150		)	—			—		(150		)	(3	)	—		(174		)	—			—		(174		)
Common stock dividends, $0.20 per share	—		—		—			(65		)	—		(65		)
Balances at August 28, 2004	324		$	32	$	802		$	2,667		$	100	$	3,601
Common stock dividends, $0.31 per share																—		—		—			(100		)	—		(100		)
Balances at November 27, 2004																328		$	33	$	945		$	2,780		$	202	$	3,960

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 28, 2004			August 30, 2003			November 27, 2004			November 29, 2003
OPERATING ACTIVITIES
Net earnings	$	264		$	114		$	412		$	236
Loss from discontinued operations, net of tax	—			29			—			29
Loss on disposal of discontinued operations, net of tax	—			66			—			66
Earnings from continuing operations	264			209			412			331
Adjustments to reconcile earnings from continuing operations to total cash provided by operating activities from continuing operations:
Depreciation	206			185			312			283
Asset impairment charges	15			5			19			19
Deferred income taxes	(14		)	(9		)	(15		)	(14		)
Other	10			6			19			(1		)

Changes in operating assets and liabilities:
Receivables	15			12			(396		)	(362		)
Merchandise inventories	(392		)	(549		)	(2,171		)	(2,308		)
Other assets	(175		)	(17		)	(110		)	(20		)
Accounts payable	265			380			2,550			2,263
Other liabilities	(4		)	74			193			287
Income taxes	(100		)	(165		)	(9		)	(91		)
Total cash provided by operating activities from continuing operations	90			131			804			387

INVESTING ACTIVITIES
Additions to property and equipment	(202		)	(292		)	(352		)	(449		)
Purchases of short-term and long-term investments	(48		)	—			(219		)	—
Other	(2		)	6			(9		)	5
Total cash used in investing activities from continuing operations	(252		)	(286		)	(580		)	(444		)

FINANCING ACTIVITIES
Long-term debt payments	(363		)	(8		)	(365		)	(13		)
Issuance of common stock							229			94
Repurchase of common stock	(150		)	—			(174		)	(60		)
Issuance of common stock	100			36
Dividends paid	(65		)	—			(100		)	—
Total cash (used in) provided by financing activities from continuing operations	(478		)	28			(410		)	21

EFFECT OF EXCHANGE RATE CHANGES ON CASH	2			—			21			2
NET CASH USED IN DISCONTINUED OPERATIONS	—			(53		)	—			(53		)

DECREASE IN CASH AND CASH EQUIVALENTS	(638		)	(180		)	(165		)	(87		)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	2,600			1,914			2,600			1,914

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,962		$	1,734		$	2,435		$	1,827

NON-CASH TRANSACTION:

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

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation:

In the opinion of management, the accompanying ~~audited and unaudited consolidated condensed~~ financial statements contain all adjustments necessary for a fair presentation. ~~Adjustments~~All of our adjustments were comprised of normal recurring adjustments, except as noted in the Notes to Consolidated Condensed Financial Statements. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season. These interim financial statements and the related notes should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2004. ~~Certain~~We reclassified certain prior-year amounts ~~have been reclassified~~ to conform to the current-year presentation. These reclassifications had no ~~impact~~effect on previously reported operating income, net earnings, financial position or cash flows.

Cost of goods sold includes the total cost of products sold; costs of services provided; certain vendor allowances; customer shipping and handling charges; in-bound freight expenses; physical inventory losses; and handling and delivery costs associated with our online and direct-to-consumer businesses.

Selling, general and administrative expenses (SG&A) include payroll and benefit costs; occupancy costs; depreciation; advertising; vendor allowances that are a reimbursement of specific, incremental and identifiable costs to promote a vendor’s products; outside service fees; costs associated with operating our distribution network that primarily relate to moving merchandise from distribution centers to stores; and long-lived asset impairment charges. Vendor allowances included in SG&A were approximately ~~$26~~$56 million and $8$35 million for the three months ended ~~August 28,~~November 27, 2004, and ~~August 30,~~November 29, 2003, respectively; and ~~$55~~$111 million and ~~$26~~$61 million for the ~~six~~nine months ended ~~August 28,~~November 27, 2004, and ~~August 30,~~November 29, 2003, respectively.

2. Impairment of Long-Lived Assets:

We recorded pre-tax long-lived asset impairment charges of $4 million and $13 million for the three months ended November 27, 2004, and November 29, 2003, respectively; and $19 million for both the nine months ended November 27, 2004, and November 29, 2003. The long-lived asset impairment charges in fiscal 2005 and 2004 primarily related to technology assets that were taken out of service based on changes in our business. The nine months ended November 27, 2004 also included an impairment charge associated with the disposal of corporate facilities which had been vacated. The long-lived asset impairment charges were recorded in SG&A within our Domestic segment.

3.Net Interest Income (Expense):

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

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	August 28, 2004			August 30, 2003			August 28, 2004			August 30, 2003			November 27, 2004			November 29, 2003			November 27, 2004			November 29, 2003
Interest expense	$	(6	)	$	(8	)	$	(13	)	$	(16	)	$	(4	)	$	(8	)	$	(17	)	$	(24	)
Capitalized interest	—			—			—			1			—			—			—			1
Interest income	7			5			14			10			10			4			24			14
Net interest income (expense)	$	1		$	(3	)	$	1		$	(5	)	$	6		$	(4	)	$	7		$	(9	)

3.4. 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 38.1% for the ~~second~~third quarter and first ~~six~~nine months of fiscal 2005, down from 38.3% for the corresponding periods of fiscal 2004, primarily due to permanent benefits associated with our International segment operations and higher levels of tax-exempt interest income in the current fiscal year.

4.5. Earnings Per Share:

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

	Three Months Ended				Six Months Ended				Three Months Ended						Nine Months Ended
	August 28, 2004		August 30, 2003		August 28, 2004		August 30, 2003		November 27, 2004				November 29, 2003		November 27, 2004		November 29, 2003
Numerator:
Earnings from continuing operations	$	150	$	140	$	264	$	209	$			148	$	122	$	412	$	331

Denominator:
Weighted average common shares outstanding	324.8		322.9		324.7		322.4		326.0				324.2		325.2		323.0
Effect of potentially dilutive securities:
Employee stock options and other	4.5		4.9		5.1		4.1
Effect of potentially dilutive securities: Employee stock options and other									5.9				6.3		6.0		4.8
Weighted average common shares outstanding, assuming dilution	329.3		327.8		329.8		326.5		331.9				330.5		331.2		327.8

Basic earnings per share – continuing operations	$	0.46	$	0.43	$	0.81	$	0.65	$		0.45		$	0.38	$	1.27	$	1.02
Diluted earnings per share – continuing operations	$	0.46	$	0.42	$	0.80	$	0.64	$	0.45			$	0.37	$	1.24	$	1.01

Potentially dilutive securities include stock options, unvested restricted stock awards, shares issuable under our employee stock purchase plan and convertible debentures – assuming certain criteria are met.

The computation of dilutive shares outstanding excluded options to purchase ~~9.4~~2.9 million and ~~13.5~~3.6 million shares of common stock for the three months ended ~~August 28,~~November 27, 2004, and ~~August 30,~~November 29, 2003, respectively; and ~~9.4~~6.4 million and ~~13.7~~16.3 million shares of common stock for the ~~six~~nine months ended ~~August 28,~~November 27, 2004, and ~~August 30,~~November 29, 2003, respectively. These amounts were excluded because the options’ exercise prices were greater than the average market price of our common stock for the periods presented and, therefore, the effect would be antidilutive (i.e., higher earnings per share). Diluted earnings per share also did not include 1.0 million and 1.1 million shares of unvested restricted stock and shares to be issued under our employee stock purchase plan for the three and six months ended August 28, 2004, respectively, in accordance with generally accepted accounting principles. Finally, the shares related to our convertible debentures were not included in our diluted earnings per share computation, as the criteria for conversion of the debentures were not met.

The ~~Emerging Issues Task Force (EITF) is considering Issue No. 04-8,~~ ~~The Effect of Contingently Convertible Debt on Diluted Earnings per Share~~~~. The current proposal, which is not final, would require us~~shares related to ~~include~~our convertible debentures due in 2022 will be included in our diluted earnings per share ~~computation the potentially dilutive shares issuable~~calculation beginning with our fourth quarter of fiscal 2005 as if our convertible debentures were converted into shares of our common stock. The proposal requires restatement of prior periods. If this proposal had been effective, diluted earnings per share from continuing operations would not have been significantly impacted for any of the periods presented herein. The criteria for conversion of the debentures is includeddescribed more fully in Note ~~4, Debt,~~14, New Accounting Standards, of the Notes to Consolidated Condensed Financial Statements of ~~our Annual~~this Quarterly Report on Form ~~10-K for the fiscal year ended February 28, 2004.~~10-Q.

5.6. Stock-Based Compensation:

We have stock-based compensation plans including fixed stock option plans, an employee stock purchase plan and a restricted stock plan. We continue to apply Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for these plans. Accordingly, we have not recognized any compensation expense for stock option grants, as the exercise price equals the stock price on the date of grant. In addition, we have not recognized any compensation expense 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. Finally, we have employee restricted stock grants which ~~vests~~vest based on continued employment with the ~~Company,~~company, or upon achievement of personal or ~~Company~~company performance goals. Restricted stock awards result in compensation expense as discussed in Note 5, Shareholders’ Equity, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year ended February 28, 2004.

The following table illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation ($ in millions, except per share amounts):

	Three Months Ended						Six Months Ended						Three Months Ended								Nine Months Ended
	August 28, 2004			August 30, 2003			August 28, 2004			August 30, 2003			November 27, 2004					November 29, 2003			November 27, 2004			November 29, 2003
Net earnings, as reported	$	150		$	139		$	264		$	114		$			148		$	122		$	412		$	236
Add: Stock-based employee compensation expense included in reported net earnings, net of tax ⁽¹⁾	1			—			3			—			5					2			8			2
Deduct: Stock-based compensation expense determined under fair value method for all awards, net of tax	(24		)	(22		)	(48		)	(44		)	(28				)	(27		)	(76		)	(71		)
Net earnings, pro forma	$	127		$	117		$	219		$	70		$		125			$	97		$	344		$	167

Earnings per share:
Basic – as reported	$	0.46		$	0.43		$	0.81		$	0.35		$	0.45				$	0.38		$	1.27		$	0.73
Basic – pro forma	$	0.39		$	0.36		$	0.68		$	0.22		$	0.39				$	0.30		$	1.06		$	0.52
Diluted – as reported	$	0.46		$	0.42		$	0.80		$	0.35		$	0.45				$	0.37		$	1.24		$	0.72
Diluted – pro forma	$	0.39		$	0.36		$	0.67		$	0.22		$	0.39				$	0.30		$	1.05		$	0.52

⁽¹⁾ Amounts represent the after-tax compensation expense for restricted stock awards.

6.7. Comprehensive Income:

We compute comprehensive income as net earnings plus or minus certain other items that are recorded directly to shareholders’ equity. The only significant other item included in comprehensive income is foreign currency translation adjustments. Comprehensive income was ~~$180~~$250 million and ~~$130~~$159 million for the three months ended ~~August 28,~~November 27, 2004, and ~~August 30,~~November 29, 2003, respectively; and ~~$278~~$528 million and ~~$154~~$313 million for the ~~six~~nine months ended ~~August 28,~~November 27, 2004, and ~~August 30,~~November 29, 2003, respectively.

7.8. 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. The International segment is comprised of Future Shop and Best Buy operations in Canada.

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

	Three Months Ended				Six Months Ended				Three Months Ended					Nine Months Ended
	August 28, 2004		August 30, 2003		August 28, 2004		August 30, 2003		November 27, 2004			November 29, 2003		November 27, 2004		November 29, 2003
Domestic	$	5,506	$	4,910	$	10,486	$	9,190	$		5,918	$	5,430	$	16,404	$	14,619
International	574		486		1,069		874		728			602		1,802		1,480
Total revenue	$	6,080	$	5,396	$	11,555	$	10,064	$	6,646		$	6,032	$	18,206	$	16,099

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

	Three Months Ended					Six Months Ended						Three Months Ended						Nine Months Ended
	August 28, 2004		August 30, 2003			August 28, 2004			August 30, 2003			November 27, 2004			November 29, 2003			November 27, 2004		November 29, 2003
Domestic	$	239	$	230		$	430		$	353		$		228	$	202		$	658	$	555
International	3		(1		)	(4		)	(10		)	5			—			1		(10		)
Total operating income	242		229			426			343
Total operating income from continuing operations												233			202			659		545

Net interest income (expense)	1		(3		)	1			(5		)	6			(4		)	7		(9		)
Earnings from continuing operations before income tax expense	$	243	$	226		$	427		$	338		$	239		$	198		$	666	$	536

Assets by reportable operating segment were as follows ($ in millions):

	August 28, 2004		February 28, 2004		August 30, 2003		November 27, 2004			February 28, 2004		November 29, 2003
Domestic	$	7,258	$	7,547	$	6,671	$		9,767	$	7,547	$	8,766
International	1,386		1,105		1,059		1,855			1,105		1,317
Total assets	$	8,644	$	8,652	$	7,730	$	11,622		$	8,652	$	10,083

Goodwill, net by reportable operating segment was as follows ($ in millions):

	August 28, 2004		February 28, 2004		August 30, 2003		November 27, 2004			February 28, 2004		November 29, 2003
Domestic	$	3	$	3	$	3	$		3	$	3	$	3
International	482		474		456		537			474		486
Goodwill, net	$	485	$	477	$	459	$	540		$	477	$	489

Changes in the International segment’s goodwill balance since February 28, 2004, and ~~August 30,~~November 29, 2003, were the result of fluctuations in foreign currency exchange rates.

