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 FEBRUARY 28, 1998.
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
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 April 30, 1998, was approximately $1,897,607,472. On that date,
there were 50,088,010 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
February 28, 1998 ("Annual Report") are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement dated May 22, 1998 for the regular
meeting of shareholders to be held June 25, 1998 ("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. The standard size for the Concept III stores is now
45,000 square feet and is designed to accommodate a 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.
In the last two fiscal years the Company has increased its store count by
13%, with a net addition of 33 new stores and, as of February 28, 1998, was
operating 284 stores from coast to coast. The rate of expansion in fiscal 1998
and 1997 was significantly slower than the previous three years when the Company
opened a total of 140 stores. The slower growth was dictated by the need to
focus on improving the Company's operations and financial performance. The
Company anticipates opening approximately 25 new
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stores in fiscal 1999 and to be operating approximately 309 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 store format features interactive displays, and for
certain product categories, a high level of customer assistance, all designed to
enhance the customer's shopping experience. As part of its overall strategy, the
Company:
- Generally offers a retail format similar to a self service discount
store for many products that consumers are familiar with and provides
a higher level of customer service and product explanation for more
complex products.
- Provides a 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
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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 generally familiar with many 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. For products that are relatively easy for
consumers to understand and purchase, the Company employs a self-service,
discount style store format, featuring easy to locate product groupings,
emphasizing customer choice and product information. For certain new technology
products such as digital cameras and phones and digital satellite systems, the
Company provides dedicated and specially trained sales assistance. Sales staff
in these product categories help customers understand the features and benefits
of new technology and can assist customers in the purchase of accessories and
registration for service with providers.
Best Buy continuously evaluates the retail environment and regularly uses
focus groups and customer surveys 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. Most
stores contain a demonstration area for television "surround sound" systems; a
simulated, life-size car display; and audio speaker rooms. These demonstration
areas allow customers to hear for themselves how different configurations of
audio components enhance sound quality at home or in the car. The speaker rooms
feature a wide variety of music allowing customers to compare speaker quality
while listening to their choice of music. 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 approximately 40,000 - 45,000 square feet 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 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 format for many of the products the
Company sells allows the
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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.
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 33 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 20 to 24 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 29% 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 introduced 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 and the
Company's responsiveness to consumers' needs.
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 entertainment
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 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 5,600 products, exclusive of entertainment
software titles and accessories, in its
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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
timing of significant new software releases can also impact sales of personal
computers. 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 experience in the market and its
significantly improved ability to manage inventories in this category. The
Company also believes that its broad product lines, including those that
generate higher profit margins, and its relatively low cost structure contribute
to its ability to compete in this category. 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. Changing technology and hardware requirements
necessary to support new software, including on-line services, are expected to
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, AT&T, Canon, Compaq, CTX, Epson, Hewlett
Packard, IBM, Motorola, Packard Bell, Panasonic, Sharp and Toshiba.
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. The introduction of digital satellite systems (DSS) in fiscal 1997
and Digital Versatile Disc (DVD) and MiniDisc in fiscal 1998 marked the initial
stages of the transition of the consumer electronics category into digital
technology. While sales of analog technology in both audio and video products
remain soft, sales of digital technology continue to accelerate. The replacement
of existing
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analog technology with digital products in the future represents a significant
opportunity for the Company, although the transition could impact sales of
current products. Manufacturers have introduced High Definition Television
(HDTV), and broadcast transmission of digital signals is planned in 10 major
markets beginning in November 1998. Similar to recent technology introductions
in consumer electronics, introductory price points are expected to be high,
resulting in a lag time between product introduction and significant sales
volumes. The Company sells consumer electronics with brand names such as Aiwa,
Bose, Cambridge Soundworks, Eosone, General Electric, Infinity, JBL, JVC,
Magnavox, Nakamichi, Panasonic, Pioneer, RCA, Sanyo, Samsung, Sharp, Sony,
Technics, Toshiba and Yamaha.
