百思買 (BBY) 2010 Q4 法說會逐字稿

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  • Operator

  • Good morning, ladies and gentlemen.

  • Thank you for standing by.

  • Welcome to the Best Buy fourth quarter earnings conference call.

  • (Operator Instructions) Following the presentation, the conference will be open for questions.

  • (Operator Instructions) This conference is being recorded today, Thursday, March 25, 2010.

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

  • Please go ahead, sir.

  • Bill Seymour - Vice President of Investor Relations

  • Thank you, Brandy.

  • Good morning everyone and thank you for participating in our fiscal 2010 fourth quarter earnings conference call.

  • We have two speakers for you today.

  • First, Brian Dunn, our CEO, will share his thoughts on 2010 and give you a quick update on his thoughts about how we're doing across the globe.

  • Second, Jim Muehlbauer, our CFO, will recap the financial performance and then provide you with guidance for 2011.

  • And finally after our prepared remarks I anticipate we will have ample time for your questions.

  • As usual, we have a broad Management Group here today in the room with me today, to answer your questions after we make our formal remarks.

  • Before I pass the call over to Brian, I'd like to take care of a couple housekeeping items.

  • First, we would like to request that callers limit themselves to a single question during the Q&A portion of the call so that we can get to as many questions as possible during the next hour.

  • Second, I'd 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.

  • Third, as usual, the media are participating in this call in a listen only mode.

  • And lastly, I'd like to remind you that our full year fiscal 2010 results included restructuring charges we recorded during the first quarter which impacted our full year net earnings by $25 million or $0.05 per diluted share.

  • The balance of our discussion on this mornings call will exclude these charges.

  • That means the comparisons we make will be on an adjusted non-GAAP basis or a comprehensive GAAP to non-GAAP reconciliation of our reported to adjusted results.

  • Please refer to the supplemental schedule on pages 11 & 12 of this morning's news release.

  • With that, I'd like to turn the call over to Brian Dunn.

  • Brian Dunn - CEO

  • Thanks, Bill, and welcome aboard.

  • Thank you, everyone, for joining us for our fourth quarter earnings call.

  • I'd like to cover two topics with you today.

  • First, I'll touch on the results we reported this morning and how we're positioning ourselves for the future and second, I'll give you a brief overview of our operations around the world.

  • After that I'll turn it over to Jim to add some more color on our Q4 and full year results and provide you with an update on our financial guidance for 2011.

  • Now let's turn to the numbers.

  • This morning we reported adjusted net earnings for Fiscal 2010 of $3.15 per diluted share which I'm pleased to point out was at the very top end of our full year guidance range and substantially better than our original guidance.

  • These results would not be possible without the exceptional work of our employees around the world.

  • The strategic bet we're making that as technology continues to march forward, people, our people, will be the key core differentiator for Best Buy.

  • Our customers want and often need someone they can trust to help them navigate the complexities of our increasingly connected world.

  • This year's results give me confidence that our people continue to be Best Buy's key point of differentiation.

  • Calendar 2009 will go down as one of the most challenging years the world economy has faced.

  • Experts said that rising unemployment would derail consumer spending for the year particularly on high ticket discretionary goods.

  • Consumers were going to retrench, increase savings and reduce their personal debt.

  • Value would determine what and from whom consumers would make their purchases.

  • And the experts were right.

  • Most of these things did happen, but you know what?

  • Other trends emerged that the experts didn't see.

  • Best Buy experienced significant year-over-year increases in unit volumes in each of the three major screens; notebooks, televisions and mobile phones.

  • In fact, each one of these categories experienced large enough increases in volume to offset price declines to the tune of double digit comp growth in notebooks and mobile phones, and mid single digit comps in TVs.

  • What do all of these trends tell me?

  • For starters, they tell me that staying connected has become a non-negotiable for millions of people and that some of the things we offer no longer fall under the category of discretionary purchases.

  • These solutions have become such integral elements in people's lives that they have little or no tolerance for any kind of disruption if things aren't working the way they should, and each additional mobile phone, notebook computer and television gives us an opportunity to introduce customers to the world of connectivity.

  • Second, we learned that while value absolutely played a bigger role this year in determining how consumers made their choices, value means more than just being sharp on price.

