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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to Best Buy's conference call for the first quarter of fiscal 2007.
At this time all participants are in a listen-only mode.
Later we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS]
As a reminder, this call is being recorded for playback and will be available by 12:00 p.m.
Eastern time today.
If you need assistance on the call, please press star zero and an Operator will assist you.
I would now like the turn the call over to Jennifer Driscoll, Vice President of Investor Relations.
- Vice President Investor Relations
Thank you, Jackie.
Good morning, everyone.
Thank you for participating in our first quarter conference call.
This morning we have three main speakers, Brad Anderson, CEO, who will provide his context of this quarter's results.
He'll also explain the three philosophies that define our customer centricity work at Best Buy.
We have Brian Dunn, President and Chief Operating Officer, who is joining us by phone to describe how we're changing, how we make decisions about resources and to give you an update on one of our strategic priorities for the year.
And last, we have Darren Jackson, Executive Vice President of Finance and CFO, who will cover our quarterly results and our fiscal 2007 outlook.
As is usual we also have a broad management group here to answer your questions at the end of our formal remarks.
I'd like to remind you that comments made by me or by others representing Best Buy may contain forward-looking statements which are, of course, subject to risks and uncertainties.
Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations.
As usual, the media are participating in this call in a listen-only mode.
Also, the call is available for replay in case you miss a portion of the call.
Let me give you the replay instructions.
Simply dial 973-341-3080 and then enter our personal identification number for this call 7456420.
The replay will be available from approximately 1:00 p.m.
Eastern time today until midnight on Tuesday, June 20th.
I'd like to remind all of our callers that we plan to take your questions after we conclude our prepared remarks.
Please limit yourself to one question, that way we can include more callers in our Q&A session.
Consistent with our approach on prior calls, we'll move to the end of the queue those who were able to ask a question on last quarter's call.
And with that, I'll turn the call over too Brad Anderson, Vice Chairman and CEO, who will begin our prepared remarks.
- Vice Chairman, CEO
Thank you, Jennifer.
I thought I'd start off with trying to put some context around our results.
We've been saying the transformations are not linear, and I think we've just illustrated it with this first quarter.
We're very proud, obviously, of the 38% earnings increase and it's obviously significantly better than we expected to do.
What I'd like to do is put it in some into for us, the core story for a long-term shareholder is what we're trying to do as an institution and really kind of give you some context about whether we're making progress on that core agenda.
The Company, when we started this transformation, and the word we're using in terms of transformation is a fundamental change in where we're going as an organization, really came at it from two -- with two fundamental challenges.
First of which is, we were running to the end of the horizon on the growth strategy that we'd used throughout the 90s and the first part of 2000, and the Company has a history as a growth culture, and one we strongly wanted to retain and affirm.
Second is, we knew that large enterprises have enormous challenges with growth.
As we looked into why a large enterprises have challenges with growth, we thought there were really essentially two core problems, one of which is that the organizations have trouble using the insight of the people with the best context in the organization which are people closest to the customer.
They have trouble using that for a very good reason which is that the bigger the Company gets, the harder it is for people in those jobs to actually understand enough about the organization to be able to use their input in the very ways that help refine and grow a company.
And as a smaller company that had used that insight regularly to grow, we knew this was a major problem.
We thought that there was a hypothesis, that is a central hypothesis we're using as an organization which is that at the very point in time we are selling literally the tools that provide the, potentially provide the information to the people with the greatest insight were the people in our organization who are closest to the customers to be able to overcome that challenge and be able to provide -- to use that creativity to allow us to grow and reinvent the Company.
Sounds like a relatively complex point of view.
It's actually very simple.
One part of it is that people with -- the people closest to the customer have the greatest context and the best ability to create.
The second part of it is that people -- one of the other things that happens is if you don't get a chance to be heard, your incentive to do great work diminishes.
We believe that the potential to disseminate information and be able to hear our employees better, using the very technology that we sell, provides us with an enormous opportunity to have a growth engine as a large enterprise that has been very hard for other companies to produce.
So as you watch our story as this transformation moves forward, we suggest you kind of look at whether or not the evidence is that we are able to do this.
We're still at the very early stages of trying to accomplish this.
What we have been able to do at this point is define specifically the core measurements for us that's going to tell us whether we're making progress or not, and the first of these directly connects to what I was talking about before, which is the first is that we are harnessing the power of our employees.
That there's evidence that we're harnessing the power of our employees because we are using their particular insight in growing the enterprise.
So core measurement in terms of what kind of progress are we making in that front, and as you hear us talk about, as Brian and Darren discuss the kind of progress we've made in the first quarter, I think you'll be able to see evidence that we're beginning to be able to use that insight very effectively and that it's also effective in terms of the engagement of our employees.
The second is that we're treating each customer uniquely and honoring the differences between our customers.
We've got to stay in close contact with the customers, obviously, our employees at, the closer our employee is to that contact point the better.
And we're, by providing them with increased financial information about the results and more information about what we're trying to achieve, we believe that we can make more consistently unique offerings to our customers.
The third is that we're attempting to meet our customer's unique needs from an end-to-end perspective.
We know that our products are very complex and that the challenge of sorting through and making the product more - simpler and more fun to use is a core challenge that we're taking on as an enterprise.
