百思買 (BBY) 2007 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to Best Buy's conference call for the third 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 11 a.m.

  • Eastern Time today.

  • I would now like to turn the conference call over to Jennifer Driscoll, Vice President of Investor Relations.

  • Please go ahead, Ms. Driscoll.

  • - VP, IR

  • Thank you.

  • Good morning, everyone.

  • We hope you enjoyed the on-hold music from the Beatles new 'Love' CD.

  • We appreciate your participation in our fiscal third quarter conference call.

  • This morning we have four speakers.

  • Brad Anderson, our CEO, will discuss our quarterly results and his continued optimism about the business, Darren Jackson, our CFO, will provide color on the Company's financial results, and Tim McGeehan, Executive Vice President of Best Buy's U.S. stores, will share how we prepared our employees to handle record volumes of customers in stores, online, by phone, and in homes.

  • Last, Brian Dunn our President and Chief Operating Officer, will share current customer insights, which give us confidence as we prepare to wrap up a strong fiscal year.

  • While we have four speakers, we plan to keep our formal remarks fairly brief this quarter, so that we have ample time to answer your questions.

  • We would like to remind you that comments made by me or by others representing Best Buy may contain forward-looking statements, which are subject to risks and uncertainties.

  • Our SEC filings contain further information about factors that could cause actual results to differ from management's expectation.

  • Be aware that as usual, the media are participating in this call in a listen-only mode.

  • And with that, let's turn the call over to Brad Anderson, Vice Chairman and Chief Executive Officer, who will begin our prepared remarks.

  • - Vice Chairman, CEO

  • Thank you, Jennifer.

  • This morning we reported third quarter earnings of $0.31 per diluted share.

  • That is up from $0.28 per share in the prior year's period.

  • Compared to expectations, we may have slightly outperformed on the top line, but due to deterioration of the gross profit rate, we underperformed on the bottom line.

  • While we don't provide quarterly earnings estimates, we understand that earnings that fall short of analysts' expectations are viewed as a miss.

  • We also know the stock opened down this morning and we appreciate how our fellow shareholders may be feeling.

  • But we are not disappointed in our performance.

  • We realize that we may have a concurrent point of view, but from our perspective, we are having a powerful year.

  • And we are optimistic because of the healthy indicators we see in the business.

  • The primary indicator that has us excited is the customers' health.

  • Certainly the gross profit rate decline was larger than we expected, however we believe that we made the right choices this quarter with respect to margin.

  • Darren will discuss the drivers including the impact of our Five Star acquisition and changes in our revenue mix.

  • One of the top factors, of course, was promotional activity.

  • We chose to match or beat competitors' prices on the 'stake-in-the-ground' categories, like name brand flat panel TVs, and honestly, if we could do it all over again, we'd make exactly the same decision.

  • The good news is that our customers responded, and not only did we get traffic, but we believe we made significant gains in market share.

  • And we are completely comfortable with making a small investment in our gross profit rate, in order to grow customer relationships.

  • When we make a positive impression early in the holiday season, it propels us forward into December, which is traditionally a less promotional environment.

  • We have momentum with customers, which is important for today, tomorrow, and beyond, and Brian will expand on this topic later in this call.

  • We also improved the customer experience, by investing in capabilities that allowed our employees to be better prepared than ever, as Tim will describe.

  • Thanks to our focus on the customer, we are taking market share.

  • And we believe we gained market share in flat panel TVs and laptop computers.

  • And as we turn the corner on the final stretch of the holidays, we have sold a lot of gift cards, that we know will be redeemed at close to double the face value.

  • We also have record numbers of Reward Zone members who opted to earn points with us.

  • All of these things bode well for the balance of the holidays, which make up a disproportionate percentage of our annual earnings.

  • Bigger picture, we are reinventing ourselves as a customer centric company, we have never expected that results would be linear, and I hope we have been painfully clear on that account.

  • We also are cognizant that our transformation is incomplete, and that's no secret to any of you who visit our stores.

  • Yet everywhere I look, I see evidence that we are starting to build capabilities that can differentiate us from our competitors.

  • Capabilities like the Geek Squad, home theatre installation, small business, international, and our multichannel experience.

  • These capabilities open up entirely new options for us, that we can explore next year and beyond.

  • If we integrate all that we now have, we will do very exciting things for our customers in the future.

  • And we are playing for the long-term, and we are playing to win.

  • Now I would like to turn it over to Darren Jackson, our Chief Financial Officer.

  • - CFO

  • Nice job, Brad.

  • Thank you, everyone.

  • We usually save the spell-binding financial update for last, however, we thought it would be helpful to move it up in the call, in order to give you the building blocks of our performance for the quarter and the balance of the year.

  • The punch line is that we remain bullish on the year, despite the speed bump in this past quarter.

  • Let's start where we left off in September.

  • Our first week of the quarter started with low double digit comparable store sales gains.

  • Like many other retailers, we experienced softer sales in growth in October and early November.

  • The quarter finished with a robust double digit comparable store sales gain on the Thanksgiving weekend.

  • Our finish to the quarter was impressive, and should bode well for the fourth quarter.

  • I say that because the double digit comp sales improvement this Thanksgiving Day weekend, came on top of last year's double digit comp gain.

  • The sheer volume that the team handled was a record, and our employees deserve a huge thank you.

  • The strong finish to the quarter allowed us to deliver sales at the high end of our original guidance.

  • On the other hand, it also contributed to a gross profit rate that was below our plans.

  • Let me talk about each of these line items.

  • First, our top line, our employees delivered a 4.8% comparable store sales gain, this performance was led by bestbuy.com, which was up 30%, and impressive 13.7% comp gain in Canada.

  • Year-to-date we are tracking at the upper half of our annual comp sales guidance range.

  • Customer interest remains very healthy, and we are purposely and thoughtfully growing our market share.

  • Second and understandably concerning at first blush, was the decline in the gross profit rate of approximately 85 basis points.

  • Let me explain the three drivers.

  • First, we lapped last year's first time gain of the initial recognition of gift card breakage.

  • That was worth approximately 30 basis points or $0.04 a share.

  • Second, adding the China Five Star business into the portfolio, reduced the gross profit rate by 25 basis points.

  • Third, was the remaining 30 basis point portion of the decline, which represents the comparable decline in our core gross profit rate.

  • This rate degradation was more than we expected at the outset of the quarter.

  • It was driven by a few things.

  • One driver was the mix of business, both from a product and a calendar perspective.

  • We generated higher than expected revenue gains in notebook computers, which are at lower margins.

  • We also had a greater proportion of the quarter's revenue come during the gross margin challenge, Thanksgiving Day weekend.

  • Frankly the environment was very promotional this quarter in categories like home theater and notebooks.

