ITEM 1. BUSINESS
Overview
We are North America’s
No. 1 specialty retailer of consumer electronics, personal computers,
entertainment software and appliances with revenues for our fiscal year ended
March 2, 2002, of $19.6 billion. We operate retail stores and commercial Web
sites under the brand names Best Buy (BestBuy.com), Media Play (MediaPlay.com),
On Cue (OnCue.com), Sam Goody (SamGoody.com), Suncoast (Suncoast.com), Magnolia
Hi-Fi (MagnoliaHiFi.com) and Future Shop (FutureShop.ca).
We began in 1966 as an
audio components retailer, and in the early 1980s, with the introduction of the
videocassette recorder, expanded into video products. In 1983, we revised our
marketing strategy 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.
The Best Buy store concept, now employed in 481 stores across the United
States, has continued to evolve to include more interactive displays and, for
certain products, a higher level of customer service, with the latest version
including a more effective labor model and improved merchandising. In fiscal
2000, we introduced a small-market Best Buy store concept that serves
communities of generally less than 200,000 people and offers merchandise in the
same product categories as larger stores, with a product assortment tailored to
each respective community. In fiscal 2001, we re-launched Best Buy stores
online shopping site, BestBuy.com. Our clicks-and-mortar strategy is designed
to empower consumers to research and purchase products seamlessly across the
Best Buy retail environment - online or in retail stores. The online site
offers products in all of Best Buy stores’ principal product categories except
appliances.
In the fourth quarter of
fiscal 2001, we acquired the common stock of Magnolia Hi-Fi, Inc. for $88
million in cash, including transaction costs, and the common stock of Musicland
Stores Corporation for $425 million, including transaction costs, plus
long-term debt valued at $271 million. Magnolia Hi-Fi is a Seattle-based,
high-end retailer of audio and video products that operates 13 stores in
Washington, Oregon and California. We believe Magnolia Hi-Fi has expansion
potential of up to 150 stores nationwide. However, prior to pursuing an
aggressive growth strategy, we believe we must refine the store concept and
broaden the scope of products and services currently offered at Magnolia Hi-Fi.
Musicland is one of the largest national retailers of movies, prerecorded
music, video games and other entertainment-related products with 1,321
stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico
and the Virgin Islands. Our intention is to enhance the Musicland business by
improving the customer experience and diversifying the revenue mix, thereby
boosting sales productivity and profitability. We also view Musicland’s
small-market stores as an attractive growth opportunity. In the third quarter
of fiscal 2002, we acquired the common stock of Future Shop Ltd. for $368
million, net of cash acquired, including transaction costs. Future Shop, which
currently operates 95 stores, is Canada’s largest consumer electronics retailer
and offers product categories similar to that at Best Buy stores. We acquired
Future Shop to further our expansion plans, leverage our expertise in consumer
electronics retailing and increase shareholder value. The acquisition marked
our initial expansion into international operations. Additional information
regarding our acquisitions is included in note 2 of the Notes to Consolidated
Financial Statements on page 41 of our Annual Report, contained in exhibit 13.1
to this report, and is incorporated herein by reference.
Our vision is to make
life fun and easy. Our business strategy is to bring technology and consumers
together in a retail environment that focuses on educating consumers on the
features and benefits of technology and entertainment while maximizing overall
profitability. We believe our stores offer consumers meaningful advantages in
store environment, product value, selection and service, all of which further
our objective of achieving a significant market share in the markets we serve.
The acquisitions of Musicland, Magnolia Hi-Fi and Future Shop give us access to
new distribution channels, more customer visits and the ability to leverage
Best Buy stores’ core competencies with their operations. We also expect
additional benefits from the cross merchandising of products and information sharing
across our distribution channels.
Operating
Segments We
currently operate three segments: Best Buy, Musicland and International. Best
Buy is primarily a specialty retailer of consumer electronics, home office
equipment, entertainment software and appliances. Also included in the Best Buy
segment is Seattle-based Magnolia Hi-Fi, a high-end retailer of audio and video
products. The Musicland segment is primarily a mall-based retailer of movies,
prerecorded music, video games and other entertainment-related products. The
International segment consists of Future Shop, a specialty retailer of consumer
electronics, home office equipment, entertainment software and appliances with
operations in Canada.
The following table
reconciles stores open at the end of fiscal 2001 to the number of stores open
at the end of the fiscal 2002:
* The International segment consists of Future Shop stores. Future Shop
was acquired in the third quarter of fiscal 2002.
Additional information
regarding our operating segments is presented in Management’s Discussion and
Analysis of Results of Operations and Financial Condition beginning on page 20
of our Annual Report, contained in exhibit 13.1 to this report, and is
incorporated herein by reference. In addition, selected operating segment
financial data is included in note 8 of the Notes to Consolidated Financial
Statements beginning on page 52 of our Annual Report, contained in exhibit 13.1
to this report, and is incorporated herein by reference.
Best Buy Segment Additional information regarding our Best Buy
operating segment is included in Management’s Discussion and Analysis of
Results of Operations and Financial Condition beginning on page 20 of our
Annual Report, contained in exhibit 13.1 to this report, and is incorporated
herein by reference. In addition, selected Best Buy segment financial data is included
in note 8 of the Notes to Consolidated Financial Statements beginning on page
52 of our Annual Report, contained in exhibit 13.1 to this report, and is
incorporated herein by reference.
