UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended November 29, 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 November 29, 1997, there were 43,906,017 shares of common stock, $.10 par
value, outstanding.
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 29, 1997
INDEX
Page
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Part I. Financial Information
Item 1. Consolidated Financial Statements:
a. Consolidated balance sheets as of November 29, 1997, 3-4
March 1, 1997 and November 30, 1996
b. Consolidated statements of operations for the 5
three and nine months ended November 29, 1997
and November 30, 1996
c. Consolidated statement of changes in shareholders' 6
equity for the nine months ended November 29, 1997
d. Consolidated statements of cash flows for the 7
nine months ended November 29, 1997 and
November 30, 1996
e. Notes to consolidated financial statements 8
Item 2. Management's Discussion and Analysis of Financial 9-13
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
Part I - Financial Information
Item 1. Consolidated Financial Statements
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
($ in 000, except per share amounts)
November 29, March 1, November 30,
1997 1997 1996
(Unaudited) (Unaudited)
----------- ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 122,060 $ 89,808 $ 43,195
Receivables 185,885 79,581 217,106
Recoverable costs from developed
properties 36,883 53,485 91,420
Merchandise inventories 1,679,721 1,132,059 1,844,782
Deferred and refundable income taxes 10,058 25,560 32,478
Prepaid expenses 13,537 4,542 13,763
----------- ----------- -----------
Total current assets 2,048,144 1,385,035 2,242,744
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 18,006 18,000 17,738
Leasehold improvements 157,177 148,168 140,842
Furniture, fixtures, and equipment 360,967 324,333 306,530
Property under capital leases 29,079 29,326 29,138
----------- ----------- -----------
565,229 519,827 494,248
Less accumulated depreciation and
amortization 238,269 188,194 173,783
----------- ----------- -----------
Net property and equipment 326,960 331,633 320,465
OTHER ASSETS 14,635 17,639 12,838
----------- ----------- -----------
TOTAL ASSETS $2,389,739 $1,734,307 $2,576,047
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
3
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in 000, except per share amounts)
November 29, March 1, November 30,
1997 1997 1996
(Unaudited) (Unaudited)
----------- ----------- -----------
CURRENT LIABILITIES:
Note payable, bank $ - $ - $ 271,500
Obligations under financing 50,238 127,510 124,632
arrangements
Accounts payable 1,152,821 487,802 1,047,941
Accrued salaries and related 37,688 33,663 33,686
expenses
Accrued liabilities 170,221 122,611 149,373
Deferred service plan revenue 21,596 24,602 26,086
Current portion of long-term debt 18,287 21,391 17,249
----------- ----------- -----------
Total current liabilities 1,450,851 817,579 1,670,467
DEFERRED INCOME TAXES 3,578 3,578 -
DEFERRED REVENUE AND OTHER LIABILITIES 18,862 28,210 33,127
LONG-TERM DEBT 211,624 216,625 212,768
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 43,906,000,
43,287,000, and 43,273,000 shares,
respectively 4,391 4,329 4,327
Additional paid-in capital 247,320 241,300 241,196
Retained earnings 223,113 192,686 184,162
----------- ----------- -----------
Total shareholders' equity 474,824 438,315 429,685
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,389,739 $1,734,307 $2,576,047
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
4
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in 000, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- --------------------------
November 29, November 30, November 29, November 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues $2,106,361 $2,007,324 $5,506,116 $5,423,148
Cost of goods sold 1,768,471 1,758,556 4,631,435 4,690,064
----------- ----------- ----------- -----------
Gross profit 337,890 248,768 874,681 733,084
Selling, general &
administrative expenses 284,971 251,878 796,620 703,558
----------- ----------- ----------- -----------
Operating income (loss) 52,919 (3,110) 78,061 29,526
Interest expense, net 9,601 14,883 28,171 40,639
----------- ----------- ----------- -----------
Earnings (loss) before income
taxes 43,318 (17,993) 49,890 (11,113)
Income tax (expense) benefit (16,900) 7,020 (19,463) 4,337
----------- ----------- ----------- -----------
Net earnings (loss) $ 26,418 $ (10,973) $ 30,427 $ (6,776)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net earnings (loss) per share $ .57 $ (.25) $ .69 $ (.16)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares (000) 50,526 43,251 44,352 43,119
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See notes to consolidated financial statements.
