SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
FISCAL PERIOD(1) 1998 1997 1996 1995 1994(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Earnings Data
Revenues $ 8,358,212 $ 7,770,683 $ 7,217,448 $ 5,079,557 $ 3,006,534
Gross profit 1,332,138 1,058,881 936,571 690,393 456,925
Selling, general and administrative expenses 1,145,280 1,005,675 813,988 568,466 379,747
Operating income 186,858 53,206 122,583 121,927 77,178
Earnings before cumulative effect of accounting
change 94,453 1,748 48,019 57,651 41,710
Net earnings 94,453 1,748 48,019 57,651 41,285
Per Share Data(3)
Earnings before cumulative
effect of accounting change - Diluted $ 1.04 $ .02 $ .55 $ .64 $ .51
Net earnings - Diluted 1.04 .02 .55 .64 .50
Common stock price: High 30 19/32 13 1/8 14 13/16 22 5/8 15 23/32
Low 4 5/16 3 15/16 6 3/8 11 1/16 5 27/64
Operating and Other Data
Comparable store sales change(4) 2% (5%) 6% 20% 27%
Number of stores (end of period) 284 272 251 204 151
Average revenues per store(5) $ 29,700 $ 29,300 $ 31,100 $ 28,400 $ 22,600
Gross profit percentage 15.9% 13.6% 13.0% 13.6% 15.2%
Selling, general and administrative expense
percentage 13.7% 12.9% 11.3% 11.2% 12.6%
Operating income percentage 2.2% .7% 1.7% 2.4% 2.6%
Inventory turns(6) 5.6x 4.6x 4.8x 4.7x 5.0x
Balance Sheet Data (at period end)
Working capital $ 676,601 $ 567,456 $ 586,841 $ 609,049 $ 362,582
Total assets 2,056,346 1,734,307 1,890,832 1,507,125 952,494
Long-term debt, including current portion 225,322 238,016 229,855 240,965 219,710
Convertible preferred securities 229,854 230,000 230,000 230,000
Shareholders' equity 557,746 438,315 431,614 376,122 311,444
- -----------------------------------------------------------------------------------------------------------------------------------
THIS TABLE SHOULD BE READ IN CONJUNCTION WITH MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION AND THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO.
(1) FISCAL 1996 CONTAINED 53 WEEKS. ALL OTHER PERIODS PRESENTED CONTAINED 52
WEEKS.
(2) DURING FISCAL 1994, THE COMPANY ADOPTED SFAS 109, RESULTING IN A CUMULATIVE
EFFECT ADJUSTMENT OF ($425) OR ($.01) PER SHARE.
(3) PER SHARE DATA REFLECTS THE REQUIREMENTS OF SFAS 128 AND IS RESTATED FOR A
TWO-FOR-ONE STOCK SPLIT IN MAY 1998.
(4) COMPARABLE STORES ARE STORES OPEN AT LEAST 14 FULL MONTHS.
(5) AVERAGE REVENUES PER STORE ARE BASED UPON TOTAL REVENUES FOR THE PERIOD
DIVIDED BY THE WEIGHTED AVERAGE NUMBER OF STORES OPEN DURING SUCH PERIOD.
(6) INVENTORY TURNS ARE CALCULATED BASED UPON A MONTHLY AVERAGE OF INVENTORY
BALANCES.
Best Buy Co., Inc. 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Fiscal 1998 was a pivotal year for the Company, as initiatives to improve
inventory management and streamline processes at its retail stores resulted in a
251% increase in operating income, compared to fiscal 1997. A significant
improvement in the gross profit margin was the main reason for the improved
overall financial performance. Sales were 8% higher than the previous year, and
selling, general and administrative expenses increased as a percentage of sales.
Interest expense, which was lower as a result of faster-turning inventory, also
contributed to the Company's overall improvement in results for the year.
Earnings in fiscal 1998 were $94.5 million, compared to $1.7 million in fiscal
1997 and $48.0 million in fiscal 1996. Earnings per share on a diluted basis
were $1.04 in fiscal 1998, $.02 in fiscal 1997 and $.55 in fiscal 1996 and have
been adjusted to reflect a two-for-one stock split in May 1998.
REVENUES
The following table presents selected revenue data for each of the last three
fiscal years ($ in thousands).
1998 1997 1996
- -------------------------------------------------------------------------------
Revenues $ 8,358,212 $ 7,770,683 $7,217,448
Percentage increase in revenues 8% 8% 42%
Comparable store sales change 2% (5%) 6%
Average revenues per store $ 29,700 $ 29,300 $ 31,100
Sales in fiscal 1998 were $8.358 billion compared to $7.771 billion in fiscal
1997, as comparable store sales increased 2% and results for the year included
13 new stores and a full year of operations at the 21 stores opened in fiscal
1997. The comparable store sales increase, which followed a 5% decrease in
comparable store sales in fiscal 1997, was driven by several factors. Consumer
demand, particularly in the second half of the year, as well as improved selling
strategies at retail, contributed to improving comparable store sales
performance throughout the year. Increased sales of entertainment software due
to new technology in video games and consumer demand for new titles in both
recorded music and computer software also led to the comparable store sales
increase for the year. Increased emphasis on the sale of Performance Service
Plans (PSPs), accessories and an expanded "ready-to-assemble" furniture
assortment also contributed to the comparable store sales increase. Comparable
store sales were adversely impacted by the continued decline in the average
selling prices of personal computers and general softness in the consumer
electronics category as it approaches the transition to digital technology.
Competition also eased somewhat as consolidation of specialty retailers in the
Company's product lines continued, although competition from mass merchants and
alternative methods of retailing such as mail order and Internet increased. New
stores opened in fiscal 1998 included entry into the new market of Pittsburgh,
Pennsylvania, with four stores. The remaining stores opened in existing markets.
In fiscal 1998 the Company closed one of its 28,000-square-foot stores where the
lease had expired.
