百思買 (BBY) 2009 Q2 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the Best Buy conference call for the second quarter of fiscal 2009.

  • 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 standard time.

  • (OPERATOR INSTRUCTIONS).

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

  • Please go ahead.

  • - VP IR

  • Thank you, Nicole.

  • Good morning everyone.

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

  • We have two speakers for you today.

  • First, Brian Dunn, our President and Chief Operating Officer, will give the highlights for the quarter and our comments on the second half.

  • Second, Jim Muehlbauer, Executive Vice President of Finance and CFO of our Company, will give the financial recap and add color on our guidance including the impact of Best Buy Europe.

  • We do have fewer speakers this quarter in response to investor requests that we allow more time on our calls for Q & A.

  • We plan to have more than a half hour for your questions today.

  • Speaking of that as usual, we also have a broad management group here with me, including our CEO, to answer your questions following our formal remarks.

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

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

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

  • Our SEC filings contain additional information and factors that could cause our actual results to differ from Management's expectations.

  • May we also remind you 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 Brian Dunn, who will begin our prepared remarks.

  • - President, COO

  • Thanks Jennifer.

  • Good morning everyone, and thanks for joining us on our quarterly earnings conference call.

  • I'll focus my comments on the successes of the second quarter , the pieces that didn't work as well as we expected, and the plan we have in place to deliver our earnings guidance for the fiscal year, but first I want to thank our employees for another quarter of outstanding effort.

  • In the teeth of a tough market, they continue to create better and better experiences for our customers and our customers are responding by choosing Best Buy over the competition at a convincing rate, something I'll talk about in a minute.

  • I also want to specifically thank the Best Buy employees who helped our Gulf Coast stores and communities prepare for the onslaught of Hurricane Ike.

  • We can only imagine how you'd feel now as you return to your homes and deal with the devastation that Ike wrought.

  • Our thoughts were especially with those from the Gulf Coast community whose lives were disrupted, whose homes were destroyed, and whose family members lost their lives.

  • This quarter's earnings were below our expectations, something we're never happy about, but we issue annual guidance because we know that a given quarter will present unique challenges.

  • We're in the process of making some changes, primarily on the expense side.

  • More importantly, we remain both optimistic and committed to our strategy.

  • Why are we optimistic?

  • First of all, from a top line perspective, we are growing our business.

  • Difficult times have historically brought out the best in Best Buy, and a challenging environment that finds many of our competitors retrenching, we're opening more new stores.

  • We believe that it's smart for strong companies to work on distancing themselves from the competitors in tough times, and we believe that when the world's most resilient economy improves, we will be well positioned to benefit from it.

  • As we've said all along, we're keeping our eye on a few key strategic indicators and they are extremely encouraging.

  • Let me take a minute or two to detail a few specific wins that support what I'm saying.

  • First, our internal measures of customer satisfaction rose to a new high, over 81%.

  • Likewise, market share gains accelerate on top of what were already all-time highs.

  • We added share in TVs, computing, mobile phones and gaming, and in fact, all of our major categories in the past 90 days.

  • Specifically, we estimate that our domestic market share at the end of the calendar quarter was nearly 21%, up 1.6 percentage points versus the prior year's period.

  • And most importantly to us, employee retention is at an all-time high.

  • We've never had turnover below 50% before, and our 12 month rolling rate for turnover sits today at 49%.

  • We believe that's because the people who drive customer satisfaction and market share gains are committed to writing his growth story and committed to writing themselves into it.

  • Second, as I said before, we continue to grow our business, faster than just about anybody in our space.

  • Our 4.2% comparable store gain, 5.3% here in the US, was at the high end of most retailers in the past quarter.

  • That tells us that customers continue to respond positively to what we offer.

  • We believe customers need someone they can trust to provide perspective on our fast moving, exciting but often confusing industry.

  • Someone who will work with them to make technology work for them, and we believe our performance in every category this past quarter supports that belief.

  • Finally, our strategic investments in growth are beginning to have a noticeable and positive impact on our business.

  • This impact was most apparent in our Best Buy Mobile experience, which we accelerated to all US stores months ahead of schedule.

  • Today, more than 5,000 Best Buy employees are trained and dedicated to improve the experience of buying a mobile phone for our customers.

  • And in a business where most US customers surveyed so they would rather visit the dentist than upgrade to a new phone, we have improved customer satisfaction scores dramatically.

  • In fact, our customer satisfaction scores in this business are now some of the highest in our Company.

  • We moved aggressively with Best Buy Mobile because the Mobile business delivers above average profit rates, but also, because we believe that Mobile technology will play a larger and larger role in what we call the connected world.

  • It's yet another reason why we see opportunities in the back half of the year.

  • And speaking of that, let me now turn to our plan for the final two quarters of fiscal 2009.

  • At the beginning of the year, we said that we planned to invest into the teeth of this difficult macroeconomic environment, using our resources as a competitive advantage while many of our competitors scaled back their plans, cut back on Customer Service, or even closed stores.

  • We've stuck to that plan and we've made many of those investments in Best Buy Mobile, in international and in several critical store projects.

  • Of course, we've made some investments that have not generated the kinds of returns we expected.

  • We're looking carefully at our investment portfolio and in the second half we will decelerate or stop some of these projects to focus on our priorities, including those that are garnering the best returns.

  • We've already identified cost savings in the back half, yet we will not stop investing in selected growth projects, nor will we make any moves that erode the customer experience.

  • This mid year inflection point allows us to exercise what has always been our guiding principle when it comes to disciplined spending.

  • We will ensure that our investments are customer driven or they will be driven out.

  • The second area we'll focus on during the back half is our promotional strategy.

  • We were generally pleased with our gross profit rate.

  • At the same time we see an opportunity to improve the effectiveness of our promotions a bit.

  • When we view them collectively through the eyes of the consumer.

  • We'll continue to fine tune our strategy in the second half, leveraging our knowledge of our customers to ensure each offer is connecting with its intended target.

