Best Buy 2007 Annual Report Download - page 48

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PART II
televisions and notebook computers. In addition,
comparable store sales were driven by continued customer
demand for and the increased affordability of these
products, as strong unit volume growth was somewhat
muted by declines in average selling prices. Products having
the largest impact on our fiscal 2007 comparable store
sales gain included flat-panel televisions, notebook
computers, video gaming and MP3 players and
accessories. An increase in online purchases also
contributed to the fiscal 2007 comparable store sales gain,
as we continued to add features and capabilities to our
Web sites. Revenue from our online operations increased
approximately 36% in fiscal 2007 and added to the overall
comparable store sales increase.
Our gross profit rate in fiscal 2007 decreased by 0.6% of
revenue to 24.4% of revenue. The decrease was due
primarily to a lower-margin revenue mix, including
increased revenue from notebook computers and video
gaming hardware. Also contributing to the decrease, in
order of impact, were a more promotional environment in
the consumer electronics and home-office product groups,
and the inclusion of our China operations for a portion of
the year. Our China operations, which carry a significantly
lower gross profit rate than our other operations, reduced
our gross profit rate in fiscal 2007 by approximately 0.2%
of revenue.
Our SG&A rate in fiscal 2007 decreased by 0.9% of
revenue to 18.8% of revenue. The decrease was due
primarily to the leveraging effect of the 16% growth in
revenue and reduced performance-based incentive
compensation. Also contributing to the decrease, in order
of impact, were controlled expenses related to our strategic
initiatives and expense reduction efforts. Our China
operations, which carry a significantly lower SG&A rate than
our other operations, reduced our SG&A rate by
approximately 0.1% of revenue in fiscal 2007. These factors
were partially offset by expenses related to increased asset
impairments, litigation and business closure costs.
Because retailers do not uniformly record costs of operating
their supply chain between cost of goods sold and SG&A,
our gross profit rate and SG&A rate may not be
comparable to other retailers’ corresponding rates. For
additional information regarding costs classified in cost of
goods sold and SG&A, refer to Note 1, Summary of
Significant Accounting Policies, of the Notes to
Consolidated Financial Statements, included in Item 8,
Financials Statements and Supplementary Data, of this
Annual Report on Form 10-K.
Fiscal 2006 Results Compared With Fiscal 2005
Fiscal 2006 earnings from continuing operations were $1.1
billion, or $2.27 per diluted share, compared with $934
million, or $1.86 per diluted share, in fiscal 2005. The
increase was driven primarily by revenue growth, including
the addition of new stores during fiscal 2006 and a
comparable store sales gain of 4.9%, and a significant
increase in our gross profit rate. These factors were partially
offset by an increase in our SG&A expenses. In addition,
earnings from continuing operations in fiscal 2006
benefited from net interest income of $77 million,
compared with net interest income of $1 million in fiscal
2005, and a lower effective income tax rate.
Revenue in fiscal 2006 increased 12% to $30.8 billion,
compared with $27.4 billion in fiscal 2005. The increase
resulted from the addition of 103 stores in fiscal 2006, a
full year of revenue from new stores added in fiscal 2005, a
4.9% comparable store sales gain and the favorable effect
of fluctuations in foreign currency exchange rates. The
addition of new stores during the past two fiscal years
accounted for more than one-half of the revenue increase
in fiscal 2006. The comparable store sales gain accounted
for nearly four-tenths of the revenue increase, and the
remainder of the revenue increase was due primarily to the
favorable effect of fluctuations in foreign currency exchange
rates, as well as income related to our initial recognition of
gift card breakage.
We believe our comparable store sales gain in fiscal 2006
benefited from continued demand for the latest
technologies and advanced product features. In addition,
the increased affordability of consumer electronics products
contributed to the comparable store sales gain. Products
having the largest impact on our fiscal 2006 comparable
store sales gain included flat-panel televisions, MP3 players
and accessories, notebook computers, digital cameras and
accessories and video gaming hardware. Flat-panel
television sales were very strong as unit volume growth and
increased screen size more than offset declines in the
average selling prices of these products. MP3 products also
generated strong comparable store sales gains as
customers continue to adopt, upgrade and add accessories
to digital music players.
Our gross profit rate in fiscal 2006 increased by 1.3% of
revenue to 25.0% of revenue. The increase was driven by
the continued transformation of our supply chain, which
enabled us to improve margins through lower product
costs, more effective pricing strategies and increased sales
of higher-margin services; and private-label products. We