SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
---------------
FISCAL PERIOD(1) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA
Revenues $10,077,906 $8,358,212 $7,770,683 $7,217,448 $5,079,557
Gross profit 1,827,783 1,332,138 1,058,881 936,571 690,393
Selling, general and
administrative expenses 1,463,281 1,145,280 1,005,675 813,988 568,466
Operating income 364,502 186,858 53,206 122,583 121,927
Earnings before cumulative effect
of accounting change 224,437 94,453 1,748 48,019 57,651
Net earnings (loss) 224,437 94,453 1,748 48,019 57,651
PER SHARE DATA(2)
Earnings before cumulative effect
of accounting change $ 1.07 $ .52 $ .01 $ .28 $ .32
Net earnings (loss) 1.07 .52 .01 .28 .32
Common stock price: High 49 15 19/64 6 9/16 7 13/32 11 5/16
Low 14 3/4 2 5/32 1 31/32 3 3/16 5 17/32
OPERATING AND OTHER DATA
Comparable store sales change(3) 13.5% 2.0% (4.7%) 5.5% 19.9%
Number of stores (end of period) 311 284 272 251 204
Average revenues per store(4) $ 33,700 $ 29,700 $ 29,300 $ 31,100 $ 28,400
Gross profit percentage 18.1% 15.9% 13.6% 13.0% 13.6%
Selling, general and administrative
expense percentage 14.5% 13.7% 12.9% 11.3% 11.2%
Operating income percentage 3.6% 2.2% .7% 1.7% 2.4%
Inventory turns(5) 6.6x 5.6x 4.6x 4.8x 4.7x
BALANCE SHEET DATA (AT PERIOD END)
Working capital $ 676,184 $ 676,601 $ 567,456 $ 586,841 $ 609,049
Total assets 2,512,493 2,056,346 1,734,307 1,890,832 1,507,125
Long-term debt, including
current portion 60,597 225,322 238,016 229,855 240,965
Convertible preferred securities -- 229,854 230,000 230,000 230,000
Shareholders' equity 1,064,134 557,746 438,315 431,614 376,122
- -----------------------------------------------------------------------------------------------------------------------
---------------
THIS TABLE SHOULD BE READ IN CONJUNCTION WITH MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, BEGINNING ON PAGE 22,
AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES, BEGINNING ON PAGE 29.
(1) FISCAL 1990 CONTAINED APPROXIMATELY 11 MONTHS BECAUSE THE COMPANY CHANGED
ITS FISCAL YEAR TO A 52/53 WEEK PERIOD ENDING ON THE SATURDAY NEAREST THE
END OF FEBRUARY. FISCAL 1996 CONTAINED 53 WEEKS. ALL OTHER PERIODS
PRESENTED CONTAINED 52 WEEKS.
(2) EARNINGS PER SHARE IS SHOWN ON A DILUTED BASIS AND REFLECTS TWO-FOR-ONE
STOCK SPLITS IN MARCH 1999, MAY 1998 AND APRIL 1994 AND A THREE-FOR-ONE
STOCK SPLIT IN SEPTEMBER 1993.
(3) COMPARABLE STORES ARE STORES OPEN AT LEAST 14 FULL MONTHS.
(4) AVERAGE REVENUES PER STORE ARE BASED UPON TOTAL REVENUES FOR THE PERIOD
DIVIDED BY THE WEIGHTED AVERAGE NUMBER OF STORES OPEN DURING SUCH PERIOD.
(5) INVENTORY TURNS ARE CALCULATED BASED UPON A MONTHLY AVERAGE OF INVENTORY
BALANCES.
(6) DURING FISCAL 1994, THE COMPANY ADOPTED SFAS NO. 109, "ACCOUNTING FOR
INCOME TAXES," RESULTING IN A CUMULATIVE EFFECT ADJUSTMENT OF ($425) OR
($.01) PER SHARE.
(7) DURING FISCAL 1991, THE COMPANY CHANGED ITS METHOD OF ACCOUNTING FOR
SERVICE PLANS, RESULTING IN A CUMULATIVE EFFECT ADJUSTMENT OF ($13,997) OR
($.15) PER SHARE.
BEST BUY CO., INC. 20
1994(6) 1993 1992 1991(7) 1990
- ------------------------------------------------------------------------------------------
$ 3,006,534 $ 1,619,978 $ 929,692 $ 664,823 $ 512,850
456,925 284,034 181,062 141,657 120,341
379,747 248,126 162,286 130,681 107,194
77,178 35,908 18,776 10,976 13,147
41,710 19,855 9,601 4,540 5,683
41,285 19,855 9,601 (9,457) 5,683
$ .26 $ .14 $ .08 $ .05 $ .06
.25 .14 .08 (.10) .06
7 55/64 3 59/64 2 61/64 59/64 47/64
2 23/32 1 11/64 43/64 3/8 15/32
26.9% 19.4% 14.0% 1.0% .3%
151 111 73 56 49
$ 22,600 $ 17,600 $ 14,300 $ 12,400 $ 11,500
15.2% 17.5% 19.5% 21.3% 23.5%
12.6% 15.3% 17.5% 19.7% 20.9%
2.6% 2.2% 2.0% 1.6% 2.6%
5.0x 4.8x 5.1x 4.5x 3.7x
$ 362,582 $ 118,921 $ 126,817 $ 64,623 $ 78,398
952,494 439,142 337,218 185,528 156,787
219,710 53,870 52,980 35,695 35,283
-- -- -- -- --
311,444 182,283 157,568 56,741 66,150
- ------------------------------------------------------------------------------------------
FISCAL 1999 BEST BUY ANNUAL REPORT 21
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Fiscal 1999 was an outstanding year, as the Company surpassed $10 billion in
revenues and generated record earnings. For the fiscal year ended February 27,
1999, earnings were $224.4 million, compared to $94.5 million in fiscal 1998 and
$1.7 million in fiscal 1997. Earnings per share on a diluted basis were $1.07 in
fiscal 1999, $.52 in fiscal 1998 and $.01 in fiscal 1997, and reflect
two-for-one stock splits on March 18, 1999 and May 26, 1998. The record results
can be attributed to the success of initiatives to increase profitability
through improvements in inventory management, retail operations and marketing
execution. These improvements enabled the Company to effectively capitalize on
strong consumer spending in fiscal 1999, nearly doubling operating income over
fiscal 1998 to $365 million. In addition, in fiscal 1999, the Company reduced
its long-term debt by more than $380 million, contributing to a decrease in net
interest of $33 million as compared to the previous year.