  • Thanksgiving weekend was particularly more intense than the prior year.

  • Consumer electronics is the focus for the holidays and everyone wants a piece of the pie.

  • Competitively we felt we had to respond to some very sharp pricing on promotional SKUs, because of the name over the door, which is Best Buy.

  • Historically, these short-term costs have helped us deliver a strong fourth quarter.

  • We believe that will be the case this year, as well.

  • We take a longer view, and we are gaining share and building relationships that will fuel the growth beyond the current quarter and the current year.

  • Closing the third quarter, our comparable store inventory levels were up only 3%.

  • We are pleased with both the quantity and the improved quality of our inventory position this year.

  • It will allow our employees to serve customers better, as we head into the bulk of the holiday shopping season.

  • That sums up the 85 basis point decline in the gross profit line for the third quarter.

  • Looking for the full year, we now expect our gross profit rate to be down approximately 60 basis points for the year.

  • The modest change from our prior guidance is driven by the third quarter results, and the anticipated mix shift to lower margin gaming and MP3 players.

  • Our assumptions also include a slightly more promotional environment for the fourth quarter versus last year, but importantly, less promotional than the Thanksgiving Day weekend.

  • A bright spot in the quarter for the year has been our SG&A improvement, the 60 basis point improvement for the quarter was in-line with what we expected.

  • This may come as a surprise to some of you who expected more.

  • We continue to generate productivity improvements in labor spending and leverage of our overhead costs.

  • The addition of the China Five Star business contributed 25 basis points of the improvement.

  • Last quarter we communicated that the SG&A leverage would moderate in Q3 versus the first half of the year.

  • It did as we ramped up investments in advance of the holidays.

  • Specifically, we relocated or opened 9 more U.S.

  • Best Buy stores than last year.

  • We also added 136 more Magnolia Home Theater locations, and expanded an additional 89 home theater departments inside U.S.

  • Best Buy stores.

  • Finally, we shifted our advertising spending to line up with the timing of these physical investments, the launch of new gaming platforms, and the WOW holiday advertising plan.

  • These significant investments limited our leverage in the third quarter as expected, but provide an important platform for growth in future periods.

  • Our SG&A leverage was also constrained by approximately 15 basis points, or $0.02 a share, for additional litigation expense that we didn't anticipate.

  • To be fair, you will recall last year's third quarter, we had a similar sized impact from hurricane-related costs and relief efforts, which cost us $0.02 per share last year.

  • At the bottom line, we grew EPS 11% in the quarter, which puts us at 25% EPS growth for year-to-date results.

  • Before we leave my commentary on the third quarter, I would be remiss not to highlight the outstanding results of our Canadian team.

  • As I mentioned earlier, comparable store sales were up an impressive 13.7% in the quarter, with both Future Shop and Best Buy brands delivering double digit gains.

  • Operating income in Canada also increased 200 basis points driven by strong sales, more efficient promotional strategies, and solid retail execution.

  • Congratulations to Kevin and the team for a great performance.

  • Bringing it all together, we are on-track for another outstanding year.

  • From a revenue perspective, our fiscal year-to-date results are strong, and early results in Q4 are ahead of our expectations.

  • As such, we now expect comp store sales gains of 4 to 5% for the year.

  • I already mentioned that we expect our annual gross profit rate to decline 60 basis points.

  • Our SG&A rate improvements will more than offset this decline.

  • We expect operating income rate to improve 30 to 40 basis points.

  • We remain on-track to deliver our planned EPS target of approximately 20% for the year.

  • I will end where I started.

  • By sharing with you that we remain bullish on the year and our future.

  • I will say it again that the results are not linear, as we saw in this quarter, however, we are committed to meeting or exceeding our objectives for the year.

  • With that I will give you Tim McGeehan, Executive Vice President of U.S.

  • Best Buy stores, to talk about how we execute in our stores, and delivered for our customers.

  • - EVP, Retail Sales

  • Thanks, Darren.

  • We can talk about execution and delivering for customers and it sounds easy.

  • What I would like to accomplish on the call though, is to share with you the reason for our success, and what really goes into it.

  • The challenge is not small.

  • We knew months ago that we would have stores with thousands of customers lined up outside their doors on Green Friday, and droves of customers online.

  • We knew that day would be by far the biggest day we've ever had as a company.

  • We knew it would stretch us to the limits and test our capacity.

  • And we knew that at the end of the day, our ultimate success would be determined by how the customer felt, before, during, and after Thanksgiving weekend.

  • That Friday and Saturday, we broke through the ceiling of what we expected.

  • We sailed through the largest day in company history.

  • And the primary reason that it went well, is that we planned well.

  • We also made smart investments.

  • Namely, we had invested in our people and we had invested in our infrastructure.

  • Of the two, our people and our infrastructure, the people are the more powerful.

  • So that was our primary focus.

  • Before I get into the investments, let me describe how we planned differently.

  • Last year we talked about how we expected our teams to execute too many initiatives at one time, and weren't focused.

  • This year we listened to our employees and they drove the work.

  • At the core of this, is the fact that our playbooks were based on employee and customer input.

  • On Green Friday, we were ready with clear, compelling offers, an effective ticketing process, store maps, and color coded balloons.

  • Most customers said our queuing systems worked smoothly, and that we made camping out overnight worth it.

  • We had engaged employees having a good time, and that improves the customer experience.

  • Overall, we came through with flying colors.

  • Our results make us very optimistic about our capacity for growth.

  • Not only for the balance of the holiday season, but for future years, as well.

  • Solid execution of the plan, was a result of hard work and meaningful investments as I mentioned earlier.

  • We invested in some of the traditional ways.

  • A big one was investing more this year in employee training.

  • We took advantage of the best vendors in the world to increase the employees' knowledge of the products and services we offer.

  • We also created new career paths for employees through additional positions in our stores, such as the opportunities in our growing services business.

  • Last year, we established an incentive program for part-time and full-time employees, which remains in place and is very popular.

  • Retention is up because of the training, incentives, culture, and careers we offer, combined with our openness to employees' ideas for serving our customers better.

  • The result is more engaged, more experienced employees, a combination which enhances every customer interaction.

  • They say crawl before you walk, and walk before you run.

  • The exciting thing is we are only crawling in terms of harnessing the collective power of our 130,000 team members.

  • We are still early in the learning curve on how to turn customer insights into higher returns, and how to scale employee innovations across the Company.

  • Every day we learn something more, and hopefully get better at solving each customers' needs through our people.

  • I said that our investment in our people is the primary investment we are making.

  • The second type of investment we are making is in our infrastructure, which enables us to deliver on our promises to our customers.

  • Two notable examples are supply chain and multichannel.