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 offers from 7,000 to approximately 40,000 titles in its
largest Concept III stores. Due to the slow rate of inventory turn of some of
the deep catalogue recorded music titles, the Company narrowed its assortment of
recorded music in fiscal 1998 to improve inventory productivity. This reduction
in titles occurred 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 increase in sales of DVD players in fiscal 1998 and
significant expansion of the number of movie titles available in DVD format led
to growth in the entertainment software category. Further growth is anticipated
in fiscal 1999 as the number of movie titles is expected to increase to 1,500 by
the end of calendar 1998. The Company will be allocating additional space in the
stores to accommodate the wider selection. The video game hardware and software
products include popular games by manufacturers 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. During fiscal 1998 this category included brand names such as
Amana, Eureka, Frigidaire, General Electric, GE Profile, Hoover, Hotpoint,
Maytag, Panasonic, Roper, Sanyo, Sharp, Tappan and White-Westinghouse. The
addition of the Whirlpool line of appliances in fiscal 1999 is expected to
complete the Company's product assortment and increase the Company's market
share in the appliance retailing industry.
The Company also sells cameras and other photographic equipment and ready
to assemble furniture designed for use with computer and audio/video equipment.
In fiscal 1998, the Company utilized a portion of the space created by the
reduction in
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recorded music to introduce books, magazines and fitness equipment to its
product assortment.
The Company intends to continue test marketing and evaluating new products
in its larger stores during fiscal 1999. 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.
The following table sets forth the approximate percentages of store sales
from each of Best Buy's principal product lines.
Fiscal Years Ended
------------------------------------------------------
March 2, 1996 March 1, 1997 February 28 1998
------------- ------------- ----------------
Home Office 41% 39% 38%
Consumer Electronics:
Video 18 17 15
Audio 13 12 11
Entertainment
Software 17 18 20
Major Appliances 7 9 9
Other (1) 4 5 7
---- ---- ----
Total 100% 100% 100%
---- ---- ----
---- ---- ----
(1) Includes, among other things, 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 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 have been expensed in the year the store is opened.
During fiscal 1998, the Company opened 13 stores, and expanded or relocated
five stores to larger facilities. Based on the Company's
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improved financial performance in fiscal 1998 Best Buy is increasing its store
expansion program in fiscal 1999. The Company expects to open 25 new stores in
fiscal 1999, which includes entry into markets of Nashville and Knoxville,
Tennessee; Wausau, Wisconsin; Charleston, South Carolina; Reno, Nevada; and the
New England states. The remainder of the new stores will be opened in existing
markets. The Company also plans to expand or relocate another five stores in
fiscal 1999. With the planned opening of the Dinuba, California distribution
center, the Company believes it has the necessary distribution capacity and
management information systems as well as management experience and depth to
support its fiscal 1999 expansion plans.
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 1999 year end.
Planned Anticipated
Number of Stores at Fiscal Year End For at Fiscal
----------------------------------- Fiscal 1999
1996 1997 1998 1999 Year End
---- ---- ---- ---- --------
Texas 34 34 35 1 36
Illinois 32 32 32 -- 32
California 19 22 24 4 28
Florida 12 17 19 2 21
Ohio 18 18 19 -- 19
Michigan 16 16 17 -- 17
Minnesota 15 15 14 -- 14
Wisconsin 11 11 11 1 12
Georgia 10 10 10 -- 10
Maryland 8 9 9 1 10
Missouri 10 10 10 -- 10
Pennsylvania -- 4 9 1 10
Arizona 7 8 8 -- 8
Colorado 7 8 8 -- 8
Indiana 8 8 8 -- 8
North 7 7 7 1 8
Carolina
Virginia 6 7 7 -- 7
Tennessee -- 1 1 5 6
Iowa 5 5 5 -- 5
Kansas 5 5 5 -- 5
South 4 4 4 1 5
Carolina
New Jersey -- 3 4 -- 4
Arkansas 3 3 3 -- 3
Massachusetts -- -- -- 3 3
Nebraska 3 3 3 -- 3
Nevada 1 2 2 1 3
New Hampshire -- -- -- 3 3
Oklahoma 3 3 3 -- 3
Kentucky 2 2 2 -- 2
Alabama 1 1 1 -- 1
Delaware 1 1 1 -- 1
Maine -- -- -- 1 1
New Mexico 1 1 1 -- 1
North Dakota 1 1 1 -- 1
South Dakota 1 1 1 -- 1
---- ---- ---- ---- ----
Total 251 272 284 25 309
---- ---- ---- ---- ----
---- ---- ---- ---- ----
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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 1998, Best Buy's 20 largest suppliers accounted for approximately 55% of
the merchandise purchased by the Company, with five suppliers, Compaq,
Hewlett-Packard, Packard Bell, Panasonic, and Sony representing approximately
28% 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 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 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.
