The Daily Magic Formula Stock for 11/10/2008 is Best Buy Co. Inc. According to the Magic Formula Investing Web Site, the ebit yield is 17% and the EBIT ROIC is 50-75 %.
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Description of Business
Unless the context otherwise requires, the use of the terms "Best Buy," "we," "us" and "our" in this Annual Report on Form 10-K refers to Best Buy Co., Inc. and its consolidated subsidiaries. Best Buy is a specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services. We operate retail stores and Web sites under the brand names Best Buy (BestBuy.com, BestBuy.ca, BestBuy.com.cn, and BestBuyMobile.com), Five Star (Five-Star.cn), Future Shop (FutureShop.ca), Geek Squad (GeekSquad.com and GeekSquad.ca), Magnolia Audio Video (MagnoliaAV.com), Pacific Sales Kitchen and Bath Centers (PacificSales.com) and Speakeasy (Speakeasy.net). References to our Web site addresses do not constitute incorporation by reference of the information contained on the Web sites.
Our vision is to make life fun and easy for consumers. Our business strategy is to treat customers as unique individuals, meeting their needs with end-to-end solutions, and engaging and energizing our employees to serve them, while maximizing overall profitability. We believe we offer consumers meaningful advantages in store environment, product value, product selection, and a variety of in-store and in-home services related to the merchandise we offer, all of which advance our objectives of enhancing our business model, gaining market share and improving profitability.
Information About Our Segments
During fiscal 2008, we operated two reportable segments: Domestic and International. The Domestic segment is comprised of all states, districts and territories of the United States and includes store, call center and online operations, including Best Buy, Best Buy Mobile, Geek Squad, Magnolia Audio Video, Pacific Sales Kitchen and Bath Centers ("Pacific Sales") and Speakeasy. U.S. Best Buy stores offer a wide variety of consumer electronics, home office products, entertainment software, appliances and related services. Best Buy Mobile offers a wide selection of mobile phones, accessories and related services. Geek Squad provides residential and commercial computer repair, support and installation services. Magnolia Audio Video stores offer high-end audio and video products and related services. Pacific Sales stores offer high-end home-improvement products including appliances, consumer electronics and related services. Speakeasy provides broadband, voice, data and information technology services. The International segment is comprised of all Canada store, call center and online operations, including Best Buy, Future Shop and Geek Squad, as well as all China store, call center and online operations, including Best Buy, Geek Squad and Jiangsu Five Star Appliance Co. ("Five Star"). Our International segment offers products and services similar to that of our U.S. Best Buy stores. However, Canada Best Buy stores do not carry appliances. Further, our China Best Buy store and Five Star stores do not carry entertainment software.
Financial information about our segments is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations , and Note 9, Segment and Geographic Information , of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K.
We were incorporated in the state of Minnesota in 1966 as Sound of Music, Inc. We began as an audio components retailer and, with the introduction of the videocassette recorder in the early 1980s, expanded into video products. In 1983, we changed our name to Best Buy Co., Inc. and began using mass-merchandising techniques, which included offering a wider variety of products and operating stores under a "superstore" concept. In 1989, we dramatically changed our method of retailing by introducing a self-service, noncommissioned, discount-style store concept designed to give the customer more control over the purchasing process.
In fiscal 2000, we established our first online shopping site, BestBuy.com. Our "clicks-and-mortar" strategy is designed to empower consumers to research and purchase products seamlessly, either online or in our retail stores. Our online shopping sites offer expanded assortments in all of our principal revenue categories.
In fiscal 2001, we acquired Magnolia Hi-Fi, Inc. â€” a Seattle-based, high-end retailer of audio and video products and services â€” to access an upscale customer segment. During fiscal 2004, Magnolia Hi-Fi began doing business as Magnolia Audio Video.
In fiscal 2003, we acquired Geek Squad Inc. Geek Squad provides residential and commercial computer repair, support and installation services. We acquired Geek Squad to further our plans of providing technology support services to customers. Geek Squad service is available in all Best Buy stores, as well as in seven stand-alone stores in the U.S. Our goal is to build Geek Squad into one of the largest multi-national providers of residential and commercial computer repair and support and installation services.
In fiscal 2005, we opened our first Magnolia Home Theater store-within-a-store experience in a U.S. Best Buy store. We believe Magnolia Home Theater â€” with its high-end brands, home-like displays and specially trained employees â€” offers a unique solution for our customers. The Magnolia Home Theater store- within-a-store experience was in 346 U.S. Best Buy stores at the end of fiscal 2008.
In fiscal 2005, we also began converting U.S. Best Buy stores to our customer centricity operating model. Stores operating under the customer centricity model offer variations in product assortments, staffing, promotions and store design, and are focused on key customer segments. The segmented stores tailor their store merchandising, staffing, marketing and presentation to address specific customer groups. Originally, these customer groups included affluent professional males, young entertainment enthusiasts who appreciate a digital lifestyle, upscale suburban mothers, families who are practical technology adopters and small businesses.
In fiscal 2007, we completed the transition of all remaining U.S. Best Buy stores to the customer centricity operating model. Also in fiscal 2007, we evolved our customer centricity segmentation to address the needs of customer lifestyle groups, rather than specific customer groups. Our stores now focus on lifestyles such as affluent suburban families, trend-setting urban dwellers, and the closely knit families of Middle America.
In fiscal 2007, we acquired Pacific Sales. Pacific Sales specializes in the sale of high-end kitchen appliances, plumbing fixtures, home entertainment products and home furnishings, with a focus on builders and remodelers. We acquired Pacific Sales to enhance our ability to grow with an affluent customer base and premium brands using a proven and successful showroom format. Utilizing the existing store format, we expect to increase the number of stores in order to capitalize on the high-end segment of the U.S. appliance market.
In fiscal 2007, we developed the Best Buy Mobile concept through a management consulting agreement with The Carphone Warehouse Group PLC ("CPW") and test marketed five stand-alone stores located in New York. Best Buy Mobile seeks to satisfy the needs of all our customer lifestyle groups by providing a comprehensive assortment of mobile phones, accessories and related services offered by experienced sales personnel in 181 U.S. Best Buy stores, as well as nine stand-alone stores located in New York and North Carolina at the end of fiscal 2008. During the next 18 months, we plan to add the Best Buy Mobile store-within-a-store experience to the majority of U.S. Best Buy stores.
In fiscal 2008, we acquired Speakeasy. Speakeasy provides broadband, voice, data and information technology services. We believe our acquisition of Speakeasy will generate synergies by providing new technology solutions for our existing and future customers.
At March 1, 2008, we operated 923 U.S. Best Buy stores in 49 states, the District of Columbia and Puerto Rico that averaged approximately 39,700 retail square feet. Collectively, U.S. Best Buy stores totaled approximately 36.7 million retail square feet at the end of fiscal 2008, or about 76% of our total retail square footage. In fiscal 2008, our U.S. Best Buy stores generated average revenue of approximately $37.6 million per store.
