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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549

FORM 10-K
(Mark One)

/x/	
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 3, 2001.	
OR

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
Commission File Number: 1-9595

BEST BUY CO., INC.
 (Exact Name of Registrant as Specified in its Charter)

Minnesota 
(State or other jurisdiction of incorporation or organization)	 	41-0907483 
(I.R.S. Employer Identification No.)	

7075 Flying Cloud Drive
Eden Prairie, Minnesota 
(Address of principal executive offices)	
 	
55344 
(Zip Code)	
Registrant's telephone number (including area code): 952-947-2000
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 Common Stock, par value $.10 per share	 	Name of each exchange on which registered
 New York Stock Exchange	
Securities registered pursuant to Section 12(g) of the Act: None

   Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
   The aggregate market value of voting stock held by non-affiliates of the Registrant on May 4, 2001, was approximately $9.694 billion, based on the closing price of $56.55 per share of Common Stock as reported on the New York Stock Exchange—Composite Index. (Excluded from that figure is the voting stock held by the Registrant's directors and executive officers.) On that date, there were 209,381,800 shares of Common Stock issued and outstanding.
   Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /
DOCUMENTS INCORPORATED BY REFERENCE
   Portions of the Registrant's Annual Report to Shareholders for the year ended March 3, 2001 ("Annual Report"), are incorporated by reference into Parts I and II.
   Portions of the Registrant's Proxy Statement dated May 17, 2001, for the regular meeting of shareholders to be held on June 26, 2001 ("Proxy Statement"), are incorporated by reference into Part III.

    Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Annual Report on Form 10-K are forward-looking statements and may be identified by the use of words such as "believe," "expect," "anticipate," "plan," "estimate," "intend" and "potential." Such statements reflect the current view of the Registrant with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause the Registrant's actual results to differ materially from the anticipated results expressed in such forward-looking statements, including, among other things, general economic conditions, acquisitions and development of new businesses, product availability, sales volumes, profit margins, weather, availability of suitable real estate locations, and the impact of labor markets and new product introductions on the Registrant's overall profitability. Readers should review the Registrant's Current Report on Form 8-K filed on May 16, 2001, that describes additional important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements made in this Annual Report on Form 10-K.
 
 PART I
  ITEM 1. BUSINESS
General
    Minneapolis-based Best Buy Co., Inc. (Company or Registrant), is the nation's number one specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. The Company operates retail stores and commercial Web sites under the brand names Best Buy (BestBuy.com), Media Play (MediaPlay.com), On Cue (OnCue.com), Sam Goody (SamGoody.com), Suncoast (Suncoast.com) and Magnolia Hi-Fi (MagnoliaHiFi.com).
    The Company began in 1966 as an audio components retailer, and in the early 1980s, with the introduction of the videocassette recorder, expanded into video products. In 1983, the Company revised its marketing strategy and began using mass-merchandising techniques, which included offering a wider variety of products and operating stores under a "superstore" format. In 1989, the Company dramatically changed its method of retailing by introducing a self-service, noncommissioned, discount-style store format designed to give the customer more control over the purchasing process. The Company determined that an increasing number of customers had become knowledgeable enough to select products without the assistance of a commissioned salesperson and preferred to make purchases in a more convenient and customer-friendly environment.
    In fiscal 1995, the Company developed a larger store format (45,000 and 58,000 square feet) that featured more hands-on and interactive product demonstrations. This concept was based on focus group interviews and other research, which indicated that customers wanted more product information and a larger product selection. In fiscal 1999, the Company introduced a new store format with improved merchandising, signage and customer service. This format, designed to address changing consumer needs, particularly as the consumer electronics industry progressed into new digital products, also reinforced the Company's image as the destination for new technology in a fun, informative and no-pressure shopping environment. In fiscal 2000, the Company introduced a small-market store format that serves communities of generally less than 200,000 people. These 30,000-square-foot stores offer the same product categories as larger stores, but have more flexible floor plans and product assortments tailored to their communities. During fiscal 2001, the Company introduced its latest store format, which features a flexible merchandising architecture, faster checkout and better product adjacencies and is expected to result in a more effective labor model and improved merchandising. Most new Best Buy stores are expected to incorporate the features of this latest store format.
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    As of March 3, 2001, the Company operated 419 Best Buy stores in 41 states. The stores average 45,400 square feet and produce average annual sales of nearly $39 million. Best Buy stores collectively had 19.0 million retail square feet, or 68% of the Company's total retail square footage.
    Starting in fiscal 2003, the Company plans to begin international expansion with the first Best Buy stores opening in Canada prior to the calendar 2002 holiday season. The Canadian marketplace is attractive because of the sizeable population, high median incomes, strong annual spending in consumer electronics and limited competition in the Company's business sector. Canadian Best Buy stores will vary in size depending on the needs of the location. It is expected that approximately 60 to 65 Best Buy stores will be opened throughout Canada in the next three to four years.
    The Company acquired Musicland Stores Corporation (Musicland) in the fourth quarter of fiscal 2001 to continue its revenue growth beyond fiscal 2005, when the Company expects to complete its Best Buy store expansion in the United States. Musicland, which is also based in Minneapolis, is one of the largest national retailers of pre-recorded music, videos, books, computer software, video games and other entertainment-related products. The mall-based music and video stores include the Sam Goody and Suncoast brands. In addition, Musicland operates rural On Cue stores and metropolitan, large-format Media Play stores. At fiscal year-end, Musicland operated approximately 1,300 stores in 49 states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands, with 8.8 million total retail square feet.
    The Musicland acquisition adds more than 300 million additional customer visits per year, as well as access to several consumer market segments typically underserved by Best Buy stores: women, young adults and rural consumers. The Musicland acquisition also significantly increased the Company's market share in sales of pre-recorded music and movies and further positioned the Company to lead the anticipated migration to digital product and connectivity services.
    Sam Goody is a mall-based specialty music retailer offering a broad product selection in a youthful, consumer-friendly shopping environment. Sam Goody stores specialize in music entertainment products, including compact discs, DVD's, videos, audiocassettes, music and movie videos, sheet music, music-inspired apparel, posters and other music-related accessories. The stores are predominantly located in malls and average approximately 4,500 square feet, although they range in size from 1,000 to 30,000 square feet. The larger stores generally are located in more prominent mall or downtown locations and carry a broader inventory of catalog product, including substantial classical and jazz music offerings as well as deep video assortments. In many cases, Sam Goody is the exclusive music retailer in the mall. As of March 3, 2001, the Company operated approximately 630 Sam Goody stores in 48 states, the District of Columbia, the Commonwealth of Puerto Rico and the Virgin Islands. The total retail square footage of these Sam Goody stores was approximately 3.0 million square feet, or 11% of the Company's total retail square footage. The average annual sales per Sam Goody store are approximately $1.2 million.
    Suncoast is a mall-based video retailer, emphasizing a broad product selection and elite customer service in a Hollywood-inspired atmosphere. Suncoast stores average approximately 2,400 square feet and feature newly released and classic movies, special interest videos and episodes from popular TV shows. Complementary products include apparel, posters and other products inspired by new releases, as well as blank videotapes, storage cases and other video-related accessories. Suncoast offers movies in both VHS format and DVD format. At March 3, 2001, there were approximately 400 Suncoast stores in 47 states, the District of Columbia and the Commonwealth of Puerto Rico. The total square footage of Suncoast stores was approximately 1.0 million square feet, or 4% of the Company's total retail square footage. The average annual sales per Suncoast store are approximately $1.0 million.
    On Cue stores are located in small or rural cities, generally with 10,000 to 30,000 people, providing a wide assortment of entertainment products at competitive prices. On Cue stores average approximately 6,000 square feet and offer customers a convenient local store to shop for music, books,
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videos, computer software, electronics, video games and related products. On Cue customers have access to more than 6,000 music and video titles as well as a comprehensive selection of book titles through a special order program. The in-store boutique, "Jam Central," features a selection of musical instruments including keyboards, guitars, microphones, amplifiers, starter drum sets and sheet music, as well as accessories. As of March 3, 2001, the Company operated approximately 200 On Cue stores in 31 states with total retail square footage of approximately 1.3 million square feet, or 5% of the Company's total retail square footage. The average annual sales per On Cue store are approximately $800,000.
    Media Play is a superstore retailer located in major metropolitan markets offering a large assortment of home entertainment products at competitive prices. The family-oriented Media Play stores are operated primarily in freestanding and strip mall locations in urban and suburban areas. The average store measures approximately 46,000 square feet and carries a broad assortment of movies, music, books, computer software, video games, electronics, computer software, musical instruments and toys. The "M.P. Kids" department houses a play area for children and a wide array of children's movies, books and educational toys. "Game Zone" allows a customer to try out new or used video games and sell or trade their used video games. The "Jam Central" area is similar to that found in On Cue stores. At March 3, 2001, Media Play operated approximately 80 stores in 20 states with total square footage of approximately 3.6 million, or 12% of the Company's total retail square footage. The average annual sales per Media Play store are approximately $7.1 million.
    On Dec. 15, 2000, the Company acquired Magnolia Hi-Fi, Inc. (Magnolia Hi-Fi), a retailer of high-end consumer electronics which was founded in Seattle in 1954. As of March 3, 2001, the company operated 13 stores in Washington, Oregon and California that average 10,200 square feet with average annual sales per store of $8.4 million. Magnolia Hi-Fi stores provide audio and video home theater systems for homes, automobiles and businesses. The stores offer top-of-the-line consumer electronics brands through a commissioned sales force. Magnolia Hi-Fi operates a state-of-the-art design center as well as an in-house repair/installation department.
Business Strategy
    The Company's vision is to be at the intersection of technology and life. The Company's business strategy is to bring technology and consumers together in a retail environment that focuses on educating consumers on the features and benefits of technology and entertainment while maximizing overall profitability. The Company believes that Best Buy stores offer consumers meaningful advantages in store environment, product value, selection and service. An objective of this strategy has been to achieve a significant market share in the markets it serves. The latest Best Buy store format features interactive displays and, for certain product categories, a high level of customer assistance, both designed to enhance the customer's shopping experience.
    As part of the Best Buy stores' overall business strategy, Best Buy:
•
Generally offers a retail format similar to a self-service discount store for many products with which consumers are familiar and provides a higher level of customer service and product information for more technically complex and integrated products.

•
Offers consumers the ability to subscribe to services such as Internet access, satellite television and wireless communications.

•
Provides a selection of brand name products comparable to that of retailers specializing in the Company's principal product categories and seeks to ensure a high level of product availability for customers.
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•
Works to provide customers with the best product value available in the market area through active comparison shopping programs, daily price changes, lowest-price guarantees and special promotions, including interest-free financing and home delivery.

•
Provides a variety of services not offered by certain competitors, including convenient financing programs, product delivery and installation, and post-sale services including repair and warranty services as the well as computer upgrades.

•
Locates stores at sites that are easily accessible from major highways and thoroughfares and seeks to create sufficient concentrations of stores in major markets to maximize leverage on fixed costs, such as advertising and operations management.

•
Offers an online shopping site, which features in-depth product information, to enhance the customer purchasing experience.

