Unless the context otherwise requires, the use of the terms "Best Buy," "we," "us" and "our" in the following refers to Best Buy Co., Inc. and its consolidated subsidiaries.

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six sections:

†          Overview

†          Results of Operations

†          Liquidity and Capital Resources

†          Off-Balance-Sheet Arrangements and Contractual Obligations

†          Significant Accounting Policies and Estimates

†          New Accounting Standards

We consolidate the financial results of our Europe, China and Mexico operations on a two-month lag. Consistent with such consolidation, the financial and non-financial information presented in our MD&A relative to these operations is also presented on a two-month lag. No significant intervening event occurred that would have materially affected our financial condition, results of operations, liquidity or other factors had it been recorded during the three months ended August 29, 2009.

Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 28, 2009, as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited.

Overview

We are a specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services. We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all operations within the U.S. and its territories. The International segment is comprised of all operations outside the U.S. and its territories.

Our business, like that of many U.S. retailers, is seasonal. Historically, we have realized more of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S., Canada and Europe, than in any other fiscal quarter. The timing of new store openings, costs associated with restructuring or asset impairments, if any, as well as general economic conditions may also affect our future quarterly results.

Throughout this MD&A, we refer to comparable store sales. Comparable store sales is a measure commonly used in the retail industry, which indicates the performance of our existing stores by measuring the growth in sales for such stores for a particular period over the corresponding period in the prior year. Our comparable store sales is comprised of revenue from customers at stores operating for at least 14 full months as well as revenue related to call centers, Web sites and our other comparable sales channels. Revenue we earn from sales of merchandise to resellers is not included within our comparable store sales calculation. Relocated, remodeled and expanded stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of the acquisition. The portion of our calculation of the comparable store sales percentage change attributable to our International segment excludes the effect of fluctuations in foreign currency exchange rates. The method of calculating comparable store sales varies across the retail industry. As a result, our method of calculating comparable store sales may not be the same as other retailers' methods.

Highlights

† Net earnings attributable to Best Buy Co., Inc. decreased 22% to $158 million, or $0.37 per diluted share, in the second quarter of fiscal 2010, compared with $202 million, or $0.48 per diluted share, in the same period one year ago. Operating income decreased 17% to $280 million, or as a percentage of revenue, 2.5%, in the second quarter of fiscal 2010, compared with $339 million, or 3.5%, in the same period one year ago. The decrease in net earnings and operating income was primarily driven by a decrease in the International segment's operating income, while the Domestic segment's operating income remained flat.

† Revenue in the second quarter of fiscal 2010 increased 12% to $11.0 billion, compared with $9.8 billion in the same period one year ago, driven primarily by the acquisition of Best Buy Europe, which contributed $1.2 billion of revenue, and the net addition of 170 new stores in the past 12 months. These gains were partially offset by a 3.9% comparable store sales decline and unfavorable fluctuations in foreign currency exchange rates.

† Our gross profit rate in the second quarter of fiscal 2010 increased slightly to 24.4% of revenue, compared with 24.3% of revenue in the same period one year ago. The increase was due primarily to the inclusion of Best Buy Europe, partially offset by a decline in our Domestic segment's gross profit rate due to unfavorable mix and rate impacts.

† Our selling, general and administrative expenses ("SG&A") rate in the second quarter of fiscal 2010 increased to 21.8% of revenue, compared with 20.8% of revenue in the same period one year ago. The increase was due primarily to the inclusion of Best Buy Europe and deleverage on the comparable store sales decline in the U.S. and Canada, partially offset by reductions in spending in certain discretionary categories and in corporate payroll. Excluding fiscal 2009 acquisitions, SG&A dollars in the fiscal second quarter declined versus the prior year period.

