UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~November 27, 2004~~May 28, 2005

OR

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

For the transition period from to

Commission File Number: 1-9595

BEST BUY CO., INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.10 Par Value — ~~328,075,000~~325,144,000 shares outstanding as of ~~November 27, 2004.~~May 28, 2005.

BEST BUY CO., INC.

FORM 10-Q FOR THE QUARTER ENDED ~~NOVEMBER 27, 2004~~MAY 28, 2005

INDEX

Part I —	Financial Information			3

	Item 1.		Consolidated Financial ~~Statements:~~Statements (unaudited):	3

		a)	Consolidated condensed balance sheets as of ~~November 27, 2004;~~May 28, 2005; February ~~28, 2004;~~26, 2005; and ~~November~~May 29, ~~2003~~2004	3

		b)	Consolidated statements of earnings for the three ~~and nine~~ months ended ~~November 27,~~May 28, 2005, and May 29, 2004 ~~and November 29, 2003~~	5

		c)	Consolidated statement of changes in shareholders’ equity for the ~~nine~~three months ended ~~November 27, 2004~~May 28, 2005	6

		d)	Consolidated statements of cash flows for the ~~nine~~three months ended ~~November 27,~~May 28, 2005, and May 29, 2004 ~~and November 29, 2003~~	7

		e)	Notes to consolidated condensed financial statements	8

	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	2425

	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	3435

	Item 4.		Controls and Procedures	3435

Part II —	Other Information			3435

	Item 1.		Legal Proceedings	3435

	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	3536

	Item 6.		Exhibits	3536

Signatures				3637

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,
2004

February 28,
2004

November 29,
2003

(Unaudited)

(Unaudited)

CURRENT ASSETS

Cash and cash equivalents

$
2,435

$
2,600

$
1,827

Short-term investments

78

—

—

Receivables

742

343

678

Merchandise inventories

4,826

2,607

4,428

Other current assets

251

174

211

Total current assets

8,332

5,724

7,144

PROPERTY AND EQUIPMENT

Property and equipment

3,910

3,574

3,520

Less accumulated depreciation and amortization

1,591

1,330

1,259

Net property and equipment

2,319

2,244

2,261

GOODWILL, NET

540

477

489

INTANGIBLE ASSET

42

37

38

LONG-TERM INVESTMENTS

141

—

—

OTHER ASSETS

248

170

151

TOTAL ASSETS

$
11,622

$
8,652

$
10,083

(Unaudited)

	May 28, 2005		February 26, 2005		May 29, 2004
CURRENT ASSETS
Cash and cash equivalents	$	604	$	470	$	250
Short-term investments	2,002		2,878		1,820
Receivables	350		375		371
Merchandise inventories	3,266		2,851		2,915
Other current assets	383		329		246
Total current assets	6,605		6,903		5,602

PROPERTY AND EQUIPMENT
Property and equipment	4,281		4,192		3,668
Less accumulated depreciation	1,825		1,728		1,429
Net property and equipment	2,456		2,464		2,239

GOODWILL	507		513		467

TRADENAME	40		40		37

LONG-TERM INVESTMENTS	113		148		—

OTHER ASSETS	178		226		205

TOTAL ASSETS	$	9,899	$	10,294	$	8,550

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.

BEST BUY CO., INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

($ in millions, except per share amounts)

November 27,
2004

February 28,
2004

November 29,
2003

(Unaudited)

(Unaudited)

CURRENT LIABILITIES

Accounts payable

$
5,150

$
2,535

$
4,501

Unredeemed gift card liabilities

316

300

233

Accrued compensation and related expenses

220

269

225

Accrued liabilities

856

649

785

Accrued income taxes

342

380

99

Dividends payable

—

—

97

Current portion of long-term debt

8

368

14

Total current liabilities

6,892

4,501

5,954

LONG-TERM LIABILITIES

292

247

276

LONG-TERM DEBT

478

482

836

SHAREHOLDERS’ EQUITY

Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none

—

—

—

Common stock, $.10 par value: Authorized — 1 billion shares; Issued and outstanding — 328,075,000, 324,648,000 and 324,671,000 shares, respectively

33

32

32

Additional paid-in capital

945

836

849

Retained earnings

2,780

2,468

2,032

Accumulated other comprehensive income

202

86

104

Total shareholders’ equity

3,960

3,422

3,017

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
11,622

$
8,652

$
10,083

(Unaudited)

	May 28, 2005		February 26, 2005		May 29, 2004
CURRENT LIABILITIES
Accounts payable	$	3,047	$	2,824	$	2,611
Unredeemed gift card liabilities	374		410		289
Accrued compensation and related expenses	189		234		183
Accrued liabilities	741		844		705
Accrued income taxes	200		575		181
Current portion of long-term debt	14		72		369
Total current liabilities	4,565		4,959		4,338

LONG-TERM LIABILITIES	373		358		251

LONG-TERM DEBT	530		528		477

SHAREHOLDERS’ EQUITY
Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none	—		—		—
Common stock, $.10 par value: Authorized — 1 billion shares; Issued and outstanding — 325,144,000, 328,342,000 and 324,845,000 shares, respectively	33		33		32
Additional paid-in capital	813		952		832
Retained earnings	3,449		3,315		2,550
Accumulated other comprehensive income	136		149		70
Total shareholders’ equity	4,431		4,449		3,484

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	9,899	$	10,294	$	8,550

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.

BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF EARNINGS

($ in millions, except per share amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

November 27,
2004

November 29,
2003

November 27,
2004

November 29,
2003

Revenue

$
6,646

$
6,032

$
18,206

$
16,099

Cost of goods sold

5,015

4,546

13,634

12,059

Gross profit

1,631

1,486

4,572

4,040

Selling, general and administrative expenses

1,398

1,284

3,913

3,495

Operating income

233

202

659

545

Net interest income (expense)

6

(4
)
7

(9
)

Earnings from continuing operations before income tax expense

239

198

666

536

Income tax expense

91

76

254

205

Earnings from continuing operations

148

122

412

331

Loss from discontinued operations, net of income tax benefit of $18

—

—

—

(29
)
Loss on disposal of discontinued operations, net of $0 tax

—

—

—

(66
)

Net earnings

$
148

$
122

$
412

$
236

Basic earnings (loss) per share:

Continuing operations

$
0.45

$
0.38

$
1.27

$
1.02

Discontinued operations

—

—

—

(0.09
)
Loss on disposal of discontinued operations

—

—

—

(0.20
)
Basic earnings per share

$
0.45

$
0.38

$
1.27

$
0.73

Diluted earnings (loss) per share:

Continuing operations

$
0.45

$
0.37

$
1.24

$
1.01

Discontinued operations

—

—

—

(0.09
)
Loss on disposal of discontinued operations

—

—

—

(0.20
)
Diluted earnings per share

$
0.45

$
0.37

$
1.24

$
0.72

Dividends declared per common share

$
0.11

$
0.30

$
0.31

$
0.30

Basic weighted average common shares outstanding (in millions)

326.0

324.2

325.2

323.0

Diluted weighted average common shares outstanding (in millions)

331.9

330.5

331.2

327.8

	Three Months Ended
	May 28, 2005		May 29, 2004
Revenue	$	6,118	$	5,479
Cost of goods sold	4,560		4,168
Gross profit	1,558		1,311
Selling, general and administrative expenses	1,319		1,127
Operating income	239		184
Net interest income	13		—

Earnings before income tax expense	252		184
Income tax expense	82		70

Net earnings	$	170	$	114

Basic earnings per share	$	0.52	$	0.35
Diluted earnings per share	$	0.51	$	0.34

Dividends declared per common share	$	0.11	$	0.10

Basic weighted average common shares outstanding (in millions)	327.5		324.7

Diluted weighted average common shares outstanding (in millions)	336.8		335.7

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE ~~NINE~~THREE MONTHS ENDED ~~NOVEMBER 27, 2004~~MAY 28, 2005

($ and shares in millions)

(Unaudited)

	Common Shares		Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total			Common Shares		Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances at February 28, 2004	325		$	32	$	836		$	2,468		$	86	$	3,422
Balances at February 26, 2005																328		$	33	$	952		$	3,315		$	149		$	4,449

Net earnings, nine months ended November 27, 2004	—		—		—			412			—		412
Net earnings, three months ended May 28, 2005																—		—		—			170			—			170
Other comprehensive loss:
Foreign currency translation adjustments	—		—		—			—			114		114			—		—		—			—			(12		)	(12		)
Other	—		—		—			—			2		2
Other, net of tax																—		—		—			—			(1		)	(1		)
Total comprehensive income													528																157

Stock-based compensation																—		—		31			—			—			31
Stock options exercised	6		1		192			—			—		193			1				16			—			—			16
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
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.

BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)

Nine Months Ended

November 27,
2004

November 29,
2003

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
)

Changes in operating assets and liabilities:

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, 2005			May 29, 2004
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.

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 includes~~The 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 Assets~~Long-Term Debt and Derivative Financial Instruments:

~~We recorded pre-tax long-lived asset impairment charges~~On 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 out~~the 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 ~~disposal~~master 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.

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, 2004			November 29, 2003			November 27, 2004			November 29, 2003			May 28, 2005			May 29, 2004
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 Taxes~~Earnings 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.

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, 2004				November 29, 2003		November 27, 2004		November 29, 2003		May 28, 2005		May 29, 2004
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 stock~~nonvested 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 ~~2.9~~6.4 million and ~~3.6~~3.8 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.

6.5. Stock-Based Compensation:

We have a stock-based compensation ~~plans including~~plan which includes fixed stock ~~option plans,~~options and nonvested share awards. We also have an ~~employee~~ESPP. 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 ~~plan~~stock 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 continue~~time-based share awards is not significant.