  • Value is about price and knowledgeable service and assortment and the ability to have someone hook it all up for you if you need it.

  • Value is about having the confidence that the product you buy will work the way you want it to.

  • Like our customers, we needed to take a hard look at our budget and plans for the year.

  • We made a concerted effort to be more focused and efficient while retaining the flexibility to deploy our resources against the highest returning opportunities.

  • We made some tough choices on how to best utilize our human and financial capital.

  • We reengineered our labor model in the Spring creating a more flexible and customer friendly experience.

  • We scrubbed our advertising plans, making sure our resources were focused not only where our customers are, but also where we know they're going.

  • Last, we are beginning to identify ways to better collaborate and share ideas across the entire enterprise, work that you will continue to see us flesh out in the year to come.

  • We are in the midst of transforming this organization, building on what we have been to become something new.

  • It's an ability we have demonstrated time and time again and I'd like to give you a few examples that illustrate our current transformation.

  • First, we're building upon our foundation as a Company that primarily sells hardware and accessories, learning to see that hardware is merely the starting point in a relationship with customers, not an end in itself, but the means by which we can connect customers to the people, content, and networks they care about.

  • As an enterprise, we plan to sell tens of millions of connectible devices this year.

  • Each one of those devices is an opportunity to create a longer, more profitable relationship with our customers.

  • Take, for example, the growing and exciting, but potentially intimidating, array of entertainment experiences.

  • We can help customers understand which of the various TVs in the market are right for them; plasma, LCD, or LED.

  • And very soon, you'll have to choose between each of those options and whether or not you want it to be 3D capable.

  • But the TV itself is only a part of the equation.

  • The experience really comes to life through a connection to the right type of content.

  • For instance, we can help the customer understand and choose among the various ways to bring movies into his or her home, purchased in a store, rented through the mail, or streamed directly to their PC, TV, Blu-ray player, or mobile phone, and then in this case, it could be that the right solution means enhancing a high-definition satellite or cable TV package, or broadband internet service for an IP enabled model with the traditional solutions customers have come to expect in this category, a digital surround receiver, speakers, cables and a universal remote control, a Blu-ray player, or a gaming platform and installation.

  • It could also mean integrating capabilities once only accessible on your PC with other devices in your home.

  • Now, that same television could become the telecommunications hub in your home.

  • Best Buy will help you choose the right broadband connection so you can Skype with family, or check a friend status on Facebook all from your TV.

  • To be clear, we're still in the early days of this work, but we're moving quickly in the right direction.

  • Best Buy Mobile for example, is one part of the enterprise where we really do this effectively today and you'll see us leverage the skills and systems we've developed for that business in other parts of the organization.

  • We're evolving from a US centric organization to a globally integrated retailer, a place where ideas will be shared, optimized and leveraged regardless of their point of origin.

  • The best ideas about how to serve customers are most likely to come from the people serving them every day and more and more frequently, we will see new ideas coming from outside the US.

  • For example, our wireless world concept stores in the UK are influencing our center of the store work in the states, and the big box stores we're building in the UK will undoubtedly have a big impact on how we think about big box stores around the globe.

  • The point I want to make is that we are developing global capabilities that will enable us to share best practices around the world.

  • We fundamentally believe that the answers to our customer's technology questions lie somewhere within our 180,000 employees and we're learning to use technology to solve these technology challenges quickly and accurately by engaging our own employees and our customers together.

  • Another way we're changing, we're building on our big box retailing foundation to become a truly multi-channel, multi-format operator.

  • As we reported this morning in our news release, online sales grew last year by approximately 20% to approximately $2 billion in revenue.

  • And one of the most exciting pieces of our online channel is that in-store pick up is approaching a 40% total of online sales, which shows the power of being a multi-channel retail company.

  • We've doubled our investment in customer care this year making it easier for customers to get the help they need if they have an issue.

  • We added more click-to-chat capabilities online for select categories and created dedicated phone Operators in many stores to better handle call volumes, and we expanded our use of social media tools, like Twitter and Facebook, to engage with customers in virtual spaces where they already spend a great deal of time.

  • In sum, we are using the very same technology we celebrate as a technology retailer to more quickly resolve customer problems.