Results of Operations



Consolidated Performance Summary



The following table presents selected consolidated financial data ($ in
millions, except per share amounts):



                                               Three Months Ended1                        Six Months Ended1
                                      August 29, 2009       August 30, 2008      August 29, 2009      August 30, 2008
Revenue                               $         11,022     $           9,801    $          21,117    $          18,791
Revenue % gain                                      12 %                  12 %                 12 %                 13 %
Comparable store sales % (decline)
gain                                              (3.9 )%                4.2 %               (5.0 )%               4.0 %
Gross profit as % of revenue 2                    24.4 %                24.3 %               24.8 %               24.0 %
SG&A as % of revenue 2                            21.8 %                20.8 %               21.8 %               20.7 %
Operating income 3                    $            280     $             339    $             576    $             616
Operating income as % of revenue                   2.5 %                 3.5 %                2.7 %                3.3 %
Net earnings attributable to Best
Buy Co., Inc                          $            158     $             202    $             311    $             381
Diluted earnings per share            $           0.37     $            0.48    $            0.74    $            0.91

1 On June 28, 2008, we acquired a 50% interest in Best Buy Europe, whose operating results are reported on a two-month lag and included within our International segment. Accordingly, our results of operations did not reflect Best Buy Europe results until the third quarter of fiscal 2009.

2 Because retailers vary in how they record costs of operating their supply chain between cost of goods sold and SG&A, our gross profit rate and SG&A rate may not be comparable to other retailers' corresponding rates. For additional information regarding costs classified in cost of goods sold and SG&A, refer to 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 28, 2009.

3 Included within our operating income for the first six months of fiscal 2010 is $52 million of restructuring charges related to measures we took to restructure our businesses in the first quarter of fiscal 2010. These charges resulted in a decrease in our operating income of 0.3% of revenue for the first six months of fiscal 2010. No restructuring charges were recorded in the second quarter of fiscal 2010 or the first six months of fiscal 2009.

Revenue in the second quarter of fiscal 2010 increased 12% to $11.0 billion, compared with $9.8 billion in the same period one year ago. In the first six months of fiscal 2010, revenue increased 12% to $21.1 billion, compared with $18.8 billion in the same period one year ago. In both the second quarter and the first six months of fiscal 2010, the revenue increases resulted primarily from the acquisition of Best Buy Europe, which contributed $1.2 billion and $2.6 billion of revenue, respectively, and the net addition of 170

new stores (of which 36 were Best Buy Europe stores) in the past 12 months. The increases were partially offset by comparable store sales declines in the second quarter and the first six months of fiscal 2010 of 3.9% and 5.0%, respectively, as well as the unfavorable effect of fluctuations in foreign currency exchange rates.

The components of the net revenue increase for the three and six months ended August 29, 2009 were as follows:

                                                                 Six months
                                         Three months ended         ended
                                          August 29, 2009      August 29, 2009
Acquisition of Best Buy Europe                           13 %               14 %
Net new stores                                            4 %                5 %
Comparable store sales decline                           (4 )%              (5 )%
Unfavorable impact of foreign currency                   (1 )%              (2 )%
Total revenue increase                                   12 %               12 %

Our gross profit rate in the second quarter of fiscal 2010 increased by 0.1% of revenue to 24.4% of revenue. In the first six months of fiscal 2010, our gross profit rate increased from 24.0% of revenue to 24.8% of revenue. The gross profit rate increase in the second quarter of fiscal 2010 was due to an increase in our International segment's gross profit rate, due to the inclusion of Best Buy Europe, offset by a decrease in our Domestic segment's gross profit rate. For the first six months of fiscal 2010, increases in both our Domestic and International segments' gross profit rates contributed to the overall gross profit rate increase. The inclusion of Best Buy Europe, which predominantly features sales of higher-margin mobile phones, increased our gross profit rate by 0.6% of revenue for the fiscal second quarter and by 0.8% of revenue for the first six months of fiscal 2010. For further discussion of each segment's gross profit rate changes, see the Segment Performance Summary for Domestic and International below.

