百思買 (BBY) 2008 Q3 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to Best Buy's conference call for the third quarter of fiscal 2008.

  • 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 P.M.

  • Eastern Time today.

  • (OPERATOR INSTRUCTIONS)

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

  • Please go ahead.

  • Jennifer Driscoll - VP, IR

  • Thank you, Eric.

  • Good morning everyone.

  • Happy Holidays.

  • Thank you for participating in our fiscal third quarter conference call.

  • We have four speakers for you today.

  • First up is Brian Dunn, our President & COO, second, Shari Ballard, Executive Vice President of Retail Channel Management.

  • Third, we have Bob Willett, CEO of International and Chief Information Officer, and fourth, we have Jim Muehlbauer, Senior VP of Finance and interim CFO.

  • As usual, we have a broad management group here with me to answer your questions following our formal remarks.

  • We would like to request that callers limit themselves to a single, one-part question, so that we can include more people in our Q&A session.

  • Consistent with our approach on prior calls, we will move to the end of the queue those who asked a question on last quarter's call.

  • I would like to remind 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 additional information, about factors that could cause actual results to differ from management's expectation.

  • As usual, the media are participating in this call in a listen-only mode.

  • With that, I will turn the call to Brian Dunn, who will begin our prepared remarks.

  • Brian Dunn - President, COO

  • Thank you Jennifer.

  • Good morning and Happy Holidays everyone, and thank you for joining us today.

  • We are very pleased to deliver the news we bring you today, because we believe it spells growth.

  • Growth that comes from our continued progress in building relationships with our customers.

  • In a minute, I would like to talk a little bit about why we believe that.

  • But first, I would like to put the third quarter's result in context.

  • If you go back to the first quarter, we talked about financial results and strategic results, and how they don't always match up in a three-month window of time.

  • The confidence that we expressed then even in a tough financial quarter, was anchored in what we were seeing in our customers and our employees.

  • We delivered very different financial results in Q2, but with no change in our focus on driving the customer experience, because that is how we are transforming this Company.

  • Let's face it, Best Buy was built as a distribution channel.

  • A vibrant independent distribution channel, but a distribution channel nonetheless.

  • The business model initially had more to do with supply what we can sell, than demand what customers want to buy.

  • When margins began to drop and it became more about efficiency and speed, we knew we had to reinvent ourselves.

  • That is where customer centricity began.

  • We have to reach people, employees and customers, and win with them.

  • That is where the profit pools in growth are.

  • Our solid second quarter results were possible only because of the investments and cultural changes we have been undertaking to move our Company in this new direction.

  • The third quarter was another transformational quarter, and one where the strategic results and the financial results were once again aligned.

  • First, the financial results.

  • Today we reported EPS of $0.53 for the third quarter, an increase of 71%.

  • With revenue growth of 17%, and a comparable store sales gain of 6.7%.

  • And once again, the strategic results which are really a measure of how well we are building our relationships with customers are very encouraging.

  • Our customer satisfaction was up again this quarter as was our market share.

  • And so was Rewards Zone membership.

  • We now have nearly 28 million Rewards Zone member.

  • In addition, just 14 months after launching our Rewards Zone MasterCard, we have surpassed 1 million members.

  • It is one ever the country's fastest growing retail credit cards.

  • We continue to look for ways to build upon the relationships we have with our most loyal customers, like offering exclusive sales events and other special promotions, and our customers love it.

  • The number of customers we consider most loyal was up this quarter, too.

  • Those customers spend more with us, and come back to shop more often, offering us an opportunity to do more for these customers.

  • We have built a solid credible relationship with our best customers, and so they trust us to move into new spaces with them.

  • In fact, they are asking us to do more for them.

  • We are going to determine these new spaces by what our customers are demanding, and not what our vendors are promoting.

  • I want to give you one good example of a new space.

  • Our musical instruments business.

  • A couple of years ago we started testing a 2500-square-foot store-within-a-store musical instruments concept in California.

  • The project was heavily based on customer research.

  • As you can see on YouTube, Face Book and MySpace, music is converging with technology, and Best Buy is seen as a partner they can trust in both areas.

  • In addition, many of our employees are musicians themselves, and are thrilled to help others create, play, perform, and share music.

  • It is early, but the results of this test so far indicate that we found in our serving a customer need.

  • We now have four of these stores with plans to add more next year.

  • I would like to give you three more examples of tangible indicators that we are improving the customer experience.

  • First, in September we will begin offering our Rewards Zone members the opportunity to redeem their certificates on-line.

  • In and of itself that isn't terribly exciting.

  • But the customer response is powerful in what it tells us.

  • In the first month, the percentage of certificates redeemed on-line was double that redeemed in our stores.

  • It proved what we already knew, customers love the flexibility to shop with us in different ways.

  • When we listen to our customers and provide the right multi-channel offerings, they also spend more money with us.

  • In fact, when they shop using different channels, they often double the number of transactions with us in a year, and remain loyal customers.

  • That is an important piece of profitable growth.

  • Second, the experience that we offer our customers during the Thanksgiving week is always in my opinion, best in class.

  • But we still find a way to make it better every year.

  • The truth is, that the customer experience increasingly starts before Black Friday, and because of this trend, we are better utilizing the on-line channel to communicate with customers about what to expect, like how the ticketing process will work.

  • On Black Friday we were very encouraged by a couple of statistics.

  • Despite record holiday volumes in our stores, customer wait times were shorter than ever.

  • In the stores I visited, recovered from that morning rush very, very well.

  • That set us up for a good afternoon with our blue shirts engaging with customers, and completing more complex transactions with them.

  • And finally, my fourth example.

  • Two weeks ago we announced the addition of Dell to our computer assortment.

  • We are certainly pleased to offer Dell products to our customers, because we now have the complete lineup of every major brand for our customers, all backed by the service and support of the Geek Squad.

  • We know that our customers wanted this brand, because Dell was one of the most heavily searched words on our website.

  • Now we can meet that need.

