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 November 25, 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 November 25, 1995, there were 42,705,224 shares of common stock, $.10 par
value, outstanding.
1
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 25, 1995
INDEX
-----
PAGE
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
a. Consolidated balance sheets as of 3-4
November 25, 1995, February 25, 1995,
and November 26, 1994
b. Consolidated statements of earnings for the 5
three and nine months ended
November 25, 1995, and November 26, 1994
c. Consolidated statement of changes in 6
shareholders' equity for the nine
months ended November 25, 1995
d. Consolidated statements of cash flows for 7
the nine months ended November 25, 1995,
and November 26, 1994
e. Notes to interim consolidated
financial statements 8
Item 2. Management's Discussion and Analysis of Financial 9-12
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
($ in 000, except per share amounts)
NOVEMBER 25, FEBRUARY 25, NOVEMBER 26,
1995 1995 1994
(UNAUDITED) (UNAUDITED)
------------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 107,041 $ 144,700 $ 20,478
Receivables 191,920 84,440 126,803
Recoverable costs from developed
properties 129,302 86,222 94,331
Merchandise inventories 1,973,967 907,677 1,491,080
Deferred income taxes 21,728 15,022 16,026
Prepaid expenses 8,249 2,606 10,517
---------- ---------- ----------
Total current assets 2,432,207 1,240,667 1,759,235
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 15,774 13,524 13,524
Property under capital leases 27,865 27,096 22,892
Leasehold improvements 120,904 93,889 88,880
Furniture, fixtures and equipment 253,912 191,084 186,624
---------- ---------- ----------
418,455 325,593 311,920
Less accumulated depreciation and
amortization 120,668 88,116 88,032
---------- ---------- ----------
Net property and equipment 297,787 237,477 223,888
OTHER ASSETS:
Deferred income taxes 11,058 9,223 8,630
Other assets 17,163 19,758 16,853
---------- ---------- ----------
Total other assets 28,221 28,981 25,483
---------- ---------- ----------
TOTAL ASSETS $2,758,215 $1,507,125 $2,008,606
========== ========== ==========
See notes to consolidated financial statements.
3
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in 000, except per share amounts)
NOVEMBER 25, FEBRUARY 25, NOVEMBER 26,
1995 1995 1994
(UNAUDITED) (UNAUDITED)
------------ ------------ ------------
CURRENT LIABILITIES:
Note payable, bank $ 310,000 $ 192,000
Obligations under financing
arrangements 174,402 $ 81,755 53,651
Accounts payable 1,122,865 406,682 787,707
Accrued salaries and related expenses 34,747 23,785 26,290
Other accrued liabilities 145,653 65,757 61,013
Deferred service plan revenue
and warranty reserve 32,240 24,942 22,394
Accrued income taxes 10,437 14,979 12,729
Current portion of long-term debt 23,109 13,718 12,298
---------- ---------- ----------
Total current liabilities 1,853,453 631,618 1,168,082
Deferred Service Plan Revenue and Warranty
Reserve, Long-Term 55,333 42,138 36,203
Long-Term Debt 208,767 227,247 227,096
Convertible Preferred Securities of Subsidiary 230,000 230,000 230,000
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 42,705,000, 42,216,000,
and 42,165,000 shares, respectively 4,271 4,221 4,217
Additional paid-in capital 235,284 228,982 228,197
Retained earnings 171,107 142,919 114,811
---------- ---------- ----------
Total shareholders' equity 410,662 376,122 347,225
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,758,215 $1,507,125 $2,008,606
========== ========== ==========
See notes to consolidated financial statements.
4
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
($ in 000, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
NOVEMBER 25, NOVEMBER 26, NOVEMBER 25, NOVEMBER 26,
1995 1994 1995 1994
------------ ------------ ------------ ------------
Revenues $1,929,277 $1,349,871 $4,641,884 $3,132,446
Cost of goods sold 1,686,394 1,166,162 4,020,092 2,697,601
---------- ---------- ---------- ----------
Gross profit 242,883 183,709 621,792 434,845
Selling, general and
administrative expenses 200,295 145,696 543,638 367,487
---------- ---------- ---------- ----------
Income from operations 42,588 38,013 78,154 67,358
Interest expense, net 13,186 9,011 31,528 18,786
---------- ---------- ---------- ----------
Net earnings before income
taxes 29,402 29,002 46,626 48,572
Income taxes 11,600 11,300 18,438 19,029
---------- ---------- ---------- ----------
Net earnings $ 17,802 $ 17,702 $ 28,188 $ 29,543
========== ========== ========== ==========
Net earnings per share $ .41 $ .41 $ .65 $ .68
========== ========== ========== ==========
Weighted average common
shares outstanding (000) 43,525 43,598 43,628 43,426
========== ========== ========== ==========
See notes to consolidated financial statements.