The following table presents selected revenue data for each of the last three
fiscal years ($ in thousands).
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Revenues $10,077,906 $8,358,212 $7,770,683
Percentage increase in revenues 21% 8% 8%
Comparable store sales change 13.5% 2.0% (4.7%)
Average revenues per store $ 33,700 $ 29,700 $ 29,300
-------------
Sales in fiscal 1999 increased 21% to $10.078 billion, compared to $8.358
billion in fiscal 1998, principally due to the 13.5% increase in comparable
store sales, the addition of 28 new stores and a full year of operations at the
13 stores opened in fiscal 1998. The comparable store sales gain was the result
of strong consumer spending, market share gains and improvements in the
Company's operating model. Double-digit comparable store sales gains occurred in
each quarter of fiscal 1999 as all major categories generated comparable store
sales increases. Increased affordability of products, including personal
computers and consumer electronics, contributed to the sales increase along with
strong consumer response to new technology such as Digital Versatile Disc (DVD),
digital phones and digital cameras. The Company gained market share in fiscal
1999 as a result of more effective advertising, better product in-stock
positions and a more customer-focused product assortment, as well as the
continued consolidation and closing of competing retailers. New stores opened in
fiscal 1999 included entry into the New England market with eight stores;
Nashville, TN, with three stores; and one store each in Syracuse, NY;
Charleston, SC; and Wausau, WI. The other new stores were opened in existing
markets.
Fiscal 1998 sales were 8% higher than the $7.771 billion reported in fiscal
1997, as comparable store sales increased 2.0% 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 gain was the result of increased consumer
demand, particularly in the second half of the year, as well as improved retail
selling strategies. 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 contributed to the comparable store sales
increase in fiscal 1998.
The following table shows the Company's retail store sales mix by major product
category for each of the past three fiscal years.
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Home Office 36% 38% 39%
Consumer Electronics - Video 16% 15% 17%
Consumer Electronics - Audio 11% 11% 12%
Entertainment Software 20% 20% 18%
Appliances 8% 9% 9%
Other 9% 7% 5%
- ---------------------------------------------------------------------------------------------------
Total 100% 100% 100%
-------------
BEST BUY CO., INC. 22
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Sales in the home office product category continued to grow in fiscal 1999,
although the category declined from 38% of total sales in fiscal 1998 to 36% in
fiscal 1999. Sales of personal computers increased over the previous year as an
increase in units sold more than offset the 16% decline in average selling
price. The introduction of computer packages below $1,000 and the increasing
popularity of the Internet attracted new, as well as second-time, computer
buyers. More effective management of the transition to new models led to a
product offering that better satisfied consumer demand. Higher unit volumes,
combined with improved merchandising and selling strategies, resulted in higher
sales of the additional products and services that complement the sale of
computer hardware and generate additional profit from the computer sale
transaction. The Company's new configure-to-order process for personal computers
enabled expansion of the computer assortment to satisfy more knowledgeable
computer buyers. Increased sales of digital phones, pagers and other new
technology products were also factors in the overall increase in this category.
Sales of digital technology and products that enhance the consumer's home
theater experience drove the video and audio product categories' sales growth in
fiscal 1999. Sales of televisions, particularly big-screen televisions which
became more affordable in fiscal 1999 as unit prices decreased, generated
double-digit comparable store sales increases as consumers sought a richer
listening and viewing experience. Camcorder and digital satellite system sales
increased in fiscal 1999 driven by lower selling prices, product improvements
and sales assistance provided to the customer in the stores' "high touch" sales
area. Lower selling prices and an increased assortment of DVD movie titles
resulted in rapid consumer acceptance of DVD hardware. DVD represents one of the
initial products in consumer electronics to transition from analog to digital
technology. The Company introduced Digital Television (DTV) to its customers in
selected markets in fiscal 1999. DTV represents a significant opportunity for
future growth, although the high initial selling prices for this new technology
will likely result in only a minimal impact on total sales in fiscal 2000.
Sales of entertainment software, which includes recorded music and movies,
computer software and video games, maintained its sales growth rate with a 24%
increase in sales in fiscal 1999 as compared to fiscal 1998. Sales of recorded
music were driven by a higher demand for new releases. Sales of DVD movies and
video game software and equipment also contributed to the overall sales
increase. Strong new movie releases such as "Titanic" also contributed to the
sales gains. DVD software sales grew significantly in fiscal 1999 due to the
increase in DVD players sold and the growth in available DVD titles from 500 to
over 1,500. Video game software and peripherals sales increased as a result of
the continued growth of the Nintendo 64 and Sony Playstation formats. The
Company also began selling recorded music and DVD movies on its Internet
shopping site in fiscal 1999. While not generating significant sales volume,
management believes the Internet is another revenue growth opportunity.
The major appliance product category generated a double-digit comparable store
sales increase in fiscal 1999, performing better than the industry as a whole.
The addition of the Whirlpool appliance line in the second quarter of fiscal
1999 strengthened the Company's appliance assortment. A strong economy, faster
product turns and better service levels all contributed to increased sales.
FISCAL 1999 BEST BUY ANNUAL REPORT 23
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The "other" category includes sales of Performance Service Plans (PSPs), which
increased from 3.0% of sales in fiscal 1998 to 3.7% of sales in fiscal 1999 as a
result of the continued focus on the presentation of plans to customers and
higher product sales across all categories. Higher quality, more affordable
digital cameras, the expansion of the Company's ready-to-assemble furniture
assortment and better merchandising of consumables, such as blank tapes, also
contributed to the overall sales gains in this category.