Those three core things you'll hear us talk about again and again, an engaged employee that's helping us recreate the enterprise, treating each customer as unique, and third, trying to meet the customer's needs from an end-to-end basis.
In conclusion, this morning's earnings report shows a couple of things.
First it shows we're reaping the benefits from our prior investments in customer centricity, and second, our bottom line shows that we are redeploying our investments to fund initiatives that will fund future growth.
As we grow, we intend to apply the three core customer centric philosophies across all of our new investment and strategy with careful adherence to these philosophies that we believe will not only give us focus but also reduce the risk of new adventures.
An example of this for us is the investment we're making in China where had planned to apply the same lens I talked about earlier in the Chinese market and one that we think will give us a significant competitive advantage similar to the advantage we've had in North America.
With that I'd like to turn it over to Brian Dunn so Brian can talk about a couple of specific examples of how we're beginning to harness this advantage.
Brian?
- President, COO
Thanks, Brad.
Good morning, everyone.
I'd like to use my time on the call to give everyone a real life example of how these three philosophies shape the specific company priority.
But before I do that, I'd like to share with you my point of view about our work to lower SG&A expenses, what it's really about, and what it's not about.
Last year we accelerated customer centricity.
We planted seeds in every garden where we saw the potential for growth.
At the end of the third quarter we had an SG&A bill that showed it.
We also had a rich landscape of growth opportunities.
We told you that we would prioritize our growth initiatives and make choices.
We've done that.
Our choices are reflected in our six priorities for the year.
We also said we'd focus on efficiency and effectiveness.
In the fourth quarter we started to redeploy resources and this work has gained momentum in the first quarter.
Cost cutting gets the headlines, but I want to be clear about this.
This work is not about cutting costs.
It's about focusing our people and our financial resources on the things that matter.
It's about harvesting resources from areas that have matured so that we can reinvest in growth initiatives with higher potential returns like Geek Squad services, like small business capabilities, like total solution selling and international expansion.
That's what it's about.
It's about figuring out what we need to do to differentiate Best Buy and grow the Company over five, ten, fifteen, twenty years and beyond.
It's about freeing up capacity to fuel new initiatives and continue our long tradition as a growth company.
One more thing this work was not.
It was not a top down initiative.
In the true spirit of the philosophies Brad just discussed, we engaged our employees in the process.
People from all parts of the Company and from all levels of the organization.
People who are close to the customer.
It's easy to say, but I can back it up with an example.
I'd like to tell you about just one of the internal groups that played a key role in the deploying our resources more effectively.
It's a group of store managers, general managers, assistant managers and district staff members who called themselves "The Watchdog Network."
They believe that if we just listen to each other, we can come up with better plans that satisfied headquarters and worked in the field.
That's how The Watchdog Network approached their work, and they came back with some really powerful, really simple ideas.
At their recommendation we made some changes that those of us at headquarters might not have considered.
We might have even ruled some of them out.
The Watchdog group felt that most stores could operate with five assistant managers rather than seven.
They recommended redeploying the headcount to fund new supervisory positions at Geek Squad precincts, which we really needed given the growth in our services business.
Their recommendations also let us preserve funding for customer facing employees.
I appreciate their work.
I applaud it, and I'm pleased to publicly acknowledge them for it.
Next, as I alluded to earlier, I'd like to give you an update on our progress with our strategic priorities, but rather than run through a laundry list of all six, which you can read about in our Annual Report, I'd like to focus on one strategic priority.
This one, like the others, was shaped by and reflects the three philosophies of customer centricity Brad just described.
The strategic priority I want to talk about is focused on bringing a differentiated home theater experience to more customers.
We told you that we intend to increase the number of locations with Magnolia Home theater this year to about 300 stores, up from 127 stores today.
But here's something we haven't told you.
This priority goes well beyond Magnolia Home Theater.
It's also about improving the entire Best Buy home theater experience at these locations.
We didn't start out with the idea that we would make over our whole home theater department, but that's the point.
And what is special about customer centricity.
Here's how it went.
When our home theater employees saw that we treated customers uniquely inside Magnolia Home Theater locations, saw us meeting their unique needs end-to-end, they had a natural question: Why would we offer a home theater experience anywhere else in the store that's any different?
And they made another important observation.
They noticed who was coming into the Magnolia rooms.
It wasn't just the affluent, early adopter male customer we'd expected.
Time-starved suburban moms loved the Magnolia rooms.
Our young entertainment enthusiasts raved about it and the value oriented family man aspired to it even if he eventually made his purchase in the Best Buy area.
So hundreds of Best Buy home theater employees were making their own observations, drawing their own conclusions about what we should do as a company with this part of our business.
We had an opportunity to listen to each other and to our customers, and we did it.
Let me back up for a minute to remind you of the history.
When we acquired Magnolia in 2000, we saw the accolades and the industry awards Magnolia won year-after-year, but customer traffic was declining and earnings were below plan.
I think that blinded us a bit so we didn't fully appreciate the growth opportunity inside Magnolia.
We didn't recognize that other customers would appreciate what Magnolia offers and, frankly, we doubted vendors would let us bring the business inside Best Buy stores.
And then coincidentally, we launched ourselves into customer centricity and a Best Buy team was assembled to get a better understanding of the affluent early adopter customer.
Somehow the people of Magnolia got wind of this work.
