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 MARCH 1, 1997.
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
6-1/2% CONVERTIBLE MONTHLY INCOME
PREFERRED SECURITIES 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 19, 1997, was approximately $461,378,308. On that date, there
were 43,805,384 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
March 1, 1997 ("Annual Report") are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement dated May 14, 1997 for the regular
meeting of shareholders to be held June 25, 1997 ("Proxy Statement") are
incorporated by reference into Part III.
PART I
Item 1. BUSINESS
General
Best Buy Co., Inc. (the "Company" or "Best Buy"), is the nation's largest
volume specialty retailer of name brand consumer electronics, home office
equipment, entertainment software and appliances. 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 changed its marketing strategy to use mass merchandising
techniques for a wider variety of products, and began to operate its stores with
a "superstore" format. In 1989, Best Buy dramatically changed its method of
retailing by introducing its "Concept II" store format, a self-service,
non-commissioned, discount style sales environment designed to give the customer
more control over the purchasing process. The Company determined that an
increasing number of customers had become knowledgeable enough to select
products without the assistance of a commissioned salesperson and preferred to
make purchases in a more convenient and customer friendly environment. With its
innovative retail format, the Company has moved into a leading position
nationally in all of its principal product categories except appliances.
In fiscal 1995, the Company developed a strategy to further enhance its
store format. The strategy, known as "Concept III", features a larger,
redesigned store format created to produce a more informative and exciting
shopping experience for the customer. Through focus group interviews and other
research, the Company determined that customers wanted more product information
and a larger product selection. In order to meet these evolving consumer
preferences, the Company developed an enhanced store format which features more
hands-on demonstrations allowing customers to, among other things, experience
audio and video products such as "surround sound" systems and sample featured
compact discs at approximately 100 private listening stations. Additionally,
these larger stores, generally 45,000 to 58,000 square feet, are designed to
accommodate a larger product selection intended to be as good as or better than
the selection offered by Best Buy's competitors in each of its principal product
categories. Management continues to evaluate and refine the content and features
of these Concept III stores to maximize the revenue and operating profit while
providing customers with the most desirable shopping experience. As of March 1,
1997, 184 of 272 stores were the 45,000 or 58,000 square foot format generally
incorporating the features of a "Concept III" store. To improve the
productivity in its largest stores, the Company intends to test and evaluate new
product lines.
In the last two fiscal years the Company has increased its store count by
33%, adding 68 new stores and, as of March 1, 1997,
-2-
was operating 272 stores from coast to coast. The Company anticipates opening
13 new stores in fiscal 1998 and to be operating approximately 285 stores by the
end of the fiscal year.
Business Strategy
The Company's business strategy is to offer consumers an enjoyable and
convenient shopping experience while maximizing the Company's profitability.
Best Buy believes it offers consumers meaningful advantages in store
environment, product value, selection and service. An objective of this
strategy has been to achieve a dominant share of the markets Best Buy serves.
The Company currently holds a leading, and in some cases dominant, share in its
mature markets. The Company's Concept III store format uses interactive
displays to enhance the customer's shopping experience. As part of its overall
strategy, the Company:
- Offers a self-service, discount style store format, featuring easy to
locate product groupings, emphasizing customer choice and product
information and providing assistance from non-commissioned product
specialists and, in Concept III stores, interactive product displays
and information.
- Provides a large selection of brand name products comparable to
retailers that specialize in the Company's principal product
categories and seeks to ensure a high level of product availability
for customers.
- Seeks to provide customers 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 interest-free financing, performance service plans generally
priced below competitors, and home delivery.
- Provides a variety of services not offered by certain competitors,
including convenient financing programs, product delivery and
installation, computer training and post-sale services including
repair and warranty services and computer upgrades.
- Locates stores at sites that are easily accessible from major highways
and thoroughfares and seeks to create sufficient concentrations of
stores in major markets to maximize the leverage on fixed costs
including advertising and operations management.
- Controls costs and enhances operating efficiency by centrally
controlling all buying, merchandising and
-3-
distribution, and vertically integrating certain support functions
such as advertising.