COMPONENTS OF OPERATING INCOME
The following table shows selected operating ratios as a percentage of sales for
the last three fiscal years.
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Gross profit margin 18.1% 15.9% 13.6%
Selling, general and administrative expenses 14.5% 13.7% 12.9%
Operating income 3.6% 2.2% .7%
-------------
Gross profit margin was 18.1% of sales in fiscal 1999, an improvement of 2.2% of
sales from fiscal 1998. This increase was mainly due to the impact from
initiatives to generate a more profitable product assortment, faster turning
inventory and increased advertising effectiveness. For the second consecutive
year, inventory turns increased by one full turn, to 6.6 turns in fiscal 1999
compared to 5.6 turns in fiscal 1998 and 4.6 turns in fiscal 1997. This increase
in inventory turns resulted in fewer markdowns, particularly during product
model transitions. The increase in sales of higher margin PSPs also contributed
to the improvement in gross profit margin. Another factor in the gross profit
margin improvement was lower inventory shrink as a result of better execution at
the retail stores. The Company anticipates further improvement in the gross
profit margin rate in fiscal 2000 as it continues to realize benefits from its
strategic initiatives, although the rate of gross profit margin improvement will
be less than the significant increases in the past two years.
Gross profit margin of 15.9% in fiscal 1998 improved from 13.6% in fiscal 1997,
a gain that was driven by greatly improved inventory management, particularly in
the personal computer product category. A less promotionally driven sales
environment, lower inventory shrink and an increase in sales of PSPs also
contributed to the gross margin improvement.
Selling, general and administrative expenses (SG&A) increased to 14.5% of sales
in fiscal 1999 compared to 13.7% of sales in fiscal 1998, primarily as a result
of higher payroll-related expenses and an increase in professional services. The
increase in payroll-related expenses was primarily due to an increase in overall
financial performance-based compensation, higher levels of compensation
resulting from building a higher caliber staff at the retail stores and labor
market conditions. Additionally, a full year operation of the retail stores'
"high touch" area and expenses associated with an increased number of store
openings contributed to higher personnel costs. Professional services costs
increased due to the Company's initiatives to improve operating performance and
implement business process improvements. The Company also increased its spending
on outside consultants to help improve technical services operations and enhance
management training and development. The Company's spending on Year 2000 system
issues also increased in fiscal 1999. Management believes that the investment in
strategic initiatives has improved the Company's operating model and has
resulted in the gross profit margin gains. The returns from the increased
investment in SG&A are reflected in the improvement in operating income to 3.6%
of sales in fiscal 1999 from 2.2% in fiscal 1998.
SG&A is anticipated to increase in fiscal 2000 as the Company continues to
invest in new information systems, operational improvements, technical services
enhancements and its E-commerce initiative. The outside consultants that had
been assisting the Company with its retail and marketing initiatives over the
past three years have been engaged in a multi-year project to improve the
operations and financial performance of the Company's service division.
Management expects the additional investment in SG&A will be adequately funded
by the anticipated increase in gross profit margin.
BEST BUY CO., INC. 24
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The increase in the SG&A ratio in fiscal 1998 compared to fiscal 1997 also was
due primarily to higher levels of compensation and professional services.
Compensation increased due to a tight labor market and the introduction of the
dedicated staff in the "high touch" area of the stores. Professional service
expenses were incurred to improve marketing effectiveness and retail operations,
in addition to addressing Year 2000 system issues.
Net interest improved by $33 million in fiscal 1999 as compared to fiscal 1998,
in part due to the conversion of the Company's $230 million in preferred
securities into equity in the first quarter of fiscal 1999. Improvements in
inventory management and strong sales enabled the Company to build significant
cash balances and prepay its $150 million 8-5/8% Senior Subordinated Notes in
October 1998. The prepayment premium of $3.8 million and the write-off of the
remaining deferred debt offering costs of approximately $1.1 million are
included in interest expense. The conversion and retirement of these two
long-term financings reduces interest expense by about $28 million annually. In
addition, the higher cash balances generated increased interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's effective income tax rate in fiscal 1999 was 38.5%, basically
unchanged compared to 38.6% in fiscal 1998 and down from 39.0% in fiscal 1997.
The Company's effective tax rate is impacted by changes in the taxability of
investment income and state income tax rates.
The Company significantly improved its financial position and liquidity in
fiscal 1999 as a result of strong earnings growth and continued improvement in
inventory management. The Company used the cash generated from operations to
repay debt and fund capital spending while increasing cash and cash equivalents
by $266 million. The conversion of preferred securities into common stock
contributed to the Company surpassing $1 billion in shareholders' equity.
Inventories of just over $1 billion at the end of fiscal 1999 were essentially
unchanged from the previous year-end even with the operation of 28 new stores
and higher sales volumes, due to improved inventory management. Owned inventory
(inventory net of accounts payable) also improved as a result of faster
inventory turns.
Trade receivables, mainly credit card and vendor-related receivables, increased
$37 million due to an increase in volume in the fourth quarter of fiscal 1999,
as sales increased 21% over the previous year. 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. Other assets increased as a result of insurance policies purchased
in connection with the Company's deferred compensation plan, established in
fiscal 1999.
Trade payables increased, as compared to the previous year-end, due to increased
business volume. Accrued liabilities increased compared to the previous year-end
as a result of expenses associated with higher performance-based compensation
related to the strong financial performance in fiscal 1999, the higher levels of
business activity and expenses for the Company's strategic initiatives.
The increase in long-term liabilities was principally the result of the excess
of rent expense for accounting purposes over cash paid and the newly established
deferred compensation plan. Deferred service plan revenue declined by $17
million as deferred revenues related to service plans sold prior to the fourth
quarter of fiscal 1996, when the Company began insuring these obligations, were
recognized. Revenues from PSP sales from that time forward are recognized when
a sale is consummated, rather than over the life of the contract. The remaining
$5.6 million of deferred revenue will be recognized in fiscal 2000.
