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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1999.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact Name of Registrant as Specified in its Charter)
MINNESOTA 41-0907483
(State of Incorporation) (I.R.S. Employer
Identification Number)
7075 FLYING CLOUD DRIVE
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-947-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
The aggregate market value of voting stock held by non-affiliates of the
Registrant on April 30, 1999, was approximately $5,527,000,000. On that date,
there were 204,643,509 shares of Common Stock issued and outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
February 27, 1999 ("Annual Report") are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement dated May 21, 1999 for the regular
meeting of shareholders to be held June 24, 1999 ("Proxy Statement") are
incorporated by reference into Part III.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies. With the exception of historical
information, the matters discussed in this Annual Report on Form 10-K are
forward-looking statements and may be identified by the use of words such as
"believe," "expect," "anticipate," "plan," "estimate," "intend" and
"potential." Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions. A variety of factors could cause the Company's actual results to
differ materially from the anticipated results expressed in such
forward-looking statements, including, among other things, general economic
conditions, sales volumes, profit margins, the Company's and its suppliers'
Year 2000 readiness, and the impact of labor markets and new product
introductions on the Company's overall profitability. Readers are encouraged
to review the Company's Current Report on Form 8-K filed on May 15, 1998,
that describes additional important factors that could cause actual results
to differ materially from those contemplated by the statements made herein.
PART I
ITEM 1. BUSINESS
General
Best Buy Co., Inc. (the "Company" or "Best Buy"), is the nation's
largest volume specialty retailer of name brand consumer electronics, home
office equipment, entertainment software and appliances. The Company started in
1966 as an audio component systems retailer, and in the early 1980s, with the
introduction of the video cassette recorder, expanded into video products. In
1983, the Company changed its marketing strategy to use mass merchandising
techniques for a wider variety of products, and began to operate its stores with
a "superstore" format. In 1989, Best Buy dramatically changed its method of
retailing by introducing its Concept II store format, a self-service,
non-commissioned, discount style sales environment designed to give the customer
more control over the purchasing process. The Company determined that an
increasing number of customers had become knowledgeable enough to select
products without the assistance of a commissioned salesperson and preferred to
make purchases in a more convenient and customer friendly environment.
In fiscal 1995, the Company developed a strategy to further enhance its
store format. The strategy, known as Concept III, incorporates a larger store
format created to produce a more informative and exciting shopping experience
for the customer. Through focus group interviews and other research, the Company
determined that customers wanted more product information and a larger product
selection. In order to meet these evolving consumer preferences, the Company
developed an enhanced store format which features more hands-on and interactive
product demonstrations. In fiscal 1999, the Company introduced its Concept IV
store format. This new format features improved merchandising, signage and
customer service and is expected to better address consumers' needs as the
consumer electronics industry, in particular, progresses into new digital
products. Concept IV reinforces the Company's retailing strategy as the
destination for new technology in a fun, informative and no pressure shopping
environment. With its innovative retail format, the Company has moved into a
leading position nationally in all of its principal product categories except
appliances, where it ranks third.
In fiscal 1999, the Company increased its store count by 10%, with the
addition of 28 new stores and, as of February 27, 1999, was operating 311 stores
in 36 states. The Company accelerated its expansion in fiscal 1999 after
initiatives to improve operations resulted in an enhanced operating model. The
Company anticipates opening approximately 45 stores in fiscal 2000, and expects
to be operating 356 stores by the end of fiscal 2000.
Business Strategy
The Company's business strategy is to offer consumers an enjoyable and
convenient shopping experience while maximizing the Company's profitability.
Best Buy believes it offers consumers meaningful advantages in store
environment, product value, selection and service. An objective of this strategy
has been to achieve a dominant market share in the markets Best Buy serves. The
Company currently holds a leading, and in some cases dominant, share in its
mature markets. The Company's store format features interactive displays, and
for certain product categories, a high level of customer assistance, all
designed to enhance the customer's shopping experience. As part of its overall
strategy, the Company:
- Generally offers a retail format similar to a self service
discount store for many products that consumers are familiar
with and provides a higher level of customer service and
product explanation for more technically complex and
integrated products.
- Provides a selection of brand name products comparable to
retailers that specialize in the Company's principal product
categories and seeks to ensure a high level of product
availability for customers.
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- Seeks to provide customers with the best product value
available in the market area through active comparison
shopping programs, daily price changes, lowest price
guarantees and special promotions, including interest-free
financing, performance service plans generally priced below
competitors, and home delivery.
- Provides a variety of services not offered by certain
competitors, including convenient financing programs, product
delivery and installation and post-sale services including
repair and warranty services and computer upgrades.
- Locates stores at sites that are easily accessible from major
highways and thoroughfares and seeks to create sufficient
concentrations of stores in major markets to maximize the
leverage on fixed costs including advertising and operations
management.
- Controls costs and enhances operating efficiency by centrally
controlling all buying, merchandising and distribution, and
vertically integrating certain support functions such as
advertising.
Best Buy's store format is a key component of its business strategy.
The Company believes that because customers are generally familiar with
certain products the Company sells and are accustomed to discount shopping
formats, they increasingly resist efforts to direct their choice of product
and appreciate controlling the purchase decision. For products that are
relatively easy for consumers to understand and purchase, the Company employs
a self-service, discount style store format, featuring easy to locate product
groupings, emphasizing customer choice and product information. These
products include entertainment software and less complex consumer electronics
products such as boom boxes, VCRs and smaller sized television sets. For
other, more complex products such as personal computers, digital versatile
disc (DVD), digital phones and digital cameras, the Company provides
dedicated and specially trained sales assistance. Sales staff in these
product categories help customers understand the features and benefits of new
technology and can assist customers in the purchase of accessories and
registration for service with providers.
