Best Buy
BBY
#1227
Rank
โ‚น1.778 T
Marketcap
โ‚น8,479
Share price
0.39%
Change (1 day)
23.55%
Change (1 year)
Text size:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 2, 1996.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934

Commission File Number: 1-9595

BEST BUY CO., INC.
(Exact Name of Registrant as Specified in Charter)

MINNESOTA 41-0907483
(State of Incorporation) (I.R.S. Employer
Identification Number)
7075 FLYING CLOUD DRIVE
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-947-2000

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange on
Title of each class which registered
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
8-5/8% SENIOR SUBORDINATED NOTES,
DUE 2000 NEW YORK STOCK EXCHANGE
9% SUBORDINATED EXTENDIBLE NOTES,
DUE 1997 NEW YORK STOCK EXCHANGE
6-1/2% CONVERTIBLE MONTHLY INCOME
PREFERRED SECURITIES NEW YORK STOCK EXCHANGE

Securities registered pursuant to Section 12(g) of the Act:
NONE

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---

The aggregate market value of voting stock held by non-affiliates of the
Registrant on May 20 1996, was approximately $701,295,307. On that date,
there were 43,118,267 shares of Common Stock issued and outstanding.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
March 2, 1996 ("Annual Report") are incorporated by reference into Part II.

Portions of the Registrant's Proxy Statement dated May 8, 1996 for the regular
meeting of shareholders to be held June 19, 1996 ("Proxy Statement") are
incorporated by reference into Part III.
PART I

Item 1. BUSINESS

General

Best Buy Co., Inc. (the "Company" or "Best Buy"), is one of the fastest
growing national specialty retailers. The Company offers a wide selection of
name brand consumer electronics, home office equipment, entertainment software
and appliances. The Company commenced business in 1966 as an audio component
systems retailer, and in the early 1980s, with the introduction of the video
cassette recorder, expanded into video products. In 1983, the Company changed
its marketing strategy to use mass merchandising techniques for a wider variety
of products, and began to operate its stores with a "superstore" format. In
1989, Best Buy dramatically changed its method of retailing by introducing its
"Concept II" store format, a self-service, non-commissioned, discount style
sales environment designed to give the customer more control over the purchasing
process. The Company determined that an increasing number of customers had
become knowledgeable enough to select products without the assistance of a
commissioned salesperson and preferred to make purchases in a more convenient
and customer friendly environment. With its innovative retail format, the
Company has moved into a leading position nationally in all of its principal
product categories except appliances.

In fiscal 1995, the Company developed a strategy to further enhance its
store format. The strategy, known as "Concept III", features a larger,
redesigned store format created to produce a more informative and exciting
shopping experience for the customer. Through focus group interviews and other
research, the Company determined that customers wanted more product information
and a larger product selection. In order to meet these evolving consumer
preferences, the Company developed interactive Answer Centers featuring touch
screen monitors from which customers and sales personnel can immediately access
product information. Additionally, the enhanced store format features more
hands-on demonstrations allowing customers to, among other things, experience
audio and video products such as "surround sound" systems and sample featured
compact discs at approximately 100 private listening stations. Finally, these
larger stores, generally 45,000 to 58,000 square feet, accommodate a larger
product selection intended to be as good as or better than the largest selection
offered by most of Best Buy's competitors in each of its principal product
categories. Management continues to evaluate and refine the content and features
of these Concept III stores to maximize the revenue and operating profit while
providing customers with the most desirable shopping experience. As of March 2,
1996, 154 of 251 stores were the 45,000 or 58,000 square foot format generally
incorporating the features of a "Concept III" store. All stores opening in
fiscal 1997 will incorporate the Concept III features when opened except for the
Answer Center kiosks. The Company continues to refine the


-2-
touch screen Answer Center kiosks to determine how to maximize the return on
this technology. Currently 24 stores operate with the Answer Center kiosks.

In the last two fiscal years the Company has increased its store count
by 66%, adding 100 new stores as of March 2, 1996, was operating 251 stores
from coast to coast. The Company anticipates opening 20 to 25 new stores in
1997. By the end of fiscal 1997, the Company expects to operate
approximately 270 stores.

Business Strategy

The Company's business strategy is to offer consumers an enjoyable and
convenient shopping experience while maximizing the Company's profitability.
Best Buy believes it offers consumers meaningful advantages in store
environment, product value, selection and service. An objective of this
strategy has been to achieve a dominant share of the markets Best Buy serves.
The Company currently holds a leading, and in some cases dominant, share in its
markets. The Company's Concept III store format uses interactive technology to
enhance the customer's shopping experience. As part of its overall strategy, the
Company:

- Offers a self-service, discount style store format, featuring
easy to locate product groupings, emphasizing customer choice and
product information and providing assistance from
non-commissioned product specialists and, in Concept III stores,
interactive product displays and information.

- Provides a large selection of brand name products comparable to
retailers that specialize in the Company's principal product
categories and seeks to ensure a high level of product
availability for customers.

- Seeks to provide customers with the best product value available
in the market area through active comparison shopping programs,
daily price changes, lowest price guarantees and special
promotions, including interest-free financing, extended service
plans generally priced below the competitors, and home delivery.


- Provides a variety of services not offered by certain
competitors, including convenient financing programs, product
delivery and installation, computer training and post-sale
services including repair and warranty services and computer
upgrades.

- Locates stores at sites that are easily accessible from major
highways and thoroughfares and seeks to create


-3-
sufficient concentrations of stores in major markets to maximize
the leverage on fixed costs including advertising and operations
management.