  • As these three examples show, we are striving to build relationships by offering more to our customers, wherever they interact with Best Buy.

  • Putting together powerful offers led by customer insights and delivered by our employees as a recipe that is working.

  • And speaking of our employees, I would like to conclude my remarks with a few comments about them.

  • A quarter like the one we just completed with 71% earnings growth, can only come when every part of the company is pulling in the same direction, from the U.S.

  • to Canada to China, it was uniformly spectacular performance, and I want to pause here to say, 'Thank You' to our people.

  • I hope you are proud of that performance and proud of what you are building at Best Buy.

  • We know that our focus on customers means nothing without our people to complete the relationship with them.

  • And I am pleased to report that we are making progress in some key indicators on the employee side of that relationship equation.

  • We continue to reduce our U.S.

  • retail employee turnover, and are on-track to reduce it by 5 percentage points this year.

  • Our general manager turnover continues to improve as well, trending at an impressive 13%, a significant decrease in last year.

  • As we look to the future, our confidence is grounded, and our employees in the progress they are making with our customers.

  • Our employees work for a growth company, and we see a ton of untapped opportunities for growth next year, and for the next ten years.

  • We already mentioned musical instruments.

  • We can explore other new offerings as well.

  • Even as we look with new eyes at existing areas, such as financial services, cellular, private label, our high end business, and even warranties.

  • We have a growing number of loyal and enthusiastic customers.

  • So it is up to us working on their behalf to decide whether the brand can go with them next.

  • We believe in our employees and have faith in what they can do for customers, especially if we give them the right tools.

  • When we put our faith in our people and their insights on customer's needs, they reward us with quarters like the one we are reporting today.

  • To talk more specifically about how we make that happen, next up is Shari Ballard, who heads up our stores, call centers, and .com capability for the U.S.

  • Shari Ballard - EVP, Retail Channel Management

  • Thanks, Brian.

  • Good morning, everyone.

  • I like to spend my time with you today discussing the growth premise underlying Brian's comments, and providing examples of the opportunity we have available to us when we operationalize that premise to our full capability.

  • Our point of view is this.

  • There are opportunities for growth that can only be seen by employees who talk to the customers, directly in the places where the customer interacts with the brand.

  • For us, that means in our stores, on the phones, on-line and in customer homes.

  • By providing these employees with the data and tools they need to understand their community, the various customer segments in that community, the needs specific to those segments, and placing them in an environment where they are invited and expected to try out their ideas for better serving those customers, we can grow Best Buy at exciting rates.

  • Additionally, we believe that running our business with a lens focused on who we serve, in addition to what we sell them, will unlock even more communities for growth.

  • Seeing evidence that using these different lenses to drive the business does work, and I would like to share some specific examples of that with you today.

  • While I don't want to overly generalize a single day out of the entire quarter, I am going to comment on Black Friday, because it offers some compelling evidence for us.

  • First, Black Friday and the following weekend was a success.

  • From a financial perspective, we had solid revenue growth, and our margins were up on a year-over-year basis.

  • Our .com channel significantly exceeded our revenue expectations, and it was a success from a customer perspective.

  • Customer satisfaction scores from up 3 points year-over-year Black Friday, and our customer complaints were down 25%.

  • Additionally, the majority of our growth came from our most loyal customers, and from our opportunity customers.

  • Opportunity customers are those who love our categories, but are not loyal to the Best Buy brand exclusively.

  • While we are pleased with these results, we are even happier with the way we are starting to get these results, and with what we are learning about our customers in the process.

  • We are using customer data to design value propositions within and across the channels, measuring how the customers respond, and adapting based on what we are learning.

  • The first example I will use comes from advertising.

  • In our Thanksgiving insert, we advertised a number of bundles.

  • We learned that all bundles are not created equally.

  • One of those bundles included a laptop, noise-canceling head phones and HD-DVDs.

  • In the past, we would have just looked at how many of those we sold.

  • Now we have the capability to look at who actually bought them.

  • That bundle in particular skewed heavily to our most loyal customers by nearly 500 basis points.

  • While other bundles in the ad underperformed relative to our best customers.

  • We knew that information fairly quickly, and are using that knowledge to guide how we serve those customers in the future.

  • For instance, we now know that offers include a, entertainment component, skew heavily to our most loyal customers.

  • In the same vein, we are learning that many of our most loyal customers want to have alternatives with how they shop with us.

  • For example, many of them would prefer to avoid the fray of Black Friday.

  • So this year we offer them a private shopping event the weekend before Thanksgiving, and had outstanding customer response, and very good business results.

  • Now, we add local insight on top of that macro visibility, and we can literally see countless opportunities for better serving the customer.

  • We have got some specific examples of that from Thanksgiving week, too.

  • The first example is Store 48 in Topeka, Kansas.

  • So a shout out to the Kansas team this morning, with industry insight coming from our PC mobility operating group here at the corporate office, the local team knew that GPS was going to be on fire this holiday.

  • They also knew one of the biggest reasons customers leave our stores without buying, is because they can't find what they are looking for.

  • Not that we were out of stock, they can't find it.

  • Store 48 tested the idea of relocating GPS to a more intuitive location in their store.

  • Their GPS category growth versus their peers increased by 20 percentage points.

  • Still working from the insight that customers want an easier experience with us, another store made changes to its notebook display, to make it easier for the customers.

  • They literally took the cabinet doors off their display, and had grab-and-go notebooks in a box with a handle, easily accessible for the customers.

  • The first day with their new approach showed a triple-digit comp in their notebook business.

  • The final example comes from the north Scottsdale area, where a handful of stores used their best asset, their people, more strategically on Black Friday.

  • They knew from past experience that customer shopping patterns change dramatically as the day unfolds.

  • They scheduled some of their most experienced associates later in the morning and in the afternoon, in an attempt to better match experienced selling labor, with the way the customers wanted to shop.

  • Not only did we see this in Phoenix, but we saw application of this in many other markets, and it is an example of us learning within the day, how to respond to local customer needs.

