Best Buy 2002 Annual Report Download

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Extending our
Leadership
Best Buy Co., Inc.
Fiscal 2002 Annual Report

Table of contents

  • Page 1
    Extending our Leadership Best Buy Co., Inc. Fiscal 2002 Annual Report

  • Page 2
    ... points to 4.8 percent of revenues. • Comparable store sales gained 1.9 percent. • We acquired Future Shop, Canada's leading specialty retailer. • We opened 62 Best Buy stores, including our entry into Seattle. • We met our operating goals for Musicland's first full year of business. Goals...

  • Page 3
    ...Contents 2 Letter to Shareholders 6 Best Buy 9 Musicland 12 Future Shop 14 Magnolia Hi-Fi 16 Company Snapshot 18 Ten-Year Financial Highlights 20 Management's Discussion and Analysis 34 Consolidated Financial Statements 56 Glossary 58 Directors and Officers 59 Shareholder Information 60 Store Counts

  • Page 4
    Letter to Shareholders Extending our Leadership in Retailing In the past year, for example, we increased revenues by 28 percent to $19.6 billion, driven by the opening of 62 new Best Buy stores, the inclusion of revenues from acquired businesses and a comparable store sales gain at Best Buy stores ...

  • Page 5
    ... become available. 1998 1999 2000 2001 2002 Return on Average Common Equity Our return on equity compares favorably with that of other national retailers. Our knowledge management systems allow our 90,000 employees to share information about everything from car stereo installation tips to selling...

  • Page 6
    ..., rural consumer; new stores in Canada, as we launch the Best Buy brand in that market and expand our Future Shop position; and up to 130 more Magnolia Hi-Fi stores for affluent consumers, building on our West Coast presence. • New levels of sales productivity, particularly at our Musicland stores...

  • Page 7
    ... out to all of our employees, for continuing to embrace new challenges as our company expands; to our board, for its guidance and direction as we strive to extend our leadership into new spaces; to our vendors, for their ongoing partnership; and to our shareholders, for your continued support of our...

  • Page 8
    ... boost store productivity by enhancing our sales training, building customer loyalty, improving our supply chain management and more closely synchronizing our e-commerce business with our stores to give customers access to us wherever, whenever and however they want it. 6 Business Review: Best Buy

  • Page 9
    ...,205 12,694 14,017 1998 1999 2000 2001 2002 Retail Selling Space (Best Buy Stores) (in thousands of square feet) We plan to continue opening approximately 60 stores per year. In fiscal 2003, we expect to enter five states: Alaska, Idaho, Utah, West Virginia and Wyoming. Best Buy Co., Inc. 7

  • Page 10
    ...We have seen early success with other subscription-based models, such as satellite radio. In the future, as consumers begin to embrace new delivery models for entertainment and information, and as the networked home arrives, we want our customers to think of Best Buy. Services, like accessories, are...

  • Page 11
    ... for the coming year as well, so our emphasis at Musicland stores - and at Best Buy stores -- will be on increasing sales of other entertainment software, particularly DVD movies and video gaming. Our first objective was to launch a new mix of products at our mall-based Sam Goody stores, which sell...

  • Page 12
    ... gaming at most of our Sam Goody stores in fiscal 2002 as part of our remerchandising strategy. -3% -6% Q1 Q2 Q3 Q4 Musicland Comps vs. Mall Traffic 10 Business Review: Musicland Comparable store sales at Musicland outperformed the National Retail Traffic Index after we remerchandised Sam Goody...

  • Page 13
    ... for its high level of service, which attracts movie enthusiasts; and 76 Media Play stores, a family-oriented, big-box retailer of entertainment software and books in a 45,000-square-foot format. For our fourth objective, we integrated all of our staff functions with Best Buy stores and produced...

  • Page 14
    ... utilize the Concept 5 format. • Begin leveraging Best Buy's expertise in key areas, including supply chain management and advertising effectiveness. • Continue to execute the Future Shop business plan, which includes the opening of another eight to nine new stores across Canada in fiscal 2003.

  • Page 15
    Future Shop stores, which average 26,000 square feet, cater to consumers in Canada ages 25 to 44. Our stores are known as the place to "get it first." Best Buy Co., Inc. 13

  • Page 16
    ... Buy's top-notch real estate team to determine locations for future stores. • Use the Company's knowledge management systems for merchants in different business units to share information about products, features, prices and services sought by early adopter customers. 14 Business Review: Magnolia...