Prior to ~~apply~~February 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 any~~No stock-based compensation expense was recognized in our statements of earnings prior to fiscal 2006 for fixed stock option grants, as the exercise price ~~equals~~was equal to the market price of our stock ~~price~~ on the date of grant. In addition, we ~~have~~did not ~~recognized~~recognize any stock-based compensation expense for our ~~employee stock purchase plan~~ESPP as it iswas intended to be a plan that ~~qualifies~~qualified 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 in~~recognized 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.

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, 2004					November 29, 2003			November 27, 2004			November 29, 2003			May 29, 2004
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 represent~~Amount represents the after-tax compensation expense for ~~restricted~~vested 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.

Stock Options

The following table summarizes the stock ~~awards.~~option transactions for the three months ended May 28, 2005:

	Options		Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding on February 26, 2005	25,168,000		$	42.64
Granted	81,000		$	49.41
Exercised	(512,000	)	$	31.74
Forfeited/Canceled	(267,000	)	$	49.17

Outstanding on May 28, 2005	24,470,000		$	42.83	6.53	$	307,000,000

Exercisable on May 28, 2005	16,264,000		$	38.44	5.54	$	270,000,000

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, 2005		May 29, 2004
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.

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:

Market-Based Nonvested Shares	Shares		Fair Value

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 comprehensive~~Comprehensive 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.

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, 2004			November 29, 2003		November 27, 2004		November 29, 2003		May 28, 2005		May 29, 2004
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,
2004

November 29,
2003

November 27,
2004

November 29,
2003

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

	Three Months Ended
	May 28, 2005			May 29, 2004
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, 2004			February 28, 2004		November 29, 2003		May 28, 2005		February 26, 2005		May 29, 2004
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, 2004			February 28, 2004		November 29, 2003		May 28, 2005		February 26, 2005		May 29, 2004
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 ~~sheet~~sheets is an indefinite-lived ~~tradename~~intangible asset related to Future Shop, ~~which~~and is included in the International segment.

9.8. Investments:

~~Short-term~~Our short-term and long-term investments ~~were primarily~~are comprised of municipal and ~~United States~~U.S. government debt securities. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and based on our ~~intentions regarding~~ability to market and sell these instruments, we classify ~~all~~auction-rate debt securities and other investments in debt securities as ~~held-to-maturity~~available-for-sale and ~~account for these investments~~carry 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 equivalent~~weighted-average interest rates (taxable equivalent), maturities and major security types for our investments in debt securities ($ in millions):

November 27, 2004

Amortized Principal
Amount

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 Principal Amount		Weighted- Average Interest Rate		Amortized Principal Amount		Weighted- Average Interest Rate
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 ~~balances~~and 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.

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

On ~~August 18, 2004, we were served with~~June 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 resulted~~Plaintiffs in artificially inflated prices of our common stock. The plaintiffs seek compensatory damages, costs and expenses. A Hearing upon our Motion to Dismiss is scheduled for January 12, 2005. We believe the allegations are without merit and intend to defend these actions vigorously.

~~We also have been served with a~~their shareholder derivative action venued in Hennepin County District Court, State of ~~Minnesota District Court. This case raises many factual matters similar to those raised in~~Minnesota. The Plaintiffs had claimed that the ~~federal securities law cases, described above. The state court action alleges violations of~~named 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 put~~had been on inactive ~~status. Based~~status 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 information~~April 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 ~~nine~~three 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, 2005			May 29, 2004
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 $400~~a $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 ~~1,805,960~~2.8 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 ~~1,564,800~~1.6 million shares at a cost of $82 million under our $400 million share repurchase ~~program. We did not purchase any shares under~~program authorized by our ~~$400 million share repurchase program during the second quarter~~Board 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.

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~~14.~~12. ~~New Accounting Standards~~Subsequent Event – Stock Split:

~~In January 2003, the Financial Accounting Standards~~On June 23, 2005, we announced that our Board ~~(FASB) issued Financial Interpretation (FIN) No. 46,~~ ~~Consolidation~~ of ~~Variable Interest Entities~~~~, which requires the consolidation~~Directors had approved a three-for-two stock split. Shareholders of ~~and disclosures about variable interest entities (VIEs). VIEs are entities~~record 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 impact~~additional shares will be distributed on ~~our consolidated financial statements.~~August 3, 2005.

The ~~Emerging Issues Task Force (EITF) reached consensus~~pro forma effect on ~~Issue No. 04-8,~~ ~~The Effect of Contingently Convertible Debt on Diluted Earnings per Share.~~ ~~The EITF consensus will require us~~the May 28, 2005, balance sheet is to ~~include in our diluted~~reduce 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, 2005		May 29, 2004
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 mature~~due in 2022, are guaranteed by our ~~wholly-owned~~wholly 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. Additionally~~The aggregate principal balance and carrying amount of our ~~fiscal~~convertible debentures, which mature in 2022, is $402 million.