Our SG&A rate in the second quarter of fiscal 2010 increased by 1.0% of revenue to 21.8% of revenue. In the first six months of fiscal 2010, our SG&A rate increased from 20.7% of revenue to 21.8% of revenue. The SG&A rate increases in both the second quarter and first six months of fiscal 2010 were due to an increases in our International segment's SG&A rates, respectively, while the Domestic segment's rates, respectively, decreased compared with the prior year periods. The inclusion of Best Buy Europe increased our SG&A rate by 1.3% of revenue for the fiscal second quarter and by 1.2% of revenue for the first six months of fiscal 2010. For further discussion of each segment's SG&A rate changes, see the Segment Performance Summary for Domestic and International below.

Other Income (Expense)

Our investment income and other in the second quarter of fiscal 2010 increased to $18 million, compared with $9 million in the same period one year ago. The increase was primarily due to a gain on the sale of an equity investment. Our investment income and other in the first six months of fiscal 2010 decreased to $27 million, compared with $30 million in the same period one year ago, primarily due to the impact of lower average cash and investment balances and lower interest rates on our cash and investment balances.

Additionally, interest expense in the fiscal second quarter increased to $22 million, compared with $21 million in the same period one year ago. Our interest expense in the first six months of fiscal 2010 increased to $45 million, compared with $34 million in the same period one year ago. The increases in the second quarter and first six months of fiscal 2010 were primarily due to increased borrowings to acquire Best Buy Europe and the financing of its operations.

Income Tax Expense

Our effective income tax rates in the second quarter and first six months of fiscal 2010 were 42.8% and 43.9%, respectively, compared to 37.3% and 37.2%, respectively, in the corresponding periods of fiscal 2009. The increases in our effective income tax rate for the second quarter and first six months of fiscal 2010 were caused primarily by unbenefitted losses in certain foreign jurisdictions.

Segment Performance Summary



Domestic



The following table presents selected financial data for the Domestic segment ($
in millions):



                                               Three Months Ended                          Six Months Ended
                                      August 29, 2009       August 30, 2008      August 29, 2009      August 30, 2008
Revenue                              $           8,274     $           8,133    $          15,799    $          15,586
Revenue % gain                                       2 %                  12 %                  1 %                 12 %
Comparable store sales %
(decline) gain                                    (3.1 )%                5.3 %               (4.0 )%               4.4 %
Gross profit as % of revenue                      24.3 %                24.9 %               24.7 %               24.7 %
SG&A as % of revenue                              20.5 %                21.0 %               20.6 %               20.9 %
Operating income 1                   $             315     $             315    $             618    $             592
Operating income as % of revenue                   3.8 %                 3.9 %                3.9 %                3.8 %

1 Included within our Domestic segment's operating income for the first six months of fiscal 2010 is $25 million of restructuring charges related to measures we took to restructure our businesses in the fiscal first quarter. These charges resulted in a decrease in our Domestic segment's operating income of 0.2% for the first six months of fiscal 2010. No restructuring charges were recorded in the second quarter of fiscal 2010 or the first six months of fiscal 2009.

The following table presents Domestic stores open at the end of the second quarters of fiscal 2010 and fiscal 2009:

                         Total Stores at End of
                             Second Quarter
                        Fiscal 2010   Fiscal 2009
U.S. Best Buy                 1,044           973
Best Buy Mobile                  48            21
Pacific Sales                    35            22
Magnolia Audio Video              7            13
U.S. Geek Squad                   6             7
Total Domestic stores         1,140 1       1,036 2

1 During the second quarter of fiscal 2010, we opened 22 new stores in our Domestic segment, consisting of 12 U.S. Best Buy stores, nine Best Buy Mobile stores and one Pacific Sales store. There were no store closures in our Domestic segment during the second quarter of fiscal 2010.

2 During the second quarter of fiscal 2009, we opened 33 new stores in our Domestic segment, consisting of 24 U.S. Best Buy stores, seven Best Buy Mobile stores and two Pacific Sales stores. There were no store closures in our Domestic segment during the second quarter of fiscal 2009.

