Best Buy 2001 Annual Report Download

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We improve people’s lives by making
technology and entertainment products
affordable and easy to use.
Table of Contents
Financial Highlights 1
Chairman’s Letter to Shareholders 4
Best Buy Business Review 10
Musicland Business Review 14
Magnolia Hi-Fi Business Review 18
Ten-year Financial Highlights 20
Management’s Discussion and Analysis 22
Consolidated Financial Statements 36
Notes to Financial Statements 41
Store Map 58
Directors and Executive Officers 59
Glossary 60
Company Information 61
Pursuing Our Mission
Minneapolis-based Best Buy Co., Inc. (NYSE: BBY) is the nation’s number one specialty retailer of consumer electronics, personal
computers, entertainment software and appliances. The Company operates retail stores and commercial Web sites under the
names: Best Buy (BestBuy.com), Magnolia Hi-Fi, Media Play (MediaPlay.com), On Cue (OnCue.com),Sam Goody (SamGoody.com)
and Suncoast (Suncoast.com). The Company reaches consumers through more than 1,700 retail stores nationwide, in Puerto Rico
and in the U.S. Virgin Islands and employs more than 75,000 people.

Table of contents

  • Page 1
    ...to Shareholders Best Buy Business Review Musicland Business Review Magnolia Hi-Fi Business Review Ten-year Financial Highlights Management's Discussion and Analysis Consolidated Financial Statements Notes to Financial Statements Store Map Directors and Executive Officers Glossary Company Information...

  • Page 2
    ... ecor d $ 3 9 6 mi lli on. • W e cr ea ted $ 13 8 mi lli on i n EVA . • W e op ened 6 2 Best Buy stor es, i nclud i ng our entr y i nto the N ew Yor k a r ea . • W e a nnounced our p la nned exp a nsi on i nto Ca na d a . • W e comp leted the a cq ui si ti on of M usi cla nd Stor es Cor p or...

  • Page 3
    ...-Fi revenues since acquisition Product Mix 1997 1998 1999 2000 2001 We have grown revenues by an average of 16% per year through new stores and sales increases at existing stores. 34 % Home Office 2 2 % Consumer Electronics - Video 7 % Other 7 % Appliances 11 % Consumer Electronics - Audio...

  • Page 4
    ... 18.0% 15.7% 13.5% 19.2% 20.0% Number of Employees (in thousands) 75.0 Company Snapshot 55.0 36.3 39.0 45.0 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 3 Best Buy Co., Inc. Our gross profit percentage improvement reflects changes in our product mix, both among and within our...

  • Page 5
    ... ees a nd community members: Best Buy has enjoyed phenomenal grow th in the past decade. W e have increased revenues at a compound annual grow th rate of 3 7 percent by opening stores, B e st B u y C o . I n c . increasing sales at existing stores and taking advantage of new product cycles. W e have...

  • Page 6
    ...These strategic initiatives provide us w ith substantial building blocks for growth. Through these three strategies, we have added new branded retail outlets, mall and rural store formats, a high-end electronics sales and service format, and hundreds of millions of new consumer touch points. W e see...

  • Page 7
    ... the store experience. W e then will apply the transformed operating model to existing also are significant. In the coming year, we hope to gain an insider's perspective on tw o key parts of M agnolia Hi-Fi's business model: w orld-class customer service and skilled marketing to high-end consumers...

  • Page 8
    ...O ur revenues climbed 2 3 percent to a record $15.3 billion, compared w ith $12 .5 billion the prior year. O ur sales growth was driven by the opening of more than10 0 Best Buy stores in the past tw o years and continued strong consumer preference for Best Buy stores' format, product assortments and...

  • Page 9
    .... G ross profit grew to 2 0 .0 percent of sales, compared w ith 19 .2 percent the prior year. The increase reflects improved product margins and changes in our B e st B u y C o . , I n c . product mix, including higher sales of consumer electronics and a low er contribution from the home office...

  • Page 10
    ...U.S. retail leader for technology products and services in the home office and entertainment categories, we stand to benefit as the digital product cycle expands. M oreover, we see tremendous opportunity as we extend that expertise through new brands and new store formats to reach consumers w e have...

  • Page 11
    ..., our new stores w ill use our new est store format, w hich features a flexible merchandising architecture, faster checkout, a labor model more tailored to the various product categories and improved merchandising. O ur customers recognize Best Buy's brand promise Best Buy stores project sales of 20...

