BBY

Best Buy Co., Inc. - 10-Q Filing Summary

Business Context and Reporting Period

This Quarterly Report on Form 10-Q covers the period ended November 27, 1999 (the third quarter of fiscal 2000). Best Buy Co., Inc. is a retailer of consumer electronics, home office products, and entertainment software. The company operated 354 stores as of the reporting date, an increase of 42 stores from the prior year. The filing includes unaudited consolidated financial statements and management discussion regarding record financial performance driven by new product introductions and market share gains.

Key Financial Metrics

Note: Cash flow from operating activities for the nine months ended Nov 27, 1999, was $171.7 million. Capital spending for the same period was $255.6 million.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 25% year-over-year for the quarter and 24% for the nine-month period. Comparable store sales rose 9.2% in the quarter and 11.1% year-to-date.
• Profitability: Net earnings increased 46% for the quarter and 70% for the nine-month period compared to the prior year. Gross profit margins improved to 19.0% (quarter) and 19.4% (nine months) from 17.8% and 18.1% respectively in the prior year.
• Accounting Restatement: The company adopted a new accounting policy for Performance Service Plans (PSPs) effective Q3 fiscal 2000, recognizing revenue ratably over the contract life rather than at the time of sale. This change reduced reported net earnings for the quarter by $2.0 million and for the nine-month period by $3.4 million. Prior year figures were restated for comparability.
• Balance Sheet: Merchandise inventories increased by approximately $400 million compared to the prior year quarter, consistent with sales growth. Accounts payable increased significantly due to higher business volume.

Guidance, Outlook, and Risks

• Store Expansion: Management plans to open approximately 60 new stores in fiscal 2001, including entry into the New York metropolitan market. Total capital spending for fiscal 2000 is expected to be approximately $400 million.
• E-Commerce: The company is investing in BestBuy.com, with plans to roll out an expanded online product assortment in the first quarter of fiscal 2001. A strategic alliance with Microsoft Corp. was announced in December 1999, involving joint marketing and a potential $200 million stock issuance.
• Outlook: Management expects comparable store sales increases to moderate in the future due to the compounding effect of recent gains. Gross profit margins are expected to improve over prior year levels but at a slower rate. SG&A expenses are expected to increase year-over-year due to hiring skilled staff and store expansion.
• Risks: Remaining Year 2000 (Y2K) risks include potential product supply issues from vendors. The company successfully completed its Y2K rollover without major disruptions. General economic conditions and product availability are cited as factors that could cause actual results to differ from forward-looking statements.

Investor Verification Checklist

• Verify the impact of the new PSP accounting policy on future revenue recognition and cash flow timing.
• Monitor the execution of the 60-store expansion plan for fiscal 2001 and associated capital expenditure levels.
• Assess the performance of the new Microsoft strategic alliance and the rollout of the expanded BestBuy.com platform.
• Review the sustainability of gross profit margin improvements given the decline in average selling prices for personal computers.
• Confirm the status of the $200 million stock repurchase program authorized in September 1999.