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Results of Operations and Financial Condition
Overview
Best Buy Co., Inc. (the Company) is the nation’s largest volume
specialty retailer of name-brand consumer electronics, home office
equipment, entertainment software and appliances. During the fourth
quarter of fiscal 2001, the Company acquired Musicland Stores Corporation
(Musicland) and Magnolia Hi-Fi, Inc. (Magnolia Hi-Fi). Musicland is
primarily a mall-based retailer of pre-recorded music and movies. Magnolia
Hi-Fi is a retailer of top-of-the-line audio and video products. Both
acquisitions were accounted for using the purchase method. Under this
method, the net assets and results of operations of those businesses are
included in the consolidated financial statements of the Company from
their dates of acquisition. For additional information, refer to Note 2 of
the Notes to Consolidated Financial Statements on page
3 and the “Musicland Acquisition” section of Management’s
Discussion and Analysis of Results of Operations and Financial Condition
on page 5.
The Company’s fiscal year ended March 3, 2001, contained 53 weeks. Fiscal 2000 and fiscal 1999 contained 52 weeks.
Results of
Operations
The Company generated record earnings for the fourth consecutive year. For
fiscal 2001, net earnings were $395.8 million, compared to $347.1 million
in fiscal 2000 and $216.3 million in fiscal 1999. Earnings per share on a
diluted basis increased to $1.86 in fiscal 2001, compared with $1.63 per
share in fiscal 2000 and $1.03 per share in fiscal 1999. The 14% increase
in fiscal 2001 net earnings was the result of strong sales of new and
expanded digital technology product offerings and gross margin
improvements. The earnings growth in fiscal 2001 also was driven by a 23%
increase in revenues for the year, with new Best Buy stores accounting for
the majority of the increase. Despite an increasingly challenging economic
environment in fiscal 2001, comparable store sales increased 4.9% on top
of an 11.1% increase in fiscal 2000, and gross profit margin improved to
20.0% of revenues from 19.2% of revenues for the same period one year ago.
The Company’s financial performance in fiscal 2001 also was impacted by
expenses associated with the Company’s growth initiatives, including the
national launch of BestBuy.com and the significant start-up costs
associated with opening 62 new Best Buy stores, including the entry into
the New York market. The write-off of $15 million of e-commerce
investments reduced fiscal 2001 earnings by approximately 4 cents per
share. Fiscal 2001 earnings per share also were reduced by approximately 4
cents per share as a result of the costs associated with the acquisition
and integration of Musicland. Magnolia Hi-Fi’s financial results did not
have a material impact on the Company’s net earnings.
In addition to traditional financial measurements, management uses
Economic Value Added (EVA®) to measure and manage the
financial performance and the allocation of capital resources of the
Company. EVA is net operating profit after taxes minus a charge for total
capital employed. Operating profit after taxes exceeded the required
return on capital employed for the third consecutive year. The Company
generated EVA of $138 million in fiscal 2001, compared with $178 million
in fiscal 2000 and $75 million in fiscal 1999. Fiscal 2001 EVA was
impacted by higher capital investments in new stores, including the impact
of capitalizing operating leases for EVA purposes and technology
investments to support expanding and increasingly complex business
operations, along with significant start-up costs for BestBuy.com and the
New York market. These activities reduced EVA in fiscal 2001 as compared
with fiscal 2000; however, the Company expects to earn positive EVA from
these investments in the future.
The following table presents selected revenue data for each of the past
three fiscal years ($ in thousands).
Revenues in fiscal 2001 increased 23% to $15.3 billion, compared with
$12.5 billion in fiscal 2000, due to the addition of 62 Best Buy stores, a
full year of operation at the 47 Best Buy stores added in fiscal 2000, a
4.9% increase in comparable store sales and the approximately $160 million
in revenues generated by Musicland and Magnolia Hi-Fi from their dates of
acquisition. The 53rd week added about $280 million to fiscal 2001
revenues. The comparable store sales increase in a weaker economic
environment reflects the strength of the digital product cycle, the
benefits from enhancements made to the Company’s operating model and the
Company’s continuing ability to gain market share. Digital product sales
comprised 15% of revenues in the fourth quarter of fiscal 2001, compared
with 10% one year ago. The Company’s enhanced operating model, which
included an improved merchandise assortment, higher in-stock positions,
more effective advertising and more consistent store execution,
contributed to market share gains. 
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