- The 40-basis-point decline in the operating income rate was driven by investments for further international expansion, which more than offset a modest rate improvement in Canada. Investment spending for continued international growth included investments in information technology (e.g., new integrated financial systems), customer analytic capabilities, new store openings and start-up expenses to launch stores in Mexico and Turkey.
- International revenue rose 23% to $2.2 billion. The revenue increase was driven primarily by a favorable foreign currency exchange rate, the net addition of 39 new stores and a comparable store sales gain of 3.4%. The revenue growth was partially offset by the loss of a week versus the prior year’s quarter. In Canada, the 3.6% comparable store sales gain reflected strong consumer interest in video gaming hardware, flat-panel TVs, GPS devices and notebook computers at both Future Shop and Best Buy stores. Similar to the U.S. business, the Canadian business experienced a consumer slow down starting in mid-January, following a solid holiday shopping season.
- Revenue from retail operations in China grew 33$ to approximately $350 million. The revenue growth included the impact of new store openings, a favorable foreign currency exchange rate and a comparable store sales gain of 2.1%.

Comparable store sales declined as higher revenue from video gaming, notebook computers, flat-panel TVs and GPS products were more than offset by declines in projection and tube TVs, MP3 devices, DVDs and CDs.

- Consumer electronics, which represented 42% of fourth-quarter revenue, declined 4.6% on a comparable store sales basis. Within consumer electronics, a low-double-digit comparable store sales increase in flat-panel TVs and a triple-digit increase in GPS products led the revenue category. More than offsetting these gains were declines in projection and tube televisions and MP3 devices.
- The home office revenue category accounted for 26% of fourth-quarter revenue and had a 5.5% comparable store sales gain. A double-digit comparable store sales increase for notebook computers fueled the growth as customers continued to opt for mobility and responded to the expanded assortments. The gain from notebook computers was partially offset by a comparable store sales decline for printers, desktop computers and monitors.

- The entertainment software revenue category, which comprised 21% of fourth-quarter revenue, increased 2.2% on a comparable store sales basis. A double-digit gain in comparable store sales of video gaming software and hardware, which was constrained by an industry-wide hardware inventory shortage, was partially offset by comparable store sales declines for DVDs and CDs.
- The appliances revenue category, which totaled 5% of fourth-quarter revenue, had a comparable store sales decline of 2.9%. This decline was driven by a mid-single-digit decline in the domestic segment due to a challenging industry-wide environment. Partially offsetting this decline was a mid-single-digit gain in the international segment, where appliances represent a larger percentage of the business (primarily in China).

- The services revenue category accounted for 5% of fourth-quarter revenue. On a comparable store sales basis, the services category increased 3.9%. A solid double-digit gain in repair revenue plus a low double-digit gain in computer services drove the comparable store sales increase. These results were offset partially by single-digit declines in commissions from the sale of extended service contracts and home theater services.
- The other revenue category consists of fees from credit card and related programs, which are provided by an outside financial institution, and revenue principally from the sales of products unrelated to the core business, such as food and beverages.

- The company opened six U.S. Best Buy stores, including two of its 45,000-square-foot stores, three of its 30,000-square-foot stores, and one of its 20,000-square-foot stores. At the end of the fourth quarter, the domestic segment included 923 Best Buy stores, nine Best Buy Mobile stand-alone stores, seven Geek Squad stand-alone stores, 13 Magnolia Audio Video stores and 19 Pacific Sales showrooms. The international segment included 160 Five Star stores and one Best Buy store in China, and 131 Future Shop stores and 51 Best Buy stores in Canada.

Fiscal 2008 Highlights

- Annual revenue increased 11% to $40 billion versus the prior fiscal year, reflecting the net addition of 137 new stores and an annual comparable store sales gain of 2.9%.
- The comparable store sales gains for the domestic and international segments were 1.9% and 9%, respectively.
- Total online revenue grew more than 25%.

- Operating income of $2.2 billion improved by 8% versus the prior fiscal year.
- Earnings per share grew 12% to $3.12, compared with EPS of $2.79 for the prior fiscal year.
Company estimates indicated that U.S. market share grew almost one percentage point to nearly 21%, reflecting the impact of new store openings and strength in key product categories such as notebooks, flat-panel TVs and video gaming.