  • We have invested in our supply chain and one of the outcomes was improved customer availability.

  • In fact we had the best ever customer availability going into Thanksgiving weekend.

  • Our customer availability or in-stocks were at 99% for that weekend, and we hit our highest average ever for the month of November.

  • Moreover, our stores recovered quickly with fresh inventory and organized shelves.

  • We have also invested in our websites.

  • We posted our circulars and holiday offers online, and offered designated parking spots for in-store pickup.

  • In addition, we improved our search engine and research capabilities online, which may have helped our conversion rate.

  • Our site traffic actually quadrupled at times, yet our online sites didn't buckle.

  • We stayed open for business, and we thrived -- online, in homes, in our call centers, just like in our stores.

  • Our investments in our people and our infrastructure are not over, but they are paying off.

  • More important, through the combination of those two investments, we see capacity that exceeds what we formerly thought we had.

  • As head of U.S. stores, I find that very encouraging.

  • I salute our employees for making it happen, and we are confident with what they have delivered so far.

  • Our teams are set up to win, and that's exactly what we are going to do.

  • Now I will turn it over to Brian to talk more about how we are doing with our customers.

  • - President, COO

  • Thanks, Tim.

  • And good morning, everyone.

  • I promise to keep this short, because it's important that we have plenty of time for your questions, and what I have to add to the conversation is simple.

  • Here it is.

  • When we talked last quarter I said that I was really excited going into the back half of the year.

  • Today as we head into the fourth quarter, I am more excited than ever, because I believe, I know, we are listening to our customers and serving them better than ever.

  • We have only just begun.

  • I want to tell you a story that I think captures why I feel this way.

  • I left my house at 4:30 a.m. the Friday after Thanksgiving, and headed out to a Best Buy store with my two teenage sons in tow, believe it or not.

  • It's become a tradition in my family, and I swear I don't force them to come.

  • Like me, they like to watch this cultural phenomenon firsthand.

  • When we got to the store in Eden Prairie, Minnesota, we saw 1,500 customers in line.

  • The hardiest of whom had been standing out there for 13 hours.

  • They seemed amazingly happy, considering where they were and what they were doing, and I think that had a lot to do with the fact, that they felt that Best Buy was taking care of them.

  • When I got there, Matt Thomas, the General Manager at Eden Prairie, and Gina Gabrielson, the Customer Experience Manager, were walking the line explaining to folks exactly how things would go when the doors opened.

  • This was by no means the first time they had communicated with these people.

  • From the small hours of the morning, the Eden Prairie team had been clearly communicating expectations to folks, handing out tickets that represented access to certain products and services from front to back, based on the reason the customers had come to Best Buy.

  • And then precisely at 5 a.m., the doors opened.

  • This incredible crowd of people moved into the store in what seemed like 2 minutes and my sons and I followed.

  • I have to admit as we neared the entrance, I was prepared for absolute pandemonium.

  • And as I passed through the doors, I saw exactly the opposite.

  • By 5:15, there were nearly 2,000 human beings in that store, counting customers and employees, and it just hummed.

  • The execution that Tim described earlier was made real that morning at Eden Prairie.

  • Matt's and Gina's team were all over it.

  • The shelves were stocked, the stores looked great, and 100 plus employees interacted with the customers in efficient, energy-filled conversations, and got them where they needed to go, and what they needed to get.

  • The checkout line wrapped literally throughout the store, marked clearly with a taped line on the floor, and it moved with amazing speed.

  • People had no idea who I was, thank goodness, and that allowed me to chat with people as they shopped and even as they stood in line.

  • I asked them if they felt the store was taking care of all of their needs, and I was being careful not to lead the witness.

  • To a person they repeated a variation on a theme, Best Buy has obviously prepared really well for this day, and I feel like they care about my needs.

  • I tell this story because I feel it gets to the essence of why I am so optimistic about our prospects, and not just for the fourth quarter.

  • Eden Prairie is a relatively new store, and it reflects many of our most recently developed ideas, including Magnolia Home Theatre, Best Buy for business, and a prominent Geek Squad presence.

  • As I was walking the store I was struck that the store at that hour with that team executing like a clock, was a tangible expression of thousands of ideas big and little, that have come from thousands of customers, and thousands of our own people.

  • It was a microcosm of Best Buy as a whole.

  • We still have a long way to go as a company.

  • The truth is that this transformational journey will never end, and we need to remind ourselves of that fact every morning when we get up and get after it.

  • But it is also important to recognize the real progress we have made in learning how to really listen to the ideas that come from our customers, and from those closest to them, our own people.

  • A lot of people scratch their heads at this American phenomenon called Green Friday.

  • A lot of people see it as sort of a necessary evil, that retailers are forced to deal with and minimize.

  • But that is not how I see it.

  • Last year on that Friday, 3 million customers shopped at Best Buy.

  • Of that 3 million, half of them were customers who fall in what we call the best or opportunity categories.

  • Essentially the two upper quartiles in terms of loyalty and profitability. 270,000 of them were completely brand new to us as customers, and finally 250,000 of them signed up as Reward Zone members for the first time.

  • Here is how I see the Friday after Thanksgiving.

  • This might be a paradox, but this day that seems to be all about stuff, is really a chance for us to reach out to people, and show them that Best Buy cares about more than just selling them stuff.

  • That Best Buy is a company that creates experiences, whether that experience is a vibrant home theater, a gaming system that comes to life in that home theater, a wireless network that actually works, or a surprisingly good time at 4:45 a.m. standing just outside the great Eden Prairie Best Buy store.

  • It is a chance to show them what the new generation of Best Buy is all about.

  • In closing, I would like to circle back to Brad's comments.

  • We never enjoy missing expectations, but we take great pride in the progress we have made on behalf of customers, and we are very excited about the momentum we have built for the future.

  • At Best Buy, we are all about the future and all about growth.

  • You can and should expect us to make long-term customer growth decisions in favor of a single quarter's results.

  • Thanks for your time, we appreciate your support this past year, and we hope you and your families have a happy, healthy, holiday season!

  • And with that, we will open the floor to questions.

  • Operator

  • [OPERATOR INSTRUCTIONS] The first question comes from Chris Horvers with Bear, Stearns.

  • Please go ahead.

  • Good morning.

  • - Vice Chairman, CEO

  • Morning, Chris.

  • - President, COO

  • Morning, Chris.

  • - Analyst

  • You mentioned that your focus on the longer term prospects for the electronics business.

  • Can you talk about the longer term revenue and gross margin outlook, in light of the increased competitive set in TVs, versus growth in the services business?

  • How do you see these two factors playing out?

  • - President, COO

  • Mike, do you want to go ahead and --

  • - SVP - Merchandising

  • Sure, this is Mike Vitelli, and looking at it from a point of view of the television business.