  • Page 12
    ... the market for new products has helped us grow revenues and net earnings. W e believe that the life cycle of digital products is gaining momentum and that Best Buy stores play a key role in building the digital future. W e envision a future in w hich w e w ill continue to provide consumers w ith...

  • Page 13
    ... of the United States. In fiscal 2 0 01, w e took the first step in our international expansion and began planning to open Best Buy stores in Canada by fall 2 0 0 2 . The C anadian marketplace is attractive because of the sizeable population, high median incomes, strong annual spending in consumer...

  • Page 14
    ... Internet access increases, and as technology begins to enable content distribution and the management of associated rights and royalties, w e expect our consumers to embrace digital distribution. Best Buy intends to be a leader in assisting customers in understanding and using these new digital...

  • Page 15
    ... consumer electronics to several new consumer segments, including segments typically underserved at our Best Buy stores. M usicland's mall-based stores and rural market locations give us access to more young people, more women and more rural communities. M usicland's 1,3 0 0 stores currently receive...

  • Page 16
    ...the 2 0 01 holiday season. W e anticipate that the full transformation w ill include an adjustment of product mix, merchandising, the labor model and branding. square feet, is an excellent w ay to reach consumers w ho live in communities that cannot support a Best Buy store but that have significant...

  • Page 17
    ... w ith those of Best Buy stores in areas w here there are opportunities for leverage, such as purchasing, distribution and inventory control. Levera ging our M edia Pla y Stores M edia Play, the fourth brand w e acquired through CD sales are heavily dependent on new releases. T op sellers at...

  • Page 18
    ... games, electronics, computer softw are, musical instruments and novelty items. These stores offer a number of specialty areas. For example, the M P Kids section houses a play area for children and a wide array of children's movies, books and educational toys. The G ame Zone area allows customers...

  • Page 19
    ...w ith a handful of stores in the San Francisco Bay area in fiscal 2 0 0 2 . W e plan to carefully manage the grow th of this chain to The company offers a state-of-the-art design center as w ell as an in-house repair/ installation department. The M agnolia Hi-Fi Design Center, located in Seattle, is...

  • Page 20
    In fiscal 2001, 10 percent of Best Buy's TV sales were digital, five times the percentage of fiscal 2000. Through Magnolia Hi-Fi, Best Buy is in a better position to leverage the explosive growth of home theater.

  • Page 21
    ... earnings w as the result of strong sales of new and expanded digital technology product offerings and gross margin improvements. The earnings grow th in fiscal 2 0 01 also w as driven by a 2 3 % increase in revenues for the year, w ith new Best Buy stores accounting for the majority of the increase...

  • Page 22
    ...-Fi from their dates of acquisition. The 5 3 rd w eek added about $ 2 8 0 million to fiscal 2 0 01 revenues. The comparable store sales increase in a w eaker economic environment reflects the strength of the digital product cycle, the benefits from enhancements made to the Company's operating model...

  • Page 23
    ... gain market share. Higher levels of disposable income due to the strong economy, consumers' rapid acceptance of digital technology products and the increased affordability of personal computers all drove consumer demand. Internet service providers (ISPs) offered new subscribers significant rebates...

  • Page 24
    ...d Fi n a n c i a l C o n d i t i o n Product Ca tegory Perform a nce The follow ing table presents the Best Buy retail store sales mix by major product category for each of the past three fiscal years. 2 0 01 Home O ffice Consumer Electronics - Video Consumer Electronics - Audio Entertainment Softw...

  • Page 25
    ...products, including digital televisions, digital camcorders, cameras and DVD players. The sales were driven by increased consumer demand for new technology and low er price points. Sales of digital televisions, w ith an average selling price of approximately $ 2 ,3 0 0 as of fiscal year-end, B e st...

  • Page 26
    ... Company also benefited from its "Complete Solution" selling strategy that is designed to provide customers w ith higher-margin accessories and services supporting their purchases. Improved inventory management contributed to the gross profit margin improvement as inventory turns for Best Buy stores...

  • Page 27
    ... start-up costs associated w ith the opening of the N ew York market, as w ell as low er than anticipated productivity from the initial operations B e st B u y C o . , I n c . of these stores, also added to the increase in the SG &A rate. Similar to the entry into Los Angeles, management currently...