Best
Buy Stores
Overview At the end of fiscal
2002, we operated 481 Best Buy stores in 44 states. The stores average 44,900
retail square feet and produce average annual sales of approximately
$38 million. Best Buy stores collectively represent 21.6 million
retail square feet, or 67% of our total retail square footage. During fiscal
2002, we launched our latest store concept, which features flexible
architecture, improved merchandising, faster checkout, better product
adjacencies and a more efficient labor model. Most new Best Buy stores opened
in fiscal 2003 are expected to incorporate the features of this latest store
format.
The following table reconciles Best Buy stores open at the beginning
and end of each of the last five fiscal years:
Merchandise Best
Buy stores generally offer merchandise in five product categories: consumer
electronics, home office, entertainment software, appliances and “other”
products. Consumer electronics, Best Buy’s largest category, based on revenues,
consists of video and audio equipment. Video products include television sets,
DVD players, cameras, camcorders, VCRs and digital broadcast satellite systems.
Audio products include car stereos, portable audio equipment, home theater
audio systems, audio components, shelf systems and speakers. The home office
category includes desktop and notebook computers and related peripheral
equipment, telephones, wireless communication devices and personal digital
assistants. Entertainment software products include compact discs, video game
hardware and software, DVD and VHS movies, and computer software. The appliance
category includes major appliances such as washers, dryers, ranges,
refrigerators, freezers and dishwashers, as well as vacuums, microwaves and
housewares. The “other” product category includes extended service contracts,
blank recording media, furniture, and other miscellaneous products such as
batteries, business cases and storage products.
The following table presents Best Buy stores’ sales, by category, as a
percentage of total Best Buy stores’ sales:
Operations Best Buy stores follow
standardized and detailed operating procedures called Standard Operating
Platform (SOP). The SOP includes procedures for inventory management,
transaction processing, customer relations, store administration, product sales
and merchandise display.
Best Buy store operations
are organized into three divisions. Each division is divided into regions and
is under the supervision of a senior vice president who oversees store
performance through regional vice presidents. Regional vice presidents have
responsibility for a number of districts within their respective region.
District managers monitor store operations closely 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. A senior vice president of retail
operations has overall responsibility for retail store processing and
operations including labor management. Each district also has a loss prevention
manager, with product security personnel employed at each store to control
inventory shrinkage. Advertising, merchandise buying and pricing, and inventory
policies for Best Buy stores are centrally controlled.
Best Buy stores are open
seven days a week for approximately 73 hours a week. A store is typically
staffed by one manager and four to five assistant managers. The average staff
ranges from 65 to 150 people, depending on store size and sales volume.
Distribution
Generally, merchandise is shipped to Best Buy stores from six
distribution centers located in California, Georgia, Minnesota, Ohio, Oklahoma
and Virginia. Best Buy stores also currently operate a dedicated distribution
center for entertainment software in Minnesota. In fiscal 2004, we expect to
open an additional general distribution center in upstate New York. The
majority of Best Buy stores’ merchandise, except for major appliances and
large-screen televisions, is shipped directly from manufacturers to a
distribution center. Major appliances and large-screen televisions are shipped
to satellite warehouses in each major market. 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 manufacturers and distributors. We believe distribution centers can
most effectively service Best Buy stores within a 600 to 700-mile radius and
that our current distribution centers, and the planned addition of the New York
distribution center in fiscal 2004, will accommodate expansion plans for the
next several years. On average, Best Buy stores receive product shipments two
or three times a week depending on sales volume. Generally, e-commerce
merchandise sales are either picked up at Best Buy retail stores, or fulfilled
through the distribution centers.
Seasonality Similar
to many retailers, Best Buy stores’ business is seasonal. Revenues and earnings
are typically greater during the second half of the fiscal year, which includes
the holiday selling season.
Competition
Best
Buy stores’ industry is highly competitive. Best Buy stores compete nationally
against other consumer electronics retailers, specialty home office retailers,
mass merchants, home improvement superstores, entertainment software
superstores, electronics boutiques and a growing number of direct-to-consumer
alternatives. Best Buy stores also compete against independent dealers,
regional chain discount stores, wholesale clubs, mail-order and Internet
retailers, video rental stores and other specialty retail stores. Mass
merchandisers continue to increase their assortment of consumer electronics
products-primarily those that are less complex to sell, install and operate.
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 believe Best Buy stores’ formats and brand
marketing strategies distinguish them from most competitors by positioning Best
Buy retail stores as the destination for new technology and entertainment
products in a fun, informative and no-pressure shopping environment. Best Buy
stores compete by aggressively advertising and emphasizing a broad product
assortment, value pricing and financing alternatives. In addition, we believe
our e-commerce operations, coupled with the knowledgeable sales associates and
service capabilities of Best Buy retail stores, have effectively positioned us
to compete successfully despite an increasingly competitive environment.
Magnolia
Hi-Fi
Overview
In the fourth quarter of fiscal 2001, we acquired Magnolia Hi-Fi, a
retailer of high-end consumer electronics, founded in Seattle in
1954. At the end of fiscal 2002, Magnolia Hi-Fi operated 13 stores in
Washington, Oregon and California that average 10,200 retail square feet and
generate average annual sales per store of $7.6 million. Collectively,
Magnolia Hi-Fi stores represent approximately 133,000 retail square feet, less
than 1% of our total retail square footage.