  • I think we are on the onset of a tremendous growth opportunity for the industry, and for Best Buy in particular.

  • The household penetration for high definition TVs is still rather small.

  • Probably in the 20s, 25%, which we look at as a 75% opportunity plus when you start getting into multiple sets in homes, we look at the next several years, and the fourth quarter in particular, as a tremendous opportunity of growth.

  • - President, COO

  • I would also add that we don't just look at it as the TV business, we look at it as the home theater experience business, and we think about audio attachments.

  • We think about all the pieces that come together around the customer to create a home theater experience.

  • That's what the customer is in the market for.

  • - Vice Chairman, CEO

  • Brian, to build on that.

  • I think you have to look long-term, and think about we continue to focus our investments in making structural improvements in our margin.

  • We are still early in the services business.

  • We are still early in some of our private label development.

  • We are still early as we look out, in terms of Canada and other parts of the business developing their supply chain efficiencies.

  • And the structural things we continue to make those investments in.

  • Environmentally, we are going to have these moments in time, where we are going to have to respond to price competition.

  • But I would also say that environmentally we will see solutions evolve.

  • So our HD advantage, if you think about the TV cycle, is something that we can do uniquely.

  • We can put together through the power of that idea coming from our blue shirts on the floor.

  • How do you get Direct TV?

  • How do you get a financing offer?

  • How do you get it installed?

  • And how do you get the best advice for what is right for your home?

  • So I think you have to think about our business model going beyond a moment in time against a product, and going against a solution and structural advantages we're looking to navigate, not just this quarter, but over the foreseeable future.

  • - Analyst

  • Okay.

  • As a follow-up, then could you maybe shed some light on the growth in the services business that you saw including Geek, and perhaps what the attachment rate was with home theater install, both on the top line and in terms of the benefit to gross margin?

  • - VP, IR

  • Sean Skelly will take that one.

  • - VP, Strategic Planning & Business Development

  • Sure.

  • So first and foremost, even the day after Thanksgiving, which is nationally a big volume day, we saw triple digit growth on both the in-home Geek Squad, and in-home theater installation.

  • We did see that mix shift to home, but candidly that is actually a competency and a capability that we have built to support that customer.

  • We are still naturally maximizing our home theater efforts.

  • We really built that in the last year.

  • We are very happy with the quality that we have, and we are happy with the, essentially the revenue that we are driving for, with strong triple digits.

  • Geek Squad is still a strong double digit growth for us, and we are prepping and preparing not only for this holiday, but for Vista.

  • - Analyst

  • Any gross margin color?

  • - VP, Strategic Planning & Business Development

  • We usually don't tell you that, and I don't think we're going to change that today. [laughter]

  • - VP, IR

  • Good try there, Chris.

  • Our next question, please.

  • Operator

  • Next question comes from Dan Wewer with Raymond James.

  • Please go ahead.

  • - Analyst

  • Good morning.

  • - Vice Chairman, CEO

  • Morning.

  • - Analyst

  • Last week Tweeter had indicated they were seeing a lower attachment rate on customers purchasing the lower priced flat panel TVs, and that this is a phenomenon that Best Buy is seeing, as well.

  • - Vice Chairman, CEO

  • In looking at it overall, I would say that that's not true.

  • I would say it could be true for a couple of days, when that activity reached volumes that were unprecedented.

  • But overall, as Darren mentioned earlier, we have been thrilled with the response that consumers have had to the High Definition advantage offer, where we are regularly telling them, and incenting them to look at the entire experience, which includes High Definition televisions, the source, the installations, and related services.

  • - SVP - Merchandising

  • This is a big part of what our core story is, which is we are not just one product for attachment.

  • And when there is a whole series of benefits that are connected up to, that enhance the use of the product that we sell, ranging from services to sourced accessories, to extended warranties, and beyond.

  • So I mean we have got a more diverse pool than some of our competitors do.

  • - Analyst

  • So you are not saying you need diminishing returns from these late adopter, or more value-conscious customers, than purchasing accessories, or--?

  • - SVP - Merchandising

  • Well, they will buy it differently, as we have seen with computers over the years.

  • So there will be a change in what they buy.

  • But I don't think, well, I will let you guys comment.

  • - Vice Chairman, CEO

  • No, in fact, I think it's actually more related to size than it is to price.

  • The larger the sets are, the higher the attachments of services, and installation and High Definition source when you re in to 21-inch TVs, generally those are less.

  • Because you are not installing those.

  • So the relation is more to size than price.

  • - Analyst

  • And then as a follow-up question Darren at the end of the previous quarter, you had indicated that inventory per store would likely remain up about 10% until the end of the year, because of the importance of being in-stock, in those both and flat panel PCs.

  • You had noted you were up now about 3%, instead of up around 10.

  • Is there a risk that we may not have the product on hand to support your, you know, optimistic sales outlook?

  • I should say, let's say upbeat.

  • - CFO

  • Oh, Dan, we are always optimistic.

  • So I would say this, Dan.

  • If I said we expected to be at 10% comparable store inventory levels for the balance of the year, then I misspoke.

  • Candidly when we talked about the end of the quarter last quarter, we were up 10% for a couple reasons, the biggest of which I talked about, the 136 new Magnolias and the 89 expanded home theater rooms.

  • So we built inventory, you know, in front of rolling out those new additions to our stores in the third quarter.

  • I have got to tell you the 3%, I think you ask that good question.

  • The 3% comp store inventory level, you know, it's light in relation to the sales plan that you just saw in the fourth quarter.

  • The teams and I think, I don't know, Tim highlighted in his comments what we feel good about, is some of the investments that we have been making in supply chain that is getting our customer availability up, and so we can have fewer days of supply and replenish more quickly.

  • I have got to tell you is, what you can't see, which is a really good news story, is underneath the quality of our inventory.

  • Our overall at-risk inventory, and at-risk has come down significantly, it is well over $150 million.

  • Q3-to-Q3, so that is yet another example, again in the merchant teams, the inventory management supply chain, bringing down the at-risk inventories.

  • That's better than 20%.

  • So I feel good about the content, the quality of it, and the levels, and our ability to refresh that as we go into the fourth quarter.

  • - Analyst

  • Right.

  • Thanks Darren, that was helpful.

  • - VP, IR

  • Thank you for the question, Dan.

  • And Brad, Mike, and Darren for your answers.

  • Operator

  • Our next question comes from David Schick with Stifel Nicolaus.

  • Please go ahead.

  • - CFO

  • Morning, David.

  • - Analyst

  • Hey, good morning.

  • You mentioned it in the release and briefly in the conversation that you have had, could you give more details on gift cards, the growth and size, or thoughts around the gift card business?

