10-K 1 a07-11419_110k.htm 10-K

 

 

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 March 3, 2007

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to               

Commission file number 1-9595


GRAPHIC

BEST BUY CO., INC.

(Exact name of registrant as specified in its charter)

Minnesota

 

41-0907483

State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization

 

Identification No.)

7601 Penn Avenue South

 

55423

Richfield, Minnesota

 

(Zip Code)

(Address of principal executive offices)

 

 

 

Registrant’s telephone number, including area code 612-291-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $.10 per share

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No

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 for 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. x Yes o No

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x       Accelerated filer o                 Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) o Yes x No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of August 25, 2006, was approximately $12.0 billion, computed by reference to the price of $45.57 per share, the price at which the common equity was last sold on such date as reported on the New York Stock Exchange-Composite Index. (For purposes of this calculation all of the registrant’s directors and executive officers are deemed affiliates of the registrant.)

As of April 30, 2007, the registrant had 479,304,000 shares of its Common Stock issued and outstanding.

 

 




DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement dated May 16, 2007 (to be filed pursuant to Regulation 14A within 120 days after the Registrant’s fiscal year-end of March 3, 2007), for the regular meeting of shareholders to be held on June 27, 2007 (“Proxy Statement”), are incorporated by reference into Part III.

CAUTIONARY STATEMENT PURSUANT TO THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), provide 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 “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” and other words and terms of similar meaning. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our future results to differ materially from the anticipated results expressed in such forward-looking statements. Readers should review Item 1A, Risk Factors, of this Annual Report on Form 10-K for a description of important factors that could cause future results to differ materially from those contemplated by the forward-looking statements made in this Annual Report on Form 10-K. In addition, general economic conditions, acquisitions and development of new businesses, product availability, sales volumes, promotional activity of our competitors, profit margins, weather, foreign currency fluctuation, availability of suitable real estate locations, our ability to react to a disaster recovery situation, and the impact of labor markets and new product introductions on our overall profitability, among other things, could cause our future results to differ materially from those projected in any such forward-looking statements.




BEST BUY   FISCAL   2007   FORM 10-K

TABLE OF CONTENTS

PART I

 

 

Item 1.

 

Business.

 

5

 

Item 1A.

 

Risk Factors.

 

13

 

Item 1B.

 

Unresolved Staff Comments.

 

16

 

Item 2.

 

Properties.

 

17

 

Item 3.

 

Legal Proceedings.

 

19

 

Item 4.

 

Submission of Matters to a Vote of Security Holders.

 

21

 

 

 

 

 

PART II

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

23

 

Item 6.

 

Selected Financial Data.

 

26

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

28

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk.

 

52

 

Item 8.

 

Financial Statements and Supplementary Data.

 

53

 

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

96

 

Item 9A.

 

Controls and Procedures.

 

96

 

Item 9B.

 

Other Information.

 

96

 

 

 

 

PART III

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance.

 

97

 

Item 11.

 

Executive Compensation.

 

97

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

97

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence.

 

98

 

Item 14.

 

Principal Accounting Fees and Services.

 

98

 

 

 

 

 

PART IV

 

 

Item 15.

 

Exhibits, Financial Statement Schedules.

 

99

 

 

 

Signatures

 

101

 

       

 

 

 

EXHIBIT INDEX:

 

 

 

Exhibit 3.1

 

 

 

 

 

Exhibit 3.2

 

 

 

 

 

Exhibit 4.1

 

 

 

 

 

Exhibit 4.2

 

 

 

 

 

Exhibit 4.3

 

 

 

 

 

Exhibit 10.1

 

 

 

 

 

Exhibit 10.2

 

 

 

 

 

Exhibit 10.3

 

 

 

 

 

Exhibit 10.4

 

 

 

 

 

Exhibit 10.5

 

 

 

 

 

Exhibit 10.6

 

 

 

 

 

Exhibit 10.7

 

 

 

 

 

Exhibit 10.8

 

 

 

 

 

Exhibit 10.9

 

 

 

 

 

Exhibit 12.1

 

 

 

 

 

Exhibit 18.1

 

 

 

 

 

Exhibit 21.1

 

 

 

 

 

Exhibit 23.1

 

 

 

 

 

Exhibit 23.2

 

 

 

 

 

Exhibit 31.1

 

 

 

 

 

Exhibit 31.2

 

 

 

 

 

Exhibit 32.1

 

 

 

 

 

Exhibit 32.2

 

 

 

 

 

 




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PART I

Item 1. Business.

Description of Business

Best Buy Co., Inc. (“Best Buy,” “we,” “us,” or “our”) is a specialty retailer of consumer electronics, home-office products, entertainment software, appliances and related services. We operate retail stores and Web sites under the brand names Best Buy (BestBuy.com, BestBuyCanada.ca and BestBuy.com.cn), Five Star (Five-Star.cn), Future Shop (FutureShop.ca), Geek Squad (GeekSquad.com and GeekSquad.ca), Magnolia Audio Video (MagnoliaAV.com) and Pacific Sales Kitchen and Bath Centers (PacificSales.com). References to our Web site addresses do not constitute incorporation by reference of the information contained on the Web sites.

Our vision is to make life fun and easy for consumers. Our business strategy is to treat customers as unique individuals, meeting their needs with end-to-end solutions, and engaging and energizing our employees to serve them, while maximizing overall profitability. We believe we offer consumers meaningful advantages in store environment, product value, product selection, and a variety of in-store and in-home services related to the merchandise we offer, all of which advance our objectives of enhancing our business model, gaining market share and improving profitability.

Information About Our Segments

During fiscal 2007, we operated two reportable segments: Domestic and International. The Domestic segment is comprised of all U.S. store and online operations, including Best Buy, Geek Squad, Magnolia Audio Video and Pacific Sales Kitchen and Bath Centers (“Pacific Sales”). We acquired Pacific Sales in the first quarter of fiscal 2007. U.S. Best Buy stores offer a wide variety of consumer electronics, home-office products, entertainment software, appliances and related services. Geek Squad provides residential and commercial computer repair, support and installation services. Magnolia Audio Video stores offer high-end audio and video products and related services. Pacific Sales stores offer high-end home-improvement products, appliances and related services. The International segment is comprised of all Canada store and online operations, including Best Buy, Future Shop and Geek Squad, as well as all China store and online operations, including Best Buy, Geek Squad and Jiangsu Five Star Appliance Co. (“Five Star”). We acquired a 75% interest in Five Star in the second quarter of fiscal 2007. We opened our first China Best Buy store in Shanghai in the fourth quarter of fiscal 2007. Our International segment offers products and services similar to our Domestic segment’s offerings. However, Canada Best Buy stores do not carry appliances. Further, Five Star stores and our China Best Buy store do not carry entertainment software.

Financial information about our segments is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 11, Segment and Geographic Information, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Domestic Segment

We were incorporated in the state of Minnesota in 1966 as Sound of Music, Inc. We began as an audio components retailer and, with the introduction of the videocassette recorder in the early 1980s, expanded into video products. In 1983, we changed our name to Best Buy Co., Inc. and began using mass-merchandising techniques, which included offering a wider variety of products and operating stores under a “superstore” concept. In 1989, we dramatically changed our method of retailing by introducing a self-service, noncommissioned, discount-style store concept designed to give the customer more control over the purchasing process.

In fiscal 2000, we established our first online shopping site, BestBuy.com. Our “clicks-and-mortar” strategy is designed to empower consumers to research and purchase products seamlessly, either online or in our retail stores. The BestBuy.com online shopping site offers expanded assortments in all of our principal product groups.

In fiscal 2001, we acquired Magnolia Hi-Fi, Inc. — a Seattle-based, high-end retailer of audio and video products and services — to access an upscale customer segment. During fiscal 2004, Magnolia Hi-Fi began doing business as Magnolia Audio Video.

In fiscal 2003, we acquired Geek Squad. Geek Squad provides residential and commercial computer repair, support and installation services. We acquired Geek Squad to further our plans of providing technology support services to customers. Geek Squad service is available in all U.S. Best Buy stores, as well as in 12 stand-alone stores, with more than 10,000 agents. Our goal is to build Geek Squad into North America’s largest provider of residential and commercial computer repair, support and installation

5




services, and we believe that over time it will become a significant component of our business.

In fiscal 2005, we opened our first Magnolia Home Theater store-within-a-store experience within a U.S. Best Buy store. We believe Magnolia Home Theater — with its high-end brands, home-like displays and specially trained employees — offers a unique solution for our customers. The Magnolia Home Theater store-within-a-store experience was offered in more than 300 U.S. Best Buy stores at the end of fiscal 2007. During fiscal 2008, we plan to add the Magnolia Home Theater store-within-a-store experience to more than 50 additional new and existing U.S. Best Buy stores.

In fiscal 2005, we also began converting U.S. Best Buy stores to our customer centricity operating model. Stores operating under the customer centricity model, also known as segmented stores, offer variations in product assortments, staffing, promotions and store design, and are focused on key customer segments. The segmented stores tailor their store merchandising, staffing, marketing and presentation to address specific customer groups. Originally, these customer groups included affluent professional males, young entertainment enthusiasts who appreciate a digital lifestyle, upscale suburban moms, families who are practical technology adopters and small businesses.

In fiscal 2007, based on the segmented stores’ operating results, as well as positive customer feedback, we completed the transition of all remaining U.S. Best Buy stores to the customer centricity operating model. Also in fiscal 2007, we evolved our customer centricity segmentation to address the needs of customer lifestyle groups, rather than specific customer types. Our stores now focus on affluent suburban families, trend-setting urban dwellers, and the closely knit families of Middle America. Best Buy For Business seeks to satisfy the needs of small business owners, who can be found within all of our lifestyle groups.

On March 7, 2006, we acquired Pacific Sales. Based in southern California, Pacific Sales specializes in the sale of high-end kitchen appliances, plumbing fixtures, home entertainment products and home furnishings. We acquired Pacific Sales 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 increase the number of stores in order to capitalize on the expanding high-end segment of the U.S. appliance market.

At March 3, 2007, we operated 822 U.S. Best Buy stores in 49 states and the District of Columbia that averaged approximately 40,500 retail square feet. Collectively, U.S. Best Buy stores totaled approximately 33.3 million retail square feet at the end of fiscal 2007, or about 80% of our total retail square footage. In fiscal 2007, U.S. Best Buy retail stores generated average revenue of approximately $39.2 million per store.

At March 3, 2007, we operated 20 Magnolia Audio Video stores in California, Washington and Oregon that averaged approximately 9,700 retail square feet. Collectively, Magnolia Audio Video stores totaled approximately 0.2 million retail square feet at the end of fiscal 2007, or less than 1% of our total retail square footage. In fiscal 2007, Magnolia Audio Video retail stores generated average revenue of approximately $8.0 million per store.

At March 3, 2007, we operated 14 Pacific Sales stores in California that averaged approximately 30,300 retail square feet. Collectively, Pacific Sales stores totaled approximately 0.4 million retail square feet at the end of fiscal 2007, or about 1% of our total retail square footage. In fiscal 2007, Pacific Sales retail stores generated average revenue of approximately $21.1 million per store.

International Segment

Our International segment was established in connection with our acquisition of Canada-based Future Shop Ltd. in fiscal 2002. The Future Shop acquisition provided us with an opportunity to increase revenue, gain market share and leverage our operational expertise in consumer electronics retailing. Since the acquisition, we have continued to build on Future Shop’s position as the leading consumer electronics retailer in Canada.

During fiscal 2003, we launched our dual-branding strategy in Canada by introducing the Best Buy brand. The dual-branding strategy allows us to retain Future Shop’s brand equity and attract more customers by offering a choice of store experiences. As we expand the presence of Best Buy stores in Canada, we expect to gain continued operating efficiencies by leveraging our capital investments, supply chain management, advertising, merchandising and administrative functions. Our goal is to reach differentiated customers with each brand by giving them the unique shopping experiences they desire. The primary differences between our two brands in Canada are:

In-store experience — The customer’s interaction with store employees is different at each of the two brands.

6




Future Shop stores have predominantly commissioned sales associates who take a more proactive role in assisting customers. Through their expertise and attentiveness, the sales associate drives the transaction. In contrast, Canada Best Buy store employees are noncommissioned, and the stores offer more interactive displays and grab-and-go merchandising. This design allows customers to drive the transaction as they experience the products themselves, with store employees available to demonstrate and explain product features.

Products and services — Only Future Shop stores carry appliances. In addition, Geek Squad service is not available in Future Shop stores, but is available in all Canada Best Buy stores.

Store size — At the end of fiscal 2007, the average Future Shop store was approximately 20,500 retail square feet, compared with an average of approximately 25,300 retail square feet for Canada Best Buy stores. Canada Best Buy stores generally have wider aisles, as well as more square footage devoted to entertainment software.

On June 8, 2006, we acquired a 75% interest in Five Star, one of China’s largest appliance and consumer electronics retailers. 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.

On December 28, 2006, we opened our first China Best Buy store in Shanghai. We plan to open two to three additional Best Buy stores in China during the next 12 to 18 months.

