UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934
For the quarterly period ended August 30, 1997
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact Name of Registrant as Specified in Charter)
Minnesota 41-0907483
(State of Incorporation) (IRS Employer Identification Number)
7075 Flying Cloud Drive 55344
Eden Prairie, Minnesota (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 612/947-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
At August 30, 1997, there were 43,813,165 shares of common stock, $.10 par
value, outstanding.
BEST BUY CO., INC.
-------------------
FORM 10-Q FOR THE QUARTER ENDED AUGUST 30, 1997
------------------------------------------------
INDEX
------
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
a. Consolidated balance sheets as of 3-4
August 30,1997, March 1, 1997 and
August 31, 1996
b. Consolidated statements of earnings 5
for the three and six months ended
August 30, 1997 and August 31, 1996
c. Consolidated statement of changes in 6
shareholders' equity for the six
months ended August 30, 1997
d. Consolidated statements of cash flows 7
for the six months ended August 30, 1997
and August 31, 1996
e. Notes to consolidated financial statements 8
Item 2. Management's Discussion and Analysis of 9-12
Financial Condition and Results of Operations
Part II. Other Information
Item 4. Submission of matters to a vote of Security 13
Holders
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
Part I - Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BEST BUY CO., INC.
-------------------
CONSOLIDATED BALANCE SHEETS
----------------------------
ASSETS
------
($ in 000, except per share amounts)
August 30, March 1, August 31,
1997 1997 1996
(Unaudited) (Unaudited)
---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 101,353 $ 89,808 $ 30,670
Receivables 101,470 79,581 125,870
Recoverable costs from developed
properties 47,205 53,485 96,935
Merchandise inventories 1,188,361 1,132,059 1,447,382
Refundable and deferred income taxes 25,753 25,560 21,143
Prepaid expenses 16,975 4,542 11,975
---------- ---------- ----------
Total current assets 1,481,117 1,385,035 1,733,975
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 18,063 18,000 16,734
Leasehold improvements 153,415 148,168 137,335
Furniture, fixtures, and equipment 346,396 324,333 295,716
Property under capital leases 29,079 29,326 29,177
---------- ---------- ----------
546,953 519,827 478,962
Less accumulated depreciation and
amortization 222,725 188,194 161,445
---------- ---------- ----------
Net property and equipment 324,228 331,633 317,517
OTHER ASSETS:
Other assets 15,023 17,639 12,912
---------- ---------- ----------
TOTAL ASSETS
$1,820,368 $1,734,307 $2,064,404
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
3
BEST BUY CO., INC.
------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
($ in 000, except per share amounts)
August March 1, August
30, 1997 31,
1997 1996
(Unaudited) (Unaudited)
----------- --------- ----------
CURRENT LIABILITIES:
Note payable, bank $ - $ - $ 208,000
Obligations under financing
arrangements 63,407 127,510 105,716
Accounts payable 617,879 487,802 619,515
Accrued salaries and related expenses 35,963 33,663 29,043
Accrued liabilities 143,597 122,611 138,820
Deferred service plan revenue 22,332 24,602 27,504
Current portion of long-term debt 16,866 21,391 16,035
---------- ---------- ----------
Total current liabilities 900,044 817,579 1,144,633
DEFERRED INCOME TAXES 3,578 3,578 -
DEFERRED REVENUE AND OTHER LIABILITIES 22,085 28,210 39,913
LONG-TERM DEBT 217,820 216,625 209,927
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
43,813,000, 43,287,000,
and 43,222,000 shares,
respectively 4,381 4,329 4,322
Additional paid-in capital 245,765 241,300 240,474
Retained earnings 196,695 192,686 195,135
---------- ---------- ----------
Total shareholders' equity 446,841 438,315 439,931
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $1,820,368 $1,734,307 $2,064,404
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
4
BEST BUY CO., INC.
------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
($ in 000, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
---------------------- -----------------------
August 30, August 31, August 30, August 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Revenues $1,793,204 $1,778,640 $3,399,755 $3,415,824
Cost of goods sold 1,504,296 1,526,974 2,862,964 2,931,508
---------- ---------- ---------- ----------
Gross profit 288,908 251,666 536,791 484,316
Selling, general and
administrative expenses 268,982 231,982 511,649 451,680
---------- ---------- ---------- ----------
Operating income 19,926 19,684 25,142 32,636
Interest expense, net 9,030 13,475 18,570 25,756
---------- ---------- ---------- ----------
Earnings before income taxes 10,896 6,209 6,572 6,880
Income taxes 4,248 2,421 2,563 2,683
---------- ---------- ---------- ----------
Net earnings $ 6,648 $ 3,788 $ 4,009 $ 4,197
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per share $ .15 $ .09 $ .09 $ .10
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
outstanding (000) 44,358 43,814 44,144 43,708
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See notes to consolidated financial statements.
5
BEST BUY CO., INC.
