Retailer Best Buy Co., Inc. today reported record earnings from continuing operations of U.S. $378 million, or $1.16 per diluted share, for the quarter ended March 1, 2003, compared with as-adjusted earnings from continuing operations of $336 million, or $1.04 per diluted share, for the quarter ended March 2, 2002.
The as-adjusted information for fiscal 2002 conforms the accounting for vendor allowances to the fiscal 2003 method. The retailer also reported net earnings for the fourth quarter of $311 million, or $0.96 per diluted share, which includes $67 million in losses from discontinued operations. The company previously reported on March 31, 2003, that it is actively marketing the Musicland businesses and has adopted new accounting guidance for vendor allowances.
"The fourth quarter was difficult for many retailers, including Best Buy," said Brad Anderson, CEO of Best Buy Co., Inc. "Yet, I am pleased that while we saw a competitive environment that was much more vigorous than in the prior year, we navigated it successfully to gain market share without sacrificing profitability. We also increased income from continuing operations at a 13-percent rate compared with fiscal 2002 on an as-adjusted basis. In addition, without the accounting classification of Musicland as a discontinued operation, the Musicland fixed asset impairment charge announced on March 6, and the change in accounting for vendor allowances, we would have reported net earnings of $1.10 per share for the fourth quarter, which was the high end of our previous guidance."
Revenue for the fourth quarter, excluding revenue from discontinued operations, increased 11 percent to $7.0 billion from $6.3 billion a year ago. The revenue increase reflected the addition of 67 U.S. Best Buy stores in the past year, which brought the total to 548 stores, and six new Magnolia Hi-Fi stores, as well as the opening of eight Best Buy Canada stores and nine Future Shop stores. Comparable store sales from continuing operations rose 1.2 percent, on top of an increase of 4.5 percent the prior year.
Forecast for Fiscal 2004
Best Buy provided guidance on its expectations from continuing operations for fiscal 2004. It expects comparable store sales gains in the low single digits and new store openings to drive a fiscal 2004 revenue increase of 11-13 percent. This growth expectation would produce approximately $23.5 billion in revenue from continuing operations. It expects modest improvement in its operating margin rate, as additional measures to boost efficiency are implemented. Net interest expense is estimated at $10 million, and the tax rate is projected to be 38.3 percent. The company did not provide guidance on the results of discontinued operations for the year because of uncertainty regarding the timing of the sale of Musicland. It currently expects capital expenditures of approximately $700 million in fiscal 2004, including the opening of approximately 80 consumer electronics stores and investments in technology that are expected to improve its e-commerce business as well as enable real-time inventory.
For the first quarter the retailer expects a decline in comparable store sales in the low single digits as a result of geo-political concerns, the uncertain consumer environment and a difficult comparison against a comparable store sales gain of 6.5 percent in the first quarter of fiscal 2003. The company looks for earnings per share from continuing operations of $0.14 to $0.20, compared to adjusted earnings per share from continuing operations of $0.24 in the first quarter of fiscal 2003. The anticipated earnings decline results from the SG&A deleverage experienced as comparable store sales decline in a seasonally smaller quarter. In addition, the first quarter includes the costs of the move to the new corporate headquarters. Musicland, which is accounted for as a discontinued operation, is expected to record a loss of approximately $25 million after tax in the first quarter of fiscal 2004.
Darren Jackson, executive vice president and CFO, said, "The first quarter will be challenging, given the trends we are seeing in the business. In light of the outbreak of war, related geo-political uneasiness and very weak consumer confidence (factors that are impacting sales in both domestic and international markets), it is difficult to forecast first-quarter earnings from continuing operations with confidence. This difficulty is compounded by the fact that revenue in the first quarter is seasonally lower, and therefore our results are more sensitive to changes in comparable store sales."
Mr. Jackson continued, "Because of the 'CNN effect,' where people stay at home watching television instead of shopping, our comparable store sales in March have declined approximately 3 percent. While our comparisons in the balance of the quarter are easier, we expect a year-over-year earnings decrease for the first quarter. Fortunately, the gross profit rate is holding as we continue to sell more digital products.
"I believe our expectations of an increase of earnings from continuing operations of approximately 15 percent in fiscal 2004 can be achieved, assuming the war comes to a swift conclusion and consumer confidence reverses its downward trend. I will update investors on our earnings guidance as customary in June, when we report second-quarter earnings, at which time we also will have an update on the timing and value of a potential sale of Musicland."
The Company is expected to announce its first-quarter sales on June 5, 2003, and its first-quarter earnings on June 18, 2003.
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