The following table reconciles Magnolia Hi-Fi stores open at the
beginning and end of each fiscal year since the date of acquisition:
*As of the date of acquisition, December 15, 2000.
Merchandise
Magnolia Hi-Fi stores offer audio and video systems for homes,
automobiles and businesses, as well as certain consumer electronics and
wireless communication devices. Magnolia Hi-Fi also operates a state-of-the-art
design center, as well as in-house repair and installation departments. In
addition, Magnolia Hi-Fi provides custom home and car installation services.
The following table presents Magnolia Hi-Fi sales, by category, as a
percentage of total Magnolia Hi-Fi sales:
Operations
Magnolia Hi-Fi stores are
typically managed by a store manager, an audio/video sales manager and a mobile
electronics sales manager. Most Magnolia Hi-Fi stores are open seven days
a week for 65 to 75 hours a week. Depending on an individual store’s volume,
store staffing includes 10 to 28 commissioned sales personnel, two to six
commissioned mobile electronic installers, and two to 11 digital product sales
personnel, cashiers and warehouse personnel. Advertising, merchandise buying
and pricing, and inventory policies for Magnolia Hi-Fi stores are centrally
controlled.
Distribution Magnolia
Hi-Fi’s merchandise inventory is received and warehoused at its distribution
center in Washington as well as a regional warehouse in California. All
inventory is bar coded and scanned to ensure accurate inventory tracking. In
addition, a computerized inventory replenishment program is used to maintain
optimal inventory levels at each retail store location. Merchandise is delivered to retail
stores an average of four times each week, via Magnolia Hi-Fi’s in-house
distribution system.
Seasonality Similar
to many retailers, Magnolia Hi-Fi’s business is seasonal. Revenues and earnings
are typically greater during the second half of the fiscal year, which includes
the holiday selling season.
Competition Magnolia Hi-Fi competes with a variety of national, regional and local
retailers, including large consumer electronics superstores, mass merchants and
small specialty stores.
Magnolia Hi-Fi has positioned itself between large mass merchants and
high-end specialty boutiques. We believe Magnolia Hi-Fi’s superior-quality
product offerings, its extensively trained sales staff and its focus on
exceptional customer service both before and after the sale, in combination
with the leveraging of Best Buy stores’ core competencies, effectively position
Magnolia Hi-Fi to meet current and future competitive challenges.
Musicland Segment
Overview
Musicland, which was
acquired in the fourth quarter of fiscal 2001, is one of the largest national
retailers of movies, prerecorded music, video games and other entertainment-related
products. Its mall-based stores include the Sam Goody and Suncoast brands. In
addition, Musicland operates small-market On Cue stores and metropolitan, large-format
Media Play stores. At the end of fiscal 2002, Musicland operated 1,321 stores
in 49 states, the District of Columbia, the Commonwealth of Puerto Rico and the
Virgin Islands, with 8.8 million total retail square feet, or
approximately 27% of our total retail square footage. Additional information
regarding our
Musicland operating
segment is included in Management’s Discussion and Analysis of Results of
Operations and Financial Condition beginning on page 24 of our Annual Report,
contained in exhibit 13.1 to this report, and is incorporated herein by
reference. In addition, selected Musicland segment financial data is included
in note 8 of the Notes to Consolidated Financial Statements beginning on page 52
of our Annual Report, contained in exhibit 13.1 to this report and, is
incorporated herein by reference.
The following is a general overview of Musicland’s four retail store
concepts:
Sam Goody - Sam Goody
stores are predominantly located in malls and average approximately 4,800
retail square feet, although they range in size from 1,000 to 30,000 square
feet. At the end of fiscal 2002, we operated 615 Sam Goody stores in 48 states,
the District of Columbia, the Commonwealth of Puerto Rico and the Virgin
Islands. The total retail square footage of Sam Goody stores was approximately
3.0 million square feet, or 9% of our total retail square footage. Sam
Goody stores average approximately $1.2 million in annual revenues per
location.
Suncoast - Suncoast stores are
mall-based and average approximately 2,400 retail square feet. At the end of
fiscal 2002, there were 398 Suncoast stores in 47 states, the District of
Columbia and the Commonwealth of Puerto Rico. The total retail square footage
of Suncoast stores was approximately 1.0 million square feet, or 3% of our
total retail square footage. Suncoast stores average approximately
$1.1 million in annual revenues per location.
On Cue - On Cue
stores are located in small or rural cities, generally with populations of
10,000 to 30,000, and average approximately 6,100 retail square feet. At the
end of fiscal 2002, we operated 232 On Cue stores in 32 states with total
retail square footage of approximately 1.4 million square feet, or 4% of
our total retail square footage. On Cue stores average approximately $700,000
in annual revenues per location. In fiscal 2003, we announced plans to begin
changing the name of On Cue stores to the Sam Goody name as the result of brand
recognition research we conducted during fiscal 2002.
Media Play - Media
Play is a superstore format retailer located in metropolitan markets. Media
Play stores are operated primarily in freestanding and strip mall locations in
urban and suburban areas and average approximately 45,000 retail square feet.