  • While we go after that opportunity, we will not stop using promotions as a powerful means to deepen our relationship with our best customers, especially members in our reward zone loyalty program, which now includes more than 31 million US memberships.

  • I'll wrap up my comments now, but before I turn it over to Jim, I want to reiterate that we are and will remain 100% focused on driving value for the long term and not just a season.

  • And although we're never satisfied with earnings below expectations in any quarter, we think it does not reflect the long term health of our Company or the soundness of our strategy.

  • With that I'll turn it over to Jim Muehlbauer, who will offer some additional color around our second quarter results and the outlook for the balance of the year.

  • - EVP Finance, CFO

  • Thanks, Brian and good morning, everyone.

  • I'd like to take you through our fiscal second quarter results and how they compared with our plans for the period.

  • Secondly, I'll update you on our earnings guidance for fiscal 2009 including what will be different in the second half due to changes we are making in the business and the impact of adding Best Buy Europe.

  • When we compare our second quarter results to our forecast, clearly our bottom line finished below our expectations due in part to our discretionary spending activities that exceeded our original plans.

  • Revenue for the second quarter met our expectations and probably was ahead of what many of you may have expected.

  • Our comparable store sales results for the domestic segment, again, showed strong improvement from the previous quarter, advancing 5.3%.

  • These results were driven by continued strength in notebook computers and gaming, strong results in flat-panel televisions, and acceleration in Best Buy Mobile.

  • In fact, our quarterly comparable store sales gains at stores open for six to 10 years were positive.

  • On average their comps were three to four percentage points better than we expected, based on the normal store maturation curve.

  • Normally, comparable store sales peak after six or seven years, and can go negative after that, unless of course we remodel or relocate the store.

  • The performance of these older stores in the last two quarters have stood out so that is exciting.

  • Roughly 470 of our domestic stores opened more than six years ago, and when our teams rejuvenate those store's results on a sustained basis, we see that as very promising for our Company and our shareholders.

  • On the other hand, as I look at our portfolio, our international comps were slightly weaker than we planned.

  • Canada had comparable store sales gain of 1% against a gain of 16% in last year's second quarter.

  • China's second quarter which includes results from April through June had a 7% comparable store sales decline, reflecting general economic conditions, including the aftermath of the earthquake.

  • Bigger picture, our top line held up well, considering the macro environment.

  • We believe that the drivers of these results were our US store strong execution, their efforts to grow their business through a local lens, our improved product assortments as well as benefits from the fiscal stimulus checks.

  • Candidly, it's hard to precisely quantify the relative contribution of each.

  • Our gross profit rate declined by 10 basis points, which was almost identical to what we experienced for the first quarter.

  • The growth in notebooks and gaming has been applying pressure on our gross profit rate for two years, and these categories continue to have growth rates well above the chain's average.

  • As planned, the growth in our Best Buy Mobile experience accelerated this quarter, and the strength in our mobility area was nearly able to offset that mix impact from notebooks and gaming.

  • We expect this trend to continue into the second half.

  • Our original SG&A guidance included deleverage for the fiscal year of 30 to 40 basis points to fund initiatives that would drive our long term growth.

  • Embedded in that assumption was an expectation that our second quarter would be the high watermark for the deleverage in the year, or approximately 70 basis points.

  • We knew we would be undertaking a number of strategic and tactical projects, including the rollout and operation of Best Buy Mobile, remodeling and resetting our GPS selling space, and investing in infrastructure to expand our platform for international growth.

  • We also plan for year-over-year increase in our investment in store labor.

  • We accomplish those objectives reasonably in line with our spending expectations.

  • In addition, our second quarter SG&A rate reflected subsequent decisions to invest slightly more labor in pursuit of an even greater top line outcome during the back-to-school shopping season.

  • We partially accomplished that objective.

  • We also spent more than we had expected on travel and related activities, and incurred some one-time expenses that we had not planned.

  • These expenses collectively cost us the additional 20 to 30 basis points of de leverage that we hadn't originally expected.

  • As I will discuss later, we've addressed these items and we can tell you with full confidence that for the year, we will be back on track for our full year SG&A spend.

  • Our second quarter also included $0.02 of dilution in net interest expense related, resulting from the financing of Best Buy Europe, without the benefit of any of its earnings.

  • We are reporting the operating results of Best Buy Europe on a two month lag basis while the cost of financing this acquisition is included on a realtime basis.

  • If you helicopter up and compare the quarter's results with our expectations, revenue and gross profits were in line and SG&A was above.

  • Fortunately, SG&A is the most controllable of the three elements.

  • That brings me to our annual guidance.

  • To provide clarity, I will break down the guidance for you into three pieces and then give you an enterprise outlook.

  • First, I'll talk about our guidance for the base business, which is our existing best by business.

  • Second, I'll walk through our expectations for Best Buy Europe, and third I'll explain the impact of the previously disclosed change in our share repurchase assumption.

  • The combination of those three pieces will give you our annual guidance for the total Company.

  • Let's start with the most familiar piece of our base business.

  • At the outset of the year, we laid out expectations for a comparable store sales gain for Best Buy of 1 to 3% for the fiscal year.

  • Our strong first half performance and comparable store sales was approximately 4%.

  • In the back half, we have based our planning assumptions on modestly softer consumer spending.

  • We're excited about the digital TV transition, our expanded assortments in computers, lower prices in gaming, the completed rollout of Best Buy Mobile and our access to the iPhone.

  • Yet, we recognize that there will be many factors in play during the second half, which makes overall consumer spending difficult to predict.

  • We currently expect to finish in the top half of our annual range for comparable store sales.

  • This implies a second half comparable store sales gain of approximately 1 or 2%.

  • After adding the impact of new stores, but still excluding our European business, we are estimating annual revenue for the base business of just north of $44 billion, an increase of 10%.

  • Our initial guidance for the year also assumed a flat gross profit rate.

  • Our gross profit rate for the first half declined by 15 basis points.