In June 2004, ~~condensed consolidating financial information includes~~we 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-owned~~wholly owned subsidiaries.

Additional information regarding our convertible debentures is included in Note 4, Debt, of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year ended February ~~28, 2004.~~26, 2005.

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 ~~November~~May 29, ~~2003;~~2004; condensed consolidating statements of earnings for the three ~~and nine~~ months ended ~~November 27, 2004,~~May 28, 2005, and ~~November~~May 29, ~~2003;~~2004; and condensed consolidating statements of cash flows for the ~~nine~~three months ended ~~November 27, 2004,~~May 28, 2005, and ~~November~~May 29, ~~2003:~~2004:

1417

Condensed Consolidating Balance Sheets

As of ~~November 27, 2004~~May 28, 2005
(Unaudited)
$ in millions

	Best Buy Co., Inc.		Guarantor Subsidiary		Non-Guarantor Subsidiaries		Eliminations			Consolidated		Best Buy Co., Inc.		Guarantor Subsidiary		Non-Guarantor Subsidiaries		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, 2004~~26, 2005

(Unaudited)

$ in millions

	Best Buy Co., Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated		Best Buy Co., Inc.		Guarantor Subsidiary		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents	$	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 ~~November~~May 29, ~~2003~~2004
(Unaudited)
$ in millions

	Best Buy Co., Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations				Consolidated		Best Buy Co., Inc.		Guarantor Subsidiary		Non-Guarantor Subsidiaries		Eliminations				Consolidated
Assets
Current Assets
Cash and cash equivalents	$	1,625	$	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, 2004~~May 28, 2005
(Unaudited)
$ in millions

	Best Buy Co., Inc.		Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated		Best Buy Co., Inc.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			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

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

Best Buy
Co., Inc.

Guarantor
Subsidiary

Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Revenue

$
12

$
15,993

$
17,709

$
(15,508
)
$
18,206

Cost of goods sold

—

13,008

16,368

(15,742
)
13,634

Gross profit

12

2,985

1,341

234

4,572

Selling, general and administrative expenses

23

2,818

1,164

(92
)
3,913

Operating (loss) income

(11
)
167

177

326

659

Net interest income (expense)

15

(11
)
3

—

7

Equity in earnings of subsidiaries

172

(46
)
52

(178
)
—

Earnings before income tax expense

176

110

232

148

666

Income tax expense

84

60

110

—

254

Net earnings

$
92

$
50

$
122

$
148

$
412

1921

Condensed Consolidating Statements of Earnings
For the Three Months Ended ~~November~~May 29, ~~2003~~2004
(Unaudited)
$ in millions

Best Buy
Co., Inc.

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

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

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

Best Buy
Co., Inc.

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Revenue

$
12

$
14,295

$
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

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

Best Buy
Co., Inc.

Guarantor
Subsidiary

Non-Guarantor
Subsidiaries

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 Co., Inc.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			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

Condensed Consolidating Statements of Cash Flows
For the ~~Nine~~Three Months Ended ~~November 29, 2003~~May 28, 2005
(Unaudited)
$ in millions

	Best Buy Co., Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated			Best Buy Co., Inc.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Total cash 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

Condensed Consolidating Statements of Cash Flows
For the Three Months Ended May 29, 2004
(Unaudited)
$ in millions

	Best Buy Co., Inc.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			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

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 ~~the~~certain 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 ~~June~~December 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 Disposal~~consolidated 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 only~~first 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 ~~third~~first quarter of fiscal ~~2005~~2006 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 quarter~~same 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, net~~Net earnings for the ~~third~~first quarter of fiscal ~~2005 benefited from net interest income~~2006 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 ~~same~~first 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 ~~third~~first quarter of fiscal ~~2005 decreased~~2006 increased by ~~0.1%~~1.6% of revenue to ~~24.5%~~25.5% of revenue, ~~down~~up from ~~24.6%~~23.9% of revenue for the ~~third~~first quarter of the prior fiscal ~~year. The modest decline in our gross profit rate was~~year, due primarily to ~~increased~~structural changes in our business model and a more modest promotional ~~activity, including~~environment.

• Our selling, general and administrative expenses ~~associated with Reward Zone, our customer loyalty program.~~

• ~~Our SG&A~~(SG&A) rate for the ~~third~~first quarter of fiscal ~~2005 decreased~~2006 increased by ~~0.3%~~1.0% of revenue to ~~21.0%~~21.6% of revenue, ~~down~~up from ~~21.3%~~20.6% of revenue for the ~~third~~first quarter of the prior fiscal ~~year. The decrease in our SG&A rate was~~year, due primarily to increased stock-based compensation expense ~~leverage resulting from~~as 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 ~~third~~first quarter of fiscal ~~2005,~~2006, we repurchased approximately ~~400,000~~4.0 million shares of our common stock ~~pursuant~~at 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

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 our~~a quarterly cash dividend of $0.11 per common share, is payable on ~~January~~July 26, 2005, to shareholders of record as of the close of business on ~~January~~July 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,
2004

November 29,
2003(1)

November 27,
2004(1)

November 29,
2003(1)

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 reclassified~~as described in Note 1, Summary of Significant Accounting Policies, of the Notes to ~~conform to~~Consolidated 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 ~~change~~gain excludes the effect of fluctuations in foreign currency exchange rates.

