UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the quarterly period ended August 26, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from _______________ to_________________ Commission File Number: 1-9595 BEST BUY CO., INC. (Exact Name of Registrant as Specified in Charter) Minnesota 41-0907483 (State of Incorporation) (IRS Employer Identification Number) 7075 Flying Cloud Drive 55344 Eden Prairie, Minnesota (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: 612/947-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- At August 26, 1995, there were 42,670,147 shares of common stock, $.10 par value, outstanding.
BEST BUY CO., INC. FORM 10-Q FOR THE QUARTER ENDED AUGUST 26, 1995 INDEX Page Part I. Financial Information Item 1. Consolidated Financial Statements: a. Consolidated balance sheets as of August 26, 1995, 3-4 February 25, 1995, and August 27, 1994 b. Consolidated statements of earnings for the three 5 and six months ended August 26, 1995, and August 27, 1994 c. Consolidated statement of changes in shareholders' 6 equity for the six months ended August 26, 1995 d. Consolidated statements of cash flows for the 7 six months ended August 26, 1995, and August 27, 1994 e. Notes to consolidated financial statements 8 Item 2. Management's Discussion and Analysis of Financial 9-11 Condition and Results of Operations Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 2
Part I - Financial Information Item 1. Consolidated Financial Statements BEST BUY CO., INC. CONSOLIDATED BALANCE SHEETS ASSETS ($ in 000, except per share amounts) <TABLE> <CAPTION> August 26, February 25, August 27, 1995 1995 1994 (Unaudited) (Unaudited) ---------- ----------- ----------- <S> <C> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 43,693 $ 144,700 $ 47,427 Receivables 116,474 84,440 67,202 Recoverable costs from developed properties 147,182 86,222 83,060 Merchandise inventories 1,269,060 907,677 863,500 Deferred income taxes 18,009 15,022 14,157 Prepaid expenses 7,035 2,606 5,958 ---------- ----------- ----------- Total current assets 1,601,453 1,240,667 1,081,304 PROPERTY AND EQUIPMENT, at cost: Land and buildings 15,414 13,524 13,524 Property under capital leases 28,435 27,096 21,902 Leasehold improvements 107,177 93,889 69,079 Furniture, fixtures, and equipment 229,006 191,084 145,449 ---------- ----------- ----------- 380,032 325,593 249,954 Less accumulated depreciation and amortization 111,212 88,116 77,286 ---------- ----------- ----------- Total property and equipment 268,820 237,477 172,668 OTHER ASSETS: Deferred income taxes 11,058 9,223 8,105 Other assets 20,151 19,758 8,828 ---------- ----------- ----------- Total other assets 31,209 28,981 16,933 ---------- ----------- ----------- TOTAL ASSETS $ 1,901,482 $1,507,125 $1,270,905 ---------- ----------- ----------- ---------- ----------- ----------- </TABLE> See notes to consolidated financial statements. 3
BEST BUY CO., INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY ($ in 000, except per share amounts) <TABLE> <CAPTION> August 26, February 25, August 27, 1995 1995 1994 (unaudited) (unaudited) ----------- ----------- ------------ <S> <C> <C> <C> CURRENT LIABILITIES: Note payable, bank $ 150,000 $ 95,000 Obligations under financing arrangements 22,851 $ 81,755 23,713 Accounts payable 662,257 406,682 481,440 Accrued salaries and related expenses 28,801 23,785 19,181 Other accrued liabilities 99,140 65,757 47,524 Deferred service plan revenue and warranty reserve 28,645 24,942 20,774 Accrued income taxes 2,641 14,979 3,583 Current portion of long-term debt 23,124 13,718 9,144 ---------- ---------- ---------- Total current liabilities 1,017,459 631,618 700,359 Deferred Service Plan Revenue and Warranty Reserve, Long-Term 49,558 42,138 31,887 Long-Term Debt 212,143 227,247 211,013 Convertible Preferred Securities of Subsidiary 230,000 230,000 SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; authorized 400,000 shares; none issued Common stock, $.10 par value; authorized 120,000,000 shares; issued and outstanding 42,670,000, 42,216,000, and 42,067,000 shares, respectively 4,267 4,221 4,207 Additional paid-in capital 234,750 228,982 226,330 Retained earnings 153,305 142,919 97,109 ---------- ---------- ---------- Total shareholders' equity 392,322 376,122 327,646 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,901,482 $1,507,125 $1,270,905 ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> See notes to consolidated financial statements. 4
