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 |
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For the quarterly period ended | |
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OR | |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to | |
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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.) |
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7601 Penn Avenue South |
| 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, $.10 Par Value — 328,075,000325,144,000 shares outstanding as of November 27, 2004.May 28, 2005.
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 27, 2004MAY 28, 2005
INDEX
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BEST BUY CO., INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
($ in millions, except per share amounts)
|
| November 27, |
| February 28, |
| November 29, |
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| (Unaudited) |
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| (Unaudited) |
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CURRENT ASSETS |
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Cash and cash equivalents |
| $ | 2,435 |
| $ | 2,600 |
| $ | 1,827 |
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Short-term investments |
| 78 |
| — |
| — |
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Receivables |
| 742 |
| 343 |
| 678 |
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Merchandise inventories |
| 4,826 |
| 2,607 |
| 4,428 |
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Other current assets |
| 251 |
| 174 |
| 211 |
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Total current assets |
| 8,332 |
| 5,724 |
| 7,144 |
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PROPERTY AND EQUIPMENT |
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Property and equipment |
| 3,910 |
| 3,574 |
| 3,520 |
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Less accumulated depreciation and amortization |
| 1,591 |
| 1,330 |
| 1,259 |
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Net property and equipment |
| 2,319 |
| 2,244 |
| 2,261 |
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GOODWILL, NET |
| 540 |
| 477 |
| 489 |
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INTANGIBLE ASSET |
| 42 |
| 37 |
| 38 |
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LONG-TERM INVESTMENTS |
| 141 |
| — |
| — |
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OTHER ASSETS |
| 248 |
| 170 |
| 151 |
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TOTAL ASSETS |
| $ | 11,622 |
| $ | 8,652 |
| $ | 10,083 |
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(Unaudited)
|
| May 28, |
| February 26, |
| May 29, |
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CURRENT ASSETS |
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Cash and cash equivalents |
| $ | 604 |
| $ | 470 |
| $ | 250 |
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Short-term investments |
| 2,002 |
| 2,878 |
| 1,820 |
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Receivables |
| 350 |
| 375 |
| 371 |
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Merchandise inventories |
| 3,266 |
| 2,851 |
| 2,915 |
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Other current assets |
| 383 |
| 329 |
| 246 |
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Total current assets |
| 6,605 |
| 6,903 |
| 5,602 |
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PROPERTY AND EQUIPMENT |
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Property and equipment |
| 4,281 |
| 4,192 |
| 3,668 |
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Less accumulated depreciation |
| 1,825 |
| 1,728 |
| 1,429 |
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Net property and equipment |
| 2,456 |
| 2,464 |
| 2,239 |
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GOODWILL |
| 507 |
| 513 |
| 467 |
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TRADENAME |
| 40 |
| 40 |
| 37 |
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LONG-TERM INVESTMENTS |
| 113 |
| 148 |
| — |
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OTHER ASSETS |
| 178 |
| 226 |
| 205 |
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TOTAL ASSETS |
| $ | 9,899 |
| $ | 10,294 |
| $ | 8,550 |
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NOTE: The consolidated balance sheet as of February 28, 2004,26, 2005, has been condensed from the audited financial statements.
See Notes to Consolidated Condensed Financial Statements.
3
BEST BUY CO., INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
($ in millions, except per share amounts)
|
| November 27, |
| February 28, |
| November 29, |
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| (Unaudited) |
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| (Unaudited) |
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CURRENT LIABILITIES |
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Accounts payable |
| $ | 5,150 |
| $ | 2,535 |
| $ | 4,501 |
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Unredeemed gift card liabilities |
| 316 |
| 300 |
| 233 |
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Accrued compensation and related expenses |
| 220 |
| 269 |
| 225 |
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Accrued liabilities |
| 856 |
| 649 |
| 785 |
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Accrued income taxes |
| 342 |
| 380 |
| 99 |
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Dividends payable |
| — |
| — |
| 97 |
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Current portion of long-term debt |
| 8 |
| 368 |
| 14 |
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Total current liabilities |
| 6,892 |
| 4,501 |
| 5,954 |
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LONG-TERM LIABILITIES |
| 292 |
| 247 |
| 276 |
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LONG-TERM DEBT |
| 478 |
| 482 |
| 836 |
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SHAREHOLDERS’ EQUITY |
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Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none |
| — |
| — |
| — |
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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 |
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Additional paid-in capital |
| 945 |
| 836 |
| 849 |
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Retained earnings |
| 2,780 |
| 2,468 |
| 2,032 |
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Accumulated other comprehensive income |
| 202 |
| 86 |
| 104 |
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Total shareholders’ equity |
| 3,960 |
| 3,422 |
| 3,017 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 11,622 |
| $ | 8,652 |
| $ | 10,083 |
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(Unaudited)
|
| May 28, |
| February 26, |
| May 29, |
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CURRENT LIABILITIES |
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Accounts payable |
| $ | 3,047 |
| $ | 2,824 |
| $ | 2,611 |
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Unredeemed gift card liabilities |
| 374 |
| 410 |
| 289 |
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Accrued compensation and related expenses |
| 189 |
| 234 |
| 183 |
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Accrued liabilities |
| 741 |
| 844 |
| 705 |
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Accrued income taxes |
| 200 |
| 575 |
| 181 |
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Current portion of long-term debt |
| 14 |
| 72 |
| 369 |
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Total current liabilities |
| 4,565 |
| 4,959 |
| 4,338 |
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LONG-TERM LIABILITIES |
| 373 |
| 358 |
| 251 |
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LONG-TERM DEBT |
| 530 |
| 528 |
| 477 |
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SHAREHOLDERS’ EQUITY |
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Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none |
| — |
| — |
| — |
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Common stock, $.10 par value: Authorized — 1 billion shares; Issued and outstanding — 325,144,000, 328,342,000 and 324,845,000 shares, respectively |
| 33 |
| 33 |
| 32 |
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Additional paid-in capital |
| 813 |
| 952 |
| 832 |
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Retained earnings |
| 3,449 |
| 3,315 |
| 2,550 |
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Accumulated other comprehensive income |
| 136 |
| 149 |
| 70 |
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Total shareholders’ equity |
| 4,431 |
| 4,449 |
| 3,484 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 9,899 |
| $ | 10,294 |
| $ | 8,550 |
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NOTE: The consolidated balance sheet as of February 28, 2004,26, 2005, has been condensed from the audited financial statements.
See Notes to Consolidated Condensed Financial Statements.
4
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
($ in millions, except per share amounts)
(Unaudited)
|
| Three Months Ended |
| Nine Months Ended |
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|
| November 27, |
| November 29, |
| November 27, |
| November 29, |
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Revenue |
| $ | 6,646 |
| $ | 6,032 |
| $ | 18,206 |
| $ | 16,099 |
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Cost of goods sold |
| 5,015 |
| 4,546 |
| 13,634 |
| 12,059 |
| ||||
Gross profit |
| 1,631 |
| 1,486 |
| 4,572 |
| 4,040 |
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Selling, general and administrative expenses |
| 1,398 |
| 1,284 |
| 3,913 |
| 3,495 |
| ||||
Operating income |
| 233 |
| 202 |
| 659 |
| 545 |
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Net interest income (expense) |
| 6 |
| (4 | ) | 7 |
| (9 | ) | ||||
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Earnings from continuing operations before income tax expense |
| 239 |
| 198 |
| 666 |
| 536 |
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Income tax expense |
| 91 |
| 76 |
| 254 |
| 205 |
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Earnings from continuing operations |
| 148 |
| 122 |
| 412 |
| 331 |
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Loss from discontinued operations, net of income tax benefit of $18 |
| — |
| — |
| — |
| (29 | ) | ||||
Loss on disposal of discontinued operations, net of $0 tax |
| — |
| — |
| — |
| (66 | ) | ||||
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Net earnings |
| $ | 148 |
| $ | 122 |
| $ | 412 |
| $ | 236 |
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Basic earnings (loss) per share: |
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Continuing operations |
| $ | 0.45 |
| $ | 0.38 |
| $ | 1.27 |
| $ | 1.02 |
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Discontinued operations |
| — |
| — |
| — |
| (0.09 | ) | ||||
Loss on disposal of discontinued operations |
| — |
| — |
| — |
| (0.20 | ) | ||||
Basic earnings per share |
| $ | 0.45 |
| $ | 0.38 |
| $ | 1.27 |
| $ | 0.73 |
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Diluted earnings (loss) per share: |
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Continuing operations |
| $ | 0.45 |
| $ | 0.37 |
| $ | 1.24 |
| $ | 1.01 |
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Discontinued operations |
| — |
| — |
| — |
| (0.09 | ) | ||||
Loss on disposal of discontinued operations |
| — |
| — |
| — |
| (0.20 | ) | ||||
Diluted earnings per share |
| $ | 0.45 |
| $ | 0.37 |
| $ | 1.24 |
| $ | 0.72 |
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Dividends declared per common share |
| $ | 0.11 |
| $ | 0.30 |
| $ | 0.31 |
| $ | 0.30 |
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Basic weighted average common shares outstanding (in millions) |
| 326.0 |
| 324.2 |
| 325.2 |
| 323.0 |
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Diluted weighted average common shares outstanding (in millions) |
| 331.9 |
| 330.5 |
| 331.2 |
| 327.8 |
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| Three Months Ended |
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|
| May 28, |
| May 29, |
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Revenue |
| $ | 6,118 |
| $ | 5,479 |
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Cost of goods sold |
| 4,560 |
| 4,168 |
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Gross profit |
| 1,558 |
| 1,311 |
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Selling, general and administrative expenses |
| 1,319 |
| 1,127 |
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Operating income |
| 239 |
| 184 |
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Net interest income |
| 13 |
| — |
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Earnings before income tax expense |
| 252 |
| 184 |
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Income tax expense |
| 82 |
| 70 |
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Net earnings |
| $ | 170 |
| $ | 114 |
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Basic earnings per share |
| $ | 0.52 |
| $ | 0.35 |
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Diluted earnings per share |
| $ | 0.51 |
| $ | 0.34 |
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Dividends declared per common share |
| $ | 0.11 |
| $ | 0.10 |
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Basic weighted average common shares outstanding (in millions) |
| 327.5 |
| 324.7 |
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Diluted weighted average common shares outstanding (in millions) |
| 336.8 |
| 335.7 |
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See Notes to Consolidated Condensed Financial Statements.
5
BEST BUY CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE NINETHREE MONTHS ENDED NOVEMBER 27, 2004MAY 28, 2005
($ and shares in millions)
(Unaudited)
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| Common |
| Common |
| Additional |
| Retained |
| Accumulated |
| Total |
|
| Common |
| Common |
| Additional |
| Retained |
| Accumulated |
| Total |
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Balances at February 28, 2004 |
| 325 |
| $ | 32 |
| $ | 836 |
| $ | 2,468 |
| $ | 86 |
| $ | 3,422 |
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Balances at February 26, 2005 |
| 328 |
| $ | 33 |
| $ | 952 |
| $ | 3,315 |
| $ | 149 |
| $ | 4,449 |
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Net earnings, nine months ended November 27, 2004 |
| — |
| — |
| — |
| 412 |
| — |
| 412 |
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Net earnings, three months ended May 28, 2005 |
| — |
| — |
| — |
| 170 |
| — |
| 170 |
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Other comprehensive loss: |
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Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| 114 |
| 114 |
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| — |
| — |
| — |
| — |
| (12 | ) | (12 | ) | ||||||||||
Other |
| — |
| — |
| — |
| — |
| 2 |
| 2 |
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Other, net of tax |
| — |
| — |
| — |
| — |
| (1 | ) | (1 | ) | |||||||||||||||||||||||
Total comprehensive income |
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| 528 |
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| 157 |
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Stock-based compensation |
| — |
| — |
| 31 |
| — |
| — |
| 31 |
| |||||||||||||||||||||||
Stock options exercised |
| 6 |
| 1 |
| 192 |
| — |
| — |
| 193 |
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| 1 |
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| 16 |
| — |
| — |
| 16 |
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Issuance of common stock under employee stock purchase plan |
| — |
| — |
| 36 |
| — |
| — |
| 36 |
|
| — |
| — |
| 15 |
| — |
| — |
| 15 |
| ||||||||||
Stock option and employee stock purchase plan income tax benefits |
| — |
| — |
| 54 |
| — |
| — |
| 54 |
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Vesting of restricted stock awards |
| — |
| — |
| 1 |
| — |
| — |
| 1 |
| |||||||||||||||||||||||
Tax benefits from stock option exercises |
| — |
| — |
| 3 |
| — |
| — |
| 3 |
| |||||||||||||||||||||||
Other |
| — |
| — |
| 3 |
| — |
| — |
| 3 |
| |||||||||||||||||||||||
Repurchase of common stock |
| (3 | ) | — |
| (174 | ) | — |
| — |
| (174 | ) |
| (4 | ) | — |
| (207 | ) | — |
| — |
| (207 | ) | ||||||||||
Common stock dividends, $0.31 per share |
| — |
| — |
| — |
| (100 | ) | — |
| (100 | ) | |||||||||||||||||||||||
Balances at November 27, 2004 |
| 328 |
| $ | 33 |
| $ | 945 |
| $ | 2,780 |
| $ | 202 |
| $ | 3,960 |
| ||||||||||||||||||
Common stock dividends, $0.11 per share |
| — |
| — |
| — |
| (36 | ) | — |
| (36 | ) | |||||||||||||||||||||||
Balances at May 28, 2005 |
| 325 |
| $ | 33 |
| $ | 813 |
| $ | 3,449 |
| $ | 136 |
| $ | 4,431 |
|
See Notes to Consolidated Condensed Financial Statements.
6
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
|
| Nine Months Ended |
| ||||
|
| November 27, |
| November 29, |
| ||
OPERATING ACTIVITIES |
|
|
|
|
| ||
Net earnings |
| $ | 412 |
| $ | 236 |
|
Loss from discontinued operations, net of tax |
| — |
| 29 |
| ||
Loss on disposal of discontinued operations, net of tax |
| — |
| 66 |
| ||
Earnings from continuing operations |
| 412 |
| 331 |
| ||
Adjustments to reconcile earnings from continuing operations to total cash provided by operating activities from continuing operations: |
|
|
|
|
| ||
Depreciation |
| 312 |
| 283 |
| ||
Asset impairment charges |
| 19 |
| 19 |
| ||
Deferred income taxes |
| (15 | ) | (14 | ) | ||
Other |
| 19 |
| (1 | ) | ||
|
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Changes in operating assets and liabilities: |
|
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|
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| ||
Receivables |
| (396 | ) | (362 | ) | ||
Merchandise inventories |
| (2,171 | ) | (2,308 | ) | ||
Other assets |
| (110 | ) | (20 | ) | ||
Accounts payable |
| 2,550 |
| 2,263 |
| ||
Other liabilities |
| 193 |
| 287 |
| ||
Income taxes |
| (9 | ) | (91 | ) | ||
Total cash provided by operating activities from continuing operations |
| 804 |
| 387 |
| ||
|
|
|
|
|
| ||
INVESTING ACTIVITIES |
|
|
|
|
| ||
Additions to property and equipment |
| (352 | ) | (449 | ) | ||
Purchases of short-term and long-term investments |
| (219 | ) | — |
| ||
Other |
| (9 | ) | 5 |
| ||
Total cash used in investing activities from continuing operations |
| (580 | ) | (444 | ) | ||
|
|
|
|
|
| ||
FINANCING ACTIVITIES |
|
|
|
|
| ||
Long-term debt payments |
| (365 | ) | (13 | ) | ||
Issuance of common stock |
| 229 |
| 94 |
| ||
Repurchase of common stock |
| (174 | ) | (60 | ) | ||
Dividends paid |
| (100 | ) | — |
| ||
Total cash (used in) provided by financing activities from continuing operations |
| (410 | ) | 21 |
| ||
|
|
|
|
|
| ||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
| 21 |
| 2 |
| ||
NET CASH USED IN DISCONTINUED OPERATIONS |
| — |
| (53 | ) | ||
|
|
|
|
|
| ||
DECREASE IN CASH AND CASH EQUIVALENTS |
| (165 | ) | (87 | ) | ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 2,600 |
| 1,914 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 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 through a capital lease.
|
| Three Months Ended |
| ||||
|
| May 28, |
| May 29, |
| ||
OPERATING ACTIVITIES |
|
|
|
|
| ||
Net earnings |
| $ | 170 |
| $ | 114 |
|
Adjustments to reconcile net earnings to total cash used in operating activities: |
|
|
|
|
| ||
Depreciation |
| 109 |
| 103 |
| ||
Stock-based compensation |
| 31 |
| 3 |
| ||
Excess tax benefits from stock-based compensation |
| (2 | ) | — |
| ||
Tax benefits from stock-based compensation |
| — |
| 9 |
| ||
Deferred income taxes |
| (7 | ) | (5 | ) | ||
Other |
| 4 |
| 2 |
| ||
|
|
|
|
|
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Receivables |
| 25 |
| (28 | ) | ||
Merchandise inventories |
| (420 | ) | (332 | ) | ||
Other assets |
| 3 |
| (47 | ) | ||
Accounts payable |
| 228 |
| 157 |
| ||
Other liabilities |
| (189 | ) | (134 | ) | ||
Accrued income taxes |
| (371 | ) | (198 | ) | ||
Total cash used in operating activities |
| (419 | ) | (356 | ) | ||
|
|
|
|
|
| ||
INVESTING ACTIVITIES |
|
|
|
|
| ||
Additions to property and equipment |
| (105 | ) | (85 | ) | ||
Purchases of available-for-sale securities |
| (229 | ) | (114 | ) | ||
Sales of available-for-sale securities |
| 1,139 |
| 649 |
| ||
Changes in restricted assets |
| 3 |
| (58 | ) | ||
Other, net |
| 4 |
| (3 | ) | ||
Total cash provided by investing activities |
| 812 |
| 389 |
| ||
|
|
|
|
|
| ||
FINANCING ACTIVITIES |
|
|
|
|
| ||
Repurchase of common stock |
| (207 | ) | (82 | ) | ||
Long-term debt payments |
| (62 | ) | (5 | ) | ||
Dividends paid |
| (36 | ) | (32 | ) | ||
Issuance of common stock |
| 31 |
| 69 |
| ||
Proceeds from issuance of long-term debt |
| 3 |
| — |
| ||
Excess tax benefits from stock-based compensation |
| 2 |
| — |
| ||
Other, net |
| 15 |
| 24 |
| ||
Total cash used in financing activities |
| (254 | ) | (26 | ) | ||
|
|
|
|
|
| ||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
| (5 | ) | (2 | ) | ||
|
|
|
|
|
| ||
INCREASE IN CASH AND CASH EQUIVALENTS |
| 134 |
| 5 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 470 |
| 245 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 604 |
| $ | 250 |
|
See Notes to Consolidated Condensed Financial Statements.
