UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- - ---- ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 26, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - ---- EXCHANGE ACT OF 1934
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact Name of Registrant as Specified in Charter)
MINNESOTA 41-0907483
(State of Incorporation) (I.R.S. Employer
Identification Number)
7075 FLYING CLOUD DRIVE
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-947-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
8-5/8% SENIOR SUBORDINATED NOTES,
DUE 2000 NEW YORK STOCK EXCHANGE
9% SUBORDINATED EXTENDIBLE NOTES,
DUE 1997 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
The aggregate market value of voting stock held by non-affiliates of the
Registrant on May 11, 1994, was approximately $1,003,760,000. On that date,
there were 41,830,551 shares of Common Stock issued and outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
February 26, 1994 ("Annual Report") are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement dated May 23, 1994 for the regular
meeting of shareholders to be held June 22, 1994 ("Proxy Statement") are
incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Best Buy Co., Inc. (the "Company") is one of the nation's leading and
fastest growing discount retailers, offering name brand consumer electronics,
personal computers and other home office products, major appliances and
entertainment software. The Company commenced business in 1966 as an audio
component systems retailer and in the early 1980s, with the introduction of the
video cassette recorder, expanded into video products. In 1983, the Company
adopted its current name, changed its marketing strategy to use mass
merchandising techniques for a wider variety of products, and began to operate
its stores with a consumer electronics "superstore" format. Due to the maturing
of the product cycle for video equipment, greater consumer sophistication, and
growing acceptance of discount retail formats, the Company, in 1988, began to
develop a retail concept that had greater appeal to evolving consumer
preferences and would differentiate it from other consumer electronics
superstores and mass merchandisers. In 1989, Best Buy introduced its "Concept
II" strategy, an innovative, self service, discount style store format
utilizing approximately 28,000 square feet, that the Company continues to
refine. All of the Company's stores currently utilize this format, with the
final 23 traditional superstores in Minnesota and Iowa converted to the
Concept II format in fiscal 1994. During the past two years the Company has
introduced larger versions of its Concept II store to offer an enhanced
selection of entertainment software, an expanded display of personal computers
and other home office products, and additional space for listening rooms and
home theater displays. The majority of the new stores in fiscal 1994 were
36,000 square feet, with some 45,000 square foot stores also opened. Due to
the increased sales productivity achieved with the 45,000 square foot version
the Company expects to open primarily that size store in fiscal 1995, with
stores of nearly 60,000 square feet planned in a few locations where population
density can support it.
In fiscal 1995, the Company intends to introduce its Concept III store, the
next evolution of its store format. These stores will feature increased
product selection and extended use of interactive technology to provide customer
assistance. The majority of the new stores to be opened in fiscal 1995 will
contain features of the Concept III design.
The Company's expansion into the major metropolitan markets of Atlanta,
Detroit and Phoenix during fiscal 1994 broadened the geographic area in which
the Company operates. At February 26, 1994 the Company has 151 stores in 18
states. The Company anticipates opening approximately 50 stores in fiscal 1995,
including entry into the markets of Charlotte, Cleveland, Orlando and
Washington, D.C. in the eastern United States and Los Angeles and Las Vegas in
the west. The expected store openings in fiscal 1995 also include additional
stores in existing markets. The
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Company expects to be operating approximately 200 retail locations by
December 1994.
INDUSTRY OVERVIEW
Consumer electronics retailing is a highly competitive industry and has
recently experienced significant consolidation. Examples of this consolidation
in 1993 include the closing of a significant number of Silo stores (97 of 232),
the acquisition of the remaining Silo stores by Fretter, Inc., the closing of
many of the McDuff/Video Concepts stores (110 of 416) and the liquidation of
Highland Superstores. While overall industry sales have grown relatively slowly
in recent years, the concentration of sales among the top retailers has
increased significantly. The relatively slow sales growth is due to market
saturation for many consumer electronics products and the absence of new
products in the market. In addition, the Company believes that consumers have
become more knowledgeable and value conscious, thereby putting pressure on
profit margins.
The increasing acceptance of personal computers in the workplace and at
home has led to an expansion in the channels of distribution for personal
computers and other home office products. As customers have sought increasingly
competitive prices, more discount retailers, such as Best Buy, have entered the
home office product market. The Company believes that it is well positioned to
withstand increased competition in the retail market for personal computer
products, traditionally low margin items, due to its early entry and experience
in the market, its broad product lines and its relatively low cost structure
which allows for profitable sales in a price competitive marketplace. In
addition, the Company believes that the changing technology and consumer demand
for access to the "Information Superhighway" will continue to generate increased
demand for computers and related products.
BUSINESS STRATEGY
The Company believes it has developed an innovative and efficient business
strategy that offers consumers meaningful advantages in store environment,
product value, selection and service. This strategy has helped Best Buy achieve
a significant, and in some cases dominant, share of the markets it serves for
most of the product categories it offers. As part of its overall `strategy, the
Company:
- Offers a self service, discount style store format, featuring easy to
locate display groupings, emphasizing customer choice and product
information and providing assistance from product specialists, when
needed, while eliminating the commissioned sales approach of the
traditional consumer electronics superstore.
