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 May 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
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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 May 31, 1997, there were 43,805,784 shares of common stock, $.10 par value,
outstanding.
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1997
INDEX
Page
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Part I. Financial Information
Item 1. Consolidated Financial Statements:
a. Consolidated balance sheets as of May 31, 1997, 3-4
March 1, 1997 and June 1, 1996
b. Consolidated statements of operations for the 5
three months ended May 31, 1997
and June 1, 1996
c. Consolidated statement of changes in shareholders' 6
equity for the three months ended May 31, 1997
d. Consolidated statements of cash flows for the 7
three months ended May 31, 1997 and
June 1, 1996
e. Notes to consolidated financial statements 8
Item 2. Management's Discussion and Analysis of Financial 9-12
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
Part I - Financial Information
Item 1. Consolidated Financial Statements
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
($ in 000, except per share amounts)
May 31, March 1, June 1,
1997 1997 1996
(Unaudited) (Unaudited)
----------- -------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 94,909 $ 89,808 $ 20,604
Receivables 84,423 79,581 104,732
Recoverable costs from developed
properties 56,786 53,485 122,773
Merchandise inventories 1,110,017 1,132,059 1,368,959
Refundable and deferred income taxes 27,847 25,560 28,519
Prepaid expenses 8,043 4,542 7,742
---------- ---------- ----------
Total current assets 1,382,025 1,385,035 1,653,329
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 18,000 18,000 16,559
Leasehold improvements 149,738 148,168 135,466
Furniture, fixtures, and equipment 329,151 324,333 278,083
Property under capital leases 29,079 29,326 29,421
---------- ---------- ----------
525,968 519,827 459,529
Less accumulated depreciation and
amortization 204,647 188,194 149,449
---------- ---------- ----------
Net property and equipment 321,321 331,633 310,080
OTHER ASSETS 17,335 17,639 15,160
---------- ---------- ----------
TOTAL ASSETS $1,720,681 $1,734,307 $1,978,569
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
3
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in 000, except per share amounts)
May 31, March 1, June 1,
1997 1997 1996
(unaudited) (unaudited)
----------- ------- -----------
CURRENT LIABILITIES:
Note payable, bank $ - $ - $ 185,000
Accounts payable 520,354 487,802 515,297
Obligations under financing arrangements 84,215 127,510 142,456
Accrued salaries and related expenses 31,881 33,663 28,183
Accrued liabilities 127,411 122,611 140,709
Deferred service plan revenue 24,906 24,602 29,469
Current portion of long-term debt 21,181 21,391 23,362
---------- ---------- ----------
Total current liabilities 809,948 817,579 1,064,476
DEFERRED INCOME TAXES 3,578 3,578 -
DEFERRED REVENUE AND OTHER LIABILITIES 24,457 28,210 41,409
LONG-TERM DEBT 212,609 216,625 207,855
CONVERTIBLE PREFERRED SECURITIES OF 230,000 230,000 230,000
SUBSIDIARY
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 43,806,000, 43,287,000,
and 43,124,000 shares, respectively 4,381 4,329 4,312
Additional paid-in capital 245,661 241,300 239,170
Retained earnings 190,047 192,686 191,347
---------- ---------- ----------
Total shareholders' equity 440,089 438,315 434,829
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,720,681 $1,734,307 $1,978,569
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
4
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000, except per share amounts)
(Unaudited)
Three Months Ended
-----------------------------
May 31, June 1,
1997 1996
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Revenues $1,606,551 $1,637,184
Cost of goods sold 1,358,668 1,404,534
---------- ----------
Gross profit 247,883 232,650
Selling, general and administrative
expenses 242,667 219,698
---------- ----------
Operating income 5,216 12,952
Interest expense, net 9,540 12,281
---------- ----------
Earnings (loss) before income taxes (4,324) 671
Income tax benefit (expense) 1,685 (262)
---------- ----------
Net earnings (loss) $ (2,639) $ 409
---------- ----------
---------- ----------
Net earnings (loss) per share
$ (.06) $ .01
---------- ----------
---------- ----------
Weighted average common shares
outstanding (000) 43,559 43,564
---------- ----------
---------- ----------
See notes to consolidated financial statements.
5
BEST BUY CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MAY 31, 1997
($ in 000)
(unaudited)
Additional
paid-in Retained
Common stock capital earnings
------------ ----------- --------
Balance, March 1, 1997 $4,329 $241,300 $192,686
Stock options exercised 52 4,361
Net loss, three months ended
May 31, 1997 (2,639)
------ -------- --------
Balance, May 31, 1997 $4,381 $245,661 $190,047
------ -------- --------
------ -------- --------
See notes to consolidated financial statements.