They asked, hey, you own a company that's been doing this for decades, can we talk?
The Best Buy team listened and adapted.
That was the beginning of what later welcome the Magnolia Home Theater concept.
But it was more than just that.
The people who led that first team, people like Jim Sweet and Julie Gilbert, Sean Score and Dean Kimberly gave us all a blueprint for how a diverse team of people can get things done in a great big company.
And that brings me back to my point.
After we launched the first Magnolia Home Theaters, our customers and our employees were both screaming for a better home theater experience at Best Buy outside the walls of Magnolia Home Theater.
And their voices are leading us down a path different from the one we would have traveled.
In fact, while we're scaling today is substantially different from the experience we initially tested.
What we're scaling today at 200 more stores this year, is home theater how customers want to experience it, and how employees said to do it.
It is the quintessential Magnolia Home Theater experience coupled with an equally compelling but more accessible experience in the home theater department of Best Buy.
We have created an end-to-end powerhouse, the right brands and the right presentation.
We believe it will appeal to a broader range of customers and allow the creation of a unique, customized solution for each individual.
We have a terrific story unfolding.
I've described what's happening in home theater.
It's just one example of how customer centricity works.
We have the same opportunity for collaboration with other parts of our business, Pacific Sales, Five Star appliances, Best Buy Canada, Best Buy for Business, Geek Squad.
Customer centricity keeps us nimble.
It keeps us connected to our customers.
All we have to do is to keep listening to those closest to the customer and focus like a laser on those last ten feet where it really counts.
With that, I'll turn the call over to Darren.
- EVP Finance, CFO
Great.
Thank you, Brian.
Good morning, everyone.
Our year is off to a terrific start as our top line and our bottom line exceeded our expectations.
This is three years in a row that our first quarter results have significantly outperformed our expectations.
Starting with our top line our revenue grew 14% versus last year to $7 billion.
The combination of new stores, a solid 4.9% comparable store sales improvement and the acquisition of Pacific Sales supported the revenue gain.
The 4.9% comp was modestly above our expectations.
We had expected a slow down from the fourth quarter's 7.3% comp run rate on account of macroeconomic factors including higher interest rates and gas prices, yet our international segment showed no signs of slowdown.
They generated a 7.1% comparable store sales gain for the first quarter.
Similarly, our dot com business posted a gain of over 30%, and our high-end Magnolia standalone stores posted a 22% comparable store gain in the quarter.
The gross profit rate declined a modest 10 basis points in Q1 compared to last year.
In the first quarter of last year we enjoyed a stellar 150 basis point increase in our gross profit rate.
We expected a 10 basis point improvement in this first quarter.
The good news is we continued to see year-over-year structural gains from Geek Squad, sourcing and other supply chain initiatives.
The bad news is the appliance business experienced a significant decline in its gross profit rate.
Overall, the decline reduced our Company gross profit rate by nearly 30 basis points in the quarter.
A combination of more price competitive environment and higher product costs related to steel accounted for the erosion.
Overall, we are content with our gross profit rate for the Company in the quarter.
Gross profit rate for the balance of the year is more likely to be flat or down modestly.
Our revised outlook is based upon the mix of product sales versus a step change in the competitive environment.
We anticipate offsetting the gross profit rate impact with sales volume and SG&A savings.
The story for the quarter was SG&A rate.
The SG&A rate improved 110 basis points despite severance and restructuring costs of approximately $26 million, or $0.03 per share.
These costs added nearly 40 basis points to the rate for the quarter.
We cannot cut our way to prosperity, but we certainly are in better shape to make the trip.
The savings came from across the pea patch.
The principle drivers of the savings were advertising, outside service reductions, occupancy cost savings and reduced levels of travel.
Collectively, these cost reductions accounted for 90% of the savings.
Equally important, we protected our investments where they matter most, closest to the customer as we kept our store payroll and benefits rate essentially flat year-over-year.
We systematically edited our SG&A run rate over the last two quarters while delivering sales above our expectations.
That's tough to do, and I want to thank all of our employees for their focus and execution which delivered these results.
So what does the balance of the year hold for the SG&A rate?
Originally we guided to 30 to 40 basis points of SG&A rate improvement for the year.
Clearly, we are more bullish on meeting or exceeding the high-end of our expectations.
Some may ask why not 100 basis points for the year?
It's pretty straightforward.
The last two quarters have been about surgical editing and reallocation of costs.
The balance of the year will be a combination of further editing and investing so we would expect the leverage to moderate.
In addition, we constrained certain strategic areas in the first quarter, a pattern we expect to amend during the balance of the year.
Specifically, our material investments will land in the second and third quarters as we scale our expanded home theater solution to approximately 300 stores, add elements of Best Buy for Business to approximately 220 stores, add to our service capabilities and further invest in our advertising related to key initiative launches.
We are deploying our resources to maximize the spaces that are important to our customers.
As flat panel TVs become increasingly popular and more affordable, we're investing in the home theater experience which Brian described earlier.
As consumers begin to learn about and ultimately adopt Vista, we're also investing in service capabilities to help customers maximize and customize this new platform.
As young technology loving customers gear up for three new gaming platforms, we are investing and building out great experiences in our store that capture that opportunity.
So I know many of you are pushing the phone buttons right now to ask what about the economic outlook.
