UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

x

 

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

 

 

 

For the quarterly period ended June 2, 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

BEST BUY CO., INC.

(Exact name of registrant as specified in its charter)

Minnesota

 

41-0907483

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

7601 Penn Avenue South

 

 

Richfield, Minnesota

 

55423

(Address of principal executive offices)

 

(Zip Code)

 

 

 

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

 

N/A
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  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 Exchange Act). Yes  o  No  x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  o  No  o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.10 Par Value — 473,898,000 shares outstanding as of June 2, 2007.

 




BEST BUY CO., INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 2, 2007

INDEX

Part I —

Financial Information

 

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements (Unaudited)

3

 

 

 

 

 

 

 

 

 

a)

Condensed consolidated balance sheets as of June 2, 2007; March 3, 2007; and May 27, 2006

3

 

 

 

 

 

 

 

 

 

b)

Consolidated statements of earnings for the three months ended June 2, 2007, and May 27, 2006

5

 

 

 

 

 

 

 

 

 

c)

Consolidated statement of changes in shareholders’ equity for the three months ended June 2, 2007

6

 

 

 

 

 

 

 

 

 

d)

Consolidated statements of cash flows for the three months ended June 2, 2007, and May 27, 2006

7

 

 

 

 

 

 

 

 

 

e)

Notes to condensed consolidated financial statements

8

 

 

 

 

 

 

 

 

Item 2.

 

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

22

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

35

 

 

Part II —

Other Information

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

37

 

 

 

 

 

 

Signatures

38

 

2




PART I —                 FINANCIAL INFORMATION

ITEM 1.                              CONSOLIDATED FINANCIAL STATEMENTS

BEST BUY CO., INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

($ in millions, except per share amounts)

(Unaudited)

 

 

June 2,
2007

 

March 3,
2007

 

May 27,
2006

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,366

 

$

1,205

 

$

772

 

Short-term investments

 

1,436

 

2,588

 

1,554

 

Receivables

 

476

 

548

 

409

 

Merchandise inventories

 

4,298

 

4,028

 

3,737

 

Other current assets

 

730

 

712

 

406

 

Total current assets

 

8,306

 

9,081

 

6,878

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

 

 

Property and equipment

 

5,131

 

4,904

 

4,957

 

Less accumulated depreciation

 

2,105

 

1,966

 

2,245

 

Net property and equipment

 

3,026

 

2,938

 

2,712

 

 

 

 

 

 

 

 

 

GOODWILL

 

1,049

 

919

 

955

 

 

 

 

 

 

 

 

 

TRADENAMES

 

93

 

81

 

63

 

 

 

 

 

 

 

 

 

LONG-TERM INVESTMENTS

 

332

 

318

 

302

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

336

 

233

 

359

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

13,142

 

$

13,570

 

$

11,269

 

 

NOTE:  The consolidated balance sheet as of March 3, 2007, has been condensed from the audited consolidated financial statements.

See Notes to Condensed Consolidated Financial Statements.

3




BEST BUY CO., INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

($ in millions, except per share amounts)

(Unaudited)

 

 

June 2,
2007

 

March 3,
2007

 

May 27,
2006

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

3,957

 

$

3,934

 

$

3,055

 

Unredeemed gift card liabilities

 

455

 

496

 

415

 

Accrued compensation and related expenses

 

243

 

332

 

278

 

Accrued liabilities

 

930

 

990

 

840

 

Accrued income taxes

 

34

 

489

 

291

 

Short-term debt

 

48

 

41

 

 

Current portion of long-term debt

 

19

 

19

 

418

 

Total current liabilities

 

5,686

 

6,301

 

5,297

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

655

 

443

 

383

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT

 

598

 

590

 

180

 

 

 

 

 

 

 

 

 

MINORITY INTERESTS

 

33

 

35

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none

 

 

 

 

Common stock, $.10 par value: Authorized — 1.5 billion shares; Issued and outstanding — 473,898,000, 480,655,000 and 484,014,000 shares, respectively

 

47

 

48

 

48

 

Additional paid-in capital

 

101

 

430

 

546

 

Retained earnings

 

5,638

 

5,507

 

4,500

 

Accumulated other comprehensive income

 

384

 

216

 

315

 

Total shareholders’ equity

 

6,170

 

6,201

 

5,409

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

13,142

 

$

13,570

 

$

11,269

 

 

NOTE:  The consolidated balance sheet as of March 3, 2007, has been condensed from the audited consolidated financial statements.

See Notes to Condensed Consolidated Financial Statements.

4




BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF EARNINGS

($ in millions, except per share amounts)

(Unaudited)

 

 

Three Months Ended

 

 

 

June 2,
2007

 

May 27,
2006

 

Revenue

 

$

7,927

 

$

6,959

 

Cost of goods sold

 

6,035

 

5,194

 

Gross profit

 

1,892

 

1,765

 

Selling, general and administrative expenses

 

1,626

 

1,428

 

Operating income

 

266

 

337

 

Other income (expense)

 

 

 

 

 

Investment income and other

 

44

 

31

 

Interest expense

 

(7

)

(8

)

 

 

 

 

 

 

Earnings before income tax expense and minority interest

 

303

 

360

 

Income tax expense

 

113

 

126

 

Minority interest

 

2

 

 

 

 

 

 

 

 

Net earnings

 

$

192

 

$

234

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

Basic

 

$

0.40

 

$

0.48

 

Diluted

 

$

0.39

 

$

0.47

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.10

 

$

0.08

 

 

 

 

 

 

 

Weighted average common shares outstanding (in millions)

 

 

 

 

 

Basic

 

478.8

 

484.6

 

Diluted

 

491.5

 

500.8

 

 

See Notes to Condensed Consolidated Financial Statements.

5




BEST BUY CO., INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED JUNE 2, 2007

($ and shares in millions)

(Unaudited)

 

 

Common
Shares

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Total

 

Balances at March 3, 2007

 

481

 

$

48

 

$

430

 

$

5,507

 

$

216

 

$

6,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings, three months ended June 2, 2007

 

 

 

 

192

 

 

192

 

Foreign currency translation adjustments

 

 

 

 

 

168

 

168

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of adopting a new accounting standard

 

 

 

 

(13

)

 

(13

)

Stock-based compensation

 

 

 

32

 

 

 

32

 

Issuance of common stock under employee stock purchase plan

 

1

 

 

25

 

 

 

25

 

Stock options exercised

 

1

 

 

17

 

 

 

17

 

Tax benefit from stock options exercised and employee stock purchase plan

 

 

 

8

 

 

 

8

 

Repurchase of common stock

 

(9

)

(1

)

(411

)

 

 

(412

)

Common stock dividends, $0.10 per share

 

 

 

 

(48

)

 

(48

)

Balances at June 2, 2007

 

474

 

$

47

 

$

101

 

$

5,638

 

$

384

 

$

6,170

 

 

See Notes to Condensed Consolidated Financial Statements.

6




BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)

 

 

Three Months Ended

 

 

 

June 2,
2007

 

May 27,
2006

 

OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

192

 

$

234

 

Adjustments to reconcile net earnings to total cash used in operating activities

 

 

 

 

 

Depreciation

 

135

 

121

 

Asset impairment charges

 

2

 

12

 

Stock-based compensation

 

32

 

28

 

Deferred income taxes

 

(78

)

(16

)

Excess tax benefits from stock-based compensation

 

(8

)

(23

)

Other, net

 

(3

)

8

 

Changes in operating assets and liabilities, net of acquired assets and liabilities

 

 

 

 

 

Receivables

 

81

 

34

 

Merchandise inventories

 

(210

)

(343

)

Other assets

 

(42

)

(10

)

Accounts payable

 

(25

)

(201

)

Other liabilities

 

(232

)

(179

)

Accrued income taxes

 

(272

)

(391

)

Total cash used in operating activities

 

(428

)

(726

)

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Additions to property and equipment, net of $36 non-cash capital expenditures in the three months ended May 27, 2006

 

(179

)

(154

)

Purchases of available-for-sale securities

 

(2,238

)

(497

)

Sales of available-for-sale securities

 

3,398

 

1,908

 

Acquisition of businesses, net of cash acquired

 

(89

)

(408

)

Change in restricted assets

 

28

 

6

 

Other, net

 

 

9

 

Total cash provided by investing activities

 

920

 

864

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Repurchase of common stock

 

(412

)

(238

)

Issuance of common stock under employee stock purchase plan and for the exercise of stock options

 

42

 

89

 

Dividends paid

 

(48

)

(38

)

Proceeds from issuance of debt

 

42

 

17

 

Repayments of debt

 

(35

)

(2

)

Excess tax benefits from stock-based compensation

 

8

 

23

 

Other, net

 

3

 

15

 

Total cash used in financing activities

 

(400

)

(134

)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

69

 

20

 

 

 

 

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

 

161

 

24

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

1,205

 

748

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

1,366

 

$

772

 

See Notes to Condensed Consolidated Financial Statements.

7




BEST BUY CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ in millions, except per share amounts)

(Unaudited)

1.                         Basis of Presentation

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States. All adjustments were comprised of normal recurring adjustments, except as noted in the Notes to Condensed Consolidated Financial Statements. 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. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. These interim financial statements and the related notes should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007.

Consistent with China’s statutory requirements, our China operations’ fiscal year ends on December 31. Therefore, we have elected to consolidate our China financial results on a two-month lag. There was no significant intervening event that would have materially affected our consolidated financial statements had it been recorded during the fiscal quarter.

Reclassifications

To maintain consistency and comparability, we reclassified certain prior-year amounts to conform to the current-year presentation as described in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007. In addition, to conform to the current-year presentation, we reclassified to the International segment certain selling, general and administrative (“SG&A”) support costs which were previously reported as part of the Domestic segment in fiscal 2007. These reclassifications had no effect on previously reported consolidated operating income, net earnings, shareholders’ equity or cash flows.