  • The end result was that customer complaints fell 18% versus fiscal 2009 all while customer interactions, sales, and earnings were on the rise.

  • Now, I'm going to shift the topic and update you quickly on our operations around the world.

  • The progress we have made and the opportunities still ahead of us.

  • We see the various businesses we operate within each region as a portfolio, each with a different role and intent within the broader enterprise.

  • Resources will flow to the project and places where over time we believe we can get the highest returns on our investment.

  • Our focus for the next several years will be on balancing growth opportunities with improving returns on capital.

  • Our established markets, like the US and Canada, will look to leverage their strong market share positions to create better solutions and experiences for customers.

  • The result of this focus, we believe, will expand operating margins and improve overall returns.

  • We will also prudently look for new growth opportunities in these markets, whether that means expanding new store formats like Best Buy Mobile, reinvigorating the center of our store, or testing new categories not traditionally associated with Best Buy.

  • In fiscal 2011, we intend to deliver on our investment in Europe while positioning the business for new growth opportunities.

  • We will continue to merge the strengths of our Carphone Warehouse brand and the rest of Best Buy.

  • At the same time, we will create our multi-channel experience and look for unmet needs for the European customer.

  • We are confident and excited about our first Best Buy store openings in the UK and look forward to serving customers in this exciting marketplace.

  • Within our emerging markets, Best Buy China, Mexico, and Turkey, we will continue to assess what we have in place.

  • Invest prudently in growth opportunities, we'll carefully measure the returns and evaluate each concept on its progress.

  • We view these stores as a new venture and as such, they will progress more slowly.

  • Looking specifically at our Best Buy China stores, I think our non-commission, non-directional sales model may be ahead of consumers by a few years in that market.

  • However, like our big box stores in Europe, we will continue to experiment with the model and will not add a significant number of stores until we believe we have a concept that serves the need of both our customers and our shareholders.

  • Our Five Star chain in China is a profitable business, one that has grown revenues and operating income at double digit growth rates since we acquired it, no small feet in any market given the economic environment.

  • This is a business we intend to optimize and grow profitably.

  • One question I am often asked by investors is whether or not I think we are spread too thin.

  • My answer is a simple "no", I do not.

  • We have a deep and talented management team in place focused on the challenges and opportunities we know we face.

  • Having talented leaders dedicated in each region, as well as for each brand and country, will help us stay true to our objective of growing our businesses across the world carefully and profitably.

  • It's designed to bring the right level of focus and support to each business we operate, whether that business is in a mature market like the US or Canada, or a new venture like Mexico or Turkey.

  • I do want to be clear that at this time that we don't plan any significant deployments of people or capital to new parts of the world.

  • But I also want to be clear about this.

  • We believe our fundamental value proposition is universal and there will be future potential to bring value propositions to customers around the world where it makes good sense at the right time.

  • Technology is becoming a bigger part of people's lives around the world.

  • Everywhere people use technology more every day to be entertained, to be productive and to be connected.

  • And when it doesn't work the way it's supposed to, the disruption it causes is also becoming bigger.

  • We believe that we exist to help make technology work for people.

  • We're committed to making the idea of a connected world a reality for customers around the world and you can expect to see us invest in our international growth with discipline and a laser focus on creating great value for customers and shareholders.

  • I've spent much of the past year traveling around the world and I've learned so much, from our customers who have helped understand where we're helping them and where we're falling short, from our vendors and partners as we frame the roles each of us can play in delivering the connected world to customers across the globe, and especially from our employees who have helped me understand their unique cultures and shared with me their dreams and their concerns.

  • With all of that in mind, I'd like to offer a profound thank you to all of our customers who have chosen to shop with us over this past year.

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

  • And finally, I want to give a heartfelt thank you to all of the men and women across our entire enterprise who will make the connected world a reality.

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

  • Jim Muehlbauer - EVP-Finance, CFO

  • Thanks, Brian, and good morning, everyone.

  • First, I'd like to recap the results we reported this morning and then provide some additional color on the fourth quarter and full year performance.

  • Finally I'll provide you guidance on our expectations for fiscal 2011.

  • Starting with the quarter.

  • This morning we reported fourth quarter net earnings of $1.82 per share which was a 13% improvement versus our adjusted EPS of $1.61 last year on a very strong 7% gain in comparable store sales.