In the second half of fiscal 1998 the Company introduced a new sales strategy
which provides customers with additional sales assistance to help them
understand the newer digital technology products. The Company refers to this
area of the store as the "high touch" area. In addition to providing enhanced
product explanation, the specially trained sales staff dedicated to this area of
the store assists customers with service activation and selection of appropriate
accessories. Products sold in this area of the store include digital cameras,
cellular and digital phones, digital satellite systems and personal digital
assistants. As a result of this additional focus on sales assistance, comparable
store sales for the products in this area more than doubled in the fourth
quarter. Management believes that there is potential future application for this
strategy as the consumer electronics category moves toward digital technology.
Fiscal 1997 sales were 8% higher than the $7.217 billion reported in fiscal
1996. Sales from the 21 new stores opened in fiscal 1997 and a full year of
operations at the 47 stores opened in fiscal 1996 offset a 5% decline in
comparable store sales. The comparable store sales decline in fiscal 1997 was
primarily due to the same industry factors in personal computers and consumer
electronics that negatively impacted comparable store sales in most of fiscal
1998.
The following table sets forth the Company's retail store sales mix by major
product category for each of the past three fiscal years.
1998 1997 1996
- -----------------------------------------------------------------------
Home Office 38% 39% 41%
Consumer Electronics - Video 15% 17% 18%
Consumer Electronics - Audio 11% 12% 13%
Entertainment Software 20% 18% 17%
Appliances 9% 9% 7%
Other 7% 5% 4%
- -----------------------------------------------------------------------
Total 100% 100% 100%
Sales in the home office category in fiscal 1998 continued to be impacted by
lower average selling prices of personal computers. Unit sales of personal
computers increased in fiscal 1998 as lower prices brought more consumers into
the marketplace, although the increase in units did not offset the 15-20% price
declines until the fourth quarter. The percentage of products offered at price
points below $1,000 continued to increase through the last half of the year.
Improved in-stock positions resulting from better inventory management also
helped increase unit volume sales during the year. The Company believes that the
higher unit sales volumes of personal computers contributes to the sales of
additional products and services such as accessories, PSPs and computer
software. Management believes that the downward trend in selling prices of
personal computers will continue, although the rate of decline should moderate.
18 Best Buy Co., Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
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 remains soft,
sales of digital technology continues to accelerate. The growth in sales of
digital products has been driven by falling price points and, in the case of
DVD, an increasing number of software titles. The number of DVD titles grew from
an introductory 23 to more than 500 during fiscal 1998 and is expected to grow
to 1,500 by the end of calendar 1998. Sales of DSS benefited from increased
emphasis on sales presentation in the new "high touch" area in the store. The
replacement of existing 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 for 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.
Sales of entertainment software, which includes recorded music and movies,
computer software and video games, increased significantly in fiscal 1998. The
increase was principally due to strong demand for video games following the
release of new technology in late fiscal 1997 when the Nintendo 64 and Sony
Playstation formats were introduced. Increased sales of computer software due to
new titles released and a larger installed base of personal computers also
contributed to the gains in the entertainment software category. Recorded music
releases with higher levels of consumer acceptance also led to sales gains in
this category, particularly late in the year.
Sales of major appliances remained relatively flat in fiscal 1998 as competitive
pressure during most of the year resulted in falling price points and limited
comparable store sales growth. The Company experienced significant comparable
store sales growth in fiscal 1997 when the Company greatly expanded its product
assortment with the addition of the Amana, General Electric, Hotpoint, Maytag
and Tappan lines of appliances. In April 1998, the Company announced that it
would begin carrying a full line of Whirlpool home appliances beginning in the
second quarter of fiscal 1999.
The "Other" category of product sales includes sales of PSPs, which grew from
1.9% of sales in fiscal 1997 to 3.0% in fiscal 1998. An increased focus on the
presentation of plans to customers and the higher sales volumes of personal
computers led to the significant increase in PSP sales. Also included in this
category is photographic equipment, an expanded assortment of ready-to-assemble
furniture, as well as books and magazines and exercise equipment, which were
introduced in the stores in the space created by the reduction in the Company's
assortment of recorded music in fiscal 1998.
In fiscal 1999 the Company expects that it can continue to capitalize on the
operational execution improvements made in the past two years with respect to
inventory management and productivity in the retail stores to further improve
the Company's sales performance. A continued healthy economy is expected to
result in a comparable store sales increase for the year. Comparable store sales
gains are expected to be strongest in the early part of the year and moderate in
the second half as the comparisons become more difficult. The Company has
announced plans to open approximately 25 new stores during the year, the most
significant of which is the entry into the New England area with six new stores.
The Company has also announced plans to enter Reno, Nevada; Charleston, South
Carolina; Wausau, Wisconsin and Nashville and Knoxville, Tennessee. The
remaining new stores will be opened in existing markets.
COMPONENTS OF OPERATING INCOME
The following table sets forth selected operating ratios as a percentage of
sales for the last three fiscal years.
1998 1997 1996
- ------------------------------------------------------------------------------
Gross profit margin 15.9% 13.6% 13.0%
Selling, general and administrative expenses 13.7% 12.9% 11.3%
Operating income 2.2% .7% 1.7%
Gross profit margin for fiscal 1998 improved to 15.9% compared to 13.6% in
fiscal 1997, a gain that was driven by greatly improved inventory management.
Faster inventory turns and a more profitable product assortment were the major
contributors to the improvement. Through more rapid replenishment of products,
the Company increased inventory turns from 4.6 to 5.6 times and reduced exposure
to margin pressure due to product model transition. This improvement was most
evident in personal computers, where inventory turns increased to 11.5 times
compared to 8.5 times in fiscal 1997, moving this significant product category
from a profit drain to a significant profit contributor. By employing better
product lifecycle management and rapid replenishment, the Company was able to
quickly react to changing consumer demand and timing of model transitions. The
inability to quickly react to changing market conditions resulted in a $15
million inventory write-down related to personal computers that severely
impacted fiscal 1997's operating results. A narrower and more profitable
assortment in consumer electronics also led to more current inventory and higher
overall rates of gross profit margin in that category. The increased
contribution in the Company's sales mix from PSPs also was a significant factor
in the improved gross profit margin for the year. A less promotionally driven
sales environment benefited the Company, as consumer financing promotions were
more selectively used, reducing the costs associated with these offers. A
continuing of the trend of improvement in inventory shrink also added to fiscal
1998 gross profit margin gains.
