Edgar Filing: BEST BUY CO INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 25, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-9595

BEST BUY CO., INC.

(Exact name of registrant as specified in its charter)

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

7601 Penn Avenue South
Richfield, Minnesota		55423
(Address of principal executive offices)		(Zip Code)

(612) 291-1000
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.10 Par Value — 481,927,000 shares outstanding as of November 25, 2006.

BEST BUY CO., INC.

FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 25, 2006

INDEX

Part I —	Financial Information		3

	Item 1.	Consolidated Financial Statements (unaudited):	3

	a)	Consolidated condensed balance sheets as of November 25, 2006; February 25, 2006; and November 26, 2005	3

	b)	Consolidated statements of earnings for the three and nine months ended November 25, 2006, and November 26, 2005	5

	c)	Consolidated statement of changes in shareholders’ equity for the nine months ended November 25, 2006	6

	d)	Consolidated statements of cash flows for the nine months ended November 25, 2006, and November 26, 2005	7

	e)	Notes to consolidated condensed financial statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

	Item 4.	Controls and Procedures	40

Part II —	Other Information		41

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

	Item 6.	Exhibits	41

Signatures			42

PART I —		FINANCIAL INFORMATION

ITEM 1.		CONSOLIDATED FINANCIAL STATEMENTS

BEST BUY CO., INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

ASSETS

($ in millions, except per share amounts)

(Unaudited)

	November 25, 2006		February 25, 2006		November 26, 2005
CURRENT ASSETS
Cash and cash equivalents	$	1,202	$	748	$	812
Short-term investments	1,513		3,051		2,285
Receivables	1,112		439		883
Merchandise inventories	6,084		3,338		5,314
Other current assets	759		409		400
Total current assets	10,670		7,985		9,694

PROPERTY AND EQUIPMENT
Property and equipment	5,427		4,836		4,658
Less accumulated depreciation	2,456		2,124		2,021
Net property and equipment	2,971		2,712		2,637

GOODWILL	991		557		546

OTHER INTANGIBLE ASSETS	83		44		46

LONG-TERM INVESTMENTS	320		218		114

OTHER ASSETS	351		348		205

TOTAL ASSETS	$	15,386	$	11,864	$	13,242

NOTE: The consolidated balance sheet as of February 25, 2006, has been condensed from the audited financial statements.

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

($ in millions, except per share amounts)

(Unaudited)

	November 25, 2006		February 25, 2006		November 26, 2005
CURRENT LIABILITIES
Accounts payable	$	6,332	$	3,234	$	5,325
Unredeemed gift card liabilities	429		469		374
Accrued compensation and related expenses	301		354		254
Accrued liabilities	1,315		878		1,157
Accrued income taxes	318		703		328
Current portion of long-term debt	459		418		17
Total current liabilities	9,154		6,056		7,455

LONG-TERM LIABILITIES	405		373		377

LONG-TERM DEBT	191		178		554

MINORITY INTERESTS	34		—		—

SHAREHOLDERS’ EQUITY
Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and outstanding — none	—		—		—
Common stock, $.10 par value: Authorized — 1.5 billion shares; Issued and outstanding — 481,927,000, 485,098,000 and 489,926,000 shares, respectively	48		49		49
Additional paid-in capital	481		643		877
Retained earnings	4,793		4,304		3,699
Accumulated other comprehensive income	280		261		231
Total shareholders’ equity	5,602		5,257		4,856

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	15,386	$	11,864	$	13,242

NOTE: The consolidated balance sheet as of February 25, 2006, has been condensed from the audited financial statements.

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF EARNINGS

($ in millions, except per share amounts)

(Unaudited)

	Three Months Ended				Nine Months Ended
	November 25, 2006		November 26, 2005		November 25, 2006		November 26, 2005
Revenue	$	8,473	$	7,335	$	23,035	$	20,155
Cost of goods sold	6,478		5,547		17,373		15,098
Gross profit	1,995		1,788		5,662		5,057
Selling, general and administrative expenses	1,799		1,599		4,799		4,368
Operating income	196		189		863		689
Net interest income	24		14		68		45

Earnings before income tax expense and minority interests	220		203		931		734
Income tax expense	70		65		317		238
Minority interests	—		—		—		—

Net earnings	$	150	$	138	$	614	$	496

Basic earnings per share	$	0.31	$	0.28	$	1.27	$	1.01
Diluted earnings per share	$	0.31	$	0.28	$	1.24	$	0.99

Dividends declared per common share	$	0.10	$	0.08	$	0.26	$	0.23

Basic weighted average common shares outstanding (in millions)	481.0		491.1		482.5		491.2

Diluted weighted average common shares outstanding (in millions)	495.8		507.2		497.4		507.4

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED NOVEMBER 25, 2006

($ and shares in millions)

(Unaudited)

	Common Shares		Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances at February 25, 2006	485		$	49		$	643		$	4,304		$	261		$	5,257

