Best Buy 1999 Annual Report Download - page 26

MANAGE ME NT ’S DI S CU S S I ON & ANALYS I S OF R E S U L T S OF
OPE R AT I ONS AND F I NANCI AL CONDI T I ON
E S T U Y O N C
The “other” category includes sales of Performance Service Plans (PSPs), which increased from 3.0% of sales
in fiscal 1998 to 3.7% of sales in fiscal 1999 as a result of the continued focus on the presentation of plans to
customers and higher product sales across all categories. Higher quality, more affordable digital cameras, the
expansion of the Company’s ready-to-assemble furniture assortment and better merchandising of consumables,
such as blank tapes, also contributed to the overall sales gains in this category.
Components of Operating Income
The following table shows selected operating ratios as a percentage of sales for the last three fiscal years.
1999 1998 1997
Gross profit margin 18.1% 15.9% 13.6%
Selling, general and administrative expenses 14.5% 13.7% 12.9%
Operating income 3.6% 2.2% .7 %
Gross profit margin was 18.1% of sales in fiscal 1999, an improvement of 2.2% of sales from fiscal 1998.
This increase was mainly due to the impact from initiatives to generate a more profitable product assortment,
faster turning inventory and increased advertising effectiveness. For the second consecutive year, inventory
turns increased by one full turn, to 6.6 turns in fiscal 1999 compared to 5.6 turns in fiscal 1998 and 4.6 turns in
fiscal 1997. This increase in inventory turns resulted in fewer markdowns, particularly during product model
transitions. The increase in sales of higher margin PSPs also contributed to the improvement in gross profit
margin. Another factor in the gross profit margin improvement was lower inventory shrink as a result of better
execution at the retail stores. The Company anticipates further improvement in the gross profit margin rate in
fiscal 2000 as it continues to realize benefits from its strategic initiatives, although the rate of gross profit margin
improvement will be less than the significant increases in the past two years.
Gross profit margin of 15.9% in fiscal 1998 improved from 13.6% in fiscal 1997, a gain that was driven by greatly
improved inventory management, particularly in the personal computer product category. A less promotionally
driven sales environment, lower inventory shrink and an increase in sales of PSPs also contributed to the gross
margin improvement.
Selling, general and administrative expenses (SG&A) increased to 14.5% of sales in fiscal 1999 compared to 13.7%
of sales in fiscal 1998, primarily as a result of higher payroll-related expenses and an increase in professional
services. The increase in payroll-related expenses was primarily due to an increase in overall financial
performance-based compensation, higher levels of compensation resulting from building a higher caliber
staff at the retail stores and labor market conditions. Additionally, a full year operation of the retail stores’
“high touch” area and expenses associated with an increased number of store openings contributed to higher
personnel costs. Professional services costs increased due to the Company’s initiatives to improve operating
performance and implement business process improvements. The Company also increased its spending on
outside consultants to help improve technical services operations and enhance management training and
development. The Company’s spending on Year 2000 system issues also increased in fiscal 1999. Management
believes that the investment in strategic initiatives has improved the Company’s operating model and has
resulted in the gross profit margin gains. The returns from the increased investment in SG&A are reflected in
the improvement in operating income to 3.6% of sales in fiscal 1999 from 2.2% in fiscal 1998.
SG&A is anticipated to increase in fiscal 2000 as the Company continues to invest in new information systems,
operational improvements, technical services enhancements and its e-commerce initiative. The outside
consultants that had been assisting the Company with its retail and marketing initiatives over the past three
years have been engaged in a multi-year project to improve the operations and financial performance of the
Company’s service division. Management expects the additional investment in SG&A will be adequately funded
by the anticipated increase in gross profit margin.