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 May 31, 1997 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 May 31, 1997, there were 43,805,784 shares of common stock, $.10 par value, outstanding.
BEST BUY CO., INC. FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1997 INDEX Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements: a. Consolidated balance sheets as of May 31, 1997, 3-4 March 1, 1997 and June 1, 1996 b. Consolidated statements of operations for the 5 three months ended May 31, 1997 and June 1, 1996 c. Consolidated statement of changes in shareholders' 6 equity for the three months ended May 31, 1997 d. Consolidated statements of cash flows for the 7 three months ended May 31, 1997 and June 1, 1996 e. Notes to consolidated financial statements 8 Item 2. Management's Discussion and Analysis of Financial 9-12 Condition and Results of Operations Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 2
Part I - Financial Information Item 1. Consolidated Financial Statements BEST BUY CO., INC. CONSOLIDATED BALANCE SHEETS ASSETS ($ in 000, except per share amounts) May 31, March 1, June 1, 1997 1997 1996 (Unaudited) (Unaudited) ----------- -------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 94,909 $ 89,808 $ 20,604 Receivables 84,423 79,581 104,732 Recoverable costs from developed properties 56,786 53,485 122,773 Merchandise inventories 1,110,017 1,132,059 1,368,959 Refundable and deferred income taxes 27,847 25,560 28,519 Prepaid expenses 8,043 4,542 7,742 ---------- ---------- ---------- Total current assets 1,382,025 1,385,035 1,653,329 PROPERTY AND EQUIPMENT, at cost: Land and buildings 18,000 18,000 16,559 Leasehold improvements 149,738 148,168 135,466 Furniture, fixtures, and equipment 329,151 324,333 278,083 Property under capital leases 29,079 29,326 29,421 ---------- ---------- ---------- 525,968 519,827 459,529 Less accumulated depreciation and amortization 204,647 188,194 149,449 ---------- ---------- ---------- Net property and equipment 321,321 331,633 310,080 OTHER ASSETS 17,335 17,639 15,160 ---------- ---------- ---------- TOTAL ASSETS $1,720,681 $1,734,307 $1,978,569 ---------- ---------- ---------- ---------- ---------- ---------- See notes to consolidated financial statements. 3
BEST BUY CO., INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY ($ in 000, except per share amounts) May 31, March 1, June 1, 1997 1997 1996 (unaudited) (unaudited) ----------- ------- ----------- CURRENT LIABILITIES: Note payable, bank $ - $ - $ 185,000 Accounts payable 520,354 487,802 515,297 Obligations under financing arrangements 84,215 127,510 142,456 Accrued salaries and related expenses 31,881 33,663 28,183 Accrued liabilities 127,411 122,611 140,709 Deferred service plan revenue 24,906 24,602 29,469 Current portion of long-term debt 21,181 21,391 23,362 ---------- ---------- ---------- Total current liabilities 809,948 817,579 1,064,476 DEFERRED INCOME TAXES 3,578 3,578 - DEFERRED REVENUE AND OTHER LIABILITIES 24,457 28,210 41,409 LONG-TERM DEBT 212,609 216,625 207,855 CONVERTIBLE PREFERRED SECURITIES OF 230,000 230,000 230,000 SUBSIDIARY SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; authorized 400,000 shares; none issued Common stock, $.10 par value; authorized 120,000,000 shares; issued and outstanding 43,806,000, 43,287,000, and 43,124,000 shares, respectively 4,381 4,329 4,312 Additional paid-in capital 245,661 241,300 239,170 Retained earnings 190,047 192,686 191,347 ---------- ---------- ---------- Total shareholders' equity 440,089 438,315 434,829 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,720,681 $1,734,307 $1,978,569 ---------- ---------- ---------- ---------- ---------- ---------- See notes to consolidated financial statements. 4
BEST BUY CO., INC. CONSOLIDATED STATEMENTS OF OPERATIONS ($ in 000, except per share amounts) (Unaudited) Three Months Ended ----------------------------- May 31, June 1, 1997 1996 ------- ------- Revenues $1,606,551 $1,637,184 Cost of goods sold 1,358,668 1,404,534 ---------- ---------- Gross profit 247,883 232,650 Selling, general and administrative expenses 242,667 219,698 ---------- ---------- Operating income 5,216 12,952 Interest expense, net 9,540 12,281 ---------- ---------- Earnings (loss) before income taxes (4,324) 671 Income tax benefit (expense) 1,685 (262) ---------- ---------- Net earnings (loss) $ (2,639) $ 409 ---------- ---------- ---------- ---------- Net earnings (loss) per share $ (.06) $ .01 ---------- ---------- ---------- ---------- Weighted average common shares outstanding (000) 43,559 43,564 ---------- ---------- ---------- ---------- See notes to consolidated financial statements. 5
BEST BUY CO., INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MAY 31, 1997 ($ in 000) (unaudited) Additional paid-in Retained Common stock capital earnings ------------ ----------- -------- Balance, March 1, 1997 $4,329 $241,300 $192,686 Stock options exercised 52 4,361 Net loss, three months ended May 31, 1997 (2,639) ------ -------- -------- Balance, May 31, 1997 $4,381 $245,661 $190,047 ------ -------- -------- ------ -------- -------- See notes to consolidated financial statements. 6