The only intangible asset, other than goodwill, included in our balance sheet is an indefinite-lived tradename related to Future Shop, which is included in the International segment.

8.9. Investments:

Short-term and long-term investments were primarily comprised of municipal and United States government debt securities. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and based on our intentions regarding these instruments, we classify all investments in debt securities as held-to-maturity and account for these investments at amortized cost.

In accordance with our investment policy, we place our investments in debt securities with issuers who have high-quality credit and limit the amount of investment exposure to any one issuer. We seek to preserve principal and minimize exposure to interest-rate fluctuations by limiting default risk, market risk and reinvestment risk.

The following table presents the amortized principal amounts, related weighted average taxable equivalent interest rates, maturities and major security types for our investments in debt securities ($ in millions):

	August 28, 2004				November 27, 2004
	Amortized Principal Amount		Weighted Average Interest Rate		Amortized Principal Amount		Weighted Average Taxable Equivalent Interest Rate
Short-term investments (less than one year)	$	7	2.37	%	$	78	2.80	%
Long-term investments (one to three years)	41		2.49	%	141		3.18	%
Total	$	48			$	219

Municipal debt securities	$	39			$	212
Debt securities issued by U.S. treasury and other U.S. government entities	9
Debt securities issued by U.S. Treasury and other U.S. government entities					7
Total	$	48			$	219

The amortized principal amount of our investment in debt securities approximated fair value at ~~August 28,~~November 27, 2004, and therefore, there were no significant unrealized holding gains or losses.

9.10. Restricted Assets:

Included in other current assets were ~~$132~~$70 million, $18 million and $0$27 million in restricted cash balances as of ~~August 28,~~November 27, 2004, February 28, 2004, and ~~August 30,~~November 29, 2003, respectively. Such balances are pledged as collateral or restricted to use for general liability insurance, ~~worker’s~~workers’ compensation insurance and/or warranty programs.

~~10.~~11. Commitments and Contingencies:

On August 18, 2004, we were served with a Consolidated Class Action Complaint that consolidates into one action, In Re Best Buy Company, Inc. Securities Litigation, the four pending purported class action lawsuits on behalf of persons who purchased our securities between January 9, 2002, and August 7, 2002. The consolidated lawsuit, pending before the U.S. District Court for the District of Minnesota, names as defendants Best Buy Co., Inc., and our Chairman, our two Vice Chairmen (including our Vice Chairman and Chief Executive ~~Officer, Chief Operating Officer~~Officer) and Chief Financial ~~Officer as defendants.~~Officer. The plaintiffs allege that the defendants violated Sections 10(b) and 20(a) of the Exchange Act, 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 our common stock. The plaintiffs seek compensatory damages, costs and expenses. A Hearing upon our Motion to Dismiss is scheduled for January 12, 2005. We believe the allegations are without merit and intend to defend these actions vigorously.

We also have been served with a shareholder derivative action venued in Hennepin County, State of Minnesota District Court. This case raises many factual matters similar to those raised in the federal securities law cases, described above. The state court action alleges violations of state law relative to fiduciary responsibilities, control and management of our ~~Company~~company and unjust enrichment. The plaintiffs seek judgment in favor of Best Buy Co., Inc. against certain named officer and director defendants for damages, equitable relief and attorneys’ fees, costs and expenses. By agreement between the parties, and with Court approval, this case was put on inactive status. Based on our information and belief, the claims against the named officer and director defendants are without merit and will be vigorously defended.

We are involved in various other legal proceedings arising in the normal course of conducting business. The resolution of those proceedings is not expected to have a material ~~impact~~effect on our results of operations or financial condition.

We assumed a liability for certain extended service contracts when we acquired Future Shop. 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 extend through fiscal 2007. The estimated remaining liability for acquired extended service contracts at ~~August 28,~~November 27, 2004, was ~~$12~~$10 million. Subsequent to the acquisition, all new extended service contracts have been sold on behalf of an unrelated third party, without recourse.

The following table reconciles the changes in our liability for our acquired extended service contracts for the ~~six~~nine months ended ~~August 28,~~November 27, 2004 ($ in millions):

Balance at February 28, 2004	$	18		$	18
Service charges	(6		)	(10		)
Foreign currency exchange rate fluctuation	—			2
Balance at August 28, 2004	$	12
Balance at November 27, 2004				$	10

~~11.~~12. Long-Term Debt:

In June 2004, we redeemed our convertible debentures due in 2021 for $355 million. There was no gain or loss on the transaction.

13.Repurchase of Common Stock:

Our Board of Directors authorized a $500 million share repurchase program in June 2004. The ~~new~~ program, which became effective on June 24, 2004, terminated and replaced the $400 million share repurchase program authorized by our Board of Directors in fiscal 2000. There is no expiration date governing the period over which we can make our share repurchases under the $500 million share repurchase program. ~~During the second quarter of fiscal 2005,~~Through November 27, 2004, we purchased and retired ~~1,406,433~~1,805,960 shares at a cost of ~~$68~~$92 million ~~pursuant to the new~~under our $500 million share repurchase program.

During the first quarter of fiscal 2005, we purchased and retired 1,564,800 shares at a cost of $82 million ~~pursuant to the~~under our $400 million share repurchase program. We did not purchase any shares ~~pursuant to the~~under our $400 million share repurchase program during the second quarter of fiscal 2005. Under the $400 million share repurchase program, we had purchased and retired 6.1 million shares at a cost of $282 million through the termination date.

~~12.~~14. New Accounting Standards:

In January 2003, the Financial Accounting Standards Board (FASB) issued Financial Interpretation (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. 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 superseded the original Interpretation. The requirements were effective for us at the end of the first quarter of fiscal ~~2005,~~2005; however, FIN No. 46 did not have an impact on our consolidated financial statements.

12The Emerging Issues Task Force (EITF) reached consensus on Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share. The EITF consensus will require us to include in our diluted earnings per share calculation the potentially dilutive shares issuable as if our convertible debentures due in 2022 had been converted into shares of our common stock. The EITF consensus is effective for reporting periods ending after December 15, 2004, or our fourth quarter of fiscal 2005. Restatement of prior periods is required. Diluted earnings per share from continuing operations would not have been significantly affected for any of the periods presented herein. The effect of adopting the EITF consensus is expected to reduce earnings per share by approximately $0.02 and $0.03 for our fourth quarter and fiscal year ending February 26, 2005, respectively. The criteria for conversion of our convertible debentures due in 2022 is included in Note 4, Debt, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year ended February 28, 2004.

~~13.~~ In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. Among other items, the standard requires us to recognize compensation cost for all share-based payments, in our consolidated statements of earnings. Note 6, Stock-Based Compensation, of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q, contains pro forma disclosures regarding the effect on net earnings and earnings per share as if we had applied the fair value method of accounting for stock-based compensation. Depending on the model used to calculate stock-based compensation expense in the future and other requirements of SFAS No. 123R, the pro forma disclosure may not be indicative of the stock-based compensation expense that will be recognized in our future financial statements. The new standard is effective for the first period that begins after June 15, 2005, and allows two different methods of transition. We expect to implement the new standard beginning with the first quarter of fiscal 2006, which begins on February 27, 2005, and to adjust our financial statements for previously-reported periods to give effect to the fair-value-based method of accounting for stock-based compensation. We are currently evaluating the new standard and models which may be used to calculate future stock-based compensation expense.

On October 22, 2004, the American Jobs Creation Act of 2004 (Act) was signed into law. This legislation creates, among other things, a temporary incentive for U.S. multinational companies to repatriate accumulated income earned outside the U.S. at an effective tax rate of 5.25%. The U.S. Treasury Department has not issued final guidelines for applying the repatriation provisions of the Act. In addition, on December 21, 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. FSP FAS No. 109-2 provides accounting and disclosure guidance for the repatriation provision. We have not provided deferred taxes on foreign earnings because such earnings were intended to be indefinitely reinvested outside the U.S. We are currently evaluating whether we will repatriate any foreign earnings under the Act, and are evaluating the other provisions of this legislation, which may affect our taxes in the future.

15. Condensed Consolidating Financial Information:

Our convertible debentures, which mature in 2022, are guaranteed by ~~certain of~~ our wholly-owned ~~subsidiaries. In June~~indirect subsidiary Best Buy Stores, L.P. Investments in subsidiaries of Best Buy Stores, L.P., which have not guaranteed the convertible debentures, are accounted for under the equity method. We reclassified certain prior-year amounts to conform to the current-year presentation. These reclassifications had no effect on the guarantor’s or consolidated previously-reported net earnings, financial position or cash flows. Additionally our fiscal 2004 ~~we redeemed~~condensed consolidating financial information includes our convertible debentures due in 2021 ~~for $355 million. The aggregate principal balance~~which were redeemed in the second quarter of fiscal 2005. These debentures were guaranteed by Best Buy Stores, L.P. and ~~carrying amount~~certain of our ~~convertible debentures, which mature in 2022, is $402 million.~~other wholly-owned subsidiaries.

Additional information regarding our convertible debentures is included in Note 4, Debt, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year ended February 28, 2004.

We file a consolidated U.S. federal income tax return. 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 the required effective tax rate if they have taxable income.

The following tables present condensed consolidating balance sheets as of ~~August 28, 2004;~~November 27, 2004, February 28, ~~2004;~~2004, and ~~August 30,~~November 29, 2003; condensed consolidating statements of earnings for the three and ~~six~~nine months ended ~~August 28, 2004;~~November 27, 2004, and ~~August 30,~~November 29, 2003; and condensed consolidating statements of cash flows for the ~~six~~nine months ended ~~August 28, 2004;~~November 27, 2004, and ~~August 30,~~November 29, 2003:

1314

Condensed Consolidating Balance Sheets
As of ~~August 28,~~November 27, 2004
(Unaudited)
$ in millions

	Best Buy Co., Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated		Best Buy Co., Inc.		Guarantor Subsidiary		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents	$	1,690	$	37	$	235	$	—		$	1,962	$	1,963	$	164	$	308	$	—		$	2,435
Short-term investments	7		—		—		—			7		78		—		—		—			78
Receivables	5		303		18		2			328		8		673		61		—			742
Merchandise inventories	—		2,811		408		(232		)	2,987		—		4,168		872		(214		)	4,826
Other current assets	16		98		197		1			312		17		103		131		—			251
Intercompany receivable	—		—		2,537		(2,537		)	—		—		—		4,125		(4,125		)	—
Intercompany note receivable	500		—		—		(500		)	—		500		—		—		(500		)	—
Total current assets	2,218		3,249		3,395		(3,266		)	5,596		2,566		5,108		5,497		(4,839		)	8,332

Net Property and Equipment	241		1,448		565		(3		)	2,251		249		1,376		697		(3		)	2,319

Goodwill, Net	—		3		482		—			485		—		3		537		—			540

Intangible Asset	—		—		38		—			38		—		—		42		—			42

Long-Term Investments	41		—		—		—			41		141		—		—		—			141

Other Assets	106		102		171		(146		)	233		105		102		190		(149		)	248

Investments in Subsidiaries	2,658		—		—		(2,658		)	—		2,860		—		1,111		(3,971		)	—

Total Assets	$	5,264	$	4,802	$	4,651	$	(6,073	)	$	8,644	$	5,921	$	6,589	$	8,074	$	(8,962	)	$	11,622

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	—	$	—	$	2,806	$	—		$	2,806	$	—	$	—	$	5,150	$	—		$	5,150
Unredeemed gift card liabilities	—		271		9		—			280		—		304		12		—			316
Accrued compensation and related expenses	1		138		53		—			192		6		154		60		—			220
Accrued liabilities	10		476		250		—			736		13		562		281		—			856
Accrued income taxes	205		15		63		—			283		258		11		73		—			342
Current portion of long-term debt	1		9		1		—			11		1		6		1		—			8
Intercompany payable	596		1,944		—		(2,540		)	—		854		3,311		—		(4,165		)	—
Intercompany note payable	—		500		—		(500		)	—		—		500		—		(500		)	—
Total current liabilities	813		3,353		3,182		(3,040		)	4,308		1,132		4,848		5,577		(4,665		)	6,892

Long-Term Liabilities	211		167		25		(146		)	257		235		573		34		(550		)	292

Long-Term Debt	410		56		12		—			478		408		57		13		—			478

Shareholders’ Equity	3,830		1,226		1,432		(2,887		)	3,601		4,146		1,111		2,450		(3,747		)	3,960

Total Liabilities and Shareholders’ Equity	$	5,264	$	4,802	$	4,651	$	(6,073	)	$	8,644	$	5,921	$	6,589	$	8,074	$	(8,962	)	$	11,622