Best Buy's store format is a key component of its business strategy. The
Company believes that because customers are familiar with most of the products
the Company sells and are accustomed to discount shopping formats, they
increasingly resist efforts to direct their choice of product and appreciate
controlling the purchase decision. However, as new technology, such as digital
technology, is introduced, particularly in consumer electronics and
communications products, the Company intends to offer consumers a higher level
of service to help them better understand the features and benefits of the
advanced technology.
Best Buy continuously evaluates the retail environment and regularly uses
focus groups to assess customer preferences. Through these processes, Best Buy
concluded that customers want access to more product information in order to be
more confident about their buying decisions. As a result, Best Buy's
Concept III store format features interactive product displays and information
including, in selected locations, Answer Center kiosks enabling customers to
immediately access product information from touch screen monitors that display
informative and entertaining full motion videos. All Concept III stores contain
a demonstration area for television "surround sound" systems so that customers
can hear for themselves how different configurations of audio components enhance
sound quality; a simulated, life-size car display that demonstrates differences
in car stereo sound resulting from different speaker configurations; speaker
rooms featuring a wide variety of music allowing customers to compare speaker
quality while listening to their choice of music; approximately 100 private
listening posts where customers can sample featured music software. Best Buy
believes that these features further differentiate it from competing retailers
and should also provide an advantage for the Company relative to competitors
such as catalog and on-line services and television shopping networks.
The Company's stores are in large, open buildings with high ceilings. Best
Buy's stores average approximately 43,000 square feet. The Concept III stores
feature specialty areas such as larger viewing rooms for large screen and
projection televisions and larger speaker rooms. The Company expects that all
of the new stores opened will be the 45,000 square foot format to best leverage
the cost of operations and maximize productivity.
Best Buy's merchandising strategy differs from many other retailers selling
comparable merchandise. Best Buy's merchandise is displayed at eye level next
to signs identifying the products' major features, with the boxed products
available above or below the display model. The Company's salaried product
specialists, who are knowledgeable about the operation and features of the
merchandise on display, are dedicated to a particular product area for customers
who desire assistance. This convenient, self service
-4-
format allows the customer to carry merchandise directly to the check-out lanes,
pay for it and leave the store thus avoiding the time-consuming process used at
traditional superstores and catalog showrooms. Certain of the Company's
competitors with the traditional superstore format use commissioned sales staffs
and generally only have display models on the selling floor with boxed
merchandise stored in a back room. This traditional superstore design allows
sales personnel to direct the customer to products selected by the salesperson.
At these stores, a salesperson is able to promote products yielding the greatest
sales commissions. In addition, unlike Best Buy, these traditional superstores
generally apply pressure to the consumer to promote the sale of extended service
plans and have trained their sales staffs to maximize the sale of these plans.
The Company offers performance service plans, generally at lower prices than its
competitors, and intends to place increased emphasis on the no pressure
presentation of these plans to consumers in fiscal 1998.
The Company believes that its advertising strategy continues to contribute
to its increasing market share and brand image. Best Buy spends over 3% of
store sales on advertising, including the distribution of about 31 million
newspaper inserts weekly. The Company has vertically integrated advertising and
promotion capabilities and operates its own in-house advertising agency. 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 generally consists of four-color weekly inserts,
generally of 16 to 20 pages, that emphasize a variety of product categories and
feature extensive name brand selection and price range. The Company also
produces all of its television commercials, each with a specific marketing
message. Television commercials account for approximately 31% of total
advertising expenditures. The Company is reimbursed by vendors for a
substantial portion of advertising expenditures through cooperative advertising
arrangements. In fiscal 1998, the Company will introduce a national brand image
program that is expected to move Best Buy's image beyond that of a low price
specialty retailer by promoting the customer's shopping experience.
Product service and repair are important aspects of Best Buy's marketing
strategy, providing the opportunity to differentiate itself from warehouse clubs
and other discount stores which generally do not provide such services.
Virtually all products sold by the Company, with the exception of software,
carry manufacturers' warranties. The Company generally offers to service and
repair all of the products it sells, except major appliances in certain markets,
and has been designated by substantially all of its major suppliers as an
authorized service center. In addition, the Company conducts computer software
training classes at selected
-5-
stores and makes its in-store technical support staff available to assist
customers with the custom configuration of personal computers and peripheral
products. The Company also delivers and installs major appliances and large
electronics products and installs car stereos and security systems.