Best Buy Co., Inc. 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Gross profit margins of 13.6% in fiscal 1997 improved from 13.0% in fiscal 1996
as increased contributions from higher margin PSPs and appliances in the sales
mix offset the impact of $25 million in inventory write-downs and a highly
promotional environment. The write-downs were primarily due to a rapid decline
in the selling prices of personal computers in the third quarter of 1997 and a
decision to reduce the Company's assortment of recorded music in the fourth
quarter.
Management believes that further refinement in the Company's product assortment,
product lifecycle management and replenishment of products will result in
additional improvement in gross profit margins. Improvement is also anticipated
as a result of an increasing contribution from sales of PSPs. The impact of
these gains is expected to be less significant than was experienced the past
year.
Selling, general and administrative expenses (SG&A) increased to 13.7% of sales
in fiscal 1998 compared to 12.9% in fiscal 1997, primarily as a result of higher
levels of service and compensation. In addition to driving higher sales volumes,
the strength of the economy has created a tight labor market, placing upward
pressure on wages. The addition of the dedicated staff in the "high touch" area
of the stores also added to the Company's overall payroll costs in fiscal 1998.
Also, compensation costs in fiscal 1998 increased over fiscal 1997 as a result
of a higher level of compensation tied to the Company's improved financial
performance. Professional services associated with the strategic initiatives to
improve inventory management and retail operations also contributed to the
increased spending in fiscal 1998. Costs associated with information systems
enhancements, including addressing Year 2000 issues and initial development of
the Company's Internet shopping site, also impacted spending during the year. As
a result of the sale and leaseback of 23 owned properties in the past two years,
rent expense has also increased, although the sale of these properties reduced
interest expense.
The increase in the SG&A expense ratio in fiscal 1997 compared to fiscal 1996
was driven by the loss of leverage on fixed expenses resulting from the
comparable store sales decline. Higher costs associated with new markets entered
in recent years and higher advertising costs due to a more promotional
environment also contributed to the increase.
The strong economy is expected to result in continued pressure on wages, and the
Company anticipates that selling, general and administrative expenses will
continue to increase as a percent of sales. The annualization of the current
year increases in compensation due both to general wage increases and the
addition of the dedicated staffing in the "high touch" area in the second half
of fiscal 1998 will also increase these expenses. Professional fees associated
with the continuation of the Company's strategic initiatives and ongoing
information systems enhancements are also expected to increase.
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 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.
Interest expense in fiscal 1998 was $33.0 million, a $17.3 million reduction as
compared to fiscal 1997. Faster inventory turns, cash generated from earnings
and lower levels of owned real estate resulted in essentially no borrowings
during the year under the Company's revolving credit facility. The expected
conversion of the Company's convertible preferred securities in the first
quarter of fiscal 1999 will reduce interest expense by approximately $15 million
annually.
The Company's income tax rate in fiscal 1998 was 38.6%, compared to 39.0% in
fiscal 1997 and 39.2% in fiscal 1996, as tax exempt interest income and slightly
lower state income taxes have reduced the Company's overall tax rate.
LIQUIDITY AND CAPITAL RESOURCES
In addition to the positive impact on gross profit margin, the Company's
progress in inventory management led to a significant improvement in the
Company's financial position and liquidity. The Company's cash and cash
equivalents increased by $430 million over the prior year. Cash flow from
operating activities of $542 million and a $45 million reduction in owned
property held for sale resulted in the increased liquidity. At the end of fiscal
1998, the Company had $520 million in cash and short-term investments, compared
to $90 million at the end of fiscal 1997.
The following table indicates the number of stores, by prototype, operated by
the Company at the end of the last three fiscal years.
STORE PROTOTYPE 1998 1997 1996
- -------------------------------------------------------------------------------
28,000 square feet 48 54 61
36,000 square feet 34 34 36
45,000 square feet 150 132 112
58,000 square feet 52 52 42
- -------------------------------------------------------------------------------
Total number of stores at year end 284 272 251
Average store size (in square feet) 43,200 42,800 41,400
20 Best Buy Co., Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Inventories at the end of fiscal 1998 were $1.06 billion, a decline of $71
million as compared to the end of fiscal 1997 and $140 million below fiscal 1996
year end. The lower levels of inventory, which includes the addition of 33
stores in the past two years, is the result of a faster turning assortment of
products.
Trade receivables at the end of fiscal 1998 were $95.7 million, an increase of
$16.1 million compared to the prior year end, principally due to the significant
increase in volume in the fourth quarter of fiscal 1998, as comparable store
sales increased 17% in that period. Trade receivables include primarily credit
card and vendor-related receivables. Receivables from sales on the Company's
private label credit card are sold to third parties, without recourse, and the
Company does not bear any risk of loss with respect to these receivables.
Refundable and deferred income taxes decreased as a result of the increase in
the Company's taxable income in fiscal 1998. Trade payables, including those
classified as financing obligations, increased as compared to the prior fiscal
year end due to the higher volume of purchases supporting the fiscal 1998
fourth-quarter sales levels and the improved inventory turns. Accrued
liabilities increased compared to the prior year end as a result of expenses
associated with various strategic initiatives, compensation related to the
improved financial performance of the Company and the higher levels of business
activity.
Deferred revenues related to extended service contracts recognized in fiscal
1998 were $24.6 million compared to $30.8 million in fiscal 1997, as the
deferral continues to decline following the Company's decision to insure these
obligations, beginning in the fourth quarter of fiscal 1996. Revenues from that
time forward are recognized at the time of sale, rather than over the life of
the contract. Other long-term liabilities primarily include real estate-related
expenses for the difference between the recognition of rent expense for
accounting purposes and the terms of the leases.
Capital spending in fiscal 1998 was $72 million compared to $88 million in
fiscal 1997 and $126 million in fiscal 1996. The slower rate of store expansion
in fiscal 1998 resulted in a lower level of capital spending as compared to the
preceding years. In addition to the 13 new stores and five remodeled or
relocated stores in fiscal 1998, the Company completed a number of merchandising
projects, including the reduction in square footage allocated to the assortment
of recorded music and the addition of the new "high touch" area in the stores.