⁽³⁾ ~~During~~Net 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 $148~~2006, a 50% increase from $114 million, or ~~$0.45~~$0.34 per diluted share, for the ~~third~~first 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 in~~4.4% comparable store sales ~~of 3.2%,~~gain, and a ~~0.3%~~1.6% of revenue improvement in our ~~SG&A~~gross profit rate. In addition, net earnings for the ~~third~~first quarter of fiscal ~~2005~~2006 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 ~~decrease~~increase 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 ~~third~~first quarter of fiscal ~~2005~~2006 increased ~~10%~~12% to ~~$6.6~~$6.1 billion, compared with ~~$6.0~~$5.5 billion for the ~~third~~first 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-fifths~~more than one-half of the revenue increase for ~~both~~ the first quarter of fiscal ~~third quarter and nine-month period. The~~2006; the 4.4% comparable store sales gain accounted for ~~approximately three-tenths and~~nearly two-fifths of the revenue increase for the fiscal ~~third quarter~~first 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 the~~favorable 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-quarter~~2006 first-quarter comparable store sales ~~gain of 3.2% was~~increased 4.4% on top of ~~a very strong 8.6%~~an 8.3% comparable store sales gain for the ~~third~~first 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 ~~third~~first quarter reflected ~~our~~ improved in-store execution ~~including our ability to~~and 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~~as 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-quarter~~first-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 the~~computers. These gains were partially offset by comparable store sales ~~growth~~declines in the ~~above products.~~desktop computer, analog television and cellular phone product categories.

Our gross profit rate ~~decreased~~increased by ~~0.1%~~1.6% of revenue to ~~24.5%~~25.5% of revenue for the ~~third~~first quarter of fiscal ~~2005,~~2006, compared with ~~24.6%~~23.9% of revenue for the ~~third~~first quarter of the prior fiscal year. For the first ~~nine months~~quarter of fiscal ~~2005,~~2006, our Domestic segment’s gross profit rate ~~was 25.1%~~increased by 1.6% of revenue ~~the same as the~~and our International segment’s gross profit rate ~~for the comparable period~~increased by 1.0% of ~~fiscal 2004.~~revenue. The ~~modest decline~~improvement in our gross profit rate for the fiscal ~~third~~first quarter was due primarily to ~~increased~~a more modest promotional ~~activity, including expenses associated with Reward Zone, our customer loyalty program. Reward Zone contributed~~environment; 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 ~~third~~first quarter of fiscal ~~2004 was favorably affected by~~2006 also benefited from an ~~adjustment~~ ~~related~~increase in higher-margin services in the revenue mix and the conversion of more stores to ~~Reward Zone points earned during~~our 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 would~~new operating model have ~~reduced the~~produced higher gross profit ~~rate by 0.4% of revenue~~rates than other U.S. Best Buy stores. See the Outlook section in this Quarterly Report on Form 10-Q for ~~the third quarter of~~additional information regarding our expectations for our fiscal ~~2004. In addition to expenses associated with Reward Zone, our~~2006 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 ~~decreased~~increased by ~~0.3%~~1.0% of revenue to ~~21.0%~~21.6% of revenue for the ~~third~~first quarter of fiscal ~~2005,~~2006, compared with ~~21.3%~~20.6% of revenue for the ~~third~~first quarter of the prior fiscal year. For the first ~~nine months~~quarter of fiscal ~~2005,~~2006, our Domestic segment’s SG&A rate ~~decreased~~increased 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 ~~decrease~~increase in our SG&A rate for the fiscal ~~third~~first quarter was due primarily to increased stock-based compensation expense, ~~leverage resulting from the 10% revenue gain and the realization of cost savings from~~which increased our ~~efficient enterprise initiative. Our fiscal third-quarter~~ SG&A rate ~~also benefited from a reduction in asset impairment charges~~by approximately 0.5% of revenue compared with the same period of the prior fiscal ~~year, a favorable settlement~~year. Expenses associated with ~~a credit card processor~~accelerating 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 in~~12% 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,
2004

November 29,
2003

November 27,
2004

November 29,
2003

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.

2627

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

	Three Months Ended				Nine Months Ended				Three Months Ended
	November 27, 2004		November 29, 2003		November 27, 2004		November 29, 2003		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 ~~third~~first quarter of fiscal ~~2005:~~

2006:

	Total Stores at Beginning of Third Quarter Fiscal 2005	Stores Opened	Stores Closed	Total Stores at End of Third Quarter Fiscal 2005	Total Stores at Beginning of First Quarter Fiscal 2006	Stores Opened	Stores Closed	Total Stores at End of First Quarter Fiscal 2006
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 ~~third~~first quarter of fiscal ~~2005, five~~2006, 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 ~~third~~first quarter of fiscal ~~2005.~~2006.