Product Selection and Merchandising
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 6,200 products, exclusive of entertainment
software titles and accessories, in its four principal product categories. In
addition, the Company offers a selection of accessories supporting its principal
product categories, which typically yield a higher margin than most of the
Company's other products. The Company believes that this assortment of
accessories builds customer traffic for its other products.
The home office category, Best Buy's largest product category, includes
personal computers and related peripheral equipment, telephones, cellular
phones, answering machines, fax machines, copiers and calculators. The Company
was among the first consumer electronics retailers to carry an extensive
assortment of personal computer products and related software. Sales in this
category are largely comprised of the sale of personal computers. The retail
market for personal computers continues to be promotional and competitive. The
Company's operating results can be affected by significant changes in
promotional activity as well as product demand for and availability of personal
computers and the timing of computer model transitions by manufacturers. 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, including those that generate higher profit margins, and its relatively
low cost structure. In addition, the Company believes that the related services
it offers, such as computer training, configuration, maintenance and upgrade,
are distinct advantages compared to other discount and mail order computer
retailers. The Company also believes that changing technology and hardware
requirements necessary to support new software, including on-line services, will
continue to be a primary factor in the growth in sales of personal computers and
related products in the future. The Company's home office products category
includes brand names such as Acer, Apple, AT&T, Canon, Compaq, Epson, Hewlett
Packard, IBM, Motorola, NEC, Packard Bell, Panasonic, Sharp and Toshiba. The
Company had also offered a broad assortment of office products and school
supplies such as paper, pens, and other consumables to complement home office
equipment. In the third quarter of fiscal 1997, the Company decided to narrow
the office supply product assortment to more closely reflect the shopping
patterns of the home user rather than small business.
-6-
Best Buy's second largest product category is consumer electronics,
consisting of video and audio equipment. Video products include televisions,
video cassette recorders, camcorders and satellite dishes that receive direct
broadcast satellite television. Audio products include audio components, audio
systems, portable audio equipment, car stereos and security systems. The
Company continues to expand its product selection in consumer electronics by
offering higher end products and components that have greater appeal to audio
and video enthusiasts. In March 1997, the Company was the first national
retailer to launch the new Digital Versatile Disk (DVD) hardware and related
software. The higher introductory price points for DVD and limited number of
software titles are likely to lead to only a modest contribution to total sales
in fiscal 1998. However, the Company anticipates that with the availability of
better picture and sound quality through direct broadcast satellite and digital
technology, it will have more opportunities to sell higher end equipment such as
home theaters, "surround sound" systems and in-wall components in the future.
The Company sells consumer electronics with brand names such as Aiwa, Bose,
Cambridge Soundworks, Eosone, General Electric, Infinity, JBL, JVC, Magnavox,
Panasonic, Pioneer, RCA, Sanyo, Samsung, Sharp, Sony, Technics and Toshiba.
Best Buy's entertainment software category includes compact discs,
pre-recorded audio and video cassettes, computer software and video game
hardware and software. The Company is one of the few large consumer electronics
retailers that sells a broad selection of entertainment software in all of its
stores. The Company intends to offer from 25,000 to approximately 50,000 titles
in its stores and had offered as many as 80,000 titles in its largest Concept
III stores in fiscal 1997. Due to the slow rate of inventory turn of some of the
deep catalogue recorded music titles, the Company decided to narrow its
assortment of recorded music in fiscal 1998 to improve inventory productivity.
This reduction in titles will occur primarily in the 45,000 and 58,000 square
foot stores. Best Buy will continue to customize a portion of the music software
assortment for particular stores. The video game hardware and software products
include popular games by manufactures such as Sony and Nintendo. Activity in
this category is impacted by changes in technology such as, for example, the
introduction of the Sony Playstation and Nintendo 64 formats in the second half
of fiscal 1997.
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 Amana,
Eureka, Frigidaire, General Electric, GE Profile, Hoover, Hotpoint, Maytag,
Roper, Sharp, Tappan, and White-Westinghouse. The Company also carries an
assortment of fully featured, high end small electrics from manufacturers such
as Braun, Cuisinart, DeLonghi, Oster and Waring Professional. The appliance
department was further enhanced in fiscal 1997 by the addition of designer
cookware and kitchen
-7-
gadgets. The appliance department is merchandised to give consumers a
presentation that looks and feels like a kitchen rather than simply rows of
appliances.