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- Seeks to provide consumers with the best product value available in
the market area through active comparison shopping programs, daily
price changes, lowest price guarantees and special promotions
including 0% financing and reasonably priced extended warranties.
- Offers a wide selection of leading brand names, including JVC,
Pioneer, Panasonic, Magnavox, RCA, Sharp and Sony consumer
electronics; Apple, AT&T, Compaq, Dell, Hewlett Packard, IBM, Packard
Bell and Toshiba home office products; and Whirlpool and White-
Westinghouse major appliances.
- Locates stores in major shopping areas that are easily accessible from
major highways and thoroughfares.
- Provides convenient delivery, installation, warranty, repair and
computer upgrade services.
- Controls costs through its Concept II store format, the use of fully
integrated point-of-sale and management information systems and the
central control of all buying, merchandising and product distribution.
Best Buy's store format is a key component of its business strategy. The
Company believes that because customers are familiar with most consumer
electronics products and are accustomed to discount shopping formats, they
increasingly resist efforts to direct their choice of product and appreciate
controlling the purchase decision. In addition, the Company believes that its
competitors' use of directional, commissioned sales staffs and showrooms in
traditional superstores are inefficient methods of completing a sale.
The Company's stores are in large, open buildings with high ceilings. Most
of Best Buy's existing stores range in size from 28,000 to 45,000 square feet.
The majority of the stores which the Company plans to open in fiscal 1995 will
have approximately 45,000 square feet with larger stores of nearly 60,000 square
feet in selected locations. Stores of this size allow for a greater selection
of music and video titles, an expanded computer and home office product
presentation, and more space available for audio listening rooms and home
theater displays.
Best Buy's merchandise is displayed at eye level next to signs detailing
the products' major features, with the boxed product available directly beneath
the display model. Salaried product specialists and "Answer Centers" are
located in each product area for customers who desire assistance. These centers
are staffed by product specialists who are knowledgeable about the operations
and features of the merchandise on display. Each Answer Center has computer
terminals from which detailed product information can be printed and provided to
the customer. In addition, the Company
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has expanded the availability of technical support staff for the custom
configuration of personal computers and peripheral products as well as offering
computer software training classes at selected stores. The stores' self service
displays, Answer Centers and product specialists combine to leave customers in
control of their purchase decisions. The use of multiple, efficient check-out
lanes results in faster processing of the sales transaction.
The style of merchandising utilized in Best Buy's stores differs from most
other retailers selling comparable merchandise. The self service format allows
the customer to carry merchandise directly to the check-out lanes, pay for it
and leave the store. This system avoids the time consuming selection, purchase
and pick up system used at traditional consumer electronics superstores and
catalog showrooms. Many of the Company's competitors with the traditional
superstore format use commissioned sales staffs and have only display models on
the selling floor with stock stored in a back room. This traditional superstore
design allows sales personnel to direct the customer to products chosen by the
salesperson. In this situation, a salesperson typically will promote products
yielding the greatest sales commissions. In addition, these traditional
superstores generally stress the sale of extended service plans and have trained
their sales staffs to maximize the sale of these plans. The Company offers
extended service plans, generally at lower prices than its competitors, but does
not emphasize their sale.
The Company believes that its advertising strategy has greatly contributed
to its overall success. In fiscal 1994, Best Buy spent approximately 3.5% of
store sales on advertising, including the distribution of about 15.7 million
newspaper inserts weekly. The Company has vertically integrated advertising and
promotion capabilities and operates one of the largest in-house advertising
agencies in the Midwest. This capability allows the Company to respond rapidly
to competitors in a cost effective manner. In many of its markets, the Company
is able to secure and deliver merchandise to its stores and to create, produce
and run an advertisement all within a period of less than one week.
Print advertising, which accounts for approximately 60% of total
advertising expenditures, has historically consisted of 16 to 20-page, four-
color weekly inserts emphasizing a variety of product categories and featuring
extensive name brand selection and price range, supplemented with full page
newspaper advertisements. In fiscal 1995, the Company expects to reduce the
size of some of its weekly inserts and feature fewer selected products while
generating enhanced consumer awareness of the services, features and promotions
the Company offers. The Company also produces approximately 80 television and
radio commercials each year, each with a specific marketing message. Television
commercials and radio spots account for approximately 37% of total advertising
expenditures. The Company is reimbursed by vendors for a substantial portion of
advertising expenditures through cooperative advertising arrangements.
-5-
Product service and repair are important aspects of Best Buy's marketing
strategy, allowing it to differentiate itself from warehouse clubs and other
discount stores which generally provide no such service. The Company offers to
service and repair virtually all products it sells, except major appliances in
certain markets, and has been designated by most of its suppliers as an
authorized service center. The Company contracts with outside factory service
organizations to service and repair major appliances. In addition, the Company
delivers and installs major appliances and large electronic products and
installs car stereos, cellular phones and security systems. Virtually all
products sold by the Company carry manufacturers' warranties.
