Our primary goal for fiscal 2006 was to accelerate our transformation to customer centricity. In this letter, I’d like to give you an update on this work, which contributed to the 22-percent increase in earnings from continuing operations we garnered for fiscal 2006. Since the past is often prologue to the future, I’d like to describe how customer centricity is influencing not only our goals for fiscal 2007, but also our long-term plans.

At Best Buy, customer centricity means treating each customer as a unique individual, meeting their needs with end-to-end solutions, and engaging and energizing our employees to serve them. It is our primary strategy for providing a differentiated experience for customers. Mass merchants, direct sellers, other specialty retailers and online retailers are increasingly interested in our product categories because of rising demand. If we can understand our customers better than our competitors do, and if we can inspire our employees to have richer interactions with customers, then we can more effectively compete. We believe that Best Buy excels based on its fun, interactive store experience; broad product assortments; name brands; knowledgeable employees; and ability to offer services.

Customer centricity has been, and will continue to be, a growth driver for us. By tuning in customers and employees more closely, we are being rewarded with new ideas every day—ideas that in the past would not have made their way to headquarters and have been implemented at other stores. Through the employees who work closest to our customers, we have discovered several material growth opportunities for the company. The opportunities with the highest potential include small-business customers, new services offerings and international growth, which we estimate are at least $230 billion markets in aggregate.

Frankly, it is a challenging goal to become customer-centric, as we have defined it. Moreover, given that consumers’ tastes are constantly changing (as are product cycles), our goal has become a moving target, forcing continuous improvement. To me, that is very exciting!

Accelerating Customer Centricity
We began our customer centricity work three years ago, starting with a few lab stores that created an energized new culture. Before long, we saw positive indicators from these lab stores: higher comparable store sales gains and a richer mix of products. While the expenses associated with this more labor-intensive model also were higher, the lab stores demonstrated potential to expand their overall profit contribution. We observed improvements in customer loyalty, employee retention and market share. Over time, we also noticed new growth ideas coming from our employees, such as possible real estate locations across North America, a faster method for customizing personal computers, new services we can offer and ways to reduce returns/exchanges of flat-panel TVs. Given these positive indicators, we made the decision to accelerate this work, and we called fiscal 2006 our tipping point.

Key Wins

• 40% of U.S. Best Buy stores now operate under the customer-centric operating model
• We expanded our services offering to include 12,000 Geek Squad® agents and 1,500 home theater installers
• We improved store employee retention by 15 percent
• Reward Zone memberships grew more than 50% to 7.2 million
• We added new and enhanced supply chain capabilities and processes, such as collaborative planning, forecasting and replenishment, and tailored market assortments

A 4.9% comparable store sales gain,103 net new store openings and a continued shift toward higher-ticket items drove fiscal 2006 revenue growth. (U.S. dollars in millions)

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