At March 3, 2007, we operated 121 Future Shop stores throughout all of Canada’s provinces and 47 Canada Best Buy stores in Ontario, Quebec, Alberta, British Columbia, Manitoba and Saskatchewan. Collectively, our stores in Canada totaled approximately 3.7 million retail square feet at the end of fiscal 2007, or about 9% of our total retail square footage. In fiscal 2007, Canada retail stores generated average revenue of approximately $26.3 million per store.

At March 3, 2007, we operated 135 Five Star stores in seven of China’s 34 provinces and one China Best Buy store in Shanghai. Collectively, our stores in China totaled approximately 4.3 million retail square feet at the end of fiscal 2007, or about 10% of our total retail square footage.

As previously announced, we anticipate continuing our international growth strategy by opening test stores in Mexico and Turkey within the next 12 to 18 months.

Discontinued Operations

In fiscal 2004, we sold our interest in Musicland Stores Corporation (“Musicland”). The transaction resulted in the transfer of all of Musicland’s assets other than a distribution center in Franklin, Indiana, and selected nonoperating assets. In fiscal 2005, we reversed previously recorded valuation allowances on deferred tax assets related to the disposition of our interest in Musicland and recognized a tax benefit. Musicland’s financial results have been classified separately as discontinued operations in our consolidated financial statements for all periods presented.

Operations

Domestic Segment

U.S. Best Buy store operations are organized into eight territories. Each territory is divided into districts and is under the management of a retail field officer who oversees store performance through district managers. District managers monitor store operations and meet regularly with store managers to discuss merchandising, new product introductions, sales promotions, customer loyalty programs, employee satisfaction surveys and store operating performance. Similar meetings are conducted at the corporate level with divisional and regional management. Each district also has a loss prevention manager, with product security personnel employed at each store to control physical inventory losses. Advertising, merchandise purchasing and pricing, as well as inventory policies, are centrally controlled.

U.S. Best Buy stores are generally open 80 hours per week, seven days a week, with extended holiday hours. A typical store is staffed by one general manager and five managers. The average staff per store in fiscal 2007 was approximately 128 employees and varied by store depending on sales volumes.

U.S. Best Buy stores follow a standardized and detailed operating procedure called our Standard Operating Platform (“SOP”). The SOP includes procedures for inventory management, transaction processing, customer relations, store administration, product sales and services, and merchandise display. All stores operate in the same manner under the SOP.

7




Magnolia Audio Video stores are typically managed by a store manager, an audio/video sales manager and, if the store contains mobile products, a mobile electronics sales manager. Magnolia Audio Video stores are generally open 73 hours per week, seven days a week. Depending on an individual store’s volume and product offerings, store staffing includes six to 18 commissioned sales personnel and one to three hourly personnel. Corporate management for Magnolia Audio Video stores centrally controls advertising, merchandise purchasing and pricing, as well as inventory policies.

Pacific Sales stores are typically managed by a store manager who also sells appliances. Pacific Sales stores are generally open 40 hours per week, five days a week. Depending on an individual store’s volume and product offerings, store staffing includes approximately 10 noncommissioned sales personnel and approximately five hourly sales support personnel. Corporate management for Pacific Sales stores centrally controls advertising, merchandise purchasing and pricing, as well as inventory policies.

International Segment

Canada store operations are organized to support two brands, each headed by a vice president. Each vice president has national management that closely monitor store operations and meets regularly with store managers to review management and staff training programs, customer feedback and requests, store operating performance and other matters. Meetings involving store management, product managers, and advertising, financial and administrative staff, as well as senior management, are held quarterly to review operating results and to establish future objectives.

Canada stores are generally open 60 to 75 hours per week, seven days a week. An average Future Shop store is staffed by a general manager, an operations manager, one to four department managers and 48 to 95 sales associates, as well as part-time sales associates. An average Canada Best Buy store is staffed with a general manager; assistant managers for operations, merchandising, inventory and sales; and 80 to 110 sales associates, including full-time and part-time sales associates. The number of sales associates is dependent upon store size and sales volume.

Canada stores use a standardized operating system. The operating system includes procedures for inventory management, transaction processing, customer relations, store administration, staff training and performance appraisals, as well as merchandise display. Advertising, merchandise purchasing and pricing, and inventory policies are centrally controlled.

Five Star stores are generally open 77 to 84 hours per week, 7 days a week. The sales staff at Five Star stores consists primarily of employees of our vendors. A typical Five Star store is staffed by 50 to 200 vendor employees who sell products; a general manager; six to 10 department managers; and 27 to 100 sales associates, as well as part-time sales associates. Corporate management at Five Star centrally controls advertising, merchandise purchasing and pricing and inventory policies for major brand products, while individual regions control these operations for local brands. Meetings involving store management and corporate management are held on a regular basis to review operating results and establish future objectives.

Our China Best Buy store employs an operating model similar to our U.S. Best Buy and Canada Best Buy stores. Our China Best Buy store is staffed with a general manager; assistant managers for operations, merchandising, inventory and sales; and approximately 340 sales associates, including full-time and part-time sales associates. Advertising, merchandise purchasing and pricing, and inventory policies for our China Best Buy store are centrally controlled by corporate management. Meetings involving store management and corporate management are held on a regular basis to review operating results and establish future objectives.

Merchandise

Domestic Segment

U.S. Best Buy stores offer merchandise in four product groups: consumer electronics, home-office, entertainment software and appliances. Consumer electronics, the largest product group in fiscal 2007 based on revenue, consists of video and audio products and services. Video products include televisions, digital cameras, home theater system installation, DVD players, digital camcorders and accessories. Audio products include MP3 players, home theater audio systems, mobile electronics including car stereo and satellite radio products, and related accessories. The home-office product group includes notebook and desktop computers, computer support services, telephones, networking and accessories. Entertainment software products include DVD movies, video game hardware and software, CDs and computer software. The appliances product group includes major appliances as well as vacuum cleaners, small electrics, housewares and services.

8




Magnolia Audio Video stores offer merchandise in two product groups: consumer electronics and home-office. Consumer electronics, the largest product group in fiscal 2007 based on revenue, consists of video and audio products. Video products include televisions, DVD players, home theater system installation, warranties and accessories. Audio products include home audio components, mobile electronics, home theater audio systems and accessories. The home-office product group consists primarily of home theater furniture.

Pacific Sales stores offer merchandise in two product groups: consumer electronics and appliances. Appliances, the largest product group in fiscal 2007 based on revenue, consists of major appliances as well as small electrics, housewares, plumbing, bathroom fixtures and services. Consumer electronics consists of video and audio products, including televisions, and home theater systems and installation.

Within our Domestic segment product groups, as well as within our International segment product groups, we include a variety of services that we provide in connection with the merchandise offered within the product groups. In-store services include computer set-up, repair and software installation, as well as the installation of mobile electronics. In-home services include computer set-up, repair, software installation and home networking, and the delivery and installation of appliances and home theater systems. Services were not a significant part of our revenue in fiscal 2007. Our services offerings generally provide higher gross margins than our merchandise assortment and has been a contributor to year-over-year gross margin gains. However, the infrastructure supporting that business has also increased our selling, general and administrative expenses (“SG&A”) rate. We expect to continue to expand our services offerings such that services revenue will become a more significant component of our business over time.

International Segment

Canada Best Buy and Future Shop stores offer merchandise in four product groups: consumer electronics, home-office, entertainment software and, for Future Shop only, appliances. Consumer electronics, the largest product group in fiscal 2007 based on revenue, consists of video and audio products. Video products include televisions, digital cameras, DVD players, digital camcorders and accessories. Audio products include MP3 players, home audio components, car stereos, speakers and accessories. The home-office product group includes desktop and notebook computers, computer support services, telephones and accessories. Entertainment software products include DVDs, video game hardware and software, computer software and CDs. The appliances product group includes major appliances as well as small electrics, vacuum cleaners and housewares.

Although Canada Best Buy and Future Shop stores carry similar product groups (except for appliances), there are differences in product brands and depth of selection within product groups. On average, approximately 35% of the product assortment (excluding entertainment software) overlaps between the two store brands.

China stores offer merchandise in three product groups: consumer electronics, home-office and appliances. Our China stores do not carry entertainment software. Appliances, the largest product group in fiscal 2007 based on revenue, includes major appliances, air conditioners, small electrics and housewares. The consumer electronics product group consists of video and audio products, including televisions, digital cameras, MP3 players and accessories. The home-office product group includes desktop and notebook computers, computer support services, telephones and accessories.

Distribution

Domestic Segment

Generally, U.S. Best Buy stores’ merchandise, except for major appliances and large-screen televisions, is shipped directly from manufacturers to our distribution centers located in California, Georgia, Indiana, Minnesota, New York, Ohio, Oklahoma and Virginia. Major appliances and large-screen televisions are shipped to satellite warehouses in each major market. U.S. Best Buy stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the stores from our suppliers. All inventory is bar-coded and scanned to ensure accurate tracking. In addition, a computerized inventory replenishment program is used to manage inventory levels at each store. On average, U.S. Best Buy stores receive product shipments two or three times per week, depending on sales volume. Contract carriers ship merchandise from the distribution centers to stores. Generally, online merchandise sales are either picked up at U.S. Best Buy stores or fulfilled directly to customers through our distribution centers.

9




Magnolia Audio Video stores’ merchandise is received and warehoused at either a Magnolia Audio Video distribution center in California or the U.S. Best Buy distribution center in California. All inventory is bar-coded and scanned to ensure accurate tracking. In addition, a computerized inventory replenishment program is used to manage inventory levels at each store. Merchandise is delivered to stores an average of three times per week pursuant to an in-house distribution system.

Pacific Sales stores’ merchandise is received and warehoused at a distribution center in California. All inventory is bar-coded or marked with vendor serial numbers to ensure accurate tracking. In addition, a computerized inventory replenishment program is used to manage inventory levels at each store. Most merchandise is fulfilled directly to customers through our distribution center.

International Segment

Our Canada stores’ merchandise is shipped directly from our suppliers to our distribution centers in British Columbia and Ontario. Our Canada stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors. All inventory is bar-coded and scanned to ensure accurate tracking. In addition, a computerized inventory replenishment program is used to manage inventory levels at each store. Our Canada stores typically receive product shipments twice per week, with accelerated shipments during periods of high sales volume. Contract carriers ship merchandise from the distribution centers to stores.

Our Five Star stores’ merchandise is housed in more than 50 distribution centers located throughout the Five Star retail chain, the largest of which is located in Nanjing, Jiangsu. Our Five Star stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. In addition, the distribution centers also provide installation services and act as service centers for Five Star customers. Most merchandise is fulfilled directly to customers through our distribution centers.

Our China store’s merchandise is shipped directly from our suppliers to our distribution center in Shanghai’s Song Jiang District. Our China store is dependent upon the distribution center for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the store from manufacturers and distributors. In certain circumstances, merchandise is shipped directly to our customers from manufacturers and distributors. Our China store typically receives product shipments three to four times per week, with accelerated shipments during periods of high sales volume.

Suppliers

Our strategy depends, in part, upon our ability to offer customers a broad selection of name-brand products and, therefore, our success is dependent upon satisfactory and stable supplier relationships. In fiscal 2007, our 20 largest suppliers accounted for over three-fifths of the merchandise we purchased, with five suppliers — Sony, Hewlett-Packard, Samsung, Gateway, and Toshiba — representing over one-third of total merchandise purchased. The loss of or disruption in supply from any one of these major suppliers could have a material adverse effect on our revenue and earnings. We generally do not have long-term written contracts with our major suppliers that would require them to continue supplying us with merchandise. We have no indication that any of our suppliers plans to discontinue selling us merchandise. We have not experienced significant difficulty in maintaining satisfactory sources of supply, and we generally expect that adequate sources of supply will continue to exist for the types of merchandise we sell.

We operate three global sourcing offices in China in order to purchase products directly from manufacturers in Asia. These offices have improved our product sourcing efficiency and provide us with the capability to offer private-label products that complement our existing product assortment. In the future, we expect purchases from our global sourcing offices to increase as a percentage of total purchases. We also believe that the expected increase in our global sourcing volumes will help drive gross profit rate improvements by lowering our overall product cost.

Store Development

The addition of new stores has played, and we believe will continue to play, a significant role in our growth and success. Our store development program has historically focused on entering new markets; adding stores within existing markets; and relocating, remodeling and expanding existing stores. During fiscal 2007, we opened 96 new stores, acquired 145 stores and relocated 20 other stores. Further, we added the Magnolia Home Theater store-within-a-store experience to nearly 200 new and existing

10




U.S. Best Buy stores during fiscal 2007. During fiscal 2007, we closed six Canada Geek Squad stores and four Five Star stores.