•
Controls costs and enhances operating efficiency by centrally managing all buying, merchandising and distribution, and vertically integrating certain support functions such as advertising.
    Best Buy's store format is a key component of its business strategy. The Company believes that because consumers are generally familiar with certain products Best Buy sells and are accustomed to discount shopping formats, they resist efforts to direct their choice of product and appreciate controlling the purchase decision. For products that are relatively easy for consumers to understand and purchase, Best Buy stores employ a self-service, discount-style store format, featuring easy-to-locate product groupings, emphasizing customer choice and product information. These products include entertainment software and less complex consumer electronics products such as VCRs and small televisions. For other, more complex and integrated products such as personal computers, digital and big-screen televisions, home theater, digital phones and digital cameras, Best Buy dedicates specially trained sales assistance. Sales staff in these product categories help customers understand the features and benefits of new technology and can assist customers in the purchase of accessories and registration for service with providers.
    Most Best Buy stores contain a demonstration area for home theater systems, big-screen televisions and audio speakers. These demonstration areas allow customers to experience and compare product performance firsthand. Best Buy believes that these demonstration and display areas further differentiate it from competing retailers and create an advantage over competitors that operate exclusively through catalogs or the Internet. In addition, all Best Buy stores feature a configure-to-order process for personal computers that enables computer buyers to custom-order a computer system from such vendors as Compaq and Hewlett-Packard.
    Best Buy spends approximately 3% of store sales on advertising, including the weekly distribution of approximately 48 million newspaper inserts. The Company is reimbursed by vendors for a substantial portion of advertising expenditures through cooperative advertising arrangements. Best Buy has vertically integrated advertising and promotion capabilities, and operates an in-house advertising agency. This capability permits the rapid response to competitor promotions in a cost-effective manner. In many markets, Best Buy is able to secure and deliver merchandise to stores and to create, produce and run an insert all within a period of less than one week.
    Best Buy's print advertising generally consists of four-color weekly inserts, typically 24 to 32 pages, that emphasize a variety of product categories and feature an extensive name-brand selection with a wide range of price points. In addition, the Company utilizes television advertising to support a national brand image campaign that positions Best Buy stores as the destination for new technology products that enhance customers' time by making it more productive and more fun. The Company believes that building customer brand loyalty is a significant element of its business strategy.
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    Product service and repair are important aspects of Best Buy's brand strategy, providing the opportunity to differentiate its stores from the retailers that do not offer such services. Best Buy stores generally offer to service and repair all of the products it sells, with the exception of entertainment software. Best Buy has been designated by substantially all major suppliers as an authorized servicer. In addition, Best Buy makes in-store technical support staff available to assist customers with the custom configuration of personal computers and peripheral products. Best Buy offers home delivery of major appliances and large electronics products. In addition, Best Buy installs car stereos, vehicle security systems and certain major appliances.
    In fiscal 2001, the Company re-launched its commercial Web site, BestBuy.com, which sells products over the Internet in Best Buy's principal product categories except appliances. The Company views the site as part of a fully integrated "clicks-and-mortar" strategy, offering a consistent and synchronized experience across both stores and Internet channels while tapping the unique advantages of each. Consumers can choose to pick-up or return their online purchases at one of the Best Buy stores, and inside Best Buy stores they can use WebStations™ to expand the product assortment available to them. The "clicks-and-mortar" strategy also leverages the Company's existing nationwide Best Buy store network with Best Buy's brand awareness, substantial advertising and promotional activities, warranty and repair capabilities, and supply chain, warehousing and logistics network. While customer-fulfillment through its Web site does not currently represent a significant portion of Best Buy's business, management believes that the development of a comprehensive Internet business represents a significant growth opportunity and that its clicks-and-mortar strategy gives the Company a competitive advantage over Internet retailers. In addition, the Company believes that the product information provided to consumers on the BestBuy.com Web site has the ability to increase overall in-store traffic.
    The Company recognized that forming strategic alliances with service providers would be an integral component of its strategy to provide full service to consumers and increase profitability. In March 2000, the Company announced a strategic alliance with Microsoft Corporation (Microsoft) that encompassed significant co-marketing activities between the Microsoft Network of Internet Services (MSN™), BestBuy.com and Best Buy's retail stores via direct marketing and advertising inserts, among other things. Microsoft is providing technology support to Best Buy and BestBuy.com and supported BestBuy.com with prominent placement across Microsoft properties such as MSNBC, MSN, Hotmail, Expedia and Carpoint. In exchange for its role in generating new subscribers for MSN, the Company shares in the profits derived from those subscribers. In connection with the alliance, Microsoft purchased approximately 3.9 million shares of the Company's common stock for $200 million.
    The acquisitions of Musicland and Magnolia Hi-Fi give the Company access to new distribution channels, new customers and the ability to leverage Best Buy core competencies to their operations. Additional benefits are expected to accrue from the cross merchandising of products and information sharing across distribution channels. The post-acquisition strategy includes increasing productivity and re-positioning Musicland stores to an improved new concept, including an infusion of new digital products that are expected to appeal to the Sam Goody customer. Initial initiatives include post-merger integration and the remerchandising of Sam Goody stores.
    Musicland's business strategy is to offer a broad assortment of entertainment software, including both new releases and catalog products, in an exciting store format. The Sam Goody, Media Play, On Cue and Suncoast brands target specific consumer segments. A key part of the strategy is customer loyalty, which Musicland helps build through customer newsletters, targeted direct mail campaigns, special events and promotional offers.
    Musicland's major suppliers offer cooperative advertising support and provide funds for the placement and position of product. The marketing programs are designed to build each store's brand image, encourage first-time visits and reinforce store loyalty among existing customers through a wide
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variety of traffic-driving special events and promotions. Marketing and advertising partnerships have been developed with vendors and nationally recognized corporations for cross promotions, events and sweepstakes that management believes are attractive to shoppers. For the sixth consecutive year, Musicland has run a nationally promoted band competition, "Bandemonium," which appeals to its target customers. In addition to the Sam Goody stores, sponsors of the Bandemonium event in fiscal 2001 included Pepsi, Gibson, Rayovac, Dentyne, Twentieth Century Fox and Sony Accessories.
    More than a million customers are members of Musicland's Replay program, a frequent shopper program designed to promote customer loyalty and encourage repeat visits through special offers and targeted marketing. Request , a cutting-edge music and video entertainment news magazine for Replay members, is also available in Sam Goody, Media Play, Suncoast and On Cue stores and also at limited magazine stands. The magazine has a pass-along readership estimated in the millions. The Request Web site, requestmagazine.com, offers an online version of the magazine, featuring music, DVD and game reviews as well as select content and interactive features for readers.
    The Company has begun testing new products at selected Sam Goody stores. The new products focus on devices that play music and movies as well as gaming hardware and software. The Company views these products as a natural extension for Sam Goody stores, which currently sell primarily music and movies. The Company expects to complete testing of the new products and to expand the product offerings to additional Sam Goody stores during fiscal 2002. The Company anticipates that these new products will drive traffic and generate incremental sales.
    Magnolia Hi-Fi's strategy is to provide superior customer service in the store, during installation and following installation. The stores are spacious, pleasant environments that allow a customer to experience the home theater product, including various scenarios for the audio and video components, prior to purchase. In addition, a design center located in Seattle is viewed by architects, builders, designers and homeowners as a resource for integrating audio and video in the home and business, which the Company believes is a competitive advantage.
Product Selection and Merchandising
Best Buy
    Best Buy stores offer customers a broad selection of name-brand models consisting of approximately 6,000 products, exclusive of entertainment software titles and accessories, in four principal product categories. In addition, they offer a selection of accessories supporting those principal product categories.
    The home office category, Best Buy's largest category, includes desktop and notebook computers and related peripheral equipment, telephones, digital communication devices, personal digital assistants, answering machines and calculators. Desktop computer sales have slowed as the percentage of households owning computers has risen. Revenue growth in this category is expected to be driven by increased demand for products providing mobile access to people and information along with the related sale of connectivity services. The Company signed up 1.3 million new ISP subscriptions in fiscal 2001 and plans to continue to be a leader in the sale of connectivity services. As of the fourth quarter of fiscal 2001, approximately 35% of the sales in this category were derived from sales of personal computers including desktops, notebooks and configure-to-order computers. The retail market for personal computers can be promotional and competitive, with competition primarily from retail stores and factory-to-customer direct channels of distribution. Operating results can be affected by significant changes in promotional activity, consumer demand, availability of personal computers and the timing of computer model transitions. The timing of significant new software releases also can impact sales of personal computers. The Company believes it is well positioned to withstand competition in the retail market for personal computer products, traditionally low margin items, due to its experience in the market and its significantly improved ability to manage inventories in this category. The Company also
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believes that Best Buy's broad product lines, including those that generate higher gross profit margins, and its relatively low cost structure contribute to the Company's ability to compete in this category. In addition, the Company believes that the related services Best Buy offers, such as knowledgeable salespeople, in-store computer configuration, maintenance and upgrades, are distinct advantages compared to Internet, discount and factory direct computer retailers. Changing technology and hardware requirements necessary to support new software, including online services, are expected to continue to be primary factors in the growth in sales of personal computers and related products in the future. Personal computer unit sales growth has been driven by technology improvements, the increasing popularity of the Internet and declining retail selling prices. In fiscal 2000 and 2001, Internet service provider rebate offers to new subscribers on the purchase of their personal computers further stimulated computer sales. While the sales of personal computer hardware generate relatively low gross profit margins, Best Buy's selling strategies have enabled the Company to generate higher total transaction profit margins through the sale of accessories and services that complete a home computer system. Best Buy's list of home office brand names includes leading vendors such as AT&T, Belkin, Canon, Cingular, Compaq, Emachine, Epson, Handspring, Hewlett-Packard, Kodak, Lexmark, Motorola, Microsoft Service Network (MSN), Nokia, Olympus, Palm, Panasonic, Sony, Sprint, Toshiba and VoiceStream.
    Best Buy's second-largest, but fastest-growing, product category is consumer electronics, consisting of video and audio equipment. The growth is driven by the continued expansion of digital technology products. Digital technology products improve the consumers' audio and video experience and enable them to connect and interact at home, work or on the road. Video products include home theater systems, television sets, DVD players, VCRs, camcorders, cameras and digital broadcast satellite systems (DBS). Audio products include audio components, audio systems, shelf systems, portable audio equipment, car stereos and other electronics. Best Buy continues to expand its product selection of consumer electronics by offering higher-end products and components that have greater appeal to audio and video enthusiasts. In recent years, the introduction of digital televisions, DVD players, digital cameras, digital camcorders and DBS systems continues the migration of the consumer electronics category into digital technology. The replacement of existing analog technology with digital products represents a significant sales growth opportunity for the Company; although as prices drop, quantities increase and new technology becomes more affordable, the transition could impact sales of current products. To date, however, increasingly affordable digital consumer electronics products have contributed to sales growth. Continued technology advancements are expected to result in the development and availability of new, more sophisticated digital products, continuing to fuel growth in this category. Best Buy sells consumer electronics with brand names such as Aiwa, Bose, Canon, DIRECTV, Funai, JBL, JVC, KLH, Minolta, Nikon, Panasonic, Philips, Pioneer, RCA, Rockford Fosgate, Samsung, Sanyo, Sharp, Sony, Technics, Toshiba, WebTV and Yamaha.
    Best Buy's entertainment software category includes compact discs, DVD and VHS movies, computer software, and video game hardware and software. Best Buy is one of the few large consumer electronics retailers that sells a broad selection of entertainment software. Best Buy customizes a portion of the entertainment software assortment for particular stores based upon the demographics of the market. Video game hardware, video game software and computer software sales are also impacted by the development of new technology. The addition of new video game hardware and software from Microsoft and Nintendo Company, Ltd. combined with the popularity to date of the Sony Playstations are expected to positively impact sales in this category.
    Best Buy's appliance category includes microwave ovens, dishwashers, refrigerators, freezers, ranges, washing machines, clothes dryers, air conditioners and vacuum cleaners. This category includes brand names such as Amana, Bisell, Braun, Cuisinart, Eureka, Fantom Technologies, Frigidaire, General Electric, Hoover, Kitchenaid, Krups, Maytag, Panasonic, Royal Appliance, Sharp, Sunbeam and Whirlpool. Sales in this category are impacted by new housing activity. An increase in large home
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improvement retailers and other large retailers selling major appliances makes this category highly competitive and promotional, despite the exit of a major competitor from the appliance category in fiscal 2001. While the appliance category represents less than 10% of total Company sales, the Company believes that it can grow its market share in this category. In addition to increasing its market share, the Company plans to work closely with suppliers to improve the overall profitability of the category. Historically, the high costs associated with the logistics, repair and installation of major appliances have put pressure on the category's financial performance.
    Best Buy's "other" category includes sales of Performance Service Plans (PSPs), furniture and other miscellaneous products such as batteries, business cases and blank audio and videotapes and compact disks. Best Buy sells PSPs on behalf of an unrelated third party. These contracts cover product repair and/or replacement for a specified period of time following the purchase of a product, extending and enhancing the manufacturer's warranty. PSP sales comprised 3.9% of Best Buy revenues in fiscal 2001 and are impacted by changes in unit volume of personal computers, appliances and other products.
    The following table shows the percentage of Best Buy store sales from each of Best Buy's principal product lines for each of the last three years.*

 	 	Fiscal Years Ended
	 	
 	 	March 3, 2001
	 	February 26, 2000
	 	February 27, 1999
	 	
Home Office	 	34	%	35	%	36	%	
Consumer Electronics:	 	 	 	 	 	 	 	
 	Video	 	22	 	19	 	18	 	
 	Audio	 	11	 	11	 	11	 	
Entertainment Software	 	19	 	19	 	20	 	
Appliances	 	7	 	8	 	8	 	
Other	 	7	 	8	 	7	 	
 	 		 		 		 	
 	Total	 	100	%	100	%	100	%	

*
Prior year percentages have been adjusted to reflect current year categorization of products. The primary change, made in fiscal 2001, was to reclassify cameras and photographic equipment from the "Other" category to Consumer Electronics—Video.
Musicland
    Sam Goody stores primarily sell pre-recorded music and movies. Sam Goody's typical customer is in their 20s and tends to buy on impulse. The Company expects to add to the Sam Goody product mix devices that play music and movies, as well as gaming hardware and software, a natural extension of the current product lines. On Cue stores offer major-market selections of music, videos and books. The Company also expects to add consumer electronics and other fast-growing products to the On Cue mix. Suncoast stores offer popular video entertainment software in VHS format and the increasingly popular DVD format. Media Play stores offer a wide assortment of movies, music, books, video games, electronics, computer software, musical instruments and novelty items.
    Sam Goody stores typically carry 6,000 to 10,000 compact disc titles, depending upon store size and location. On Cue and Media Play stores carry up to 9,000 and 40,000 compact disc titles, respectively. These titles include "hits," which are the best selling newer releases, and "catalog" items, which are older but still popular titles that customers purchase to build their music collections. Most of the Musicland stores also carry DVD and VHS movies. Suncoast and Media Play stores carry up to 12,000 and 15,000 movie titles, respectively. Computer software and video games are available primarily in Media Play and On Cue stores.
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Magnolia Hi-Fi
    Magnolia Hi-Fi carries high-end brand products for the home and car with an emphasis on high-quality digital products. Brands carried include Alpine, Bose, Boston Acoustics, Definitive Technology, Denon, Kenwood, Klipsch, Krell, Martin-Logan, McIntosh, Mitsubishi, Panasonic, Sonus-Faber and Sony.
Store Locations and Expansion
    Best Buy, Musicland and Magnolia Hi-Fi store locations by state can be found on page 58 of the Annual Report, contained in Exhibit 13.1 to this report.
Best Buy
    The Company opened 62 Best Buy stores in fiscal 2001, including entries into the new markets of the New York City Area and Norfolk, Va. The Company expects to open approximately 60 Best Buy stores in fiscal 2002, including approximately 20 small-market format stores. The Company also plans to remodel or relocate approximately six Best Buy stores to larger facilities. The Company expects to open approximately 60 Best Buy stores per year through fiscal 2005, at which time the Company expects to have completed its Best Buy store expansion in the United States.
    Best Buy's expansion strategy generally has been to enter major metropolitan areas with the simultaneous opening of several stores and then to expand into contiguous non-metropolitan markets. In fiscal 2001, the Company continued to broaden its existing strategy and opened 11 small-market Best Buy stores bringing the total small-market format to 20 stores. As of March 3, 2001, approximately 75% of Best Buy stores were in the 50 largest metropolitan markets.
    The entry into a new market is preceded by a market analysis, including a review of competitors, demographics and economic data. The store location strategy enables Best Buy to increase the effectiveness of advertising expenditures and to create a high level of consumer awareness. In addition, the clustering of stores allows Best Buy to maintain more effective management control and utilize distribution facilities more efficiently. Currently, Best Buy stores cover approximately 70% of the United States population and serve 47 of the 50 largest metropolitan markets.
    When entering a major metropolitan market, Best Buy usually establishes a district office, service center and major appliance warehouse. New stores require working capital of approximately $4 million for merchandise inventory (net of vendor financing), leasehold improvements, fixtures and equipment. Pre-opening costs of approximately $550,000 per store, excluding advertising costs associated with the grand opening of a store, are incurred through hiring, relocating and training new employees, and in merchandising the store. These costs are expensed as incurred.
Musicland
    While the Company has not yet made a decision on the ultimate expansion strategy for the Musicland brands, it does not expect to open or close a significant number of Musicland stores in fiscal 2002. The Company's initial strategy will focus on remerchandising and expanding the sales base of Sam Goody stores.
Magnolia Hi-Fi
    The Company plans to grow the Magnolia Hi-Fi chain, beginning with several new stores in the San Francisco Bay area in fiscal 2002. The Company plans to manage the growth of this chain carefully to ensure that Magnolia Hi-Fi's entrepreneurial and quality-focused culture remains intact. Magnolia carries high-end products that have minimal overlap with Best Buy.
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Suppliers, Purchasing and Distribution
    Best Buy's marketing strategy depends, in part, upon the ability to offer customers a broad selection of name-brand products and is, therefore, dependent upon satisfactory and stable supplier relationships. In fiscal 2001, Best Buy's 20 largest suppliers accounted for over half of the merchandise Best Buy purchased, with five suppliers—Compaq, Hewlett-Packard, Panasonic, Sony and Toshiba—representing approximately 33% of total purchases for Best Buy stores. The loss of or disruption in supply, including disruptions in supply due to manufacturers' product quality or component parts availability issues, from any one of these major suppliers could have a material adverse effect on Best Buy sales. Higher than expected demand also places a strain on certain suppliers at times, resulting in suppliers limiting or temporarily discontinuing their supply of products to retailers, including Best Buy. For instance, when new products are introduced, manufacturers are at times unable to supply sufficient quantities to meet the high demand. Best Buy generally does not have long-term written contracts with its major suppliers and does not have any indication that any current suppliers will discontinue selling merchandise to them. The Company has not experienced significant difficulty in maintaining satisfactory sources of supply, and management generally expects that adequate sources of supply will continue to exist for the types of merchandise sold in the stores.
    Best Buy's centralized marketing staff purchases substantially all store merchandise. The buying staff is responsible for product assortment, promotion planning and product pricing. An inventory management staff is responsible for overall product acquisition and inventory management, including allocations and replenishment of store inventory. Except for certain entertainment software, there are generally no agreements with suppliers for the return of unsold inventory. Merchandise remaining at the time of new product introduction is generally sold on a close-out basis and may be subject to a reduction in selling price to levels at or below cost.
    Best Buy has made product availability to consumers a high priority. Accordingly, the Company is increasing its investments in systems to assure that in-stock positions at Best Buy's stores are among the highest in the industry. Best Buy uses an automatic replenishment system for restocking store inventories based on inventory levels, historical and projected sales trends, promotions and seasonality. Best Buy uses an extensive merchandise planning and daily inventory monitoring system to manage inventory and increase inventory turns.
    In fiscal 2001, the Company completed a new 700,000 square-foot distribution center in Dublin, Ga. Through the acquisition of Musicland, the Company also added a 715,000 square-foot distribution center in Franklin, Ind. The Company uses third-party distributors for fulfillment of a portion of the merchandise sold via the Company's Internet sites. The majority of Best Buy's merchandise, except for major appliances, is shipped directly from manufacturers to a distribution center. In addition, Best Buy operates a dedicated distribution center for entertainment software in Minnesota. Major appliances are shipped to satellite warehouses in each major market. In order to meet release dates for selected entertainment software titles and certain computer products, and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors. However, Best Buy is dependent upon the distribution centers for inventory storage and shipment of most merchandise to its stores. Management believes that distribution centers can most effectively service Best Buy stores within a 600- to 700-mile radius and that its current distribution centers, including the new center mentioned above, will accommodate expansion plans for the next several years. The Company plans to continue investing in new systems to reduce labor costs and improve accuracy in filling orders.
    Musicland purchases inventory for its stores directly from approximately 1,100 suppliers, exclusive of consignment arrangements. More than 60% of all purchases, net of returns, are made from Musicland's 10 largest suppliers. Musicland does not have any long-term contracts with its suppliers and transacts business principally on an order-by-order basis as is typical throughout the industry. The
12