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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. 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 stores. During
fiscal 1999, the Company is constructing a 650,000 square foot distribution
center in Dinuba, California replacing an existing leased facility in Ontario,
California. The Company expects to obtain long term financing on the facility
after its anticipated opening in Spring 1999. The Company believes that its
distribution centers can most effectively service stores within a 600 to 700
mile radius and that its current 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.
The Company has identified critical operational and financial systems as
part of a comprehensive plan to address Year 2000 computer systems issues and
make the required changes to existing systems or replace non-compliant systems,
as appropriate. The Company is also working with its business partners to
mitigate the impact of Year 2000 issues. The Company expects to complete most of
the effort to address these issues in fiscal 1999 at a cost of approximately
$10 million. The Company is also replacing its point of sale system with Year
2000 compliant equipment. The Company does
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not expect to incur material costs beyond this estimate; however, the magnitude
of the effort is difficult to accurately predict and there can be no assurance
that the Company or its business partners will be completely Year 2000 compliant
on a timely basis.
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 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,
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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 35% 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 allow customers to
purchase certain products with repayment terms ranging from 90 days to one year
without a finance charge. The longer financing offers, generally those beyond
six months, typically require minimum monthly payments to avoid the finance
charge. 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 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 growth in the consumer electronics business has slowed
in recent years and the concentration of sales among the top retailers in the
industry has increased. 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 Montgomery Ward and store
closures by other national and regional chains in fiscal 1998. The flat industry
sales are due to market saturation for many consumer electronics products and
the general absence, until recently, of new products in that market. The dollar
volume growth of sales nationally in the home office product category has slowed
as average selling prices decline and household penetration increases. The
Company competes with an increasing number of retailers and alternative channels
of distribution such as mail order and internet shopping services. The Company
is currently testing a "configure to order" sales process to compete
-13-
for the business of the most knowledgeable home office computer buyers. 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
Computer City 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 February 28, 1998, the Company employed approximately 39,000 persons,
of whom approximately 19,500 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.
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 six 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. 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 February 28, 1998, the Company owned one of its operating retail store
locations. Management expects to sell and lease back this property in fiscal
1999.
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
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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.
THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
YEARS
WITH
THE
NAME AGE POSITION WITH COMPANY COMPANY
---- --- --------------------- -------
Richard M. Schulze 57 Chairman, Chief Executive Officer and Director 31
Bradbury H. Anderson 48 President, Chief Operating Officer and Director 24
Allen U. Lenzmeier 54 Executive Vice President and Chief Financial Officer 13
Wade R. Fenn 39 Executive Vice President - Marketing 17
Julie M. Engel 37 Senior Vice President - Advertising 16
Robert C. Fox 47 Senior Vice President - Finance and Treasurer 12
Kevin P. Freeland 40 Senior Vice President - Inventory Management 2
Marc D. Gordon 37 Senior Vice President - MIS & Chief Information Officer -
Wayne R. Inouye 45 Senior Vice President - Marketing, Computers and Home Office 2
Michael P. Keskey 43 Senior Vice President - Sales 10
Richard L. Lewis 58 Senior Vice President - Human Resources -
George Z. Lopuch 48 Senior Vice President - Strategic Planning & Development -
Joseph T. Pelano 50 Senior Vice President - Retail Store Operations 9
Lowell W. Peters 57 Senior Vice President - Services -
Philip J. Schoonover 38 Senior Vice President - Marketing, Consumer Electronics 3
Kenneth R. Weller 49 Senior Vice President - Sales 4
_____________________________
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.
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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.
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.
MARC D. GORDON joined the Company in April 1998 as Senior Vice President -
MIS & Chief Information Officer. Mr. Gordon brings 13 years experience in the
retail information systems area most recently as CIO for West Marine Products, a
West Coast-based specialty retailer/wholesaler of marine products. Other
positions have included senior manager with Andersen Consulting, principal with
a Boston IS consulting firm and Vice President of Information Systems with the
Timberland Company.
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.