  • We believe this contributed to the 3-point improvement in customer satisfaction I referenced earlier.

  • We have more examples, and they are all variations on a theme.

  • That theme is that when we get away from looking at the business solely by what and where we sell, and pay attention to the combination of powerful customer focused solutions, matched with the insights of our local teams, we can unlock extraordinary results.

  • That is why we are confident in our growth runway.

  • We believe we can materially grow market share in our current categories this way, and that in these dialogues with customers, we will discover new adjacent spaces where they want us to participate, like musical instruments that Brian referenced a minute ago.

  • I also think this lens will take us into new spaces as we identify customers, and we identify where customers are massively disappointed with their technology solutions.

  • Our work with Car Phone Warehouse, and the customer value propositions we are building together in the mobility space, is an example of the possibilities.

  • As we get better and better at operationalizing our core premise, we expect to see the results show up in market share gains, comp growth, and overall earnings growth.

  • There is no reason a ten-year-old store can't be generating growth like a new store, based on what we are seeing.

  • As I close, I too want to thank the employees in all of our channels and here at our corporate office, for working together to deliver a great quarter.

  • Team, the work you doing is defining a bright few future for Best Buy.

  • With that, I will turn it over to my colleague Bob.

  • Bob Willett - CEO, Best Buy Int'l, CIO

  • Thanks Shari.

  • I would like to take you through an overview of the results in the International segment.

  • Then I will comment a wee bit on each country's performance, as we take our domestic growth engine to international markets, and continue to invest in our enterprise infrastructure.

  • Collectively our International segment produced operating income of $22 million.

  • A materially increase compared with the $7 million for the prior year's third quarter.

  • Our earnings gain was supported by revenue growth of 32%, to $1.7 billion, or more than one-sixth of the total revenue for the enterprise, including comparable store sales gains that clocked in at 9.3%.

  • We were very impressed with the work that the teams did in serving customers, we are benefiting from the opportunity to achieve faster growth in markets outside the United States.

  • As you have seen in the news release, our international operating income rate improved by approximately 80 basis points.

  • This gain was largely due to the focused execution in Canada, which drove 130 basis points of SG&A expense improvement, as well as an operating model shift in China.

  • These improvements offset a modest 40 basis point decline in our international gross profit rate, which reflected unfavorable mix changes and pricing pressure in Canada.

  • All together, our operating income rate for our international segment was 1.3% of revenue.

  • We delivered these results while continuing our work through the Geek Squad partnership with Car Phone Warehouse, as well as preparing to enter Turkey and Mexico.

  • I have already begun down the road of commenting on the individual brands, so let me complete that thought.

  • First and foremost, congratulations to the Five Star team, on its 13% comparable store sales gain, a brilliant debut to the Company comp figure.

  • Because of the very different business model typically employed by retailers in China, which focused on devoting space in stores for each of the vendors, this metric historically wasn't a focus area for the team in China.

  • But they are fast learners.

  • We believe that comps are a critical way of gauging how our customers are responding to what we are doing in our stores and other channels.

  • It is also terrific feedback and the Five Star stores are using the data to drive actions.

  • Sales per square meter are also rising.

  • Another good indicator and contrary to other retailers in China.

  • In addition, both customers and employees are responding well to the new layouts we are testing in 20 Five Star stores.

  • Customer centricity is very much the centerpiece of our strategy internationally.

  • In fact, sometimes we are able to move more nimbly when we enter new countries, because there are no legacy issues with which to contend.

  • Specifically, it is much easier to create a culture from scratch, where employees are encouraged to gather customer insights, develop ideas for serving them better, and measure the results.

  • For example, at our Best Buy store in Shanghai, we have seen a real cultural shift, compared to how other retailers operate in China.

  • Our focus is not on vendor funding or rapid real estate growth, but on the employee experience, the customer experience, and the overall store performance.

  • Employees are responding to our culture.

  • As evidenced by the very low 15% staff turnover we had in the store's first 11 months of operations.

  • Customers are responding to the opportunity to touch and try our products, which are arranged by category, not by vendor.

  • 91% of customers surveyed said they liked the in-store experience, and 76% are likely to recommend Best Buy.

  • Give than the customers and employee metrics look good, it is no surprise that financially our performance in China is on-track with our plans year-to-date.

  • Yet, it is still early days, and we continue to go carefully with our organic store growth plans.

  • As expected, Canada where we have a very focused leadership team also reported a strong comp.

  • Our comparable store sales in Canada rose 8.7%, on top of a gain of 13.7% in the last year's third quarter, including both store and on-line performance.

  • Well done, team.

  • We recently launched Rewards Zone at Best Buy stores in Canada, and we are anticipating as many as 550,000 Rewards Zone members by fiscal year end.

  • We believe this investment will be repaid in customer loyalty, spending, and shopping frequency.

  • Another change we made in Canada was the launch of home theater services last summer., which is showing up in our international services growth.

  • Last we have a small but quickly growing private label business, which gives us huge differentiation and growth potential.

  • Before moving on, let me take a moment to give an example, that illustrates how private label can differentiate us and provide growth.

  • One of the many things our private label team does well, is to talk to our store employees and about what customers need.

  • But can't currently buy from us.

  • In our Canadian stores, we found out that there is an increase need for both a 25 and 50-foot HDMI cable, to connect their home theater system components, but none of our vendors offered anything that long.

  • In less than two months, the private label team launched a 25-foot rocketfish HDMI cable.

  • The 50-foot will follow in February.

  • And the 25-foot is selling very well.

  • Through our partnership with Car Phone Warehouse, we continue to add the Best Buy Mobile experience at our stores, and currently operate 181 such locations.

  • The early results are really promising from a top line perspective.

  • We previously indicated plans to offer this experience at all U.S.

  • Best Buy stores within the next two years.

  • Likewise, we continue to progress with offering Geek Squad services at Car Phone's U.K.

  • locations.

  • While the in-home channel is still in the pilot phase, the on-line and over the phone channels are right on plan.