At March 1, 2008, we operated 19 Pacific Sales stores in California that averaged approximately 34,000 retail square feet. Collectively, Pacific Sales stores totaled approximately 0.6 million retail square feet at the end of fiscal 2008, or about 1% of our total retail square footage. In fiscal 2008, our Pacific Sales stores generated average revenue of approximately $18.7 million per store.
At March 1, 2008, we operated 13 Magnolia Audio Video stores in California, Oregon and Washington that averaged approximately 11,600 retail square feet. Collectively, Magnolia Audio Video stores totaled approximately 0.2 million retail square feet at the end of fiscal 2008, or less than 1% of our total retail square footage. In fiscal 2008, our Magnolia Audio Video stores generated average revenue of approximately $7.2 million per store.
At March 1, 2008, we operated nine Best Buy Mobile stand-alone stores in New York and North Carolina that averaged approximately 1,400 retail square feet. Collectively, Best Buy Mobile stand-alone stores totaled approximately 13,000 retail square feet at the end of fiscal 2008, or less than 1% of our retail square footage.
At March 1, 2008, we operated seven Geek Squad stand-alone stores in California, Colorado, Georgia, Minnesota and Texas that averaged approximately 2,000 retail square feet. Collectively, Geek Squad stand-alone stores totaled approximately 14,000 retail square feet at the end of fiscal 2008, or less than 1% of our retail square footage.
Our International segment was established in connection with our acquisition of Canada-based Future Shop Ltd. in fiscal 2002. The Future Shop acquisition provided us with an opportunity to increase revenue, gain market share and leverage our operational expertise in consumer electronics retailing. Since the acquisition, we have continued to build on Future Shop's position as the leading consumer electronics retailer in Canada.
During fiscal 2003, we launched our dual-branding strategy in Canada by introducing the Best Buy brand. The dual-branding strategy allows us to retain Future Shop's brand equity and attract more customers by offering a choice of store experiences. As we expand the presence of Best Buy stores in Canada, we expect to gain continued operating efficiencies by leveraging our capital investments, supply chain management, advertising, merchandising and administrative functions. Our goal is to reach differentiated customers with each brand by giving them the unique shopping experiences they desire. The primary differences between our two principal brands in Canada are:
In-store experience â€” The customer's interaction with store employees is different at each of the two brands. Future Shop stores have predominantly commissioned sales associates who take a more proactive role in assisting customers. Through their expertise and attentiveness, the sales associate drives the transaction. In contrast, Canada Best Buy store employees, like employees in U.S. Best Buy stores, are noncommissioned, and the stores offer more interactive displays and grab-and-go merchandising. This design allows customers to drive the transaction as they experience the products themselves, with store employees available to demonstrate and explain product features.
Products and services â€” Only Future Shop stores carry appliances. In addition, Geek Squad service is available in all Canada Best Buy stores, but is not available in Future Shop stores.
Store size â€” At the end of fiscal 2008, the average Future Shop store was approximately 26,600 retail square feet, compared with an average of approximately 33,200 retail square feet for Canada Best Buy stores. Canada Best Buy stores generally have wider aisles, as well as more square footage devoted to entertainment software.
In fiscal 2007, we acquired a 75% interest in Five Star, one of China's largest appliance and consumer electronics retailers. We made the investment in Five Star to further our international growth plans, to increase our knowledge of Chinese customers and to obtain an immediate retail presence in China. We have a contractual commitment to acquire the remaining 25% interest in Five Star within the next several years, subject to Chinese government approval.
In fiscal 2007, we opened our first China Best Buy store in Shanghai. We plan to open five to eight additional Best Buy stores in China during fiscal 2009.
In fiscal 2008, we expanded Geek Squad to the United Kingdom through our relationship with CPW.
At March 1, 2008, we operated 131 Future Shop stores throughout all of Canada's provinces and 51 Canada Best Buy stores in seven provinces: Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan. Collectively, our stores in Canada totaled approximately 5.2 million retail square feet at the end of fiscal 2008, or about 11% of our total retail square footage. In fiscal 2008, our Canada stores generated average revenue of approximately $30.9 million per store.
At March 1, 2008, we operated 160 Five Star stores in seven of China's 34 provinces and one China Best Buy store in Shanghai. Collectively, our stores in China totaled approximately 5.9 million retail square feet at the end of fiscal 2008, or about 12% of our total retail square footage. In fiscal 2008, our China retail stores generated average revenue of approximately $8.8 million per store.
As previously announced, we plan to open two to five Best Buy stores in Mexico in the second half of fiscal 2009 and project that we will open one or two Best Buy stores in Turkey in the early part of fiscal 2010.
Richard M. Schulze is a founder of Best Buy. He has been an officer and director from our inception in 1966 and currently is Chairman of the Board. Effective in June 2002, he relinquished the duties of Chief Executive Officer. He had been our principal executive officer for more than 30 years. He is on the board of the University of St. Thomas, chairman of its Executive and Institutional Advancement Committee, and a member of its Board Affairs Committee. Mr. Schulze is also chairman of the board of the University of St. Thomas Business School.
Bradbury H. Anderson has been a director since August 1986 and is currently our Vice Chairman and Chief Executive Officer. He assumed the responsibility of Chief Executive Officer in June 2002, having previously served as President and Chief Operating Officer since April 1991. He has been employed in various capacities with us since 1973. In addition, he serves on the board of General Mills, Inc. and the Retail Industry Leaders Association, as well as on the boards of the American Film Institute, Minnesota Early Learning Foundation, The Best Buy Children's Foundation, Minnesota Public Radio and Waldorf College.
Allen U. Lenzmeier has been a director since February 2001 and is currently our Vice Chairman, serving on a part-time basis to support our international expansion. Prior to his promotion to his current position in 2004, he served in various capacities since joining us in 1984, including as President and Chief Operating Officer from 2002 to 2004, and as President of Best Buy Retail Stores from 2001 to 2002. He serves on the board of UTStarcom, Inc. He is also a national trustee for the Boys and Girls Clubs of America and serves on its Twin Cities board.
Brian J. Dunn was named President and Chief Operating Officer in February 2006. Prior to his promotion to his current position, he served as President â€” Retail, North America since December 2004. Mr. Dunn joined us in 1985 and has held positions as Executive Vice President, Senior Vice President, Regional Vice President, regional manager, district manager and store manager. He serves on the board of Dick's Sporting Goods, Inc.
