UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended August 26, 1995
OR
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 Charter)
Minnesota 41-0907483
(State of Incorporation) (IRS Employer Identification Number)
7075 Flying Cloud Drive 55344
Eden Prairie, Minnesota (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 612/947-2000
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
--- ---
At August 26, 1995, there were 42,670,147 shares of common stock, $.10 par
value, outstanding.
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED AUGUST 26, 1995
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements:
a. Consolidated balance sheets as of August 26, 1995, 3-4
February 25, 1995, and August 27, 1994
b. Consolidated statements of earnings for the three 5
and six months ended August 26, 1995, and
August 27, 1994
c. Consolidated statement of changes in shareholders' 6
equity for the six months ended August 26, 1995
d. Consolidated statements of cash flows for the 7
six months ended August 26, 1995, and
August 27, 1994
e. Notes to consolidated financial statements 8
Item 2. Management's Discussion and Analysis of Financial 9-11
Condition and Results of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
Part I - Financial Information
Item 1. Consolidated Financial Statements
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
($ in 000, except per share amounts)
August 26, February 25, August 27,
1995 1995 1994
(Unaudited) (Unaudited)
---------- ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 43,693 $ 144,700 $ 47,427
Receivables 116,474 84,440 67,202
Recoverable costs from developed
properties 147,182 86,222 83,060
Merchandise inventories 1,269,060 907,677 863,500
Deferred income taxes 18,009 15,022 14,157
Prepaid expenses 7,035 2,606 5,958
---------- ----------- -----------
Total current assets 1,601,453 1,240,667 1,081,304
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 15,414 13,524 13,524
Property under capital leases 28,435 27,096 21,902
Leasehold improvements 107,177 93,889 69,079
Furniture, fixtures, and equipment 229,006 191,084 145,449
---------- ----------- -----------
380,032 325,593 249,954
Less accumulated depreciation and
amortization 111,212 88,116 77,286
---------- ----------- -----------
Total property and equipment 268,820 237,477 172,668
OTHER ASSETS:
Deferred income taxes 11,058 9,223 8,105
Other assets 20,151 19,758 8,828
---------- ----------- -----------
Total other assets 31,209 28,981 16,933
---------- ----------- -----------
TOTAL ASSETS $ 1,901,482 $1,507,125 $1,270,905
---------- ----------- -----------
---------- ----------- -----------
See notes to consolidated financial statements.
3
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in 000, except per share amounts)
August 26, February 25, August 27,
1995 1995 1994
(unaudited) (unaudited)
----------- ----------- ------------
CURRENT LIABILITIES:
Note payable, bank $ 150,000 $ 95,000
Obligations under financing arrangements 22,851 $ 81,755 23,713
Accounts payable 662,257 406,682 481,440
Accrued salaries and related expenses 28,801 23,785 19,181
Other accrued liabilities 99,140 65,757 47,524
Deferred service plan revenue
and warranty reserve 28,645 24,942 20,774
Accrued income taxes 2,641 14,979 3,583
Current portion of long-term debt 23,124 13,718 9,144
---------- ---------- ----------
Total current liabilities 1,017,459 631,618 700,359
Deferred Service Plan Revenue and Warranty
Reserve, Long-Term 49,558 42,138 31,887
Long-Term Debt 212,143 227,247 211,013
Convertible Preferred Securities of Subsidiary 230,000 230,000
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value;
authorized 400,000 shares; none issued
Common stock, $.10 par value; authorized
120,000,000 shares; issued and
outstanding 42,670,000, 42,216,000,
and 42,067,000 shares, respectively 4,267 4,221 4,207
Additional paid-in capital 234,750 228,982 226,330
Retained earnings 153,305 142,919 97,109
---------- ---------- ----------
Total shareholders' equity 392,322 376,122 327,646
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,901,482 $1,507,125 $1,270,905
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
4
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
($ in 000, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
August 26, August 27, August 26, August 27,
1995 1994 1995 1994
---------- ---------- ---------- ----------
Revenues $1,437,911 $ 933,172 $2,712,607 $1,782,575
Cost of goods sold 1,241,290 800,988 2,333,698 1,531,439
---------- ---------- ---------- ----------
Gross profit 196,621 132,184 378,909 251,136
Selling, general and
administrative expenses 177,418 114,525 343,343 221,791
---------- ---------- ---------- ----------
Income from operations 19,203 17,659 35,566 29,345
Interest expense, net 9,726 5,099 18,342 9,775
---------- ---------- ---------- ----------
Net earnings before income taxes 9,477 12,560 17,224 19,570
Income taxes 3,763 4,960 6,838 7,729
---------- ---------- ---------- ----------
Net earnings $ 5,714 $ 7,600 $ 10,386 $ 11,841
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per share $ .13 $ .18 $ .24 $ .27
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
outstanding (000) 43,623 43,208 43,622 43,226
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See notes to consolidated financial statements.
