Best Buy Co., Inc. reported earnings from continuing operations of U.S. $69 million, or $0.21 per diluted share, for the quarter ended May 31, 2003, compared to $79 million, or $0.24 per diluted share, for the quarter ended June 1, 2002.
"Earnings from continuing operations came in above our expectations, after the war in Iraq ended and increased consumer confidence during the quarter sent more shoppers to our stores and to our Web sites," said Brad Anderson, vice chairman & CEO. "The mid-single-digit gain in comparable store sales we enjoyed in May boosts our confidence in the sales outlook for our fiscal second quarter and for the rest of our fiscal year."
As reported on June 5, 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.
The gross profit rate for continuing operations was 25.4 percent of revenue in the first quarter, down by 0.3 percent of revenue compared with the first quarter of fiscal 2003. An increase in promotional activity at U.S. Best Buy stores contributed to the decline. The SG&A expense rate for continuing operations was 22.9 percent of revenue for the first quarter, compared with 22.6 percent of revenue for the first quarter of fiscal 2003. The increase in the SG&A expense rate was driven by incremental depreciation costs related to investments to support strategic growth initiatives, one-time costs associated with moving into the company's new corporate headquarters, and the deleveraging impact of a modest comparable store sales gain. These factors were partially offset by the success of various efficiency initiatives launched last fall, which increased productivity.
Operating income from continuing operations declined to 2.4 percent of revenue for the first quarter of fiscal 2004, compared with 3.1 percent of revenue for the first quarter of fiscal 2003. Net interest expense was $2 million; the change in net interest was due to lower yields on the Company's cash investments and reduced capitalized interest as a result of completing construction of the new corporate campus in the first quarter of fiscal 2004. The Company's effective tax rate in the first quarter of fiscal 2004 was 38.3 percent, slightly lower than the effective rate in the first quarter of fiscal 2003, primarily due to a lower effective state income-tax rate.
"We were pleased with our ability to achieve earnings at the top end of our guidance, especially given the slow start to the quarter," said Darren Jackson, Executive Vice President - Finance and CFO. "At the same time, we are not satisfied with the growth in the SG&A rate and are committed to improving enterprise efficiency going forward, while increasing our market share."
He added, "We currently expect comparable store sales gains to be in the mid-single digits for the second quarter. We also expect gross margins to remain relatively flat in the second quarter of fiscal 2004. Furthermore, we expect the SG&A rate to improve, although that will be partially offset by expenses associated with the development of our customer centricity initiative. As a result, we are forecasting diluted earnings per share from continuing operations of approximately $0.27 to $0.32 for the second quarter, compared to diluted earnings per share from continuing operations of 24 cents in the second quarter of fiscal 2003.
"We anticipate that increased consumer confidence, market share gains and easier comparable store sales comparisons versus fiscal 2003 will drive higher comparable store sales gains in the second half of fiscal 2004. We also expect to realize more cost savings, but these will be offset in part by investment in our strategic initiatives. Therefore, we are maintaining our guidance for continuing operations in fiscal 2004, including estimated revenue growth of 11 to 13 percent and earnings growth of 14 to 16 percent, which represents a diluted earnings per share range of $2.17 to $2.22 for the fiscal year."
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