The Company also sells cameras and other photographic equipment and ready
to assemble furniture designed for use with computer and audio/video equipment.
The Company intends to test market new products in its larger stores in
fiscal 1998. While some of the products to be tested may not fit in the
Company's four major product categories, they will be items that appeal to the
demographics of the Company's existing customer base. Additionally, as a result
of the increasing lack of differentiation between certain products in the
consumer electronics and personal computer categories, the Company expects to
reduce the depth of its product offerings in fiscal 1998. Management believes it
is no longer necessary to offer consumers a larger number of competing products
at the same price point. The Company plans to evaluate the individual product
profitability of items offered and narrow its selection to those items
generating an adequate profit margin while still offering consumers a meaningful
selection of products at each price point.
The following table sets forth the approximate percentages of store sales
from each of Best Buy's principal product lines.
Fiscal Years Ended
-----------------------------------------------------
February 25, 1995 March 2, 1996 March 1, 1997
----------------- ------------- -------------
Home Office 37% 41% 39%
Consumer Electronics:
Video 20 18 17
Audio 14 13 12
Entertainment
Software (1) 18 17 18
Major Appliances 8 7 9
Other (2) 3 4 5
---- ---- ----
Total 100% 100% 100%
---- ---- ----
---- ---- ----
(1) Fiscal 1996 and 1995 restated to include video game products, previously
included in Other.
(2) Includes photographic equipment, blank audio and video tapes, furniture and
accessories and performance service plans.
Store Locations and Expansion
The Company's expansion strategy generally has been to enter major
metropolitan areas with the simultaneous opening of several stores and then to
expand into contiguous non-metropolitan markets. Currently, approximately
one-third of the Company's 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 increase the effectiveness of advertising expenditures
and to create a high level of consumer awareness. In addition, the clustering
of stores allows the
-8-
Company to maintain more effective management control, enhance asset
utilization, and utilize its distribution facilities more efficiently.
When entering a major metropolitan market, the Company establishes a
district office, service center and major appliance warehouse. Each new store
requires approximately $3 million of working capital, depending on the size of
the store, for merchandise inventory (net of vendor financing), leasehold
improvements, fixtures and equipment. Pre-opening costs of approximately
$300,000 per store are incurred in hiring and training new employees and in
advertising and are expensed in the year the store is opened.
During fiscal 1997, the Company opened 21 stores, an 8% increase in its
store base. The Company also expanded or relocated 10 stores to larger
facilities. Due to an anticipated industry wide softness in the growth of the
Company's product categories, Best Buy is slowing its store expansion program in
fiscal 1998. The Company expects to open 13 new stores in fiscal 1998, which
includes entry into the new markets of Pittsburgh, Pennsylvania; Knoxville,
Tennessee; and Palm Desert, California. The remainder of the new stores will be
opened in existing markets. To further implement the Concept III store format,
the Company also plans to expand or relocate another five stores in fiscal 1998.
The Company believes it has the necessary distribution capacity and management
information systems as well as management experience and depth to support its
fiscal 1998 expansion plans.
-9-
The following table presents the number and location of stores
operated by the Company at the end of each of the last three fiscal years and
anticipated stores at fiscal 1998 year end.