So I want to give you our perspective.
In short, the landscape has not fundamentally changed since the start of the year.
Our fiscal 2007 guidance that we gave a couple of months ago contemplated mixed signals that we saw in the economic landscape.
Gas prices, interest rates and housing starts were headwinds then, and they are today.
At the same time, we have tailwinds from the unemployment level, consumer confidence and a remarkably strong product cycle.
As Ron tells me, wants can be more powerful than needs sometimes.
We cannot forecast or control the external factors, but we are obviously very encouraged by our results thus far and are making investments to capitalize on what we can control and what customers are prioritizing.
To conclude, we are encouraged with the start to the year.
Candidly, we are ahead of where we expected.
Practically, we remain upbeat about the balance of the year.
Our strong start gives us more flexibility as we evaluate investments for the remainder of the year.
Realistically, we think it's too early in the year to change our view on earnings.
We have more than 80% of the year still ahead of us.
More importantly, we are not changing our focus on delivering results that meet or exceed our expectations for the year.
With that, we'll now take questions for our investor audience.
Operator
Thank you. [OPERATOR INSTRUCTIONS] Your first question is from Matthew Fassler of Goldman Sachs.
- Analyst
Thanks a lot and good morning.
And Darren, thanks for that detailed accounting of the quarter.
- Vice Chairman, CEO
Good morning, Matt.
- Analyst
Good morning.
How are you?
I'd like my question to focus on SG&A.
In the press release and in your commentary, you really called out two specific areas.
One was advertising and one was strategic investments.
Those seem to be the biggest line items other than simple expense leverage from better sales that drove the improvement.
Can you help us understand the relative importance of each of those and on the strategic investment side centricity formats I guess in particular, sort of understand the magnitude of the decline year-to-year in the first quarter and perhaps how you're spending on those initiatives in the middle of the year will compare with where they were a year ago?
Yep.
Great, Matt.
- EVP Finance, CFO
Matt, a way it think about our SG&A rate, I'll talk about the first quarter specifically is that if you add back the restructuring charges, our SG&A rate leverage was 150 basis points, and a way to think about it is a third, a third, a third.
A third of it principally in the advertising area, a third of it due to the sale leverage in terms of productivity gains we saw in the business, and third, in terms of absolute cuts that we made in places like outside services, travel, and some occupancy cost areas.
That's how it's made up.
I think one of the things that doesn't necessarily come out when you just look at the SG&A save that I think is critical to understand, is that what we saw in the quarter is a pick up, a sequential pick up that we've seen from the third quarter to the fourth quarter to the first quarter now in our overall labor productivity.
You can see that.
That shows up in the top line when we do nearly a 5% comp and we're able to moderate some of our advertising.
So I think there was a healthy balance between making some of the adjustments that we made and seeing the productivity pick up sequentially quarter-to-quarter as we finished out this first quarter.
- Analyst
If I could follow-up on that answer with two real quick ones.
The one -third of the reductions that related to advertising, are those going to be reversed, if you will, or at least returned to something more like last year's run rate through the remainder of the year since you talked to kind of short-term cuts, if you will, in the release?
And secondly, among the three items you gave, you didn't specifically talk to format conversion.
Is that the kind of locked into one of those three buckets or is that separate?
- EVP Finance, CFO
Yeah.
So that was six questions, Matt.
So I'll try to break that down.
The advertising I would say, Matt, I don't think we should get locked on a permanent 50 basis point saving.
If you look at strategically where we're going to make our investments in the second and the third quarter in home theater solutions, the growth of Geek related to Vista and those capabilities, you would ask yourself should we be moderating our advertising and applying it to the quarters with the launch of the three -- the combined launch of the three game platforms, you would expect us to be moderating those investments consistent where we see opportunities to support evolutions in the brand, evolutions in launches, and where we see bigger opportunities as we go throughout the balance of the year.
So that's one.
I wouldn't write down say 50 basis points through the end of time.
We're going to save a chunk of that because the team is finding different ways to apply advertising dollars that are more productive, and we're going to strategically use that consistent with our strategic investments across the balance of the year.
Two, because there were six questions, I.
Format conversion.
- EVP, Customer Business Groups
This is John Walden.
Maybe I can help with that question.
We've talked before about how we've moved from a smaller scale adoption of customer centricity where we deployed it in waves of stores where we invested in converting specific stores, and that made sense early because we could measure results compared to the balance of the Company.
We can no longer do that because we're now touching virtually every store in the Company with some customer centricity conversion.
Every store is trained on customers they should focus on.
Every store has been trained on how to operate with a model that talks to customers and is conscious of what their needs are, and as we deploy Magnolia Home Theater, other home theater experience, upgrades, Best Buy for Business, services changes, we're pretty much touching every store.
So we no longer are converting individual stores and measuring the cost the way we did last year.
We're really now adopting every store as a customer centric store and deciding which solutions to deploy based on which ones have demonstrated success in our customer labs and which ones we think will be more successful out in the field.
We're also doing initial work on new segments as well.
- EVP, Customer Business Groups
That's right.
We have to look at customer centricity different.
It's the whole chain now and every store.
It's not certain stores versus others.
Operator
Thank you.
Your next question is from Brian Nagel of UBS.
- Analyst
Good morning.