  • Page 28
    ...mainly credit card and vendor-related receivables, increased by $ 7 million compared w ith the prior year. The increase w as primarily due to higher business volume offset by a reduction in receivables from Internet service providers. Receivables from sales on the Company's private-label credit card...

  • Page 29
    ...M D&A $ 4 0 0 million of the Company's common stock from time to time through open market purchases. The stock purchase program has no stated expiration date. Approximately 1.9 million shares had been purchased under this plan during the prior fiscal year at a cost of $ 10 0 million. N o additional...

  • Page 30
    ... the impact of changes in product assortment at M usicland stores and expected expense savings and synergies, are not reflected. The pro forma gross profit margin ratio of 2 1.7 % as compared to the reported 2 0 .0 % reflects the impact of M usicland's higher margin sales mix. The pro forma SG...

  • Page 31
    ... profitable sales mix resulting from an increase in digital products as a percentage of the Company's sales mix. In addition, a continuation of the shift to higher margin products in the home office category and the migration to digital televisions should benefit the Company's overall gross margin...

  • Page 32
    profit margin than Best Buy stores due to product mix and pricing differences. This gap is expected to narrow slightly in fiscal 2 0 0 2 due to a broader product assortment as new consumer electronics are introduced into the M usicland stores. The SG &A ratio is expected to increase in fiscal 2 0 0 ...

  • Page 33
    ... to many retailers, the Company's business is seasonal. Revenues and earnings are typically greater during the second half of the fiscal year, w hich includes the holiday selling season. The timing of new store openings, costs associated w ith acquisitions and development of new businesses, and...

  • Page 34
    ... economic conditions, acquisitions and development of new businesses, product availability, sales volumes, profit margins, and the impact of labor markets and new product introductions on the Company's overall profitability. Readers should review the Company's Current Reports on Form 8 -K that...

  • Page 35
    ...a n c e Sh e e t s C o n so l i d a t e d Ba l a n c e Sh e e t s $ in thousands, except per share amounts Assets Current Assets Cash and cash equivalents Receivables Recoverable costs from developed properties M erchandise inventories O ther current assets T otal current assets $ M a rch 3 2 0 01...

  • Page 36
    ... n c e Sh e e t s $ in thousands, except per share amounts Lia bilities a nd Sha reholders' Equity Current Lia bilities Accounts payable Accrued compensation and related expenses Accrued liabilities Accrued income taxes Current portion of long-term debt T otal current liabilities M a rch 3 2 0 01...

  • Page 37
    ...e st B u y C o . , I n c . Cost of goods sold G ross profit Selling, general and administrative expenses O perating income N et interest income 38 C o n so l i d a t e d St a t e m e n t s Earnings before income tax expense Income tax expense N et earnings Basic earnings per share Diluted earnings...

  • Page 38
    ..., net of acquired assets and liabilities: Receivables M erchandise inventories O ther assets Accounts payable O ther liabilities Accrued income taxes T otal cash provided by operating activities $ M a rch 3 2 0 01 3 9 5 ,8 3 9 Feb. 2 6 2000 $ 3 4 7 ,0 7 0 Feb. 2 7 19 9 9 C o n so l i d a t e d St...

  • Page 39
    ... s' Eq u i t y $ in thousands Common Stock B e st B u y C o . , I n c . Ba la nces a t Feb. 2 8 , 19 9 8 Stock options exercised T ax benefit from stock options exercised Conversion of preferred securities M ay 1 9 9 8 tw o-for-one stock split Repurchase of common stock N et earnings $ 4 ,4 6 3 199...

  • Page 40
    ... Company acquired the common stock of M usicland Stores Corporation (M usicland) and M agnolia Hi-Fi, Inc. (M agnolia Hi-Fi). M usicland is principally a mall-based retailer of pre-recorded home entertainment products. M agnolia Hi-Fi is a Seattle-based, high-end retailer of audio and video products...

  • Page 41
    ... revenue is recognized at the time of sale. Stock -Ba sed Com pensa tion The Company accounts for employee stock-based compensation using the intrinsic value method as prescribed under Accounting Principles Board (APB) O pinion N o. 2 5 , Accounting for Stock Issued to Employees, and related...

  • Page 42
    ... dilutive shares of common stock include stock options and other stock-based aw ards granted under stock-based compensation plans. Convertible preferred securities w ere assumed to be converted into common stock, and any related interest expense, net of income taxes, w as N o te s added back...

