B E S T B U Y F I S C A L 2 0 1 1 F O R M 1 0 – K
T A B L E O F C O N T E N T S
P A R T I
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Item 1.
Business.
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Item 1A.
Risk Factors.
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Item 1B.
Unresolved Staff Comments.
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Item 2.
Properties.
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Item 3.
Legal Proceedings.
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Item 4.
Reserved.
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P A R T I I
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Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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Item 6.
Selected Financial Data.
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Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations.
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Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
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Item 8.
Financial Statements and Supplementary Data.
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Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
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Item 9A.
Controls and Procedures.
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Item 9B.
Other Information.
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P A R T I I I
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Item 10.
Directors, Executive Officers and Corporate Governance.
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Item 11.
Executive Compensation.
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Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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Item 13.
Certain Relationships and Related Transactions, and Director Independence.
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Item 14.
Principal Accounting Fees and Services.
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P A R T I V
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Item 15.
Exhibits, Financial Statement Schedules.
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Signatures
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P A R T I
Item 1. Business.
Description of Business
Unless the context otherwise requires, the use of the terms we, us and our in this Annual Report on Form 10-K refers to Best Buy Co., Inc. and, as applicable, its consolidated subsidiaries. We are a multinational retailer of consumer electronics, home office products, entertainment products, appliances and related services. We operate retail stores and call centers and conduct online retail operations under a variety of brand names such as Best Buy (BestBuy.com, BestBuy.ca, BestBuy.co.uk), Best Buy Mobile (BestBuyMobile.com), The Carphone Warehouse (CarphoneWarehouse.com), Five Star (Five-Star.cn), Future Shop (FutureShop.ca), Geek Squad, Magnolia Audio Video, Napster (Napster.com), Pacific Sales and The Phone House (PhoneHouse.com). References to our Web site addresses do not constitute incorporation by reference of the information contained on the Web sites.
Information About Our Segments
During fiscal 2011, we operated two reportable segments: Domestic and International. The Domestic segment is comprised of the operations in all states, districts and territories of the U.S., operating under various brand names including, but not limited to, Best Buy, Best Buy Mobile, Geek Squad, Magnolia Audio Video, Napster and Pacific Sales.
The International segment is comprised of: (i) all Canada operations, operating under the brand names Best Buy, Best Buy Mobile, Cell Shop, Connect Pro, Future Shop and Geek Squad; (ii) all Europe operations, operating under the brand names Best Buy, The Carphone Warehouse, The Phone House and Geek Squad; (iii) all China operations, operating under the brand names Best Buy, Geek Squad and Five Star; (iv) all Mexico operations, operating under the brand names Best Buy and Geek Squad and (v) all Turkey operations, operating under the brand names Best Buy and Geek Squad.
Financial information about our segments is included in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Note 12, Segment and Geographic Information, of the Notes to ConsolidatedFinancial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on
Form 10-K.
Domestic Segment
We were incorporated in the state of Minnesota in 1966 as Sound of Music, Inc. We began as an audio components retailer and, with the introduction of the videocassette recorder in the early 1980s, expanded into video products. In 1983, we changed our name to Best Buy Co., Inc. and began using mass-merchandising techniques, which included offering a wider variety of products and operating stores under a superstore concept. In 1989, we dramatically changed our method of retailing by introducing a self-service, noncommissioned, discount-style store concept designed to give the customer a variety of brands and more control over the purchasing process. Today, our U.S. Best Buy stores operate a model whereby we offer our customers a wide variety of consumer electronics, home office products, entertainment products, appliances and related services with variations on product assortments, staffing, promotions and store design to address specific customer groups and local market needs.
In fiscal 2001, we acquired Magnolia Hi-Fi, Inc. a Seattle-based, high-end retailer of audio and video products and services to access an upscale customer segment. In fiscal 2005, we began operating Magnolia Home Theater store-within-a-store experiences in U.S. Best Buy stores, offering customers high-end electronics with specially trained employees.
In fiscal 2003, we acquired Geek Squad Inc. Geek Squad provides repair, support and installation services. We acquired Geek Squad to further our plans of providing technology support services to customers. Geek Squad service is available in all U.S. Best Buy branded stores.
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In fiscal 2007, we acquired California-based Pacific Sales Kitchen and Bath Centers, Inc. (Pacific Sales). Pacific Sales specializes in the sale and installation of high-end and mass-market premium brand kitchen appliances, plumbing fixtures and home entertainment products, with a focus on builders and remodelers.
In fiscal 2007, we also developed the Best Buy Mobile concept through a management consulting agreement with U.K.-based The Carphone Warehouse Group PLC (CPW). Best Buy Mobile provides a comprehensive assortment of mobile phones, accessories and related services using experienced sales personnel, now in all U.S. Best Buy stores, as well as stand-alone stores.
