百思買 (BBY) 2003 Q1 法說會逐字稿

Ladies and gentlemen,

thank you for standing by. Welcome to the Best Buy first

quarter earnings conference call for fiscal 2003. At this

time, participants are in a listen-only mode. Later, we

will conduct a question-and-answer session. If you have

a question, you will press 1 and 4 on your touchtone phone.

As a reminder, this call is being recorded for playback

and will be available by 12 p.m. eastern time today. If

you need assistance on the call, please press * zero and

an operator will assist you. I would like to turn the

call over to Mrs. Jennifer Driscoll, vice president of

investor relations.

Thank you for joining us

today. With me are Richard Schulze our Founder, Chairman

and C.E.O., who will provide an overview of our performance

and product category; Allen Lenzmeier, president and chief

operating officer, who will report on the stores; and Darren

Jackson, executive vice president and C.F.O. who will

provide our outlook for the second quarter. Kevin Laden,

president of our Canadian operations is on the call from

the road in Toronto. Also available are Kevin Freeland,

president of Musicland stores; Michael Lundon, executive

vice president of general merchandising; Susan Hoff,

senior vice president of (inaudible); and Bruce

Vankle, vp of performance and planning management.

As always, comments made by me or others representing

Best Buy may contain forward-looking statements, which

are subject to risks and uncertainties. Filings contain

information about factor that is could cause actual results

to differ from management's expectation. I would like

to remind (inaudible) listen-only mode. Also, in the and

(inaudible) replay instructions. Simply dial 973-341-3080

and then enter the personal identification number of

3328297. With that, I will turn it over to Mr. Schulze

who will begin our prepared remarks.

Good morning,

everyone. I am pleased to report the company's earnings

for the first quarter of fiscal 2003 rose 27 percent to

$70 million or 22 cents per diluted share, adjusted for

our three-for-two stock split. That compares favorably

with the earn accident guidance provided in early April

of 20 to 21 cents per diluted share.

Our revenues for first quarter as reported on June sixth, rose

24 percent, to 4.58 billion. Revenue increase included the

impact of new stores opened in the past 12 months, addition

of Future Shop revenues and a company comparable store

gain of 5.7 percent. We view this increase as quite healthy,

particularly in light of the current economic environment.

Many of you have asked about the progression of comparable

store sales as a barometer of consumer behavior. We saw

the strongest comp gains in March, which included an earlier

Easter, followed by somewhat less robust sales in April.

In May, however, sales picked up again, due in part to

a slightly more promotional environment.

As you can see, our margins held up well as a result of

our strength in both mixed and balance. We will talk about

the quarter's business highlights and then comment on our

product categories. Afterward, I will turn over to Al

for a discussion of results by each business segment.

Finally, Darren will give us the financial highlights, as well

as an elaboration on our outlook for the next quarter.

The business highlights of the quarter were as follows:

First, we continued to grow by opening more new stores.

In fact, we opened 12 Best Buy stores this past quarter,

as well as two Future Shop stores and three Magnolia

Hi-Fi stores in the San Francisco market. Our grand opening

schedule was heavier than usual, for the first quarter.

We also closed a net of 6 mall-based Sam Goody stores

that were not meeting our profitability targets. Secondly,

we increased comp store sales by 5.7 percent, well ahead

of our origin expectations. During the environment that

was of course, generally weak for most all of retail.

I attribute the increase to the incredible strong product

cycle we continue to enjoy. It is truly exciting to see

product innovations that extend so far beyond a single product

category. Many people, seeing some products for the first

time, literally stop and stare because of the difference

that is so visually compelling, particularly in the case

of digital television, DVD and flat-screen T.V.

Thirdly, as a result of new stores in a solid comparable

store sales, we believe we continue to gain an overall market

share, specifically we believe we achieved share gains in

computers, television, as well as many other digital products.

We remain North America's top retailer of consumer

electronics computers for the home, movies and music.

Fourth, we continue to increase the gross

margin rate on top of the large gains we made last

year, reflecting lower interest rates, which

reduce the overall costs that are associated with consumer

financing offers. I would like to talk briefly about our

product categories.

Consumer electronic sales remained our largest product

category in the first quarter and add comparable store sales

gains in the high single digits. Sales of video products

remain very strong, including double digit increases in

digital television, digital cameras, as well as DVD hardware.

Lower price points are driving the digital television

business, which now comprises approximately fully one-third

of our overall T.V. revenue at Best Buy stores. DVD

players continue very strong, as lower price points and

feature products continue to boost household penetration.

Advanced features continue to enable us to sell higher-priced

digital cameras, while lower priced models fuel the increasing

demand.

Sales of audio equipment were nearly flat on a comp store

basis and declined in home components, speakers and portable

products were mostly offset by continued growth in our home

theater in a box category. Our home office category grew

in the mix, reflecting comp store sales gains in the mid-

singles, as well as the inclusion of sales from the Future

Shop stores, which have a higher proportion of home office

sales, sales of notebook computer grew double digits,

reflecting second-time users requirement for portability.