  • We expect to improve that trend modestly in the back half, thanks to the stability in our revenue mix and plans to increase the efficiency of our promotions.

  • As a result, our guidance for the base business now assumes an annual gross profit rate that will be down slightly to last year.

  • Next, let me give you some more color on the SG&A for the second half.

  • We plan Fiscal 2009 to be an investment year for the business so our initial guidance assumed SG&A deleverage of 30 to 40 basis points.

  • For the first half of the year, it was up approximately 55 basis points.

  • Again, we had planned that the second quarter would bring our peak spending in SG&A in terms of dollar increases year-over-year.

  • As Brian mentioned, we are making portfolio changes in our second half spending plans.

  • We'll reduce our deferred non-essential in store and corporate projects and lower our non-customer facing overhead cost.

  • We'll also adjust our advertising spend to closely align with expected business conditions.

  • Through these reductions, plus the impact of coming off that planned peak, we anticipate that our SG&A rate will slow and meet the original target for annual deleverage of 30 to 40 basis points.

  • Bringing these assumptions together, we still contemplate a 5% operating income rate for the year, down approximately 40 basis points from last year.

  • That gives us guidance for an annual EPS contribution from the base business of $3.25 to $3.40, an average increase of 7%, it's unchanged from what we gave you before.

  • To be clear, our previous guidance included the benefits from an expected $800 million in share repurchases or roughly $0.05 per share, which we later announced we will not be taking place this year.

  • From this point forward, those share repurchase benefits are not included in our guidance.

  • Now I'd like to walk you through the earnings impact of our European business.

  • We estimate that Best Buy Europe, which is primarily comprised of 2400 Carphone stores, will be accretive to the enterprise by $0.03 per diluted share for fiscal 2009, inclusive of the cost of financing the $2.1 billion acquisition.

  • We anticipate that it will generate revenue of approximately $3.2 billion for the July to December based on current foreign exchange rates.

  • As you saw in our news release this morning, Best Buy Europe will raise both our gross profit rate and our SG&A rate.

  • We expect that its operating income rate will be approximately 4% for the back half.

  • The inclusion of Best Buy Europe will modestly lower our average effective income tax rate as well since it's current expected tax rate is approximately 25%.

  • Keep in mind that while we report the full income statement of Best Buy Europe starting in Q3, only 50% of the after-tax earnings makes it to our bottom line.

  • So the operating results of our 50% stake in Best Buy Europe would bring us approximately $50 million in earnings after-tax but before financing costs.

  • Included in this amount are purchase accounting adjustments such as amortization of intangible assets.

  • We have lowered our estimates for Best Buy Europe since the updated guidance we gave you in June.

  • The retail business in Europe is proceeding as expected, so that wasn't the impetus for the change.

  • Rather, the Company has now completed the phasing of the operating plans for Best Buy Europe and updated its estimates for purchase accounting related to the amortization of intangible assets.

  • Additionally, recent strength of the US dollar is expected to slightly lower the results of Best Buy Europe as consolidated in Best Buy's financials.

  • So we started with guidance of $3.25 to $3.40 for the base business.

  • The second step was adding accretion of $0.03 for Best Buy Europe, that brings us to the third step.

  • Now, we subtract $0.05 for dilution for the fiscal year, reflecting our decision last May to suspend $800 million in planned share repurchases, following the acquisition of Best Buy Europe.

  • Rather than lower our earnings guidance by a couple of pennies, we are maintaining our original guidance range.

  • As the business plays out in the second half, we are comfortable that we can offset those pennies in other parts of our business.

  • To close, we are satisfied with our top line performance in the second quarter and with our margins.

  • We are a little disappointed with our SG&A rate so we are taking actions and have some work to do there.

  • We plan to have most of the year's earnings growth in the second half, putting together our better than expected performance in the first quarter with the results in the second quarter, we are only slightly behind our original expectations for the first half, with roughly 70% of the year's earnings still ahead of us, so we are pleased but not satisfied with where we stand entering the back half of the year.

  • Our focus is fully on serving customers and delivering on the financial expectations for the year.

  • We have great confidence in our people and in our strategy of customer and employee centricity.

  • With that, I'd like to open up the call to questions from our audience.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • As a reminder, please limit your question to one and then one follow-up question.

  • Our first question comes from the line of Gary Balter with Credit Suisse.

  • Please go ahead.

  • - Analyst

  • Thank you.

  • We're only allowed one question so I'll ask my one question.

  • You gave a somewhat bullish second half guidance and can you incorporate in that the worries that people seem to have about the flat-panel or flat television pricing dropping significantly?

  • How much has this stimulus package helped and whether you see that and the impact of credit availability on Christmas, like how do you look at Christmas season?

  • - President, COO

  • That was a great three part question, Gary.

  • Mike, do you want to talk about that?

  • - EVP - Customer Operating Groups

  • This is Mike Vitelli.

  • I'll talk about flat-panels first because I know that will come up a lot.

  • From an industry and inventory point of view, for the most part, the inventory is relatively solid as many of you have been reading and writing, the factories have been making adjustments in the production as they see the change in world supply.

  • We think that's good.

  • We think them reacting to worldwide demand in different categories where they supply panels for making those adjustments are positive because they need to make money and they aren't over building based upon what they see in forecasting.

  • Price declines have been following the pattern they've followed for the last several years.

  • The first quarter and the second quarter of this year for us, they were in the 13 and 14% range and average ASPs.

  • The good news is that's lower than it's been in previous quarters and we've built in the projections in the second half that reflect that and the growth accordingly.

  • We talk about the availability of credit.

  • That's a good point for us that we've aggressively gone out and put together a program to offer financing to our customers.

  • We think that was a big part of what we saw in the first quarter and the second quarter of customers coming to us and in some cases when they needed financing and in other cases where they didn't they thought it was a good promotional offer so our ability to offer credit to customers has been a positive for us.

  • - Analyst

  • And how do you measure the impact of the stimulus package in that as you look towards your second half in your 1 to 2% comp guidance?