New Accounting Standards

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. We plan to adopt SFAS No. 159 beginning in the first quarter of fiscal 2009. We are evaluating the impact, if any, the adoption of SFAS No. 159 will have on our operating income or net earnings.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We plan to adopt SFAS No. 157 beginning in the first quarter of fiscal 2009. We are evaluating the impact, if any, the adoption of SFAS No. 157 will have on our operating income or net earnings.

2.                         Acquisitions

Speakeasy, Inc.

On May 1, 2007, we acquired Speakeasy, Inc. (“Speakeasy”) for $103 in cash, or $89 net of cash acquired, including transaction costs and the repayment of $5 of Speakeasy’s debt.  We acquired Speakeasy, an independent U.S. broadband voice, data, and IT services provider, to strengthen our portfolio of technology solutions.  The acquisition was accounted for using the purchase method in accordance with SFAS No. 141, Business Combinations. Accordingly, we recorded the net assets at their estimated fair values, and included operating results in our Domestic segment from the date of acquisition. We allocated the purchase price on a preliminary basis using information currently available. The

8




$ in millions, except per share amounts

allocation of the purchase price to the assets and liabilities acquired will be finalized no later than the first quarter of fiscal 2009, as we obtain more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of purchase. The premium we paid in excess of the fair value of the net assets acquired was primarily for the expected future synergies we believe Speakeasy will generate by providing new technology solutions for our existing and future customers, as well as to obtain Speakeasy’s skilled, established workforce. None of the goodwill is deductible for tax purposes.

The preliminary purchase price allocation, net of cash acquired, was as follows:

Receivables

 

$

8

 

Property and equipment

 

8

 

Other assets

 

21

 

Tradename

 

6

 

Goodwill

 

76

 

Current liabilities

 

(30

)

Total

 

$

89

 

 

Jiangsu Five Star Appliance Co., Ltd.

On June 8, 2006, we acquired a 75% interest in Jiangsu Five Star Appliance Co., Ltd. (“Five Star”) for $184, including a working capital injection of $122 and transaction costs. Five Star is an appliance and consumer electronics retailer 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. The acquisition was accounted for using the purchase method in accordance with SFAS No. 141. Accordingly, we recorded the net assets at their estimated fair values, and included operating results in our International segment from the date of acquisition. We allocated the purchase price on a preliminary basis using information then available. The allocation of the purchase price to the assets and liabilities acquired was finalized in the first quarter of fiscal 2008. There was no significant adjustment to the preliminary purchase price allocation. None of the goodwill is deductible for tax purposes.

The final purchase price allocation, net of cash acquired, was as follows:

Restricted cash

 

$

204

 

Merchandise inventories

 

109

 

Property and equipment

 

78

 

Other assets

 

78

 

Tradename

 

21

 

Goodwill

 

24

 

Accounts payable

 

(368

)

Other current liabilities

 

(35

)

Debt

 

(64

)

Long-term liabilities

 

(1

)

Minority interests1

 

(33

)

Total

 

$

13

 

 

1       The minority interests’ proportionate ownership of assets and liabilities were recorded at historical carrying values.

3.                         Investments

Debt Securities

Short-term and long-term investments are comprised of municipal and U.S. government debt securities, as well as auction-rate securities and variable-rate demand notes. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and based on our ability to market and to sell these instruments, we classify auction-rate securities, variable-rate demand notes and other investments in debt securities as available-for-sale and carry them at amortized cost, which approximates fair value. Auction-rate securities and variable-rate demand notes are similar to short-term debt instruments because their interest rates are reset periodically. Investments in these securities can be sold for cash on the auction date. We classify auction-rate securities and variable-rate demand notes as short-term or long-term investments based on the reset dates.

In accordance with our investment policy, we place our investments in debt securities with issuers who have high-quality credit and limit the amount of investment exposure to any one issuer. We seek to preserve principal and minimize exposure to interest-rate fluctuations by limiting default risk, market risk and reinvestment risk.

9




$ in millions, except per share amounts

The following table presents the amortized principal amounts, related weighted-average interest rates (taxable equivalent), maturities and major security types for our investments in debt securities:

 

June 2, 2007

 

March 3, 2007

 

May 27, 2006

 

 

 

Amortized
Principal
Amount

 

Weighted-
Average
Interest
Rate

 

Amortized
Principal
Amount

 

Weighted-
Average
Interest
Rate

 

Amortized
Principal
Amount

 

Weighted-
Average
Interest
Rate

 

Short-term investments (less than one year)

 

$

1,436

 

5.90

%

$

2,588

 

5.68

%

$

1,554

 

5.61

%

Long-term investments (one to three years)

 

332

 

5.84

%

318

 

5.68

%

302

 

5.80

%

Total

 

$

1,768

 

 

 

$

2,906

 

 

 

$

1,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal debt securities

 

$

1,711

 

 

 

$

2,840

 

 

 

$

1,780

 

 

 

Auction-rate and asset-backed securities

 

57

 

 

 

66

 

 

 

76

 

 

 

Total

 

$

1,768

 

 

 

$

2,906

 

 

 

$

1,856

 

 

 

 

The carrying values of our investments in debt securities approximated fair value at June 2, 2007; March 3, 2007; and May 27, 2006, due to the rapid turnover of our portfolio and the highly liquid nature of these investments. Therefore, there were no significant unrealized holding gains or losses.

See Note 10, Subsequent Events, for information on investments used subsequent to June 2, 2007, to finance our accelerated share repurchase program.

Marketable Equity Securities

We also invest in marketable equity securities and classify them as available-for-sale. Investments in marketable equity securities are included in other assets in our consolidated balance sheets, and are reported at fair value based on quoted market prices. All unrealized holding gains or losses are reflected net of tax in accumulated other comprehensive income in shareholders’ equity.

The carrying values of our investments in marketable equity securities at June 2, 2007; March 3, 2007; and May 27, 2006, were $4, $4 and $25, respectively. The decrease in marketable equity securities compared with May 27, 2006, was due to the sale of our investment in Golf Galaxy, Inc. (“Golf Galaxy”) on February 13, 2007. At May 27, 2006, the carrying value of our investment in Golf Galaxy was $21.

Net unrealized (loss)/gain, net of tax, included in accumulated other comprehensive income were $(1), $(1) and $10 at June 2, 2007; March 3, 2007; and May 27, 2006, respectively.

4.                         Income Taxes

We adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109, effective March 4, 2007.  FIN No. 48 provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. The adoption of FIN No. 48 resulted in the reclassification of $214 of certain tax liabilities from current to long-term and a $13 increase in our liability for unrecognized tax benefits, which was accounted for as a reduction to the March 4, 2007 retained earnings balance.

At March 4, 2007, our total liability for unrecognized tax benefits, after the adoption of FIN No. 48, was $214, of which $81 represented tax benefits that, if recognized, would favorably impact the effective tax rate. Our liability for unrecognized tax benefits was $222 at June 2, 2007.

We recognize interest and penalties in income tax expense in our consolidated statements of earnings. At March 4, 2007, we had accrued interest and penalties of $17. There has been no significant change in our accrued interest and penalties since March 4, 2007.

We file a consolidated U.S. federal income tax return, as well as income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal 2003. In April 2007, the Internal Revenue Service (“IRS”) completed its examination of our U.S. federal income tax returns for fiscal 2003 and fiscal 2004 and resolution of the issues pertaining to those years is expected in fiscal 2009. However, we do not expect that the resolution of these issues will have a significant effect on our financial condition or results of operations.

10




$ in millions, except per share amounts

5.                         Earnings per Share

Our basic earnings per share calculation is computed based on the weighted-average number of common shares outstanding. Our diluted earnings per share calculation is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include stock options, nonvested share awards and shares issuable under our employee stock purchase plan, as well as common shares that would have resulted from the assumed conversion of our convertible debentures. Since the potentially dilutive shares related to the convertible debentures are included in the calculation, the related interest expense, net of tax, is added back to net earnings, as the interest would not have been paid if the convertible debentures had been converted to common stock. Nonvested market-based awards and nonvested performance-based awards are included in the average diluted shares outstanding each period if established market or performance criteria have been met at the end of the respective periods.

The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share (shares in millions):

 

Three Months Ended

 

 

 

June 2,
2007

 

May 27,
2006

 

Numerator

 

 

 

 

 

Net earnings, basic

 

$

192

 

$

234

 

Adjustment for assumed dilution

 

 

 

 

 

Interest on convertible debentures, net of tax

 

2

 

2

 

Net earnings, diluted

 

$

194

 

$

236

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

Weighted-average common shares outstanding

 

478.8

 

484.6

 

Effect of potentially dilutive securities

 

 

 

 

 

Shares from assumed conversion of convertible debentures

 

8.8

 

8.8

 

Stock options and other

 

3.9

 

7.4

 

Weighted-average common shares outstanding, assuming dilution

 

491.5

 

500.8

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

Basic

 

$

0.40

 

$

0.48

 

Diluted

 

$

0.39

 

$

0.47

 

 

The computation of average dilutive shares outstanding excluded stock options to purchase 4.7 million and 0.1 million shares of common stock for the three months ended June 2, 2007, and May 27, 2006, respectively. These amounts were excluded as the options’ exercise prices were greater than the average market price of our common stock for the periods presented and, therefore, the effect would be antidilutive (i.e., including such options would result in higher earnings per share).

6.                       Common Stock Repurchases

Our Board of Directors (“Board”) authorized a $1,500 share repurchase program in June 2006. The program, which was announced on June 21, 2006, terminated and replaced a $1,500 share repurchase program authorized by our Board in April 2005.

For the three months ended June 2, 2007, we purchased and retired 8.7 million shares at a cost of $412 under our June 2006 share repurchase program.  For the three months ended May 27, 2006, we purchased and retired 4.4 million shares at a cost of $238 under our April 2005 share repurchase program.

See Note 10, Subsequent Events, for additional information on common stock repurchases.