Sales of desktop PCs improved, as well, reflecting aggressive

pricing in the category.

We are modestly optimistic for the desktop computers in

the coming quarters. The first quarter included the

successful launch of our new private label PCs called VPR

matrix. We will continue to use the platform to compliment

our brand name assortment. Sales of peripherals also

perform very well, particularly networking, hard drives,

memory and MP-3 players. Cellular sales were very strong and

the growing pre-paid sales have not taken away from our

traditional eight plan offers.

The third largest category is entertainment software.

It had comp store sales gains in mid-single digits. We

enjoyed strong sale of video hardware, software and a wide

variety of accessories, as well as increased sales in DVD

movies. The video gaming category benefited from significant

price reductions on Sony and Microsoft hardware, although

sales softened somewhat ahead of the anticipated price drops.

New releases, strong catalog movies and more affordable prices

contributed to strong sales of DVD movies. Sales of pre-

recorded music declined, partly due to digital downloading,

file sharing, lack of content, lack of recognized artists

and a reduction in radio play.

Computer software, particularly productivity software

performed very well, despite the comp store sales gains

in this category, entertainment software declined in the

company's overall mix because of the inclusion of Future

Shop sales, which have a lower proportion of entertainment

software. We had comp store sales declined in the mid-single

digits for appliances amid a competitive environment. In the

next three quarters, the focus at Best Buy's appliance

departments is going to be on improving the in-store

experience, having the right products in the right store at

the right time, and increasing closed ratio of appliance

shoppers. We continue to believe in the long-term future of

this business for Best Buy, as well as, of course, Future

Shop. Each day more homes are connected to broadband

and reengineering this business in the United States will

enable us to leverage our relationships with the higher

income, technology-oriented consumers that frequently visit

our stores.

Digital products which tend to carry higher margins, comp

prized 19 percent of total sales in the quarter, up from

15 percent in the first quarter of fiscal 2002. We continue

to anticipate the sales of digital products will grow to

25 percent of our overall sales by the fourth quarter of

this year. Some of you have expressed concern about the

promotional environment. In the past quarter, the environment

was hotter than it was expected, driven by lower prices

on mostly Chinese-produced goods and lower costs in some

other categories. Secondly, consumer electronics is now

the fashion component of the retail business and more and

more competitors are participating in this space.

Third, financing is being used as promotional lever. These

factors contribute to overall promotional environment that

is perhaps more challenging. However, these trends also

are allowing us to bring more value to the consumer, which

helps support strong comparable store sales gains as we

experienced in the first quarter. Remember, we have developed

four strong segments and achieved meaningful balance in

our overall mix. With that, I would like to turn the

conference call over to Al Lenzmeier, our president and chief

operating officer. Allen.

Thanks and

good morning, everyone. This quarter we began reporting

in two segments, domestic and international. I will address

the two of them in order during my portion of the call.

Our domestic segment now includes Best Buy, Magnolia

Hi-Fi and Musicland stores. The comparable store sales

gain of 6.6 percent was above planned at Best Buy, which

accounts for the largest percentage of the sales. Musicland

comp declined 1.2 percent and was in line with our

expectations. Magnolia Hi-Fi's comp decline of approximately

10 percent was below our expectations.

For the combined group, the comps of 5.7 percent was ahead

of our expectations. The profitability of these segments

was essentially on plan. The gross profit margin rate

rose by 20 basis points reflecting a higher proportion of

digital product sales and lower costs associated with consumer

financing offers. The selling, general and administrative

expense rate declined by 10 basis points, reflecting leverage

from strong comp store sales gains. The operating income

rate improved by 40 basis points.

Our international segment includes Future Shop stores in

Canada, but will expand to include our first Canadian Best

Buy stores in the first quarter in Toronto. We are pleased

to report this segment continues to report above-average

growth. Comps at Future Shop were above planned at 9.6

percent. Operating results were ahead of plan, as well,

including investments made to boost the future profitability

of Future Shop stores and to prepare for the launch of

Best Buy stores in Canada in Toronto.

The 50-basis point decline in gross profit rate was

due to higher levels of clearance markdowns and product

mix shift. As we expected, the SG and A rate rose by 140

basis points, as we increased use of outside consultants

to promote our process to profits initiative, similar to

the initiative we completed at Best Buy stores a few years

ago. We expect the benefit of these investments to begin

to accrue in the latter part of the year, as we demonstrated

at Best Buy stores. Another factor in the SG and A rate

was investments and systems and processes to prepare for

the launch of the Best Buy stores in Canada.

We previously have stated we would incur start-up costs

in the first and second quarters related to the launch.

Combined these initiatives result indeed 190-basis point

decline for international segments. We had expected a

loss from international segment of approximately one and

a half cents per diluted share, which is where we finished.