  • Page 43
    ... from the dates of acquisition. The purchase prices for M agnolia Hi-Fi and M usicland have been allocated on a preliminary basis using information currently available. The allocation of the purchase price to the assets and liabilities acquired is expected to be finalized by the end of fiscal 2 00...

  • Page 44
    ... Less: current portion Long-term debt 1 6 0 ,5 7 4 2 4 ,9 0 4 2 9 5 ,9 4 9 (1 1 4 ,9 4 0 ) $ 1 8 1 ,0 0 9 - 3 0 ,6 5 0 3 0 ,6 5 0 (1 5 ,7 9 0 ) $ 1 4 ,8 6 0 $ 1 1 0 ,4 7 1 $ - Feb. 2 6 2000 N o te s The mortgage and other debt are secured by certain property and equipment w ith a net book value...

  • Page 45
    ... ,0 0 0 inventory financing credit line, w hich increases to $ 3 2 5 ,0 0 0 on a seasonal basis. Borrow ings are collateralized by a security interest in certain merchandise inventories approximating the outstanding borrow ings. The terms of this arrangement allow the Company to extend the due dates...

  • Page 46
    ...public offering of 4 .6 million convertible monthly income preferred securities with a liquidation preference of $ 5 0 per security. The securities were convertible into shares of the Company's common stock at the rate of 4 .4 4 4 shares per security (equivalent to a conversion price of $ 11.2 5 per...

  • Page 47
    ...by SFAS N o. 12 3 , the Company has elected to account for its stock option plans under the provisions of APB O pinion N o. 2 5 . Accordingly, no compensation cost has generally been recognized for stock options granted. Had the Company adopted B e st B u y C o . , I n c . SFAS N o. 12 3 , the pro...

  • Page 48
    ...share amounts O ption activity for the last three fiscal years w as as follow s: W eighted Avera ge Ex ercise Price...0 5 5 .8 1 9 .1 6 4 0 .4 1 3 3 .1 9 49 B e st B u y C o . , I n c . N o te s (1 ) Represents M usicland options converted into Company options in connection w ith the acquisition.

  • Page 49
    ... and independent contractors of the Company and its subsidiaries. Restricted shares have the same rights as other shares of common stock, except they are not transferable until fully vested. Restrictions lapse over a vesting period of three years in w hich 2 5 % is vested at the time of aw...

  • Page 50
    ... of up to $ 4 0 0 ,0 0 0 of the Company's common stock from time to time through open market purchases. This plan has no stated expiration date. As of M arch 3 , 2 0 01, 1.9 million shares had been purchased and retired at a cost of $ 10 0 ,0 0 0 . N o shares w ere repurchased in fiscal 2 0 01.

  • Page 51
    ... operations from leased locations. The terms of the lease agreements generally range from three to 16 years B e st B u y C o . , I n c . for Best Buy stores and three to 2 0 years for M usicland stores. The leases require payment of real estate taxes, insurance and common area maintenance in...

  • Page 52
    ... and leasing new retail locations. An operating lease agreement w ill be entered into for certain retail stores providing for an initial lease term of five years. The leases w ill require payment of real estate taxes, insurance and common area maintenance. 53 B e st B u y C o . , I n c .

  • Page 53
    ..., except per share amounts 7 . Benefit Pla ns The Company sponsors retirement savings plans for employees meeting certain age and service requirements. The plans provide B e st B u y C o . , I n c . for Company-matching contributions, which are subject to annual approval by the Company's Board of...

  • Page 54
    ... reporting and income tax purposes. Significant deferred tax assets and liabilities consist of the follow ing: 55 B e st B u y C o . , I n c . M a rch 3 2 0 01 Accrued expenses Deferred revenues Compensation and benefits Inventory O ther T otal deferred tax assets Property and equipment Inventory...

  • Page 55
    ... arising during the normal course of conducting business. M anagement believes that the resolution of these proceedings, either individually or in the aggregate, w ill not have a significant adverse impact on the Company's consolidated financial statements. 56 N o te s B e st B u y C o . , I n c .

  • Page 56
    ...selecting Investor Relations. A W eb-based e-mail notification system also is available to alert subscribers to new press releases, SEC filings, upcoming events and other significant postings. Also visit our W eb site to obtain product information, Company background information and current new s or...