James L. Muehlbauer was named Executive Vice President â€” Finance and Chief Financial Officer in April 2008. Previously, he served as Enterprise Chief Financial Officer (Interim), Chief Financial Officer â€” Best Buy U.S., Senior Vice President â€” Finance, and Vice President and Chief Financial Officer â€” Musicland. Prior to joining us, Mr. Muehlbauer spent 10 years with The Pillsbury Company, a consumer packaged goods company, where he held various senior-level finance management positions, including Vice President and Worldwide Controller, Vice President of Operations, divisional finance director, director of mergers and acquisitions, and director of internal audit. A certified public accountant (inactive), Mr. Muehlbauer spent eight years with Coopers & Lybrand LLP and most recently served as a senior manager in the firm's audit and consulting practice.
Robert A. Willett is our Chief Executive Officer â€” Best Buy International and Chief Information Officer. He previously served as Executive Vice President â€” Operations from 2004 to 2006. In 2002, we engaged Mr. Willett as a consultant and special advisor to our Board on matters relating to operational efficiency and excellence. Prior to that, he was the global managing partner for the retail practice at Accenture LLP, a global management consulting, technology services and outsourcing company, and was also a member of its Executive Committee. Mr. Willett launched his career in store management at Marks & Spencer P.L.C., a leading British department store chain, and has held executive positions of managing director and group CEO at other retailers in Europe.
Shari L. Ballard was named Executive Vice President â€” Retail Channel Management in September 2007. Previously, she served as Executive Vice President â€” Human Resources and Legal since December 2004. Ms. Ballard joined us in 1993 and has held positions as Senior Vice President, Vice President, and general and assistant store manager.
David P. Berg was named Executive Vice President â€” International Strategy and Corporate Development in March 2008. Prior to his strategy and development role, he was Senior Vice President and Chief Operating Officer of Best Buy International. Mr. Berg joined Best Buy in 2002 as Vice President and Associate General Counsel.
Thomas C. Healy resigned from Best Buy in April 2008. He had been Executive Vice President â€” Best Buy For Business since December 2004. Mr. Healy joined us in 1990 and held positions as President â€” Best Buy International, Senior Vice President, Regional Vice President, district manager and store manager.
Kevin T. Layden was named Chief Operating Officer â€” Best Buy International in January 2008. He previously served as President and Chief Operating Officer â€” Best Buy Canada (formerly Future Shop Ltd.) with responsibility for both our Future Shop and Canada Best Buy operations. Mr. Layden joined us in 1997 as Vice President â€” Merchandising. Before joining Best Buy, he spent approximately 17 years with Circuit City Stores, Inc., a retailer of consumer electronics, serving in positions of increasing responsibility, including most recently as assistant vice president and general manager for New York. Mr. Layden also serves on the board of the Business Council of British Columbia and is the chairman of the Retail Council of Canada. He is a trustee, board member and audit committee member of Tree Island Industries, Inc. and serves as a cabinet member of the United Way for Lower Mainland Vancouver.
Timothy D. McGeehan was named Executive Vice President â€” Best Buy Mobile Worldwide in October 2007. Mr. McGeehan joined us in 1988 and has held positions as Executive Vice President â€” Retail Sales, Senior Vice President, Regional Vice President, regional manager, district manager and store manager.
David J. Morrish became Executive Vice President â€” Connected Digital Solutions in March 2008. Mr. Morrish joined us in 1998 as Vice President, Merchandising and most recently served as a Senior Vice President â€” PC Mobility Solutions. Prior to joining us, he spent 17 years with Sears Canada Inc., where he held a variety of positions of increasingly responsibility including as vice president/general merchandising manager.
Kalendu Patel was named Executive Vice President â€” Emerging Business in September 2007. Mr. Patel joined us in 2003 and has held positions as Executive Vice President â€” Strategy and International, Senior Vice President and Vice President. Prior to joining us, Mr. Patel was a partner at Strategos, a strategic consulting firm.
Prior to that, he held various positions with KPMG Consulting Inc. and Courtaulds PLC in the U.K.
Jonathan E. Pershing was named Executive Vice President â€” Human Capital in December 2007. Mr. Pershing joined us in 1989 as a retail manager. He has held various positions, including Divisional Manager â€” Loss Prevention, Vice President â€” Retail Operations for Musicland and Vice President â€” Organizational Alignment. He serves as a member of the board of directors for Project Success in theTwin Cities.
Michael J. Pratt became President â€” Best Buy Canada in January 2008. Prior to his new role, Mr. Pratt was a Senior Vice President of Best Buy Canada. He has held numerous roles in his 17 years with Future Shop and Best Buy Canada, most recently responsible for Best Buy stores, marketing, advertising, store design and Canada's Commercial Sales Group.
Michael A. Vitelli became Executive Vice President â€” Customer Operating Groups in March 2008. Mr. Vitelli joined us in February 2004 and has held positions such as Senior Vice President and General Manager â€” Home Solutions. Prior to joining us, his professional career included 23 years at Sony Electronics, Inc., serving in positions of increasing responsibility, including executive vice president of Sony's Visual Products Company. Mr. Vitelli serves on the boards of the National Consumer Technology Industry chapter of the Anti-Defamation League where he serves as the industry chair and the National Multiple Sclerosis Society's Minnesota Chapter.
Joseph M. Joyce was named Senior Vice President, General Counsel and Assistant Secretary in 1997. Mr. Joyce joined us in 1991 as Vice President â€” Human Resources and General Counsel. Prior to joining us, Mr. Joyce was with Tonka Corporation, a toy maker, having most recently served as vice president, secretary and general counsel.
John Noble was named Senior Vice President and Chief Financial Officer â€” Best Buy International in May 2006. Mr. Noble joined us in 2002 and has held positions as Senior Vice President and Chief Financial Officer â€” Best Buy Canada, and Vice President â€” Finance. Prior to joining us, Mr. Noble spent 10 years with The Pillsbury Company, and most recently served as vice president â€” finance for operations.
Ryan D. Robinson was named Senior Vice President, U.S. SBU CFO and Treasurer in December 2007. Mr. Robinson joined us in 2002 and has held positions as Senior Vice President and Chief Financial Officer â€” New Growth Platforms, Senior Vice President â€” Finance and Treasurer, and Vice President â€” Finance and Treasurer. Prior to joining us, he spent 15 years at ABN AMRO Holding N.V., an international bank, and most recently served as senior vice president and director of that financial institution's North American private-equity activities. Mr. Robinson also held management positions in ABN AMRO Holding N.V.'s corporate finance, finance advisory, acquisitions and asset securitization divisions.
Susan S. Grafton was named Vice President, Controller and Chief Accounting Officer in December 2006. Ms. Grafton joined us in 2000 and has held positions as Vice President â€” Financial Operations and Controller, Vice President â€” Planning and Performance Management, senior director, and director. Prior to joining us, she was with The Pillsbury Company and Pitney Bowes, Inc. in numerous finance and accounting positions. Ms. Grafton serves on the Finance Leaders Council for the National Retail Industry Leaders Association and the Financial Executive Council for the National Retail Federation.