My question, I want to ask a question regarding the demand environment for the flat screen TVs in the first quarter.
Over the past few weeks we've had a few reports from various manufacturers that talked about potentially weaker demand but your numbers today still showed demand is strong.
If you could just kind of articulate upon the trends in the quarter to help us kind of square up with what we're hearing from both you and some of the manufacturers overseas?
Thanks.
- EVP, Global Merchandise Manager
Hi, Brian, this is Ron.
I'm surprised it took so long to get to flat panel today.
We think, obviously, there's been some shift in worldwide demand.
LG made an announcement, AU made an announcement.
The two big components of those announcements really are around I think smaller screen flat panel aimed at the computer market, so you think about the global desktop environment on one side of the equation, and probably a little bit bigger expectations than would have been reasonable in the European market from the other side of the equation.
We are still, as you've already noted, seeing significant growth in flat panel.
We are on or above our plan and our expectations in the flat panel space.
We're, as Brian spoke about on the call, continuing to really lean into this cycle with the acceleration of our Magnolia strategy, the 300 stores by the back half of this year.
And finally, I met personally with one of the largest global producers, the head of factory and the global business for one of the largest LCD producers yesterday, and as larger panels come on line, there's still some struggle to meet demand on the largest panel size.
So I think you're seeing a blend of things going on here.
Fundamentally, this is a market that is growing extremely rapidly and we're working hard to stay ahead of the curve on it.
- Analyst
Just to follow-up on that, as far as your business went, did you see any, as far as price declines out of retail through the quarter or any changes in margins?
Did anything deviate significantly from your plan there?
- EVP, Global Merchandise Manager
No.
I think the price trend was pretty much right on our plan.
We went through a transition in the back half of the quarter which affected price, but simply a standard kind of transitional pricing issues.
We're staying with our 15 to 25% annualized expected decline in price.
I'll remind you and the balance of the people on the call, we look at prices on kind of a per inch basis.
We're not looking at it like the manufacturing side looks at it, but in aggregate our trends should be pretty similar to what the manufacturers are reporting to you.
- Analyst
Okay.
Thank you.
Operator
Thanks.
Your next question is from David Magee of SunTrust Robinson Humphrey.
- President, COO
Good morning, David.
- EVP, Global Merchandise Manager
Must have been a flat panel question.
- Vice President Investor Relations
Next question, please?
Operator
We'll move on to the next question which is from Mark Rowen of Prudential.
- Analyst
Thank you.
Good morning, congratulations on a nice quarter.
- Vice Chairman, CEO
Thank you.
- Analyst
A couple of questions.
The revenue outperform that you saw in the first part of the quarter, that suggests that you saw a slowdown maybe mid-April when a lot of other retailers saw a slowdown.
Can you sort of confirm that, and then talk about what you saw in May and early June?
Has that picked up from that slowdown?
- EVP Finance, CFO
Yeah.
Mark, I don't ever remember talking about a slowdown.
- Analyst
Well, slowdown from the revenue outperformance in the first part of the quarter you talked about.
- EVP Finance, CFO
Nope.
So when we look across the quarter in terms of the three months that comprised the first quarter, with each month we exceeded our plan.
So early on in the -- when we saw the year coming I think in my comments as I shared with you, we anticipated a sequential slowdown from the fourth quarter to the first quarter for the reasons we talked about.
I think our planning teams did a nice job recognizing calendar shifts, and as I look across each month of the quarter, we beat our expectations modestly.
And as to second quarter and beyond, we'll talk about those at the end of the second quarter call at this point, but I think what you should glean from our comments were we expected an economically mixed environment, and we're planning the business that way, and we're pleased that in light of what we expected were able to outperform in terms of our own internal expectations the first quarter.
- Analyst
So, Darren, are you saying that you didn't see a slowdown that other retailers saw middle of April that that just didn't affect you?
- EVP Finance, CFO
What I'm saying, Mark, is that our plans anticipated the seasonality of the business, and whether it was up in the beginning and down at the end and the middle, our seasonality forecasted those bumps and we were able to exceed those in each month at least modestly in each month.
Operator
Thank you.
Your next question is from Rex Henderson of Raymond James.
- Analyst
Thank you and congratulations on a great quarter.
- Vice Chairman, CEO
Thank you.
- Analyst
I had a clarifying question on the SG&A issue, and I was wondering about the reduction year-over-year in the spending on customer centricity conversions, and how much of that is, again, how much of your SG&A is reflective of that particular issue?
And I'm not sure I got a clear understanding of that prior to this.
- EVP Finance, CFO
Yep.
So why don't I frame it and then maybe John will add a few comments about going forward.
One of the clear benefits in the first quarter is really the absence of the level of investment spend that we had a year ago.
If you actually look back to our year ago results we said on average we added not less than 60 basis points across the year in terms of investment spending, in terms of building, not just -- we tend to think of segment in stores for customer centricity, but we also had the launch of Geek Squad and other initiatives last year.
We clearly benefit in this first quarter because, honestly, we spent more time editing than investing, and we spent more time working with the stores and the teams to build productivity at store level than wearing on new things that tend to bog down productivity and increase our SG&A rate.
So that's why we had guided as we looked to the second and third quarter which will have the bulk of our new home theater solutions, Best Buy for Business, service, new service capabilities.