The following table reconciles U.S. Best Buy stores open at the beginning and end of each of the last five fiscal years:

Fiscal Year

 

Stores
Opened

 

Stores
Closed

 

Total
Stores at
End of
Fiscal Year

 

Balance forward

 

 

NA

 

 

NA

 

 

481

 

2003

 

 

67

 

 

 

 

548

 

2004

 

 

60

 

 

 

 

608

 

2005

 

 

61

 

 

1

 

 

668

 

2006

 

 

74

 

 

 

 

742

 

2007

 

 

80

 

 

 

 

822

 

 

The following table reconciles Magnolia Audio Video stores open at the beginning and end of each of the last five fiscal years:

Fiscal Year

 

Stores
Opened

 

Stores
Closed

 

Total
Stores at
End of
Fiscal Year

 

Balance forward

 

 

NA

 

 

NA

 

 

13

 

2003

 

 

6

 

 

 

 

19

 

2004

 

 

3

 

 

 

 

22

 

2005

 

 

 

 

2

 

 

20

 

2006

 

 

 

 

 

 

20

 

2007

 

 

 

 

 

 

20

 

 

The following table reconciles Pacific Sales stores open at the end of fiscal 2007:

Fiscal Year

 

Stores
Opened

 

Stores
Closed

 

Total
Stores at
End of
Fiscal Year

 

Balance forward(1)

 

 

NA

 

 

NA

 

 

14

 

2007

 

 

 

 

 

 

14

 

 

(1)                  As of the March 7, 2006, date of acquisition

The following table reconciles Canada Best Buy stores open at the beginning and end of each of the last five fiscal years:

Fiscal Year

 

Stores
Opened

 

Stores
Closed

 

Total
Stores at
End of
Fiscal Year

 

Balance forward

 

 

NA

 

 

NA

 

 

NA

 

2003

 

 

8

 

 

 

 

8

 

2004

 

 

11

 

 

 

 

19

 

2005

 

 

11

 

 

 

 

30

 

2006

 

 

14

 

 

 

 

44

 

2007

 

 

   3

 

 

 

 

47

 

 

The following table reconciles Future Shop stores open at the beginning and end of each of the last five fiscal years:

Fiscal Year

 

Stores
Opened

 

Stores
Closed

 

Total
Stores at
End of
Fiscal Year

 

Balance forward

 

 

NA

 

 

NA

 

 

95

 

2003

 

 

9

 

 

 

 

104

 

2004

 

 

4

 

 

 

 

108

 

2005

 

 

6

 

 

 

 

114

 

2006

 

 

5

 

 

1

 

 

118

 

2007

 

 

3

 

 

 

 

121

 

 

The following table reconciles Five Star stores open at the end of fiscal 2007:

Fiscal Year

 

Stores
Opened

 

Stores
Closed

 

Total
Stores at
End of
Fiscal Year

 

Balance forward(1)

 

 

NA

 

 

NA

 

 

131

 

2007

 

 

8

 

 

4

 

 

135

 

 

(1)                  As of the June 8, 2006, date of acquisition

The following table reconciles the China Best Buy store open at the end of fiscal 2007:

Fiscal Year

 

Stores
Opened

 

Stores
Closed

 

Total
Stores at
End of
Fiscal Year

 

Balance forward

 

NA

 

NA

 

NA

 

2007

 

1

 

 

1

 

 

During fiscal 2008, we expect to open approximately 130 new stores in the United States, Canada and China. Most of the new stores will be opened in markets where we already have stores, leveraging our infrastructure and making shopping more convenient for our customers. In the U.S., we anticipate opening approximately 90 Best Buy stores, as well as relocating approximately eight existing Best Buy stores. We also expect to open up to five Pacific Sales stores. In Canada, we expect to open three to five Best Buy stores and seven to nine Future Shop stores, as well as relocating approximately two existing Future Shop stores. In China, we plan to open 20 to 23 Five Star stores. We also expect to open two to three additional Best Buy stores in China in the next 12 to 18 months. Finally, we anticipate extending our international presence by opening test stores in Mexico and Turkey, also within the next 12 to 18 months.

Additional information regarding our outlook for fiscal 2008 is included in the Outlook for Fiscal 2008 section of Item 7, Management’s Discussion and Analysis of Financial

11




Condition and Results of Operations, of this Annual Report on Form 10-K.

Intellectual Property

We believe we own valuable intellectual property including trademarks, service marks and tradenames, some of which are of material importance to our business, and include “Best Buy,” the “Yellow Tag” logo, “Geek Squad,” “Five Star,” “Future Shop,” “Magnolia Audio Video” and “Pacific Sales.” Some of our intellectual property is the subject of numerous United States and foreign trademark and service mark registrations. Our trademarks in the United States generally have 10 year renewable terms. We believe our intellectual property has significant value and is an important factor in the marketing of our company, our stores and our Web sites. We also believe we own valuable patents and intellectual property for which we have patents pending. We are not aware of any facts that could negatively impact our continuing use of any of our intellectual property.

In accordance with accounting principles generally accepted in the United States (“GAAP”), our balance sheets include the cost of acquired intellectual property only. The only material acquired intellectual properties presently included in our balance sheets are the Future Shop, Five Star and Pacific Sales tradenames, which had a total carrying value of $81 million at the end of fiscal 2007. The values of these tradenames are based on the continuation of the Future Shop, Five Star and Pacific Sales brands. We currently classify these tradenames as indefinite-lived intangible assets. If we were to abandon the Future Shop, Five Star or Pacific Sales brand, we would incur an impairment charge based on the then-carrying value of the associated tradename.

Seasonality

Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season in the United States and Canada.

Working Capital

We fund our business operations through a combination of available cash and cash equivalents, short-term investments and cash flows generated from operations. In addition, our revolving credit facilities are available for additional working capital needs or investment opportunities.

Customers

We do not have a significant concentration of sales with any individual customer and, therefore, the loss of any one customer would not have a material impact on our business. No single customer has accounted for 10% or more of our total revenue.

Backlog

Our stores and online shopping sites do not have a material amount of backlog orders.

Government Contracts

No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any government.

Competition

Our stores compete against other consumer electronics retailers, specialty home-office retailers, mass merchants, home-improvement superstores and a growing number of direct-to-consumer alternatives. Our stores also compete against independent dealers, regional chain discount stores, wholesale clubs, video rental stores and other specialty retail stores. Mass merchants continue to increase their assortment of consumer electronics products, primarily those that are less complex to sell, install and operate, and have been expanding their product offerings into higher-end categories. Similarly, large home-improvement retailers are expanding their assortment of appliances. In addition, consumers are increasingly downloading entertainment and computer software directly via the Internet.

We compete principally on the basis of customer service; installation and support services; store environment, location and convenience; product assortment and availability; value pricing; and financing alternatives.

We believe our store experience, broad product assortment, store formats and brand marketing strategies differentiate us from most competitors by positioning our stores as the destination for new technology and entertainment products in a fun and informative shopping environment. Our stores compete by aggressively advertising and emphasizing a complete product and service solution, value pricing and financing alternatives. In addition, our trained and knowledgeable sales and service staffs allow us to tailor the offerings to meet the needs of our customers.

12




Research and Development

We have not engaged in any material research and development activities during the past three fiscal years.

Environmental Matters

We are not aware of any federal, state or local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, that have materially affected, or will materially affect, our net earnings or competitive position, or have resulted or will result in material capital expenditures. During fiscal 2007, we had no material capital expenditures for environmental control facilities and no such material expenditures are anticipated in the foreseeable future.

Number of Employees

At the end of fiscal 2007, we employed approximately 140,000 full-time, part-time and seasonal employees. We consider our employee relations to be good. There are currently no collective bargaining agreements covering any of our employees, and we have not experienced a strike or work stoppage.

Financial Information About Geographic Areas

We operate two reportable segments: Domestic and International. Financial information regarding the Domestic and International geographic areas is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 11, Segment and Geographic Information, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Available Information

We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the U.S. Securities and Exchange Commission (“SEC”). Copies of these reports, proxy statements and other information can be read and copied at:

SEC Public Reference Room
100 F Street NE
Washington, D.C. 20549

Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

The SEC maintains a Web site that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s Web site at http://www.sec.gov.

We make available, free of charge on our Web site, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. These documents are posted on our Web site at www.BestBuy.com — select the “For Our Investors” link and then the “SEC Filings” link.

We also make available, free of charge on our Web site, the charters of the Audit Committee, the Compensation and Human Resources Committee, and the Nominating, Corporate Governance and Public Policy Committee, as well as the Corporate Governance Principles of our Board of Directors (“Board”) and our Code of Business Ethics (including any amendment to, or waiver from, a provision of our Code of Business Ethics) adopted by our Board. These documents are posted on our Web site at www.BestBuy.com — select the “For Our Investors” link and then the “Corporate Governance” link.

Copies of any of the above-referenced documents will also be made available, free of charge, upon written request to:

Best Buy Co., Inc.
Investor Relations Department
7601 Penn Avenue South
Richfield, MN 55423-3645

Item 1A. Risk Factors.

Described below are certain risks that our management believes are applicable to our business and the industry in which we operate. There may be additional risks that are not presently material or known. There are also risks within the economy and the capital markets, both domestically and internationally, that affect business generally, and our company and industry as well, such as inflation; higher interest rates; higher fuel and other energy costs; higher transportation costs; higher costs of labor, insurance and healthcare; foreign currency exchange rate fluctuations;

13




and higher levels of unemployment, which have not been described. You should carefully consider each of the following risks and all other information set forth in this Annual Report on Form 10-K.

If any of the events described below were to occur, our business, financial condition, results of operations, liquidity or access to the capital markets could be materially adversely affected. The following risks could cause our actual results to differ materially from our historical results and from results predicted by forward-looking statements made by us or on our behalf related to conditions or events that we anticipate may occur in the future. All forward-looking statements made by us or on our behalf are qualified by the risks described below.

If we do not anticipate and respond to changing consumer preferences in a timely manner, our operating results could suffer.

Our business depends, in large part, on our ability to introduce successfully new products, services and technologies to consumers; the frequency of such introductions; the level of consumer acceptance; and the related impact on the demand for existing products, services and technologies. Failure to predict accurately constantly changing consumer tastes, preferences, spending patterns and other lifestyle decisions, or to address effectively consumer concerns, could have a material adverse effect on our revenue, results of operations and standing with our customers.

Our growth is dependent on the success of our strategies.

Our growth is dependent on our ability to identify, develop and execute strategies. While we believe customer centricity and the pursuit of international growth opportunities will enable us to grow our business, misjudgments could have a material adverse effect on our business, financial condition and results of operations.

Our results of operations could deteriorate if we fail to attract, develop and retain qualified employees.

Our performance is dependent on attracting and retaining a large and growing number of employees. We believe our competitive advantage is providing unique end-to-end solutions for each individual customer, which requires us to have highly trained and engaged employees. Our success depends in part upon our ability to attract, develop and retain a sufficient number of qualified employees, including store, service and administrative personnel. The turnover rate in the retail industry is high, and qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some areas. Competition for such qualified individuals could require us to pay higher wages to attract a sufficient number of employees. Our inability to recruit a sufficient number of qualified individuals in the future may delay planned openings of new stores or affect the speed with which we expand initiatives such as Best Buy For Business and services. Delayed store openings, significant increases in employee turnover rates or significant increases in labor costs could have a material adverse effect on our business, financial condition and results of operations.

We face strong competition from traditional store-based retailers, Internet businesses and other forms of retail commerce, which could materially affect our revenue and profitability.

The retail business is highly competitive. We compete for customers, employees, locations, products and other important aspects of our business with many other local, regional, national and international retailers. Pressure from our competitors, some of which have a greater market presence and more financial resources than we do, could require us to reduce our prices or increase our costs of doing business. As a result of this competition, we may experience lower revenue and/or higher operating costs, which could materially adversely affect our results of operations.

Our growth strategy includes expanding our business, both in existing markets and by opening stores in new markets.

Our future growth is dependent, in part, on our ability to build or lease new stores. We compete with other retailers and businesses for suitable locations for our stores. Local land use, local zoning issues, environmental regulations and other regulations applicable to the types of stores we desire to construct may impact our ability to find suitable locations, and also influence the cost of constructing and leasing our stores. We also may have difficulty negotiating leases or real estate purchase agreements on acceptable terms. Failure to manage effectively these and other similar factors will affect our ability to build or lease new stores, which may have a material adverse effect on our future profitability.

We seek to expand our business in existing markets in order to attain a greater overall market share. Because our stores typically draw customers from their local areas, a new store may draw customers away from our nearby existing stores

14




and may cause customer traffic and comparable store sales performance to decline at those existing stores.

We also intend to open stores in new markets. The risks associated with entering a new market include difficulties in attracting customers due to a lack of customer familiarity with our brand, our lack of familiarity with local customer preferences and seasonal differences in the market. In addition, entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. While we have a strong track record of profitable new-store growth, we cannot ensure that our new stores will be profitably deployed; as a result, our future profitability may be materially adversely affected.

Risks associated with the vendors from whom our products are sourced could materially adversely affect our revenue and gross profit.

