百思買 (BBY) 2010 Q3 法說會逐字稿

Welcome to Best Buy's conference call for the third quarter of fiscal 2010.

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 today for playback and will be available by 12:00 PM Eastern time today.

(Operator Instructions) I would now like to turn the call over to Andrew Lacko, Senior Director of Investor Relations.

Please go ahead.

Thanks for joining us this morning for our fiscal 2010 third quarter earnings conference call.

We have three speakers for you today.

First, Brian Dunn, our CEO will share with you his thoughts on the results we reported this morning and what we are seeing for the balance of the year.

Second, Jim Muehlbauer, our EVP of Finance and CFO will provide you with some additional color on our third quarter financial performance and provide you with an update on our fiscal 2010 guidance.

Lastly, Bob Willett, our CEO of International, will provide you his thoughts as he prepares to retire at the end of the year.

After our prepared remarks we anticipate that there will be ample time for your questions.

As usual, we have a broad management group here in the room with me to answer your questions after our formal remarks.

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

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

Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations.

May I also remind you that as usual, the media are participating in this call in a listen-only mode.

With that I would turn the call over to Brian Dunn.

Thanks Andrew and thanks everyone for joining us on our third quarter earnings call.

Allow me to take this opportunity to wish all of you a Merry Christmas and happy holiday season.

I'd like to cover a few topics with you today.

First, I want to spend a couple of moments reflecting on our third quarter and Black Friday weekend.

Second, I'd like to give you an update on our market share gains and why we are so pleased with those results.

And lastly I'll spend a few minutes discussing our expectations for the fourth quarter.

After that I'll turn it over to Jim to add some more color on our Q3 results and provide you with an update on our financial guidance.

Now let's turn to the numbers.

This morning we reported quarterly net earnings of $0.53 per diluted share which was better than our expectations for the quarter.

Our results were driven by a 4.6% comparable store sales gain in our domestic segment, solid expense management, and a strong effective promotional strategy over the important Black Friday shopping weekend.

Because of these strong results, and reinforced by the strong traffic and sales performance, we announced this morning that we have increased our non-GAAP diluted EPS guidance for the year to a range of $3 to $3.15.

The Black Friday weekend which goes by in what feels like a heartbeat is the culmination of months of planning and marks the beginning of the most critical part of the year.

It's important financially, of course, but even more importantly it represents millions of customer interactions over the course of a 48 hour period.

It's an incredible opportunity to serve long time customers and win new ones and I'm pleased to tell you that our employees once again set Best Buy apart from the competition.

Our domestic comparable store sales for the month of November increased 8.4%.

A phenomenal result given the challenging environment most retailers are experiencing.

That month concluded with a double digit comparable store sales gain over the Black Friday weekend with roughly half of the gain coming from an increase in traffic and the balance coming from higher average ticket.

Our online business also experienced strong results.

Revenues for the third quarter increased more than 20% versus last year as a record number of consumers visited Best Buy.

com over the period.

These results also highlighted the power of a multichannel retailer as in-store pick ups were up nearly one third of total online sales for the quarter.

Results like these are only possible through the joint efforts of marketing merchant supply chain teams all working with a sense of shared purpose to support what I believe is the greatest retail team in the industry.

Connectible devices drove most of our strength in the quarter and over the Black Friday weekend with strong growth in notebooks, net books, smartphones, televisions and digital SLR cameras.

This performance simply reinforces our belief that these devices continue to move from discretionary items to products with real utility in customers lives.

While we are seeing very strong growth in devices that can be connected, only a small percentage of them leave our stores with a connection attached with the notable exception of smartphones.

We are not yet where our customers need us to be in the connected world, a situation that is both a challenge and a future opportunity.

Gift cards are also a bright spot this year.

Last year, as you might recall, customer demand for gift cards dropped dramatically in large part because of the bankruptcies and strife among retailers and financial institutions.

We are very encouraged by the fact that gift card sales were up approximately 40% in November heading into the final two days and they were up approximately 100% on Friday and Saturday.

As you might know our customers historically spend over two times the value of a gift card when they come back to redeem it.

A fact that has contributed meaningfully to our post Christmas business in recent years.

At the same time our teams are serving a record number of customers across all of our channels, the number of Black Friday customer complaint calls to our call center decreased 24% versus last year which is on top of a 25% decline the previous year, an outstanding data point that illustrates how well we are taking care of our customers during this very busy season.

Even though we believe our categories are more important to customers than ever, we need to make sure that we continue to add tremendous value to each and every customer who shops with Best Buy.

We were and will continue to be sharp on price because we know that remains the non-negotiable table stakes in this very competitive environment.

But beyond price, we wanted to make sure customers had the opportunity to buy all of their connected devices from Best Buy and have access to 18 month interest-free financing on any basket over $249.

We created a PC home makeover package that allowed customers to upgrade their desktop PC, monitor, notebook, net book and router and have the Geek Squad set it all up for $11.99.

Despite the fact that this bundle is at a relatively high price point sales have exceeded our expectations as customers were drawn to the solutions that the package created.