  • Page 17
    © 2001 Twent ieth Century Fox Film Corpo ration Expanding our Presence We plan to open six Magnolia Hi-Fi stores in fiscal 2003 and expand our offering at existing locations. Best Buy Co., Inc. 15

  • Page 18
    ...Wall Street Journal ranked our stock No.1 in total return to shareholders over the last five years. Gross Profit Percentage Our 2002 gross profit percentage improvement reflects our Musicland acquisition, a richer product mix, fewer markdowns and lower consumer financing costs. 16 Company Snapshot

  • Page 19
    ..., new stores, expense controls and acquisitions. Store Count Our number of retail stores has increased dramatically with the addition of Musicland and Future Shop. 33% Consumer Electronics 31% Home Office Product Sales Mix 8% Other 6% Appliances 22% Entertainment Software (Best Buy Stores...

  • Page 20
    ... revenues per store(6) Year-End Data Working capital Total assets Long-term debt, including current portion Convertible preferred securities Shareholders' equity Number of stores Best Buy Magnolia Hi-Fi Musicland International Total retail square footage (000s) Best Buy Magnolia Hi-Fi Musicland...

  • Page 21
    ... turns reflect Best Buy stores only and are calculated based upon a monthly average of inventory balances. Average revenues per store reflect Best Buy stores only and are based upon total revenues for the period divided by the weighted average number of stores open during the fiscal year. Best Buy...

  • Page 22
    ...Buy Co., Inc. is North America's No. 1 specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. In November of fiscal 2002, we acquired Future Shop Ltd. (Future Shop). Future Shop currently operates 95 stores and is Canada's largest specialty retailer...

  • Page 23
    ...-margin digital products, improved supply chain management and more effective promotional strategies. In addition, the inclusion of Musicland's higher-margin sales mix increased our gross profit rate by approximately 1.1% of revenues. Our selling, general and administrative expenses (SG&A) rate was...

  • Page 24
    ... income as a % of revenues (1) 2002 $17,115 1.9% 21.2% 16.0% $ 886 5.2% $ 2001 $15,189 4.9% 19.8% 15.8% 611 4.0% $ 2000 $12,494 11.1% 19.2% 14.8% 539 4.3% Aggregate results of our businesses other than Musicland and International. Includes only sales at Best Buy stores open at least 14 full...

  • Page 25
    ... products. Inventory turns for Best Buy stores declined slightly to 7.5 times in fiscal 2002, compared with last fiscal year's 7.6 times, due to a sales mix shift from faster-turning computers to consumer electronics, improved in-stock positions and modest comparable store sales growth. Lower costs...

  • Page 26
    ... expenses, such as corporate hiring and outside consulting costs, positively impacted our SG&A rate. Overall, the results of operations at Magnolia Hi-Fi did not significantly impact the Best Buy segment's financial results. During fiscal 2002, we opened 62 new Best Buy stores, including 20 stores...

  • Page 27
    ... software products. The impact of the sales mix shift was partially offset by lower costs associated with consumer financing offers due to lower interest rates and more favorable terms related to a new private-label credit card agreement. For the year, the SG&A rate was 19.7% of revenues...

  • Page 28
    ... from operations, including improved inventory management and a $200 million investment in Best Buy common stock by Microsoft Corporation as part of a strategic alliance. Interest expense on Musicland debt and lost interest income on the cash used to acquire Musicland and Magnolia Hi-Fi reduced net...

  • Page 29
    ... credit facility is available for additional working capital needs or Factors that can impact our credit rating include changes in the economic environment, conditions in the retail and consumer electronics industries, our financial position and changes in our business strategy. We do not currently...

  • Page 30
    ..., in the Notes to Financial Statements beginning on page 39. The following table presents information regarding available commercial commitments and their expiration dates by fiscal year ($ in millions): Available Commercial Commitments Expires Amount Lines of credit (1) 2003 $ 31 - 200 $ 231 2004...

  • Page 31
    ..., $39 million in capitalized leases related to new stores had been financed under the master lease agreement. In fiscal 2000, our Board of Directors authorized the purchase of up to $400 million of our common stock from time to time through open-market purchases. The stock purchase program has no...

  • Page 32
    ...-lived assets such as property, plant and equipment; goodwill; software; and investments are reviewed for impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. We would recognize an impairment loss when estimated future undiscounted cash...