In fiscal 1998, the Company also purchased approximately $10 million in
equipment that had been leased through the Company's master lease facility. The
purchase of these assets was financed through a $10 million intermediate-term
loan. In fiscal 1997 the Company obtained intermediate-term equipment financing
totaling $21 million and refinanced its corporate headquarters facility with a
$12 million, 15-year mortgage loan.
Recoverable costs from developed properties declined $45 million in fiscal 1998
as store development slowed and improved conditions for the sale of the
Company's real estate resulted in the sale and leaseback of essentially all
owned operating locations. In the past two years the Company has sold and leased
back 22 retail locations and one distribution center which it had developed. In
addition to the sale of owned property, in fiscal 1998 the Company secured
long-term lease financing of all of the properties in its master lease facility.
This facility, which was used to support the development of approximately $125
million of store and distribution center expansion in fiscal 1995 and 1996, had
an underlying bank credit facility which was scheduled to mature in September
1998.
In May 1997, the Company reduced the capacity of its revolving credit facility
from $550 million to $365 million, based upon lower anticipated usage. The rapid
improvement in inventory turns and higher-than-anticipated sales volumes
resulted in essentially no borrowings under the facility in fiscal 1998. This
facility matures in June 1998. Management intends to have a new $200 to $250
million, 2 year facility in place by the expiration date of the existing
facility.
On March 10, 1998, the Company announced that it was exercising its right to
cause the conversion rights of the Company's $230 million of preferred
securities to expire. These securities pay monthly distributions at an annual
rate of 6.5%. Until April 24, 1998, these securities were convertible into the
equivalent of approximately 10.2 million shares of the Company's common stock,
as adjusted for the two-for-one stock split in May 1998. Through that date, 99%
of the securities had been converted resulting in issuance of 10.1 million
post-split common shares. The Company has the right to redeem the remaining
outstanding preferred securities for $50 in cash per security. As a result of
the conversion, shareholders' equity was increased to nearly $780 million.
The acceleration in store growth to 25 stores, a significant investment in
information systems and construction of a new distribution facility is expected
to increase capital spending in fiscal 1999 to approximately $140 million,
exclusive of amounts expected to be recovered through subsequent sales and
leasebacks. The new distribution center in Dinuba, California replaces a leased
facility. This facility, which will be approximately 650,000 square feet, is
expected to open in March 1999. The Company expects that this level of capital
growth will be funded through earnings and depreciation. Management also
believes that the working capital requirements to support the inventories for
the new stores can be funded through the anticipated further improvement in
inventory turns.
Management believes that the cash generated by expected results of operations
and cash and short-term investments on hand will be sufficient to meet the
Company's anticipated needs for the coming year. The expected new revolving
credit facility would be available for additional working capital needs or
opportunities.
Best Buy Co., Inc. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
QUARTERLY RESULTS AND SEASONALITY
Similar to most retailers, the Company's business is seasonal. Revenues and
earnings are lower during the first half of each fiscal year and are greater
during the second half, which includes the holiday selling season. The timing of
new store openings and general economic conditions may affect future quarterly
results of the Company.
The following table sets forth the Company's unaudited quarterly operating
results for each quarter of fiscal 1998 and 1997. Results for the quarter ended
Nov. 30, 1996, include a $15 million pre-tax charge related to the write-down of
certain inventories, primarily personal computers, to expected net realizable
values. Results for the quarter ended March 1, 1997, include a $10 million
pre-tax charge mainly as a result of the Company's decision to reduce its
assortment of recorded music. Per share amounts are on a diluted basis, and have
been restated to reflect SFAS 128.
($ in thousands, except per share amounts)
FISCAL 1998 MAY 31 AUG. 30 NOV. 29 FEB. 28
1997 1997 1997 1998
- --------------------------------------------------------------------------------------------------------
Revenues $ 1,606,551 $ 1,793,204 $ 2,106,361 $ 2,852,096
Gross profit 247,883 288,908 337,890 457,457
Operating income 5,216 19,926 52,919 108,797
Net earnings (loss) (2,639) 6,648 26,418 64,026
Net earnings (loss) per share (.03) .07 .29 .65
FISCAL 1997 JUNE 1 AUG. 31 NOV. 30 MARCH 1
1996 1996 1996 1997
- --------------------------------------------------------------------------------------------------------
Revenues $ 1,637,184 $ 1,778,640 $ 2,007,324 $ 2,347,535
Gross profit 232,650 251,666 248,768 325,797
Operating income (loss) 12,952 19,684 (3,110) 23,680
Net earnings (loss) 409 3,788 (10,973) 8,524
Net earnings (loss) per share .01 .04 (.13) .10
COMMON STOCK PRICES
QUARTER 1ST 2ND 3RD 4TH
- --------------------------------------------------------------------------------------------------------
FISCAL 1998
High $ 7 3/16 $ 8 3/4 $ 15 1/8 $ 30 19/32
Low 4 5/16 5 5/8 8 7/16 14 9/16
FISCAL 1997
High $ 11 1/2 $ 13 1/8 $ 11 7/8 $ 7 3/16
Low 8 3/16 8 11/16 6 1/16 3 15/16
Best Buy's common stock is traded on the New York Stock Exchange, symbol BBY.
As of March 31, 1998, there were 1,508 holders of record of Best Buy common
stock. The Company has not historically paid cash dividends on its common stock.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies. With the exception of historical information,
the matters discussed in the Annual Report are forward-looking statements that
involve risks and uncertainties. Such risks and uncertainties include, among
other things, the Company's expectations regarding the economy, future sales
volumes, profit margins, the impact of labor markets and new product
introductions on the Company's overall profitability. Reference is made to the
Company's Current Report on Form 8-K, wherein the Company has identified
additional important factors that could cause actual results to differ
materially from those contemplated by the statements made herein.
PER SHARE AMOUNTS IN THE ABOVE TABLES HAVE BEEN ADJUSTED FOR A TWO-FOR-ONE STOCK
SPLIT IN MAY 1998.