  • More important, the customer reaction is just terrific.

  • We need to get the message out, because the business model clearly offers value for customers.

  • We also continue to move forward into new markets, recently welcoming to Best Buy an experienced new leader from Mexico with a passion for our values, including unleashing the power of our people.

  • We also currently expect our first stores in Turkey and in Mexico next fiscal year, and we are pleased with initial response from our vendor community.

  • We were not daft enough to believe we were good at everything, and we can go everywhere with our current store formats.

  • But we do think we will have less risk in expanding internationally than any other retailer, because we have a good business model, and a clear sense of the employee behavior we need, and the culture we want to create to serve our customers.

  • We are also learning from others who have gone before us.

  • We cannot be effective offshore, unless we are good at what we do at the core, and can translate it to other markets.

  • To facilitate this effectiveness, we are continuing to make major investments, to complete our supply chain program, and technology infrastructure build out.

  • These investments will enable us to implement new capabilities, that will accelerate our differentiation.

  • Our core is very strong.

  • That is why we are a growth company, and plan to keep acting accordingly.

  • We are also very optimistic about what the future holds for us.

  • Thanks for your attention this morning.

  • We will put a full stop there, and turn the call over to Jim.

  • But before closing, I would like to wish all of our employees and their families a very Happy Christmas, and a Happy Holiday.

  • Jim, over to you.

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Thank you, Bob.

  • Good morning, everyone.

  • In short, we are pleased with the 71% EPS growth in the quarter.

  • We saw relatively consistent underlying strength throughout the quarter, and enjoyed a very solid November.

  • Consumer electronics appears to be once again the holiday gift of choice.

  • And as Brian said, our employees planning and execution on behalf of our customers was second to none.

  • Both our strategic results and our financial results are telling us that we offer the products people want, but more importantly, we are offering the experience that people want.

  • While we love great financial results, we are most excited about the positive traction we are gaining as evidenced by our latest customer satisfaction and market share data, which shows us continuing to build share in key categories profitably.

  • Our 17% revenue growth in the quarter, was driven by strength in both our domestic and international segments.

  • We reported a 6.1% comp in the domestic business, or roughly 3% when adjusted for the calendar shift.

  • That was double the first half run rate of 1.7%.

  • The acceleration in comp performance from the previous quarter, was a function of both better industry growth, and share gains in product categories, such as gaming, notebooks, and GPS.

  • We are doing a better job of developing bundles of solutions that make sense for our customers, and that leverage the benefit of a world-class retail team.

  • Additionally we saw greater revenue contribution from new stores, because we accelerated the timing of new store openings this year.

  • We opened up 72% more U.S.

  • Best Buy stores in the first half of this year versus last year.

  • As expected, U.S.

  • consumer interests for the quarter centered on gaming, computing, and GPS.

  • As Bob mentioned, our international segment posted strong revenue growth as well, with 32% on top of 51% growth last year.

  • Total revenue growth was aided by the impact of positive foreign currency exchange rates, the 9.3% comp sales gains, and new store openings.

  • The gross profit rate was flat year-over-year.

  • Sometimes flat feels like a success.

  • The growth profit rate actually increased the domestic business by 20 basis points.

  • I know that you have not heard the words gross profit and increase used in the same sentence for a while, so let me give you color behind these results.

  • As you all know, we are lapping a pretty promotional November, particularly in home theater and notebooks.

  • Consistent with our hypothesis at the beginning of the year, these two spaces were more rational this time around, and we actually grew home theater margins for the second quarter in a row.

  • Part of the way we accomplished that was through lower cost promotional programs.

  • We have also lapped the inclusion of the China business.

  • While we have added new stores in China, it no longer puts pressure on the year-over-year gross profit rate comparison.

  • These gains were essentially offset by the impact of continued strong growth in lower margin categories, such as gaming hardware and notebook computers, which we saw both domestically and internationally.

  • A continued bright spot for the year was the level of SG&A improvement.

  • Our 120 basis points of SG&A leverage reflected strong revenue growth and efficient spending.

  • Our domestic leverage accelerated from Q2, fueled by higher revenue growth, and changes we made to our store labor model.

  • As you can appreciate, we generate significant leverage on a 17% revenue growth.

  • In addition, we had fewer changes in the stores this year than last year, when we were rolling out 136 Magnolia home theater rooms.

  • The absence of startup expenses, and a more efficient labor model, enabled our stores to better focus on serving customers.

  • Finally, internationally the SG&A rate also improved by over 100 basis points, supported by strong revenue growth and expense control, including advertising leverage.

  • Net, it adds up to roughly 120 basis point improvement in operating income rate, and more importantly, a 79% increase in operating income dollars.

  • The calendar shift contributed to that growth, but we are very pleased with the underlying growth we see on an apples-to-apples basis.

  • At the end of the day, this was one of our best third quarter operating performances in recent memory.

  • Bottom line we grew our diluted EPS by 71%.

  • These results bring us to 19% earnings growth year-to-date, after being flat through the first half of the year.

  • All-in-all it was a very solid performance, our employees deserve all of the credit for maintaining focus on executing their operational [brand], which drove this rewarding quarter.

  • We are consistently working on new and better value propositions for our customers.

  • Not that everything always works, but seeing how well customers are responding, gives us a ton of energy for the future.

  • Before shifting to the outlook for the balance ever the year, it might be helpful to touch on a few balance sheet items.

  • First our U.S.

  • comparable store inventory was up approximately 8%, which was higher than previous quarters.

  • This inventory increase was a function of purposeful investments in high growth product categories, such as flat panel TVs, gaming, and notebooks.

  • Furthermore, almost half of this increase was due to the calendar shift, as we ended the quarter one week deeper into the holiday season.

  • Overall we are comfortable with the status of our inventory positions.

  • Second, our diluted share count for the quarter finished about where we thought at 431 million shares.

  • We still expect an average diluted share count of 454 million shares for the fiscal year.

  • As previously stated, the accelerated share repurchase program is planned to conclude at the end of our fiscal year.

