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Keep the Customer Satisfied


The test for smart management isn't that it doesn't make mistakes. It's whether it knows how to fix them. In 2001, consumer-electronics giant Best Buy Co. (BBY) paid $685 million for the Musicland chain. This June, after watching more and more consumers defect to free downloaded music, Best Buy threw in the towel. Conceding that the synergies it saw between music stores and its core business of selling audio systems, DVD players, and TVs had not materialized, Best Buy sold Musicland to a private investment firm for no net cash.

"RETAIL IS DETAIL." A disaster? Not by a long shot. Now free to focus on its core retail business, Best Buy kept right on winning market share from troubled rivals like Circuit City Stores Inc. (CC) by keeping customers happy. "The clich? is 'retail is detail,' and Best Buy does thousands of things right," says Jefferies & Co. analyst Don Trott. Best Buy, for instance, was one of the first big electronics retailers to devote significant floor space to traffic-driving CDs and electronic-game software. It generated 75% higher operating income in the quarter ended Aug. 30, compared with a year earlier, and strong 5% gains in same-store sales so far this year. Investors were rewarded with a total return of 68.3% from Mar. 19 to Sept. 12. That was the best of any company on our BusinessWeek 50 list of top performers over the past six months. (Best Buy was added to the BW50 in April, after Pharmacia Corp. was acquired by Pfizer Corp (PFE).

That kind of strong consumer focus was evident for many of the top BW50 companies at the midyear mark. Electronic Arts Inc. (ERTS) returned 52.6% over six months, cranking out video games. Analysts say that its strategy of licensing marquee names, such as football pundit John Madden and Harry Potter, could boost fourth-quarter earnings to almost as much as it earned in all of fiscal 2002. Another BW50 company, Pulte Homes (PHM), generated a 31.3% shareholder return by riding the housing boom, especially homes geared to older but still active buyers. In fact, the consumer discretionary sector returned 22.6%, making it the third-strongest category -- behind information technology and materials -- in the Standard & Poor's 500-stock index.

The S&P 500 is the pool from which we pluck the BW50 each spring. Companies are ranked on growth of sales and earnings, and shareholder returns over one and three years, and year-to-year growth in net profit margins and return on equity. The result is essentially a growth list. But because the three-year period this time took in the dot-com downturn, the 2003 BW50 was light on technology companies. That explains why the BW50 as a group underperformed indexes which better captured this year's runup in tech stocks: The BW50 returned only 12.5% in the six months, vs. 17.5% for the S&P 500 and 33% for the Nasdaq.

COMATOSE BARBIE. It didn't help that some of the companies that replaced the tech stars fell into their own holes. Bringing up the rear in terms of stock returns was Mattel Inc. (MAT), whose shareholders suffered a 10% loss. The toymaker's turnaround appears to have stalled. CEO Robert A. Eckert launched new toys like the hip-hop Flavas dolls. But that can't make up for the fact that little girls just don't love Mattel's core Barbie like they used to. Says Brean Murray Research analyst Margaret Whitfield: "Barbie remains comatose."

Drugmaker Forrest Labs fell back from its high, returning -5.4%. And insurer Aflac Inc. (AFL) and its trademark duck waddled in with a -4.7% return. While Aflac's large Japanese business is still strong, investors worry about flagging U.S. sales growth. In fact, the company says it expects no growth in domestic new-premium income in the fourth quarter. To help turn things around, Aflac has named a new U.S. head of sales.

The BW50 was created to identify growth companies that are more than a flash in the pan. That methodology knocked some companies off the list that are now flying high on Wall Street. The rest of the year will prove whether they will sustain that pace -- or whether the BW50 can catch up. By Dean Foust in Atlanta, with Amy Tsao in New York, Christopher Palmeri in Los Angeles, and Brian Grow in Chicago


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