  • - EVP Finance, CFO

  • Yeah, Gary, it's Jim.

  • Clearly as we look at the back half of the year, as I said in my comments, we're not expecting the same level of consumer spending in the back half which is why we're not forecasting a repeat of the 4% comp in the back half.

  • The thing that's difficult to predict is that while we know these stimulus checks had an impact on our business, given the multitude of things we did around improving our assortment especially in the computing space, adding products like Best Buy Mobile, where essentially customers come in and purchase products that basically have a recurring bill versus a payment on the front end, we know those type of purchases historically aren't stimulus check driven, so we have parts of our business we know are performing well absent stimulus check activities.

  • We have other parts of our business we know the customers benefited by having that extra spending capability so our back half plans really reflect what we see in the marketplace at this point in time both from a competitive standpoint and we've also been able to build able to build share first two quarters and we anticipate that's going to continue in the back half of the year as well.

  • - President, COO

  • That's part of the reason we shared the data and the older stores is that the only variable we can see moving the older stores up from a comp store is the work we're doing at a store basis is actually driving that improvement.

  • - Analyst

  • Great.

  • Thank you.

  • - EVP Finance, CFO

  • Thanks Gary.

  • - VP IR

  • Next question, please?

  • Operator

  • Thank you.

  • Our next question comes from the line of Chris Horvers with JPMorgan.

  • Please go ahead.

  • - Analyst

  • Thanks and good morning.

  • On the wireless business, checking my math, maybe the Mobile business aided domestic comps 250, 300 basis points like if you could comment on that and also, seems like Best Buy Mobile, it certainly helped drive sales, it certainly helped drive gross margin.

  • How much of the labor side and the operating model is diminishing the returns in the business and where are the returns now versus what you expected and what the tweaks of the model would result in?

  • - EVP Finance, CFO

  • Yeah, Chris, that's certainly the encouraging part of Best Buy Mobile so you're right.

  • The comp sales performance in Best Buy Mobile almost comping up triple digits was something that was a great tailwind for our comps in the quarter and we expect to see that in the back half of the year as well, although not at quite the same rate because we'll be lapping the launch of the Best Buy Mobile stores of last year but as we think about the impact both on margins and SG&a, great margin lift in the business.

  • The SG&A leverage actually we're just getting started on.

  • We know purposely that model that we're invest being in for customers experience in the Mobile space is more expensive to run.

  • We want our employees to spend more time with those customers getting them the solutions they need and we'll actually spend more labor in that space than some of the other parts of our business.

  • We have not yet begun to try to find opportunities to materially leverage that labor.

  • We want those teams to learn how to serve customer needs and grow the top line of the business before we start finding opportunities that the teams will identify themselves to get more efficient in that labor.

  • So we see opportunities going forward to get more efficient in that piece but honestly that's not the part of the model that we're focused on right now.

  • - Analyst

  • So, right now, you're still in the investment phase and you expect the returns to increase as you tweak the model?

  • - EVP Finance, CFO

  • Yeah, absolutely.

  • - Analyst

  • Okay, thank you.

  • - VP IR

  • Thanks Chris.

  • Thanks, Jim.

  • Next question, please?

  • Operator

  • Thank you.

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

  • Please go ahead.

  • - Analyst

  • Thank you.

  • Can you talk a little bit about inventory, follow-up on some of Gary's questions, in the US, where your inventory is on a comp store basis relative to where the comp was and what areas you're investing heaviest in?

  • What your relative comfort is in the categories?

  • - EVP Finance, CFO

  • David, it's Jim.

  • Our enterprise inventory if I take out the impact of including the Best Buy Europe venture, which is also included in our balance sheet this quarter, was up about 20% year-over-year while our comp inventory in the US business was up roughly 10%.

  • That number is a little deceiving in that last year, as we looked at our inventory levels, we know we were a little lighter in some categories than we wanted to be in Q2 last year, heading into the holiday season, so if we look at the comp inventory levels year-over-year of roughly up 10%, part of that was driven by just inventory positions that were too low last year plus the investments that we're making for this year purposely in the areas that we expect the greatest levels of growth in the back half of the year, continued growth in our computing business, continued growth in Best Buy Mobile, and growth in our flat-panel TV business for the back half of the year.

  • That's where our inventory investments have been made.

  • - EVP - Customer Operating Groups

  • David, this is Mike Vitelli.

  • The other thing to add to what Jim said is we're also pleased with the quality of our inventory, looking at how we measure our at risk and the products that are selling well and doing well, it's actually better than last year so our quality is better as well.

  • - Analyst

  • Thank you.

  • - EVP Finance, CFO

  • Thanks David.

  • - VP IR

  • Next question please?

  • Operator

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

  • Please go ahead.

  • - Analyst

  • Thanks guys.

  • So my question is on also on the TV business.

  • Can you discuss the margins on flat-panel TV both just on the TV itself and then including installation and warranty, how the year-over-year trends in the margins in that business?

  • Thanks.

  • - EVP - Customer Operating Groups

  • Mike, this is Mike Vitelli again.

  • The good news is that we see an improvement and we have seen a significant improvement in the second quarter and the first half in our attachment rates of home theatre installation and warranty services and protection for home theatre.

  • The promotional expense in the first half of the second quarter were a little more aggressive in the marketplace, so in total, we saw our home theatre margin rates slightly down.

  • Part of that would be use of financing.

  • Part of that would be increased use of Reward Zone but collectively, they're right where we want it to be and we're pleased with the continued attachments that we're seeing in home theatre installation space.

  • - Analyst

  • And so are you lowering the prices on your warranty and on home theatre to help drive that attachment so is that, the comments on attachments being up, is that units or dollars or both?

  • - SVP, Business Group Services

  • To expand, this is Sean Skelley, to expand on Mike's point, we actually saw growth in the attachment rate on our extended warranties which now have moved to black tie warranty protection, and with a drop in price we still saw a growth in that category.

  • On the installation specifically, we were less promotional this year than we were last year.