MANAGEMENT DISCUSSION FROM LATEST 10K
Best Buy is a specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services.
We operate two reportable segments: Domestic and International. The Domestic segment is comprised of all store, call center and online operations, including Best Buy, Best Buy Mobile, Geek Squad, Magnolia Audio Video, Pacific Sales and Speakeasy located within the U.S. and its territories. U.S. Best Buy stores offer a wide variety of consumer electronics, home office products, entertainment software, appliances and related services, operating 923 stores in 49 states, the District of Columbia and Puerto Rico at the end of fiscal 2008. Best Buy Mobile offers a wide selection of mobile phones, accessories and services through nine stand-alone stores located in New York and North Carolina, as well as in 181 U.S. Best Buy stores at the end of fiscal 2008. Geek Squad offers residential and commercial computer repair, support and installation services in all U.S. Best Buy stores and seven stand-alone stores at the end of fiscal 2008. Magnolia Audio Video stores offer high-end audio and video products and related services from 13 stores located in California, Oregon and Washington, as well as through 346 Magnolia Home Theater rooms located in U.S. Best Buy stores at the end of fiscal 2008. Pacific Sales stores offer high-end home-improvement products including appliances, consumer electronics and related services, operating 19 stores in California at the end of fiscal 2008. Speakeasy provides broadband voice, data and information technology services to home and small business users through a network of experienced sales associates. The International segment is comprised of all Canada store, call center and online operations, including Best Buy, Future Shop and Geek Squad, as well as all China store and online operations, including Best Buy, Five Star and Geek Squad. Our International segment offers products and services similar to our Domestic segment's offerings. However, Canada Best Buy stores do not carry appliances, the China Best Buy store and Five Star stores do not carry entertainment software, and Geek Squad services in Canada and China are offered only through our Best Buy stores. At the end of fiscal 2008, we operated 51 Canada Best Buy stores in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan; 131 Future Shop stores throughout all of Canada's provinces; 160 Five Star stores located in seven of China's 34 provinces; and one China Best Buy store in Shanghai.
In support of our retail store operations, we also operate Web sites for each of our brands (BestBuy.com, BestBuy.ca, BestBuy.com.cn, BestBuyMobile.com, Five-Star.cn, FutureShop.ca, GeekSquad.com, GeekSquad.ca, MagnoliaAV.com, PacificSales.com and Speakeasy.net).
Our business, like that of many U.S. retailers, is seasonal. Historically, we have realized more of our revenue and earnings in the fiscal fourth quarter, which includes the majority of the holiday shopping season in the U.S. and Canada, than in any other fiscal quarter. The timing of new store openings, costs associated with the development of new businesses, as well as general economic conditions may affect our future results.
On May 1, 2007, we acquired Speakeasy, Inc. ("Speakeasy") for $103 million in cash, or $89 million net of cash acquired, which included transaction costs and the repayment of $5 million of Speakeasy's debt. We acquired Speakeasy, an independent U.S. broadband, voice, data and information technology services provider, to strengthen our portfolio of technology solutions. The premium we paid, in excess of the fair value of the net assets acquired, was primarily for the synergies we believe Speakeasy will generate by providing new technology solutions for our existing and future customers, as well as to obtain Speakeasy's skilled, established workforce. Speakeasy contributed revenue of $78 million to our consolidated financial results in fiscal 2008.
Financial Reporting Changes
To maintain consistency and comparability, we reclassified certain prior-year amounts to conform to the current-year presentation as described in Note 1, Summary of Significant Accounting Policies , of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
We adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes â€” an Interpretation of FASB Statement No. 109 , effective March 4, 2007. FIN No. 48 provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. See Note 8, Income Taxes , of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Business Strategy and Core Philosophies
Our business, broadly defined, is about meeting the wants and needs of consumers. We believe that our assets position us to solve more customer problems than ever. Specifically, our assets include approximately 150,000 engaged employees; valuable relationships with vendors all over the world; continuing and emerging relationships with companies like Apple, Dell and The Carphone Warehouse Group PLC ("CPW"); and all of the other mutually enriching business relationships that our people continue to establish and develop wherever we go, from Asia to Silicon Valley. We also generate significant positive cash flows. All of these assets are at our disposal as we envision how we will deepen our relationships with customers and increase shareholder value.
Our business strategy is customer centricity. We define customer centricity through its parts, which we call our three core philosophies: inviting our employees to contribute their unique ideas and experiences in service of customers; treating customers uniquely and honoring their differences; and meeting customers' unique needs, end-to-end.
We start with a view of all of our customers, including what their problems are and what their desires are. We try to match that against everything we know about the solutions that now exist, or that could be created. Then we figure out how to get customers the right solutions by
using our employees' unique capabilities, as well as our network of vendors and other third-party providers. If we accomplish what we have set out to do, we believe these solutions may give us something unique in the marketplace, and something truly differentiated.
Mass merchants, direct sellers, other specialty retailers and online retailers are increasingly interested in our revenue categories because of rising demand. We believe that by understanding our customers better than our competitors do, and by inspiring our employees to have richer interactions with customers, we can differentiate ourselves and compete more effectively. We further believe that this strategy can be successful for us with a variety of products and services, store formats, customer groups and even countries.
We believe that our customer centricity strategy provides the framework to grow and to enhance our business in the future. Examples of new growth areas in the past year include our Best Buy Mobile and Apple store-within-a-store experiences, our introduction of Dell computers to all U.S. Best Buy stores (making us the only U.S. retailer offering all major computing brands), our acquisition of Speakeasy and our entry into Puerto Rico.
Our future growth plans include focusing on investments that will quicken our progress in transforming the customer experience. We plan to do this by scaling the Best Buy Mobile store-within-a-store experience to the majority of our U.S. Best Buy stores in the next 18 months. In addition, we plan to invest in approximately 250 additional Apple store-within-a-store locations in the next year and to expand our private label business, which provides customers with an affordable alternative in several product categories such as home theater, computing and MP3.
We expect to continue expanding into new product categories such as musical instruments and recreation and plan to increase our market share in existing product categories such as home theater, navigation, mobile phones and gaming by improving our in-store and online customer experiences. We plan to focus the in-store customer experience on customer value propositions that provide for better and localized product assortments and resets in our store lay-out that enhance and highlight products that are generating the most customer interest such as our offerings in gaming, navigation devices, digital SLR cameras and computing. We expect online offerings to include greater assortments which include Best Buy Mobile offerings, online services scheduling, personalized shopping options and auction and outlet sites that offer more favorable pricing. Members of Reward Zone, our customer loyalty program, will also see increased benefits and program offerings in the next year with rewards becoming even greater the more they shop with us.