Best Buy continuously evaluates the retail environment and regularly
uses focus groups and customer surveys to assess customer preferences. Through
these processes, Best Buy concluded that customers want access to more product
information in order to be more confident about their buying decisions. Most
stores contain a demonstration area for home theater systems; a simulated,
life-size car display; and audio speaker areas. These demonstration areas allow
customers to experience and compare product performance firsthand. Most of the
stores also feature a "high touch" sales area where specially trained
salespeople assist customers with more complex products such as digital cameras,
digital phones and personal digital assistants. Best Buy believes that these
demonstration and display areas further differentiate it from competing
retailers and should also provide an advantage for the Company relative to
competitors such as catalog and Internet retailers. Most Best Buy stores feature
a configure to order process for personal computers that enables more
knowledgeable computer buyers to tailor order a computer system.
The Company also sells music software and DVD videos on its E-commerce
site, www.bestbuy.com. While E-commerce does not currently represent a
significant portion of the Company's business, the Company believes expansion of
its on-line sales initiative represents a significant growth opportunity and in
April 1999 named a president of its E-commerce Division to lead the continued
development and expansion of the Company's Internet initiative. The Company
plans to introduce other products in its principal product categories on its
E-commerce site in the coming year. Management believes that its retail stores
and E-commerce strategy should complement each other, allowing consumers to
purchase products in the shopping environment they prefer. The Company believes
that its marketplace visibility and significant size in the retailing of its
products should provide a competitive advantage over other Internet retailers.
The Company's existing name recognition and weekly print and television
advertising are examples of some of the efficiencies the Company has over new
entrants in E-commerce. Additionally, the ability to provide convenient product
service and repair creates an opportunity to differentiate the Company from
other Internet retailers.
-3-
The Company's stores are in large, open buildings with high ceilings.
Best Buy's stores average approximately 44,000 square feet. The stores feature
interactive displays and skilled employee demonstrations; most stores feature
large viewing areas for big screen and projection televisions and interactive
speaker environments. The Company expects to open approximately 45 new stores in
fiscal 2000, including the testing of four 30,000 square foot stores designed
for smaller markets with populations up to 200,000.
Best Buy's merchandising strategy differs from many other retailers
selling comparable merchandise. Best Buy's merchandise is displayed at eye level
next to signs identifying the products' major features, with the boxed products
available near the display model. The Company's product specialists, who are
knowledgeable about the operation and features of the merchandise on display,
are dedicated to a particular product area for customers who desire assistance.
This convenient, self service format for many of the products the Company sells
allows the customer to carry merchandise directly to the check-out lanes, pay
for it and leave the store, avoiding the time-consuming process used at
traditional superstores.
The Company believes that its advertising strategy continues to
contribute to its increasing market share and brand image. Best Buy spends
almost 3% of store sales on advertising, including the weekly distribution of
about 36 million newspaper inserts. The Company has vertically integrated
advertising and promotion capabilities and operates its own in-house advertising
agency. This capability allows the Company to respond rapidly to competitors in
a cost effective manner. In many of its markets, the Company is able to secure
and deliver merchandise to its stores and to create, produce and run an
advertisement all within a period of less than one week.
Print advertising generally consists of four-color weekly inserts,
generally 24 to 28 pages, that emphasize a variety of product categories and
feature extensive name brand selection with a wide range of price points. The
Company also produces all of its television commercials, each with a specific
marketing message. Television commercials account for about one-third of total
advertising expenditures. The Company also utilizes a national brand image
program to move Best Buy's image beyond that of a low price specialty retailer
by promoting the customer's shopping experience and the Company's responsiveness
to consumers' needs. The Company believes that building customer brand loyalty
is a significant element in its business strategy. The Company is reimbursed by
vendors for a substantial portion of advertising expenditures through
cooperative advertising arrangements
Product service and repair are important aspects of Best Buy's
marketing strategy, providing the opportunity to differentiate itself from
warehouse clubs, other discount stores, and Internet retailers which generally
do not provide such services. Virtually all products sold by the Company, with
the exception of entertainment software, carry manufacturers' warranties. The
Company generally offers to service and repair all of the products it sells and
has been designated by substantially all of its major suppliers as an authorized
service center. In addition, the Company makes its in-store technical support
staff available to assist customers with the custom configuration of personal
computers and peripheral products. The Company also delivers major appliances
and large electronics products and installs car stereos and vehicle security
systems. In fiscal 2000, the Company is dedicating significant resources to
expanding and improving its services capabilities. The Company is undertaking
efforts to reduce product repair times and increase its product installation
capabilities in customers' homes.
Product Selection and Merchandising
Best Buy provides a broad selection of name brand models within each
product line in order to provide customers with a meaningful assortment. The
Company currently offers approximately 5,300 products, exclusive of
entertainment software titles and accessories, in its four principal product
categories. In addition, the Company offers a selection of accessories
supporting its principal product categories, which typically yield a higher
margin than most of the Company's other products. The Company believes that this
assortment of accessories builds customer traffic for its other products.
-4-
The home office category, Best Buy's largest product category, includes
personal computers and related peripheral equipment, telephones, digital and
cellular phones, answering machines, fax machines, copiers and calculators.