7.                         Comprehensive Income

Comprehensive income is computed as net earnings plus certain other items that are recorded directly to shareholders’ equity. In addition to net earnings, the significant components of comprehensive income include foreign currency translation adjustments

11




$ in millions, except per share amounts

and unrealized gains or losses, net of tax, on available-for-sale marketable equity securities. Foreign currency translation adjustments do not include a provision for income tax expense when earnings from foreign operations are considered to be indefinitely reinvested outside the United States. Comprehensive income was $360 and $288 for the three months ended June 2, 2007, and May 27, 2006, respectively.

8.                         Segments

We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all U.S. store and online operations. The International segment is comprised of all store and online operations outside the U.S. We have included Speakeasy, which was acquired on May 1, 2007, and Pacific Sales Kitchen and Bath Centers, Inc. (“Pacific Sales”), which was acquired on March 7, 2006, in the Domestic segment. We have included Five Star, which was acquired on June 8, 2006, in the International segment. Our segments are evaluated on an operating income basis, and a stand-alone tax provision is not calculated for each segment. To conform to the current-year presentation, we reclassified to the International segment certain SG&A support costs which were previously reported as part of the Domestic segment in fiscal 2007. The other accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007.

Revenue by reportable segment was as follows:

 

Three Months Ended

 

 

 

June 2,
2007

 

May 27,
2006

 

Domestic

 

$

6,704

 

$

6,162

 

International

 

1,223

 

797

 

Total revenue

 

$

7,927

 

$

6,959

 

 

Operating income (loss) by reportable segment and the reconciliation to earnings before income tax expense and minority interest were as follows:

 

Three Months Ended

 

 

 

June 2,
2007

 

May 27,
2006

 

Domestic

 

$

270

 

$

334

 

International

 

(4

)

3

 

Total operating income

 

266

 

337

 

Other income (expense)

 

 

 

 

 

Investment income and other

 

44

 

31

 

Interest expense

 

(7

)

(8

)

Earnings before income tax expense and minority interest

 

$

303

 

$

360

 

 

Assets by reportable segment were as follows:

 

June 2,
2007

 

March 3,
2007

 

May 27,
2006

 

Domestic

 

$

9,913

 

$

10,614

 

$

9,053

 

International

 

3,229

 

2,956

 

2,216

 

Total assets

 

$

13,142

 

$

13,570

 

$

11,269

 

 

Goodwill by reportable segment was as follows:

 

June 2,
2007

 

March 3,
2007

 

May 27,
2006

 

Domestic

 

$

451

 

$

375

 

$

383

 

International

 

598

 

544

 

572

 

Total goodwill

 

$

1,049

 

$

919

 

$

955

 

 

The changes in the Domestic goodwill balance since March 3, 2007, and May 27, 2006, were primarily the result of the acquisitions of Pacific Sales and Speakeasy. The changes in the International goodwill balance since March 3, 2007, and May 27, 2006, were due primarily to the acquisition of Five Star totaling $24, and an adjustment related to the resolution of certain

12




$ in millions, except per share amounts

tax matters associated with our acquisition of Future Shop $(21), with the remainder due primarily to fluctuations in foreign currency exchange rates.

Tradenames included in our balance sheets were comprised of indefinite-lived intangible assets related to our Pacific Sales and Speakeasy tradenames, which are included in the Domestic segment, and to our Future Shop and Five Star tradenames, which are included in the International segment. Tradenames by reportable segment were as follows:

 

June 2,
2007

 

March 3,
2007

 

May 27,
2006

 

Domestic

 

$

24

 

$

17

 

$

17

 

International

 

69

 

64

 

46

 

Total tradenames

 

$

93

 

$

81

 

$

63

 

 

9.                         Contingencies

We are involved in various legal proceedings arising in the normal course of conducting business. We believe the amounts provided in our consolidated financial statements are adequate in consideration 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.

10.                Subsequent Events

Repurchase of Common Stock

On June 26, 2007, our Board authorized a new $5,500 share repurchase program.  The program, which has no stated expiration date, terminated and replaced our prior $1,500 share repurchase program announced in June 2006.  Approximately $730 of common stock was purchased under the prior program.

In accordance with the new share repurchase program, on June 26, 2007, we entered into an accelerated share repurchase (“ASR”) program authorized by our Board. The ASR consists of two agreements to purchase shares of our common stock from Goldman, Sachs & Co. (“Goldman”) for an aggregate purchase price of $3,000.  Goldman will borrow the shares to be delivered and is expected to purchase sufficient shares of our common stock in the open market to return to lenders over the terms of the agreements.  The ASR program will conclude in February 2008, although in certain circumstances the termination date may be accelerated at Goldman’s option.  The actual number of shares repurchased will be determined at the completion of the ASR program.  We do not expect to make significant additional share repurchases prior to the conclusion of the ASR program.  Repurchased shares will be retired and constitute authorized but unissued shares.

Collared ASR

One of  the agreements (the “Collared ASR”) provides that the number of shares to be repurchased will be based generally on the volume-weighted average price (“VWAP”) of our common stock during the term of the Collared ASR, subject to collar provisions that will establish minimum and maximum numbers of shares based on the VWAP of our common stock over the hedge period, which is expected to conclude during the second quarter of fiscal 2008.  We will receive an initial number of shares of common stock on certain specified settlement dates.  At the conclusion of the hedge period, we may receive additional shares based on the VWAP of our common stock during the hedge period.  At the conclusion of the Collared ASR, we may also receive additional shares based on the VWAP of our common stock during the agreement term.

On July 2, 2007, we paid $2,000 to Goldman in exchange for an initial delivery of 28.3 million shares to us on July 2-6, 2007, under the terms of the Collared ASR.  The minimum and maximum numbers of shares that we will ultimately repurchase pursuant to the Collared ASR will not be known until the conclusion of the hedge period.

Uncollared ASR

Under the second agreement (the “Uncollared ASR”), the number of shares to be repurchased will be based generally on the VWAP of our common stock during the term of the Uncollared ASR.  We will receive an initial number of shares of common stock on certain specified settlement dates during the second quarter of fiscal 2008.  At the conclusion of the Uncollared ASR, we may receive additional shares, or we may be required to pay additional cash or shares (at our option), based on the VWAP of our common stock during the agreement term.

13




$ in millions, except per share amounts

On July 2, 2007, we paid $1,000 to Goldman under the terms of the Uncollared ASR. The numbers of shares that we will ultimately repurchase pursuant to the Uncollared ASR will not be known until the conclusion of the agreement.

Credit Facilities

Simultaneously with the execution of the ASR program, we entered into a $3,000 bridge loan facility with Goldman Sachs Credit Partners L.P. (the “Bridge Facility”).  We initially borrowed $2,500 under the Bridge Facility and used $500 of our existing cash and investments to finance the ASR program.  We subsequently used additional existing cash and investments to to repay $788 of our initial borrowing under the Bridge Facility.  The Bridge Facility is guaranteed by certain of our subsidiaries and expires on June 24, 2008.  Borrowings under the Bridge Facility are unsecured and bear interest at rates specified in the credit agreement.  The Bridge Facility contains covenants that require us to maintain certain financial ratios. Effective July 11, 2007, we reduced the amount we may borrow under the Bridge Facility to $2,500.  At July 10, 2007, $1,712 was outstanding under the Bridge Facility.

Additionally, we received a commitment letter from JPMorgan Chase Bank, N.A. and J.P. Morgan Securities Inc. (“JPMorgan”) for a five-year senior unsecured revolving credit facility of $2,000. The final terms of the credit facility are subject to negotiation by us and JPMorgan.

Finally, effective July 2, 2007, we terminated our previous $200 bank revolving credit facility that was scheduled to expire on December 22, 2009.

11.                Condensed Consolidating Financial Information

Our convertible debentures, due in 2022, are guaranteed by our wholly-owned indirect subsidiary Best Buy Stores, L.P. Investments in subsidiaries of Best Buy Stores, L.P., which have not guaranteed the convertible debentures, are accounted for under the equity method. We reclassified certain prior-year amounts as described in Note 1, Basis of Presentation, in this Quarterly Report on Form 10-Q. The aggregate principal balance and carrying amount of our convertible debentures, which mature in 2022, was $402 at June 2, 2007.

The debentures may be converted into shares of our common stock if the criteria, as described in Note 5, Debt, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007, are met. During a portion of the three months ended May 27, 2006, our closing stock price exceeded the specified stock price for more than 20 trading days in a 30-trading-day period. Therefore, debenture holders had the option to convert their debentures into shares of our common stock. However, no debentures were so converted. Due to changes in the price of our common stock, the debentures were no longer convertible as of May 27, 2006.

We file a consolidated U.S. federal income tax return. Income taxes are allocated in accordance with our tax allocation agreement. U.S. affiliates receive no tax benefit for taxable losses, but are allocated taxes at the required effective income tax rate if they have taxable income.