5
BEST BUY CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED NOVEMBER 25, 1995
($ in 000)
(Unaudited)
ADDITIONAL
PAID-IN RETAINED
COMMON STOCK CAPITAL EARNINGS
------------ ---------- --------
Balance, February 25, 1995 $4,221 $228,982 $142,919
Stock options exercised 50 6,302
Net earnings 28,188
------ -------- --------
Balance, November 25, 1995 $4,271 $235,284 $171,107
====== ======== ========
See notes to consolidated financial statements.
6
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000)
(Unaudited)
NINE MONTHS ENDED
---------------------------------
NOVEMBER 25, NOVEMBER 26,
1995 1994
------------ ------------
OPERATING ACTIVITIES:
Net earnings $ 28,188 $ 29,543
Charges to earnings not affecting cash:
Depreciation and amortization 40,320 27,383
---------- ----------
68,508 56,926
Changes in operating assets and liabilities:
Receivables (107,480) (73,859)
Merchandise inventories (1,066,290) (853,130)
Prepaid income taxes and expenses (14,184) (14,251)
Accounts payable 716,183 493,647
Accrued salaries and related expenses 10,962 6,971
Other current liabilities 79,099 28,406
Deferred service plan revenue and
warranty reserve 20,493 11,240
---------- ----------
Total cash used in operating
activities (292,709) (344,050)
INVESTING ACTIVITIES:
Additions to property and equipment (98,997) (106,384)
Increase in recoverable costs from developed
properties (43,080) (61,325)
(Decrease)increase in other assets 2,595 (8,772)
---------- ----------
Total cash used in investing activities (139,482) (176,481)
FINANCING ACTIVITIES:
Common stock issued 2,608 2,126
Borrowings on revolving credit line, net 310,000 213,404
Repayments of long-term debt (10,723) (6,888)
Proceeds from issuance of preferred securities 230,000
Increase in obligations under
financing arrangements 92,647 42,495
---------- ----------
Total cash provided by
financing activities 394,532 481,137
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (37,659) (39,394)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 144,700 59,872
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 107,041 $ 20,478
========== ==========
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 $ 34,153 $ 18,652
Income taxes $ 27,578 $ 18,651
See notes to consolidated financial statements.
7
BEST BUY CO., INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of November 25, 1995, and November 26,
1994, the related consolidated statements of earnings for the three and
nine months ended November 25, 1995, and November 26, 1994, the
consolidated statements of cash flows for the nine months ended
November 25, 1995 and November 26, 1994, and the consolidated statement of
changes in shareholders' equity for the nine months ended November 25,
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
in 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
Net earnings for the third quarter of fiscal 1996 were $17.8 million, or $.41
per share, compared to net earnings of $17.7 million, also $.41 per share,
reported in the third quarter last year. For the nine month period ended
November 25, 1995, net earnings were $28.2 million, or $.65 per share compared
to $29.5 million, or $.68 per share, for the comparable period last year. The
impact of increased revenues on the Company's earnings for the quarter and nine
month periods was reduced by continued pressure on profit margins due to
promotional activity and the increasing contribution of the lower margin Home
Office category in the Company's sales mix. Earnings were also impacted by
higher interest expense in the periods as compared to last year.
Revenues in the third quarter increased 43% to $1.929 billion and increased 48%
for the nine month period to $4.642 billion as compared to the same periods last
year. The revenue increases are the result of the addition of 49 new stores in
the past 12 months and comparable store sales increases of 11% in the third
quarter and 8% for the nine month period. In the third quarter, the Company
completed its fiscal 1996 expansion, opening 27 new stores and bringing the
number of new stores opened in fiscal 1996 to 47. Expansion in fiscal 1996
included entry into the new major markets of Miami (seven stores) in May and
Cincinnati (three stores) in October. The Company also expanded its presence in
existing markets, adding twelve stores in Los Angeles and five stores in the
Baltimore/Washington, D.C. market. In addition, the Company has remodeled or
relocated 16 stores during the current fiscal year. At November 25, 1995, the
Company operated 251 retail locations compared to 202 at the same time last
year. Much of the comparable store sales increase was generated by increasing
sales volumes of personal computers, as faster speed Pentium models have become
more affordable. The retail market for personal computers has continued to be
highly competitive and the Company believes it has maintained its market share
by offering promotions on computers that have resulted in total comparable store
sales increases above reported industry averages. Comparable store sales
increases in other product categories have generally been flat due to a slowing
level of consumer spending and the absence of significant new product
introductions during the current fiscal year.