Approximately half of the revenues in this category are derived from sales of
personal computers. The retail market for personal computers is promotional and
competitive, with competition primarily from retail stores and factory to
customer direct channels of distribution. The Company's operating results can be
affected by significant changes in promotional activity as well as consumer
demand for and availability of personal computers and the timing of computer
model transitions by manufacturers. The timing of significant new software
releases can also impact sales of personal computers. Although the Company has
not yet experienced an impact on sales, consumer demand for personal computers
may also be affected by year 2000 computer systems concerns. The Company
believes that it is well positioned to withstand competition in the retail
market for personal computer products, traditionally low margin items, due to
its experience in the market and its significantly improved ability to manage
inventories in this category. The Company also believes that its broad product
lines, including those that generate higher gross profit margins, and its
relatively low cost structure contribute to its ability to compete in this
category. In addition, the Company believes that the related services it offers,
such as in-store computer configuration, maintenance and upgrades, are distinct
advantages compared to Internet discount and factory direct computer retailers.
Changing technology and hardware requirements necessary to support new software,
including on-line services, are expected to continue to be primary factors in
the growth in sales of personal computers and related products in the future.
Unit sales volume growth of personal computers has been driven by improvements
in technology and declines in retail selling prices of approximately 15% per
year. The increasing popularity of the Internet and the number of second time
buyers have also been factors in the unit growth of personal computers. While
the sales of personal computers generates relatively low gross profit margins,
the Company's selling strategies have enabled it to generate higher total
transaction profit margins through the sale of the accessories and services that
complete a home computer system. The Company's home office products category
includes brand names such as AT&T, Apple, Canon, Compaq, CTX, Epson, Fujitsu,
Hewlett Packard, IBM, Motorola, NEC, Packard Bell, Panasonic, Samsung, Sharp,
Sony, and Toshiba.
Best Buy's second largest product category is consumer electronics,
consisting of video and audio equipment. Video products include televisions, DVD
players, Web TV, video cassette recorders, camcorders and Digital Satellite
Systems (DSS). Audio products include audio components, audio systems, shelf
systems, portable audio equipment, car stereos and security systems. The Company
continues to expand its product selection in consumer electronics by offering
higher end products and components that have greater appeal to audio and video
enthusiasts. The introduction of digital television (DTV) in fiscal 1999, DVD
and MiniDisc in fiscal 1998, and DSS in fiscal 1997 continue the migration of
the consumer electronics category into digital technology. The replacement of
existing analog technology with digital products represents a significant sales
growth opportunity for the Company, although the transition could impact sales
of current products. The Company sells consumer electronics with brand names
such as Advent, Aiwa, Bose, Clarion, Direct TV, Funai, JBL, JVC, Kenwood, KLH,
Magnavox, RCA, Rockford Fosgate, Samsung, Sanyo, Sony, Technics, Toshiba, Web TV
and Yamaha.
Best Buy's entertainment software category includes compact discs, DVD
movies, pre-recorded audio and video cassettes, computer software and video game
hardware and software. The Company is one of the few large consumer electronics
retailers that sells a broad selection of entertainment software in all of its
stores. The Company offers from approximately 10,000 to as many as 27,000 titles
in its largest stores. Best Buy customizes a portion of the music software
assortment for particular stores based upon the demographics of the market. The
increase in sales of DVD players in fiscal 1999 and significant expansion of the
number of movie titles available in DVD format, as well as high demand for
recorded music and video game software and peripherals led to growth in the
entertainment software category. The number of DVD movie titles increased to
1,500 at the end of fiscal 1999. The Company continues to allocate additional
space in the stores to accommodate the wider selection. The video game hardware
and software products has continued to grow in fiscal 1999 with the popularity
of Nintendo 64 and Sony Playstation formats.
The major appliance category includes microwave ovens, washing
machines, dryers, air conditioners, dishwashers, refrigerators, freezers, ranges
and vacuum cleaners. This category includes brand names such as Amana, Bisell,
Eureka, Fantom Technologies, Frigidaire, General Electric, GE Profile,
-5-
Hoover, Hotpoint, Maytag, Panasonic, Roper, Royal Appliance, Samsung, Sanyo,
Sharp, Tappan, Whirlpool and White-Westinghouse. Sales in this category are
impacted by new housing activity as well as a reduction in the number of
retailers selling major appliances.
In addition to products in its four main categories, the Company sells
cameras and other photographic equipment and ready to assemble furniture
designed for use with computer and audio/video equipment. Sales of new digital
cameras have contributed to growth in this category. The Company also sells
performance service plans (PSPs) on behalf of an unrelated third party. These
PSPs cover product repair and/or replacement for a specified period of time
following the purchase of a product, generally following the expiration of the
manufacturers warranty.
The following table sets forth the approximate percentages of store
sales from each of Best Buy's principal product lines.
Fiscal Years Ended
------------------------------------------------------
February 27, 1999 February 28, 1998 March 1, 1997
----------------- ----------------- -------------
Home Office 36% 38% 39%
Consumer Electronics:
Video 16 15 17
Audio 11 11 12
Entertainment Software 20 20 18
Appliances 8 9 9
Other (1) 9 7 5
--- --- ---
Total 100% 100% 100%
--- --- ---
--- --- ---
(1) Includes, among other things, performance service plans, photographic
equipment, blank audio and video tapes, furniture and accessories.
Store Locations and Expansion
The Company's expansion strategy generally has been to enter major metropolitan
areas with the simultaneous opening of several stores and then to expand into
contiguous non-metropolitan markets. Currently, approximately one-third of the
Company's stores are in non-metropolitan markets. The entry into a new market is
preceded by a detailed market analysis which includes a review of competitors,
demographics and economic data. Best Buy's store location strategy enables it to
increase the effectiveness of advertising expenditures and to create a high
level of consumer awareness. In addition, the clustering of stores allows the
Company to maintain more effective management control, enhance asset
utilization, and utilize its distribution facilities more efficiently.