PRODUCTS
Best Buy provides a broad selection of name brand models within each
product line in order to provide customers with greater choice. The Company
currently offers approximately 3,000 products, exclusive of entertainment
software, in four major product categories: consumer electronics, home office
equipment, major appliances and entertainment software. The Company is one of a
few large consumer electronics retailers that sell a broad selection of
entertainment software in all of their stores. It was also among the first
consumer electronics retailers to carry an extensive assortment of personal
computer products and related software. The Company also aggressively promotes
and displays a large selection of lower priced, high volume items, such as blank
audio and video tapes, portable audio equipment and photographic equipment.
Consumer electronics, consisting of video and audio equipment, is Best
Buy's leading product category. Video products include televisions, video
cassette recorders and camcorders. Audio products include audio components,
audio systems, portable audio equipment, keyboards, car stereos and mobile
electronics. The Company sells consumer electronics with brand names such as
Aiwa, Bose, Infinity, JBL, JVC, Magnavox, Panasonic, Pioneer, RCA, Sanyo/Fisher,
Samsung, Sharp, Sony, Technics and Toshiba. In fiscal 1995, the Company intends
to expand its product offerings in the consumer electronics category by adding
more technologically advanced products, appealing to the more sophisticated
consumer. Additionally, beginning in fiscal 1995, the Company will be one of
three authorized distributors of the satellite dishes needed to receive
broadcasts from the two providers of direct satellite broadcast television.
Best Buy's home office category includes personal computers and related
peripheral equipment, telephones, answering machines, fax machines, copiers and
calculators. The home office products include name brands such as Acer, Apple,
AT&T, Canon, Compaq, Dell, Epson, Hewlett Packard, IBM, NEC, Packard Bell,
Panasonic, Sharp and Toshiba.
-6-
The major appliance category includes microwave ovens, washing machines,
dryers, air conditioners, dishwashers, refrigerators, freezers, ranges and
vacuum cleaners. Products in this category include brand names such as Eureka,
Hoover, Maytag, Sharp, Whirlpool and White-Westinghouse.
Best Buy's entertainment software category includes compact discs, pre-
recorded audio and video cassettes and computer software. The Company currently
offers an extensive selection of approximately 23,000 titles in most stores and
approximately 70,000 titles in selected stores in high population markets. The
Company believes that it has substantially increased customer traffic by
offering this wide assortment of entertainment software.
The following table sets forth the approximate percentages of store sales
from each of Best Buy's principal product lines.
Fiscal Years Ended
---------------------------------------------------------
February 26, 1994 February 27, 1993 February 29, 1992
----------------- ----------------- -----------------
Consumer Electronics:
Video. . . . . . . . . . . . . 22% 26% 28%
Audio. . . . . . . . . . . . . 16 20 22
Home Office. . . . . . . . . . . 35 27 22
Entertainment Software . . . . . 12 9 7
Major Appliances . . . . . . . . 9 11 13
Extended Service Plans . . . . . 1 1 2
Other (1). . . . . . . . . . . . 5 6 6
--- --- ---
Total. . . . . . . . . . . . . 100% 100% 100%
--- --- ---
--- --- ---
<FN>
(1) Primarily photographic equipment, blank audio and video tapes, video game
hardware and software, furniture and accessories.
STORE LOCATIONS AND EXPANSION
The Company's strategy has been to enter major metropolitan areas with the
simultaneous opening of several stores and then to expand into contiguous non-
metropolitan markets. At February 26, 1994, 57 of the Company's 151 stores are
in non-metropolitan markets. The entry into a new market is preceded by a
detailed market analysis which includes a review of competitors, demographics
and economic data. Best Buy's store location strategy enables it to maximize
the effectiveness of advertising expenditures and to create a high level of
consumer awareness. In addition, the clustering of stores allows the Company to
maintain more effective management control, enhance asset utilization, and
utilize the Company's distribution facilities more efficiently.
When entering a new metropolitan market, the Company establishes a district
office, service center and major appliance warehouse. Each new store requires
approximately $3.0 million of working capital for merchandise inventory (net of
vendor
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financing), leasehold improvements, fixtures and equipment. Additional pre-
opening costs are incurred in hiring and training new employees and in
advertising. Pre-opening costs of approximately $180,000 per store are expensed
in the year the store is opened.
Best Buy is continuing its aggressive store expansion strategy. The
Company believes it has the necessary distribution and management information
systems as well as management experience and depth to support its expansion
plans. During the last fiscal year, the Company opened 40 stores, a 36%
increase in its store base. The Company intends to open approximately 50
additional stores during the current fiscal year, including stores in the major
markets of Charlotte, Cleveland, Las Vegas, Los Angeles, Orlando and
Washington, D.C.
The following table summarizes the number and location of stores presently
operated by the Company and which the Company plans to open during the current
fiscal year. The location and number of stores opened in fiscal 1995 may differ
from the following estimates.