Net earnings, nine months ended November 25, 2006	—		—			—			614			—			614
Other comprehensive income, net of tax:
Foreign currency translation adjustments	—		—			—			—			20			20
Other	—		—			—			—			(1		)	(1		)
Total comprehensive income															633

Stock options exercised	5		—			143			—			—			143
Stock-based compensation	—		—			87			—			—			87
Tax benefits from stock options exercised and employee stock purchase plan	—		—			43			—			—			43
Issuance of common stock under employee stock purchase plan	1		—			48			—			—			48
Repurchase of common stock	(9	)	(1		)	(483		)	—			—			(484		)
Common stock dividends, $0.26 per share	—		—			—			(125		)	—			(125		)
Balances at November 25, 2006	482		$	48		$	481		$	4,793		$	280		$	5,602

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)

	Nine Months Ended
	November 25, 2006			November 26, 2005
OPERATING ACTIVITIES
Net earnings	$	614		$	496
Adjustments to reconcile net earnings to total cash provided by operating activities:
Depreciation	369			333
Asset impairment charges	25			—
Stock-based compensation	87			94
Deferred income taxes	(29		)	(54		)
Excess tax benefits from stock-based compensation	(46		)	(55		)
Other	12			12
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Receivables	(641		)	(505		)
Merchandise inventories	(2,597		)	(2,443		)
Other assets	(54		)	(10		)
Accounts payable	2,595			2,487
Other liabilities	246			218
Accrued income taxes	(324		)	(193		)
Total cash provided by operating activities	257			380

INVESTING ACTIVITIES
Additions to property and equipment, net of $93 and $24 non-cash capital expenditures in the nine months ended November 25, 2006 and November 26, 2005, respectively	(520		)	(497		)
Acquisition of businesses, net of cash acquired	(421		)	—
Purchases of available-for-sale securities	(1,910		)	(1,589		)
Sales of available-for-sale securities	3,341			2,328
Proceeds from property dispositions	—			42
Changes in restricted assets	(32		)	18
Other, net	8			18
Total cash provided by investing activities	466			320

FINANCING ACTIVITIES
Repurchase of common stock	(484		)	(434		)
Issuance of common stock under employee stock purchase plan and for the exercise of stock options	191			228
Dividends paid	(125		)	(112		)
Proceeds from issuance of long-term debt	70			5
Long-term debt payments	(62		)	(68		)
Excess tax benefits from stock-based compensation	46			55
Other, net	87			72
Total cash used in financing activities	(277		)	(254		)

EFFECT OF EXCHANGE RATE CHANGES ON CASH	8			12

INCREASE IN CASH AND CASH EQUIVALENTS	454			458

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	748			354

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,202		$	812

See Notes to Consolidated Condensed Financial Statements.

BEST BUY CO., INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation:

In the opinion of management, the accompanying financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States. All adjustments were comprised of normal recurring adjustments, except as noted in the Notes to Consolidated Condensed Financial Statements. Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season. These interim financial statements and the related notes should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended February 25, 2006.

To maintain consistency with our accounting policies, we reclassified selected balances from receivables to cash and cash equivalents in our February 25, 2006, consolidated condensed balance sheet. This reclassification had no effect on previously reported operating income, net earnings or shareholders’ equity.

During the third quarter of fiscal 2007, we made a one-time election to adopt the transition method described in Financial Accounting Standards Board (FASB) Staff Position (FSP) No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This election resulted in the reclassification of excess tax benefits as presented in the statement of cash flows, from operating activities to financing activities. See Note 7, Stock-Based Compensation, for further details. This reclassification had no effect on previously reported operating income, net earnings or shareholders’ equity.

Effective June 8, 2006, we acquired a 75% interest in Jiangsu Five Star Appliance Co., Ltd. (Five Star). Consistent with China’s statutory requirements, Five Star’s fiscal year ends on December 31. Therefore, we have elected to consolidate Five Star’s financial results on a two-month lag. There were no significant intervening events that would have materially affected our consolidated financial statements had they been recorded during the quarter. See Note 2, Acquisitions, for further details regarding this transaction.

The following table illustrates the primary costs classified in each major expense category (the classification of which varies across the retail industry):

Cost of Goods Sold

Selling, General & Administrative Expenses (SG&A)

· Total cost of products sold including:

— Freight expenses associated with moving merchandise inventories from our vendors to our distribution centers;

— Vendor allowances that are not a reimbursement of specific, incremental and identifiable costs to promote a vendor’s products;

— Cash discounts on payments to vendors;

· Cost of services provided including:

— Payroll and benefits costs for services employees;

— Cost of replacement parts and related freight expenses;

· Physical inventory losses;

· Markdowns;

· Customer shipping and handling expenses;

· Costs associated with operating our distribution network, including payroll and benefit costs, occupancy costs, and depreciation;

· Freight expenses associated with moving merchandise inventories from our distribution centers to our retail stores; and

· Promotional financing costs.