- Controls costs and enhances operating efficiency by centrally
controlling all buying, merchandising and distribution, and
vertically integrating certain support functions such as
advertising.

Best Buy's store format is a key component of its business strategy. The
Company believes that because customers are familiar with most of the products
the Company sells and are accustomed to discount shopping formats, they
increasingly resist efforts to direct their choice of product and appreciate
controlling the purchase decision.

Best Buy continuously evaluates the retail environment and regularly uses
focus groups to assess customer preferences. Through these processes, Best Buy
concluded that customers want access to more product information in order to be
more confident about their buying decisions. As a result, Best Buy's
Concept III store format features interactive product displays and information
including, in selected locations, Answer Centers enabling customers to
immediately access product information from touch screen monitors that display
informative and entertaining full motion videos. All Concept III stores contain
a demonstration area for television "surround sound" systems so that customers
can hear for themselves how different configurations of audio components enhance
sound quality; a simulated, life-size car display that demonstrates differences
in car stereo sound resulting from different speaker configurations; speaker
rooms featuring a wide variety of music allowing customers to compare speaker
quality while listening to their choice of music; approximately 100 private
listening posts where customers can sample featured music software; and a "Fun &
Games" area where customers and their children can try the latest video games.
Best Buy believes that these features further differentiate it from competing
retailers and should also provide an advantage for the Company relative to
potential future competitors such as catalog and on-line services and television
shopping networks.

The Company's stores are in large, open buildings with high ceilings. Best
Buy's stores average over 40,000 square feet. The Concept III stores feature
specialty areas such as larger viewing rooms for large screen and projection
televisions, larger speaker rooms and a separate department for movie videos.
The Company expects that the majority of the new stores opened will be the
45,000 square foot format to best leverage the cost of operations and maximize
productivity.

Best Buy's merchandising strategy differs from many other retailers selling
comparable merchandise. Best Buy's merchandise



-4-
is displayed at eye level next to signs identifying the products' major
features, with the boxed products available above or below the display model.
The Company's salaried product specialists, who are knowledgeable about the
operation and features of the merchandise on display, are dedicated to a
particular product area for customers who desire assistance. This convenient,
self service format allows the customer to carry merchandise directly to the
check-out lanes, pay for it and leave the store thus avoiding the time-consuming
process used at traditional superstores and catalog showrooms. Certain of the
Company's competitors with the traditional superstore format use commissioned
sales staffs and generally only have display models on the selling floor with
boxed merchandise stored in a back room. This traditional superstore design
allows sales personnel to direct the customer to products selected by the
salesperson. At these stores, a salesperson is able to promote products
yielding the greatest sales commissions. In addition, unlike Best Buy, these
traditional superstores generally apply pressure to the consumer to promote the
sale of extended service plans and have trained their sales staffs to maximize
the sale of these plans. The Company offers extended service plans, generally
at lower prices than its competitors and intends to place increased emphasis on
the sale of these plans in fiscal 1997. The Company's sales staff will be
trained in a no pressure presentation of value priced extended service plans.

The Company believes that its advertising strategy continues to contribute
to its increasing revenues. Best Buy spends approximately 3% of store sales on
advertising, including the distribution of about 28 million newspaper inserts
weekly. The Company has vertically integrated advertising and promotion
capabilities and operates its own in-house advertising agency. This capability
allows the Company to respond rapidly to competitors in a cost effective manner.
In many of its markets, the Company is able to secure and deliver merchandise to
its stores and to create, produce and run an advertisement all within a period
of less than one week.

Print advertising consists of four-color weekly inserts, generally of 16 to
20 pages, that emphasize a variety of product categories and feature extensive
name brand selection and price range. The Company also produces all of its
television and radio commercials, each with a specific marketing message.
Television commercials and radio spots account for approximately 35% of total
advertising expenditures. The Company is reimbursed by vendors for a
substantial portion of advertising expenditures through cooperative advertising
arrangements. In fiscal 1997, the Company is also introducing a national brand
image advertising program which illustrates the principal differences in the
Company's store format and shopping environment compared to its competitors.

Product service and repair are important aspects of Best Buy's marketing
strategy, providing the opportunity to differentiate itself from warehouse clubs
and other discount stores which


-5-
generally provide no such services.  Virtually all products sold by the Company,
with the exception of software, carry manufacturers' warranties. The Company
offers to service and repair almost all of the products it sells, except major
appliances in certain markets, and has been designated by most of its suppliers
as an authorized service center. The Company contracts with outside factory
service organizations in certain markets to service and repair major appliances
and is expanding its own in-home appliance repair service. In addition, the
Company conducts computer software training classes at selected stores and makes
its technical support staff available to assist customers with the custom
configuration of personal computers and peripheral products. The Company also
delivers and installs major appliances and large electronics products and
installs car stereos, cellular phones and car security systems.

Product Selection and Merchandising

Best Buy provides a broad selection of name brand models within each
product line in order to provide customers with greater choice. The Company
currently offers approximately 5,000 products, exclusive of entertainment
software titles and accessories, in its four principal product categories. In
addition, the Company continues to expand its selection of accessories, which
typically yield a higher margin than most of the Company's other products. The
Company believes that this assortment of accessories builds customer traffic for
its other products.