5
BEST BUY CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AUGUST 26, 1995
($ in 000)
(unaudited)
Additional
paid in Retained
Common stock capital earnings
------------- ---------- ---------
Balance, February 25, 1995 $4,211 $228,982 $142,919
Stock options exercised 56 5,768
Net earnings, six months ended
August 26, 1995 10,386
------- -------- --------
Balance, August 26, 1995 $4,267 $234,750 $153,305
------- -------- --------
------- -------- --------
See notes to consolidated financial statements.
6
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000)
(unaudited)
Six Months Ended
------------------------------
August 26, August 27,
1995 1994
---------- ----------
OPERATING ACTIVITIES:
Net earnings $ 10,386 $ 11,841
Charges to earnings not affecting cash:
Depreciation and amortization 25,971 16,628
-------- --------
36,357 28,469
Changes in operating assets and liabilities:
Receivables (32,034) (14,258)
Merchandise inventories (361,383) (225,550)
Prepaid income taxes and expenses (9,251) (7,298)
Accounts payable 255,575 187,380
Accrued salaries and related expenses 5,016 (138)
Other current liabilities 24,546 4,501
Deferred service plan revenue and warranty
reserve 11,123 5,305
-------- --------
Total cash used in operating activities (70,051) (21,589)
INVESTING ACTIVITIES:
Additions to property and equipment (55,682) (44,524)
Increase in recoverable costs from developed properties (60,960) (50,054)
Increase in other assets (393) (747)
-------- --------
Total cash used in investing activities (117,035) (95,325)
FINANCING ACTIVITIES:
Common stock issued 2,314 1,519
Borrowings on revolving credit line, net 150,000 95,000
Repayments of long-term debt (7,331) (4,607)
(Decrease)increase in obligations under
financing arrangements (58,904) 12,557
-------- --------
Total cash provided by financing activities 86,079 104,469
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (101,007) (12,445)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 144,700 59,872
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,693 $ 47,427
-------- --------
-------- --------
Amounts in this statement are presented on a cash basis and therefore may differ from those shown in other
sections of this quarterly report.
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 18,805 $ 9,423
Income taxes $ 20,165 $ 15,093
See notes to consolidated financial statements.
7
BEST BUY CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of August 26, 1995, and August 27, 1994,
the related consolidated statements of earnings for the three and six
months ended August 26, 1995, and August 27, 1994, the consolidated
statements of cash flows for the six months ended August 26, 1995 and
August 27, 1994, and the consolidated statement of changes in shareholders'
equity for the six months ended August 26, 1995, are unaudited; in the
opinion of management, all adjustments necessary for a fair presentation of
such financial statements have been included and were normal and recurring
in nature. Interim results are not necessarily indicative of results for a
full year. The interim financial statements and notes thereto should be
read in conjunction with the financial statements and notes included in the
Company's Annual Report to Shareholders for the fiscal year ended
February 25, 1995.