· Payroll and benefit costs for retail and corporate employees;

· Occupancy costs of retail, services and corporate facilities;

· Depreciation related to retail, services and corporate assets;

· Advertising;

· Vendor allowances that are a reimbursement of specific, incremental and identifiable SG&A costs to promote a vendor’s products;

· Charitable contributions;

· Outside service fees;

· Long-lived asset impairment charges; and

· Other administrative costs, such as credit card service fees, supplies, and travel and lodging.

Vendor Allowances

The majority of vendor allowances are initially deferred and recorded as a reduction of merchandise inventories. The deferred amounts are then included as a reduction of cost of goods sold when the related product is sold.

Vendor allowances that are included in revenue for reimbursement of vendor-provided sales incentives and in SG&A for reimbursement of specific, incremental and identifiable SG&A costs to promote a vendor’s products were as follows
($ in millions):

	Three Months Ended				Nine Months Ended
	November 25, 2006		November 26, 2005		November 25, 2006		November 26, 2005
Revenue	$	5	$	36	$	17	$	77
SG&A	$	48	$	32	$	115	$	87

2. Acquisitions:

Pacific Sales Kitchen and Bath Centers, Inc.

Effective March 7, 2006, we acquired all of the common stock of Pacific Sales Kitchen and Bath Centers, Inc. (Pacific Sales) for $411 million, or $408 million, net of cash acquired, including transaction costs. We acquired Pacific Sales, a high-end home-improvement and appliance retailer, to enhance our ability to grow with an attractive customer base and premium brands using a proven and successful showroom format. Utilizing the existing store format, we expect to expand the number of stores in order to capitalize on the expanding high-end segment of the U.S. appliance market. The acquisition was accounted for using the purchase method in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. Accordingly, we recorded the net assets at their estimated fair values, and included operating results in our Domestic segment from the date of acquisition. We allocated the purchase price on a preliminary basis using information currently available. The allocation of the purchase price to the assets and liabilities acquired will be finalized no later than the first quarter of fiscal 2008, as we obtain more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of purchase. All goodwill is deductible for tax purposes.

The preliminary purchase price allocation, net of cash acquired, was as follows ($ in millions):

Merchandise inventories	$	40
Property and equipment	2
Other assets(1)	19
Tradename	17
Goodwill	373
Current liabilities	(43		)
Total	$	408

(1) Includes $7 million related to the acquired customer sales backlog.

Jiangsu Five Star Appliance Co., Ltd.

Effective June 8, 2006, we acquired a 75% interest in Five Star for $184 million, including a working capital injection of $122 million and transaction costs. Five Star is one of China’s largest appliance and consumer electronics retailers with 133 stores located in seven of China’s 34 provinces. We made the investment in Five Star to further our international growth plans, to increase our knowledge of Chinese customers and to obtain an immediate retail presence in China. The acquisition was accounted for using the purchase method in accordance with SFAS No. 141, Business Combinations. Accordingly, we recorded the net assets at their estimated fair values, and included operating results in our International segment from the date of acquisition. We allocated the purchase price on a preliminary basis using information currently available. The allocation of the purchase price to the assets and liabilities acquired will be finalized no later than the second quarter of fiscal 2008, as we obtain more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates of fair values made at the date of purchase. The resulting goodwill is not deductible for tax purposes.

The preliminary purchase price allocation, net of cash acquired, was as follows ($ in millions):

Restricted cash	$	204
Merchandise inventories	109
Property and equipment	37
Other assets	81
Tradename	21
Goodwill	65
Accounts payable	(363		)
Other current liabilities	(43		)
Debt, due 2006 to 2007, interest rates ranging from 1.9% to 6.8% (1)	(64		)
Long-term liabilities	(1		)
Minority interests (2)	(33		)
Total	$	13

(1) Debt is secured by property and equipment with a net book value of $26 million.

(2) The minority interests’ proportionate ownership of assets and liabilities were recorded at historical carrying values.

The minority interests’ share of net earnings included in the three and nine months ended November 25, 2006, was less than $1 million.

Five Star owns a 40% interest in, and purchases appliances from, Jiangsu Heng Xin Ge Li Air Conditioner Sales Co., Ltd. Purchases from this affiliate were $20 million and $23 million for the three and nine months ended November 25, 2006, respectively. As of November 25, 2006, $16 million was due to this affiliate for the purchase of appliances.

3. Co-Branded Credit Card:

We have a co-branded credit card agreement with a third-party bank (the Bank) for the issuance of a customer loyalty credit card bearing the Best Buy brand. Cardholders earn points for qualifying purchases, including purchases made at Best Buy. Points earned enable cardholders to receive certificates that may be redeemed on future purchases at Best Buy. The Bank is the sole owner of the accounts issued under the program and absorbs losses associated with non-payment by the cardholders and fraudulent usage of the accounts. We are responsible for redeeming the points earned by the cardholders. The Bank pays fees to us based on the number of credit card accounts activated and card usage, and makes certain other payments. Expenses associated with points earned by cardholders are primarily funded from the fees paid by the Bank.