FISCAL 1999 BEST BUY ANNUAL REPORT 25
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Capital spending in fiscal 1999 was $166 million, compared to $72 million in
fiscal 1998 and $88 million in fiscal 1997. The Company increased its expansion
program in fiscal 1999 after the initiatives to improve operations resulted in
an enhanced operating model. In addition to opening 28 new stores and remodeling
or relocating five new stores in fiscal 1999, the Company began development of
approximately 45 stores scheduled to open in fiscal 2000. The majority of the
stores opened in fiscal 1999 incorporated the features of the Company's new
Concept IV store format. This new format, while retaining the 45,000-square-foot
size, features improved merchandising, signage and customer service and is
expected to better address consumers needs as the industry progresses into new
digital products. The Company also continued to invest in its information
systems and distribution facilities to support growing business requirements.
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 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
28,000 square feet 43 48 54
36,000 square feet 34 34 34
45,000 square feet 182 150 132
58,000 square feet 52 52 52
- ---------------------------------------------------------------------------------------------------
Total number of stores at year end 311 284 272
Average store size (in square feet) 43,700 43,200 42,800
-------------
The Company's practice is to lease rather than own real estate; however, for
those sites developed using working capital, the Company sells and leases back
those properties under long-term leases. The costs of development are classified
as recoverable costs from developed properties and are included in current
assets. Based on the number of store openings in both fiscal 1999 and 2000,
recoverable costs from developed property increased by $66 million in fiscal
1999. The increase also includes the cost of new Dinuba, CA, distribution
facility that opened in April 1999.
Capital spending for fiscal 2000 is expected to exceed $300 million, exclusive
of amounts to be recovered through subsequent sales and leasebacks, to support
the Company's plans to open new stores and remodel or relocate selected stores
to its new Concept IV format. The new stores scheduled to open in fiscal 2000
include entry into the markets of San Francisco, San Diego and Sacramento, CA;
northern Florida; upstate New York; and Richmond and Norfolk, VA. The Company
also plans to remodel or relocate approximately 20 stores to larger facilities.
Included in its expansion plans, the Company will test four 30,000-square-foot
small market format stores in markets with populations between 100,000 and
200,000. These stores are expected to offer a narrowed assortment of the same
product categories as the larger stores. The Company will also be investing in
information systems to support the development of its E-commerce business and
improve its services division.
In the first quarter of fiscal 1999, essentially all of the Company's preferred
securities were converted into common stock, resulting in the issuance of
approximately 20.4 million common shares. This conversion increased
shareholders' equity by over $220 million, net of the remaining $6.8 million in
deferred issuance costs. The remaining preferred securities were redeemed in
June 1998 for cash of $671,000. In October 1998, the Company prepaid its $150
million 8-5/8% Senior Subordinated Notes, due in October 2000.
In October 1998, the Company's Board of Directors authorized the purchase of up
to $100 million of the Company's common stock. Through February 27, 1999,
125,000 shares at a cost of $2.5 million have been purchased.
In May 1998, the Company entered into a new, unsecured $220 million revolving
credit facility, replacing the $365 million facility that was scheduled to
mature in June 1998. The Company was able to reduce the size of the facility due
to improved operating performance and better inventory management. The new
facility is scheduled to mature in June 2000, can be extended for one year if
certain conditions are met and may be reduced at the Company's option.
Management believes that funds generated by the expected results of operations
and available cash and cash equivalents will be sufficient to finance the
Company's anticipated expansion plans for the upcoming year. The revolving
credit facility and the Company's inventory financing program are also available
for additional working capital needs or opportunities.
BEST BUY CO., INC. 26
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
YEAR 2000 READINESS
The Company understands the material nature of the business issues surrounding
computer processing of dates into and beyond the year 2000 (Y2K). Any computer
program or computer chip-controlled device could harbor a Y2K processing issue.
Typically, Y2K issues arise from systems or software processing only two digits
representing a year. The absence of century digits (e.g., "19" for years
1900-1999, or "20" for years beginning in 2000) usually leads to false results
from computer-controlled systems. This is the most pervasive issue.
The Company recognized that Y2K issues existed within its computer programs and
computer chip controlled devices and has taken corrective action. The Company's
actions to address Y2K issues began with the selection of a nationally
recognized, experienced computer hardware and consulting firm to assist in both
identifying and resolving these issues. The Company developed specific and
detailed plans to correct Y2K issues and management believes, to date, the
Company has made significant progress.
The majority of the Company's business processing applications operate on
mainframe computer systems. Over five million lines of computer programming were
scanned and analyzed to identify Y2K issues in these systems. In the past year,
corrective programming logic to replace existing computer code for these Y2K
issues has been installed and this effort is over 95% complete. Corrected logic
was tested as changes were made. This portion of the Company's plan was
completed at a total cost of approximately $9 million in outside professional
fees, of which the majority were incurred in fiscal 1999. In addition, the
Company has dedicated a staff of its internal resources to address Y2K issues.
Although the change to the calendar year 2000 is responsible for the majority of
the Y2K issues, the Company's systems are fully functional in its current fiscal
year 2000.
The Company is also replacing or installing certain computer hardware and
software which will address new business applications, as well as Y2K issues.
The timing of some of these projects has been accelerated to meet Y2K
compliance. The Company expects to fund both the capital and expensed elements
of resolving Y2K issues through funds generated from operations.
In addition to the mainframe system Y2K issues, the Company has substantially
completed efforts to identify non-mainframe computer system Y2K issues and other
potential Y2K issues. These issues include the Company's communication systems
and operating systems at and between the Company's locations and support
facilities. The Company has corresponded with its business partners, including
merchandise suppliers and service providers to assess their ability to support
the Company's operations with respect to their individual Y2K issues. These
issues include data exchange with the Company, as well as the partners'
production and shipping processes. The issues that were identified as part of
this process have been prioritized in order of significance to the Company's
operations and corrective action is being taken as appropriate. This portion of
the Company's plan is expected to be completed at a total cost of approximately
$8 million, of which the majority will be incurred in fiscal 2000.