Recent milestones in domestic business include the following:

first, last week we opened our first downtown store in

Manhattan. Our new Chelsea location features 35,000 square

feet on two floors and illustrates the versatility of our

Hi-Fi format. We are optimistic about the store's potential

and the New York metropolitan area stores led the country

in comp store sales gains again in the first quarter.

Second, in the first quarter, we successfully launched

the VPR matrix computer line. VPR matrix computers fill

gaps in our product line. In July, we will introduce

a unique new design created by Porsche or VPR matrix.

We tested a change to Best Buy's computer department

and it incorporates computer technicians directly in the

retail selling space. The change boosted sales in test

stores and profitability and will be rolled out to

approximately 120 Best Buy stores this year.

In addition, we successfully tested in-home pc networking

in two markets and are prepare tog start rolling that out

this summer. We feel these initiatives will further

strengthen our lead in the retail channel and support our

customers. Third, during the first quarter, Future Shop

opened a fully automated distribution store in Meskuse, Quebec

and Courtney, British Columbia. We are on track for eight

new Best Buy stores and nine new Future Shop stores

in Canada in the current fiscal year. Later this year,

we plan to test a 20,000 square foot form at of the Best

Buy store in several markets. This new store design is

expected to include all four of our product categories and

utilize aspects of the Hi-Fi design. We can reach markets

with the population of less than 120,000 and would provide

the company with yet another avenue for growth.

We believe this store size could give us a opportunity

to open up an additional 150 locations. At Musicland,

we continue to refine our product assortments. For example,

we are preparing to rename our small market On Cue stores

of Sam Goody and to remerchandise the stores with an expanded

assortment of DVD movies and video gaming. We will expand

our assortments in these two categories at approximately

250 of our mall-based Sam Goody stores. Our Suncoast

stores are enjoying strong store gains due to the popularity

of DVD movies.

Next, Darren Jackson will provide our outlook for the

second quarter.

Thanks. Good

morning, everyone. Now that we have covered the first

quarter results, I would like to give you our outlook for

the second quarter. Our assumptions for the second quarter

include total sales growth of 23 to 24 percent, including

the impact of new stores of comparable store gain of 4 to

5 percent and the addition of Future Shop sales. We

are projecting comp gain of 5 percent at Best Buy stores.

Essentially flat comps at Musicland and 8 percent gains

at Future Shop for the second quarter. We expect our

gross margin rate for the enterprise to decline by 30 basis

points, reflecting continued strength in the digital products

offset by mixed changes at Musicland stores, principally

the increase in DVD and video gaming. We also expect

to increase our penetration in the lower margin computer

business in the second quarter.

We anticipate the SG and A rate being essentially flat

with the prior year. That brings me to our international

guidance for the second quarter. This level of performance

would bring us to estimated EPS of 30 to 32 cents per diluted

share and average increase of 21 percent, which is in line

with projected growth rate for the year and higher than we

originally budgeted. This estimate includes approximately

4 cents per share of dilution, related to our investments

in remerchandising in Sam Goody stores, launching Best

Buy in Canada and (inaudible, background noise) initiatives

in Future Shop stores. This investment is equivalent to the 4

cents invested in the first quarter in the same initiatives.

Today, we will reiterate the full-year guidance, which

included growth of 17 to 20 percent and earnings growth

of 18 to 21 percent. We feel very confident about that

guidance in this current environment. With that, I will

return the call to Dick.

Thank you. As

you know, at the end of this month, I will step aside as

the C.E.O. of Best Buy to focus on my new role as Founder

and chairman of the board. Brad Anderson will be C.E.O.

As many of you know, and he will lead our future earnings

conference calls. This was a great deal of confidence

I turn over the helm to Brad, who has been my colleague

for three full decades. Together, we have built one of

the nation's top retailers and it is a gratifying scene

and scenario to me that I can place the future of this

company in the hands of a truly talented management team.

Now, I would like the operator to open up the floor to

questions from our investor audience.

Thank you. To ask

a question, press 1, followed by 4 on your touchtone phone

at this time. Our first question is from Bill Julian

of Salomon Smith Barney.

Thank you. Good morning.

With respect to the four cents of dilution, which you

are referring to in the second quarter here. As you probably

know, consensus estimates sit at 33 cents and you are guiding

to 30 or 32 cents. Are we to read into this there is nothing

new about guidance here and this 4 cents was always planned?

Have you changed the timing of cost? Can you give me

color on that?

That is Darren.

We have not changed the timing. Our practice has been

to guide during these conference calls on the next quarter.

We have never given guidance in terms of a point estimate

in the second quarter. So, from our vantage point, nothing

has really changed. If you go back to our last call, we

had said in the first two quarters of this year, historically

Future Shop is break even to losing a little money. We

talked on the last call about making investments, particularly

in the Sam Goody change. So, from our perspective, things

have not changed. That is why when you look at the full-year

number you see it inched up a little bit as a result of

our first quarter performance. It is a timing event versus

any change in guidance. I would say we feel every bit

as confident about the year today as we did when we started

the year.