RICHARD L. LEWIS joined the Company in July 1997 as Senior Vice President -
Human Resources. Mr. Lewis' career history includes 12 years with Limited
Express where he held various positions, most recently as Executive Vice
President of Human Resources. Lewis also served as Vice President of Human
Resources for the car rental divisions of Republic Industries.
GEORGE Z. LOPUCH joined the Company in March 1998 as Senior Vice President
- - Strategic Planning & Development. Mr. Lopuch brings to Best Buy more than 18
years of retail industry
-16-
experience. Most recently he served as Senior Vice President of Corporate
Strategic Planning and Research at SuperValu.
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.
LOWELL W. PETERS joined the Company in September 1997 as Senior Vice
President - Service. Mr. Peters' career spans 34 years with Sears, where he held
various positions in their service organization, most recently as Vice President
Parts, Product Services.
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
22 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 17 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 18 through
22 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 February 28, 1998
and March 1, 1997 23
For the fiscal years ended February 28, 1998,
March 1, 1997, and March 2, 1996
Consolidated statements of earnings 24
Consolidated statements of cash flows 25
Consolidated statements of shareholders'
equity 26
Independent auditor's report 26
Notes to consolidated financial statements 27-31
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 8 of the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" on
pages 9 through 16 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 8 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 (2,4,5,9)
4.1 Note Purchase Agreement with Principal (6)
Mutual Life Insurance Company, dated as
of July 30, 1992
4.2 Amended and Restated Credit Agreement (12)
with First Bank National Association
dated May 13, 1997
4.3 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
4.4 Amended and Restated Agreement of (2)
Limited Partnership of Best Buy
Capital, L.P., dated as of November 3,
1994
4.5 Indenture between Best Buy, Best Buy (2)
Capital, 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
4.6 Guarantee Agreement related to 6-1/2% (2)
Convertible Monthly Income Preferred
Securities of Best Buy Capital, L.P.,
dated November 3, 1994
4.7 Deposit Agreement with respect to Best (2)
Buy Series A Cumulative Convertible
Preferred Stock, dated November 3, 1994
10.1 1987 Employee Non-Qualified Stock Option (7)
Plan, as amended
-20-
10.2 1987 Directors' Non-Qualified Stock (2)
Option Plan, as amended
10.3 Best Buy Co., Inc. Deferred Compensation (11)
Plan
10.4 Resolutions of the Board of Directors (10)
dated April 24, 1998 amending the bonus
program for senior officers
10.5 1997 Employee Non-Qualified Stock Option (10)
Plan, as amended
10.6 1997 Directors' Non-Qualified Stock (8)
Option Plan
10.7 Amended and Restated 1994 Full-Time (8)
Employee Non-Qualified Stock Option Plan
13.1 1998 Annual Report to Shareholders (1)
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Ernst & Young LLP (1)
27.1 1998 Fiscal Year End Financial Data (1)
Schedule
27.2 1998 Fiscal Quarters 1, 2 and 3 (1)
Financial Data Schedules
27.3 1997 Fiscal Year End and Fiscal Quarters (1)
1, 2, and 3 Financial Data Schedules
27.4 1996 Fiscal Year End Financial Data (1)
Schedule
(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.
-21-
(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) 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.
(7) 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.
(8) 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.
(9) Exhibits so marked were filed with the Securities and Exchange
Commission on May 28, 1997, 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 April 30, 1998, as exhibits to the preliminary Proxy
Statement of Best Buy Co., Inc., and are incorporated herein by
reference and made a part hereof.
(11) Exhibit so marked was filed on April 3, 1998, as an exhibit to the
Registration Statement on Form S-8 (Registration No. 333-49371) of
Best Buy Co., Inc., and is incorporated herein by reference and made a
part hereof.
(12) Exhibit so marked was filed with the Securities and Exchange
Commission on July 11, 1997, as an exhibit to Form 10-Q of Best Buy
Co., Inc., and is 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 27, 1998
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 27, 1998.
/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)
- -------------------------- Director
Culver Davis, Jr.
- -------------------------- Director
Yvonne R. Jackson
/s/ Elliot S. Kaplan
- -------------------------- Director
Elliot S. Kaplan
/s/ David Stanley
- -------------------------- Director
David Stanley
/s/ Frank D. Trestman
- -------------------------- Director
Frank D. Trestman
- -------------------------- Director
Hatim A. Tyabji
- -------------------------- Director
James C. Wetherbe
-24-