  • Page 33
    ... sale and lease back of the properties. The capital spending will support the opening of approximately 60 Best Buy stores in the United States and six to eight in Canada, 30 small-market Sam Goody stores, eight to nine Future Shop stores and six Magnolia Hi-Fi stores. About half of the new U.S. Best...

  • Page 34
    ... 2001, we acquired the common stock of Musicland Stores Corporation and Magnolia Hi-Fi, Inc. The results of operations of those businesses were included from their dates of acquisition. Best Buy stores only. The comparable store sales increase for the fourth quarter of fiscal 2002 was based upon...

  • Page 35
    ... the ticker symbol BBY. As of March 28, 2002, there were 2,013 holders of record of Best Buy common stock. We have not historically paid, and have no current plans to pay, cash dividends on our common stock. The stock prices above have been restated to reflect a three-for-two stock split, effective...

  • Page 36
    ... per share amounts Assets Current Assets Cash and cash equivalents Receivables Recoverable costs from developed properties Merchandise inventories Other current assets Total current assets Property and Equipment Land and buildings Leasehold improvements Fixtures and equipment Property under capital...

  • Page 37
    ... related expenses Accrued liabilities Accrued income taxes Current portion of long-term debt Total current liabilities Long-Term Liabilities Long-Term Debt Shareholders' Equity Preferred stock, $1.00 par value: Authorized - 400,000 shares; Issued and outstanding - none Common stock, $.10 par value...

  • Page 38
    ...Years Ended Revenues Cost of goods sold Gross profit Selling, general and administrative expenses Operating income Net interest (expense) income Earnings before income tax expense Income tax expense Net earnings Basic earnings per share Diluted earnings per share Basic weighted average common shares...

  • Page 39
    ... Acquisitions of businesses, net of cash acquired Decrease (increase) in recoverable costs from developed properties Increase in other assets Total cash used in investing activities Financing Activities Net proceeds from issuance of long-term debt Long-term debt payments Issuance of common stock...

  • Page 40
    ... of Changes in Shareholders' Equity $ and shares in millions Common Shares Common Stock Additional Paid-In Capital Accumulated Other Retained Comprehensive Earnings Loss Total Balances at Feb. 27, 1999 Stock options exercised Tax benefit from stock options exercised Repurchase of common stock...

  • Page 41
    ... prerecorded music, movies and other entertainmentrelated products. International is comprised of Future Shop, which currently operates 95 stores and is Canada's largest consumer electronics retailer, offering products similar to Best Buy. Basis of Presentation The consolidated financial statements...

  • Page 42
    ... note 4 as if we had adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Pre-Opening Costs Non-capital expenditures associated with opening new stores are expensed as incurred. Advertising Costs Advertising costs, which are included in selling...

  • Page 43
    ...or financial position. 2. Acquisitions Effective Nov. 4, 2001, we acquired all of the common stock of Future Shop for $377, or $368 net of cash acquired, including transaction costs. We acquired Future Shop to further our expansion plans and increase shareholder value. The acquisition was accounted...

  • Page 44
    ... operations as though Musicland and Future Shop had been acquired as of the beginning of fiscal 2001: 2002 Revenues Net earnings Basic earnings per share Diluted earnings per share $20,392 570 1.80 1.77 2001 $18,392 428 1.38 1.34 Pro forma information related to the acquisition of Magnolia Hi-Fi is...

  • Page 45
    ... Best Buy Stores, L.P., our wholly owned indirect subsidiary. On Feb. 28, 2002, we filed a Registration Statement on Form S-3 with the Securities and Exchange Commission to register the debentures, the guarantee and the underlying shares of common stock. As of May 1, 2002, the Registration Statement...

  • Page 46
    ...an unsecured and unsubordinated basis by Best Buy Stores, L.P., our wholly owned indirect subsidiary. The debentures, the guarantee and the underlying shares of common stock were registered with the Securities and Exchange Commission pursuant to a Registration Statement on Form S-3 that was declared...

  • Page 47
    ... of constructing and leasing new retail locations. At the end of fiscal 2002, $39 in capitalized leases for new stores had been financed under the master lease agreement. Inventory Financing We have a $200 inventory financing line. Borrowings are collateralized by a security interest in certain...