7
BEST BUY CO., INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
In the opinion of management, the accompanying financial statements contain all adjustments necessary for a fair presentation. 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. 26, 2005.
We reclassified certain prior-year amounts as described in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended February 26, 2005. In addition, during the first quarter of fiscal 2006, we reclassified changes in restricted assets in our consolidated statements of cash flows from operating activities to investing activities. Prior-year amounts were reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported operating income or net earnings, financial position or cash flows.earnings.
Cost of goods sold includesThe following table illustrates the total cost of products sold;primary 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.classified in each major expense category:
Cost of Goods Sold | Selling, General & Administrative (SG&A) | |
• Total cost of products sold including: - Freight expenses associated with moving merchandise inventories from our vendors to our distribution centers; and - Vendor allowances that are not a reimbursement of specific, incremental and identifiable costs to promote a vendor’s products; • Costs of services provided; • Physical inventory losses; • Markdowns; • Customer shipping and handling expenses; • Costs associated with operating our distribution network, including payroll and benefit costs, occupancy costs and depreciation; and • Freight expenses associated with moving merchandise inventories from our distribution centers to our retail stores. | • Payroll and benefit costs, including stock-based compensation in fiscal 2006, for retail and corporate employees; • Occupancy costs of retail, services and corporate facilities; • Depreciation related to retail, services and corporate assets; • Advertising; • Vendor allowances that are a reimbursement of specific, incremental and identifiable costs to promote a vendor’s products; • Outside service fees; • Long-lived asset impairment charges; and • Other administrative costs, such as credit card service fees, supplies, and travel and lodging. |
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 $56$20 million and $35$29 million for the three months ended November 27,May 28, 2005, and May 29, 2004, and November 29, 2003, respectively; and $111 million and $61 million for the nine months ended November 27, 2004, and November 29, 2003, respectively.
2. Impairment of Long-Lived AssetsLong-Term Debt and Derivative Financial Instruments:
We recorded pre-tax long-lived asset impairment chargesOn May 4, 2005, we repaid the outstanding balance of $4$54 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 primarilyon our master lease program. In addition, we terminated our only derivative financial instrument, an interest-rate swap related to technology assets that were taken outthe master lease program. The net loss recognized on the repayment of service based on changes in our business. The nine months ended November 27, 2004 also included an impairment charge associated with the disposalmaster lease obligation and termination of corporate facilities which had been vacated. The long-lived asset impairment charges were recorded in SG&A within our Domestic segment.the interest-rate swap was less than $1 million.
8
3. �� Net Interest Income (Expense):
Net interest income (expense) was comprised of the following ($ in millions):
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||||
|
| November 27, |
| November 29, |
| November 27, |
| November 29, |
|
| May 28, |
| May 29, |
| ||||||
Interest income |
| $ | 21 |
| $ | 7 |
| |||||||||||||
Interest expense |
| $ | (4 | ) | $ | (8 | ) | $ | (17 | ) | $ | (24 | ) |
| (8 | ) | (7 | ) | ||
Capitalized interest |
| — |
| — |
| — |
| 1 |
| |||||||||||
Interest income |
| 10 |
| 4 |
| 24 |
| 14 |
| |||||||||||
Net interest income (expense) |
| $ | 6 |
| $ | (4 | ) | $ | 7 |
| $ | (9 | ) | |||||||
Net interest income |
| $ | 13 |
| $ | — |
|
4. Income TaxesEarnings per Share:
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 third quarter and first 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.
8
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 |
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||||||
|
| November 27, |
| November 29, 2003 |
| November 27, |
| November 29, |
|
| May 28, |
| May 29, |
| ||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Earnings from continuing operations |
| $ | 148 |
| $ | 122 |
| $ | 412 |
| $ | 331 |
| |||||||||
Net earnings, basic |
| $ | 170 |
| $ | 114 |
| |||||||||||||||
Adjustment for assumed dilution: |
|
|
|
|
| |||||||||||||||||
Interest on convertible debentures due in 2022, net of tax |
| 2 |
| 1 |
| |||||||||||||||||
Net earnings, diluted |
| $ | 172 |
| $ | 115 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average common shares outstanding |
| 326.0 |
| 324.2 |
| 325.2 |
| 323.0 |
|
| 327.5 |
| 324.7 |
| ||||||||
Effect of potentially dilutive securities: Employee stock options and other |
| 5.9 |
| 6.3 |
| 6.0 |
| 4.8 |
| |||||||||||||
Effect of potentially dilutive securities: |
|
|
|
|
| |||||||||||||||||
Shares from assumed conversion of convertible debentures due in 2022 |
| 5.8 |
| 5.8 |
| |||||||||||||||||
Stock options and other |
| 3.5 |
| 5.2 |
| |||||||||||||||||
Weighted average common shares outstanding, assuming dilution |
| 331.9 |
| 330.5 |
| 331.2 |
| 327.8 |
|
| 336.8 |
| 335.7 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Basic earnings per share – continuing operations |
| $ | 0.45 |
| $ | 0.38 |
| $ | 1.27 |
| $ | 1.02 |
| |||||||||
Diluted earnings per share – continuing operations |
| $ | 0.45 |
| $ | 0.37 |
| $ | 1.24 |
| $ | 1.01 |
| |||||||||
Basic earnings per share |
| $ | 0.52 |
| $ | 0.35 |
| |||||||||||||||
Diluted earnings per share |
| $ | 0.51 |
| $ | 0.34 |
|
Potentially dilutive securities include stock options, unvested restricted stocknonvested share awards, shares issuable under our employee stock purchase plan and(ESPP) as well as common shares that would have resulted from the assumed conversion of our convertible debentures. Since the potentially dilutive shares related to the convertible debentures – assuming certain criteria are met.included in the earnings per share calculation, the related interest, net of tax, is added back to net earnings because the interest would not have been paid if the convertible debentures were converted to common stock.
The computation of dilutive shares outstanding excluded options to purchase 2.96.4 million and 3.63.8 million shares of common stock for the three months ended November 27,May 28, 2005, and May, 29, 2004, and November 29, 2003, respectively; and 6.4 million and 16.3 million shares of common stock for the nine months ended November 27, 2004, and 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., including such options would result in higher earnings per share). 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 shares related to our convertible debentures due in 2022 will be included in our diluted earnings per share calculation beginning with our fourth quarter of fiscal 2005 as described more fully in Note 14, New Accounting Standards, of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.
9
6.5. Stock-Based Compensation:
We have a stock-based compensation plans includingplan which includes fixed stock option plans,options and nonvested share awards. We also have an employeeESPP. Our outstanding stock options have a ten-year term. Outstanding options issued to employees generally vest over a four-year period, and outstanding options issued to directors vest immediately upon grant. Nonvested share grants vest based on continued employment (time-based) or upon achievement of Company or personal performance goals. Time-based share grants vest over a period of at least three years, during which no more than 25% may vest at the time of the award, and no more than 25% may vest on each anniversary date thereafter. Nonvested share awards, that are not time-based, vest at the end of a three-year incentive period based on our total return to shareholders compared with the total return to shareholders of companies that comprise the Standard & Poor’s 500 Index (market-based) or upon the achievement of Company or personal performance goals (performance-based). Our ESPP permits employees to purchase planstock at 85% of the fair market value of our common stock at the beginning or at the end of the semi-annual purchase period, whichever is less. Stock-based compensation expense associated with our ESPP and a restricted stock plan. We continuetime-based share awards is not significant.
Prior to applyFebruary 27, 2005, we applied 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 anyNo stock-based compensation expense was recognized in our statements of earnings prior to fiscal 2006 for fixed stock option grants, as the exercise price equalswas equal to the market price of our stock price on the date of grant. In addition, we havedid not recognizedrecognize any stock-based compensation expense for our employee stock purchase planESPP as it iswas intended to be a plan that qualifiesqualified under Section 423 of the Internal Revenue Code of 1986, as amended. Finally, we have employee restricted stock grants which vest based on continued employment with the company, or upon achievement of personal or company performance goals. Restricted stock awards result inrecognized stock-based compensation expense for nonvested share awards 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, 2004.26, 2005.
9On February 27, 2005, we early-adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (123(R)), requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modified prospective transition method as permitted by SFAS No. 123(R). Under this transition method, stock-based compensation expense for the three months ended May 28, 2005 includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of February 26, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and (b) compensation expense for all stock-based compensation awards granted subsequent to February 26, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). We recognize compensation expense for stock option awards and nonvested share awards, that are either time-based or market-based, on a straight-line basis over the requisite service period of the award (or to an employee’s eligible retirement date, if earlier). Performance-based nonvested share awards are recognized as compensation expense based on the fair value on the date of grant, the number of shares ultimately expected to vest and the vesting period. At May 28, 2005, achievement of the performance factors is not believed to be probable, thus no compensation expense has been recorded for our performance-based awards during the three months ended May 28, 2005. Total stock-based compensation expense included in our statements of earnings for the three months ended May 28, 2005, and May 29, 2004, was $31 million ($20 million, net of tax) and $3 million ($2 million, net of tax), respectively. In accordance with the modified prospective transition method of SFAS No. 123(R), financial results for the prior period have not been restated.
As a result of adopting SFAS No. 123(R) on February 27, 2005, our earnings before income tax expense and net earnings for the three months ended May 28, 2005, were $29 million and $19 million lower, respectively, than if we had continued to account for stock-based compensation under APB Opinion No. 25. If we had not adopted SFAS No. 123(R), our basic and diluted earnings per share would have been increased by $0.06.
Prior to the adoption of SFAS No. 123(R), we reported all tax benefits resulting from the exercise of stock options as operating cash flows in our consolidated statements of cash flows. In accordance with SFAS No. 123(R), for the three months ended May 28, 2005, we revised our statement of cash flows presentation to report the excess tax benefits from the exercise of stock options as financing cash flows. For the three months ended May 28, 2005, $2 million of excess tax benefits were reported as financing cash flows rather than operating cash flows.
10
The following table below illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS)SFAS No. 123 Accounting for Stock-Based Compensation, to stock-based employee compensation ($ in millions, except per share amounts):during the three-month period ended May 29, 2004.
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||
|
| November 27, |
| November 29, |
| November 27, |
| November 29, |
|
| May 29, |
| |||||||
Net earnings, as reported |
| $ | 148 |
| $ | 122 |
| $ | 412 |
| $ | 236 |
|
| $ | 114 |
| ||
Add: Stock-based employee compensation expense included in reported net earnings, net of tax (1) |
| 5 |
| 2 |
| 8 |
| 2 |
| ||||||||||
Deduct: Stock-based compensation expense determined under fair value method for all awards, net of tax |
| (28 | ) | (27 | ) | (76 | ) | (71 | ) | ||||||||||
Add: Stock-based compensation expense included in reported net earnings, net of tax (1) |
| 2 |
| ||||||||||||||||
Deduct: Stock-based compensation expense determined under fair value method for all awards, net of tax(2) |
| (24 | ) | ||||||||||||||||
Net earnings, pro forma |
| $ | 125 |
| $ | 97 |
| $ | 344 |
| $ | 167 |
|
| $ | 92 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Basic – as reported |
| $ | 0.45 |
| $ | 0.38 |
| $ | 1.27 |
| $ | 0.73 |
|
| $ | 0.35 |
| ||
Basic – pro forma |
| $ | 0.39 |
| $ | 0.30 |
| $ | 1.06 |
| $ | 0.52 |
|
| $ | 0.28 |
| ||
Diluted – as reported |
| $ | 0.45 |
| $ | 0.37 |
| $ | 1.24 |
| $ | 0.72 |
|
| $ | 0.34 |
| ||
Diluted – pro forma |
| $ | 0.39 |
| $ | 0.30 |
| $ | 1.05 |
| $ | 0.52 |
|
| $ | 0.28 |
|
(1) Amounts representAmount represents the after-tax compensation expense for restrictedvested share awards.
(2)For purposes of this pro forma disclosure, the value of the stock-based compensation is amortized to expense on a straight-line basis over the period it is vested or earned. Forfeitures are estimated based on historical experience.
11
Stock Options
The following table summarizes the stock awards.option transactions for the three months ended May 28, 2005:
Note: At May 28, 2005, stock-based compensation associated with our ESPP was not significant and is excluded from table above.
The weighted-average grant date fair value of stock options granted during the three months ended May 28, 2005, and May 29, 2004, was $19.61 and $20.85, respectively. The aggregate intrinsic value of options (the amount by which the stock price of the option on the date of grant exceeded the stock price on the date of exercise) exercised during the three months ended May 28, 2005, and May 29, 2004, was $11 million and $24 million, respectively.
The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model.
Black-Scholes Option Valuation Assumptions(1) |
| May 28, |
| May 29, |
|
Risk-free interest rate(2) |
| 3.9 | % | 3.4 | % |
Expected dividend yield |
| 0.8 | % | 0.9 | % |
Expected stock price volatility(3) |
| 40 | % | 40 | % |
Expected life of stock options (in years)(4) |
| 5.5 |
| 5.5 |
|
(1)Forfeitures are estimated based on historical experience.
(2)Based on the five-year Treasury constant maturity interest rate whose term is consistent with the expected life of our stock options.
(3)In fiscal 2005, we used an outside valuation advisor to assist us in more accurately projecting expected stock price volatility. We considered both historical data and observable market prices of similar equity instruments. Prior to fiscal 2005, expected stock price volatility was based primarily on historical experience.
(4)We estimate the expected life of stock options based upon historical experience.
Net cash proceeds from the exercise of stock options were $16 million and $49 million for the three months ended May 28, 2005, and May 29, 2004, respectively. The actual income tax benefit realized from stock option exercises total $4 million and $9 million, respectively, for those same periods.