This fact demonstrates that value does not equate exclusively to low prices.

Low prices are table stakes but only the beginning of the value equation.

Despite the economic conditions, customers are willing to spend money for solutions and experiences that create real value for them.

Another example is in home theater.

We continue to help customers bring home a fully realized home theater experience by offering free delivery, basic hook up and recycling of your own television on any TV purchase over $999.

These are examples of customer focus offers that have allowed us to deliver on one of our Company's strategic priorities to take market share.

Heading into this fiscal year we believe that strong brands who are focused on creating solutions and value for customers will take a disproportionate share of customer's wallets.

I believe that in tough environments like the one we've been navigating this year, there will be winners and losers and that the customers will decide the contest.

Our market share gains during the quarter proved that this was true.

The three months ending October 31st marked our 16th consecutive quarter of share gains as we believe that we gained approximately 230 basis points of market share in the US.

Once again gaining more share than anyone in our industry.

The only quarter I can recall where we added more share was 270 basis points we gained last quarter.

These results were better than we expected in the period and do not reflect our strong performance in November and especially the concentrated activity of Black Friday weekend.

During that critical week we gained share in almost every category we tracked.

We estimate more than 600 basis points of additional share overall.

These results provide us excellent momentum heading into the remainder of the holiday shopping season where we have historically achieved our peak market share during the year.

I am confident that will be the case again in fiscal 2010.

Before I turn it over to Jim, I'd like to give you an update on how we are thinking about the fourth quarter.

We believe Christmas will come later yet again this year a trend that has emerged over the last several years and that places where our strength as we have proven time and time again that we can effectively serve our customers and serve them well while running at peak volume levels.

Likewise, it reinforces a lesson that continues to play out, a critical role that effective bundling can have on our model, not from the perspective of predicting or dictating exactly what solution is right for every customer, but rather bundling to paint the art of the connected possibilities for customers.

That is the heavy lifting that our collective capabilities and merchandising supply chain and marketing can deliver better than anyone else in the industry and when that is combined with employees who can interpret and customize a bundle for a customer based on that person's unique needs it's a powerful combination and one that I am convinced we have only began to tap into.

Our investments in the connected categories have been strategic and targeted and I am very pleased with our inventory position heading into the holiday period and our stores are certainly in a better holiday inventory position than they were last year.

Let me leave you with a few final thoughts.

Our performance last quarter and over the Thanksgiving weekend is a great example of the power of our organization, of our people when we work together with singular focus.

That is why I have such complete confidence in our ability to deliver the connected world for our customers.

With all of that in mind, I want to give a heartfelt thank you to all of the men and women of Best Buy and our family of brands for the great performance of this past quarter and for the great experiences you are bringing to millions of customers around the world.

I would like to thank all of our vendor partners for their support and continued innovation which is critical to the benefits we all derive from a connected world.

Lastly, I would like to offer a profound thank you to all of our customers who have chosen us through the tough times of this past year.

And with that I'll turn it over to Jim.

Thanks Brian and good morning to everyone.

This morning I would like to provide you with an overview of the key items impacting our third quarter financial results and then provide an update on how we are thinking the balance of the year may play out.

I will also discuss our fiscal 2010 guidance that we are very pleased to raise again this morning.

As mentioned earlier our third quarter net earnings of $0.53 per diluted share was ahead of our expectations.

We are very pleased with our revenue and share trends in this difficult environment and are optimistic that the strength we see is sustainable for several reasons.

First, we continue to see domestic volumes and traffic stabilize and improve.

This gives us confidence that the results we announced are the results of something more than just easy year-over-year comparisons.

Second, actions we have taken to focus spending on growth areas while lowering costs are providing benefits in both the domestic and International segments.

Lastly, given our sales and operating income performance this quarter, we believe we are finding a good balance between price and profit relative to the opportunities that exist in the current environment.

Turning now to the third quarter results, revenue for the enterprise rose 5% to $12 billion.

The revenue growth was a bit ahead of what we had assumed in our guidance and was the result of new stores and third quarter comparable store sales growth of 1.7%.

Domestically third quarter revenues increased approximately 9% from last year to $8.9 billion.

The quarter saw comparable store sales increase of 4.6%.

We are encouraged to see strength in categories that are consistent with where Best Buy is going in the path to the connected world such as computing and mobile phones.

These categories have been particularly strong all year and in the early holiday season as evidenced by their low double digit comparable store sales growth.

Additionally, flat panel TV's saw low double digit growth versus last year due to strong unit increases that were offset by declines in the average selling price.

Partially offsetting these gains were continued low double digit comparable store sales declines in music and movies and high single digit comparable store sales declines in gaming.

Looking at how the quarter performed, we are encouraged that the domestic comparable store sales improved sequentially each month and finished strong in the month of November, as Brian mentioned earlier.

Another bright spot was the 3% increase in domestic store traffic during the quarter which marks the second consecutive quarter of traffic growth for Best Buy.