NUMBER OF STORES NUMBER OF STORES ESTIMATED NUMBER
AT FISCAL YEAR END PLANNED TO BE OF STORES TO BE
------------------------ OPENED IN FISCAL OPEN AT END OF
1992 1993 1994 1995 FISCAL 1995
---- ---- ---- ---------------- ----------------
Illinois . . . . . . . . . . . 7 20 30 2 32
Texas. . . . . . . . . . . . . 15 26 28 3 31
Minnesota. . . . . . . . . . . 14 14 15 1 16
Michigan . . . . . . . . . . . -- -- 10 3 13
Wisconsin. . . . . . . . . . . 11 11 11 -- 11
Missouri . . . . . . . . . . . 10 10 10 -- 10
Georgia. . . . . . . . . . . . -- -- 7 2 9
Ohio . . . . . . . . . . . . . -- -- 2 7 9
Arizona. . . . . . . . . . . . -- -- 6 1 7
Indiana. . . . . . . . . . . . -- 7 7 -- 7
California . . . . . . . . . . -- -- -- 6 6
Colorado . . . . . . . . . . . 5 6 6 -- 6
Iowa . . . . . . . . . . . . . 5 5 5 -- 5
Kansas . . . . . . . . . . . . 3 3 4 -- 4
Virginia . . . . . . . . . . . -- -- -- 4 4
Arkansas . . . . . . . . . . . -- 1 2 1 3
Florida. . . . . . . . . . . . -- -- -- 3 3
Maryland . . . . . . . . . . . -- -- -- 3 3
Nebraska . . . . . . . . . . . 2 3 3 -- 3
North Carolina . . . . . . . . -- -- -- 3 3
Oklahoma . . . . . . . . . . -- 3 3 -- 3
South Carolina . . . . . . . . -- -- -- 3 3
Kentucky . . . . . . . . . . . -- -- -- 1 1
Nevada . . . . . . . . . . . . -- -- -- 1 1
New Mexico . . . . . . . . . . -- 1 1 -- 1
South Dakota . . . . . . . . . 1 1 1 -- 1
To Be Determined . . . . . . . -- -- -- 6 6
--- --- --- --- ---
Total . . . . . . . . . . 73 111 151 50 201
--- --- --- --- ---
--- --- --- --- ---
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SUPPLIERS, PURCHASING AND DISTRIBUTION
The Company's marketing strategy depends, in part, upon its ability to
offer a wide selection of name brand products to its customers and is,
therefore, dependent upon satisfactory supplier relationships. Currently, Best
Buy's 25 largest suppliers account for approximately 70% of the merchandise
purchased by the Company, with five suppliers, Hewlett-Packard, IBM, Packard
Bell, RCA and Sony, accounting for approximately 29% of the Company's total
purchases. The loss of any one of these major suppliers could have a material
adverse effect on the Company's sales. While certain suppliers have at times
limited or discontinued their supply of products to the Company, the Company's
operations have not been materially adversely impacted by any limitation on or
loss of supply.
Best Buy has no written contracts with its suppliers but has not received
any indication that any suppliers will discontinue selling merchandise to the
Company. The Company has not experienced difficulty in maintaining satisfactory
sources of supply, and management believes that adequate sources of supply will
continue to exist for the types of merchandise sold in its stores. Because the
Company purchases a substantial portion of its audio and video products from
Japanese and other foreign manufacturers, world political and economic events
and trends, such as export-import controls and the value of the U.S. dollar
relative to the Japanese yen and other foreign currencies, may affect the
Company's ability to acquire and sell merchandise at sufficient volumes and
margins.
Best Buy's centralized buying staff purchases substantially all of the
Company's merchandise. The buying staff is responsible for overall inventory
management, including promotion planning, pricing and replenishment of store
inventory. Generally, with the exception of certain entertainment software,
there are no agreements with suppliers for the return of unsold inventory.
Merchandise remaining at the time of new product introduction is generally sold
on a close-out basis. Historically, revenues from the sale of close-out
merchandise have been insignificant. The Company utilizes an automatic
replenishment system for restocking its stores. Replenishment of store
inventories is based on inventory levels, historical and projected sales trends,
promotions and seasonality. The Company utilizes an extensive merchandise
planning and daily inventory monitoring system to manage inventory turns.