Our plans in fiscal 2009 also include significant investments internationally as we prepare to enter Mexico and Turkey and to expand further in China. These investments include real estate, personnel, training and enhanced information, supply chain and customer analytic systems. Our continuing plans for international expansion have been thoughtfully managed and we plan to offer tailored market assortments at optimum prices in each country we enter.
We anticipate expanding our private label business to other retailers internationally, including retailers in countries where we do not have a footprint presently. We plan to grow and to optimize our Canada business by implementing labor model changes at Future Shop, expanding financial services and broadening our loyalty program given the success we have had in the U.S. We believe the growth we are planning for in Canada will help offset our international investments in fiscal 2009. Not only are we executing on organic growth drivers, we are evaluating options to leverage our existing relationship with CPW, as well as considering potential new relationships to support our international expansion.
Results of Operations
Fiscal 2008 Summary
Net earnings in fiscal 2008 increased 2% to slightly more than $1.4 billion, or $3.12 per diluted share, compared with nearly $1.4 billion, or $2.79 per diluted share, in fiscal 2007. The modest increase in net earnings was driven by revenue growth and a decrease in our selling, general and administrative expense ("SG&A") rate, offset by a decrease in our gross profit rate and a higher effective income tax rate. The increase in net earnings per diluted share was due primarily to the lower average number of shares outstanding, resulting from our share repurchases in fiscal 2008.
Revenue in fiscal 2008 increased 11% to $40.0 billion. The increase reflected market share gains and was driven by the net addition of 137 new stores during fiscal 2008; a 2.9% comparable store sales gain; the non-comparable store sales generated from the acquisition of Five Star, Pacific Sales and Speakeasy; and favorable fluctuations in foreign currency exchange rates, partially offset by the impact of an extra week of business in fiscal 2007.
Our gross profit rate in fiscal 2008 decreased by 0.5% of revenue to 23.9% of revenue. The decrease was due primarily to increased sales of lower-margin products, including increased revenue from notebook computers and video gaming hardware. Our China operations, which carry a significantly lower gross profit rate than our other operations, reduced our gross profit rate by approximately 0.2% of revenue in fiscal 2008.
Our SG&A rate in fiscal 2008 decreased by 0.3% of revenue to 18.5% of revenue. The improvement was due primarily to the leveraging effect of the 11% growth in revenue and store operating model improvements. Our China operations, which carry a significantly lower SG&A rate than our other operations, reduced our SG&A rate by approximately 0.1% of revenue in fiscal 2008.
During fiscal 2008, we added the Apple store-within-a-store experience to 357 new and existing U.S. Best Buy stores, the Best Buy Mobile store-within-a-store experience to 181 new and existing U.S. Best Buy stores and 44 Magnolia Home Theater rooms to new and existing U.S. Best Buy stores, bringing the total number of Magnolia Home Theater rooms to 346 at the end of fiscal 2008.
Effective with the cash dividend paid in the third quarter of fiscal 2008, we increased our quarterly cash dividend per common share by 30%, to $0.13 per common share. During fiscal 2008, we made four dividend payments totaling $0.46 per common share, or $204 million in the aggregate.
During fiscal 2008, we purchased and retired 75.6 million shares of our common stock at a cost of $3.5 billion pursuant to our share repurchase programs.
In fiscal 2008, we and The Best Buy Children's Foundation contributed approximately $32 million to local communities. The Best Buy Children's Foundation supports educational programs that integrate and leverage today's technology.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Consolidated Performance Summary
Net earnings were $202 million, or $0.48 per diluted share, in the second quarter of fiscal 2009, compared with $250 million, or $0.55 per diluted share, in the same period one year ago. In the first six months of fiscal 2009, net earnings were $381 million, or $0.91 per diluted share, compared with $442 million, or $0.94 per diluted share, in the same period one year ago.
In both the second quarter and first six months of fiscal 2009, the decrease in net earnings reflects an increase in our SG&A expense rate, a modest reduction in our gross profit rate and a decrease in investment income and other, partially offset by an increase in revenue.
Revenue in the second quarter of fiscal 2009 increased 12% to $9.8 billion, compared with $8.8 billion in the same period one year ago. In the first six months of fiscal 2009, revenue increased 13% to $18.8 billion, compared with $16.7 billion in the same period one year ago. In both the second quarter and the first six months of fiscal 2009, the net addition of new stores in the past 12 months accounted for approximately six-tenths of the revenue increase; the comparable store sales gain accounted for approximately three-tenths of the revenue increase; and the remainder of the increase was due to the favorable effect of fluctuations in foreign currency exchange rates.
Our comparable store sales in the second quarter of fiscal 2009 increased 4.2%, reflecting a higher average transaction amount, which was driven by continued growth in the sales of larger-ticket items. Also contributing to the fiscal second-quarter comparable store sales gain was an increase in online purchases of 27%, as we continued to add features and capabilities to our Web sites. In the second quarter of fiscal 2009, our largest comparable store sales gains were in flat-panel televisions, notebook computers, video gaming hardware and software, mobile phones and GPS navigation products. Growth in the sales of these product categories was partially offset by comparable store sales declines in tube and projection televisions, digital cameras, DVDs and CDs.
Our gross profit rate in the second quarter of fiscal 2009 decreased by 0.1% of revenue to 24.3% of revenue. In the first six months of fiscal 2009, our gross profit rate decreased from 24.2% of revenue to 24.0% of revenue. The gross profit rate decrease in both the second quarter and first six months of fiscal 2009 was due to a decrease in our Domestic segmentâ€™s gross profit rate, partially offset by an increase in the gross profit rate in our International segment. For further discussion of each segmentâ€™s gross profit rate changes, see the Segment Performance Summary for Domestic and International below.
Our SG&A expense rate in the second quarter of fiscal 2009 increased by 0.9% of revenue to 20.8% of revenue. In the first six months of fiscal 2009, our SG&A expense rate increased from 20.2% of revenue to 20.7% of revenue. The SG&A expense rate increase in both the second quarter and first six months of fiscal 2009 was due to increases in our Domestic and International segmentsâ€™ SG&A expense rates. For further discussion of each segmentâ€™s SG&A expense rate changes, see the Segment Performance Summary for Domestic and International below.
Other Income (Expense)
Our investment income and other in the second quarter of fiscal 2009 decreased to $9 million, compared with $22 million in the same period one year ago. Our investment income and other in the first six months of fiscal 2009 decreased to $30 million, compared with $66 million in the same period one year ago. In both the second quarter and first six months of fiscal 2009, the lower investment income and other was due primarily to lower average cash and investments balances related to $3.5 billion of share repurchases made in the prior fiscal year, as well as our purchase of Best Buy Europe in the second quarter of fiscal 2009.