BEST BUY CO., INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in 000) (unaudited) <TABLE> <CAPTION> Three Months Ended ------------------ May 31, June 1, 1997 1996 --------- --------- <S> <C> <C> OPERATING ACTIVITIES: Net earnings (loss) $ (2,639) $ 409 Charges to earnings not affecting cash: Depreciation and amortization 17,095 17,042 --------- --------- 14,456 17,451 Changes in operating assets and liabilities: Receivables (4,842) 16,706 Merchandise inventories 22,042 (167,817) Income taxes and prepaid expenses (4,762) (5,191) Accounts payable 32,552 (158,555) Other current liabilities 3,018 16,420 Deferred revenue and other liabilities (3,449) (8,210) --------- --------- Total cash provided by (used in) operating activities 59,015 (289,196) INVESTING ACTIVITIES: Additions to property and equipment (6,783) (16,083) (Increase)decrease in recoverable costs from developed properties (3,301) 3,464 (Decrease)increase in other assets 304 (137) --------- --------- Total cash used in investing activities (9,780) (12,756) FINANCING ACTIVITIES: Borrowings on revolving credit line, net - 185,000 (Decrease)increase in obligations under financing arrangements (43,295) 48,505 Long-term debt borrowings - 5,000 Long-term debt payments (4,226) (3,638) Common stock issued 3,387 1,244 --------- --------- Total cash provided by (used in) financing activities (44,134) 236,111 --------- --------- INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 5,101 (65,841) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 89,808 86,445 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 94,909 $ 20,604 --------- --------- --------- --------- Amounts in this statement are presented on a cash basis and therefore may differ from those shown in other sections of this quarterly report. Supplemental cash flow information: Cash paid(received) during the period for: Interest $ 12,526 $ 13,347 Income taxes $ (250) $ 1,063 </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 May 31, 1997, and June 1, 1996, the related consolidated statements of operations and cash flows for the three months ended May 31, 1997, and June 1, 1996, and the consolidated statement of changes in shareholders' equity for the three months ended May 31, 1997, are unaudited; in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included and were normal and recurring in nature. Interim results are not necessarily indicative of results for a full year. These interim financial statements and notes thereto should be read in conjunction with the financial statements and notes included in the Company's Annual Report to Shareholders for the fiscal year ended March 1, 1997. 2. RECLASSIFICATION: Certain prior year amounts have been reclassified to conform to current year presentation. 3. INCOME TAXES: Income taxes are provided on an interim basis based upon management's estimate of the annual effective tax rate. 4. EARNINGS PER SHARE: The Financial Accounting Standards Board has issued FASB Statement No. 128 "Earnings per Share", which will be effective for periods ending after December 15, 1997. The Company will adopt the new accounting rules in the quarter ending February 28, 1998 with restatement of previously reported periods. The new accounting rules will change the method of computation of earnings per share. The Company does not believe that the application of the new accounting rules will result in materially different earnings per share than are computed under current rules. 8
BEST BUY CO., INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS In the quarter ended May 31, 1997, the first quarter of fiscal 1998, the Company had a net loss of $2,639,000, or six cents per share. The Company earned $409,000, or one cent per share, in the first quarter of the previous fiscal year. Results for the quarter as compared to the prior year reflect modestly lower revenues which reduced the Company's leverage on operating expenses, partially offset by improved gross profit margins and lower interest expense. Revenues of $1.607 billion in the quarter declined 2% as compared to the prior year as comparable store sales declined 8%. The Company operated 274 stores at May 31,1997 compared to 259 stores a year ago. The comparable store sales decline was driven primarily by industry wide softness in consumer electronics and a 15% to 20% decline in the average selling price of personal computers compared to year ago levels. Revenues from sales of personal computers for the duration of the year will be impacted by the decline in year over year average selling prices as well as consumer acceptance of the Pentium-Registered Trademark- II computers being introduced this summer. Comparable store sales of appliances increased as the Company continues to generate additional sales volume in this category following the significant expansion of name brand offerings in May 1996. The entertainment software category also improved, as sales of video game hardware and related software continued strong after the introduction of new technology formats late last year. Management expects that comparable store sales will continue to decline at a similar rate in the second quarter and moderate thereafter as comparisons are less difficult in the second half of the year. The Company opened one new store in Cleveland, Ohio, and one in Houston, Texas during the quarter. As of the end of the first quarter, the Company planned to open eleven additional stores during the fiscal year including the new markets of Pittsburgh, Pennsylvania and Palm Desert, California in June. The Company also intends to expand or relocate five stores during the year. 9