At the end of fiscal 2002, we operated 76 Media Play stores in 19 states with
total retail square footage of approximately 3.4 million, or 11% of our
total retail square footage. Media Play stores average approximately
$7.3 million in annual revenues per location.
The following table reconciles Musicland stores open at the beginning
and end of each fiscal year since the date of acquisition:
*As of the date of acquisition, January 31, 2001.
Merchandise The following is an overview of the merchandise offered at each of
Musicland’s four retail store concepts:
Sam Goody - Sam
Goody stores generally offer music entertainment products such as compact
discs, DVD’s, audiocassettes, music and movie videos, sheet music,
music-inspired apparel, posters and other music-related accessories. In fiscal
2002, we launched a new mix of products in Sam Goody stores. We doubled the
assortment of DVD movies and introduced video gaming, categories that carry
lower profit margins but are expected to generate higher sales growth. We also
expanded our assortment of hardware products that play music and movies, a
natural extension of Sam Goody’s principal product offerings.
Suncoast - Suncoast
stores feature newly released and classic movies, special interest videos and
video recordings of popular TV shows. Complementary products include apparel,
posters and other products inspired by new releases, as well as blank
videotapes, storage cases and other video-related accessories.
On Cue - On
Cue stores provide a wide assortment of entertainment products including
movies, music, books, computer software, electronics, video games and related
products.
Media Play - Media
Play offers a large assortment of entertainment products including movies,
music, books, computer software, video games, electronics, musical instruments
and toys.
The following table presents Musicland sales, by category, as a
percentage of total Musicland sales:
Operations Sam Goody, Suncoast and
On Cue stores are typically managed by a store manager and an assistant
manager. Media Play stores are typically managed by a general manager, an
assistant general manager and three to five department managers. Most Musicland
stores are open from 65 to 80 hours per week, seven days a week, depending
on mall hours. Store staffing levels fluctuate with the size of the store and
anticipated sales volume. Advertising, merchandise buying and pricing, and
inventory policies for Musicland stores are centrally controlled.
Distribution
The majority of
Musicland’s inventory is shipped from its distribution center located in
Indiana. From time to time, 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.
Seasonality Similar to many retailers, Musicland’s business is
seasonal. Revenues and earnings are typically greater during the second half of
the fiscal year, which includes the holiday selling season.
Competition Musicland’s industry is
highly competitive. Increased downloading of entertainment and computer
software directly via the Internet, the progression of CD recording technology
and slumping music sales have all led to more intense competitive conditions.
The industry has begun to test various copy-protection techniques as a
potential means to mitigate the impact of CD recording technology advancements.
Musicland retail stores also compete with specialty retail chains, mass
merchants, bookstores and consumer electronics stores, as well as video rental
stores, mail order clubs and various Internet-based retailers.
We believe that
Musicland’s convenience-based strategy, service levels and broad product
assortment, in combination with the leveraging of Best Buy stores’ core
competencies and the re-merchandising strategy, position Musicland to meet
current and future competitive challenges.
International Segment
Overview
At the end of fiscal 2002, we operated 95 Future Shop
stores in 10 Canadian provinces. The stores average 20,200 retail square feet
and produce average annual sales of approximately $15.3 million per store.
Future Shop stores collectively represent 1.9 million retail square feet,
or 6% of our total retail square footage. Reference is made to Part II, Item
7A., “Quantitative and Qualitative Disclosures About Market Risk,” of this
report for a discussion regarding risks associated with foreign operations.
The International segment was established in
connection with our acquisition of Future Shop in November of fiscal 2002. At
the end of fiscal 2002, Future Shop operated 95 stores and was Canada’s largest
consumer electronics retailer. Additional information regarding our
International operating segment is included in Management’s Discussion and
Analysis of Results of Operations and Financial Condition beginning on page 25
of our Annual Report, contained in exhibit 13.1 to this report, and is
incorporated herein by reference. In addition, selected International segment
financial data is included in note 8 of the Notes to Consolidated Financial
Statements on page 52 of our Annual Report, contained in exhibit 13.1 to this
report, and is incorporated herein by reference.
The following table reconciles Future Shop stores open at the beginning
and end of each fiscal year since the date of acquisition:
*As of the date of acquisition, November 4, 2001.
Merchandise
Future Shop stores offer a large assortment of home office equipment,
consumer electronics, entertainment software and appliances. Home office
equipment includes products such as desktop and notebook computers and related
peripheral equipment, telephones, wireless communication devices and personal
digital assistants. Consumer electronics include products such as television
sets, DVD players, cameras, camcorders, VCRs and digital broadcast satellite
systems. Entertainment software includes products such as compact discs, video
game hardware and software, DVD and VHS movies and computer software.
Appliances include major
appliances such as washers, dryers, ranges, refrigerators, freezers and
dishwashers, as well as vacuums, microwaves and housewares.
The following table presents Future Shop sales, by category, as a
percentage of total sales:
*
Since date of acquisition on November 4, 2001
Operations
Future Shop stores use a
standardized operating system. The operating system includes procedures for
inventory management, transaction processing, customer relations, store
administration, staff training and performance appraisal as well as merchandise
display. Advertising, merchandise buying and pricing, and inventory policies
for Future Shop stores are centrally controlled.