The majority of the Company's merchandise, except for major appliances, is
shipped directly from manufacturers to the Company's current distribution
centers in Minnesota and Oklahoma. Major appliances are shipped to satellite
warehouses in each of the Company's major markets. In order to respond to
shortened lead time from production to retail sale for certain computer and
entertainment software products, the Company has increased the
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volume of merchandise shipped directly to the stores from manufacturers and
distributors. The Company is, however, still dependent upon the distribution
centers for inventory storage and shipment of merchandise to stores. The
Company primarily uses contract carriers to ship merchandise from its
distribution centers to its stores. On average, stores are supplied with
merchandise on a weekly basis, although shipments are accelerated during the
year end holiday season. The Company believes that its distribution centers can
most effectively service stores within a 600 to 700 mile radius. The Company's
distribution facilities are being expanded considerably in fiscal 1995 to handle
the increased sales volume and store growth. A 200,000 square foot expansion
is being made to the Company's Oklahoma facility. A 700,000 square foot
distribution center in Virginia, expected to open in August 1994, will serve
many of the stores expected to be opened in fiscal 1995, as well as certain
existing stores in the central and southeast regions. The Company also expects
to utilize distribution facilities in California to service the new stores in
California and Nevada, as well as certain existing stores. The Company also
expects to lease a 240,000 square foot entertainment software distribution
facility in Minneapolis. The Company plans to continue investing in developing
new systems and purchasing material handling equipment to reduce labor costs,
improve accuracy in filling orders and enhance space utilization.
MANAGEMENT INFORMATION SYSTEMS
Best Buy has invested significant resources to develop proprietary software
that provides daily information on sales, gross margins and inventory levels by
store and by stockkeeping unit. These systems allow the Company to compare
current performance against historical performance and the current year's
budget. The systems have been designed to integrate all major aspects of the
Company's business including sales, warehousing, distribution, purchasing,
inventory control, merchandise planning and replenishment, as well as various
financial systems. Best Buy uses point-of-sale bar code scanning from which
sales information is polled at the end of each day. The Company is also
implementing EDI (Electronic Data Interchange) with selected suppliers for the
more efficient transmittal of purchase orders, shipping notices and invoices.
The Company believes that the systems it has developed have the ability to
continue to improve customer service, operational efficiency, and management's
ability to monitor critical performance factors. The systems have been designed
to support the growth and expansion of the Company for the foreseeable future.
Best Buy is continuing to make investments in designing new systems and
modifying existing systems, particularly in the distribution and inventory
management areas.
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STORE OPERATIONS
Best Buy has developed a standardized and detailed system for operating its
stores. The system includes procedures for inventory management, transaction
processing, customer relations, store administration and merchandise display.
The Company's store operations are organized into three regions. Each region is
divided into districts and is under the supervision of a senior vice president
who oversees the operation through several regional managers, each of whom has
responsibility for a number of districts within the region. District managers
monitor store operations closely and meet regularly with store managers to
discuss merchandising and new product introductions, sales promotions, customer
feedback and requests, store operating performance and other matters. Similar
meetings are conducted at the corporate level with regional management. Each
district also has a loss prevention manager and product security controllers are
employed at each store to control inventory shrinkage. Advertising, pricing and
inventory policies are controlled at corporate headquarters. The Company's
training, consumer affairs, human resources and store merchandising functions
are also centralized at corporate headquarters.
The Company's stores are open seven days and six evenings a week. A store
is typically staffed by one manager, two or three assistant managers, and an
average staff of 80 persons, including product specialists and a support staff
of cashiers and customer service and stock handling employees. Approximately
50% of a store's staff is employed on a part-time basis. Store managers are
paid a salary and have the opportunity to earn bonuses if their stores exceed
sales and gross margin quotas, meet certain budget criteria in controlling
expenses, and achieve certain administrative goals.
The Company has an extensive in-house education program to train new
employees, keep employees informed of changes and modifications to its operating
procedures and demonstrate new products. The training program includes classes
for employees and the use of detailed store manuals and training video tapes
produced in-house. Best Buy also provides its store personnel with in-store
training in the demonstration and operation of the Company's merchandise, which
is enhanced using tests that are administered through the Company's mainframe
computer system. The Company also conducts an 11-week course of classroom
instruction combined with on-the-job training for future management candidates.
The Company's policy is to staff store management positions with personnel
promoted from within each store and to staff new stores from its pool of trained
managers.
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CREDIT POLICY
The Company has significantly expanded the use of special financing offers
and considers them an important part of its marketing strategy. Approximately
40% of store revenues are paid for in cash, with the remaining 60% paid for by
either major credit cards or the Best Buy private label credit card. The
special financing offers are provided to customers who qualify for Best Buy's
private label credit card. The private label credit card allows these customers
to obtain financing on purchases of merchandise at Best Buy stores through
arrangements between the Company and independent banks and consumer credit
programs. Receivables from private label credit card sales are sold, without
recourse to unaffiliated third party financial institutions. In May 1993, the
Company began to discontinue its prior program which allowed customers to
receive similar financing on their purchases but relied more on the use of non-
recourse installment contracts rather than a private label credit card. One
benefit of the private label credit card program is that the Company now
receives payment from the consumer finance companies within two to three days
rather than the two to three weeks experienced under the prior program. At
February 26, 1994, there are over 700,000 card holders with available credit in
excess of $1.5 billion.
COMPETITION
Consumer electronics, major home appliance and home office product
retailing is highly competitive. Management believes that its store format
distinguishes the Company from most of its competitors by offering customers a
friendlier and less pressured shopping experience. In addition, the Company
competes by aggressively advertising and emphasizing product selection, low
prices and service.