The products we sell are sourced from a wide variety of domestic and international vendors. Global sourcing has become an increasingly important part of our business and positively affects our financial performance. Our 20 largest suppliers account for over three-fifths of the merchandise we purchase. If any of our key vendors fails to supply us with products, we may not be able to meet the demands of our customers and revenue could decline. We require all of our vendors to comply with applicable laws, including labor and environmental laws, and otherwise be certified as meeting our required vendor standards of conduct. Our ability to find qualified vendors who meet our standards and supply products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced from outside the United States. Political or financial instability, merchandise quality issues, trade restrictions, tariffs, foreign currency exchange rates, transportation capacity and costs, inflation, outbreak of pandemics and other factors relating to foreign trade are beyond our control. These and other issues affecting our vendors could materially adversely affect our revenue and gross profit.

We are subject to certain regulatory and legal developments which could have a material adverse impact on our business.

Our regulatory and legal environment exposes us to complex compliance and litigation risks that could materially affect our operations and financial results. In our major global markets, we are subject to increasing regulations, which increase our cost of doing business. The most significant compliance and litigation risks we face are:

·        The difficulty in complying with sometimes conflicting regulations in local, national or international jurisdictions and new or changing regulations that affect how we operate;

·        The impact of changes in tax laws (or interpretations thereof);

·        The impact of litigation trends, including class actions involving consumers and shareholders, and labor and employment matters; and

·        The significant uncertainties of operating globally, including the costs and difficulties of managing international operations, foreign currencies, complex laws, contractual obligations and intellectual property rights.

We rely heavily on our management information systems for inventory management, distribution and other functions. If our systems fail to perform these functions adequately or if we experience an interruption in their operation, our business and results of operations could be materially adversely affected.

The efficient operation of our business is dependent on our management information systems. We rely heavily on our management information systems to manage our order entry, order fulfillment, pricing, point-of-sale and inventory replenishment processes. The failure of our management information systems to perform as we anticipate could disrupt our business and could result in decreased revenue, increased overhead costs and excess or out-of-stock inventory levels, causing our business and results of operations to suffer materially.

A disruption in our relationship with Accenture, who manages our information technology and human resources operations, could materially adversely affect our business and results of operations.

We have engaged Accenture to manage our information technology and human resources operations. We rely heavily on our management information systems for inventory management, distribution and other functions. We also rely heavily on human resources support to attract, develop and retain a sufficient number of qualified employees. Any disruption in our relationship with Accenture could result in decreased revenue and increased

15




overhead costs, causing our business and results of operations to suffer materially.

Failure to protect the integrity and security of our customers’ information could expose us to litigation and materially damage our standing with our customers.

The increasing costs associated with information security — such as increased investment in technology, the costs of compliance with consumer protection laws and costs resulting from consumer fraud — could cause our business and results of operations to suffer materially. Additionally, the success of our online operations depends upon the secure transmission of confidential information over public networks, including the use of cashless payments. While we are taking significant steps to protect customer and confidential information, there can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and personal data. If any such compromise of our information security were to occur, it could have a material adverse effect on our reputation, business, operating results and financial condition and may increase the costs we incur to protect against such information security breaches.

Failure in our pursuit or execution of new business ventures, strategic alliances and acquisitions could have a material adverse impact on our business.

Our growth strategy includes expansion via new business ventures, strategic alliances and acquisitions. While we employ several different valuation methodologies to assess a potential growth opportunity, we can give no assurance that new business ventures and strategic alliances will positively affect our financial performance. Acquisitions may result in the diversion of our capital and our management’s attention from other business issues and opportunities. We may not be able to assimilate or integrate successfully companies that we acquire, including their personnel, financial systems, distribution, operations and general operating procedures. If we fail to assimilate or integrate acquired companies successfully, our business could suffer materially. We may also encounter challenges in achieving appropriate internal control over financial reporting in connection with the integration of an acquired company. In addition, the integration of any acquired company, and its financial results, into ours may have a material adverse effect on our operating results.

We are highly dependent on the cash flows and net earnings we generate during our fourth fiscal quarter, which includes the majority of the holiday selling season.

Approximately one-third of our revenue and more than one-half of our net earnings are generated in our fourth fiscal quarter, which includes the majority of the holiday selling season in the United Sates and Canada. Unexpected events or developments such as natural disasters, man-made disasters and adverse economic conditions in our fourth quarter could have a material adverse effect on our revenue and earnings.

The foregoing should not be construed as an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf.

Item 1B. Unresolved Staff Comments.

Not applicable.


 

16




Item 2. Properties.

Stores, Distribution Centers and Corporate Facilities

Domestic Segment

The following table summarizes the geographic location of our Domestic segment stores at the end of fiscal 2007:

 

 

U.S. Best Buy
Stores

 

U.S. Geek Squad
Stores 

 

Magnolia Audio
Video Stores

 

Pacific Sales
Stores

 

Alabama

 

10

 

 

 

 

 

Alaska

 

1

 

 

 

 

 

Arizona

 

18

 

 

 

 

 

Arkansas

 

5

 

 

 

 

 

California

 

91

 

2

 

11

 

 

14

 

Colorado

 

14

 

1

 

 

 

 

Connecticut

 

10

 

 

 

 

 

Delaware

 

3

 

 

 

 

 

District of Columbia

 

1

 

 

 

 

 

Florida

 

46

 

 

 

 

 

Georgia

 

26

 

3

 

 

 

 

Hawaii

 

2

 

 

 

 

 

Idaho

 

4

 

 

 

 

 

Illinois

 

49

 

 

 

 

 

Indiana

 

19

 

 

 

 

 

Iowa

 

12

 

 

 

 

 

Kansas

 

8

 

 

 

 

 

Kentucky

 

8

 

 

 

 

 

Louisiana

 

10

 

 

 

 

 

Maine

 

3

 

 

 

 

 

Maryland

 

20

 

 

 

 

 

Massachusetts

 

20

 

 

 

 

 

Michigan

 

30

 

 

 

 

 

Minnesota

 

21

 

2

 

 

 

 

Mississippi

 

5

 

 

 

 

 

Missouri

 

18

 

 

 

 

 

Montana

 

3

 

 

 

 

 

Nebraska

 

4

 

 

 

 

 

Nevada

 

7

 

 

 

 

 

New Hampshire

 

6

 

 

 

 

 

New Jersey

 

19

 

 

 

 

 

New Mexico

 

5

 

 

 

 

 

New York

 

40

 

 

 

 

 

North Carolina

 

25

 

 

 

 

 

North Dakota

 

4

 

 

 

 

 

Ohio

 

34

 

 

 

 

 

Oklahoma

 

7

 

 

 

 

 

Oregon

 

7

 

 

2

 

 

 

Pennsylvania

 

26

 

 

 

 

 

Rhode Island

 

1

 

 

 

 

 

South Carolina

 

11

 

 

 

 

 

South Dakota

 

2

 

 

 

 

 

Tennessee

 

12

 

 

 

 

 

Texas

 

81

 

3

 

 

 

 

Utah

 

8

 

 

 

 

 

Vermont

 

1

 

 

 

 

 

Virginia

 

24

 

 

 

 

 

Washington

 

19

 

 

7

 

 

 

West Virginia

 

2

 

 

 

 

 

Wisconsin

 

20

 

1

 

 

 

 

Total

 

822

 

12

 

20

 

 

14

 

 

Note: At the end of fiscal 2007, we owned 23 of our U.S. Best Buy stores. Also at the end of fiscal 2007, we operated 31 U.S. Best Buy stores with owned improvements on leased land. All other stores in the Domestic segment at the end of fiscal 2007 were leased.


17




At the end of fiscal 2007, we operated 822 U.S. Best Buy stores, 20 Magnolia Audio Video stores, 14 Pacific Sales stores and 12 Geek Squad stores, totaling approximately 34.0 million retail square feet.

The operations of the Domestic segment are serviced by the following major distribution centers:

Location

 

Square
Footage

 

Owned
or Leased

 

Dinuba, California

 

1,028,000

 

 

Owned

 

Findlay, Ohio

 

1,010,000

 

 

Leased

 

Nichols, New York

 

720,000

 

 

Owned

 

Ardmore, Oklahoma

 

720,000

 

 

Owned

 

Franklin, Indiana

 

714,000

 

 

Owned

 

Staunton, Virginia

 

709,000

 

 

Leased

 

Dublin, Georgia

 

700,000

 

 

Leased

 

Bloomington, Minnesota

 

425,000

 

 

Leased

 

Whittier, California

 

305,000

 

 

Leased

 

Total

 

6,331,000

 

 

 

 

 

We also lease approximately 2.9 million square feet of space in 13 satellite warehouses in major metropolitan markets for home delivery of major appliances and large-screen televisions.

Our principal corporate office is located in Richfield, Minnesota, and is an owned facility consisting of four interconnected buildings totaling approximately 1.5 million square feet. Accenture, who manages our information technology and human resources operations, and certain other of our vendors who provide us with a variety of additional corporate services, occupy a portion of our principal corporate office.


International Segment

The following table summarizes the geographic location of our International segment stores at the end of fiscal 2007:

 

 

Canada

 

China

 

 

 

Canada Best Buy
Stores

 

Future Shop
Stores

 

China Best Buy
Stores

 

Five Star
Stores

 

Alberta

 

 

7

 

 

15

 

 

 

 

 

 

 

British Columbia

 

 

6

 

 

21

 

 

 

 

 

 

 

Manitoba

 

 

2

 

 

5

 

 

 

 

 

 

 

New Brunswick

 

 

 

 

3

 

 

 

 

 

 

 

Newfoundland

 

 

 

 

1

 

 

 

 

 

 

 

Nova Scotia

 

 

 

 

2

 

 

 

 

 

 

 

Ontario

 

 

23

 

 

48

 

 

 

 

 

 

 

Prince Edward Island

 

 

 

 

1

 

 

 

 

 

 

 

Quebec

 

 

8

 

 

22

 

 

 

 

 

 

 

Saskatchewan

 

 

1

 

 

3

 

 

 

 

 

 

 

Anhui

 

 

 

 

 

 

 

 

 

 

14

 

Henan

 

 

 

 

 

 

 

 

 

 

7

 

Jiangsu

 

 

 

 

 

 

 

 

 

 

86

 

Shandong

 

 

 

 

 

 

 

 

 

 

8

 

Shanghai

 

 

 

 

 

 

 

 

1

 

 

 

Sichuan

 

 

 

 

 

 

 

 

 

 

4

 

Yunnan

 

 

 

 

 

 

 

 

 

 

3

 

Zhejiang

 

 

 

 

 

 

 

 

 

 

13

 

Total

 

 

47

 

 

121

 

 

1

 

 

135

 

 

Note: At the end of fiscal 2007, we owned three of our Canada Best Buy stores, six of our Five Star stores and our China Best Buy store. All other stores in the International segment at the end of fiscal 2007 were leased.


18




At the end of fiscal 2007, we operated 121 Future Shop stores, 47 Canada Best Buy stores, 135 Five Star stores and one China Best Buy store, totaling approximately 7.9 million retail square feet.

Our International segment leases approximately 1.1 million square feet of distribution center space in Brampton, Ontario, and approximately 0.4 million square feet of distribution center space in Burnaby, British Columbia to service our Canada operations.

We also lease approximately 0.6 million square feet of distribution center space in Jiangsu province, and an additional 0.6 million square feet of distribution center space throughout the Five Star retail chain to support our Five Star distribution network.

The principal office for our Canada operations is located in a 141,000-square-foot leased facility in Burnaby, British Columbia. The principal office for our Five Star operations is located in a 46,000-square-foot owned facility in Nanjing, Jiangsu. The principal office for our China Best Buy operations is located in a 27,000-square-foot leased facility in Shanghai.

Global Sourcing

In support of our global sourcing initiative, we lease office space in China totaling approximately 32,000 square feet at the end of fiscal 2007.

Operating Leases

Almost all of our stores and a majority of our distribution facilities are leased. Terms of the lease agreements generally range from 10 to 20 years. Most of the leases contain renewal options and escalation clauses.

Additional information regarding our operating leases is available in Note 8, Leases, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Item 3. Legal Proceedings.

On December 8, 2005, a purported class action lawsuit captioned, Jasmen Holloway, et al. v. Best Buy Co., Inc., was filed against us in the U.S. District Court for the Northern District of California. This federal court action alleges that we discriminate against women and minority individuals on the basis of gender, race, color and/or national origin in our stores with respect to recruitment, hiring, job assignments, transfers, promotions, compensation, allocation of weekly hours and other terms and conditions of employment. The plaintiffs seek an end to discriminatory policies and practices, an award of back and front pay, punitive damages and injunctive relief, including rightful place relief for all class members. We believe the allegations are without merit and intend to defend this action vigorously.

We are involved in various other legal proceedings arising in the normal course of conducting business. We believe the amounts provided in our consolidated financial statements, as prescribed by GAAP, are adequate in light of the probable and estimable liabilities. The resolution of those proceedings is not expected to have a material effect on our results of operations or financial condition.


