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Best Buy CEO Sees Benefits in Musicland Sale

19 Jun, 2003 By: Joan Villa

After almost giving away the 1,100-store Musicland Group to an affiliate of private investment firm Sun Capital, Best Buy CEO Brad Anderson admitted the electronics retailer had learned a “painful and expensive lesson” from the failed acquisition.

However, “the future financial benefits of exiting this business are significant,” Anderson added. “It has freed up management to focus on our core businesses where we have significant opportunities for growth.”

The sale also reduces future lease obligations by $500 million and plugs Musicland's $79 million cash drain in fiscal year 2003, observed EVP and CFO Darren Jackson. Best Buy will show improved return on invested capital, report a mostly non-cash $70 million impairment loss net of tax, and realize approximately $100 million in tax benefits as a result of the sale, he noted.

“It's a bittersweet ending to the Musicland acquisition,” he added. Best Buy purchased Musicland in Dec. 2000 -- including Suncoast Motion Picture Co., Sam Goody and Media Play -- for $425 million and the assumption of some $260 million in debt.

Under the deal, Fla.-based Sun Capital acquired Musicland's liabilities, lease obligations and all operating assets, but no cash was involved in the sale. The deal does not include Musicland's distribution center in Franklin, Ind., which Best Buy will continue to operate. Musicland's Connie Fuhrman will continue as president, the companies said.

Without the struggling music group, Best Buy raised guidance for full-year earnings to $2.17 to $2.27 per diluted share.

A new advertising campaign will launch later this month with the slogan: “Thousands of possibilities. Get yours.” The campaign targets the heavy user with the message that Best Buy offers brand, selection, value and assistance in making a technology decision, Anderson said.

The company is also working on several new initiatives to reduce expenses and improve the shopping experience. The retailer will unveil a redesigned bestbuy.com July 1, offering faster checkout, free shipping and personalized recommendations to shoppers based on previous items purchased, said Allen Lenzmeier, president and COO.

“In the past year, the site has shown spectacular increases in sales due to both increased traffic and a higher close rate,” he said. The new strategy is intended to better integrate the online and in-store experiences so clerks can refer customers who need a bigger selection and specific product information to the site, he added.

The chain said it has targeted large markets such as New York, Los Angeles and Seattle for expansion and will also build stores in secondary markets to reach its goal of 1,000 superstores in North America.

As previously reported, revenue from continuing operations for the first quarter of fiscal 2004 increased 11 percent to $4.67 billion, driven by the addition of 79 new stores in the past 12 months and a comparable store sales gain of 2.2 percent. Earnings from continuing operations declined 12.6 percent to $69 million.

Same-store sales were “above expectations,” according to Anderson, who said he is encouraged by mid single-digit same-store sales in May. The retailer expects the trend to continue for the second quarter, he added.

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