1415

Condensed Consolidating Balance Sheets
As of February 28, 2004

$ 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	$	2,402	$	33	$	165	$	—		$	2,600	$	2,402	$	34	$	164	$	—		$	2,600
Receivables	5		318		19		1			343		5		313		23		2			343
Merchandise inventories	—		2,811		289		(493		)	2,607		—		2,736		363		(492		)	2,607
Other current assets	1		96		77		—			174		1		95		78		—			174
Intercompany receivable	—		—		2,548		(2,548		)	—		—		—		2,091		(2,091		)	—
Intercompany note receivable	500		—		—		(500		)	—		500		—		—		(500		)	—
Total current assets	2,908		3,258		3,098		(3,540		)	5,724		2,908		3,178		2,719		(3,081		)	5,724

Net Property and Equipment	244		1,437		566		(3		)	2,244		244		1,325		678		(3		)	2,244

Goodwill, Net	—		3		474		—			477		—		—		477		—			477

Intangible Asset	—		—		37		—			37		—		—		37		—			37

Other Assets	115		105		106		(156		)	170		115		106		105		(156		)	170

Investments in Subsidiaries	2,547		—		—		(2,547		)	—		2,547		1		—		(2,548		)	—

Total Assets	$	5,814	$	4,803	$	4,281	$	(6,246	)	$	8,652	$	5,814	$	4,610	$	4,016	$	(5,788	)	$	8,652

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	—	$	—	$	2,535	$	—		$	2,535	$	—	$	—	$	2,535	$	—		$	2,535
Unredeemed gift card liabilities	—		300		—		—			300		—		300		—		—			300
Accrued compensation and related expenses	3		156		110		—			269		3		152		114		—			269
Accrued liabilities	10		438		201		—			649		10		435		204		—			649
Accrued income taxes	305		23		52		—			380		305		23		52		—			380
Current portion of long-term debt	354		13		1		—			368		354		13		1		—			368
Intercompany payable	597		1,955		—		(2,552		)	—		597		1,507		—		(2,104		)	—
Intercompany note payable	—		500		—		(500		)	—		—		500		—		(500		)	—
Total current liabilities	1,269		3,385		2,899		(3,052		)	4,501		1,269		2,930		2,906		(2,604		)	4,501

Long-Term Liabilities	222		160		21		(156		)	247		222		421		21		(417		)	247

Long-Term Debt	410		60		12		—			482		410		61		11		—			482

Shareholders’ Equity	3,913		1,198		1,349		(3,038		)	3,422		3,913		1,198		1,078		(2,767		)	3,422

Total Liabilities and Shareholders’ Equity	$	5,814	$	4,803	$	4,281	$	(6,246	)	$	8,652	$	5,814	$	4,610	$	4,016	$	(5,788	)	$	8,652

1516

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

Merchandise inventories

—

2,541

299

(199
)
2,641

Income taxes receivable

—

5

—

(5
)
—

Other current assets

59

54

96

—

209

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 Asset

—

—

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

Unredeemed gift card liabilities

—

198

—

—

198

Accrued compensation and related expenses

1

119

53

—

173

Accrued liabilities

20

403

234

—

657

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 Statements of Earnings~~
~~For the Three Months Ended August 28, 2004~~
~~(Unaudited)~~
~~$ in millions~~

Best Buy
Co., Inc.

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Revenue

$
4

$
5,468

$
5,908

$
(5,300
)
$
6,080

Cost of goods sold

—

4,483

5,284

(5,239
)
4,528

Gross profit

4

985

624

(61
)
1,552

Selling, general and administrative expenses

12

949

388

(39
)
1,310

Operating (loss) income

(8
)
36

236

(22
)
242

Net interest income (expense)

4

(3
)
—

—

1

Equity in earnings of subsidiaries

201

—

—

(201
)
—

Earnings from continuing operations before income tax expense

197

33

236

(223
)
243

Income tax expense

25

19

49

—

93

Net earnings

$
172

$
14

$
187

$
(223
)
$
150

	Best Buy Co., Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations				Consolidated
Assets
Current Assets
Cash and cash equivalents	$	1,625	$	101	$	101	$		—		$	1,827
Receivables	3		635		39		1				678
Merchandise inventories	—		4,014		665		(251			)	4,428
Income taxes receivable	—		7		—		(7			)	—
Other current assets	55		57		99		—				211
Intercompany receivable	—		—		3,243		(3,243			)	—
Intercompany note receivable	500		—		—		(500			)	—
Total current assets	2,183		4,814		4,147		(4,000			)	7,144

Net Property and Equipment	245		1,315		704		(3			)	2,261

Goodwill, Net	—		—		489		—				489

Intangible Asset	—		—		38		—				38

Other Assets	108		78		66		(101			)	151

Investments in Subsidiaries	1,955		2		—		(1,957			)	—

Total Assets	$	4,491	$	6,209	$	5,444	$	(6,061		)	$	10,083

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	—	$	—	$	4,501	$	—			$	4,501
Unredeemed gift card liabilities	—		233		—		—				233
Accrued compensation and related expenses	4		132		89		—				225
Accrued liabilities	26		507		252		—				785
Accrued income taxes	56		—		50		(7			)	99
Dividends payable	97		—		—		—				97
Current portion of long-term debt	1		13		—		—				14
Intercompany payable	84		3,163		—		(3,247			)	—
Intercompany note payable	—		500		—		(500			)	—
Total current liabilities	268		4,548		4,892		(3,754			)	5,954

Long-Term Liabilities	195		401		18		(338			)	276

Long-Term Debt	762		63		11		—				836

Shareholders’ Equity	3,266		1,197		523		(1,969			)	3,017

Total Liabilities and Shareholders’ Equity	$	4,491	$	6,209	$	5,444	$	(6,061		)	$	10,083

~~Condensed Consolidating Statements of Earnings~~
~~For the Six Months Ended August 28, 2004~~
~~(Unaudited)~~
~~$ in millions~~

Best Buy
Co., Inc.

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Revenue

$
8

$
10,416

$
10,098

$
(8,967
)
$
11,555

Cost of goods sold

—

8,496

9,268

(9,150
)
8,614

Gross profit

8

1,920

830

183

2,941

Selling, general and administrative expenses

19

1,847

727

(78
)
2,515

Operating (loss) income

(11
)
73

103

261

426

Net interest income (expense)

7

(7
)
1

—

1

Equity in earnings of subsidiaries

87

—

—

(87
)
—

Earnings from continuing operations before income tax expense

83

66

104

174

427

Income tax expense

80

39

44

—

163

Net earnings

$
3

$
27

$
60

$
174

$
264

Condensed Consolidating Statements of Earnings
For the Three Months Ended ~~August 30,~~November 27, 2004
(Unaudited)
$ in millions

	Best Buy Co., Inc.		Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Revenue	$	4	$	5,769		$	7,619	$	(6,746	)	$	6,646

Cost of goods sold	—		4,687			7,108		(6,780		)	5,015

Gross profit	4		1,082			511		34			1,631

Selling, general and administrative expenses	3		1,024			404		(33		)	1,398

Operating income	1		58			107		67			233

Net interest income (expense)	8		(3		)	1		—			6

Equity in earnings (loss) of subsidiaries	90		(9		)	24		(105		)	—

Earnings before income tax expense	99		46			132		(38		)	239

Income tax expense	4		21			66		—			91

Net earnings	$	95	$	25		$	66	$	(38	)	$	148

Condensed Consolidating Statements of Earnings
For the Nine Months Ended November 27, 2004
(Unaudited)
$ in millions

	Best Buy Co., Inc.				Guarantor Subsidiary				Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenue	$	12			$	15,993			$	17,709		$	(15,508	)	$	18,206

Cost of goods sold	—				13,008				16,368			(15,742		)	13,634

Gross profit	12				2,985				1,341			234			4,572

Selling, general and administrative expenses	23				2,818				1,164			(92		)	3,913

Operating (loss) income	(11			)	167				177			326			659

Net interest income (expense)	15				(11			)	3			—			7

Equity in earnings of subsidiaries	172				(46			)	52			(178		)	—

Earnings before income tax expense	176				110				232			148			666

Income tax expense	84				60				110			—			254

Net earnings	$		92		$		50		$		122	$	148		$	412

Condensed Consolidating Statements of Earnings
For the Three Months Ended 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		$	4,882		$	5,511		$	(5,001	)	$	5,396		$	4		$	5,303		$	7,003	$	(6,278	)	$	6,032

Cost of goods sold	—			3,927			4,976			(4,879		)	4,024			—			4,254			6,460		(6,168		)	4,546

Gross profit	4			955			535			(122		)	1,372			4			1,049			543		(110		)	1,486

Selling, general and administrative expenses	8			917			288			(70		)	1,143			4			989			372		(81		)	1,284

Elimination of intercompany indebtedness	38			—			(38		)	—			—

Operating income	34			38			209			(52		)	229			—			60			171		(29		)	202

Net interest (expense) income	—			(4		)	1			—			(3		)
Net interest (expense)																—			(4		)	—		—			(4		)

Equity in earnings of subsidiaries	124			—			—			(124		)	—
Equity in earnings (loss) of subsidiaries																143			(20		)	—		(123		)	—

Earnings from continuing operations before income tax (benefit) expense	158			34			210			(176		)	226
Earnings before income tax expense																143			36			171		(152		)	198

Income tax (benefit) expense	(33		)	19			100			—			86			(29		)	22			83		—			76

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		$	172		$	14		$	88	$	(152	)	$	122

1920

Condensed Consolidating Statements of Earnings
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
Revenue	$	8		$	9,135		$	9,682		$	(8,761	)	$	10,064		$	12		$	14,295		$	16,643		$	(14,851	)	$	16,099

Cost of goods sold	—			7,196			8,632			(8,321		)	7,507			—			11,320			15,102			(14,363		)	12,059

Gross profit	8			1,939			1,050			(440		)	2,557			12			2,975			1,541			(488		)	4,040

Selling, general and administrative expenses	14			1,869			574			(243		)	2,214			18			2,813			987			(323		)	3,495

Elimination of intercompany indebtedness	(198		)	—			198			—			—			(198		)	—			198			—			—

Operating (loss) income	(204		)	70			674			(197		)	343			(204		)	162			752			(165		)	545

Net interest income (expense)	2			(8		)	1			—			(5		)	2			(12		)	1			—			(9		)

Equity in earnings of subsidiaries	337			—			—			(337		)	—
Equity in earnings (loss) of subsidiaries																498			(52		)	—			(446		)	—

Earnings from continuing operations before income tax (benefit) expense	135			62			675			(534		)	338			296			98			753			(611		)	536

Income tax (benefit) expense	(187		)	36			280			—			129			(198		)	58			345			—			205

Earnings from continuing operations	322			26			395			(534		)	209			494			40			408			(611		)	331

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

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

Net earnings	$	311		$	26		$	311		$	(534	)	$	114		$	483		$	40		$	324		$	(611	)	$	236

2021

Condensed Consolidating Statements of Cash Flows
For the ~~Six~~Nine Months Ended ~~August 28,~~November 27, 2004
(Unaudited)
$ in millions

	Best Buy Co., Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated			Best Buy Co., Inc.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Total cash (used in) provided by operating activities from continuing operations	$	(193	)	$	155		$	128		$	—	$	90
Total cash (used in) provided by operating activities															$	(68	)	$	(1,399	)	$	2,271		$	—	$	804

Investing activities
Additions to property and equipment	—			(132		)	(70		)	—		(202		)	(9		)	(229		)	(114		)	—		(352		)
Purchases of short-term and long-term investments	(48		)	—			—			—		(48		)	(219		)	—			—			—		(219		)
Other	—			(2		)	—			—		(2		)	—			(9		)	—			—		(9		)
Total cash used in investing activities from continuing operations	(48		)	(134		)	(70		)	—		(252		)
Total cash used in investing activities															(228		)	(238		)	(114		)	—		(580		)

Financing activities
Long-term debt payments	(355		)	(7		)	(1		)	—		(363		)	(355		)	(9		)	(1		)	—		(365		)
Issuance of common stock															229			—			—			—		229
Repurchase of common stock	(150		)	—			—			—		(150		)	(174		)	—			—			—		(174		)
Issuance of common stock	100			—			—			—		100
Dividends paid	(65		)	—			—			—		(65		)	(100		)	—			—			—		(100		)
Change in intercompany receivable/payable	(1		)	(10		)	11			—		—			257			1,776			(2,033		)	—		—
Total cash (used in) provided by financing activities from continuing operations	(471		)	(17		)	10			—		(478		)
Total cash (used in) provided by financing activities															(143		)	1,767			(2,034		)	—		(410		)

Effect of exchange rate changes on cash	—			—			2			—		2			—			—			21			—		21

(Decrease) increase in cash and cash equivalents	(712		)	4			70			—		(638		)	(439		)	130			144			—		(165		)
Cash and cash equivalents at beginning of period	2,402			33			165			—		2,600			2,402			34			164			—		2,600
Cash and cash equivalents at end of period	$	1,690		$	37		$	235		$	—	$	1,962		$	1,963		$	164		$	308		$	—	$	2,435

2122

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		$	(1,840	)	$	2,392		$	(246	)	$	387

Investing activities
Additions to property and equipment	(32		)	(156		)	(104		)	—			(292		)	(45		)	(196		)	(208		)	—			(449		)
Other	—			6			—			—			6			1			6			(2		)	—			5
Total cash used in investing activities from continuing operations	(32		)	(150		)	(104		)	—			(286		)	(44		)	(190		)	(210		)	—			(444		)

Financing activities
Long-term debt payments	—			(8		)	—			—			(8		)	—			(13		)	—			—			(13		)
Issuance of common stock	36			—			—			—			36			94			—			—			—			94
Repurchase of common stock																(60		)	—			—			—			(60		)
Change in intercompany receivable/payable	(234		)	444			(407		)	197			—			(309		)	2,107			(2,044		)	246			—
Total cash (used in) provided by financing activities from continuing operations	(198		)	436			(407		)	197			28			(275		)	2,094			(2,044		)	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

2223

BEST BUY CO., INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative on our financial condition, results of operations, liquidity, critical accounting policies and the future impact of accounting standards that have been issued but are not yet effective. Our MD&A is presented in seven sections: Overview, Results of Operations, Liquidity and Capital Resources, Off-Balance-Sheet Arrangements and Contractual Obligations, Significant Accounting Policies and Estimates, New Accounting Standards and Outlook. We believe it is useful to read our MD&A in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 28, 2004, ~~and~~as well as our reports on Forms 10-Q and 8-K and other publicly available information.