  • - Vice Chairman, CEO

  • [Dave Judge], you want to take that for us?

  • Sure.

  • We are seeing strong sales of gift cards this year as we have in the past.

  • We expect our gift cards business to be up double digit versus prior year.

  • As I think we have said before in the calls, that we see them coming back at about $2 to every dollar that we sell.

  • So a very strong business for us right now.

  • - CFO

  • Yes.

  • Maybe to put some quantification around that, I think last year our gift card business went well over $1 billion, and it grew 16% last year, on top of the prior year's 29% growth.

  • As [Barry] said, we are tracking to double digit growth this year and it's approaching the same level of growth in that 15 to 16% range that we are seeing.

  • And usually historically bodes well for business right after the holidays, as well.

  • - Analyst

  • And Darren, as you planned out the year, would you have expected a year ago that this Christmas would be up 15 to 16 again?

  • Or is it better or worse or roughly in-line?

  • - CFO

  • Well, Barry's back here, he would say absolutely in-line with our expectations.

  • We don't have a business that I think for the past 5 years if we looked at it collectively has been growing on average almost 20%.

  • It slowed a little bit recently, but I think that just goes to the team's work in terms of the innovative gift cards, and our ability to look at the other channels to grow that business.

  • - Analyst

  • Great.

  • Thanks.

  • - VP, IR

  • Thank you, Barry and Darren, next question, please.

  • Operator

  • Our next question comes from Jack Murphy with William Blair, please go ahead.

  • - Analyst

  • Good morning.

  • - SVP - Merchandising

  • Morning, Jack.

  • - Analyst

  • Wondered if you could talk about your view of the average selling price declines in digital flat panel TVs, where they are at roughly through the third quarter, and if you're seeing acceleration going into the fourth, and into '07?

  • - SVP - Merchandising

  • This is Mike Vitelli, again.

  • The pricing year-over-year if you looked at where LCD and plasma are now versus a year ago for comparable inches, if you will, because that is how we try to look at it, is inches.

  • LCD is down about 25%, Plasma is about 30.

  • I would say they are ahead of where we planned them to be, as far as them accelerating based upon the aggressiveness of the manufacturers of getting their products into the marketplace.

  • I think in many cases they are set for where they are going to be in the fourth quarter.

  • As they move into '07, they are starting to say, again that they think that decline will slow.

  • Some of the manufacturers have started saying that.

  • They said that last year as well.

  • But I'm still very bullish on the fact of every time we are changing a $225 tube TV, for whether it is a $1600 or a $1400 or a $1200 flat panel TV, that's a positive thing for us.

  • And as we said earlier, the experience that the customer is looking for in High Definition, is materially different than the experience when they were buying 2 televisions for the last decade.

  • That is giving us an opportunity to explain to customers how to get experience that they see in our stores, and to bring that into their homes, and that's a big shift and a positive one for us, as well.

  • - Analyst

  • One quick follow-up.

  • As the LCDs are getting into the larger screen sizes, is that level of competition, and the fact that LCD has also a pretty aggressive built in ASP decline, is that creating more average selling price pressure on larger screen sizes?

  • Is that something that we should expect for '07?

  • - SVP - Merchandising

  • I think that would be right.

  • I think to your point as LCD gets into larger screen sizes, that will put plasma and LCD and even projection TV, so to speak, head-to-head against with each other.

  • It will take a little bit of time for LCD to get to the point where it is below plasma, because that is the projections in the industry, as that total industry expands over the next 5 years.

  • But it will get them imparity, and then begin to bring prices down for consumers, which is going to be a positive thing for the growth of the industry.

  • - President, COO

  • It is a positive thing.

  • In fact, it is moving it right into the sweet spot, into the Power Zone for middle America, which is something we are extremely excited about here at Best Buy.

  • - Analyst

  • And then what would be the implications of margins on that phenomenon?

  • - SVP - Merchandising

  • Well, the product costs move down with, you know with the manufacturing capacity and that is what allows for the price decline.

  • So in general, the margins relatively stayed the same, if you will, and follow the price down.

  • - Analyst

  • Okay.

  • Thanks.

  • - Vice Chairman, CEO

  • Thank you, that was Mike Vitelli and Brian Dunn.

  • Next question please.

  • Operator

  • Alan Rifkin with Lehman Brothers.

  • Please go ahead.

  • - Analyst

  • Yes, good morning.

  • Couple of questions if I may.

  • Darren, you mentioned that there was a shift in the advertising spend in the quarter.

  • Can you maybe just quantify that?

  • And what do you foresee the advertising spend in Q4 compared to last year?

  • And then I do have a follow-up.

  • - CFO

  • Yes.

  • So a couple, maybe a little bit of context, Alan.

  • If you go back to Q2, you might ask yourself, at Q2 I think we were running call it 95 basis points of SG&A leverage.

  • And what we had shared with the group is where did it come from?

  • We said a third of its coming from labor productivity, a third of it is coming from overhead, and a third of it from advertising.

  • And we said that part of that was a deliberate decision to shift advertising dollars into the third quarter.

  • So when you look at our third quarter SG&A leverage, say how did we go from 95 basis points down to 60 basis points of leverage.

  • We would say almost two-thirds of that is that we released the advertising spend into the third quarter, absolutely targeted at the things I talked about in my comments.

  • You know the other piece of it is, we also made some investments as we said we would in all of those Magnolia Home Theater rooms, and expanded home theater offerings which slowed some of the leverage that we experienced in the second quarter.

  • So those are the two big differences quarter to quarter.

  • As we go into the fourth quarter, we would expect to continue to be investing more in advertising as we reached the gaming platform launches, and more importantly, Vista.

  • And the Vista launch, and what they will mean to our home office business and our services business, as we go into the fourth quarter.

  • - Analyst

  • And then a follow-up for Brad if I may.

  • Brad, it was mentioned on the call that obviously you had a tremendous post Thanksgiving weekend.

  • Comps were up double digit, there were 1500 people at the store that Brian was at.

  • There were 1000 people in line when the store opened that we were at.

  • - Vice Chairman, CEO

  • Yes.

  • - Analyst

  • Looking at that weekend and maybe even the, holiday season maybe holistically, and I realize that obviously you have to be competitive with more and more competitors nowadays.

  • But as you look at the holiday season maybe from 30,000 feet.

  • Is it really necessary to be as promotional as you have been in the past?

  • And maybe sacrifice some of the revenues in an effort to drive even greater profitability?

  • - Vice Chairman, CEO

  • Well, thanks for the question.

  • Actually when we first started doing customer centricity, we had a hypothesis that this weekend was, actually we called it Red Friday.