majority of Musicland's inventory is shipped directly to its Fanklin, Ind. distribution center. Similar to Best Buy, Musicland uses an automatic replenishment system for restocking store inventories. E-commerce product orders are also fulfilled at the Franklin distribution center.
Management Information Systems
    The Company's management information systems provide daily information on the Company's sales, gross margins, and inventory levels by store and by stockkeeping unit. These systems allow management to compare current performance against historical performance and the current year's budget. At the end of each day, the Company compiles sales information using point-of-sale bar code scanning. The Company uses Electronic Data Interchange (EDI) with selected suppliers for the more efficient transmittal of purchase orders, shipping notices and invoices. Management believes that the systems the Company has developed have the ability to continue to improve customer service, operational efficiency and management's ability to monitor critical performance indicators. The Company continuously assesses its information systems needs to increase efficiency, improve decision-making and support growth. A major component of the systems development plan for fiscal 2002 includes replacement of the Company's supply chain, financial and human resource systems. The Company is aware of the inherent risks associated with the replacement of these core systems and believes it is taking appropriate action to reduce these risks. The Company expects to implement the replacement systems in a phased approach through fiscal 2003. Additional systems initiatives for fiscal 2002 include improvements in store systems, support for development of systems to support the retail store and e-commerce integration initiatives and continued support for the e-commerce business.
Store Operations
    The Company has developed a standardized and detailed system for operating Best Buy stores called Standard Operating Platform (SOP). The system includes procedures for inventory management, transaction processing, customer relations, store administration, product sales and merchandise display. Best Buy store operations are organized into three divisions. Each division is divided into regions and is under the supervision of a senior vice president who oversees store performance through regional managers, each of whom has responsibility for a number of districts within the region. District managers monitor store operations closely and meet regularly with store managers to discuss SOP, merchandising, new product introductions, sales promotions, customer loyalty programs, employee satisfaction surveys and store operating performance. Similar meetings are conducted at the corporate level with divisional and regional management. A senior vice president of retail operations has overall responsibility for retail store processing and operations including labor management. Each district also has a loss prevention manager, with product security personnel employed at each store to control inventory shrinkage. Best Buy controls advertising, pricing and inventory policies at corporate headquarters.
    Best Buy stores are open seven days and six evenings a week. A store is typically staffed by one manager, four or five assistant managers and an average staff ranging from 65 to 150 people, depending on store size. Approximately 60% of a Best Buy store's staff, which includes product specialists and a support staff of cashiers and customer service and stock handling employees, is employed on a part-time basis. Best Buy store managers are paid a salary and have the opportunity to earn bonuses if their stores exceed sales and gross margin goals, meet certain budget criteria in controlling expenses and achieve certain administrative targets.
    The Best Buy employee development department provides managers with a variety of tools to teach employees the core skills they need to meet their performance objectives. In the stores, Sales, Inventory, Operations and Merchandising managers undergo comprehensive training in their specialty areas, which include store operations, selling, managerial, training and communications skills. The retail selling and sales support teams receive a thorough orientation to the industry and Best Buy business
13

objectives. Sales personnel are trained to ask specific questions of customers to determine their needs and to present products, accessories and services that meet those expressed needs. Stores hold quarterly team meetings to review store performance, focus, and changes and modifications in operating procedures. Best Buy also conducts specialized product training at these quarterly meetings. Best Buy staffs store management positions with both personnel promoted from within the stores and those recruited from outside of Best Buy. In connection with expansion into new markets, Best Buy recruits local management personnel who have valuable knowledge about the new market. The store management development program is designed to help support the increased rate of store growth by developing and integrating new managers who have generally completed a year of training prior to assuming full management responsibility. Continued investments in new technology support the Company's ongoing efforts to improve performance.
    Musicland stores are operated independently from Best Buy stores. Sam Goody, Suncoast and On Cue stores are typically managed by a store manager and an assistant manager. Media Play stores are typically managed by a general manager, an assistant general manager and three to five department managers. Most Musicland stores are open from 65 to 80 hours per week, seven days a week depending on mall hours. Store staffing levels fluctuate with the size of the store and anticipated sales volume.
    Magnolia Hi-Fi stores are also operated independently from Best Buy stores. These stores are typically managed by a store manager, an audio/video sales manager and a mobile electronics sales manager and one or more warehouse/receiving staff. Most Magnolia Hi-Fi stores are open approximately 70 to 75 hours a week, seven days a week. Depending on an individual store's volume, store staffing includes and additional 12 to 28 sales personnel and 2 to 10 mobile electronic installers.
Credit Policy
    Approximately one-third of Best Buy customer purchases are paid for by cash or check, with the remainder paid for by major credit cards or the Best Buy private-label credit card. Best Buy uses special financing offers to stimulate sales. Generally, these financing offers allow customers to purchase certain products with repayment terms typically ranging from 90 days to 18 months without a finance charge. The longer financing offers, generally those beyond six months, typically require minimum monthly payments to avoid the finance charge. The special financing offers are provided only to customers who qualify for Best Buy's private-label credit card. The private-label credit card allows these customers to obtain financing on purchases of merchandise at Best Buy stores through arrangements the Company has made with unaffiliated third-party institutions that have consumer credit programs. Best Buy is generally able to qualify a new customer for credit on the spot, typically in less than five minutes. Best Buy sells receivables from private-label credit card sales, without recourse, to unaffiliated third-party institutions. Best Buy receives payment from these institutions within three days following the sale. Sam Goody, Suncoast, On Cue and Media Play stores accept cash, checks and most major credit cards with approximately 60% of customer transactions paid in cash or check. Magnolia Hi-Fi stores also accept cash, checks and most major credit cards with approximately 22% of customer transactions paid in cash or check.
Competition
    The Company's industry is highly competitive. Alternative channels of distribution such as the Internet and factory direct shopping services are expanding, and mass merchandisers continue to increase their assortment of consumer electronics products—primarily those that are less complex to sell, install and operate. Consumers are increasingly downloading entertainment and computer software directly via the Internet. Additionally, while many retail stores have exited the market, new competition is emerging as evidenced by the entrance of large home improvement retailers into the major appliance market. The Company believes that its e-commerce initiatives, coupled with product knowledge, brand imaging, expertise and the services capabilities of the retail stores, will effectively position the Company
14

to meet the increased competition from e-commerce and mail-order retailers as well as mass merchandisers.
    More effective advertising, a more customer-focused product assortment, improved product in-stock levels and better customer service have contributed to Best Buy market share gains over the past year. The Company believes that Best Buy's store formats and brand positioning distinguishes Best Buy from most competitors by positioning the stores as the destination for new technology and entertainment products in a fun, informative and no-pressure shopping environment. Best Buy competes by aggressively advertising and emphasizing a broad product assortment, value pricing, financing alternatives and service.
    The Company currently competes nationally against consumer electronics retailers such as Circuit City and RadioShack; computer superstores such as CompUSA; home office retailers such as Office Depot, Office Max and Staples; mass merchants such as Sears, Wal-Mart and Target; home improvement superstores such as Home Depot and Lowes; entertainment software superstores owned by Tower Records; boutiques such as Tweeter Home Entertainment Group and Ultimate Electronics; and a growing number of direct-to-consumer alternatives. The Company also competes against independent dealers, regional chain discount stores, wholesale clubs, mail-order and Internet retailers, video rental stores and other specialty retail stores.
Employees
    As of March 3, 2001, the Company had approximately 75,000 employees, of whom approximately 42,000 were part-time or seasonal employees. There are currently no collective bargaining agreements covering any of the Company's employees except that unions represent hourly employees at fourteen Musicland stores. The Company has not experienced a strike or work stoppage, and management believes that its employee relations are good.
 
 ITEM 2. PROPERTIES
    Best Buy, Musicland and Magnolia Hi-Fi store locations by state can be found on page 58 of the Annual Report, contained in Exhibit 13.1 to this report.
    At March 3, 2001, the Company operated 419 Best Buy stores in 41 states totaling approximately 19.0 million retail square feet. The Company also operated approximately 1,300 Musicland stores. Essentially all Musicland stores are located in the United States with a total retail square footage of approximately 8.8 million. Musicland stores are primarily in malls and rural locations. The thirteen Magnolia Hi-Fi stores, totaling approximately 100,000 square feet, are located in Washington, Oregon and California.
    Best Buy stores are serviced by the following major distribution centers:

Location
	 	Square Footage
	 	Owned or Leased
	
Findlay, Ohio	 	808,000	 	Leased	

Staunton, Va.	
 	
725,000	
 	
Leased	

Dublin, Ga.	
 	
700,000	
 	
Owned	

Dinuba, Calif.	
 	
641,000	
 	
Owned	

Ardmore, Okla.	
 	
440,000	
 	
Leased	

Bloomington, Minn.	
 	
425,000	
 	
Leased	

Edina, Minn. (entertainment software)	
 	
245,000	
 	
Leased	
15

    Best Buy also leases space in 20 satellite warehouses in major metropolitan markets for home delivery of major appliances and large-screen televisions. The Company utilizes approximately 2.5 million square feet in these warehouses.
    Musicland owns a 715,000 square-foot distribution facility in Franklin, Ind., and also has 105,000 square feet of storage space in a leased building in Indianapolis, Ind. Additional office, warehouse and storage space totaling approximately 160,000 square feet is leased in Minneapolis, Minn.
    Essentially all retail and most distribution facilities are leased. Terms of the lease agreements generally range from three to 16 years for Best Buy stores, three to 20 years for Musicland stores, and five to 20 years for Magnolia Hi-Fi stores. Most of the leases contain renewal options and escalation clauses. Leases for the majority of Musicland stores and several Best Buy stores include percentage rent provisions.
    The Company's principal corporate offices are in two owned facilities aggregating 540,000 square feet in Eden Prairie, Minn. In addition to owning these two facilities, the Company leases another 550,000 square feet of office space in close proximity to its main corporate office facility. In fiscal 2002, the Company plans to begin construction on a new corporate campus in Richfield, Minn. The new corporate facility, which will replace existing owned and leased corporate office facilities, is expected to be completed in fiscal 2003.
    Musicland's corporate offices are located in a 94,000 square-foot owned facility in Minnetonka, Minn. Magnolia Hi-Fi's offices are located in a 66,000 square-foot leased facility in Kent, Wash.
16

 ITEM 3. LEGAL PROCEEDINGS
    The Company is involved in various legal proceedings arising during the normal course of conducting business. The resolution of those proceedings is not expected to have a material impact on the Company's results of operations and financial condition.
The Executive Officers of the Registrant are as follows:

Name
	 	Age
	 	Position With the Company
	 	Years
With the
Company
	
Richard M. Schulze	 	60	 	Chairman, Chief Executive Officer and Director	 	35	

Bradbury H. Anderson	
 	
51	
 	
Vice Chairman, President, Chief Operating Officer and Director	
 	
28	

Allen U. Lenzmeier	
 	
58	
 	
President – Best Buy Retail Stores and Director	
 	
17	

Wade R. Fenn	
 	
42	
 	
President – Entertainment and Strategic Business Development	
 	
20	

Kevin P. Freeland	
 	
43	
 	
President, Musicland Stores Corporation	
 	
6	

Marc D. Gordon	
 	
40	
 	
Executive Vice President and Chief Information Officer	
 	
3	

Darren R. Jackson	
 	
36	
 	
Senior Vice President – Finance, Treasurer and Chief Financial Officer	
 	
1	

Michael P. Keskey	
 	
46	
 	
Executive Vice President – Retail Sales	
 	
13	

Michael London	
 	
52	
 	
Executive Vice President and General Merchandise Manager	
 	
5	

George Z. Lopuch	
 	
51	
 	
Executive Vice President – Strategic Planning	
 	
4	

Philip J. Schoonover	
 	
42	
 	
Executive Vice President – Digital Technology Services	
 	
7	

John C. Walden	
 	
41	
 	
President, BestBuy.com, Inc.	
 	
2	
    Richard M. Schulze is a founder of the Company. He has served as an officer and director of the Company from its inception in 1966 and currently serves as its Chairman and Chief Executive Officer.
    Bradbury H. Anderson, who was promoted to Vice Chairman in Feb. 2001, has been the Company's President and Chief Operating Officer since 1991. He has been employed in various other capacities with the Company since 1973, including sales manager, store manager and retail salesperson. Mr. Anderson has been a director of the Company since 1986.
    Allen U. Lenzmeier was promoted to President – Best Buy Retail Stores in Feb. 2001. He was Executive Vice President and Chief Financial Officer from 1991 until 2001, after having served as Senior Vice President – Finance and Operations and Treasurer of the Company from 1986. Mr. Lenzmeier joined the Company in 1984 as Vice President – Finance and Operations and Treasurer.
    Wade R. Fenn was promoted to President – Entertainment and Strategic Business Development in Feb. 2001 after having served as Executive Vice President – Marketing since 1995. Mr. Fenn joined the
17

Company as a sales person in 1980 and served in various operating roles, including Senior Vice President – Retail, Vice President – Sales, district manager and store manager.
    Kevin P. Freeland was named President of Musicland in Feb. 2001. He has served as Senior Vice President – Inventory Management of the Company since 1997. Mr. Freeland joined the Company as Vice President – Inventory Management in 1995. Prior to joining Best Buy, Mr. Freeland spent more than eight years with Payless Shoe Source, where he held various positions in merchandise management, most recently as vice president of merchandise distribution.
    Marc D. Gordon was named Executive Vice President and Chief Information Officer in Feb. 2001. He is responsible for information systems, logistics and the legal department. Marc Gordon joined the Company in 1998 and has served as Senior Vice President – Information Systems and Chief Information Officer. Prior to that, Mr. Gordon had experience in the retail information systems area, most recently for West Marine Products, a West Coast-based specialty retailer/wholesaler of marine products. Other positions have included senior manager with Accenture, principal with a Boston management consulting firm and vice president of information systems with Timberland Company.
    Darren R. Jackson joined the Company in Sept. 2000 as Senior Vice President – Finance and Treasurer and was promoted to Chief Financial Officer in February 2001. Prior to that, he served as chief financial officer of the Full-line Store Division at Nordstrom, Inc. and as chief financial officer of Carson Pirie Scott & Co. Inc. A certified public accountant, he has 12 years of experience in the retailing industry.
    Michael P. Keskey was promoted to Executive Vice President of Retail Sales in Feb. 2001 after having served as Senior Vice President – Sales since 1997. Earlier, he had been Vice President – Sales since 1996. Mr. Keskey joined the Company in 1988 and has held positions as a regional manager, district manager and store manager.
    Michael London was promoted to Executive Vice President and General Merchandise Manager in Feb. 2001. Prior to that, he served as Senior Vice President – General Merchandise. Mr. London joined the Company in 1996 as Vice President – General Merchandise. Prior to joining the Company, Mr. London was a senior vice president of NordicTrack, a division of the CML Group, Inc., and executive vice president for Central Tractor Farm & Country.
    George Z. Lopuch was named Executive Vice President – Strategic Planning in Feb. 2001. Mr. Lopuch joined the Company in 1998 as Senior Vice President – Corporate Strategic Planning. Prior to that, Mr. Lopuch was a senior vice president of corporate strategic planning and research at SuperValu, Inc.
    Philip J. Schoonover was promoted to Executive Vice President of Digital Technology Solutions in Feb. 2001 after having served for five years as Senior Vice President – Merchandising. Prior to joining the Company in 1995, Mr. Schoonover was an executive vice president for TOPS Appliance City.
    John C. Walden, President of BestBuy.com, Inc., joined the Company in 1999 as Senior Vice President – E-Commerce. Prior to joining the Company, he served as chief operating officer of Peapod, Inc., an Internet retailer of groceries. Mr. Walden has also held executive positions with Ameritech Corporation and Storage Technology Corporation.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    None.
18

 
 PART II
  ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    The information set forth under the caption "Common Stock Prices" on page 35 of the Annual Report is incorporated herein by reference.
 