Overview

Best Buy Co., Inc. is a specialty retailer of consumer electronics, home-office products, entertainment software, appliances and related services. 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. The International segment is comprised of Future Shop and Best Buy operations in Canada. For additional information regarding segments, refer to Note 7,8, Segments, 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. Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season.

On June 16, 2003, we sold our interest in The Musicland Group, Inc. (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 a distribution center in Franklin, Indiana, and selected nonoperating assets. 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 for ~~the second quarter and first six months of~~ fiscal 2004, through the date of sale, were reported separately as discontinued operations.

Unless otherwise noted, the following discussion regarding year-to-date results relates only to results from continuing operations.

Executive Summary

• ~~Earnings from continuing operations~~Net earnings for the third quarter of fiscal 2005 were ~~$150~~$148 million, or ~~$0.46~~$0.45 per diluted share, an increase of 8%21% compared with ~~$140~~$122 million, or ~~$0.42~~$0.37 per diluted share, for the ~~second~~third quarter of the prior fiscal ~~2004.~~year. The increase in net earnings ~~from continuing operations for the fiscal second quarter~~ resulted primarily from a combination of revenue gains and a ~~modest improvement in our gross profit rate, partially offset by an increase~~decrease in our selling, general and administrative expenses (SG&A) rate. In addition, net earnings for the third quarter of fiscal 2005 benefited from net interest income of $6 million, compared with net interest expense of $4 million for the same quarter of the prior fiscal year, and a lower effective income tax rate.

• Revenue for the third quarter of fiscal 2005 increased ~~13%~~10% to ~~$6.1~~$6.6 billion, compared with $6.0 billion for the third quarter of the prior fiscal ~~2004 second-quarter revenue of $5.4 billion,~~year, driven by the addition of new stores in the past 12 months and a comparable store sales gain of ~~4.3%~~3.2%.

• Our gross profit rate ~~increased~~for the third quarter of fiscal 2005 decreased by 0.1% of revenue to ~~25.5%~~24.5% of revenue, updown from ~~25.4%~~24.6% of revenue for the second quarter of fiscal 2004. The modest gross profit rate improvement was primarily due to a more profitable revenue mix and a less promotional environment in our International segment, compared with the secondthird quarter of the prior fiscal year. ~~These factors were partially offset by~~The modest decline in our gross profit rate was due primarily to increased promotional ~~expenses in our Domestic segment,~~activity, including ~~rebates and costs~~expenses associated with Reward Zone, our customer loyalty program.

• Our SG&A rate ~~increased~~for the third quarter of fiscal 2005 decreased by ~~0.4%~~0.3% of revenue to ~~21.6%~~21.0% of revenue, updown from ~~21.2%~~21.3% of revenue for the second quarter of fiscal 2004. The increase in our SG&A rate for the fiscal second quarter was primarily due to charges for the preliminary settlement of pending litigation, asset impairment expenses and transition costs associated with outsourcing our information technology function. The charges increased our SG&A rate by approximately 0.7% of revenue for the fiscal second quarter. In addition, expenses associated with our customer centricity initiative increased our SG&A rate by approximately 0.1% of revenue for the second quarter of fiscal 2005 compared with the samethird quarter of the prior fiscal year. ~~These factors were partially offset by~~The decrease in our SG&A rate was due primarily to expense leverage resulting from the ~~13%~~10% revenue gain and the realization of cost savings from our efficient enterprise initiative.

• ~~Net earnings were $150 million, or $0.46 per diluted share,~~ Additionally, our fiscal third-quarter SG&A rate benefited from a reduction in asset impairment charges compared with ~~$139 million, or $0.42 per diluted share, for~~ the ~~second quarter~~same period of the prior fiscal ~~2004. Net earnings for~~year, a favorable settlement with a credit card processor and reduced performance-based incentive compensation. These factors were partially offset by increased spending on our customer centricity initiative, the ~~second~~absence of the gain realized in the third quarter of fiscal 2004 ~~included a net loss~~ from discontinued operations of $1 million, net of tax. The net loss from discontinued operations for the second quarter of fiscal 2004 was comprised of a $5 million operating loss, net of tax, and a $4 million gain on disposal, net of tax, resulting from adjustments related to the sale of ~~Musicland. The results of discontinued operations for the second quarter of fiscal 2004 were included~~

~~through the date of sale, June 16,~~stock acquired in connection with a vendor co-marketing agreement and increased compensation expense associated with restricted stock awards granted pursuant to our long-term incentive program, which was implemented in November 2003.

• During the ~~second~~third quarter of fiscal 2005, we repurchased ~~1.4 million~~approximately 400,000 shares of our common stock pursuant to a $500 million share repurchase program authorized by our Board of Directors in June 2004. We paid an average price of ~~$48.38~~$59.67 per share, or ~~$68~~$24 million in the aggregate.

• In ~~June~~December 2004, ~~we redeemed all of our convertible debentures due in 2021 for $355 million.~~

• In July 2004, we entered into an agreement for a seven-year relationship with Accenture LLP (Accenture) for consulting as well as support and development services in the information technology area to further enable our anticipated transformation to a more efficient, customer-centric business model.

• In September 2004, we provided initial guidance for our fiscal 2005 third-quarter earnings from continuing operations of $0.41 to $0.47 per diluted share. We also reiterated our fiscal 2005 full-year forecast for earnings from continuing operations of $2.80 to $2.93 per diluted share. Finally, we announced that our quarterly cash dividend of $0.11 per common share ~~would be paid~~is payable on ~~October 27, 2004,~~January 26, 2005, to shareholders of record as of the close of business on ~~October 6, 2004.~~January 5, 2005.

Results of Operations

Consolidated Performance Summary

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 28, 2004			August 30, 2003			August 28, 2004			August 30, 2003			November 27, 2004			November 29, 2003(1)			November 27, 2004(1)			November 29, 2003(1)
Revenue	$	6,080		$	5,396		$	11,555		$	10,064		$	6,646		$	6,032		$	18,206		$	16,099
Revenue % change	13		%	17		%	15		%	14		%	10		%	18		%	13		%	15		%
Comparable store sales % change ⁽¹⁾⁽²⁾	4.3		%	6.7		%	6.2		%	4.1		%	3.2		%	8.6		%	5.1		%	5.8		%
Gross profit as a % of revenue	25.5		%	25.4		%	25.4		%	25.4		%	24.5		%	24.6		%	25.1		%	25.1		%
SG&A as a % of revenue	21.6		%	21.2		%	21.8		%	22.0		%	21.0		%	21.3		%	21.5		%	21.7		%
Operating income	$	242		$	229		$	426		$	343		$	233		$	202		$	659		$	545
Operating income as a % of revenue	4.0		%	4.2		%	3.7		%	3.4		%	3.5		%	3.3		%	3.6		%	3.4		%
Earnings from continuing operations	$	150		$	140		$	264		$	209		$	148		$	122		$	412		$	331
Loss from discontinued operations, net of tax	—			(5		)	—			(29		)	—			—			—			(29		)
Gain (loss) on disposal of discontinued operations, net of tax ⁽²⁾	—			4			—			(66		)
Loss on disposal of discontinued operations, net of tax ⁽³⁾													—			—			—			(66		)
Net earnings	$	150		$	139		$	264		$	114		$	148		$	122		$	412		$	236
Diluted earnings per share – continuing operations	$	0.46		$	0.42		$	0.80		$	0.64
Diluted earnings per share — continuing operations													$	0.45		$	0.37		$	1.24		$	1.01
Diluted earnings per share	$	0.46		$	0.42		$	0.80		$	0.35		$	0.45		$	0.37		$	1.24		$	0.72

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

⁽¹⁾ Certain amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on operating income, net earnings, financial position or cash flows.

⁽²⁾ Comprised of revenue at stores and Web 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. The calculation of the comparable store sales percentage change excludes the ~~impact~~effect of fluctuations in foreign currency exchange rates.

We refined our methodology for calculating our comparable store sales percentage change in the third quarter of fiscal 2004 to reflect the impact of non-point-of-sale revenue transactions. The comparable store sales percentage changes for the second quarter and first six months of fiscal 2004 have been computed using the refined methodology. The change did not impact previously reported revenue, earnings or cash flows.

⁽²⁾⁽³⁾ During 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 were recorded in our fiscal 2004 second-quarter results and reduced the after-tax loss on disposal of discontinued operations to $66 million for the first ~~six~~nine months of fiscal 2004.

~~Earnings from continuing operations~~Net earnings were ~~$150~~$148 million, or ~~$0.46~~$0.45 per diluted share, for the ~~second~~third quarter of fiscal 2005, ~~an 8%~~a 21% increase from ~~$140~~$122 million, or ~~$0.42~~$0.37 per diluted share, for the ~~second~~third quarter of fiscal 2004. For the first ~~six~~nine months of fiscal 2005, earnings from continuing operations were ~~$264~~$412 million, or ~~$0.80~~$1.24 per diluted share, compared with ~~$209~~$331 million, or ~~$0.64~~$1.01 per diluted share, for the same period one year ago. For the fiscal third quarter, the increase in net earnings ~~from continuing operations reflects~~reflected an increase in revenue, including a gain in comparable store sales of ~~4.3%~~3.2%, and a ~~modest~~0.3% of revenue improvement in our ~~gross profit~~SG&A rate. In addition, net earnings for the third quarter of fiscal 2005 benefited from net interest income of $6 million, compared with net interest expense of $4 million for the same quarter of the prior fiscal year, and a lower effective income tax rate. These factors were partially offset by a ~~higher SG&A~~modest decline in our gross profit rate. For the ~~six-month~~nine-month period, the increase in earnings from continuing operations was due primarily ~~due~~ to revenue growth, including a comparable store sales gain of ~~6.2%~~5.1%, and a 0.2% of revenue decrease in our SG&A rate.

Revenue for the ~~second~~third quarter of fiscal 2005 increased ~~13%~~10% to ~~$6.1~~$6.6 billion, compared with ~~$5.4~~$6.0 billion for the ~~second~~third quarter of the prior fiscal year. For the first ~~six~~nine months of fiscal 2005, revenue increased ~~15%~~13% to ~~$11.6~~$18.2 billion, compared with ~~$10.1~~$16.1 billion for the same period of fiscal 2004. The addition of new stores in the past 12 months accounted for ~~nearly two-thirds of the revenue increase for the fiscal second quarter and nearly~~approximately three-fifths of the revenue increase for both the ~~six-month~~fiscal third quarter and nine-month period. The comparable store sales gain accounted for approximately ~~one-third~~three-tenths and two-fifths of the revenue increase for the fiscal ~~second~~third quarter and first ~~six~~nine months, respectively. The remainder of the increase in revenue for the fiscal ~~second~~third quarter and first ~~six~~nine months was due primarily ~~due~~ to the ~~impact~~effect of fluctuations in foreign currency exchange rates. ~~The~~

Our fiscal 2005 third-quarter comparable store sales gain of 3.2% was ~~driven by an improved~~

~~economic environment, continued demand~~on top of a very strong 8.6% comparable store sales gain for ~~digital products and an increase in revenue-generating promotions, including a full~~the third quarter of the ~~Reward Zone program.~~prior fiscal year. Comparable store sales gains were strongest early in our fiscal third quarter and moderated in November. We believe ~~we gained~~our comparable store sales performance for the fiscal third quarter reflected our improved in-store execution, including our ability to increase the close rate and average ticket, which more than offset customer traffic declines in our stores. In addition, comparable store sales were driven by consumer demand for and the increased affordability of digital products, market share ~~during the second quarter of fiscal 2005.~~gains and promotional offers. Products having the largest ~~impact~~effect on our fiscal ~~second quarter~~third-quarter comparable store sales gain included digital televisions, ~~notebook computers,~~MP3 players, digital cameras and accessories, ~~MP3 players, CDs~~notebook computers, video gaming and major appliances. ~~The increase~~Softness in ~~revenue from digital products reflects~~sales of CDs and DVD movies dampened the ~~continued consumer migration to, and increased affordability~~impact of ~~digital~~the comparable store sales growth in the above products.