6
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000)
(unaudited)
Three Months Ended
------------------
May 31, June 1,
1997 1996
--------- ---------
OPERATING ACTIVITIES:
Net earnings (loss) $ (2,639) $ 409
Charges to earnings not affecting cash:
Depreciation and amortization 17,095 17,042
--------- ---------
14,456 17,451
Changes in operating assets and liabilities:
Receivables (4,842) 16,706
Merchandise inventories 22,042 (167,817)
Income taxes and prepaid expenses (4,762) (5,191)
Accounts payable 32,552 (158,555)
Other current liabilities 3,018 16,420
Deferred revenue and other liabilities (3,449) (8,210)
--------- ---------
Total cash provided by (used in) operating
activities 59,015 (289,196)
INVESTING ACTIVITIES:
Additions to property and equipment (6,783) (16,083)
(Increase)decrease in recoverable costs from developed
properties (3,301) 3,464
(Decrease)increase in other assets 304 (137)
--------- ---------
Total cash used in investing activities (9,780) (12,756)
FINANCING ACTIVITIES:
Borrowings on revolving credit line, net - 185,000
(Decrease)increase in obligations under
financing arrangements (43,295) 48,505
Long-term debt borrowings - 5,000
Long-term debt payments (4,226) (3,638)
Common stock issued 3,387 1,244
--------- ---------
Total cash provided by (used in)
financing activities (44,134) 236,111
--------- ---------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 5,101 (65,841)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 89,808 86,445
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 94,909 $ 20,604
--------- ---------
--------- ---------
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(received) during the period for:
Interest $ 12,526 $ 13,347
Income taxes $ (250) $ 1,063
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 May 31, 1997, and June 1, 1996, the
related consolidated statements of operations and cash flows for the three
months ended May 31, 1997, and June 1, 1996, and the consolidated statement
of changes in shareholders' equity for the three months ended May 31, 1997,
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. These 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 March 1, 1997.
2. RECLASSIFICATION:
Certain prior year amounts have been reclassified to conform to current
year presentation.
3. INCOME TAXES:
Income taxes are provided on an interim basis based upon management's
estimate of the annual effective tax rate.
4. EARNINGS PER SHARE:
The Financial Accounting Standards Board has issued FASB Statement No. 128
"Earnings per Share", which will be effective for periods ending after
December 15, 1997. The Company will adopt the new accounting rules in the
quarter ending February 28, 1998 with restatement of previously reported
periods. The new accounting rules will change the method of computation of
earnings per share. The Company does not believe that the application of
the new accounting rules will result in materially different earnings per
share than are computed under current rules.
8
BEST BUY CO., INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In the quarter ended May 31, 1997, the first quarter of fiscal 1998, the Company
had a net loss of $2,639,000, or six cents per share. The Company earned
$409,000, or one cent per share, in the first quarter of the previous fiscal
year. Results for the quarter as compared to the prior year reflect modestly
lower revenues which reduced the Company's leverage on operating expenses,
partially offset by improved gross profit margins and lower interest expense.
Revenues of $1.607 billion in the quarter declined 2% as compared to the prior
year as comparable store sales declined 8%. The Company operated 274 stores at
May 31,1997 compared to 259 stores a year ago. The comparable store sales
decline was driven primarily by industry wide softness in consumer electronics
and a 15% to 20% decline in the average selling price of personal computers
compared to year ago levels. Revenues from sales of personal computers for the
duration of the year will be impacted by the decline in year over year average
selling prices as well as consumer acceptance of the Pentium-Registered
Trademark- II computers being introduced this summer. Comparable store sales of
appliances increased as the Company continues to generate additional sales
volume in this category following the significant expansion of name brand
offerings in May 1996. The entertainment software category also improved, as
sales of video game hardware and related software continued strong after the
introduction of new technology formats late last year. Management expects that
comparable store sales will continue to decline at a similar rate in the second
quarter and moderate thereafter as comparisons are less difficult in the second
half of the year.
The Company opened one new store in Cleveland, Ohio, and one in Houston, Texas
during the quarter. As of the end of the first quarter, the Company planned to
open eleven additional stores during the fiscal year including the new markets
of Pittsburgh, Pennsylvania and Palm Desert, California in June. The Company
also intends to expand or relocate five stores during the year.
9
Retail store sales mix by major product category for the first quarter of the
current and prior year was as follows:
Quarter Ended
-------------
May 31, 1997 June 1, 1996
------------ ------------
Home Office 40% 41%
Consumer Electronics
Audio 11% 12%
Video 14% 17%
Entertainment Software* 19% 17%
Appliances 9% 8%
Other 7% 5%
---- ----
Total 100% 100%
---- ----
---- ----
* The prior year has been restated to include video game hardware and software,
previously included in Other.