The home office category, Best Buy's largest product category, includes
personal computers and related peripheral equipment, telephones, cellular
phones, answering machines, fax machines, copiers and calculators. The Company
was among the first consumer electronics retailers to carry an extensive
assortment of personal computer products and related software. Sales in this
category are largely comprised of the sale of personal computers. The retail
market for personal computers has become promotional and competitive. The
Company's results can be affected by significant changes in promotional activity
as well as product demand for and availability of personal computers. The
Company believes that it is well positioned to withstand increased competition
in the retail market for personal computer products, traditionally low margin
items, due to its early entry and experience in the market, its broad product
lines, including those that generate higher profit margins, and its relatively
low cost structure. In addition, the Company believes that the related services
it offers, such as computer training, configuration, maintenance and upgrade,
are distinct advantages compared to other discount and mail order computer
retailers. The Company also believes that changing technology and hardware
requirements necessary to support new software, including on-line services, will
continue to be a primary factor in the growth in sales of personal computers and
related products in the future. The Company's home office products category
includes brand names such as Acer, Apple, AT&T, Canon,


-6-
Compaq, Epson, Hewlett Packard, IBM, Motorola, NEC, Packard Bell, Panasonic,
Sharp and Toshiba. The Company also offers a broad assortment of office
products and school supplies such as paper, pens, and other consumables to
complement home office equipment.

Best Buy's second largest product category is consumer electronics,
consisting of video and audio equipment. Video products include televisions,
video cassette recorders, camcorders and satellite dishes that receive direct
broadcast satellite television. Audio products include audio components, audio
systems, portable audio equipment, car stereos and security systems. The
Company continues to expand its product selection in consumer electronics by
offering higher end products and components that have greater appeal to audio
and video enthusiasts. Further, the Company anticipates that with the
availability of better picture and sound quality through direct broadcast
satellite, it will have more opportunities to sell higher end equipment such as
home theaters, "surround sound" systems and in-wall components. The Company
sells consumer electronics with brand names such as Aiwa, Bose, Cambridge
Soundworks, Eosone, General Electric, Infinity, JBL, JVC, Magnavox, Panasonic,
Pioneer, RCA, Sanyo, Samsung, Sharp, Sony, Technics and Toshiba.

Best Buy's entertainment software category includes compact discs,
pre-recorded audio and video cassettes and computer software. The Company is
one of the few large consumer electronics retailers that sells a broad selection
of entertainment software in all of its stores. The Company offers from 25,000
to 60,000 titles in its stores with as many as 80,000 titles in its largest
Concept III stores. In addition, Best Buy customizes a portion of the music
software assortment for particular stores. The Company believes that it has
substantially increased customer traffic by offering this wide and customized
assortment of entertainment software.

The major appliance category includes microwave ovens, washing machines,
dryers, air conditioners, dishwashers, refrigerators, freezers, ranges and
vacuum cleaners. Products in this category through fiscal 1996 included brand
names such as Eureka, Frigidaire, Hoover, Maytag, Roper, Sharp, and
White-Westinghouse. In the first quarter of fiscal 1997, the Company
significantly expanded its assortment and selection in this category through the
addition of the Amana, General Electric, GE Profile, Hotpoint and Tappan
appliance brand names. The Company will also begin carrying an assortment of
fully featured, high end small electrics from manufacturers such as Braun,
Cuisinart, DeLonghi, Oster and Waring Professional. The appliance department
will be further enhanced by the addition of designer cookware, kitchen gadgets
and gourmet spices and oils. The appliance department will be merchandised to
give consumers a presentation that looks and feels like a real gourmet kitchen
rather than simply rows of appliances.


-7-
The Company also sells cameras and other photographic equipment, easy to
assemble furniture designed for use with computer and audio/video equipment and
a broad selection of accessories. The Company continues to evaluate compatible
products to maximize the profit from the available space in the larger stores.

In the fourth quarter of fiscal 1996, Best Buy finalized an agreement with
AI WarrantyGuard Inc. (AIWG), a joint venture between American International
Group, Inc. (AIG) and National Electronics Warranty Corporation. AIWG will
administer extended service plans sold by Best Buy and insured by New Hampshire
Insurance Company, an AIG member company, which carries A.M. Best Company
ratings of superior (A++).

The following table sets forth the approximate percentages of store sales
from each of Best Buy's principal product lines.
<TABLE>
<CAPTION>

Fiscal Years Ended
-------------------------------------------------------
February 26, 1994 February 25, 1995 March 2, 1996
----------------- ----------------- -------------
<S> <C> <C> <C>
Home Office 35% 37% 41%
Consumer Electronics:
Video 23 20 18
Audio 15 14 13
Entertainment
Software 12 14 15
Major Appliances 9 8 7
Other (1) 6 7 6
--- --- ---
Total 100% 100% 100%
---- ---- ----
---- ---- ----
</TABLE>

(1) Includes photographic equipment, blank audio and video tapes, video games,
furniture and accessories and extended service plans.

Store Locations and Expansion

The Company's expansion strategy generally has been to enter major
metropolitan areas with the simultaneous opening of several stores and then to
expand into contiguous non-metropolitan markets. Currently, approximately 25% of
the Company's stores are in non-metropolitan markets. The entry into a new
market is preceded by a detailed market analysis which includes a review of
competitors, demographics and economic data. Best Buy's store location strategy
enables it to increase the effectiveness of advertising expenditures and to
create a high level of consumer awareness. In addition, the clustering of
stores allows the Company to maintain more effective management control, enhance
asset utilization, and utilize its distribution facilities more efficiently.