We would expect as we layer on some of those investments that initially what we learned last year is there's a productivity dip before there's a productivity increase.
I think the first quarter experienced a lot of the increases from the things that we invested in Q3 and Q4, and I think going forward the good news is we've edited the expense base so we can moderate some of those dips in productivity, and we have things coming through the pipeline that keep improving in their productivity.
- Analyst
Okay.
Thank you.
A second follow-up on the flat panel television question, and that is on ASP, and you said that your prices per square inch continue to decline in the 15 to 25% range, but what about the average selling price?
Are customers trading up to bigger and more features so that your ASP holds up or rises?
- EVP, Global Merchandise Manager
I think what we said is that we're on plan for ASP declines.
We expect the year to be in the 15 to 25 range and we continue to mix up in ASP broadly [in] TV.
Operator
Thank you.
- EVP, Global Merchandise Manager
Go ahead.
Operator
Please finish your comment, sir.
- EVP, Global Merchandise Manager
So the third comment around mixing up we hadn't specifically addressed, but that's been about a full-year trend for us and that continued in Q1.
Operator
Thank you.
Your next question is from Mitch Kaiser of Piper Jaffray.
- Analyst
Good morning, guys.
Congratulations.
I was wondering if you could comment, I know you've launched a couple key initiatives within Geek Squad, mainly Geek Squad City and also testing Geek Squad in Office Depot stores.
I was wondering if you could elaborate a little bit on those and what opportunities those might give to the services business?
- EVP Finance, CFO
Yeah.
Thanks, Mitch.
Why don't I frame Geek Squad City for those who may not know is that Geek Squad City is, you know, we have made a decision to centralize some of our service depot capabilities in Memphis.
What that allows us to do, honestly, is improve productivity, improve the customer experience and improve turn times.
I'd say at this point it's early.
The teams are busy putting together the center and getting it fully staffed and, you know, the good news is we see further productivity gains and a better customer experience down the road.
So early at this point question two.
- Analyst
On Office Depot and maybe just kind of the strategic rational, was that more to get into the small business segment in a more meaningful way?
- Vice Chairman, CEO
Maybe I'll comment on that.
One of the things about that you should see is themes for Best Buy as we continue to develop new brands, it's because new brands are going to be part of our growth story with Geek Squad being one of those.
Is that it's our overall intent not to constrain the brand from growing where the brand would grow because of its association with Best Buy.
So at this point the Office Depot is a test to find out if it's beneficial for Geek Squad and for Office Depot.
That will be the basis on which we make a determination as to whether or go forward and what kind of configuration in terms of how both companies look at it.
Essentially, this was an opportunity for Geek Squad to reach new customers and as a growing business part of our portfolio, that would be a very encouraging thing for us to pursue.
- Vice President Investor Relations
Thank you, Brad.
Next question, please?
Operator
Thank you.
Your next question is from Andy Hargreaves of Pacific Crest Securities.
- Analyst
Hi.
Thanks.
Just wondering this time last year we kind of had a similar quarter in terms of beating expectations and you were raising guidance.
I know you talked about quite a few things that are a little bit different this year but wondering if you could just clarify exactly what it is that's keeping you steady this year as opposed to last year?
- Vice Chairman, CEO
Well, we said last year at the first quarter that we didn't actually raise guidance for the year and except for the some adjustments to what we've seen already in the first quarter.
We basically are saying the same argument, that essentially transformations are not linear, and that we like -- we cannot predict exactly what happens with -- I'd say Brian's portion of the presentation, Brian's, if we have the benefit that Brian believes we'll have, I share that belief, but if we have the benefit out of those, those benefits will occur during the course of the year, but there are hypothesis as to what the benefit is.
So as we're trying to forecast, the reason we stepped away from forecasting quarterly is we're trying to forecast with as many new initiatives as this Company has, which I think, I hope, will be an ongoing brand or trademark of the Company because we stay a growth company you can't forecast what precisely what's going to happen on something that's genuinely new.
So we've always got this kind of rough degree of -- we can forecast expenses fairly well.
We can't forecast revenue growth on things that do not have a track record.
And so a lot of the -- we're leaving ourselves some room with a desire to outperform, but we also know we're capable of having things like the surprise, the negative surprise, we had in the third quarter last year when we find investments we make don't work out as fast or as we hypothesized initially.
- Analyst
And then, sorry, on the flat panels, can I ask just if you've seen any change in the accessory attach rate or attach rate of audio or anything like that?
- EVP, Global Merchandise Manager
Well, we certainly, with Magnolia, have some leading indicators that there's a big opportunity for attaching better audio.
As you look at the total actual wallet available to home theater, those TV prices and specifically flat panel become more attainable, more of that wallet is available to wrap things around them such as home theater installation, such as walking out of the store with a digital or a high definition source or home audio.
We're seeing strong leading indicators from our Magnolia business that that could be a cycle that we finally begin to lean in a little bit after last four or five years of struggling with audio.
- Vice Chairman, CEO
Maybe this could be a chance to do a little translation of the earlier points we were making in the call.
When Brian's talking about the salesforce in the stores seeing what's happening with whole solutions at Magnolia, and saying why aren't we bringing those to the Best Buy customers, the way that you'll see it if you're looking at our financial results ultimately is improved sales of other products surrounding home theater.