Best Buy competes in most of its markets against Sears and Montgomery Ward
and in an increasing number of markets against Circuit City, Fretters and
Incredible Universe (owned by Tandy Corp.). It also competes against computer
superstores such as Computer City (owned by Tandy Corp.) and CompUSA in the sale
of home office products. Some of these competitors have significantly greater
financial resources than the Company. The Company also competes against
independent dealers, discount stores, wholesale clubs, office products
superstores and mass merchandisers. The consumer electronics retailing industry
continued to experience consolidation in 1993 as evidenced by the liquidation of
Highland Superstores, sale and concurrent closing of Silo stores (formerly owned
by Dixons Group plc) in many of the markets where the Company competes and the
closing of 110 McDuff/Video Concepts (owned by Tandy Corp.) stores in states
such as Texas, Colorado and Missouri. At February 26, 1994, approximately 45%
of the Company's stores compete in markets with Circuit City. This percentage
is expected to increase as the Company enters new markets in the eastern
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United States and Los Angeles and Las Vegas in the west, and Circuit City enters
the Minneapolis/St. Paul and Kansas City markets in fiscal 1995.
EMPLOYEES
As of February 26, 1994, the Company employed approximately 15,200
persons, of whom 7,800 were part-time employees. The Company has never
experienced a strike or work stoppage, and management believes that its employee
relations are good. There are no collective bargaining agreements covering any
of the Company's employees.
ITEM 2. PROPERTIES
The Company's stores, most of which are leased, include sales space,
inventory storage, management offices and employee areas. All of the leases
provide for a fixed minimum rent with scheduled escalation dates and amounts.
Leases for 11 of the stores have a percentage rent provision equal to from .75%
to 4% of gross sales at each location in excess of certain specified sales
amounts. Currently, percentage rent is paid for only six stores. The terms of
the leases generally range from 10 to 20 years and generally allow the Company
to renew for up to three additional five-year terms. The terms, including
renewal options, of about 80% of the leases extend past the year 2010.
The Company leases a 425,000 square foot distribution facility in
Bloomington, Minnesota. The Company also leases a second distribution center in
Ardmore, Oklahoma, consisting of approximately 240,000 square feet. This
facility is currently undergoing a 200,000 square foot expansion which is
expected to be completed by June 1994. The Company has also begun construction
of a third distribution facility in Staunton, Virginia. The permanent financing
for this 700,000 foot facility is expected to come from a master lease program
the Company is utilizing for development of property in fiscal 1995. This
facility is expected to be operational by August 1994. The Company expects to
lease additional warehouse space in the western United States to service the
new stores in the west along with certain existing stores. In addition, the
Company has leased a 240,000 square foot distribution facility for entertainment
software in Minneapolis. The Company operates leased satellite warehouses for
major appliances in most major markets. The Company's corporate offices are
located in Eden Prairie, Minnesota in a 260,000 square foot facility which the
Company occupied in January, 1994.
-13-
ITEM 3. LEGAL PROCEEDINGS
In November 1993 the Company settled litigation with Onkyo U.S.A. Corp.,
which had been filed in United States District Court for the District of
Minnesota, without material impact to the Company's reported results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) A special meeting of the Shareholders of the Company was held January
13, 1994. James C. Wetherbe was elected at the meeting as a Director
of the Company to serve until the 1994 regular meeting of
shareholders. Voted in favor of his election were 16,587,790 shares,
while 35,732 shares were withheld from voting in his favor. The other
matters voted on and the results of the voting were as follows:
i) Shareholders voted to increase the number of authorized
shares of the Company's Common Stock to 120 million shares
by a vote of 12,883,977 shares in the affirmative; 3,704,684
shares in the negative; and 34,361 shares abstaining.
ii) Shareholders voted to approve an amendment to the Company's
1987 Employee Non-Qualified Stock Option Plan, increasing
the number of shares subject to the Plan to 3,625,000
(number of shares is prior to a two-for-one stock split in
April 1994 which increased the number of shares to
7,250,000) by a vote of 16,084,738 shares in the
affirmative; 308,986 shares in the negative; and 142,709
shares abstaining; and 86,589 broker non-votes.
-14-
THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
YEARS
WITH
THE
NAME AGE POSITION WITH COMPANY COMPANY
- - ---- --- --------------------- -------
Richard M. Schulze 53 Founder, Chairman, Chief Executive Officer and Director 27
Bradbury H. Anderson 45 President, Chief Operating Officer and Director 20
Allen U. Lenzmeier 50 Executive Vice President and Chief Financial Officer 9
Wade R. Fenn 35 Senior Vice President - Sales 13
George S. Fouts 56 Senior Vice President - Sales 7
Kenneth R. Weller 45 Senior Vice President - Sales *
Lee H. Schoenfeld 41 Senior Vice President - Marketing 15
Steven R. Anderson 47 Senior Vice President - MIS and Chief Information Officer 7
Robert C. Fox 43 Senior Vice President - Finance and Treasurer 8
James P. Mixon 49 Senior Vice President - Distribution and Transportation *
Randall K. Zanatta 36 Senior Vice President - Merchandising 14
<FN>
_____________________________
* Less than one year
RICHARD M. SCHULZE is a founder of the Company. He has served as an
officer and director of the Company from its inception in 1966 and currently
serves as its Chairman and Chief Executive Officer.