Retail store sales mix by major product category for the first quarter of the current and prior year was as follows: Quarter Ended ------------- May 31, 1997 June 1, 1996 ------------ ------------ Home Office 40% 41% Consumer Electronics Audio 11% 12% Video 14% 17% Entertainment Software* 19% 17% Appliances 9% 8% Other 7% 5% ---- ---- Total 100% 100% ---- ---- ---- ---- * The prior year has been restated to include video game hardware and software, previously included in Other. The Company's gross profit margin improved to 15.4% of sales in the quarter compared to 14.2% in the first quarter last year. The increase was due, in part, to an improvement in profit margins in most product categories as well as a shift in the Company's sales mix toward higher margin categories such as appliances and entertainment software. The gross profit rate also improved as a result of the continued increase in the rate of sale of Performance Service Plans (PSPs). Sales of PSPs increased to 2.9% of sales compared to 1.5% of sales in the first quarter last year. A reduction in the use of deferred consumer financing offers as compared to last year also benefited gross profit rates. Management expects that the Company's overall gross profit rate for the year as a whole should approximate 15%; however, unexpected softness in sales of higher margin products or increased volatility in the personal computer market could adversely impact margins. The Company's selling, general and administrative (SG&A) ratio increased to 15.1% from 13.4% in the first quarter of last year. The 8% comparable store sales decline this year resulted in the loss of leverage on certain of the Company's fixed operating expenses. The costs of operating the 23 new stores opened in the past 15 months, and an increased number of leased versus owned stores, also contributed to the increase in SG&A spending compared to last year's first quarter. Management expects that the SG&A ratio will decline from the level reported in the first quarter as seasonal sales levels increase and comparable store sales declines moderate in the second half of the year. However, management also expects that the SG&A ratio for the year as a whole will be higher than the prior fiscal year. 10
Interest expense of $9.5 million in the first quarter was $2.7 million, or 22%, below last year's first quarter as lower inventory levels and a reduced number of owned properties resulted in minimal bank borrowings under the Company's revolving credit facility. FINANCIAL CONDITION Working capital of $572 million at May 31, 1997 was essentially unchanged from a year ago. However, the Company's current assets were $271 million less than year ago levels as reductions in inventories and recoverable costs from developed properties resulted in declines in bank borrowings and trade payables. The Company's net cash position, as measured by cash net of bank borrowings, improved nearly $260 million compared to June 1, 1996. Inventories at quarter end were $259 million below year ago levels due to improved inventory and model transition management as well as the Company's decision to narrow product offerings in selected categories. Receivables declined from year ago levels due to lower levels of business activity preceding the end of the period. Deferred revenues continued to decline as revenues from PSPs sold prior to the fourth quarter of fiscal 1996 are recognized over the lives of the contracts. Revenues from PSP sales subsequent to that time are recognized at the time of sale as they are insured through a third party. The Company's investment in property held for sale has declined $66 million in the past year to $57 million as 11 retail locations and a distribution center were sold and leased back under long term leases in the past twelve months. The Company currently owns six operating retail locations and an another four that are under development for opening later in the fiscal year. Management expects that the majority of these properties will be sold and leased back during the current fiscal year. One of the locations was sold and leased back subsequent to the end of the quarter. Capital spending in the first quarter was $6.8 million compared to $16.1 million in the first quarter of last year, reflecting fewer store openings. The Company currently expects that capital spending for the year will be approximately $65 million, exclusive of property development classified as recoverable costs. In May 1997 the Company reduced the seasonal capacity of its revolving credit facility from $550 million to $365 million based upon expected borrowing needs. Management expects that continued improvement in inventory management and a slower rate of store growth will reduce the Company's borrowing needs as compared to the prior year. The Company and the banks participating in the facility also agreed to reduce the interest coverage ratio covenant through the maturity of the facility in June 1998. Management believes that funds available through cash flow from operations, customary vendor terms and inventory financing facilities and the revolving credit facility will be sufficient to support the Company's working capital needs for the coming year. Management also intends to obtain working capital financing to be in place following the maturity of the revolving credit facility. 11
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company filed a Current Report on Form 8-K on May 8, 1996, with the Securities and Exchange Commission. This report, and other subsequent SEC filings, contains cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward looking statements made by the Company herein. 12
BEST BUY CO., INC. Part II - Other Information Item 6. EXHIBITS AND REPORTS ON FORM 8-K: a. Exhibits: METHOD OF FILING 10.1 Third Amendment to and Restatement of Amended and Restated Credit Agreement Filed herewith 11.1 Computation of net earnings (loss) per common share Filed herewith 27.1 Financial Data Schedule Filed herewith b. Reports on Form 8-K: None 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: July 10, 1997 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