The following table reconciles Domestic stores open at the beginning and end of the ~~third~~first quarter of fiscal ~~2004:~~2005:

	Total Stores at Beginning of Third Quarter Fiscal 2004	Stores Opened	Stores Closed	Total Stores at End of Third Quarter Fiscal 2004	Total Stores at Beginning of First Quarter Fiscal 2005	Stores Opened	Stores Closed	Total Stores at End of First Quarter Fiscal 2005
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 ~~third~~first 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 ~~third~~first quarter of fiscal ~~2004.~~2005.

For the ~~third~~first 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 period~~first quarter of the prior fiscal ~~2004.~~year. The increase in our Domestic segment’s operating income rate for the first quarter of fiscal ~~third quarter~~2006 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 with~~revenue. These benefits were partially offset by an increase in the ~~first nine months~~SG&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 ~~third~~first quarter of fiscal ~~2005,~~2006, compared with ~~$5.4~~$5.0 billion for the ~~third~~first quarter of fiscal ~~2004. For~~2005. The addition of new stores in the past 12 months accounted for nearly three-fifths of the revenue increase for the first ~~nine months~~quarter of fiscal ~~2005, Domestic revenue increased 12% to $16.4 billion, compared with $14.6 billion for~~2006, 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 and~~4.5% comparable store sales ~~gains.~~gain accounted for the remainder of the fiscal first-quarter revenue increase.

We believe ~~the~~our Domestic segment’s comparable store sales performance for the fiscal ~~third~~first quarter reflected ~~our~~ improved in-store execution ~~including our ability to~~and 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 ~~the~~our Domestic segment’s comparable store sales gain for the fiscal ~~third~~first quarter were MP3 players, digital televisions, ~~MP3 players, and~~video gaming, digital cameras and ~~accessories.~~accessories, and notebook computers. The ~~home-office products category~~consumer electronics product group posted a high single-digit comparable store sales gain ~~in the mid-single-digits~~ for the fiscal ~~third~~first 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~~

~~increased sales of~~ digital televisions, ~~as well as~~and digital cameras and accessories, reflecting continued consumer preference for and the increased affordability of digital products, ~~and~~as 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-digit~~mid-single-digit comparable store sales gain in the appliances ~~category~~product group was driven primarily by the expansion of our improved appliance assortments and labor model to more stores.

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 from~~notebook 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 ~~category~~product group also recorded a modest comparable store sales gain ~~driven~~resulting 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 CDs~~comparable stores sales declines in DVDs and ~~DVD movies.~~CDs.

~~The~~Our Domestic segment’s gross profit rate for the ~~third~~first quarter of fiscal ~~2005~~2006 was ~~24.7%~~25.7% of revenue, ~~down~~up from ~~24.9%~~24.1% of revenue for the ~~third~~first quarter of the prior fiscal year. ~~For the first nine months of fiscal 2005, the~~The 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 months~~quarter of fiscal 2006, compared with 20.2% of revenue for the first quarter of the prior fiscal year. The ~~modest decline~~increase 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 ~~third~~first quarter was due primarily to increased stock-based compensation expense, ~~leverage resulting from the 9% revenue gain and the realization of cost savings from~~which increased our ~~efficient enterprise initiative. Our fiscal third quarter~~Domestic segment’s SG&A rate ~~also benefited from a reduction in asset impairment charges~~by approximately 0.5% of revenue compared with the same period of the prior ~~year’s period, a favorable settlement~~fiscal year. Expenses associated with ~~a credit card processor~~accelerating 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 in~~10% 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 had~~operating model last October continued to deliver a higher comparable store sales gain ~~more than double the comparable store sales gain of~~and a higher gross profit rate when compared with other U.S. Best Buy stores. In addition, ~~the gross profit rate of our~~these 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 of~~are 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 rate~~regardless 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 other~~whether they have been fully converted. For instance, all U.S. Best Buy stores ~~which was slightly better than~~are 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 with~~lab 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,
2004

November 29,
2003(1)

November 27,
2004(1)

November 29,
2003(1)

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		)%

⁽²⁾Comprised of revenue at stores and Web sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. The calculation of the comparable store sales percentage ~~change~~gain excludes the effect of fluctuations in foreign currency exchange rates.

The following table reconciles International stores open at the beginning and end of the ~~third~~first quarter of fiscal ~~2005:~~2006:

	Total Stores at Beginning of Third Quarter Fiscal 2005	Stores Opened	Stores Closed	Total Stores at End of Third Quarter Fiscal 2005	Total Stores at Beginning of First Quarter Fiscal 2006	Stores Opened	Stores Closed	Total Stores at End of First Quarter Fiscal 2006
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 ~~third~~first quarter of fiscal ~~2005.~~2006.