 ITEM 6. SELECTED FINANCIAL DATA
    The information set forth under the caption "10-Year Financial Highlights" on pages 20 and 21 of the Annual Report for the years 1997 through 2001 is incorporated herein by reference.
 
 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
    The information given under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 22 through 35 of the Annual Report is incorporated herein by reference.
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    The Company's operations are not currently subject to material market risks for interest rates, foreign currency rates, commodity prices or other market price risks.
 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    The financial statements required by this Item, listed below, are contained in the Annual Report on the pages indicated below, and are expressly incorporated herein by this reference.

 	 	Page No.
	
Consolidated balance sheets as of March 3, 2001, and Feb. 26, 2000	 	36-37	
For the fiscal years ended March 3, 2001; Feb. 26, 2000; and Feb. 27, 1999	 	 	
 	Consolidated statements of earnings	 	38	
 	Consolidated statements of cash flows	 	39	
 	Consolidated statements of changes in shareholders' equity	 	40	
 	Notes to consolidated financial statements	 	41-56	
 	Independent auditor's report	 	57	
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    None.
 
 PART III
  ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    The information provided under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Nominees and Directors" on pages 6 through 13 of the Proxy Statement is incorporated herein by reference.
 
 ITEM 11. EXECUTIVE COMPENSATION
    The information set forth under the caption "Executive Compensation" on pages 15 through 24 of the Proxy Statement is incorporated herein by reference.
19

 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    The information provided under the caption "Security Ownership of Certain Beneficial Owners and Management" on pages 6 through 10 of the Proxy Statement is incorporated herein by reference.
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    The information found under the captions "Nominees and Directors" and "Certain Transactions" on pages 11 through 14 of the Proxy Statement is incorporated herein by reference.
 
 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
The following documents are filed as part of this report:

1.
Financial Statements:
All financial statements as set forth under Item 8 of this Report.
2.
Financial Statement Schedules:
No schedules have been included either because they are not applicable or because the information is included elsewhere in this Report.
20

3.
Exhibits:

Number
	 	Description
	 	Method of Filing
	 	
3.1	 	Amended and Restated Articles of Incorporation, as amended	 	(3	)	

3.2	
 	
Amended and Restated By-Laws, as amended	
 	
(1,2,4,5,6	
)	

4.1	
 	
Credit Agreement with U.S. Bank National Association dated Aug. 9, 1999	
 	
(8	
)	

10.1	
 	
1987 Employee Non-Qualified Stock Option Plan, as amended	
 	
(10	
)	

10.2	
 	
1987 Directors' Non-Qualified Stock Option Plan, as amended	
 	
(11	
)	

10.3	
 	
1994 Full-Time Employee Non-Qualified Stock Option Plan, as amended	
 	
(11	
)	

10.4	
 	
1997 Employee Non-Qualified Stock Option Plan, as amended	
 	
(9	
)	

10.5	
 	
1997 Directors' Non-Qualified Stock Option Plan, as amended	
 	
(12	
)	

10.6	
 	
Best Buy Co., Inc. Deferred Compensation Plan, as amended	
 	
(15	
)	

10.7	
 	
Resolutions of the Board of Directors adopting the EVA® Incentive Program for senior officers	
 	
(7	
)	

10.8	
 	
2000 Restricted Stock Award Plan	
 	
(13	
)	

10.9	
 	
The Assumed Musicland 1988 Stock Option Plan of Best Buy Co., Inc.	
 	
(14	
)	

10.10	
 	
The Assumed Musicland 1992 Stock Option Plan of Best Buy Co., Inc.	
 	
(14	
)	

10.11	
 	
The Assumed Musicland 1994 Stock Option Plan of Best Buy Co., Inc.	
 	
(14	
)	

10.12	
 	
The Assumed Musicland 1998 Stock Incentive Plan of Best Buy Co., Inc.	
 	
(14	
)	

13.1	
 	
2001 Annual Report to Shareholders	
 	
(1	
)	

21.1	
 	
Subsidiaries of the Registrant	
 	
(1	
)	

23.1	
 	
Consent of Ernst & Young LLP	
 	
(1	
)	

(1)
Document is filed herewith.

(2)
Exhibit so marked was filed with the Securities and Exchange Commission (SEC) on May 23, 1995, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(3)
Exhibit so marked was filed with the SEC on May 20, 1994, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(4)
Exhibit so marked was filed with the SEC on Nov. 12, 1991, as an exhibit to the Registration Statement on Form S-3 (Registration No. 33-43065) of Best Buy Co., Inc., and is incorporated herein by reference and made a part of hereof.

(5)
Exhibit so marked was filed with the SEC on Jan. 13, 1992, as an exhibit to Form 10-Q of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(6)
Exhibit so marked was filed with the SEC on May 28, 1997, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(7)
Exhibit so marked was filed with the SEC on April 29, 1999, as an exhibit to the preliminary Proxy Statement of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
21

(8)
Exhibit so marked was filed with the SEC on Oct. 12, 1999, as an exhibit to Form 10-Q of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(9)
Exhibit so marked was filed on Aug. 20, 1998, as an exhibit to the Registration Statement on Form S-8 (Registration No. 333-61897) of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(10)
Exhibit so marked was filed with the SEC on May 29, 1996, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(11)
Exhibit so marked was filed with the SEC on May 27, 1999, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(12)
Exhibit so marked was filed with the SEC on Jan. 11, 2000, as an exhibit to the Form 10-Q of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(13)
Exhibit so marked was filed with the SEC on April 28, 2000, as an exhibit to the preliminary Proxy Statement of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(14)
Exhibit so marked was filed with the SEC on Feb. 23, 2001, as an exhibit to the Form S-8 (Registration No. 333-56146) of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.

(15)
Exhibit so marked was filed with the SEC on May 24, 2000, as an exhibit to the Form 10-K of Best Buy Co., Inc., and is incorporated herein by reference and made a part hereof.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K under the Securities Act of 1933, the Registrant has not filed as exhibits to the Form 10-K certain instruments with respect to long-term debt under which the amount of securities authorized does not exceed 10% of the total assets of the Registrant. The Registrant hereby agrees to furnish copies of all such instruments to the Commission upon request.
(b)
Reports on Form 8-K:

(1)
Announcement of an Agreement and Plan of Merger with Musicland Stores Corporation, filed on Dec. 8, 2000.

(2)
Announcement of the consummation of the Agreement and Plan of Merger with Musicland Stores Corporation, filed on Feb. 1, 2001.

(3)
Announcement of the increase in the Board of Directors and the appointment of two new directors, filed on Feb. 23, 2001.
22

 SIGNATURES
    Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 	 	BEST BUY CO., INC. 
(Registrant)	

 	
By:	
 	
/s/  RICHARD M. SCHULZE    

Richard M. Schulze
 Chairman and Chief Executive Officer	
    Dated: May 31, 2001
    Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on May 31, 2001.

/s/  RICHARD M. SCHULZE    

Richard M. Schulze	 	Chairman, Chief Executive Officer and
Director (principal executive officer)	

/s/  DARREN R. JACKSON    

Darren R. Jackson	
 	
Senior Vice President - Finance, Treasurer
and Chief Financial Officer (principal
financial officer)	

/s/  MARC I. GORDON    

Marc I. Gordon	
 	
Vice President - Controller
(principal accounting officer)	

/s/  BRADBURY H. ANDERSON    

Bradbury H. Anderson	
 	
Director	

/s/  ROBERT T. BLANCHARD    

Robert T. Blanchard	
 	
Director	

/s/  JACK W. EUGSTER    

Jack W. Eugster	
 	
Director	

/s/  KATHY HIGGINS VICTOR    

Kathy Higgins Victor	
 	
Director	

/s/  ELLIOT S. KAPLAN    

Elliot S. Kaplan	
 	
Director	

/s/  ALLEN U. LENZMEIER    

Allen U. Lenzmeier	
 	
Director	

Mark C. Thompson	
 	
Director	

/s/  FRANK D. TRESTMAN    

Frank D. Trestman	
 	
Director	
23

Hatim A. Tyabji	
 	
Director	

/s/  JAMES C. WETHERBE    

James C. Wetherbe	
 	
Director	
24

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 PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 SIGNATURES
 
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 Exhibit 3.2
 
 SECRETARY'S CERTIFICATE
    I, Elliot S. Kaplan, the Secretary of Best Buy Co., Inc., a Minnesota corporation (the "Corporation"), do hereby certify that the following resolutions were duly adopted by the Board of Directors of the Corporation at a meeting held February 1, 2001, and that said resolutions are still in full force and effect:
RESOLVED:
    The Board of Directors of this corporation does hereby amend Section 1 of Article III of the Amended and Restated By-Laws of the corporation, to read as follows:
Section 1
ELECTION OF
DIRECTORS.
    The business and affairs of this corporation shall be managed by or under the direction of its Board of Directors which shall be comprised of up to eleven (11) directors, six (6) of whom shall be Class 1 Directors, and five (5) of whom shall be Class 2 Directors. Each Director shall be elected to serve for a term of two (2) years and until his/her successor shall have been duly elected and qualified. Class 1 Directors shall be elected in even numbered years and Class 2 Directors shall be elected in odd numbered years. Except as to the year in which elected, the powers, privileges, duties and responsibilities of each Class 1 and Class 2 Director shall be alike in every respect.
RESOLVED:
    The Board of Directors of this corporation does hereby amend Article IV of the Amended and Restated By-Laws of the corporation, to read as follows:
ARTICLE IV
OFFICERS
Section 1
ELECTION, TERM;
NUMBER.
    The officers of the corporation shall be elected or appointed by the Board of Directors. Officers of the corporation shall consist of officers having responsibilities with respect to the corporation and all of its subsidiaries, as well as officers having responsibility only with respect to one or more designated operating units or functions within the corporation. The officers of the corporation shall consist of a Chairman and Chief Executive Officer; a Vice Chairman, President and Chief Operating Officer; a Chief Financial Officer; a Treasurer; a Secretary and such other officer or officers as are elected or appointed by the Board of Directors. A person may hold more than one office. The officers shall perform such duties and have such responsibilities as provided for in these By-laws or as otherwise determined by the Board of Directors. The terms of office with respect to each officer shall be prescribed by the Board at the time of election of the officers and absent the specifications of a term, the term shall be determined to be at the pleasure of the Board of Directors.
Section 2
CHAIRMAN AND CHIEF EXECUTIVE OFFICER.
    The Chairman and Chief Executive Officer shall preside at all meetings of shareholders and directors and shall be responsible for the strategic management and planning of the business of the

corporation, in addition to the duties and powers prescribed by the Board of Directors or by Chapter 302A.
Section 3
VICE CHAIRMAN, PRESIDENT AND CHIEF OPERATING OFFICER.
    The Vice Chairman, President and Chief Operating Officer shall perform the duties and exercise the powers of the Chief Executive Officer in his absence or upon his incapacity and shall have responsibility for managing the day-to-day operations of the business of the corporation, in addition to such duties and powers prescribed by the Board of Directors.
Section 4
OPERATING UNIT OR FUNCTION PRESIDENTS.
    Presidents of the corporation's operating units or functions, if any, as designated by the Board of Directors, shall have responsibility for managing the day-to-day operations of the business of their respective operating units or functional areas of responsibility and shall perform such other duties as the Board of Directors may from time to time prescribe or as may be delegated by the Chief Executive Officer or the Chief Operating Officer.
Section 5
VICE PRESIDENTS.
    The Vice Presidents, if any, in the order designated by the Board of Directors, shall perform such duties as the Board of Directors may from time to time prescribe or as may be delegated by the Chief Executive Officer or the Chief Operating Officer.
Section 6
CHIEF FINANCIAL OFFICER.
    The Chief Financial Officer of the corporation shall be responsible for the strategic management and planning of the corporation's finances, in addition to the duties and powers prescribed by the Board of Directors or by Chapter 302A.
Section 7
TREASURER.
    The Treasurer of the corporation shall have responsibility for managing the day-to-day finances of the corporation, in addition to such other duties and powers prescribed by the Board of Directors.
Section 8
SECRETARY.
    The Secretary and, in his absence, the Assistant Secretary, if any, shall attend all meetings of the Board of Directors, committees thereof, if any, and all meetings of the shareholders and record all votes and minutes of all proceedings in a book kept for that purpose. The Secretary and, in his absence, the Assistant Secretary, shall give or cause to be given notice of all meetings of the shareholders and of the Board of Directors and of committees, if any, and shall perform such other duties as may be prescribed by the Board of Directors or delegated to such officer by the Chief Executive Officer, the Chief Operating Officer or the Chief Financial Officer. The Secretary and, in his absence, the Assistant Secretary, shall cause and affix the seal of the corporation, to the extent the corporation shall have one, to any instrument requiring the same.

Section 9
VACANCIES.
    If any office becomes vacant by reason of death, resignation, retirement, disqualification, removal, or other cause, the directors then in office, although less than a quorum, may by a majority vote, choose a successor or successors who shall hold office for the unexpired term in respect of which such vacancy occurred.
Section 10
DELEGATION.
    Unless prohibited by a resolution approved by the affirmative vote of the Board of Directors, an officer of the corporation may delegate some or all of the duties and powers of an office to other persons, provided that such delegation is in writing.