BRADBURY H. ANDERSON has been the Company's President and Chief Operating
Officer since April 1991, having served as Executive Vice President - Marketing
of the Company from February 1986. He has been employed in various other
capacities with the Company since 1973, including retail salesperson, store
manager and sales manager. Mr. Anderson has been a Director of the Company
since 1986.
ALLEN U. LENZMEIER was promoted to his present position in April 1991 after
having served as Senior Vice President - Finance and Operations and Treasurer of
the Company from 1986. Mr. Lenzmeier joined the Company in 1984 and has also
served as Vice President - Finance and Operations and Treasurer.
WADE R. FENN was promoted to his present position in April 1991, having
served as Regional Vice President of the Company from 1987. Mr. Fenn joined the
Company in 1980 as a salesperson and has also been employed by the Company as a
store and district manager.
GEORGE S. FOUTS was promoted to his present position in April 1991, having
served as Regional Vice President of the Company from 1987. Mr. Fouts joined
the Company in 1986 as a sales manager after being employed by RCA Corporation
for nineteen years, most recently as Vice President of RCA Sales Corporation.
-15-
KENNETH R. WELLER joined the Company in May 1993. Since 1986, he was Vice
President of Sales of The Good Guys!, a San Francisco-based consumer electronics
retailer where he had worked since 1982.
LEE H. SCHOENFELD was promoted to his present position in July 1993. Mr.
Schoenfeld joined the Company in 1978 as a salesperson and has served most
recently as Vice President - Marketing.
STEVEN R. ANDERSON was promoted to his present position in April 1994,
after having served as Vice President-MIS since July 1990. Mr. Anderson joined
the Company in 1986 as Director of Management Information Systems.
ROBERT C. FOX was promoted to his present position in April 1994, after
having served as Vice President-Accounting since 1987 and Treasurer since 1993.
Mr. Fox joined the Company in 1985 as Controller.
JAMES P. MIXON joined Best Buy in April 1994 as Senior Vice President-
Transportation and Distribution. Prior to joining the Company, Mr. Mixon held
various distribution management positions with several national retailers,
most recently with Marshalls Stores, Inc.
RANDALL K. ZANATTA has been with Best Buy for 14 years and was promoted to
his present position in April 1994. Mr. Zanatta joined the Company as a
salesperson and was promoted to store manager, joined the Company's Marketing
Department, becoming a Vice President-Marketing in 1986.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth for the periods indicated the high and
low prices of the Company's common stock. The prices listed reflect the high
and low last sale prices as quoted on the New York Stock Exchange.
High Low
---- ---
FISCAL 1994:
1st Quarter ended May 29, 1993. . . . . . . . $16-5/32 $11-7/32
2nd Quarter ended August 28, 1993 . . . . . . 16-1/2 10-27/32
3rd Quarter ended November 27, 1993 . . . . . 31-7/16 16-3/32
4th Quarter ended February 26, 1994 . . . . . 27-11/16 18-13/16
FISCAL 1993:
1st Quarter ended May 30, 1992. . . . . . . . $9-11/32 $5-7/32
2nd Quarter ended August 29, 1992 . . . . . . 6-3/8 4-23/32
3rd Quarter ended November 28, 1992 . . . . . 11-27/32 5-1/2
4th Quarter ended February 27, 1993 . . . . . 15-23/32 10-25/32
As of May 11, 1994, there were approximately 1,139 shareholders of record.
-16-
The Company has not historically paid cash dividends on its Common Stock
and does not currently intend to pay any dividends on its Common Stock for the
foreseeable future. In addition, the Company's bank line of credit and certain
financing agreements restrict its ability to pay dividends. See Notes 3 and 4
to the Financial Statements incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial and
Operating Data" on page 19 of the Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 14 through
18 of the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are listed below, are
contained in the Annual Report on the pages thereof indicated, and are expressly
incorporated herein by this reference.
Page No.
-------
Independent auditors' report 23
Balance sheets as of February 26, 1994 and
February 27, 1993 20
For the fiscal years ended February 26, 1994,
February 27, 1993, and February 29, 1992
Statements of earnings 21
Statements of cash flows 22
Statements of shareholders' equity 23
Notes to financial statements 24-27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-17-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Security Ownership of Certain
Beneficial Owners" and "Nominees and Directors" on pages 3 through 6 of the
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation"
on pages 7 through 13 of the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners" on pages 3 through 5 of the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Nominees and Directors" and
"Certain Transactions" on pages 5 through 7 of the Proxy Statement is
incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements.
All financial statements of the Registrant as set forth under Item 8
of this Report.