Our gross profit rate ~~increased~~decreased by 0.1% of revenue to ~~25.5%~~24.5% of revenue for the ~~second~~third quarter of fiscal 2005, compared with ~~25.4%~~24.6% of revenue for the ~~second~~third quarter of the prior fiscal year. For the first ~~six~~nine months of fiscal 2005, our gross profit rate was ~~25.4%~~25.1% of revenue, ~~consistent with~~the same as the gross profit rate for the ~~same~~comparable period of fiscal 2004. The modest ~~improvement~~decline in our gross profit rate for the fiscal ~~second~~third quarter was due primarily ~~due~~ to ~~a more profitable revenue mix and a less promotional environment in our International segment, compared with the second quarter of the prior fiscal year. These factors were partially offset by~~ increased promotional ~~expenses in our Domestic segment,~~activity, including ~~rebates and costs~~expenses associated with Reward Zone, our customer loyalty program. Reward Zone contributed to the revenue gain for the fiscal third quarter, but reduced the gross profit rate by approximately ~~0.8%~~0.6% of revenue for the ~~fiscal second~~ quarter, compared with ~~a reduction of 0.4%~~0.3% of revenue for the same quarter last ~~year.~~year, reflecting growth in membership. The ~~0.4%~~impact of ~~revenue incremental reduction in~~Reward Zone on the gross profit rate for the third quarter of fiscal 2004 was favorably affected by an adjustment related to Reward Zone points earned during the second quarter ~~resulting from our~~of the prior fiscal year. Excluding the adjustment for fiscal 2004 second-quarter points, expenses associated with Reward Zone ~~program, compared~~would have reduced the gross profit rate by 0.4% of revenue for the third quarter of fiscal 2004. In addition to expenses associated with ~~the same period last year, was due to the full quarter effect of the~~ Reward Zone, ~~program~~our gross profit rate was affected by a higher level of promotional activity that ~~was launched on July 16, 2003,~~resulted from more generous promotions initiated to increase revenue and ~~increased~~stem customer ~~participation in~~traffic declines, a trend experienced throughout the ~~program.~~retail industry. For the first ~~six~~nine months of fiscal 2005, our gross profit rate benefited from ~~the same factors contributing to the modest improvement in our gross profit rate for the fiscal second quarter,~~improved product assortments, but was offset by ~~a more promotional environment in our International segment in the first quarter of the current fiscal year.~~expenses associated with Reward Zone.

Our SG&A rate ~~increased~~decreased by ~~0.4%~~0.3% of revenue to ~~21.6%~~21.0% of revenue for the ~~second~~third quarter of fiscal 2005, compared with ~~21.2%~~21.3% of revenue for the ~~second~~third quarter of the prior fiscal year. For the first ~~six~~nine months of fiscal 2005, our SG&A rate decreased by 0.2% of revenue to ~~21.8%~~21.5% of revenue, compared with ~~22.0%~~21.7% of revenue for the first ~~six~~nine months of fiscal 2004. The ~~increase~~decrease in our SG&A rate for the fiscal ~~second~~third quarter was due primarily ~~due~~ to ~~charges for~~expense leverage resulting from the ~~preliminary settlement~~10% revenue gain and the realization of ~~pending litigation,~~cost savings from our efficient enterprise initiative. Our fiscal third-quarter SG&A rate also benefited from a reduction in asset impairment ~~expenses~~charges compared with the same period of the prior fiscal year, a favorable settlement with a credit card processor and ~~transition costs associated with outsourcing~~reduced performance-based incentive compensation. These factors were partially offset by additional spending on our ~~information technology function. The charges~~customer centricity initiative, which increased our SG&A rate by approximately ~~0.7%~~0.2% of revenue for the ~~fiscal second quarter. In addition, expenses associated with our customer centricity initiative increased our SG&A rate by approximately 0.1% of revenue for the second~~third quarter of fiscal 2005, compared with the same quarter of the prior fiscal ~~year. These factors were partially offset by expense leverage resulting~~year; the absence of the gain realized in the third quarter of fiscal 2004 from the ~~13% revenue gain~~sale of stock acquired in connection with a vendor co-marketing agreement; and ~~the realization of cost savings from~~increased compensation expense associated with restricted stock awards granted pursuant to our ~~efficient enterprise initiative.~~long-term incentive program. The decrease in our SG&A rate for the first ~~six~~nine months of fiscal 2005 was due primarily ~~due~~ to expense leverage resulting from the ~~15%~~13% increase in revenue and the realization of cost savings from our efficient enterprise initiative, partially offset by ~~the fiscal second-quarter charges and~~ additional expenses associated with our customer centricity ~~initiative.~~initiative and increased compensation expense associated with restricted stock awards granted pursuant to our long-term incentive program.

Segment Performance Summary

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 28, 2004			August 30, 2003			August 28, 2004			August 30, 2003			November 27, 2004			November 29, 2003			November 27, 2004			November 29, 2003
Revenue	$	5,506		$	4,910		$	10,486		$	9,190		$	5,918		$	5,430		$	16,404		$	14,619
Revenue % change	12		%	15		%	14		%	12		%	9		%	15		%	12		%	13		%
Comparable stores sales % change ⁽¹⁾	4.4		%	6.9		%	6.3		%	4.3		%	3.0		%	9.0		%	5.2		%	6.0		%
Gross profit as a % of revenue	25.6		%	25.6		%	25.5		%	25.5		%	24.7		%	24.9		%	25.2		%	25.3		%
SG&A as a % of revenue	21.2		%	20.9		%	21.4		%	21.7		%	20.9		%	21.2		%	21.2		%	21.5		%
Operating income	$	239		$	230		$	430		$	353		$	228		$	202		$	658		$	555
Operating income as a % of revenue	4.3		%	4.7		%	4.1		%	3.8		%	3.9		%	3.7		%	4.0		%	3.8		%

⁽¹⁾ Comprised of revenue at stores and Web 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.

2526

The following table presents Domestic comparable store sales percentage changes for the ~~second~~third quarter and first ~~six~~nine months of the past two fiscal years:

Three Months Ended

Six Months Ended

August 28, 2004

August 30, 2003⁽¹⁾

August 28, 2004

August 30, 2003⁽¹⁾

U.S. Best Buy stores

4.4
%
7.0
%
6.3
%
4.3
%
Magnolia Audio Video stores

6.8
%
(5.2
)%
5.0
%
(2.9
)%
Total

4.4
%
6.9
%
6.3
%
4.3
%

⁽¹⁾We refined our methodology for calculating our comparable store sales percentage change in the third quarter of fiscal 2004 to reflect the impact of non-point-of-sale revenue transactions. The comparable store sales percentage changes for the second quarter and first six months of fiscal 2004 have been computed using the refined methodology. The change did not impact previously reported revenue, earnings or cash flows.

	Three Months Ended				Nine Months Ended
	November 27, 2004		November 29, 2003		November 27, 2004		November 29, 2003
U.S. Best Buy stores	3.0	%	9.0	%	5.2	%	6.1	%
Magnolia Audio Video stores	7.2	%	5.8	%	5.9	%	0.5	%
Total	3.0	%	9.0	%	5.2	%	6.0	%

The following table reconciles Domestic stores open at the beginning and end of the ~~second~~third quarter of fiscal 2005:

Total Stores at
Beginning of
Second Quarter
Fiscal 2005

Stores
Opened

Stores
Closed

Total Stores at
End of
Second Quarter
Fiscal 2005

U.S. Best Buy stores

619

9

—

628

Magnolia Audio Video stores

22

—

—

22

Total

641

9

—

650

	Total Stores at Beginning of Third Quarter Fiscal 2005	Stores Opened	Stores Closed	Total Stores at End of Third Quarter Fiscal 2005
U.S. Best Buy stores	628	32	1	659
Magnolia Audio Video stores	22	—	—	22
Total	650	32	1	681

Note: During the ~~second~~third quarter of fiscal 2005, ~~we relocated one U.S. Best Buy store and remodeled two~~five U.S. Best Buy stores ~~to accommodate Magnolia Home Theater departments.~~were relocated. No other U.S. Best Buy stores or Magnolia Audio Video stores were relocated, remodeled or expanded during the ~~second~~third quarter of fiscal 2005.

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 ~~store was~~stores were relocated and one store was remodeled or expanded. No other U.S. Best Buy stores or Magnolia Audio Video stores were ~~relocated,~~ remodeled or expanded during the ~~second~~third quarter of fiscal 2004.

For the ~~second~~third quarter of fiscal 2005, Domestic operating income was ~~$239~~$228 million, or ~~4.3%~~3.9% of revenue, compared with ~~$230~~$202 million, or ~~4.7%~~3.7% of revenue, for the ~~second~~third quarter of the prior fiscal year. For the first ~~six~~nine months of fiscal 2005, Domestic operating income increased to ~~$430~~$658 million, or ~~4.1%~~4.0% of revenue, compared with ~~$353~~$555 million, or 3.8% of revenue, for the same period of fiscal 2004. The ~~decrease~~increase in our Domestic segment’s operating income rate for the fiscal ~~second~~third quarter ~~reflects an~~reflected revenue gains, including a 3.0% comparable store sales increase, and a decrease in the SG&A rate of 0.3% of revenue, partially offset by a decrease in our gross profit rate of 0.2% of revenue compared with the ~~second~~third quarter of the prior fiscal ~~year, partially offset by revenue gains, including a 4.4% comparable store sales increase.~~year. The improvement in the operating income rate for the first ~~six~~nine months of fiscal 2005 was due primarily ~~due~~ to a combination of revenue gains, including an increase in comparable store sales of ~~6.3%~~5.2%, and a decrease in the SG&A rate of 0.3% of revenue. Those factors were partially offset by a decrease in the gross profit rate of 0.1% of revenue compared with the first ~~six~~nine months of fiscal 2004.

Domestic revenue increased ~~12%~~9% to ~~$5.5~~$5.9 billion for the ~~second~~third quarter of fiscal 2005, compared with ~~$4.9~~$5.4 billion for the ~~second~~third quarter of fiscal 2004. For the first ~~six~~nine months of fiscal 2005, Domestic revenue increased ~~14%~~12% to ~~$10.5~~$16.4 billion, compared with ~~$9.2~~$14.6 billion for the same period of the prior fiscal year. The revenue ~~increase~~increases for both the fiscal ~~second~~third quarter and ~~six-month~~nine-month period ~~was~~were driven by ~~the addition~~a combination of new ~~stores in the past 12 months~~store openings and ~~the~~ comparable store sales gains.

We believe the Domestic segment’s comparable store sales performance for the fiscal third quarter reflected our improved in-store execution, including our ability to increase the close rate and average ticket, which more than offset customer traffic declines in our stores. In addition, comparable store sales were driven by consumer demand for and the increased affordability of digital products, market share gains and promotional offers. The ~~fiscal second-quarter~~products having the largest effect on the Domestic segment’s comparable store sales gain ~~was~~for the fiscal third quarter were digital televisions, MP3 players, and digital cameras and accessories. The home-office products category posted a comparable store sales gain in the mid-single-digits for the fiscal third quarter, driven primarily by ~~an improved economic environment, continued demand~~sales of MP3 players and notebook computers, reflecting consumer’s desire for ~~digital products and an increase in revenue-generating promotions, including a full quarter of the Reward Zone program. We believe we gained market share during the second quarter of fiscal 2005.~~portable entertainment. A ~~high-single-digit~~low single-digit comparable store sales gain in the consumer electronics category was fueled by

increased sales of digital televisions, as well as digital cameras and accessories, reflecting continued consumer preference for and the increased affordability of digital ~~products. The home-office~~ products ~~category posted a~~and our improved assortments in these categories following our merchandise resets in the home theater, digital imaging and computing departments completed during the fiscal third quarter. A high single-digit comparable store sales gain in the ~~mid-single digits for the fiscal second quarter, primarily~~appliances category was driven by a low double-digit comparable store sales ~~of notebook computers, MP3 players and cellular telephones.~~increase in major appliances which benefited from expanded assortments, but was partially offset by comparable store sales declines in other products within the appliances category. The entertainment software category recorded a ~~low-single-digit~~modest comparable store sales gain driven primarily ~~driven~~ by increased revenue from ~~CDs~~video gaming and computer software, but was partially offset by reduced revenue from CDs and DVD ~~movies and video gaming. Comparable store sales for the appliances category were nearly flat for the fiscal second quarter. A high-single-digit comparable~~

~~store sales gain in major appliances was offset by a strong double-digit comparable store sales decline in air conditioning, as a result of a cooler than normal summer.~~movies.