We account for the co-branded credit card agreement in accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.

4. Gift Cards:

We sell gift cards to our customers in our retail stores, through our Web sites and through selected third parties. Our gift cards do not have an expiration date. We recognize income from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and we determine that we do not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. We determine our gift card breakage rate based upon historical redemption patterns. Based on our historical information, the likelihood of a gift card remaining unredeemed can be determined 24 months after the gift card is issued. At that time, we recognize breakage income for those cards for which the likelihood of redemption is deemed to be remote if we do not have a legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdictions. Gift card breakage income is included in revenue in our consolidated statements of earnings.

During the third quarter of fiscal 2006, based on the resolution of certain legal matters associated with gift card liabilities, we began recognizing gift card breakage income. During the three and nine months ended November 26, 2005, we recognized $29 million of gift card breakage income. During the three and nine months ended November 25, 2006, we recognized $4 million and $9 million, respectively, of gift card breakage income.

5. Net Interest Income:

Net interest income was comprised of the following ($ in millions):

	Three Months Ended						Nine Months Ended
	November 25, 2006			November 26, 2005			November 25, 2006			November 26, 2005
Interest income	$	31		$	21		$	91		$	63
Dividend income	—			—			—			4
Interest expense	(7		)	(7		)	(23		)	(22		)
Net interest income	$	24		$	14		$	68		$	45

6. Earnings per Share:

Basic earnings per share are computed based on the weighted-average number of common shares outstanding. Diluted earnings per share are 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 non-qualified stock options, nonvested share awards and shares issuable under our employee stock purchase plan, as well as common shares that would have resulted from the assumed conversion of our convertible debentures. Since the potentially dilutive shares related to the convertible debentures are included in the calculation, the related interest expense, net of tax, is added back to net earnings, as the interest would not have been paid if the convertible debentures were converted to common stock. Nonvested market-based awards and nonvested performance-based awards are included in the average diluted shares outstanding each period if established market or performance criteria have been met at the end of the respective periods.

The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share ($ and shares in millions, except per share amounts):

	Three Months Ended				Nine Months Ended
	November 25, 2006		November 26, 2005		November 25, 2006		November 26, 2005
Numerator:
Net earnings, basic	$	150	$	138	$	614	$	496
Adjustment for assumed dilution:
Interest on convertible debentures, net of tax	2		2		5		5
Net earnings, diluted	$	152	$	140	$	619	$	501

Denominator:
Weighted-average common shares outstanding	481.0		491.1		482.5		491.2
Effect of potentially dilutive securities:
Shares from assumed conversion of convertible debentures	8.8		8.8		8.8		8.8
Stock options and other	6.0		7.3		6.1		7.4
Weighted-average common shares outstanding, assuming dilution	495.8		507.2		497.4		507.4

Basic earnings per share	$	0.31	$	0.28	$	1.27	$	1.01
Diluted earnings per share	$	0.31	$	0.28	$	1.24	$	0.99

The computation of average dilutive shares outstanding excluded non-qualified options to purchase 4.3 million and 5.0 million shares of common stock for the three months ended November 25, 2006, and November 26, 2005, respectively; and 4.6 million and 5.0 million shares of common stock for the nine months ended November 25, 2006, and November 26, 2005, respectively. These amounts were excluded as the options’ exercise prices were greater than the average market price of our common stock for the periods presented and, therefore, the effect would be antidilutive (i.e., including such options would result in higher earnings per share).

7. Stock-Based Compensation:

Stock-based compensation expense was $28 million and $31 million for the three months ended November 25, 2006, and November 26, 2005, respectively; and $87 million and $94 million for the nine months ended November 25, 2006, and November 26, 2005, respectively. Stock-based compensation expense for the nine months ended November 25, 2006, may not be indicative of the expense for the entire fiscal year.

In November 2005, the FASB issued FSP No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. During the third quarter of fiscal 2007, we elected to adopt the alternative transition method provided in FSP No. FAS 123(R)-3 for calculating the tax effects of stock-based compensation. The alternative transition method includes simplified methods to determine the beginning balance of the additional paid-in capital (APIC) pool related to the tax effects of stock-based compensation, and to determine the subsequent impact on the APIC pool and the statement of cash flows of the tax effects of stock-based awards that were fully vested and outstanding upon the adoption of SFAS No. 123(R), Share-Based Payment. In accordance with SFAS No. 154, Accounting Changes and Error Corrections, this change in accounting principle has been applied retrospectively to our fiscal 2007 and fiscal 2006 consolidated statements of cash flows. The effects on the consolidated statements of cash flows were decreases in operating activities with offsetting increases in financing activities of $3 million and $9 million for the three months ended May 27, 2006, and the six months ended August 26, 2006, respectively, and $1 million, $29 million and $31 million, for the three months ended May 28, 2005, six months ended August 27, 2005, and nine months ended November 26, 2005, respectively. The adoption of FSP No. FAS 123(R)-3 did not have an impact on our operating income, net earnings or shareholders’ equity.

