Best Buy 2003 Annual Report Download - page 144

Gross profit as a % of revenue 25.0% 24.9% 21.2% 19.8%
SG&A as a % of revenue 19.8% 19.8% 16.0% 15.8%
Operating income $ 1,002 $ 876 $ 886 $ 611
Operating income as a % of revenue 5.2% 5.1% 5.2% 4.0%
Note: All periods presented reflect the classification of Musicland’s financial results as discontinued operations.
(1) As−adjusted information conforms the accounting for vendor allowances to the fiscal 2003 method.
(2) Includes results of operations of Magnolia Hi−Fi since its acquisition in the fourth quarter of fiscal 2001.
(3) Includes revenue at stores and Internet sites operating for at least 14 full months, as well as remodeled and expanded
locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening.
Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first
anniversary of the date of acquisition. The calculation of the comparable store sales change excludes Musicland revenue, which is
included in discontinued operations.
Domestic operating income increased 14% to $1.0 billion in fiscal 2003, compared with $876 million in fiscal 2002 on an as−adjusted
basis. The increase in operating income was primarily due to the addition of 67 new U.S. Best Buy stores in the past 12 months, a full
year of revenue from new stores opened in fiscal 2002 and a slight improvement in the gross profit rate.
Domestic revenue increased to $19.3 billion in fiscal 2003, a 13% increase over fiscal 2002 revenue of $17.1 billion. Approximately
four−fifths of the revenue increase was due to new U.S. Best Buy stores opened in the past two fiscal years. The remainder of the
revenue increase was attributable to the 2.4% comparable store sales gain for the fiscal year. The comparable store sales gain was
primarily the result of revenue gains in the entertainment software and consumer electronics product categories, partially offset by
revenue declines in the home office and appliances categories. Comparable store sales gains in the entertainment software category
were driven by double−digit comparable store sales increases in video gaming hardware and software and DVD movies. The growth
in the entertainment software category was partially offset by weak sales of prerecorded music resulting from the continuing trend of
downloading music via Internet sites and increasing consumer awareness of CD recording technology. The consumer electronics
category experienced a mid−single−digit comparable store sales increase, fueled by increased digital product revenue. Digital product
revenue comprised 22% of the revenue mix in fiscal 2003, compared with 17% the prior fiscal year. Within the consumer electronics
category, digital televisions and digital cameras were the primary products driving the comparable store sales gain. Declines in
revenue from analog televisions and VCR players, products being replaced by new technology, partially offset gains generated in
other consumer electronics product groups. Comparable store sales in the home office category declined slightly, primarily due to
continued weakness in sales of desktop computers and reduced prices for computer peripherals. The decline was partially offset by
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increased revenue from notebook computers and MP3 players. Appliance revenue experienced a high−single−digit comparable store
sales decline due to reduced consumer demand and increased competition.
The Domestic gross profit rate increased to 25.0% of revenue in fiscal 2003, compared with 24.9% of revenue the prior fiscal year.
The gross profit rate improvement was mainly due to a more profitable revenue mix at U.S. Best Buy stores. Revenue in the
higher−margin consumer electronics category experienced larger increases than revenue in the home office category, which generally
includes lower−margin products. In addition, the gross profit rate benefited modestly from improved supply chain management. The
gross profit rate was negatively impacted by gross profit rate declines in the home office product category, partially due to
promotional pressure on desktop computers, the largest product group in the category.
The fiscal 2003 SG&A rate for the Domestic segment was 19.8% of revenue, consistent with the prior fiscal year. The SG&A rate was
negatively impacted by the deleveraging effect of a modest comparable store sales increase; increased depreciation expense related to
technology investments; and investments in personnel and outside consultants to support strategic initiatives and business growth. In
addition, the SG&A rate was impacted by lease termination and asset impairment charges associated with vacating existing corporate
facilities in connection with the relocation to our new corporate campus in fiscal 2004. These factors were offset by expense
reductions initiated in the second half of fiscal 2003 and additional expense leverage resulting from opening new stores in existing
markets.
The following table reconciles Domestic stores open at the beginning and end of fiscal 2003:
Total Stores at
End of Fiscal 2002 Stores Opened Stores Closed Total Stores at End of Fiscal 2003
U.S. Best Buy stores 481 67 — 548
Magnolia Hi−Fi stores 13 6 — 19