  • Last year, we essentially included some installation offers.

  • This year we weren't, and we saw good growth particularly on the 37 plus side of our TV business.

  • - Analyst

  • Okay, thank you.

  • Very helpful.

  • - VP IR

  • Thank you, Mike and Sean, next question, please?

  • Operator

  • Thank you.

  • Our next question comes from the line of Mitch Kaiser with Piper Jaffrey.

  • - Analyst

  • Thanks guys.

  • Good morning.

  • I know the iPhone has been out for just over a week.

  • Could you maybe talk a little bit about the results that you've seen thus far and then maybe what your expectations are for the iPhone and what's embedded into the guidance for the back half?

  • - EVP Finance, CFO

  • Yes, Mitch, it's Jim Muehlbauer.

  • We don't talk about specific results of individual products within our portfolio, but I know the team would be happy to comment on what they're seeing from a customer stand point and what it means strategically to have that product in our store.

  • - EVP - Customer Operating Groups

  • Mitch, it's Mike Vitelli again, the one thing that we are seeing is that as we said I think Jim mentioned earlier, part of what the iPhone is doing is bringing people into our stores and the investment that we're making in the experience in that department is producing some of the highest customer satisfaction rates coming into Best Buy, and that's probably the most important thing it's doing for us, is bringing people in and letting them see the experience we can provide that's completely different than the rest of the industry and we think that experience today is going to help us every day after that for the rest of the year, so the category in general is really positive for us, and the investment and experience that we think is going to pay off well beyond the Best Buy Mobile department in the store.

  • - Analyst

  • Okay.

  • Thanks guys.

  • Good luck.

  • - EVP - Customer Operating Groups

  • Thanks.

  • - VP IR

  • Thanks, Mike.

  • Next question, please?

  • Operator

  • Our next question comes from the line of Dan Wewer with Raymond James.

  • - Analyst

  • Thanks.

  • Brian, most of your specialty store competitors are struggling at a faster rate.

  • Could you talk about what you're seeing, those type of competitors doing to generate traffic and if it's creating any type of an irrational competitive behavior in the market ?

  • - President, COO

  • Yeah, I'm happy to comment on that, and I think the simple answer is no, we have not seen irrational behavior in the marketplace, and we are very pleased with the market share gains we're seeing and what we're doing and what we always do, is we're focusing on our experience for our customers in our stores.

  • We think that is the most important strategic competitive posture we can take.

  • - Analyst

  • And Jim, could you clarify one of your answers a few minutes ago, You talked about comp inventories up 10% I believe in the US.

  • Was that 10% at the store level or for the total enterprise?

  • That was 10% for the total domestic business.

  • - EVP Finance, CFO

  • So if you were to look at that on a comparable stores were up like 1 or 2%?

  • No.

  • It would be higher than that, Dan.

  • If you think about it our square footage was up roughly 10% year-over-year.

  • Our total US inventory was up 19, 20%, so I'm thinking our comp inventory was up roughly 10%.

  • Pulling that apart, you have to look at where we stood in our inventory positions in Q2 of last year, we were light in inventory especially flat-panel TVs so we have that as an inappropriate comparison to last year and we made purposeful investments this year in parts of our business that are growing for the back half, namely computing, TVs, gaming and in Mobile phones.

  • - Analyst

  • But if we're looking for same-store sales to increase 1 to 3 % why should we not be concerned about comparable inventories being up 10?

  • - EVP Finance, CFO

  • Well again, the 10 isn't an apples-to-apples number.

  • That's what I'm trying to dissect for you.

  • The other thing to remember is that given where we're at within a year we've got six months of sales in front of us, so over the next two and a half to three months, all of the inventory we have in the pipe in those categories is out and sold to customers and we're reordering and certainly as as we always do we have the opportunity to purchase more from our vendors or scale back as customer demands dictate.

  • - Analyst

  • Just last question.

  • What would you estimate the year-end comparable inventories will be?

  • - EVP Finance, CFO

  • I'll have a better idea of that when I know what the year-end, quarter end comparable store sales will be.

  • - Analyst

  • Well seeing if you made your plan?

  • - EVP Finance, CFO

  • I'm not providing an estimate at this point in time.

  • Certainly we would not expect it to be up 10% at the end of the year Dan.

  • - Analyst

  • Great, thank you.

  • - EVP Finance, CFO

  • Thank you.

  • - VP IR

  • Next question, please?

  • Operator

  • Our next question comes from the line of Alan Rifkin with Merrill Lynch.

  • - Analyst

  • Thanks.

  • With the tightening of credit in the market place can you maybe shed a little bit more color on your use of financing particularly around the holiday period whether you think it will be more intense than that of last year and I do have a follow-up for Brad.

  • - EVP Finance, CFO

  • Alan, it's Jim.

  • It's typical we aren't going to comment on promotional strategies and expectations for the back half of the year for obvious reasons, but I would like to build on something that Mike Vitelli talked about earlier, is that when we put our financial ser financial services strategy into place firmly about a year and a half ago, we knew we would be building competitive advantages for customers on multiple fronts.

  • One is really the ability to offer a variety of financing packages that meets their unique needs and one of the things that we've certainly learned in the first half of the year is the opportunity to simplify our financing message with customers.

  • Historically we focused our financing activities on individual product lines with different types of financing periods, so you could get X type of financing if you bought a computer, you could get Y type of financing if you bought a certain brand of television.

  • The traction that we're getting both from customers and our store employees around simplifying that message, around offering 24 month financing for purchases, no matter where they take place in the store under whatever brand, the customer is looking for above $999 has really helped improve our attachment rates in financing.

  • So that's positive for customers because many of those customers are Reward Zone members getting access to credit but also getting Reward Zone points.