Okay. Perhaps you can give us

just a feeling for what is expected in the third and fourth

quarter. Consensus now sits at 32 cents for the third

quarter, which implies stronger growth, much stronger

than consensus implies in the fourth. Should we look at

the timing of profitability in the back half of the year

maybe shifting that from the third to the fourth quarter?

The short

answer is for the year, we still plan on doing the two 10

to 2 17. Look at performance last year, we had a strong

fourth quarter. I would suggest to you that our third

quarter performance in all retail expected this and felt

this last year result of September 11th. When we look

to the back half of the year, the third quarter would be

a place that I think we have a little bit of opportunity.

In the fourth quarter, based on our initiatives and store

openings, we feel good about that. The third quarter,

in relation to where the consensus is seems to be in place

where we would look to outperform a little bit.

Okay. Thank you very

much.

Thank you. Our next question is

coming from Peter Caruso of Merrill Lynch.

Thank you. Good morning.

First, Dick, good luck in your new role as Chairman

of Best Buy. I hope it is as success employ as your

C.E.O. role was. I would like to ask you first, your

perspective. You have been through many promotional cycles

in this business. This is not the first time we have such

a highly consolidated market share where Best Buy circuit,

Sears, (inaudible) dominant players and increasingly

have to eat each other's lunch to gain market share. Are

you committed to remaining the promotional leader no matter

what it entails in terms of gross margin over the next year

if the market continues to heat up? Who would you name

as one or two major competitors you have seen heat the

market up the most?

I suggest

you are correct that with the consolidation that has occurred

in the framework of the last five or six years in particular,

the balance of market share has shifted to a small, but

very powerful group of retailers. We have a strong franchise

with American consumers. We believe that we have emerged

through the process clearly as the branded choice, the

preferred retailer for the sale of three of the four

categories that are major components for our growing business.

I would say that it is incumbent on us to always maintain

a balance between the level of promotional activity or the

type of representation we will have to be in the game with

any and all players that would attempt to try to ratchet

market share. We have, however, learned that you don't

have to overload the assortment with that type of product.

In fact, you are better off by sharpening your offerings,

making sure they are competitive, turning them effectively

and strategizing for much of the shift that you have seen

has taken place in digital products. This is where we

feel we have a huge leg up over most of all our competitors,

certainly for sure, the discount channel in the purest form,

meaning wholesale clubs and mass retailers.

The other specialty retailers certainly have similar plans.

We just think that the next element of differentiation falls

to execution. So, the simple answer is we are definitely

going to be in the game, matching off on any and all pricing

from wherever it comes to ensure the fact that we are always

priced right for our consumers on literally any and all

products offered by the mass channel. But, you will see

a stave evolution, to higher better quality brand names

and technology offerings on our floor, as we continue to move

more toward that early adaptor techno file consumer. We

think the way we merchandise, display, interact, demonstrate,

train, and promote, that we will continue to get more share

of footsteps into our stores than any of our direct

competitors trying to emulate the same strategy. This got us

here and we are fortunate right now because of the market

share we occupy and the preference that our stores have shown

against any and all competitors that many more suppliers,

each and every year, are opting to introduce products on

our floor.

I feel confident we are well positioned a minimum two-and-

a-half to one over the next consumer preference and meaningful

share advantage over everybody. So, the one key obvious

factor that the rest of the world needs to be aware of,

the consolidation that has literally driven a high level

of that threshold level type product is now in the hands

of the Wal-Mart, Target, K-mart strategy and because of sheer

magnitude of the volume of retail stores in the marketplace,

they are just bound to do a tremendous amount of business

in those categories. It is why they have been so formidable.

But, we think that the complexity and the technology of

the new digital products will ensure the fact those consumers

will stay in our stores.

Do you see anyone other than

Circuit City racking up the promotional environment?

I would

ask Michael who is here. Mike, have you seen anybody

other than Circuit? They have had aggressive activity

on the PC world in the last quarter. Has there been anybody

else doing anything?

Everybody is behaving as

they have in the past. I think one thing that is important

as we think about this is that we are just really in the

beginning of the digital cycle. I think a lot of us are

close to the product and live it everyday. When you go

out and talk to consumers and talk about satellite, radio,

digital T.V., we are just beginning. As Dick eluded

to, the parts of more complex. More and more parts are

working together. I think we have the opportunity to offer

a wide variety of products of digital cameras, for example,

are extremely popular. Take a look at our circular this

week. We have prices from 999 to 279. There are

a tremendous amount of offering to the consumer as they

embrace new digital technology. Even DVD, household

saturation is really just beginning.

The best

way to look at it with this promotionality in the most recent

quarter, our margins were up, which would suggest we have

a great mix and a strong balance and we know how to get

to the better quality more profitable products.