8. Comprehensive Income:

Comprehensive income is computed as net earnings plus certain other items that are recorded directly to shareholders’ equity. The significant components of comprehensive income include foreign currency translation adjustments and unrealized gains/losses net of tax on available-for-sale marketable equity securities. Foreign currency translation adjustments do not include a provision for income tax expense because earnings from foreign operations are considered to be indefinitely reinvested outside the United States. Comprehensive income was $123 million and $168 million for the three months ended November 25, 2006, and November 26, 2005, respectively; and $633 million and $578 million for the nine months ended November 25, 2006, and November 26, 2005, respectively.

9. Segments:

We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all U.S. store and online operations, including Best Buy, Geek Squad, Magnolia Audio Video and Pacific Sales. The International segment is comprised of all Canada store and online operations, including Future Shop, Best Buy and Geek Squad, as well as all China store and online operations, including Five Star and our first Best Buy store in Shanghai, which opened on December 28, 2006. Pacific Sales was acquired on March 7, 2006, and Five Star was acquired on June 8, 2006. Our segments are evaluated on an operating income basis, and a stand-alone tax provision is not calculated for each segment. The other accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended February 25, 2006.

Revenue by reportable segment was as follows ($ in millions):

	Three Months Ended				Nine Months Ended
	November 25, 2006		November 26, 2005		November 25, 2006		November 26, 2005
Domestic	$	7,164	$	6,466	$	19,947	$	17,955
International	1,309		869		3,088		2,200
Total revenue	$	8,473	$	7,335	$	23,035	$	20,155

Operating income (loss) by reportable segment and the reconciliation to earnings before income tax expense and minority interests were as follows ($ in millions):

	Three Months Ended					Nine Months Ended
	November 25, 2006		November 26, 2005			November 25, 2006		November 26, 2005
Domestic	$	186	$	198		$	847	$	695
International	10		(9		)	16		(6		)
Total operating income	196		189			863		689
Net interest income	24		14			68		45
Earnings before income tax expense and minority interests	$	220	$	203		$	931	$	734

Assets by reportable segment were as follows ($ in millions):

	November 25, 2006		February 25, 2006		November 26, 2005
Domestic	$	12,004	$	9,722	$	10,741
International	3,382		2,142		2,501
Total assets	$	15,386	$	11,864	$	13,242

Goodwill by reportable segment was as follows ($ in millions):

	November 25, 2006		February 25, 2006		November 26, 2005
Domestic	$	383	$	6	$	6
International	608		551		540
Total goodwill	$	991	$	557	$	546

The change in the Domestic goodwill balance since February 25, 2006, and November 26, 2005, was the result of the acquisition of Pacific Sales. The changes in the International goodwill balance since February 25, 2006, and November 26, 2005, were due primarily to the acquisition of Five Star totaling $65 million, with the remainder due primarily to fluctuations in foreign currency exchange rates.

Other intangible assets included in our balance sheets were comprised primarily of indefinite-lived intangible tradename assets related to Pacific Sales, which is included in the Domestic segment, and to Future Shop and Five Star, which are included in the International segment. Other intangible assets by reportable segment were as follows ($ in millions):

	November 25, 2006		February 25, 2006		November 26, 2005
Domestic	$	17	$	—	$	—
International	66		44		46
Total other intangible assets	$	83	$	44	$	46

10. Investments:

Debt Securities

Short-term and long-term investments are comprised of municipal and United States government debt securities, as well as auction-rate securities and variable-rate demand notes. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and based on our ability to market and sell these instruments, we classify auction-rate securities, variable-rate demand notes and other investments in debt securities as available-for-sale and carry them at amortized cost, which approximates fair value. Auction-rate securities and variable-rate demand notes are similar to short-term debt instruments because their interest rates are reset periodically. Investments in these securities can be sold for cash on the auction date. We classify auction-rate securities and variable-rate demand notes as short-term or long-term investments based on the reset dates.

In accordance with our investment policy, we place our investments in debt securities with issuers who have high-quality credit and limit the amount of investment exposure to any one issuer. We seek to preserve principal and minimize exposure to interest-rate fluctuations by limiting default risk, market risk and reinvestment risk.

The carrying amounts of our investments in debt securities approximated fair value at November 25, 2006; February 25, 2006; and November 26, 2005, due to the rapid turnover of our portfolio and the highly liquid nature of these investments. Therefore, there were no significant unrealized holding gains or losses.