Planned Anticipated
Number of Stores at Fiscal Year End For at Fiscal
----------------------------------- Fiscal 1998
1995 1996 1997 1998 Year End
---- ---- ---- ---- --------
Texas 32 34 34 1 35
Illinois 31 32 32 -- 32
California 7 19 22 1 23
Florida 3 12 17 3 20
Ohio 12 18 18 1 19
Michigan 14 16 16 1 17
Minnesota 15 15 15 -- 15
Wisconsin 11 11 11 -- 11
Georgia 9 10 10 -- 10
Missouri 10 10 10 -- 10
Maryland 4 8 9 -- 9
Arizona 7 7 8 -- 8
Colorado 6 7 8 -- 8
Indiana 8 8 8 -- 8
Pennsylvania -- -- 4 4 8
North Carolina 3 7 7 -- 7
Virginia 5 6 7 -- 7
Iowa 5 5 5 -- 5
Kansas 5 5 5 -- 5
New Jersey -- -- 3 1 4
South Carolina 3 4 4 -- 4
Arkansas 3 3 3 -- 3
Nebraska 3 3 3 -- 3
Oklahoma 3 3 3 -- 3
Kentucky 1 2 2 -- 2
Nevada 1 1 2 -- 2
Tennessee -- -- 1 1 2
Alabama -- 1 1 -- 1
Delaware -- 1 1 -- 1
New Mexico 1 1 1 -- 1
North Dakota 1 1 1 -- 1
South Dakota 1 1 1 -- 1
---- ---- ---- ---- ----
Total 204 251 272 13 285
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Suppliers, Purchasing and Distribution
The Company's marketing strategy depends, in part, upon its ability to
offer a meaningful selection of name brand products to its customers and is,
therefore, dependent upon satisfactory and stable supplier relationships. In
fiscal 1997, Best Buy's 20 largest suppliers accounted for approximately 58% of
the merchandise purchased by the Company, with five suppliers, Acer, Compaq
Computer Corp., Hewlett-Packard, Packard Bell, and Sony representing
approximately 29% of the Company's total purchases. The loss of or disruption of
supply, including disruptions in supply due to manufacturers' product quality
issues, from any one of these major suppliers could have a material adverse
effect on the Company's sales. Certain suppliers have, at times, limited or
discontinued their supply of products to the Company. Best Buy
-10-
generally does not have long-term written contracts with its major suppliers and
does not currently have any indication that any current suppliers will
discontinue selling merchandise to the Company. The Company has not experienced
difficulty in maintaining satisfactory sources of supply, and management expects
that adequate sources of supply will continue to exist for the types of
merchandise sold in its stores.
Best Buy's centralized buying staff purchases substantially all of the
Company's merchandise. The buying staff within the Company's Marketing
Department is responsible for product acquisition, promotion planning and
product pricing. An inventory management staff in the Marketing Department is
responsible for overall inventory management including allocations of inventory
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 and may be subject to a reduction in
selling price to levels at or below the Company's cost. Revenues from the sale
of close-out merchandise have been insignificant.
The Company has made product availability a high priority and continues to
make investments in facilities, personnel and systems to assure that its
in-stock position will be among the highest in the industry. The Company
utilizes an automatic replenishment system for restocking its stores and is able
to deliver products to its stores as required. 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
Company has engaged Andersen Consulting LLP in fiscal 1998 to assist in the
design and implementation of systems and practices to improve the Company's
assortment planning, inventory management, product sourcing and advertising
effectiveness.
The majority of the Company's merchandise, except for major appliances, is
shipped directly from manufacturers to the Company's distribution centers in
California, Ohio, Minnesota, Oklahoma and Virginia. In addition, the Company
operates a dedicated distribution center for entertainment software in
Minnesota. Major appliances are shipped to satellite warehouses in each of the
Company's major markets. Beginning in fiscal 1997, the Company expanded its
appliance distribution capacity to support the additional product assortment.
This capacity will be further expanded in fiscal 1998. In order to meet release
dates for selected computer products and entertainment software titles, certain
merchandise is shipped directly to the stores from manufacturers and
distributors. The Company is, however, dependent upon the distribution centers
for inventory storage and shipment of most merchandise to stores. The Company
primarily uses contract carriers to ship merchandise from its distribution
centers to its
-11-
stores. The Company believes that its distribution centers can most effectively
service stores within a 600 to 700 mile radius and that its six distribution
centers will accommodate the Company's expansion plans for the next year. The
Company plans to continue investing in 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 developed 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. Best Buy uses
point-of-sale bar code scanning from which sales information is polled at the
end of each day. The Company uses 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.
Best Buy is continuing to make investments in designing new systems, modifying
existing systems and increasing processing capacity, particularly with respect
to inventory management.