Okay. Thank you and good

luck in the next quarter.

Thank you.

Next question.

Thank you. Our next

question comes from Matt Fassler of Goldman

Sachs.

Thanks a lot. Good morning. Dick

best wishes to you going forward. A couple of questions.

I want to focus on Canada and you spoke about bringing

the process to profits efforts to the Future Shop operation.

That was obviously very successful for you to say the

least, in the United States. Can you comment on where

that business is right now? What kind of changes you

think you need to make? What the timeframe is to get

that operation to targeted profit levels?

Maybe I

might ask Allen and Kevin, who is on the phone from Toronto,

to comment directly. Obviously Allen is spearheading

the process as we know it here. Kevin is on the firing

line in Canada. Maybe Allen, give Matt an overview and

ask Kevin to fill in the blanks.

Matt, that probably was

the process at Best Buy in terms of process to profits.

I will probably compress it to probably two-year process

with respect we are doing to Future Shop up in Canada.

We are starting off the areas that we are starting off are

advertising effectiveness, as well as assortment management

and we are working on that now. We think we can start

accruing benefits from that in the latter part of the year.

Kevin, expand on that a little bit or -

You are correct on the

fact we are basically taking on the two-year initiative

component of what Best Buy did for process to profit.

The biggest benefit actually comes in year two and then

our ability to execute beyond that is on the table for us

to continue. Certainly from the standpoint of what we

are doing now, we are working on advertising effectiveness,

number one. Number two is assortment management and number

three is inventory in-stock, which Best Buy does a phenomenal

job of advertisement as well as regular in-stock. The

opportunity of Future Shop in the Canadian marketplace

to improve that is substantial. We are in the low 80s

as far as in-stock on some regular promotional goods.

The ability to take that into the 90s like Best Buy has

an upside opportunity for us and the assortment of life cycle

management, which we believe will improve operating margin

substantially.

Great. I could follow

up on the domestic business, gross margin domestically relied

the promotional intensity that you spoke about. We have

seen some of the 18-month and 24-month no interest financing

that has been rocked. At what point would this start to

weigh on grosses and how - obviously, no interest financing

is cheaper for you, is this something that has no cost at

this point? We shouldn't focus on historical paradox

for promotional extremes?

I think the financing

vehicle is probably one of many vehicles that we use,

Matt, in terms of the promotional strategy. Obviously,

with interest rates down, it probably in the past quarter,

anyway, we have used it more extensively. Again, it may

vary by month, depending on the promotional climate out

there in terms of the vehicle we use for financing and rebates

and pricing, whichever is the most effective vehicle, we

will use that vehicle.

Do you have sense this

is a lever likely to be used for protractive period of time?

That is what Matt wants to get his hands around. Is

there extended use of it?

Go back to what Al said.

This is a lever we use. We understand

what happens to levers frequently and it is just a technique

for us to go to market when appropriate.

Another

thing that is important for you to know like follow to Peter's

question. We are not going to withdraw from the use of

any of the levers we feel is important and appropriate to

make sure we are in the game on each and every sale. So,

we are not letting anybody slide in anywhere with anything

that we are not willing to respond to or ready to respond

to.

Got you. Thank you very

much.

Thank you. Our next

question is from Allen Rifkin of Lehman Brothers.

My congratulations and

best of luck, dick in future endeavors. Taking your comments

with respect to Peter's question together with Darren's

comments on the gross margin drivers. Darren did not mention

in his comments that increased promotional would have a

detrimental affect on margins in the second quarter. Do

you think the near-term outlook with respect to promotional

activity may actually subside as compared to Q1?

The best

way to go at that is generally to suggest that it is only

when promotional activity does not carry with it appropriate

financial benefit or performance from those using it that

they go back to the toolbox to look for new and different

ways. That is why it was such an important question is

if disproportionate gains were made from extraordinary offers

and unresponsive, you can bet they will continue. The very

fact our margins continue to strengthen certainly has a

lot to do with the mix of product that we sell. It also

suggests we know how to get to the category of product.

This is, of course, digital offerings.

That is something we have that the purest discount channel

does not offer and the ability to connect it up and integrate

it with existing products, it continues to be a competitive

advantage for a store like ours. Our sense is that if others

need to stimulate the market, disproportionately in the face

of whatever their activity might be, it is incumbent

on us to make sure we are in step with what happens in the

market to make sure we hang on to customers and remain the

preferred store.

I think we have enough

tools in the tool kit to have the flexibility to move around

here and if it does get promotional, I think we have proven

in the past, we are pretty successful at if margins are

impacted, we are able to offset that with increased revenue

so the bottom line impact is pretty negligible. If

it is promotional, we are confident we can drive more revenue

to offset whatever margin dilution there may be.

