Finally. I've Found a Place
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2004 ANNUAL REPORT Finally. I’ve found a place. We can untangle your mind 2004 ANNUAL REPORT I’ve found a place. A place where the complex becomes simple, where endless solutions are possible, where people understand. I’ve found a place. A place where I can ask questions and get the right answers, where experts work with me to make my vision a reality, where I know my satisfaction is the bottom line. I’ve found a place. A place that’s about quality, not a quota, where choices are clear, where my entertainment becomes remarkably uncomplicated. Finally. I’ve found a place. 2004 ANNUAL REPORT To our Associates, Business Partners and Investors... It is with considerable thanks to our entire team that I write the 2004 Annual Report to Shareholders, Associates and Business Partners. As has been the case since our company’s inception in 1972, the passion to provide outstanding service to our customers and the commitment to organizational success are trademarks of our entire organization. At no time during my fourteen years with the company have both of these been more evident than in the course of the past twelve months. Together, 3,671 associates completed two years worth of foundational improvement work for a successful future in just twelve months. Together, 3,671 associates completed two years worth of foundational improvement work [ for a successful future in just twelve months. ] The past year has been one of tremendous internal growth and renewal for the entire Tweeter Home Entertainment organization. Simply put, 2004 was the year that Tweeter learned how to run the company that it has become after acquiring twelve high-end electronics retailers comprised of $525 million in revenue, 1,700 people and approximately 100 stores through the late 90s and the early years of this century. Sandy Bloomberg, Joseph McGuire, Philo Pappas, Judy Quye, Mark Richardson, Jeffrey Stone, Founder & Senior VP & Chief Senior VP & Chief Senior VP Senior VP President & Chief Chairman Financial Officer Merchandising Retail Sales & Marketing & Executive Officer Officer Operations Chief Brand Officer 2004 ANNUAL REPORT Building the Foundation for Profitable Growth Two years ago we recognized the need to rebuild the foundation of our company to support a future multibillion-dollar revenue base with hundreds of stores across America. We began fiscal 2004 with very specific and aggressive improvement goals for Supply Chain, attachment selling and back-of-the-house operations. We are pleased to report that we achieved approximately 95% of these planned objectives. Supply Chain With the help of the RetailMasters consulting group, the company is developing sophisticated tools and methods inside our merchandising organization to drive Supply Chain improvements. We knew that this was an imperative for our busi- ness model as we sell expensive merchandise and display a high percentage of our overall inventory in our stores. During the course of the year we determined our critical stake-in-the ground product groups and moved inventory out of less significant categories to support these growth drivers. As a result, we averaged an overall in-stock position of 91% during the second half of the year compared to 82% during our first fiscal quarter. Supply Chain improvements...helped drive our debt level down from $48 million [ to $35 million year over year. ] We learned how to do a better job transitioning products throughout our 176-store fleet and dramatically drove the age of our discontinued inventory down. The average age of discontinued items was 296 days in our first fiscal quarter compared with 186 days during our fourth quarter. In the process, our gross margin for this category of goods steadily improved from the beginning to the end of the year. We expect continued improvement in gross margins for this class of merchandise in 2005 as we continue to improve our product transitions. Supply Chain improvements have also driven positive changes in our Balance Sheet as our inventory decreased by $11 million year over year. Inventory days on hand were reduced by seven days and our cash conversion cycle improved by five days — from 87 days a year ago to 82 at the end of FY04. This continued the 5-day improvement trend in our cash conversion cycle realized in FY03. These results helped drive our debt level down from $48 million to $35 million year over year. 2004 ANNUAL REPORT Attachment Selling With a focus on increasing the basket of what we sell and solution selling, the retail team was driven to improve sales of accessories, warranty and in-home installation labor in 2004. TOTAL ATTACHMENT RATE As the year 18 progressed 2004 we gained 16 traction and 14 2003 by our fourth 12 quarter the 10 sales team OCT NOV DEC JAN FEB MAR APR MAY JUN JULY AUG SEP was running at a 290 basis point improvement on the attachment rate year over year for the quarter. We expect continued improvement in FY05 in expanding our total basket to our customer. Back-of-the-House Improvements In addition to the RetailMasters group, the company hired AT Kearney and PRG Schultz to assist us in improving some back-of-the-house functions. Commodity purchasing and sourcing, Accounts Payable and Real Estate audits were among the areas that we attacked, resulting in saving estimates of $1.9 million in FY04 and estimated savings in excess of $3 million projected in FY05. Our approach with each of the consultant groups is to have them teach new core competencies to [ our team, not do all the work themselves. ] Our approach with each of the consultant groups is to have them teach new core competencies to our team, not do all the work themselves. As a result, we face the future with a heightened understanding of what’s possible within critical areas of the company. 