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Best Buy U.S. Operating. Income Up 13%

12/15/2004 12:50:00 PM Eastern

Minneapolis — Calling itself a “leaner” organization this year than last, Best Buy reported operating income of $228 million for its U.S. Best Buy and Magnolia Audio Video locations in its fiscal third quarter, a 13 percent increase over the $202 million reported in the same three months last year.

In the face of a slightly more promotional environment, Best Buy’s domestic segment recorded a gross profit as a percent of revenue of 24.7 percent in the quarter, ended Nov. 27, called a “modest decline” from the 24.9 percent reported in the year-ago period. However, expenses for domestic units decreased to 20.9 percent in the third quarter, down from 21.2 percent year-over-year.

For the three months, Best Buy’s U.S. store revenue climbed 9 percent, to $5.9 billion, from $5.4 billion, as reported. Comp-store sales climbed 3 percent.

Including international sales, Best Buy’s consolidated three-month revenue rose 10 percent, to $6.6 billion, from $6 billion in the same quarter a year earlier, as reported. The increase reflected the addition of 75 new stores in the past 12 months. Comp-store sales jumped 3.2 percent.

Consolidated net income for the three months soared 22 percent, hitting $148 million, compared with a year-earlier $122 million. Gross profit as a percent of revenue reached 24.5 percent, down slightly from 24.6 percent in the same quarter last year, due to promotional activity. Expenses for the quarter dropped to 21 percent, from a year-on-year 21.3 percent.

“Our ability to deliver double-digit revenue and earnings increases in a more modest growth environment demonstrates how well we execute the business,” said Brad Anderson, vice chairman/CEO. In a conference call, Anderson said that Best Buy’s superior comp-store growth, compared with its competitors, indicates that the company is gaining market share, and that the trend is continuing through the holiday season.

During the conference call, senior executives acknowledged that traffic had slowed throughout the CE retail sector, particularly among lower-income consumers, which they attributed in part to higher fuel prices. Best Buy compensated for that by raising its average ticket and close rates, using approaches developed in its customer centricity stores.

Best Buy said its customer loyalty program, launched in mid-2003, also continued to contribute to the revenue growth for the quarter. Reward Zone, as it is called, reduced the gross profit rate by 0.6 percent of revenue in the third quarter, compared with a reduction of 0.3 percent year-over-year, reflecting increased membership.

Lower expenses in the third quarter, compared with a year ago, were primarily driven by leverage associated with the revenue increase, efficiency initiatives implemented in the past year and lower impairment charges and administrative costs. This was offset somewhat by the launch of 67 segmented stores as part of the retailer’s customer centricity initiative.

These 67 segmented stores, which came on board in early October, outperformed other U.S. Best Buy locations in terms of comp-store sales gain and gross profit rate. The comp-store increase more than doubled that of other U.S. Best Buy locations, which, in turn outperformed competitors, said the retailer. The gross profit rate was higher in segmented stores due to a more profitable revenue mix. Expenses, including launch costs, were somewhat more modest than expected, said Best Buy, which now operates 85 customer centric stores in California, Nevada, Illinois, Maryland and the District of Columbia.

“Our commitment to this initiative — and our excitement about the outcomes — has never been greater,” said Anderson about the segmented stores program. Now that Best Buy has centralized its customer centricity team, Anderson believes their work will gain momentum. All the areas driving this business — segment leaders, the marketing organization which identifies customer segments and the store experience and communications teams — have been brought together into one operation, the customer business group under executive VP John Walden.

With the fourth quarter shaping up to be more promotional than the same three months last year, Best Buy expects to enjoy continued sales strength in its so-called “Big Six” core categories of digital televisions, MP3 players, digital cameras, notebooks and appliances, as well as other product sectors.

For the nine months, consolidated revenue increased 13 percent, reaching $18.2 billion, from $16.1 billion in the same period in 2003. Comp-store sales rose 5.1 percent.

The chain’s gross profit as a percent of revenue for the nine months held steady at 25.1 percent, compared to the same period in 2003, while the company’s operating income rate improved to 3.6 percent, from 3.4 percent in the prior-year period. This was due primarily to expense leverage related to revenue growth as well as ongoing efficiency initiatives. Net income for the nine months hit $412 million, up from $236 million in the same period last year.

Looking ahead, the company said it is considering opening stores in China and other countries; will expand its Geek Squad service offering, where it sees a multi-billion-dollar opportunity based on small business demand and the growth of home networking; and will beef up its selection of Geek Squad and Insignia-branded private label commodity and opening price point products. — Additional reporting by Alan Wolf