12
Nonvested Share Awards
The fair value of nonvested market-based share awards is determined based on generally accepted valuation techniques and the closing market price of our stock on the date of grant. A summary of the status of our nonvested market-based share awards as of May 28, 2005, and changes during the three-month period ended May 28, 2005, were as follows:
| Shares |
| Fair |
| ||
|
|
|
|
|
| |
Nonvested at February 26, 2005 |
| 1,531,000 |
| $ | 43.80 |
|
Granted |
| — |
| — |
| |
Vested |
| — |
| — |
| |
Forfeited/Canceled |
| (40,000 | ) | 44.03 |
| |
|
|
|
|
|
| |
Nonvested at May 28, 2005 |
| 1,491,000 |
| $ | 43.79 |
|
Note: At May 28, 2005, time-based nonvested share awards were not significant and are excluded from table above.
No market-based share awards vested during the three months ended May 28, 2005, and May 29, 2004. As of May 28, 2005, there was $36 million of unrecognized compensation expense related to nonvested market-based share awards that is expected to be recognized over a weighted average period of 1.9 years.
7.6. Comprehensive Income:
We compute comprehensiveComprehensive income is computed 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. Foreign currency translation adjustments do not include a provision for income tax expense because earnings from foreign operations are considered to be indefinitely reinvested outside the U.S. Investment gains/losses were not significant. Comprehensive income was $250$157 million and $159$98 million for the three months ended November 27,May 28, 2005, and May 29, 2004, and November 29, 2003, respectively; and $528 million and $313 million for the nine months ended November 27, 2004, and November 29, 2003, respectively.
13
8.7. Segments:
We operate two reportable segments: Domestic and International. The Domestic segment is comprised of the operations of U.S. Best Buy and Magnolia Audio Video.Video operations. The International segment is comprised of Future Shop and Best Buy operations in Canada. Our segments are evaluated on an operating income basis, and a stand-alone tax provision is not calculated for each segment. The other accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 26, 2005.
Revenue from continuing operations by reportable segment was as follows ($ in millions):
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||
|
| November 27, |
| November 29, |
| November 27, |
| November 29, |
|
| May 28, |
| May 29, |
| |||||||
Domestic |
| $ | 5,918 |
| $ | 5,430 |
| $ | 16,404 |
| $ | 14,619 |
|
| $ | 5,492 |
| $ | 4,980 |
| |
International |
| 728 |
| 602 |
| 1,802 |
| 1,480 |
|
| 626 |
| 499 |
| |||||||
Total revenue |
| $ | 6,646 |
| $ | 6,032 |
| $ | 18,206 |
| $ | 16,099 |
|
| $ | 6,118 |
| $ | 5,479 |
|
Operating income from continuing operations(loss) by reportable segment and the reconciliation to earnings from continuing operations before income tax expense were as follows ($ in millions):
|
| Three Months Ended |
| Nine Months Ended |
| |||||||||
|
| November 27, |
| November 29, |
| November 27, |
| November 29, |
| |||||
Domestic |
| $ | 228 |
| $ | 202 |
| $ | 658 |
| $ | 555 |
| |
International |
| 5 |
| — |
| 1 |
| (10 | ) | |||||
Total operating income from continuing operations |
| 233 |
| 202 |
| 659 |
| 545 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Net interest income (expense) |
| 6 |
| (4 | ) | 7 |
| (9 | ) | |||||
Earnings from continuing operations before income tax expense |
| $ | 239 |
| $ | 198 |
| $ | 666 |
| $ | 536 |
| |
10
|
| Three Months Ended |
| ||||
|
| May 28, |
| May 29, |
| ||
Domestic |
| $ | 242 |
| $ | 190 |
|
International |
| (3 | ) | (6 | ) | ||
Total operating income |
| 239 |
| 184 |
| ||
|
|
|
|
|
| ||
Net interest income |
| 13 |
| — |
| ||
Earnings before income tax expense |
| $ | 252 |
| $ | 184 |
|
Assets by reportable operating segment were as follows ($ in millions):
|
| November 27, |
| February 28, |
| November 29, |
|
| May 28, |
| February 26, |
| May 29, |
| |||||||
Domestic |
| $ | 9,767 |
| $ | 7,547 |
| $ | 8,766 |
|
| $ | 8,186 |
| $ | 8,372 |
| $ | 7,378 |
| |
International |
| 1,855 |
| 1,105 |
| 1,317 |
|
| 1,713 |
| 1,922 |
| 1,172 |
| |||||||
Total assets |
| $ | 11,622 |
| $ | 8,652 |
| $ | 10,083 |
|
| $ | 9,899 |
| $ | 10,294 |
| $ | 8,550 |
|
Goodwill net by reportable operating segment was as follows ($ in millions):
|
| November 27, |
| February 28, |
| November 29, |
|
| May 28, |
| February 26, |
| May 29, |
| |||||||
Domestic |
| $ | 3 |
| $ | 3 |
| $ | 3 |
|
| $ | 3 |
| $ | 3 |
| $ | 3 |
| |
International |
| 537 |
| 474 |
| 486 |
|
| 504 |
| 510 |
| 464 |
| |||||||
Goodwill, net |
| $ | 540 |
| $ | 477 |
| $ | 489 |
| |||||||||||
Total goodwill |
| $ | 507 |
| $ | 513 |
| $ | 467 |
|
Changes in the International segment’s goodwill balance since February 28,26, 2005, and May 29, 2004, and November 29, 2003, were the result of fluctuations in foreign currency exchange rates.
The only intangible asset, other than goodwill,tradename included in our balance sheetsheets is an indefinite-lived tradenameintangible asset related to Future Shop, whichand is included in the International segment.
14
9.8. Investments:
Short-termOur short-term and long-term investments were primarilyare comprised of municipal and United StatesU.S. government debt securities. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and based on our intentions regardingability to market and sell these instruments, we classify allauction-rate debt securities and other investments in debt securities as held-to-maturityavailable-for-sale and account for these investmentscarry them at amortized cost. Auction-rate debt securities are long-term bonds that are similar to short-term instruments because their interest rates are reset periodically and investments in these securities can be sold for cash on the auction dates. We classify auction-rate debt securities as short-term or long-term investments based on the auction dates.
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.
On an annual basis, we review the key characteristics of our debt securities portfolio and their classification in accordance with accounting principles generally accepted in the United States (GAAP). If a decline in the fair value of a security is deemed by management to be other than temporary, the cost basis of the investment is written down to fair value, and the amount of the write-down is included in the determination of net earnings.
We revised the presentation of our consolidated statement of cash flows for the three months ended May 29, 2004, to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents, which is consistent with the presentation for the three months ended May 28, 2005.
The carrying amount of our investments in debt securities approximated fair value at May 28, 2005, and May 29, 2004, respectively, due to the rapid turnover of our portfolio and the highly liquid nature of these investments. Therefore, there were no significant unrealized holding gains or losses.
The following table presents the amortized principal amounts, related weighted average taxable equivalentweighted-average interest rates (taxable equivalent), maturities and major security types for our investments in debt securities ($ in millions):
|
| November 27, 2004 |
| |||
|
| Amortized Principal |
| Weighted Average Taxable Equivalent Interest Rate |
| |
Short-term investments (less than one year) |
| $ | 78 |
| 2.80 | % |
Long-term investments (one to three years) |
| 141 |
| 3.18 | % | |
Total |
| $ | 219 |
|
|
|
|
|
|
|
|
| |
Municipal debt securities |
| $ | 212 |
|
|
|
Debt securities issued by U.S. Treasury and other U.S. government entities |
| 7 |
|
|
| |
Total |
| $ | 219 |
|
|
|
The amortized principal amount of our investment in debt securities approximated fair value at November 27, 2004, and therefore, there were no significant unrealized holding gains or losses.
|
| May 28, 2005 |
| May 29, 2004 |
| ||||||
|
| Amortized |
| Weighted- |
| Amortized |
| Weighted- |
| ||
Short-term investments (less than one year) |
| $ | 2,002 |
| 4.60 | % | $ | 1,820 |
| 1.86 | % |
Long-term investments (one to three years) |
| 113 |
| 3.81 | % | — |
| — |
| ||
Total |
| $ | 2,115 |
|
|
| $ | 1,820 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Municipal debt securities |
| $ | 2,108 |
|
|
| $ | 1,820 |
|
|
|
Debt securities issued by U.S. Treasury and other U.S. government entities |
| 7 |
|
|
| — |
|
|
| ||
Total |
| $ | 2,115 |
|
|
| $ | 1,820 |
|
|
|
10.9. Restricted Assets:
Included in other current assets were $70$155 million, $18$158 million and $27$85 million in restricted cash balancesand investments in debt securities as of November 27,May 28, 2005, February 26, 2005, and May 29, 2004, February 28, 2004, and November 29, 2003, respectively. Such balances are pledged as collateral or restricted to use for general liability insurance, workers’ compensation insurance and/or warranty programs.
1115
11.10. Commitments and Contingencies:
On August 18, 2004, we were served withJune 13, 2005, 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 Courtvoluntary Stipulation 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) and Chief Financial Officer. The plaintiffs allege that the defendants violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder,Dismissal without prejudice was filed by making material misrepresentations between January 9, 2002, and August 7, 2002, which resultedPlaintiffs 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 atheir shareholder derivative action venued in Hennepin County District Court, State of Minnesota District Court. This case raises many factual matters similar to those raised inMinnesota. The Plaintiffs had claimed that the federal securities law cases, described above. The state court action alleges violations ofnamed officer and director defendants violated state law relative to fiduciary responsibilities, control and management of our company and unjust enrichment.enrichment because we allegedly made material misrepresentations between January 9, 2002, and August 7, 2002, that resulted in artificially inflated prices of our common stock. 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 puthad been on inactive status. Basedstatus pending the decision of the U.S. District Court for the District of Minnesota in a related case, which was dismissed with prejudice by the federal court on our informationApril 12, 2005, and belief,without an appeal of the claims against the named officer and director defendants are without merit and will be vigorously defended.dismissal.
We are involved in various other legal proceedings arising in the normal course of conducting business. We believe the amounts provided in our consolidated financial statements, as prescribed by GAAP, are adequate in light of the probable and estimable liabilities. The resolution of those proceedings is not expected to have a material 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 November 27, 2004,May 28, 2005, was $10$8 million. Subsequent to the acquisition, all new extended service contracts have been sold on behalf of an unrelated third party, without recourse.
The following table reconciles the changes in our liability for our acquired extended service contracts for the ninethree months ended November 27,May 28, 2005, and May 29, 2004 ($ in millions):
Balance at February 28, 2004 |
| $ | 18 |
|
Service charges |
| (10 | ) | |
Foreign currency exchange rate fluctuation |
| 2 |
| |
Balance at November 27, 2004 |
| $ | 10 |
|
|
| Three Months Ended |
| ||||
|
| May 28, |
| May 29, |
| ||
Balance at beginning of period |
| $ | 9 |
| $ | 18 |
|
Service charges |
| (1 | ) | (4 | ) | ||
Balance at end of period |
| $ | 8 |
| $ | 14 |
|
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.
13.11. Repurchase of Common Stock:
Our Board of Directors authorized a $500 million$1.5 billion share repurchase program in June 2004.April 2005. The program, which became effective on June 24, 2004,April 27, 2005, terminated and replaced the $400a $500 million share repurchase program authorized by our Board of Directors in fiscal 2000.2005. There is no expiration date governing the period over which we can make our share repurchases under the $500 million$1.5 billion share repurchase program. Through November 27, 2004,
For the three months ended May 28, 2005, we purchased and retired 1,805,9602.8 million shares at a cost of $92$146 million under our $1.5 billion share repurchase program. We also purchased and retired 1.2 million shares at a cost of $61 million under our $500 million share repurchase program.program during the quarter.
During the first quarter of fiscal 2005, we purchased and retired 1,564,8001.6 million shares at a cost of $82 million under our $400 million share repurchase program. We did not purchase any shares underprogram authorized by our $400 million share repurchase program during the second quarterBoard of Directors in 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.2000.
1216
14.12. New Accounting StandardsSubsequent Event – Stock Split:
In January 2003, the Financial Accounting StandardsOn June 23, 2005, we announced that our Board (FASB) issued Financial Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, which requires the consolidationDirectors had approved a three-for-two stock split. Shareholders of and disclosures about variable interest entities (VIEs). VIEs are entitiesrecord as of July 13, 2005, will receive one additional share 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.every two shares owned. The revised Interpretation superseded the original Interpretation. The requirements were effective for us at the end of the first quarter of fiscal 2005; however, FIN No. 46 did not have an impactadditional shares will be distributed on our consolidated financial statements.August 3, 2005.
The Emerging Issues Task Force (EITF) reached consensuspro forma effect on Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share. The EITF consensus will require usthe May 28, 2005, balance sheet is to include in our dilutedreduce additional paid-in-capital by $33 million and increase common stock by $33 million. Common shares outstanding — giving retroactive effect to the stock split at May 28, 2005, February 26, 2005, and May 29, 2004 — would have been 487.7 million, 492.5 million and 487.3 million, respectively. Pro forma 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.
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 givegiving retroactive 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.stock split, were as follows:
|
| Three Months Ended |
| ||||
|
| May 28, |
| May 29, |
| ||
Basic earnings per share – as reported (pre-stock split) |
| $ | 0.52 |
| $ | 0.35 |
|
Basic earnings per share – pro forma (post-stock split) |
| 0.35 |
| 0.23 |
| ||
Diluted earnings per share – as reported (pre-stock split) |
| 0.51 |
| 0.34 |
| ||
Diluted earnings per share – pro forma (post-stock split) |
| 0.34 |
| 0.23 |
| ||
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 2004.13. 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 maturedue in 2022, are guaranteed by our wholly-ownedwholly owned 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. AdditionallyThe aggregate principal balance and carrying amount of our fiscalconvertible debentures, which mature in 2022, is $402 million.
In June 2004, condensed consolidating financial information includeswe redeemed our convertible debentures due in 2021, which were redeemed in the second quarter of fiscal 2005.for $355 million. These debentures were guaranteed by Best Buy Stores, L.P. and certain of our other wholly-ownedwholly 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, 2004.26, 2005.
13
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 income tax rate if they have taxable income.