When entering a major metropolitan market, the Company establishes a district
office, service center and major appliance warehouse. Each new store requires
approximately $3.4 million of working capital, depending on the size of the
store, for merchandise inventory (net of vendor financing), leasehold
improvements, fixtures and equipment. Pre-opening costs of approximately
$400,000 per store, incurred in hiring, relocating and training new employees
and in merchandising the store, are expensed as incurred.
The Company opened 28 stores in fiscal 1999 including entry into the
New England market and the markets of Nashville, TN; Syracuse, NY; Charleston,
SC; and Wausau, WI. The Company expects to open approximately 45 stores in
fiscal 2000, including entry into the markets of San Francisco, San Diego and
Sacramento, CA; Northern Florida; Upstate New York; and Richmond and Norfolk,
VA. The remaining stores will be opened mainly in existing markets. The Company
also plans to remodel or relocate approximately 20 stores to larger facilities.
Included in its expansion plans, the Company will test four 30,000 square-foot
small market format stores in markets with populations up to 200,000. In May
1999, the Company opened a new distribution center in Dinuba, California,
replacing its leased facility in Ontario, California. The Company believes it
has the necessary distribution capacity and management information systems as
well as management experience and depth to support its fiscal 2000 expansion
plans.
-6-
The following table presents the number and location of stores operated by the
Company at the end of each of the last three fiscal years and anticipated stores
at fiscal 2000 year end.
Anticipated Planned
at Fiscal For Number of Stores at Fiscal Year End
2000 Fiscal -----------------------------------
Year End 2000 1999 1998 1997
----------- ------- ---- ---- ----
California 40 11 29 24 22
Texas 40 4 36 35 34
Illinois 32 -- 32 32 32
Florida 26 5 21 19 17
Ohio 20 1 19 19 18
Michigan 17 -- 17 17 16
Minnesota 16 2 14 14 15
Georgia 12 2 10 10 10
Virginia 12 5 7 7 7
Wisconsin 12 -- 12 11 11
Maryland 11 1 10 9 9
Pennsylvania 11 1 10 9 4
North Carolina 10 1 9 7 7
Arizona 9 1 8 8 8
Missouri 9 -- 9 10 10
Colorado 8 -- 8 8 8
Indiana 8 -- 8 8 8
Massachusetts 8 4 4 - --
Tennessee 6 -- 6 1 1
Iowa 5 -- 5 5 5
Kansas 5 -- 5 5 5
South Carolina 5 -- 5 4 4
New Hampshire 4 1 3 -- --
New Jersey 4 -- 4 4 3
Arkansas 3 -- 3 3 3
Kentucky 3 1 2 2 2
Nebraska 3 -- 3 3 3
Nevada 3 1 2 2 2
Oklahoma 3 -- 3 3 3
New York 2 1 1 -- --
Alabama 1 -- 1 1 1
Delaware 1 -- 1 1 1
Maine 1 -- 1 -- --
New Mexico 1 -- 1 1 1
North Dakota 1 -- 1 1 1
South Dakota 1 -- 1 1 1
Rhode Island 1 1 -- -- --
To be Determined 2 2 -- -- --
--- -- --- --- ---
Total 356 45 311 284 272
--- -- --- --- ---
--- -- --- --- ---
Suppliers, Purchasing and Distribution
The Company's marketing strategy depends, in part, upon its ability to
offer a meaningful selection of name brand products to its customers and is,
therefore, dependent upon satisfactory and stable supplier relationships. In
fiscal 1999, Best Buy's 20 largest suppliers accounted for over half of the
merchandise purchased by the Company, with five suppliers, Compaq,
Hewlett-Packard, IBM, Panasonic, and Sony representing approximately 30% of the
Company's total purchases. The loss of or disruption in supply,
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including disruptions in supply due to manufacturers' product quality issues,
from any one of these major suppliers could have a material adverse effect on
the Company's sales. Certain suppliers have, at times, limited or
discontinued their supply of products to the Company. Best Buy generally does
not have long-term written contracts with its major suppliers and does not
have any indication that any current suppliers will discontinue selling
merchandise to the Company. Any of these manufacturers may also decide to
sell their products direct to consumers through the Internet. The Company has
not experienced difficulty in maintaining satisfactory sources of supply, and
management expects that adequate sources of supply will continue to exist for
the types of merchandise sold in its stores.
Best Buy's centralized buying staff purchases substantially all of the
Company's merchandise. The buying staff within the Company's Merchandising
Department is responsible for product acquisition, promotion planning and
product pricing. An inventory management staff in the Merchandising Department
is responsible for overall inventory management including allocations of
inventory and replenishment of store inventory. Generally, with the exception of
certain entertainment software, there are no agreements with suppliers for the
return of unsold inventory. Merchandise remaining at the time of new product
introduction is generally sold on a close-out basis and may be subject to a
reduction in selling price to levels at or below the Company's cost.
The Company has made product availability a high priority and continues
to make investments in facilities, personnel and systems to assure that its
in-stock position will be among the highest in the industry. The Company
utilizes an automatic replenishment system for restocking its stores.
Replenishment of store inventories is based on inventory levels, historical and
projected sales trends, promotions and seasonality. The Company utilizes an
extensive merchandise planning and daily inventory monitoring system to manage
inventory turns. The Company engaged an outside consulting firm in fiscal 1998
and 1999 to assist in the design and implementation of systems and practices to
improve the Company's assortment planning, inventory management, product
sourcing and advertising effectiveness and realized significant benefits from
improvements in these areas.