2. Financial Statement Schedules:
Independent Auditors' Report
Schedule V - Property & Equipment
Schedule VI - Accumulated Depreciation & Amortization of
Property & Equipment
Schedule IX - Short-term Borrowings
Schedules other than those listed above have been omitted since they
are either not applicable, not required, or the information is
included elsewhere herein.
-18-
3. Exhibits:
Method
of
Number Description filing
------ ----------- ------
3.1 Amended and Restated Articles of Filed herewith
Incorporation, as amended, of
Best Buy Co., Inc.
3.2 Amended and Restated By-Laws, as (1,2)
amended, of Best Buy Co., Inc.
4.1 Form of Indenture between Best Buy Co., (3)
Inc., and First Trust Company, Inc.,
relating to $30,000,000 Subordinated
Extendible Notes due 1997.
4.2 Note Purchase Agreement with Principal (4)
Mutual Life Insurance Company, dated as
of July 30, 1992.
4.3 Credit Agreement dated September 1, 1993 (5)
between Best Buy Co., Inc. and First
Bank National Association.
4.4 Indenture between Best Buy Co., Inc. and Filed herewith
Mercantile Bank of St. Louis N.A.
relating to $150,000,000 Senior
Subordinated Notes due 2000.
4.5 Second Amendment to the Credit Agreement Filed herewith
between Best Buy Co. Inc. and First Bank
National Association, dated April 25, 1994.
4.6 First Amendment to the Credit Agreement Filed Herewith
between Best Buy Co. Inc. and First Bank
National Association, dated September 17, 1993.
10.1 Amended 1987 Employee Non-Qualified Filed herewith
Stock Option Plan
10.2 Amended 1987 Directors' Non-Qualified (4)
Stock Option Plan
10.3 1994 Full-Time Employee Non-Qualified Filed herewith
Stock Plan
10.4 Resolutions of the Board of Directors Filed herewith
dated March 30, 1994 implementing the fiscal
1995 bonus program for senior officers
11.1 Computation of Earnings Per Common Share Filed herewith
13.1 1994 Annual Report to Shareholders Filed herewith
24.1 Independent Auditors' Consent Filed herewith
24.2 Independent Auditors' Report on Schedules Filed herewith
_________________________
-19-
(1) Exhibit so marked was filed with the Securities and Exchange
Commission on November 12, 1991, as an exhibit to the Registration
Statement on Form S-3 (Registration No. 33-43065) of Best Buy Co.,
Inc., and is incorporated herein by reference and made a part of
hereof.
(2) Exhibit so marked was filed with the Securities and Exchange
Commission on January 13, 1992, as an exhibit to Form 10-Q of Best Buy
Co., Inc., and is incorporated herein by reference and made a part
hereof.
(3) Exhibit so marked was filed with the Securities and Exchange
Commission on June 19, 1987, as an exhibit to the registration
statement on form S-1 (Registration No. 33-15201) of
Best Buy Co., Inc., and are incorporated herein by reference and made
a part hereof.
(4) Exhibits so marked were filed with the Securities and Exchange
Commission on October 12, 1992, as exhibits to Form 10-Q of Best Buy
Co., Inc., and are incorporated herein by reference and made a part
hereof.
(5) Exhibit so marked was filed with the Securities and Exchange
Commission on September 3, 1993, as an exhibit to Amendment No. 1 the
Registration Statement on Form S-3 (Registration No. 33-67776) of Best
Buy Co., Inc. and is incorporated herein by reference.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K under the Securities Act
of 1933, the Registrant has not filed as exhibits to the Form 10-K certain
instruments with respect to long-term debt under which the amount of
securities authorized does not exceed 10 percent of the total assets of the
Registrant. The Registrant hereby agrees to furnish copies of all such
instruments to the Commission upon request.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended
February 26, 1994.
-20-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ RICHARD M. SCHULZE
------------------------------
Richard M. Schulze
Chief Executive Officer
Dated: May 20, 1994
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 20, 1994.
/s/ RICHARD M. SCHULZE Chairman, Chief Executive Officer
- - -------------------------- and Director (principal executive
Richard M. Schulze officer)
/s/ BRADBURY H. ANDERSON President, Chief Operating Officer
- - -------------------------- and Director
Bradbury H. Anderson
/s/ ALLEN U. LENZMEIER Executive Vice President and Chief
- - -------------------------- Financial Officer (principal
Allen U. Lenzmeier financial officer)
/s/ ROBERT C. FOX Sr. Vice President - Finance and
- - -------------------------- Treasurer (principal accounting
Robert C. Fox officer)
/s/ ELLIOT S. KAPLAN Director
- - --------------------------
Elliot S. Kaplan
/s/ FRANK D. TRESTMAN Director
- - --------------------------
Frank D. Trestman
Director
- - --------------------------
Culver Davis, Jr.
Director
- - --------------------------
David Stanley
/s/ JAMES C. WETHERBE Director
- - --------------------------
James C. Wetherbe
-21-