Okay. One follow-up,

if I may. Now that I have had a short period with the

impact of reductions in the hardware prices on the part

of Sony and Microsoft, what is your take on the net benefits

to the business with respect to tirades and traffic and

what-not? One more question, if I may. Do you care

to quantify the diluted effects of Musicland the same way

you did Future Shop in Q1?

Mike, take the first

part relative to pricing on the video gaming hardware

and (inaudible) respond to the second.

The video games of today

are extensive features and solutions for customers. We

have seen not only just the international shopping consumer

demand, but continually increase consumer demand after the

price drops. What is driving, we see people buying more

software and accessories. This bows well for the upcoming

season. We are excited about it. It has injected life

into it. We have seen a lot of third-party software people

talking about it and bringing to market a new software

releases, which encourage people to buy more and more product.

As to the second question,

the way I would answer it is in my comments, I said we

expect a 4-cent diluted impact on Future Shop process to

profits launch in Canada,s well as investments to convert some

of the rural On Cue to Sam Goody and making remerchandising

adjustments in the second quarter collectively that is 4

cents. If you recall, I think Al quantified the Future

Shop impact as one and a half cents in this first quarter.

So, you are good with math. I think the difference between

the two is 2-and-a-half cents. I want to make sure I

characterize. That would be the investments to go with

it, including moving the lever mix to a fully assorted

DVD gaming offer.

All right.

Next question,

please.

Our next question from

Colin McGranahan of Sanford Bernstein.

Good morning. Question

is inventory levels. The levels were overall just a little

bit higher than expected. It looks like sales exceeded

our expectations and exceeded your plan. Can you comment

on the quarter ending first quarter inventory levels and

how you feel about the inventory situation going forward

in the second quarter?

Absolutely.

That is a great question. So, average store inventories

grew a little over 10 percent in the first quarter. At

first glance, that might appear concerning. What you should

be aware of is right at the end of the first quarter, we

had done a system conversion to our new retech management

system. What we did in anticipation of that is to make

sure that we brought in some extra inventory in the event

and others have had challenges with ARP conversions in the

past. I am glad to report, as we sit here today, we don't

see those challenges. We put inventories in the store

in the event there were challenges.

So, we are comfortable that even though the inventory grows,

we will work through the inventory through the June-July

time period and be back on plan. Essentially, our trailing

turns are still at 7.4, which is where we wanted to be.

Thank you. Secondly,

doing my math I think I came up with 2-and-a-half cents

that is 13 million from Musicland dilution in the second

quarter. Was that a similar amount in the first quarter

and overall for the year, you had said you would make a

$30 million investment in Musicland? Are you on

track there? If it was 2 and a half cents, that is 26

million so far first and second quarter, is the timing being

moved into the first half of the year?

The math is not

not far off. We have not changed our expectations to

the overall 40 million dollars of incremental year over

year investment in the business.

Sufficed to say, in

the Musicland and Future Shop initiative, there does exist

a miss-balance in the seasonality of the profitability

generated through both chains not dissimilar from Best

Buy in our earlier days before we were able to land our

process to profits initiative. Clearly, we are working

side by side with both management teams to put the kind

of competency and processes in place to balance out what

happens throughout the course of the year. Obviously, reduce

the losses that occur more traditionally in the first part of

the year and in large, the profitability that occurs in

the back half of the year. That is the nature of the

business.

We have found ways to get at that meaningfully and we think

given a bit of time, and obviously understanding from the

leadership of both groups, that we are clearly going to

land solidly on our feet there, as well.

Great. Thank you very

much.

Next question,

please.

Thank you. Our next

question comes from Susan Quilty from Morgan Stanley.

If I could clarify the

last point. When you look at the full year guidance, you

are talking about 40 million in incremental investment on

Musicland. I know you said you expected the contribution

to be 40 million less this year. Is that all investment

(inaudible) at Musicland?

Yeah, the

short answer is it is the combination of the evolution of

the mix. When we quantified 40, we said we would lose

profitability as we intensify DVD and video game offer

in the Musicland business. We should be essentially cycled

on that at the end of the second quarter, maybe a little

bit as we go into the first half of the third quarter.

The second piece is going to include the investments that

are - we are going to make in remerchandising, continuing

to transform 250 Sam Goody mall locations and then the

On Cue locations, making the investments to convert those

from On Cue to Sam Goody rural locations.

When you are giving 4 cent

dilution you talked about in the first and second quarter,

that is also including the mix-related shift in addition

to the remerchandising expenses and the actual start-up

expenses you talked about in Canada?

That is correct.

If we look at the full

year and you are factoring in a total of 40 million dilutions

from Musicland, what would be the similar number for Future

Shop? From an investment perspective?

We have not

quantified that at this point. We have not shared that

publicly. As we get - move through the year in terms

of the Future Shop business, and finish scoping some of

the process to profit work, as well as the benefits that

go with it, we will finalize those estimates.

Okay. Is it renal to

assume the recent trends would be not dramatically out of

line with those kinds of numbers going forward?

That is correct.