In fiscal 2008, we acquired Speakeasy Inc. (Speakeasy). Speakeasy provides broadband, voice, data and information technology services to small businesses. During the second quarter of fiscal 2011, we completed the sale of our Speakeasy business to Covad Communications Group.
In fiscal 2009, we acquired Napster, Inc. Napster provides a comprehensive digital music service offering, including digital music downloads and on-demand streaming capabilities.
International Segment
Our International segment was established in fiscal 2002 in connection with our acquisition of Future Shop Ltd., Canadas largest consumer electronics retailer.
During fiscal 2003, we launched our dual-branding strategy in Canada by introducing the Best Buy brand. The dual-branding strategy allows us to retain Future Shops brand equity and attract more customers by offering a choice of distinct store experiences.
In fiscal 2007, we acquired a 75% interest in Jiangsu Five Star Appliance Co., Ltd. (Five Star), one of Chinas largest appliance and consumer electronics retailers. We made the investment in Five Star to further our international growth plans, to increase our knowledge of Chinese customers and to obtain an immediate retail presence in China. We also opened our first Best Buy branded store in China, located in Shanghai, in fiscal 2007. In the fourth quarter of fiscal 2009, we completed the acquisition of the remaining 25% interest in Five Star.
In fiscal 2009, we acquired a 50% share in Best Buy Europe Distributions Limited (Best Buy Europe). Best Buy Europe is a venture with CPW, consisting of CPWs former retail and distribution business with over 2,400 small-format The Carphone Warehouse and The Phone House stores, online channels, device insurance operations, and mobile and fixed-line telecommunication services. The transaction also included CPWs economic interest in both Best Buy Mobile in the U.S. and Geek Squad in the U.K. and Spain. We made the investment in Best Buy Europe to further our international growth plans, to increase our knowledge of European customers and to obtain an immediate retail presence in Europe. During fiscal 2011, we launched large-format Best Buy branded stores in the U.K. and a related online channel in the European market.
In fiscal 2009, we also expanded our Best Buy Mobile operations to Canada by opening stand-alone stores. We now also offer the Best Buy Mobile store-within-a-store experience in all Canadian Best Buy branded stores. Also in fiscal 2009, we opened our first Best Buy branded store in Mexico, located in Mexico City.
In fiscal 2010, we opened our first Best Buy branded store in Turkey, located in Izmir.
In the fourth quarter of fiscal 2011, we announced plans to exit the Turkey market and restructure the Best Buy branded stores in China during fiscal 2012. The exit from the Turkey market includes exiting of all current operations in that country, including its two Best Buy branded stores. Restructuring activities in China include closing all eight Best Buy branded stores. We also intend to explore other more profitable growth options for the Best Buy brand in China, including the option to reopen two of the closed stores at a later date.
In order to align our fiscal reporting periods and comply with statutory filing requirements in certain foreign jurisdictions, we consolidate the financial results of our Europe, China, Mexico and Turkey operations on a two-month lag. Consistent
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with such consolidation, the financial and non-financial information presented in this Annual Report on Form 10-K relative to our Europe, China, Mexico and Turkey operations is also presented on a two-month lag.
Operations
Domestic Segment
Our Domestic segment store operations are organized by store brand. U.S. Best Buy store operations are divided into districts and are under the management of a retail field officer who oversees store performance through district managers. District managers monitor U.S. Best Buy store operations and meet regularly with store managers to discuss merchandising, new product introductions, sales promotions, customer loyalty programs, employee satisfaction surveys and store operating performance.
Our U.S. Best Buy, U.S. Best Buy Mobile, Magnolia Audio Video, Pacific Sales and Geek Squad stores have developed procedures for inventory management, transaction processing, customer relations, store administration, product sales and services, staff training and merchandise display that are standardized within each store brand. Corporate retail management for each store brand generally controls advertising, merchandise purchasing and pricing, as well as inventory policies. All stores within each store brand generally operate in the same manner under the standard procedures adjusted to local customer needs.
International Segment
Located throughout nine European countries, The Carphone Warehouse and The Phone House stores are significantly smaller than our Best Buy branded stores and employ sales associates that provide independent advice on the best service and hardware suited to each customer. Most phone sales require in-store registration with the mobile phone network operator facilitated by our employees, allowing the customer to leave the store with a fully active phone and a service contract. Advertising, merchandise purchasing and pricing and inventory policies for these stores are controlled by corporate retail management in each respective local market.