  • Looking forward, we are raising our earnings guidance for the fiscal year, due to our solid performance in the third quarter.

  • For the year, our earnings outlook is $3.10 to $3.20, an an increase of 11 to 15% year-over-year.

  • We still expect an enterprise comp of roughly 4%, driving close to $40 billion in revenue.

  • Our annual outlook assumes SG&A leverage will offset growth margin declines, yielding nominal growth in the operating income rate for the year.

  • Specific to the fourth quarter, earnings will be constrained by the loss of 53rd week from last year, and the shift of the holiday shopping week into Q3 of this year.

  • Conversely, the ASR will provide a tailwind for EPS growth in the fourth quarter.

  • While we will continue to make progress in improving our promotional programs, we expect the Q4 gross profit rate to be down modestly from the prior year, in part due to mix shift changes, and the gift card breakage that benefited the prior fourth quarter.

  • We also expect significantly lower SG&A leverage in Q4 versus Q3, as a function of lower revenue growth, driven by the absence of 53rd week and the calendar shift.

  • Reaching $40 billion in sales is an exciting milestone for everyone in the Company.

  • For context, it took us 33 years to hit the first $10 billion mark.

  • We added $10 billion in the last two years alone.

  • We come a long way, and we aren't done accelerating the growth.

  • We have said many times that our results won't be linear, because we are pursuing a growth strategy, that is dependent on really engaging our people, to generate ideas that meet customer needs, which won't be linear.

  • We are humble enough to remember that both when financial results exceed our expectations, and when they don't meet our expectations.

  • To be clear, while we were pleased with the progress we made this quarter with comparable store sales, as a growth company, we are not yet satisfied that we have truly unlocked the best solutions for our customers, or that we have fully embraced the ideas generated by our employees, to grow the business faster.

  • We see that as the biggest opportunity that is still out there in front of us.

  • And when we do these two things successfully, we believe we will set the organization on even a higher growth trajectory for the future.

  • In closing, I want to reiterate our appreciation to all of our employees for the great quarter they produced.

  • We are confident that our diligence in maintaining our customer focus, will continue to lead us to outsized growth opportunities.

  • Thank you, and we wish you and your family and friends a wonderful Holiday season.

  • Brian Dunn - President, COO

  • With that, Operator, we would like to turn it over to questions and answers please.

  • Operator

  • Thank you sir.

  • (OPERATOR INSTRUCTIONS) Our first question comes from Colin McGranahan with Bernstein.

  • Please go ahead.

  • Colin McGranahan - Analyst

  • Good morning, thank you.

  • Brian Dunn - President, COO

  • Good morning.

  • Colin McGranahan - Analyst

  • I guess my first question is for Bob Willett.

  • Who needs a 50-foot HDMI cable in Canada?

  • Bob Willett - CEO, Best Buy Int'l, CIO

  • Name and address to follow.

  • I want to live in Seattle.

  • Colin McGranahan - Analyst

  • Then I do have a serious question.

  • Looking at obviously November, Best Buy I think led the way in a less intense promotional environment, or a more favorable promotional environment.

  • What do you see so far in December in the context of the overall holiday shopping trend, which looks like it started well on Black Friday, but has decelerated since, and how are you thinking about the promotional strategy through the fourth quarter, given your current inventory position?

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • This is Jim Muehlbauer, I will try to take that apart a little bit, and maybe let some of my colleagues add some color.

  • First off, you are right.

  • We did execute our plans in the third quarter on Black Friday, consistent with the environment that we had actually anticipated through most of the year.

  • Our teams were much sharper on our promotional offers, and the execution of our store teams were phenomenal.

  • We were very, very pleased with our top line results, and more importantly our margin results when we compared them from the previous year.

  • As we look at the fourth quarter so far, the promotional environment continues to be about what we thought.

  • From a sales standpoint, early in December, importantly we are trending within the range of our predicted outcomes for the quarter.

  • And historically we know that our customers are shopping later and later each year.

  • Accordingly we are planning and we are prepared for a strong finish for the holiday season.

  • After what is somewhat a slower overall retail environment in early December.

  • As you know, December is our largest earnings month of the year, and we look forward to giving you an earnings update during our December sales release.

  • Colin McGranahan - Analyst

  • Thanks Jim.

  • Just to be clear with that trending within your predicted outcome, so that would be for the fourth quarter kind of a $1.70-ish implied in your full year guidance?

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Roughly, we don't give quarterly guidance, as you know Colin.

  • I think if you looked at the fourth quarter, it would imply something like $1.70 to $1.80.

  • Colin McGranahan - Analyst

  • Perfect.

  • Thank you.

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Thank you, Colin.

  • Operator

  • Our next question comes from Anthony Chukumba with FTN Midwest Securities, please go ahead.

  • Anthony Chukumba - Analyst

  • Yes, thanks.

  • Congratulations on a great quarter.

  • Just had a question in terms of I guess, what you are expecting for this upcoming weekend?

  • It looks like the promotional environment has been fairly rational through the first sort of few weeks after Black Friday.

  • What are your expectations for this upcoming weekend, and then after Christmas?

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • As I mentioned earlier, our teams have been preparing for the rush of the close of the holiday season kind of all year long.

  • This is the time the year where our team certainly has a lot of energy around meeting customer needs as they finish their shopping list.

  • We don't comment specifically on expectations for the last week or so, other than the fact that we have purposely made investments in inventory to have great in-stock positions.

  • We have got store labor planned to meet the needs that we see of our customers.

  • And we believe that we will have a strong finish to the holiday season.

  • Brian Dunn - President, COO

  • And I would just add that we are very confident about the position of our employees and the stores they are in, to not only execute the plan, but this year we have really asked them to innovate around the plan, to make good smart decisions in each of their localities, and we are very confident about what that means.

  • Brad Anderson - CEO, Vice Chairman

  • After watching the holiday seasons for a lot of years, this is Brad, as we see things compress closer and closer to Christmas, it winds up becoming more of an operational challenge than it really does becoming a promotional challenge.