The Company's gross profit margin improved to 15.4% of sales in the quarter
compared to 14.2% in the first quarter last year. The increase was due, in part,
to an improvement in profit margins in most product categories as well as a
shift in the Company's sales mix toward higher margin categories such as
appliances and entertainment software. The gross profit rate also improved as a
result of the continued increase in the rate of sale of Performance Service
Plans (PSPs). Sales of PSPs increased to 2.9% of sales compared to 1.5% of sales
in the first quarter last year. A reduction in the use of deferred consumer
financing offers as compared to last year also benefited gross profit rates.
Management expects that the Company's overall gross profit rate for the year as
a whole should approximate 15%; however, unexpected softness in sales of higher
margin products or increased volatility in the personal computer market could
adversely impact margins.
The Company's selling, general and administrative (SG&A) ratio increased to
15.1% from 13.4% in the first quarter of last year. The 8% comparable store
sales decline this year resulted in the loss of leverage on certain of the
Company's fixed operating expenses. The costs of operating the 23 new stores
opened in the past 15 months, and an increased number of leased versus owned
stores, also contributed to the increase in SG&A spending compared to last
year's first quarter. Management expects that the SG&A ratio will decline from
the level reported in the first quarter as seasonal sales levels increase and
comparable store sales declines moderate in the second half of the year.
However, management also expects that the SG&A ratio for the year as a whole
will be higher than the prior fiscal year.
10
Interest expense of $9.5 million in the first quarter was $2.7 million, or 22%,
below last year's first quarter as lower inventory levels and a reduced number
of owned properties resulted in minimal bank borrowings under the Company's
revolving credit facility.
FINANCIAL CONDITION
Working capital of $572 million at May 31, 1997 was essentially unchanged from a
year ago. However, the Company's current assets were $271 million less than year
ago levels as reductions in inventories and recoverable costs from developed
properties resulted in declines in bank borrowings and trade payables. The
Company's net cash position, as measured by cash net of bank borrowings,
improved nearly $260 million compared to June 1, 1996. Inventories at quarter
end were $259 million below year ago levels due to improved inventory and model
transition management as well as the Company's decision to narrow product
offerings in selected categories. Receivables declined from year ago levels due
to lower levels of business activity preceding the end of the period. Deferred
revenues continued to decline as revenues from PSPs sold prior to the fourth
quarter of fiscal 1996 are recognized over the lives of the contracts. Revenues
from PSP sales subsequent to that time are recognized at the time of sale as
they are insured through a third party.
The Company's investment in property held for sale has declined $66 million in
the past year to $57 million as 11 retail locations and a distribution center
were sold and leased back under long term leases in the past twelve months. The
Company currently owns six operating retail locations and an another four that
are under development for opening later in the fiscal year. Management expects
that the majority of these properties will be sold and leased back during the
current fiscal year. One of the locations was sold and leased back subsequent to
the end of the quarter. Capital spending in the first quarter was $6.8 million
compared to $16.1 million in the first quarter of last year, reflecting fewer
store openings. The Company currently expects that capital spending for the year
will be approximately $65 million, exclusive of property development classified
as recoverable costs.
In May 1997 the Company reduced the seasonal capacity of its revolving credit
facility from $550 million to $365 million based upon expected borrowing needs.
Management expects that continued improvement in inventory management and a
slower rate of store growth will reduce the Company's borrowing needs as
compared to the prior year. The Company and the banks participating in the
facility also agreed to reduce the interest coverage ratio covenant through the
maturity of the facility in June 1998. Management believes that funds available
through cash flow from operations, customary vendor terms and inventory
financing facilities and the revolving credit facility will be sufficient to
support the Company's working capital needs for the coming year. Management also
intends to obtain working capital financing to be in place following the
maturity of the revolving credit facility.
11
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The Company filed a Current Report on Form 8-K on May 8, 1996, with the
Securities and Exchange Commission. This report, and other subsequent SEC
filings, contains cautionary statements identifying important factors that could
cause the Company's actual results to differ materially from those projected in
forward looking statements made by the Company herein.
12
BEST BUY CO., INC.
Part II - Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits: METHOD OF FILING
10.1 Third Amendment to and Restatement
of Amended and Restated Credit
Agreement Filed herewith
11.1 Computation of net earnings (loss)
per common share Filed herewith
27.1 Financial Data Schedule Filed herewith
b. Reports on Form 8-K:
None
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: July 10, 1997 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