Our Domestic segment's operating income in the second quarter of fiscal 2010 was $315 million, or 3.8% of revenue, compared with $315 million, or 3.9% of revenue, in the same period one year ago. The decrease in our Domestic segment's operating income rate for the second quarter of fiscal 2010 reflected a decrease in the gross profit rate, which was partially offset by an improvement in the SG&A rate. In the first six months of fiscal 2010, our Domestic segment's operating income was $618 million, or 3.9% of revenue, compared with $592 million, or 3.8% of revenue, in the same period one year ago. The increase in our Domestic segment's operating income rate in the first six months of fiscal 2010 reflected a decrease in the SG&A rate, while the gross profit rate remained flat. The increase was partially offset by $25 million of restructuring charges recorded in the fiscal first quarter of 2010.

Our Domestic segment's revenue in the second quarter of fiscal 2010 increased 2% to $8.3 billion, compared with $8.1 billion in the same period one year ago. In the first six months of fiscal 2010, our Domestic segment's revenue increased 1% to $15.8 billion, compared with $15.6 billion in the same period one year ago. In both the second quarter and first six months of fiscal 2010, the revenue increases resulted primarily from the net addition of 104 new stores in the past 12 months, partially offset by the comparable store sales declines in the second quarter and the first six months of fiscal 2010 of 3.1% and 4.0%, respectively.

The components of our Domestic segment's net revenue increase for the three and six months ended August 29, 2009 were as follows:

                                                         Six months
                                 Three months ended         ended
                                  August 29, 2009      August 29, 2009
Net new stores                                    5 %                5 %
Comparable store sales decline                   (3 )%              (4 )%
Total revenue increase                            2 %                1 %

The following table presents revenue mix percentages and comparable store sales percentage changes for the Domestic segment by revenue category in the second quarters of fiscal 2010 and fiscal 2009:

                                          Revenue Mix Summary              Comparable Store Sales Summary
                                           Three Months Ended                    Three Months Ended
                                   August 29, 2009    August 30, 2008    August 29, 2009    August 30, 2008
Consumer electronics                            38 %               38 %             (2.4 )%             2.0 %
Home office                                     37 %               34 %              7.3 %             15.1 %
Entertainment software                          13 %               16 %            (23.4 )%             0.0 %
Appliances                                       5 %                5 %            (10.1 )%            (9.8 )%
Services                                         6 %                7 %             (3.7 )%             8.7 %
Other                                            1 %               <1 %              n/a                n/a
Total                                          100 %              100 %             (3.1 )%             5.3 %

Our Domestic segment's comparable store sales decline in the second quarter of fiscal 2010 was driven by a reduction in average ticket, partially offset by a slight increase in customer traffic. The categories having the largest effect on our Domestic segment's comparable store sales decline in the fiscal second quarter were video gaming, digital cameras, DVDs and CDs. Weaker sales in these categories were partially offset by comparable store sales gains in notebook computers, mobile phones and flat-panel televisions.

In the second quarter of fiscal 2010, our Domestic segment's consumer electronics revenue category posted a 2.4% comparable store sales decline, driven primarily by decreases in the sales of digital cameras, navigation products and MP3 players, partially offset by gains in flat-panel televisions as unit sales increases more than offset average selling price decreases. The home office revenue category posted a 7.3% comparable store sales gain driven primarily by a continuation of increases in the sales of notebook computers and mobile phones. The entertainment software revenue category recorded a 23.4% comparable store sales decline due primarily to a decline in sales of video gaming, partially caused by industry-wide softness, as well as continued decline in sales of DVDs and CDs. The appliances revenue category recorded a 10.1% decline in comparable store sales due to continued weakness in the housing sector. The services revenue category recorded a 3.7% comparable store sales decline due primarily to reductions in computer and home installation services as a result of lower average selling prices and attachment rates.