The following table presents the amortized principal amounts, related weighted-average interest rates (taxable equivalent), maturities and major security types for our investments in debt securities ($ in millions):

	November 25, 2006				February 25, 2006				November 26, 2005
	Amortized Principal Amount		Weighted- Average Interest Rate		Amortized Principal Amount		Weighted- Average Interest Rate		Amortized Principal Amount		Weighted- Average Interest Rate
Short-term investments (less than one year)	$	1,513	5.68	%	$	3,051	4.76	%	$	2,285	4.55	%
Long-term investments (one to three years)	320		5.58	%	218		4.95	%	114		4.13	%
Total	$	1,833			$	3,269			$	2,399

Municipal debt securities	$	1,776			$	3,153			$	2,296
Auction-rate and asset-backed securities	57				109				96
Debt securities issued by U.S. Treasury and other U.S. government entities	—				7				7
Total	$	1,833			$	3,269			$	2,399

Equity Securities

We also hold investments in equity securities. We classify all marketable equity securities as available-for-sale. Investments in marketable equity securities are generally included in other assets in our consolidated balance sheets. However, as described below, at November 25, 2006, we reclassified our equity investment in Golf Galaxy, Inc. (Golf Galaxy) from other assets to other current assets. Investments in marketable equity securities are reported at fair value, based on quoted market prices when available. All unrealized holding gains or losses are reflected net of tax in accumulated other comprehensive income in shareholders’ equity.

The carrying values of our investments in equity securities at November 25, 2006; February 25, 2006; and November 26, 2005, were $38 million, $31 million and $26 million, respectively. Net unrealized gains, net of tax, included in accumulated other comprehensive income were $12 million, $12 million and $9 million at November 25, 2006; February 25, 2006; and November 26, 2005, respectively.

On November 13, 2006, Golf Galaxy entered into a definitive agreement and plan of merger with Dick’s Sporting Goods, Inc. If consummated, under the terms of the agreement each outstanding share of Golf Galaxy common stock will be converted into the right to receive $18.82 per share in cash, without interest. The merger is anticipated to be completed not before February 6, 2007. At November 25, 2006, we owned 1,276,001 shares of Golf Galaxy common stock. The carrying values of our investment in Golf Galaxy at November 25, 2006; February 25, 2006; and November 26, 2005, were $24 million, $24 million and $20 million, respectively. At November 25, 2006, unrealized gains of $12 million, net of tax, related to our investment in Golf Galaxy, were included in accumulated other comprehensive income.

11. Restricted Assets:

Restricted cash and investments in debt securities, which are included in other current assets, totaled $414 million, $178 million and $140 million as of November 25, 2006; February 25, 2006; and November 26, 2005, respectively. Such balances are pledged as collateral or restricted to use for general liability insurance, workers’ compensation insurance, warranty programs and vendor payables. The increases in restricted cash and investments in debt securities compared with February 25, 2006, and November 26, 2005, were due primarily to restricted cash assumed in connection with the acquisition of Five Star.

12. Impairment of Long-Lived Assets:

We recorded pre-tax long-lived asset impairment charges of $4 million and $25 million for the three and nine months ended November 25, 2006, respectively. Long-lived asset impairment charges for the three and nine months ended November 26, 2005, were not significant. The long-lived asset impairment charges in fiscal 2007 related to assets that were taken out of service based on changes in our business. There were no significant long-lived asset impairment charges recorded in SG&A within our Domestic segment during the third quarter of fiscal 2007. Long-lived asset impairment charges recorded in SG&A within our Domestic segment during the first nine months of fiscal 2007 were $19 million. Long-lived asset impairment charges recorded in SG&A within our International segment during the third quarter and the first nine months of fiscal 2007 were $4 million and $6 million, respectively.

13. Commitments and Contingencies:

On December 8, 2005, a purported class action lawsuit captioned, “Jasmen Holloway, et al. v. Best Buy Co., Inc.,” was filed against us in the U.S. District Court for the Northern District of California. This federal court action alleges that we discriminate against women and minority individuals on the basis of gender, race, color and/or national origin in our stores with respect to recruitment, hiring, job assignments, transfers, promotions, compensation, allocation of weekly hours and other terms and conditions of employment. The plaintiffs seek an end to discriminatory policies and practices, an award of back and front pay, punitive damages and injunctive relief, including rightful place relief for all class members. We believe the allegations are without merit and intend to defend this action vigorously.

We are involved in various other legal proceedings arising in the normal course of conducting business. We believe the amounts provided in our consolidated financial statements are adequate in light of the probable and estimable liabilities. The resolution of those proceedings is not expected to have a material effect on our results of operations or financial condition.

14. Common Stock Repurchases:

Our Board of Directors (Board) authorized a $1.5 billion share repurchase program in June 2006. The program, which was announced on June 21, 2006, terminated and replaced a $1.5 billion share repurchase program authorized by our Board in April 2005. The April 2005 share repurchase program terminated and replaced a $500 million share repurchase program authorized by our Board in June 2004. There is no expiration date governing the period over which we can make our share repurchases under the June 2006 share repurchase program.

