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Best Buy U.S. Stores Q4 Rev. Rises

3/30/2006 09:52:00 AM Eastern

Minneapolis — A combination of robust sales, continued gross profit gains and focused operating expense reduction paid off for Best Buy in the retailer’s fiscal fourth quarter, with U.S. Best Buy stores posting a 14 percent rise in revenue, hitting $9.4 billion, up from $8.2 billion a year earlier.

Comp-store sales increased 7.3 percent.

Best Buy’s high-end consumer electronics segment at Magnolia Audio Video stores reported $55 million in sales for the fourth quarter, excluding the results of Magnolia Home Theater, which is reported as part of U.S. Best Buy stores, and a 30.3 percent comp-store sales gain. This was due to consumer interest in audio and video products, as well as custom installation services, said Best Buy.

The combination of Best Buy and Magnolia, comprising the retailer’s domestic business, accounted for a 7.4 percent comp-store increase in the fourth quarter, ended Feb. 25. Gross profit as a percent of revenue for the domestic stores business climbed to 25.2 percent, from 23.7 percent year-on-year. Expenses as a percent of revenue increased to 15.7 percent in the three months, compared with 14.7 percent last year.

Segmented stores led the company with a comp-store sales gain nearly 2 percent higher than the balance of the U.S. Best Buy stores in the fiscal quarter, said the retailer.

Operating income for the domestic segment rose to $893 million in the fourth quarter, compared with $735 million in the same three months the prior year. Operating income as a percent of revenue increased to 9.5 percent, from 8.9 percent.

“I’m very proud of our employees and the outstanding results they delivered for the quarter and the year,” said Brad Anderson, vice chairman/CEO. “We’re growing our business even as we refine our model for the future. This past year was our tipping point, and it has opened highways to the future.

“In the coming year, it’s our goal to expand through new store openings, Magnolia Home Theater, services, Best Buy for Business and a more focused approach to running the business that’s rooted in customer centricity,” said Anderson.

During the fourth quarter, Best Buy’s comp-store gains were driven by higher sales of flat-panel TVs, MP3 players and accessories, notebook computers and video gaming hardware, said the company. These gains more than offset comp declines in tube and projection TVs, DVDs and CDs.

The retailer’s fourth quarter revenue mix reflected continued growth in its CE products group, which represented 45 percent of the quarter’s revenue, compared with 41 percent the previous year. CE posted a 17.7 percent comp-store sales gain, while leading the company’s results.

The company said revenue results were bolstered by growth in online revenue of nearly 50 percent. Total online revenue, including Canadian Web sites, grew 45 percent in the fourth quarter.

Within CE, flat-panel TVs posted triple-digit comps as higher volumes and increased screen sizes more than offset the impact of declining prices. Total television comps grew in the double digits as flat-panel TV growth was partially offset by declines in tube and projection TVs.

Home office products, which accounted for 30 percent of fourth quarter revenue, had a comp-store increase of 2.5 percent. However, its share of revenue slipped from 32 percent in the fourth quarter of last year. A low double-digit comp-store sale rise for notebooks and a strong double-digit increase in computer service revenue fueled the growth, said Best Buy.

The entertainment software segment comprised 21 percent of fourth-quarter revenue, down from a year-on-year 23 percent. The group recorded a 4.5 percent decline on a comp-store sales basis. A strong double-digit gain in comps of gaming hardware was more than offset by expected declines in DVDs and CDs.

Appliance share of revenue held firm in the fourth quarter, at 4 percent, with the product group registering a 5.5 percent comp-store sales gain. The group, said Best Buy, continued to benefit from an expanded product assortment and an increase in average selling prices for major appliances.

When combining its U.S. and Canadian operations, Best Buy consolidated fourth-quarter revenue increased 15 percent, hitting $10.7 billion, up from $9.2 billion. The revenue increase reflects the net addition of 103 new stores in the past 12 months and a comp-store gain of 7.3 percent.

The comps increase was driven by a climb in average transaction size, as Best Buy’s revenue mix continues to reflect a shift toward higher-ticket items. Additionally, said the retailer, an improvement in labor productivity, compared with the fiscal third quarter, and solid execution offset slightly lower customer traffic year-on-year.

Consolidated net income in the fourth quarter jumped to $644 million from a year-earlier $572 million. Gross profit as a percent of revenue rose to 25 percent from 23.5 percent, while expenses as a percent of revenue moved up to 16 percent from 15 percent. Operating income as a percent of revenue climbed to 8.9 percent, from 8.5 percent.

In the current fiscal year, Best Buy said it plans to add its Magnolia Home Theater store-within-a-store experience to about 200 locations, and elements of Best Buy For Business to at least 120 stores. The retailer believes Magnolia Home Theater — featuring high-end brands, home-like displays and specially trained employees — offers a unique solution for customers.

Best Buy also anticipates high double-digit revenue growth from its Geek Squad in the coming year, with only a modest increase in the number of agents. It expects to accomplish this goal by installing new systems to support and boost productivity, as it benefits from volume and scale. Additionally, up to 1,000 new home theater installers are expected to join the 1,500 installers Best Buy currently employs.

For the 12 months, consolidated revenue increased 12 percent to $30.8 billion from $27.4 billion, while comps gained 4.9 percent. U.S. Best Buy store comps were up 5.1 percent for the 12 months, and Magnolia Audio Video 15.2 percent.

Consolidated net earnings for the year reached $1.1 billion, up from $984 million the previous year. Gross profit as a percent of sales hit 25 percent, up from 23.7 percent, while expenses as a percent of revenue climbed to 19.7 percent, rising from 18.4 percent.