When entering a major metropolitan market, the Company establishes a
district office, service center and major appliance warehouse. Each new store
requires approximately $3.0 to $4.0 million of working capital, depending on the
size of the store, for merchandise inventory (net of vendor financing),
leasehold improvements, fixtures and equipment. Pre-opening costs of


-8-
approximately $200,000 per store are incurred in hiring and training new
employees and in advertising and are expensed in the year the store is opened.

During fiscal 1996, the Company opened 47 stores, a 23% increase in its
store base. The Company also expanded or relocated 16 stores to larger
facilities. Due to an expected slowing in the economy, Best Buy is slowing its
national market expansion in fiscal 1997. The Company expects to open 20 to 25
new stores in fiscal 1997, half of which are expected to be in the new markets
of Philadelphia, Pennsylvania and Tampa, Florida. The remainder of the new
stores will be opened generally in existing markets. To further implement the
Concept III store format, the Company also plans to reposition another nine
stores in fiscal 1997. The Company believes it has the necessary distribution
capacity and management information systems as well as management experience and
depth to support its fiscal 1997 expansion plans.

The following table presents the number and location of stores operated by the
Company at the end of each of the last three fiscal years.

<TABLE>
<CAPTION>

Number of Stores at Fiscal Year End
---------------------------------------
1994 1995 1996
---- ---- ----

<S> <C> <C> <C>
Texas 28 32 34
Illinois 30 31 32
California -- 7 19
Ohio 2 12 18
Michigan 10 14 16
Minnesota 15 15 15
Florida -- 3 12
Wisconsin 11 11 11
Georgia 7 9 10
Missouri 10 10 10
Indiana 7 8 8
Maryland -- 4 8
Arizona 6 7 7
Colorado 6 6 7
North Carolina -- 3 7
Virginia -- 5 6
Iowa 5 5 5
Kansas 4 5 5
South Carolina -- 3 4
Arkansas 2 3 3
Nebraska 3 3 3
Oklahoma 3 3 3
Kentucky -- 1 2
Alabama -- -- 1
Delaware -- -- 1
Nevada -- 1 1
New Mexico 1 1 1
North Dakota -- 1 1
South Dakota 1 1 1
--- --- ---
Total 151 204 251
--- --- ---
--- --- ---
</TABLE>


-9-
Suppliers, Purchasing and Distribution

The Company's marketing strategy depends, in part, upon its ability to
offer a wide selection of name brand products to its customers and is,
therefore, dependent upon satisfactory and stable supplier relationships. In
fiscal 1996, Best Buy's 20 largest suppliers accounted for approximately 70%
of the merchandise purchased by the Company, with five suppliers, Acer,
Hewlett-Packard, Packard Bell, Sony, and Thomson Consumer Electronics (RCA)
accounting for approximately 38% of the Company's total purchases. The loss
of or disruption of supply, including disruptions in supply due to
manufacturers' product quality issues, from any one of these major suppliers
could have a material adverse effect on the Company's sales. Certain
suppliers have, at times, limited or discontinued their supply of products to
the Company. Best Buy generally does not have long-term written contracts
with its major suppliers and does not currently have any indication that any
current suppliers will discontinue selling merchandise to the Company. The
Company has not experienced difficulty in maintaining satisfactory sources of
supply, and management expects that adequate sources of supply will continue
to exist for the types of merchandise sold in its stores.

Best Buy's centralized buying staff purchases substantially all of the
Company's merchandise. The buying staff within the Company's Marketing
Department is responsible for product acquisition, promotion planning and
product pricing. An inventory management staff in the Marketing Department is
responsible for overall inventory management including allocations of inventory
and replenishment of store inventory. Generally, with the exception of certain
entertainment software, there are no agreements with suppliers for the return of
unsold inventory. Merchandise remaining at the time of new product introduction
is generally sold on a close-out basis. Revenues from the sale of close-out
merchandise have been insignificant.

The Company has made product availability a high priority and continues to
make investments in facilities, personnel and systems to assure that its
in-stock position will be among the highest in the industry. The Company
utilizes an automatic replenishment system for restocking its stores and is able
to deliver products to its stores as required. Replenishment of store
inventories is based on inventory levels, historical and projected sales trends,
promotions and seasonality. The Company utilizes an extensive merchandise
planning and daily inventory monitoring system to manage inventory turns.

The majority of the Company's merchandise, except for major appliances, is
shipped directly from manufacturers to the Company's distribution centers in
California, Ohio, Minnesota, Oklahoma and Virginia. In addition, the Company
operates a dedicated distribution center for entertainment software in
Minnesota. The Company's newest distribution center is in Findlay, Ohio,
opening


-10-
in fiscal 1996, with this approximately 780,000 square feet. Major appliances
are shipped to satellite warehouses in each of the Company's major markets.
In fiscal 1997, the Company will expand its appliance distribution capacity
to support the additional product assortment. In order to respond to the need
to meet release dates for certain computer products and entertainment
software titles, the Company has increased the volume of merchandise shipped
directly to the stores from manufacturers and distributors. The Company is,
however, still dependent upon the distribution centers for inventory storage
and shipment of most merchandise to stores. The Company primarily uses
contract carriers to ship merchandise from its distribution centers to its
stores. The Company believes that its distribution centers can most
effectively service stores within a 600 to 700 mile radius and that its six
distribution centers will accommodate the Company's expansion plans for the
next year. The Company plans to continue investing in new systems and
purchasing material handling equipment to reduce labor costs, improve
accuracy in filling orders and enhance space utilization.