Traffic gains and strong coordinated execution by our store and corporate teams resulted in estimated 230 basis points increase in our domestic market share for the three months ending October.

Overall ASP was up slightly during the quarter as notebook computers, mobile phones and televisions increased in the revenue mix.

The net result was an average ticket that was up slightly for the quarter.

Turning now to International, the segment's third quarter revenue totaled $3.1 billion which was approximately a 6% decline versus last year.

The revenue decrease was driven by comparable store sales decline of 6.7% and a negative impact of foreign currency fluctuations.

Excluding the impact of foreign currency exchange rates the International segment revenue decreased by approximately 4% versus the prior period.

Best Buy Europe which is in our comparable store sales numbers for the first time reported an approximately 3% decline in comparable store sales.

These results were in line with our expectations and resulted in slightly higher market share as modest increase and connections was offset by increased promotional pricing.

Canada experienced high single digit comparable store sales decline while essentially maintaining its strong market share.

So while we are seeing relative strength domestically, the consumer in Canada continues to experience more difficult headwinds of a challenging macro environment.

In China we experienced low double digit store sales decline.

Turning now to gross margins, overall the third quarter our enterprise gross margin rate decreased 40 basis points to 24.5%.

The domestic gross profit rate of 24.1% reflects a 30 basis point decrease year-over-year.

Margins in the quarter were consistent with what we had expected and included a 20 basis point decline driven by mix and a 10 basis point decline due to rate.

On the whole, the mix decline primarily reflects continued strong sales in notebook computers.

Helping to partially offset this negative mix pressure was growth in Best Buy mobile and a reduce mixed of lower margin gaming hardware.

Looking at margin rates, we experienced the 10 basis points decline due to a couple of offsetting drivers.

First, computers experienced a significant rate improvement in the quarter driven by effective price management and smooth inventory transitions to the Windows 7 platform in November.

This rate increase was essentially offset by higher promotional spending in appliances.

For context, overall our year-to-date domestic gross margin of 24.5% now stands just 10 basis points below last year driven primarily by product mix changes due to higher sales of computers.

One of the benefits of delivering the industry leading CE sales market share performance, and strong cost containment all year long has been much of the discussion on these calls and during meetings with shareholders focuses on our gross margin performance.

Accordingly, I thought it would be helpful if we provided some preliminary context on our assumptions concerning margins in the balance of our fiscal year for the domestic business.

Overall, based on the sales trends we experienced year-to-date and our expectations for the fourth quarter, we currently expect the domestic gross margin rate to decline more than our previous estimate.

Before we jump into the details, let's start with a couple of important points.

First, our updated margin expectations are being driven by the mix impact of higher sales volumes and lapping of unique items in the prior year.

Second, our competitive pricing expectations regarding the promotional environment in the fourth quarter have not changed.

Overall, we are pleased to report that we now expect higher fourth quarter domestic sales than our previous guidance.

The mix of these incremental sales however is expected to be incurred in lower margin categories like computing, and entry price point flat panel TV's which also carry lower margins.

As you will recall we were out of stock on these TV's last year in the fourth quarter and commented at the time that we had left some sales on the table.

In addition, as we discussed on last quarters call, we will be lapping favorable incentives provided last year by vendors to help move excess supplies of their inventory as a result of the dramatic changes in the macro environment.

Together we currently expect these changes will result in higher gross margin dollars in the fourth quarter than previously expected, but at a much lower total gross margin rate.

We estimate that the total decline in the domestic fourth quarter gross margins could be in the range of 80 to 100 basis points.

International segment reported gross profit rate of 25.4% which is a decline of 70 basis points versus last year.

The decline was driven primarily by Best Buy Europe and was the result of a more promotional environment and increased sales mix to lower margin connections.

Turning now to enterprise SG&A, for the quarter, enterprise SG&A spend totaled $2.6 billion.

This was approximately $20 million favorable to last year despite operating 127 more stores and was consistent with our expectations.

On a rate basis, SG&A declined 120 basis points year-over-year.

SG&A leverage across the enterprise especially domestically and in Europe was driven by tight cost controls and stronger than expected revenue performance.

The third quarter SG&A rate and dollar improvement was also limited due to the significant increase in incentive compensation in our stores and corporate offices versus last year when we essentially had little incentives earned.

So for the full year we are still on track to deliver total SG&A dollar spend growth excluding FY09 acquisitions of approximately 1% to 1.5% which is consistent with the guidance we had previously provided.

So when one helicopter is up it results in operating income of $376 million for the quarter which is a 37% increase versus last year.

The domestic segment reported operating income of $353 million or a 25% year-over-year increase.

The International segment generated $23 million of operating profit, an increase of $32 million versus the prior year.

Domestic performance was better than expected and in total the International segment results were in line with what we expected.

A couple of quick items to round out the quarter before I move to our earnings outlook.

First, as you noticed this morning our effective tax rate of 25.6% in the quarter was lower than what we had previously contemplated.

The reduction in the third quarter rate was due primarily to the settlement of tax items in our International segment.