------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
---------------------------------------------------------
FOR THE SIX MONTHS ENDED AUGUST 30, 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 4,465
Net earnings, six months ended
August 30, 1997 4,009
-------- -------- --------
Balance, August 30, 1997 $ 4,381 $245,765 $196,695
-------- -------- --------
-------- -------- --------
See notes to consolidated financial statements.
6
BEST BUY CO., INC.
------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
($ in 000)
(Unaudited)
Six Months Ended
------------------------
August 30, August 31,
1997 1996
---------- ----------
OPERATING ACTIVITIES:
Net earnings $ 4,009 $ 4,197
Charges to earnings not affecting cash:
Depreciation and amortization 35,341 33,872
---------- ----------
39,350 38,069
Changes in operating assets and liabilities:
Receivables (21,889) (4,432)
Merchandise inventories (56,302) (246,240)
Income taxes and prepaid expenses (11,589) 1,318
Accounts payable 130,077 (54,337)
Other current liabilities 23,285 19,871
Deferred revenue and other liabilities (8,394) (16,151)
--------- ----------
Total cash provided by (used in)
operating activities 94,538 (261,902)
INVESTING ACTIVITIES:
Additions to property and equipment (27,936) (40,350)
Recoverable costs from developed properties 6,280 29,302
Decrease(increase) in other assets 2,616 (866)
--------- ----------
Total cash used in investing
activities (19,040) (11,914)
FINANCING ACTIVITIES:
Borrowings on revolving credit line, net - 208,000
(Decrease)increase in obligations under
financing arrangements (64,103) 11,765
Long-term borrowings 10,000 13,000
Payments on long-term debt (13,330) (16,893)
Common stock issued 3,480 2,169
--------- ----------
Total cash provided by (used in)
financing activities (63,953) 218,041
--------- ----------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 11,545 (55,775)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 89,808 86,445
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 101,353 $ 30,670
--------- ----------
--------- ----------
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 $ 19,088 $ 25,424
Income taxes $ 1,469 $ (4,110)
See notes to consolidated financial statements.
7
BEST BUY CO., INC.
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of August 30, 1997, and August 31, 1996,
the related consolidated statements of earnings for the three and six
months ended August 30, 1997 and August 31, 1996, the consolidated
statements of cash flow for the six months ended August 30, 1997 and
August 31, 1996 and the consolidated statement of changes in shareholders'
equity for the six months ended August 30, 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
Net earnings for the second quarter of fiscal 1998 were $6,648,000, or $.15 per
share, compared to net earnings of $3,788,000, or $.09 per share, in the
comparable period last year. For the first six months of the current fiscal
year net earnings were $4,009,000, or $.09 per share compared to $4,197,000, or
$.10 per share for the same period last year. Results for the quarter and year
to date periods as compared to the prior year reflect essentially flat revenues,
improved gross profit margins and lower interest expense, offset by higher
selling, general and administrative expenses.
Revenues in the second quarter increased 1% to $1.793 billion compared to $1.779
billion in the second quarter last year. Revenues for the year to date period
were $3.4 billion, essentially unchanged from the prior year. Revenues were
impacted by the contribution from the 18 new stores opened in the past twelve
months, offset by comparable store sales declines of 5.6% in the quarter and
6.8% in the six month period. The comparable store sales declines were driven
primarily by industry wide softness in consumer electronics and declines in the
average selling price of personal computers as compared to year ago levels.
Revenues from sales of personal computers for the duration of the year will be
impacted by the mix of sales of value priced sub-$1000 computers and higher
priced Pentium-Registered Trademark- II computers. The appliance category
increased to 12% of the Company's sales mix in the second quarter despite slow
air conditioner sales resulting from the lack of a hot summer. The entertainment
software category continued to improve, as sales of recorded music showed a
comparable store sales increase in the second quarter, consistent with
improvement in that industry as a whole. Video games continued strong after the
introduction of new technology formats late last year. Management expects that
total Company comparable store sales declines will moderate in the third and
fourth quarters as comparisons to the prior year become less difficult.
In September the Company completed a significant reduction in the number of
titles offered in the entertainment software category, reducing the selection of
recorded music by approximately 20,000 titles in the largest stores. The space
created by this reduction is being deployed to present an assortment of best
selling books and magazines and a selection of exercise equipment in the larger
stores. Also, the Company has converted a portion of the space to present a
dedicated, specially trained sales staff to assist customers in the purchase of
products that typically require higher levels of demonstration and service
registration. Included in this area are digital satellite systems, cellular
phones, digital cameras and personal digital assistants.
9
In the second quarter, the Company opened six stores, including entry into
Pittsburgh, Pennsylvania with two stores. The other four stores opened in
Clearwater and St. Petersburg, Florida; Detroit, Michigan; and Palm Desert,
California. Five stores are expected to be opened in the third quarter,
bringing the number of new stores opened in fiscal 1998 to 13.