  • Because as a standalone, it made no economic sense.

  • So the hypothesis going in was this was a stupid way to put a huge amount of financial investment and take almost no margin out of it.

  • But as we got deeper into customer centricity, and a deeper understanding in terms of the customer, and this is what Brian referred to, we discovered well, it may be red on the day, but it is not red.

  • And if you don't, and I think you have seen some other retailers lose the consistently lose the Thanksgiving weekend.

  • And they, there is an elongated impact of that loss that is not smart.

  • And that's kind of what we were trying to go back and say, look we expected probably higher margins than we got on the Thanksgiving weekend, because you can never tell, and when you compress business into that tight of a framework, exactly what people are going to buy.

  • But we are very bullish about seeing that so many customers responded because it's, those customers over time are highly valuable to us.

  • - Analyst

  • Okay.

  • Thank you very much and best of luck.

  • - Vice Chairman, CEO

  • Thanks.

  • Great question.

  • - VP, IR

  • Thanks Brad.

  • Next question, please.

  • Operator

  • Our next question comes from Michael Baker, Deutsche Bank.

  • Please go ahead.

  • - Analyst

  • Thanks.

  • I do want to focus on the gross margin a little bit.

  • And two questions.

  • One, so in the fourth quarter, I think if you do your annual guidance, you are backing the fourth quarter down about that same 80 basis points.

  • But it sounds like you expect the fourth quarter to be less promotional, you don't have Black Friday, you don't have the gift card breakage, either my math is wrong, you are being conservative, or there's something else in there.

  • Why is the gross margin not--, I would expect it to be down less than 80 basis points.

  • - SVP - Finance

  • [laughter] Michael, it is Jim Muehlbauer talking.

  • As we look at margins in the fourth quarter, we also recognize consistent with Darren's comments that we are going to be mixing into some lower margin categories, based on the growth cycles of those businesses, namely we expect the gaming platform to be bigger in the fourth quarter.

  • We also know that we will be mixing heavier into MP3 hardware, which carries lower margin rates.

  • Those are the two things that will actually see a little bit of degradation, once again just due to the mix change in our business, not in the individual rates of those product line performances.

  • - Analyst

  • Okay, so it is the mix.

  • And I guess the follow-up is, I assume that around Black Friday and I think Mike Vitelli alluded to this, the attachment rates are lower on TVs, and probably on video games, as well, as people are just coming into the box, and getting out as quickly as they possibly can.

  • Is that the case, and if so, can you talk about how much Black Friday hurts the gross margin?

  • - CFO

  • Why don't I have Tim qualitatively answer the question.

  • Qualitatively I will give you the--, I can just say, we didn't, when you look at part of the basis point decline, and that 30 basis point core decline that we had in the quarter.

  • I would roughly estimate it is about a third of that decline came from the mix of more business falling on Black Friday than our original forecast.

  • So as we said, the good news is we absolutely got the volume.

  • The reality of just the challenge of trying to attach on those days, and the mix of the promotional items was probably a third of that cost on that day for the quarter.

  • - EVP, Retail Sales

  • Darren, I'll just add a little color.

  • This is Tim, the first part of the day, the first few hours as you know is just, taking care of customers, and moving the velocity out of the store.

  • The rest of the day, we don't see that degradation at the rate that we do the first few hours at our Door Busters, or what you will see in our insert in our flyer, either online or in the flier at a 7-hour special.

  • That's really a 3 or 4 hour window, just heavy velocity, that we don't see actually even the rest of Friday maintaining at that rate for the rest of the day.

  • - Analyst

  • Okay.

  • Thanks for the call, appreciate it.

  • - VP, IR

  • Next question, please.

  • Operator

  • Our next question comes from Dan Binder, Buckingham Research Group.

  • - Analyst

  • Hi, it's Dan Binder.

  • - CFO

  • Good morning.

  • - Analyst

  • Just an expense related question.

  • On the litigation expense, I was just wondering if you could address what that is for.

  • Is it one-time in nature, Or is there sort of a permanent list of litigation expense accruals going forward?

  • And then it sounds like advertising in home theater where you said expense was more or less in-line with what you were thinking.

  • I was just thinking as we look forward, is there a lot more money that needs to be thrown at the home theater resets, whether it is probably not Q4, but sort of a post-Q4 into next year.

  • And then does that spending in China also pick up next year?

  • - CFO

  • Yes.

  • Why don't I take a swing at litigation.

  • So the $0.02 charge or 15 basis points in the quarter.

  • I think the key takeaway was, we didn't anticipate it.

  • And so in relation to the quarter and the year, it's not something that, we don't look out, and we believe any dollars going into this type of litigation manner are wasted dollars.

  • The reality of the size of our company is that I would love to call it a one-time event.

  • At the size of our company, we are going to have other litigation matters of this size.

  • I just don't know when.

  • We wanted to highlight it for the group in terms of transparency.

  • We also want to be candid that we wish they are one-time, but the reality of the size of our company, we are going to have other of these matters.

  • I don't think it's things we necessarily want to plan for, but they are going to occur.

  • - Analyst

  • Okay.

  • - VP, IR

  • The second question had to do with home theater spending.

  • - CFO

  • Oh, yes.

  • We have got obviously more stores we haven't done than stores that we have done.

  • - SVP - Merchandising

  • Yes, so we have got Magnolia Home Theater in just over 300 stores, and probably two-thirds of those we have transformed the home theater department outside, and we have done that in over another 100 stores.

  • There are probably 500 stores left, that we can do some action in as we look at next year.

  • From a Magnolia Home Theater point of view, we are probably close to done and covered in that space, if you look at individual markets where you are going to put that assortment, and that level of investment in.

  • But the home theater transformation, which is fundamentally creating a space where you can experience the flat panels, in an environment where you can actually see them and step back from them.

  • But more importantly, go through the experience of what High Definition source and installation is all about.

  • We will be looking at how much of that we need to do, and how many stores next year as we plan out the year.

  • But that is something that will likely, has to happen because the consuming public has yet to grasp the need for High Definition.

  • They certainly have the need for flat panel television.

  • That experience is very clear.

  • But the understanding and the need for High Definition, and the experienced difference it gives you is still very, very low on the consumer awareness scale, and we think we have an opportunity to explain it to tens of millions of customers.

  • - CFO

  • Mike, if I can just add.

  • I think I would add a couple notes.

  • One is we are going to continue to evolve what hour home looks like for the customer.

  • So as the customer learns more about, not just flat panel, but exactly what HD source means, what picture quality, what sourcing looks like.

  • Not just from picture, but also in terms of sound.

  • We are going to continue to work that home theater department.

  • So you may go in and see what we call our heat proposition, where we have remodeled the whole flat panel wall.