  • Page 48
    ... rate Expected dividend yield Expected stock price volatility Expected life of options 4.9% 0% 55% 4.5 years 2001 6.1% 0% 60% 4.5 years 2000 6.4% 0% 50% 4.5 years The weighted average fair value of options granted during fiscal 2002, 2001 and 2000 used in computing pro forma compensation expense...

  • Page 49
    ...) 26,368,000 9,382,000 (6,846,000) (1,417,000) 27,487,000 Exercised Canceled Outstanding on March 3, 2001 Granted Exercised Canceled Outstanding on March 2, 2002 (1) Represents Musicland options converted into Best Buy Co., Inc. options in connection with the acquisition. Best Buy Co., Inc. 47

  • Page 50
    ...-based awards granted under stock-based compensation plans. The shares related to the convertible debentures were not included in our diluted earnings per share computation as the criteria for conversion of the debentures were not met. We completed a three-for-two stock split effected in the form...

  • Page 51
    ... of up to $400 of our common stock from time to time through open market purchases. This program has no stated expiration date. As of March 2, 2002, 2.9 million shares had been purchased and retired at a cost of $100. No shares were repurchased in fiscal 2002 or 2001. $ 1.80 $ 1.77 $ 1.28 $ 1.24...

  • Page 52
    ... percentage rentals) for all operating leases at March 2, 2002, were as follows: Fiscal Year 2003 2004 2005 2006 2007 Thereafter $ 472 459 417 376 361 2,698 6. Benefit Plans We sponsor retirement savings plans for employees meeting certain age and service requirements. The plans provide for Company...

  • Page 53
    ... tax expense to the federal statutory tax rate: 2002 Federal income tax at the statutory rate State income taxes, net of federal benefit Tax-exempt interest income Goodwill amortization Other Income tax expense Effective tax rate Income tax expense consists of the following: 2002 Current: Federal...

  • Page 54
    ..., movies and other entertainment -related products. Musicland was acquired in the fourth quarter of fiscal 2001. The International segment was established in connection with the acquisition of Future Shop, a specialty retailer of consumer electronics, home office equipment, entertainment software...

  • Page 55
    ... (loss) by reportable segment for each of the past three fiscal years: 2002 Revenues Best Buy Musicland International Total revenues Operating Income (Loss) Best Buy Musicland International Total operating income (loss) Net interest (expense) income Earnings before income tax expense $ $ 886 29...

  • Page 56
    $ in millions, except per share amounts Supplemental Segment Information: 2002 Assets Best Buy Musicland International Total assets Capital Expenditures Best Buy Musicland International Total capital expenditures Depreciation and Amortization Best Buy Musicland International Total depreciation and ...

  • Page 57
    ... balance sheets of Best Buy Co., Inc. and subsidiaries as of March 2, 2002, and March 3, 2001, and the related consolidated statements of earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended March 2, 2002. These financial statements are the...

  • Page 58
    ... months consumer electronics product category includes TVs, DVD players, speakers, cameras, camcorders, car stereos, home theater systems, shelf systems, personal portables, satellite systems and accessories Concept 5 or C5 the newest Best Buy store format, the fifth in the Company's history cost of...

  • Page 59
    ... turns the number of times the average inventory is sold annually, based on average monthly inventory balances logistics transportation and distribution of products, both inbound and outbound, between vendors and stores MAP minimum advertised price market reaction price in -store price changes...

  • Page 60
    ... - Retail Sales Donald G. Eames Senior Vice President Business Group Leader - Division 1 58 Directors and Officers Marc D. Gordon Executive Vice President & Chief Information Officer Thomas C. Healy President - Best Buy International Susan S. Hoff Senior Vice President - Public Affairs & IRO...

  • Page 61
    ... our Web site to obtain product information, Company background information and current news or to add your name to our e-mail notification lists. Or write to: Best Buy Co., Inc. Investor Relations Department P.O. Box 9312 Minneapolis, MN 55440-9312 phone (952) 947-2621 fax (952) 947-2693 Transfer...

  • Page 62
    Company Store Counts BBY = Best Buy ML = Musicland MH = Magnolia Hi - Fi FS = Future Shop BBY Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota ...

  • Page 63
    Extending our Leadership ...in Retailing ...into New Technologies ...with New Customers ...into New Markets

  • Page 64
    Best Buy Co., Inc. World Headquarters P.O. Box 9312 Minneapolis, MN 55440 (952) 947- 2000 www.BestBuy.com © 2002 Best Buy Co., Inc.