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Best Buy's Musicland For Sale

3/31/2003 12:56:00 PM Eastern

Minneapolis, Minn. - Best Buy confirmed today that it is in talks to sell its ailing, mall-based Musicland music and video software group, comprised of the Sam Goody, Suncoast Video and Media Play chains.

The company has hired an investment banking firm to assist with the sale, as well as 'additional professionals to assist in other areas of the plan,' the retailer said.

In making the announcement, Best Buy CEO Brad Anderson conceded that the company's plan to use Musicland as a platform from which to sell consumer electronics through the shopping mall channel 'has been less successful than we had hoped.' Factors contributing to its failure include 'a continued slowdown in traffic in traditional shopping centers nationwide,' he said, plus steep declines in CD sales.

Anderson added that a strategic study begun several months ago concluded that Musicland 'would not be capable of meeting our original expectations.' Divesting the division would allow Best Buy to concentrate on its core business and assets, the company said.

'In an effort to derive the best outcome for all of our constituencies - including our shareholders, employees, vendors, landlords and communities - we have concluded that we should seek a buyer for our interest in Musicland,' he noted.

Anderson acknowledged that sales talks are proceeding, and that in the interim Best Buy is working to maximize Musicland's value. To that end, it has promoted executive VP Connie Fuhrman to president, a post that had been eliminated with the dismissal of Kevin Freeland in January.

Best Buy acquired Musicland for $685 million in February 2001 with an eye toward expanding its portable digital product mix while tapping into its mall-based demographic of women and 15-to-25 year olds. But a sharp downturn in demand for pre-recorded music and a slowdown in mall traffic have weighed heavily on the chain, whose sales fell 15 percent to $580 million during the fiscal fourth quarter ended March 1, as comps dropped 13.3 percent.

Faced with mounting losses, Best Buy closed 128 stores during the quarter and integrated the group into Best Buy operations.

Lehman Brothers retail analyst Alan Rifkin described the move as a 'clear positive in that it shows a firm commitment to exit the troubled business at an accelerated rate.' He added that Best Buy would likely sell off Musicland's component retail chains separately.

Going forward, Best Buy will classify Musicland as a discontinuing business, and has adopted new guidance on a retroactive basis to the beginning of fiscal 2003, which resulted in a one-time, non-cash, after-tax charge of $42 million.

The retailer's charge was classified as a 'cumulative effect of a change in accounting principle,' and the company's change in method of accounting guidance will alter the timing of recognizing allowances in net earnings.

In addition, Musicland's revenue, gross profit and Selling, General and Administrative expenses will be netted into a single line item in the financial statements.

The impact on continuing operations in fiscal 2003 is to increase fourth quarter diluted earnings per share by $0.08 cents and to reduce full-year diluted earnings per share by $0.01 cents.

Net loss from discontinued operations of $441 million in fiscal 2003, net of tax, is comprised of Musicland's $308 million goodwill impairment charge and $8 million after-tax non-cash charge related to the cumulative change in accounting for vendor allowances. It also is comprised of a $102 million after-tax loss related to impairment of Musicland's long-lived assets and a $23 million after-tax loss from Musicland's store operations.

The loss on discontinued operations excludes future operating results and any future gains or losses resulting from the potential sale of the company's interest in Musicland. The final financial impact of the planned sale of the Musicaland subsidiary depends on the results of negotiations with the ultimate buyers.

For fiscal 2003, as a result of reclassifying Musicaland as a discontinued operation, Best Buy revenue will be reduced by $1.7 million. Operating income in fiscal 2003, excluding non-cash charge for impairment of long-lived assets and including the impact of adopting new accounting guidance for vendor allowances, totals $72,000.

Financial impact on continuing operations as a result of adopting new accounting guidance for vendor allowances, shows a decrease of $3,000 for fiscal 2003.

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