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Best Buy U.S. Stores Increase Q4 Operating Income

Minneapolis — Spurred by strong revenue gains in February, Best Buy U.S. stores, which includes Best Buy and Magnolia Audio Video operations, posted operating income of $735 million in the retailer’s fiscal fourth quarter, up from $712 million in the year-ago period.

The U.S. segment’s operating income as a percent of revenue, however, dropped to 8.9 percent in the fourth quarter, ended Feb. 26, down from 9.4 percent. More positive were expenses as a percent of revenue, which were reduced to 14.7 percent in the three months, compared with 15.1 percent in the same period a year earlier.

Revenue for the U.S. stores segment, as reported earlier (see TWICE, March 7, p.1), hit $8.2 billion, an 8 percent rise over the $7.6 billion recorded the previous year. Comp-store sales increased 3.1 percent in the three months.

“We had our strongest revenue gains of the quarter in February,” said Brad Anderson, vice chairman/CEO, “which allowed us to post quarterly same-store sales stronger than the trend we saw in December.

“We are proud of another year of double-digit growth in our bottom line, particularly as we invest in the transformation of our company. We believe so deeply in this transformation that we are going to accelerate it in fiscal 2006. We are planning for all of our U.S. Best Buy stores to convert to our customer centric model within three years.”

Currently, 85 U.S. Best Buy stores have been converted to the customer centricity operating model. Now, Best Buy intends to open or convert 150 to 200 more U.S. Best Buy locations to this operating model in 2006, beginning with the conversion of more segmented stores later this spring. In addition, the retailer anticipates rolling out key elements of customer centricity to all of its U.S. Best Buy stores in fiscal 2006, mainly training.

The decision to accelerate store conversion was based on strong top-line results of the retailer’s 67 segmented stores converted last October, as well as the expected future performance of the segmented stores. The segmented units outperformed other U.S. Best Buy stores in terms of comp-store sales in the fourth quarter, moving up to 8.4 percent, compared with 2.3 percent.

“We believe this new operating model offers our customers a richer in-store experience, including better shopping assistance as well as more of the products and services they want,” said Anderson. “Customer centricity empowers employees to recognize sets of customers and to build offerings and experiences that meet their needs,” he said.

Consolidated fourth quarter Best Buy revenue jumped 9 percent, reaching $9.2 billion, up from $8.4 billion year-on-year. The revenue increase reflected the addition of 78 new stores in the past 12 months and a comp-store gain of 2.8 percent.

Consolidated earnings from continuing operations climbed 11 percent in the fourth quarter, hitting $522 million, up from $469 million the previous year. Net income rose to $572 million, compared with $469 million a year earlier. Gross profit rate for the fourth quarter was 23.5 percent of revenue, down from 24.2 percent in the same three months in the prior year.

The revenue mix unfavorably affected the gross profit rate, as strong growth of lower margin MP3 players, DVD movies and notebook computers put pressure on the rate on a year-over-year basis. Seasonal promotional activity, as well as the impact of product model transitions, also contributed to the rate decline, which was offset by improvements in significant growth of the retailer’s higher margin computer services business.

The consolidated expense rate improved to 15 percent of revenue in the fourth quarter, compared with 15.3 percent a year earlier.

In the 12 months, consolidated revenue increased 12 percent, hitting $27.4 billion, up from a year-ago $24.5 billion. This was driven by a comp-store sales gain of 4.3 percent and the opening of new stores.

Consolidated earnings from continuing operations for the 12 months reached $934 million, an increase of 17 percent over the previous year’s $800 million. Net earnings hit $984 million for the year, compared with $705 million in the past 12 months. Gross profit rate for the 12 months was 23.7 percent, down from 23.9 percent the previous year. Expenses dropped from 18.4 percent in the 12 months, down from a year-on-year 18.6 percent.