Management Information Systems

Best Buy has developed proprietary software that provides daily information
on sales, gross margins and inventory levels by store and by stockkeeping unit.
These systems allow the Company to compare current performance against
historical performance and the current year's budget. Best Buy uses
point-of-sale bar code scanning from which sales information is polled at the
end of each day. The Company's MIS group, in conjunction with the advertising
department, has also developed the proprietary technology that is used in the
touch screen Answer Centers. The Company uses EDI (Electronic Data Interchange)
with selected suppliers for the more efficient transmittal of purchase orders,
shipping notices and invoices. The Company believes that the systems it has
developed have the ability to continue to improve customer service, operational
efficiency, and management's ability to monitor critical performance factors.
Best Buy is continuing to make investments in designing new systems, modifying
existing systems and increasing processing capacity, particularly with respect
to distribution, inventory management and store operations.

Store Operations

Best Buy has developed a standardized and detailed system for operating its
stores. The system includes procedures for inventory management, transaction
processing, customer relations, store administration and merchandise display.
The Company's store operations are organized into divisions. Each division is
divided into regions and is under the supervision of a vice president who
oversees operations through several regional managers, each of whom has
responsibility for a number of districts within the region. District managers
monitor store operations closely and meet regularly with store managers to
discuss merchandising and new product introductions, sales promotions, customer
feedback and


-11-
requests and store operating performance.  Similar meetings are conducted at the
corporate level with divisional and regional management. Each district also has
a loss prevention manager, with product security controllers employed at each
store to control inventory shrinkage. Advertising, pricing and inventory
policies are controlled at corporate headquarters. The Company's training,
consumer affairs, human resources and store merchandising functions are also
centralized at corporate headquarters.

The Company's stores are open seven days and six evenings a week. A store
is typically staffed by one manager, four assistant managers, and an average
staff ranging from 70 to 140 persons depending on store size. Approximately 65%
of a store's staff, which includes product specialists and a support staff of
cashiers and customer service and stock handling employees, is employed on a
part-time basis. Store managers are paid a salary and have the opportunity to
earn bonuses if their stores exceed sales and gross margin quotas, meet certain
budget criteria in controlling expenses, and achieve certain administrative
goals.

The Company has an in-house education program to train new employees, keep
current employees informed of changes and modifications to its operating
procedures and demonstrate new products. The training program includes classes
for employees and the use of detailed store manuals and training video tapes
produced in-house. Best Buy also provides its store personnel with in-store
training in the demonstration and operation of the Company's merchandise, which
is enhanced using tests that are administered through the Company's mainframe
computer system. The Company also conducts a six-week course of classroom
instruction combined with on-the-job training for future management candidates.
Stores hold monthly "team meetings" for all personnel to review store
performance and Company focus. Specialized product training is also conducted
at these monthly meetings. The Company's policy is to staff store management
positions with personnel promoted from within each store and to staff new stores
from its pool of trained managers. However, as Best Buy expands into new
markets, it also recruits local management personnel who have valuable knowledge
about the new market.

Credit Policy

Approximately 35% of store revenues are paid for in cash, with the
remaining 65% paid for by either major credit cards or the Best Buy private
label credit card. The Company has significantly expanded the use of special
financing offers and considers them an important part of its marketing strategy.
Generally, the special financing offers allow customers to defer all payments
interest-free for 90 days or six months, depending on the price of the product,
or to defer interest payments for approximately one year on the purchase of
selected products. The special financing offers are provided to customers who
qualify for Best Buy's private label credit card. The private label credit card
allows these


-12-
customers to obtain financing on purchases of merchandise at Best Buy stores
through arrangements between the Company and independent banks and consumer
credit programs. The Company is generally able to qualify a new customer for
credit on the spot, typically in less than five minutes. Receivables from
private label credit card sales are sold, without recourse to the Company, to
unaffiliated third party institutions. The Company receives payment from these
institutions within 2 to 3 days following the sale.

Competition

Retailing in each of the Company's product categories is highly
competitive. While overall consumer electronics sales have grown relatively
slowly in recent years, the concentration of sales among the top retailers in
the industry has increased significantly. The industry's consolidation has been
evidenced in recent years by the liquidation and consolidation of a number of
competitors. The relatively slow industry sales growth is due to market
saturation for many consumer electronics products and the general absence of new
products in that market. The growth of sales nationally in the home office
product category has begun to slow and the Company competes with an increasing
number of retailers and alternative channels of distribution. In addition, the
Company believes that consumers have become more knowledgeable and value
conscious, thereby putting pressure on profit margins. Management believes that
its store format distinguishes the Company from most of its competitors by
offering customers a friendlier and less pressured shopping experience. In
addition, the Company competes by aggressively advertising and emphasizing
product selection, low prices, financing alternatives and service.

Best Buy competes in most of its markets against Circuit City, Sears and
Montgomery Ward and in selected markets against Incredible Universe (owned by
Tandy Corp.). It also competes against computer superstores such as Computer
City (owned by Tandy Corp.) and CompUSA and entertainment software superstores
operated by Musicland and Tower Records. Certain of these competitors have
significantly greater financial resources than the Company. The Company also
competes against independent dealers, discount stores, wholesale clubs, office
products superstores and mass merchandisers. As of March 2, 1996, approximately
75% of the Company's stores compete with Circuit City.