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 divisions. Each division is
divided into regions and is under the supervision of a senior vice president who
oversees store performance 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 and store operating performance. Similar meetings are
conducted at the corporate level with divisional and regional management. A
senior vice president of retail operations has overall responsibility for retail
store processing and operations. Each district also has a loss prevention
manager, with product security controllers 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, four assistant
-12-
managers, and an average staff ranging from 70 to 140 persons depending on store
size. Approximately 60% of a store's staff, which includes product specialists
and a support staff of cashiers and customer service and stock handling
employees, 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 employee development department which provides
managers with a variety of tools to teach employees the core skills they need
to meet their performance objectives. In the stores, Sales, Inventory,
Operations and Merchandising managers undergo comprehensive training in their
specialty areas, which include store operations, selling, managerial,
training and communications skills. The retail selling and sales support
teams receive a thorough orientation to the Company's industry and its
business objectives. Sales personnel are trained to ask specific questions
of customers to determine their needs and to present products, accessories
and services that meet those expressed needs. Stores hold monthly "team
meetings" to review store performance, Company focus and changes and
modifications in operating procedures. Specialized product training is also
conducted at these monthly meetings. 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. However, as Best Buy
expands into new markets, it also recruits local management personnel who
have valuable knowledge about the new market.
Credit Policy
Approximately 32% of store revenues are paid for in cash, with the
remainder paid for by either major credit cards or the Best Buy private label
credit card. In recent years, the Company has utilized special financing offers
to stimulate sales. Generally, these financing offers allowed customers to defer
all payments interest-free for 90 days or six months, depending on the price of
the product, or to defer payments for approximately one year or longer on the
purchase of selected products. Late in fiscal 1997, the Company determined that
the longer term financing offers had become increasingly expensive and were not
as effective as they had been in generating incremental profitable business. In
the fourth quarter, the Company generally changed its strategy to offer the
promotions with shorter terms and monthly payments and limited the offers to
those products that generated sufficient profit margin to warrant the cost of
the offer. The special financing offers are only 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. The Company is generally able to qualify a new
customer for credit on the spot, typically in less than five
-13-
minutes. Receivables from private label credit card sales are sold, without
recourse to the Company, to unaffiliated third party institutions. The Company
receives payment from these institutions within 2 to 3 days following the sale.
Competition
Retailing in each of the Company's product categories is highly
competitive. The overall consumer electronics business has slowed in the last
year and the concentration of sales among the top retailers in the industry has
increased significantly. The industry's consolidation has been evidenced in
recent years by the liquidation and consolidation of a number of competitors,
including the closing of Tandy Corp.'s Incredible Universe stores and selected
Computer City stores, stores operated by Musicland and the increased rate of
consolidation and store closures by other national and regional chains in fiscal
1997. The flat industry sales are due to market saturation for many consumer
electronics products and the general absence of new products in that market. The
growth of sales nationally in the home office product category has begun to slow
and the Company competes with an increasing number of retailers and alternative
channels of distribution. In addition, the Company believes that consumers
continue to become more knowledgeable and value conscious, thereby putting
pressure on profit margins. 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 a meaningful product
selection, low prices, financing alternatives and service.
Best Buy competes in most of its markets against Circuit City, Sears and
Montgomery Ward and in selected markets against computer superstores such as the
remaining Computer City stores and CompUSA and entertainment software
superstores operated by Musicland and Tower Records. Certain 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.
Employees
As of March 1, 1997, the Company employed approximately 36,300 persons, of
whom approximately 19,000 were part-time or seasonal employees. The Company has
never experienced a strike or work stoppage, and management believes that its
employee relations are good. There are currently no collective bargaining
agreements covering any of the Company's employees.
-14-
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 eight 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 three stores. The initial
terms of the leases range from 5 to 20 years and generally allow the Company to
renew for up to three additional five-year terms. The terms of a majority of
the leases, including renewal options, extend beyond the year 2020. At March 1,
1997 the Company owned five of its operating retail store locations and three
locations under development. Management expects to sell and lease back these
properties in fiscal 1998.
The Company leases over 3 million square feet of distribution facilities
including brown goods centers in Bloomington, Minnesota; Ardmore, Oklahoma;
Staunton, Virginia; Ontario, California; and Findlay, Ohio, and a software
distribution center in Edina, Minnesota. The Company also operates leased
satellite warehouses for major appliances in its major markets. The Company's
corporate offices are located in a 290,000 square foot facility it owns in Eden
Prairie, Minnesota.
Item 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising during the normal
course of conducting business. The resolution of those proceedings is not
expected to have a material impact on the Company's financial condition.