2004 ANNUAL REPORT Rounding out the Senior Team We made some changes and additions to our team, as it was necessary to add skills, competencies and experi- ences that did not exist within our management group. Jim Bengier joined Tweeter as Vice President of Supply Chain after serving in a like capacity, most recently with BestBuy.com. Jim has partnered with the RetailMasters group and created a 19-member team within our Merchandising group to drive continuous Supply Chain improvements as our store model evolves. Judy Quye joined the team mid-year and brings tremendous retail experiences to the organization. Judy has served in senior leadership roles at GAP, Gateway, Office Depot and Target over her twenty-five year career and leads Tweeter’s retail organization in the role of Senior Vice President of Retail Operations. Mark Richardson joined our team as Senior Vice President Marketing/Chief Brand Officer simultaneous with Judy’s arrival. Mark was the brand officer for a division of Allied Domecq prior to joining Tweeter and held executive leadership positions at Boston advertising agencies Hill Holliday and Houston Effler, where he was responsible for large national brands including Fidelity Investments and AutoNation USA. These additions fortify a strong, committed senior team and provide depth as well as enhanced leadership and knowledge with which to tackle our future. A Changing Industry Dynamic Our view is that consumer electronics retail business models are migrating and need to migrate toward connectivity, applications, services and content - all of which will support the digital product evolution and the connected home. On top of that, too many retailers are fighting for the middle market. In addition, Chinese and Korean manufacturers are dramatically compressing product lifecycles and reducing price points—and often the gross margins that accompany them. And while historically, passion for television and audio gear was a “guy’s domain,” the advent of flat panel televisions, the growth of in-wall or in-ceiling (hidden) speakers and small, sleek audio systems are driving lifestyle and fashion changes within the home—particularly the living room. With those changes, women today have more influence over electronics purchases than ever before and they are a driving force behind the purchase of many new technologies that are landing in the home. 2004 ANNUAL REPORT Our Response to These Changes Installation Services — Introducing “Entertainment Architects” Five years ago, Tweeter began to envision the coming industry changes that are at our doorstep today. It was in 1999 that we bought the first of three small home installation service businesses so that we could begin learning the services business from a specialty design and installation perspective. As we acquired specialty consumer electronics companies over the ensuing years, we paid particular attention to those companies that had an emerging competency in in-home services. With new digital technologies come increasing complexities in the technologies themselves, the potential uses in the home and the integration of all these emerging technologies and services that are creating the connected home (and to an extent, the connected life). Take the television as a perfect example. You cannot buy a high definition television and simply plug it in and get a digital picture and digital sound. You need to have access to a source, such as digital cable or digital satellite, a digital/high definition receiver to decode the digital signal (if it is not built in to the television) and of course, the right mix of audio equipment to make your living room sound like a movie theater. Then, you need to hook all of this gear up AND also connect it to your VCR, DVD player, etc. What if you wanted to hook your PC up to your digital camera or send pictures to your parents over email or put a repeating collage of your favorite pictures on your plasma television? What if you want to download music over the Internet and play songs through select room speakers or throughout your whole home and your outdoor deck? Or perhaps you want to download some movies, store them on a server in the basement and figure out how to send them to either the television in the living room, kids room, play room or master suite? 2004 ANNUAL REPORT The electronic home, as you can see, is changing.