So from a product centric stand point, when you ultimately see the outcome of this work, you'll see it in increased sales of things like home theater and other related products.
But the genesis point we were trying to reveal was the sort of how we got to the point where we start to eventually get that benefit and product.
- EVP, Global Merchandise Manager
That's the fundamental output of customer centricity.
You go from engaged employees to treating the meeting customers unique needs to an end-to-end solution.
That should be the output.
We've seen that in our MP3 business.
We've seen that in our notebook business as the quality of the sale over specifically at transaction time but also over time becomes better and better.
We're also, I think, starting to see that in flat panel.
- Vice President Investor Relations
Thank you, Ron and Brad.
Next question, please?
Operator
Thank you.
Your next question is from Scot Ciccarelli of RBC Capital Markets.
- Analyst
Hey, guys.
How are you?
Can you comment on the performance and outlook for Geek Squad as you start to assimilate all the infrastructure you built up over the last few years?
In other words, with the Office Depot experimenting and Geek Squad City et cetera, do you guys still consider yourselves in investment phase or are we at the point on the maturity curve where you can really start to leverage that piece of the business?
Thanks.
- EVP, Global Merchandise Manager
Hi, Scott, this is Ron.
I would say that we are still in the investment stage.
We are building out the brand, the capability, the infrastructure around services broadly.
What you see now is the tip of the spear which is really Geek Squad which is the most visible thing.
We've talked about our home theater strategy and the investment and infrastructure that is supporting Geek Squad, will support that strategy as well.
The investments you're seeing in Geek Squad City we think will make a material change in the customer experience in the store and in the employee experience.
So we are, as you know, we feel getting great returns from our current Geek Squad business, but that really is -- I would describe it as the tip of the spear in a much bigger strategy around services, and we are certainly very early in that strategy.
- Analyst
Theoretically that's a business that should become increasingly profitable as we kind of move down the time line?
- EVP, Global Merchandise Manager
I would say increasingly accretive and increasingly material to the total enterprise.
- Vice Chairman, CEO
It may be a little hard at this stage to see like -- as you see with the experiment with Office Depot, it may be hard at this stage to see where the investment stages may be in that business.
It depends on what the ultimate size and scale of the business could grow to.
- EVP Finance, CFO
Yes, Scott, some of the expectations out there for Geek and services we would characterize are very ambitious in terms of what we're reading.
Candidly, what we're thrilled with is the progress that they're making in terms of both top line margin growth in the quarter and bottom line profitability.
We just wanted to make sure they don't get too far ahead of reality.
What we're recognizing is service is a complex business and we're building new capabilities both in terms of how to train and develop service technicians.
We're going through right now a major systems investment to enable it.
We're putting in a whole centralized depot.
And I'll tell you, our past experience in centralized depot management we're going to learn our way through that.
All that being said, it's one of the few businesses that starts from essentially nothing to what we'd say is a level of profitability both principally and profit rate, and now it's becoming more meaningful in profit dollars that we're very pleased with.
What we want to make sure is that we continue to recognize where it is in the growth curve.
It's still probably closer to the second inning than the seventh inning, and it's key at this point to continue to balance both the capability maturation process and making sure that the customer experience isn't damaged.
So I'd say we're still early but excited in terms of progress that we're making.
- Analyst
Helpful.
Thank you.
- Vice President Investor Relations
Thank you.
That was Ron and Darren.
Next question, please?
Operator
Thank you.
Your next question is from Steve Chick of JPMorgan.
- Analyst
Thanks.
Good quarter.
Darren, just a follow-up question to, I guess, the sales progress during the quarter.
You know, maybe to Mark's question, if you get a little more granular, I know you mentioned how they performed, how sales performed relative to your expectations, but what exactly kind of were your expectations as the quarter went on when you talk about expecting a softer environment?
And then I know there's only a couple weeks, but post quarter end, I mean where are trends now kind of relative to where you exited?
- EVP Finance, CFO
Steve, maybe I wasn't clear.
Our expectations were three to five in the quarter and for the year.
So if we're performing within that band quite frankly, that's how we've positioned the profit formula to get the results we were.
As to post -- and I am not trying to be evasive at this point but I'll give you an example you have seasonality in the calendar.
We have a small event that I appreciate every year called Father's Day coming up.
That will shift to any one daily performance at this point where a few weeks into the quarter, got Father's Day coming up, I don't know, they like flat panel TVs.
That will shift in terms of performance day-to-day.
I'd say the way to read our numbers, and we're not, again, not trying to be evasive, is that if we're managing the business between a three and a five throughout the balance of the year, we're feeling good about that.
We think in some quarters could it be below -- some months could it be below three, you bet you.
In some months has it been above five, you bet.
And we think that it will continue to be bumpy for the reasons that we talked about.
All of that being said, you can glean from our comments that the quarter in total was above where we expected it to be, and as we look for the balance of the year, we continue to have confidence in the top line, as I suggested, that there be a little more pressure in terms of the margin line, but we think that that will be offset by our confidence in the top line.
- Analyst
Okay.
With the consumer confidence number that came out in May, I was really trying to see if there was a noted deceleration in the last month of the quarter.
But I think you've been clear enough.
I guess the second question is, if I [helped], you mentioned the expectations on services were a little bit ambitious.