  • That's positive for the Best Buy model because as we put those transactions on our branded card vehicles, we don't incur the same type of tender costs that we would have to pay the banks under other types of forms of payment so there is really multiple wins across the business model for both us and for customers and what we're most encouraged by is that when the employees in the stores feel more comfortable in helping the customers meet their needs by allowing more breadth in what the customers can include in that financing package, it makes the transaction simpler for everybody and the customers wack out getting what they needed at the price they wanted with the price they wanted with the type of Financing that fits their lifestyle.

  • - Analyst

  • A follow-up for Brad if I may.

  • - CEO

  • Sure.

  • - Analyst

  • Brad, with your stock price significantly lower today than where it was at the beginning of the year, when you suspended share buyback program and with estimates for Europe coming down, is there any sort of reconsider Asian with respect to buying back stock as potentially near term that may provide a greater return on invested capital than the investment in all of these countries out there?

  • - CEO

  • Well, near term, I think that's clearly the case, and I think part of what we're trying to say as an organization and it's core to the values here is we just don't make decisions for near term variables as much as we possibly can.

  • It's part of what you see in the way we handled this year.

  • We think this year is an extraordinary opportunity for the Company to position itself in an incredibly strong way for the long term because we're going into the sort of short-term difficulties with enormous strength.

  • We had financial strength.

  • We had strength in terms of market position.

  • We have strength in terms of strategic options for the enterprise for the future and what we've decided to do with this fiscal year is lever that strength at a point in time in which we think all of our investments will be much more efficient than they would be if we were trying to make exactly the same investments in a very strong economic climate and we would expect based on what I've seen historically from the firm's history, when the economic client improves you actually get the benefit from those investments like a wave.

  • And they are easier to make in this kind of climate, they get higher productivity because of some of the stresses of the organization and when we see that they don't pay, as you'll see us do in the balance of the year, it's much easier to move off those investments than it would be in an environment in which you're sort of swimming in very very good results so I would definitely pursue the strategy we've got over again and to be honest with you even when it comes to the expenses we engaged in the second quarter I wouldn't make the same expenses with hindsight but I'd start with the same premise we started with.

  • - Analyst

  • But Brad, what would be the strategic disadvantage if you held off the international spending for just six or 12 months until you see what the global environment looks like and instead, more so focus on greater cost control?

  • - CEO

  • Well, the huge strategic advantage is anything we would have done would have cost us a lot more to do or may not be possible to do.

  • You've got options that open up to an organization when there's more stress on the economic climate that's literally closed so I'm pretty sure a lot of the things you see us doing today if we were in a stronger, at a minimum would cost us a great deal more and in some cases I think flat out wouldn't be available.

  • The other thing is as you look at sort of the way we're building unique strategic skill sets, we want to make sure that we can capitalize those, and one of the things about Best Buy is it's in an always changing ecosystem, because the environment of the products we sell was always in transition so you have time intervals you get when you get a strategic advantage so if you lost that interval in terms of time, it has a huge strategic impact in terms of what you'll ultimately be able to capitalize out of your advantage.

  • - Analyst

  • Okay, Brad, thank you very much.

  • - CEO

  • Thank you.

  • - VP IR

  • Next question, please?

  • Operator

  • Our next question comes from the line of Dan Binder with Jefferies & Company.

  • Please go ahead.

  • - Analyst

  • Hi, good morning.

  • I was wondering if you could give us an idea of how business trended through the quarter and then more specifically if you were to look at the TV business, how that has trended versus recent end quarters, in other words it's still double digits.

  • Is that pace slowing at all or is it fairly steady?

  • - EVP Finance, CFO

  • Dan, why don't I take the trended business and I'll let Mike follow-up on the trend of the TV business.

  • As I look at our domestic business during the quarter, the trend of business was actually for the most part fairly consistent.

  • Certainly we saw higher results earlier in the quarter than the end of the quarter but it was not a tale of two cities.

  • There was not a dramatic difference in the comparable store sales results in the US business between the first month of the quarter and last month of the quarter.

  • - EVP - Customer Operating Groups

  • And looking at the TV business, looking at the second quarter and then the first quarter both those quarters were better than the second half growth of last year so actually the TV business in total for us actually turned around and started moving to the more positive direction versus the second half.

  • If you look at the months within the year, within the quarter, they were relatively the same as Jim said overall, it reflected our overall business.

  • - Analyst

  • And then just as a follow-up you mentioned earlier, roughly 13% or so declined in average selling prices in the first half of the year.

  • Can you give us a sense of what you're anticipating for the back half?

  • - EVP - Customer Operating Groups

  • No.

  • And It's come up before.

  • The minute we say we think and we plan that prices go down this much, then somebody else says we have to do better than that.

  • It becomes a self-fulfilling prophecy in the industry.

  • In fact I'd encourage a lot of people to not talk about what they think will happen with prices because you get into speculation, but the model of price decline has been consistent with what we've seen in past years and what we expect in plan for this year.

  • - EVP Finance, CFO

  • If only that commentary worked both ways we could say TV prices were going up.

  • - Analyst

  • Right well since you can't answer that question just to follow-up on somebody's prior question about the pricing on warranty and services.

  • Can you give us an idea of how that pricing has trended?

  • - EVP - Customer Operating Groups

  • Yeah, so as we mentioned before our attachment rate is what we were actually 6% for the quarter, and we saw a growth in TVs.

  • We saw stronger growth in top line revenue.

  • We saw a little bit of drop because of ASP drops but we're still positive, so we're excited about what we've done there and we're probably more excited about how we're pushing that advantage further.

  • We're going to have that continual product essentially covering the basic needs you want but now we've pushed into a Premium Black Tie Protection, which we'll actually do more for the customers and we're only two days into it but we expect that to help us continue differentiation and continue to offer great choices to our customers for the third and fourth quarter.

  • - Analyst

  • Thanks.

  • - VP IR

  • Thanks for your additional comments.

  • Operator, next question, please?

  • Operator

  • Our next question comes from the line of Michael Lasser with Lehman Brothers.

  • Please go ahead.

  • - Analyst

  • Good morning.

  • Thanks for taking my question.