22 Best Buy Co., Inc.
CONSOLIDATED BALANCE SHEETS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
ASSETS FEB. 28 MARCH 1
1998 1997
- -------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 520,127 $ 89,808
Receivables 95,702 79,581
Recoverable costs from developed properties 8,215 53,485
Merchandise inventories 1,060,788 1,132,059
Refundable and deferred income taxes 16,650 25,560
Prepaid expenses 8,795 4,542
-----------------------------
Total current assets 1,710,277 1,385,035
Property and Equipment
Land and buildings 19,977 18,000
Leasehold improvements 160,202 148,168
Furniture, fixtures and equipment 372,314 324,333
Property under capital leases 29,079 29,326
-----------------------------
581,572 519,827
Less accumulated depreciation and amortization 248,648 188,194
-----------------------------
Net property and equipment 332,924 331,633
Other Assets 13,145 17,639
-----------------------------
Total Assets $2,056,346 $1,734,307
-----------------------------
-----------------------------
LIABILITIES AND FEB. 28 MARCH 1
SHAREHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------
Current Liabilities
Accounts payable $ 727,087 $ 487,802
Obligations under financing arrangements 35,565 127,510
Accrued salaries and related expenses 48,772 33,663
Accrued liabilities 163,744 122,611
Income taxes payable 24,608
Deferred service plan revenue 18,975 24,602
Current portion of long-term debt 14,925 21,391
-----------------------------
Total current liabilities 1,033,676 817,579
Deferred Income Taxes 7,095 3,578
Deferred Revenue and Other Liabilities 17,578 28,210
Long-Term Debt 210,397 216,625
Convertible Preferred Securities of Subsidiary 229,854 230,000
Shareholders' Equity
Preferred stock, $1.00 par value:
Authorized - 400,000 shares;
Issued and outstanding - none
Common stock, $.10 par value:
Authorized - 120,000,000 shares;
Issued and outstanding 89,252,000
and 86,574,000 shares, respectively 4,463 4,329
Additional paid-in capital 266,144 241,300
Retained earnings 287,139 192,686
-----------------------------
Total shareholders' equity 557,746 438,315
-----------------------------
Total Liabilities and Shareholders' Equity $2,056,346 $1,734,307
-----------------------------
-----------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Best Buy Co., Inc. 23
CONSOLIDATED STATEMENTS OF EARNINGS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
FOR THE FISCAL YEARS ENDED FEB. 28 MARCH 1 MARCH 2
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Revenues $8,358,212 $7,770,683 $7,217,448
Cost of goods sold 7,026,074 6,711,802 6,280,877
---------------------------------------------
Gross profit 1,332,138 1,058,881 936,571
Selling, general and administrative expenses 1,145,280 1,005,675 813,988
---------------------------------------------
Operating income 186,858 53,206 122,583
Interest expense, net 33,005 50,338 43,594
---------------------------------------------
Earnings before income taxes 153,853 2,868 78,989
Income taxes 59,400 1,120 30,970
---------------------------------------------
Net Earnings $ 94,453 $ 1,748 $ 48,019
---------------------------------------------
---------------------------------------------
Basic Earnings Per Share $ 1.08 $ .02 $ .56
Diluted Earnings Per Share $ 1.04 $ .02 $ .55
Basic Weighted Average Common Shares Outstanding (000's) 87,708 86,344 85,240
Diluted Weighted Average Common Shares Outstanding (000's) 100,126 87,246 86,966
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24 Best Buy Co., Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
$ IN THOUSANDS
FOR THE FISCAL YEARS ENDED FEB. 28 MARCH 1 MARCH 2
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Operating Activities
Net earnings $ 94,453 $ 1,748 $ 48,019
Charges to earnings not affecting cash:
Depreciation and amortization 68,330 66,844 54,862
Other 3,254 468 1,267
---------------------------------------------
166,037 69,060 104,148
Changes in operating assets and liabilities:
Receivables (16,121) 41,857 (36,998)
Merchandise inventories 71,271 69,083 (293,465)
Prepaid taxes and expenses 4,657 8,174 (16,273)
Accounts payable 239,285 (186,050) 278,515
Other liabilities 68,103 4,792 63,589
Income taxes 33,759 3,579 (12,004)
Deferred revenue (24,603) (30,845) 12,008
---------------------------------------------
Total cash provided by (used in) operating activities 542,388 (20,350) 99,520
---------------------------------------------
Investing Activities
Additions to property and equipment (72,063) (87,593) (126,201)
Decrease (increase) in recoverable costs from developed properties 45,270 72,752 (40,015)
Decrease (increase) in other assets 4,494 (5,593) 7,712
---------------------------------------------
Total cash used in investing activities (22,299) (20,434) (158,504)
---------------------------------------------
Financing Activities
(Decrease) increase in obligations under financing arrangements (91,945) 33,559 12,196
Long-term debt borrowings 10,000 33,542
Long-term debt payments (22,694) (25,694) (14,600)
Common stock issued 14,869 2,740 3,133
---------------------------------------------
Total cash (used in) provided by financing activities (89,770) 44,147 729
---------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 430,319 3,363 (58,255)
Cash and Cash Equivalents at Beginning of Period 89,808 86,445 144,700
---------------------------------------------
Cash and Cash Equivalents at End of Period $ 520,127 $ 89,808 $ 86,445
---------------------------------------------
---------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25 Best Buy Co., Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND INDEPENDENT AUDITOR'S REPORT
$ IN THOUSANDS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
- ---------------------------------------------------------------------------------------------
Balances at Feb. 25, 1995 $4,221 $228,982 $142,919
Stock options exercised 63 3,070
Tax benefit from stock options exercised 4,340
Net earnings 48,019
------------------------------------------
Balances at
March 2, 1996 4,284 236,392 190,938
Stock options exercised 45 2,695
Tax benefit from stock options exercised 2,213
Net earnings 1,748
------------------------------------------
Balances at
March 1, 1997 4,329 241,300 192,686
Stock options exercised 134 14,056
Tax benefit from stock options exercised 10,642
Conversion of preferred securities 146
Net earnings 94,453
------------------------------------------
Balances at
Feb. 28, 1998 $4,463 $266,144 $287,139
------------------------------------------
------------------------------------------
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
Best Buy Co., Inc.