Our Domestic segment's gross profit rate in the second quarter of fiscal 2010 decreased by 0.6% of revenue to 24.3% of revenue. In the first six months of fiscal 2010, our Domestic segment's gross profit rate remained flat at 24.7% of revenue, consistent with the same period one year ago. The decrease in the second quarter of fiscal 2010, as well as the flat gross profit rate for the first six months of fiscal 2010, was partially due to a shift in the segment's revenue mix to sales of lower-margin notebook computers, partially offset by increased sales of higher-margin mobile phones and decreased sales of lower-margin video gaming. In addition, the decrease in the second quarter of fiscal 2010 was impacted by rate unfavorability caused by increased sales of certain lower-margin mobile phones and several focused initiatives such as increased promotional pricing on televisions. Gross profit rate improvements in digital cameras and camcorders, televisions and services in the first quarter of fiscal 2010 directly offset the unfavorable mix and rate impacts previously discussed, resulting in the gross profit rate remaining flat for the first six months of fiscal 2010.

Our Domestic segment's SG&A rate in the second quarter of fiscal 2010 decreased by 0.5% of revenue to 20.5% of revenue. In the first six months of fiscal 2010, our Domestic segment's SG&A rate was 20.6% of revenue, compared with 20.9% of revenue in the same period one year ago. The decreases in the second quarter and first six months of fiscal 2010 were attributable to reductions in outside and outsourced services, travel expense, advertising and corporate payroll, partially offset by the deleveraging impact of lower comparable store sales on payroll, benefits and overhead and higher incentive pay due to better-than-expected performance. Overall, SG&A dollars in the fiscal second quarter declined versus the prior year period.

Our Domestic segment incurred no restructuring charges in the second quarter of fiscal 2010, consistent with the same period one year ago. Our Domestic segment's restructuring charges in the first six months of fiscal 2010 were $25, compared to $0 in the same period one year ago. The charges were primarily the result of changes to our U.S. Best Buy store operating model, which resulted in the elimination of certain positions, for which we incurred employee termination costs.

International



The following table presents selected financial data for the International
segment ($ in millions):



                                                     Three Months Ended1                        Six Months Ended1
                                            August 29, 2009       August 30, 2008      August 29, 2009      August 30, 2008
Revenue                                    $           2,748     $           1,668    $           5,318    $           3,205
Revenue % gain                                            65 %                  10 %                 66 %                 17 %
Comparable store sales % (decline) gain                 (8.3 )%               (1.0 )%             (10.9 )%               1.7 %
Gross profit as % of revenue                            24.5 %                21.3 %               25.2 %               20.8 %
SG&A as % of revenue                                    25.8 %                19.9 %               25.5 %               20.1 %
Operating (loss) income 2                  $             (35 )   $              24    $             (42 )  $              24
Operating (loss) income as % of revenue                 (1.2 )%                1.4 %               (0.8 )%               0.7 %

1 On June 28, 2008, we acquired a 50% interest in Best Buy Europe, whose operating results are reported on a two-month lag. Accordingly, our results of operations did not reflect Best Buy Europe results until the third quarter of fiscal 2009.

2 Included within our International segment's operating loss for the first six months of fiscal 2010 is $27 million of restructuring charges related to measures we took to restructure our businesses in the fiscal first quarter. These charges resulted in a decrease in our International segment's operating income of 0.5% of revenue for the first six months of fiscal 2010. No restructuring charges were recorded in the second quarter of fiscal 2010 or the first six months of fiscal 2009.

The following table presents International stores open at the end of the second quarters of fiscal 2010 and fiscal 2009:

                              Total Stores at End of
                                  Second Quarter
                             Fiscal 2010   Fiscal 2009
Best Buy Europe1                   2,450             -
Five Star                            165           161
Future Shop                          142           133
Best Buy Canada                       60            52
Best Buy China                         6             1
Best Buy Mobile Canada                 3             -
Best Buy Mexico                        1             -
Total International stores         2,827 2         347 3

1 Consists of The Carphone Warehouse stores in the U.K. and The Phone House stores throughout continental Europe.

2 During the second quarter of fiscal 2010, we opened 34 new stores in our International segment, consisting of 27 Best Buy Europe stores, two Five Star stores, two Future Shop stores, two Best Buy Canada stores, and one Best Buy China store. Offsetting these store openings were 37 store closures in second quarter of fiscal 2010, consisting of 36 Best Buy Europe stores and one Five Star store.

3 During the second quarter of fiscal 2009, we opened one new store in our . . .