Future Shop’s store operations are organized into three divisions, each
headed by a vice president. Each vice president has several regional managers
who closely monitor store operations and meet regularly with store managers to
review management and staff training programs, as well as customer feedback and
requests, store operating performance and other matters. Meetings involving
store management, product managers, advertising, financial and administrative
staff, as well as senior regional and global headquarters personnel, are held
quarterly to review operating results and to establish future objectives.
Future Shop stores are typically open seven days a week for
approximately 60 to 75 hours a week. A typical store is staffed by a general
manager, several department sales managers, a customer service manager and 35
to 45 associate staff, depending on store size and sales volume.
Distribution The majority of Future Shop’s merchandise, exclusive of appliances, is
shipped directly from suppliers to distribution centers in British Columbia and
Ontario. Future Shop uses contract carriers to ship merchandise from the
distribution centers to retail stores. Appliance sales are fulfilled by the
distribution centers or by a contracted third-party distributor. Future Shop 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. While Future Shop
stores typically receive product shipments twice a week, shipments are
accelerated during high sales volume periods.
Seasonality Similar to many retailers, Future Shop’s business is
seasonal. Revenues and earnings are typically greater during the second half of
the fiscal year, which includes the holiday selling season.
Competition Future Shop’s industry is highly competitive. Future Shop competes
against a variety of Canadian retailers, including major department stores,
independent consumer electronics and appliance dealers, mail order
distributors, discount stores, warehouse clubs and superstores. In addition,
Future Shop competes with Internet-based retailers in Canada and the United
States. Mass merchandisers continue to increase their assortment of consumer
electronics products-primarily those that are less complex to sell, install and
operate. Similarly, large home improvement retailers are expanding their
assortment of appliances. In addition, Canadian consumers are increasingly
downloading entertainment and computer software directly via the Internet.
We believe Future Shop’s low price leadership, large product assortment
and focus on customer service in combination with the leveraging of Best Buy
stores’ core competencies, effectively position Future Shop to meet current and
future competitive conditions.
Our Employees
At the end of fiscal
2002, we employed approximately 94,000 full-time, part-time and seasonal
employees across all of our operating segments. There are currently no collective bargaining agreements covering
any of our employees with the exception of unions that represent hourly
employees at 13 Musicland stores. We have not experienced a strike or work
stoppage and we believe that we have favorable employee relations.
ITEM 2.
ITEM 2. PROPERTIES
Stores,
Distribution Centers and Corporate Facilities Best Buy, Musicland,
Future Shop and Magnolia Hi-Fi geographic store locations are included on page
60 of our Annual Report, contained in Exhibit 13.1 to this report, and are
incorporated herein by reference.
Best
Buy Segment
Best Buy Stores
At the end of fiscal 2002, we operated 481 Best Buy stores totaling
approximately 21.6 million retail square feet.
Best Buy stores are
serviced by the following major distribution centers:
In addition, Best Buy
stores lease space in 20 satellite warehouses in major metropolitan markets for
home delivery of major appliances and large-screen televisions. Best Buy
stores utilize approximately 2.5 million square feet in these warehouses.
In fiscal 2004, we expect to open an additional distribution center in upstate
New York.
Best Buy Co., Inc.’s
principal corporate offices are in two owned facilities aggregating 540,000
square feet in Eden Prairie, Minnesota. In addition to owning these two
facilities, we lease an additional 550,000 square feet of office space in close
proximity to the main corporate office facility. In fiscal 2002, construction
commenced on a new corporate campus in Richfield, Minnesota. The new corporate
campus, which will replace existing owned and leased corporate office
facilities, is expected to be completed in fiscal 2003.
Magnolia Hi-Fi
At the end of fiscal
2002, we operated 13 Magnolia Hi-Fi stores totaling approximately 133,000
retail square feet.
Magnolia Hi-Fi
leases an 80,000 square-foot distribution, warehouse and office facility in
Kent, Washington, of which approximately 54,000 square feet are used for
distribution and warehouse operations, with the remainder dedicated to a
service department and corporate administrative functions. In addition,
Magnolia Hi-Fi utilizes a 13,000 square-foot leased regional warehouse in
Hayward, California.
Musicland
Segment
At the end of fiscal
2002, we operated 1,321 Musicland stores totaling approximately 8.8 million
retail square feet.
Musicland’s stores are
serviced by a 715,000 square-foot owned distribution facility in Franklin,
Indiana.
Musicland’s corporate
offices are located in a 94,000 square-foot owned facility in Minnetonka,
Minnesota. Musicland will be headquartered in Richfield, Minnesota upon the
expected completion of the new corporate campus in fiscal 2003.
International
Segment
At the end of fiscal
2002, we operated 95 Future Shop stores totaling approximately 1.9 million
square feet.
Future Shop leases two
distribution centers located in Delta, British Columbia and Brampton, Ontario.
Substantially all of Future Shop’s merchandise, other than appliances, is
distributed from these two distribution centers, which total 288,000 square
feet and 418,000 square feet, respectively. Appliance sales in western Canada
are fulfilled by the distribution center in British Columbia; however, Future
Shop contracts with a third-party distributor to warehouse and ship appliance
inventory in other parts of Canada, primarily Ontario and Alberta.