The following tables present condensed consolidating balance sheets as of June 2, 2007; March 3, 2007; and May 27, 2006; condensed consolidating statements of earnings for the three months ended June 2, 2007, and May 27, 2006; and condensed consolidating statements of cash flows for the three months ended June 2, 2007, and May 27, 2006:

14




$ in millions, except per share amounts

Condensed Consolidating Balance Sheets

As of June 2, 2007

(Unaudited)

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

255

 

$

56

 

$

1,055

 

$

 

$

1,366

 

Short-term investments

 

1,430

 

 

6

 

 

1,436

 

Receivables

 

13

 

316

 

147

 

 

476

 

Merchandise inventories

 

 

3,604

 

1,016

 

(322

)

4,298

 

Other current assets

 

20

 

189

 

559

 

(38

)

730

 

Intercompany receivable

 

 

 

4,965

 

(4,965

)

 

Intercompany note receivable

 

500

 

 

 

(500

)

 

Total current assets

 

2,218

 

4,165

 

7,748

 

(5,825

)

8,306

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Property and Equipment

 

237

 

1,940

 

852

 

(3

)

3,026

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

6

 

1,043

 

 

1,049

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradenames

 

 

 

93

 

 

93

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Investments

 

332

 

 

 

 

332

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

91

 

265

 

105

 

(125

)

336

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in Subsidiaries

 

6,493

 

265

 

1,301

 

(8,059

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

9,371

 

$

6,641

 

$

11,142

 

$

(14,012

)

$

13,142

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

3,957

 

$

 

$

3,957

 

Unredeemed gift card liabilities

 

 

410

 

45

 

 

455

 

Accrued compensation and related expenses

 

 

169

 

74

 

 

243

 

Accrued liabilities

 

27

 

505

 

398

 

 

930

 

Accrued income taxes

 

34

 

 

 

 

34

 

Short-term debt

 

 

 

48

 

 

48

 

Current portion of long-term debt

 

2

 

13

 

4

 

 

19

 

Intercompany payable

 

2,170

 

2,795

 

 

(4,965

)

 

Intercompany note payable

 

 

500

 

 

(500

)

 

Total current liabilities

 

2,233

 

4,392

 

4,526

 

(5,465

)

5,686

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities

 

209

 

814

 

360

 

(728

)

655

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

407

 

134

 

57

 

 

598

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority Interests

 

 

 

33

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

6,522

 

1,301

 

6,166

 

(7,819

)

6,170

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

9,371

 

$

6,641

 

$

11,142

 

$

(14,012

)

$

13,142

 

 

15




$ in millions, except per share amounts

Condensed Consolidating Balance Sheets

As of March 3, 2007

(Unaudited)

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

235

 

$

77

 

$

893

 

$

 

$

1,205

 

Short-term investments

 

2,582

 

 

6

 

 

2,588

 

Receivables

 

33

 

363

 

152

 

 

548

 

Merchandise inventories

 

 

3,465

 

960

 

(397

)

4,028

 

Other current assets

 

20

 

202

 

596

 

(106

)

712

 

Intercompany receivable

 

 

 

4,891

 

(4,891

)

 

Intercompany note receivable

 

500

 

 

 

(500

)

 

Total current assets

 

3,370

 

4,107

 

7,498

 

(5,894

)

9,081

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Property and Equipment

 

239

 

1,898

 

804

 

(3

)

2,938

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

6

 

913

 

 

919

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradenames

 

 

 

81

 

 

81

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Investments

 

318

 

 

 

 

318

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

91

 

263

 

14

 

(135

)

233

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in Subsidiaries

 

6,099

 

162

 

1,293

 

(7,554

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

10,117

 

$

6,436

 

$

10,603

 

$

(13,586

)

$

13,570

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

3,934

 

$

 

$

3,934

 

Unredeemed gift card liabilities

 

 

452

 

44

 

 

496

 

Accrued compensation and related expenses

 

 

198

 

134

 

 

332

 

Accrued liabilities

 

7

 

564

 

544

 

(125

)

990

 

Accrued income taxes

 

484

 

5

 

 

 

489

 

Short-term debt

 

 

 

41

 

 

41

 

Current portion of long-term debt

 

2

 

12

 

5

 

 

19

 

Intercompany payable

 

2,460

 

2,431

 

 

(4,891

)

 

Intercompany note payable

 

 

500

 

 

(500

)

 

Total current liabilities

 

2,953

 

4,162

 

4,702

 

(5,516

)

6,301

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities

 

219

 

849

 

102

 

(727

)

443

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

407

 

132

 

51

 

 

590

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority Interests

 

 

 

35

 

 

35

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

6,538

 

1,293

 

5,713

 

(7,343

)

6,201

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

10,117

 

$

6,436

 

$

10,603

 

$

(13,586

)

$

13,570

 

 

16




$ in millions, except per share amounts

Condensed Consolidating Balance Sheets

As of May 27, 2006

(Unaudited)

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25

 

$

64

 

$

683

 

$

 

$

772

 

Short-term investments

 

1,376

 

 

178

 

 

1,554

 

Receivables

 

19

 

298

 

92

 

 

409

 

Merchandise inventories

 

 

3,308

 

725

 

(296

)

3,737

 

Other current assets

 

18

 

143

 

279

 

(34

)

406

 

Intercompany receivable

 

 

 

3,399

 

(3,399

)

 

Intercompany note receivable

 

500

 

 

 

(500

)

 

Total current assets

 

1,938

 

3,813

 

5,356

 

(4,229

)

6,878

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Property and Equipment

 

243

 

1,738

 

734

 

(3

)

2,712

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

6

 

949

 

 

955

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradenames

 

 

 

63

 

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Investments

 

302

 

 

 

 

302

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

118

 

262

 

133

 

(154

)

359

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in Subsidiaries

 

5,178

 

12

 

1,314

 

(6,504

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

7,779

 

$

5,831

 

$

8,549

 

$

(10,890

)

$

11,269

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

3,055

 

$

 

$

3,055

 

Unredeemed gift card liabilities

 

 

381

 

34

 

 

415

 

Accrued compensation and related expenses

 

7

 

157

 

114

 

 

278

 

Accrued liabilities

 

8

 

443

 

421

 

(32

)

840

 

Accrued income taxes

 

289

 

2

 

 

 

291

 

Current portion of long-term debt

 

404

 

9

 

5

 

 

418

 

Intercompany payable

 

1,088

 

2,149

 

 

(3,237

)

 

Intercompany note payable

 

 

500

 

 

(500

)

 

Total current liabilities

 

1,796

 

3,641

 

3,629

 

(3,769

)

5,297

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities

 

260

 

760

 

30

 

(667

)

383

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

6

 

116

 

58

 

 

180

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

5,717

 

1,314

 

4,832

 

(6,454

)

5,409

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

7,779

 

$

5,831

 

$

8,549

 

$

(10,890

)

$

11,269

 

 

17




$ in millions, except per share amounts

Condensed Consolidating Statements of Earnings

For the Three Months Ended June 2, 2007

(Unaudited)

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

4

 

$

6,270

 

$

7,275

 

$

(5,622

)

$

7,927

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

5,113

 

6,637

 

(5,715

)

6,035

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

4

 

1,157

 

638

 

93

 

1,892

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

39

 

1,098

 

484

 

5

 

1,626

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(35

)

59

 

154

 

88

 

266

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

Investment income and other

 

39

 

 

18

 

(13

)

44

 

Interest expense

 

(2

)

(11

)

(7

)

13

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before equity in earnings (loss) of subsidiaries

 

2

 

48

 

165

 

88

 

303

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (loss) of subsidiaries

 

136

 

(6

)

30

 

(160

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income tax expense and minority interest

 

138

 

42

 

195

 

(72

)

303

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

34

 

18

 

61

 

 

113

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

 

 

2

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

104

 

$

24

 

$

136

 

$

(72

)

$

192

 

 

18




$ in millions, except per share amounts

Condensed Consolidating Statements of Earnings

For the Three Months Ended May 27, 2006

(Unaudited)

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

4

 

$

5,828

 

$

6,352

 

$

(5,225

)

$

6,959

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

4,807

 

5,802

 

(5,415

)

5,194

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

4

 

1,021

 

550

 

190

 

1,765

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

52

 

973

 

409

 

(6

)

1,428

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(48

)

48

 

141

 

196

 

337

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

Investment income and other

 

28

 

 

9

 

(6

)

31

 

Interest expense

 

(3

)

(4

)

(7

)

6

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings before equity in earnings of subsidiaries

 

(23

)

44

 

143

 

196

 

360

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

153

 

1

 

28

 

(182

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income tax expense and minority interest

 

130

 

45

 

171

 

14

 

360

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

63

 

16

 

47

 

 

126

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

67

 

$

29

 

$

124

 

$

14

 

$

234

 

 

19




$ in millions, except per share amounts

Condensed Consolidating Statements of Cash Flows

For the Three Months Ended June 2, 2007

(Unaudited)

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Total cash (used in) provided by operating activities

 

$

(249

)

$

(254

)

$

75

 

$

 

$

(428

)

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(134

)

(45

)

 

(179

)

Purchases of available-for-sale securities

 

(2,237

)

 

(1

)

 

(2,238

)

Sales of available-for-sale securities

 

3,397

 

 

1

 

 

3,398

 

Acquisition of business, net of cash acquired

 

 

 

(89

)

 

(89

)

Change in restricted assets

 

 

 

28

 

 

28

 

Total cash provided by (used in) investing activities

 

1,160

 

(134

)

(106

)

 

920

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

(412

)

 

 

 

(412

)

Issuance of common stock under employee stock purchase plan and for the exercise of stock options

 

42

 

 

 

 

42

 

Dividends paid

 

(48

)

 

 

 

(48

)

Proceeds from issuance of debt

 

 

3

 

39

 

 

42

 

Repayments of debt

 

 

 

(35

)

 

(35

)

Excess tax benefits from stock-based compensation

 

8

 

 

 

 

8

 

Other, net

 

 

 

3

 

 

3

 

Change in intercompany receivable/payable

 

(481

)

364

 

117

 

 

 

Total cash (used in) provided by financing activities

 

(891

)

367

 

124

 

 

(400

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

 

69

 

 

69

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

20

 

(21

)

162

 

 

161

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

235

 

77

 

893

 

 

1,205

 

Cash and cash equivalents at end of period

 

$

255

 

$

56

 

$

1,055

 

$

 

$

1,366

 

 

20




$ in millions, except per share amounts

Condensed Consolidating Statements of Cash Flows

For the Three Months Ended May 27, 2006

(Unaudited)

 

 

Best Buy
Co., Inc.