-13-
Employees


As of March 2, 1996, the Company employed approximately 33,500 persons, of
whom approximately 18,000 were part-time or seasonal employees. The Company has
never experienced a strike or work stoppage, and management believes that its
employee relations are good. There are currently no collective bargaining
agreements covering any of the Company's employees.


Item 2. PROPERTIES

The Company's stores, most of which are leased, include sales space,
inventory storage, management offices and employee areas. All of the leases
provide for a fixed minimum rent with scheduled escalation dates and amounts.
Leases for seven of the stores have a percentage rent provision equal to from
.75% to 4% of gross sales at each location in excess of certain specified sales
amounts. Currently, percentage rent is paid for only three stores. The initial
terms of the leases range from 5 to 25 years and generally allow the Company to
renew for up to three additional five-year terms. The terms of a majority of
the leases, including renewal options, extend beyond the year 2020. At March 2,
1996 the Company owned twelve of its retail store locations. Management expects
to sell and lease back these properties in fiscal 1997.

The Company leases over 2 million square feet of distribution
facilities including brown goods centers in Bloomington, Minnesota, Ardmore,
Oklahoma, Saunton, Virginia, and Ontario, California, and a software
distribution center in Edina, Minnesota. The Company also currently owns a
780,000 square foot distribution facility in Findlay, Ohio. The Company also
operates leased satellite warehouses for major appliances in its major
markets. The Company's corporate offices are located in a 290,000 square
foot facility it owns in Eden Prairie, Minnesota.

Item 3. LEGAL PROCEEDINGS

The Company was named a defendant in a lawsuit against the Company and certain
officers filed in the United States District Court for the District of Minnesota
on December 6, 1994. The plaintiffs alleged various violations of federal
securities laws and sought damages in an unspecified amount on behalf of a
purported class of all persons who purchased Best Buy stock between
September 20, 1994 and December 1, 1994. The Company has defended the lawsuit
vigorously and the original complaint was dismissed without prejudice by the
Court on September 11, 1995. The plaintiffs amended the complaint and again, on
May 3, 1996, the magistrate judge recommended that the amended complaint be
dismissed without prejudice. The Court dismissed the lawsuit without prejudice
on May 30, 1996.


-14-
THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:

<TABLE>
<CAPTION>

YEARS
WITH
THE
NAME AGE POSITION WITH COMPANY COMPANY
---- --- --------------------- -------

<S> <C> <C> <C>
Richard M. Schulze 55 Founder, Chairman, Chief Executive Officer and Director 29
Bradbury H. Anderson 46 President, Chief Operating Officer and Director 22
Allen U. Lenzmeier 52 Executive Vice President and Chief Financial Officer 11
Wade R. Fenn 37 Executive Senior Vice President - Marketing 15
Steven R. Anderson 49 Senior Vice President - MIS and Chief Information Officer 9
Julie M. Engel 35 Senior Vice President - Advertising 14
George S. Fouts 58 Senior Vice President - Sales 9
Robert C. Fox 45 Senior Vice President - Finance and Treasurer 10
Wayne R. Inouye 43 Senior Vice President - Marketing, Computers & Home Office -
James P. Mixon 51 Senior Vice President - Logistics 2
Lee H. Schoenfeld 43 Senior Vice President - Strategic Marketing 17
Philip J. Schoonover 36 Senior Vice President - Marketing, Consumer Electronics & Appliances 1
Kenneth R. Weller 47 Senior Vice President - Sales 2
Randall K. Zanatta 38 Senior Vice President - Visual Merchandising 16
</TABLE>


RICHARD M. SCHULZE is a founder of the Company. He has served as an
officer and director of the Company from its inception in 1966 and currently
serves as its Chairman and Chief Executive Officer.

BRADBURY H. ANDERSON has been the Company's President and Chief Operating
Officer since April 1991, having served as Executive Vice President - Marketing
of the Company from February 1986. He has been employed in various other
capacities with the Company since 1973, including retail salesperson, store
manager and sales manager. Mr. Anderson has been a Director of the Company
since 1986.

ALLEN U. LENZMEIER was promoted to his present position in April 1991 after
having served as Senior Vice President - Finance and Operations and Treasurer of
the Company from 1986. Mr. Lenzmeier joined the Company in 1984 and has also
served as Vice President - Finance and Operations and Treasurer.

WADE R. FENN was promoted to his present position in August 1995, having
served as a Sr. Vice President - Sales since 1991 and a Regional Vice President
of the Company from 1987. Mr. Fenn joined the Company in 1980 as a salesperson
and has also been employed by the Company as a store and district manager.

STEVEN R. ANDERSON was promoted to his present position in April 1994,
after having served as Vice President-MIS since July 1990. Mr. Anderson joined
the Company in 1986 as Director of Management Information Systems.


-15-
JULIE M. ENGEL was promoted to her present position in April 1995.  Ms.
Engel joined the Company in July 1981 as Advertising Manager, was promoted to
Advertising Director in 1984 and became Vice-President - Advertising in April
1987.

GEORGE S. FOUTS was promoted to his present position in April 1991, having
served as Regional Vice President of the Company from 1987. Mr. Fouts joined
the Company in 1986 as a sales manager after being employed by RCA Corporation
for nineteen years.

ROBERT C. FOX was promoted to his present position in April 1994, after
having served as Vice President-Accounting since 1987 and Treasurer since 1993.
Mr. Fox joined the Company in 1985 as Controller.

WAYNE R. INOUYE joined the Company as Senior Vice President of Marketing
for Computers and Home Office. Mr. Inouye's retail experience spans 17 years,
the past 10 as vice president of merchandising with The Good Guys!