The following table reconciles International stores open at the beginning and end of the ~~third~~first quarter of fiscal ~~2004:~~2005:

	Total Stores at Beginning of Third Quarter Fiscal 2004	Stores Opened	Stores Closed	Total Stores at End of Third Quarter Fiscal 2004	Total Stores at Beginning of First Quarter Fiscal 2005	Stores Opened	Stores Closed	Total Stores at End of First Quarter Fiscal 2005
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 during~~During the ~~third~~first 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 ~~third~~first quarter of fiscal ~~2004.~~2005.

~~The~~Our International segment reported ~~third-quarter~~a first-quarter operating ~~income~~loss 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 period~~first 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, an~~gain and a 1.0% of revenue increase in the gross profit rate, and was partially offset by a ~~decrease~~0.2% of revenue increase in the SG&A rate. ~~The~~Our International segment ~~generally~~historically 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 ~~third~~first quarter of fiscal ~~2005~~2006 to ~~$728~~$626 million, compared with ~~$602~~$499 million for the ~~third~~first quarter of fiscal ~~2004. For~~2005. 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 the~~favorable effect of fluctuations in foreign currency exchange rates, International segment revenue would have increased ~~13%~~15% for the ~~third~~first quarter of fiscal ~~2005~~2006, compared with the same period of the prior fiscal year. The addition of new stores in the past 12 months accounted for nearly ~~two-thirds~~four-fifths of the revenue increase for the fiscal ~~third~~first quarter, excluding the favorable effect of fluctuations in foreign currency

exchange rates. The remainder of the fiscal ~~third quarter~~first-quarter revenue

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 ~~third~~first quarter, ~~the~~our International segment reported a low double-digit comparable store sales ~~gains~~gain 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 ~~increases~~gains were partially offset by a ~~modest~~slight 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.

~~The~~Our International segment’s gross profit rate increased by ~~0.6%~~1.0% of revenue to ~~23.0%~~23.5% of revenue for the ~~third~~first quarter of fiscal ~~2005,~~2006, up from ~~22.4%~~22.5% of revenue for the ~~third~~first 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 ~~the~~our 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 within~~for the fiscal first quarter benefited from reduced markdowns due to improved product ~~categories, increased vendor allowances and reduced markdowns.~~model transitions.

~~The~~Our International segment’s SG&A rate ~~decreased~~increased 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 period~~first quarter of fiscal ~~2004. For both the fiscal third quarter and~~2006, up from 23.8% of revenue for the first ~~nine months, the modest decrease~~quarter of fiscal 2005. The increase in ~~the~~our International segment’s SG&A rate was due primarily to increased stock-based compensation expense, ~~leverage from~~which increased our International segment’s SG&A rate by approximately 0.2% of revenue ~~gains, including a reduction in advertising expenses as a percent~~compared 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,
2004

November 29,
2003

November 27,
2004

November 29,
2003

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 of~~prior 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 ~~third~~first 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 $9~~less than $1 million for the first ~~nine months~~quarter of fiscal ~~2004.~~ 2005~~For 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 months~~corresponding 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 in~~state 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 ~~current~~prior fiscal year.

3031

Liquidity and Capital Resources

Summary

We ended the ~~third~~first quarter of fiscal ~~2005~~2006 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 ~~2004~~2005 and ~~$1.8~~$2.1 billion at the end of last year’s fiscal ~~third~~first 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 ~~1.21~~1.45 at the end of the ~~third~~first quarter of fiscal ~~2005,~~2006, compared with ~~1.27~~1.39 at the end of fiscal ~~2004~~2005 and ~~1.20~~1.29 one year ago. Our debt-to-capitalization ratio was 11% at the end of the ~~third~~first 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 down~~2005. The decrease in our debt-to-capitalization ratio from ~~22% at~~ the end of the ~~third~~first 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 by~~The following table summarizes our cash flows from operating, investing and financing activities ~~from continuing operations~~ for the first ~~nine months~~quarters 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 ~~2005~~2006 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 ~~provided~~used by changes in operating assets and ~~liabilities. Earnings from continuing operations~~liabilities, and was partially offset by an increase in net earnings. Net earnings were ~~$412~~$170 million for the first ~~nine months~~quarter of fiscal ~~2005,~~2006, an increase from ~~$331~~$114 million for the first ~~nine months~~quarter of fiscal ~~2004.~~2005. The changes in operating assets and liabilities were due substantially to ~~increases~~changes in ~~accounts payable~~merchandise inventories, income taxes and other liabilities, partially offset by ~~increases in merchandise inventories, receivables and other assets. The~~an 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 positions~~appliances. The decrease in ~~product categories that have been driving our revenue growth. Receivables increased~~income 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 in~~provided by investing activities ~~from continuing operations~~ for the first ~~nine months~~quarter of fiscal ~~2005~~2006 was ~~$580~~$812 million, compared with ~~$444~~$389 million for the first ~~nine months~~quarter of the prior fiscal year. The change was due primarily to ~~purchases~~the net sale of ~~short-term~~investments 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 months~~quarter of fiscal ~~2005,~~2006, compared with ~~cash provided by financing activities from continuing operations of $21~~$26 million for the first ~~nine months~~quarter 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 ~~issuance~~exercise of ~~common~~ stock ~~in connection with our stock-based compensation programs.~~options and increased quarterly cash dividend payments. During the first ~~nine months~~quarter 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 months~~quarter of fiscal ~~2005,~~2006, we paid cash dividends totaling ~~$0.31~~$0.11 per common share, or ~~$100~~$36 million in the aggregate.