Dated: May 25, 2001	
 	
/s/  ELLIOT S. KAPLAN    

Elliot S. Kaplan
 Secretary	

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Exhibit 3.2
SECRETARY'S CERTIFICATE
 
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Exhibit 13.1
10-Year Financial Highlights
 $ in thousands, except per share amounts

Fiscal Year(1)
	 	2001(2)
	 	2000
	 	1999
	 	1998
	 	1997
	 	1996
	 	1995
	 	1994
	 	1993
	 	1992
	 	
Statement of Earnings Data	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Revenues	 	$	15,326,552	 	$	12,494,023	 	$	10,064,646	 	$	8,337,762	 	$	7,757,692	 	$	7,214,828	 	$	5,079,557	 	$	3,006,534	 	$	1,619,978	 	$	929,692	 	
 	Gross profit	 	 	3,059,093	 	 	2,393,429	 	 	1,814,523	 	 	1,311,688	 	 	1,045,890	 	 	933,951	 	 	690,393	 	 	456,925	 	 	284,034	 	 	181,062	 	
 	Selling, general and administrative expenses	 	 	2,454,785	 	 	1,854,170	 	 	1,463,281	 	 	1,145,280	 	 	1,005,675	 	 	813,988	 	 	568,466	 	 	379,747	 	 	248,126	 	 	162,286	 	
 	Operating income	 	 	604,308	 	 	539,259	 	 	351,242	 	 	166,408	 	 	40,215	 	 	119,963	 	 	121,927	 	 	77,178	 	 	35,908	 	 	18,776	 	
 	Net earnings (loss)	 	 	395,839	 	 	347,070	 	 	216,282	 	 	81,938	 	 	(6,177	)	 	46,425	 	 	57,651	 	 	41,285	 	 	19,855	 	 	9,601	 	
Per Share Data(3)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Net earnings (loss)	 	$	1.86	 	$	1.63	 	$	1.03	 	$	.46	 	$	(.04	)	$	.27	 	$	.32	 	$	.25	 	$	.14	 	$	.08	 	
 	Common stock price:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	High	 	 	88.88	 	 	80.50	 	 	49.00	 	 	15.30	 	 	6.56	 	 	7.41	 	 	11.31	 	 	7.86	 	 	3.92	 	 	2.95	 	
 	 	Low	 	 	21.00	 	 	40.50	 	 	14.75	 	 	2.16	 	 	1.97	 	 	3.19	 	 	5.53	 	 	2.72	 	 	1.17	 	 	.67	 	
Operating Statistics	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Comparable store sales change(4)	 	 	4.9	%	 	11.1	%	 	13.5	%	 	2.0	%	 	(4.7	%)	 	5.5	%	 	19.9	%	 	26.9	%	 	19.4	%	 	14.0	%	
 	Inventory turns(5)	 	 	7.6	 	 	7.2	 	 	6.6	 	 	5.6	 	 	4.6	 	 	4.8	 	 	4.7	 	 	5.0	 	 	4.8	 	 	5.1	 	
 	Gross profit percentage	 	 	20.0	%	 	19.2	%	 	18.0	%	 	15.7	%	 	13.5	%	 	12.9	%	 	13.6	%	 	15.2	%	 	17.5	%	 	19.5	%	
 	Selling, general and administrative expense percentage	 	 	16.0	%	 	14.8	%	 	14.5	%	 	13.7	%	 	13.0	%	 	11.3	%	 	11.2	%	 	12.6	%	 	15.3	%	 	17.5	%	
 	Operating income percentage	 	 	3.9	%	 	4.3	%	 	3.5	%	 	2.0	%	 	.5	%	 	1.7	%	 	2.4	%	 	2.6	%	 	2.2	%	 	2.0	%	
 	Average revenues per store(6)	 	$	38,900	 	$	37,200	 	$	33,700	 	$	29,600	 	$	29,300	 	$	31,100	 	$	28,400	 	$	22,600	 	$	17,600	 	$	14,300	 	
Year-End Data	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Working capital	 	$	213,965	 	$	453,411	 	$	662,111	 	$	666,172	 	$	563,083	 	$	584,769	 	$	609,049	 	$	362,582	 	$	118,921	 	$	126,817	 	
 	Total assets	 	 	4,839,587	 	 	2,995,342	 	 	2,531,623	 	 	2,070,371	 	 	1,740,399	 	 	1,891,858	 	 	1,507,125	 	 	952,494	 	 	439,142	 	 	337,218	 	
 	Long-term debt, including current portion	 	 	295,949	 	 	30,650	 	 	60,597	 	 	225,322	 	 	238,016	 	 	229,855	 	 	240,965	 	 	219,710	 	 	53,870	 	 	52,980	 	
 	Convertible preferred securities	 	 	—	 	 	—	 	 	—	 	 	229,854	 	 	230,000	 	 	230,000	 	 	230,000	 	 	—	 	 	—	 	 	—	 	
 	Shareholders' equity	 	 	1,821,928	 	 	1,095,985	 	 	1,033,945	 	 	535,712	 	 	428,796	 	 	430,020	 	 	376,122	 	 	311,444	 	 	182,283	 	 	157,568	 	
 	Number of stores	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Best Buy	 	 	419	 	 	357	 	 	311	 	 	284	 	 	272	 	 	251	 	 	204	 	 	151	 	 	111	 	 	73	 	
 	 	Musicland	 	 	1,309	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	
 	 	Magnolia Hi-Fi	 	 	13	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	
 	Total retail square footage (000s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Best Buy	 	 	19,010	 	 	16,205	 	 	14,017	 	 	12,694	 	 	12,026	 	 	10,771	 	 	8,041	 	 	5,072	 	 	3,250	 	 	2,105	 	
 	 	Musicland	 	 	8,772	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	
 	 	Magnolia Hi-Fi	 	 	133	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	
This table should be read in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition, beginning on page 22, and the Consolidated Financial Statements and Notes, beginning on page 36.
(1)
Both fiscal 2001 and 1996 included 53 weeks. All other periods presented included 52 weeks.
(2)
During the fourth quarter of fiscal 2001, the Company acquired the common stock of Musicland Stores Corporation (Musicland) and Magnolia Hi-Fi, Inc. (Magnolia Hi-Fi). The results of operations of those businesses are included from their dates of acquisition.
(3)
Earnings per share is presented on a diluted basis and reflects two-for-one stock splits in March 1999, May 1998 and April 1994, and a three-for-two stock split in September 1993.
(4)
Comparable stores are stores open at least 14 full months and for all periods presented reflect Best Buy stores only.
(5)
Inventory turns reflect Best Buy stores only and are calculated based upon a monthly average of inventory balances.
(6)
Average revenues per store reflect Best Buy stores only and is based upon total revenues for the period divided by the weighted average number of stores open during such period.
20-21

 Management's Discussion and Analysis of
Results of Operations and Financial Condition
Overview
Best Buy Co., Inc. (the Company) is the nation's largest volume specialty retailer of name-brand consumer electronics, home office equipment, entertainment software and appliances. During the fourth quarter of fiscal 2001, the Company acquired Musicland Stores Corporation (Musicland) and Magnolia Hi-Fi, Inc. (Magnolia Hi-Fi). Musicland is primarily a mall-based retailer of pre-recorded music and movies. Magnolia Hi-Fi is a retailer of top-of-the-line audio and video products. Both acquisitions were accounted for using the purchase method. Under this method, the net assets and results of operations of those businesses are included in the consolidated financial statements of the Company from their dates of acquisition. For additional information, refer to Note 2 of the Notes to Consolidated Financial Statements on page 44 and the "Musicland Acquisition" section of Management's Discussion and Analysis of Results of Operations and Financial Condition on page 31.
The Company's fiscal year ended March 3, 2001, contained 53 weeks. Fiscal 2000 and fiscal 1999 contained 52 weeks.
Results of Operations
The Company generated record earnings for the fourth consecutive year. For fiscal 2001, net earnings were $395.8 million, compared to $347.1 million in fiscal 2000 and $216.3 million in fiscal 1999. Earnings per share on a diluted basis increased to $1.86 in fiscal 2001, compared with $1.63 per share in fiscal 2000 and $1.03 per share in fiscal 1999. The 14% increase in fiscal 2001 net earnings was the result of strong sales of new and expanded digital technology product offerings and gross margin improvements. The earnings growth in fiscal 2001 also was driven by a 23% increase in revenues for the year, with new Best Buy stores accounting for the majority of the increase. Despite an increasingly challenging economic environment in fiscal 2001, comparable store sales increased 4.9% on top of an 11.1% increase in fiscal 2000, and gross profit margin improved to 20.0% of revenues from 19.2% of revenues for the same period one year ago. The Company's financial performance in fiscal 2001 also was impacted by expenses associated with the Company's growth initiatives, including the national launch of BestBuy.com and the significant start-up costs associated with opening 62 new Best Buy stores, including the entry into the New York market. The write-off of $15 million of e-commerce investments reduced fiscal 2001 earnings by approximately 4 cents per share. Fiscal 2001 earnings per share also were reduced by approximately 4 cents per share as a result of the costs associated with the acquisition and integration of Musicland. Magnolia Hi-Fi's financial results did not have a material impact on the Company's net earnings.
22

In addition to traditional financial measurements, management uses Economic Value Added (EVA®) to measure and manage the financial performance and the allocation of capital resources of the Company. EVA is net operating profit after taxes minus a charge for total capital employed. Operating profit after taxes exceeded the required return on capital employed for the third consecutive year. The Company generated EVA of $138 million in fiscal 2001, compared with $178 million in fiscal 2000 and $75 million in fiscal 1999. Fiscal 2001 EVA was impacted by higher capital investments in new stores, including the impact of capitalizing operating leases for EVA purposes and technology investments to support expanding and increasingly complex business operations, along with significant start-up costs for BestBuy.com and the New York market. These activities reduced EVA in fiscal 2001 as compared with fiscal 2000; however, the Company expects to earn positive EVA from these investments in the future.
The following table presents selected revenue data for each of the past three fiscal years ($ in thousands).

 	 	2001
	 	2000
	 	1999
	 	
Revenues	 	$	15,326,552	 	$	12,494,023	 	$	10,064,646	 	
Percentage increase in revenues	 	 	23	%	 	24	%	 	21	%	
Comparable store sales increase*	 	 	4.9	%	 	11.1	%	 	13.5	%	
Average revenues per store*	 	$	38,900	 	$	37,200	 	$	33,700	 	

*
Best Buy stores only.
Revenues in fiscal 2001 increased 23% to $15.3 billion, compared with $12.5 billion in fiscal 2000, due to the addition of 62 Best Buy stores, a full year of operation at the 47 Best Buy stores added in fiscal 2000, a 4.9% increase in comparable store sales and the approximately $160 million in revenues generated by Musicland and Magnolia Hi-Fi from their dates of acquisition. The 53rd week added about $280 million to fiscal 2001 revenues. The comparable store sales increase in a weaker economic environment reflects the strength of the digital product cycle, the benefits from enhancements made to the Company's operating model and the Company's continuing ability to gain market share. Digital product sales comprised 15% of revenues in the fourth quarter of fiscal 2001, compared with 10% one year ago. The Company's enhanced operating model, which included an improved merchandise assortment, higher in-stock positions, more effective advertising and more consistent store execution, contributed to market share gains.
23

As of March 3, 2001, the Company operated more than 1,700 retail stores. The Company acquired more than 1,300 stores as part of its acquisition of Musicland and 13 stores in connection with the acquisition of Magnolia Hi-Fi. The Company opened 62 new Best Buy stores in fiscal 2001, including entries into the new markets of the New York City area and Norfolk, Va. Included in the new store openings were 11 small-market stores, intended to serve markets with populations of less than 200,000, bringing the total stores in this format to 20. The Company also relocated seven stores and expanded three stores during the last year. At the end of fiscal 2001, the Company operated 419 Best Buy stores, compared with 357 stores at the end of the prior fiscal year.
In the second quarter of fiscal 2001, the Company launched its online shopping site, BestBuy.com. The Company's clicks-and-mortar strategy is designed to empower consumers to research and purchase products seamlessly across the Best Buy retail environment—online or in retail stores. The online site initially offered consumer electronics products, music and movies. Later in the year, the product offerings were expanded to include computers and related products. While online revenues do not currently represent a significant portion of the Company's business, the Company believes the investment in and increased expenses associated with the development, launch and operation of a comprehensive Internet strategy creates a significant future growth opportunity in serving consumers both online and in retail stores.
Fiscal 2000 revenues increased 24% to $12.5 billion, compared with $10.1 billion in fiscal 1999, due to an 11.1% increase in comparable store sales, 47 new stores and a full year of operations at the 28 stores opened in fiscal 1999. The increase in comparable store sales reflected the continued strength in consumer spending and the Company's ability to gain market share. Higher levels of disposable income due to the strong economy, consumers' rapid acceptance of digital technology products and the increased affordability of personal computers all drove consumer demand. Internet service providers (ISPs) offered new subscribers significant rebates on purchases of personal computers, making them more affordable. These offers stimulated unit sales of personal computers and sales of higher-margin accessories and Performance Service Plans (PSPs).
24

Product Category Performance
The following table presents the Best Buy retail store sales mix by major product category for each of the past three fiscal years.

 	 	2001
	 	2000*
	 	1999*
	 	
Home Office	 	34	%	35	%	36	%	
Consumer Electronics—Video	 	22	%	19	%	18	%	
Consumer Electronics—Audio	 	11	%	11	%	11	%	
Entertainment Software	 	19	%	19	%	20	%	
Appliances	 	7	%	8	%	8	%	
Other	 	7	%	8	%	7	%	
 	 		 		 		 	
Total	 	100	%	100	%	100	%	

*
Prior-year percentages have been adjusted to reflect current year categorization of products. The primary change was to reclassify cameras and photographic equipment from the "other" category to consumer electronics—video.
Home Office Best Buy's home office category experienced positive comparable store sales growth in 2001 as a whole; however, sales slowed through the latter half of the year as consumer demand for personal computers declined. Revenues were driven by a variety of products, including wireless communications, computer peripherals, configure-to-order computer offerings, notebook computers and personal digital assistants (PDAs). ISPs continued to offer new subscribers significant rebates on the purchase of personal computers and other products, stimulating demand. As a result of its strategic alliance with Microsoft Corporation and Best Buy's retail execution, the Company signed up more than 1.3 million new ISP subscriptions in fiscal 2001, which had a favorable impact on computer sales and other product sales. Laptop computers and configure-to-order computers, which generally carry a higher gross profit margin, increased in their percentage of the computer business' sales mix. Consumer demand has been shifting to higher-priced, more fully featured computers. Desktop personal computer sales declined as a result of the industry-wide decline in unit sales volume and a slight decrease in average selling prices. Computer peripherals, including CD drives with read/write capabilities, generated strong sales gains during the year. Sales of PDAs increased significantly in fiscal 2001 and contributed to the category's positive comparable store sales growth. The re-merchandising of wireless communications and other digital products within this category to a more prominent position at the front of the stores contributed to the comparable store sales increase.
25

 Consumer Electronics Consumer electronics comprised 33% of Best Buy's total sales mix in fiscal 2001, up from 30% in fiscal 2000. The category experienced double-digit comparable store sales growth, led by new technology products, including digital televisions, digital camcorders, cameras and DVD players. The sales were driven by increased consumer demand for new technology and lower price points. Sales of digital televisions, with an average selling price of approximately $2,300 as of fiscal year-end, increased dramatically during the year, accounting for approximately 10% of fiscal 2001 television sales compared with 2% in fiscal 2000. Consumers continued the rapid transition to DVD technology from the VHS format. Sales of analog televisions and home theater systems also generated strong sales gains in fiscal 2001.
Entertainment Software Sales of entertainment software, which includes music and movies, computer software and video games, were 19% of Best Buy's total sales in fiscal 2001, unchanged from fiscal 2000. Best Buy posted its third consecutive year of DVD movie comparable store sales gains of more than 100% due to the continued expansion of the DVD hardware installed base and a broader assortment of movie titles, including strong-selling new releases. Sales of recorded music were impacted by the general absence of new releases with strong consumer appeal and an increase in both the downloading of music via Internet sites and greater consumer awareness of CD recording technology. Video game hardware and software sales were weaker than expected due to a shortage of new titles and the limited availability of new technology products such as Sony's PlayStation II video game platform. Online offerings, industry consolidation, the industry-wide decrease in personal computer unit sales volume and lower price points continued to impact computer software sales.
Appliances Comparable store sales of appliances declined in fiscal 2001 as a result of an increased number of competing retail stores offering major appliances, a lack of new products and the slowdown in consumer demand that was experienced throughout the industry. Currently, the Company is working with suppliers to improve its appliance business model, end to end, and increase profitability. The primary areas of concentration include the consumer shopping experience, marketing of products, after-sale service and logistics.
Other Sales in the "other" category, comprised of Performance Service Plans (PSPs), furniture and other miscellaneous products such as batteries, business cases and blank audio and video media, were consistent with fiscal 2000 as a percentage of the retail store sales mix. PSP sales decreased to 3.9% of revenues in fiscal 2001 from 4.0% of revenues in fiscal 2000 due to the decline in personal computer and appliance unit volume, which was offset by higher unit sales of other products.
26

Components of Operating Income
The following table presents selected operating ratios as a percentage of revenues for each of the past three fiscal years.