19




Executive Officers of the Registrant

(As of March 3, 2007)

Name

Age

 

Position With the Company

 

Years
With the
Company

Bradbury H. Anderson

57

 

Vice Chairman and Chief Executive Officer

 

34

Richard M. Schulze

66

 

Founder and Chairman of the Board

 

41

Allen U. Lenzmeier

63

 

Vice Chairman

 

23

Brian J. Dunn

46

 

President and Chief Operating Officer

 

22

Robert A. Willett

60

 

Chief Executive Officer — Best Buy International

 

3

Kevin T. Layden

46

 

President and Chief Operating Officer — Best Buy Canada

 

10

Shari L. Ballard

40

 

Executive Vice President — Human Resources and Legal

 

14

Thomas C. Healy

45

 

Executive Vice President — Best Buy For Business

 

17

Darren R. Jackson

42

 

Executive Vice President — Finance and Chief Financial Officer

 

7

Timothy D. McGeehan

40

 

Executive Vice President — Retail Sales

 

19

Kalendu Patel

43

 

Executive Vice President — Strategy and International

 

4

Joseph M. Joyce

55

 

Senior Vice President, General Counsel and Assistant Secretary

 

16

James L. Muehlbauer

45

 

Senior Vice President and Chief Financial Officer — Best Buy U.S.

 

5

John Noble

48

 

Senior Vice President and Chief Financial Officer — Best Buy International

 

5

Ryan D. Robinson

41

 

Senior Vice President and Chief Financial Officer — New Growth Platforms

 

5

Susan S. Grafton

50

 

Vice President, Controller and Chief Accounting Officer

 

6

 


Bradbury H. Anderson has been a director since August 1986 and is currently our Vice Chairman and Chief Executive Officer. He assumed the responsibility of Chief Executive Officer in June 2002, having previously served as President and Chief Operating Officer since April 1991. He has been employed in various capacities with us since 1973. In addition, he serves on the board of the Retail Industry Leaders Association, as well as on the boards of the American Film Institute, Junior Achievement, Minnesota Public Radio and Waldorf College.

Richard M. Schulze is a founder of Best Buy. He has been an officer and director from our inception in 1966 and currently is Chairman of the Board. Effective in June 2002, he relinquished the duties of Chief Executive Officer. He had been our principal executive officer for more than 30 years. He is on the board of the University of St. Thomas, chairman of its Executive and Institutional Advancement Committee, and a member of its Board Affairs Committee. Mr. Schulze is also chairman of the board of the University of St. Thomas Business School.

Allen U. Lenzmeier has been a director since February 2001 and is currently our Vice Chairman, serving on a part-time basis to support our international expansion. Prior to his promotion to his current position in 2004, he served in various capacities since joining us in 1984, including as President and Chief Operating Officer from 2002 to 2004, and as President of Best Buy Retail Stores from 2001 to 2002. He serves on the board of UTStarcom, Inc. He is also a national trustee for the Boys and Girls Clubs of America and serves on its Twin Cities board.

Brian J. Dunn was named President and Chief Operating Officer in February 2006. Prior to his promotion to his current position, he served as President — Retail, North America since December 2004. Mr. Dunn joined us in 1985 and has held positions as Executive Vice President, Senior Vice President, Regional Vice President, regional manager, district manager and store manager.

Robert A. Willett became our Chief Executive Officer — Best Buy International in February 2006. He previously served as Executive Vice President — Operations since April 2004. In April 2002, we engaged Mr. Willett as a consultant and special advisor to our Board on matters relating to operational efficiency and excellence. Prior to that, he was the global managing partner for the retail practice at Accenture LLP, a global management consulting, technology services and outsourcing company, and was also a member of its Executive Committee. Mr. Willett began his career in store management at Marks & Spencer P.L.C., a British department store chain, and has held executive positions at F.W. Woolworth & Co., a department store chain, as well as several other retailers in the United Kingdom.

Kevin T. Layden was named President and Chief Operating Officer — Best Buy Canada (formerly Future Shop Ltd.) in 1999, with responsibility for both our Canada Best Buy and Future Shop operations. Mr. Layden joined us in 1997 as

20




Vice President — Merchandising. Prior to joining us, he spent approximately 17 years with Circuit City Stores, Inc., a retailer of consumer electronics, serving in positions of increasing responsibility, including most recently as assistant vice president and general manager for New York.

Shari L. Ballard was named Executive Vice President — Human Resources and Legal in December 2004. Ms. Ballard joined us in 1993 and has held positions as Senior Vice President, Vice President, and general and assistant store manager.

Thomas C. Healy was named Executive Vice President — Best Buy For Business in December 2004. Mr. Healy joined us in 1990 and has held positions as President — Best Buy International, Senior Vice President, Regional Vice President, district manager and store manager.

Darren R. Jackson was named Executive Vice President — Finance and Chief Financial Officer in April 2002. Mr. Jackson joined us in 2000 as Senior Vice President — Finance and Treasurer and was promoted to Chief Financial Officer in 2001. Prior to that, Mr. Jackson served as chief financial officer of the Full-Line Store Division at Nordstrom, Inc., a department store chain, from 1998 to 2000 and as chief financial officer of Carson Pirie Scott & Co. Inc., a department store chain, from 1996 to 1998. A certified public accountant (inactive), Mr. Jackson has 18 years of experience in the retail industry. He serves as a director of Advanced Auto Parts, Inc., vice chairman of the Marquette University board and a director of Cristo Rey Network.

Timothy D. McGeehan was named Executive Vice President — Retail Sales in June 2005. Mr. McGeehan joined us in 1988 and has held positions as Senior Vice President, Regional Vice President, regional manager, district manager and store manager.

Kalendu Patel was named Executive Vice President — Strategy and International in April 2005. Mr. Patel joined us in 2003 and has held positions as Senior Vice President and Vice President. Prior to joining us, Mr. Patel was a partner at Strategos, a strategic consulting firm. Prior to that, he held various positions with KPMG Consulting Inc. and Courtaulds PLC in the United Kingdom.

Joseph M. Joyce was named Senior Vice President, General Counsel and Assistant Secretary in 1997. Mr. Joyce joined us in 1991 as Vice President — Human Resources and General Counsel. Prior to joining us, Mr. Joyce was with Tonka Corporation, a toy maker, having most recently served as vice president, secretary and general counsel.

James L. Muehlbauer was named Senior Vice President and Chief Financial Officer — Best Buy U.S. in December 2006. He joined us in 2002 and has served as Senior Vice President — Finance, and Vice President and Chief Financial Officer — Musicland. Prior to joining us, Mr. Muehlbauer spent 10 years with The Pillsbury Company, a consumer packaged goods company, where he held various senior-level finance management positions, including vice president and worldwide controller, vice president of operations, divisional finance director, director of mergers and acquisitions, and director of internal audit. A certified public accountant (inactive), Mr. Muehlbauer spent eight years with Coopers & Lybrand LLP and most recently served as a senior manager in the firm’s audit and consulting practice.

John Noble was named Senior Vice President and Chief Financial Officer — Best Buy International in May 2006. Mr. Noble joined us in 2002 and has held positions as Senior Vice President and Chief Financial Officer — Best Buy Canada, and Vice President — Finance. Prior to joining us, Mr. Noble spent 10 years with The Pillsbury Company, and most recently served as vice president — finance for operations.

Ryan D. Robinson was named Senior Vice President and Chief Financial Officer — New Growth Platforms in December 2006. Mr. Robinson joined us in 2002 and has held positions as Senior Vice President — Finance and Treasurer, and Vice President — Finance and Treasurer. Prior to joining us, he spent 15 years at ABN AMRO Holding N.V., an international bank, and most recently served as senior vice president and director of that financial institution’s North American private-equity activities. Mr. Robinson also held management positions in ABN AMRO Holding N.V.’s corporate finance, finance advisory, acquisitions and asset securitization divisions.

Susan S. Grafton was named Vice President, Controller and Chief Accounting Officer in December 2006. Ms. Grafton joined us in 2000 and has held positions as Vice President — Financial Operations and Controller, Vice President — Planning and Performance Management, Senior Director, and Director. Prior to joining us, she was with The Pillsbury Company and Pitney Bowes, Inc. in numerous finance and accounting positions. Ms. Grafton serves on the Finance Leaders Council for the National Retail Industry Leaders Association and the Financial Executive Council for the National Retail Federation.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

21




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22




PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is traded on the New York Stock Exchange under the ticker symbol BBY. The table below sets forth the high and low sales prices of our common stock as reported on the New York Stock Exchange — Composite Index during the periods indicated.

 

 

Sales Price

 

 

 

High

 

Low

 

Fiscal 2007

 

 

 

 

 

First Quarter

 

$

59.50

 

$

50.49

 

Second Quarter

 

55.51

 

43.51

 

Third Quarter

 

58.49

 

44.53

 

Fourth Quarter

 

56.69

 

45.08

 

Fiscal 2006

 

 

 

 

 

First Quarter

 

$

36.99

 

$

31.93

 

Second Quarter

 

53.17

 

36.20

 

Third Quarter

 

50.88

 

40.40

 

Fourth Quarter

 

56.00

 

42.75

 

 

Holders

As of April 30, 2007, there were 3,683 holders of record of Best Buy common stock.

Dividends

In fiscal 2004, our Board initiated the payment of a regular quarterly cash dividend, then $0.07 per common share per quarter. A quarterly cash dividend has been paid in each subsequent quarter. Effective with the quarterly cash dividend paid in the third quarter of fiscal 2005, we increased our quarterly cash dividend per common share by 10%. Effective with the quarterly cash dividend paid in the third quarter of fiscal 2006, we increased our quarterly cash dividend per common share by 9%, to $0.08 per common share per quarter. Effective with the quarterly cash dividend paid in the third quarter of fiscal 2007, we increased our quarterly cash dividend per common share by 25% to $0.10 per common share per quarter. The payment of cash dividends is subject to customary legal and contractual restrictions.

Future dividend payments will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

From time to time, we repurchase our common stock in the open market pursuant to programs approved by our Board. We may repurchase our common stock for a variety of reasons, such as acquiring shares to offset dilution related to equity-based incentives, including stock options and our employee stock purchase plan, and optimizing our capital structure.

In June 2006, our Board authorized a $1.5 billion share repurchase program. The program, which became effective on June 21, 2006, terminated and replaced a $1.5 billion share repurchase program authorized by our Board in April 2005. There is no expiration date governing the period over which we can make our share repurchases under the June 2006 share repurchase program.

During the fourth quarter of fiscal 2007, we purchased and retired 2.3 million shares at a cost of $116 million pursuant to the June 2006 share repurchase program. At the end of fiscal 2007, $1.2 billion of the $1.5 billion originally authorized by our Board was available for future share repurchases.

We consider several factors in determining when to make share repurchases including, among other things, our cash needs and the market price of our stock. We expect that cash provided by future operating activities, as well as available cash and cash equivalents and short-term investments, will be the sources of funding for our share repurchase program. Based on the anticipated amounts to be generated from those sources of funds in relation to the remaining authorization approved by our Board under the June 2006 share repurchase program, we do not expect that future share repurchases will have a material impact on our short-term or long-term liquidity.


 

23




The following table presents the total number of shares repurchased during the fourth quarter of fiscal 2007 by fiscal month, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase plan, and the approximate dollar value of shares that may yet be purchased pursuant to the $1.5 billion share repurchase program as of the end of fiscal 2007:

Fiscal Period

 

Total Number
of Shares
Purchased

 

Average
Price Paid
per Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

(1)

Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs

(1)

November 26, 2006, through December 30, 2006

 

 

1,692,806

 

 

$

49.41

 

 

1,692,806

 

 

$

1,265,000,000

 

December 31, 2006, through January 27, 2007

 

 

649,977

 

 

49.21

 

 

649,977

 

 

1,233,000,000

 

January 28, 2007, through March 3, 2007

 

 

 

 

 

 

 

 

1,233,000,000

 

Total Fiscal 2007 Fourth Quarter

 

 

2,342,783

 

 

$

49.36

 

 

2,342,783

 

 

$

1,233,000,000

 

 

(1)                  Pursuant to a $1.5 billion share repurchase program announced on June 21, 2006. There is no expiration date governing the period over which we can make our share repurchases under the June 2006 share repurchase program. The June 2006 share repurchase program terminated and replaced a $1.5 billion share repurchase program announced on April 27, 2005.

Additional information regarding our share repurchase program is included in the Liquidity and Capital Resources and Outlook for Fiscal 2008 sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, included as Item 7 of this Annual Report on Form 10-K.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about Best Buy Common Stock that may be issued under our equity compensation plans as of March 3, 2007.

Plan Category

 

Securities to Be Issued
Upon Exercise of
Outstanding

Options

 

Weighted
Average
Exercise Price
per Share

(1)

Securities
Available for
Future
Issuance

(2)

Equity compensation plans approved by security holders(3)

 

 

31,376,985

(4)

 

$

35.81

 

11,911,862

 

Equity compensation plans not approved by security holders(5)

 

 

11,250

 

 

34.44

 

NA

 

Total

 

 

31,388,235

 

 

$

35.81

 

11,911,862

 


(1)      Includes weighted average exercise price of outstanding stock options only.

(2)                  Includes 3,978,674 shares of Best Buy Common Stock which have been reserved for issuance under the Best Buy Co., Inc. 2003 Employee Stock Purchase Plan.

