Best Buy 1999 Annual Report Download - page 28

E S T U Y O N C
MANAGE ME NT ’S DI S CU S S I ON & ANALYS I S OF R E S U L T S OF
OPE R AT I ONS AND F I NANCI AL CONDI T I ON
Capital spending in fiscal 1999 was $166 million, compared to $72 million in fiscal 1998 and $88 million in
fiscal 1997. The Company increased its expansion program in fiscal 1999 after the initiatives to improve operations
resulted in an enhanced operating model. In addition to opening 28 new stores and remodeling or relocating five
new stores in fiscal 1999, the Company began development of approximately 45 stores scheduled to open
in fiscal 2000. The majority of the stores opened in fiscal 1999 incorporated the features of the Company’s
new Concept IV store format. This new format, while retaining the 45,000-square-foot size, features improved
merchandising, signage and customer service and is expected to better address consumers needs as the industry
progresses into new digital products. The Company also continued to invest in its information systems and
distribution facilities to support growing business requirements.
The following table indicates the number of stores, by prototype, operated by the Company at the end of the
last three fiscal years.
T OR E R OT OT Y P E 1999 1998 1997
28,000 square feet 43 48 54
36,000 square feet 34 34 34
45,000 square feet 182 150 132
58,000 square feet 52 52 52
Total number of stores at year end 311 2 8 4 272
Average store size ( in square feet) 43,7 0 0 43,200 42,800
The Company’s practice is to lease rather than own real estate; however, for those sites developed using working
capital, the Company sells and leases back those properties under long-term leases. The costs of development
are classified as recoverable costs from developed properties and are included in current assets. Based on the
number of store openings in both fiscal 1999 and 2000, recoverable costs from developed property increased
by $66 million in fiscal 1999. The increase also includes the cost of new Dinuba, CA, distribution facility that
opened in April 1999.
Capital spending for fiscal 2000 is expected to exceed $300 million, exclusive of amounts to be recovered
through subsequent sales and leasebacks, to support the Company’s plans to open new stores and remodel or
relocate selected stores to its new Concept IV format. The new stores scheduled to open in fiscal 2000 include
entry into the markets of San Francisco, San Diego and Sacramento, CA; northern Florida; upstate New York;
and Richmond and Norfolk, VA. The Company also plans to remodel or relocate approximately 20 stores to
larger facilities. Included in its expansion plans, the Company will test four 30,000-square-foot small market format
stores in markets with populations between 100,000 and 200,000. These stores are expected to offer a narrowed
assortment of the same product categories as the larger stores. The Company will also be investing in information
systems to support the development of its e-commerce business and improve its services division.
In the first quarter of fiscal 1999, essentially all of the Company’s preferred securities were converted into common
stock, resulting in the issuance of approximately 20.4 million common shares. This conversion increased
shareholders’ equity by over $220 million, net of the remaining $6.8 million in deferred issuance costs. The
remaining preferred securities were redeemed in June 1998 for cash of $671,000. In October 1998, the Company
prepaid its $150 million 8-5/8% Senior Subordinated Notes, due in October 2000.
In October 1998, the Company’s Board of Directors authorized the purchase of up to $100 million of the
Company’s common stock. Through February 27, 1999, 125,000 shares at a cost of $2.5 million have been purchased.
In May 1998, the Company entered into a new, unsecured $220 million revolving credit facility, replacing the
$365 million facility that was scheduled to mature in June 1998. The Company was able to reduce the size of the
facility due to improved operating performance and better inventory management. The new facility is scheduled
to mature in June 2000, can be extended for one year if certain conditions are met and may be reduced at the
Company’s option.
Management believes that funds generated by the expected results of operations and available cash and cash
equivalents will be sufficient to finance the Company’s anticipated expansion plans for the upcoming year. The
revolving credit facility and the Company’s inventory financing program are also available for additional working
capital needs or opportunities.