Management Discussion & Analysis pg 1 2 3 4 5 6 7 8 9 10 11 12 13 14

In fiscal 2003, our gross profit rate is expected to remain essentially even with the fiscal 2002 rate based on anticipated gross profit rate improvement at Best Buy stores and International, offset by a planned gross profit rate decline at Musicland. The anticipated gross profit rate improvement at Best Buy stores and International is based on a more profitable sales mix resulting from an increase in sales of higher-margin digital products. However, the rate of improvement is likely to be less than experienced in the prior fiscal year, as these and other products become more widely distributed through mass merchandisers and discount chains. Musicland’s planned gross profit rate decline in fiscal 2003 is due to the continued shift in the sales mix from higher-margin sales of prerecorded music to lower-margin sales of DVD movies and video gaming.

Our SG&A rate is expected to decrease modestly in fiscal 2003. The expected decrease is due to expense leverage, primarily in the second half of our fiscal year, as a result of the anticipated increase in comparable store sales and the expanding store base. The SG&A rate decline resulting from increased expense leverage will be partially offset by higher depreciation expenses related to our increased levels of capital spending in fiscal 2003 and higher medical coverage costs for our employees.

We anticipate net interest income for fiscal 2003 of approximately $6 million, consistent with fiscal 2002, excluding the $8 million pre-tax charge from the early retirement of debt incurred in the second quarter of fiscal 2002.

Our effective tax rate is expected to decrease modestly in fiscal 2003 as a result of the discontinued amortization of nondeductible goodwill.

We expect fiscal 2003 capital expenditures to be approximately $1 billion, exclusive of amounts expended on property development that will be recovered through the sale and lease back of the properties. The capital spending will support the opening of approximately 60 Best Buy stores in the United States and six to eight in Canada, 30 small-market Sam Goody stores, eight to nine Future Shop stores and six Magnolia Hi-Fi stores. About half of the new U.S. Best Buy stores are expected to be 45,000-square-foot, Concept 5 store formats, and the other half are expected to be 30,000-square-foot, smaller market Concept 5 store formats. In addition, fiscal 2003 capital spending will support the continued development of our information systems and infrastructure, the continued construction of our new corporate headquarters and the transformation and integration of Musicland and Future Shop stores.

Beginning in the first quarter of fiscal 2003, we will report two segments, Domestic and International. The Domestic segment will be comprised of operations at Best Buy’s U.S., Musicland and Magnolia Hi-Fi stores. The International segment will be comprised of Best Buy’s Canadian and Future Shop operations. The primary reasons for this change are the significant similarities of their respective products and markets, the leveraging of our buying and distribution functions and the merging of many of our operational functions into a shared services model in the first quarter of fiscal 2003.