(3)                  Includes the 1994 Full-Time Non-Qualified Stock Option Plan, the 1997 Directors’ Non-Qualified Stock Option Plan, the 1997 Employee Non-Qualified Stock Option Plan, the Assumed Musicland 1998 Stock Incentive Plan, the 2000 Restricted Stock Award Plan, and the 2004 Omnibus Stock and Incentive Plan.

(4)                  Includes grants of stock options and performance-based and time-based restricted stock.

(5)                  Represents non-plan options issued to one of our executive officers in 2002 in consideration of his service to the Board prior to his employment with Best Buy.

24




Best Buy Stock Comparative Performance Graph

The information contained in this Best Buy Stock Comparative Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.

The graph below compares the cumulative total shareholder return on Best Buy common stock for the last five fiscal years with the cumulative total return on the Standard & Poor’s 500 Index (“S&P 500”), of which we are a component, and the Standard & Poor’s Retailing Group Industry Index (“S&P Retailing Group”), of which we are a component. The S&P Retailing Group is a capitalization-weighted index of domestic equities traded on the NYSE, the American Stock Exchange and NASDAQ, and includes high-capitalization stocks representing the retail sector of the S&P 500.

The graph assumes an investment of $100 at the close of trading on March 1, 2002, the last trading day of fiscal 2002, in Best Buy common stock, the S&P 500 and the S&P Retailing Group.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*
Among Best Buy Co., Inc., the S&P 500 Index
and the S&P Retailing Group

GRAPHIC

 

 

FY02

 

FY03

 

FY04

 

FY05

 

FY06

 

FY07

 

Best Buy Co., Inc.

 

100.00

 

 

64.10

 

 

118.25

 

 

115.68

 

 

182.78

 

157.82

 

S&P 500

 

100.00

 

 

77.32

 

 

107.10

 

 

114.57

 

 

124.20

 

139.07

 

S&P Retailing Group

 

100.00

 

 

69.45

 

 

105.43

 

 

113.29

 

 

124.06

 

137.12

 

 

*                      Cumulative Total Return assumes dividend reinvestment.

Source: Research Data Group, Inc.

25




Item 6. Selected Financial Data.

The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Certain prior-year amounts have been reclassified to conform to the current-year presentation. In fiscal 2004, we sold our interest in Musicland. All fiscal years presented reflect the classification of Musicland’s financial results as discontinued operations.

Five-Year Financial Highlights

$ in millions, except per share amounts

Fiscal Year

 

2007

(1)

2006

(2)

2005

(3)

2004

 

2003

 

Consolidated Statements of Earnings Data

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

35,934

 

$

30,848

 

$

27,433

 

$

24,548

 

$

20,943

 

Operating income

 

1,999

 

1,644

 

1,442

 

1,304

 

1,010

 

Earnings from continuing operations

 

1,377

 

1,140

 

934

 

800

 

622

 

Loss from discontinued operations, net of tax

 

 

 

 

(29

)

(441

)

Gain (loss) on disposal of discontinued operations, net of tax

 

 

 

50

 

(66

)

 

Cumulative effect of change in accounting principles, net of tax(4)

 

 

 

 

 

(82

)

Net earnings

 

1,377

 

1,140

 

984

 

705

 

99

 

Per Share Data(5)

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

2.79

 

$

2.27

 

$

1.86

 

$

1.61

 

$

1.27

 

Discontinued operations

 

 

 

 

(0.06

)

(0.89

)

Gain (loss) on disposal of discontinued operations

 

 

 

0.10

 

(0.13

)

 

Cumulative effect of accounting changes

 

 

 

 

 

(0.16

)

Net earnings

 

2.79

 

2.27

 

1.96

 

1.42

 

0.20

 

Cash dividends declared and paid

 

0.36

 

0.31

 

0.28

 

0.27

 

 

Common stock price:

 

 

 

 

 

 

 

 

 

 

 

High

 

59.50

 

56.00

 

41.47

 

41.80

 

35.83

 

Low

 

43.51

 

31.93

 

29.25

 

17.03

 

11.33

 

Operating Statistics

 

 

 

 

 

 

 

 

 

 

 

Comparable store sales gain(6)

 

5.0

%

4.9

%

4.3

%

7.1

%

2.4

%

Gross profit rate

 

24.4

%

25.0

%

23.7

%

23.9

%

23.6

%

Selling, general and administrative expenses rate

 

18.8

%

19.7

%

18.4

%

18.6

%

18.8

%

Operating income rate

 

5.6

%

5.3

%

5.3

%

5.3

%

4.8

%

Year-End Data

 

 

 

 

 

 

 

 

 

 

 

Current ratio(7)(8)

 

1.4

 

1.3

 

1.4

 

1.3

 

1.3

 

Total assets(7)

 

$

13,570

 

$

11,864

 

$

10,294

 

$

8,652

 

$

7,694

 

Debt, including current portion(7)

 

650

 

596

 

600

 

850

 

834

 

Total shareholders’ equity

 

6,201

 

5,257

 

4,449

 

3,422

 

2,730

 

Number of stores

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

868

 

774

 

694

 

631

 

567

 

International

 

304

 

167

 

144

 

127

 

112

 

Total

 

1,172

 

941

 

838

 

758

 

679

 

Retail square footage (000s)

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

33,959

 

30,826

 

28,465

 

26,640

 

24,432

 

International

 

7,926

 

3,564

 

3,139

 

2,800

 

2,375

 

Total

 

41,885

 

34,390

 

31,604

 

29,440

 

26,807

 

 

(1)                  Fiscal 2007 included 53 weeks. All other periods presented included 52 weeks.

(2)                  In the first quarter of fiscal 2006, we early-adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“123(R)”), requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modified prospective transition method as permitted by SFAS No. 123(R) and, accordingly, financial results for years prior to fiscal 2006 have not been restated. Stock-based compensation expense in fiscal 2007 and 2006 was $121 ($82 net of tax) and $132 ($87 net of tax), respectively. Stock-based compensation expense recognized in our financial results for years prior to fiscal 2006 was not significant.

Footnotes continue on next page.

26




$ in millions, except per share amounts

(footnotes continued)

(3)                  During the fourth quarter of fiscal 2005, following a review of our lease accounting practices, we recorded a cumulative charge of $36 pre-tax ($23 net of tax) to correct our accounting for certain operating lease matters. Additionally, during the same quarter, we established a sales return liability which reduced gross profit by $15 pre-tax ($10 net of tax). Further, in fiscal 2005 we recognized a $50 tax benefit related to the reversal of valuation allowances on deferred tax assets as a result of the favorable resolution of outstanding tax matters with the Internal Revenue Service regarding the disposition of our interest in Musicland. The tax benefit was classified as discontinued operations.

(4)                  Effective on March 3, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. During fiscal 2003, we completed the required goodwill impairment testing and recognized an after-tax, noncash impairment charge of $40 that was reflected in our fiscal 2003 financial results as a cumulative effect of a change in accounting principle. Also effective on March 3, 2002, we changed our method of accounting for vendor allowances in accordance with Emerging Issues Task Force (“EITF”) Issue No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor. The change resulted in an after-tax, noncash charge of $42 that also was reflected in our fiscal 2003 financial results as a cumulative effect of a change in accounting principle.

(5)                  Earnings per share is presented on a diluted basis and reflects three-for-two stock splits effected in August 2005 and May 2002.

(6)                  Comprised of revenue at stores and Web sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of acquisition. The calculation of the comparable store sales percentage gain excludes the effect of fluctuations in foreign currency exchange rates. All comparable store sales percentage calculations reflect an equal number of weeks. The method of calculating comparable store sales varies across the retail industry. As a result, our method of calculating comparable store sales may not be the same as other retailers’ methods.

During fiscal 2004, we refined our methodology for calculating our comparable store sales percentage gain to reflect the impact of non-point-of-sale (non-POS) revenue transactions. We refined our comparable store sales calculation in light of changes in our business. Previously, our comparable store sales calculation was based on store POS revenue. The comparable store sales percentage gains for fiscal 2007, 2006, 2005 and 2004 have been computed using the refined methodology. The comparable store sales percentage gain for fiscal 2003 has not been computed using the refined methodology. Refining the methodology for calculating our comparable store sales percentage gain did not impact previously reported revenue, net earnings or cash flows.

(7)                  Includes both continuing and discontinued operations.

(8)                  The current ratio is calculated by dividing total current assets by total current liabilities.

27




Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We believe transparency and clarity are the primary goals of successful financial reporting. We remain committed to increasing the transparency of our financial reporting, providing our shareholders with informative financial disclosures and presenting an accurate view of our financial position and operating results.

In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our internal control over financial reporting and concluded that such control was effective as of March 3, 2007. In addition, our independent registered public accounting firm expressed an unqualified opinion on management’s assessment of the effectiveness of our internal control over financial reporting. Management’s report on the effectiveness of our internal control over financial reporting and the related report of our independent registered public accounting firm are included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in nine sections:

·        Overview

·        Business Strategy and Core Philosophies

·        Results of Operations

·        Liquidity and Capital Resources

·        Off-Balance-Sheet Arrangements and Contractual Obligations

·        Critical Accounting Estimates

·        New Accounting Standards

·        Outlook for Fiscal 2008

·        Subsequent Event

We believe our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Our fiscal year ends on the Saturday nearest the end of February. Fiscal 2007 included 53 weeks, whereas our fiscal 2006 and 2005 each included 52 weeks.

Unless otherwise noted, this MD&A relates only to results from continuing operations. Fiscal 2005 reflects the classification of Musicland’s financial results as discontinued operations.

Overview

Best Buy Co., Inc. is a specialty retailer of consumer electronics, home-office products, entertainment software, appliances and related services.

We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all U.S. store and online operations, including Best Buy, Geek Squad, Magnolia Audio Video and Pacific Sales. U.S. Best Buy stores offer a wide variety of consumer electronics, home-office products, entertainment software, appliances and related services, operating 822 stores in 49 states and the District of Columbia at the end of fiscal 2007. Geek Squad offers residential and commercial computer repair, support and installation services in all U.S. Best Buy stores and 12 stand-alone stores at the end of fiscal 2007. Magnolia Audio Video stores offer high-end audio and video products and related services from 20 stores located in California, Washington and Oregon at the end of fiscal 2007. Pacific Sales stores offer high-end home-improvement products, appliances and related services, operating 14 stores in Southern California at the end of fiscal 2007. We acquired Pacific Sales in the first quarter of fiscal 2007.

The International segment is comprised of all Canada store and online operations, including Best Buy, Future Shop and Geek Squad, as well as all China store and online operations, including Best Buy, Five Star and Geek Squad. We acquired a 75% interest in Five Star in the second quarter of fiscal 2007. We opened our first Best Buy store in China on December 28, 2006. Our International segment offers products and services similar to our Domestic segment’s offerings. However, Canada Best Buy stores do not carry appliances. Further, Five Star stores and our China Best Buy store do not carry entertainment software. At the end of fiscal 2007, we operated 47 Canada Best Buy stores in Ontario, Quebec, Alberta, British Columbia, Manitoba and Saskatchewan; 121 Future Shop stores throughout all of Canada’s provinces; 135 Five Star stores located in seven of China’s 34 provinces; and one China Best Buy store in Shanghai.

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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.

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We also have a sizeable cash balance. All of these assets are at our disposal as we envision how we’ll deepen our relationships with customers and increase shareholder value.

Our business strategy is customer centricity. We define customer centricity through its parts, which we call our three core philosophies: inviting our employees to contribute their unique ideas and experiences in service of customers; treating customers uniquely and honoring their differences; and meeting customers’ unique needs, end-to-end.

We start with a view of all of our customers, including what their problems are and what their desires are. We try to match that against everything we know about the solutions that now exist, or that could be created. Then we figure out how to get customers the right solutions by using our employees’ unique capabilities, as well as our network of vendors and outside partners. If we accomplish what we have set out to do, we believe these solutions may give us something unique in the marketplace, and something truly differentiated.

Mass merchants, direct sellers, other specialty retailers and online retailers are increasingly interested in our product categories because of rising demand. We believe that by understanding our customers better than our competitors do, and by inspiring our employees to have richer interactions with customers, we can differentiate ourselves and compete more effectively. We further believe that this strategy can be successful for us with a variety of products and services, store formats, customer groups and even countries.

Our customer centricity strategy provides the framework to grow and further enhance our business in the future. Examples of new growth areas so far have included our dual brand strategy in Canada, our Magnolia Home Theater store-within-a-store, our Geek Squad services business, our acquisition of Pacific Sales, and our entry into China last year with the Five Star acquisition and the opening of our first Best Buy store in Shanghai.

Profitably Scaling Customer Centricity

In fiscal 2007, we had six key priorities aimed at scaling customer centricity.

First, we implemented a single, customer-centric operating model at all U.S. Best Buy stores and at the corporate campus. Moving to a single operating model eliminated redundant work and allowed us to redeploy our efforts to support growth areas. In the coming year, we plan to continue this work by refining the store operating model.

