The reported gross profit margin and SG&A ratios were both increased by 0.2% of sales as result of the inclusion of Musicland’s results since the date of acquisition. The reported earnings per share of $1.86 were reduced by 4 cents per share from one month of operation including initial integration costs and goodwill amortization.
Pro forma information regarding the Magnolia Hi-Fi acquisition is not presented as it would not have had a material impact on the Company’s reported results or operating ratios.
Outlook for Fiscal
2002
The Company believes it will generate growth in net earnings in fiscal
2002. The net earnings improvement is expected to result from the
operating profits from fiscal 2002 new store openings, a full year’s
contribution from stores opened in fiscal 2001 and the continued benefits
from the increase in sales of digital products. In addition, the operating
losses from the Company’s e-commerce business should decline in fiscal
2002 as sales volume increases and the business realizes the benefits of
last year’s launch and infrastructure improvements. The Company
anticipates that inclusion of Musicland’s financial results —
including integration expenses, store transformation efforts and goodwill
amortization — will negatively impact the first three quarters of fiscal
2002. Profits contributed by Musicland in the highest volume fourth
quarter are expected to offset the aggregate losses in the first three
quarters of fiscal 2002.
Comparable store sales increases are expected to be in the low single digits for fiscal 2002. However, during the first half of the year comparable store sales are expected to decline modestly as consumers are likely to remain cautious. The Company’s fiscal 2002 sales are expected to range from $19.0 billion to $19.5 billion.
The Company believes Best Buy stores will realize a modest improvement in its gross profit margin in fiscal 2002; however, the improvement is expected to be less than the fiscal 2001 improvement. The anticipated margin improvement assumes moderate promotional activity and a more profitable sales mix resulting from an increase in digital products as a percentage of the Company’s sales mix. In addition, a continuation of the shift to higher margin products in the home office category and the migration to digital televisions should benefit the Company’s overall gross margin rate in fiscal 2002. The Company believes digital products sales will be approximately 18% to 19% of the fourth quarter fiscal 2002 sales mix, compared with 15% in the fourth quarter of fiscal 2001. Reduced product margins due to the commoditization of selected digital products, DVD in particular, is expected to partially offset the gross profit margin improvements anticipated from the more profitable sales mix. In addition, the Company expects that Musicland will positively impact the Company’s gross profit margin rate in fiscal 2002. Historically, Musicland stores have produced a higher gross profit margin than Best Buy stores due to product mix and pricing differences. This gap is expected to narrow slightly in fiscal 2002 due to a broader product assortment as new consumer electronics are introduced into the Musicland stores.
The SG&A ratio is expected to increase in fiscal 2002 due, in part, to the inclusion of a full year of Musicland’s higher operating cost structure. In addition, the increased depreciation resulting from the investments in initiatives supporting the Company’s growth strategies and goodwill amortization resulting from the acquisitions of Musicland and Magnolia Hi-Fi will impact the fiscal 2002 SG&A ratio. Recently proposed accounting rule changes could eliminate the requirement to amortize goodwill by the second half of the year. The flat or slightly negative comparable store sales in the first half of fiscal 2002 are expected to result in lower expense leverage and an increase in the SG&A ratio. The Company anticipates gaining expense leverage in the second half of the fiscal year as new stores open and comparable store sales increase.
Net interest income is
expected to decrease in fiscal 2002 as a result of the cash used to
purchase Musicland and Magnolia Hi-Fi and the assumption of Musicland’s
debt as well as lower yields on invested cash.
The Company’s effective tax rate is expected to increase in fiscal 2002
because of the nondeductibility of goodwill that resulted from the
acquisition of Musicland.
Capital expenditures in fiscal 2002 are expected to range from $700 million to $750 million, exclusive of amounts expended on property development that will be recovered through sale leasebacks. The capital spending will support the opening of approximately 60 new Best Buy stores, the continued development of the Company’s systems, the expansion of corporate facilities and the Company’s strategic initiatives, including the Musicland integration and store transformation strategy. Small-market stores are expected to comprise about one-third of the new Best Buy stores scheduled to open in fiscal 2002. Most new stores will incorporate the features of Best Buy’s new Concept 5 store format. This new format, while retaining the 45,000-square-foot size, features customer-centric layouts, better adjacencies of products and accessories, faster checkout and improved merchandising. Existing stores will not be remodeled with the new concept in fiscal 2002.
Management currently
believes that funds from the expected results of operations and available
cash and cash equivalents will be sufficient to finance anticipated
expansion plans and strategic initiatives for the next year. In addition,
the Company’s revolving credit facility is available for additional
working capital needs or investment opportunities. Management also intends
to consider long-term financing to support development of the Company’s
new corporate headquarters facility. 
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