  • I'm just curious about the legacy stores, if you commented how they were comping quite well, those stores that are older than six years.

  • Can you talk a little bit more about their performance, what was the driver there, the same things that drove the overall results for the quarter or was it something more unique?

  • - EVP Finance, CFO

  • I'll be happy to take that.

  • Thanks for the question.

  • Some of the drivers were similar so we saw RPT growth in those stores as well but one of the things that was stand out different was we saw close rate growth that was higher than the average close rate growth for the Company, and I think that is, it has us excited in a lot of ways.

  • We've got the teams in those stores as Jim mentioned earlier , there's a particular trajectory that we normally see in terms of the age of stores and declining of comps so for us to prove in this model with a number of older stores we've got that those older stores will know their communities well enough, it can find local needs well enough that we can actually grow the comps in those stores, that is really good news for our model.

  • So some of what we saw there was similar to other stores and there was also stand out in terms of close

  • - Analyst

  • And real quick follow-up.

  • On the extension of financing can you talk, about maybe quantify the penetration and then in the last call you said that you weren't as aggressive with the financing on third and fourth quarter of last year such that you can be more, use that as a tool in the back half of the year.

  • Maybe you can offer some quantification so we know what sort of impact that can have on a business over the next couple of quarters.

  • - EVP Finance, CFO

  • Yeah.

  • So our financing activities have benefited as I said from increased penetration year-over-year.

  • We're also, as you've seen in the marketplace, we're using a simplified financing message that I talked about earlier.

  • In light of all of that, our financing activities continue to be accretive to our overall gross margins, and we planned that for similar, we plan that for similar outcomes for the back two quarters of the year as well.

  • - Analyst

  • Okay, thank you so much.

  • - EVP Finance, CFO

  • Thank you.

  • - VP IR

  • You're welcome.

  • Next question, please?

  • Operator

  • Our next question comes from the line of Joe Feldman with Telsey Advisory Group.

  • Please go ahead.

  • - Analyst

  • Yeah, hi, guys.

  • I was wondering, you talked about on the call and in the release about the increasing the labor and customer facing labor in the stores and we were just wondering how much of that will be sustained throughout the back half of the year and going forward versus paring that back as you've talked and some ways to cut some costs?

  • And I'm also thinking about the Best Buy Mobile because you specifically called that out.

  • - EVP Finance, CFO

  • Yes, so we'll actually be labor changes as a result of putting new value propositions into the store like Best Buy Mobile.

  • As I mentioned earlier, purposely that model has got more labor associated with it but it also drives a bigger outcome for the store and we have gross profit so as we looked at our model year-over-year, serving customers in areas that are high touch in our stores within the Mobile space, within the computing space, given the significant growth of our business, Mike Vitelli talked about how the business in home theatre has been improving, high touch spaces in our stores where we know our employees make the difference in making that transaction and that solution work for our customers, in a very differentiated experience than our competitors utilize so we're very happy to invest labor in those spaces to get the customers what they're looking for.

  • We're also at this point in journey, we're not asking our store teams to optimize the labor that they are deploying in those areas at the expense of meeting those customer needs and growing the overall business.

  • Brad said it well, at this point in time in the season we see a significant opportunity to build share in the business and we see an opportunity that's actually very profitable for us so that's kind of the investment lens we're looking through.

  • Maybe Shari, you want to comment on how that translates into the stores local plans as they think about our customer facing spend.

  • - EVP - Retail Channel Management

  • I'd be happy to.

  • I think you covered that nicely, Jim.

  • The stores at this point are half way through the year with their local growth plans in identifying where they got unmet needs for the customers and trying to find better ways to serve them, and so they are through like you said half way through the year and through the process of prioritizing what they actually see relative to those opportunities where they believe they've got value propositions that when they invest in them the customers respond to, and so they are actually paying off and places where they've tried value propositions where the customers are not responding and deciding what that means.

  • So it will either mean they're investing something to get at a customer, need it's working, they will keep doing it.

  • They have invested something that to get at a customer need, that's not working they will have one of two decisions to make.

  • They will either adjust the value proposition to help the customer respond or stop investing in it, so they've got a view now of their full suite of local needs.

  • They prioritized them and they are going into the back half with a prioritized view of the spend.

  • - Analyst

  • And then I guess just a follow-up on this whole kind of labor and then into the cost discussion.

  • You've mentioned a few times on the call that you've identified some areas to cut costs and I guess I'm still a little fuzzy on what those are.

  • I was hoping you could clarify that again.

  • - EVP Finance, CFO

  • Sure.

  • So what I mentioned in my comments is that as we look at the number of projects we have both going on in the stores to Shari's point and the things we've had going within the corporate enterprise, we've invested in some things and have now got feedback on what's working and what's not working in some areas so like we do every year, we have an opportunity to both prune some of those investments and accelerate others.

  • I would tell you the magnitude of the expense reductions that we're looking for aren't inconsistent with what we've done in the past of the business.

  • We're not alarmed by the level of reductions that would be entailed and as Brian mentioned, we are purposely not going to scale back on the growth investments that we see for the future.

  • So as we look at delaying deferring some store and headquarters projects, we're going to look at some of our overhead spending, some of our advertising spend in the back half of the year and we see opportunities to be a little sharper in those areas based on our learnings from the first half.

  • - CEO

  • I'd like to comment on the longer term implication of what we're seeing.

  • One of the things we are seeing now is we're able to move market share with different tool sets, and so what you've got in the organization is a lot of legacy tool sets that we've used over the course of the years and what I think less so the second half this year but much more so as you look in the next year and beyond.

  • There will be places we will be able to disinvest which are getting deteriorating returns which I think happens almost it's a little bit like we talked in older stores, happens in any sort of mature retailer.

  • You start to see reductions in efficiency and legacy investment and what we will be doing over the course of the next several years is cutting back significantly on some of the legacy differentiators because we have the option of seeing new things work at a much higher related productivity and that's part of what we've been doing the first half of the year is flooding the zone with new options so we have a much better frame as we look into the future.