Canada store operations are organized to support two principal brands. Future Shop stores have predominantly commissioned sales associates who take a proactive role in assisting customers and driving the transaction, whereas employees in Best Buy branded stores in Canada, like employees in U.S. Best Buy stores, are noncommissioned, allowing the customers to drive the transaction through interactive displays and grab-and-go merchandising. Each brand has national management that closely monitors store operations. All Canada stores use a standardized operating system that includes procedures for inventory management, transaction processing, customer relations, store administration, staff training and merchandise display. Advertising, merchandise purchasing and pricing and inventory policies are centrally controlled. Our Best Buy Mobile stores in Canada employ an operating model similar to that used in our U.S. Best Buy Mobile stores.
China store operations are also organized to support two principal brands. Our Five Star stores primarily utilize vendor employees and full-time sales associates to sell our products. Our Best Buy branded stores in China have employed an operating model similar to Best Buy branded stores in the U.S. However, in the fourth quarter of fiscal 2011, we announced plans to restructure the Best Buy branded stores in China during fiscal 2012. Corporate retail management for each store brand generally controls advertising, merchandise purchasing and pricing, and inventory policies, although management for individual regions within our Five Star brand may vary these operations locally to adapt to customer needs. We anticipate consolidating the support operations for the Best Buy branded stores in China with the existing Five Star business as a part of the announced restructuring of such stores.
Our Best Buy branded stores in the U.K., Mexico and Turkey employ an operating model similar to that used in our U.S. Best Buy stores. In the fourth quarter of fiscal 2011, we announced plans to exit the Turkey market during fiscal 2012.
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Merchandise and Services
Domestic Segment
U.S. Best Buy stores and the related online channel have offerings in six revenue categories: consumer electronics, home office, entertainment, appliances, services and other. Consumer electronics consists of video and audio products. Video products include televisions, navigation products, digital cameras and accessories, digital camcorders and accessories, e-Readers and DVD and Blu-ray players. Audio products consist of MP3 players and accessories, home theater audio systems and components, musical instruments and mobile electronics such as car stereo and satellite radio products. The home office revenue category includes notebook and desktop computers, tablets, monitors, mobile phones and related subscription service commissions, hard drives, networking equipment and related accessories such as printers. The entertainment revenue category includes video gaming hardware and software, DVDs, Blu-rays, CDs, digital downloads and computer software. The appliances revenue category includes major appliances as well as small electrics. The services revenue category consists primarily of service contracts, extended warranties, computer-related services, product repair, and delivery and installation for home theater, mobile audio and appliances. The other revenue category includes non-core offerings such as snacks and beverages.
U.S. Best Buy Mobile offerings are included in our home office revenue category. Revenue from U.S. Best Buy Mobile stand-alone stores is primarily derived from mobile phone hardware, subscription service commissions from mobile phone network operators and associated mobile phone accessories.
Magnolia Audio Video stores have offerings in two revenue categories: consumer electronics and services. Consumer electronics consists of video and audio products. Video products include televisions, DVD and Blu-ray players and accessories. Audio products include home theater audio systems and components, mobile electronics and accessories. The services revenue category consists primarily of home theater system installation as well as extended warranties.
Pacific Sales stores have offerings in three revenue categories: appliances, consumer electronics and services. Appliances consists of major appliances, evenly split between high-end and mass-market premium brands, and plumbing, which consists of kitchen and bath fixtures including faucets, sinks, toilets and bath tubs. Consumer electronics consists of video and audio products, including televisions and home theater systems. The services revenue category consists primarily of extended warranties, installation and repair services.
International Segment
Our small-format The Carphone Warehouse and The Phone House stores in Europe have offerings in two revenue categories: home office and services. Home office consists primarily of mobile phone hardware, subscription service commissions from mobile phone network operators and associated mobile phone accessories. Services consists of device insurance operations, providing protection primarily for the replacement of a lost, stolen or damaged handset, as well as mobile and fixed-line telecommunication services, billing management services and Geek Squad repair services.
Our large-format Best Buy branded stores in the U.K. have offerings in six revenue categories: consumer electronics, home office, entertainment, appliances, services and other, with products and services similar to those of our U.S. Best Buy stores.
In Canada, the Future Shop and Best Buy branded stores have offerings in five revenue categories: consumer electronics, home office, entertainment, services and other, and at Future Shop only, a sixth revenue category, appliances. Consumer electronics consists of video and audio products. Video products include televisions, navigation products, digital cameras and accessories, digital camcorders and accessories, e-Readers, and DVD and Blu-ray players. Audio products encompass MP3 players and accessories, home theater audio systems and components, mobile electronics such as car stereo and accessories. The home office revenue category includes notebook and desktop computers, tablets, monitors, mobile phones and related subscription service commissions, hard drives, networking equipment and related accessories such as printers. The entertainment revenue category includes video game hardware and software, DVDs, Blu-rays, CDs and computer software. The appliances revenue category includes major appliances as well as small electrics. The services