Can you give us a little more granularity possibly on what Geek or what services in total represent as a percentage of your total revenues?
Are you guys ready to speak to it in that type of fashion?
- EVP, Global Merchandise Manager
This is Ron.
I'll speak to expectations.
I think what Darren was saying is that the external expectations seem to be outsized from time to time.
I think internally we are on our expectations.
We know that we're a couple years into this strategy.
Darren talked about the significant investments we're making in infrastructure.
Some of them have been talked about on this call already to build out a services platform that we can plug in not just Geek Squad but multiple different services offering, so our expectations are large, but we're right on them.
I think what Darren was trying to say is externally there's been perhaps some outsized expectations or unrealistic expectations as to what Geek or services may represent.
As to what we report, I'll let Darren comment a little bit on the plans there.
- EVP Finance, CFO
Yeah.
I would say this, so Geek is just one element of services.
Home theater installation is yet another element of services.
As you think about how that integrates into the greater strategy of end-to-end solutions selling, I think there is this desire to say breakout services and that is a different part of your business.
It's not.
It's absolutely integral to the thing that is the biggest part of the Best Buy engine today which is the products it supports and the customers it supports.
As we look to the future we see an integrated product in selling solution for our customers that services just like accessories before that, software before that and the product together come together within the categories of business to form the profitability of that end-to-end solution.
- Vice Chairman, CEO
This is the heart of what we're trying to talk about.
It's why we keep talking about customer centricity is the customer does not define the solution by its pieces.
We can't take a piece out and say this is what's actually happening with the transaction and give you any kind of realistic picture of what's actually happening with the business.
That's right.
- Vice Chairman, CEO
So I'll give you a little live ammo on that.
This fall in our Q4 Microsoft will launch Vista.
We could carve out Vista and say, you know, X number of agents touch this many PCs and install this many Vista solutions.
That's the wrong point of view.
The right point of view is these customers need a solution, an easy upgrade path or an easy installation path, and it's going to be the end-to-end solution which is enabled in part by services, by Geek Squad, and by, frankly, the talented people on the floor engaging the customer and really digging out what the need is, and the customer is not coming in saying give me a service rep.
They're coming in saying help me make my computer work and by the way, I'd really love to be able to see my pictures, my family pictures, on this cool Hi-Def flat panel TV I just bought, so it's broader than just having people that can make wireless work for you.
It's about what the people do with it.
- EVP Finance, CFO
An example might be to watch what's happened to other mass market guys have talked about the difficulty of selling flat panel TVs based on the return rate.
If you look at a transaction without looking at it holistically in its component points, you won't get a financial outcome that makes sense.
- Vice Chairman, CEO
It really hurts me that they're having such a hard time.
- Vice President Investor Relations
Okay.
One lucky caller is going to get to ask the last question.
Operator
Your final question is from Mike Baker of Deutsche Bank.
- Vice Chairman, CEO
Good morning.
- Analyst
Hi.
How are you guys?
A couple of questions on the gross margin.
One, I think Darren, you had said that something in the mix is what you think will lead to flattish margins over the coming quarters, so can you tell us what you're seeing that is different in the mix?
And then I guess related to the gross margin the promotional activity you spoke about the appliance promotions.
What are you seeing in terms of the TV promotional activity?
Thanks.
- EVP Finance, CFO
We think the mix to digital specifically you're talking about TV and continued mix of MP3 will be contributors to the margin flattening out a little bit.
From a promotional environment standpoint, we have not seen anything overly aggressive in flat panel to date, but as we've talked about on previous calls, things like the mix of gaming into the balance of the year, the launch of Vista, we expect acceleration from the PC business in the balance of the year, a continued aggressive driving of the flat panel and MP3 business, we think all bode to a change in mix that could see flat rate, if you will, and better margin dollars in the balance of the year.
- Analyst
So MP3, gaming, Vista, things along those lines are lower margin.
Is flat panel still a higher margin business or is that sort of trending back towards chain average or below even?
- Vice Chairman, CEO
We don't comment on specific category margin rates.
- EVP Finance, CFO
Again, on balance, to put it in perspective, when we gave guidance I think we said up 10 basis points.
We're now saying flat to modestly down.
We're looking at the mix of business, you know, every day practically.
But every thirty days, and it's just our best view based upon the velocity charts that we see today that suggest there is just, fundamentally the velocity suggests that it could be flat to down this year.
What we didn't want the group to walk away with is that there's just been this step change in the pricing environment because there hasn't been.
Where there has been a change in appliances, we've highlighted that for you, but we just wanted to provide that context as we look out the balance of the year.
- Vice President Investor Relations
Thank you, Darren, and thank you, Jackie, and thanks to our audience for participating in our first quarter earnings conference call.
As a reminder the replay will be able by dialing 973-341-3080 and entering the personal identification number of 7456420.
The replay will be available from about 1:00 Eastern time today until midnight next Tuesday, June 20th.
You can also hear the replay on www.bestbuy.com.
Just click on "For Our Investors.
If you have additional questions please call me at 612-291-6110.
Charles Mancastle is also available, 612-291-6184 and Carla Hougan at 6146.
Reporters on the other hand should contact Sue Bush, Director of corporate P.R. at 612-291-6114.
That concludes our call.
Operator
This concludes today's Best Buy conference call.
You may now disconnect.