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Best Buy Details Revitalization Strategy

4/09/2012 12:01:00 AM Eastern

MINNEAPOLIS – Best Buy is pinning its brick-andmortar
hopes on reducing its big-box real estate, building
out its small-format Mobile chain, and converting
its remaining flagship locations to its new connectedstore
design.

The No. 1 CE chain said it also plans to trim staff,
improve efficiencies and close 50 stores this year to
realize $800 million in savings by 2015.

The announced strategy was detailed after the retailer
reported a $1.7 billion loss in its fiscal fourth
quarter. The loss stemmed entirely from one-time
charges including the buyout of its mobile business
from European partner Carphone Warehouse and the
closing of a handful of failed British stores, but Wall
Street’s dour consensus still sent shares lower in the
hours following the earnings release.

CEO Brian Dunn described the new moves as “major
actions” that will help lower the company’s overall
cost structure. Some of the cost savings will be invested
in improving the customer experience and lowering
prices to drive revenue, he said on an earnings call,
while some of the savings will eventually fall to the bottom
line as increased operating margins.

The changes will take time to bear fruit, he noted, and
for the near term the company still faces an uncertain
consumer environment and another year of weak sales
of “traditional CE,” including TV, digital imaging and
entertainment.

But “flat innovation cycles are temporal and not permanent,”
he said, and “I am very enthusiastic about the
future.”

At least one analyst, Credit Suisse’s Gary Balter,
concurred. Admittedly a lone voice among a growing
chorus of naysayers, he cited in a research note a litany
of factors working in Best Buy’s favor including its
strong cash flow; its reinvestment in its stores; its service
model; margin relief from new vendor pricing policies
and a potential across-the-board e-commerce tax;
and its plans to cut costs and incentivize associates.

The cost-cutting plan includes the closure of 50
of Best Buy’s 1,100 big-box stores this year; the loss
of about 400 corporate and support positions; a reduction
in outside consultant services; savings from
improved supply-chain efficiencies and lower return
rates; and lower non-merchandise procurement costs.

About $250 million in cuts would be made this year
alone, the company said.

On the store front the chain will convert all of its bigbox
stores in Minneapolis-St. Paul and San Antonio,
Texas, to its connected store format before the 2012
holiday season, and will open another 100 Best Buy
Mobile stores for a total of 405 locations this year. The
company is still projecting upwards of 800 freestanding
mobile locations by 2015.

The connected stores are focused on wireless and
broadband subscriptions and provide what Dunn described
as “a multichannel experience through a total
transformation of the big-box store.” Among other features,
the format combines tablets with mobile, moves
the Geek Squad stations up front, adds in-store pick
up at checkout and, borrowing a page from Apple, provides
a Genius Bar-like “Central Knowledge Desk.”

Prototypes in Las Vegas are outperforming the rest
of chain in profit per square foot, are showing a “significant”
lift in sales and margin, and are generating an
internal rate of return of over 20 percent, Dunn said. He
cited one of the test stores, a 19-year-old location, that
went from “an old and tired footprint” to “performing
like it’s new again.”

Best Buy expects total big-box square footage in the
targeted Texas and Minnesota markets to be reduced
by almost 20 percent by closing stores and trimming instore
space by subletting it or returning it to landlords.
Depending on the outcome of the two regional pilots,
20 percent could be a benchmark for future real estate
reductions Dunn suggested, while “points of presence”
including standalone mobile stores will increase
by more than the same amount. The approach, he said,
will result in “more doors and less square footage.”

Dunn stressed that the store-format changes are
about more than “brick” alone, and are designed to
help migrate customers across all of Best Buy’s distribution
channels, including the web.

Elsewhere, the chain will also continue to roll out its
in-store Pacific Kitchen & Bath and Magnolia Design
Center concepts. The former is outpacing comp sales
in its standard appliance departments two to one, while
the latter, which features home automation solutions,
has similarly been outselling Best Buy’s regular Magnolia
Home Theater areas, Dunn said.

The chain will also bring a new labor model to all
big-box stores starting this summer that will provide a
40 percent increase in training for new employees and
an enhanced compensation plan. Based on Best Buy
Mobile, the plan provides team encouragement and introduces
financial incentives for delivering on customer
service and sales goals.

In addition, Best Buy will provide improved benefits
to members of its Reward Zone Silver loyalty program,
which include a significant percentage of its most
profitable customers, Dunn said. The new benefits will
include free expedited shipping, a free annual house
call from Geek Squad, and a 60-day return and pricematch
policy.

Overseas, the company plans to open 50 Five Star
stores in China this year, including 14 new mobile
store-within-a-store shops that it will launch with Carphone
Warehouse.

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