The majority of the Company's merchandise, except for major appliances,
is shipped directly from manufacturers to the Company's distribution centers in
California, Minnesota, Ohio, Oklahoma and Virginia. In addition, the Company
operates a dedicated distribution center for entertainment software in
Minnesota. Major appliances are shipped to satellite warehouses in each of the
Company's major markets. In order to meet release dates for selected
entertainment software titles and certain computer products and to improve
inventory management, certain merchandise is shipped directly to the stores from
manufacturers and distributors. The Company is, however, dependent upon the
distribution centers for inventory storage and shipment of most merchandise to
stores. The Company primarily uses contract carriers to ship merchandise from
its distribution centers to its stores. The Company believes that its
distribution centers can most effectively service stores within a 600 to 700
mile radius and that its current distribution centers will accommodate the
Company's expansion plans for the next year. The Company plans to continue
investing in new systems and purchasing material handling equipment to reduce
labor costs, improve accuracy in filling orders and enhance space utilization.
Management Information Systems
Best Buy has developed proprietary software that provides daily
information on sales, gross margins and inventory levels by store and by
stockkeeping unit. These systems allow the Company to compare current
performance against historical performance and the current year's budget. Best
Buy uses point-of-sale bar code scanning from which sales information is polled
at the end of each day. The Company uses Electronic Data Interchange (EDI) with
selected suppliers for the more efficient transmittal of purchase orders,
shipping notices and invoices. The Company believes that the systems it has
developed have the ability to continue to improve customer service, operational
efficiency and management's ability to monitor critical performance indicators.
Best Buy continuously assesses its information systems needs to support the
Company's growth, improve decision making and increase efficiency. Major
components of the Company's systems development plan for fiscal 2000 include
support of its E-commerce initiative, development of
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systems to support the Company's technical services operations and continued
improvement in its inventory management systems. The Company also intends to
evaluate its enterprise reporting systems in fiscal 2000. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition" for a discussion of the effect of Year 2000 issues on management
information systems.
Store Operations
Best Buy has developed a standardized and detailed system for operating
its stores. The system includes procedures for inventory management, transaction
processing, customer relations, store administration and merchandise display.
The Company's store operations are organized into divisions. Each division is
divided into regions and is under the supervision of a senior vice president who
oversees store performance through several regional managers, each of whom has
responsibility for a number of districts within the region. District managers
monitor store operations closely and meet regularly with store managers to
discuss merchandising and new product introductions, sales promotions, customer
feedback and requests and store operating performance. Similar meetings are
conducted at the corporate level with divisional and regional management. A
senior vice president of retail operations has overall responsibility for retail
store processing and operations. Each district also has a loss prevention
manager, with product security controllers employed at each store to control
inventory shrinkage. Advertising, pricing and inventory policies are controlled
at corporate headquarters. The Company's training, consumer affairs, human
resources and store merchandising functions are also centralized at corporate
headquarters.
The Company's stores are open seven days and six evenings a week. A
store is typically staffed by one manager, four assistant managers and an
average staff ranging from 70 to 150 persons depending on store size.
Approximately 60% of a store's staff, which includes product specialists and a
support staff of cashiers and customer service and stock handling employees, is
employed on a part-time basis. Store managers are paid a salary and have the
opportunity to earn bonuses if their stores exceed sales and gross margin
quotas, meet certain budget criteria in controlling expenses and achieve certain
administrative goals.
The Company has an employee development department which provides
managers with a variety of tools to teach employees the core skills they need to
meet their performance objectives. In the stores, Sales, Inventory, Operations
and Merchandising managers undergo comprehensive training in their specialty
areas, which include store operations, selling, managerial, training and
communications skills. The retail selling and sales support teams receive a
thorough orientation to the Company's industry and its business objectives.
Sales personnel are trained to ask specific questions of customers to determine
their needs and to present products, accessories and services that meet those
expressed needs. Stores hold monthly "team meetings" to review store
performance, Company focus and changes and modifications in operating
procedures. Specialized product training is also conducted at these monthly
meetings. The Company's policy is to staff store management positions with
personnel promoted from within each store and to staff new stores from its pool
of trained managers. However, as Best Buy continues to expand into new markets,
it also recruits local management personnel who have valuable knowledge about
the new market. The Company has an extensive store management development
program to help support the increased rate of store growth. Managers are
generally expected to train for a year prior to assuming full management
responsibility.
Credit Policy
Approximately 36% of store revenues are paid for in cash, with the
remainder paid for by either major credit cards or the Best Buy private label
credit card. The Company utilizes special financing offers to stimulate sales.
Generally, these financing offers allow customers to purchase certain products
with repayment terms ranging from 90 days to one year without a finance charge.
The longer financing offers, generally those beyond six months, typically
require minimum monthly payments to avoid the finance charge. The special
financing offers are only provided to customers who qualify for Best Buy's
private label credit card. The private label credit card allows these customers
to obtain financing on purchases of merchandise at Best Buy stores through
arrangements between the Company and independent financial institutions and
consumer credit programs. The Company is generally able to qualify a new
customer for credit on the spot,
-9-
typically in less than five minutes. Receivables from private label credit
card sales are sold, without recourse to the Company, to unaffiliated third
party institutions. The Company receives payment from these institutions
within 2 to 3 days following the sale.
Competition
Consumer electronics retailers realized significant sales increases in
1999 driven by strong consumer spending, continued demand for personal computers
and rapid consumer acceptance of new digital technology products such as DVD,
digital phones and digital cameras. Meanwhile, the closing of competitors such
as Sun TV and Appliance, Lechmere stores and selected Montgomery Ward Stores,
store closings by other national and regional chains and Comp USA's acquisition
of Computer City in fiscal 1999 have resulted in a concentration of sales among
the top retailers in the industry. While the store based retailers continue to
consolidate, alternative channels of distribution such as E-commerce and mail
order shopping services are expanding. Retailing in each of the Company's
product categories remains highly competitive and these new channels of
distribution, while not yet providing significant competition to the Company,
could become significant over time. Management believes, however, that the
Company's own E-commerce initiative coupled with product knowledge, brand
imaging, expertise and services capabilities of its retail stores effectively
position the Company to meet the increased competition from E-commerce and mail
order retailers.