  • We finished the full year with adjusted EPS of $3.15 on sales of nearly $50 billion.

  • Both revenue and earnings were up over 10% versus last year.

  • The 1.7% comparable store sales gain in our domestic segment, expansion of our gross margin, strong operating income growth in our international segment, and expense management across the enterprise all contributed positively to our full year results.

  • Looking back on the past year, while there were many challenging factors that play in the macro environment, I'm extremely pleased that our performance met or exceeded virtually all of the guidance goals we established with you throughout the year.

  • For example, we grew domestic market share by an estimated 240 basis points.

  • This year-over-year gain was a record for the Company and we believe it was more than anyone in our industry.

  • We delivered full year comparable store sales growth and domestic comparable store sales of nearly 2% in an environment where most retailers reported full year declines.

  • We implemented cost reduction initiatives and actively managed expenses that helped drive operating expense leverage at much lower comparable store sales levels than in the past and far below the benchmark 3% that many use when modeling our cost structure.

  • Our customer satisfaction scores improved 210 basis points to almost 83%.

  • We continue to drive improvements in employee turnover.

  • In fact, during the year, domestic store turnover improved by eight percentage points to a record low level of 36%, and as I mentioned in my opening comment, we delivered adjusted full year earnings per share of $3.15 which was $0.25 or nearly 9% above the top end of the original guidance range we established at the beginning of the year.

  • The strength of these results underscore Best Buy's relevance and its unique position as one of the largest customer acquisition platforms for technology solutions in the industry.

  • For example, when we peel back the layers in our results, one of the underlying themes is the incredible strength of our computing business which grew significantly not only during the quarter but also for the entire year.

  • In fact, this quarter represented the 29th consecutive quarter of double digit sales growth in the notebook computing category and we firmly believe that this growth is critical to our transformation into the connected world.

  • From a customer perspective, the computer and the connections it makes possible at home, at work, and on the road, make it a critical device in the daily lives of many individuals.

  • Computing is a category that not long ago was struggling to get one per household.

  • Computers are now a utility in people's lives and are the center of the connected world.

  • While this is all very exciting for customers, the question you may ask yourself is what's in this for Best Buy?

  • It's no secret that computers by themselves yield a lower gross profit rate than many of the other products that we sell.

  • It's also not a secret that for the past several years, computing has become a bigger part of our mix and that trend has put pressure on our overall gross profit rate.

  • What sometimes gets lost in the computing story is the overall financial impact computing has on our model.

  • We track and analyze each part of our business and focus on its complete contribution, including the hardware sales, accessories, services, SG&A, and the space and capital required to operate each business.

  • When we look at the computing business at the operating margin line, it is much closer to the domestic Company average, as it runs at a relatively low SG&A rate because of the high sales velocity.

  • Most importantly, on a return on invested capital basis, it actually operates at a higher rate than the overall domestic business.

  • So even though computing has a slightly lower gross profit margin, the business in total generates positive returns because it is so efficient with expense and capital.

  • So we are thrilled with the growth that we've seen in computing because it not only satisfies a customer need, but it also drives shareholder value and provides further opportunities for more profitable future growth in the connected world.

  • Many of these new growth opportunities are centered on our ability to successfully create solutions for customers including offerings from our services business, which includes warranties, home theatre installations, and computing services.

  • While this category has not grown as fast on a comparable store sales basis over the past several quarters as the corresponding hardware categories, the opportunity at hand for us is to find new ways to improve these value propositions and make them even more relevant to our customers.

  • In fiscal 2011, you will see us test and deploy new service, content, and connection offerings in order to enhance the customer value proposition in a space that is highly accretive in our business.

  • With that context, let me spend a moment giving you some additional color on our margin performance this year.

  • We are very pleased that our top line strength drove an 11% increase in the gross profit dollars for the year.

  • On a rate basis, our full year gross profit rate of 24.5% increased 10 basis points.

  • I mentioned earlier that we are pleased to deliver on most of the guidance goal posts we established at the beginning of the year.

  • The gross margin rate came in below our original expectations due to stronger consumer demand in specific product categories, decisions we made to improve our top line revenue and share by growing sales in key categories that have lower margins like computing, and through focused initiatives throughout the year to gain share in growth categories such as appliances.