We estimate that these reductions positively impacted the third quarter earnings by approximately $0.05 after the impact of the noncontrolling interest adjustment in Best Buy Europe.

As a result of this favorable tax impact we now anticipate that our effective tax rate for the full year will be approximately 36.5%.

Second, our US comparable store inventory at the end of the third quarter was up approximately 6% which was in line with our expectations.

We are comfortable with the level and availability of product going into the fourth quarter.

And finally we were pleased to end the quarter with $350 million drawn on our existing domestic credit facility which was a full $1.4 billion lower than last year.

This brings me to our earnings outlook.

As I mentioned earlier our third quarter performance was ahead of our previous guidance and our market share and traffic trends continue to improve.

To date, we have been appropriately cautious about the outlook of the US consumer and the impact on our business.

While we are certainly not expecting the low double digit sales performance like we saw domestically during the Black Friday weekend to continue into the fourth quarter, we do see clear opportunities to grow our business further in the balance of the year.

These data points give us reason to be encouraged about what lies ahead.

As a result, while large portion of our annual earnings are ahead of us we are comfortable once again raising the bottom and top end of our full year guidance expectations.

For fiscal 2010, we now anticipate that annual enterprise revenue will be $49 billion to $49.5 billion with enterprise comparable store sales now projected to be flat to up 1%.

As I mentioned a few moments ago, from a gross profit rate perspective we now anticipate that our enterprise gross margin rate will be flat to up 10 basis points year-over-year which is down slightly versus our previous guidance.

The updated domestic business full year gross margin rate is now projected to be down 30 to 40 basis points year-over-year.

Putting it altogether we now expect our fiscal 2010 non-GAAP EPS to be in the range of $3 to $3.15, an increase of 4% to 9% which excludes first quarter's restructuring charges of roughly $0.06 per diluted share.

To summarize, we delivered a very strong performance in the third quarter despite a difficult environment, strong share gains continued and top line revenue increased all while maintaining disciplined expense control.

While we expect consumer spending to remain challenged we have a better view of our customers are choosing to purchase CE products and solutions and which retailers they are trusting with these purchases.

And finally we are pleased to raise our full year revenue and EPS guidance for fiscal 2010.

With that, I'd like to turn the call back to Brian.

Thanks, Jim.

And now I have the pleasure to introduce Bob Willett , the leader of our information systems, supply chain and International strategy.

Bob is retiring from Best Buy at the end of this month ask I've asked him to provide his view on our International business with a lens not only on this past quarter but also with an eye towards the future.

Thanks Brian.

Good morning.

As I look ahead to my retirement from Best Buy in just a few weeks, I would also like to look back a few years to a time when our former CEO, Brad Anderson, asked me to develop the strategy for Best Buy's International expansion.

The opportunity was clear.

Best Buy's growth ambitions had us looking beyond the US but the challenges were great, different languages and cultures.

However, the core question was how do we best replicate our single and most important differentiation, our blue shirts.

Would we be able to explore our unique employee and customer experience?

We knew it would not be a quick or easy next step for Best Buy but the research indicated a significant opportunity if properly executed.

The painstaking research we undertook mapped out a customer centric platform for growth for our International expansion.

Today some four years later, I am reminded of a quote from a very wise man, Sir Winston Churchill once said however beautiful the strategy, you should occasionally look at the results.

So let me provide some thoughts on the results to date of Best Buy's International expansion and the outlook before handing off the baton to Brian's capable hands.

First some quick comments on the current quarter.

As Jim mentioned International delivered $23 million in operating profit this quarter, an improvement of $32 million over Q3 last year.

Although top line results continue to be challenging, we are very pleased with our return to profitability this quarter.

Our diligent efforts around managing International expense helped us achieve that profitability while continuing to invest in our growth.

Long term, I believe the seeds we have planted around the world will bear fruit for our customers, investors and our employees.

Whilst a single quarter is no way to assess an International performance, I am however very proud of the fact that strategically we developed and then leveraged dual-brand strategies which accelerated our International presence.

Firstly, with Future Shop in Canada, then with Five Star in China and most recently via our venture with Carphone Warehouse in Europe.

As a result we've successfully grown the Best Buy and Future Shop brands and now have an excess of 35% consumer electronics market in Canada.

In China, since completing the full acquisition of Five Star last March we are very pleased with the leadership collaboration and learning across brands in particular our performance over the key holiday periods including the most recent October golden week.

Whilst there were significant challenges, I believe the opportunities for profitable growth are very promising.

Lastly our venture with Carphone Warehouse resulted in Best Buy mobile.

The mobile phone sales and operating model that is now scaled across all Best Buy stores in the US and Canada.

Today it's one of our most successful growth stores across the enterprise.

Next we've leveraged our various brands Internationally most notably is Geek Squad which is operational in every country in which we do business.

We've also methodically expanded the Best Buy big box concept in new countries.

Today we have 64 Best Buy stores in Canada, six in China, in Mexico we will have five stores by year end.

In Q4, we'll open the first Best Buy store in Turkey.

That brings me to Europe.