Our interest expense in the second quarter of fiscal 2009 decreased $2 million to $21 million, compared with $23 million in the same period one year ago. The decrease was due primarily to lower interest rates, partially offset by higher debt balances in the second quarter of fiscal 2009. Our interest expense in the first six months of fiscal 2009 increased $4 million to $34 million, compared with $30 million in the same period one year ago. The increase was due primarily to higher debt balances in the first six months of fiscal 2009, partially offset by the benefit of lower interest rates.
Income Tax Expense
Our effective income tax rates in the second quarter and the first six months of fiscal 2009 were 37.3% and 37.2%, respectively, up from 36.3% and 36.7%, respectively, in the corresponding periods of fiscal 2008. The increase in our effective income tax rate for the second quarter of fiscal 2009 was due primarily to state income tax expense. For the first six months of fiscal 2009, the increase was due to lower tax-exempt interest income.
Segment Performance Summary
Note: One U.S. Best Buy store in the Domestic segment was relocated during the second quarter of fiscal 2008. No other store in the Domestic segment was relocated during the second quarter of fiscal 2008.
Our Domestic segmentâ€™s operating income in the second quarter of fiscal 2009 was $315 million, or 3.9% of revenue, compared with $358 million, or 5.0% of revenue, in the same period one year ago. In the first six months of fiscal 2009, our Domestic segmentâ€™s operating income was $592 million, or 3.8% or revenue, compared with $628 million, or 4.5% of revenue, in the same period one year ago. In both the second quarter and first six months of fiscal 2009, the decrease in our Domestic segmentâ€™s operating income reflected an increase in our SG&A expense rate and a decrease in our gross profit rate, partially offset by an increase in revenue.
Our Domestic segmentâ€™s revenue in the second quarter of fiscal 2009 increased 12% to $8.1 billion, compared with $7.2 billion in the same period one year ago. In the first six months of fiscal 2009, our Domestic segmentâ€™s revenue increased 12% to $15.6 billion, compared with $13.9 billion in the same period one year ago. In both the second quarter and the first six months of fiscal 2009, the net addition of 124 new stores in the past 12 months accounted for approximately six-tenths of the revenue increase, and the comparable store sales gain (5.3% for the second quarter of fiscal 2009 and 4.4% in the first six months of fiscal 2009) accounted for the remainder of the increase.
Our Domestic segmentâ€™s comparable store sales gain in the second quarter of fiscal 2009 reflected an increase in the average transaction amount, driven by the continued growth in the sales of larger-ticket items, including flat-panel televisions and notebook computers. The products having the largest effect on our Domestic segmentâ€™s comparable store sales gain in the fiscal second quarter were flat-panel televisions, notebook computers, mobile phones, video gaming hardware and software, and GPS navigation products. Strong sales in these product categories were offset by comparable store sales declines in tube and projection televisions, digital cameras, DVDs, CDs and major appliances.
In the second quarter of fiscal 2009, our Domestic segmentâ€™s consumer electronics revenue category posted a 2.0% comparable store sales gain. The consumer electronics comparable store sales gain was driven primarily by increases in flat- panel televisions and GPS navigation products, partially offset by decreases in the sales of tube and projection televisions, digital cameras and MP3 players and accessories. Our home office revenue category posted a 15.1% comparable store sales gain, driven primarily by continued gains in notebook computers and mobile phones, the latter due to the roll-out of our Best Buy Mobile store-within-a-store locations. The entertainment software revenue category recorded flat comparable store sales, with gains in the sales of video gaming hardware and software being offset by declines in the sales of DVDs and CDs. Our appliances revenue category recorded a 9.8% decline in comparable store sales driven primarily by a decrease in the sales of major appliances, reflecting a continued industry-wide decline Our services revenue category recorded an 8.7% comparable store sales gain due primarily to increases in the sales of computer and home theater services and extended service contracts.
Our Domestic segmentâ€™s gross profit rate in the second quarter of fiscal 2009 decreased by 0.2% of revenue to 24.9% of revenue. In the first six months of fiscal 2009, our Domestic segmentâ€™s gross profit rate was 24.7% of revenue compared with 24.9% of revenue in the same period one year ago. In both the second quarter and the first six months of fiscal 2009, the decrease was due primarily to a shift in our revenue mix, which was driven by increased sales of lower-margin products such as notebook computers and video gaming hardware, partially offset by increased sales of higher-margin products within our mobile phones product category.
Our Domestic segmentâ€™s SG&A expense rate in the second quarter of fiscal 2009 increased by 0.8% of revenue to 21.0% of revenue. In the first six months of fiscal 2009, our Domestic segmentâ€™s SG&A rate was 20.9% of revenue, compared with 20.4% of revenue in the same period one year ago. The increase was due primarily to increased spending on investments, including the roll-out and staffing of the Best Buy Mobile store-within-a-store experience; store projects such as the reset of our GPS selling space, the addition of musical instruments rooms and information technology enhancements to our point-of-sale systems; and increased spending on store labor. In addition, the SG&A expense rate for the second quarter of fiscal 2009 was impacted by higher-than-expected legal and travel expenses, though the additional leverage on strong revenue growth partially offset the increase.
We have two speakers for you today. First, Brian Dunn, our President and Chief Operating Officer, will give our highlights for the quarter and our comments on the second half. Second, Jim Muehlbauer, Executive Vice President of Finance and CFO of our company, will give the financial recap and add color on our guidance, including the impact of Best Buy Europe.
We do have fewer speakers this quarter in response to investor requests that we allow more time on our calls for Q&A. We plan to have more than a half hour for your questions today.
Speaking of add as usual, we also have a broad management group here with me, including our CEO, to answer your questions following our formal remarks. Weâ€™d like to request that our callers limit themselves to a single question so that we may include more people in our Q&A session. Consistent with our approach on prior calls, weâ€™ll move to the end of the cue those who asked a question on last quarterâ€™s conference call.
Weâ€™d like to remind you that comments made by me or by others representing Best Buy may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause our actual results to differ from managementâ€™s expectations.
May we also remind you that, as usual, the media are participating in this call in a listen-only mode.
With that, letâ€™s turn the call over to Brian Dunn, who will begin our prepared remarks.
Brian J. Dunn
Iâ€™ll focus my comments on the successes of the second quarter, the pieces that didnâ€™t work as well as we expected, and the plan we have in place to deliver our earnings guidance for the fiscal year.
First, I want to thank our employees for another quarter of outstanding effort. In the chief of a tough market they continue to create better and better experiences for our customers and our customers are responding by choosing Best Buy over the competition at a convincing rate, something Iâ€™ll talk about in a minute.
I also want to specifically thank the Best Buy employees who helped our Gulf Coast stores and communities prepare for the onslaught of Hurricane Ike. We can only imagine how youâ€™d feel now as you return to your homes and deal with the devastation that Ike wrought. Our thoughts were especially with those in the Gulf Coast community whose lives were disrupted, whose homes were destroyed, and whose family members lost their lives.