The Company generally believes that the vendors that supply products to the
Company for resale are responsible for the Y2K functionality of those products.
However, should product failures occur, the Company may be required to address
the administrative aspects of those failures such as handling product returns or
repairs.
While the Company believes that it is pursuing the appropriate courses of action
to ensure Y2K readiness, there can be no assurance that the objective will be
achieved either internally or as it relates to business partners. Also, the
Company can provide no assurance regarding potential impact on consumer spending
that may result from concerns regarding the Y2K functionality of products. For
the Y2K issues which, if not timely resolved, could have a significant impact on
the Company's operations, the Company is continuing to develop contingency plans
to minimize the impact of failure to achieve Y2K compliance. The Company has
also devoted significant attention to planning for what could be the result of
the most adverse consequence of Y2K issues. Management believes that adequate
contingency plans are being developed to minimize the financial impact to the
Company.
FISCAL 1999 BEST BUY ANNUAL REPORT 27
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
QUARTERLY RESULTS AND SEASONALITY
Similar to most retailers, the Company's business is seasonal. Revenues and
earnings are lower during the first half of each fiscal year and are greater
during the second half, which includes the holiday selling season. The timing of
new store openings and general economic conditions may affect future quarterly
results of the Company.
The following tables set forth the Company's unaudited quarterly operating
results and high and low common stock prices for each quarter of fiscal 1999 and
1998.
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; PER SHARE AMOUNTS HAVE BEEN ADJUSTED
FOR A TWO-FOR-ONE STOCK SPLIT IN MARCH 1999)
QUARTER 1ST 2ND 3RD 4TH
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
FISCAL 1999
Revenues $1,943,664 $2,182,124 $ 2,493,843 $3,458,275
Gross profit 354,219 410,349 445,591 617,624
Operating income 28,065 72,795 91,606 172,036
Net earnings 15,725 44,135 54,389 110,188
Diluted earnings per share .08 .21 .26 .52
- -----------------------------------------------------------------------------------------------------------
FISCAL 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
Diluted earnings (loss) per share (.02) .04 .14 .32
Common Stock Prices
QUARTER 1ST 2ND 3RD 4TH
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
FISCAL 1999
High $ 19 $ 27 13/32 $ 29 27/32 $ 49
Low 14 3/4 14 7/8 16 23 7/16
- -----------------------------------------------------------------------------------------------------------
FISCAL 1998
High $ 3 19/32 $ 4 3/8 $ 7 9/16 $ 15 19/64
Low 2 5/32 2 13/16 4 7/32 7 9/32
Best Buy's common stock is traded on the New York Stock Exchange, symbol BBY. As
of March 31, 1999, there were 1,656 holders of record of Best Buy common stock.
The Company has not historically and does not intend to pay 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, its Year 2000 readiness, the impact of labor markets
and new product introductions on the Company's overall profitability. Readers
are encouraged to review the Company's Current Report on Form 8-K filed on May
15, 1998, that describes additional important factors that could cause actual
results to differ materially from those contemplated by the statements made
herein.
BEST BUY CO., INC. 28
CONSOLIDATED BALANCE SHEETS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
--------------
FEB. 27 FEB. 28
ASSETS 1999 1998
- -------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 785,777 $ 520,127
Receivables 132,401 95,702
Recoverable costs from developed properties 73,956 8,215
Merchandise inventories 1,046,366 1,060,788
Other current assets 24,591 25,445
-----------------------------------------
Total current assets 2,063,091 1,710,277
PROPERTY AND EQUIPMENT
Land and buildings 23,158 19,977
Leasehold improvements 174,495 160,202
Furniture, fixtures and equipment 505,232 372,314
Property under capital leases 29,079 29,079
-----------------------------------------
731,964 581,572
Less accumulated depreciation and amortization 308,324 248,648
-----------------------------------------
Net property and equipment 423,640 332,924
OTHER ASSETS 25,762 13,145
-----------------------------------------
TOTAL ASSETS $2,512,493 $2,056,346
=========================================
--------------
--------------
LIABILITIES AND FEB. 27 FEB. 28
SHAREHOLDERS' EQUITY 1999 1998
- -------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $1,011,746 $ 762,652
Accrued compensation and related expenses 86,667 48,772
Accrued liabilities 211,555 182,719
Income taxes payable 46,851 24,608
Current portion of long-term debt 30,088 14,925
-----------------------------------------
Total current liabilities 1,386,907 1,033,676
LONG-TERM LIABILITIES 30,943 24,673
LONG-TERM DEBT 30,509 210,397
CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY -- 229,854
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value:
Authorized - 400,000 shares;
Issued and outstanding - none -- --
Common stock, $.10 par value:
Authorized - 400,000,000 shares;
Issued and outstanding 203,621,000
and 178,504,000 shares, respectively 10,181 4,463
Additional paid-in capital 542,377 266,144
Retained earnings 511,576 287,139
-----------------------------------------
Total shareholders' equity 1,064,134 557,746
-----------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,512,493 $2,056,346
=========================================
--------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FISCAL 1999 BEST BUY ANNUAL REPORT 29
CONSOLIDATED STATEMENTS OF EARNINGS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
--------------
FEB. 27 FEB. 28 MARCH 1
FOR THE FISCAL YEARS ENDED 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
REVENUES $10,077,906 $8,358,212 $7,770,683
COST OF GOODS SOLD 8,250,123 7,026,074 6,711,802
---------------------------------------------------------------
GROSS PROFIT 1,827,783 1,332,138 1,058,881
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,463,281 1,145,280 1,005,675
---------------------------------------------------------------
OPERATING INCOME 364,502 186,858 53,206
NET INTEREST INCOME (EXPENSE) 435 (33,005) (50,338)
---------------------------------------------------------------
EARNINGS BEFORE INCOME TAX EXPENSE 364,937 153,853 2,868
INCOME TAX EXPENSE 140,500 59,400 1,120
---------------------------------------------------------------
NET EARNINGS $ 224,437 $ 94,453 $ 1,748
===============================================================
BASIC EARNINGS PER SHARE $ 1.13 $ .54 $ .01