9
Retail store sales mix by major product category for the third quarter and nine
month periods is as follows:
THIRD QUARTER ENDED NINE MONTH PERIOD ENDED
------------------- -----------------------
11/25/95 11/26/94 11/25/95 11/26/94
-------- -------- -------- --------
Home Office 46% 41% 42% 38%
Consumer Electronics:
Video 18 19 18 20
Audio 11 13 12 13
Entertainment Software 14 14 15 14
Appliances 6 7 8 9
Other 5 6 5 6
--- --- --- ---
TOTAL 100% 100% 100% 100%
=== === === ===
Gross profit margin was 12.6% in the third quarter compared to 13.6% for the
third quarter last year. Gross profit margin for the nine month period was
13.4% compared to 13.9% for the same period last year. The increasing
contribution of personal computers in the Company's sales mix, as well as the
generally competitive market for most of the products the Company sells, has
continued to put pressure on profit margins. Personal computers have margins
below those of other product categories and promotional activity related to
personal computer sales has increased in the last few months causing further
pressure on margins. Promotions offered by the Company and other computer
retailers have included deferred financing plans, free peripheral equipment such
as monitors or printers, and cash rebates.
Sales of extended service plans represented less than 1% of retail sales in all
periods presented. Pretax profits from extended service plans, before
allocation of any selling, general and administrative expenses, other than
direct selling expenses, were $4.1 million and $12.6 million for the third
quarter and nine month periods in fiscal 1996, respectively, compared to $3.9
million and $11.3 million, respectively, in the comparable periods of fiscal
1995.
Selling, general and administrative (SG&A) expenses improved to 10.4% of sales
in the third quarter, compared to 10.8% for the third quarter last year,
principally as a result of the higher sales volumes in the quarter. For the
nine months ended November 25, 1995, SG&A expenses were 11.7%, unchanged from
the prior year. Higher costs associated with the new, larger stores opened
during the past year in more expensive markets such as Los Angeles, limited the
leverage achieved during the first nine months. As volumes increased in the
third quarter and additional stores were opened in existing markets the Company
achieved increased leverage on its fixed operating costs.
Interest expense was $13.2 million and $31.5 million for the third quarter and
year to date, respectively, compared to $9.0 million and $18.8 million for the
same periods last year. The increase is related to interest on the $230 million
of convertible preferred securities
10
issued in the third quarter of last year and higher bank borrowings used to
support increased sales volumes.
The Company's effective tax rate of 39.5% is up slightly compared to the prior
year as the Targeted Jobs Tax Credit expired in December 1994. The loss of the
benefit from this tax credit was partially offset by a lower expected state
income tax rate.
FINANCIAL CONDITION
Working capital at November 25, 1995, was $579 million compared to $609 million
at February 25, 1995. Inventories increased $483 million to $1.974 billion
compared to November of the prior year as a result of the new stores and larger
remodeled or relocated stores and an additional brown goods distribution center
in Findlay, Ohio. Increased inventory levels as compared to the prior fiscal
year end also reflect seasonal increases in preparation for the holiday selling
season. The increase in inventories was financed through higher vendor credit
and financing arrangements as well as borrowings under the Company's revolving
credit facility. Receivables increased $107 million from the end of the prior
fiscal year reflecting higher levels of credit card sales during the
Thanksgiving weekend. Receivables from sales under deferred financing promotions
are sold to third parties without recourse and the Company has no collection
exposure on those receivables.
Recoverable costs from developed properties of $129 million at November 25,
1995, reflects the costs of developing 13 retail stores and the Company's new
distribution center in Findlay, Ohio. While the Company expects to sell and
lease back most of these properties by the end of the fiscal year, market
conditions may delay the sale of some properties into early fiscal 1997. The
Company has sold nearly $90 million of property during the current year,
including transactions for eight stores generating $50 million in proceeds in
the third quarter.
For the nine months ended November 25, 1995, the Company has expended
approximately $230 million on property and equipment, inclusive of amounts
classified as recoverable costs from developed properties. Net spending for the
year is expected to be approximately $115 million after receipt of proceeds from
long-term real estate financing during the year.
Expansion plans for fiscal 1997 include the opening of 25 to 30 new stores and
the relocation/remodeling of approximately 10 existing stores to expanded
facilities. The reduced number of new store openings, compared to the prior
four fiscal years, reflects slowing economic conditions and the Company's desire
to fund future store growth internally. These openings will largely occur in
existing markets and include entry into the new markets of Philadelphia and
Tampa. This growth will be supported by the existing distribution facilities.
11
Management believes that the Company's working capital needs will be met through
the availability of its revolving bank line of credit, expected vendor and third
party inventory financing arrangements and cash flow from operations.
Management also believes adequate long-term financing for property development
will be available to support planned growth.
12
BEST BUY CO., INC.
Part II - Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits: METHOD OF FILING
----------------
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: January 5, 1996 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
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 5, 1996 By:
-----------------------------------------
Allen U. Lenzmeier, Executive Vice
President & Chief Financial Officer
(principal financial officer)
By:
-----------------------------------------
Robert C. Fox, Senior Vice President-
Finance & Treasurer (principal accounting
officer)
15