We have audited the accompanying consolidated balance sheets of Best Buy Co.,
Inc. as of February 28, 1998, and March 1, 1997, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended February 28, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Best Buy Co., Inc.
at February 28, 1998, and March 1, 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
February 28, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 31, 1998
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26 Best Buy Co., Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
The Company operates in a single business segment, selling personal computers
and other home office products, consumer electronics, entertainment software,
major appliances and related accessories through its retail stores.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Best Buy Co., Inc.
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS:
The Company considers all short-term investments with a maturity of three months
or less when purchased to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.
RECOVERABLE COSTS FROM DEVELOPED PROPERTIES:
The costs of acquisition and development of properties which the Company intends
to sell and lease back or recover from landlords within one year are included in
current assets.
MERCHANDISE INVENTORIES:
Merchandise inventories are recorded at the lower of average cost or market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation, including
amortization of property under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets or, in the case of
leasehold improvements, over the shorter of the estimated useful lives or lease
terms. The Company evaluates potential losses on impairment of long-lived assets
used in operations on a location by location basis when indicators of impairment
are present. A loss is recorded when an asset's carrying value exceeds the
undiscounted cash flows from the asset.
PRE-OPENING COSTS:
Costs incurred in connection with the opening of new stores are expensed in the
year the store is opened. Pre-opening costs were $3,500, $5,800 and $10,700 in
fiscal 1998, 1997 and 1996, respectively.
ADVERTISING COSTS:
Advertising costs, included in selling, general and administrative expenses, are
expensed as incurred.
DEFERRED SERVICE PLAN REVENUE:
Beginning in the fourth quarter of fiscal 1996, the Company began selling
Performance Service Plans on behalf of an unrelated third party. The Company
recognizes commission revenue on the sale of the plans at the time of sale.
Revenue from the sale of the plans sold prior to November 26, 1995, net of
direct selling expenses, is recognized straight-line over the life of the plan.
Costs related to servicing these plans are expensed as incurred.
EARNINGS PER SHARE:
The Company has adopted and retroactively applied the requirements of Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" to all
periods presented. This change did not have a material impact on the computation
of the earnings per share data.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share
includes the incremental shares assumed issued on the exercise of stock options
and assumes that the convertible preferred securities are converted into common
stock and the interest expense thereon, net of related taxes, is added back to
net earnings when such conversion results in dilution All common share and per
share information has been adjusted to reflect a two-for-one stock split in May
1998.
STOCK OPTIONS:
The Company applies APB 25, "Accounting for Stock Issued to Employees" in
accounting for stock options and presents in Note 5 pro forma net earnings as if
the accounting prescribed by SFAS123 "Accounting for Stock-Based Compensation"
had been applied.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the balance sheet and statement of earnings, as
well as the disclosure of contingent liabilities. Actual results could differ
from these estimates.
FISCAL YEAR:
The Company's fiscal year ends on the Saturday nearest the end of February.
Fiscal 1998 and 1997 contained 52 weeks, and fiscal 1996 contained 53 weeks.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. OBLIGATIONS UNDER FINANCING ARRANGEMENTS
The Company has a $200,000 inventory financing credit line, which increases to
$325,000 on a seasonal basis. Borrowings are collateralized by a security
interest in certain merchandise inventories approximating the outstanding
borrowings. The terms of this arrangement allow the Company to extend the due
dates of invoices beyond their normal terms. Amounts extended generally bear
interest at a rate approximating the prime rate. The line has provisions that
give the financing source a portion of the cash discounts provided by the
manufacturers.
Best Buy Co., Inc. 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
3. Borrowings
FEB. 28 MARCH 1
1998 1997
- ------------------------------------------------------------------------------
Senior subordinated notes $ 150,000 $ 150,000
Subordinated notes 18,000 21,904
Equipment financing loans 35,578 39,649
Corporate headquarters financing 11,619 12,000
Obligations under capital leases 10,125 14,463
------------------------------
225,322 238,016
Current portion of long-term debt 14,925 21,391
------------------------------
$ 210,397 $ 216,625
------------------------------
------------------------------
CREDIT AGREEMENT:
The Company has a credit agreement (the "Agreement") that contains a bank
revolving credit facility under which the Company can borrow up to $365,000. The
Agreement provides that up to $250,000 of the facility is available at all
times, and an additional $115,000 is available from July 1 to December 31. The
Agreement expires in June 1998.
Borrowings under the facility are unsecured. Interest on borrowings is at rates
specified in the Agreement, as elected by the Company. The Company also pays
certain commitment and agent fees.
The Agreement contains covenants that require maintenance of certain financial
ratios and place limits on owned real estate and capital expenditures. The
Agreement also provides that once a year, for a period of not less than 45 days
thereafter, the aggregate principal amount outstanding is limited to $50,000.
There were no balances outstanding under the facility at February 28, 1998, or
March 1, 1997. The weighted average interest rate under the Company's current
and prior credit agreements was 8.67%, 6.86% and 7.11% for the fiscal years
1998, 1997 and 1996, respectively.
SENIOR SUBORDINATED NOTES:
The Company has $150,000 of senior subordinated notes outstanding. The notes
mature on October 1, 2000, and bear interest at 8.63%. The Company may, at its
option, prepay the notes at 102.50% of par after September 30, 1998, or at
101.25% of par after September 30, 1999. The Company may be required to offer
early redemption in the event of a change in control, as defined.
The notes are unsecured and subordinate to the prior payment of all senior debt,
which approximates $147,800 at February 28, 1998. The indenture also contains
provisions, which limit the amount of additional borrowings the Company may
incur and limit the Company's ability to pay dividends and make other restricted
payments.
SUBORDINATED NOTES:
The Company has an $18,000 unsecured, subordinated note outstanding which bears
interest at 9.95% and matures on July 30, 1999. In addition, the Company had
$3,904 of unsecured, subordinated notes bearing interest at 9.00% which matured
and were paid on June 15, 1997.
EQUIPMENT FINANCING LOANS:
The equipment financing loans require monthly or quarterly payments and have
maturity dates between March 1998 and March 2001. Interest rates on these loans
range from 5.65% to 9.41%. Furniture and fixtures with a book value of $28,400
are pledged against these loans.