 	 	2001
	 	2000
	 	1999
	 	
Gross profit	 	20.0	%	19.2	%	18.0	%	
Selling, general and administrative expenses	 	16.0	%	14.8	%	14.5	%	
Operating income	 	3.9	%	4.3	%	3.5	%	
Gross profit for fiscal 2001 improved to 20.0% of revenues, compared with 19.2% in fiscal 2000. The current-year increase was driven by improved product margins and a more profitable sales mix that resulted from increased sales of digital products and higher-end, more fully featured products. The generally lower-margin home office category, which includes personal computers, declined in Best Buy's sales mix, while the generally higher-margin consumer electronics categories, which include most digital products, increased. However, within the home office category, Best Buy benefited from a more profitable sales mix as consumers shifted from lower- margin desktop computers to higher-margin configure-to-order and notebook computers. The Company also benefited from its "Complete Solution" selling strategy that is designed to provide customers with higher-margin accessories and services supporting their purchases. Improved inventory management contributed to the gross profit margin improvement as inventory turns for Best Buy stores increased to 7.6 turns in fiscal 2001, compared with 7.2 turns in fiscal 2000. The increase in inventory turns resulted in fewer markdowns, particularly during model transitions. The addition of Musicland's financial results from its date of acquisition positively impacted the Company's gross profit by approximately 0.2% of revenues, due to its higher margin sales mix.
Gross profit improved to 19.2% of revenues in fiscal 2000 from 18.0% in fiscal 1999. The improvement resulted from higher product margins, a more profitable sales mix due to higher sales of PSPs and accessories, and an enhanced inventory assortment. Improved inventory turns and continued efforts to reduce inventory shrink also contributed to the gross profit margin improvement.
27

Selling, general and administrative expenses (SG&A) increased to 16.0% of revenues in fiscal 2001 compared with 14.8% one year ago, primarily as a result of the Company's increased investment in strategic initiatives combined with a more modest sales growth environment. The launch and operation of BestBuy.com was a significant component of the increase in the SG&A ratio. The start-up costs associated with the opening of the New York market, as well as lower than anticipated productivity from the initial operations of these stores, also added to the increase in the SG&A rate. Similar to the entry into Los Angeles, management currently expects that the New York market will take longer to reach its projected productivity. Fiscal 2001 expenses also were impacted by the $15 million write-off of e-commerce company investments that increased SG&A by approximately 0.1% of revenues. In addition, the costs associated with the operation, acquisition and integration of Musicland increased fiscal 2001 SG&A by approximately 0.2% of revenues. The Company's overall financial performance in fiscal 2001 benefited from its strategic alliance with Microsoft Corporation in the form of profit sharing and technology and marketing support.
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.
28

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.
29

The Company's practice is to lease rather than own real estate. For those sites developed using working capital, the Company generally sells and leases back those properties under long-term leases. Recoverable costs from developed properties increased by $31 million over last year primarily due to the increased development of new stores. During the fourth quarter of fiscal 2001, the Company entered into a $60 million, five-year master lease agreement for the purpose of constructing and leasing new retail locations.
Capital spending in fiscal 2001 was $658 million, compared with $361 million and $166 million in fiscal 2000 and fiscal 1999, respectively. The increase is primarily the result of the Company's investment in 62 new stores and 10 expanded or relocated stores during fiscal 2001, compared with 47 new stores and 13 expanded or relocated stores in fiscal 2000, and 28 new stores and five expanded or relocated stores in fiscal 1999. Capital spending in fiscal 2001 also included investment in store enhancement projects and expansion of the Company's distribution and corporate facilities. In addition, the Company is significantly increasing its investment in its core financial and operating systems to support the Company's growth and to support more complex sales and customer transaction processes.
In October 1998 and September 1999, the Company's Board of Directors authorized the purchase of up to $100 million and $200 million, respectively, of the Company's common stock. These plans were completed with a total of 1.8 million and 3.8 million shares purchased and retired, respectively. In February 2000, the Company's Board of Directors authorized the purchase of up to $400 million of the Company's common stock from time to time through open market purchases. The stock purchase program has no stated expiration date. Approximately 1.9 million shares had been purchased under this plan during the prior fiscal year at a cost of $100 million. No additional purchases were made in fiscal 2001.
The Company has a $100 million revolving credit facility that is scheduled to mature in June 2002. There were no borrowings under that facility during fiscal 2001.
30

Musicland Acquisition
The following table shows unaudited pro forma combined results of operations of Best Buy and Musicland for fiscal 2001 as though that acquisition had been completed as of the beginning of the fiscal year:

 	 	Pro Forma Results
	 	Reported Results
	 	
 	 	($ in thousands, except per share amounts)
	 	
Revenues	 	$	17,078,464	 	$	15,326,552	 	
Gross profit	 	 	3,710,328	 	 	3,059,093	 	
Selling, general and administrative costs	 	 	3,023,200	 	 	2,454,785	 	
Operating income	 	 	687,128	 	 	604,308	 	
Net interest income (expense)	 	 	(2,024	)	 	37,171	 	
Earnings before income tax expense	 	 	685,104	 	 	641,479	 	
Income tax expense	 	 	267,875	 	 	245,640	 	
Net earnings	 	 	417,229	 	 	395,839	 	
Earnings per share—diluted	 	$	1.96	 	$	1.86	 	
Components of operating income:	 	 	 	 	 	 	 	
 	Gross profit	 	 	21.7	%	 	20.0	%	
 	Selling, general and administrative expense	 	 	17.7	%	 	16.0	%	
 	Operating income	 	 	4.0	%	 	3.9	%	
The information presented above does not necessarily represent what actual results would have been, had the acquisition taken place at the beginning of the fiscal year. Expenses associated with post-acquisition integration and store transformation activities are not included in the pro forma results. Additionally, anticipated changes to operations, including the impact of changes in product assortment at Musicland stores and expected expense savings and synergies, are not reflected.
The pro forma gross profit margin ratio of 21.7% as compared to the reported 20.0% reflects the impact of Musicland's higher margin sales mix.
The pro forma SG&A ratio of 17.7%, compared with a reported SG&A ratio of 16.0%, reflects the higher cost structure of Musicland's operations. In addition, the amortization of goodwill resulting from the acquisition is included in the pro forma SG&A and contributes $15.9 million in SG&A or approximately 0.1% of revenues.
31

Pro forma interest expense reflects interest on the debt assumed as well as the lost interest income on the cash used to finance the acquisition of Musicland shares. The pro forma effective tax rate of 39.1% compared to the reported tax rate of 38.3% principally reflects the impact of non tax-deductible goodwill amortization.
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
32

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.
33

 Quarterly Results and Seasonality
Similar to many retailers, the Company's business is seasonal. Revenues and earnings are typically greater during the second half of the fiscal year, which includes the holiday selling season. The timing of new store openings, costs associated with acquisitions and development of new businesses, and general economic conditions also may affect future quarterly results of the Company.
The following tables show selected unaudited quarterly operating results and high and low prices of the Company's common stock for each quarter of fiscal 2001 and 2000.
($ in thousands, except per share amounts)

Quarter
	 	1st
	 	2nd
	 	3rd
	 	4th(1)
	 	
Fiscal 2001	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	 	$	2,963,718	 	$	3,169,171	 	$	3,732,080	 	$	5,461,583	 	
Comparable store sales increase(2)	 	 	9.5	%	 	5.1	%	 	5.9	%	 	1.8	%	
Gross profit	 	$	605,593	 	$	648,745	 	$	689,041	 	$	1,115,714	 	
Operating income	 	 	108,518	 	 	115,350	 	 	85,013	 	 	295,427	 	
Net earnings	 	 	72,158	 	 	76,748	 	 	57,263	 	 	189,670	 	
Diluted earnings per share	 	 	.34	 	 	.36	 	 	.27	 	 	.89	 	

Fiscal 2000	

 	

 	

 	

 	
 	
Revenues	 	$	2,385,431	 	$	2,686,640	 	$	3,107,337	 	$	4,314,615	 	
Comparable store sales increase(2)	 	 	13.3	%	 	11.1	%	 	9.2	%	 	11.0	%	
Gross profit	 	$	462,002	 	$	530,520	 	$	590,367	 	$	810,540	 	
Operating income	 	 	71,701	 	 	89,606	 	 	122,588	 	 	255,364	 	
Net earnings	 	 	46,809	 	 	58,067	 	 	78,389	 	 	163,805	 	
Diluted earnings per share	 	 	.22	 	 	.27	 	 	.37	 	 	.78	 	

(1)
The fourth quarter of fiscal 2001 included 14 weeks. All other quarters included 13 weeks. The comparable store sales increase for the fourth quarter of fiscal 2001 was based upon the comparable 14-week period for the prior year. Also, during the fourth quarter of fiscal 2001, the Company acquired the common stock of Musicland Stores Corporation and Magnolia Hi-Fi, Inc. The results of operations of those businesses are included from their dates of acquisition.

(2)
Best Buy stores only.
34

Common Stock Prices

Quarter
	 	1st
	 	2nd
	 	3rd
	 	4th
	
Fiscal 2001	 	 	 	 	 	 	 	 	 	 	 	 	
High	 	$	88.88	 	$	80.69	 	$	74.13	 	$	51.00	
Low	 	 	47.25	 	 	57.50	 	 	30.50	 	 	21.00	

Fiscal 2000	

 	

 	

 	

 	
High	 	$	57.38	 	$	80.50	 	$	72.81	 	$	67.00	
Low	 	 	40.50	 	 	44.25	 	 	45.88	 	 	42.00	
Best Buy's common stock is traded on the New York Stock Exchange under the symbol BBY. As of March 30, 2001, there were 1,970 holders of record of Best Buy common stock. The Company has not historically paid, and has no current plans to pay, cash dividends on its common stock.
Forward-Looking Statements
Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this annual report are forward-looking statements and may be identified by the use of words such as "believe,""expect," "anticipate," "plan," "estimate," "intend" and "potential." Such statements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause the Company's actual results to differ materially from the anticipated results expressed in such forward-looking statements, including, among other things, general economic conditions, acquisitions and development of new businesses, product availability, sales volumes, profit margins, and the impact of labor markets and new product introductions on the Company's overall profitability. Readers should review the Company's Current Reports on Form 8-K that describe additional important factors that could cause actual results to differ materially from those contemplated by the statements made in this annual report.
35

 Consolidated Balance Sheets
$ in thousands, except per share amounts

ASSETS
	 	March 3
2001
	 	Feb. 26
2000
	
Current Assets	 	 	 	 	 	 	
 	Cash and cash equivalents	 	$	746,879	 	$	750,723	
 	Receivables	 	 	209,031	 	 	189,301	
 	Recoverable costs from developed properties	 	 	103,846	 	 	72,770	
 	Merchandise inventories	 	 	1,766,934	 	 	1,183,681	
 	Other current assets	 	 	101,973	 	 	41,985	
 	 		 		
 	 	Total current assets	 	 	2,928,663	 	 	2,238,460	

Property and Equipment	

 	

 	
 	Land and buildings	 	 	170,978	 	 	76,228	
 	Leasehold improvements	 	 	556,534	 	 	254,767	
 	Fixtures and equipment	 	 	1,259,880	 	 	762,476	
 	 		 		
 	 	 	1,987,392	 	 	1,093,471	
 	Less accumulated depreciation and amortization	 	 	543,220	 	 	395,387	
 	 		 		
 	 	Net property and equipment	 	 	1,444,172	 	 	698,084	

Goodwill, Net	

385,355	

—	

Other Assets	

81,397	

58,798	

Total Assets	
 	
$	
4,839,587	
 	
$	
2,995,342	
 	 		 		
See Notes to Consolidated Financial Statements.
36

$ in thousands, except per share amounts

LIABILITIES AND SHAREHOLDERS' EQUITY
	 	March 3
2001
	 	Feb. 26
2000
	
Current Liabilities	 	 	 	 	 	 	
 	Accounts payable	 	$	1,772,722	 	$	1,313,940	
 	Accrued compensation and related expenses	 	 	154,159	 	 	102,065	
 	Accrued liabilities	 	 	545,590	 	 	287,888	
 	Accrued income taxes	 	 	127,287	 	 	65,366	
 	Current portion of long-term debt	 	 	114,940	 	 	15,790	
 	 		 		
 	 	Total current liabilities	 	 	2,714,698	 	 	1,785,049	

Long-Term Liabilities	

121,952	

99,448	

Long-Term Debt	

181,009	

14,860	

Shareholders' Equity	

 	

 	
 	Preferred stock, $1.00 par value: Authorized—400,000 shares; Issued and outstanding—none	 	 	—	 	 	—	
 	Common stock, $.10 par value: Authorized—1,000,000,000 shares;	 	 	 	 	 	 	
 	Issued and outstanding—208,138,000 and 200,379,000 shares, respectively	 	 	20,814	 	 	20,038	
 	Additional paid-in capital	 	 	576,818	 	 	247,490	
 	Retained earnings	 	 	1,224,296	 	 	828,457	
 	 		 		
 	 	Total shareholders' equity	 	 	1,821,928	 	 	1,095,985	

Total Liabilities and Shareholders' Equity	
 	
$	
4,839,587	
 	
$	
2,995,342	
 	 		 		
See Notes to Consolidated Financial Statements.
37

 CONSOLIDATED STATEMENTS OF EARNINGS
$ in thousands, except per share amounts

For the Fiscal Years Ended
	 	March 3
2001
	 	Feb. 26
2000
	 	Feb. 27
1999
	
Revenues	 	$	15,326,552	 	$	12,494,023	 	$	10,064,646	
Cost of goods sold	 	 	12,267,459	 	 	10,100,594	 	 	8,250,123	
 	 		 		 		
Gross profit	 	 	3,059,093	 	 	2,393,429	 	 	1,814,523	
Selling, general and administrative expenses	 	 	2,454,785	 	 	1,854,170	 	 	1,463,281	
 	 		 		 		
Operating income	 	 	604,308	 	 	539,259	 	 	351,242	
Net interest income	 	 	37,171	 	 	23,311	 	 	435	
 	 		 		 		
Earnings before income tax expense	 	 	641,479	 	 	562,570	 	 	351,677	
Income tax expense	 	 	245,640	 	 	215,500	 	 	135,395	
 	 		 		 		
Net earnings	 	$	395,839	 	$	347,070	 	$	216,282	
 	 		 		 		
Basic earnings per share	 	$	1.92	 	$	1.70	 	$	1.09	
Diluted earnings per share	 	$	1.86	 	$	1.63	 	$	1.03	
Basic weighted average common	 	 	 	 	 	 	 	 	 	
shares outstanding (000s)	 	 	206,699	 	 	204,194	 	 	199,185	
Diluted weighted average common	 	 	 	 	 	 	 	 	 	
shares outstanding (000s)	 	 	212,658	 	 	212,580	 	 	210,006	
See Notes to Consolidated Financial Statements.
38

 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
$ in thousands

For the Fiscal Years Ended
	 	March 3
2001
	 	Feb. 26
2000
	 	Feb. 27
1999
	 	
Operating Activities	 	 	 	 	 	 	 	 	 	 	
 	Net earnings	 	$	395,839	 	$	347,070	 	$	216,282	 	
 	Adjustments to reconcile net earnings to net cash provided by operating activities:	 	 	 	 	 	 	 	 	 	 	
 	 	Depreciation	 	 	167,369	 	 	103,709	 	 	73,627	 	
 	 	Deferred income taxes	 	 	42,793	 	 	29,233	 	 	(749	)	
 	 	Other	 	 	20,609	 	 	5,832	 	 	4,740	 	
 	Changes in operating assets and liabilities, net of acquired assets and liabilities:	 	 	 	 	 	 	 	 	 	 	
 	 	Receivables	 	 	(7,434	)	 	(56,900	)	 	(36,699	)	
 	 	Merchandise inventories	 	 	(143,969	)	 	(137,315	)	 	14,422	 	
 	 	Other assets	 	 	(16,018	)	 	(6,904	)	 	(19,090	)	
 	 	Accounts payable	 	 	16,186	 	 	302,194	 	 	249,094	 	
 	 	Other liabilities	 	 	198,721	 	 	91,715	 	 	89,639	 	
 	 	Accrued income taxes	 	 	134,108	 	 	97,814	 	 	62,672	 	
 	 		 		 		 	