Second, we opened 80 new U.S. Best Buy stores and added nearly 200 Magnolia Home Theater locations inside new and existing U.S. Best Buy stores, taking advantage of rising consumer interest in flat-panel TVs. We also enhanced the home theater area of more than 130 additional new and existing U.S. Best Buy stores. We gained market share in flat-panel TVs last year due in part to these investments. Additional home theater investments are planned for the coming year so we can serve a broader array of needs.

Third, we built our small business capabilities. We added Best Buy For Business locations to nearly 200 U.S. Best Buy stores, and trained more than 500 Microsoft-certified professionals by year-end. We plan to continue to grow this business in the coming year by adding capabilities in Voice over Internet Protocol (VOIP), through our acquisition of Speakeasy, Inc. (“Speakeasy”). We believe this acquisition also will improve our ability to form strong relationships with small business customers, as customers wish to save on their telecommunications costs and have a single source for their technology needs.

Fourth, we grew our services business by driving productivity improvements in computer services and home theater installation. We implemented new scheduling, routing and dispatch tools; launched a centralized repair facility (called Geek Squad City); and began a move to test a market-based approach to home visits and gained economies of scale. In the coming year, we hope to accelerate the growth of our services business, particularly our home theater installation business, based on consumer demand.

Fifth, we began to enhance our ability to provide complete solutions to customers. Our stores and Web sites need better tools and capabilities for describing, demonstrating and selling solutions such as digital music subscriptions, digital cable and voice over Internet telephony. We made modest progress in this area during the year and plan to accelerate this work in the coming year, starting with the infrastructure to support ongoing subscription relationships.

Sixth, we have embarked on a controlled international growth strategy, beginning with China, where we have operated sourcing offices for over three years. Through our acquisition of Five Star, we expanded our retail footprint into China. We also opened our first Best Buy store in China, an 80,000-square-foot store located in Shanghai. We anticipate advancing our international growth strategy by opening two to three additional Best Buy stores in China

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within the next 12 to 18 months, and by opening test stores in Mexico and Turkey, also within the next 12 to 18 months.

Results of Operations

Fiscal 2007 Summary

·        Net earnings in fiscal 2007 increased 21% to $1.4 billion, or $2.79 per diluted share, compared with $1.1 billion, or $2.27 per diluted share, in fiscal 2006. The increase was driven by revenue growth, including the addition of new stores during fiscal 2007 and a comparable store sales gain of 5.0%, and a decrease in our SG&A rate. These factors were partially offset by a decrease in our gross profit rate and a higher effective income tax rate.

·        Revenue in fiscal 2007 increased 16% to $35.9 billion. The increase reflected market share gains and was driven by the addition of new Best Buy and Future Shop stores during fiscal 2007, a full year of revenue from stores added in fiscal 2006, a 5.0% comparable store sales increase, and the acquisitions of Five Star and Pacific Sales. The remainder of the increase was due primarily to the inclusion of an extra week of business in fiscal 2007 and the favorable effect of fluctuations in foreign currency exchange rates.

·        Our gross profit rate in fiscal 2007 decreased by 0.6% of revenue to 24.4% of revenue. The decrease was due primarily to a lower-margin revenue mix, including increased revenue from notebook computers and video gaming hardware. Also contributing to the decrease, in order of impact, were a more promotional environment in the consumer electronics and home-office product groups, and the inclusion of our China operations for a portion of the year.

·        Our SG&A rate in fiscal 2007 decreased by 0.9% of revenue to 18.8% of revenue. The decrease was due primarily to the leveraging effect of the 16% growth in revenue and reduced performance-based incentive compensation. Also contributing to the decrease in our SG&A rate in fiscal 2007, in order of impact, were controlled expenses related to our strategic initiatives and expense reduction efforts. These factors were partially offset by increased expenses related to asset impairments, litigation and business closure costs.

·        Net earnings in fiscal 2007 included income of $20 million ($13 million net of tax, or $0.03 per diluted share) related to the gain from the sale of our investment in Golf Galaxy, Inc. In addition, net earnings in fiscal 2007 included income of $19 million ($12 million net of tax, or $0.02 per diluted share) related to additional recognition of gift card breakage (gift cards sold where the likelihood of the gift card being redeemed by the customer is remote). The gift card breakage was recorded as a result of determining our legal obligation to remit the value of unredeemed gift cards to certain states not reflected in our initial fiscal 2006 gift card breakage recognition.

·        During fiscal 2007, we added Magnolia Home Theater rooms to nearly 200 new and existing U.S. Best Buy locations, bringing the total number of Magnolia Home Theater rooms inside U.S. Best Buy stores to more than 300 at the end of fiscal 2007.

·        Effective with the cash dividend paid in the third quarter of fiscal 2007, we increased our quarterly cash dividend per common share by 25%, to $0.10 per common share. During fiscal 2007, we made four dividend payments totaling $0.36 per common share, or $174 million in the aggregate.

·        During fiscal 2007, we purchased and retired 11.8 million shares of our common stock at a cost of $599 million pursuant to our share repurchase programs.

·        In fiscal 2007, we and The Best Buy Children’s Foundation contributed approximately $25 million to local communities. The Best Buy Children’s Foundation supports educational programs that integrate and leverage today’s technology.


 

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Consolidated Results

The following table presents selected consolidated financial data for each of the past three fiscal years ($ in millions, except per share amounts):

Consolidated Performance Summary

 

2007

(1)

2006

 

2005

(2)

Revenue

 

$

35,934

 

$

30,848

 

$

27,433

 

Total revenue gain %

 

16

%

12

%

12

%

Comparable store sales % gain(3)

 

5.0

%

4.9

%

4.3

%

Gross profit as % of revenue

 

24.4

%

25.0

%

23.7

%

SG&A as % of revenue

 

18.8

%

19.7

%

18.4

%

Operating income

 

$

1,999

 

$

1,644

 

$

1,442

 

Operating income as % of revenue

 

5.6

%

5.3

%

5.3

%

Earnings from continuing operations

 

$

1,377

 

$

1,140

 

$

934

 

Gain on disposal of discontinued operations, net of tax

 

$

 

$

 

$

50

 

Net earnings

 

$

1,377

 

$

1,140

 

$

984

 

Diluted earnings per share — continuing operations

 

$

2.79

 

$

2.27

 

$

1.86

 

Diluted earnings per share

 

$

2.79

 

$

2.27

 

$

1.96

 

 

Note: All periods presented reflect the classification of Musicland’s financial results as discontinued operations.

(1)                  Fiscal 2007 included 53 weeks. Fiscal 2006 and 2005 each included 52 weeks.

(2)                  During the fourth quarter of fiscal 2005, following a review of our lease accounting practices, we recorded a cumulative pre-tax charge of $36 ($23 net of tax, or $0.05 per diluted share) to correct our accounting for certain operating lease matters. Additionally, we established a sales return liability which reduced revenue by $65 and gross profit by $15 ($10 net of tax, or $0.02 per diluted share). Finally, based on the favorable resolution of outstanding tax matters with the Internal Revenue Service regarding the disposition of our interest in Musicland, we recorded a $50 tax benefit. The tax benefit is included in gain on disposal of discontinued operations.

(3)                  Comprised of revenue at store and Web sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of acquisition. The calculation of the comparable store sales percentage gain excludes the effect of fluctuations in foreign currency exchange rates. All comparable store sales percentage calculations reflect an equal number of weeks. The method of calculating comparable store sales varies across the retail industry. As a result, our method of calculating comparable store sales may not be the same as other retailers’ methods.


Continuing Operations

Fiscal 2007 Results Compared With Fiscal 2006

Fiscal 2007 net earnings were $1.4 billion, or $2.79 per diluted share, compared with $1.1 billion, or $2.27 per diluted share, in fiscal 2006. The increase was driven by revenue growth, including the addition of new stores during fiscal 2007 and a comparable store sales gain of 5.0%, and a decrease in our SG&A rate. These factors were partially offset by a decrease in our gross profit rate and a higher effective income tax rate. Net earnings in fiscal 2007 also benefited from net interest income of $111 million, compared with net interest income of $77 million in the prior fiscal year.

Revenue in fiscal 2007 increased 16% to $35.9 billion, compared with $30.8 billion in fiscal 2006. The increase resulted primarily from the addition of 87 new Best Buy and Future Shop stores during fiscal 2007, a full year of revenue from new stores added in fiscal 2006, a 5.0% comparable store sales gain, and the acquisitions of Five Star and Pacific Sales. The remainder of the revenue increase was due primarily to the inclusion of an extra week of business in fiscal 2007, the favorable effect of fluctuations in foreign currency exchange rates and income related to our additional recognition of gift card breakage. The addition of new Best Buy and Future Shop stores during the past two fiscal years accounted for nearly four-tenths of the revenue increase in fiscal 2007; the comparable store sales gain accounted for three-tenths of the revenue increase; the acquisitions of Five Star and Pacific Sales accounted for nearly two-tenths of the revenue increase; the inclusion of an extra week of business in fiscal 2007 accounted for one-tenth of the revenue increase; and the remainder of the revenue increase was due to the favorable effect of fluctuations in foreign currency exchange rates, as well as income related to our additional recognition of gift card breakage.

Our comparable store sales gain in fiscal 2007 benefited from a higher average transaction amount driven by the continued growth in higher-ticket items, including flat-panel

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televisions and notebook computers. In addition, comparable store sales were driven by continued customer demand for and the increased affordability of these products, as strong unit volume growth was somewhat muted by declines in average selling prices. Products having the largest impact on our fiscal 2007 comparable store sales gain included flat-panel televisions, notebook computers, video gaming and MP3 players and accessories. An increase in online purchases also contributed to the fiscal 2007 comparable store sales gain, as we continued to add features and capabilities to our Web sites. Revenue from our online operations increased approximately 36% in fiscal 2007 and added to the overall comparable store sales increase.

Our gross profit rate in fiscal 2007 decreased by 0.6% of revenue to 24.4% of revenue. The decrease was due primarily to a lower-margin revenue mix, including increased revenue from notebook computers and video gaming hardware. Also contributing to the decrease, in order of impact, were a more promotional environment in the consumer electronics and home-office product groups, and the inclusion of our China operations for a portion of the year. Our China operations, which carry a significantly lower gross profit rate than our other operations, reduced our gross profit rate in fiscal 2007 by approximately 0.2% of revenue.

Our SG&A rate in fiscal 2007 decreased by 0.9% of revenue to 18.8% of revenue. The decrease was due primarily to the leveraging effect of the 16% growth in revenue and reduced performance-based incentive compensation. Also contributing to the decrease, in order of impact, were controlled expenses related to our strategic initiatives and expense reduction efforts. Our China operations, which carry a significantly lower SG&A rate than our other operations, reduced our SG&A rate by approximately 0.1% of revenue in fiscal 2007. These factors were partially offset by expenses related to increased asset impairments, litigation and business closure costs.

Because retailers do not uniformly record costs of operating their supply chain between cost of goods sold and SG&A, our gross profit rate and SG&A rate may not be comparable to other retailers’ corresponding rates. For additional information regarding costs classified in cost of goods sold and SG&A, refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financials Statements and Supplementary Data, of this Annual Report on Form 10-K.

Fiscal 2006 Results Compared With Fiscal 2005

Fiscal 2006 earnings from continuing operations were $1.1 billion, or $2.27 per diluted share, compared with $934 million, or $1.86 per diluted share, in fiscal 2005. The increase was driven primarily by revenue growth, including the addition of new stores during fiscal 2006 and a comparable store sales gain of 4.9%, and a significant increase in our gross profit rate. These factors were partially offset by an increase in our SG&A expenses. In addition, earnings from continuing operations in fiscal 2006 benefited from net interest income of $77 million, compared with net interest income of $1 million in fiscal 2005, and a lower effective income tax rate.

Revenue in fiscal 2006 increased 12% to $30.8 billion, compared with $27.4 billion in fiscal 2005. The increase resulted from the addition of 103 stores in fiscal 2006, a full year of revenue from new stores added in fiscal 2005, a 4.9% comparable store sales gain and the favorable effect of fluctuations in foreign currency exchange rates. The addition of new stores during the past two fiscal years accounted for more than one-half of the revenue increase in fiscal 2006. The comparable store sales gain accounted for nearly four-tenths of the revenue increase, and the remainder of the revenue increase was due primarily to the favorable effect of fluctuations in foreign currency exchange rates, as well as income related to our initial recognition of gift card breakage.

We believe our comparable store sales gain in fiscal 2006 benefited from continued demand for the latest technologies and advanced product features. In addition, the increased affordability of consumer electronics products contributed to the comparable store sales gain. Products having the largest impact on our fiscal 2006 comparable store sales gain included flat-panel televisions, MP3 players and accessories, notebook computers, digital cameras and accessories and video gaming hardware. Flat-panel television sales were very strong as unit volume growth and increased screen size more than offset declines in the average selling prices of these products. MP3 products also generated strong comparable store sales gains as customers continue to adopt, upgrade and add accessories to digital music players.

Our gross profit rate in fiscal 2006 increased by 1.3% of revenue to 25.0% of revenue. The increase was driven by the continued transformation of our supply chain, which enabled us to improve margins through lower product costs, more effective pricing strategies and increased sales of higher-margin services; and private-label products. We

33




also benefited from better product transition management and a more stable promotional environment.