More effective advertising, a more customer-focused product assortment,
improved product in-stock levels and better customer service have contributed to
market share gains over the past year. Management believes that its store format
and brand positioning distinguish the Company from most of its competitors by
positioning the Company as the destination for new technology in a fun,
informative and no-pressure shopping environment. The Company competes by
aggressively advertising and emphasizing a broad product assortment, low prices,
financing alternatives and service.
The Company competes against consumer electronics retailers such as
Circuit City and Radio Shack; computer superstores such as Comp USA; home office
retailers such as Office Depot, Office Max and Staples; mass merchants such as
Sears, Wal-Mart and Target; and entertainment software superstores owned by
Musicland and Tower Records. The Company also competes against independent
dealers, discount stores, wholesale clubs and mail order and E-commerce
retailers.
Employees
As of February 27, 1999, the Company had approximately 45,000
employees, of whom approximately 23,000 were part-time or seasonal employees.
There are currently no collective bargaining agreements covering any of the
Company's employees. The Company has not experienced a strike or work stoppage,
and management believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's stores, most of which are leased, include sales space,
inventory storage, management offices and employee areas. All of the leases
provide for a fixed minimum rent with scheduled escalation dates and amounts.
Leases for six of the stores have percentage rent provisions that range from
.75% to 4% of gross sales at each location in excess of certain specified sales
amounts and, in some cases, subject to a maximum annual rent. The initial terms
of the leases range from 5 to 20 years and generally allow the Company to renew
the leases for up to three additional five-year terms. The terms of a majority
of the leases, including renewal options, extend beyond the year 2020. At
February 27, 1999, the Company owned three of its operating retail store
locations. Management expects to sell and lease back these properties in fiscal
2000.
-10-
At February 27 1999, the Company utilized over 3.4 million square feet
of distribution facilities including distribution centers in Bloomington,
Minnesota; Ardmore, Oklahoma; Staunton, Virginia; Ontario, California; and
Findlay, Ohio, and a software distribution center in Edina, Minnesota. The
Company also operates leased satellite warehouses for major appliances in its
major markets. The Company's corporate offices are located in a 350,000
square foot facility it owns in Eden Prairie, Minnesota. The Company also
leases 260,000 square feet of office space in close proximity to its main
corporate offices and will be adding additional space in fiscal 2000 to
accommodate its expanding corporate support. In May 1999 the Company opened a
new distribution center in Dinuba, California, replacing the Ontario,
California distribution center and adding approximately 350,000 additional
square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising during the
normal course of conducting business. The resolution of those proceedings is not
expected to have a material impact on the Company's financial condition.
THE EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
Years
with the
Name Age Position With Company Company
---- --- --------------------- --------
Richard M. Schulze 58 Chairman, Chief Executive Officer and Director 32
Bradbury H. Anderson 49 President, Chief Operating Officer and Director 25
Allen U. Lenzmeier 55 Executive Vice President and Chief Financial Officer 14
Wade R. Fenn 40 Executive Vice President - Marketing 18
Gary L. Arnold 47 Senior Vice President - Merchandising 4
Nancy C. Bologna 46 Senior Vice President - People & Learning --
Julie M. Engel 38 Senior Vice President - Advertising 17
Robert C. Fox 48 Senior Vice President - Finance and Treasurer 13
Kevin P. Freeland 41 Senior Vice President - Inventory Management 3
Marc D. Gordon 38 Senior Vice President - Information Systems & CIO 1
Wayne R. Inouye 46 Senior Vice President - Merchandising 3
Michael P. Keskey 44 Senior Vice President - Sales 10
Michael A. Linton 43 Senior Vice President - Strategic Marketing --
Michael London 50 Senior Vice President - Merchandising 2
George Z. Lopuch 49 Senior Vice President - Corporate Strategic Planning 1
Joseph T. Pelano 51 Senior Vice President - Operations 10
Lowell W. Peters 58 Senior Vice President - Services 1
Charles A. Scheiderer 49 Senior Vice President - Logistics 4
Philip J. Schoonover 39 Senior Vice President - Merchandising 4
John C. Walden 39 President - E-commerce Division --
Kenneth R. Weller 50 Senior Vice President - Sales 5
RICHARD M. SCHULZE is a founder of the Company. He has served as an
officer and director of the Company from its inception in 1966 and currently
serves as its Chairman and Chief Executive Officer.
BRADBURY H. ANDERSON has been the Company's President and Chief
Operating Officer since April 1991. He has been employed in various other
capacities with the Company since 1973, including retail salesperson, store
manager and sales manager. Mr. Anderson has been a Director of the Company since
1986.
ALLEN U. LENZMEIER has been Executive Vice President & CFO since April
1991 after having served as Senior Vice President - Finance and Operations and
Treasurer of the Company from 1986. Mr. Lenzmeier joined the Company in 1984 and
has also served as Vice President - Finance and Operations and Treasurer.
WADE R. FENN has been Executive Vice President - Marketing since August
1995, having served as a Senior Vice President - Sales since 1991 and a Regional
Vice President of the Company from 1987. Mr. Fenn joined the Company in 1980 as
a salesperson and has also been employed by the Company as a store and district
manager.
-11-
GARY L. ARNOLD joined the Company in 1994 as Merchandise Manager of
Music and was promoted to Vice President in 1996. Mr. Arnold was promoted to his
current position of Senior Vice President - Merchandising in May 1998.
