Best Buy 2006 Annual Report Download - page 47

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PART II
revenue, compared with a 0.3% of revenue reduction in the
gross profit rate for fiscal 2004. In addition, our gross profit
rate was affected by a higher level of promotional activity
initiated to increase revenue and stem customer traffic
declines, a trend webelieve was experienced throughout
the consumer electronics retail industry. The increase in
promotional activity was partially offset by the increase of
services revenue in the revenue mix, asservices carry a
higher gross profit rate, and benefits from our global
sourcinginitiative which enabled us to improve margins
through lower product costs.
Our SG&A rate for fiscal 2005 declined by 0.2% of
revenue to 18.4% of revenue. The improvement was due
primarily to reduced performance-based incentive
compensation, expense leverage from the comparable store
sales gainand the addition of new stores, and the
realization of cost savings from our efficient enterprise
initiative. Our fiscal 2005 SG&A rate also benefitedfrom
favorable settlements with two credit card companies. These
factors were partially offset by additional expenses
associated with our customer centricity initiative, and
charges to correct our accounting for leases andto settle
litigation which, collectively, increased our SG&Arate for
fiscal 2005 by approximately 0.2% of revenue.
Segment Performance
Domestic
The following table presents selectedfinancial data forour Domestic segment for each of the past three fiscal years
($ in millions):
Domestic Segment Performance Summary (unaudited) 2006 2005 2004
Revenue $ 2 7,380 $24,616 $ 2 2,225
Total revenue gain % 11% 11 % 15%
Comparable stores sales % gain(1)5.1% 4.4 % 7.4%
Gross profit as % of revenue 25.3% 23.8 % 24.1%
SG&A as % of revenue 19.5% 18.2 % 18.4%
Operating income $ 1,588 $1,393 $ 1,267
Operating income as % of revenue 5.8% 5.7 % 5.7%
Note: All periods presented reflect the classification of Musicland’s financial results as discontinued operations.
(1)Comprised of revenue at stores and Web sites operating for at least 14 full months, as well as remodeled and expanded locations.
Relocated stores are excludedfrom the comparable store sales calculation until at least 14 full months after reopening.
For fiscal 2006, our Domestic segment’s operatingincome
was $1.6 billion, or 5.8% of revenue, compared with $1.4
billion, or 5.7% of revenue, for fiscal 2005. The Domestic
segment’s operating income rate for fiscal 2006benefited
from revenue gains, including the addition of newstores
during fiscal 2006 and a 5.1% comparable store sales
increase, and an increase in the gross profit rate, partially
offset by an increase in the SG&A rate.
Our Domestic segment’s revenue for fiscal 2006 increased
11% to $27.4 billion. The addition of new stores during the
past two fiscal years accounted for overone-half of the
revenue increase for fiscal 2006, and the remainder of
the revenue increase was due primarily tothe 5.1%
comparable store sales gain.
We believe our Domestic segment’s comparable store sales
gain for fiscal 2006benefited from continued demand for
increased features, assortment, portability and affordability
of consumer electronics products. Our Domestic segment’s
consumer electronics product groupposted a 15.0%
comparable store sales gain for fiscal 2006, driven by sales
of flat-panel televisions, and MP3 players andaccessories.
Strong sales of flat-panel televisions resulted fromunit-
volume growth and increased screen size, which more than
offset declines in the average selling prices of these
products. MP3 products also generated strongcomparable
store sales gainsas customers continued to adopt, upgrade
and addaccessories to digital music players. A0.3%
comparable store sales gain in our Domestic segment’s
home-office product group was driven primarily by sales of