Our SG&A rate in fiscal 2006 increased by 1.3% of revenue to 19.7% of revenue. The increase was due primarily to increased performance-based incentive compensation resulting from our strong financial performance; a growing number of stores operating under the higher-cost, customer-centric labor model; costs associated with supporting our services business and the absence of favorable settlements with two credit card companies as recognized in fiscal 2005. These factors were partially offset by expense leverage resulting from a higher revenue base, as well as the absence of charges recognized in fiscal 2005 to correct our accounting for leases and to settle litigation. The change in our accounting for stock-based compensation increased our fiscal 2006 SG&A rate by approximately 0.4% of revenue compared with the prior fiscal year.


Segment Performance

Domestic

The following table presents selected financial data for our Domestic segment for each of the past three fiscal years ($ in millions):

Domestic Segment Performance Summary (unaudited)

 

2007

(1) 

2006

 

2005

 

Revenue

 

$

31,031

 

$

27,380

 

$

24,616

 

Total revenue gain %

 

13

%

11

%

11

%

Comparable store sales % gain(2)

 

4.1

%

5.1

%

4.4

%

Gross profit as % of revenue

 

24.8

%

25.3

%

23.8

%

SG&A as % of revenue

 

18.8

%

19.5

%

18.2

%

Operating income

 

$

1,889

 

$

1,588

 

$

1,393

 

Operating income as % of revenue

 

6.1

%

5.8

%

5.7

%

 

(1)                  Fiscal 2007 included 53 weeks. Fiscal 2006 and 2005 each included 52 weeks.

(2)                  Comprised of revenue at store and Web sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of acquisition. All comparable store sales percentage calculations reflect an equal number of weeks. The method of calculating comparable store sales varies across the retail industry. As a result, our method of calculating comparable store sales may not be the same as other retailers’ methods.


In fiscal 2007, our Domestic segment’s operating income was $1.9 billion, or 6.1% of revenue, compared with $1.6 billion, or 5.8% of revenue, in fiscal 2006. The Domestic segment’s operating income rate in fiscal 2007 benefited from revenue gains, including the addition of 80 new Best Buy stores during fiscal 2007 and a 4.1% comparable store sales increase, and a decrease in the SG&A rate, partially offset by a decrease in the gross profit rate.

Our Domestic segment’s revenue in fiscal 2007 increased 13% to $31.0 billion. The addition of new stores during the past two fiscal years accounted for nearly one-half of the revenue increase in fiscal 2007; a 4.1% comparable store sales gain accounted for approximately three-tenths of the revenue increase; the inclusion of an extra week of business in fiscal 2007 accounted for over one-tenth of the revenue increase; and the remainder of the revenue increase was due primarily to the acquisition of Pacific Sales and income related to our additional recognition of gift card breakage.

Our Domestic segment’s comparable store sales gain in fiscal 2007 benefited from a higher average transaction amount driven by the continued growth in higher-ticket items, including flat-panel televisions and notebook computers. Also contributing to the fiscal 2007 comparable store sales gain was an increase in online purchases, as we continued to add features and capabilities to our Web sites. Revenue from our Domestic segment’s online operations increased approximately 39% in fiscal 2007 and added to the overall comparable store sales increase.

Our Domestic segment’s consumer electronics product group posted an 8.7% comparable store sales gain in fiscal 2007, driven by sales of flat-panel televisions and MP3 players and accessories, partially offset by declines in tube and projection televisions. Comparable store sales gains from flat-panel television unit-volume growth and increased screen size were somewhat muted by declines in average selling prices.

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A 3.0% comparable store sales gain in our Domestic segment’s entertainment software product group was due primarily to sales growth in video gaming, driven by the increased affordability of existing platforms, as well as the launches of Sony Playstation 3 and Nintendo Wii. The comparable store sales gains were partially offset by continued softness in sales of new music and movie releases.

Our Domestic segment’s home-office product group recorded a 0.5% comparable store sales decrease in fiscal 2007, driven primarily by declines in desktop computers and printers. The comparable store sales declines were partially offset by growth in notebook computers, reflecting continued consumer demand for portable technology.

A 2.1% comparable store sales decline in our Domestic segment’s appliances product group was driven primarily by declines in sales of small appliances. Comparable store sales of major appliances were flat in fiscal 2007, as benefits from the expansion of our improved appliance assortments were offset by a softer housing market.

Our Domestic segment’s gross profit rate in fiscal 2007 decreased by 0.5% of revenue to 24.8% of revenue. The decrease was due primarily to a lower-margin revenue mix, including increased revenue from notebook computers and video gaming hardware. Also contributing to the decrease was a more promotional environment in the consumer electronics and home-office product groups.

Our Domestic segment’s SG&A rate in fiscal 2007 decreased by 0.7% of revenue to 18.8% of revenue. The decrease was due primarily to the leveraging effect of the 13% growth in revenue and reduced performance-based incentive compensation. Also contributing to the decrease, in order of impact, were controlled expenses related to our strategic initiatives and expense reduction efforts. These factors were partially offset by expenses related to increased asset impairments, litigation and business closure costs.


The following table reconciles Domestic stores open at the beginning and end of fiscal 2007:

 

 

Total
Stores at
End of
Fiscal 2006

 

Stores
Opened

 

Stores
Acquired

 

Stores
Closed

 

Total
Stores at
End of
Fiscal 2007

 

U.S. Best Buy

 

 

742

 

 

80

 

 

 

 

 

 

822

 

Magnolia Audio Video

 

 

20

 

 

 

 

 

 

 

 

20

 

Pacific Sales

 

 

 

 

 

 

14

 

 

 

 

14

 

U.S. Geek Squad

 

 

12

 

 

 

 

 

 

 

 

12

 

Total Domestic stores

 

 

774

 

 

80

 

 

14

 

 

 

 

868

 

 

Note: During fiscal 2007, we relocated 13 U.S. Best Buy stores. No other stores in the Domestic segment were relocated during fiscal 2007. At the end of fiscal 2007, we operated 822 U.S. Best Buy stores in 49 states and the District of Columbia; 20 Magnolia Audio Video stores in California, Washington and Oregon; 14 Pacific Sales stores in California; and 12 U.S. Geek Squad stores in Georgia, Texas, California, Minnesota, Colorado and Wisconsin.

The following table reconciles Domestic stores open at the beginning and end of fiscal 2006:

 

 

Total
Stores at
End of
Fiscal 2005

 

Stores
Opened

 

Stores
Acquired

 

Stores
Closed

 

Total
Stores at
End of
Fiscal 2006

 

U.S. Best Buy

 

 

668

 

 

74

 

 

 

 

 

 

742

 

Magnolia Audio Video

 

 

20

 

 

 

 

 

 

 

 

20

 

U.S. Geek Squad

 

 

6

 

 

7

 

 

 

 

1

 

 

12

 

Total Domestic stores

 

 

694

 

 

81

 

 

 

 

1

 

 

774

 

 

Note: During fiscal 2006, we relocated 10 U.S. Best Buy stores. No other stores in the Domestic segment were relocated during fiscal 2006. At the end of fiscal 2006, we operated 742 U.S. Best Buy stores in 49 states and the District of Columbia; 20 Magnolia Audio Video stores in California, Washington and Oregon; and 12 U.S. Geek Squad stores in Georgia, Texas, California, Minnesota, Colorado and Wisconsin.

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International

The following table presents selected financial data for our International segment for each of the past three fiscal years ($ in millions):

International Segment Performance Summary (unaudited)

 

2007

(1)

2006

 

2005

 

Revenue

 

$

4,903

 

$

3,468

 

$

2,817

 

Total revenue gain %

 

41

%

23

%

21

%

Comparable store sales % gain(2)

 

11.7

%

2.8

%

3.3

%

Gross profit as % of revenue

 

21.6

%

22.9

%

22.5

%

SG&A as % of revenue

 

19.4

%

21.3

%

20.7

%

Operating income

 

$

110

 

$

56

 

$

49

 

Operating income as % of revenue

 

2.2

%

1.6

%

1.7

%

 

(1)                  Fiscal 2007 included 53 weeks. Fiscal 2006 and 2005 each included 52 weeks.

(2)                  Comprised of revenue at stores and Web sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of acquisition. The calculation of the comparable store sales percentage gain excludes the effect of fluctuations in foreign currency exchange rates. All comparable store sales percentage calculations reflect an equal number of weeks. The method of calculating comparable store sales varies across the retail industry. As a result, our method of calculating comparable store sales may not be the same as other retailers’ methods.


In fiscal 2007, our International segment’s operating income was $110 million, or 2.2% of revenue, compared with $56 million, or 1.6% of revenue, in fiscal 2006. The increase in our International segment’s operating income resulted primarily from revenue gains, including the acquisition of Five Star and an 11.7% comparable store sales increase, and a significant reduction in the SG&A rate. These factors were partially offset by a decrease in the gross profit rate.

Our International segment’s revenue increased 41% to $4.9 billion in fiscal 2007, compared with $3.5 billion in fiscal 2006. The acquisition of Five Star accounted for nearly four-tenths of the revenue increase in fiscal 2007; the 11.7% comparable store sales gain accounted for nearly three-tenths of the revenue increase; the addition of new Best Buy and Future Shop stores during the past two fiscal years accounted for over one-tenth of the revenue increase; the favorable effect of fluctuations in foreign currency exchange rates accounted for over one-tenth of the revenue increase; and the inclusion of an extra week of business in fiscal 2007 accounted for the remainder of the revenue increase.

We believe the comparable store sales increase reflected market share gains and was driven by increased sales of flat-panel televisions, video gaming and notebook computers, partially offset by declines in tube and projection televisions. Our International segment reported comparable store sales increases in fiscal 2007 in the consumer electronics, home-office, entertainment software and appliances product groups of 15.5%, 7.6%, 12.1% and 8.1%, respectively. Revenue from our International segment’s online operations increased approximately 19% and added to the overall comparable store sales increase.

Our International segment’s gross profit rate in fiscal 2007 decreased by 1.3% of revenue to 21.6% of revenue. Our China operations, which carry a significantly lower gross profit rate than our Canada operations, reduced our International segment’s gross profit rate by approximately 1.1% of revenue in fiscal 2007. The remainder of the decrease in our International segment’s gross profit rate was due primarily to increased financing costs, resulting from increased borrowing rates and a shift toward longer-term financing programs in conjunction with strong flat-panel television sales.

Our International segment’s SG&A rate in fiscal 2007 decreased by 1.9% of revenue to 19.4% of revenue. Our China operations, which carry a significantly lower SG&A rate than our Canada operations, reduced our International segment’s SG&A rate by approximately 0.7% of revenue in fiscal 2007. The remainder of the decrease in our International segment’s SG&A rate was due primarily to, in order of impact, the leveraging effect of the 41% growth in revenue; improvements in the labor model used in our Canada Best Buy stores; reduced Canada headquarters payroll costs at the end of fiscal 2006; and the leveraging effect of the 11.7% comparable store sales gain on advertising expense as a percentage of revenue. A performance-driven increase in incentive-based compensation, expenses incurred related to the closure of all six Canada Geek Squad stores in the second quarter of fiscal 2007 and increased asset impairment charges partially offset the decrease.


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The following table reconciles International stores open at the beginning and end of fiscal 2007:

 

 

Total
Stores at
End of
Fiscal 2006

 

Stores
Opened

 

Stores
Acquired

 

Stores
Closed

 

Total
Stores at
End of
Fiscal 2007

 

Future Shop

 

 

118

 

 

3

 

 

 

 

 

 

121

 

Canada Best Buy

 

 

44

 

 

3

 

 

 

 

 

 

47

 

Canada Geek Squad

 

 

5

 

 

1

 

 

 

 

6

 

 

 

Five Star

 

 

 

 

8

 

 

131

 

 

4

 

 

135

 

China Best Buy

 

 

 

 

1

 

 

 

 

 

 

1

 

Total International stores

 

 

167

 

 

16

 

 

131

 

 

10

 

 

304

 

 

Note: During fiscal 2007, we relocated four Future Shop stores and three Five Star stores. No other stores in the International segment were relocated during fiscal 2007. At the end of fiscal 2007, we operated 121 Future Shop stores throughout all of Canada’s provinces; 47 Canada Best Buy stores in Ontario, Quebec, Alberta, British Columbia, Manitoba and Saskatchewan; 135 Five Star stores throughout seven of China’s 34 provinces; and one China Best Buy store in Shanghai.

The following table reconciles International stores open at the beginning and end of fiscal 2006:

 

 

Total
Stores at
End of
Fiscal 2005

 

Stores
Opened

 

Stores
Acquired

 

Stores
Closed

 

Total
Stores at
End of
Fiscal 2006

 

Future Shop

 

 

114

 

 

5

 

 

 

 

1

 

 

118

 

Canada Best Buy

 

 

30

 

 

14

 

 

 

 

 

 

44

 

Canada Geek Squad

 

 

 

 

5

 

 

 

 

 

 

5

 

Total International stores