  • It is who is in-stock, who can process the business best, typically has done better, and then you riding on the brands, one of the things we keep talking about customer loyalty stores, is the fundamental thing that drives that last minute choice is where you selected to buy probably some time ago.

  • I think that has been a long term, and we feel like we are in a great position on all three of those fronts.

  • Bob Willett - CEO, Best Buy Int'l, CIO

  • Just to add on to Brad's point.

  • This is Bob.

  • I think what we are seeing as we go around the stores at the moment, is that the investments we have been making, the work the field teams have been doing, the investments we have been making from a technology and supply chain perspective, are really starting to pay dividends.

  • The quality of execution is still at the moment just incredible, even when you go in looking for trouble, frankly you can't find it.

  • You can always find bits of things going wrong in any business.

  • But overall materially the quality of execution is just phenomenal.

  • And it is getting better each year.

  • Brian Dunn - President, COO

  • I don't know, Bob, if you are going in looking for trouble, and you can't find it?

  • Brad Anderson - CEO, Vice Chairman

  • I spent a career looking for trouble.

  • Shari Ballard - EVP, Retail Channel Management

  • This is Shari, I would say one thing, maybe just underscores what Brad said.

  • I think as we head into this weekend and the upcoming weekend, we still have a lot of traffic coming into the store.

  • I mentioned it in my remarks.

  • We have a fair number of customers who come into our stores every day looking to do business with us, and leave without being able do it, because they can't find what they are looking for.

  • The store teams in particular, the on-line teams are working really hard to get at the large percentage of folks that come in wanting to purchase, and are leaving without that purchase.

  • We see that as a huge opportunity for us with the traffic we have today to close out the holiday.

  • Jennifer Driscoll - VP, IR

  • Thank you.

  • That was Jim, Brian, Brad, Bob, and then Shari.

  • With that, we will take our next question.

  • Operator

  • Next question comes from Gregory Miller with Morgan Stanley.

  • Please go ahead.

  • Gregory Miller - Analyst

  • Thank you.

  • I want to get a little bit more into the pros and cons in gross margin in the quarter.

  • Jim, you talked about how the promotional environment faded, and then some puts and takes last year.

  • How much of a positive was the lapping of promotional, particularly in television, if you look versus a year ago?

  • And then a follow-up on some of the negative pressures there.

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Greg, it is really hard to tell when we pull apart the promotional environment last year versus the change in offers that we made.

  • But if you go back to the third quarter of last year, our gross profit was down roughly 85 basis points.

  • If I recall 30 to 40 basis points of that was driven by the rates we saw in the marketplace, particularly in home theater and notebooks during that time.

  • We have been very encouraged by the progress we made, both last quarter and this quarter in our home theater space, and I think it would be a mistake to just solely attribute, and I am not suggesting you are doing this, but to attribute too much of that improvement to just the promotional environment.

  • Our teams have gotten much, much more insight to the types of customers that drive the most interest in the marketplace.

  • As you have probably seen, we have been refining our HDA Advantage program over the year, to get sharper on what our customers want, and actually improving our margin performance in that space.

  • So that was a very important driver that we see as sustaining in the business.

  • The promotional lever piece, it may have been in the 15 to 20, 25 basis point range.

  • Once again, it is very difficult to pull that apart, when you look category by category, offer by offer.

  • Gregory Miller - Analyst

  • It is fair to say that there was a portion last year that was just promotion, but then there are other improvements made, to structurally improve gross margin in those categories.

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Yes, that is correct.

  • We talked about that last year on the call.

  • We made some very specific investments to respond to the competitive environment.

  • To put us in a position to win for both last year and going forward.

  • And as you recall, our Q4 performance bore that out, and certainly the way we have been building share in some of our key categories this year, has been a continuing benefit of the statements we made, and our choices last Q3.

  • Gregory Miller - Analyst

  • On the negative side, was that pressure simply mixed?

  • Or was rate down within some of those categories?

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • In Q3 of this year, Greg, it is primarily mixed.

  • Our gaming business is on fire.

  • It is an area of high, high consumer interest, and we continue to have that business mix greater.

  • We are going to see a little, it will still be dilutive in the next quarter, but we will see a little less of that as we start to lap last year's strong gaming performance, when there was greater availability of some of the initial hardware launches.

  • Gregory Miller - Analyst

  • Thanks.

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Thanks Greg.

  • Jennifer Driscoll - VP, IR

  • Thanks Jim.

  • Our next question, please.

  • Operator

  • Our next question comes from David Strasser with Banc of America Securities.

  • David Strasser - Analyst

  • Quick question.

  • To follow-up on that on the comment on gaming.

  • As we kind of look into next year, how should we think about this shift from the hardware to the software, and when do you think that sort of becomes more prominent?

  • Julie Owen - SVP, Entertainment Business Operating

  • This is Julie Owen, with our Entertainment business.

  • We are looking pretty optimistically as we seen a lot of the cycles in the past.

  • You know, you start out with usually a new hardware release, and then follow with the software titles.

  • They don't usually happen at the same time, and we have had the same situation in this last 12 months with the releases.

  • We are look pretty optimistically for next year in terms of the software that will continue to come out, especially as you seek a new kind of software in the social and casual gaming areas.

  • So the Rock Band, Guitar Hero 3, and then the excitement that we see for consumers around the Wii.

  • We see a lot of enthusiasm from customers wanting to get a lot more engaged in the gaming experience.

  • Not only on the individual level, but with their families.

  • David Strasser - Analyst

  • Do you think that next year becomes a better gross margin maybe less comp?

  • Julie Owen - SVP, Entertainment Business Operating

  • I think there is an opportunity next year for us to continue to figure out how is the customer using the solution in their household, and then what are the things that go with that solution.

  • As people bring in more gaming systems, how does that connect to their home theater system, and what other accessories do they need.

  • We will be doing a lot of the same kind of work for the customers that TV and notebooks has done, around putting together the best offer that makes the sure customer is getting the full benefit of what they are trying to do.