BEST BUY CO., INC. CONSOLIDATED STATEMENTS OF EARNINGS ($ in 000, except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------------- ------------------------------- August 26, August 27, August 26, August 27, 1995 1994 1995 1994 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenues $1,437,911 $ 933,172 $2,712,607 $1,782,575 Cost of goods sold 1,241,290 800,988 2,333,698 1,531,439 ---------- ---------- ---------- ---------- Gross profit 196,621 132,184 378,909 251,136 Selling, general and administrative expenses 177,418 114,525 343,343 221,791 ---------- ---------- ---------- ---------- Income from operations 19,203 17,659 35,566 29,345 Interest expense, net 9,726 5,099 18,342 9,775 ---------- ---------- ---------- ---------- Net earnings before income taxes 9,477 12,560 17,224 19,570 Income taxes 3,763 4,960 6,838 7,729 ---------- ---------- ---------- ---------- Net earnings $ 5,714 $ 7,600 $ 10,386 $ 11,841 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings per share $ .13 $ .18 $ .24 $ .27 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding (000) 43,623 43,208 43,622 43,226 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> See notes to consolidated financial statements. 5
BEST BUY CO., INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED AUGUST 26, 1995 ($ in 000) (unaudited) <TABLE> <CAPTION> Additional paid in Retained Common stock capital earnings ------------- ---------- --------- <S> <C> <C> <C> Balance, February 25, 1995 $4,211 $228,982 $142,919 Stock options exercised 56 5,768 Net earnings, six months ended August 26, 1995 10,386 ------- -------- -------- Balance, August 26, 1995 $4,267 $234,750 $153,305 ------- -------- -------- ------- -------- -------- </TABLE> See notes to consolidated financial statements. 6
BEST BUY CO., INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in 000) (unaudited) <TABLE> <CAPTION> Six Months Ended ------------------------------ August 26, August 27, 1995 1994 ---------- ---------- <S> <C> <C> OPERATING ACTIVITIES: Net earnings $ 10,386 $ 11,841 Charges to earnings not affecting cash: Depreciation and amortization 25,971 16,628 -------- -------- 36,357 28,469 Changes in operating assets and liabilities: Receivables (32,034) (14,258) Merchandise inventories (361,383) (225,550) Prepaid income taxes and expenses (9,251) (7,298) Accounts payable 255,575 187,380 Accrued salaries and related expenses 5,016 (138) Other current liabilities 24,546 4,501 Deferred service plan revenue and warranty reserve 11,123 5,305 -------- -------- Total cash used in operating activities (70,051) (21,589) INVESTING ACTIVITIES: Additions to property and equipment (55,682) (44,524) Increase in recoverable costs from developed properties (60,960) (50,054) Increase in other assets (393) (747) -------- -------- Total cash used in investing activities (117,035) (95,325) FINANCING ACTIVITIES: Common stock issued 2,314 1,519 Borrowings on revolving credit line, net 150,000 95,000 Repayments of long-term debt (7,331) (4,607) (Decrease)increase in obligations under financing arrangements (58,904) 12,557 -------- -------- Total cash provided by financing activities 86,079 104,469 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (101,007) (12,445) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 144,700 59,872 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,693 $ 47,427 -------- -------- -------- -------- Amounts in this statement are presented on a cash basis and therefore may differ from those shown in other sections of this quarterly report. Supplemental cash flow information: Cash paid during the period for: Interest $ 18,805 $ 9,423 Income taxes $ 20,165 $ 15,093 </TABLE> See notes to consolidated financial statements. 7
BEST BUY CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The consolidated balance sheets as of August 26, 1995, and August 27, 1994, the related consolidated statements of earnings for the three and six months ended August 26, 1995, and August 27, 1994, the consolidated statements of cash flows for the six months ended August 26, 1995 and August 27, 1994, and the consolidated statement of changes in shareholders' equity for the six months ended August 26, 1995, are unaudited; in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included and were normal and recurring in nature. Interim results are not necessarily indicative of results for a full year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes included in the Company's Annual Report to Shareholders for the fiscal year ended February 25, 1995. 2. RECLASSIFICATION: Certain prior year amounts have been reclassified to conform to current year presentation. 3. NOTE PAYABLE, BANK: On August 25, 1995 the Company expanded and extended its bank line of credit to allow for seasonal borrowings up to $550 million with a maturity of June, 1998. 4. INCOME TAXES: Income taxes are provided on an interim basis based upon management's estimate of the annual effective tax rate. 8