Future Shop’s corporate
offices are located in a 141,000 square-foot leased facility in Burnaby,
British Columbia.
Operating
Leases
Essentially all retail
stores and most distribution facilities are leased. Terms of the lease
agreements generally range from three to 20 years. Most of the leases
contain renewal options and escalation clauses. Additional information
regarding operating leases is
included in note 5 of the
Notes to Consolidated Financial Statements beginning on page 49 of our Annual
Report, contained in exhibit 13.1 to this report, and is incorporated herein by
reference.
ITEM 3.
ITEM 3. LEGAL
PROCEEDINGS
We are involved in
various legal proceedings arising during the normal course of conducting
business. The resolution of those proceedings is not expected to have a
material impact on our results of operations and financial condition.
Our Executive Officers are as follows:
Richard M. Schulze has been an officer and
director from our inception in 1966 and currently is Chairman of the Board and
Chief Executive Officer. Effective June 30, 2002, Mr. Schulze will relinquish
the duties of Chief Executive Officer while continuing to serve as Chairman of
the Board. Mr. Schulze is also a trustee of the University of St. Thomas, a
member of the Board of Overseers at the Carlson School of Management at the
University of Minnesota and a director of Twin Cities Public Television, Inc.
Bradbury H. Anderson is currently our Vice
Chairman, having previously served as President and Chief Operating Officer
since April 1991. Mr. Anderson has been a director since 1986. Effective June
30, 2002, Mr. Anderson will assume the responsibilities of Chief Executive
Officer. Mr. Anderson has been employed in various capacities with us since
1973.
Allen U. Lenzmeier was named President and
Chief Operating Officer in March 2002. Mr. Lenzmeier has been a director since
2001. Mr. Lenzmeier joined us in 1984 as Vice President of Finance and
Operations. He was named Senior Vice President in 1986, promoted to Chief
Financial Officer and Executive Vice President in 1991, and then promoted to
President of Best Buy Retail Stores in 2001. He is a national trustee for the
Boys and Girls Clubs of the Twin Cities and serves on the Business Advisory
Council at Minnesota State University.
Brian J. Dunn was named Executive Vice President
- Retail Sales in March 2002. Mr. Dunn joined us in 1985 and has held positions
as senior vice president, regional vice president, regional manger, district
manager and store manager.
Marc D. Gordon was named Executive Vice
President and Chief Information Officer in 2001. He is responsible for
information systems, logistics and the legal department. Mr. Gordon joined us
in 1998 and served as Senior Vice President - Information Systems and Chief
Information Officer. Prior to that, Mr. Gordon had experience in the
retail information systems area, most recently for West Marine Products, a West
Coast-based specialty retailer/wholesaler of marine products. Mr. Gordon
also served as senior manager with Accenture, a principal with a Boston
management consulting firm and vice president of information systems with
Timberland Company.
Darren R. Jackson was named Executive Vice
President - Finance and Treasury, 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. and as chief financial officer of Carson Pirie
Scott & Co. Inc. A certified public accountant, Mr. Jackson has
13 years of experience in the retailing industry.
Michael P. Keskey was promoted to President
of Best Buy Stores in February 2002. Mr. Keskey was promoted to Executive
Vice President - Retail Sales in 2001. Prior to that, he had served as Senior
Vice President - Retail Sales since 1997. Mr. Keskey joined us in 1988 and
has held positions as Vice President - Sales, regional manager, district
manager and store manager.
Michael A. Linton was promoted to Executive
Vice President and Chief Marketing Officer in March 2002. Mr. Linton joined us
in 1999 as Senior Vice President - Strategic Marketing. Prior to that, Mr.
Linton held positions as vice president of marketing at Remington Products
Corporation, vice president and general manager of a product category at James
River Corporation and a general manager at Progressive Insurance. Mr. Linton
began his career at The Proctor & Gamble Company in brand management.
Michael London was promoted to Executive
Vice President and General Merchandise Manager in 2001. Prior to that, he
served as Senior Vice President - General Merchandise. Mr. London joined
us in 1996 as Vice President - General Merchandise. Prior to joining us, Mr. London
was a senior vice president of NordicTrack, a division of the CML Group, Inc.,
and executive vice president for Central Tractor Farm & Country.
George Z. Lopuch was named Executive Vice
President - Strategic Planning in 2001. Mr. Lopuch joined us in 1998 as
Senior Vice President - Corporate Strategic Planning. Prior to that,
Mr. Lopuch was a senior vice president of corporate strategic planning and
research at SuperValu, Inc.
Philip J. Schoonover was named Executive
Vice President - Business Development in February 2002. He was promoted to
Executive Vice President of Digital Technology Solutions in February 2001
after having served for five years as Senior Vice President - Merchandising.
Prior to joining us in 1995, Mr. Schoonover was an executive vice
president for TOPS Appliance City.
John C. Walden was named Executive Vice
President of Human Capital and Leadership in February 2002. Mr. Walden served
as President of our Internet division, BestBuy.com, from 1999 to 2002. Prior to
joining us Mr. Walden served as chief operating officer of Peapod, Inc.,
an Internet retailer of groceries. Mr. Walden has also held executive
positions with Ameritech Corporation and Storage Technology Corporation, and
practiced corporate and securities law with Sidley, Austin, Brown and Wood LLP.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information set forth
under the caption “Common Stock Prices” on page 33 of the Annual Report is
incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED
FINANCIAL DATA
The information set forth
under the caption “10-Year Financial Highlights” on pages 18 and 19 of the
Annual Report for the years 1998 through 2002 is incorporated herein by
reference.