Retail store sales mix by major product category for the second quarter and six
month period was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- -------------------
8/30/97 8/31/96 8/30/97 8/31/96
------- ------- ------- -------
Home Office 38% 39% 39% 40%
Consumer Electronics
Audio 11% 12% 11% 12%
Video 15% 17% 15% 17%
Entertainment Software 17% 16% 18% 16%
Appliances 12% 11% 10% 10%
Other 7% 5% 7% 5%
---- ---- ---- ----
Total 100% 100% 100% 100%
---- ---- ---- ----
---- ---- ---- ----
Gross profit margin was 16.1% of sales in the second quarter of this year and
15.8% for the first half, compared to 14.1% and 14.2% in the comparable periods
last year. Gross profit margins improved in both periods due to increased
contributions from higher margin product categories in the Company's sales mix.
In particular, profits from sales of performance service plans, which
represented 2.9% of sales for the quarter and year to date periods, contributed
significantly to the year over year improvement in gross margins. Sales of these
plans were less than 2% of total sales in the first half of last year. An
improvement in gross margin rates within product categories also favorably
impacted margin rates for the periods as did a reduction in the use of extended
consumer financing offers as compared to last year. Management expects that the
traditional shift to a lower margin sales mix in the second half of the year
will likely result in a lower gross profit margin than reported in the second
quarter, however, still well above last year's levels.
Selling, general and administrative (SG&A) expenses were 15.0% of sales for both
the second quarter and six month period. This compares to expense ratios of
13.0% and 13.2% respectively, for the second quarter and six month period last
year. The increases were mainly due to reduced leverage on the Company's
operating expenses resulting from the decline in comparable store sales. In
addition, SG&A was negatively impacted by the higher operating costs of the
larger stores opened in recent years and rent expense associated with stores
that are now leased rather than owned. Net advertising expenditures also
increased as a result of somewhat lower vendor advertising support. Although
the SG&A ratio for the year will be higher than last year, management expects to
achieve better leverage on operating expenses in the traditionally higher volume
second half of the year.
10
Net interest expense decreased $4.4 million in the second quarter and $7.2
million in the first six months compared to fiscal 1997. The decreases were due
principally to significantly lower inventory levels and fewer properties held
for sale.
FINANCIAL CONDITION
Working capital of $581 million at August 30, 1997 was essentially unchanged
from a year ago as reductions in inventories and recoverable costs from
developed properties resulted in a decline in bank borrowings and an increased
cash position. The Company's net cash position, as measured by cash net of bank
borrowings, improved nearly $280 million compared to August 31, 1996. As a
result of improved inventory and model transition management as well as the
Company's decision to narrow product offerings in selected categories, inventory
has declined by $259 million below year ago levels even though the Company was
operating 18 additional stores. 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 performance service plans sold
prior to the fourth quarter of fiscal 1996 are recognized over the lives of the
contracts. Revenues from 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 $50 million in
the past year to $47 million as 12 retail locations were sold and leased back
under long term leases. The Company currently owns six operating retail
locations and two others 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. Two of the locations were
sold and leased back subsequent to the end of the quarter. Capital spending for
the year to date was $28 million compared to $40 million last year, reflecting
fewer store openings. The Company currently expects that capital spending for
the year will be approximately $65 million, exclusive of amounts to be recovered
under long term financing.
In May 1997, the Company reduced the seasonal capacity of its revolving credit
facility from $550 million to $365 million as improvement in inventory
management and a slower rate of store growth has reduced the Company's borrowing
needs for the current year. In August 1997, the Company obtained $10 million in
intermediate term equipment financing.
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
in June 1998.
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. The Report 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a) The Regular Meeting of the Shareholders of the Company was held
June 25, 1997. The following individuals were elected at the meeting
as Directors of the Company to serve until the 1999 Regular Meeting of
Shareholders. Shares voted in favor of these directors and shares
withheld were as follows:
Culver Davis, Jr.
Shares For 40,407,418
Shares Withheld 808,839
Elliot S. Kaplan
Shares For 39,895,336
Shares Withheld 1,320,921
Richard M. Schulze
Shares For 40,393,210
Shares Withheld 823,047
Other matters voted on and the results of voting were as follows:
Shareholders ratified the appointment of Ernst & Young, LLP by the
Board of Directors as the Company's independent auditor for the fiscal
year beginning March 2, 1997, with shares voted as follows:
Shares For 40,792,682
Shares Against 337,897
Shares Abstaining 85,678
Shareholders authorized and approved the Company's 1997 Employee
Non-Qualified Stock Option Plan with shares voted as follows:
Shares For 20,190,446
Shares Against 3,938,648
Shares Abstaining 334,421
13
Shareholders authorized and approved the Company's 1997 Directors'
Non-Qualified Stock Option Plan with shares voted as follows:
Shares For 18,888,366
Shares Against 4,000,918
Shares Abstaining 363,543
Shareholders authorized and approved an amendment to and restatement
of the Company's 1994 Full-Time Employee Non-Qualified Stock Option
Plan with shares voted as follows:
Shares For 37,109,903
Shares Against 3,186,138
Shares Abstaining 209,528
14
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:
None
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
Date: October 9, 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)
16