Best Buy 2003 Annual Report Download - page 143

The increase in earnings from continuing operations was primarily driven by a 13% revenue increase and a slight improvement in the
gross profit rate, partially offset by a higher SG&A rate. The revenue increase resulted from the opening of 67 U.S. Best Buy, eight
Canadian Best Buy and nine Future Shop stores in the past 12 months, a full year of revenue from new stores opened in fiscal 2002, as
well as a 2.4% comparable store sales gain. Approximately four−fifths of the increase in revenue was due to the opening of new stores
in the past two fiscal years. The remainder of the increase was due to the comparable store sales gain.
Our gross profit rate in fiscal 2003 increased slightly to 25.0% of revenue, versus 24.9% of revenue in the prior fiscal year. The
improvement in the gross profit rate was primarily due to a more profitable revenue mix at U.S. Best Buy stores, including increased
revenue from higher−margin digital products. A more promotional environment limited improvement in the gross profit rate.
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Our SG&A rate was 20.2% of revenue in fiscal 2003, an increase of 0.2% of revenue over the prior fiscal year’s rate. The increase in
the SG&A rate was primarily due to increased expenses in our International segment to support strategic initiatives, including the
launch of Best Buy stores in Canada and investments intended to improve the future efficiency and profitability of our International
segment. The SG&A rate also increased due to the deleveraging effect of a modest comparable store sales increase, as operating
expenses increased at a faster rate than comparable store sales. In addition, the SG&A rate was negatively impacted by higher
consulting expenses, increased depreciation expenses related to technology investments, and 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. Increases in the SG&A rate were partially offset by expense−saving initiatives implemented in the second half of fiscal 2003,
reduced performance−based compensation and expense leverage from opening new stores in existing markets.
Fiscal 2002 Results Compared with Fiscal 2001
The discussion and analysis of fiscal 2002 results compared with fiscal 2001 reflects the classification of Musicland’s results as
discontinued operations, but does not reflect the new accounting method for vendor allowances adopted in fiscal 2003.
Fiscal 2002 revenue increased 17% to $17.7 billion, compared with $15.2 billion in fiscal 2001. Approximately two−thirds of the
revenue increase, compared with the prior fiscal year, was due to the addition of 62 U.S. Best Buy stores during fiscal 2002 and a full
year of revenue from stores opened in fiscal 2001.
Approximately one−tenth of the revenue increase was attributable to a 1.9% comparable store sales increase at U.S. Best Buy stores.
The remainder of the revenue increase was principally due to the inclusion of revenue from the International segment due to the
acquisition of Future Shop in the third quarter of fiscal 2002. The 1.9% comparable store sales increase in fiscal 2002 was offset by
the inclusion of an extra week of operations in fiscal 2001, which increased fiscal 2001 revenue by approximately $280 million.
The gross profit rate in fiscal 2002 increased to 21.3% of revenue, compared with 19.8% of revenue in fiscal 2001. Approximately
half of the increase was due to a more profitable sales mix; the remainder of the increase was due to reduced markdowns resulting
from improved supply chain management and more effective promotional strategies, as well as lower costs associated with consumer
financing offers.
The fiscal 2002 SG&A rate increased to 16.2% of revenue compared with 15.8% of revenue in fiscal 2001. This increase was
primarily due to operating expenses increasing at a faster rate than comparable store sales, as well as increased performance−based
compensation, higher depreciation expenses related to capital investments and increased charitable giving. The increase was partially
offset by reduced outside consulting costs, improved productivity and the absence of certain non−recurring expenses incurred in fiscal
2001 for the relaunch of BestBuy.com™, our entry into the New York market and the write−off of certain e−commerce investments.
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Segment Performance
Domestic
The following table presents selected financial data for the Domestic segment for each of the past three fiscal years ($ in millions):
Segment Performance Summary (unaudited) 2003 As−Adjusted 2002(1) 2002 2001(2)
Revenue $ 19,303 $ 17,115 $ 17,115 $ 15,189
Comparable stores sales % change(3) 2.4% 1.9% 1.9% 4.9%