As the sponsor of our partnership with Carphone Warehouse and our big box entry into the UK I am looking forward to our big box openings next spring.

Given my home grown awareness of consumer electronics retailing in Britain, I have every confidence that the UK consumer will absolutely be delighted by the Best Buy experience.

The UK after all is a bit of a service desert with the odd exception.

In the UK the connected world strategy is evidenced by our 17 wireless world car phone warehouse stores where we combine CPW and Best Buy capabilities to better serve our customers and their changing needs.

Those stores combine Geek Squad with an expanded product mix and the prospect of renewable long term revenue streams from the products and services we provide.

I believe this holds the key for the shape of things to come.

I'd be remiss if I did not mention my responsibilities with Best Buy supply chain and information technology.

In supply chain, during my time here, we have converted from a product push to a product pull system, a major achievement for Best Buy.

In IT, I am very proud of having built the infrastructure that supported our growth over the past six years.

Not once during that period did our point of sale systems fail us even in the crush of holiday.

As I move on, I can say with great confidence that we have the right leaders in place throughout the enterprise, Best Buy International, supply chain, IT and Best Buy mobile.

I want to thank Brian, Brad Anderson, Al Lenzmeier and Dick Schulze along with all the other leaders I've worked with.

I've learned from them.

We've had fun and I hope I've left them with a few ideas and the odd inspiration.

I look forward to seeing the Company grow to the $80 billion that I know Brian had set his sights on and if anyone can achieve it, Brian can.

Finally, last but not least to all of our employees listening I want to personally thank you.

I also want to wish you the best of success.

I believe Best Buy is the finest people company in the world.

This is a place where employees can make their dreams come true and as our employees dreams come true so do those of our customers and our many shareholders.

In closing, it's been one amazing journey for me and I intend to remain a shareholder so I plan to keep a ring side seat as this remarkable journey continues.Thank you.

Thank you Bob.

I am so glad you are going to have the ring side seat.

And I should also note where Bob referred to Great Britain as a service desert, we thought that was a service dessert.

I do want to add my personal congratulations to you, Bob, and my deep profound thanks on behalf of the 168,000 men and women in Best Buy an our brands.

I want to thank you for your energy, your creativity, your tenacity and your commitment to making this enterprise a better place every single day.

So thank you very much and congratulations on your well earned retirement which I'm sure will last a month.

Before we open it up to Q&A, I want to offer my sincere wish to everyone listening a warm and wonderful holiday.

Happy Hanukkah, Joyous Kwanza, Merry Christmas and a prosperous New Year.

With that we are ready to take your questions.

(Operator Instructions) Our first question comes from the line of Gary Balter with Credit Suisse.

Go ahead.

Thank you.

Bob congratulations on your successful career and enjoy the retirement.

It was a pleasure working with you and the times we had together.

Thank you Gary

And I also want to note that the stock was rising when you were speaking so maybe you should keep on speaking.

Then I will hand it right back to Bob.

(laughter)

One question and a follow-up.

You talked about the gross margin and expecting a lower gross margin and one of the things you mentioned is the vendor monies, but the vendor monies you knew about and you also mentioned the competitive environment isn't really changed.

S what is changing in the gross margin outlook?

Is it all mix that is causing it?

Yes, Gary, it's Jim.

It's principally mix.

You're right.

We had talked at Q4 last year and during our last quarter call about the challenge of lapping the margin performance we saw in Q4 of last year.

For context, our domestic business gross margins in Q4 of last year were up 40 basis points.

So we knew that was going to provide a headwind.

That's not new news.

But as I roadmap where we finish Q3 and where we see Q4 is, certainly it's going to be a sequential phenomena lapping those back year vendor monies.

More importantly as you called out and we called out on the script, we are very happy that we are going to drive more sales in the quarter than we originally anticipated.

And those sales are going to come in in categories like computers and opening price point televisions that have been strong during Q4 and we anticipate being strong -- I'm sorry in Q3 we anticipate being strong in Q4 as well.

The margin dollars in the business in the quarter are higher than we anticipated.

They are just coming in space that have lower overall rates.

Gary, this is Brian.

You correctly called out that were able to predict a number of those things like vendor support last year.

One of the positive surprises although it shows up in margin rate pressures is the continued extraordinary growth in our computing space, in our continued rapid growth in share in computing.

So while it shows up as a margin rate issue, we are actually very pleased that customers continue to gravitate to Best Buy to make that connection with their computing specifically around net books and notebooks.

And the follow up.

People-- fourth quarter is kind of accepted and it sounds like it's going to be a good fourth quarter.

The bigger issue for investors at this point is the question of next year and the comparison when you don't have the easy Circuit City compares and how do we think about gross margin?

How do we think about expense opportunities?

How do we think about International and I know you are not giving guidance at this point, but how should we be thinking about some of those key items?

We are not in a position that we are going to provide guidance, but if you go back to the conversations we've had all year long, we saw an extraordinary opportunity going into this year to capitalize on the strength of the Best Buy model, not only the products that we have across the wide spectrum of CE but also marrying that to the services capabilities and really focusing that on the connected world.

