Best Buy 1999 Annual Report Download - page 27

F I S CAL 1999 B E S T B U Y ANNU AL R E POR T
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MANAGE ME NT ’S DI S CU S S I ON & ANALYS I S OF R E S U L T S OF
OPE R AT I ONS AND F I NANCI AL CONDI T I ON
The increase in the SG&A ratio in fiscal 1998 compared to fiscal 1997 also was due primarily to
higher levels of compensation and professional services. Compensation increased due to a tight labor
market and the introduction of the dedicated staff in the “high touch” area of the stores. Professional
service expenses were incurred to improve marketing effectiveness and retail operations, in addition
to addressing Year 2000 system issues.
Net interest improved by $33 million in fiscal 1999 as compared to fiscal 1998, in part due to the
conversion of the Company’s $230 million in preferred securities into equity in the first quarter of
fiscal 1999. Improvements in inventory management and strong sales enabled the Company to build
significant cash balances and prepay its $150 million 8-5/8% Senior Subordinated Notes in
October 1998. The prepayment premium of $3.8 million and the write-off of the remaining
deferred debt offering costs of approximately $1.1 million are included in interest expense.
The conversion and retirement of these two long-term financings reduces interest expense by about
$28 million annually. In addition, the higher cash balances generated increased interest income.
The Company’s effective income tax rate in fiscal 1999 was 38.5%, basically unchanged compared
to 38.6% in fiscal 1998 and down from 39.0% in fiscal 1997. The Company’s effective tax rate is
impacted by changes in the taxability of investment income and state income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company significantly improved its financial position and liquidity in fiscal 1999 as a result
of strong earnings growth and continued improvement in inventory management. The Company
used the cash generated from operations to repay debt and fund capital spending while increasing
cash and cash equivalents by $266 million. The conversion of preferred securities into common
stock contributed to the Company surpassing $1 billion in shareholders’ equity.
Inventories of just over $1 billion at the end of fiscal 1999 were essentially unchanged from the
previous year-end even with the operation of 28 new stores and higher sales volumes, due to improved
inventory management. Owned inventory (inventory net of accounts payable) also improved as a result
of faster inventory turns.
Trade receivables, mainly credit card and vendor-related receivables, increased $37 million due to
an increase in volume in the fourth quarter of fiscal 1999, as sales increased 21% over the previous year.
Receivables from sales on the Company’s private label credit card are sold to third parties, without
recourse, and the Company does not bear any risk of loss with respect to these receivables. Other
assets increased as a result of insurance policies purchased in connection with the Company’s
deferred compensation plan, established in fiscal 1999.
Trade payables increased, as compared to the previous year-end, due to increased business volume.
Accrued liabilities increased compared to the previous year-end as a result of expenses associated with
higher performance-based compensation related to the strong financial performance in fiscal 1999,
the higher levels of business activity and expenses for the Company’s strategic initiatives.
The increase in long-term liabilities was principally the result of the excess of rent expense for
accounting purposes over cash paid and the newly established deferred compensation plan.
Deferred service plan revenue declined by $17 million as deferred revenues related to service
plans sold prior to the fourth quarter of fiscal 1996, when the Company began insuring these
obligations, were recognized. Revenues from PSP sales from that time forward are recognized when
a sale is consummated, rather than over the life of the contract. The remaining $5.6 million of
deferred revenue will be recognized in fiscal 2000.