The Domestic gross profit rate for the ~~second~~third quarter of fiscal 2005 was ~~25.6%~~24.7% of revenue, ~~consistent with the gross profit rate~~down from 24.9% of revenue for the ~~same period~~third quarter of the prior fiscal ~~2004.~~year. For the first ~~six~~nine months of fiscal 2005, the Domestic gross profit rate was ~~25.5%~~25.2% of revenue, ~~even with the gross profit rate~~down from 25.3% of revenue for the first ~~six~~nine months of the prior fiscal year. The modest decline in the Domestic segment’s gross profit rate for both the ~~second~~third quarter and first ~~six~~nine months of fiscal 2005 ~~benefited from a more profitable revenue mix offset by~~was due primarily to increased promotional activity, including ~~higher rebates and increased costs~~expenses associated with Reward ~~Zone, which was launched in July 2003.~~Zone. The expense associated with points earned by Reward Zone members reduced the fiscal ~~second~~third quarter gross profit rate by ~~0.9%~~0.7% of revenue, compared with ~~0.4%~~0.3% of revenue for the ~~second~~third quarter of fiscal 2004. The impact of Reward Zone on the Domestic gross profit rate for the third quarter of fiscal 2004 was favorably affected by an adjustment related to Reward Zone points earned during the second quarter of the prior fiscal year. Excluding the adjustment for fiscal 2004 second-quarter points, expenses associated with Reward Zone would have reduced the gross profit rate by 0.5% of revenue for the third quarter of fiscal 2004. In addition to expenses associated with Reward Zone, our gross profit rate for the third quarter of fiscal 2005 was affected by a higher level of promotional activity that resulted from more generous promotions initiated to increase revenue and stem customer traffic declines, a trend experienced throughout the retail industry.

At the end of the ~~second~~third quarter of fiscal 2005, we had more than ~~four~~4.2 million Reward Zone members. We continue to believe in the merits of Reward Zone as a vehicle for building customer loyalty. Further, we believe the insights gained from this program are important as we continue to pursue our customer centricity initiative. Beginning in October 2004, Reward Zone members ~~will need~~were required to spend $150 to earn a $5 gift certificate redeemable on future purchases. Previously, Reward Zone members earned a $5 gift certificate after spending $125.

The Domestic SG&A rate ~~increased~~decreased by 0.3% of revenue to ~~21.2%~~20.9% of revenue for the ~~second~~third quarter of fiscal 2005, compared with ~~20.9%~~21.2% of revenue for the same period last fiscal year. For the first ~~six~~nine months of fiscal 2005, the SG&A rate declined by 0.3% of revenue to ~~21.4%~~21.2% of revenue, compared with ~~21.7%~~21.5% of revenue for the same period one year ago. The ~~increase~~decrease in the Domestic segment’s SG&A rate for the fiscal ~~second~~third quarter was due primarily ~~due~~ to the charges for the preliminary settlement of pending litigation, asset impairment expenses and transition costs associated with outsourcing our information technology function, as well as expenses associated with our customer centricity initiative. These factors were partially offset by expense leverage resulting from the ~~12%~~9% revenue gain and the realization of cost savings from our efficient enterprise initiative. Our fiscal third quarter SG&A rate also benefited from a reduction in asset impairment charges compared with the prior year’s period, a favorable settlement with a credit card processor and reduced performance-based incentive compensation. These factors were partially offset by additional spending on our customer centricity initiative as a result of launching 67 segmented stores in October 2004, the absence of the gain realized in the third quarter of fiscal 2004 from the sale of stock acquired in connection with a vendor co-marketing agreement, and increased compensation expense associated with restricted stock awards granted pursuant to our long-term incentive program. The decrease in the Domestic segment’s SG&A rate for the first ~~six~~nine months of fiscal 2005 was due primarily ~~due~~ to expense leverage resulting from the ~~14%~~12% increase in revenue and the realization of cost savings from our efficient enterprise initiative, partially offset by ~~the fiscal second-quarter charges and additional~~increased expenses associated with our customer centricity ~~initiative.~~initiative and increased compensation expense associated with restricted stock awards granted pursuant to our long-term incentive program.

~~For the fiscal second quarter,~~We continue to believe that our customer centricity ~~lab~~initiative will further differentiate us from our competitors. In October 2004, we launched 67 segmented stores, primarily in California, as part of our customer centricity initiative. The experience of converting the stores will be helpful to us as we develop our plans for converting additional U.S. Best Buy stores in the future. For the portion of the fiscal third quarter in which they operated, our customer centricity segmented stores collectively had a comparable store sales gain more than double the comparable store sales gain of other U.S. Best Buy stores. In addition, the gross profit rate of our ~~customer centricity lab~~segmented stores, collectively, was approximately 0.5% of revenue higher than that of other U.S. Best Buy stores, which was in line with our expectation. We also made progress during our fiscal third quarter in reducing the SG&A rate of our segmented stores. ~~However,~~In fact, for the fiscal ~~second~~third quarter the SG&A rate ~~for the lab~~of our segmented stores, collectively, was approximately ~~1.1%~~0.5% of revenue higher than that of other U.S. Best Buy ~~stores. The difference in the SG&A rate between the lab~~ stores, ~~and other U.S. Best Buy stores~~which was ~~primarily due to increased labor, advertising, distribution, and customer research and analysis expenses. For the first quarter of fiscal 2005, the SG&A rate of~~slightly better than our ~~customer centricity lab stores, collectively, was approximately 2.2% of revenue higher than that of other U.S. Best Buy stores.~~expectation. While we were pleased with ~~the improvement we made during the fiscal second quarter~~our progress in reducing the SG&A rate of our ~~customer centricity lab~~segmented stores, we believe we still have room for improvement. Finally, the launch costs and capital investments for our segmented stores were somewhat more modest than we had expected. The ~~expense control~~ lessons learned in rolling out our ~~lab~~segmented stores will be applied to the other U.S. Best Buy stores as we expand the customer centricity initiative and convert additional stores to the customer centricity platform. ~~Accordingly, the SG&A rate for the lab stores is not indicative~~

The successful roll out of ~~the SG&A rate we expect to incur at other U.S. Best Buy stores that will be converted to the~~our customer centricity ~~platform. In fact, we expect the SG&A~~initiative is a critical component in our goal of increasing our annual operating income rate ~~of the stores~~ to ~~be converted during our fiscal third quarter to be only 0.5% to 0.6%~~7% of revenue ~~higher than that of other U.S. Best Buy stores.~~

by fiscal 2007. We ~~continue to~~ believe that our customer centricity initiative will ~~further differentiate~~continue to generate significant comparable store sales gains, which will help us ~~from~~leverage our ~~competitors. Based on~~cost structure and is expected to increase our ~~assessment~~annual operating income rate by approximately 0.5% of the lab stores’ results to-date, we anticipate converting approximately 70 additional existing U.S. Best Buy stores primarily in California to our customer centricity platform during the third quarter ofrevenue for fiscal 2005. The experience of converting these additional stores will be helpful to us as we develop our plans for converting the remaining U.S. Best Buy stores. We believe that the successful rollout of our customer centricity initiative in conjunction with our other strategic initiatives could afford us several more years of double-digit earnings growth without expanding outside of North America.2007.

2728

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 28, 2004			August 30, 2003			August 28, 2004			August 30, 2003			November 27, 2004			November 29, 2003(1)			November 27, 2004(1)			November 29, 2003(1)
Revenue	$	574		$	486		$	1,069		$	874		$	728		$	602		$	1,802		$	1,480
Revenue % change	18		%	44		%	22		%	36		%	21		%	42		%	22		%	39		%
Comparable stores sales % change ⁽¹⁾⁽²⁾	3.0		%	4.6		%	5.0		%	2.4		%	5.0		%	4.0		%	5.0		%	3.0		%
Gross profit as a % of revenue	25.1		%	24.1		%	24.7		%	24.3		%	23.0		%	22.4		%	23.9		%	23.3		%
SG&A as a % of revenue	24.6		%	24.4		%	25.1		%	25.5		%	22.3		%	22.4		%	23.9		%	24.0		%
Operating income (loss)	$	3		$	(1	)	$	(4	)	$	(10	)	$	5		$	—		$	1		$	(10	)
Operating income (loss) as a % of revenue	0.5		%	(0.3		)%	(0.3		)%	(1.1		)%	0.7		%	0.0		%	0.1		%	(0.7%		)

⁽¹⁾ Certain amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on operating income, net earnings, financial position or cash flows.

⁽²⁾Comprised of revenue at stores and Web 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. The calculation of the comparable store sales percentage change excludes the ~~impact~~effect of fluctuations in foreign currency exchange rates.

The following table reconciles International stores open at the beginning and end of the ~~second~~third quarter of fiscal 2005:

	Total Stores at Beginning of Second Quarter Fiscal 2005	Stores Opened	Stores Closed	Total Stores at End of Second Quarter Fiscal 2005	Total Stores at Beginning of Third Quarter Fiscal 2005	Stores Opened	Stores Closed	Total Stores at End of Third Quarter Fiscal 2005
Future Shop stores	109	—	—	109	109	5	—	114
Canadian Best Buy stores	19	3	—	22	22	6	—	28
Total	128	3	—	131	131	11	—	142

Note: ~~During the second quarter of fiscal 2005, three Future Shop stores were relocated.~~ No ~~other~~ stores in the International segment were relocated, remodeled or expanded during the ~~second~~third quarter of fiscal 2005.

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 International segment reported ~~second-quarter~~third-quarter operating income of $3$5 million in fiscal 2005, compared with a ~~second-quarter operating loss of $1 million~~breakeven third quarter in fiscal 2004. For the first ~~six~~nine months of fiscal 2005, the International segment had an operating ~~loss~~income of $4$1 million, compared with an operating loss of $10 million for the same period of fiscal 2004. The improved operating results for both the fiscal ~~second~~third quarter and first nine months were due to ~~the impact of revenue gains and an increase in the gross profit rate, which were partially offset by a higher SG&A rate. For the six-month period, operating results benefited from the impact of~~ revenue gains, an increase in the gross profit rate and a decrease in the SG&A rate. The International segment generally derives a high proportion of its annual earnings in the fiscal fourth quarter, which encompasses the majority of the holiday selling season. ~~In fact, the second quarter of fiscal 2005 was the first time that the International segment generated operating income in a quarter other than the fiscal fourth quarter.~~

International segment revenue increased ~~18%~~21% for the ~~second~~third quarter of fiscal 2005 to ~~$574~~$728 million, compared with ~~$486~~$602 million for the ~~second~~third quarter of fiscal 2004. For the first ~~six~~nine months of fiscal 2005, International segment revenue increased 22% to ~~$1.1~~$1.8 billion, compared with ~~$874 million~~$1.5 billion for the same period of the prior fiscal year. Excluding the ~~impact~~effect of fluctuations in foreign currency exchange rates, International segment revenue would have increased ~~14%~~13% for the ~~second~~third quarter of fiscal 2005 compared with the same period of the prior fiscal year. The addition of new stores in the past 12 months ~~and store relocations~~ accounted for ~~approximately four-fifths~~nearly two-thirds of the revenue increase for the fiscal ~~second~~third quarter, excluding the ~~impact~~effect of fluctuations in foreign currency

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~~currency~~ exchange rates. The remainder of the fiscal ~~second-quarter~~third quarter revenue increase, excluding the effect of fluctuations in foreign currency exchange rates, was due to the ~~3.0%~~5.0% comparable store sales gain. For the fiscal ~~second~~third quarter, the International segment reported comparable store sales gains in the ~~consumer electronics,~~ home-office products, ~~and~~ entertainment software ~~product~~and appliances categories. These comparable store sales increases were partially offset by a modest comparable store sales decline in the ~~appliances~~consumer electronics category. For the ~~six-month~~nine-month period, new store openings ~~and relocations~~ accounted for approximately seven-tenths of the revenue increase, excluding the ~~impact~~effect of fluctuations in foreign currency exchange rates. The remainder of the revenue increase for the first ~~six~~nine months, excluding the ~~impact~~effect of fluctuations in foreign currency exchange rates, was due to the 5.0% comparable store sales gain.

The International segment’s gross profit rate increased by ~~1.0%~~0.6% of revenue to ~~25.1%~~23.0% of revenue for the ~~second~~third quarter of fiscal 2005, up from ~~24.1%~~22.4% of revenue for the ~~second~~third quarter of fiscal 2004. For the ~~six-month~~nine-month period, the International gross profit rate was ~~24.7%~~23.9% of revenue, an increase of ~~0.4%~~0.6% of revenue compared with ~~24.3%~~23.3% of revenue for the same period of the prior fiscal year. For both the quarter and the ~~six-month~~nine-month period, the increase in the International gross profit rate was due primarily ~~due~~ to ~~a more profitable revenue mix, reduced promotional activity and~~gross profit rate improvements within the product categories, increased vendor ~~allowances.~~allowances and reduced markdowns.

The International segment’s SG&A rate ~~increased~~decreased by ~~0.2%~~0.1% of revenue to ~~24.6%~~22.3% of revenue for the ~~second~~third quarter of fiscal 2005, compared with ~~24.4%~~22.4% of revenue for the ~~second~~third quarter of fiscal 2004. For the first ~~six~~nine months of fiscal 2005, the International SG&A rate was ~~25.1%~~23.9% of revenue, a decrease from ~~25.5%~~24.0% of revenue for the same period of fiscal 2004. For both the fiscal ~~second~~third quarter and the ~~increase~~first nine months, the modest decrease in the International segment’s SG&A rate was due primarily ~~due~~ to ~~a loss on the sale of long-lived assets and expenses associated with a store relocation. These factors were partially offset by~~ expense leverage from revenue gains, including a reduction in advertising expenses as a percent of revenue. ~~For the six-month period, the SG&A rate decreased by 0.4% of revenue as a result of expense leverage from revenue gains and the realization of cost savings from efficiency initiatives.~~

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 28, 2004		August 30, 2003			August 28, 2004		August 30, 2003			November 27, 2004		November 29, 2003		November 27, 2004		November 29, 2003
Revenue	$	—	$	54		$	—	$	354		$	—	$	—	$	—	$	354
Operating loss	—		(7		)	—		(46		)	—		—		—		(46		)
Interest expense	—		—			—		—			—		—		—		—
Loss before income tax benefit	—		(7		)	—		(46		)	—		—		—		(46		)
Income tax benefit	—		2			—		17			—		—		—		17
Loss before gain (loss) on disposal of discontinued operations	—		(5		)	—		(29		)
Gain (loss) on disposal of discontinued operations, net of tax ⁽¹⁾	—		4			—		(66		)
Loss before loss on disposal of discontinued operations											—		—		—		(29		)
Loss on disposal of discontinued operations, net of tax⁽¹⁾											—		—		—		(66		)
Loss from discontinued operations, net of tax	$	—	$	(1	)	$	—	$	(95	)	$	—	$	—	$	—	$	(95	)

⁽¹⁾During 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 were recorded in our fiscal 2004 second-quarter results and reduced the after-tax loss on disposal of discontinued operations to $66 million for the first ~~six~~nine months of fiscal 2004.