NANCY C. BOLOGNA was promoted to her present position in May 1999.
Ms. Bologna joined the company in February 1999 as Vice President -
Organizational Effectiveness. Prior to joining Best Buy, Ms. Bologna worked
as an Executive Development Consultant with KRW International, an executive
development firm, and also as a clinical psychologist and administrator for
Park Nicollet Clinic.
JULIE M. ENGEL was promoted to her present position in April 1995. Ms.
Engel joined the Company in July 1981 as Advertising Manager, was promoted to
Advertising Director in 1984 and became Vice-President - Advertising in April
1987.
ROBERT C. FOX has been Senior Vice President - Finance and Treasurer
since April 1994, after having served as Vice President - Accounting since 1987
and Treasurer since 1993. Mr. Fox joined the Company in 1985 as Controller.
KEVIN P. FREELAND was promoted to his present position in April 1997,
after having served as Vice President - Inventory Management since 1995. Prior
to joining Best Buy, Mr. Freeland spent more than eight years with Payless Shoe
Source, where he held various positions in merchandise management, most recently
as Vice President of Merchandise Distribution.
MARC D. GORDON joined the Company in April 1998 as Senior Vice
President - Information Systems & Chief Information Officer. Prior to joining
Best Buy, Mr. Gordon had experience in the retail information systems area most
recently as CIO for West Marine Products, a West Coast-based specialty
retailer/wholesaler of marine products. Other positions have included senior
manager with Andersen Consulting, a principal with a Boston IS consulting firm
and Vice President of Information Systems with the Timberland Company.
WAYNE R. INOUYE joined the Company in September 1995 as Senior Vice
President - Merchandising. Prior to joining Best Buy, Mr. Inouye was with The
Good Guys! for 10 years, most recently as Vice President of Merchandising.
MICHAEL P. KESKEY was promoted to his present position in April 1997,
having served as Vice President - Sales since 1996. Mr. Keskey joined the
Company in 1988 and has held positions as a Store Manager, District Manager and
Regional Manager.
MICHAEL A. LINTON joined the Company in January of 1999 as Senior Vice
President - Strategic Marketing. Mr. Linton has more than 19 years experience,
most recently as Vice President of Marketing at Remington Products Corporation.
Prior to that, he served as Vice President and General Manager of a product
category at James River Corporation.
MICHAEL LONDON was promoted to his present position in May 1998. Mr.
London joined the Company in July 1996 as Vice President - General Merchandise.
Prior to joining Best Buy, Mr. London served as Senior Vice President of Retail
and Commercial Sales for Nordic Track and Executive Vice President for Central
Tractor Farm & Country. Prior to that, Mr. London spent 22 years with Lechmere
most recently as Senior Vice President - General Marketing Manager.
GEORGE Z. LOPUCH joined the Company in March 1998 as Senior Vice
President - Corporate Strategic Planning. Mr. Lopuch brings to Best Buy more
than 18 years of retail industry experience. Most recently he served as Senior
Vice President of Corporate Strategic Planning and Research at SuperValu, Inc.
JOSEPH T. PELANO, JR was promoted to his present position in
April 1997, having served as Vice President - Retail Store Operations since
1996. Mr. Pelano joined the Company in 1989 as Regional Operations Manager.
LOWELL W. PETERS joined the Company in September 1997 as Senior Vice
President - Services. Prior to joining Best Buy, Mr. Peters spent 34 years with
Sears, where he held various positions in their service organization, most
recently as Vice President Parts, Product Services.
-12-
CHARLES A. SCHEIDERER was promoted to his current position in April
1998, having served as Vice President - Distribution and Logistics since July of
1997 and as General Manager of Distribution in 1994.
PHILIP J. SCHOONOVER joined Best Buy in May 1995 and was promoted to
Senior Vice President - Merchandising. Prior to joining Best Buy, Mr. Schoonover
was the Executive Vice President for TOPS Appliance City where he worked for
five years.
JOHN C. WALDEN joined the Company in May 1999 as President of the
Company's E-commerce Division. Mr. Walden has more than 17 years of experience,
most recently as Chief Operating Officer of Peapod, Inc., an Internet retailer
of groceries. Mr. Walden has held executive positions with Ameritech Corporation
and Storage Technology Corporation.
KENNETH R. WELLER joined the Company in May 1993. Since 1986, he was
Vice President of Sales with The Good Guys!, a San Francisco-based consumer
electronics retailer where he had worked since 1982.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information set forth under the caption "Common Stock Prices" on
page 28 of the Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated
Financial and Operating Data" on pages 20 and 21 of the Annual Report is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 22 through
28 of the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not currently subject to market risks for
interest rates, foreign currency rates, commodity prices or other market
price risks of a material nature.
-13-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item, listed below, are
contained in the Annual Report on the pages thereof indicated, and are expressly
incorporated herein by this reference.
Page No.
--------
Consolidated balance sheets as of February 27, 1999
and February 28, 1998 29
For the fiscal years ended February 27, 1999,
February 28, 1998 and March 1, 1997
Consolidated statements of earnings 30
Consolidated statements of cash flows 31
Consolidated statements of changes in shareholders' equity 32
Independent auditor's report 32
Notes to consolidated financial statements 33-39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Security Ownership of
Certain Beneficial Owners and Management" and "Nominees and Directors" on pages
4 through 8 of the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" on
pages 9 through 17 of the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" on pages 4 through 6 of the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Nominees and Directors"
and "Certain Transactions" on pages 7 and 8 of the Proxy Statement is
incorporated herein by reference.