- U.S. Best Buy stores accelerated their improvement in employee turnover in fiscal 2008. Employee turnover in U.S. Best Buy stores improved by 8 percentage points to 60%.
- U.S. Best Buy stores added the Dell brand to the computer assortment and ended the fiscal year with 357 Apple store-within-a-store locations. The company also finished the fiscal year with 181 Best Buy Mobile locations within its U.S. Best Buy stores. Best Buy Mobile, which the company is developing through its relationship with The Carphone Warehouse Group PLC (CPW), offers customers twice the assortment of mobile phones and is producing higher customer satisfaction scores (as compared to stores without the Best Buy Mobile experience).
- The international segment grew its annual revenue and operating income by 37% and 64%, respectively, due largely to revenue and operating income gains in Canada.
- Total share repurchases and dividends paid during the fiscal year totaled a company record of $3.7 billion. The company repurchased 75.6 million shares during the fiscal year, or 16% of the shares that were outstanding at the beginning of fiscal 2008.

- The company received a final delivery of 7.6 million shares from Goldman, Sachs & Co., which marked the conclusion of the accelerated share repurchase (ASR) program initiated in June 2007. In total, Best Buy repurchased 65.8 million shares in fiscal 2008 through the ASR program. Including other repurchases of 9.8 million shares during the fiscal year, the company repurchased an aggregate of 75.6 million shares for $3.5 billion in fiscal 2008. The company has a remaining authorization of $2.5 billion for the repurchase of its common stock with no stated expiration date.
- On Jan. 30, 2008, the company paid a dividend of 13 cents per share, or $56 million in the aggregate, which a 30% increase was compared with the dividend per share paid in the prior year’s fourth quarter.
- The company opened 155 new stores and closed 18 stores.

Fiscal 2009 Outlook

- The company estimates annual earnings per share of $3.25 to $3.40, which ends on Feb. 28, 2009. Its initial earnings guidance represents an average increase of 7%, year-over-year.

- The company’s earnings guidance for the year includes the following key assumptions:
- Revenue of $43 billion to $44 billion, including an estimated comparable store sales gain of 1% to 3% for the year. The company expects the comparable store sales gain in the international segment to exceed the domestic segment’s comparable store sales gain for fiscal 2009.
- Revenue growth of 9% from new store openings and comparable store sales gains from notebook computers, GPS devices, video-gaming, home theater and mobile phones. These gains are expected to be partially offset by comparable store sales declines in music and DVDs.

- An unchanged gross profit rate, year-over-year. The company expects mix benefits from revenue growth in mobile phones, GPS devices and services to offset the negative mix from continued growth in notebook computers and video-gaming. The company also pointed to opportunities to improve promotional effectiveness in order to support the gross profit rate in fiscal 2009.
- A 30- to 40-basis-point deterioration in the SG&A rate due to slower revenue growth combined with continued investment in strategic growth platforms (including Best Buy Mobile and international expansion).
- An increase in the company’s effective tax rate to a range of 37.5% to 38%, due primarily to a reduced tax benefit from foreign operations and lower tax-exempt interest income.

- In addition, the company provided its capital expenditures guidance for fiscal 2009 of approximately $1.1 billion, up from approximately $800 million in fiscal 2008. The estimate includes increased investments in new store openings, Best Buy Mobile, and information technology and supply chain infrastructure to support domestic and international growth. The company previously reported that it anticipates opening approximately 140 new stores globally during fiscal 2009.

Key questions from the fourth quarter earnings call conducted by Best Buy Co., Inc. on April 2, 2008.

Matthew Fassler (Goldman Sachs): You made comments in your press release about tools to pull back to some degree on promotions. What do you have in mind there and how big part of your gross margin forecast that is?

Mike Vitelli: I would characterize the comment as not so much as pulling back on our promotions but a more effective use of our promotions. In working with our marketing colleagues, it is a matter of addressing our customers in a more direct basis, whether that be through our Reward Zone program and how we utilize the various marketing tools and reaching our customers during the course of the year. You have seen and will see that we are continually aggressive in our promotions, whether they be financing, how we deliver products and pricing to our consumers but it is a matter of a more effective use of that. Equally important is we are seeing some solid success in how we are dealing with our end-of-life products as we make transitions. That was an important thing for us to improve in fiscal year 2008 and we even see a better runway of doing that in fiscal year 2009 as we find better outlets, including the Best Buy outlet on our website, to deal with products as they get to their end of life. We think that effective use of promotions is what is going to give us a margin improvement.

Matthew Fassler (Goldman Sachs): Are you saying in a sense that you will be less mass market shotgun approach and more targeted than you have been?