5
BEST BUY CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED NOVEMBER 29, 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 62 6,020
Net earnings
30,427
--------- --------- ---------
Balance, November 29, 1997 $4,391 $247,320 $223,113
--------- --------- ---------
--------- --------- ---------
See notes to consolidated financial statements.
6
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000)
(unaudited)
Nine Months Ended
---------------------------
November 29, November 30,
1997 1996
------------ ------------
OPERATING ACTIVITIES:
Net earnings (loss) $ 30,427 $ (6,776)
Charges to operations not affecting cash:
Depreciation and amortization 52,628 50,743
Inventory write-down - 15,000
---------- ----------
83,055 58,967
Changes in operating assets and liabilities:
Receivables (106,304) (95,668)
Merchandise inventories (547,662) (658,640)
Income taxes and prepaid expenses 8,116 (11,564)
Accounts payable 665,019 374,089
Deferred revenue and other liabilities 39,281 10,712
---------- ----------
Total cash provided by (used in)
operating activities 141,505 (322,104)
INVESTING ACTIVITIES:
Additions to property and equipment (47,955) (60,169)
Recoverable costs from developed properties 16,602 34,817
Decrease(increase) in other assets 3,004 (792)
---------- ----------
Total cash used in investing
activities (28,349) (26,144)
FINANCING ACTIVITIES:
Borrowings on revolving credit line, net - 271,500
(Decrease)increase in obligations under
financing arrangements (77,272) 30,681
Long-term borrowings 10,000 21,542
Payments on long-term debt (18,105) (21,380)
Common stock issued 4,473 2,655
---------- ----------
Total cash (used in) provided by
financing activities (80,904) 304,998
---------- ----------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 32,252 (43,250)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 89,808 86,445
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 122,060 $ 43,195
---------- ----------
---------- ----------
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 $ 30,723 $ 41,411
Income taxes $ 1,807 $ (3,487)
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 November 29, 1997, and November 30,
1996, the related consolidated statements of operations for the three and
nine months ended November 29, 1997 and November 30, 1996, the consolidated
statements of cash flows for the nine months ended November 29, 1997 and
November 30, 1996 and the consolidated statement of changes in
shareholders' equity for the nine months ended November 29, 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 (see note 5). 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:
Earnings per share relate to fully diluted earnings per share. Earnings per
share for the three months ended November 29, 1997 reflect the dilutive
impact of the Company's Convertible Preferred Securities. This results in
the assumption of approximately 5.1 million additional shares outstanding
and requires the addback of $2.28 million in after tax cost of the interest
expense on such securities during the period. All other periods presented
do not reflect such dilution as the result would be antidilutive.
5. INVENTORY WRITE-DOWN:
The results of operations for the three and nine month periods ended
November 30, 1996 include a $15 million pretax charge to adjust certain
inventories, primarily personal computers, to their expected net realizable
values.
8
BEST BUY CO., INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for the third quarter of fiscal 1998 were a record $26,418,000, or
$.57 per share on a fully diluted basis, compared to a loss of $10,973,000 or
$.25 per share, in the comparable period last year. For the first nine months of
the current fiscal year net earnings were a record $30,427,000 or $.69 per share
compared to a net loss of $6,776,000, or $.16 per share for the same period last
year. Results for the prior year periods were impacted by a $15 million pre-tax
inventory writedown in the third quarter. Exclusive of the inventory writedown,
current year results for the quarter and year-to-date periods, as compared to
the prior year, reflect modest increases in revenues, significantly improved
gross profit margins and lower interest expense. Higher selling, general and
administrative expenses as a percentage of sales offset a portion of those
gains.