See the “Overview” section of this MD&A for additional information regarding the sale of our interest in Musicland.

Consolidated

Net Interest Income (Expense)

Net interest income was $1$6 million for ~~both~~ the ~~second~~third quarter ~~and the first six months~~ of fiscal 2005, compared with net interest expense of ~~$3 million and $5~~$4 million for the ~~second~~third quarter ~~and~~of fiscal 2004. For the first ~~six~~nine months of fiscal ~~2004, respectively~~2005, net interest income was $7 million, compared with net interest expense of $9 million for the first nine months of fiscal 2004. . ~~The~~For both the third quarter and the nine-month period, the change was due primarily to higher yields on short-term investments, higher average investment balances and the ~~result of the redemption~~repayment in June 2004 of ~~our~~ convertible debentures due in ~~2021 and higher yields on cash investments.~~2021.

Effective Income Tax Rate

Our effective income tax rate decreased to 38.1% for the ~~second~~third quarter and first ~~six~~nine months of fiscal 2005, down from 38.3% for the corresponding periods of fiscal 2004, due primarily ~~due~~ to permanent benefits associated with our International segment operations and higher levels of tax-exempt interest in the current fiscal year.

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Liquidity and Capital Resources

Summary

We ended the ~~second~~third quarter of fiscal 2005 with ~~$2.0~~$2.4 billion of cash and cash equivalents, compared with $2.6 billion at the end of fiscal 2004 and ~~$1.7~~$1.8 billion at the end of last year’s fiscal ~~second~~third quarter. Our current ratio, calculated as current assets divided by current liabilities, was ~~1.30~~1.21 at the end of the ~~second~~third quarter of fiscal 2005, compared with 1.27 at the end of fiscal 2004 and ~~1.33~~1.20 one year ago. Our debt-to-capitalization ratio was ~~12%~~11% at the end of the ~~second~~third quarter of fiscal 2005, compared with 20% at the end of fiscal 2004 and down from ~~23%~~22% at the end of the ~~second~~third quarter of fiscal 2004.

Our liquidity is affected by restricted cash balances that are pledged as collateral or restricted to use for general liability insurance, ~~worker’s~~workers’ compensation insurance and/or warranty programs. Restricted cash balances, which are included in other current assets, ~~were $132~~totaled $70 million, $18 million and $0$27 million as of ~~August 28,~~November 27, 2004, February 28, 2004, and ~~August 30,~~November 29, 2003, respectively.

During ~~the second quarter of~~ fiscal 2005, we ~~purchased $48 million of~~began purchasing investments in debt securities with ~~durations~~longer maturities. As of ~~up to three years. In accordance with our investment policy,~~November 27, 2004, we place our investments with issuers who have high-quality credit and limit the amount of investment exposure to any one issuer. We seek to preserve principal and minimize exposure to interest-rate fluctuations by limiting default risk, market risk and reinvestment risk. We consider highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. We carry these investments at cost, which approximates market value. Short-term investments, with maturities up to one year,had short-term and long-term investments, ~~with maturities ranging from one to three years, are~~ primarily comprised of municipal and United States government ~~and municipal debt securities. We determine the appropriate classification of our investments in~~ debt securities, ~~at the time of purchase and reevaluate such determinations at each quarterly balance-sheet date. In accordance with~~ ~~SFAS No. 115,~~ ~~Accounting for Certain Investments in Debt and Equity Securities~~, and based on our intentions regarding these instruments, we classify all investments in debt securities as held-to-maturity and account for these investments at amortized cost. We classify debt securities as held-to-maturity when we have the positive intent and ability to hold the securities to maturity. We record held-to-maturity securities as either short-term or long-term on our balance sheet based on contractual maturity date. The fair value of substantially all securities is determined by quoted market prices. The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market.

totaling $219 million. Refer to Note 8,9, Investments, of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q, for a summary of our investments in debt securities as of ~~August 28,~~November 27, 2004.

Cash Flows

Cash provided by operating activities from continuing operations for the first ~~six~~nine months of fiscal 2005 totaled ~~$90~~$804 million, compared with ~~$131~~$387 million for the same period ~~last~~of the prior fiscal year. The change was due primarily ~~due~~ to an increase in earnings from continuing operations and an increase in cash ~~used~~provided by changes in operating assets and ~~liabilities, partially offset by an increase in earnings from continuing operations.~~liabilities. Earnings from continuing operations were ~~$264~~$412 million for the first ~~six~~nine months of fiscal 2005, an increase from ~~$209~~$331 million for the first ~~six~~nine months of fiscal 2004. The changes in operating assets and liabilities were due substantially ~~due~~ to ~~changes~~increases in accounts payable and other liabilities, partially offset by increases in merchandise inventories, receivables and other ~~assets and income taxes, partially offset by an~~assets. The increase in accounts ~~payable. Merchandise~~payable was due primarily to higher business volumes, mainly the purchase of inventory in advance of the holiday selling season, and the timing of vendor payments. Other liabilities also increased as the result of higher business volumes and the timing of payments. The increase in merchandise inventories was due primarily to the seasonal build up of inventory. In addition, inventory levels increased ~~in fiscal 2005 primarily~~ due to the addition of new stores, ~~and~~ expanded assortments in key product categories ~~including digital televisions~~ and ~~personal computers. In addition, the increased inventory levels reflected our efforts to improve~~improved in-stock positions in product categories that have been driving our revenue growth. Receivables increased as a result of higher business volumes and the timing of credit card settlements. The increase in other assets was due primarily ~~due~~ to an increase in ~~worker’s~~workers’ compensation deposits, as well as an increase in deposits with Canadian tax authorities. The decrease in income taxes was primarily due to the timing of estimated income tax payments. The increase in accounts payable was primarily due to the increase in inventory, the timing of vendor payments and higher business volume.

Cash used in investing activities from continuing operations for the first ~~six~~nine months of fiscal 2005 was ~~$252~~$580 million, compared with ~~$286~~$444 million for the first ~~six~~nine months of the prior fiscal year. The change was due primarily ~~due~~ to purchases of short-term and long-term investments in debt securities, partially offset by reduced capital spending in the first ~~six~~nine months of fiscal 2005 as a result of completing the construction of our new corporate ~~campus~~headquarters in April 2003 and the timing of ~~payments. The decrease in capital spending was partially offset by purchases of temporary cash investments pursuant to our investment policy described above.~~new store projects.

Cash used in financing activities from continuing operations was ~~$478~~$410 million for the first ~~six~~nine months of fiscal 2005, compared with cash provided by financing activities from continuing operations of ~~$28~~$21 million for the first ~~six~~nine months of fiscal 2004. The change was primarily the result of the redemption in June 2004 of our convertible debentures due in 2021 for $355 million, repurchases of our common stock and the payment of a quarterly cash ~~dividend,~~dividends, partially offset by increased proceeds from the issuance of common stock in connection with our ~~equity-based~~stock-based compensation ~~programs, including the shares purchased under our new employee stock purchase plan.~~programs. During the first ~~six~~nine months of fiscal 2005, we repurchased ~~$150~~$174 million of our common stock pursuant to ~~the~~ stock repurchase programs authorized by our Board of Directors in fiscal 2005 and fiscal 2000. In addition, during the first ~~six~~nine months of fiscal 2005,

we paid ~~a quarterly~~ cash ~~dividend of $0.10~~dividends totaling $0.31 per common share, or ~~$65~~$100 million in the aggregate.

Sources of Liquidity

Funds generated by operating activities and available 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 operations and available cash and cash equivalents will be sufficient to finance anticipated expansion plans and strategic initiatives for the remainder of fiscal 2005. 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 flows at or above current levels or that we will be able to maintain our ability to borrow under the revolving credit facilities.

~~We have~~On December 22, 2004, we entered into an agreement for a $200 million ~~unsecured~~ revolving credit facility ~~scheduled~~that is guaranteed by certain of our subsidiaries. The new revolving credit facility will mature on December 22, 2009, and replaces our $200 million revolving credit facility that was due to mature in March 2005. Borrowings under the new revolving credit facility are unsecured and bear interest at rates specified in the agreement. The agreement contains covenants that require us to maintain certain financial ratios. A copy of the new revolving credit facility agreement is filed as Exhibit No. 4.1 to this Quarterly Report on Form 10-Q. As of November 27, 2004, there were no borrowings outstanding under our revolving credit facility that was due to mature in March 2005. However, outstanding letters of credit reduced amounts available under this facility.

We also have inventory financing lines totaling $210 million that allow us to extend the due dates of merchandise inventories beyond normal payment terms. We have a ~~$19~~$21 million unsecured revolving demand facility related to our International segment operations, of which $4 million is only available on a seasonal basis from August through January of each year.

Our credit ratings as of ~~August 28,~~November 27, 2004, were as follows:

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

⁽¹⁾ Standard & Poor’s Ratings Services revised its outlook to positive from stable on June 24, 2004. The outlook revision is based on our improving credit measures and continued positive comparable store sales trends. Standard & Poor’s Ratings Services also affirmed our BBB- credit rating.

Factors that can affect our 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 occupancy 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 fiscal year ended February 28, 2004, for additional information regarding our sources of liquidity.

Debt and Capital

Other than the redemption in June 2004 of all of our convertible debentures due in 2021 for $355 million, the amount of debt outstanding as of ~~August 28,~~November 27, 2004, was essentially unchanged from the end of fiscal 2004. See our Annual Report on Form 10-K for the fiscal year ended February 28, 2004, for additional information regarding our debt and capital.

Off-Balance-Sheet Arrangements and Contractual Obligations

Our liquidity is not dependent on the use of off-balance sheet financing arrangements other than in connection with our operating leases.

~~In June 2004, we redeemed our convertible debentures due in 2021 for $355 million.~~ Other than the redemption of our convertible debentures due in 2021, there has been no material change in our contractual obligations out of the ordinary course of our business since the end of fiscal 2004. See our Annual Report on Form 10-K for the fiscal year ended February 28, 2004, for additional information regarding our off-balance-sheet arrangements and contractual obligations.

Significant Accounting Policies and Estimates

~~Our~~We describe our significant accounting policies ~~are described~~ in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2004. ~~A discussion of~~We discuss 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 fiscal year ended February 28, 2004. There were no significant changes in our accounting policies or estimates since ~~our~~the end of fiscal ~~year ended February 28,~~ 2004.

New Accounting Standards

~~Recently issued and pending accounting standards are discussed in Note 12, New Accounting Standards, of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.~~

The Emerging Issues Task Force (EITF) ~~is considering~~reached consensus on Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per ~~Share~~Share. . The ~~current proposal, which is not final, would~~EITF consensus will require us to include in our diluted earnings per share ~~computation~~calculation the potentially

dilutive shares issuable as if our convertible debentures ~~were~~due in 2022 had been converted into shares of our common stock. The ~~proposal requires restatement~~EITF consensus is effective for reporting periods ending after December 15, 2004, or our fourth quarter of fiscal 2005. Restatement of prior ~~periods. If this proposal had been effective, diluted~~periods is required. Diluted earnings per share from continuing operations would not have been significantly ~~impacted~~affected for any of the periods presented herein. The effect of adopting the EITF consensus is expected to reduce earnings per diluted share by approximately $0.02 and $0.03 for our fourth quarter and fiscal year ending February 26, 2005, respectively. The criteria for conversion of ~~the~~our convertible debentures due in 2022 is included in Note 4, Debt, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year ended February 28, 2004.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment. Among other items, the standard requires us to recognize compensation cost for all share-based payments, including stock options, in our consolidated statements of earnings. Note 6, Stock-Based Compensation, of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q, contains pro forma disclosures regarding the effect on net earnings and earnings per share as if we had applied the fair value method of accounting for stock-based compensation. Depending on the model used to calculate stock-based compensation expense in the future and other requirements of SFAS No. 123R, the pro

forma disclosure may not be indicative of the stock-based compensation expense that will be recognized in our future financial statements. The new standard is effective for the first period that begins after June 15, 2005, and allows two different methods of transition. We expect to implement the new standard during the first quarter of fiscal 2006, which begins on February 27, 2005, and to adjust our financial statements for previously-reported periods to give effect to the fair-value-based method of accounting for stock-based compensation. We are currently evaluating the new standard and models which may be used to calculate future stock-based compensation expense.