  • We are going to continue to work on that across America.

  • So that that solution matches up to fulfill the customers' needs that we are trying to solve for.

  • And Bob, did you just want to briefly about China?

  • - CEO - Best Buy International

  • In terms of China, the level of spend is absolutely consistent with our plans.

  • In fact the mix will change somewhat.

  • We will open probably in the region of 20 to 22 Five Star stores.

  • We open our first Best Buy store in Shanghai in approximately 10 days time.

  • And that will be followed by one or two other Best Buy stores in the subsequent 12 to 18 months, subject to how we learn from the first one.

  • So it is absolutely consistent with the plan.

  • - Analyst

  • Okay.

  • Just a follow-up to that.

  • Given that the SG&A was basically in-line with your expectations, even though the Street was maybe a little bit ahead of that.

  • Does this give you any reason to maybe give greater clarity?

  • I know you are not providing quarterly earnings.

  • The last several quarters we have had a lot of bumpiness in SG&A, is there any desire to maybe provide a little bit more color?

  • You know where we have bumpiness, so that the Street doesn't get too far ahead of you?

  • - CFO

  • Yes.

  • What a great question!

  • You know, we bumped through the first half of the year with 100 basis points of SG&A leverage.

  • I hope to bump the rest of the way through the year at that level.

  • So I think part of it is, I think it is good feedback.

  • So if at the end of the second quarter we, honestly we tried to signal that we were shifting some SG&A investments into the third quarter.

  • Both in terms of advertising, the number of Magnolia Home Theaters, so clearly that didn't come through.

  • So I think that's good feedback for us to go back and ask ourselves are we doing a good enough job, in terms of making it transparent?

  • Litigation like I said before, it was different than what we thought, and what outside followers had thought, as well.

  • I think when you step back and holistically look at the year, our SG&A guidance for the year continues to be very, very gratifying, in terms of seeing overall SG&A leverage come in.

  • I don't think it's come in this well for a couple years.

  • So it should approach as we have said in the math, should approach 90 to 100 basis points.

  • There is also one other perspective, which is to be honest with you over the years, I appreciate spending.

  • The, if you look at the benefit we have gotten as we've kept our strategy fresh, and as we constantly evolve to a very, a very transient industry.

  • If you look at this industry it is also always in some degree of pretty substantial flux, and this company has consistently done a good job to have gaining market share and adapting to that change.

  • And we have done it by constantly revising and refreshing what our stores are.

  • So we, and I think you are starting to see a pattern that a lot of that occurs in the third quarter from a timing standpoint, it seem to me that makes a great deal of sense for us.

  • We won't be spending money on a linear basis I hope going forward.

  • But I also think from a shareholders' point of view.

  • I like seeing us spend, especially you can pretty quickly see whether or not it gets us leverage in our results.

  • - Analyst

  • Okay.

  • Great.

  • Thanks.

  • Just one last thing I wanted to touch on.

  • Just a comment you made earlier about the promotional activity in December versus November.

  • The last few years we have also seen the promotional activity abate somewhat post holiday.

  • Is there any reason you would think that would change, as maybe some of the marginal players pull back from the category this year?

  • - CFO

  • We will ask our merchants here.

  • Mike or Dave?

  • - SVP - Merchandising

  • I think the point that traditional comeback after holiday is consistent with what we're seeing right now, and what our feeling is and plans are for the rest of the year.

  • There will always be somebody out there that will do something desperate at a particular point in time.

  • I think overall I don't think that is a concern.

  • - Analyst

  • Okay.

  • Great.

  • Thanks.

  • - President, COO

  • This is Brian.

  • I have a follow-up.

  • I'm going to turn the table.

  • I have a follow-up for you.

  • I just want to call out that I don't think we have been bumpy on our guidance on our EPS guidance for the year.

  • And that is exactly why we have gone to annual guidance here.

  • - Analyst

  • Yes.

  • Well, I guess the point I was making was if you look over the fiscal '06 period, you had some, you know, you had some big quarters where you had some investment spending that rose greater than expected.

  • And then this year we had the benefit in fiscal '07 of not having some of that.

  • But I guess my point was, is that in some quarters it's just greater than I would say normal levels of investment spending.

  • And so then when we lap that just having sort of better clarity on what you think, you know, will come back to you versus what you plan to respend just might be a little bit more healthy.

  • - CFO

  • I appreciate that comment.

  • I think there's a huge difference.

  • One of the things that we are trying to signal with the call.

  • Last year we also had a problem with this quarter versus expectations.

  • And we were doing quarterly at that point.

  • And what we were saying was that our, we were saying we had made an investment and the investment wasn't working.

  • So, because on what we expected and anticipated, we saw the investment didn't give us the outcome.

  • This year our lens is very different.

  • We have also made an investment here in this year.

  • And we are very confident that the investment is working, in spite of the fact that the quarter isn't linear in terms of it's earnings improvement.

  • So one of the things you will see.

  • Sometimes we will make mistakes and you will see us signal as we did last year that we are retrenching from a strategy that wasn't paying off for us.

  • Right now we are probably doubling down into a strategy we believe in.

  • - VP, IR

  • With that, could we move on to another caller?

  • - Analyst

  • Thanks.

  • Sorry.

  • Before there's redirect.

  • - President, COO

  • Sorry, Jennifer.

  • Operator

  • My apologies.

  • Our next question comes from Mark Rowen with Prudential.

  • Please go ahead.

  • - Analyst

  • Thanks, good morning.

  • - CFO

  • Good morning.

  • - Analyst

  • A few questions on the competitive environment in TVs.

  • I know a lot of people have already asked about this, but a couple of things.

  • It looked to us like your advertised pricing in your circulars, you didn't really lower prices very much.

  • And so how much of the margin pressure in TVs came from people coming in where you had to match ads on the floor?

  • And then second, you know Wal-Mart has talked about their TV business, flat panels growing triple digit.

  • You have said that now, you are up strong double digits, and previously had been triple digits.

  • Are you seeing people more interested in price in those, as opposed to the whole experience?

  • And are they willing just to deal on price, and basically walk out of the store if you don't match prices?

  • - SVP - Merchandising

  • Okay.

  • So two questions.

  • You said that our advertised prices, are you talking about on Black Friday weren't low?

  • - Analyst

  • No, no, no, I am talking about just in general throughout the quarter.

  • It didn't look to us like you had lowered prices that much compared to some of the competitors in your circulars, and online, and things like that, in your stores.

  • - SVP - Merchandising

  • Well, we do a number of things.

  • We do have the insert that's there all the time.

  • But I would say the promotion that we have had running for this quarter, that's been a good part of our success is the high Definition advantage.