ITEM 7.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The information given
under the caption “Management’s Discussion and Analysis of Results of
Operations and Financial Condition” on pages 20 through 33 of the Annual Report
is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Our debt is not subject
to material interest rate volatility risk. The rates on a substantial portion
of our debt may be reset, but not more than one percentage point higher than
the current rates. If the rates on the debt were to be reset one percentage
point higher, annual interest expense would increase by approximately $8
million. We do not manage the risk through the use of derivative instruments.
We have market risk
arising from changes in foreign currency exchange rates as a result of our
acquisition of Future Shop, in Canada, in November fiscal 2002. At this time,
we do not manage the risk through the use of derivative instruments. A 10%
adverse change would not have a significant impact on our results of operations
or financial position.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements
required by this Item, listed below, are included in the Annual Report,
contained in exhibit 13.1 to this report, on the pages indicated below and are
expressly incorporated herein by this reference.
Page No.
Consolidated balance
sheets as of March 2, 2002 and March 3, 2001
34-35
For the fiscal years ended
March 2, 2002; March 3, 2001 and Feb. 26, 2000
Consolidated statements of earnings
Consolidated statements of cash flows
Consolidated statements of changes in shareholders’ equity
Notes to consolidated financial statements
39-54
Independent auditor’s report
Condensed Consolidating Financial
Information
In
fiscal 2002, we completed two private offerings of 20-year convertible
debentures. The convertible debentures are guaranteed by Best Buy Stores, L.P.,
our wholly-owned subsidiary. At March
2, 2002, a total of approximately $743 million related to these debentures was
outstanding.
Additional information
regarding the convertible debentures is included in note 3 of the Notes to
Consolidated Financial Statements beginning on page 43 of the Annual Report,
contained in exhibit 13.1 to this report, and is incorporated herein by
reference.
The following tables present condensed consolidating
balance sheets for the fiscal years ended March 2, 2002 and March 3, 2001, and
condensed consolidating statements of earnings and cash flows for the fiscal
years ended March 2, 2002; March 3, 2001 and February 26, 2000:
Condensed Consolidating Balance Sheets
As of March 2, 2002
$ in millions
Condensed Consolidating Balance
Sheets
As of March 3, 2001
$ in millions
Condensed Consolidating Statements of Earnings
For the Fiscal Year Ended March 2, 2002
$ in millions
Condensed Consolidating Statements of Earnings
For the Fiscal Year Ended March 3, 2001
$ in millions
Condensed Consolidating Statements of Earnings
For the Fiscal Year Ended February 26, 2000
$ in millions
Condensed Consolidated Statements of Cash Flows
For the Fiscal Year Ended March 2, 2002
$ in millions
Condensed Consolidated Statements of Cash Flows
For the Fiscal Year Ended March 3, 2001
$ in millions
Condensed Consolidated Statements of Cash Flows
For the Fiscal Year Ended February 26, 2000
$ in millions
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information provided
under the captions “Security Ownership of Certain Beneficial Owners and
Management” and “Nominees and Directors” on pages 6 through 10 of the Proxy
Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth
under the caption “Executive Compensation” on pages 12 through 22 of the Proxy
Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information provided
under the caption “Security Ownership of Certain Beneficial Owners and
Management” on pages 6 through 10 of the Proxy Statement is incorporated herein
by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information found
under the captions “Nominees and Directors” and “Certain Transactions” on pages
9 through 11 of the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The
following documents are filed as part of this report:
1. Financial
Statements:
All financial
statements as set forth under Item 8 of this Report.
2. Supplementary
Financial Statement Schedules:
Schedule II -
Valuation and Qualifying Accounts
3. Exhibits:
Number
Description
Method of
Filing
3.1
Amended and Restated
Articles of Incorporation, as amended
(3
)
3.2
Amended and Restated
By-Laws, as amended
(1,2,4,5,6,15
)
4.1
Credit Agreement with
U.S. Bank National Association dated March 21, 2002
(1
)
4.2
Indenture by and among
Best Buy Co., Inc. the subsidiary guarantors named therein and Wells Fargo
Bank Minnesota, National Association, dated June 27, 2001
(16
)
4.3
Indenture by and among
Best Buy Co., Inc., Best Buy Stores, L.P. and Wells Fargo Bank Minnesota,
National Association, dated January 15, 2002
(17
)
10.1
1987 Employee
Non-Qualified Stock Option Plan, as amended
(10
)
10.2
1987 Directors’
Non-Qualified Stock Option Plan, as amended
(11
)
10.3
1994 Full-Time Employee
Non-Qualified Stock Option Plan, as amended
(11
)
10.4
1997 Employee
Non-Qualified Stock Option Plan, as amended
(9
)
10.5
1997 Directors’
Non-Qualified Stock Option Plan, as amended
(12
)
10.6
Best Buy Co., Inc.