JAMES P. MIXON joined Best Buy in April 1994 as Senior Vice President-
Transportation and Distribution. Prior to joining the Company, Mr. Mixon held
various distribution management positions with several national retailers, most
recently with Marshalls Stores, Inc.

LEE H. SCHOENFELD was promoted to his present position in July 1993. Mr.
Schoenfeld joined the Company in 1978 as a salesperson and has served most
recently as Vice President - Marketing.

PHILIP J. SCHOONOVER joined Best Buy in May 1995 and was promoted to Senior
Vice President of Marketing for Consumer Electronics and Appliances. Mr.
Schoonover's retail background spans 13 years, which includes more than eight
years as vice president of sales for the eastern region of Sony Corp. of
America. Most recently he served as executive vice president for TOPS Appliance
City for five years.

KENNETH R. WELLER joined the Company in May 1993. Since 1986, he was Vice
President of Sales of The Good Guys!, a San Francisco-based consumer electronics
retailer where he had worked since 1982.

RANDALL K. ZANATTA joined the Company in March 1980 and was promoted to his
present position in April 1994. Mr. Zanatta joined the Company as a salesperson
and was promoted to store manager. He later joined the Company's Marketing
Department, becoming a Vice President-Marketing in 1986.


-16-
PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The information set forth under the caption "Common Stock Prices" on page
10 of the Annual Report is incorporated herein by reference.


ITEM 6. SELECTED FINANCIAL DATA

The information set forth under the caption "Selected Consolidated
Financial and Operating Data" on page 5 of the Annual Report is incorporated
herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The information set forth under the caption "Management's Discussion &
Analysis of Financial Condition and Results of Operations" on pages 6 through 9
of the Annual Report is incorporated herein by reference.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this Item, listed below, are contained
in the Annual Report on the pages thereof indicated, and are expressly
incorporated herein by this reference.

Page No.
--------

Consolidated balance sheets as of March 2, 1996
and February 25, 1995 11
For the fiscal years ended March 2, 1996,
February 25, 1995, and February 26, 1994
Consolidated statements of earnings 12
Consolidated statements of cash flows 13
Consolidated statements of shareholders'
equity 14
Notes to consolidated financial statements 15-19

REPORT OF INDEPENDENT AUDITORS - ERNST & YOUNG LLP

Shareholders and Board of Directors
Best Buy Co., Inc.

We have audited the accompanying consolidated balance sheets of Best Buy Co.,
Inc. and subsidiaries as of March 2, 1996 and February 25, 1995, and the related
consolidated statements of


-17-
earnings, shareholders' equity and cash flows for each of the years then ended.
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 1996 and 1995 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Best
Buy Co., Inc. at March 2, 1996 and February 25, 1995, and the consolidated
results of its operations and its cash flows for each of the years then ended,
in conformity with generally accepted accounting principles.


ERNST & YOUNG LLP
Minneapolis, Minnesota
April 15, 1996


REPORT OF INDEPENDENT AUDITORS - DELOITTE & TOUCHE LLP

We have audited the accompanying statements of earnings, shareholders' equity,
and cash flows of Best Buy Co., Inc. (the Company) for the year ended
February 26, 1994. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the results of Best Buy Co., Inc.'s operations and its cash flows for
the year ended February 26, 1994, in conformity with generally accepted
accounting principles.


-18-
As discussed in Note 8 to the financial statements, the Company changed its
method of accounting for income taxes during the year ended February 26, 1994.

DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
April 13, 1994


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On August 16, 1994, the Company dismissed Deloitte & Touche LLP as its
independent auditors and retained Ernst & Young LLP. The Audit Committee of the
Board of Directors approved the decision to change auditors. The reports of
Deloitte & Touche LLP for each of the previous two fiscal years contained no
adverse opinion or disclaimer of opinion and were not qualified or modified with
respect to uncertainty, audit scope or accounting principle. During the prior
two fiscal years and through the date of dismissal, there were no disagreements
with Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. During the same
time period there were no "reportable events" as defined by the Rules and
Regulations of the Securities and Exchange Commission.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the captions "Security Ownership of Certain
Beneficial Owners and Management" and "Nominees and Directors" on pages 3
through 6 of the Proxy Statement is incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the caption "Executive Compensation" on
pages 7 through 13 of the Proxy Statement is incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information set forth under the caption "Security Ownership of
Beneficial Owners and Management" on pages 3 through 5 of the Proxy Statement is
incorporated herein by reference.


-19-
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the captions "Nominees and Directors" and
"Certain Transactions" on pages 5 through 6 of the Proxy Statement is
incorporated herein by reference.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Financial Statements.

All financial statements of the Registrant as set forth under Item 8
of this Report.

2. Financial Statement Schedules:

No schedules have been included since they are either not applicable or the
information is included elsewhere herein.


3. Exhibits:
<TABLE>
<CAPTION>

Method
of
Number Description filing
- ------ ----------- ------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation, as amended, of (3)
Best Buy Co., Inc.