-15-
THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
YEARS
WITH
THE
NAME AGE POSITION WITH COMPANY COMPANY
---- --- --------------------- -------
Richard M. Schulze 56 Chairman, Chief Executive Officer and Director 30
Bradbury H. Anderson 47 President, Chief Operating Officer and Director 23
Allen U. Lenzmeier 53 Executive Vice President and Chief Financial Officer 12
Wade R. Fenn 38 Executive Vice President - Marketing 16
Julie M. Engel 36 Senior Vice President - Advertising 15
Robert C. Fox 46 Senior Vice President - Finance and Treasurer 11
Kevin P. Freeland 39 Senior Vice President - Inventory Management 1
Wayne R. Inouye 44 Senior Vice President - Marketing, Computers and Home Office 1
Michael P. Keskey 42 Senior Vice President - Sales 9
James P. Mixon 52 Senior Vice President - Logistics 3
Joseph T. Pelano 49 Senior Vice President - Retail Store Operations 8
Philip J. Schoonover 37 Senior Vice President - Marketing, Consumer Electronics and Appliances 2
Kenneth R. Weller 48 Senior Vice President - Sales 3
_____________________________
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. 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 August 1995, having
served as a Sr. Vice President - Sales since 1991 and a 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.
JULIE M. ENGEL was promoted to her present position in April 1995. Ms.
Engel joined the Company in July 1981 as Advertising Manager, was promoted to
Advertising Director in 1984 and became Vice-President - Advertising in April
1987.
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.
-16-
KEVIN R. FREELAND was promoted to his present position in April 1997, after
having served as Vice President - Inventory Management since 1995. Prior to
joining Best Buy, Mr. Freeland spent more than eight years with Payless Shoe
Source, where he held various positions in merchandise management, most recently
as Vice President of Merchandise Distribution.
WAYNE R. INOUYE joined the Company in September 1995 as Senior Vice
President - Marketing for Computers and Home Office. Prior to joining the
Company, Mr. Inouye was with The Good Guys! for 10 years, most recently as Vice
President of Merchandising.
MICHAEL P. KESKEY was promoted to his present position in April 1997,
having served as Vice President - Sales since 1996. Mr. Keskey joined the
Company in 1988 and has held positions as a Store Manager, District Manager and
Regional Manager.
JAMES P. MIXON joined Best Buy in April 1994 as Senior Vice
President-Logistics. Prior to joining the Company, Mr. Mixon held various
distribution management positions with several national retailers, most recently
with Marshalls Stores, Inc.
JOSEPH T. PELANO was promoted to his present position in April 1997, having
served as Vice President - Retail Store Operations since 1996. Mr. Pelano
joined the Company in 1989 as Regional Operations Manager.
PHILIP J. SCHOONOVER joined Best Buy in May 1995 and was promoted to Senior
Vice President - Marketing for Consumer Electronics and Appliances. Mr.
Schoonover's background includes more than eight years as Vice President of
Sales for the eastern region of Sony Corp. of America. Prior to joining the
Company, he was Executive Vice President for TOPS Appliance City for five years.
KENNETH R. WELLER joined the Company in May 1993. Since 1986, he was
Vice President of Sales with The Good Guys!, a San Francisco-based consumer
electronics retailer where he had worked since 1982.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-17-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information set forth under the caption "Common Stock Prices" on page
14 of the Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated
Financial and Operating Data" on page 9 of the Annual Report is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 10 through
14 of the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item, listed below, are contained
in the Annual Report on the pages thereof indicated, and are expressly
incorporated herein by this reference.
Page No.
-------
Consolidated balance sheets as of March 1, 1997
and March 2, 1996 15
For the fiscal years ended March 1, 1997,
March 2, 1996, and February 25, 1995
Consolidated statements of earnings 16
Consolidated statements of cash flows 17
Consolidated statements of shareholders'
equity 18
Independent auditor's report 18
Notes to consolidated financial statements 19-23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-18-
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 Management" and "Nominees and Directors" on pages 4
through 7 of the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" on
pages 8 through 15 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 and Management" on pages 4 through 6 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 6 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:
No schedules have been included since they are either not applicable or the
information is included elsewhere herein.
