Best Buy 2002 Annual Report Download - page 32

30 MD&A
Inventory Reserves
We maintain inventory at the lower of cost or market.
Markdown reserves are established based primarily on
forecasted consumer demand, inventory aging and
technological obsolescence. If our estimates regarding
consumer demand are inaccurate or changes in technology
impact demand for certain products in an unforeseen
manner, we could be exposed to losses in excess of our
established reserves.
Independent physical inventory counts are taken on a
regular basis at all locations that hold inventory to ensure
the amounts reflected in our consolidated financial
statements are properly stated. During the interim period
between physical inventory counts, we accrue for
anticipated physical inventory losses on a location-by-
location basis, based on historical results and current
trends. If our estimates regarding physical losses are
inaccurate, we could be exposed to losses in excess of
our established reserves.
Long-Lived Assets
Long-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 flows expected to result from the use of the
asset and its value upon disposal are less than its carrying
amount. If our estimates regarding future undiscounted cash
flows or useful lives were to change, we could be exposed
to losses that are material in nature.
Tax Contingencies
Domestic and foreign tax authorities frequently audit us.
These audits include questions regarding the timing and
amount of deductions and the allocation of income among
various tax jurisdictions. In evaluating the exposure
associated with our various filing positions, we record
reserves for probable exposures. To the extent we prevail
in matters for which accruals have been established or are
required to pay amounts in excess of our reserves, our
effective tax rate in a given financial statement period may
be materially impacted. As of the end of fiscal 2002,
three and two of our open tax years were undergoing
examination by the United States Internal Revenue Service
and Revenue Canada, respectively.
New Accounting Pronouncements
A discussion of recently issued accounting pronouncements
is described in note 1 of the Notes to Consolidated
Financial Statements on page 39.
Outlook for Fiscal 2003
Looking forward to fiscal 2003, we are projecting earnings
growth of approximately 1 8 % to 21% from $1. 77 per
share in fiscal 2002 to approximately $2.10 to $2.1 7
per share in fiscal 2003. We expect the earnings growth
to be driven by a 1 7 % to 20% increase in revenues,
maintaining the gross profit rate we delivered in fiscal
2002 and modestly reducing our SG&A rate. The
projected earnings increase reflects a reduction in
Musicland’s operating income from $29 million in fiscal
2002 to approximately break-even in fiscal 2003 due
to continued transformation initiatives. The reduction in
Musicland’s operating income is net of the $16 million
decrease in Musicland’s goodwill amortization expense
as a result of adopting SFAS No. 142, Goodwill and
Other Intangible Assets, at the beginning of fiscal 2003.
In addition, our projections assume that the U.S. economy
will continue to gradually improve in fiscal 2003.
We expect total revenues to grow from $19.6 billion in
fiscal 2002 to between $23.0 billion and $23.5 billion