DILUTED EARNINGS PER SHARE $ 1.07 $ .52 $ .01
BASIC WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (000'S) 199,185 175,416 172,686
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (000'S) 210,006 200,251 174,491
--------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BEST BUY CO., INC. 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
$ IN THOUSANDS
--------------
FEB. 27 FEB. 28 MARCH 1
FOR THE FISCAL YEARS ENDED 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 224,437 $ 94,453 $ 1,748
Depreciation, amortization and
other non-cash charges 78,367 71,584 67,312
---------------------------------------------------
302,804 166,037 69,060
Changes in operating assets and liabilities:
Receivables (36,699) (16,121) 41,857
Merchandise inventories 14,422 71,271 69,083
Other current assets 854 4,657 8,174
Accounts payable 249,094 147,340 (152,491)
Other liabilities 109,713 43,500 (26,053)
Income taxes payable 22,243 33,759 3,579
---------------------------------------------------
Total cash provided by
operating activities 662,431 450,443 13,209
---------------------------------------------------
INVESTING ACTIVITIES
Additions to property and equipment (165,698) (72,063) (87,593)
(Increase) decrease in recoverable costs
from developed properties (65,741) 45,270 72,752
(Increase) decrease in other assets (18,128) 4,494 (5,593)
---------------------------------------------------
Total cash used in investing activities (249,567) (22,299) (20,434)
---------------------------------------------------
FINANCING ACTIVITIES
Long-term debt payments (165,396) (22,694) (25,694)
Long-term debt borrowings -- 10,000 33,542
Common stock issued 20,644 14,869 2,740
Repurchase of common stock (2,462) -- --
---------------------------------------------------
Total cash (used in) provided by
financing activities (147,214) 2,175 10,588
---------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 265,650 430,319 3,363
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 520,127 89,808 86,445
---------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 785,777 $ 520,127 $ 89,808
===================================================
--------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FISCAL 1999 BEST BUY ANNUAL REPORT 31
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND INDEPENDENT AUDITOR'S REPORT
$ IN THOUSANDS
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
- -------------------------------------------------------------------------------------------------------
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
FEBRUARY 28, 1998 4,463 266,144 287,139
Stock options exercised 199 21,381 --
Tax benefit from stock options exercised -- 40,428 --
Conversion of preferred securities 509 221,896 --
May 1998 two-for-one stock split 5,016 (5,016) --
Repurchase of common stock (6) (2,456) --
Net earnings -- -- 224,437
------------------------------------------------------------
BALANCES AT
FEBRUARY 27, 1999 $ 10,181 $ 542,377 $ 511,576
============================================================
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 27, 1999, and February 28, 1998, and the related
consolidated statements of earnings, changes in shareholders' equity, and cash
flows for each of the three years in the period ended February 27, 1999. 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 27, 1999, and February 28, 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
February 27, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 30, 1999
BEST BUY CO., INC. 32
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 principally through its retail stores.
Accordingly, additional disclosures under Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and
Related Information," are not required.
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 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
estimated undiscounted cash flows from the asset.
PRE-OPENING COSTS:
The Company adopted Statement of Position (SOP) 98-5, "Reporting on the Cost of
Start-Up Activities," during the first quarter of fiscal 1999. The SOP requires
the costs of start-up activities, including store opening costs, to be expensed
in the period incurred. The Company historically deferred and amortized those
costs over interim periods in the year the store opened. Annual results were not
materially impacted by the adoption.
ADVERTISING COSTS:
Advertising costs, included in selling, general and administrative expenses, are
expensed as incurred.
PERFORMANCE SERVICE PLANS:
The Company sells 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.
FISCAL 1999 BEST BUY ANNUAL REPORT 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
EARNINGS PER SHARE:
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.
Convertible preferred securities were assumed to be converted into common stock
and any interest expense thereon, net of related taxes, was added back to net
earnings when such conversion resulted in dilution.
STOCK SPLITS:
The Company completed a two-for-one stock split effected in the form of a 100%
stock dividend distributed on May 26, 1998. In addition, on February 19, 1999,
the Company's Board of Directors authorized another two-for-one stock split
effected in the form of a 100% stock dividend distributed on March 18, 1999. All
share and per share information reflects these stock splits.
STOCK OPTIONS:
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for stock options and
presents in Note 5 pro forma net earnings and earnings per share as if the
Company had adopted SFAS No. 123, "Accounting for Stock-Based Compensation."
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 consolidated balance sheet and statement of
earnings, as well as the disclosure of contingent liabilities. Actual results
could differ from these estimates and assumptions.
FISCAL YEAR:
The Company's fiscal year ends on the Saturday nearest the end of February.
RECLASSIFICATIONS:
Certain previous year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no impact on net earnings or
total shareholders' equity.
2. WORKING CAPITAL FINANCING
CREDIT AGREEMENT:
The Company has a credit agreement (the Agreement) that provides a bank
revolving credit facility under which the Company can borrow up to $220,000. The
Agreement expires on June 30, 2000 and can be extended for one year upon meeting
certain requirements. 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 requires that the Company reduce the outstanding principal
balance for a period not less than 30 consecutive days to not more than $50,000,
net of cash and cash equivalents. There were no borrowings under the facility
during fiscal 1999. The weighted average interest rates on borrowings under the
Company's prior credit agreements were 8.67% and 6.86% for fiscal 1998 and 1997,
respectively.