This quarterâ€™s earnings were below our expectations, something weâ€™re never happy about. But we issue annual guidance because we know that a given quarter will present unique challenges. Weâ€™re in the process of making some changes, primarily on the expense side. More importantly, we remain both optimistic and committed to our strategy.
Why are we optimistic? First of all, from a top-line perspective, we are growing our business. Difficult times have historically brought out the best in Best Buy. In a challenging environment that finds many of our competitors retrenching, we are opening more new stores. We believe that itâ€™s smart for strong companies to work on distancing themselves from their competitors in tough times and we believe that when the worldâ€™s most resilient economy improves we will be well positioned to benefit from it.
As weâ€™ve said all along, weâ€™re keeping our eye on a few key strategic indicators and they are extremely encouraging. Let me take a minute or two to detail a few specific winds that support what Iâ€™m saying.
First, our internal measures of customer satisfaction rose to a new high, over 81%. Likewise, market share gains accelerated on top of what were already all-time highs. We added share in TVs, computing, mobile phones, and gaming â€“ in fact, all of our major categories in the past 90 days. Specifically, we estimate that our domestic market share at the end of the calendar quarter was nearly 21%, up 1.6 percentage points versus the prior yearâ€™s period.
And most importantly to us, employee retention is at an all-time high. Weâ€™ve never had turnover below 50% before and our 12-month rolling rate for turnover sits today at 49%. We believe thatâ€™s because the people who drive customer satisfaction in market share gains are committed to writing this growth story and committed to writing themselves into it.
Second, as I said before, we continue to grow our business â€“ faster than just about anybody in our space. Our 4.2% comparable store gain, 5.3% here in the US, was at the high end of most retailers in the past quarter. That tells us that customers continue to respond positively to what we offer. We believe customers need someone they can trust to provide perspective on our fast-moving, exciting, but often confusing industry. Someone who will work with them to make technology work for them. And we believe that our performance in every category this past quarter supports that belief.
Finally, our strategic investments in growth are beginning to have a noticeable and positive impact on our business. This impact was most apparent in our Best Buy Mobile experience, which we accelerated to all US stores months ahead of schedule. Today more than 5,000 Best Buy employees are trained and dedicated to improve the experience of buying a mobile phone for our customers. In a business where most US customers surveyed said they would rather visit the dentist than upgrade to a new phone we have improved customer satisfaction scores dramatically. In fact, our customer satisfaction scores in this business are now some of the highest in our company.
We moved aggressively with Best Buy Mobile because the mobile business delivers above-average profit rates, but also because we believe that mobile technology will play a larger and larger role in what we call the connected world. Itâ€™s yet another reason why we see opportunities in the back half of the year.
Speaking of that, let me now turn to our plan for the final two quarters of fiscal 2009. At the beginning of the year we said that we plan to invest into the teeth of this difficult macroeconomic environment using our resources as a competitive advantage while many of our competitors scale back their plans, cut back on customer service, or even close stores. Weâ€™ve stuck to that plan and weâ€™ve made many of those investments. Invest by mobile, in international, and in several critical store projects.
Of course weâ€™ve made some investments that have not generated the kinds of returns we expected. We are looking carefully at our investment portfolio. In the second half we will decelerate or stop some of these projects to focus on our priorities, including those that are garnering the best returns.
Weâ€™ve already identified cost savings in the back half, yet we will not stop investing in selected growth projects, nor will we make any moves that erode the customer experience. This mid-year inflection point allows us to exercise what has always been our guiding principle when it comes to disciplined spending. We will ensure that our investments are customer driven or they will be driven out.
The second area weâ€™ll focus on during the back half is our promotional strategy. We were generally pleased with our gross profit rate. At the same time, we see an opportunity to improve the effectiveness of our promotions a bit when we view them collectively through the eyes of the consumer. Weâ€™ll continue to fine tune our strategy in the second half, leveraging our knowledge of our customers to ensure each offer is connecting with its intended target. While we go after that opportunity we will not stop using promotions as a powerful means to deepen our relationship with our best customers, especially members in our Reward Zone loyalty program, which now includes more than 31 million US memberships.
Iâ€™ll wrap up my comments now, but before I turn it over to Jim I want to reiterate that we are and will remain 100% focused on driving value for the long term and not just a season. And although weâ€™re never satisfied with earnings below expectations in any quarter, we think it does not reflect the long-term health of our company or the soundness of our strategy.
With that, Iâ€™ll turn it over to Jim Muehlbauer who will offer some additional color on our second quarter results and the outlook for the balance of the year. Jim?
James L. Muehlbauer
Thanks, Brian, and good morning, everyone. Iâ€™d like to take you through our fiscal second quarter results and how they compared with our plans for the period. Secondly, Iâ€™ll update you on our earnings guidance for fiscal 2009, including what will be different in the second half due to changes we are making in the business and the impact of adding Best Buy Europe.
When we compare our second quarter results to our forecast, clearly our bottom line finished below our expectations due in part to our discretionary spending activities that exceeded our original plans.
Revenue for the second quarter met our expectations and probably was ahead of what many of you may have expected.
Our comparable store sales results for the domestic segment again showed strong improvement from the previous quarter, advancing 5.3%. These results were driven by continued strength in notebook computers and gaming, strong results in flat-panel televisions, and acceleration in Best Buy Mobile. In fact, our quarterly comparable store sales gains at stores open for six to 10 years were positive. On average, their comps were 3 to 4 percentage points better than we expected based on the normal store maturation curve.
Normally comparable store sales peak after six or seven years and can go negative after that, unless of course we remodel or relocate the store. The performance of these older stores in the last two quarters have stood out, so that is exciting. Roughly 470 of our domestic stores opened more than six years ago and when our teams rejuvenate those stores results on a sustained basis we see that as very promising for our company and our shareholders.
On the other hand, as I look at our portfolio our international comps were slightly weaker than we planned. Canada had comparable store sales gain of 1% against a gain of 16% in last yearâ€™s second quarter. Chinaâ€™s second quarter, which includes results from April through June, have a 7% comparable store sales decline reflecting general economic conditions, including the aftermath of the earthquake.
Bigger picture, our top line held up well considering the macro-environment. We believe the drivers of these results were our US stores strong execution, their efforts to grow their business through a local lens, our improved product assortments, as well as benefits from the fiscal stimulus cheques. Candidly, itâ€™s hard to precisely quantify the relative contribution of each.
Our gross profit rate declined by 10 basis points, which was almost identical to what we experienced for the first quarter. The growth in notebooks and gaming has been applying pressure on our gross profit rate for two years and these categories continue to have growth rates well above the chainâ€™s average.
As planned, the growth in our Best Buy Mobile experience accelerated this quarter and the strength in our mobility area was nearly able to offset that mix impact from notebooks and gaming. We expect this trend to continue into the second half.