 

Guarantor
Subsidiary

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Total cash (used in) provided by operating activities

 

$

(903

)

$

38

 

$

139

 

$

 

$

(726

)

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(84

)

(70

)

 

(154

)

Purchases of available-for-sale securities

 

(486

)

 

(11

)

 

(497

)

Sales of available-for-sale securities

 

1,908

 

 

 

 

1,908

 

Acquisition of business, net of cash acquired

 

 

 

(408

)

 

(408

)

Change in restricted assets

 

 

 

6

 

 

6

 

Other, net

 

 

4

 

5

 

 

9

 

Total cash provided by (used in) investing activities

 

1,422

 

(80

)

(478

)

 

864

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

(238

)

 

 

 

(238

)

Issuance of common stock under employee stock purchase plan and for the exercise of stock options

 

89

 

 

 

 

89

 

Dividends paid

 

(38

)

 

 

 

(38

)

Proceeds from issuance of debt

 

 

12

 

5

 

 

17

 

Repayment of debt

 

 

 

(2

)

 

(2

)

Excess tax benefits from stock-based compensation

 

23

 

 

 

 

23

 

Other, net

 

 

 

15

 

 

15

 

Change in intercompany receivable/payable

 

(340

)

15

 

325

 

 

 

Total cash (used in) provided by financing activities

 

(504

)

27

 

343

 

 

(134

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

 

20

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

15

 

(15

)

24

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

10

 

79

 

659

 

 

748

 

Cash and cash equivalents at end of period

 

$

25

 

$

64

 

$

683

 

$

 

$

772

 

 

21




ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended 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 seven sections:

·                 Overview

·                 Results of Operations

·                 Liquidity and Capital Resources

·                 Off-Balance-Sheet Arrangements and Contractual Obligations

·                 Significant Accounting Policies and Estimates

·                 New Accounting Standards

·                 Outlook

Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 3, 2007, as well as our reports on Forms 10-Q and 8-K and other publicly available information.

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. The International segment is comprised of all store and online operations outside the U.S.  For additional information regarding our business segments, see Note 8, Segments, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Our business, like that of many U.S. 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.  Consequently, interim results are not necessarily indicative of results for the entire fiscal year.

Acquisition

On May 1, 2007, we acquired Speakeasy, Inc. (“Speakeasy”) for $103 million in cash, or $89 million net of cash acquired, including transaction costs and the repayment of $5 million of Speakeasy’s debt. We acquired Speakeasy, an independent U.S. broadband voice, data and IT services provider, to strengthen our portfolio of technology solutions. Speakeasy, which recorded calendar 2006 revenue of approximately $80 million, is not expected to have a significant impact on our net earnings in fiscal 2008. The premium we paid for Speakeasy in excess of the fair value of the net assets acquired was primarily for the expected future synergies we believe Speakeasy will generate by providing new technology solutions for our existing and future customers, as well as to obtain Speakeasy’s skilled, established workforce.

Financial Reporting Changes

To maintain consistency and comparability, we reclassified certain prior-year amounts to conform to the current-year presentation as described in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007. In addition, to conform to the current-year presentation, we reclassified to the International segment certain selling, general and administrative (“SG&A”) support costs which were previously reported as part of the Domestic segment. These reclassifications had no effect on previously reported consolidated operating income, net earnings, shareholders’ equity or cash flows.

22




Highlights

·                 Net earnings in the first quarter of fiscal 2008 were $192 million, or $0.39 per diluted share, compared with $234 million, or $0.47 per diluted share, in the same period one year ago.

·                 Revenue in the first quarter of fiscal 2008 increased 14% to $7.9 billion, compared with $7.0 billion in the same period one year ago, driven primarily by the addition of 230 net new stores in the past 12 months, the acquisition of Jiangsu Five Star Appliance Co., Ltd. (“Five Star”) and a 3.0% comparable store sales gain.

·                 Our gross profit rate in the first quarter of fiscal 2008 decreased to 23.9% of revenue, compared with 25.4% of revenue in the same period one year ago. The decrease was due primarily to the increased sales of lower-margin products and the promotional environment in home theater, including the effects of product model transitions in televisions. The inclusion of Five Star, which carries a lower gross profit rate, also contributed to the decline.

·                 Our SG&A rate in the first quarter of fiscal 2008 was 20.5% of revenue, unchanged as compared with the same period one year ago. Although the SG&A rate was stable compared to last year, the composition of the rate reflected an increase in the Domestic SG&A rate, offset by a decrease in the International SG&A rate.

·                 Net earnings in the first quarter of fiscal 2008 benefited from a $14 million increase in other income to $37 million, compared with $23 million in the same period one year ago, due primarily to higher investment balances and higher yields.

·                 Our effective income tax rate increased to 37.1% in the first quarter of fiscal 2008, compared with 35.0% in the same period one year ago, due primarily to increases in local and foreign income taxes.

·                 During the first quarter of fiscal 2008, we repurchased approximately 8.7 million shares of our common stock at an average price of $47.21 per share, or $412 million in the aggregate.

·                 Based on our fiscal first quarter results and trends in the revenue mix, we now project earnings for fiscal 2008 in the range of $2.95 to $3.15 per diluted share, compared with $3.10 to $3.25, as previously indicated in the Outlook for Fiscal 2008 section of Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended March 3, 2007.

·                 On June 26, 2007, we entered into an accelerated share repurchase program to purchase $3.0 billion of our common stock pursuant to a new $5.5 billion share repurchase program, which was approved by our Board of Directors (“Board”) in June 2007.  We entered into a $3.0 billion bridge loan facility to finance the accelerated share repurchase program.

23




Results of Operations

Consolidated Performance Summary

The following table presents unaudited selected consolidated financial data ($ in millions, except per share amounts):

 

 

Three Months Ended

 

 

 

June 2, 2007

 

May 27, 2006

 

Revenue

 

$

7,927

 

$

6,959

 

Revenue % gain

 

14

%

14

%

Comparable store sales % gain1

 

3.0

%

4.9

%

Gross profit as % of revenue

 

23.9

%

25.4

%

SG&A as % of revenue

 

20.5

%

20.5

%

Operating income

 

$

266

 

$

337

 

Operating income as % of revenue

 

3.4

%

4.8

%

Net earnings

 

$

192

 

$

234

 

Diluted earnings per share

 

$

0.39

 

$

0.47

 

 

1       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 the acquisition. The calculation of the comparable store sales percentage change excludes the effect of fluctuations in foreign currency exchange rates. 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.

Net earnings were $192 million, or $0.39 per diluted share, in the first quarter of fiscal 2008, compared with $234 million, or $0.47 per diluted share, in the same period one year ago. The decrease in net earnings reflects a reduction in our gross profit rate, a flat SG&A rate and a higher effective income tax rate, each as compared with the same period one year ago, partially offset by an increase in revenue.

Revenue in the first quarter of fiscal 2008 increased 14% to $7.9 billion, compared with $7.0 billion in the same period one year ago. The addition of 230 net new stores in the past 12 months accounted for approximately one-half of the revenue increase in the first quarter of fiscal 2008. The acquisition of Five Star accounted for more than one-fourth of the revenue increase, while the 3.0% comparable store sales gain accounted for most of the remainder of the revenue increase for the first quarter of fiscal 2008. Fluctuations in foreign currency exchange rates did not materially impact our revenue in the first quarter of fiscal 2008. Based on our quarterly weighted-average calculation, the value of the Canadian dollar increased 1% to $0.89 per U.S. dollar for the quarter ended June 2, 2007, up from $0.88 per U.S. dollar for the same period one year ago.

Revenue mix and comparable store sales percentage changes by product group in the first quarter of fiscal 2008 were as follows:

 

 

Revenue Mix Summary

 

Comparable Store Sales Summary

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

June 2, 2007

 

May 27, 2006

 

June 2, 2007

 

May 27, 2006

 

Consumer electronics

 

43

%

43

%

1.4

%

12.1

%

Home-office

 

32

%

32

%

6.7

%

2.2

%

Entertainment software

 

17

%

18

%

1.3

%

(4.3

)%

Appliances

 

8

%

7

%

0.7

%

0.9

%

Total

 

100

%

100

%

3.0

%

4.9

%

 

Our comparable store sales in the first quarter of fiscal 2008 increased 3.0%, reflecting a higher average transaction amount, which was driven by the continued growth in the sales of higher-priced products. Also contributing to the fiscal first-quarter comparable store sales gain was an increase in online purchases, as we continue to add features and capabilities to our Web sites. In the first quarter of fiscal 2008, our largest comparable store sales gains were for flat-panel televisions, notebook computers and gaming hardware. Growth in the sales of these product categories was partially offset by comparable store sales declines in tube and projection televisions, CDs, DVDs, phones and MP3 players.

Our gross profit rate in the first quarter of fiscal 2008 decreased by 1.5% of revenue to 23.9% of revenue. The gross

24




profit rate decrease was due to the increased sales of lower-margin products, such as notebook computers and gaming hardware.  The promotional environment in home theater, including the effects of product model transitions in televisions, and a decline in the profitability of the sales of computers and the related products and services sold with them also contributed to the decrease. Our China operations, which carry a significantly lower gross profit rate than our other operations, reduced our gross profit rate in the first quarter of fiscal 2008 by approximately 0.6% of revenue.

Our SG&A rate in the first quarter of fiscal 2008 was 20.5% of revenue, unchanged as compared with the same period one year ago.  Our Domestic segment drove an increase in our consolidated SG&A rate of approximately 0.4% of revenue, while a decrease in our International segment’s SG&A rate fully offset the increase. The increase in our Domestic segment’s SG&A rate was due primarily to the effect of lower comparable store sales.  Additionally, the Domestic segment’s SG&A rate increase was driven by increased spending on investments and initiatives to support customers, increased wages and depreciation expense resulting from investments made in fiscal 2007 to our home theater business, an increase in the number of new store openings in the first quarter of fiscal 2008 compared with the first quarter of fiscal 2007, and increased expenses associated with the resolution of certain legal matters. These increases were partially offset by the absence in the first quarter of fiscal 2008 of charges for severance and reorganization that we recognized in the first quarter of fiscal 2007. The decrease in our International segment’s SG&A rate was due primarily to the lower SG&A rate of our China operations and the effect of strong revenue growth and SG&A savings in Canada.

Other Income (Expense)

Other income in the first quarter of fiscal 2008 was $37 million, an increase from $23 million in the first quarter of fiscal 2007. The increase was due primarily to higher investment balances and higher yields, compared with the first quarter of fiscal 2007.

Income Tax Expense

Our effective income tax rate in the first quarter of fiscal 2008 increased to 37.1%, up from 35.0% in the same period one year ago. The increase was due primarily to increases in local and foreign income taxes.

