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Best Buy Plans $800M In Cost Cuts

3/29/2012 08:57:44 AM Eastern
Minneapolis - Best Buy said it will cut $800 million in costs over the next three years by closing stores, trimming staff and improving efficiencies.

The actions were announced as the No. 1 CE chain reported a $1.7 billion loss in its fiscal fourth quarter due to one-time charges.

The company also said it was pinning its future growth on converting its flagship locations to its new connected-store format, reducing its big-box real estate, and opening more freestanding Best Buy Mobile shops.

The cost-cutting plan includes the closure of 50 big-box Best Buy stores this year, and a reduction of about 400 corporate and support positions. About $250 million in cuts would be made this year alone, the company said.

Other cost savings will be realized in corporate and support structure from IT services savings, procurement savings on non-merchandise purchases, and a reduction in outside consultant services, while savings in cost of goods sold will be driven by supply-chain efficiencies and by working with vendors to reduce return rates.

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

Best Buy's connected stores are remodeled big-box locations that focus on wireless and broadband subscriptions and provide what CEO Brian Dunn described during an earnings call 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 to the front of the store, 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, and are showing a "significant" lift in sales and margin and 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 markets to be reduced by almost 20 percent by closing stores and either subletting or returning space to landlords within continuing locations. Depending on the outcome of the Minnesota and Texas tests, the 20 percent figure could be a benchmark for future real estate reductions Dunn suggested, while "points of presence" including standalone mobile stores will increase by more than 20 percent. The approach, he said, will result in "more doors and less square footage."

Dunn said the store-format changes are about more than just "brick" alone, and are designed to help migrate customers across all of Best Buy's distribution channels.

Elsewhere, the chain will also continue to roll out its in-store Pacific Kitchen & Bath and Magnolia Design Center concepts. The former is outpacing standard appliance department comp sales two to one, while the latter, which also features home automation solutions, has similarly been outselling Best Buy's regular Magnolia Home Theater sections, 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, which 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. The new benefits will include free expedited shipping, a free annual house call from Geek Squad, and a 60-day return and price-match 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 European partner Carphone Warehouse.

Dunn described the 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, 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."

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