OBLIGATIONS UNDER CAPITAL LEASES:
The present value of future minimum lease payments relating to certain equipment
and a distribution center has been capitalized. The capitalized cost was
approximately $29,000 both at February 28, 1998, and March 1, 1997. The net book
value of assets under capital leases was $10,200 and $13,900 at February 28,
1998, and March 1, 1997, respectively. Assets acquired under capital leases were
$0, $300 and $3,500 in fiscal 1998, 1997 and 1996, respectively.
CORPORATE HEADQUARTERS FINANCING:
The Company's corporate headquarters is financed with a 15-year mortgage at an
interest rate of 8.40%.
During fiscal 1998, 1997 and 1996, interest paid (net of amounts capitalized)
totaled $37,700, $50,900 and $44,800, respectively. The fair value of the
Company's senior subordinated notes was $153,400 at February 28, 1998, based on
quoted market prices. The fair value of all other financial instruments
approximates carrying value.
FUTURE MATURITIES OF DEBT:
FISCAL YEAR CAPITAL LEASES OTHER DEBT
- ------------------------------------------------------------------------------
1999 $ 2,031 $ 12,993
2000 586 29,594
2001 7,631 157,767
2002 18 4,251
2003 1,445
Thereafter 9,147
-------------------------------------
10,266 $ 215,197
Less amount representing interest 141 ---------------
---------------- ---------------
Minimum lease payments $ 10,125
----------------
----------------
28 Best Buy Co., Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
4. CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY
In November 1994, the Company and Best Buy Capital, L.P. (Best Buy Capital), a
special-purpose limited partnership in which the Company is the sole general
partner, completed the public offering of 4,600,000 convertible monthly income
preferred securities with a liquidation preference of $50 per security. The
underwriting discount and expenses of the offering aggregated $7,700. The
proceeds of the offering were loaned to the Company in exchange for a
subordinated debenture with payment terms substantially similar to the preferred
securities. Distributions on the securities are payable monthly at the annual
rate of 6.50% of the liquidation preference and are included in interest expense
in the consolidated financial statements. The securities are convertible into
shares of the Company's common stock at the rate of 2.222 shares per security
(equivalent to a conversion price of $22.50 per share). The preferred securities
are subject to mandatory redemption in November 2024 at the liquidation
preference price. The Company has the option to defer distributions on the
securities for up to 60 months. A deferral of distributions may result in the
conversion of the preferred securities into Series A Preferred Stock of the
Company. The Company has the right to cause the conversion rights to expire any
time after three years from the date of issuance in the event the Company's
common stock price exceeds $27 per share for 20 out of 30 consecutive trading
days. The common stock met this criteria in March 1998 and the Company issued
notice to holders of the preferred securities that the conversion rights would
expire on April 24, 1998.
5. SHAREHOLDERS' EQUITY
STOCK OPTIONS:
The Company currently sponsors two non-qualified stock option plans for
employees and one non-qualified plan for directors. These plans provide for the
issuance of up to 13,000,000 shares. Options may be granted only to employees or
directors at option prices not less than the fair market value of the Company's
common stock on the date of the grant. In addition, two plans expired in fiscal
1998 that still have outstanding options. At February 28, 1998, options to
purchase 8,372,000 shares are outstanding under all of these plans.
Pursuant to Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," the Company has elected to account for its stock
option plans under the provisions of APB Opinion No. 25 "Accounting for Stock
Issued to Employees." Accordingly, no compensation cost has generally been
recognized for the stock option plans. The Company has evaluated the pro forma
effects of Statement 123 and as such, net earnings, basic earnings per share and
diluted earnings per share would have been as follows:
1998 1997 1996
- -----------------------------------------------------------------------------
Net Earnings
As reported $ 94,453 $ 1,748 $ 48,019
Pro forma 88,614 (1,196) 46,052
Basic Earnings Per Share
As reported $ 1.08 $ .02 $ .56
Pro forma 1.01 (.01) .54
Diluted Earnings Per Share
As reported $ 1.04 $ .02 $ .55
Pro forma .98 (.01) .53
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
1998 1997 1996
- -----------------------------------------------------------------------------
Risk-free interest rate 6.8% 6.2% 6.9%
Expected dividend yield 0% 0% 0%
Expected stock price volatility 60% 40% 40%
Expected life of options 4.2 years 4.3 years 4.2 years
The pro forma effect on net earnings and earnings per share is not
representative of the pro forma net earnings in future years because it does not
take into consideration pro forma compensation expense related to grants made
prior to 1996.
The weighted average fair value of options granted during fiscal 1998, 1997 and
1996 used in computing pro forma compensation expense was $3.47, $2.52 and
$4.87 per share, respectively.
In February 1997, the Company canceled 3,278,000 options, representing
approximately half of the outstanding options granted to employees since April
1993, with exercise prices ranging from $5.60 to $19.10 and granted the same
number of new options with an exercise price of $4.31. Options issued to the
Company's CEO and president were not included in the repricing.