So we purposely set out this year to grow our business profitably and gain market share which was an extraordinary opportunity for us this year.

Gary, this is Brian again.

To reiterate Jim's point, we are not in the position to give you new guidance but we announced today our 16th consecutive quarter of share gains.

We have no intention of remediating those gains, and we, in fact, have every intention of continuing to grow our business and our share.

Thank you very much.

Thank you, Gary.

Our next question comes from the line of Jack Murphy with William Blair.

Please go ahead.

Thanks.

I wonder if we can get back to Internationally and specifically on the quarter and if you can maybe give us more color on the specific sources of sales weakness, what are some of the specific plans you have for potentially turning that around particularly in Canada understanding there's a macro drag there.

And also as you look forward with Bob having retired can you talk about the risk of management's distraction or how much top management time you really need to be spending outside of the US?

Thanks.

I'll start with that and then I'll turn it over to Bob and perhaps Shawn can give some color commentary there.

As Bob came to me and discussed this retirement we would -- we wouldn't be letting Bob walk out the door if we didn't have every confidence that we had a tremendously strong International team that has worked with Bob and in support of our individual countries around the globe.

So my confidence is extraordinarily high that we will continue to manage that business in such a fashion that does not create a distraction, or take our eye off the largest piece of our business which is the Domestic ball.

As far as Canada I just mentioned we have folks up there that are working very hard in a tough environment that don't have the benefit of a competitor going out, who have really done a very nice job holding their share in a very, very challenging environment.

Our share gains Canada continues to run just north of 35%, which is a very extraordinary share to hold and hold over sustained period of time.

And I think our team there is navigating a very difficult environment very well.

Bob or Shawn would you add any further content?

Just to give you -- this is Bob.

Just to give you a quick round up.

Just to reinforce his point.

We've got some very strong leadership around the place.

Yes, there are still some gaps to fill, but we have some strong leadership and to Brian's point, I wouldn't be doing this if we didn't have good leadership in place and that you just have to trust us and you will see in the results.

In terms of Canada, as Brian said, the business is holding its share, and you have to remember there is distinct differences between the two brands in Canada but were holding our share.

But the market up there is definitely following the US.

The overall economy as we heard yesterday from one of the eminent global economists from DeLoitte's, the economy up there very much follows the US.

It is slowly starting to recover but we think it will be a year behind the US.

We are doing all sorts to grow our margin and share of wallets and I'm comfortable that we have good plans in place to do that.

In terms of China, we changed out the leadership there.

We are seeing some really good growth there which you are going to hear about in the next quarter.

As you know China has 60 days lag time behind these results so you will hear about Golden Week as the next quarter unfolds.

We've had some changes there.

We have some more changes to add there as well but we are pleased with Five Star, with Best Buy.

We still have work to do in terms of the correct model but that's where it's coming on and I am pleased to say again that we have started to see things improve.

But China is also has had some significant changes in its own macro marketplace.

Tier three and tier two cities are actually starting to do well as a result of the government stimulus package.

We are really taking advantage of that.

We are not going to disclose the participation of sales that we are getting from it but it's really good.

And we are starting to see that same impact now in Shanghai.

And we're starting to see Shanghai come back.

In terms of--So overall very confident about the fact that we have the roots in place there.

We have to go carefully, but the plans are in place.

And in terms of Europe, we are starting to see, as you heard from Jim, improvements in connections.

We don't talk too much about the mix, but we have seen significant shift from postpaid to prepaid on upgrades, but we are very, very pleased with our share even though this is a business that doesn't traditionally focus on comps, it focuses on margin.

But now that we are starting to annualize, I am confident that the work we are doing around the 17 wireless world stores where are seeing the best of Best Buy in terms of Geek, in terms of gaming, in terms of PCs coupled with their strength in mobile, we are starting to see that work well.

And we are also starting to see that now flow into Canada.

Canada, we've now converted all the stores there into mobile and we are seeing a really major growth and we are only halfway through Future Shop and that will continue next year.

So there are some great plans in place together with the work the (inaudible) around Private Label exclusive brands.

We are starting to build that up in all markets.

We still have a long way to go.

We are still quite immature when it comes to exclusive brands Private Label.

But there is some good stuff and we are very confident, very confident.

Great.

Can I just make one quick follow up on just the International gross margin if Jim can give us a sense of how much it has contributed from the individual geographies at least directionally.

Is China still most of the drag?

The structural model in China obviously operates at a much lower gross margin rate.

It also operates at a much lower SG&A rate overall.

So from a percentage standpoint the drag is coming from China.

The propensity of the dollar is, of course, both in Europe and in Canada.

Thanks.

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

Please go ahead.

Hi guys.

You guys look like you are raising your Q4 enterprise comp projection to the mid to even upper single digit range which is obviously a meaningful acceleration.

But to clarify, is all that difference at least relative to prior expectation coming from computing and small flat panel TV's?

Or is it farther than that?

Because this really goes back to the gross margin issue.

