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Best Buy to Ramp Up Customer-Centric Store Model

6 Apr, 2005 By: Kurt Indvik

Best Buy's “customer-centricity” operating models seems to be working well enough that the chain expects to incorporate the model into another 150 to 200 stores by the end of fiscal year 2006.

According to 2005 fiscal year-end results announced this week, the 67 stores converted last October to the new model generated comp-store sales gains of 8.4 percent for the fourth quarter (ended Feb. 26, 2005), compared to the 2.3 percent comp-store sales increase averaged at the chain's other U.S. stores. Currently, 85 U.S. stores have been converted to the new model.

Best Buy reported fourth-quarter earnings of $522 million ($1.55 per diluted share), up 11 percent from the same quarter a year ago, on revenue of $9.2 billion, up 9 percent. Strong sales of DVD software, MP3 players and notebook computers contributed to the gain.

The chain announced 2005 fiscal year earnings of $934 million, ($2.79 per diluted share), up 17 percent from 2004's $800 million, ($2.41 per diluted share). The chain generated revenue of $27.4 billion for 2005, an increase of 12 percent, driven by the opening of 78 new stores, as well as comp-store sales gains of 4.3 percent.

In noting the strong performance of the company overall and the successful implementation of its customer-centric focus, CEO Brad Anderson said, “We believe so deeply in this transformation that we are going to accelerate it in fiscal 2006. We are planning for all of our U.S. Best Buy stores to convert to our customer-centric operating model within three years.”

The model involves converting a store's merchandise mix and marketing focus to serve one or two of the chains five key customer segments as identified in that store's customer radius. The chain has identified these five customer segments as including affluent professional males, young digital entertainment enthusiasts, upscale suburban moms, families that are practical technology adopters, and small businesses with fewer than 20 employees.

The segmented stores generate a stronger gross profit rate as well as revenue, according to the company, because of a more effective, focused merchandise mix, though the initial expenses in store conversion increased at a higher rate than gross profit, resulting in an operating income decline. But overall the stores collectively increased operating profits from the 2004 quarter as comp-store sales gains more than made up for a lower operating profit.

The company's “Geek Squad” computer and home theater customer service and installation service now employs 7,000 agents, and Best Buy expects to add another 5,000 agents in 2006, Anderson said. It also plans to add services such as network installations, server installations and server maintenance for small businesses.

Best Buy anticipates driving some $30 billion in revenue in the next fiscal year, assuming the opening of another 75 new stores, as well as comp-store sales gains of 4 percent to 5 percent. Earnings per diluted share are expected to be $2.95 to $3.10.

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