-14-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
All financial statements of the Registrant as set forth under
Item 8 of this Report.
2. Financial Statement Schedules:
No schedules have been included since they are either not
applicable or the information is included elsewhere herein.
3. Exhibits:
Number Description Method of Filing
------ ----------- ----------------
3.1 Amended and Restated Articles of Incorporation, as amended (3)
3.3 Amended and Restated By-Laws, as amended (2,4,5,7)
4.1 Note Purchase Agreement with Principal Mutual Life Insurance Company, (6)
dated as of July 30, 1992
4.2 Credit Agreement with US Bank National Association dated May 22, 1998 (10)
10.1 1987 Employee Non-Qualified Stock Option Plan, as amended (12)
10.2 1987 Directors' Non-Qualified Stock Option Plan, as amended (1)
10.3 Best Buy Co., Inc. Deferred Compensation Plan (9)
10.4 Resolutions of the Board of Directors dated April 16, 1999 adopting (8)
the EVA-Registered Trademark- Incentive Program for senior officers
10.5 1997 Employee Non-Qualified Stock Option Plan, as amended (11)
10.6 1997 Directors' Non-Qualified Stock Option Plan, as amended (1)
10.7 1994 Full-Time Employee Non-Qualified Stock Option Plan, as amended (1)
13.1 1999 Annual Report to Shareholders (1)
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Ernst & Young LLP (1)
27.1 1999 Fiscal Year End Financial Data Schedule (1)
-15-
(1) Document is filed herewith.
(2) Exhibit so marked was filed with the Securities and Exchange
Commission on May 23, 1995, as exhibit to the Form 10-K of
Best Buy Co., Inc. and is incorporated herein by reference
and made a part hereof.
(3) Exhibit so marked was filed with the Securities and Exchange
Commission on May 20, 1994, as exhibit to the Form 10-K of
Best Buy Co., Inc. and is incorporated herein by reference
and made a part hereof.
(4) Exhibit so marked was filed with the Securities and Exchange
Commission on November 12, 1991, as an exhibit to the
Registration Statement on Form S-3 (Registration No. 33-43065)
of Best Buy Co., Inc., and is incorporated herein by reference
and made a part of hereof.
(5) Exhibit so marked was filed with the Securities and Exchange
Commission on January 13, 1992, as an exhibit to Form 10-Q of
Best Buy Co., Inc., and is incorporated herein by reference
and made a part hereof.
(6) Exhibit so marked was filed with the Securities and Exchange
Commission on October 12, 1992, as an exhibit to Form 10-Q of
Best Buy Co., Inc., and is incorporated herein by reference
and made a part hereof.
(7) Exhibit so marked was filed with the Securities and Exchange
Commission on May 28, 1997, as an exhibit to the Form 10-K of
Best Buy Co., Inc., and is incorporated herein by reference
and made a part hereof.
(8) Exhibit so marked was filed with the Securities and Exchange
Commission on April 29, 1999, as an exhibit to the preliminary
Proxy Statement of Best Buy Co., Inc., and is incorporated
herein by reference and made a part hereof.
(9) Exhibit so marked was filed on April 3, 1998, as an exhibit to
the Registration Statement on Form S-8 (Registration No.
333-49371) of Best Buy Co., Inc., and is incorporated herein
by reference and made a part hereof.
(10) Exhibit so marked was filed with the Securities and Exchange
Commission on July 10, 1998, as an exhibit to Form 10-Q of
Best Buy Co., Inc., and is incorporated herein by reference
and made a part hereof.
(11) Exhibit so marked was filed on August 20, 1998, as an exhibit
to the Registration Statement on Form S-8 (Registration No.
333-61897) of Best Buy Co., Inc. and is incorporated herein by
reference and made a part hereof.
(12) Exhibit so marked was filed with the Securities and
Exchange Commission on May 29, 1996, as an exhibit to the
Form 10-K of Best Buy Co., Inc., and is incorporated herein
by reference and made a part hereof.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K under the Securities
Act of 1933, the Registrant has not filed as exhibits to the Form 10-K
certain instruments with respect to long-term debt under which the
amount of securities authorized does not exceed 10 percent of the total
assets of the Registrant. The Registrant hereby agrees to furnish
copies of all such instruments to the Commission upon request.
(b) Reports on Form 8-K
A Form 8-K announcing a two-for-one stock split was filed February 22,
1999.
-16-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
By: /s/ Richard M. Schulze
------------------------------------------
Chairman and Chief Executive Officer
Dated: May 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 26, 1999.
/s/ Richard M. Schulze Chairman, Chief Executive Officer
- --------------------------- and Director (principal executive
Richard M. Schulze officer)
/s/ Bradbury H. Anderson President, Chief Operating Officer
- --------------------------- and Director
Bradbury H. Anderson
/s/ Allen U. Lenzmeier Executive Vice President and Chief
- --------------------------- Financial Officer (principal
Allen U. Lenzmeier financial officer)
/s/ Robert C. Fox Sr. Vice President - Finance and
- --------------------------- Treasurer (principal accounting
Robert C. Fox officer)
/s/ Culver Davis, Jr. Director
- ---------------------------
Culver Davis, Jr.
/s/ Yvonne R. Jackson Director
- ---------------------------
Yvonne R. Jackson
/s/ Elliot S. Kaplan Director
- ---------------------------
Elliot S. Kaplan
/s/ David H. Starr Director
- ---------------------------
David H. Starr
/s/ Frank D. Trestman Director
- ---------------------------
Frank D. Trestman
/s/ Hatim A. Tyabji Director
- ---------------------------
Hatim A. Tyabji
/s/ James C. Wetherbe Director
- ---------------------------
James C. Wetherbe