The following tables present condensed consolidating balance sheets as of November 27, 2004,May 28, 2005, February 28, 2004,26, 2005, and NovemberMay 29, 2003;2004; condensed consolidating statements of earnings for the three and nine months ended November 27, 2004,May 28, 2005, and NovemberMay 29, 2003;2004; and condensed consolidating statements of cash flows for the ninethree months ended November 27, 2004,May 28, 2005, and NovemberMay 29, 2003:2004:
1417
Condensed Consolidating Balance Sheets
As of November 27, 2004May 28, 2005
(Unaudited)
$ in millions
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Cash and cash equivalents |
| $ | 1,963 |
| $ | 164 |
| $ | 308 |
| $ | — |
| $ | 2,435 |
|
| $ | 168 |
| $ | 70 |
| $ | 366 |
| $ | — |
| $ | 604 |
|
Short-term investments |
| 78 |
| — |
| — |
| — |
| 78 |
|
| 1,880 |
| — |
| 122 |
| — |
| 2,002 |
| ||||||||||
Receivables |
| 8 |
| 673 |
| 61 |
| — |
| 742 |
|
| 16 |
| 287 |
| 46 |
| 1 |
| 350 |
| ||||||||||
Merchandise inventories |
| — |
| 4,168 |
| 872 |
| (214 | ) | 4,826 |
|
| — |
| 2,924 |
| 542 |
| (200 | ) | 3,266 |
| ||||||||||
Other current assets |
| 17 |
| 103 |
| 131 |
| — |
| 251 |
|
| 36 |
| 144 |
| 259 |
| (56 | ) | 383 |
| ||||||||||
Intercompany receivable |
| — |
| — |
| 4,125 |
| (4,125 | ) | — |
|
| — |
| — |
| 2,783 |
| (2,783 | ) | — |
| ||||||||||
Intercompany note receivable |
| 500 |
| — |
| — |
| (500 | ) | — |
|
| 500 |
| — |
| — |
| (500 | ) | — |
| ||||||||||
Total current assets |
| 2,566 |
| 5,108 |
| 5,497 |
| (4,839 | ) | 8,332 |
|
| 2,600 |
| 3,425 |
| 4,118 |
| (3,538 | ) | 6,605 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net Property and Equipment |
| 249 |
| 1,376 |
| 697 |
| (3 | ) | 2,319 |
|
| 248 |
| 1,527 |
| 684 |
| (3 | ) | 2,456 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Goodwill, Net |
| — |
| 3 |
| 537 |
| — |
| 540 |
| |||||||||||||||||||||
Goodwill |
| — |
| 3 |
| 504 |
| — |
| 507 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Intangible Asset |
| — |
| — |
| 42 |
| — |
| 42 |
| |||||||||||||||||||||
Tradename |
| — |
| — |
| 40 |
| — |
| 40 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Long-Term Investments |
| 141 |
| — |
| — |
| — |
| 141 |
|
| 113 |
| — |
| — |
| — |
| 113 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Other Assets |
| 105 |
| 102 |
| 190 |
| (149 | ) | 248 |
|
| 87 |
| 165 |
| 84 |
| (158 | ) | 178 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Investments in Subsidiaries |
| 2,860 |
| — |
| 1,111 |
| (3,971 | ) | — |
|
| 3,454 |
| — |
| 1,112 |
| (4,566 | ) | — |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total Assets |
| $ | 5,921 |
| $ | 6,589 |
| $ | 8,074 |
| $ | (8,962 | ) | $ | 11,622 |
|
| $ | 6,502 |
| $ | 5,120 |
| $ | 6,542 |
| $ | (8,265 | ) | $ | 9,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Accounts payable |
| $ | — |
| $ | — |
| $ | 5,150 |
| $ | — |
| $ | 5,150 |
|
| $ | — |
| $ | — |
| $ | 3,047 |
| $ | — |
| $ | 3,047 |
|
Unredeemed gift card liabilities |
| — |
| 304 |
| 12 |
| — |
| 316 |
|
| — |
| 359 |
| 15 |
| — |
| 374 |
| ||||||||||
Accrued compensation and related expenses |
| 6 |
| 154 |
| 60 |
| — |
| 220 |
|
| — |
| 136 |
| 53 |
| — |
| 189 |
| ||||||||||
Accrued liabilities |
| 13 |
| 562 |
| 281 |
| — |
| 856 |
|
| 9 |
| 449 |
| 327 |
| (44 | ) | 741 |
| ||||||||||
Accrued income taxes |
| 258 |
| 11 |
| 73 |
| — |
| 342 |
|
| 151 |
| — |
| 60 |
| (11 | ) | 200 |
| ||||||||||
Current portion of long-term debt |
| 1 |
| 6 |
| 1 |
| — |
| 8 |
|
| 2 |
| 8 |
| 4 |
| — |
| 14 |
| ||||||||||
Intercompany payable |
| 854 |
| 3,311 |
| — |
| (4,165 | ) | — |
|
| 1,088 |
| 1,775 |
| — |
| (2,863 | ) | — |
| ||||||||||
Intercompany note payable |
| — |
| 500 |
| — |
| (500 | ) | — |
|
| — |
| 500 |
| — |
| (500 | ) | — |
| ||||||||||
Total current liabilities |
| 1,132 |
| 4,848 |
| 5,577 |
| (4,665 | ) | 6,892 |
|
| 1,250 |
| 3,227 |
| 3,506 |
| (3,418 | ) | 4,565 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Long-Term Liabilities |
| 235 |
| 573 |
| 34 |
| (550 | ) | 292 |
|
| 228 |
| 700 |
| 50 |
| (605 | ) | 373 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Long-Term Debt |
| 408 |
| 57 |
| 13 |
| — |
| 478 |
|
| 417 |
| 81 |
| 32 |
| — |
| 530 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Shareholders’ Equity |
| 4,146 |
| 1,111 |
| 2,450 |
| (3,747 | ) | 3,960 |
|
| 4,607 |
| 1,112 |
| 2,954 |
| (4,242 | ) | 4,431 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total Liabilities and Shareholders’ Equity |
| $ | 5,921 |
| $ | 6,589 |
| $ | 8,074 |
| $ | (8,962 | ) | $ | 11,622 |
|
| $ | 6,502 |
| $ | 5,120 |
| $ | 6,542 |
| $ | (8,265 | ) | $ | 9,899 |
|
1518
Condensed Consolidating Balance Sheets
As of February 28, 200426, 2005
(Unaudited)
$ in millions
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Cash and cash equivalents |
| $ | 2,402 |
| $ | 34 |
| $ | 164 |
| $ | — |
| $ | 2,600 |
|
| $ | 175 |
| $ | 62 |
| $ | 233 |
| $ | — |
| $ | 470 |
|
Short-term investments |
| 2,769 |
| — |
| 109 |
| — |
| 2,878 |
| |||||||||||||||||||||
Receivables |
| 5 |
| 313 |
| 23 |
| 2 |
| 343 |
|
| 12 |
| 314 |
| 48 |
| 1 |
| 375 |
| ||||||||||
Merchandise inventories |
| — |
| 2,736 |
| 363 |
| (492 | ) | 2,607 |
|
| — |
| 2,747 |
| 454 |
| (350 | ) | 2,851 |
| ||||||||||
Other current assets |
| 1 |
| 95 |
| 78 |
| — |
| 174 |
|
| 34 |
| 139 |
| 200 |
| (44 | ) | 329 |
| ||||||||||
Intercompany receivable |
| — |
| — |
| 2,091 |
| (2,091 | ) | — |
|
| — |
| — |
| 2,826 |
| (2,826 | ) | — |
| ||||||||||
Intercompany note receivable |
| 500 |
| — |
| — |
| (500 | ) | — |
|
| 500 |
| — |
| — |
| (500 | ) | — |
| ||||||||||
Total current assets |
| 2,908 |
| 3,178 |
| 2,719 |
| (3,081 | ) | 5,724 |
|
| 3,490 |
| 3,262 |
| 3,870 |
| (3,719 | ) | 6,903 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net Property and Equipment |
| 244 |
| 1,325 |
| 678 |
| (3 | ) | 2,244 |
|
| 250 |
| 1,504 |
| 713 |
| (3 | ) | 2,464 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Goodwill, Net |
| — |
| — |
| 477 |
| — |
| 477 |
| |||||||||||||||||||||
Goodwill |
| — |
| 3 |
| 510 |
| — |
| 513 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Intangible Asset |
| — |
| — |
| 37 |
| — |
| 37 |
| |||||||||||||||||||||
Tradename |
| — |
| — |
| 40 |
| — |
| 40 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Long-Term Investments |
| 148 |
| — |
| — |
| — |
| 148 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Other Assets |
| 115 |
| 106 |
| 105 |
| (156 | ) | 170 |
|
| 80 |
| 171 |
| 142 |
| (167 | ) | 226 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Investments in Subsidiaries |
| 2,547 |
| 1 |
| — |
| (2,548 | ) | — |
|
| 3,456 |
| — |
| 1,094 |
| (4,550 | ) | — |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total Assets |
| $ | 5,814 |
| $ | 4,610 |
| $ | 4,016 |
| $ | (5,788 | ) | $ | 8,652 |
|
| $ | 7,424 |
| $ | 4,940 |
| $ | 6,369 |
| $ | (8,439 | ) | $ | 10,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Accounts payable |
| $ | — |
| $ | — |
| $ | 2,535 |
| $ | — |
| $ | 2,535 |
|
| $ | — |
| $ | — |
| $ | 2,824 |
| $ | — |
| $ | 2,824 |
|
Unredeemed gift card liabilities |
| — |
| 300 |
| — |
| — |
| 300 |
|
| — |
| 393 |
| 17 |
| — |
| 410 |
| ||||||||||
Accrued compensation and related expenses |
| 3 |
| 152 |
| 114 |
| — |
| 269 |
|
| 2 |
| 166 |
| 66 |
| — |
| 234 |
| ||||||||||
Accrued liabilities |
| 10 |
| 435 |
| 204 |
| — |
| 649 |
|
| 5 |
| 548 |
| 335 |
| (44 | ) | 844 |
| ||||||||||
Accrued income taxes |
| 305 |
| 23 |
| 52 |
| — |
| 380 |
|
| 504 |
| 2 |
| 69 |
| — |
| 575 |
| ||||||||||
Current portion of long-term debt |
| 354 |
| 13 |
| 1 |
| — |
| 368 |
|
| 3 |
| 66 |
| 3 |
| — |
| 72 |
| ||||||||||
Intercompany payable |
| 597 |
| 1,507 |
| — |
| (2,104 | ) | — |
|
| 1,441 |
| 1,398 |
| — |
| (2,839 | ) | — |
| ||||||||||
Intercompany note payable |
| — |
| 500 |
| — |
| (500 | ) | — |
|
| — |
| 500 |
| — |
| (500 | ) | — |
| ||||||||||
Total current liabilities |
| 1,269 |
| 2,930 |
| 2,906 |
| (2,604 | ) | 4,501 |
|
| 1,955 |
| 3,073 |
| 3,314 |
| (3,383 | ) | 4,959 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Long-Term Liabilities |
| 222 |
| 421 |
| 21 |
| (417 | ) | 247 |
|
| 227 |
| 693 |
| 56 |
| (618 | ) | 358 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Long-Term Debt |
| 410 |
| 61 |
| 11 |
| — |
| 482 |
|
| 417 |
| 80 |
| 31 |
| — |
| 528 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Shareholders’ Equity |
| 3,913 |
| 1,198 |
| 1,078 |
| (2,767 | ) | 3,422 |
|
| 4,825 |
| 1,094 |
| 2,968 |
| (4,438 | ) | 4,449 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total Liabilities and Shareholders’ Equity |
| $ | 5,814 |
| $ | 4,610 |
| $ | 4,016 |
| $ | (5,788 | ) | $ | 8,652 |
|
| $ | 7,424 |
| $ | 4,940 |
| $ | 6,369 |
| $ | (8,439 | ) | $ | 10,294 |
|
1619
Condensed Consolidating Balance Sheets
As of NovemberMay 29, 20032004
(Unaudited)
$ in millions
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| ||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cash and cash equivalents |
| $ | 1,625 |
| $ | 101 |
| $ | 101 |
| $ | — |
| $ | 1,827 |
|
| $ | 118 |
| $ | 20 |
| $ | 112 |
| $ | — |
| $ | 250 |
| ||
Short-term investments |
| 1,749 |
| — |
| 71 |
| — |
| 1,820 |
| |||||||||||||||||||||||
Receivables |
| 3 |
| 635 |
| 39 |
| 1 |
| 678 |
|
| 5 |
| 342 |
| 22 |
| 2 |
| 371 |
| ||||||||||||
Merchandise inventories |
| — |
| 4,014 |
| 665 |
| (251 | ) | 4,428 |
|
| — |
| 2,717 |
| 408 |
| (210 | ) | 2,915 |
| ||||||||||||
Income taxes receivable |
| — |
| 7 |
| — |
| (7 | ) | — |
| |||||||||||||||||||||||
Other current assets |
| 55 |
| 57 |
| 99 |
| — |
| 211 |
|
| 1 |
| 100 |
| 146 |
| (1 | ) | 246 |
| ||||||||||||
Intercompany receivable |
| — |
| — |
| 3,243 |
| (3,243 | ) | — |
|
| — |
| — |
| 1,913 |
| (1,913 | ) | — |
| ||||||||||||
Intercompany note receivable |
| 500 |
| — |
| — |
| (500 | ) | — |
|
| 500 |
| — |
| — |
| (500 | ) | — |
| ||||||||||||
Total current assets |
| 2,183 |
| 4,814 |
| 4,147 |
| (4,000 | ) | 7,144 |
|
| 2,373 |
| 3,179 |
| 2,672 |
| (2,622 | ) | 5,602 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net Property and Equipment |
| 245 |
| 1,315 |
| 704 |
| (3 | ) | 2,261 |
|
| 242 |
| 1,333 |
| 667 |
| (3 | ) | 2,239 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Goodwill, Net |
| — |
| — |
| 489 |
| — |
| 489 |
| |||||||||||||||||||||||
Goodwill |
| — |
| — |
| 467 |
| — |
| 467 |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Intangible Asset |
| — |
| — |
| 38 |
| — |
| 38 |
| |||||||||||||||||||||||
Tradename |
| — |
| — |
| 37 |
| — |
| 37 |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Other Assets |
| 108 |
| 78 |
| 66 |
| (101 | ) | 151 |
|
| 114 |
| 103 |
| 148 |
| (160 | ) | 205 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Investments in Subsidiaries |
| 1,955 |
| 2 |
| — |
| (1,957 | ) | — |
|
| 2,418 |
| — |
| 1,081 |
| (3,499 | ) | — |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total Assets |
| $ | 4,491 |
| $ | 6,209 |
| $ | 5,444 |
| $ | (6,061 | ) | $ | 10,083 |
|
| $ | 5,147 |
| $ | 4,615 |
| $ | 5,072 |
| $ | (6,284 | ) | $ | 8,550 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Accounts payable |
| $ | — |
| $ | — |
| $ | 4,501 |
| $ | — |
| $ | 4,501 |
|
| $ | — |
| $ | — |
| $ | 2,611 |
| $ | — |
| $ | 2,611 |
| ||
Unredeemed gift card liabilities |
| — |
| 233 |
| — |
| — |
| 233 |
|
| — |
| 281 |
| 8 |
| — |
| 289 |
| ||||||||||||
Accrued compensation and related expenses |
| 4 |
| 132 |
| 89 |
| — |
| 225 |
|
| — |
| 126 |
| 57 |
| — |
| 183 |
| ||||||||||||
Accrued liabilities |
| 26 |
| 507 |
| 252 |
| — |
| 785 |
|
| 11 |
| 399 |
| 296 |
| (1 | ) | 705 |
| ||||||||||||
Accrued income taxes |
| 56 |
| — |
| 50 |
| (7 | ) | 99 |
|
| 105 |
| 20 |
| 56 |
| — |
| 181 |
| ||||||||||||
Dividends payable |
| 97 |
| — |
| — |
| — |
| 97 |
| |||||||||||||||||||||||
Current portion of long-term debt |
| 1 |
| 13 |
| — |
| — |
| 14 |
|
| 355 |
| 13 |
| 1 |
| — |
| 369 |
| ||||||||||||
Intercompany payable |
| 84 |
| 3,163 |
| — |
| (3,247 | ) | — |
|
| 345 |
| 1,590 |
| — |
| (1,935 | ) | — |
| ||||||||||||
Intercompany note payable |
| — |
| 500 |
| — |
| (500 | ) | — |
|
| — |
| 500 |
| — |
| (500 | ) | — |
| ||||||||||||
Total current liabilities |
| 268 |
| 4,548 |
| 4,892 |
| (3,754 | ) | 5,954 |
|
| 816 |
| 2,929 |
| 3,029 |
| (2,436 | ) | 4,338 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Long-Term Liabilities |
| 195 |
| 401 |
| 18 |
| (338 | ) | 276 |
|
| 229 |
| 549 |
| 23 |
| (550 | ) | 251 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Long-Term Debt |
| 762 |
| 63 |
| 11 |
| — |
| 836 |
|
| 410 |
| 56 |
| 11 |
| — |
| 477 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Shareholders’ Equity |
| 3,266 |
| 1,197 |
| 523 |
| (1,969 | ) | 3,017 |
|
| 3,692 |
| 1,081 |
| 2,009 |
| (3,298 | ) | 3,484 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total Liabilities and Shareholders’ Equity |
| $ | 4,491 |
| $ | 6,209 |
| $ | 5,444 |
| $ | (6,061 | ) | $ | 10,083 |
|
| $ | 5,147 |
| $ | 4,615 |
| $ | 5,072 |
| $ | (6,284 | ) | $ | 8,550 |
|
1720
Condensed Consolidating Statements of Earnings
For the Three Months Ended November 27, 2004May 28, 2005
(Unaudited)
$ in millions
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| ||||||||||
Revenue |
| $ | 4 |
| $ | 5,769 |
| $ | 7,619 |
| $ | (6,746 | ) | $ | 6,646 |
|
| $ | 4 |
| $ | 5,338 |
| $ | 5,532 |
| $ | (4,756 | ) | $ | 6,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Cost of goods sold |
| — |
| 4,687 |
| 7,108 |
| (6,780 | ) | 5,015 |
|
| — |
| 4,307 |
| 5,170 |
| (4,917 | ) | 4,560 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Gross profit |
| 4 |
| 1,082 |
| 511 |
| 34 |
| 1,631 |
|
| 4 |
| 1,031 |
| 362 |
| 161 |
| 1,558 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Selling, general and administrative expenses |
| 3 |
| 1,024 |
| 404 |
| (33 | ) | 1,398 |
|
| 8 |
| 981 |
| 366 |
| (36 | ) | 1,319 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Operating income |
| 1 |
| 58 |
| 107 |
| 67 |
| 233 |
| |||||||||||||||||||||
Operating (loss) income |
| (4 | ) | 50 |
| (4 | ) | 197 |
| 239 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net interest income (expense) |
| 8 |
| (3 | ) | 1 |
| — |
| 6 |
|
| 16 |
| (5 | ) | 2 |
| — |
| 13 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Equity in earnings (loss) of subsidiaries |
| 90 |
| (9 | ) | 24 |
| (105 | ) | — |
|
| 18 |
| (12 | ) | 18 |
| (24 | ) | — |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Earnings before income tax expense |
| 99 |
| 46 |
| 132 |
| (38 | ) | 239 |
|
| 30 |
| 33 |
| 16 |
| 173 |
| 252 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Income tax expense |
| 4 |
| 21 |
| 66 |
| — |
| 91 |
|
| 52 |
| 15 |
| 15 |
| — |
| 82 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net earnings |
| $ | 95 |
| $ | 25 |
| $ | 66 |
| $ | (38 | ) | $ | 148 |
| ||||||||||||||||
Net (loss) earnings |
| $ | (22 | ) | $ | 18 |
| $ | 1 |
| $ | 173 |
| $ | 170 |
|
18
Condensed Consolidating Statements of EarningsFor the Nine Months Ended November 27, 2004(Unaudited)$ in millions
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| 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 |
| |||
1921
Condensed Consolidating Statements of Earnings
For the Three Months Ended NovemberMay 29, 20032004
(Unaudited)
$ in millions
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| |||||
Revenue |
| $ | 4 |
| $ | 5,303 |
| $ | 7,003 |
| $ | (6,278 | ) | $ | 6,032 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of goods sold |
| — |
| 4,254 |
| 6,460 |
