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First, we conducted a review of our lease accounting Finally, we adopted EITF Issue No. 04-08. The calculation
practices in light of the views expressed by the Securities of diluted earnings per share for fiscal 2005 assumes the
and Exchange Commission (SEC) in its letter dated conversion of our convertible debentures, due in 2022,
February 7, 2005, to the American Institute of Certified into 5.8 million shares of our common stock, and adds
Public Accountants Center for Public Company Audit back the related after-tax interest of $6.5 million. The
Firms. In the letter, the SEC expressed its views regarding adoption of EITF Issue No. 04-08 reduced diluted
certain operating lease accounting matters and the related earnings per share by $0.03 for fiscal 2005. Prior-year
interpretation/application of these matters under existing amounts have been adjusted to conform to the
GAAP. Following our review, we recorded a cumulative current-year presentation.
fourth-quarter charge of $36 million pre-tax ($23 million Unless otherwise noted, this MD&A relates only to results
after-tax, or $0.07 per diluted share) to correct our from continuing operations. All periods presented reflect
accounting for certain operating lease matters. Of the the classification of Musicland’s financial results as
$36 million pre-tax charge, $15 million was recorded as discontinued operations.
an increase to SG&A, while the remaining $21 million
was recorded as an increase to interest expense. We Fiscal 2005 Summary
determined that no restatement was required due to the • Earnings from continuing operations for fiscal 2005
immaterial impact of the errors on current and prior increased 17% to $934 million, or $2.79 per diluted
periods. The adjustment increased our SG&A rate by share, compared with $800 million, or $2.41 per
0.1% of revenue for fiscal 2005. For additional discussion diluted share, for fiscal 2004. The increase was driven
on the correction of our accounting for leases, see primarily by revenue growth, including a comparable
Note 7, Leases, included in Item 8, Financial Statements store sales gain of 4.3%, and a decrease in our SG&A
and Supplementary Data, of this Annual Report on rate, and was partially offset by a decrease in our
Form 10-K. gross profit rate. In addition, earnings from continuing
Second, we established a sales return liability. The sales operations for fiscal 2005 benefited from net interest
return liability represented the gross profit related to income of $1 million, compared with net interest
consumer purchases expected to be returned after the end expense of $8 million for the prior fiscal year, and a
of an accounting period. Historically, the year-over-year lower effective income tax rate due to the resolution
impact of consumer returns was not material. The and clarification of state and federal tax matters.
establishment of the sales return liability reduced our • Revenue for fiscal 2005 increased 12% to
gross profit for fiscal 2005 by $15 million pre-tax $27.4 billion, compared with $24.5 billion for the prior
($10 million after-tax, or $0.03 per diluted share) and fiscal year. The increase reflected market share gains
reduced fiscal 2005 revenue by $65 million. The and was driven by the addition of 78 new stores in the
establishment of the sales return liability did not affect our past 12 months, a full of year of revenue from stores
gross profit rate for fiscal 2005. added in fiscal 2004, the 4.3% comparable store sales
Third, due to the favorable resolution and clarification of increase and the favorable effect of fluctuations in
certain federal and state income tax matters, we reduced foreign currency exchange rates.
our effective income tax rate for continuing operations to • Our gross profit rate for fiscal 2005 declined by 0.2%
35.3% for fiscal 2005. In addition, we recorded a of revenue to 23.7% of revenue, down from 23.9% of
$50 million tax benefit in our results from discontinued revenue for fiscal 2004. The decrease was due
operations. The $50 million tax benefit related to our primarily to a more promotional environment compared
former Musicland subsidiary and was the result of the with the prior fiscal year.
favorable resolution of outstanding tax matters with the
• Our SG&A rate for fiscal 2005 declined by 0.2% of
Internal Revenue Service. The Musicland tax benefit
revenue to 18.4% of revenue, down from 18.6% of
resulted in an increase to net earnings of $0.15 per
revenue for the prior fiscal year. The improvement was
diluted share for fiscal 2005.
due primarily to reduced performance-based incentive
27