What drove the improvement in profitability in fiscal 1998?

Management attributed the improvement mainly to a higher gross profit margin, which rose to 15.9% from 13.6%. The company credited better inventory management, faster inventory turns, a more profitable product assortment (including personal computers moving from a profit drain to a profit contributor), and higher sales of performance service plans. Lower interest expense also contributed.

What is happening with the convertible preferred securities?

The company exercised its right to cause the conversion rights of its $230 million of 6.5% convertible preferred securities to expire. Through April 24, 1998, 99% of the securities had been converted, resulting in issuance of 10.1 million post-split common shares. Management said the conversion would reduce interest expense by approximately $15 million annually and increase shareholders' equity to nearly $780 million.

What are the company's expansion and spending plans for fiscal 1999?

Best Buy plans to open about 25 new stores, including six in New England and new markets in Nashville, Knoxville, Reno, Charleston and Wausau, bringing its total to approximately 309 stores. Capital spending is expected to rise to about $140 million, including construction of a 650,000 square foot distribution center in Dinuba, California. The company also estimates about $10 million in Year 2000 remediation costs, mostly in fiscal 1999.

What risks did management identify?

Management noted continued downward pressure on personal computer selling prices, though the rate of decline was expected to moderate, and softness in analog consumer electronics during the transition to digital products. It expects wage pressures from a tight labor market to keep increasing SG&A as a percentage of sales. The company also cited competition from mass merchants and mail order and Internet retailers, and the loss or disruption of supply from major suppliers such as Compaq, Hewlett-Packard, Packard Bell, Panasonic and Sony, which together represented about 28% of purchases.

BBY 10-K FY1998 Annual Report — Revenue, Net Income, EPS

Q: How did the balance sheet and liquidity change?

Cash and cash equivalents increased by $430 million to $520.1 million, merchandise inventories declined to $1.06 billion, and shareholders' equity rose to $557.7 million from $438.3 million. The company had essentially no borrowings under its revolving credit facility during the year, and the facility was scheduled to mature in June 1998, with management intending to put a new $200 to $250 million, two-year facility in place.

01—Abstract

Summary

Summary of the 10-K filed May 28, 1998. Cited figures are marked; the original filing is the authoritative source.

Best Buy Co., Inc. (the Company) reported fiscal 1998 (year ended February 28, 1998) revenues of $8.358 billion^a, up from $7.771 billion in fiscal 1997, with comparable store sales up 2%.

Net earnings rose to $94.5 million^b, or $1.04 per diluted share, compared with $1.7 million in fiscal 1997. Operating income was $186.9 million versus $53.2 million a year earlier, driven mainly by a higher gross profit margin of 15.9% (13.6% in fiscal 1997), which management attributed to improved inventory management, faster inventory turns (5.6 times versus 4.6), and a more profitable product assortment. SG&A rose to 13.7% of sales from 12.9%, reflecting higher service, compensation and professional costs.

The balance sheet strengthened considerably. Cash and cash equivalents increased to $520.1 million^c from $89.8 million, operating cash flow was $542.4 million, and merchandise inventories fell to $1.06 billion. Interest expense declined to $33.0 million from $50.3 million, and the Company had essentially no borrowings under its revolving credit facility during the year.

Shareholders' equity rose to $557.7 million^d, and management said conversion of the $230 million convertible preferred securities would increase equity to nearly $780 million. Looking ahead, the Company plans to open about 25 new stores in fiscal 1999, reaching approximately 309 stores, including entry into New England, and expects capital spending of about $140 million. Management expects continued pressure on wages and SG&A as a percentage of sales, and estimates Year 2000 remediation costs of about $10 million, mostly in fiscal 1999.

02—Key points

Key Highlights

Revenues of $8.358 billion in fiscal 1998, up from $7.771 billion in fiscal 1997; comparable store sales increased 2% after a 5% decline the prior year.
Net earnings of $94.5 million, or $1.04 per diluted share, versus $1.7 million ($.02 per share) in fiscal 1997.
Operating income of $186.9 million versus $53.2 million, with gross profit margin improving to 15.9% from 13.6%.
Inventory turns improved to 5.6 times from 4.6 times; inventories declined to $1.06 billion.
Cash and cash equivalents rose to $520.1 million from $89.8 million, supported by $542.4 million of operating cash flow.
Interest expense fell to $33.0 million from $50.3 million, with essentially no revolving credit borrowings during the year.
The Company plans to open about 25 new stores in fiscal 1999, reaching approximately 309 stores, and expects SG&A to keep rising as a percentage of sales.

03—Questions

Frequently Asked Questions

What drove the improvement in profitability in fiscal 1998?
Management attributed the improvement mainly to a higher gross profit margin, which rose to 15.9% from 13.6%. The company credited better inventory management, faster inventory turns, a more profitable product assortment (including personal computers moving from a profit drain to a profit contributor), and higher sales of performance service plans. Lower interest expense also contributed.
How did the balance sheet and liquidity change?
Cash and cash equivalents increased by $430 million to $520.1 million, merchandise inventories declined to $1.06 billion, and shareholders' equity rose to $557.7 million from $438.3 million. The company had essentially no borrowings under its revolving credit facility during the year, and the facility was scheduled to mature in June 1998, with management intending to put a new $200 to $250 million, two-year facility in place.
What is happening with the convertible preferred securities?
The company exercised its right to cause the conversion rights of its $230 million of 6.5% convertible preferred securities to expire. Through April 24, 1998, 99% of the securities had been converted, resulting in issuance of 10.1 million post-split common shares. Management said the conversion would reduce interest expense by approximately $15 million annually and increase shareholders' equity to nearly $780 million.
What are the company's expansion and spending plans for fiscal 1999?
Best Buy plans to open about 25 new stores, including six in New England and new markets in Nashville, Knoxville, Reno, Charleston and Wausau, bringing its total to approximately 309 stores. Capital spending is expected to rise to about $140 million, including construction of a 650,000 square foot distribution center in Dinuba, California. The company also estimates about $10 million in Year 2000 remediation costs, mostly in fiscal 1999.
What risks did management identify?
Management noted continued downward pressure on personal computer selling prices, though the rate of decline was expected to moderate, and softness in analog consumer electronics during the transition to digital products. It expects wage pressures from a tight labor market to keep increasing SG&A as a percentage of sales. The company also cited competition from mass merchants and mail order and Internet retailers, and the loss or disruption of supply from major suppliers such as Compaq, Hewlett-Packard, Packard Bell, Panasonic and Sony, which together represented about 28% of purchases.

04—Continue

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