-19-
3. Exhibits:
Method
of
Number Description filing
- ------ ----------- ------
3.1 Amended and Restated Articles of (3)
Incorporation, as amended
3.2 Certificate of Designation with respect (2)
to Best Buy Series A Cumulative
Convertible Preferred Stock, filed
November 1, 1994
3.3 Amended and Restated By-Laws, as amended (2,4,5)
3.4 Resolution of the Board of Directors (1)
dated February 13, 1997 amending the
Amended and Restated By-Laws
4.1 Form of Indenture between Best Buy Co., (6)
Inc. and First Trust Company, Inc.,
relating to $30,000,000 Subordinated
Extendible Notes due 1997, dated as of
July 1, 1987
4.2 Note Purchase Agreement with Principal (7)
Mutual Life Insurance Company, dated as
of July 30, 1992
4.3 Amended and Restated Credit Agreement (8)
dated August 25, 1995 with First Bank
National Association ("the Credit Agreement")
4.4 First Amendment to the Credit Agreement (9)
with First Bank National Association, dated
March 1, 1996
4.5 Second Amendment to the Credit Agreement (1)
with First Bank National Association, dated
December 24, 1996
4.6 Indenture between Best Buy Co., Inc. and (3)
Mercantile Bank of St. Louis N.A. relating to
$150,000,000 8-5/8% Senior Subordinated Notes
due 2000, dated as of October 12, 1993
4.7 Amended and Restated Agreement of Limited (2)
Partnership of Best Buy Capital, L.P., dated
as of November 3, 1994
-20-
4.8 Indenture between Best Buy, Best Buy Capital, (2)
L.P., and Harris Trust and Savings Bank
relating to $288,227,848 6-1/2% Convertible
Subordinated Debentures due 2024, dated as of
November 3, 1994
4.9 Guarantee Agreement related to 6-1/2% (2)
Convertible Monthly Income Preferred Securities
of Best Buy Capital, L.P., dated November 3, 1994
4.10 Deposit Agreement with respect to Best Buy (2)
Series A Cumulative Convertible Preferred Stock,
dated November 3, 1994
10.1 1987 Employee Non-Qualified Stock Option Plan, (9)
as amended
10.2 1987 Directors' Non-Qualified Stock Option (2)
Plan, as amended
10.3 1994 Full-Time Employee Non-Qualified Stock (9)
Option Plan
10.4 Resolutions of the Board of Directors dated (9)
April 19, 1996 establishing the bonus program
for senior officers
10.5 1997 Employee Non-Qualified Stock Option Plan (10)
10.6 1997 Directors' Non-Qualified Stock Option (10)
Plan
10.7 Amended and Restated 1994 Full-Time Employee (10)
Non-Qualified Stock Option Plan
11.1 Computation of Earnings Per Share (1)
13.1 1997 Annual Report to Shareholders (1)
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Ernst & Young LLP (1)
27.1 Financial Data Schedule (1)
-21-
(1) Document is filed herewith.
(2) Exhibits so marked were filed with the Securities and Exchange
Commission on May 23, 1995, as exhibits to the Form 10-K of Best Buy
Co., Inc. and are incorporated herein by reference and made a part
hereof.
(3) Exhibits so marked were filed with the Securities and Exchange
Commission on May 20, 1994, as exhibits to the Form 10-K of Best Buy
Co., Inc. and are incorporated herein by reference and made a part
hereof.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) Exhibit so marked was filed with the Securities and Exchange
Commission on October 10, 1995, as an exhibit to Form 10-Q of Best
Buy Co., Inc. and is incorporated herein by reference and made a
part hereof.
(9) Exhibits so marked were filed with the Securities and Exchange
Commission on May 29, 1996, as exhibits to the Form 10-K of Best Buy
Co., Inc. and are incorporated herein by reference and made a part
hereof.
(10) Exhibits so marked were filed with the Securities and Exchange
Commission on May 12, 1997, as exhibits to the definitive Proxy
Statement of Best Buy Co., Inc. and are incorporated herein by
reference and made a part hereof.
-22-
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
None.
-23-
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
--------------------------
Chief Executive Officer
Dated: May 28, 1997
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 28, 1997.
/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
/s/ Culver Davis, Jr. Director
- --------------------------
Culver Davis, Jr.
/s/ David Stanley Director
- --------------------------
David Stanley
/s/ James C. Wetherbe Director
- --------------------------
James C. Wetherbe
-24-