 	 	 	Total cash provided by operating activities	 	 	808,204	 	 	776,448	 	 	653,938	 	
 	 		 		 		 	
Investing Activities	 	 	 	 	 	 	 	 	 	 	
 	 	Additions to property and equipment	 	 	(657,706	)	 	(361,024	)	 	(165,698	)	
 	 	Acquisitions of businesses, net of cash acquired	 	 	(326,077	)	 	—	 	 	—	 	
 	 	Increase in recoverable costs from developed properties	 	 	(31,076	)	 	(21,009	)	 	(65,741	)	
 	 	Increase in other assets	 	 	(14,943	)	 	(34,301	)	 	(9,635	)	
 	 		 		 		 	
 	 	 	Total cash used in investing activities	 	 	(1,029,802	)	 	(416,334	)	 	(241,074	)	
 	 		 		 		 	
Financing Activities	 	 	 	 	 	 	 	 	 	 	
 	 	Long-term debt payments	 	 	(17,625	)	 	(29,946	)	 	(165,396	)	
 	 	Issuance of common stock	 	 	235,379	 	 	32,229	 	 	20,644	 	
 	 	Repurchase of common stock	 	 	—	 	 	(397,451	)	 	(2,462	)	
 	 		 		 		 	
 	 	 	Total cash provided by (used in) financing activities	 	 	217,754	 	 	(395,168	)	 	(147,214	)	
 	 		 		 		 	
(Decrease) Increase in Cash and Cash Equivalents	 	 	(3,844	)	 	(35,054	)	 	265,650	 	
Cash and Cash Equivalents at Beginning of Period	 	 	750,723	 	 	785,777	 	 	520,127	 	
 	 		 		 		 	
Cash and Cash Equivalents at End of Period	 	$	746,879	 	$	750,723	 	$	785,777	 	
 	 		 		 		 	
See Notes to Consolidated Financial Statements.
39

 Consolidated Statements of Changes in Shareholders' Equity
$ in thousands

 	 	Common
Stock
	 	Additional
Paid-In
Capital
	 	Retained
Earnings
	
Balances at Feb. 28, 1998	 	$	4,463	 	$	266,144	 	$	265,105	
Stock options exercised	 	 	199	 	 	21,381	 	 	—	
Tax benefit from stock options exercised	 	 	—	 	 	40,428	 	 	—	
Conversion of preferred securities	 	 	509	 	 	221,896	 	 	—	
May 1998 two-for-one stock split	 	 	5,016	 	 	(5,016	)	 	—	
Repurchase of common stock	 	 	(6	)	 	(2,456	)	 	—	
Net earnings	 	 	—	 	 	—	 	 	216,282	
 	 		 		 		
Balances at Feb. 27, 1999	 	 	10,181	 	 	542,377	 	 	481,387	
Stock options exercised	 	 	408	 	 	32,713	 	 	—	
Tax benefit from stock options exercised	 	 	—	 	 	79,300	 	 	—	
March 1999 two-for-one stock split	 	 	10,190	 	 	(10,190	)	 	—	
Repurchase of common stock	 	 	(741	)	 	(396,710	)	 	—	
Net earnings	 	 	—	 	 	—	 	 	347,070	
 	 		 		 		
Balances at Feb. 26, 2000	 	 	20,038	 	 	247,490	 	 	828,457	
Stock options exercised	 	 	388	 	 	37,104	 	 	—	
Tax benefit from stock options exercised	 	 	—	 	 	92,612	 	 	—	
Stock issuance	 	 	388	 	 	199,612	 	 	—	
Net earnings	 	 	—	 	 	—	 	 	395,839	
 	 		 		 		
Balances at March 3, 2001	 	$	20,814	 	$	576,818	 	$	1,224,296	
 	 		 		 		
See Notes to Consolidated Financial Statements.
40

 
 Notes to Consolidated Financial Statements
$ in thousands, except per share amounts
1.  Summary of Significant Accounting Policies
Description of Business
The Company has operated in a single business segment, selling personal computers and other home office products, consumer electronics, entertainment software, major appliances and related accessories principally through its retail stores. During the fourth quarter of fiscal 2001, the Company acquired the common stock of Musicland Stores Corporation (Musicland) and Magnolia Hi-Fi, Inc. (Magnolia Hi-Fi). Musicland is principally a mall-based retailer of pre-recorded home entertainment products. Magnolia Hi-Fi is a Seattle-based, high-end retailer of audio and video products. The results of the acquired businesses have been included in the consolidated financial statements since the dates of acquisition (see Note 2).
Basis of Presentation
The consolidated financial statements include the accounts of Best Buy Co., Inc. and its subsidiaries. Significant intercompany accounts and transactions have been eliminated. All subsidiaries are wholly owned.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated balance sheets and statements of earnings, as well as the disclosure of contingent liabilities. Actual results could differ from these estimates and assumptions.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest the end of February. Fiscal 2001 included 53 weeks, while fiscal 2000 and 1999 each included 52 weeks.
Cash and Cash Equivalents
The Company considers short-term investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. Restricted cash amounts are not significant.
Recoverable Costs From Developed Properties
The costs of acquisition and development of properties which the Company intends to sell and lease back or recover from landlords within one year are included in current assets.
Merchandise Inventories
Merchandise inventories are recorded at the lower of cost or market. The primary methods used to determine cost are the average cost method and the retail inventory method.
41

Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or, in the case of leasehold improvements, over the shorter of the estimated useful lives or lease terms. Useful lives for buildings, leasehold improvements, fixtures and equipment generally range from 30 to 40 years, 10 to 20 years and 3 to 15 years, respectively. When indicators of impairment exist, the Company evaluates long-lived assets for impairment using undiscounted cash flow analysis.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets of businesses acquired in fiscal 2001. Goodwill is being amortized using the straight-line method over 20 years. The Company periodically reviews goodwill for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the goodwill may not be recoverable. An impairment loss would be recorded in the period such determination is made. The Company believes that no material impairment of goodwill existed at March 3, 2001.
Revenue Recognition
The Company recognizes revenues from the sale of merchandise at the time the merchandise is sold. Service revenues are recognized at the time the service is provided.
The Company sells extended service contracts, called Performance Service Plans, on behalf of an unrelated third party. In those states where the Company is deemed to be the obligor on the contract at the time of sale, the net commission revenue from the sale is recognized ratably over the term of the service contract, generally two to five years. For contracts sold in all other states, the net commission revenue is recognized at the time of sale.
Stock-Based Compensation
The Company accounts for employee stock-based compensation using the intrinsic value method as prescribed under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The Company also presents pro forma net earnings and earnings per share in Note 5 as if the Company had adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Pre-Opening Costs
Non-capital expenditures associated with opening new stores are expensed as incurred.
42

Advertising Costs
Advertising costs, which are included in selling, general and administrative expenses, are expensed the first time the advertisement runs.
Earnings per Share
Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under stock-based compensation plans. Convertible preferred securities were assumed to be converted into common stock, and any related interest expense, net of income taxes, was added back to net earnings when the assumed conversion resulted in lower earnings per share.
The Company completed two-for-one stock splits effected in the form of 100% stock dividends distributed on March 18, 1999, and May 26, 1998. All share and per share information reflects these stock splits.
Reclassifications
Certain previous year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on net earnings or total shareholders' equity.
43

2.  Acquisitions
Effective December 15, 2000, the Company acquired the common stock of Magnolia Hi-Fi for $88,000 in cash, including transaction costs. Effective January 31, 2001, the Company acquired the common stock of Musicland for $425,100, including transaction costs, plus the assumption of long-term debt valued at $271,200. Both acquisitions were accounted for using the purchase method. Accordingly, the net assets were recorded at their estimated fair values and operating results were included in the Company's financial statements from the dates of acquisition.
The purchase prices for Magnolia Hi-Fi and Musicland have been allocated on a preliminary basis using information currently available. The allocation of the purchase price to the assets and liabilities acquired is expected to be finalized by the end of fiscal 2002. Adjustments to the allocation of purchase price may occur as a result of obtaining more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of purchase. The Company is continuing to evaluate how the acquired operations will be integrated into the Company's overall business strategy. These preliminary allocations resulted in acquired goodwill of $387,400, which is being amortized on a straight-line basis over 20 years. Amortization of goodwill was $2,000 for fiscal 2001 and is included in selling, general and administrative expenses.
The pro forma unaudited consolidated results of operations as though Musicland had been acquired as of the beginning of fiscal 2001 and 2000 are as follows:

 	 	2001
	 	2000
	
Revenues	 	$	17,078,464	 	$	14,393,960	
Net earnings	 	 	417,229	 	 	371,724	
Basic earnings per share	 	 	2.02	 	 	1.82	
Diluted earnings per share	 	 	1.96	 	 	1.75	
The pro forma results include goodwill amortization of $15,900 and other adjustments, principally the loss of interest income on cash used to finance the acquisition. The pro forma results exclude costs expected to be incurred in the integration and transformation of Musicland's business. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been completed as of the beginning of each of the fiscal years presented, nor are they necessarily indicative of future consolidated results. Pro forma information related to the acquisition of Magnolia Hi-Fi is not presented, as the operating results of Magnolia Hi-Fi would not have had a significant impact on the Company's results of operations.
44

3.  Debt

 	 	March 3
2001
	 	Feb. 26
2000
	 	
Senior subordinated notes, face amount $109,500, unsecured, due 2003,	 	 	 	 	 	 	 	
interest rate 9.0%, effective rate 8.9%	 	$	110,471	 	$	—	 	
Senior subordinated notes, face amount $150,000, unsecured, due 2008,	 	 	 	 	 	 	 	
interest rate 9.9%, effective rate 8.5%	 	 	160,574	 	 	—	 	
Mortgage and other debt, interest rates ranging from 5.3% to 9.4%	 	 	24,904	 	 	30,650	 	
 	 		 		 	
Total debt	 	 	295,949	 	 	30,650	 	
Less: current portion	 	 	(114,940	)	 	(15,790	)	
 	 		 		 	
Long-term debt	 	$	181,009	 	$	14,860	 	
 	 		 		 	
The mortgage and other debt are secured by certain property and equipment with a net book value of $43,500 and $35,600 at March 3, 2001, and February 26, 2000, respectively.
During fiscal 2001, 2000 and 1999, interest paid totaled $7,000, $5,300 and $23,800, respectively.
During fiscal 2001, 2000 and 1999, interest expense totaled $6,900, $5,100 and $19,400, respectively, and is included in net interest income. The fair value of long-term debt approximates the carrying value.
The future maturities of long-term debt consist of the following:

Fiscal Year
	
2002	 	$	114,940	
2003	 	 	2,036	
2004	 	 	895	
2005	 	 	745	
2006	 	 	810	
Thereafter	 	 	176,523	
 	 		
 	 	$	295,949	
 	 		
45

Senior Subordinated Notes
The Company's Musicland subsidiary had $110,500 of Senior Subordinated Notes due in 2003 (2003 Notes) and $160,600 of Senior Subordinated Notes due in 2008 (2008 Notes) outstanding, which were assumed and recorded at their fair value as part of the Musicland acquisition. Fair value was based upon the present value of the amounts expected to be paid. Both notes contained change-in-control provisions that required the Company to offer to repurchase the notes within 30 to 60 days after the Company's acquisition of Musicland. The offer to repurchase both notes was made on February 12, 2001, at 101.0% of the aggregate principal amount of the notes plus accrued interest. The offer expired on March 16, 2001, at which time $93,900 of the 2003 Notes had been tendered. Accordingly, these 2003 Notes have been classified to the current portion of long-term debt in the Company's balance sheet. Amounts tendered under the 2008 Notes were not significant. The Company also has options to redeem the remaining notes outstanding prior to maturity. The 2003 Notes may be redeemed at 101.1% of par until June 15, 2001, and at par thereafter. The 2008 Notes may be redeemed at 104.9% of par beginning March 15, 2003, and thereafter at prices declining annually to 100.0% of par on and after March 15, 2006.
On October 5, 1998, the Company prepaid its $150,000, 8.6% Senior Subordinated Notes due October 1, 2000, at 102.5% of their par value. The prepayment premium of $3,800 and the write-off of the remaining deferred debt offering costs of approximately $1,100 were included in interest expense in fiscal 1999.
Credit Agreement
The Company has a credit agreement (the Agreement) that provides a bank revolving credit facility (the Facility) under which the Company can borrow up to $100,000. The Agreement expires on June 30, 2002. Borrowings under the Facility are unsecured. Interest on borrowings is at rates specified in the Agreement, as elected by the Company. The Company also pays certain commitment and agent fees.
The Agreement contains covenants that require maintenance of certain financial ratios and minimum net worth. The Agreement also requires that the Company has no outstanding principal balance for a period not less than 30 consecutive days, net of cash and cash equivalents. There were no borrowings under the Facility during fiscal 2001 or 2000.
Inventory Financing
The Company has a $200,000 inventory financing credit line, which increases to $325,000 on a seasonal basis. Borrowings are collateralized by a security interest in certain merchandise inventories approximating the outstanding borrowings. The terms of this arrangement allow the Company to extend the due dates of invoices beyond their normal terms. The amounts extended generally bear interest at a rate approximating the prime rate. No amounts were extended under this line in fiscal 2001 or 2000. The line has provisions that give the financing source a portion of the cash discounts provided by the manufacturers.
46

4.  Convertible Preferred Securities of Subsidiary
In November 1994, the Company and Best Buy Capital, L.P., a special-purpose limited partnership in which the Company was the sole general partner, completed the public offering of 4.6 million convertible monthly income preferred securities with a liquidation preference of $50 per security. The securities were convertible into shares of the Company's common stock at the rate of 4.444 shares per security (equivalent to a conversion price of $11.25 per share). In April 1998, substantially all of the preferred securities were converted into approximately 20.4 million shares of common stock. The remaining preferred securities were redeemed in June 1998 for cash in the amount of $671.
5.  Shareholders' Equity
Stock Options
The Company currently sponsors non-qualified stock option plans for employees and the Board of Directors. These plans provide for the issuance of up to 48.8 million shares of common stock. Options may be granted only to employees or directors at option prices not less than the fair market value of the Company's common stock on the date of the grant. The options vest over a four-year period and expire over a range of five to 10 years. In addition, two plans expired in fiscal 1998 that still have outstanding options. At March 3, 2001, options to purchase 17.6 million shares were outstanding under all of these plans.
In connection with the Musicland acquisition, outstanding stock options held by certain employees of Musicland were converted into options exercisable into the Company's shares of common stock. These options were fully vested at the time of conversion and expire based on the remaining option term of up to 10 years. These options did not reduce the shares available for grant under any of the Company's other option plans. The acquisition was accounted for as a purchase and, accordingly, the fair value of these options was included as a component of the purchase price using the Black-Scholes option pricing model.
47

As permitted by SFAS No. 123, the Company has elected to account for its stock option plans under the provisions of APB Opinion No. 25. Accordingly, no compensation cost has generally been recognized for stock options granted. Had the Company adopted SFAS No. 123, the pro forma effects on net earnings, basic earnings per share and diluted earnings per share would have been as follows:

