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The increase in SG&A as a percentage of revenues in fiscal 2000 compared with fiscal 1999 was primarily due to increased spending on the Company’s strategic initiatives and expenses related to the greater number of new store openings. Fiscal 2000 strategic initiatives included the enhancement of operating systems and processes in Best Buy’s services area, which provides product installation and repair services; early development of Best Buy’s e-commerce business; and refinement of Best Buy’s retail operating model. Compensation costs also increased in fiscal 2000 to support the development of a more effective sales staff, the hiring and training of store managers to support growth and the increase in corporate staff to drive strategic initiatives. 

Net interest income increased to $37.2 million in fiscal 2001 compared with $23.3 million in the same period last year. The increase is due to higher cash balances compared to the prior fiscal year. The higher cash balances are the result of cash flows generated from operations during the last 12 months, including improved inventory management and a $200 million investment in Best Buy common stock by Microsoft Corporation as part of the strategic alliance. Interest expense on the Musicland debt and lost interest income on the cash used to acquire Musicland and Magnolia Hi-Fi reduced net interest income by approximately $4 million. 

The Company’s effective income tax rate in fiscal 2001 was 38.3%, unchanged from fiscal 2000. Historically, the Company’s effective tax rate has been impacted primarily by the taxability of investment income and state income taxes. 

Liquidity and Capital Resources
The continued increase in cash flows from operations enabled the Company to internally fund its business expansion plans and invest $513 million ($326 million net of cash acquired) to purchase Musicland and Magnolia Hi-Fi. Cash flow from operations increased $32 million in fiscal 2001, to $808 million, driven by earnings growth. The Company’s cash flows were supplemented by Microsoft Corporation’s $200 million investment in Best Buy common stock. The Company’s financial position and liquidity remain strong even with the significant investments in new growth and strategic initiatives. Cash and cash equivalents totaled $747 million at the end of fiscal 2001, basically unchanged from one year ago. The Company’s debt-to-capitalization ratio at the end of fiscal 2001 was less than 10%.

Merchandise inventories increased by $144 million as a result of the net addition of 62 new Best Buy stores in the last year. Inventory turns for Best Buy stores improved to 7.6 times for the fiscal year, compared with 7.2 times for the comparable period one year ago. Average inventory per Best Buy store declined by approximately 3%, compared to the end of fiscal 2000. The acquisition of Musicland and Magnolia Hi-Fi increased inventory at fiscal year-end by approximately $400 million.

Receivables, mainly credit card and vendor-related receivables, increased by $7 million compared with the prior year. The increase was primarily due to higher business volume offset by a reduction in receivables from Internet service providers. Receivables from sales on the Company’s private-label credit card are sold to third parties, and the Company does not bear risk of loss with respect to these receivables. Other assets increased $16 million from the end of fiscal 2000 due to the purchase of real estate associated with the Company’s corporate facilities expansion plans and the purchase of insurance in connection with the Company’s deferred compensation plan. The $15 million write-down of minority e-commerce investments offset the increase in other long-term assets. The acquisition of Musicland and Magnolia Hi-Fi increased receivables and other assets other than goodwill at year-end by approximately $70 million.

Accounts payable and other liabilities increased as compared with the end of fiscal 2000 as a result of higher business volume. Accounts payable is impacted by the timing of payments to vendors and can fluctuate significantly. Other liabilities also increased due to advances received under alliances and an increase in outstanding gift cards. Increased accrued compensation resulting from the expanding employee base supporting the Company’s growth and an increase in deferred taxes also contributed to the increase. The acquisition of Musicland and Magnolia Hi-Fi increased accounts payable and other liabilities at fiscal year-end by approximately $450 million.

The Company assumed $260 million of debt, with a fair value of $271 million, in connection with the acquisition of Musicland. Subsequent to the end of fiscal 2001, $94 million of the debt was retired as a result of the debt’s change-in-control provisions. Other debt decreased compared to the prior fiscal year-end due to repayments, partially offset by the assumption of a mortgage related to the investment in corporate real estate.
 

 
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