  • And that's where you have an opportunity to save up to $400 on a TV depending upon the various High Definition services and installation packages that you might be able to use.

  • So we have, if you will the everyday price that we are promoting in the circular and online, and an additional up to $400 opportunity.

  • You put those together and we are very aggressive.

  • And in fact, when you talk about matching, more often than not, that's part of the matching conversation.

  • Because when you actually listen to people and what they want in their home, is they want what they're seeing in the store.

  • They want to see that picture, they want to have it hanging on the wall.

  • They want the sound that blows them away.

  • And the High Definition advances, get them that experience at a price that can meet or beat our competition, and that's something they can't do.

  • - Analyst

  • But Mike, you were primarily offering that all through the season, so that wasn't all that unexpected, that special promotion.

  • So with what I am trying to understand is what changed from the beginning of the quarter through the quarter?

  • And was it the fact that the competition had lower prices, and you had to lower prices to match?

  • Or was it that when people came into the store they came in with ads from competitors, and then you had to match at that point?

  • - SVP - Merchandising

  • The High Definition advantage started in the quarter and worked it's way through.

  • The phenomenon of the two days of November, and the both offensive and defensive actions of that day, are certainly a big part of what happened, of a piece of the margin for TV.

  • But if you look at it in total of looking at our quarters as they progress, if you look at the third quarter without those two days, if you look at our projections in to the fourth quarter and beyond, the TV business in total, when you put together the basket of products that go along with it, it's been very positive.

  • - Analyst

  • Okay.

  • And then just sort of related to that.

  • You have talk about your attach rate of all other things that you sell with the TVs, as not having gone down.

  • But it seems to me that given the strong double digit growth, and previously the triple digit growth in these big ticket items, that your warranty attach rate should have gone up, which should have helped margins, why is that not happening?

  • Are people, is the attach rate on flat panels, the big screens becoming less important to people?

  • - VP, Strategic Planning & Business Development

  • I think there are two answers there, responsible for services.

  • Naturally some of these products are gifts, candidly, right.

  • And then the way that they get our installation and our services, or our PSPs, are going to be through that attachment process after the fact.

  • We're not seeing dramatic changes, but we are seeing some shifts matching the price point of the product, which is how we priced the warranties then to fit with that solution for the customer.

  • So we are not seeing a significant change in that business.

  • - Analyst

  • Okay.

  • Thanks.

  • - VP, IR

  • And now for our final question, please.

  • Operator

  • Yes, our final question comes from Colin McGranahan, Sanford C. Bernstein & Co. Please go ahead.

  • - Analyst

  • I'll have a final two, if that's okay.

  • - Vice Chairman, CEO

  • Of course you will. [laughter]

  • - Analyst

  • Okay, I am stopping there.

  • Magnolia, if we can focus on that first. can you talk about the performance of the converted stores to the in-store Magnolia shop, versus your expectations, and versus the rest of the chain that did not have that Magnolia?

  • And also just comment maybe on the standalone Magnolia comp of negative 10%?

  • - CFO

  • Why don't I do that, and then Mike you do the--

  • - SVP - Merchandising

  • Okay.

  • - CFO

  • This is Darren Jackson.

  • So the Magnolia standalone stores, which there are 20 of them, their comps were down 10%.

  • I think part of the story there is, you know, as we look to last year, that business was up closer to 20%.

  • As a matter of fact when you get into the fourth quarter, their business was up 30%.

  • And I think as a practical matter, they are also experiencing and lapping some of the price compression that we are seeing in the marketplace.

  • And so we're not, we're not ultimately alarmed, but we are realistic that that business needs to continue to evolve in terms of its offer beyond TVs, and source and sound, in order to protect the profit formulas going forward for the standalone businesses.

  • And again, I would remind you part of what Magnolia brings us to in the standalone space is that what we are learning and what we are experiencing, which led to the conversions into our own stores.

  • So I think, I want to make sure we keep it in perspective, understand why it is that way, but also understand Magnolia is an enormous source for us to understand the front end of trends, in terms of the marketplace so we can use that information to make adjustments in the Best Buy store and benefit from those.

  • And I think Mike will take you through what we are seeing in-store Magnolia stores.

  • - SVP - Merchandising

  • So the intent of the Magnolia store within the store is to change the home theater experience within those stores.

  • So last year the 120 or so that we opened were literally as standalone Magnolia in the home theater department, and that home theater department didn't change.

  • The 180 that we added this year that we just completed that as we moved through the quarter.

  • In those stores we also changed the experience outside of the Magnolia home theater department.

  • When we look at it, we actually don't focus our attention on is it Magnolia Home Theater, or is it outside Magnolia Home Theater?

  • We're changing the experience in the department.

  • And we are very pleased we have consciously picked the stores that we are going into, to put that experience in, and we are thrilled with our response our customers are having, and the business that we're doing in the stores that we changed, and that's why Tim mentioned earlier we're looking at how to change the experience in the remaining stores regardless of whether we put a Magnolia Home Theatre in there or not.

  • It's the home theater experience that Magnolia was a big part of it in getting us going is what we are going to continue to do.

  • - Analyst

  • Okay.

  • And just a very quick follow-up, Darren.

  • What was the gift card breakage in the third quarter this year?

  • - CFO

  • Oh, it probably wasn't even a penny, Colin.

  • So net for the quarter was probably $0.03 against us.

  • So we had the initial breakage last quarter, last year in the third quarter of $0.04, I think roughly we take in almost a penny a quarter, as we did this year.

  • - Analyst

  • Thank you very much.

  • - Senior Director, IR

  • Thank you, Darren.

  • Thank you, Mike, Colin for your last question.

  • Thank you Eric, and thank you to our audience for participating in our third quarter earnings conference call.

  • As a reminder, a replay will be available by dialing in the U.S. 1-800-405-2236, or internationally, 303-590-3000.

  • No personal identification number is required.

  • The replay will be available from about 12:00 Eastern today, until 1:00 a.m.

  • Eastern on Wednesday, December 20th.

  • You can also hear the replay on our website, just click on For our Investors.

  • And finally, if you have any additional questions, please call Jennifer Driscoll at 612-291-6110, Carla Haugen, at 612-291-6146, or you can call me, Charles Marentette at 612-291-6184.

  • And as always, reporters can contact Sue Busch, our Director of Corporate Public Relations on 612-291-6114.

  • I think that concludes all of the numbers that I am going to give you.

  • And please end the call.

  • Thank you all.

  • Operator

  • Ladies and gentlemen, as an update, you will require a passcode for the replay.

  • The passcode is 11078191, once again the passcode is 11078191.

  • This does conclude the Best Buy conference for the third quarter of fiscal 2007.

  • You may now disconnect, and thank you for using AT&T Teleconferencing.