  • David Strasser - Analyst

  • And a follow-up.

  • One of the question I keep getting is business has been strong now.

  • It has been a consumer electronics holiday.

  • What about '08?

  • Just somewhat bigger picture as you are thinking about your plans for next year.

  • What do you think are the products that continue to gain momentum versus products that may be kind of slowed down a little bit across the --?

  • Brad Anderson - CEO, Vice Chairman

  • I would just make a macro comment that if you look at the balance of our products, we are very optimistic about '08.

  • Whether it is in the computer field, television field, gaming field, there is a lot of products that have very good sparks, plus combined with something we feel is that we are making improvements with our internal operation, that allows to actually grow businesses at a faster rate than they might grow otherwise.

  • David Strasser - Analyst

  • I mean, if you take the macro out of it, do you think there is a better product cycle next year than there is this year, if you look at it on a combined basis?

  • David Morrish - SVP, PC and Mobility Solutions

  • I would like to answer that in this way.

  • This is Dave Morrish.

  • what we have been working on the last couple of years, is really to get an understanding of our customers needs as they look at our products.

  • We have been taking those needs to our manufacturers, and really developing products that allow us to shift what we are really trying to build.

  • And we were focusing much more on the output of those machines, and how do we create an experience for the customer.

  • I think as you read through our circular what you will see, what you have seen this year, and what you are going to see more of next year, is both private label products that deliver a different experience, but also our branded partners are developing exclusive products for us, that really give us an opportunity to accelerate growth from an experienced perspective, that also allows us to really add on all of the additional accessories, that drive margin and sales opportunity for us.

  • Brian Dunn - President, COO

  • Also, this is Brian.

  • In conjunction with what Dave has just said and Brad's comments, what we are really enthusiastic about, is what I believe is our most powerful growth engine.

  • That is the fact that we are becoming more and more skilled in connecting and hearing what our employees in the field who are connecting with the customers every day have to say, and turning that into actionable strategies.

  • We are enormously enthusiastic about what that means for next year, and the ten years after that.

  • Mike Vitelli - SVP, General Manager, Home Solutions

  • This is Mike Vitelli.

  • I just want to add one thing we are expecting to hear over the course of the next year.

  • 14 months from today, the television system of the United States is going to switch from analog to digital on February 18, 2009.

  • That is going to happen.

  • This next year the drum beat of that change will go through the country, and we believe our employees and our stores are going to be in a great position to help our customers through that transition.

  • It is going to be one of the biggest transitions that has happened anyplace in the world in changing an entire television system.

  • And it is complicated on one level, and simple on one level.

  • But there is going to be 300 million people that are going to want to know what is going on, and we think Best Buy is a great place for them to find that out.

  • David Strasser - Analyst

  • Thank you very much.

  • Jennifer Driscoll - VP, IR

  • Thank you David.

  • Next question, please.

  • Operator

  • Our next question comes from [Gerald Feldman] with Telsey Advisory Group

  • Gerald Feldman - Analyst

  • Hi, guys.

  • Brian Dunn - President, COO

  • Good morning.

  • Gerald Feldman - Analyst

  • Quick question about the stores.

  • You mentioned in the release that you will now open about 150 stores globally.

  • I was wondering two things.

  • One is where exactly they will be, are they mostly domestic or is it more on the international side?

  • And what does this mean for next year?

  • Does this mean you will open a little less than expected next year?

  • Or how does that play out?

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Gerald, thank you for the question.

  • A vast majority of the store openings that we are planning for this year are focused on our domestic business.

  • We will be opening up roughly 100 stores this year.

  • That is up from the 90 stores that we forecasted at the beginning of the year.

  • We are very pleased that we can have store growth outside of the U.S.

  • of approximately 50 stores, including our Canadian and our international operations.

  • We have not provided comments on what we think our store growth plans are going to be for next year.

  • Suffice it to say, with some of the great opportunities our employees are unlocking, and serving customers some of the product cycle changes, that Mike Vitelli and others just commented on.

  • We are very bullish on the store runway we have in front of us yet, and the returns we are seeing from our new stores planned.

  • Gerald Feldman - Analyst

  • Great.

  • Thanks.

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Thank you.

  • Jennifer Driscoll - VP, IR

  • Thank you.

  • Next question, please.

  • Operator

  • Our next question comes from Chris Horvers with Bear Stearns.

  • Please go ahead.

  • Chris Horvers - Analyst

  • Thanks and good morning.

  • First, a clarification question.

  • On the shift in 3Q and 4Q, so are we talking about 300 basis points in domestic comps.

  • Is that what you would expect to impact, come out of 4Q?

  • And any estimate on what the EPS benefit was, and then what comes out in 4Q?

  • And then just a follow-on the spending type question.

  • Accelerating the store growth side in 4Q that creates some SG&A pressure, is as we look to '08, is that an overall harbinger of what is to come?

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • So on the calendar shift question, not that we look at this at all, but the impact was actually 2.5% in the third quarter.

  • We actually expect that will be a little less in the fourth quarter.

  • Just because of the size of the fourth quarter is so much bigger from a revenue perspective.

  • That will moderate to something close to 1% for the total fourth quarter.

  • As we look at the new store growth, we actually haven't accelerated our openings in Q4.

  • We accelerated our openings earlier in the year.

  • I think I said in my comments that we had 72% more new store openings in the first half of the year.

  • We really took it as a purposeful investment this year to get those stores opened early, so that those teams would have more time on the ground before the holiday season, and we actually saw benefit to doing that in our sales in the third, and we certainly would expect that to continue in the fourth quarter.

  • Really no, if anything, we have had fewer new store openings in Q4 this year than we have had in previous years.

  • Jennifer Driscoll - VP, IR

  • And Jim, did you want to estimate the Q4 EPS impact?

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Thank you Jennifer.

  • I think the question on the calendar shift, you know, we estimate that it was worth roughly $0.03 to $0.04 on Q3.