Revenues in the third quarter increased 5% to $2.106 billion compared to $2.007
billion in the third quarter last year. Revenues for the year to date period
were $5.506 billion, an increase of 2% over the comparable nine month period
from last year. Comparable store sales for the quarter were essentially flat
compared to last year and for the year to date declined 4%. Revenues were
impacted by the contribution from the 13 new stores opened in the past twelve
months, as the Company operated 285 stores at November 29, 1997 compared to 272
a year ago. The comparable store sales decline for the year to date was driven
by lower average selling prices, particularly in personal computers where
average selling prices have declined approximately 15% compared to the first
nine months of last year primarily due to the increased popularity of sub-$1,000
units. An increase in personal computer unit sales was not sufficient to offset
the lower selling prices.
The entertainment software category, which includes pre-recorded music and
videos as well as video games, continued to build strength in the quarter. Video
game products in particular performed extremely well, with significant
comparable store sales increases continuing since a year ago when the Nintendo
64 and Sony Playstation formats were introduced. The Company's new DSS/Cellular
area, introduced in the stores early in the third quarter, resulted in
significant comparable store sales increases in cellular phones, satellite
systems, and digital cameras. This new area, which was created from a portion of
the space vacated by a refinement of the Company's music assortment, has a
dedicated sales staff assisting customers with product explanation and service
registration. As is currently being experienced industry wide, the consumer
electronics business continues to be soft as consumers await new technology and
the distribution of audio and video products through mass merchants continues to
expand.
9
In the third quarter the Company introduced an assortment of books and magazines
and exercise equipment, further utilizing the space created by the tailoring of
the music assortment. While these new products are not expected to make a
significant contribution to current year revenues, they, along with an expanded
assortment of ready to assemble furniture, are expected to grow to 2% of sales
next year.
In the third quarter, the Company opened five new stores, including stores in
the Philadelphia, Pittsburgh and Los Angeles markets. These openings completed
the Company's planned store openings for fiscal 1998 with a total of 13 new
stores. The Company also relocated or expanded five stores to larger facilities
this year. The Company's announced expansion plans for the next fiscal year,
which begins in March 1998, include 20 to 25 new stores including entry into the
Boston market.
Retail store sales mix by major product category for the third quarter and nine
month period was as follows:
Third Quarter Ended Nine Months Ended
--------------------- --------------------
11/29/97 11/30/96 11/29/97 11/30/96
--------------------- --------------------
Home Office 40% 41% 40% 41%
Consumer Electronics
Video 16 17 15 17
Audio 10 11 11 12
Entertainment Software 18 17 18 16
Appliances 9 9 10 9
Other 7 5 6 5
---- ---- ---- ----
Total 100% 100% 100% 100%
---- ---- ---- ----
---- ---- ---- ----
Gross profit margin was 16.0% of sales in the third quarter of this year and
15.9% for the first nine months, compared to 12.4% and 13.5%, respectively, in
the comparable periods last year. The inventory writedown in the third quarter
last year, which was principally due to declines in value of personal computer
inventories in advance of new technology, reduced margins for the quarter and
nine month periods by .7% and .3% of sales, respectively. Exclusive of the
impact of the inventory writedown, gross profit margins improved 2.9% of sales
and 2.1% of sales for the quarter and year to date period, respectively. The
higher gross profit margins resulted from better product margins and a more
profitable sales mix. Gains in product margins were impacted by enhanced buying
and selling strategies, including improved product life cycle management of
personal computers. Inventory turns for personal computers have increased to
approximately 10 times, reducing the Company's exposure to significant markdowns
during model and technology transitions. The increase in gross margins due to a
more profitable sales mix was driven by an increase in the sale of performance
service plans (PSPs) in the Company's sales mix. PSPs
10
represented 3.2% of sales in the third quarter this year compared to 2.1% in the
third quarter last year. For the year to date PSPs represented 3.0% of sales
compared to 1.8% of sales for the first nine months of last year. Increased
sales of the higher margin products in the new DSS/Cellular area also increased
the overall profitability of the Company's sales mix. The promotional
environment during the third quarter was also less intense than last year as a
number of the Company's competitors have closed stores in the past year. As a
result of the less competitive conditions the Company used fewer and less
aggressive consumer financing offers, contributing to the profit margin
improvement. Management expects that gross profit margins for the fourth
quarter, while still significantly above last years levels, will be slightly
lower than the margins reported in the third quarter, due in part, to
the traditional shift in the Company's sales mix during the holiday selling
season.