Segment Performance Summary

Domestic

The following table presents unaudited selected financial data for the Domestic segment ($ in millions):

 

 

Three Months Ended

 

 

 

June 2, 2007

 

May 27, 2006

 

Revenue

 

$

6,704

 

$

6,162

 

Revenue % gain

 

9

%

12

%

Comparable stores sales % gain1

 

1.7

%

4.6

%

Gross profit as % of revenue

 

24.6

%

25.6

%

SG&A as % of revenue2

 

20.6

%

20.2

%

Operating income2

 

$

270

 

$

334

 

Operating income as % of revenue2

 

4.0

%

5.4

%

 

1       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 the acquisition. 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.

2       Prior-year amounts have been adjusted to conform to the current-year presentation, which allocates to the International segment certain SG&A support costs which were reported as part of the Domestic segment in fiscal 2007.

25




The following table reconciles Domestic stores open at the beginning and end of the first quarter of fiscal 2008:

 

 

Total Stores at
Beginning of
First Quarter
Fiscal 2008

 

Stores
Opened

 

Stores
Closed

 

Total Stores at
End of
First Quarter
Fiscal 2008

 

U.S. Best Buy

 

822

 

30

 

 

852

 

Magnolia Audio Video

 

20

 

 

(1

)

19

 

Pacific Sales

 

14

 

 

 

14

 

U.S. Geek Squad

 

12

 

 

(5

)

7

 

Total

 

868

 

30

 

(6

)

892

 

 

Note: Three U.S. Best Buy stores in the Domestic segment were relocated during the first quarter of fiscal 2008. No other stores in the Domestic segment were relocated during the first quarter of fiscal 2008.

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

 

 

Total Stores at
Beginning of
First Quarter
Fiscal 2007

 

Stores
Opened or
Acquired

 

Stores
Closed

 

Total Stores at
End of
First Quarter
Fiscal 2007

 

U.S. Best Buy

 

742

 

12

 

 

754

 

Magnolia Audio Video

 

20

 

 

 

20

 

Pacific Sales

 

 

14

 

 

14

 

U.S. Geek Squad

 

12

 

 

 

12

 

Total

 

774

 

26

 

 

800

 

 

Note: 14 Pacific Sales stores were acquired during the first quarter of fiscal 2007. No store in the Domestic segment was relocated during the first quarter of fiscal 2007.

Our Domestic segment’s operating income in the first quarter of fiscal 2008 was $270 million, or 4.0% of revenue, compared with $334 million, or 5.4% of revenue, in the same period one year ago. The decrease in our Domestic segment’s operating income reflected a decrease in our gross profit rate and an increase in our SG&A rate, partially offset by an increase in revenue.

Our Domestic segment’s revenue in the first quarter of fiscal 2008 increased 9% to $6.7 billion, compared with $6.2 billion in the same period one year ago. The addition of 98 new Best Buy stores in the past 12 months accounted for almost four-fifths of the revenue increase, and the 1.7% comparable store sales gain accounted for nearly one-fifth of the revenue increase. The remainder of the increase was due to revenue growth at Pacific Sales and the acquisition of Speakeasy.

Our Domestic segment’s comparable store sales gain in the first quarter of fiscal 2008 reflected an increase in the average transaction amount driven by the continued growth in the sales of higher-priced products, including flat-panel televisions and notebook computers. The products having the largest effect on our Domestic segment’s comparable store sales gain in the fiscal first quarter were flat-panel televisions, notebook computers, and gaming hardware and software. These strong-selling product categories were offset by comparable store sales declines in product categories such as tube and projection televisions, CDs, DVDs, phones and MP3 players.

Our Domestic segment’s consumer electronics product group posted a 0.3% comparable store sales gain in the first quarter of fiscal 2008. The consumer electronics product group’s comparable store sales gain was driven primarily by increases in the sales of flat panel TVs, GPS navigation and digital cameras, offset by declines in the sales of tube and projection televisions and MP3s players. A 5.4% comparable store sales gain in our Domestic segment’s home-office product group was driven primarily by a comparable store sales gain in notebook computers, reflecting expanded assortments and the adoption of Windows Vista™.

26




The Domestic segment’s entertainment software product group recorded a 0.3% comparable store sales decline due primarily to the continued softness in sales of movie releases and new music. The decline was partially offset by comparable store sales increases in gaming hardware and software. The appliances product group recorded a 0.4% decline in comparable store sales in the first quarter of fiscal 2008. The decline was driven by a decrease in the sales of major appliances.

Our Domestic segment’s gross profit rate in the first quarter of fiscal 2008 decreased by 1.0% of revenue to 24.6% of revenue. The decrease was due primarily to increased sales of lower-margin product categories such as notebook computers and gaming hardware.  The promotional environment in home theater, including the effects of product model transitions in televisions, and reduced profitability of the sales of computers and the related products and services sold with them also contributed to the decline.

Our Domestic segment’s SG&A rate in the first quarter of fiscal 2008 increased by 0.4% of revenue to 20.6% of revenue. The increase was due primarily to the effect of lower comparable store sales.  Additionally, the Domestic segment’s SG&A rate was driven by increased spending on investments and initiatives to support customers, increased wages and depreciation expense resulting from investments made in fiscal 2007 in our home theater business, an increase in the number of new store openings in the first quarter of fiscal 2008 compared with the first quarter of fiscal 2007, and increased expenses associated with the resolution of certain legal matters. These increases were partially offset by the absence in the first quarter of fiscal 2008 of charges for severance and reorganization that we recognized in the same period one year ago.

International

The following table presents unaudited selected financial data for the International segment ($ in millions):

 

 

Three Months Ended

 

 

 

June 2, 2007

 

May 27, 2006

 

Revenue

 

$

1,223

 

$

797

 

Revenue % gain

 

53

%

27

%

Comparable stores sales % change1

 

12.8

%

7.1

%

Gross profit as % of revenue

 

19.9

%

23.4

%

SG&A as % of revenue2

 

20.2

%

23.1

%

Operating (loss) income 2

 

$

(4

)

$

3

 

Operating (loss) income as % of revenue2

 

(0.3

)%

0.4

%

 

1       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 the acquisition. The calculation of the comparable store sales percentage change excludes the effect of fluctuations in foreign currency exchange rates. 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.

2       Prior-year amounts have been adjusted to conform to the current year presentation, which allocates to the International segment certain SG&A support costs which were reported as part of the Domestic segment in fiscal 2007.

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The following table reconciles International stores open at the beginning and end of the first quarter of fiscal 2008:

 

 

Total Stores at
Beginning of
First Quarter
Fiscal 2008

 

Stores
Opened

 

Stores
Closed

 

Total Stores at
End of
First Quarter
Fiscal 2008

 

Future Shop

 

121

 

1

 

 

122

 

Canada Best Buy

 

47

 

 

 

47

 

Five Star

 

135

 

3

 

(1

)

137

 

China Best Buy

 

1

 

 

 

1

 

Total

 

304

 

4

 

(1

)

307

 

 

Note: No store in the International segment was relocated during the first quarter of fiscal 2008.

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

 

 

Total Stores at
Beginning of
First Quarter
Fiscal 2007

 

Stores
Opened

 

Stores
Closed

 

Total Stores at
End of
First Quarter
Fiscal 2007

 

Future Shop

 

118

 

1

 

 

119

 

Canada Best Buy

 

44

 

 

 

44

 

Canada Geek Squad

 

5

 

1

 

 

6

 

Total

 

167

 

2

 

 

169

 

 

Note: One Future Shop store was relocated during the first quarter of fiscal 2007. No other store in the International segment was relocated during the first quarter of fiscal 2007.

Our International segment’s operating loss in the first quarter of fiscal 2008 was $4 million, or a loss of 0.3% of revenue, compared with operating income of $3 million for the same period one year ago. The International segment’s decrease in operating income resulted primarily from operating losses from our China operations and increased SG&A costs associated with the development of our International support capabilities, partially offset by strong income gains in Canada.

Our International segment’s revenue in the first quarter of fiscal 2008 increased 53% to $1.2 billion, compared with $0.8 billion for the same period one year ago.  Fluctuations in foreign currency exchange rates did not have a material effect on the change in the International segment’s revenue in the first quarter of fiscal 2008 as compared with the same period one year ago. The acquisition of Five Star accounted for more than three-fifths of the revenue increase. The 12.8% comparable store sales gain contributed more than one-fifth of the revenue increase. The remainder of the revenue increase was due to the opening of new stores in the past 12 months.

Our International segment reported comparable store sales gains in the first quarter of fiscal 2008 in the consumer electronics, home-office, entertainment software, and appliances product groups of 9.5%, 14.6%, 18.8%, and 12.6%, respectively.

Our International segment’s gross profit rate in the first quarter of fiscal 2008 decreased by 3.5% of revenue to 19.9% 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 3.6% of revenue. A change in our revenue mix in Canada also contributed to the decrease.  The decrease was partially offset by improvements in our product margin rates in Canada.

Our International segment’s SG&A rate in the first quarter of fiscal 2008 decreased by 2.9% of revenue to 20.2% of revenue. The inclusion of our China operations, which carry a normally lower SG&A rate, reduced our International segment’s SG&A rate by approximately 2.7% of revenue. Lower store wages, overhead and corporate costs, and advertising costs, as well as the leveraging effect of strong revenue growth in Canada, also contributed to the decrease. The decrease was partially offset by the additional costs associated with infrastructure investments in China and the development of our International support capabilities.

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Liquidity and Capital Resources

Summary

The following table summarizes our cash and cash equivalents and short-term investments balances as of June 2, 2007; March 3, 2007; and May 27, 2006 ($ in millions):

 

 

June 2, 2007

 

March 3, 2007

 

May 27, 2006

 

Cash and cash equivalents

 

$

1,366

 

$

1,205

 

$

772

 

Short-term investments

 

1,436

 

2,588

 

1,554

 

Total cash and cash equivalents and short-term investments

 

$

2,802

 

$

3,793

 

$

2,326

 

 

Note: See condensed consolidated balance sheets included in Item 1, Consolidated Financial Statements, of this Quarterly Report on Form 10-Q for additional information.