INVENTORY FINANCING:
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. The amounts extended generally bear
interest at a rate approximating the prime rate. No amounts were extended under
this facility in fiscal 1999. The line has provisions that give the financing
source a portion of the cash discounts provided by the manufacturers.
BEST BUY CO., INC. 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
3. LONG-TERM DEBT
--------------
FEB. 27 FEB. 28
1999 1998
- --------------------------------------------------------------------------------------
Senior Subordinated Notes $ -- $ 150,000
Other 60,597 75,322
-----------------------------------------
60,597 225,322
Current portion of long-term debt 30,088 14,925
-----------------------------------------
$ 30,509 $ 210,397
=========================================
--------------
SENIOR SUBORDINATED NOTES:
On October 5, 1998, the Company prepaid its $150,000, 8-5/8% Senior Subordinated
Notes due October 1, 2000, at 102.5% of their par value. The prepayment premium
of $3,750 and the write-off of the remaining deferred debt offering costs of
approximately $1,100 are included in interest expense in fiscal 1999.
OTHER:
At February 27, 1999, long-term debt consists of a subordinated note, capital
leases and other loans that bear interest at rates ranging from 5.25% to 9.95%.
The subordinated note is unsecured and matures in July 1999. The capital leases
and other loans are secured by certain property and equipment with a net book
value of $42,900 and $54,100 at February 27, 1999 and February 28, 1998,
respectively.
During fiscal 1999, 1998 and 1997, interest paid (net of amounts capitalized)
totaled $23,800, $37,700 and $50,900, respectively. The fair value of long-term
debt approximates carrying value.
FUTURE MATURITIES OF LONG-TERM DEBT:
FISCAL YEAR CAPITAL LEASES OTHER
- --------------------------------------------------------------------------------------
2000 $ 693 $ 29,395
2001 7,542 8,167
2002 -- 4,251
2003 -- 1,445
2004 -- 895
Thereafter -- 8,251
-----------------------------------------
8,235 $ 52,404
=============
Less amount representing interest 42
--------------
Minimum lease payments $ 8,193
==============
4. CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY
In November 1994, the Company and Best Buy Capital, L.P., 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 securities were
convertible into shares of the Company's common stock at the rate of 4.444
shares per security (equivalent to a conversion price of $11.25 per share). In
April 1998, substantially all of the preferred securities were converted into
approximately 20.4 million shares of common stock. The remaining preferred
securities were redeemed in June 1998 for cash of $671.
FISCAL 1999 BEST BUY ANNUAL REPORT 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
5. SHAREHOLDERS' EQUITY
STOCK OPTIONS:
The Company currently sponsors two non-qualified stock option plans for
employees and one non-qualified stock option plan for directors. These plans
provide for the issuance of up to 48,800,000 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 27,
1999, options to purchase 19,139,000 shares are outstanding under all of these
plans.
Pursuant to SFAS No. 123, the Company has elected to account for its stock
option plans under the provisions of APB Opinion No. 25. Accordingly, no
compensation cost has generally been recognized for stock options granted. Had
the Company adopted SFAS No. 123, the pro forma effects on net earnings, basic
earnings per share and diluted earnings per share would have been as follows:
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
NET EARNINGS
AS REPORTED $ 224,437 $ 94,453 $ 1,748
PRO FORMA 209,412 88,614 (1,196)
BASIC EARNINGS PER SHARE
AS REPORTED $ 1.13 $ .54 $ .01
PRO FORMA 1.05 .51 (.01)
DILUTED EARNINGS PER SHARE
AS REPORTED $ 1.07 $ .52 $ .01
PRO FORMA 1.00 .49 (.01)
-------------
The fair value of each option was estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions:
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
RISK-FREE INTEREST RATE 5.6% 6.8% 6.2%
EXPECTED DIVIDEND YIELD 0% 0% 0%
EXPECTED STOCK PRICE VOLATILITY 50% 60% 40%
EXPECTED LIFE OF OPTIONS 4.9 years 4.2 years 4.3 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 1999, 1998 and
1997 used in computing pro forma compensation expense was $8.58, $1.74 and $1.26
per share, respectively.
In February 1997, the Company canceled 6,556,000 options, representing
approximately half of the outstanding options granted to employees since April
1993, with exercise prices ranging from $2.80 to $9.55 and granted the same
number of new options with an exercise price of $2.16. Options issued to the
Company's CEO and president were not included in the repricing.
BEST BUY CO., INC. 36
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 MARCH 2, 1996 17,080,000 $ 4.74
GRANTED 10,660,000 3.05
EXERCISED (1,784,000) 1.54
CANCELED (9,056,000) 5.61
--------------
OUTSTANDING MARCH 1, 1997 16,900,000 3.54
GRANTED 7,720,000 3.24
EXERCISED (5,356,000) 2.78
CANCELED (2,520,000) 3.44
--------------
OUTSTANDING FEBRUARY 28, 1998 16,744,000 3.66
GRANTED 9,423,000 17.27
EXERCISED (4,909,000) 4.56
CANCELED (2,119,000) 9.74
--------------
OUTSTANDING FEBRUARY 27, 1999 19,139,000 9.46
--------------
--------------
Exercisable options at the end of fiscal 1999, 1998 and 1997 were 5,038,000,
4,716,000 and 5,860,000, respectively. The following table summarizes
information concerning options outstanding and exercisable as of February 27,
1999:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -----------------------------------------------------------------------------------------
$0 to $5 9,214,000 5.68 $ 2.91 3,746,000 $ 2.83
$5 to $10 1,559,000 1.76 5.90 1,132,000 5.91
$10 to $15 58,000 8.99 14.36 10,000 14.10
$15 to $20 8,162,000 9.16 17.21 150,000 17.39
$20 to $25 95,000 9.58 23.66 -- --
$25 to $30 21,000 9.69 25.31 -- --
$30 to $35 30,000 9.86 31.75 -- --
- -----------------------------------------------------------------------------------------
$0 to $35 19,139,000 6.88 $ 9.46 5,038,000 $ 3.98
EARNINGS PER SHARE:
The following table presents a reconciliation of the numerators and denominators
of basic and diluted earnings per common share for fiscal 1999, 1998 and 1997:
----------
1999 1998 1997
- -------------------------------------------------------------------------------------------------
NUMERATOR:
NET EARNINGS $ 224,437 $ 94,453 $ 1,748
INTEREST ON PREFERRED SECURITIES, NET OF TAX 771 9,179 --
- -------------------------------------------------------------------------------------------------
NET EARNINGS ASSUMING DILUTION $ 225,208 $ 103,632 $ 1,748
DENOMINATOR (000's):
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 199,185 175,416 172,686
EFFECT OF DILUTIVE SECURITIES:
EMPLOYEE STOCK OPTIONS 8,726 4,404 1,805
PREFERRED SECURITIES 2,095 20,431 --
- -------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
ASSUMING DILUTION 210,006 200,251 174,491
BASIC EARNINGS PER SHARE $ 1.13 $ .54 $ .01
DILUTED EARNINGS PER SHARE $ 1.07 $ .52 $ .01
----------
FISCAL 1999 BEST BUY ANNUAL REPORT 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
STOCK REPURCHASE:
On October 13, 1998, the Company announced a stock repurchase program, which
authorized the purchase of up to $100 million of the Company's common stock over
the next year. Under the program, the Company may purchase shares of common
stock from time to time through open market purchases. As of February 27, 1999,
125,000 shares were purchased and retired at a cost of $2,500.