Our original SG&A guidance includes deleverage for the fiscal year of 30 to 40 basis points to fund initiatives that would drive our long-term growth. Embedded in that assumption was an expectation that our second quarter would be the high-water mark for the deleverage in the year, or approximately 70 basis points. We knew we would be undertaking a number of strategic and tactical projects, including the roll out and operation of Best Buy Mobile, remodelling and resetting our GPS selling space, and investing in infrastructure to expand our platform for international growth.
We also planned for year-over-year increase in our investment and store labour. We accomplished those objectives reasonably in line with our spending expectations.
In addition, our second quarter SG&A rate reflected subsequent decisions to invest slightly more labour in pursuit of an even greater top-line outcome during the back-to-school shopping season. We partially accomplished that objective.
We also spent more than we had expected on travel and related activities, and incurred some one-time expenses that we had not planned. These expenses collectively cost us the additional 20 to 30 basis points of deleverage that we hadnâ€™t originally expected. As I will discuss later, weâ€™ve addressed these items and we can tell you with full confidence that for the year we will be back on track for our full-year SG&A spend.
Our second quarter also included $0.02 of dilution in net interest expense resulting from the financing of Best Buy Europe without the benefit of any of its earnings. We are reporting the operating results of Best Buy Europe on a two-month lag basis while the cost of financing this acquisition is included on a real-time basis.
If you helicopter up and compare the quarterâ€™s results with our expectations, revenue and gross profits were in line and SG&A was above. Fortunately, SG&A is the most controllable of the three elements.
That brings me to our annual guidance. To provide clarity, I will break down the guidance for you into three pieces and then give you an enterprise outlook. First, Iâ€™ll talk about our guidance for the base business, which is our existing Best Buy business. Second, Iâ€™ll walk through our expectations for Best Buy Europe. And third, Iâ€™ll explain the impact of the previously disclosed change in our share repurchase assumption. The combination of those three pieces will give you our annual guidance for the total company.
Letâ€™s start with the most familiar piece, our base business. At the outset of the year we laid out expectations for a comparable store sales gain for Best Buy of 1% to 3% for the fiscal year. Our strong first half performance in comparable store sales was approximately 4%. In the back half we have based our planning assumptions on modestly softer consumer spending.
Weâ€™re excited about the digital TV transition, our expanded assortments in computers, lower prices in gamings, the completed roll out of Best Buy Mobile, and our access to the iPods. Yet we recognize that there will be many factors in play during the second half, which makes overall consumer spending difficult to predict.
We currently expect to finish in the top half of our annual range for comparable store sales. This implies a second half comparable store sales gain of approximately 1% or 2%. After adding the impact of new stores, but still excluding our European business, we are estimating an annual revenue for the base business of just north of $44 billion, an increase of 10%.
Our initial guidance for the year also assumed a flat gross profit rate. Our gross profit rate for the first half declined by 15 basis points. We expect to improve that trend modestly in the back half thanks to stability in our revenue mix and plans to increase the efficiency of our promotions. As a result, our guidance for the base business now assumes an annual gross profit rate that will be down slightly to last year.
Next, let me give you some more color on the SG&A for the second half. We planned fiscal 2009 to be an investment year for the business, so our initial guidance assumed SG&A deleverage of 30 to 40 basis points. For the first half of the year it was up approximately 55 basis points. Again, we had planned that the second quarter would bring our peak spending in SG&A in terms of dollar increase year over year.
As Brian mentioned, we are making portfolio changes in our second half spending plans. Weâ€™ll reduce or defer non-essential in-store and corporate projects and lower our non-customer facing overhead costs. Weâ€™ll also adjust our advertising spend to closely align with expected business conditions. Through these reductions, plus the impact of coming off that planned peak, we anticipate that our SG&A rate will slow and meet the original target for annual deleverage of 30 to 40 basis points.
Bringing these assumptions together we still contemplate a 5% operating income rate for the year, down approximately 40 basis points from last year. That gives us guidance for annual EPS contribution from the base business of $3.25 to $3.40, an average increase of 7%. Itâ€™s unchanged from what we gave you before.
To be clear, our previous guidance included the benefits from an expected $800 million in share repurchases or roughly $0.05 per share which we later announced will not be taking place this year. From this point forward those share repurchase benefits are not included in our guidance.
Now Iâ€™d like to walk you through the earnings impact of our European business. We estimate that Best Buy Europe, which is primarily comprised of 2,400 Carphone stores will be accretive to the enterprise by $0.03 per diluted share for fiscal 2009, inclusive of the cost of financing the $2.1 billion acquisition. We anticipate that it will generate revenue of approximately $3.2 billion for July to December based on current foreign exchange rates.
As you saw on our news release this morning, Best Buy Europe will raise both our gross profit rate and our SG&A rate. We expect that the operating income rate will be approximately 4% for the back half.
The inclusion of Best Buy Europe will modestly lower our average effective income tax rate as well since its current expected tax rate is approximately 25%. Keep in mind that while weâ€™ll report the full income statement of Best Buy Europe starting in Q3 only 50% of the after-tax earnings makes it to our bottom line. So the operating results of our 50% stake in Best Buy Europe would bring us approximately $50 million in earnings after tax but before financing costs. Included in this amount are purchase accounting adjustments, such as amortization of intangible assets.
We have lowered our estimates for Best Buy Europe since the updated guidance we gave you in June. The retail business in Europe is proceeding as expected, so that wasnâ€™t the impetus for the change. Rather, the company has now completed the phasing of the operating plans for Best Buy Europe and updated its estimates for purchase accounting related to the amortization of intangible assets. Additionally, recent strength of the US dollar is expected to slightly lower the results of Best Buy Europe as consolidated in Best Buyâ€™s financials.
So we started with guidance of $3.25 to $3.40 for the base business. The second step was adding accretion of $0.03 for Best Buy Europe. That brings us to the third step. Now we subtract $0.05 for dilution for the fiscal year, reflecting our decision last may to suspend $800 million in planned share repurchases following the acquisition of Best Buy Europe. Rather than lower our earnings guidance by a couple of pennies, we are maintaining our original guidance range. As the business plays out in the second half, we are comfortable that we can offset those pennies in other parts of our business.
To close, we are satisfied with our top-line performance in the second quarter and with our margins. We were a little disappointed with our SG&A rate, so we are taking actions and have some work to do there.
We plan to have most of the yearâ€™s earnings growth in the second half, putting together our better-than-expected performance in the first quarter with the results in the second quarter, we are only slightly behind our original expectations for the first half with roughly 70% of the yearâ€™s earnings still ahead of us. So we are pleased, but not satisfied, with where we stand entering the back half of the year.
Our focus is fully on serving customers and delivering on the financial expectations for the year. We have great confidence in our people and in our strategy of customer and employee centricity.
With that, Iâ€™d like to open up the call to questions from our audience.