We ended the first quarter of fiscal 2008 with $2.8 billion of cash and cash equivalents and short-term investments, compared with $3.8 billion at the end of fiscal 2007 and $2.3 billion at the end of the first quarter of fiscal 2007. As of June 2, 2007, we had short-term and long-term investments, comprised of municipal debt securities, as well as auction-rate and asset-backed securities, totaling $1.8 billion. See Note 3, Investments, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, for a summary of our short-term investments as of June 2, 2007; March 3, 2007; and May 27, 2006.  The increase in the balance of our cash and cash equivalents and short-term investments compared with the end of the first quarter of fiscal 2007 was due primarily to cash generated from operations, partially offset by cash used to repurchase common stock and pay dividends, as well as to acquire Speakeasy. See Note 10, Subsequent Events, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for information on cash and investments used subsequent to June 2, 2007, to finance our accelerated share repurchase program.

Our current ratio, calculated as current assets divided by current liabilities, was 1.46 at the end of the first quarter of fiscal 2008, compared with 1.44 at the end of fiscal 2007 and 1.30 at the end of the first quarter of fiscal 2007.  The increase in our current ratio compared with the end of the first quarter of fiscal 2007 was due primarily to a decrease in the current portion of our long-term debt.  The decrease in the current portion of our long-term debt was due to the reclassification in the fourth quarter of fiscal 2007 of $402 million of convertible debentures due in 2022 from short-term to long-term debt in connection with the expiration of a put option in January 2007.

Our debt-to-capitalization ratio, which represents the ratio of total debt, including the current portion of long-term debt, to total capitalization (total debt plus total shareholders’ equity), was 10% at the end of the first quarter of fiscal 2008.  This figure remained unchanged, compared with 10% at the end of fiscal 2007 and 10% at the end of the first quarter of fiscal 2007. We view our debt-to-capitalization ratio as an important indicator of our creditworthiness.

Our adjusted debt-to-capitalization ratio, which includes capitalized operating lease obligations in its calculation, was 50% at the end of the first quarter of fiscal 2008, compared with 49% at the end of fiscal 2007 and 48% at the end of the first quarter of fiscal 2007.

Our adjusted debt-to-capitalization ratio is considered a non-GAAP financial measure and is not in accordance with, or preferable to, the ratio determined pursuant to accounting principles generally accepted in the United States (“GAAP”). However, we have included this information as we believe that our adjusted debt-to-capitalization ratio contributes to an understanding of our operations and provides meaningful additional information about our ability to service our long-term debt and other fixed obligations and to fund our future growth. In addition, we believe our adjusted debt-to-capitalization ratio is relevant because it enables investors to compare our indebtedness to that of retailers who own, rather than lease, their stores. Our decision to own or lease real estate is based on an assessment of our financial liquidity, our capital structure, our desire to own or to lease the location, the owner’s desire to own or to lease the location and the alternative that results in the highest return to our shareholders.

The most directly comparable GAAP financial measure to our adjusted debt-to-capitalization ratio is our debt-to-capitalization ratio. Our debt-to-capitalization ratio excludes capitalized operating lease obligations in both the numerator and the denominator.  The following table presents a reconciliation of the numerator and denominator

29




used in the calculation of our adjusted debt-to-capitalization ratio ($ in millions):

 

 

June 2, 2007

 

March 3, 2007

 

May 27, 2006

 

Debt (including current portion)

 

$

665

 

$

650

 

$

598

 

Capitalized operating lease obligations (8 times rental expense) 1

 

5,599

 

5,401

 

4,469

 

Total debt (including capitalized operating lease obligations)

 

$

6,264

 

$

6,051

 

$

5,067

 

 

 

 

 

 

 

 

 

Debt (including current portion)

 

$

665

 

$

650

 

$

598

 

Capitalized operating lease obligations (8 times rental expense) 1

 

5,599

 

5,401

 

4,469

 

Total shareholders’ equity

 

6,170

 

6,201

 

5,409

 

Adjusted capitalization

 

$

12,434

 

$

12,252

 

$

10,476

 

 

 

 

 

 

 

 

 

Debt-to-capitalization ratio

 

10

%

10

%

10

%

Adjusted debt-to-capitalization ratio (including capitalized operating lease obligations)

 

50

%

49

%

48

%

 

1       The multiple of eight times rental expense used to calculate our capitalized operating lease obligations total is the multiple used for the retail sector by one of the nationally recognized credit rating agencies that rate our creditworthiness.

Our liquidity is affected by restricted cash balances that are pledged as collateral or restricted to use for vendor payables, general liability insurance, workers’ compensation insurance, and warranty programs. Restricted cash and investments in debt securities, which are included in other current assets, totaled $356 million, $382 million and $172 million at June 2, 2007; March 3, 2007; and May 27, 2006, respectively.  The increase in restricted cash and investments in debt securities compared with May 27, 2006, was due primarily to restricted cash assumed in connection with the acquisition of Five Star.

Cash Flows

The following table summarizes our cash flows for the first three months of the current and prior fiscal years ($ in millions):

 

 

Three Months Ended

 

 

 

June 2, 2007

 

May 27, 2006

 

Total cash (used in) provided by:

 

 

 

 

 

Operating activities

 

$

(428

)

$

(726

)

Investing activities

 

920

 

864

 

Financing activities

 

(400

)

(134

)

Effect of exchange rate changes on cash

 

69

 

20

 

Increase in cash and cash equivalents

 

$

161

 

$

24

 

 

Note: See consolidated statements of cash flows included in Item 1, Consolidated Financial Statements, of this Quarterly Report on Form 10-Q for additional information.

Cash used in operating activities in the first three months of fiscal 2008 totaled $428 million, compared with $726 million in the first three months of fiscal 2007. The change was due primarily to a decrease in cash used by changes in connection with operating assets and liabilities, partially offset by a decrease in net earnings. Net earnings were $192 million in the first three months of fiscal 2008, a decrease from $234 million in the first three months of fiscal 2007. The changes in operating assets and liabilities were due primarily to changes in accounts payable, merchandise inventories and accrued income taxes. The decrease in cash used attributed to the change in accounts payable was due primarily to the timing of vendor payments. The decrease in cash used for changes in merchandise inventories was due primarily to better inventory management in the first three months of fiscal 2008 compared to the same period one year ago.  The decrease in cash used for changes in accrued income taxes was due primarily to the timing of estimated tax payments and lower earnings.

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Cash provided by investing activities in the first three months of fiscal 2008 was $920 million, compared with $864 million in the first three months of fiscal 2007. The change was due primarily to an increase in the net sales of investments, partially offset by moderately higher capital expenditures.  Additionally, the change in cash provided by investing activities increased due to the effects of the acquisition of Pacific Sales in the first quarter of fiscal 2007, partially offset by the acquisition of Speakeasy in the first quarter of fiscal 2008.

Cash used in financing activities was $400 million for the first three months of fiscal 2008, compared with $134 million for the first three months of fiscal 2007. The increase in cash used in financing activities was primarily the result of an increase in repurchases of common stock. During the first three months of fiscal 2008, we repurchased $412 million of our common stock, compared with $238 million during the first three months of fiscal 2007. A decrease in the issuance of common stock in connection with our stock-based compensation programs also contributed to the increase in cash used in financing activities.

Share Repurchases and Dividends

For the three months ended June 2, 2007, we purchased and retired 8.7 million shares of our common stock at a cost of $412 million under our June 2006 share repurchase program.  For the three months ended May 27, 2006, we purchased and retired 4.4 million shares of our common stock at a cost of $238 under our April 2005 share repurchase program.

On June 26, 2007, our Board authorized a new $5.5 billion share repurchase program.  The program has no stated expiration date, and terminated and replaced our prior $1.5 billion share repurchase program announced in June 2006.

Also on June 26, 2007, under the new share repurchase program, we entered into an accelerated share repurchase (“ASR”) program consisting of two agreements to purchase shares of our common stock from Goldman, Sachs & Co. (“Goldman”), for an aggregate purchase price of $3.0 billion.  The ASR program will conclude in February 2008, although in certain circumstances the termination date may be accelerated at Goldman’s option.  We do not expect to make significant additional share repurchases prior to the conclusion of the ASR program. For additional information regarding these transactions, see Note 10, Subsequent Events, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

During the first quarter of fiscal 2008 we paid our regular quarterly cash dividend of $0.10 per common share, or $48 million in the aggregate.  During the same period one year ago we paid our then regular quarterly cash dividend of $0.08 per common share, or $38 million in the aggregate.  As announced on June 27, 2007, our Board of Directors intends to increase our quarterly cash dividend by 30 percent as compared with our existing dividend of $0.10 per common share, to $0.13 per common share.  The change will be effective with the quarterly dividend which, if authorized, would be payable on October 30, 2007, to shareholders of record as of October 9, 2007.

Sources of Liquidity

Funds generated by operating activities, available cash and cash equivalents, and short-term investments continue to be our most significant sources of liquidity. We believe funds generated from the expected results of operations, available cash and cash equivalents, and short-term investments will be sufficient to finance anticipated expansion plans and strategic initiatives for the remainder of fiscal 2008. In addition, our revolving credit facilities are available for additional working capital needs or investment opportunities. There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facilities.

We have inventory financing programs totaling $237 million through which certain vendors receive payments from a designated finance company for amounts we owe to them. We have $96 million in both secured and unsecured revolving demand facilities related to our International segment operations, of which $91 million is available from February through July, and $96 million is available from August through January of each year.

31




On June 26, 2007, we entered into a $3.0 billion bridge loan facility (“Bridge Facility”).  The Bridge Facility will be used along with our existing cash and investments to finance our ASR program.  The Bridge Facility is guaranteed by certain of our subsidiaries and expires on June 24, 2008.  Borrowings under the Bridge Facility are unsecured and bear interest at rates specified in the credit agreement.  The Bridge Facility contains covenants that require us to maintain certain financial ratios.  Effective July 11, 2007, we reduced the amount we may borrow under the Bridge Facility to $2.5 billion. At July 10, 2007, $1.7 billion was outstanding under the Bridge Facility.

