Best Buy 2007 Annual Report Download - page 44

29
PART II
In support of our retail store operations, we also operate
Web sites for each of our brands (BestBuy.com,
BestBuyCanada.ca, BestBuy.com.cn, Five-Star.cn,
FutureShop.ca, GeekSquad.com, GeekSquad.ca,
MagnoliaAV.com and PacificSales.com).
Our business, like that of many retailers, is seasonal.
Historically, we have realized more of our revenue and
earnings in the fiscal fourth quarter, which includes the
majority of the holiday selling season in the United States
and Canada, than in any other fiscal quarter. The timing of
new-store openings, costs associated with the development
of new businesses, as well as general economic conditions
may also affect our future quarterly results.
Acquisitions
Pacific Sales Kitchen and Bath Centers, Inc.
On March 7, 2006, we acquired all of the common stock
of Pacific Sales for $411 million, or $408 million, net of
cash acquired, including transaction costs. We acquired
Pacific Sales, a high-end home-improvement and appliance
retailer, to enhance our ability to grow with an affluent
customer base and premium brands using a proven and
successful showroom format. Utilizing the existing store
format, we expect to expand the number of stores in order
to capitalize on the expanding high-end segment of the
U.S. appliance market. At March 3, 2007, Pacific Sales
operated 14 showrooms in Southern California and
contributed revenue of $296 million to our consolidated
financial results in fiscal 2007.
Jiangsu Five Star Appliance Co., Ltd.
On June 8, 2006, we acquired a 75% interest in Five Star
for $184 million, including a working capital injection of
$122 million and transaction costs. Five Star is one of
China’s largest appliance and consumer electronics
retailers, with 135 stores located in seven of China’s 34
provinces. We made the investment in Five Star to further
our international growth plans, to increase our knowledge
of Chinese customers and to obtain an immediate retail
presence in China.
Five Star employs a business model that carries a
significantly lower gross profit rate and a significantly lower
selling, general and administrative expenses (“SG&A”) rate
than our other operations. Consistent with China’s statutory
requirements, Five Star’s fiscal year ends on December 31.
Therefore, we have elected to consolidate Five Star’s
financial results on a two-month lag. Five Star’s operations
for the period of June 8, 2006, through December 31,
2006, contributed revenue of $563 million to our
consolidated financial results in fiscal 2007.
Financial Reporting Changes
To maintain consistency with our accounting policies, we
reclassified selected balances from receivables to cash and
cash equivalents in our February 25, 2006, consolidated
balance sheet. This reclassification had no effect on
previously reported operating income, net earnings or
shareholders’ equity.
In November 2005, the Financial Accounting Standards
Board (“FASB”) issued Staff Position (“FSP”) No. FAS
123(R)-3, Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards. During the third
quarter of fiscal 2007, we elected to adopt the alternative
transition method provided in FSP No. FAS 123(R)-3 for
calculating the tax effects of stock-based compensation. The
alternative transition method includes simplified methods to
determine the beginning balance of the additional paid-in
capital (“APIC”) pool related to the tax effects of stock-
based compensation, and to determine the subsequent
impact on the APIC pool and the statement of cash flows of
the tax effects of stock-based awards that were fully vested
and outstanding upon the adoption of Statement of
Financial Accounting Standards (“SFAS”) No. 123(R),
Share-Based Payment.
In accordance with SFAS No. 154, Accounting Changes
and Error Corrections, the change in accounting principle
related to our adoption of the alternative transition method
has been applied retrospectively to our fiscal 2006
consolidated statement of cash flows. The effect on
the consolidated statement of cash flows was a decrease in
operating activities with an offsetting increase in financing
activities of $22 million in fiscal 2006. The adoption of FSP
No. FAS 123(R)-3 did not have an impact on our operating
income, net earnings or shareholders’ equity.
Business Strategy and Core Philosophies
Our business, broadly defined, is about meeting the needs
and wants of consumers, not all of which are confined to
consumer electronics. We believe that our assets position us
to solve more customer problems than ever. Specifically,
our assets include 140,000 engaged employees; valuable
relationships with vendors all over the world; emerging
relationships with companies like Accenture, Apple and Car
Phone Warehouse; and all of the other mutually enriching
business relationships that our people continue to establish
and develop wherever we go, from Asia to Silicon Valley.