  • - Analyst

  • Got it.

  • That's helpful.

  • Thanks guys and good luck with the back half.

  • - VP IR

  • Thanks.

  • Next question, please?

  • Operator

  • Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

  • - Analyst

  • Hi, guys.

  • This is actually a follow-up on the previous question there.

  • Can you guys give any examples of what Jim classified as kind of one-timish expenditures that aren't expected to be repeated in the second half?

  • - EVP Finance, CFO

  • Yeah, Scot.

  • So we had a few things.

  • We had legal expenditures related to things we've had in the system for awhile that we do not expect to occur in the back half of the year.

  • As we appropriately looked at our selling space and kind of Mobile electronics GPS, we wrote off some assets we had in place of fixtures that were not quite at the end of their useful life for accounting purposes but we saw better value proposition capability that we could deploy for the back half of the year so those were one-time expenses that we also put through the P & L in the second quarter that will not recur in the back half of the year.

  • - President, COO

  • Scott this is Brian.

  • We also have sort of a whole laundry list of things we've looked at.

  • There's some travel expenses we won't be making in the second half we made in the first half.

  • There's project costs we won't be incurring around resets that we might have rolled forward with, and none of these things we believe has a material effect on what we want to do.

  • I also want to go back and build a bridge to Brad's comments.

  • I think it's really important you understand these aren't just sort of knee jerk back half reactions.

  • These are building blocks to retiring some of the legacy pieces that Brad referred to.

  • We will build on this work for next year and the years beyond.

  • - Analyst

  • Okay.

  • That's helpful and then just a follow-up.

  • It sounds like you guys have kind of followed up with the historical pattern you've had when you rollout various initiatives where you throw out labor at a project and try and fine tune it later on.

  • Is it fair we saw quite a bit of that this quarter particularly on the Best Buy Mobile side?

  • - President, COO

  • Scott, this is Brian again.

  • That's exactly what we do.

  • Our history is we find a value proposition that works.

  • We move to scale, and we move to scale without thinking about efficiency once we see we can move that and move that share as Brad referred to earlier, and then we get to the business of refining and making the value proposition more efficient.

  • - Analyst

  • How quickly does that happen, Brian?

  • Is it a quarter?

  • Is it a year?

  • Like what's the time frame before you start to fine tune the labor mode?

  • - President, COO

  • I would love to tell you Scott and you know this as well as I do, one size doesn't fit all for us, but we certainly think as we get into next year, we'll understand materially more about Best Buy Mobile and the elements of the value proposition that are precious and we'll be able to make some intelligent decisions.

  • - CEO

  • It's partially directly connected to how sophisticated the program is.

  • - President, COO

  • Precisely.

  • - CEO

  • So what you're seeing is the rollout of like the Mobile strategy.

  • That's several years in duration because you had, we tried it ourselves a number of times that failed.

  • We then had to find a partner that we could work with effectively.

  • We then had to test whether that partner innovations would work in the US, and then, we rolled it as fast as we possibly could once we had the evidence that the test was going to work, but it looks like a mass rollout in the first half of this year which is what it was but it's several years old in duration, so when we're looking at overall strategy for the Company and this goes back to the question from earlier about why we're doing major investment right now is these things that we put into the pipeline, not all of which work, but so far I think if you look at the evidence over the last several years for the organization, a very high percentage of them tend to work.

  • They will have different levels of duration from we find it and we're seeing a fair amount of this right now, you find it you can use it right now to something that will take us three or four years to get the full benefit of what we're searching for.

  • - CEO Best Buy International, CIO

  • And Scott this is Bob.

  • We're also taking those lessons we've learned from the US and we're now scaling Best Buy Mobile in Canada, and we've just got our first standard on stores and we've got our first stores.

  • Coming back to your original question about costs that Jim answered, one of the big costs we've had this year that we won't have to any significant degree next year is PCI compliance.

  • That's huge in the US, and minimal in Canada and it will be minimal in Canada next year but very small in the US and that's a very significant number.

  • - VP IR

  • But related to customer privacy of their data.

  • - Analyst

  • Right.

  • Thanks a lot guys.

  • - VP IR

  • That was Brad, sorry, Brian then Brad and Bob.

  • Operator?

  • Another question, please?

  • Operator

  • Our next question comes from the line of Vivian Ma with Oppenheimer.

  • - Analyst

  • Good morning.

  • Just want to get a little bit more color on the international business specifically on China.

  • Looking at the comp decline in the quarter, what are you expecting for the rest of the year for comps in China and then it looks like some improvement in the gross margin, but offset by the SG&A and I'm wondering of the 150 basis point increase in the international set how much of that is related to the China part of the business?

  • Thanks.

  • - VP IR

  • Bob?

  • Or John Noble will answer that one.

  • - SVP, CFO - Best Buy International

  • In terms of comps obviously we had some big impacts in Q2 in China.

  • What we have seen so far is a bit of a rebound, not a full rebound in our comps in China and we have modest expectations for the balance of this year from a China comp perspective.

  • We obviously have some investments, particularly on our Best Buy China business in anticipation of additional store openings this year and that contributed i would estimate around 50 basis points to our SG&a rate in international.

  • - VP IR

  • Thank you.

  • And it looking like our hour is ending.

  • Appreciate John your answer, and Vivian for your question.

  • Thank you, Nicole and thanks for our audience for participating in our second quarter earnings conference call.

  • As a reminder a replay will be available in the United States by dialing 800-405-2236 or internationally, dial 303- 590-3000.

  • The personal identification number is 11119134.

  • The replay will be available from approximately 11:00 central until noon Central Time next Tuesday which is September 23rd.

  • You also can hear the replay on our website under BestBuy.Com for our investors.

  • If you have additional questions please call wait Wade Bronson, Director of IR, at 612- 291-5693 or me, Jennifer Driscoll at 612-291-6110.

  • Reporters on the other hand please contact Sue Bush at 612-291-6114.

  • And that concludes our call.