| (6,168 | ) | 4,546 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross profit |
| 4 |
| 1,049 |
| 543 |
| (110 | ) | 1,486 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Selling, general and administrative expenses |
| 4 |
| 989 |
| 372 |
| (81 | ) | 1,284 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating income |
| — |
| 60 |
| 171 |
| (29 | ) | 202 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net interest (expense) |
| — |
| (4 | ) | — |
| — |
| (4 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Equity in earnings (loss) of subsidiaries |
| 143 |
| (20 | ) | — |
| (123 | ) | — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings before income tax expense |
| 143 |
| 36 |
| 171 |
| (152 | ) | 198 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income tax (benefit) expense |
| (29 | ) | 22 |
| 83 |
| — |
| 76 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net earnings |
| $ | 172 |
| $ | 14 |
| $ | 88 |
| $ | (152 | ) | $ | 122 |
|
20
Condensed Consolidating Statements of EarningsFor the Nine Months Ended November 29, 2003(Unaudited)$ in millions
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| |||||
Revenue |
| $ | 12 |
| $ | 14,295 |
| $ | 16,643 |
| $ | (14,851 | ) | $ | 16,099 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of goods sold |
| — |
| 11,320 |
| 15,102 |
| (14,363 | ) | 12,059 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross profit |
| 12 |
| 2,975 |
| 1,541 |
| (488 | ) | 4,040 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Selling, general and administrative expenses |
| 18 |
| 2,813 |
| 987 |
| (323 | ) | 3,495 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Elimination of intercompany indebtedness |
| (198 | ) | — |
| 198 |
| — |
| — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating (loss) income |
| (204 | ) | 162 |
| 752 |
| (165 | ) | 545 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net interest income (expense) |
| 2 |
| (12 | ) | 1 |
| — |
| (9 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Equity in earnings (loss) of subsidiaries |
| 498 |
| (52 | ) | — |
| (446 | ) | — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings from continuing operations before income tax (benefit) expense |
| 296 |
| 98 |
| 753 |
| (611 | ) | 536 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income tax (benefit) expense |
| (198 | ) | 58 |
| 345 |
| — |
| 205 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings from continuing operations |
| 494 |
| 40 |
| 408 |
| (611 | ) | 331 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loss from discontinued operations, net of tax |
| — |
| — |
| (29 | ) | — |
| (29 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loss on disposal of discontinued operations, net of tax |
| (11 | ) | — |
| (55 | ) | — |
| (66 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net earnings |
| $ | 483 |
| $ | 40 |
| $ | 324 |
| $ | (611 | ) | $ | 236 |
|
21
Condensed Consolidating Statements of Cash FlowsFor the Nine Months Ended November 27, 2004(Unaudited)$ in millions
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| |||||
Total cash (used in) provided by operating activities |
| $ | (68 | ) | $ | (1,399 | ) | $ | 2,271 |
| $ | — |
| $ | 804 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Additions to property and equipment |
| (9 | ) | (229 | ) | (114 | ) | — |
| (352 | ) | |||||
Purchases of short-term and long-term investments |
| (219 | ) | — |
| — |
| — |
| (219 | ) | |||||
Other |
| — |
| (9 | ) | — |
| — |
| (9 | ) | |||||
Total cash used in investing activities |
| (228 | ) | (238 | ) | (114 | ) | — |
| (580 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt payments |
| (355 | ) | (9 | ) | (1 | ) | — |
| (365 | ) | |||||
Issuance of common stock |
| 229 |
| — |
| — |
| — |
| 229 |
| |||||
Repurchase of common stock |
| (174 | ) | — |
| — |
| — |
| (174 | ) | |||||
Dividends paid |
| (100 | ) | — |
| — |
| — |
| (100 | ) | |||||
Change in intercompany receivable/payable |
| 257 |
| 1,776 |
| (2,033 | ) | — |
| — |
| |||||
Total cash (used in) provided by financing activities |
| (143 | ) | 1,767 |
| (2,034 | ) | — |
| (410 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Effect of exchange rate changes on cash |
| — |
| — |
| 21 |
| — |
| 21 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Decrease) increase in cash and cash equivalents |
| (439 | ) | 130 |
| 144 |
| — |
| (165 | ) | |||||
Cash and cash equivalents at beginning of period |
| 2,402 |
| 34 |
| 164 |
| — |
| 2,600 |
| |||||
Cash and cash equivalents at end of period |
| $ | 1,963 |
| $ | 164 |
| $ | 308 |
| $ | — |
| $ | 2,435 |
|
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| |||||
Revenue |
| $ | 4 |
| $ | 4,850 |
| $ | 4,195 |
| $ | (3,570 | ) | $ | 5,479 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of goods sold |
| — |
| 3,999 |
| 3,989 |
| (3,820 | ) | 4,168 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross profit |
| 4 |
| 851 |
| 206 |
| 250 |
| 1,311 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Selling, general and administrative expenses |
| 7 |
| 796 |
| 353 |
| (29 | ) | 1,127 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating (loss) income |
| (3 | ) | 55 |
| (147 | ) | 279 |
| 184 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net interest income (expense) |
| 3 |
| (4 | ) | 1 |
| — |
| — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Equity in (loss) earnings of subsidiaries |
| (118 | ) | (19 | ) | 11 |
| 126 |
| — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) earnings before income tax expense |
| (118 | ) | 32 |
| (135 | ) | 405 |
| 184 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income tax expense (benefit) |
| 55 |
| 20 |
| (5 | ) | — |
| 70 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net (loss) earnings |
| $ | (173 | ) | $ | 12 |
| $ | (130 | ) | $ | 405 |
| $ | 114 |
|
22
Condensed Consolidating Statements of Cash Flows
For the NineThree Months Ended November 29, 2003May 28, 2005
(Unaudited)
$ in millions
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| ||||||||||
Total cash provided by (used in) operating activities from continuing operations |
| $ | 81 |
| $ | (1,840 | ) | $ | 2,392 |
| $ | (246 | ) | $ | 387 |
| ||||||||||||||||
Total cash (used in) provided by operating activities |
| $ | (367 | ) | $ | (191 | ) | $ | 139 |
| $ | — |
| $ | (419 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Additions to property and equipment |
| (45 | ) | (196 | ) | (208 | ) | — |
| (449 | ) |
| — |
| (53 | ) | (52 | ) | — |
| (105 | ) | ||||||||||
Other |
| 1 |
| 6 |
| (2 | ) | — |
| 5 |
| |||||||||||||||||||||
Total cash used in investing activities from continuing operations |
| (44 | ) | (190 | ) | (210 | ) | — |
| (444 | ) | |||||||||||||||||||||
Purchases of available-for-sale securities |
| (216 | ) | — |
| (13 | ) | — |
| (229 | ) | |||||||||||||||||||||
Sales of available-for-sale securities |
| 1,139 |
| — |
| — |
| — |
| 1,139 |
| |||||||||||||||||||||
Changes in restricted assets |
| — |
| — |
| 3 |
| — |
| 3 |
| |||||||||||||||||||||
Other, net |
| — |
| 4 |
| — |
| — |
| 4 |
| |||||||||||||||||||||
Total cash provided by (used in) investing activities |
| 923 |
| (49 | ) | (62 | ) | — |
| 812 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Repurchase of common stock |
| (207 | ) | — |
| — |
| — |
| (207 | ) | |||||||||||||||||||||
Long-term debt payments |
| — |
| (13 | ) | — |
| — |
| (13 | ) |
| — |
| (62 | ) | — |
| — |
| (62 | ) | ||||||||||
Dividends paid |
| (36 | ) | — |
| — |
| — |
| (36 | ) | |||||||||||||||||||||
Issuance of common stock |
| 94 |
| — |
| — |
| — |
| 94 |
|
| 31 |
| — |
| — |
| — |
| 31 |
| ||||||||||
Repurchase of common stock |
| (60 | ) | — |
| — |
| — |
| (60 | ) | |||||||||||||||||||||
Proceeds from issuance of long-term debt |
| — |
| — |
| 3 |
| — |
| 3 |
| |||||||||||||||||||||
Other, net |
| — |
| — |
| 15 |
| — |
| 15 |
| |||||||||||||||||||||
Excess tax benefits from stock-based compensation |
| 2 |
| — |
| — |
| — |
| 2 |
| |||||||||||||||||||||
Change in intercompany receivable/payable |
| (309 | ) | 2,107 |
| (2,044 | ) | 246 |
| — |
|
| (353 | ) | 310 |
| 43 |
| — |
| — |
| ||||||||||
Total cash (used in) provided by financing activities from continuing operations |
| (275 | ) | 2,094 |
| (2,044 | ) | 246 |
| 21 |
| |||||||||||||||||||||
Total cash (used in) provided by financing activities |
| (563 | ) | 248 |
| 61 |
| — |
| (254 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Effect of exchange rate changes on cash |
| — |
| — |
| 2 |
| — |
| 2 |
|
| — |
| — |
| (5 | ) | — |
| (5 | ) | ||||||||||
Net cash used in discontinued operations |
| — |
| — |
| (53 | ) | — |
| (53 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
(Decrease) increase in cash and cash equivalents |
| (238 | ) | 64 |
| 87 |
| — |
| (87 | ) |
| (7 | ) | 8 |
| 133 |
| — |
| 134 |
| ||||||||||
Cash and cash equivalents at beginning of period |
| 1,863 |
| 37 |
| 14 |
| — |
| 1,914 |
|
| 175 |
| 62 |
| 233 |
| — |
| 470 |
| ||||||||||
Cash and cash equivalents at end of period |
| $ | 1,625 |
| $ | 101 |
| $ | 101 |
| $ | — |
| $ | 1,827 |
|
| $ | 168 |
| $ | 70 |
| $ | 366 |
| $ | — |
| $ | 604 |
|
23
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended May 29, 2004
(Unaudited)
$ in millions
|
| Best Buy |
| Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| |||||
Total cash used in operating activities |
| $ | (238 | ) | $ | (42 | ) | $ | (76 | ) | $ | — |
| $ | (356 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Additions to property and equipment |
| — |
| (53 | ) | (32 | ) | — |
| (85 | ) | |||||
Purchases of available-for-sale securities |
| (101 | ) | — |
| (13 | ) | — |
| (114 | ) | |||||
Sales of available-for-sale securities |
| 649 |
| — |
| — |
| — |
| 649 |
| |||||
Changes in restricted assets |
| — |
| — |
| (58 | ) | — |
| (58 | ) | |||||
Other, net |
| — |
| (3 | ) | — |
| — |
| (3 | ) | |||||
Total cash provided by (used in) investing activities |
| 548 |
| (56 | ) | (103 | ) | — |
| 389 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Repurchase of common stock |
| (82 | ) | — |
| — |
| — |
| (82 | ) | |||||
Issuance of common stock |
| 69 |
| — |
| — |
| — |
| 69 |
| |||||
Dividends paid |
| (32 | ) | — |
| — |
| — |
| (32 | ) | |||||
Other, net |
| — |
| — |
| 24 |
| — |
| 24 |
| |||||
Long-term debt payments |
| — |
| (4 | ) | (1 | ) | — |
| (5 | ) | |||||
Change in intercompany receivable/payable |
| (252 | ) | 89 |
| 163 |
| — |
| — |
| |||||
Total cash (used in) provided by financing activities |
| (297 | ) | 85 |
| 186 |
| — |
| (26 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Effect of exchange rate changes on cash |
| — |
| — |
| (2 | ) | — |
| (2 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Increase (decrease) in cash and cash equivalents |
| 13 |
| (13 | ) | 5 |
| — |
| 5 |
| |||||
Cash and cash equivalents at beginning of period |
| 105 |
| 33 |
| 107 |
| — |
| 245 |
| |||||
Cash and cash equivalents at end of period |
| $ | 118 |
| $ | 20 |
| $ | 112 |
| $ | — |
| $ | 250 |
|
24
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 from the perspective of our management on our financial condition, results of operations, liquidity critical accounting policies and thecertain other factors that may affect our future impact of accounting standards that have been issued but are not yet effective.results. 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.
• 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, 2004,26, 2005, 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 our business segments, refer to Note 8, 7, 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 JuneDecember 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 of2004, 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 withFinancial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144,123 (revised 2004), Share-Based Payment (123(R)), effective for a company’s first fiscal year beginning after June 15, 2005. SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires all share-based compensation to employees, including grants of employee stock options, to be recognized in the Impairment or Disposalconsolidated statements of Long-Lived Assets, Musicland’s financial results for fiscal 2004, through the date of sale, were reported separately as discontinued operations.earnings.
Unless otherwise noted,During the following discussion regarding year-to-date results relates onlyfirst quarter of fiscal 2006, we early-adopted SFAS No. 123(R), and elected the modified prospective transition method. This method permits us to results from continuing operations.apply the new requirements on a prospective basis.
For additional information on our adoption of SFAS No. 123(R), see Note 5, Stock-Based Compensation, of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.
Executive Summary
• Net earnings for the thirdfirst quarter of fiscal 20052006 were $148$170 million, or $0.45$0.51 per diluted share, an increase of 21%50% compared with $122$114 million, or $0.37$0.34 per diluted share, for the third quartersame period of the prior fiscal year. The increase in net earnings resulted primarily from a combination of revenue gains and a decrease in our selling, general and administrative expenses (SG&A) rate. In addition, netNet earnings for the thirdfirst quarter of fiscal 2005 benefited from net interest income2006 reflect the impact of $6early-adopting SFAS No. 123(R), which resulted in stock-based compensation expense of $31 million ($20 million after tax), or $0.06 per diluted share. For additional information on the impact of adopting SFAS No. 123(R), see Note 5, Stock-Based Compensation, of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.
• Revenue for the first quarter of fiscal 2006 increased 12% to $6.1 billion, compared with net interest expense of $4 million$5.5 billion for the samefirst quarter of the prior fiscal year, and a lower effective income tax rate.
• Revenue for the third quarter of fiscal 2005 increased 10% to $6.6 billion, compared with $6.0 billion for the third quarter of the prior fiscal year, driven primarily by the addition of new stores in the past 12 months and a 4.4% comparable store sales gain of 3.2%.gain.
• Our gross profit rate for the thirdfirst quarter of fiscal 2005 decreased2006 increased by 0.1%1.6% of revenue to 24.5%25.5% of revenue, downup from 24.6%23.9% of revenue for the thirdfirst quarter of the prior fiscal year. The modest decline in our gross profit rate wasyear, due primarily to increasedstructural changes in our business model and a more modest promotional activity, includingenvironment.
• Our selling, general and administrative expenses associated with Reward Zone, our customer loyalty program.
• Our SG&A(SG&A) rate for the thirdfirst quarter of fiscal 2005 decreased2006 increased by 0.3%1.0% of revenue to 21.0%21.6% of revenue, downup from 21.3%20.6% of revenue for the thirdfirst quarter of the prior fiscal year. The decrease in our SG&A rate wasyear, due primarily to increased stock-based compensation expense leverage resulting fromas a result of adopting SFAS No. 123(R) during the 10% revenue gain and the realization of cost savings from our efficient enterprise initiative. Additionally, our fiscal third-quarter SG&A rate benefited from a reduction in asset impairment charges compared with the same period of the prior fiscal 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 absence of the gain realized in the thirdfirst 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, which was implemented in November 2003.2006.