3.2 Certificate of Designation with respect to Best Buy Series A (2)
Cumulative Convertible Preferred Stock, filed November 1, 1994

3.3 Amended and Restated By-Laws, as amended, of Best Buy Co., Inc. (2,4,5)


4.1 Form of Indenture between Best Buy Co., Inc. and First Trust (6)
Company, Inc., relating to $30,000,000 Subordinated Extendible
Notes due 1997, dated as of July 1, 1987

4.2 Note Purchase Agreement with Principal Mutual Life Insurance (7)
Company, dated as of July 30, 1992


4.3 Amended and Restated Credit Agreement (8)

</TABLE>


-20-
<TABLE>
<CAPTION>
<S> <C> <C>
dated August 25, 1995 between Best Buy Co., Inc. and First
Bank National Association

4.4 First Amendment to the Credit Agreement between Best Buy and (1)
First Bank National Association, dated March 1, 1996

4.5 Indenture between Best Buy Co., Inc. and Mercantile Bank of (3)
St. Louis N.A. relating to $150,000,000 8-5/8% Senior
Subordinated Notes due 2000, dated as of October 12, 1993

4.6 Amended and Restated Agreement of Limited Partnership of (2)
Best Buy Capital, L.P., dated as of November 3, 1994

4.7 Indenture between Best Buy, Best Buy Capital, L.P., and (2)
Harris Trust and Savings Bank relating to $288,227,848 6-1/2%
Convertible Subordinated Debentures due 2024, dated as of
November 3, 1994

4.8 Guarantee Agreement related to 6-1/2% Convertible Monthly (2)
Income Preferred Securities of Best Buy Capital, L.P.,
dated November 3, 1994


4.9 Deposit Agreement with respect to Best Buy Series A (2)
Cumulative Convertible Preferred Stock, dated
November 3, 1994


10.1 1987 Employee Non-Qualified Stock Option Plan, as amended (1)


10.2 Amended 1987 Directors' Non-Qualified Stock Option Plan, (2)
as amended


10.3 1994 Full-Time Employee Non-Qualified Option Stock Plan, (1)
as amended

10.4 Resolutions of the Board of Directors dated April 19, 1996 (1)
establishing the bonus program for senior officers

11.1 Computation of Earnings Per Share (1)

13.1 1996 Annual Report to Shareholders (1)

21.1 Subsidiaries of the Registrant (1)
</TABLE>


-21-
<TABLE>
<CAPTION>
<S> <C> <C>
23.1 Consent of Ernst & Young LLP (1)

23.2 Consent of Deloitte & Touche LLP (1)

27.1 Financial Data Schedule (1)
</TABLE>

(1) Document is filed herewith.

(2) Exhibits so marked were filed with the Securities and Exchange
Commission on May 23, 1995 as exhibits to the Form 10-K of Best Buy
Co., Inc. and are incorporated herein by reference and made a part
hereof.

(3) Exhibits so marked were filed with the Securities and Exchange
Commission on May 20, 1994 as exhibits to the Form 10-K of Best Buy
Co., Inc. and are incorporated herein by reference and made a part
hereof.

(4) Exhibit so marked was filed with the Securities and Exchange
Commission on November 12, 1991, as an exhibit to the Registration
Statement on Form S-3 (Registration No. 33-43065) of Best Buy Co.,
Inc., and is incorporated herein by reference and made a part of
hereof.

(5) Exhibit so marked was filed with the Securities and Exchange
Commission on January 13, 1992, as an exhibit to Form 10-Q of Best Buy
Co., Inc., and is incorporated herein by reference and made a part
hereof.

(6) Exhibit so marked was filed with the Securities and Exchange
Commission on June 19, 1987, as an exhibit to the registration
statement on form S-1 (Registration No. 33-15201) of
Best Buy Co., Inc., and are incorporated herein by reference and made
a part hereof.

(7) Exhibits so marked were filed with the Securities and Exchange
Commission on October 12, 1992, as exhibits to Form 10-Q of Best Buy
Co., Inc., and are incorporated herein by reference and made a part
hereof.

(8) Exhibit so marked was filed with the Securities and Exchange
Commission on October 10, 1995, as an exhibit to Form 10-Q of Best Buy
Co., Inc. and is incorporated herein by reference and made a part
hereof.

Pursuant to Item 601(b)(4)(iii) of Regulation S-K under the Securities Act
of 1933, the Registrant has not filed as exhibits to the Form 10-K certain
instruments with respect to long-term debt under which the amount of
securities authorized does not exceed 10 percent of the total assets of the



-22-
Registrant.  The Registrant hereby agrees to furnish copies of all such
instruments to the Commission upon request.

(b) Reports on Form 8-K

A Current Report on Form 8-K was filed on May 8, 1996 regarding cautionary
language with respect to forward looking comments made by or on behalf of
the Company.


-23-
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

BEST BUY CO., INC.
(Registrant)


By: /s/ Richard M. Schulze
-------------------------------
Chief Executive Officer

Dated: May 29, 1996

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 29, 1996.


/s/ Richard M. Schulze Chairman, Chief Executive Officer
- ------------------------------ and Director (principal executive
Richard M. Schulze officer)


/s/ Bradbury H. Anderson President, Chief Operating Officer
- ------------------------------ and Director
Bradbury H. Anderson


/s/ Allen U. Lenzmeier Executive Vice President and Chief
- ------------------------------ Financial Officer (principal
Allen U. Lenzmeier financial officer)


/s/ Robert C. Fox Sr. Vice President - Finance and
- ------------------------------ Treasurer (principal accounting
Robert C. Fox officer)


Director
- ------------------------------
Elliot S. Kaplan


/s/ Frank D. Trestman Director
- ------------------------------
Frank D. Trestman


Director
- ------------------------------
Culver Davis, Jr.


/s/ David Stanley Director
- ------------------------------
David Stanley


Director
- ------------------------------
James C. Wetherbe


-24-