Additionally, we have received a commitment letter for a five-year senior unsecured revolving credit facility of $2.0 billion to be used for general corporate purposes. The final terms of the credit facility are subject to negotiation.

Effective July 2, 2007, we terminated our $200 million revolving credit facility that was scheduled to mature in December 2009.

Our credit ratings and outlooks at July 11, 2007, are summarized below and are consistent with the ratings and outlooks reported in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007:

Rating Agency

 

Rating

 

Outlook

 

Fitch

 

BBB+

 

Stable

 

Moody’s

 

Baa2

 

Stable

 

Standard & Poor’s

 

BBB

 

Stable

 

 

Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the retail and consumer electronics industries, our financial position, and changes in our business strategy. We do not currently foresee any reasonable circumstances under which our credit ratings would be significantly downgraded. If a downgrade were to occur, it could adversely impact, among other things, our future borrowing costs, access to capital markets, vendor financing terms and future new-store occupancy costs. In addition, the conversion rights of the holders of our convertible debentures could be accelerated if our credit ratings were to be downgraded.

See our Annual Report on Form 10-K for the fiscal year ended March 3, 2007, for additional information regarding our sources of liquidity.

Debt and Capital

The amount of debt outstanding at June 2, 2007, was essentially unchanged from the end of fiscal 2007.

Subsequent to June 2, 2007, as discussed above, we entered into our Bridge Facility, which had $1.7 billion outstanding at July 10, 2007. Also subsequent to June 2, 2007, we received a commitment letter for a five-year senior unsecured revolving credit facility of $2.0 billion, and terminated our $200 million bank revolving credit facility.

For additional information regarding these transactions, see Note 10, Subsequent Events, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. See our Annual Report on Form 10-K for the fiscal year ended March 3, 2007, for additional information regarding our debt and capital.

Off-Balance-Sheet Arrangements and Contractual Obligations

Our liquidity is not dependent on the use of off-balance sheet financing arrangements other than in connection with our operating leases.

32




Other than the Bridge Facility into which we entered in connection with our ASR program, there has been no material change in our contractual obligations other than in the ordinary course of business since the end of fiscal 2007. See our Annual Report on Form 10-K for the fiscal year ended March 3, 2007, for additional information regarding our off-balance-sheet arrangements and contractual obligations.

Significant Accounting Policies and Estimates

We describe our significant accounting policies in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007. We discuss our critical accounting estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007. There has been no significant change in our significant accounting policies or critical accounting estimates since the end of fiscal 2007.

New Accounting Standards

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. We plan to adopt SFAS No. 159 beginning in the first quarter of fiscal 2009. We are evaluating the impact, if any, the adoption of SFAS No. 159 will have on our operating income or net earnings.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We plan to adopt SFAS No. 157 beginning in the first quarter of fiscal 2009. We are evaluating the impact, if any, the adoption of SFAS No. 157 will have on our operating income or net earnings.

Outlook

In our June 19, 2007, announcement of our results of operations for the first quarter of fiscal 2008, we projected earnings for fiscal 2008 in the range of $2.95 to $3.15 per diluted share, compared with earnings of $2.79 per diluted share for fiscal 2007. Prior fiscal 2008 earnings guidance was $3.10 to $3.25 per diluted share. We revised our guidance based on our first-quarter performance and revenue trends that we expect will continue, including the shift in mix of sales to lower-margin products. Due to these changes in our revenue mix, we anticipated more pressure on the gross profit rate than we had originally planned. Our revised guidance assumes that lower SG&A expenses will partially offset the additional decline in our gross profit rate. As a result, the revised and current guidance anticipates only a nominal improvement in our operating income rate versus the 30 basis points of improvement we originally projected. Consistent with our original estimate, our guidance assumes anticipated revenue of approximately $39.0 billion for the fiscal year, driven by the addition of new stores and an expected comparable store sales gain for the fiscal year of 3% to 5%. Earnings growth in fiscal 2008 is anticipated to be realized in the second half of the fiscal year.

As announced on June 27, 2007, we have entered into agreements constituting an accelerated share repurchase program to repurchase $3.0 billion of common stock no later than February 2008.  We expect the effect of the lower share count to be offset by a reduction in net interest income related to lower cash and investment balances as well as increased interest expense associated with interim borrowing.  Additionally, we expect our effective tax rate to increase to approximately 37 percent for fiscal 2008 as a result of the anticipated sale of tax-advantaged short-term investments, compared with our prior expectation of a 36-percent effective tax rate.  Last, our projected earnings of

33




$2.95 to $3.15 assumed the completion of the remaining $0.8 billion balance of our $1.5 billion share repurchase program; this program was terminated and replaced by a new $5.5 billion share repurchase program, also announced on June 27, 2007.  We anticipate a modest benefit to fiscal 2008 earnings per diluted share as a result of the additional share repurchases under the new program.

We continue to project 130 to 135 new store openings in fiscal 2008, as more specifically detailed in the Outlook section provided in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007.

Also as announced on June 27, 2007, we have increased the number of stores included in our long-term growth plan for the United States and Canada by 400 stores, up to 1,800 stores.  This new total assumes 1,400 U.S. Best Buy superstores, up from 1,000 previously; at least 200 superstores in Canada (including both Future Shop and Best Buy stores); and up to 200 Pacific Sales stores.  We also remain committed to our expansion of both the Five Star and Best Buy brands in China, and we continue to anticipate the opening of test stores in Mexico and Turkey.

For additional information on our outlook for fiscal 2008, see the Outlook for Fiscal 2008 section provided in Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended March 3, 2007.

Safe Harbor Statement Under the Private Securities Litigation Reform Act

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 Quarterly Report on Form 10-Q 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 our Annual Report on Form 10-K for the fiscal year ended March 3, 2007, 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 Quarterly Report on Form 10-Q. In addition, general economic conditions, acquisitions and development of new businesses, divestitures, product availability, sales volumes, pricing actions and promotional activities of our competitors, profit margins, weather, changes in law or regulations, 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 statement.

34




ITEM 3. 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 our debt at June 2, 2007, were to be reset one percentage point higher, our annual interest expense would increase by approximately $4 million. We do not currently manage our debt interest-rate volatility risk through the use of derivative instruments.

We have market risk arising from changes in foreign currency exchange rates related to our International segment operations. A 10% adverse change in the foreign currency exchange rate would not have a significant impact on our results of operations or financial position. We do not currently manage our foreign currency exchange rate risk through the use of derivative instruments.

Changes in the overall level of interest rates affect interest income generated from our short-term and long-term investments in debt securities. If overall interest rates were one percentage point lower than current rates, our annual interest income would decline by approximately $18 million, based on our short-term and long-term investments at June 2, 2007. We do not currently manage our investment interest-rate volatility risk through the use of derivative instruments.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. The Disclosure Committee meets on a regular quarterly basis, and as needed.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), at June 2, 2007. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at June 2, 2007, our disclosure controls and procedures were effective.

There was no change in internal control over financial reporting during the fiscal quarter ended June 2, 2007, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

35




PART II — OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)  Stock Repurchases

The following table presents the total number of shares purchased during the first quarter of fiscal 2008, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase program, and the approximate dollar value of shares that still could have been purchased at the end of the applicable fiscal period, pursuant to the June 2006 $1.5 billion share repurchase program:

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

 

March 4, 2007, through April 7, 2007

 

 

$

 

 

$

1,233,000,000

 

April 8, 2007, through May 5, 2007

 

4,547,487

 

47.38

 

4,547,487

 

1,017,000,000

 

May 6, 2007, through June 2, 2007

 

4,167,466

 

47.02

 

4,167,466

 

821,000,000

 

Total Fiscal 2008 First Quarter

 

8,714,953

 

47.21

 

8,714,953

 

821,000,000

 

 

1       Pursuant to a $1.5 billion share repurchase program announced on June 21, 2006. This program, which had no expiration date governing the period over which we could make share repurchases, was terminated and replaced on June 26, 2007, by a new $5.5 billion share repurchase program that also has no stated expiration date. For additional information related to the new share repurchase program, see Note 10, Subsequent Events, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

36




ITEM 6. EXHIBITS

*10.1

 

Supplemental Confirmation entered into by the registrant and Goldman, Sachs & Co. on June 26, 2007

 

 

 

*10.2

 

Supplemental Confirmation entered into by the registrant and Goldman, Sachs & Co. on June 26, 2007

 

 

 

*10.3

 

Supplemental Confirmation entered into by the registrant and Goldman, Sachs & Co. on June 26, 2007

 

 

 

*10.4

 

Supplemental Confirmation entered into by the registrant and Goldman, Sachs & Co. on June 26, 2007

 

 

 

*10.5

 

Supplemental Confirmation entered into by the registrant and Goldman, Sachs & Co. on June 26, 2007

 

 

 

*10.6

 

Supplemental Confirmation entered into by the registrant and Goldman, Sachs & Co. on June 26, 2007

 

 

 

 

31.1

 

Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

* Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been separately filed with the U.S. Securities and Exchange Commission.

37




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BEST BUY CO., INC.

 

(Registrant)

 

 

 

 

Date: July 12, 2007

By:

/s/ BRADBURY H. ANDERSON

 

 

Bradbury H. Anderson

 

 

Vice Chairman
and Chief Executive Officer
(duly authorized officer)

 

 

Date: July 12, 2007

By:

/s/ DARREN R. JACKSON

 

 

Darren R. Jackson

 

 

Executive Vice President — Finance
and Chief Financial Officer
(duly authorized and principal financial officer)

 

 

 

Date: July 12, 2007

By:

/s/ SUSAN S. GRAFTON

 

 

Susan S. Grafton

 

 

Vice President, Controller
and Chief Accounting Officer
(duly authorized and chief accounting
officer)

 

38