Best Buy Co., Inc. 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Option activity for the last three fiscal years is as follows:
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
- -----------------------------------------------------------------------------
Outstanding February. 25, 1995 7,540,000 $ 7.82
Granted 2,944,000 11.60
Exercised (1,250,000) 2.50
Canceled (694,000) 13.13
-------------
Outstanding March 2, 1996 8,540,000 9.47
Granted 5,330,000 6.11
Exercised (892,000) 3.08
Canceled (4,528,000) 11.22
-------------
Outstanding March 1, 1997 8,450,000 7.09
Granted 3,860,000 6.47
Exercised (2,678,000) 5.56
Canceled (1,260,000) 6.88
-------------
Outstanding February 28, 1998 8,372,000 $ 7.32
-------------
-------------
Excerscisable options at the end of fiscal 1998, 1997 and 1996 were 2,358,000,
2,930,000 and 4,652,000 respectively. The following table summarizes information
concerning currently outstanding and exercisable options:
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------
$0 to $5 2,448,000 3.81 $ 4.31 700,000 $ 4.31
$5 to $10 4,208,000 7.81 6.71 612,000 7.09
$10 to $15 1,156,000 2.52 11.60 606,000 11.60
$15 to $20 560,000 1.10 16.22 440,000 16.22
- -----------------------------------------------------------------------------------------------------
$0 to $20 8,372,000 5.46 $ 7.32 2,358,000 $ 9.13
EARNINGS PER SHARE:
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share," the following table presents a reconciliation of the
numerators and denominators of basic and diluted earnings per common share for
the fiscal years 1998, 1997 and 1996:
1998 1997 1996
- --------------------------------------------------------------------------------------------
Numerator:
Net earnings $ 94,453 $ 1,748 $ 48,019
Interest on preferred securities, net of tax 9,179
---------------------------------------------
Net earnings per share assuming dilution $ 103,632 $ 1,748 $ 48,019
Denominator:
Average common shares outstanding 87,708,000 86,344,000 85,240,000
Effect of dilutive securities:
Employee stock options 2,202,000 902,000 1,726,000
Preferred securities 10,216,000
---------------------------------------------
Average common shares outstanding
assuming dilution 100,126,000 87,246,000 86,966,000
Basic earnings per share $ 1.08 $ .02 $ .56
Diluted earnings per share $ 1.04 $ .02 $ .55
6. OPERATING LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company conducts essentially all of its retail and distribution operations
from leased locations. Transaction costs associated with the sale and leaseback
of properties and any gain or loss are recognized over the term of the lease
agreement. Proceeds from the sale/leaseback of properties are included in the
net change in recoverable costs from developed properties. The Company also
leases various equipment under operating leases. In addition, the Company had
leased 17 stores and a distribution center, along with the related fixtures and
equipment under a master lease agreement through February 1998. The initial
terms of the leases under this agreement ranged from one to five years, and rent
was variable based on interest rate options as selected by the Company. The
leases on these properties were terminated in fiscal 1998 and the properties
were re-leased under long-term leases. The Company purchased the fixtures and
equipment from the lessor. The leases require payment of real estate taxes,
insurance and common area maintenance. Most of the leases contain renewal
options and escalation clauses, and several require contingent rents based on
specified percentages of sales. Certain leases also contain covenants related to
maintenance of financial ratios.
The composition of total rental expenses for all operating leases during the
last three fiscal years, including leases of buildings and equipment, was as
follows:
1998 1997 1996
- -----------------------------------------------------------------------------
Minimum rentals $161,500 $139,200 $105,300
Percentage rentals 400 500 500
------------------------------------------
$161,900 $139,700 $105,800
------------------------------------------
------------------------------------------
30 Best Buy Co., Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
As of February 28, 1998 three stores are leased from the Company's CEO and
principal shareholder, his spouse, or partnerships in which he is a partner.
Rent under these leases during the last three fiscal years and two additional
stores, for which the leases expired in January 1996 and January 1998, was as
follows:
1998 1997 1996
- ------------------------------------------------------------------------------
Minimum rentals $1,000 $1,000 $1,100
Percentage rentals 300 400 400
-----------------------------------------
$1,300 $1,400 $1,500
-----------------------------------------
-----------------------------------------
Future minimum lease obligations by year (not including percentage rentals) for
all operating leases at February 28, 1998, are as follows:
FISCAL YEAR
- --------------------------------------------------------------------------
1999 $ 152,200
2000 153,000
2001 148,500
2002 147,000
2003 143,000
Later years 1,422,500
7. RETIREMENT SAVINGS PLAN
The Company has a retirement savings plan for employees meeting certain age and
service requirements. The plan provides for a Company-matching contribution,
which is subject to annual approval. This matching contribution was $2,100,
$2,000 and $1,700 during fiscal 1998, 1997 and 1996, respectively.
8. INCOME TAXES
Following is a reconciliation of the provision for income taxes to the federal
statutory rate:
1998 1997 1996
- ------------------------------------------------------------------------------
Federal income tax
at the statutory rate $53,849 $1,004 $27,646
State income taxes,
net of federal benefit 5,763 116 3,717
Tax exempt interest (1,038)
Jobs tax credit (574)
Other 826 181
------------------------------------------
Provision for income taxes $59,400 $1,120 $30,970
------------------------------------------
------------------------------------------
Effective tax rate 38.6% 39.0% 39.2%
------------------------------------------
------------------------------------------
The provision for income taxes consists of the following:
1998 1997 1996
- ------------------------------------------------------------------------------
Current: Federal $ 50,950 $ (5,100) $ 27,401
State 5,487 (581) 6,693
------------------------------------------
56,437 (5,681) 34,094
------------------------------------------
Deferred: Federal 2,687 6,103 (2,904)
State 276 698 (220)
------------------------------------------
2,963 6,801 (3,124)
------------------------------------------
Provision for income taxes $ 59,400 $ 1,120 $ 30,970
------------------------------------------
------------------------------------------
Deferred taxes are the result of differences between the basis of assets and
liabilities for financial reporting and income tax purposes. Significant
deferred tax assets and liabilities consist of the following:
FEB. 28 MARCH 1
1998 1997
- ------------------------------------------------------------------------------
Accrued expenses $ 13,294 $ 7,579
Deferred service plan revenue 9,125 18,811
Compensation and benefits 2,554 3,375
Inventory 1,872
Other - net 350 159
---------------------------------
Total deferred tax assets 27,195 29,924
---------------------------------
Property and equipment 17,067 15,697
Other - net 573 3,356
---------------------------------
Total deferred tax liabilities 17,640 19,053
---------------------------------
Net deferred tax assets $ 9,555 $ 10,871
---------------------------------
---------------------------------
The Internal Revenue Service (IRS) has taken a position that interest on
securities such as the subordinated debenture referred to in Note 4 is not
deductible for federal income tax purposes. The Company believes that the
interest is deductible and intends to contest the IRS' position. Income taxes
paid (received) were $12,700, ($8,600) and $45,900 in fiscal 1998, 1997 and
1996, respectively.
9. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising during the normal
course of conducting business. Management believes that the resolution of these
proceedings will not have any material adverse impact on the Company's financial
statements.
Best Buy Co., Inc. 31