For the three and nine months ended November 25, 2006, we purchased and retired 0.5 million and 3.3 million shares, respectively, at a cost of $22 million and $152 million, under our June 2006 share repurchase program. We also purchased and retired 6.2 million shares at a cost of $332 million under our April 2005 share repurchase program during the period from February 26, 2006, through June 21, 2006. No shares were purchased and retired under the April 2005 share repurchase program for the three months ended November 25, 2006.

For the three and nine months ended November 26, 2005, we purchased and retired 4.0 million and 9.3 million shares, respectively, at a cost of $172 million and $372 million, under our April 2005 share repurchase program. We also purchased and retired 1.8 million shares at a cost of $61 million under our June 2004 share repurchase program during the period from February 27, 2005, through April 26, 2005.

15. New Accounting Pronouncements

In October 2005, the FASB issued FSP No. FAS 13-1, Accounting for Rental Costs Incurred During a Construction Period. FSP No. FAS 13-1 requires companies to expense rent payments for building or ground leases incurred during the construction period. FSP No. FAS 13-1 is effective for all interim and annual reporting periods beginning after December 15, 2005. Retrospective application is permitted, but not required. We adopted FSP No. FAS 13-1 on a prospective basis in the first quarter of fiscal 2007. The adoption of FSP No. FAS 13-1 did not have a significant effect on our operating income or net earnings.

In July 2006, the FASB issued Financial Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109. FIN No. 48 provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We will adopt FIN No. 48 beginning in the first quarter of fiscal 2008. We are currently evaluating the impact, if any, the adoption of FIN No. 48 will have on our operating income or net earnings. The cumulative effect, if any, of applying the provisions of FIN No. 48 upon initial adoption, will be reported as an adjustment to retained earnings as of the beginning of fiscal 2008.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on the consideration of the effects of prior-year misstatements in quantifying current-year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Early application is encouraged, but not required. We are required to adopt SAB No. 108 for our fiscal year ending March 3, 2007. We are currently assessing the impact, if any, the adoption of SAB No. 108 will have on our operating income or net earnings. The cumulative effect, if any, of applying the provisions of SAB No. 108 upon initial adoption, will be reported as an adjustment to beginning-of-year retained earnings.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We plan to adopt SFAS No. 157 beginning in the first quarter of fiscal 2009. We are currently evaluating the impact, if any, the adoption of SFAS No. 157 will have on our operating income or net earnings.

16. Condensed Consolidating Financial Information:

Our convertible debentures, due in 2022, are guaranteed by our wholly owned indirect subsidiary Best Buy Stores, L.P. Investments in subsidiaries of Best Buy Stores, L.P., which have not guaranteed the convertible debentures, are accounted for under the equity method. Certain prior-year amounts were reclassified as described in Note 1, Basis of Presentation, in this Quarterly Report on Form 10-Q. The aggregate principal balance and carrying amount of our convertible debentures at November 25, 2006, was $402 million.

The debentures may be converted into shares of our common stock if certain criteria are met as described in Note 4, Debt, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended February 25, 2006. During a portion of the nine months ended November 25, 2006, our closing stock price exceeded the specified stock price for more than 20 trading days in a 30-trading-day period. Therefore, debenture holders had the option to convert their debentures into shares of our common stock. However, no debentures were so converted. Due to changes in the price of our common stock, the debentures were no longer convertible as of November 25, 2006, and through January 4, 2007. The convertible debentures were reclassified from long-term to short-term debt in the fourth quarter of fiscal 2006, as holders of these debentures may again require us to purchase all or a portion of their debentures on January 15, 2007.

We file a consolidated U.S. federal income tax return. Income taxes are allocated in accordance with our tax allocation agreement. U.S. affiliates receive no tax benefit for taxable losses, but are allocated taxes at the required effective income tax rate if they have taxable income.

The following tables present condensed consolidating balance sheets as of November 25, 2006; February 25, 2006; and November 26, 2005; condensed consolidating statements of earnings for the three and nine months ended November 25, 2006, and November 26, 2005; and condensed consolidating statements of cash flows for the nine months ended November 25, 2006, and November 26, 2005:

Condensed Consolidating Balance Sheets
As of November 25, 2006
(Unaudited)
($ in millions)

	Best Buy Co., Inc.		Guarantor Subsidiary		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents	$	223	$	190	$	789	$	—		$	1,202
Short-term investments	1,507		—		6		—			1,513
Receivables	23		940		149		—			1,112
Merchandise inventories	—		4,879		1,439		(234		)	6,084
Other current assets	35		121		644		(41		)	759
Intercompany receivable	—		—		5,912		(5,912		)	—
Intercompany note receivable	500		—		—		(500		)	—
Total current assets	2,288		6,130		8,939		(6,687		)	10,670