• During the thirdfirst quarter of fiscal 2005,2006, we repurchased approximately 400,0004.0 million shares of our common stock pursuantat an average price of $51.35 per share, or $207 million in the aggregate.
• In April 2005, our Board of Directors authorized the purchase of up to a$1.5 billion of our common stock from time to time
25
through open market purchases. This share repurchase program has no stated expiration date. The $1.5 billion share repurchase program terminated and replaced the $500 million share repurchase program authorized by our Board of Directors in June 2004. We paid an average price of $59.67 per share, or $24 million in the aggregate.
• In December 2004, On June 15, 2005, we announced that oura quarterly cash dividend of $0.11 per common share, is payable on JanuaryJuly 26, 2005, to shareholders of record as of the close of business on JanuaryJuly 5, 2005.
24• On June 23, 2005, we announced that our Board of Directors had approved a three-for-two stock split for shareholders of record as of July 13, 2005. For additional information on our three-for-two stock split, see Note 12, Subsequent Event - Stock Split, of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.
• Also on June 23, 2005, we announced our intention to increase the quarterly cash dividend to $0.12 per common share, on a pre-split basis. The change would be effective with the quarterly cash dividend which, if authorized, would be payable on October 25, 2005, to shareholders of record as of October 4, 2005. The quarterly cash dividend rate on a post-split basis will be $0.08 per common share.
Results of Operations
Consolidated Performance Summary
The following table presents unaudited selected consolidated financial data ($ in millions, except per share amounts):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| November 27, |
| November 29, |
| November 27, |
| November 29, |
| ||||
Revenue |
| $ | 6,646 |
| $ | 6,032 |
| $ | 18,206 |
| $ | 16,099 |
|
Revenue % change |
| 10 | % | 18 | % | 13 | % | 15 | % | ||||
Comparable store sales % change (2) |
| 3.2 | % | 8.6 | % | 5.1 | % | 5.8 | % | ||||
Gross profit as a % of revenue |
| 24.5 | % | 24.6 | % | 25.1 | % | 25.1 | % | ||||
SG&A as a % of revenue |
| 21.0 | % | 21.3 | % | 21.5 | % | 21.7 | % | ||||
Operating income |
| $ | 233 |
| $ | 202 |
| $ | 659 |
| $ | 545 |
|
Operating income as a % of revenue |
| 3.5 | % | 3.3 | % | 3.6 | % | 3.4 | % | ||||
Earnings from continuing operations |
| $ | 148 |
| $ | 122 |
| $ | 412 |
| $ | 331 |
|
Loss from discontinued operations, net of tax |
| — |
| — |
| — |
| (29 | ) | ||||
Loss on disposal of discontinued operations, net of tax (3) |
| — |
| — |
| — |
| (66 | ) | ||||
Net earnings |
| $ | 148 |
| $ | 122 |
| $ | 412 |
| $ | 236 |
|
Diluted earnings per share — continuing operations |
| $ | 0.45 |
| $ | 0.37 |
| $ | 1.24 |
| $ | 1.01 |
|
Diluted earnings per share |
| $ | 0.45 |
| $ | 0.37 |
| $ | 1.24 |
| $ | 0.72 |
|
|
| Three Months Ended |
| ||||
|
| May 28, 2005 |
| May 29, 2004(1) |
| ||
Revenue |
| $ | 6,118 |
| $ | 5,479 |
|
Revenue % change |
| 12 | % | 17 | % | ||
Comparable store sales % gain(2) |
| 4.4 | % | 8.3 | % | ||
Gross profit as % of revenue |
| 25.5 | % | 23.9 | % | ||
SG&A as % of revenue |
| 21.6 | % | 20.6 | % | ||
Operating income |
| $ | 239 |
| $ | 184 |
|
Operating income as % of revenue |
| 3.9 | % | 3.4 | % | ||
Net earnings |
| $ | 170 |
| $ | 114 |
|
Diluted earnings per share |
| $ | 0.51 |
| $ | 0.34 |
|
Note: All periods presented reflect the classification of Musicland’s financial results as discontinued operations.
(1) Certain We reclassified certain prior-year amounts have been reclassifiedas described in Note 1, Summary of Significant Accounting Policies, of the Notes to conform toConsolidated Financial Statements in our Annual Report on Form 10-K for the current presentation.fiscal year ended February 26, 2005. These reclassifications had no effect on previously reported operating income or net earnings, financial position or cash flows.earnings.
(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 changegain excludes the effect of fluctuations in foreign currency exchange rates.
(3) DuringNet earnings were $170 million, or $0.51 per diluted share, for 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 nine months of fiscal 2004.
Net earnings were $1482006, a 50% increase from $114 million, or $0.45$0.34 per diluted share, for the thirdfirst quarter of fiscal 2005, a 21% increase from $122 million, or $0.37 per diluted share, for the third quarter of fiscal 2004. For the first nine months of fiscal 2005, earnings from continuing operations were $412 million, or $1.24 per diluted share, compared with $331 million, or $1.01 per diluted share, for the same period one year ago. For the fiscal third quarter, the2005. The increase in net earnings reflected an increase in revenue, including a gain in4.4% comparable store sales of 3.2%,gain, and a 0.3%1.6% of revenue improvement in our SG&Agross profit rate. In addition, net earnings for the thirdfirst quarter of fiscal 20052006 benefited from a lower effective income tax rate and a $13 million increase in 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.year. These factors were partially offset by a modest decline in our gross profit rate. For the nine-month period, the increase in earnings from continuing operations was due primarily to revenue growth, including a comparable store sales gain of 5.1%, and a 0.2%1.0% of revenue decreaseincrease in our SG&A rate.rate, which included the impact of early-adopting SFAS No. 123(R) during the first quarter of fiscal 2006. The adoption of
SFAS No. 123(R) resulted in stock-based compensation expense of $31 million ($20 million after tax), or $0.06 per diluted share, for the first quarter of fiscal 2006. For additional information on the impact of adopting SFAS No. 123(R), see Note 5, Stock-Based Compensation, of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.
Revenue for the thirdfirst quarter of fiscal 20052006 increased 10%12% to $6.6$6.1 billion, compared with $6.0$5.5 billion for the thirdfirst quarter of the prior fiscal year. For the first nine months of fiscal 2005, revenue increased 13% to $18.2 billion, compared with $16.1 billion for the same period of fiscal 2004. The addition of new stores in the past 12 months accounted for approximately three-fifthsmore than one-half of the revenue increase for both the first quarter of fiscal third quarter and nine-month period. The2006; the 4.4% comparable store sales gain accounted for approximately three-tenths andnearly two-fifths of the revenue increase for the fiscal third quarterfirst quarter; and first nine months, respectively. The remainder of the increase in revenue for the fiscal third quarter and first nine months was due primarily to thefavorable effect of fluctuations in foreign currency exchange rates.rates accounted for the remainder of the revenue increase for the first quarter of fiscal 2006.
2526
Our fiscal 2005 third-quarter2006 first-quarter comparable store sales gain of 3.2% wasincreased 4.4% on top of a very strong 8.6%an 8.3% comparable store sales gain for the thirdfirst quarter of the prior fiscal year. Comparable store sales gains were strongest early in our fiscal third quarter and moderated in November. We believe our comparable store sales performance for the fiscal thirdfirst quarter reflected our improved in-store execution including our ability toand an increase in 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 gainsas well as improved assortments and promotional offers.higher in-stock levels in select digital product categories. Products having the largest effect on our fiscal third-quarterfirst-quarter comparable store sales gain included MP3 players, digital televisions, MP3 players,video gaming, digital cameras and accessories, and notebook computers, video gaming and major appliances. Softness in sales of CDs and DVD movies dampened the impact of thecomputers. These gains were partially offset by comparable store sales growthdeclines in the above products.desktop computer, analog television and cellular phone product categories.
Our gross profit rate decreasedincreased by 0.1%1.6% of revenue to 24.5%25.5% of revenue for the thirdfirst quarter of fiscal 2005,2006, compared with 24.6%23.9% of revenue for the thirdfirst quarter of the prior fiscal year. For the first nine monthsquarter of fiscal 2005,2006, our Domestic segment’s gross profit rate was 25.1%increased by 1.6% of revenue the same as theand our International segment’s gross profit rate for the comparable periodincreased by 1.0% of fiscal 2004.revenue. The modest declineimprovement in our gross profit rate for the fiscal thirdfirst quarter was due primarily to increaseda more modest promotional activity, including expenses associated with Reward Zone, our customer loyalty program. Reward Zone contributedenvironment; reduced markdowns due to the revenue gain for the fiscal third quarter, but reduced the gross profit rate by approximately 0.6% of revenue for the quarter, compared with 0.3% of revenue for the same quarter last year, reflecting growth in membership. The impact of Reward Zone on theimproved product model transitions; and supply chain benefits related to pricing, global sourcing and private label initiatives. Our gross profit rate for the thirdfirst quarter of fiscal 2004 was favorably affected by2006 also benefited from an adjustment relatedincrease in higher-margin services in the revenue mix and the conversion of more stores to Reward Zone points earned duringour customer centricity operating model, as stores operating under the second quarter of the prior fiscal year. Excluding the adjustment for fiscal 2004 second-quarter points, expenses associated with Reward Zone wouldnew operating model have reduced theproduced higher gross profit rate by 0.4% of revenuerates than other U.S. Best Buy stores. See the Outlook section in this Quarterly Report on Form 10-Q for the third quarter ofadditional information regarding our expectations for our fiscal 2004. In addition to expenses associated with Reward Zone, our2006 gross profit rate 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. For the first nine months of fiscal 2005, our gross profit rate benefited from improved product assortments, but was offset by expenses associated with Reward Zone.rate.
Our SG&A rate decreasedincreased by 0.3%1.0% of revenue to 21.0%21.6% of revenue for the thirdfirst quarter of fiscal 2005,2006, compared with 21.3%20.6% of revenue for the thirdfirst quarter of the prior fiscal year. For the first nine monthsquarter of fiscal 2005,2006, our Domestic segment’s SG&A rate decreasedincreased by 1.1% of revenue and our International segment’s SG&A rate increased by 0.2% of revenue to 21.5% of revenue, compared with 21.7% of revenue for the first nine months of fiscal 2004.revenue. The decreaseincrease in our SG&A rate for the fiscal thirdfirst quarter was due primarily to increased stock-based compensation expense, leverage resulting from the 10% revenue gain and the realization of cost savings fromwhich increased our efficient enterprise initiative. Our fiscal third-quarter SG&A rate also benefited from a reduction in asset impairment chargesby approximately 0.5% of revenue compared with the same period of the prior fiscal year, a favorable settlementyear. Expenses associated with a credit card processoraccelerating our customer centricity initiative and reduced performance-based incentive compensation.expanding our services business, and higher store relocation costs also placed pressure on our SG&A rate. These factors were partially offset by additional spending on our customer centricity initiative, which increased our SG&A rate by approximately 0.2% of revenue for the third quarter of fiscal 2005, compared with the same quarter of the prior fiscal year; 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 our SG&A rate for the first nine months of fiscal 2005 was due primarily to expense leverage resulting from the 13% increase in12% revenue and the realization of cost savings from our efficient enterprise initiative, partially offset by additional expenses associated with our customer centricity initiative and increased compensation expense associated with restricted stock awards granted pursuant to our long-term incentive program.gain.
Segment Performance Summary
Domestic
The following table presents unaudited selected financial data for the Domestic segment ($ in millions):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| November 27, |
| November 29, |
| November 27, |
| November 29, |
| ||||
Revenue |
| $ | 5,918 |
| $ | 5,430 |
| $ | 16,404 |
| $ | 14,619 |
|
Revenue % change |
| 9 | % | 15 | % | 12 | % | 13 | % | ||||
Comparable stores sales % change (1) |
| 3.0 | % | 9.0 | % | 5.2 | % | 6.0 | % | ||||
Gross profit as a % of revenue |
| 24.7 | % | 24.9 | % | 25.2 | % | 25.3 | % | ||||
SG&A as a % of revenue |
| 20.9 | % | 21.2 | % | 21.2 | % | 21.5 | % | ||||
Operating income |
| $ | 228 |
| $ | 202 |
| $ | 658 |
| $ | 555 |
|
Operating income as a % of revenue |
| 3.9 | % | 3.7 | % | 4.0 | % | 3.8 | % |
|
| Three Months Ended |
| ||||
|
| May 28, 2005 |
| May 29, 2004(1) |
| ||
Revenue |
| $ | 5,492 |
| $ | 4,980 |
|
Revenue % change |
| 10 | % | 16 | % | ||
Comparable stores sales % gain(2) |
| 4.5 | % | 8.4 | % | ||
Gross profit as % of revenue |
| 25.7 | % | 24.1 | % | ||
SG&A as % of revenue |
| 21.3 | % | 20.2 | % | ||
Operating income |
| $ | 242 |
| $ | 190 |
|
Operating income as % of revenue |
| 4.4 | % | 3.8 | % |
(1) We reclassified certain prior-year amounts as described in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended February 26, 2005. These reclassifications had no effect on previously reported operating income or net earnings.
(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.
2627
The following table presents Domestic comparable store sales percentage changesgains for the thirdfirst quarter and first nine months of the past two fiscal years:
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| ||||||
|
| November 27, |
| November 29, |
| November 27, |
| November 29, |
|
| May 28, 2005 |
| May 29, 2004 |
|
U.S. Best Buy stores |
| 3.0 | % | 9.0 | % | 5.2 | % | 6.1 | % |
| 4.5 | % | 8.5 | % |
Magnolia Audio Video stores |
| 7.2 | % | 5.8 | % | 5.9 | % | 0.5 | % |
| 1.4 | % | 3.2 | % |
Total |
| 3.0 | % | 9.0 | % | 5.2 | % | 6.0 | % |
| 4.5 | % | 8.4 | % |
The following table reconciles Domestic stores open at the beginning and end of the thirdfirst quarter of fiscal 2005:
2006:
|
| Total Stores at |
| Stores |
| Stores |
| Total Stores at |
|
| Total Stores at |
| Stores |
| Stores |
| Total Stores at |
|
U.S. Best Buy stores |
| 628 |
| 32 |
| 1 |
| 659 |
|
| 668 |
| 11 |
| — |
| 679 |
|
Magnolia Audio Video stores |
| 22 |
| — |
| — |
| 22 |
|
| 20 |
| — |
| — |
| 20 |
|
Total |
| 650 |
| 32 |
| 1 |
| 681 |
|
| 688 |
| 11 |
| — |
| 699 |
|
Note: During the thirdfirst quarter of fiscal 2005, five2006, we remodeled 46 existing U.S. Best Buy stores, were relocated.including those stores converted to our customer centricity operating model, and relocated three other U.S. Best Buy stores. No other U.S. Best Buy stores or Magnolia Audio Video stores were relocated, remodeled or expanded during the thirdfirst quarter of fiscal 2005.2006.
The following table reconciles Domestic stores open at the beginning and end of the thirdfirst quarter of fiscal 2004:2005:
|
| Total Stores at Beginning of Third Quarter Fiscal 2004 |
| Stores |
| Stores |
| Total Stores at End of |
|
| Total Stores at |
| Stores |
| Stores |
| Total Stores at |
|
U.S. Best Buy stores |
| 566 |
| 34 |
| — |
| 600 |
|
| 608 |
| 11 |
| — |
| 619 |
|
Magnolia Audio Video stores |
| 20 |
| 2 |
| — |
| 22 |
|
| 22 |
| — |
| — |
| 22 |
|
Total |
| 586 |
| 36 |
| — |
| 622 |
|
| 630 |
| 11 |
| — |
| 641 |
|
Note: During the thirdfirst quarter of fiscal 2004,2005, we remodeled two existing U.S. Best Buy stores were relocated and one store was remodeled or expanded.stores. No other U.S. Best Buy stores or Magnolia Audio Video stores were relocated, remodeled or expanded during the thirdfirst quarter of fiscal 2004.2005.