Okay. One last question,

if I have time. In the digital T.V. category, you talked

about it being a third of overall T.V. revenue and price

points being important. Can you give us a sense of where

the average retails are in the category and where they will

be at Christmas this year and then what you think the entry

level price could be at Christmas this year? That is

it for me.

Michael, can you give that end?

On the digital T.V. and

it may be hard to quantify the average price. We have

seen digital move down into smaller screen sizes and flat

T.V.s move into smaller sizes. We see changes in prices

and projection T.V.s. It is in the neighborhood of 10

to 15 percent if you compare year over year. We do see

many more offerings with many more features. We have a

phenomena of people walking into the store and looking at

the picture availability. They are excited about home

theater being in homes. We see an increase in average

selling price in the television area.

Any sense,

Mike, for the holiday season?

I think the holiday season

will be relatively stable. The new models are coming out

now. We are seeing price drops for new models coming out.

We think prices will stay about the same as where they

are now and where we are entering new products.

Is average retail for digital

T.V.s are above $2000 or below that?

Below that, now.

As much as screen-sized?

Screen size plays a lot

of it. They are up to $1700. The $2000 barrier

has been broken with a number of offerings from

multiple vendors.

Thanks.

Thank you. Our next

question is from Mark Rowan of Prudential Securities.

Thanks and good morning.

Couple of questions. First, on performance service plans,

Darren, what percentage of revenues came from PSPs in this

quarter? Do you expect any change from a mixed shift or

anything that you are doing in-store as far as initiatives

going forward for the rest of the year? Second, on

expansion, if you could update us on your thinking on that,

how many stores as far as Future Shop? How many stores

Best Buy do you think you can grow to in Canada? You

are thinking on Europe, what would you be thinking being

doing there? Thank you.

We don't

give out those numbers. What I can tell anecdotally,

when products like digital cameras and digital televisions

have the growth rates we have been experiencing and given

the complex nature of those benefits products, there is

benefits in the PSP arena we are seeing in the numbers today.

So, the growth in the digital products certainly

is benefiting the PSP business.

It is also

effective add-on to include the fact that we have developed

the process and sharpened the focus so effectively in our

retail sop platforms that literally, new stores come onboard,

the new styles assembled to launch these stores, literally

get up to speed on the point of time in which we open.

So, the ratio relationship of our sale on many of these

accessory service warrants, extended service or connection-

type opportunities literally hit the ground at about the same

rate that of an up-and-running store. It is in the culture

and into our process. We, of course, draw immediate gain

and benefit from its impact.

As far as the international activity or Canadian activity.

The overall target for Best Buy over time is to open

somewhere between 65 and 75 Best Buy stores across the

country. At the same time, we would expect Future Shop

to grow probably another 15 to 20 stores in total. Some

of that will actually be the expansion of smaller stores

into a larger footprint. Others will be just newly introduced

stores in markets where they have not gained fully the kind

of saturation that is necessary. So, it probably is going

to lead us somewhere around 120 stores in Canada and 65

to 75 Best Buy stores in Canada.

With respect to the international marketplace beyond the

Canadian opportunity, we have really just begun to look

seriously at each of a wide variety of new market

opportunities. We are drawing down

information about the European marketplace.

We are exploring the same kind of information relative

to competition market potential in Asia, as well as South

America. This is the process we are just underway with.

We need to learn more about the consumer attitudes and

behaviors market by market, versus what we have known and

become accustomed to in North America.

We have made an initiative to appoint a special director,

who has joined our board, and actually lives in Europe

and knows a considerable amount about the business, the retail

business in general, not just consumer electronics, a wide

variety of countries. He is engaging in the development

of a lot of facts and information to help us and guide our

thinking about what this market opportunity may or may not

be. Our sense is we have so much work ahead of us here

in North America, not only the ability to land the Best

Buy strategy in Canada, as Allen pointed out, but to

continue to refine and enhance the Future Shop initiative

to get the operating margins more closely aligned to what goes

on at Best Buy. We have this entire magnolia strategy, which

is only appearing in some increased form in San Francisco

and ultimately we expect California. Allen mentioned

the new 20,000 foot prototype we are going to be launching

later this year for the expressed purpose to try to determine

how many additional smaller communities might we bring all

four of our offerings. We still have several hundred

Best Buy stores to be launched throughout the United

States.

So, we have a full plate right now of new stores to open,

new business to create and so, we are taking it a step at

a time. Our commitment to our employees, as well as to

our shareholders was to maximize the returns on the capital

we have deployed and the investments we have made. That

is what we have learned to do reasonably well and our intent

is to stay after that barometer in a meaningful way.

Thanks. One other question,

if I could on the music business. It has been a tough

business for everybody and everyone has just kind of throwing

up their hands and saying it is digital downloading and

there is not a lot of good acts. What is your thinking

going forward on that? Do you have contingency plans

if the business does not pick up in the next 12 months,

would you devote more floor space to you? Are you already

doing that?