Net Property and Equipment	240		1,939		795		(3		)	2,971

Goodwill	—		6		985		—			991

Other Intangible Assets	—		—		83		—			83

Long-Term Investments	320		—		—		—			320

Other Assets	85		259		151		(144		)	351

Investments in Subsidiaries	5,383		166		1,389		(6,938		)	—

Total Assets	$	8,316	$	8,500	$	12,342	$	(13,772	)	$	15,386

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	—	$	—	$	6,332	$	—		$	6,332
Unredeemed gift card liabilities	—		390		39		—			429
Accrued compensation and related expenses	—		177		124		—			301
Accrued liabilities	7		653		693		(38		)	1,315
Accrued income taxes	312		6		—		—			318
Current portion of long-term debt	404		11		44		—			459
Intercompany payable	1,469		4,443		—		(5,912		)	—
Intercompany note payable	—		500		—		(500		)	—
Total current liabilities	2,192		6,180		7,232		(6,450		)	9,154

Long-Term Liabilities	234		800		24		(653		)	405

Long-Term Debt	5		131		55		—			191

Minority Interests	—		—		34		—			34

Shareholders’ Equity	5,885		1,389		4,997		(6,669		)	5,602

Total Liabilities and Shareholders’ Equity	$	8,316	$	8,500	$	12,342	$	(13,772	)	$	15,386

Condensed Consolidating Balance Sheets
As of February 25, 2006
(Unaudited)
($ in millions)

	Best Buy Co., Inc.		Guarantor Subsidiary		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents	$	10	$	79	$	659	$	—		$	748
Short-term investments	2,884		—		167		—			3,051
Receivables	27		319		93		—			439
Merchandise inventories	—		3,173		636		(471		)	3,338
Other current assets	20		211		265		(87		)	409
Intercompany receivable	—		—		3,757		(3,757		)	—
Intercompany note receivable	500		—		—		(500		)	—
Total current assets	3,441		3,782		5,577		(4,815		)	7,985

Net Property and Equipment	244		1,733		737		(2		)	2,712

Goodwill	—		6		551		—			557

Other Intangible Assets	—		—		44		—			44

Long-Term Investments	218		—		—		—			218

Other Assets	108		266		131		(157		)	348

Investments in Subsidiaries	4,813		—		1,124		(5,937		)	—

Total Assets	$	8,824	$	5,787	$	8,164	$	(10,911	)	$	11,864

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	—	$	—	$	3,234	$	—		$	3,234
Unredeemed gift card liabilities	—		430		39		—			469
Accrued compensation and related expenses	3		225		126		—			354
Accrued liabilities	7		518		392		(39		)	878
Accrued income taxes	670		—		76		(43		)	703
Current portion of long-term debt	404		9		5		—			418
Intercompany payable	1,717		2,134		—		(3,851		)	—
Intercompany note payable	—		500		—		(500		)	—
Total current liabilities	2,801		3,816		3,872		(4,433		)	6,056

Long-Term Liabilities	257		732		31		(647		)	373

Long-Term Debt	7		115		56		—			178

Shareholders’ Equity	5,759		1,124		4,205		(5,831		)	5,257

Total Liabilities and Shareholders’ Equity	$	8,824	$	5,787	$	8,164	$	(10,911	)	$	11,864

Condensed Consolidating Balance Sheets
As of November 26, 2005
(Unaudited)
($ in millions)

	Best Buy Co., Inc.		Guarantor Subsidiary		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current Assets
Cash and cash equivalents	$	19	$	183	$	610	$	—		$	812
Short-term investments	2,136		—		149		—			2,285
Receivables	20		776		87		—			883
Merchandise inventories	—		4,380		1,109		(175		)	5,314
Other current assets	19		181		267		(67		)	400
Intercompany receivable	—		—		4,703		(4,703		)	—
Intercompany note receivable	500		—		—		(500		)	—
Total current assets	2,694		5,520		6,925		(5,445		)	9,694

Net Property and Equipment	245		1,660		735		(3		)	2,637

Goodwill	—		6		540		—			546

Other Intangible Assets	—		4		42		—			46

Long-Term Investments	114		—		—		—			114

Other Assets	129		159		93		(176		)	205

Investments in Subsidiaries	3,886		—		1,162		(5,048		)	—

Total Assets	$	7,068	$	7,349	$	9,497	$	(10,672	)	$	13,242

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	—	$	—	$	5,325	$	—		$	5,325
Unredeemed gift card liabilities	—		350		24		—			374
Accrued compensation and related expenses	1		177		76		—			254
Accrued liabilities	10		682		509		(44		)	1,157
Accrued income taxes	280		—		71		(23		)	328
Current portion of long-term debt	2		10		5		—			17
Intercompany payable	1,067		3,671		—		(4,738		)	—
Intercompany note payable	—		500		—		(500		)	—
Total current liabilities	1,360		5,390		6,010		(5,305		)	7,455

Long-Term Liabilities	236		708		65		(632		)	377

Long-Term Debt	410		89		55		—			554

Shareholders’ Equity	5,062