And I think people want to get their arms around, exactly how many different changes we are looking at in terms of the complexion of the sales mix here.

Scott, it's principally driven by the higher incremental sales expected in those categories.

We have seen stronger growth in the categories overall but the principal drivers are the ones we called out in the release.

Okay and just to clarify the November 8.5% comp, is that against the calendar adjusted figures because I remember there was some funky things with the calendar last year.

Great memory, Scott.

For context last year, I recall our reported comp in November was roughly negative 8% for the Domestic business.

This year our reported comp as Brian mentioned is 8.4%.

Last year's number was deceiving because it was based on a period two years ago where we had an extra week in November.

So as I look at the real comp last year I think we quoted that it was probably more in the range of roughly flat in the month of November for our domestic business.

So simplify on an adjusted basis last year's comp was about flat.

This year is plus 8 in November.

So that is the comparison.

Great.

Thanks guys.

Thank you.

The next question comes from the line of Colin McGranahan with Bernstein.

Please go ahead.

Good morning.

Thank you.

I just wanted to come back to gross margin.

First in the fourth quarter, Jim, can you give us any sense of the breakdown between that 80 and 100 basis point, pressure between rate, mix,the impact of anniversarying the vendor incentives, just a little bit more color?

It's a bigger number than what we would have expected.

And longer term thinking about-- and again, not looking for guidance but just thinking about how the business the growing and what you are seeing in product categories.

It seems likely that you will continue to face some gross margin mix pressure and wondering what you can do from an enterprise perspective as an offset as we start to think about putting the model together for next year.

How quickly can the connected products grow?

What have you seen with the remodels that might be giving you some hope there?

Just in terms of the persistent mix headwinds and potential offset to that.

So Colin why don't I take the front end piece around what we expect to see sequentially in the margins from Q3 to Q4.

And then I'll turn it over to Shari or Mike who can talk about how the model is evolving into next year.

As I look sequentially from Q3 to Q4, where I see that margin change coming from is primarily in mix, and if I look from a run rate standpoint if we are down 30 basis points domestically in Q3 and we are going to be down 80 to 100 in Q4, I put 75% of that change in the volume camp around higher sales of notebooks and entry price points TV, Q3 versus Q4.

I put the balance of the 25% in anniversarying the unique buying opportunities we had last year.

That's helpful.

Thank you.

And Colin, this is Mike Vitelli.

Looking at the categories and how they are moving and how that impacts us as we go forward.

Very consciously as we went into this year, we made a decision that when we historically had looked at managing our mix at different price points in computing and television that we were aggressively going to go out and try to sell units in all of the price bands.

And we've been enormously successful at that.

The increases in units in both of those two categories year-over-year has been growing by quarter in growth at each of the unit bases.

We look at that as a tremendous opportunity for us to increase our ability to actually connect those units now that we have those tens of millions in each category.

We are getting improvements there now.

We are doing some tests in areas in television where we are connecting people to digital cable and digital satellite and those rates have increased.

So the probability of us having more connected TVs next year than this year is something we are confident in.

The majority of TVs at the high end next year will have internet connection capability.

So the ability for us to bring broadband out of the computer department and into the home department is a unique opportunity for us and to help consumers be able to get their internet connection through their television, which is usually not a thought most people have today.

And the millions of computers that we are selling we believe there's an enormous opportunity for us to bring mobile broadband to those computers as people want to surf and connect away from their desk, and away from their home office, and even away from their couch but literally as they are moving around the city and the country.

We think those two opportunities are what lie ahead of us next year in those areas in addition to the increasing business that we see continuing to grow in smartphones which is the third screen of that triangle.

Just a final follow up on that.

Is rate within the home office category or even within the PC category, is rate improving or degredating?

All year long it's been improving.

I think the teams have done a good job overall of bundling those services along with those units.

As Mike mentioned we are mixing into some lower price point units in that space but in the home office category which includes mobile phones and the notebook and computing business, we have seen improvements in rates in total.

Thank you.

Good luck.

Thanks.

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

Thanks and good morning.

A quick follow up on the TVs.

Can you remind us when you got in stock in the smaller screen sizes, or just overall availability was that first quarter of this past year?

And then curious to your thoughts on the pull forward of demand.

You had Windows 7 October 23rd, clearly very successful.

We have heard that from a number of retailers.

You had Call of Duty on November 10.

You had a fantastic Black Friday.

Circuits not around.

So I am curious if people were in the stores earlier in the quarter than they would normally be is that something that you thought about in your outlook?

Two questions.

This is Vitelli again.

On the television side last year we weren't getting back into good inventory positions until the middle of our first quarter last year.

We went through--because of our aggressive adjustments to the economy, we went through a really tough January, February and even early March and April.

It took us that long to the point that we felt comfortable again.

Having that inventory now in January, February, and March, it will put that pressure as we described in the first, the fourth quarter of this year and in TV alone just the first quarter next year but we are planning to that.

And your point about the quarter and the way it shaking out, not only it's happening because of the way the vendors are introducing products at different points so that it all doesn't crush onto one or two weeks.