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 terms of the lease
agreements. Proceeds from the sale and 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 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:
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
MINIMUM RENTALS $ 186,100 $ 161,500 $ 139,200
PERCENTAGE RENTALS 500 400 500
--------------------------------------------------------------
$ 186,600 $ 161,900 $ 139,700
--------------------------------------------------------------
--------------------------------------------------------------
-------------
As of February 27, 1999, three stores are leased from the Company's CEO and
principal shareholder, or partnerships in which he is a partner. Rent under
these leases during the last three fiscal years and one additional store, leased
from his spouse, for which the lease expired in January 1998, was as follows:
-------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
MINIMUM RENTALS $ 800 $ 900 $ 1,000
PERCENTAGE RENTALS 400 400 400
--------------------------------------------------------------
$ 1,200 $ 1,300 $ 1,400
--------------------------------------------------------------
--------------------------------------------------------------
-------------
Future minimum lease obligations by year (not including percentage rentals) for
all operating leases at February 27, 1999, are as follows:
FISCAL YEAR
- -------------------------------------------------------------------------------
2000 $ 184,700
2001 182,900
2002 180,000
2003 171,700
2004 167,200
THEREAFTER 1,584,100
7. BENEFIT PLANS
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 by the Company's Board of Directors. The
matching contribution was $3,100, $2,100 and $2,000 in fiscal 1999, 1998 and
1997, respectively.
In fiscal 1999, the Company established a deferred compensation plan for certain
management employees. The related liability for compensation deferred under this
plan was $8,400 at February 27, 1999, and is included in long-term liabilities.
The Company has elected to match its liability under the plan through the
purchase of life insurance. The cash value of the insurance, which includes
funding for future deferrals, was $14,200 and is included in other assets. Both
the asset and the liability are carried at market value.
BEST BUY CO., INC. 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
8. INCOME TAXES
Following is a reconciliation of income tax expense to the federal statutory tax
rate:
--------------
1999 1998 1997
- --------------------------------------------------------------------------------------
FEDERAL INCOME TAX
AT THE STATUTORY RATE $ 127,728 $ 53,849 $ 1,004
STATE INCOME TAXES,
NET OF FEDERAL BENEFIT 14,670 5,763 116
TAX EXEMPT INTEREST (3,232) (1,038) --
OTHER 1,334 826 --
---------------------------------------------------
INCOME TAX EXPENSE $ 140,500 $ 59,400 $ 1,120
---------------------------------------------------
---------------------------------------------------
EFFECTIVE TAX RATE 38.5% 38.6% 39.0%
---------------------------------------------------
---------------------------------------------------
--------------
Income tax expense consists of the following:
--------------
1999 1998 1997
- --------------------------------------------------------------------------------------
CURRENT: FEDERAL $ 120,892 $ 50,950 $ (5,100)
STATE 15,252 5,487 (581)
---------------------------------------------------
136,144 56,437 (5,681)
---------------------------------------------------
DEFERRED: FEDERAL 3,868 2,687 6,103
STATE 488 276 698
---------------------------------------------------
4,356 2,963 6,801
---------------------------------------------------
INCOME TAX EXPENSE $ 140,500 $ 59,400 $ 1,120
---------------------------------------------------
---------------------------------------------------
--------------
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. 27 FEB. 28
1999 1998
- --------------------------------------------------------------------------------------
ACCRUED EXPENSES $ 15,690 $ 13,294
DEFERRED INCOME 4,154 9,125
COMPENSATION AND BENEFITS 8,052 2,554
OTHER 4,608 2,222
-----------------------------------------
TOTAL DEFERRED TAX ASSETS 32,504 27,195
-----------------------------------------
PROPERTY AND EQUIPMENT 10,973 17,067
INVENTORY 2,215 --
OTHER 3,603 573
-----------------------------------------
TOTAL DEFERRED TAX LIABILITIES 16,791 17,640
-----------------------------------------
NET DEFERRED TAX ASSETS $ 15,713 $ 9,555
-----------------------------------------
-----------------------------------------
--------------
The Internal Revenue Service has changed its original position regarding the
deductibility of interest related to the Company's preferred securities referred
to in Note 4 and has determined that the interest is deductible for federal
income tax purposes.
Income taxes paid (received) were $84,000, $12,700 and ($8,600) in fiscal 1999,
1998 and 1997, 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
consolidated financial statements.
FISCAL 1999 BEST BUY ANNUAL REPORT 39