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The Best Performers 2006


COVER STORY PODCAST

The last place you might expect to find creativity would be the corner drugstore. But just take a look at CVS Corp. (CVS). First, it focused on the pharmacy, creating a sophisticated system that allows customers to phone in, and then pick up, prescriptions at preset times. And after an exhaustive survey of shoppers, the chain, based in Woonsocket, R.I., embarked on a sweeping makeover of the rest of its 5,400 stores, focusing on its core female shoppers. Shelves that previously stood six to seven feet high were lowered to five feet, putting every item within view of the average woman (who, CVS found, is 5 feet 4 inches tall). Stores were repainted in vivid designer colors.

Not least, CVS made a major upgrade of its beauty sections. It hired several hundred beauty advisers, who help shoppers select just the right shade of foundation and then recommend other cosmetics. And the company added exclusive brands such as hair-care products by Beverly Hills stylist Christophe as well as Lumene, a Finnish skin-care and cosmetics brand that is the top-selling beauty line in Europe. The new ranges "have created energy and momentum for us," says Helena Foulkes, CVS's senior vice-president for marketing and advertising. "Our beauty business is outperforming our overall store." The innovations have paid off for CVS. Same-store sales rose 6.5% last year, helping fuel an overall 33% increase in earnings. Investors are raving as well, with CVS shares up 132% over the past three years -- a performance that helped earn CVS the No. 39 slot in this year's BusinessWeek 50, our 10th annual effort to identify the best-performing companies in Standard & Poor's (MHP) 500-stock index.

Profiles >>

Some powerful economic and demographic forces favored certain sectors this year. With oil at $60 a barrel, energy-related companies are at the fore. Among them are a number of service providers, including Baker Hughes (BMI) (No. 21), National Oilwell Varco (No. 27), and Weatherford International (No. 36). That's further evidence for investors that the biggest winners aren't always the companies digging for gold but sometimes the companies selling the picks and shovels. And the list was populated, once again, with a number of health-care companies, including Amgen (AMGN) (No. 9) and Aetna (AET) (No. 10), a reflection of the aging of baby boomers.

Pull out energy and health care, however, and you'll find a lot of successful companies on this year's BW50 that, like CVS, earned their stripes the hard way, by thriving in industries where stiff competition and cutthroat pricing have wiped out lesser companies. These companies have used innovation -- be it through technology, or clever design and marketing -- to win the hearts and wallets of consumers. And with more and more businesses seeing their competitive edge whittled away by the Internet and globalization, experts say it's imperative for companies always to look for new ways to build, and then maintain, intense customer loyalty.

Competitive Advantage

The best example may be this year's No. 1 company, Apple Computer Inc. (AAPL), which has used catchy TV ads as well as cutting-edge technology to stay ahead of competitors selling MP3 devices, most recently with the video capabilities of its newer iPods. Ditto for 24th-ranked Starbucks Corp. (SBUX), which is staying a step ahead of other coffee shops by creating new drinks such as current fave Marble Mocha Macchiato as well as producing music compilations aimed at baby boomers, all of which give its customers new reasons to keep coming back.

Staples Inc. (SPLS) (No. 44) turned a perpetual source of customers' annoyance -- the rebate process that many have grown to distrust -- into a competitive advantage. By allowing shoppers simply to file for a rebate at its Web site without photocopying receipts or cutting UPC codes off boxes, Staples has earned the trust and loyalty of millions. Staples says its research showed that 80% of customers found its online rebate process "extremely easy" and -- most important -- are more likely to seek out Staples for their future needs. "We think the marketing of rebates is a significant positive in terms of brand loyalty and sales," says James F. Sherlock, director of sales and merchandising for Staples. So far, eight million customers have claimed their rebates electronically, and Staples is working to enhance the program further. By early next year it hopes to give customers a choice of a rebate check, direct deposit into their bank account, or the ability to convert the funds into an immediate purchase at Staples.

Several companies have made their mark by providing better service. Adrian Slywotzky, a vice-president at Mercer Management Consulting (MMC), notes that Lowe's (LOW) (No. 11) and Best Buy (BBY) (No. 19) have both put a premium on offering more service than their better-known rivals, Home Depot (HD) and Wal-Mart Stores (WMT), respectively. Lowe's, for instance, has designed its stores to appeal to women, with wider aisles that make it easier for moms to navigate a stroller or shopping cart and better lighting. Lowe's also uses a higher proportion of full-time workers, who tend to be more knowledgeable, than Home Depot. Best Buy has managed to steal away from Wal-Mart popular brands, such as Samsung Group, that prefer their goods to be displayed in Best Buy's bright and lively stores. "This proves that smaller players who create a different value proposition that emphasizes service can compete with the big boys," says Slywotzky.

Marketing savvy may make for profitable businesses, but, alas, it doesn't always produce big returns for investors. While 32 of the 50 companies that made last year's roster generated positive returns over the ensuing 12 months, the group as a whole failed to beat two of the major indexes. The BW50 stocks earned an 8.2% return in the year through Mar. 14, 2006. That's better than the 5.5% total return for the Dow Jones industrial average, but below the 9.4% gain of the S&P 500 and the 12.7% earned by the NASDAQ Composite index.

That's no big surprise. The BW50 has a growth and momentum bias. It tends to shine during years when the market is rising quickly -- and performs less well in grinding markets. And last year's class was held back by the tech sector, with Electronic Arts (ERTS), Dell Computer (DELL), and Symantec (SYMC) all suffering losses of 20% or greater. But as the saying goes, it's not a stock market, but a market of stocks, and there are plenty of ways to mine the BW50 for investment ideas.

Tech isn't as dominant this year, and given the diversity of this year's list, we've selected a cross section of companies to profile: Apple, which built on the popularity of the iPod to become this year's star performer; FedEx (FDX), which has ridden the manufacturing boom in China better than any delivery company; two standout homebuilders, Lennar (LEN) and D.R. Horton (DHI); Goldman Sachs, which continues to spin profits out of its proprietary trading; and Schlumberger (SLB), whose heavy investments in R&D and technology made it a standout in the energy-services field. What they all have in common is that they have developed products and services that are distinct from the rest of the herd. In addition, we've included brief snapshots of each of the BW50 companies. And we round out this year's coverage with statistical tables that provide performance rankings for the BW50. The full ratings for the S&P 500 appear on BusinessWeek Online. Read on.

By Dean Foust, with William C. Symonds in Boston, Brian Grow in Atlanta, and Fred Katzenberg in New York


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