We've actually planned our promotions that way as well in trying to take the Black Friday from a couple of days into a week and actually into a month long process beginning at the earlier part of the month with some of our rewards on our Silver events and then staging that throughout the entire month of the year and then moving into December.

You are right in that we are trying to make it a longer period of time rather than just a week here and a week there.

Did that answer your question?

Is there anything then-- the gift card sales are extremely encouraging.

Is there anything, the gaming might be a little weaker in the fourth quarter or something on the PC side where you had people waiting, you had the surge in demand and maybe that slows into December, January, February?

This is Shari.

I think from a PC perspective, I think we actually saw that prior to the Windows 7 release more so than we did after where we saw the demand really slow up as customers were waiting for the Windows 7 release.

That probably contemplated prior to November rather than something that was a pull forward from December.

Okay.

I understand.

And then a question for Brian.

Clearly there's always a lot of innovation.

It's really very important as you--given the sector that you operate in, how should we think about your initial thoughts on spending next year?

You are starting to anniversary the big cost cuts.

Innovation is always necessary.

Is it something you've held back on and the positive comps encourage you to be a little looser with the opportunities?

We are certainly not going to hold back on innovation.

But as always it's a portfolio, it's a balancing act.

You are going to see us maintain the discipline that you've seen from us over the last years around capital and capital allocation and the return we are looking from our capital.

But you are also going to see us invest in innovation where we think it can be meaningful and where our employees lead us to.

So I would not interpret our approach.

Look for us to be efficient and effective, and you should look for us to continue to innovate around the customers and his or her needs.

Thank you.

Thank you.

Next question comes from the line of Anthony Chukumba with FTN Equity Capital Markets.

Please go ahead.

Good morning.

I don't want to beat a dead horse on this gross margin question but I have a question related to the entry level flat panel TVs.

When I've been in your stores it seems with the entry level TV's a lot more of it is your own Dynex and Insignia brands.

So I would have thought that hose would have maybe comparable or maybe even higher gross margins than larger TVs by some of the national brands like a Sony or a Samsung.

Am I thinking the right way or is it just a case of they don't have higher gross margins even though they are private labels as opposed to national brands?

This is Mike Vitelli.

They have higher margins than comparable products that we would buy from third parties from other vendors.

If we were buying the same product, meaning its specs and size in the same price band from a vendor of any name, the margins are higher.

But an entry level Insignia TV is going to have a different price point than a high end LED TV from Samsung.

Okay no I understand the price point but--

The margin rate.

Okay.

Got it.

That makes a lot of sense.

Thank you.

Thank you.

The next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

I wanted to follow up on the TV category as well.

I know you talked a little bit about this earlier but can you talk a little bit more about what you are seeing in terms of the average selling price and unit sales as well as some of the traction from newer products like the LED TV's?

And as we think out to 2010, how should we think about the benefits that you can see from some of the new products such as 3D?

Thank you.

We are thrilled again with the unit increases we are seeing in television.

Part of that is offset, as Jim said earlier, we had low double digit comps in television.

We had mid double digit comps in units.

That is offset by about a 17% decrease in average selling price.

We also look at dollars per inch which is when you look at all the different (inaudible), that is down about 22% versus last year.

It was running minus 17.

So the price per inch was accelerating in its decline as the largest screen sizes started to come down made them more affordable.

That is why we believe our units are growing.

We are pleased with that and we actually see our average screen size going up and our ASP going up and both of those are higher than the industry averages based on the assortment that we have and the way that our overall personnel plus Geek can make buying a large TV a much simpler and more pleasant and fulfilled experience.

As we go to next year I think you are 100% right.

What we are seeing is each year the industry strives to bring something new that brings some excitement and some profitability into the category.

A few years ago it was flat panel TV and plasma.

Then it turns into okay we are going to have full HD and everything was 1080P.

This year with LED and faster refresh rates.

Next year, as you mentioned, it's going to be 3D, that's going to be a significant increase.

I'm hoping James Cameron's movie when it opens Friday is an outstanding success and hundreds of millions of people see it.

We are all going.

So I think there are continuing things that we see on the horizon that continue to make the home theater experience exciting and an opportunity for us.

While still early, do you have a sense for how many 3DTVs you end up having on your shelfs in early or late next year?

We don't have a specific number.

We are still in those discussions.

Every manufacturer has something exciting and we'll be finalizing our assortment in the next couple of months.

Thank so much.

That concludes the questions.

Thank you everyone for participating in today's third quarter earnings conference call.

As a reminder a replay will be available in the United States by dialing (800)406-7325 or (303) 590-3030 internationally.

Personal identification number is 4188285.

The replay will be available today through next Tuesday, December 22.

You can hear also replay on our website under For Our Investors.

If you have any additional questions, please contact Wade Bronson at (612) 291-5693 or myself Andrew Lacko at (612) 291-6992 and reporters should contact Sue Bush at (612) 291-6114.

Thanks everyone for joining us.

Have a happy holiday and that concludes our call.