 	 	2001
	 	2000
	 	1999
	
Net earnings	 	 	 	 	 	 	 	 	 	
 	As reported	 	$	395,839	 	$	347,070	 	$	216,282	
 	Pro forma	 	 	352,300	 	 	321,881	 	 	201,257	
Basic earnings per share	 	 	 	 	 	 	 	 	 	
 	As reported	 	$	1.92	 	$	1.70	 	$	1.09	
 	Pro forma	 	 	1.70	 	 	1.58	 	 	1.01	
Diluted earnings per share	 	 	 	 	 	 	 	 	 	
 	As reported	 	$	1.86	 	$	1.63	 	$	1.03	
 	Pro forma	 	 	1.67	 	 	1.52	 	 	.96	
The fair value of each option was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

 	 	2001
	 	2000
	 	1999
	
Risk-free interest rate	 	6.1%	 	6.4%	 	5.6%	
Expected dividend yield	 	0%	 	0%	 	0%	
Expected stock price volatility	 	60%	 	50%	 	50%	
Expected life of options	 	4.5 years	 	4.5 years	 	4.9 years	
The weighted average fair value of options granted during fiscal 2001, 2000 and 1999 used in computing pro forma compensation expense was $34.59, $25.59 and $8.58 per share, respectively.
48

Option activity for the last three fiscal years was as follows:

 	 	Shares
	 	Weighted Average
Exercise Price
per Share
	
Outstanding Feb. 28, 1998	 	16,744,000	 	$	3.66	
 	Granted	 	9,423,000	 	 	17.27	
 	Exercised	 	(4,909,000	)	 	4.56	
 	Canceled	 	(2,119,000	)	 	9.74	
 	 		 	 	 	
Outstanding Feb. 27, 1999	 	19,139,000	 	 	9.46	
 	Granted	 	3,040,000	 	 	51.97	
 	Exercised	 	(4,172,000	)	 	7.75	
 	Canceled	 	(961,000	)	 	19.48	
 	 		 	 	 	
Outstanding Feb. 26, 2000	 	17,046,000	 	 	16.89	
 	Granted	 	5,380,000	 	 	68.30	
 	Assumed(1)	 	307,000	 	 	55.81	
 	Exercised	 	(3,813,000	)	 	9.16	
 	Canceled	 	(1,341,000	)	 	40.41	
 	 		 	 	 	
Outstanding March 3, 2001	 	17,579,000	 	 	33.19	
 	 		 	 	 	
(1)
Represents Musicland options converted into Company options in connection with the acquisition.
49

Exercisable options at the end of fiscal 2001, 2000 and 1999 were 6.3 million, 4.6 million and 5.0 million, respectively. The following table summarizes information concerning options outstanding and exercisable as of March 3, 2001:

Range of
Exercise
Prices
	 	Number
Outstanding
	 	Weighted
Average
Remaining
Contractual
Life (Years)
	 	Weighted
Average
Exercise
Price
	 	Number
Exercisable
	 	Weighted
Average

Price
	
$ 0 to $10	 	4,784,000	 	4.20	 	$	2.92	 	3,463,000	 	$	2.86	
$10 to $20	 	5,128,000	 	7.14	 	 	17.18	 	1,773,000	 	 	17.15	
$20 to $30	 	74,000	 	7.59	 	 	23.98	 	24,000	 	 	24.40	
$30 to $40	 	34,000	 	7.92	 	 	31.98	 	16,000	 	 	31.90	
$40 to $50	 	240,000	 	7.32	 	 	47.25	 	104,000	 	 	47.24	
$50 to $60	 	2,598,000	 	8.01	 	 	52.41	 	794,000	 	 	52.81	
$60 to $70	 	153,000	 	9.39	 	 	66.59	 	4,000	 	 	65.38	
$70 to $80	 	4,566,000	 	9.08	 	 	70.21	 	81,000	 	 	73.51	
$80 to $90	 	2,000	 	9.09	 	 	82.64	 	—	 	 	—	
 	 		 		 		 		 		
$ 0 to $90	 	17,579,000	 	7.00	 	$	33.19	 	6,259,000	 	$	15.09	
Restricted Stock Plan
The Company adopted a restricted stock award plan in fiscal 2001. The plan authorizes the Company to issue up to 1.0 million shares of the Company's common stock to eligible employees of the Company and its subsidiaries, as well as to the Board of Directors, consultants and independent contractors of the Company and its subsidiaries. Restricted shares have the same rights as other shares of common stock, except they are not transferable until fully vested. Restrictions lapse over a vesting period of three years in which 25% is vested at the time of award and 25% on each anniversary date thereafter. All shares still subject to restrictions are generally forfeited and returned to the plan if the plan participant's relationship with the Company is terminated. The number of shares granted under this plan was not significant during fiscal 2001.
50

Earnings per Share
The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per common share for fiscal 2001, 2000 and 1999:

 	 	2001
	 	2000
	 	1999
	
Numerator:	 	 	 	 	 	 	 	 	 	
 	Net earnings	 	$	395,839	 	$	347,070	 	$	216,282	
 	Interest on preferred securities, net of tax	 	 	—	 	 	—	 	 	771	
 	 		 		 		
 	Net earnings assuming dilution	 	$	395,839	 	$	347,070	 	$	217,053	

Denominator (000s):	

 	

 	

 	
 	Weighted average common shares outstanding	 	 	206,699	 	 	204,194	 	 	199,185	
 	Effect of dilutive securities:	 	 	 	 	 	 	 	 	 	
 	 	Employee stock options	 	 	5,959	 	 	8,386	 	 	8,726	
 	 	Preferred securities	 	 	—	 	 	—	 	 	2,095	
 	 		 		 		
 	Weighted average common shares outstanding assuming dilution	 	 	212,658	 	 	212,580	 	 	210,006	

Basic earnings per share	
 	
$	
1.92	
 	
$	
1.70	
 	
$	
1.09	
Diluted earnings per share	 	$	1.86	 	$	1.63	 	$	1.03	
Repurchase of Common Stock
In October 1998 and September 1999, the Company's Board of Directors authorized the purchase of up to $100,000 and $200,000, respectively, of the Company's common stock. These plans were completed with a total of 1.8 million and 3.8 million shares purchased and retired, respectively.
In February 2000, the Company's Board of Directors authorized the purchase of up to $400,000 of the Company's common stock from time to time through open market purchases. This plan has no stated expiration date. As of March 3, 2001, 1.9 million shares had been purchased and retired at a cost of $100,000. No shares were repurchased in fiscal 2001.
51

6.  Operating Lease Commitments
The Company currently both owns and leases portions of its corporate facilities and conducts essentially all of its retail and the majority of its distribution operations from leased locations. The terms of the lease agreements generally range from three to 16 years for Best Buy stores and three to 20 years for Musicland stores. The leases require payment of real estate taxes, insurance and common area maintenance in addition to rent. Most of the leases contain renewal options and escalation clauses, and the majority of the Musicland stores and several Best Buy stores require contingent rents based on specified percentages of sales. Certain Musicland store leases provide the Company with an early cancellation option if sales for a designated period do not reach a specified level as defined in the lease. Certain leases contain covenants related to maintenance of financial ratios. Also, the Company leases various equipment under operating leases. Transaction costs associated with the sale and leaseback of properties and any gain or loss are recognized over the terms of the lease agreements. Proceeds from the sale and leaseback of properties are included in the net change in recoverable costs from developed properties.
The composition of total rental expenses for all operating leases during the past three fiscal years, including leases of buildings and equipment, was as follows:

 	 	2001
	 	2000
	 	1999
	
Minimum rentals	 	$	299,090	 	$	227,500	 	$	186,100	
Percentage rentals	 	 	615	 	 	500	 	 	500	
 	 		 		 		
 	 	$	299,705	 	$	228,000	 	$	186,600	
 	 		 		 		
52

Future minimum lease obligations by year (not including percentage rentals) for all operating leases at March 3, 2001, were as follows:

Fiscal Year
	
2002	 	$	388,000	
2003	 	 	377,000	
2004	 	 	346,000	
2005	 	 	315,000	
2006	 	 	289,000	
Thereafter	 	 	2,282,000	
Master Lease
During fiscal 2001, the Company entered into a $60 million, five-year master lease agreement for the purpose of constructing and leasing new retail locations. An operating lease agreement will be entered into for certain retail stores providing for an initial lease term of five years. The leases will require payment of real estate taxes, insurance and common area maintenance.
53

7.  Benefit Plans
The Company sponsors retirement savings plans for employees meeting certain age and service requirements. The plans provide for Company-matching contributions, which are subject to annual approval by the Company's Board of Directors. The total matching contributions were $6,800, $4,600 and $3,100 in fiscal 2001, 2000 and 1999, respectively.
The Company has a deferred compensation plan for certain management employees. The liability for compensation deferred under this plan was $27,500 and $18,900 at March 3, 2001, and February 26, 2000, respectively, and is included in long-term liabilities. The Company has elected to match its liability under the plan through the purchase of life insurance. The cash value of the insurance, which includes funding for future deferrals, was $33,900 and $26,500 in fiscal 2001 and 2000, respectively, and is included in other assets. Both the asset and the liability are carried at fair value.
8.  Income Taxes
The following is a reconciliation of income tax expense to the federal statutory tax rate:

 	 	2001
	 	2000
	 	1999
	 	
Federal income tax at the statutory rate	 	$	224,518	 	$	196,899	 	$	123,087	 	
State income taxes, net of federal benefit	 	 	26,942	 	 	22,503	 	 	14,206	 	
Tax-exempt interest income	 	 	(9,006	)	 	(5,592	)	 	(3,232	)	
Other	 	 	3,186	 	 	1,690	 	 	1,334	 	
 	 		 		 		 	
Income tax expense	 	$	245,640	 	$	215,500	 	$	135,395	 	
 	 		 		 		 	
Effective tax rate	 	 	38.3	%	 	38.3	%	 	38.5	%	
54

Income tax expense consists of the following:

 	 	2001
	 	2000
	 	1999
	 	
Current:
              Federal	 	$	179,314	 	$	164,938	 	$	120,892	 	
              State	 	 	23,533	 	 	21,329	 	 	15,252	 	
 	 		 		 		 	
 	 	 	202,847	 	 	186,267	 	 	136,144	 	
 	 		 		 		 	
Deferred:
              Federal	 	 	37,850	 	 	25,725	 	 	(665	)	
              State	 	 	4,943	 	 	3,508	 	 	(84	)	
 	 		 		 		 	
 	 	 	42,793	 	 	29,233	 	 	(749	)	
 	 		 		 		 	
Income tax expense	 	$	245,640	 	$	215,500	 	$	135,395	 	
 	 		 		 		 	
Deferred taxes are the result of differences between the basis of assets and liabilities for financial reporting and income tax purposes. Significant deferred tax assets and liabilities consist of the following:

 	 	March 3
2001
	 	Feb. 26
2000
	
Accrued expenses	 	$	46,481	 	$	19,001	
Deferred revenues	 	 	13,057	 	 	25,009	
Compensation and benefits	 	 	30,681	 	 	17,293	
Inventory	 	 	8,319	 	 	—	
Other	 	 	19,827	 	 	2,763	
 	 		 		
 	Total deferred tax assets	 	 	118,365	 	 	64,066	
 	 		 		
Property and equipment	 	 	93,454	 	 	42,937	
Inventory	 	 	—	 	 	15,639	
Other	 	 	4,870	 	 	4,606	
 	 		 		
 	Total deferred tax liabilities	 	 	98,324	 	 	63,182	
 	 		 		
Net deferred tax assets	 	$	20,041	 	$	884	
 	 		 		
Income taxes paid (net of refunds) were $61,700, $82,600 and $84,000 in fiscal 2001, 2000 and 1999, respectively.
55

9.  Legal Proceedings
The Company is involved in various legal proceedings arising during the normal course of conducting business. Management believes that the resolution of these proceedings, either individually or in the aggregate, will not have a significant adverse impact on the Company's consolidated financial statements.
56

 Independent Auditor's Report
Shareholders and Board of Directors
Best Buy Co., Inc.
We have audited the accompanying consolidated balance sheets of Best Buy Co., Inc. as of March 3, 2001, and February 26, 2000, and the related consolidated statements of earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended March 3, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Best Buy Co., Inc. at March 3, 2001, and February 26, 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 3, 2001, in conformity with accounting principles generally accepted in the United States.

Minneapolis, Minnesota
April 2, 2001
57

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 Management's Discussion and Analysis of Results of Operations and Financial Condition
 Consolidated Balance Sheets
 CONSOLIDATED STATEMENTS OF EARNINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Consolidated Statements of Changes in Shareholders' Equity
Notes to Consolidated Financial Statements
 
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 Exhibit 21.1
 
 BEST BUY CO., INC.
SUBSIDIARIES OF THE REGISTRANT*

 	 	State of Formation
	
BBC Insurance Agency, Inc.	 	Minnesota	

BBC Investment Co.	
 	
Nevada	

BBC Property Co.	
 	
Minnesota	
 	
Best Buy Stores, L.P.	
 	
Delaware	
 	 	
Best Buy Purchasing LLC	
 	
Minnesota	

BestBuy.com, Inc.	
 	
Delaware	

Best Buy Concepts, Inc.	
 	
Nevada	

CP Gal Ritchfield, LLC	
 	
Delaware	

Magnolia Hi-Fi, Inc.	
 	
Washington	

Musicland Stores Corporation	
 	
Delaware	
 	
The Musicland Group, Inc.	
 	
Delaware	
 	
Media Play, Inc.	
 	
Delaware	
 	
MG Financial Services, Inc.	
 	
Delaware	
 	
MLG Internet, Inc.	
 	
Delaware	
 	
Musicland Retail, Inc.	
 	
Delaware	
 	
On Cue, Inc.	
 	
Delaware	
 	
Request Media, Inc.	
 	
Delaware	
 	
Suncoast Group, Inc.	
 	
Delaware	
 	
Suncoast Motion Picture Company, Inc.	
 	
Delaware	
 	
Suncoast Retail, Inc.	
 	
Delaware	
 	
TMG Caribbean, Inc.	
 	
Delaware	
 	
TMG-Virgin Islands, Inc.	
 	
Delaware	

Redline Entertainment, Inc.	
 	
Minnesota	
*
Indirect subsidiaries are indicated by indentation.

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Exhibit 21.1
BEST BUY CO., INC. SUBSIDIARIES OF THE REGISTRANT
 
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 Exhibit 23.1
 
 Consent of Independent Auditors
    We consent to the incorporation by reference in this Annual Report (Form 10-K) of Best Buy Co., Inc. of our report dated April 2, 2001, included in the 2001 Annual Report to Shareholders of Best Buy Co., Inc. We also consent to the incorporation by reference in the Registration Statements on Form S-8 pertaining to the Deferred Compensation Plan (Nos. 333-49371 and 333-80967), the 1997 Directors' Non-Qualified Stock Option Plan (No. 333-39531), the 1997 Employee Non-Qualified Stock Option Plan (Nos. 333-39535 and 333-61897), the 1987 Employee Non-Qualified Stock Option Plan (No. 33-54875), the 1994 Full-Time Employee Non-Qualified Stock Option Plan (No. 33-54871), the 1987 Directors' Non-Qualified Stock Option Plan (No. 33-54873), the 2000 Restricted Stock Award Plan (No. 333-46228), The Assumed Musicland 1988 Stock Option Plan, The Assumed Musicland 1992 Stock Option Plan, The Assumed Musicland 1994 Stock Option Plan and The Assumed Musicland 1998 Stock Incentive Plan (collectively No. 333-56146) of our report dated April 2, 2001, with respect to the consolidated financial statements of Best Buy Co., Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended March 3, 2001.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 31, 2001
2

QuickLinks
Exhibit 23.1
Consent of Independent Auditors