Deferred Compensation Plan, as amended
(14
)
10.7
Resolutions of the
Board of Directors adopting the EVA® Incentive Program for senior officers
(7
)
10.8
2000 Restricted Stock
Award Plan, as amended
(1
)
10.9
The Assumed Musicland
1988 Stock Option Plan of Best Buy Co., Inc.
(13
)
10.10
The Assumed Musicland
1992 Stock Option Plan of Best Buy Co., Inc.
(13
)
10.11
The Assumed Musicland
1994 Stock Option Plan of Best Buy Co., Inc.
(13
)
10.12
The Assumed Musicland
1998 Stock Incentive Plan of Best Buy Co., Inc.
(13
)
12.1
Statements re:
Computations of Ratios
(1
)
13.1
2002 Annual Report to
Shareholders
(1
)
21.1
Subsidiaries of the
Registrant
(1
)
23.1
Consent of Ernst &
Young LLP
(1
)
(1) Document
is filed herewith.
(2) Exhibit
so marked was filed with the Securities and Exchange Commission (SEC) on
May 23, 1995, as an exhibit to the Form 10-K of Best Buy
Co., Inc., and is incorporated herein by reference and made a part hereof.
(3) Exhibit
so marked was filed with the SEC on May 20, 1994, as an exhibit to the
Form 10-K of Best Buy Co., Inc., and is incorporated herein by
reference and made a part hereof.
(4) Exhibit
so marked was filed with the SEC on Nov. 12, 1991, as an exhibit to the
Registration Statement on Form S-3 (Registration No. 33-43065) of
Best Buy Co., Inc., and is incorporated herein by reference and made a
part hereof.
(5) Exhibit
so marked was filed with the SEC on Jan. 13, 1992, as an exhibit to
Form 10-Q of Best Buy Co., Inc., and is incorporated herein by
reference and made a part hereof.
(6) Exhibit
so marked was filed with the SEC on May 28, 1997, as an exhibit to the
Form 10-K of Best Buy Co., Inc., and is incorporated herein by
reference and made a part hereof.
(7) Exhibit
so marked was filed with the SEC on April 29, 1999, as an exhibit to the
preliminary Proxy Statement of Best Buy Co., Inc., and is incorporated
herein by reference and made a part hereof.
(8) Exhibit
so marked was filed with the SEC on October 12, 1999, as an exhibit to
Form 10-Q of Best Buy Co., Inc., and is incorporated herein by
reference and made a part hereof.
(9) Exhibit
so marked was filed on August 20, 1998, as an exhibit to the Registration
Statement on Form S-8 (Registration No. 333-61897) of Best Buy
Co., Inc., and is incorporated herein by reference and made a part hereof.
(10) Exhibit
so marked was filed with the SEC on May 29, 1996, as an exhibit to the
Form 10-K of Best Buy Co., Inc., and is incorporated herein by
reference and made a part hereof.
(11) Exhibit
so marked was filed with the SEC on May 27, 1999, as an exhibit to the
Form 10-K of Best Buy Co., Inc., and is incorporated herein by
reference and made a part hereof.
(12) Exhibit
so marked was filed with the SEC on January 11, 2000, as an exhibit to the
Form 10-Q of Best Buy Co., Inc., and is incorporated herein by
reference and made a part hereof.
(13) Exhibit
so marked was filed with the SEC on February 23, 2001, as an exhibit to
the Form S-8 (Registration No. 333-56146) of Best Buy Co., Inc.,
and is incorporated herein by reference and made a part hereof.
(14) Exhibit
so marked was filed with the SEC on May 24, 2000, as an exhibit to the
Form 10-K of Best Buy Co., Inc., and is incorporated herein by
reference and made a part hereof.
(15) Exhibit
so marked was filed with the SEC on June 1, 2001, as an exhibit to the
Form 10-K of Best Buy Co., Inc., and is incorporated herein by
reference and made a part hereof.
(16) Exhibit
so marked was filed with the SEC on September 24, 2001, as an exhibit to the
Registration Statement on Form S-3 (Registration No. 333-70060) of Best Buy
Co., Inc., and is incorporated herein by reference and made a part hereof.
(17) Exhibit
so marked was filed with the SEC on February 28, 2002, as an exhibit to the
Registration Statement on Form S-3 (Registration No. 333-83562) of Best Buy
Co., Inc., and is incorporated herein by reference and made a part hereof.
Pursuant to Item
601(b)(4)(iii) of Regulation S-K under the Securities Act of 1933,
the Registrant has not filed as exhibits to the Form 10-K certain
instruments with respect to long-term debt under which the amount of securities
authorized does not exceed 10% of the total assets of the Registrant. The
Registrant hereby agrees to furnish copies of all such instruments to the
Commission upon request.
(b) Reports
on Form 8-K:
(1) Announcement
of the issuance of two press releases in connection with fiscal December 2002
sales results, updated expectations for fourth quarter fiscal 2002 financial
results and initial guidance for fiscal 2003 financial results, filed on
January 9, 2002.
(2) Announcement
of executive management changes, filed on February 27, 2002.
(3) Announcement
of issuance of press release regarding financial outlook for the fourth quarter
fiscal 2002, filed on February 28, 2002.
SIGNATURES
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: May 30, 2002
Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated
on May 30, 2002.
Schedule II
Valuation and Qualifying
Accounts
($ in millions)
* Other includes bad debt write-offs and recoveries, as well as
reserves associated with acquired companies.