2. RECLASSIFICATION:
Certain prior year amounts have been reclassified to conform to current
year presentation.
3. NOTE PAYABLE, BANK:
On August 25, 1995 the Company expanded and extended its bank line of
credit to allow for seasonal borrowings up to $550 million with a maturity
of June, 1998.
4. INCOME TAXES:
Income taxes are provided on an interim basis based upon management's
estimate of the annual effective tax rate.
8
BEST BUY CO., INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Earnings for the second quarter of fiscal 1996 were $5,714,000, or $.13 per
share, compared to $7,600,000, or $.18 per share, for the same period last
year. For the six month period, earnings were $10,386,000, or $.24 per share,
compared to $11,841,000, or $.27 per share, last year. The impact of higher
revenues on earnings compared to the prior year was reduced by higher
interest expense and, in the second quarter, a lower gross profit margin.
Revenues of $1.438 billion in the second quarter represent a 54% increase
compared to the same period last year. For the year, revenues of $2.713
billion were up 52% over the prior year. The increased revenues are the
result of opening 56 stores over the last twelve months as well as a
comparable store sales increase of 7% for the quarter and the six month
period. These comparable store sales increases are on top of comparable
sales increases of 18% and 26% for the quarter and the six months,
respectively, last year. The comparable store sales percentage increases
this year are more in line with retailing in general and are the result of a
slower economy. During the second quarter, the Company opened 11 stores
including three in North Carolina, two in the Los Angeles area, and two in
Ohio. In addition, the Company also added one store in each of the following
states: South Carolina, Missouri, Michigan, and Texas. As of August 26, 1995,
the Company operated 224 stores, compared to 168 stores as of August 27,
1994. Office supplies were introduced late in the second quarter this year as
a logical extension of the home office product category although these
products are not expected to have a large impact on revenues during this
fiscal year. Retail store sales mix by major product category for the second
quarter and six month period is as follows:
Second Quarter Ended Six Month Period Ended
---------------------- ----------------------
8/26/95 8/27/94 8/26/95 8/27/94
------- ------- ------- --------
Home Office 40% 33% 40% 35%
Consumer Electronics:
Audio 13% 14% 13% 14%
Video 17% 21% 18% 21%
Appliances 10% 11% 9% 10%
Entertainment Software 15% 14% 15% 14%
Other 5% 7% 5% 6%
---- ---- ---- ----
Total 100% 100% 100% 100%
---- ---- ----- ----
---- ---- ----- ----
9
Gross profit margins were 13.7% and 14.0% for the quarter and the six month
period, respectively, compared to 14.2% and 14.1% for the same periods,
respectively, last year. The continued pressure on margins from personal
computers, along with their increasing percent of total Company sales impacted
the overall Company margin in the second quarter and for the year. The market
for personal computers continues to be highly promotional with retailers
offering, at times, free peripheral equipment to generate sales and store
traffic to maintain market share.
Selling, general and administrative expenses remained relatively constant as a
percent of sales at 12.3% for the second quarter and 12.7% for the year,
compared to 12.3% and 12.4% for the same periods, respectively, last year. The
unchanged expense ratio in the second quarter and reduction in leverage for the
six month period were mainly the result of costs associated with the new, more
expensive markets entered and larger stores opened in the last year. Additional
stores opening in some markets not fully developed, such as Los Angeles and
Baltimore/Washington D.C., and seasonally higher revenues are expected to
improve the operating expense ratio in the second half of this year.
Extended service plan revenues represented less than 1% of revenues for all
periods presented. Profit earned on extended service plans contributed $4.3
million and $8.5 million to the Company's operating income in the second quarter
and six month period, respectively. Profit earned on extended service plans was
$3.7 million and $7.4 million for the second quarter and six month period,
respectively, last year. This profit is before the allocation of any selling,
general or administrative expenses, except for direct selling expenses.