  • From an operating income growth perspective, our reported operating income growth was up 79%.

  • I think if we exclude the calendar shift, it merely would have been up 60 or so percent.

  • Chris Horvers - Analyst

  • So does that mean, so I guess we might read this as, just to play devil's advocate, that you are lest optimistic about 4Q?

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Less optimistic in what sense?

  • Chris Horvers - Analyst

  • From an EPS growth perspective.

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • I think given the shift in the calendar, which is going to have a similar $0.04 impact on the fourth quarter, although we have obviously a much larger base of EPS.

  • And more importantly the loss of a 53rd week from last year, are the reasons we believe that the Q4 operating income and earnings growth will be less from a percentage standpoint.

  • We are certainly not bearish on Q4.

  • We are playing our plan out the way we intended all year long.

  • Chris Horvers - Analyst

  • And just one follow-up.

  • Could you remind us what the 53rd week benefit was last year in 4Q?

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • The 53rd week was roughly, I think it was $0.03 to $0.05 is what we called out.

  • Chris Horvers - Analyst

  • Thank you very much.

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Thank you for your questions.

  • Jennifer Driscoll - VP, IR

  • Next question, please.

  • Operator

  • Our next question comes from Mike Baker with Deutsche Bank.

  • Michael Baker - Analyst

  • Thanks, guys.

  • I just wanted to ask about your Apple products a little bit.

  • So you mentioned the 200 or so, 270 stores, how much of an impact is that having to the comps?

  • Is that big enough just that percentage of stores to actually matter?

  • And then any insight in to how you will roll that out next year?

  • You talked about some exclusive products I imagine that that is one there.

  • How that might roll out, and what kind of comp contributor that could be in the future?

  • David Morrish - SVP, PC and Mobility Solutions

  • First of all, let me talk about the impact.

  • I think there is, we really don't discuss the balance of sale with regards to any of our products.

  • But let's say that from this standpoint, the Apple share has been growing in our stores as a result of our investment.

  • More importantly, I think the impact has been solid, in terms of the overall performance of our employees in those stores.

  • They are excited to be able to offer another brand, another set of solutions to our customers.

  • We have seen substantial growth, not only in the Apple component, but across the entire PC area of the store, as a result of them being in the store.

  • As for next year, we have a very, very solid relationship with Apple.

  • It continues to grow.

  • They are very delighted with what it is we have been able to accomplish with them.

  • And I think you will see sustained activity, in terms of many new stores being added to the stable each quarter, as we go forward next year.

  • Michael Baker - Analyst

  • Okay.

  • Thanks.

  • That helps.

  • And then one follow-up if I could.

  • I am just wondering, what was behind the strategy to now brand the home theater installation also under the Geek Squad umbrella?

  • Was that something that your customers were telling you?

  • Or just some color there?

  • That would be great.

  • Sean Skelley - SVP, Business Group Leader, Services

  • I was just that simple.

  • We asked our consumers what they thought of the Geek Squad brand, and they already thought we were doing home theater installs.

  • So the benefit of connecting that, and build brand awareness, and take advantage of our service capability, was to put that brand holistically over our mobile installation, our auto tech, our home theater installations, and our computer agents.

  • Barry Judge - SVP, Marketing

  • And customers think about it that way so it enables us to put a more singular message into the marketplace, and be able to get more efficiency and higher awareness as a Geek Squad brand, and just tying back some of the comments that Shari made earlier, and Brian, about really building up our loyalty with our best customers.

  • Some of the things that we talked about in terms of service and in-home installation, and the Apple brand, we are finding are our customers, our best customers want more.

  • They want the great brands.

  • They want the brands that do more like Apple, and they want to do more with that experience.

  • That is who we are finding that is really attracted to our service offerings.

  • As we go forward, and we try to please our best customers who are asking for more.

  • You see us pushing the edges of the different businesses that we are in.

  • Michael Baker - Analyst

  • Thank you.

  • Jennifer Driscoll - VP, IR

  • Thanks.

  • And those answers were from David, Sean, and Barry Judge.

  • Next question and last question, please.

  • Operator

  • Last question comes from Gary Balter with Credit Suisse.

  • Please go ahead.

  • Gary Balter - Analyst

  • Hi, there just seems to be some confusion of Q4.

  • I found it would be useful on the call to just go over it, because I think you tell me where I am missing something.

  • But to do it properly, we should be thinking about essentially the 155 from last year being almost 145 when we take out the extra week.

  • We take out the gift card and we take out the shift in the week after Thanksgiving.

  • So when we compare 175 to 145, that is 20% up, that seems like a pretty nice estimate.

  • Am I missing something there?

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • Gary, I don't think you are missing anything.

  • We think if you look at the reported numbers and you adjust it for that 53rd week, we think we will be at a 20% earnings growth for the fourth quarter, which we are very pleased with.

  • Gary Balter - Analyst

  • And that is what we see.

  • But it seems like some people are not appreciating that 20% up in a difficult environment.

  • I wanted to make sure everybody heard that.

  • Thank you very much.

  • Jim Muehlbauer - SVP, Finance, Interim CFO

  • I appreciate that.

  • And we are not voting -- We are not voting for calendar shifts in the future.

  • Thank you, Gary.

  • Charles Marentette - Senior Director, IR

  • 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 in the U.S.

  • by dialing 1-800-405-2236, or 303-590-3000 internationally.

  • The pin number is 11103881.

  • The replay will be available in about an hour, and available until December 25th.

  • You can also hear it on our website under "For our Investors." If you have any additional questions, please just call Jennifer at 612-291-6110.

  • Or if you can't get Jennifer, call Carla Haugen at 612-291-6146.

  • Or me, Charles Marentette at 612-291-6184.

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

  • And that concludes our call.

  • So if we can please end the call, Eric.

  • Operator

  • Thank you, sir.

  • Ladies and gentlemen, this does conclude Best Buy's conference call for the third quarter of fiscal 2008.

  • You may now disconnect, and we do thank you for using ACT Conferencing.