For the thirdfirst quarter of fiscal 2005,2006, our Domestic segment’s operating income was $228$242 million, or 3.9%4.4% of revenue, compared with $202 million, or 3.7% of revenue, for the third quarter of the prior fiscal year. For the first nine months of fiscal 2005, Domestic operating income increased to $658 million, or 4.0% of revenue, compared with $555$190 million, or 3.8% of revenue, for the same periodfirst quarter of the prior fiscal 2004.year. The increase in our Domestic segment’s operating income rate for the first quarter of fiscal third quarter2006 reflected revenue gains, including a 3.0%4.5% 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 third quarter of the prior fiscal year. The improvement in the operating income rate for the first nine months of fiscal 2005 was due primarily to a combination of revenue gains, including an increase in comparable store sales of 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%1.6% of revenue compared withrevenue. These benefits were partially offset by an increase in the first nine monthsSG&A rate of fiscal 2004.1.1% of revenue.
Our Domestic segment’s revenue increased 9%10% to $5.9$5.5 billion for the thirdfirst quarter of fiscal 2005,2006, compared with $5.4$5.0 billion for the thirdfirst quarter of fiscal 2004. For2005. The addition of new stores in the past 12 months accounted for nearly three-fifths of the revenue increase for the first nine monthsquarter of fiscal 2005, Domestic revenue increased 12% to $16.4 billion, compared with $14.6 billion for2006, while the same period of the prior fiscal year. The revenue increases for both the fiscal third quarter and nine-month period were driven by a combination of new store openings and4.5% comparable store sales gains.gain accounted for the remainder of the fiscal first-quarter revenue increase.
We believe theour Domestic segment’s comparable store sales performance for the fiscal thirdfirst quarter reflected our improved in-store execution including our ability toand an increase in 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 products having the largest effect on theour Domestic segment’s comparable store sales gain for the fiscal thirdfirst quarter were MP3 players, digital televisions, MP3 players, andvideo gaming, digital cameras and accessories.accessories, and notebook computers. The home-office products categoryconsumer electronics product group posted a high single-digit comparable store sales gain in the mid-single-digits for the fiscal thirdfirst quarter, driven primarily by sales of MP3 players, and notebook computers, reflecting consumer’s desire for portable entertainment. A low single-digit comparable store sales gain in the consumer electronics category was fueled by
27
increased sales of digital televisions, as well asand digital cameras and accessories, reflecting continued consumer preference for and the increased affordability of digital products, andas well as our improved assortments and higher in-stock levels in these categories following our merchandise resets in the home theater, digital imaging and computing departments completed during the fiscal third quarter.categories. A high single-digitmid-single-digit comparable store sales gain in the appliances categoryproduct group was driven primarily by the expansion of our improved appliance assortments and labor model to more stores.
28
The home-office product group reported a modest comparable store sales gain for the first quarter of fiscal 2006, driven by a low double-digit comparable store sales increase in major appliances which benefited fromnotebook computers, reflecting expanded assortments, but was partially offset by comparable store sales declines in other products within the appliances category.desktop computers and cellular phones. The entertainment software categoryproduct group also recorded a modest comparable store sales gain drivenresulting primarily by increased revenue from double-digit growth in video gaming, driven by the launch of Sony’s Playstation Portable, and computer software, but was partially offset by reduced revenue from CDscomparable stores sales declines in DVDs and DVD movies.CDs.
TheOur Domestic segment’s gross profit rate for the thirdfirst quarter of fiscal 20052006 was 24.7%25.7% of revenue, downup from 24.9%24.1% of revenue for the thirdfirst quarter of the prior fiscal year. For the first nine months of fiscal 2005, theThe improvement in our Domestic segment’s gross profit rate for the fiscal first quarter was 25.2%due primarily to a more modest promotional environment; reduced markdowns due to improved product model transitions; and supply chain benefits related to pricing, global sourcing and private label initiatives. Our Domestic segment’s gross profit rate for the first quarter of fiscal 2006 also benefited from an increase in higher-margin services in the revenue mix and the conversion of more stores to our customer centricity operating model, as stores operating under the new operating model have produced higher gross profit rates than other U.S. Best Buy stores.
Our Domestic segment’s SG&A rate increased by 1.1% of revenue down from 25.3%to 21.3% of revenue for the first nine monthsquarter of fiscal 2006, compared with 20.2% of revenue for the first quarter of the prior fiscal year. The modest declineincrease in the Domestic segment’s gross profit rate for both the third quarter and first nine months of fiscal 2005 was due primarily to increased promotional activity, including expenses associated with Reward Zone. The expense associated with points earned by Reward Zone members reduced the fiscal third quarter gross profit rate by 0.7% of revenue, compared with 0.3% of revenue for the 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 third quarter of fiscal 2005, we had more than 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 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 decreased by 0.3% of revenue to 20.9% of revenue for the third quarter of fiscal 2005, compared with 21.2% of revenue for the same period last fiscal year. For the first nine months of fiscal 2005, the SG&A rate declined by 0.3% of revenue to 21.2% of revenue, compared with 21.5% of revenue for the same period one year ago. The decrease in the Domestic segment’s SG&A rate for the fiscal thirdfirst quarter was due primarily to increased stock-based compensation expense, leverage resulting from the 9% revenue gain and the realization of cost savings fromwhich increased our efficient enterprise initiative. Our fiscal third quarterDomestic segment’s SG&A rate also benefited from a reduction in asset impairment chargesby approximately 0.5% of revenue compared with the same period of the prior year’s period, a favorable settlementfiscal year. Expenses associated with a credit card processoraccelerating our customer centricity initiative and reduced performance-based incentive compensation.expanding our services business, and higher store relocation costs also placed pressure on our Domestic SG&A rate. 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 nine months of fiscal 2005 was due primarily to expense leverage resulting from the 12% increase in10% revenue and the realization of cost savings from our efficient enterprise initiative, partially offset by increased expenses associated with our customer centricity initiative and increased compensation expense associated with restricted stock awards granted pursuant to our long-term incentive program.gain.
We continue to believe that our customer centricity 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 inconverted to the future. For the portion of the fiscal third quarter in which they operated, our customer centricity segmented stores collectively hadoperating model last October continued to deliver a higher comparable store sales gain more than double the comparable store sales gain ofand a higher gross profit rate when compared with other U.S. Best Buy stores. In addition, the gross profit rate of ourthese customer centricity stores made progress with their operating expense structure. The lessons and benefits learned from converting segmented stores collectively, was approximately 0.5% of revenue higher than that ofare being applied to our 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 rateregardless of our segmented stores. In fact, for the fiscal third quarter the SG&A rate of our segmented stores, collectively, was approximately 0.5% of revenue higher than that of otherwhether they have been fully converted. For instance, all U.S. Best Buy stores which was slightly better thanare now beginning to focus on customer segments as they prepare for full conversion over the next two and one-half years. We also continue to use our expectation. While we were pleased withlab stores for testing new business strategies and supplying new customer insights. For example, the lab stores are actively helping us identify additional customer segments who shop in our progress in reducing the SG&A rate of our 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 lessons learned in rolling out our 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.stores.
The successful roll out of our customer centricity initiative is a critical component in our goal of increasing our annual operating income rate to 7% of revenue by fiscal 2007. We believe that our customer centricity initiative will continue to generate significant comparable store sales gains, which will help us leverage our cost structure and is expected to increase our annual operating income rate by approximately 0.5% of revenue for fiscal 2007.
2829
International
The following table presents unaudited selected financial data for the International segment ($ in millions):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| November 27, |
| November 29, |
| November 27, |
| November 29, |
| ||||
Revenue |
| $ | 728 |
| $ | 602 |
| $ | 1,802 |
| $ | 1,480 |
|
Revenue % change |
| 21 | % | 42 | % | 22 | % | 39 | % | ||||
Comparable stores sales % change (2) |
| 5.0 | % | 4.0 | % | 5.0 | % | 3.0 | % | ||||
Gross profit as a % of revenue |
| 23.0 | % | 22.4 | % | 23.9 | % | 23.3 | % | ||||
SG&A as a % of revenue |
| 22.3 | % | 22.4 | % | 23.9 | % | 24.0 | % | ||||
Operating income (loss) |
| $ | 5 |
| $ | — |
| $ | 1 |
| $ | (10 | ) |
Operating income (loss) as a % of revenue |
| 0.7 | % | 0.0 | % | 0.1 | % | (0.7% | ) |
|
| Three Months Ended |
| ||||
|
| May 28, 2005 |
| May 29, 2004(1) |
| ||
Revenue |
| $ | 626 |
| $ | 499 |
|
Revenue % change |
| 25 | % | 28 | % | ||
Comparable stores sales % gain(2) |
| 3.0 | % | 7.2 | % | ||
Gross profit as % of revenue |
| 23.5 | % | 22.5 | % | ||
SG&A as % of revenue |
| 24.0 | % | 23.8 | % | ||
Operating loss |
| $ | (3 | ) | $ | (6 | ) |
Operating loss as % of revenue |
| (0.5 | )% | (1.3 | )% |
(1) Certain We reclassified certain prior-year amounts have been reclassifiedas described in Note 1, Summary of Significant Accounting Policies, of the Notes to conform toConsolidated Financial Statements in our Annual Report on Form 10-K for the current presentation.fiscal year ended February 26, 2005. These reclassifications had no effect on previously reported operating income or net earnings, financial position or cash flows.earnings.
(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 changegain excludes the effect of fluctuations in foreign currency exchange rates.
The following table reconciles International stores open at the beginning and end of the thirdfirst quarter of fiscal 2005:2006:
|
| Total Stores at |
| Stores |
| Stores |
| Total Stores at |
|
| Total Stores at |
| Stores |
| Stores |
| Total Stores at |
|
Future Shop stores |
| 109 |
| 5 |
| — |
| 114 |
|
| 114 |
| 1 |
| — |
| 115 |
|
Canadian Best Buy stores |
| 22 |
| 6 |
| — |
| 28 |
|
| 30 |
| 2 |
| — |
| 32 |
|
Total |
| 131 |
| 11 |
| — |
| 142 |
|
| 144 |
| 3 |
| — |
| 147 |
|
Note: During the first quarter of fiscal 2006, two Future Shop stores were relocated. No other stores in the International segment were relocated, remodeled or expanded during the thirdfirst quarter of fiscal 2005.2006.
The following table reconciles International stores open at the beginning and end of the thirdfirst quarter of fiscal 2004:2005:
|
| Total Stores at |
| Stores |
| Stores |
| Total Stores at |
|
| Total Stores at |
| Stores |
| Stores |
| Total Stores at |
|
Future Shop stores |
| 106 |
| 2 |
| — |
| 108 |
|
| 108 |
| 1 |
| — |
| 109 |
|
Canadian Best Buy stores |
| 14 |
| 5 |
| — |
| 19 |
|
| 19 |
| — |
| — |
| 19 |
|
Total |
| 120 |
| 7 |
| — |
| 127 |
|
| 127 |
| 1 |
| — |
| 128 |
|
Note: Five Future Shop stores were relocated duringDuring the thirdfirst quarter of fiscal 2004.2005, one Future Shop store was relocated. No other stores in the International segment were relocated, remodeled or expanded during the thirdfirst quarter of fiscal 2004.2005.
TheOur International segment reported third-quartera first-quarter operating incomeloss of $5$3 million in fiscal 2005, compared with a breakeven third quarter in fiscal 2004. For the first nine months of fiscal 2005, the International segment had operating income of $1 million,2006, compared with an operating loss of $10$6 million for the same periodfirst quarter of fiscal 2004.2005. The improved operating results for both the fiscal third quarter and first nine months were due to a 25% revenue gains, angain and a 1.0% of revenue increase in the gross profit rate, and was partially offset by a decrease0.2% of revenue increase in the SG&A rate. TheOur International segment generallyhistorically has incurred losses for the fiscal first quarter and derives a high proportion of its annual earnings in the fiscal fourth quarter, which encompasses the majority of the holiday selling season.
International segment revenue increased 21%25% for the thirdfirst quarter of fiscal 20052006 to $728$626 million, compared with $602$499 million for the thirdfirst quarter of fiscal 2004. For2005. Excluding the first nine months of fiscal 2005, International segment revenue increased 22% to $1.8 billion, compared with $1.5 billion for the same period of the prior fiscal year. Excluding thefavorable effect of fluctuations in foreign currency exchange rates, International segment revenue would have increased 13%15% for the thirdfirst quarter of fiscal 20052006, compared with the same period of the prior fiscal year. The addition of new stores in the past 12 months accounted for nearly two-thirdsfour-fifths of the revenue increase for the fiscal thirdfirst quarter, excluding the favorable effect of fluctuations in foreign currency
29
exchange rates. The remainder of the fiscal third quarterfirst-quarter revenue
30
increase, excluding the favorable effect of fluctuations in foreign currency exchange rates, was due to the 5.0%3.0% comparable store sales gain. For the fiscal thirdfirst quarter, theour International segment reported a low double-digit comparable store sales gainsgain in the home-office products,appliances product group; a mid-single-digit comparable store sales gain in the consumer electronics product group; and a low single-digit comparable store sales gain in the entertainment software and appliances categories.product group. These comparable store sales increasesgains were partially offset by a modestslight comparable store sales decline in the consumer electronics category. For the nine-month period, new store openings accounted for approximately seven-tenths of the revenue increase, excluding the effect of fluctuations in foreign currency exchange rates. The remainder of the revenue increase for the first nine months, excluding the effect of fluctuations in foreign currency exchange rates, was due to the 5.0% comparable store sales gain.home-office product group.
TheOur International segment’s gross profit rate increased by 0.6%1.0% of revenue to 23.0%23.5% of revenue for the thirdfirst quarter of fiscal 2005,2006, up from 22.4%22.5% of revenue for the thirdfirst quarter of fiscal 2004. For the nine-month period, the International gross profit rate was 23.9% of revenue, an increase of 0.6% of revenue compared with 23.3% of revenue for the same period of the prior fiscal year. For both the quarter and the nine-month period, the2005. The increase in theour International segment’s gross profit rate was due primarily to a more profitable revenue mix, including a significant increase in sales of higher-margin extended service contracts. In addition, our International segment’s gross profit rate improvements withinfor the fiscal first quarter benefited from reduced markdowns due to improved product categories, increased vendor allowances and reduced markdowns.model transitions.
TheOur International segment’s SG&A rate decreasedincreased by 0.1%0.2% of revenue to 22.3% of revenue for the third quarter of fiscal 2005, compared with 22.4% of revenue for the third quarter of fiscal 2004. For the first nine months of fiscal 2005, the International SG&A rate was 23.9% of revenue, a decrease from 24.0% of revenue for the same periodfirst quarter of fiscal 2004. For both the fiscal third quarter and2006, up from 23.8% of revenue for the first nine months, the modest decreasequarter of fiscal 2005. The increase in theour International segment’s SG&A rate was due primarily to increased stock-based compensation expense, leverage fromwhich increased our International segment’s SG&A rate by approximately 0.2% of revenue gains, including a reduction in advertising expenses as a percentcompared with the same period of revenue.
Discontinued Operations
The following table presents unaudited selected financial data for Discontinued Operations ($ in millions):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| November 27, |
| November 29, |
| November 27, |
| November 29, |
| ||||
Revenue |
| $ | — |
| $ | — |
| $ | — |
| $ | 354 |
|
Operating loss |
| — |
| — |
| — |
| (46 | ) | ||||
Interest expense |
| — |
| — |
| — |
| — |
| ||||
Loss before income tax benefit |
| — |
| — |
| — |
| (46 | ) | ||||
Income tax benefit |
| — |
| — |
| — |
| 17 |
| ||||
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 |
| $ | — |
| $ | — |
| $ | — |
| $ | (95 | ) |
(1)During the first quarter ofprior 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 nine months of fiscal 2004.
See the “Overview” section of this MD&A for additional information regarding the sale of our interest in Musicland.year.
Consolidated
Net Interest Income (Expense)
Net interest income was $6$13 million for the thirdfirst quarter of fiscal 2005,2006, compared with net interest expense of $4 million for the third quarter of fiscal 2004. For the first nine months of fiscal 2005, net interest income was $7 million, compared with net interest expense of $9less than $1 million for the first nine monthsquarter of fiscal 2004. 2005For both the third quarter and the nine-month period, the. The change in net interest income was due primarily to higher yields on short-term investments, higher average investment balances and the repayment in June 2004 of $355 million of convertible debentures due in 2021.