Selling, general and administrative (SG&A) expenses were 13.5% of sales for the
third quarter and 14.5% for the nine month period of the current year. These
compare to SG&A expense ratios for the third quarter and nine month period last
year of 12.5% and 13.0%, respectively. In the third quarter SG&A expenses were
impacted by the staffing associated with the DSS/Cellular area. Generally higher
compensation costs due to market conditions and improved operating performance
also contributed to higher payroll costs as compared to last year. In addition,
SG&A expenses for the quarter and the year to date were impacted by higher
professional fees associated with the Company's strategic initiatives and
management information systems enhancements. Higher rent expense resulting from
stores that were owned last year and leased this year also increased the
Company's SG&A, although this also resulted in lower interest expense. The year
to date increase was, in part, due to reduced leverage on the Company's
operating expenses resulting from the decline in comparable store sales for the
year to date. 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 fourth quarter of the year.
Net interest expense decreased $5.2 million in the third quarter and
$12.5 million in the first nine 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 $597 million at November 29, 1997 was essentially unchanged
from a year ago as lower inventories and costs recovered from developed
properties were used to pay off bank borrowings and increased cash balances. The
Company's net cash position, as measured by cash balances net of bank
borrowings, improved $350 million compared to November 30, 1996. As a result of
improved inventory and model transition management, as well as a narrowing of
product offerings in selected categories, inventory has declined by $165 million
from year ago levels
11
even though the Company is operating 13 additional stores. Better timing of
inventory purchases in advance of the holiday selling season also resulted in
increased leveraging of inventory through trade payables at the end of the
quarter. Receivables declined from year ago levels due to lower levels of vendor
advertising receivables at the end of the period. Other current assets have
declined, in part, due to a reduction in refundable income taxes resulting from
the improved operating performance compared to a year ago. Deferred revenues,
and the related deferred taxes, continue 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 approximately
$50 million in the past year to $37 million as retail locations developed by the
Company have been sold and leased back under long term leases. At November 29,
1997, the Company owned six retail locations that were held for sale and
leaseback, two of which have been subsequently sold. In addition to sales of
property owned by the Company, the Company continues to reduce its master lease
facility as properties are sold by the lessor and leased by the Company under
long term lease agreements. Capital spending for the year to date is $48 million
compared to $60 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 such
as financing under sale/leaseback transactions.
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. During the nine month period the Company had only
minimal borrowings under this facility. In August 1997, the Company obtained
$10 million in intermediate term equipment financing.
Management believes that funds available through cash flow from operations,
including further anticipated improvement in inventory turns, 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 evaluate its working capital financing needs in
the coming months and determine the appropriate size credit facility to be in
place before the maturity of the current facility in June 1998.
12
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share".
SFAS No. 128 is effective for periods ending after December 15, 1997, and
requires restatement of all prior period EPS data presented. The Company will
adopt SFAS No. 128 in the fourth quarter of the current fiscal year. The
Company's basic and diluted earnings (loss) per common share computed under the
new pronouncement would have been as follows:
Third Quarter Ended Nine Months Ended
---------------------- --------------------
11/29/97 11/30/96 11/29/97 11/30/96
---------------------- --------------------
Basic $.60 $(.25) $.70 $(.16)
Diluted $.57 $(.25) $.68 $(.16)
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.
13
BEST BUY CO., INC.
Part II - Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits: Method of Filing
----------------
11.1 Computation of net earnings (loss)
per common share Filed herewith
27.1 Financial Data Schedule Filed herewith
b. Reports on Form 8-K:
None
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
Date: January 7, 1998 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)
15