BEST BUY CO., INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Earnings for the second quarter of fiscal 1996 were $5,714,000, or $.13 per share, compared to $7,600,000, or $.18 per share, for the same period last year. For the six month period, earnings were $10,386,000, or $.24 per share, compared to $11,841,000, or $.27 per share, last year. The impact of higher revenues on earnings compared to the prior year was reduced by higher interest expense and, in the second quarter, a lower gross profit margin. Revenues of $1.438 billion in the second quarter represent a 54% increase compared to the same period last year. For the year, revenues of $2.713 billion were up 52% over the prior year. The increased revenues are the result of opening 56 stores over the last twelve months as well as a comparable store sales increase of 7% for the quarter and the six month period. These comparable store sales increases are on top of comparable sales increases of 18% and 26% for the quarter and the six months, respectively, last year. The comparable store sales percentage increases this year are more in line with retailing in general and are the result of a slower economy. During the second quarter, the Company opened 11 stores including three in North Carolina, two in the Los Angeles area, and two in Ohio. In addition, the Company also added one store in each of the following states: South Carolina, Missouri, Michigan, and Texas. As of August 26, 1995, the Company operated 224 stores, compared to 168 stores as of August 27, 1994. Office supplies were introduced late in the second quarter this year as a logical extension of the home office product category although these products are not expected to have a large impact on revenues during this fiscal year. Retail store sales mix by major product category for the second quarter and six month period is as follows: <TABLE> <CAPTION> Second Quarter Ended Six Month Period Ended ---------------------- ---------------------- 8/26/95 8/27/94 8/26/95 8/27/94 ------- ------- ------- -------- <S> <C> <C> <C> <C> Home Office 40% 33% 40% 35% Consumer Electronics: Audio 13% 14% 13% 14% Video 17% 21% 18% 21% Appliances 10% 11% 9% 10% Entertainment Software 15% 14% 15% 14% Other 5% 7% 5% 6% ---- ---- ---- ---- Total 100% 100% 100% 100% ---- ---- ----- ---- ---- ---- ----- ---- </TABLE> 9
Gross profit margins were 13.7% and 14.0% for the quarter and the six month period, respectively, compared to 14.2% and 14.1% for the same periods, respectively, last year. The continued pressure on margins from personal computers, along with their increasing percent of total Company sales impacted the overall Company margin in the second quarter and for the year. The market for personal computers continues to be highly promotional with retailers offering, at times, free peripheral equipment to generate sales and store traffic to maintain market share. Selling, general and administrative expenses remained relatively constant as a percent of sales at 12.3% for the second quarter and 12.7% for the year, compared to 12.3% and 12.4% for the same periods, respectively, last year. The unchanged expense ratio in the second quarter and reduction in leverage for the six month period were mainly the result of costs associated with the new, more expensive markets entered and larger stores opened in the last year. Additional stores opening in some markets not fully developed, such as Los Angeles and Baltimore/Washington D.C., and seasonally higher revenues are expected to improve the operating expense ratio in the second half of this year. Extended service plan revenues represented less than 1% of revenues for all periods presented. Profit earned on extended service plans contributed $4.3 million and $8.5 million to the Company's operating income in the second quarter and six month period, respectively. Profit earned on extended service plans was $3.7 million and $7.4 million for the second quarter and six month period, respectively, last year. This profit is before the allocation of any selling, general or administrative expenses, except for direct selling expenses. Interest expense was $9.7 million in the second quarter compared to $5.1 million for the second quarter last year and $18.3 million for the six month period compared to $9.8 million for the same period