We are going the other way.

This is a wonderful business. It is theater for our

strategy. I would like to maybe ask Kevin Freeland to take

a couple of minutes to tell you about the way Musicland has

worked through for improved traction in the mall operation.

I can tell you we are taking a tremendous amount of direction

from their lead in determining the importance of getting

our departments in our stores right. Even though there is

erosion in the business from certainly a couple of different

areas of opportunity, there is plenty of business to be

done at retail. We fully intend to capture an increasing

amount. Kevin, add color to what we are doing.

The combined companies

have been working over the last several months looking at

the music business, what we sell traditionally within our

stores, the businesses we are doing on-line, both physical

product and the paid down mode business on-line, as well

as looking at the broader music business, including other

channels of profitability, like live venues, concert venues,

and the like.

At this stage, the combined teams, the retail division

teams, see an opportunity that when there is a significant

change in the business, like what is going on in the music

business today, that puts an opportunity out for a growth

in our position. So, we, as a team, are committed to that

business. It reminds us quite a bit of where we were in

PCs a number of years back and by staying committed to

a business that at times look troubled. Best Buy emerged

as dominant leader in retail. So, we are at this point,

looking at what strengths we have, what new competencies we

need to build and we intend to hold our lead market share

position. We intend to grow it.

Thank you.

Thank you. Our next

question is coming from Dana Telsey of Bear Stearns.

Good morning and congratulations.

Can you comment more on the private label computer area?

How big do you expect it to be? How many skews have

you added? Are there other categories where you would

add private label to? Comment on the appliance categories.

I was in the New York store this weekend, it was packed

and the sales were terrific.

Let me ask Mike London,

who rides over the top of merchandising efforts to give

you initial thoughts around the VPR matrix and appliance

business.

As far as VPR matrix goes,

it is a limited selection of SKUs. We use it to fill in

some spots where we think it is appropriate and we can offer

value. I think we have always said we expect it to compliment

branded name products and provides appropriate niches

we can fill. We are learning the process as we go along

and trying to understand it, it is complicated. We are

building competency around developing an understanding of

how you bring a product like this to market. We are excited

about our back to school offer. I think we have just been

in the business a short period of time. I think the VPR

matrix brand, as you see today, is limited to the PC area.

As far as the appliance business goes, we talk body our

results. I would tell you, we are working extremely hard

to satisfy our customers in the in-store experience and

converting customers as quickly as possible and making the

appropriate invests to do that.

Coming back from the kitchen and bath show last April,

having business in the business a number of years, there

is probably more new product at that show, than the last

10 shows together. We are excited about the future of

appliances as they become so-called smart. We think this

is a great opportunity for Best Buy and an area where

customers will look for us to be in a leadership position.

Thank you.

Thank you. I think

we are running out of time here. With that, I would

like to thank each and every of you who has so faithfully

participated in our quarterly conference calls and attended

the various conferences that we participate in around the

country. I would like to leave you with some thoughts.

I honestly, truly and genuinely believe we are at the

top of our game in a wide variety of key areas.

Our commitment to our shareholders, as

well as our employees, is that we are going

to continue to leverage many of the core competencies we

have developed as a company over the last several decades,

not the least of which is the yield in our process to profits

initiatives. Of course, our standard operating process of

procedure that is take place at retail stores. We turn these

structural capital and we think one of the key differentiating

benefits we have really is our ability to create best in

class processes.

This is obviously what we are attempting to land solidly

in the new acquisitions we have made over the last year.

We are also really strategically more strongly linked

with our key suppliers in building partnerships of strategic

importance going forward. You are going to see and hear

about new exciting initiatives as the year rolls along, with

many suppliers who are helping us get to market quickly at the

right price and with the right offer. We are continuing

to invest in new development. A special team

of people are essentially dedicated to creating new solutions

that can be packaged and sold on the floor of our stores

with continuing improvement and profitability. Our strategic

planning teams solidly focus on providing for us stimulating

new ideas on how to think about our business over the next

five years and up to 10 years.

So, we are all about market share. We are about building

customer preference. We are about improving execution.

And, as I hand the mantel of responsibility as the C.E.O.

over to Brad, I have never been more confident in the

wonderful talents that a team has been assembled and the

passion that each and every member of this team has for

building us to another level of standard performance. Thanks

again for all of your support and all of your commitment

to what we are trying to do here. We feel good about it.

I am confident over time that you will also continue to

share in that same confidence.

Thank you very much.

Thank you for participating

in this morning's call. Again, this call will be available

for replay by dialing 973-341-3080 and entering the pin

of 3328297. You also can hear replace www.bestbuy.com by

clicking on investor relations and presentations. If you

have additional questions please call me, Jennifer Driscoll

at 952-947-2350. That concludes our call.

Thank you. That concludes

today's teleconference. You may disconnect your line at

this time and have a great day.