Effective Income Tax Rate
Our effective income tax rate decreased to 32.5% for the first quarter of fiscal 2006, down from 38.1% for the third quarter and first nine monthscorresponding period of fiscal 2005, down from 38.3% for the corresponding periods of fiscal 2004, due primarily to higher levels of tax-exempt interest income and permanent benefits associated with our International segment operations, as well as the resolution of certain federal and higher levels of tax-exempt interest instate income tax matters. We expect our annual effective income tax rate for fiscal 2006 to be 34.5% to 35.0%, compared with 35.3% for the currentprior fiscal year.
3031
Liquidity and Capital Resources
Summary
We ended the thirdfirst quarter of fiscal 20052006 with $2.4$2.6 billion of cash and cash equivalents and short-term investments, compared with $2.6$3.3 billion at the end of fiscal 20042005 and $1.8$2.1 billion at the end of last year’s fiscal thirdfirst quarter. As of May 28, 2005, we had short-term and long-term investments, comprised of municipal and United States government debt securities, totaling $2.1 billion. Refer to Note 8, 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 May 28, 2005.
Our current ratio, calculated as current assets divided by current liabilities, was 1.211.45 at the end of the thirdfirst quarter of fiscal 2005,2006, compared with 1.271.39 at the end of fiscal 20042005 and 1.201.29 one year ago. Our debt-to-capitalization ratio was 11% at the end of the thirdfirst quarter of fiscal 2005,2006, compared with 12% at the end of fiscal 2005, and down from 20% at the end of the first quarter of fiscal 2004 and down2005. The decrease in our debt-to-capitalization ratio from 22% at the end of the thirdfirst quarter of fiscal 2004.2005 was due primarily to the repayment in June 2004 of $355 million of convertible debentures due in 2021.
Our liquidity is affected by restricted cash balances that are pledged as collateral or restricted to use for general liability insurance, workers’ compensation insurance and/or warranty programs. Restricted cash balances, which are included in other current assets, totaled $70$155 million, $18$158 million and $27$85 million as of November 27,May 28, 2005; February 26, 2005; and May 29, 2004, February 28, 2004, and November 29, 2003, respectively.
During fiscal 2005, we began purchasing investments in debt securities with longer maturities. As of November 27, 2004, we had short-term and long-term investments, primarily comprised of municipal and United States government debt securities, totaling $219 million. Refer to Note 9, Investments, of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q, for a summary of our investments in debt securities as of November 27, 2004.
Cash Flows
Cash provided byThe following table summarizes our cash flows from operating, investing and financing activities from continuing operations for the first nine monthsquarters of the past two fiscal years ($ in millions):
|
| Three Months Ended |
| ||||
|
| May 28, 2005 |
| May 29, 2004 |
| ||
Total cash (used in) provided by: |
|
|
|
|
| ||
Operating activities |
| $ | (419 | ) | $ | (356 | ) |
Investing activities |
| 812 |
| 389 |
| ||
Financing activities |
| (254 | ) | (26 | ) | ||
Effect of exchange rate changes on cash |
| (5 | ) | (2 | ) | ||
Increase in cash and cash equivalents |
| $ | 134 |
| $ | 5 |
|
Note: See consolidated statements of cash flows included in Item 1, Consolidated Financial Statements, of this Quarterly Report on Form 10-Q for additional information.
Cash used in operating activities for the first quarter of fiscal 20052006 totaled $804$419 million, compared with $387$356 million for the same period of the prior fiscal year. The change was due primarily to an increase in earnings from continuing operations and an increase in cash providedused by changes in operating assets and liabilities. Earnings from continuing operationsliabilities, and was partially offset by an increase in net earnings. Net earnings were $412$170 million for the first nine monthsquarter of fiscal 2005,2006, an increase from $331$114 million for the first nine monthsquarter of fiscal 2004.2005. The changes in operating assets and liabilities were due substantially to increaseschanges in accounts payablemerchandise inventories, income taxes and other liabilities, partially offset by increases in merchandise inventories, receivables and other assets. Thean increase in accounts 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.payable. The increase in merchandise inventories was due primarily to the seasonal build up of inventory. In addition, inventory levels increased due to the addition of new stores and expanded assortments in key product categories, including digital imaging, home theater, computing and improved in-stock positionsappliances. The decrease in product categories that have been driving our revenue growth. Receivables increasedincome taxes resulted mainly from a lower effective income tax rate and the timing of estimated income tax payments. Other liabilities decreased primarily as a result of the timing of payments. The increase in accounts payable was due mostly to higher business volumes and the timing of credit card settlements. The increase in other assets was due primarily to an increase in workers’ compensation deposits, as well as an increase in deposits with Canadian tax authorities.vendor payments.
Cash used inprovided by investing activities from continuing operations for the first nine monthsquarter of fiscal 20052006 was $580$812 million, compared with $444$389 million for the first nine monthsquarter of the prior fiscal year. The change was due primarily to purchasesthe net sale of short-terminvestments which were used to fund capital expenditures, repurchase stock and long-term investments in debt securities, partially offset by reduced capital spending in the first nine months of fiscal 2005 as a result of completing the construction of our new corporate headquarters in April 2003 and the timing of new store projects.fund other operating activities.
Cash used in financing activities from continuing operations was $410$254 million for the first nine monthsquarter of fiscal 2005,2006, compared with cash provided by financing activities from continuing operations of $21$26 million for the first nine monthsquarter of fiscal 2004.2005. 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 quarterly cash dividends, partially offset by increased long-term debt payments, decreased proceeds from the issuanceexercise of common stock in connection with our stock-based compensation programs.options and increased quarterly cash dividend payments. During the first nine monthsquarter of fiscal 2005,2006, we repurchased $174$207 million of our common stock pursuant to stock repurchase programs authorized by our Board of Directors in fiscal 2005 and fiscal 2000.Directors. In addition, during the first nine monthsquarter of fiscal 2005,2006, we paid cash dividends totaling $0.31$0.11 per common share, or $100$36 million in the aggregate.
32
Sources of Liquidity
Funds generated by operating activities, and available cash and cash equivalents, and short-term investments continue to be our most significant sources of liquidity. Based on current levels of operations, weWe believe funds generated from the expected results of operations, and available cash and cash equivalents, and short-term investments will be sufficient to finance anticipated expansion plans and strategic initiatives for the remainder of fiscal 2005.2006. In addition, our revolving credit facilities are available for additional working capital needs andor 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 theour revolving credit facilities.
On December 22, 2004, we entered into an agreement forWe have a $200 million revolving credit facility 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 duescheduled 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.
31
December 2009. We also have inventory financing linesprograms totaling $210$225 million that allow us to extend the due dates of merchandise inventories beyond normal payment terms.through which certain vendors receive payments from a designated finance company on invoices we owe them. We have a $21$20 million unsecured revolving demand facility related to our International segment operations, of which $4$16 million is only available on a seasonal basisfrom February through July and $20 million is available from August through January of each year.
Our credit ratings and outlook as of November 27, 2004, were as follows:June 30, 2005, are summarized below and are consistent with the ratings and outlook reported in our Annual Report on Form 10-K for the fiscal year ended February 26, 2005:
Rating Agency |
| Rating |
| Outlook |
|
Fitch |
| BBB |
|
|
|
Moody’s |
| Baa3 |
|
|
|
Standard & Poor’s |
|
|
|
|
|
(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. IfHowever, 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 storenew-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, 2004,26, 2005, for additional information regarding our sources of liquidity.
Debt and Capital
On May 4, 2005, we repaid the outstanding balance of $54 million on our master lease program. Other than the redemption in June 2004 of allrepayment of our convertible debentures duemaster lease program in 2021 for $355 million,May 2005, the amount of debt outstanding as of November 27, 2004,May 28, 2005, was essentially unchanged from the end of fiscal 2004.2005. See our Annual Report on Form 10-K for the fiscal year ended February 28, 2004,26, 2005, 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.
Other than the redemptionrepayment of our convertible debentures duemaster lease program in 2021,May 2005, there has been no material change in our contractual obligations out ofother than in the ordinary course of our business since the end of fiscal 2004.2005. See our Annual Report on Form 10-K for the fiscal year ended February 28, 2004,26, 2005, for additional information regarding our off-balance-sheet arrangements and contractual obligations.
Significant Accounting Policies and Estimates
We describe our significant accounting policies 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, 2004.26, 2005. We discuss our critical accounting policies, and the related estimates 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, 2004.26, 2005. There were no significant changes in our accounting policies or estimates since the end of fiscal 2004.2005.
33
New Accounting Standards
The 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 usThere are no recently issued accounting standards that are reasonably likely 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 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 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, inmaterially affect 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
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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, 2004.26, 2005.
We anticipateproject earnings from continuing operations for fiscal 20052006 in the range of $2.80$3.10 to $2.90$3.25 per diluted share, compared with earnings from continuing operations of $2.44$2.79 per diluted share for fiscal 2004. Our2005, or $2.65 per diluted share had we expensed stock-based compensation in fiscal 2005. We revised our original fiscal 2006 earnings guidance isof $2.95 to $3.10 per diluted share based on our first-quarter performance. Consistent with our original estimate, our revised guidance assumes anticipated revenue of approximately $27.5$30 billion for the fiscal year, driven by the addition of new stores and a comparable store sales gain for the fiscal year of 4% to 5%. We also expect improvement in our operating income rate compared with fiscal 2005, driven primarily by growth in our services business, benefits from supply chain initiatives such as pricing and sourcing, and the continued rollout of our customer centricity initiative. Further, we believe that net earnings will be favorably impacted by a lower effective income tax rate, as compared with fiscal 2005. We expect our annual effective income tax rate for fiscal 2006 to be 34.5% to 35.0%, compared with previous guidance of 36.5% to 37.0%, due to higher levels of tax-exempt interest income and increased income tax benefits associated with foreign operations. Currently, no effective income tax rate impact is anticipated from the American Jobs Creation Act, as we do not expect to repatriate additional income earned outside of the United States during fiscal 2006.
For our fiscal second quarter, we are projecting net earnings in the range of $0.51 to $0.56 per diluted share, compared with net earnings of $0.46 per diluted share for the second quarter of fiscal 2005, or $0.39 per diluted share had we expensed stock-based compensation in the second quarter of fiscal 2005. Our guidance for the second quarter of fiscal 2006 is based on an anticipated comparable store sales gain of approximately 4%, as well as a modest improvement in our operating income rate for the fiscal year driven primarily by a lower SG&A rate. Finally, wegross profit rate gains. We also expect our SG&A rate to benefit frombe modestly higher net interest income and a slightly lower effective income tax rate.
For the fiscal fourth quarter, we are projecting net earningsthan in the range of $1.56 to $1.66 per diluted share, compared with net earnings of $1.42 per diluted share for the fourthsecond quarter of fiscal 2004. Our guidance for the fourth quarter of fiscal 2005 is based on an anticipated comparable store sales gain at the low end of our 3% to 5% range announced on December 15, 2004. In addition, 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 expectyear due primarily to increases in employee training, human resources and consulting expenses.
On June 23, 2005, we announced that our Board of Directors had approved a three-for-two stock split. Shareholders of record as of July 13, 2005, will receive one additional share for every two shares owned. The additional shares will be distributed on August 3, 2005. For additional information regarding the fiscal fourth quarterstock-split, refer to benefit from higher net interest income and a slightly lower effective income tax rate. Finally,Note 12, Subsequent Event - Stock Split, of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q.
Also on June 23, 2005, we expectannounced our intent to open approximately ten new stores and pay a regularincrease our quarterly cash dividend of $0.11to $0.12 per common share, duringon a pre-split basis. The change would be effective with the fiscal fourth quarter.
As indicated above in the New Accounting Standards sectionquarterly cash dividend which, if authorized, would be payable on October 25, 2005, to shareholders of this MD&A, we adopted EITF Issue No. 04-8 effective at the beginningrecord as of our fiscal fourth quarter.October 4, 2005. The earningsquarterly cash dividend rate on a post-split basis will be $0.08 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 and fiscal fourth quarter ending February 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 significant favorable effect on our financial results for the fourth quarter and fiscal year ending February 26, 2005.
common share.
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,” “project,” “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
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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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt is not subject to material interest-rate volatility risk. The raterates on a substantial portion of our debt may be reset, but may not be more than one percentage point higher than the current rate.rates. If the raterates 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 theour interest-rate volatility 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 $2 million.approximately $21 million based on our short-term and long-term investments as of May 28, 2005.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer (principal executive officer) and Chief Financial Officer have conducted an evaluation of(principal financial and accounting officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-1513a-15(b) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.May 28, 2005. 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 beenwere no changes in internal control over financial reporting during the fiscal quarter ended May 28, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the period covered by this report.reporting.
On August 18, 2004, we were served withJune 13, 2005, 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 Courtvoluntary Stipulation 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) and Chief Financial Officer. The plaintiffs allege that the defendants violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder,Dismissal without prejudice was filed by making material misrepresentations between January 9, 2002, and August 7, 2002, which resultedPlaintiffs 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 atheir shareholder derivative action venued in Hennepin County District Court, State of Minnesota District Court. This case raises many factual matters similar to those raised inMinnesota. The Plaintiffs had claimed that the federal securities law cases, described above. The state court action alleges violations ofnamed officer and director defendants violated state law relative to fiduciary responsibilities, control and management of our company and unjust enrichment.enrichment because we allegedly made material misrepresentations between January 9, 2002, and August 7, 2002, that resulted in artificially inflated prices of our common stock. 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 puthad been on inactive status. Basedstatus pending the decision of the U.S. District Court for the District of Minnesota in a related case, which was dismissed with prejudice by the federal court on our informationApril 12, 2005, and belief,without an appeal of the claims against the named officer and director defendants are without merit and will be vigorously defended.dismissal.
We are involved in various other legal proceedings arising in the normal course of conducting business. We believe the amounts provided in our consolidated financial statements, as prescribed by GAAP, are adequate in light of the probable and estimable liabilities. The resolution of those proceedings is not expected to have a material impacteffect on our results of operations or financial condition.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
OurIn April 2005, our Board of Directors authorized a $500 millionthe purchase of up to $1.5 billion of our common stock from time to time through open market purchases. The $1.5 billion share repurchase program in June 2004. The program, which became effective on June 24, 2004,April 27, 2005, terminated and replaced a $400$500 million share repurchase program authorized by our Board of Directors in June 2004. During the first quarter of fiscal 2000. Through November 27, 2004,2006, we purchased and retired 1,805,9602,834,783 shares at a cost of $92$146 million under ourpursuant to the new $1.5 billion share repurchase program, and 1,198,585 shares at a cost of $61 million pursuant to the $500 million share repurchase program.
There is no expiration date governing the period over which we can make our share repurchases 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 theour stock. CashWe expect that cash provided by future operating activities, as well as available cash and cash equivalents areand short-term investments, will be the expected sources of funding for theour share repurchase program.
The following table presents the total number of shares purchased during the thirdfirst quarter of fiscal 2005,2006, 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 purchasemay yet be purchased pursuant to the $1.5 billion share repurchase program as of November 27, 2004:May 28, 2005:
Fiscal Period |
| Total Number of Shares |
| Average Price Paid per |
| Total Number of Shares |
| Approximate Dollar Value of |
| ||
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 |
|
Fiscal Period |
| Total Number of Shares |
| Average Price Paid per |
| Total Number of Shares |
| Approximate Dollar Value of |
| ||
February 27, 2005, |
| 686,000 |
| $ | 52.46 |
| 686,000 |
| $ | 346,000,000 |
|
April 3, 2005, through |
| 872,585 |
| 49.30 |
| 872,585 |
| 1,482,000,000 |
| ||
May 1, 2005, through |
| 2,474,783 |
| 51.76 |
| 2,474,783 |
| 1,354,000,000 |
| ||
Total Fiscal 2006 |
| 4,033,368 |
| $ | 51.35 |
| 4,033,368 |
| $ | 1,354,000,000 |
|
(1) Pursuant to a $500 million share repurchase program announced on June 24, 2004 and a $1.5 billion share repurchase program announced on April 27, 2005. The $500 million share purchase program was terminated and replaced by the $1.5 billion share repurchase program effective April 27, 2005. There is no expiration date governing the period over which we can make our share repurchases under the $1.5 billion share repurchase program.
ITEM 66. EXHIBITS. EXHIBITS
a. Exhibits:
4.1 5-year Revolving Credit10.1 Non-Qualified Stock Option and Performance Share Award Agreement, as approved by the Board of Directors on February 7, 2005
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
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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.
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| BEST BUY CO., INC. | ||
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| (Registrant) | ||
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Date: |
| By: | /s/ Darren R. Jackson |
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| Darren R. Jackson | |
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| Executive Vice President — Finance |
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