Best Buy ends 1Q with new stores, new profit

DSN Retailing Today, June 27, 2005 by Laura Heller

MINNEAPOLIS -- The transformation of Best Buy stores continues unabated as the retailer announced the expansion of two new programs in addition to its customer centricity efforts and released first-quarter earnings so strong, the chain buoyed the entire retail stock index for the day.

Best Buy is expanding both its Magnolia Home Theater and Best Buy for Business initiatives across 45 stores in 12 cities. The expanded departments are complementary to the chain's customer centricity program that seeks to identify key customer segments and tailors merchandise assortments and services to better serve those customers.

Best Buy for Business offers an expanded technology mix to serve small business customers including more professional-style notebook computers and network servers. Service here is stepped up and the company's Geek Squad will offer 24-hour technical support, acting as an IT department for those businesses too small to have their own. The effort also incorporates elements of community-based marketing with stores sponsoring networking events and partnering with local small business associations.

Last year, Best BuyCested a Magnolia store-within-a-store concept in two locations in California. The units boasted Magnolia Home Theater units inside existing Best Buy stores featuring higher-end product in lifestyle settings to serve an upper-income customer. That effort is now being rolled out to 32 stores and in addition to the expanded product mix and settings, offers custom-design consultations and same-day installation.

Both initiatives are offshoots of Best Buy's customer centricity program, which has helped spur sales, earnings and future growth prospects for the chain, as evidenced by a profit gain of 85% for the first quarter this year, ended May 28, coming in at $170 million compared to $92 million for the period a year before.

Revenue increased 12% and comp-store sales rose 4.4% on top of an 8.3% comp-store gain the previous year, all driven by the chain's ramped-up focus on the customer, according to ceo, Brad Anderson. "By empowering our employees to focus on our customers' needs and lifestyles, we continue to generate solid, profitable revenue growth with existing and new customers," Anderson said.

Best Buy's segmented stores led performance for the chain, delivering twice the comp-store sales gains and a higher gross profit rate when compared with other U.S. Best Buy stores, according to the company.

"Consumers are responding well to the change in how our employees engage with them and suggest solutions that fit their individual lifestyle," Anderson said. "Moreover, we continue to improve in our execution of the new business model. This work is driving changes in everything from our supply chain to our service offerings to our marketing programs. While making such sweeping changes is difficult, we believe it helps differentiate Best Buy in the marketplace."

Analysts agree, and in spite of some higher costs associated with developing and implementing centricity, most expect those investments to pay off in the form of stronger comp-store gains and increased market share going forward. In addition to its expansion of Magnolia Home Theater and Best Buy for Business departments, the company said it remains on track to open or convert a total of 150 to 200 segmented stores during fiscal 2006, while continuing to provide all other stores with elements of the new business model.