last year. The increase in interest is mainly due to interest related to $230 million of convertible preferred securities issued in November 1994. Income taxes for the first half of this year were 39.7% of pre-tax income compared to 38.7% for fiscal 1995. The increased tax rate is due primarily to the elimination of the targeted jobs tax credit, which expired December 31, 1994. FINANCIAL CONDITION Working capital at August 26, 1995 was $584 million compared to $609 million at February 25, 1995. Inventory increased $361 million principally supporting additional stores, a seasonally higher sales rate, and higher levels of inventory in existing stores associated with the introduction of office supplies and "Windows `95" products. Higher credit card sales resulting from promotional activity in the last few days of the period account for the majority of the increase in receivables. 10
Recoverable costs from developed properties increased $61 million from the end of the prior fiscal year. The increase is related to development costs for fiscal 1996 stores and the development costs of a new distribution center in Ohio. The Company has completed the sale/leaseback of nine stores to date generating nearly $50 million in proceeds. In addition, the Company has engaged an investment bank to market a multiple property sale/leaseback which is expected to generate approximately $90 million by the end of the year. The remainder of the recoverable store development costs are expected to be recovered in single store sale/leaseback transactions by the end of the fiscal year. During the second quarter, the Company opened eleven stores bringing the total store openings through the first half of the year to 20. In addition, the Company relocated or remodeled five stores. The Company expects to open another 27 stores and remodel or relocate an additional 11 stores during the third quarter. Third quarter store openings will include additional stores in Los Angeles and Baltimore/Washington D.C. and entry into the Cincinnati market. In August, the Company completed an expansion and extension of its bank revolving credit agreement which increased the seasonally available line to $550 million and extended the maturity to June 1998. The agreement contains a "clean down" period of 45 days during which the borrowings cannot exceed $50 million. Management believes that the bank revolving line of credit, and inventory credit facilities, combined with long term real estate development financing and cash generated from operations will be sufficient to meet the Company's financing needs for the current fiscal year. 11
BEST BUY CO., INC. PART II - Other Information ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The Regular Meeting of the Shareholders of the Company was held June 21, 1995. The following individuals were elected at the meeting as Directors of the Company to serve until the 1997 Regular Meeting of Shareholders. Shares voted in favor of these directors and shares withheld were as follows: Culver Davis, Jr. Shares For 39,119,680 Shares Withheld 120,293 Elliot S. Kaplan Shares For 39,117,915 Shares Withheld 122,058 Richard M. Schulze Shares For 39,119,265 Shares Withheld 120,708 Other matters voted on and the results of voting were as follows: Shareholders ratified the appointment by the Board of Directors of Ernst & Young, LLP as the corporation's independent auditor for the fiscal year beginning February 26, 1995, with shares voted as follows: Shares For 37,703,676 Shares Against 14,797 Shares Abstaining 20,765 Shareholders approved an amendment to the Company's bonus program for senior officers, with shares voted as follows: Shares For 37,810,257 Shares Against 809,458 Shares Abstaining 583,258 12
BEST BUY CO., INC. Item 6. EXHIBITS AND REPORTS ON FORM 8-K: a. Exhibits: Method of Filing ---------------- 4.1 Amended and Restated Credit Agreement Filed herewith dated August 25, 1995 between Best Buy Co., Inc. and First Bank National Association 11.1 Computation of net earnings per common share Filed herewith 27.1 Financial Data Schedule Filed herewith b. Reports on Form 8-K: No reports on Form 8-K were filed during the period. 13
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BEST BUY CO., INC. (Registrant) Date: October 10, 1995 By: /s/ ALLEN U. LENZMEIER ------------------------------------- Allen U. Lenzmeier, Executive Vice President & Chief Financial Officer (principal financial officer) By: /s/ ROBERT C. FOX ------------------------------------- Robert C. Fox, Senior Vice President- Finance & Treasurer (principal accounting officer) 14