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, we~~We 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 ~~and~~or investment opportunities. There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under ~~the~~our revolving credit facilities.

~~On December 22, 2004, we entered into an agreement for~~We 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 due~~scheduled 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.

December 2009. We also have inventory financing ~~lines~~programs 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 basis~~from 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	~~Stable~~Positive
Moody’s	Baa3	~~Stable~~Positive
Standard & Poor’s⁽¹⁾	~~BBB-~~BBB	~~Positive~~Stable

⁽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 store~~new-store occupancy costs. In addition, the conversion rights of the holders of our convertible debentures could be accelerated if our credit ratings were to be downgraded.

See our Annual Report on Form 10-K for the fiscal year ended February ~~28, 2004,~~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 all~~repayment of our ~~convertible debentures due~~master 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 ~~redemption~~repayment of our ~~convertible debentures due~~master lease program in ~~2021,~~May 2005, there has been no material change in our contractual obligations ~~out of~~other 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.

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 us~~There 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, in~~materially 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

~~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 ~~anticipate~~project earnings from continuing operations for fiscal ~~2005~~2006 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. Our~~2005, 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, we~~gross profit rate gains. We also expect our SG&A rate to ~~benefit from~~be modestly higher ~~net interest income and a slightly lower effective income tax rate.~~

~~For the fiscal fourth quarter, we are projecting net earnings~~than in the ~~range of $1.56 to $1.66 per diluted share, compared with net earnings of $1.42 per diluted share for the fourth~~second 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 expect~~year 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 quarter~~stock-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 ~~expect~~announced our intent to ~~open approximately ten new stores and pay a regular~~increase our quarterly cash dividend ~~of $0.11~~to $0.12 per common share, ~~during~~on a pre-split basis. The change would be effective with the ~~fiscal fourth quarter.~~

~~As indicated above in the New Accounting Standards section~~quarterly 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 beginning~~record as of ~~our fiscal fourth quarter.~~October 4, 2005. The ~~earnings~~quarterly 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

margins, weather, foreign currency fluctuation, availability of suitable real estate locations, our ability to react to a disaster recovery situation, and the impact of labor markets and new product introductions on our overall profitability. Readers should review our Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on March 18, 2004, that describes additional important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements made in this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our debt is not subject to material interest-rate volatility risk. The ~~rate~~rates 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 ~~rate~~rates on the debt were to be reset one percentage point higher, our annual interest expense would increase by approximately $4 million. We do not currently manage ~~the~~our 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-15~~13a-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 been~~were 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.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 ~~impact~~effect on our results of operations or financial condition.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~Our~~In April 2005, our Board of Directors authorized ~~a $500 million~~the 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 ~~1,805,960~~2,834,783 shares at a cost of ~~$92~~$146 million ~~under our~~pursuant 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 ~~the~~our stock. ~~Cash~~We expect that cash provided by future operating activities, as well as available cash and cash equivalents ~~are~~and short-term investments, will be the ~~expected~~ sources of funding for ~~the~~our share repurchase program.

The following table presents the total number of shares purchased during the ~~third~~first 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 purchase~~may 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
Purchased

Average Price Paid per
Share

Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs

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

August 29, 2004, through October 2, 2004

—

$
—

—

$
432,000,000

October 3, 2004, through October 30, 2004

75,708

56.91

75,708

428,000,000

October 31, 2004, through November 27, 2004

323,819

60.31

323,819

408,000,000

Total Fiscal 2005 Third Quarter

399,527

$
59.67

399,527

$
408,000,000

Fiscal Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs⁽¹⁾
February 27, 2005, through April 2, 2005	686,000	$	52.46	686,000	$	346,000,000
April 3, 2005, through April 30, 2005	872,585	49.30		872,585	1,482,000,000
May 1, 2005, through May 28, 2005	2,474,783	51.76		2,474,783	1,354,000,000
Total Fiscal 2006 First Quarter	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 Credit~~10.1 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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BEST BUY CO., INC.
	(Registrant)


Date: ~~January 6,~~July 7, 2005	By:	/s/ Darren R. Jackson
		Darren R. Jackson
		Executive Vice President — Finance and Chief Financial Officer (principal financial and accounting officer)

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	November 27, 2004
	Amortized Principal Amount		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

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