Interest expense was $9.7 million in the second quarter compared to $5.1 million
for the second quarter last year and $18.3 million for the six month period
compared to $9.8 million for the same period last year. The increase in
interest is mainly due to interest related to $230 million of convertible
preferred securities issued in November 1994.
Income taxes for the first half of this year were 39.7% of pre-tax income
compared to 38.7% for fiscal 1995. The increased tax rate is due primarily to
the elimination of the targeted jobs tax credit, which expired December 31,
1994.
FINANCIAL CONDITION
Working capital at August 26, 1995 was $584 million compared to $609 million at
February 25, 1995. Inventory increased $361 million principally supporting
additional stores, a seasonally higher sales rate, and higher levels of
inventory in existing stores associated with the introduction of office supplies
and "Windows `95" products. Higher credit card sales resulting from promotional
activity in the last few days of the period account for the majority of the
increase in receivables.
10
Recoverable costs from developed properties increased $61 million from the end
of the prior fiscal year. The increase is related to development costs for
fiscal 1996 stores and the development costs of a new distribution center in
Ohio. The Company has completed the sale/leaseback of nine stores to date
generating nearly $50 million in proceeds. In addition, the Company has
engaged an investment bank to market a multiple property sale/leaseback which
is expected to generate approximately $90 million by the end of the year. The
remainder of the recoverable store development costs are expected to be
recovered in single store sale/leaseback transactions by the end of the fiscal
year.
During the second quarter, the Company opened eleven stores bringing the
total store openings through the first half of the year to 20. In addition,
the Company relocated or remodeled five stores. The Company expects to open
another 27 stores and remodel or relocate an additional 11 stores during the
third quarter. Third quarter store openings will include additional stores
in Los Angeles and Baltimore/Washington D.C. and entry into the Cincinnati
market.
In August, the Company completed an expansion and extension of its bank
revolving credit agreement which increased the seasonally available line to $550
million and extended the maturity to June 1998. The agreement contains a "clean
down" period of 45 days during which the borrowings cannot exceed $50 million.
Management believes that the bank revolving line of credit, and inventory credit
facilities, combined with long term real estate development financing and cash
generated from operations will be sufficient to meet the Company's financing
needs for the current fiscal year.
11
BEST BUY CO., INC.
PART II - Other Information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Regular Meeting of the Shareholders of the Company was held June 21,
1995. The following individuals were elected at the meeting as Directors of the
Company to serve until the 1997 Regular Meeting of Shareholders. Shares voted
in favor of these directors and shares withheld were as follows:
Culver Davis, Jr.
Shares For 39,119,680
Shares Withheld 120,293
Elliot S. Kaplan
Shares For 39,117,915
Shares Withheld 122,058
Richard M. Schulze
Shares For 39,119,265
Shares Withheld 120,708
Other matters voted on and the results of voting were as follows:
Shareholders ratified the appointment by the Board of Directors of Ernst &
Young, LLP as the corporation's independent auditor for the fiscal year
beginning February 26, 1995, with shares voted as follows:
Shares For 37,703,676
Shares Against 14,797
Shares Abstaining 20,765
Shareholders approved an amendment to the Company's bonus program for senior
officers, with shares voted as follows:
Shares For 37,810,257
Shares Against 809,458
Shares Abstaining 583,258
12
BEST BUY CO., INC.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits: Method of Filing
----------------
4.1 Amended and Restated Credit Agreement Filed herewith
dated August 25, 1995 between
Best Buy Co., Inc. and First Bank
National Association
11.1 Computation of net earnings
per common share Filed herewith
27.1 Financial Data Schedule Filed herewith
b. Reports on Form 8-K:
No reports on Form 8-K were filed during the period.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
Date: October 10, 1995 By: /s/ ALLEN U. LENZMEIER
-------------------------------------
Allen U. Lenzmeier, Executive Vice
President & Chief Financial Officer
(principal financial officer)
By: /s/ ROBERT C. FOX
-------------------------------------
Robert C. Fox, Senior Vice President-
Finance & Treasurer (principal
accounting officer)
14