On October 22, 2004, the American Jobs Creation Act of 2004 (Act) was signed into law. The Act creates, among other things, a temporary incentive for U.S. multinational companies to repatriate accumulated income earned outside the U.S. at an effective tax rate of 5.25%. The U.S. Treasury Department has not issued final guidelines for applying the repatriation provisions of the Act. In addition, on December 21, 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. FSP FAS No. 109-2 provides accounting and disclosure guidance for the repatriation provision. We have not provided deferred taxes on foreign earnings because such earnings were intended to be indefinitely reinvested outside the U.S. We are currently evaluating whether we will repatriate any foreign earnings under the Act, and are evaluating the other provisions of this legislation, which may affect our income taxes in the future.

Recently issued and pending accounting standards are discussed in Note 14, New Accounting Standards, of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.

Outlook

The following section should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 28, 2004.

~~We continue to expect our fiscal 2005 annual operating performance to be in line with our original guidance outlined in our Annual Report on Form 10-K for the fiscal year ended February 28, 2004.~~

We anticipate earnings from continuing operations for fiscal 2005 in the range of $2.80 to ~~$2.93~~$2.90 per diluted share, ~~an increase of 15% to 20%~~ compared with earnings from continuing operations of $2.44 per diluted share for fiscal 2004. Our guidance is based on anticipated revenue of approximately $27.5 billion for the fiscal year, driven by the ~~expected opening~~addition of ~~approximately 70~~ new stores and a comparable store sales gain for the fiscal year of approximately 4% ~~to 6%~~, ~~and an~~as well as a modest improvement in our operating income rate for the fiscal year ~~of 0.2% to 0.3% of revenue,~~ driven primarily by a lower SG&A rate. ~~In addition,~~Finally, we ~~now~~also expect ~~capital expenditures for~~to benefit from higher net interest income and a slightly lower effective income tax rate.

For the fiscal ~~2005 to be~~fourth quarter, we are projecting net earnings in the range of ~~$550 million~~$1.56 to ~~$600 million, down from our original guidance of $700 million.~~

~~Looking forward to the fiscal third quarter, we are projecting earnings from continuing operations in the range of $0.41 to $0.47~~$1.66 per diluted share, compared with net earnings ~~from continuing operations~~ of ~~$0.37~~$1.42 per diluted share for the ~~third~~fourth quarter of fiscal 2004. Our guidance for the ~~third~~fourth quarter of fiscal 2005 is based on an anticipated comparable store sales ~~increase~~gain at the low end of our 3% to 5%. range announced on December 15, 2004. In addition, ~~during~~we continue to expect a modest increase in the promotional environment. However, similar to the third quarter of fiscal 2005, we believe that we will be able to achieve further productivity improvements that will result in a modest increase in our operating income rate compared with the same period of the prior fiscal year. We also expect the fiscal ~~third~~fourth quarter to benefit from higher net interest income and a slightly lower effective income tax rate. Finally, we expect to ~~complete the conversion of~~open approximately ~~70 additional existing U.S. Best Buy~~ten new stores ~~to our customer centricity platform~~ and pay a regular quarterly cash dividend of $0.11 per common ~~share.~~share during the fiscal fourth quarter.

As ~~discussed~~indicated above in the New Accounting Standards section of this MD&A, we adopted EITF Issue No. 04-8 effective at the beginning of our ~~Annual Report on Form 10-K~~fiscal fourth quarter. The earnings per share guidance included in this Outlook section above for both the fiscal year and fiscal fourth quarter exclude the anticipated effect of the adoption of EITF Issue No. 04-8. We believe the adoption of EITF Issue No. 04-8 will reduce our earnings per diluted share by approximately $0.03 and $0.02 for the fiscal year ~~ended~~and fiscal fourth quarter ending February ~~28, 2004,~~26, 2005, respectively.

When the actual result of a tax settlement differs from our estimated accrual for a matter, we adjust our tax contingencies reserve and income tax provision in the period in which the income tax matter is resolved. We expect to finalize settlements related to certain federal and state income tax matters during our fiscal fourth quarter. Currently, it is management’s belief that the settlement of these income tax matters could have a ~~goal of increasing~~significant favorable effect on our ~~annual operating income rate to 7% of revenue by fiscal 2007, while continuing to deliver double-digit earnings growth. Our operating income rate~~financial results for the ~~trailing twelve months (through the end of the second~~fourth quarter ofand fiscal 2005) is 5.3% of revenue, consistent with our operating income rate for fiscal 2004. In order to accomplish our “7 by ‘07” goal, we must increase the profitability of our International segment, improve our supply chain, realize the anticipated benefits from our efficient enterprise strategy and successfully roll out our customer centricity initiative. We believe that increasing our International segment’s annual operating income rate to 5% of revenue for fiscal 2007 would add up to 0.5% of revenue to our consolidated annual operating income rate. Further, we believe that supply chain improvements, such as more accurate demand forecasting and direct importing, as well as sourcing opportunities, primarily private labeled products, could also add up to 0.5% of revenue to our annual operating income rate for fiscal 2007. Next, we believe the strategic relationship we recently formed with Accenture, discussed in greater detail below, could increase our annual operating income rate by as much as 0.5% of revenue for fiscal 2007. Finally, we believe that our customer centricity initiative will generate significant comparable store sales gains, which will help us leverage our cost structure and could increase our annual operating income rate by approximately 0.5% of revenue for fiscal 2007. Our progress toward achieving the goal of an annual 7% operating income rate for fiscal 2007 will not be perfectly linear; however, we expect to make progress each fiscal year.year ending February 26, 2005.

As discussed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2004, we do not recognize expense for stock option grants or our employee stock purchase plan. The Financial Accounting Standards Board (FASB) has proposed a new standard which would require expense recognition in our statement of earnings for stock option grants and certain employee stock purchase plans. If adopted as currently proposed by the FASB, the new standard would be effective for us beginning in fiscal 2006.

~~Strategic Consulting and Outsourcing Agreement~~

During fiscal 2004, we completed a comprehensive evaluation of our information technology capabilities. We concluded that new, flexible systems that could support business innovation were needed for us to continue to compete effectively in the rapidly changing retail environment. We then began to evaluate strategic options for delivering information technology and other corporate support services.

After considering various options and conducting due diligence, we entered into discussions with Accenture to develop a relationship that would enhance our operational capabilities. In July 2004, we engaged Accenture to provide us with consulting services, as well as support and development services in the information technology area to further enable our anticipated transformation to a more efficient, customer-centric business model. We selected Accenture based on our historical track record of successful joint projects and our confidence in Accenture’s ability to help us deliver results.

Under our July 2004 seven-year agreement with Accenture, Accenture will manage and further develop the full scope of our information technology operations. As part of the agreement, we plan to optimize our supply chain management capabilities,

enhance the vendor management of our customer call centers, expand the functionality of our Web sites and improve the reporting for our customer centricity initiative. We expect the agreement with Accenture will result in a new and easier-to-manage operating platform that will reduce our cost structure, including our total cost of ownership for information technology systems.

We anticipate that the enhanced operational capabilities resulting from the agreement with Accenture will enable us to improve our annual operating income rate by approximately 0.5% of revenue for fiscal 2007 and thus is an important part of our goal to achieve a 7% annual operating income rate for fiscal 2007.

Fiscal 2005 second-quarter results reflect a charge for transition costs associated with outsourcing our information technology operations under the agreement with Accenture. As described in our critical accounting policies, we evaluate long-lived assets, including our information technology assets, for impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable.

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 (Exchange Act), 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, our ability to react to a disaster recovery situation, 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 March 18, 2004, 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our debt is not subject to material interest-rate volatility risk. The ~~rates~~rate on a substantial portion of our debt may be reset, but may not be more than one percentage point higher than the current rate. If the ~~rates~~rate on the debt were to be reset one percentage point higher, our annual interest expense would increase by approximately $4 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 related to our operations in 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.

Changes in the overall level of interest rates affect interest income generated from our short-term and long-term investments in debt securities. If overall interest rates were one percentage point lower than current rates, our annual interest income would decline by less than $1$2 million.

ITEM 4. CONTROLS AND PROCEDURES~~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 Exchange 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 Exchange 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.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various other legal proceedings arising in the normal course of conducting business. The resolution of those proceedings is not expected to have a material impact on our results of operations or financial condition.

ITEM 2. ~~CHANGES IN~~ UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Our Board of Directors authorized a $500 million share repurchase program in June 2004. The ~~new~~ program, which became effective on June 24, 2004, terminated and replaced a $400 million share repurchase program authorized by our Board of Directors in fiscal 2000. ~~During the second quarter of fiscal 2005,~~Through November 27, 2004, we purchased and retired ~~1,406,433~~1,805,960 shares at a cost of ~~$68~~$92 million ~~pursuant to the new~~under our $500 million share repurchase program. ~~We did not purchase any shares pursuant to the $400 million share repurchase program during the second quarter of fiscal 2005.~~

There is no expiration date governing the period over which we can make our share repurchases ~~pursuant to~~under the $500 million share repurchase program. 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. Cash provided by future operating activities, as well as available cash and cash equivalents, are the expected sources of funding for the share repurchase program.

The following table presents the total number of shares purchased during the ~~second~~third quarter of fiscal 2005, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase plan, and the approximate dollar value of shares that were available for purchase as of ~~August 28,~~November 27, 2004:

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⁽¹⁾

Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the Plans or
Programs⁽¹⁾

May 30, 2004, through July 3, 2004

—

$
—

—

$
500,000,000

July 4, 2004, through July 31, 2004

791,100

49.38

791,100

461,000,000

August 1, 2004, through August 28, 2004

615,333

47.10

615,333

432,000,000

Total Fiscal 2005 Second Quarter

1,406,433

$
48.38

1,406,433

$
432,000,000

⁽¹⁾ Pursuant to a $500 million share repurchase program announced on June 24, 2004. The program replaced a $400 million share repurchase program announced on September 20, 1999, which was terminated on June 23, 2004. We did not purchase any shares pursuant to the $400 million share repurchase program during the second quarter of fiscal 2005.

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 29, 2004, through October 2, 2004	—	$	—	—	$	432,000,000
October 3, 2004, through October 30, 2004	75,708	56.91		75,708	428,000,000
October 31, 2004, through November 27, 2004	323,819	60.31		323,819	408,000,000
Total Fiscal 2005 Third Quarter	399,527	$	59.67	399,527	$	408,000,000

ITEM ~~4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~6

~~Our Regular Meeting of the Shareholders was held on June 24, 2004.~~

a. ~~The individuals named below were elected as Class 1 directors, each to serve for a term of two years. Shares voted were as follows:~~

~~Bradbury H. Anderson~~
~~Shares For~~		~~274,029,445~~
~~Shares Withheld~~		~~10,815,337~~

~~Kathy J. Higgins Victor~~
~~Shares For~~		~~278,570,589~~
~~Shares Withheld~~		~~6,274,193~~

~~Allen U. Lenzmeier~~
~~Shares For~~		~~272,573,688~~
~~Shares Withheld~~		~~12,271,094~~

~~Frank D. Trestman~~
~~Shares For~~		~~267,650,496~~
~~Shares Withheld~~		~~17,194,286~~

~~James C. Wetherbe, Ph.D.~~
~~Shares For~~		~~268,451,388~~
~~Shares Withheld~~		~~16,393,394~~

b. ~~The appointment of the individuals named below as Class 2 directors, each to serve until the 2005 Regular Meeting of the Shareholders, was ratified. Shares voted were as follows:~~

~~Ronald James~~
~~Shares For~~		~~254,271,854~~
~~Shares Withheld~~		~~30,572,928~~

~~Matthew H. Paull~~
~~Shares For~~		~~254,053,959~~
~~Shares Withheld~~		~~30,790,823~~

~~Mary A. Tolan~~
~~Shares For~~		~~278,505,417~~
~~Shares Withheld~~		~~6,339,365~~

c. The appointment of Ernst & Young LLP as our independent auditor for the fiscal year beginning February 29, 2004, was ratified. There were 266,582,115 votes for, and 16,906,847 votes against, ratification. There were 1,353,587 abstentions.

d. ~~Our 2004 Omnibus Stock and Incentive Plan was approved. There were 206,594,511 votes for, and 34,121,231 votes against, approval. There were 1,837,451 abstentions.~~

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

a. Exhibits:

4.1 5-year Revolving Credit Agreement

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 notice of intent to redeem on June 27, 2004, all of the registrant’s convertible debentures due in 2021 having an outstanding principal amount at maturity of $492 million, filed on June 3, 2004.

~~(2)~~ ~~Announcement of the registrant’s revenue for its first fiscal quarter ended May 29, 2004, and an updated earnings outlook for the first fiscal quarter ended May 29, 2004, filed on June 4, 2004.~~

~~(3)~~ ~~Announcement of the registrant’s results of operations for the first fiscal quarter ended May 29, 2004, filed on June 16, 2004.~~

~~(4)~~ ~~Announcement of a quarterly cash dividend payable on July 28, 2004, filed on June 21, 2004.~~

~~(5)~~ Pursuant to Regulation FD, information was furnished with respect to the registrant’s entering into an agreement for a seven-year strategic relationship with Accenture Ltd for consulting and outsourcing services, filed on July 16, 2004.

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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 1, 2004~~January 6, 2005		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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