Best Buy Sees Strong Q4 Net For U.S. Stores

MINNEAPOLIS— Bolstered by what it called "outstanding growth" for quarterly and yearly earnings and sales, Best Buy reported domestic fourth quarter operating income of $712 million, compared with $591 million in the year-ago period.

Revenue in the chain's U.S. division jumped 19 percent in the fourth quarter, hitting $7.6 billion for the three months, ended Feb. 28, as reported earlier, up from $6.4 billion in the same quarter a year ago. Comp-store sales increased 9.9 percent. For the year, domestic sales climbed 15 percent to $22.2 billion, with comps rising 7.4 percent, as reported. Domestic numbers include U.S. Best Buy and Magnolia Audio Video operations.

Best Buy's U.S. segment increased gross profit margin as a percent of revenue to 25.5 percent in the fourth quarter, up from 25.1 percent in the same three months a year earlier. However, expenses rose to 16.1 as a percent of revenue in the fourth quarter, up from 15.9 percent year-on-year.

The retailer said it invested about 0.4 percent of fourth quarter revenue developing and testing its customer centricity program, a major strategic initiative that segments consumers and stores by need and profitability, and which empowers store-level employees to make decisions and act as "owner/operators." Best Buy believes that its 32 customer centricity test stores contributed to higher revenue and gross margin in the quarter and collectively led the company in comp-store sales gains for the quarter and the year.

In the current fiscal year, Best Buy expects to convert up to 100 additional stores to its customer centricity platform and will eventually bring the program, or elements of it, system-wide, conceivably within the next three years, said retail store president Mike Keskey during a conference call. More details regarding the initiative and the timetable for its rollout will be announced this spring, the company said.

Also contributing to comp-store gains is the Rewards Zone loyalty program, whose 2.5 million members shop Best Buy twice as frequently as non-members. Helpful also is its 24-hour Geek Squad in-home PC tech-support program, which is being rolled out this April to 425 stores in 45 markets, up from the current 7 markets.

The company is also cutting costs by reducing the number of store-level managers and supervisors. They will be moved into sales positions, and by outsourcing HR, IT and call-center functions. Best Buy is also lowering supply-chain expenses by sharing more data with vendors and handling more transportation, CFO Darren Jackson said.

President/chief operating officer Alan Lenzmeier said the company would also begin upgrading as many as 60 older stores. The company is embracing an internal goal of "seven by seven," or operating income of 7 percent by fiscal 2007, along with double-digit revenue growth.

"We achieved outstanding growth in revenue and earnings for the fourth quarter and the fiscal year," said Brad Anderson, vice chairman/CEO. "Our focus on the customer has resulted in our highest market share, customer satisfaction, customer loyalty and brand awareness ever."

Best Buy's total fourth quarter sales soared 21 percent, as reported, hitting $8.4 billion, up from $7 billion in the year-ago period. Total comp-store sales increased 9.7 percent. Net income climbed to $469 million, compared with $311 million in the same three months last year. Gross profit margin increased to 25.4 percent, up from 25.1 percent year-on-year, while expenses remained flat at 16.4 percent.

For the 12 months, Best Buy's total sales increased 17 percent, reaching $24.5 billion, up from $21 billion in the year-ago time frame. Comp-store sales gained 7.1 percent. Gross profit margin for the year reached 25.2 percent, up from 25 percent in the same period a year ago, while expenses dropped to 19.9 percent, down from 20.2 percent a year earlier. — Additional reporting by Alan Wolf