  • Looking at our enterprise operating cost for the year, SG&A totaled $9.9 billion or 19.9% of revenue which was a 10 basis point improvement year-over-year.

  • In our domestic segment the full year SG&A rate of 18.6% was a 60 basis point improvement year-over-year.

  • The SG&A leverage that we delivered was driven by tight cost controls and stronger than expected revenue performance.

  • I'd also like to point out that in the fourth quarter and for the full year, SG&A rate was limited by the increase incentive compensation versus last year when we essentially had little incentives earned.

  • We estimate that this incremental pay for higher profit performance impacted the full year domestic SG&A rate by approximately 50 basis points.

  • So now let me take a few minutes to give you some additional background on our international business.

  • In fiscal 2010 I'm happy to share with you that our international business finished the year strong with both revenue and profitability improving sequentially throughout the year across the globe.

  • As a reminder, this was the first full year in which we reported Best Buy Europe.

  • At the beginning of the year, we provided you detailed guidance on Best Buy Europe and I'm pleased to share with you that we delivered on that top and bottom line guidance.

  • For the year, Best Buy Europe revenue totaled $5.6 billion.

  • The operating income rate finished the year at 3.7% before purchase accounting amortization, or 2.1% including the amortization of those items.

  • As a reminder, these results exclude restructuring charges.

  • In total, Best Buy's portion of the net earnings from the operations of Best Buy Europe were slightly accretive to our overall results.

  • Based on the reporting complexities of this business and questions we received from shareholders, this morning we posted a new schedule entitled Best Buy Europe Accounting Flow Chart to our IR website.

  • We hope you find this information, -- this overview information helpful in assisting you build out your models for the Best Buy Europe business.

  • So, turning back to the full year enterprise P&L, all in all, adjusted operating income increased 14% to $2.3 billion compared to $2 billion a year ago.

  • On a rate basis, adjusted operating income increased 10 basis points to 4.6% of revenue for the year.

  • The Company's strong financial performance also improved its cash flow generation.

  • Free cash flow which we define as operating cash flows less capital expenditures increased $1 billion to $1.6 billion in fiscal 2010.

  • This was driven by our improved profits and approximately 50% reduction in CapEx spending.

  • As a result, we finished the year with a cash and cash equivalent balance of $1.8 billion which was an increase of over $1 billion versus the prior year.

  • In total, we are pleased with both the strategic and financial results we delivered in Fiscal 2010.

  • Entering fiscal 2011, we are squarely focused on continuing to profitably grow the business and build on the momentum we have achieved to date.

  • We intend to execute a set of plans focused on the connected world that will provide continued expansion in our operating margins and improve our Company's return on invested capital.

  • So turning now to fiscal 2011, let me share with you our thoughts on the upcoming year.

  • Our plans call for top line revenue of $52 billion to $53 billion which represents a 5% to 7% growth year-over-year.

  • The revenue outlook includes comparable store sales growth between 1% to 3%.

  • Additionally, we intend to continue moderating our square footage growth and leverage our existing footprint.

  • Prior to this past year, it was not unusual for us to grow square footage by 8% to 10% a year primarily through the opening of 30,000 square foot and 45,000 square foot boxes in our domestic big box business.

  • In fiscal 2010, we moderated this growth to just over 3% and in fiscal 2011, we anticipate that a majority of our new store openings will come from the expansion of smaller footprint concepts such as Best Buy Mobile standalone and CPW Wireless World stores.

  • As a result we again expect modest square footage growth in the range of 3% to 5% for fiscal 2011.

  • From an operating income rate perspective, we expect enterprise margins to expand by 30 basis points to 40 basis points from our adjusted 2010 results to nearly 5% driven by both gross margin expansion and SG&A rate leverage.

  • While we expect the improvements in both the first half and the second half of fiscal 2011, we anticipate that our operating income rate expansion will be larger in the second half of the year as we ramp growth initiatives and begin to lap the mix pressure headwinds we experienced in the back half of fiscal 2010.

  • In the domestic business, we are planning for operating margins to increase by a rate that is at the top end of this range.

  • Looking at our CapEx next year, we anticipate spending approximately $850 million in fiscal 2011 and we expect to once again increase free cash flow over the prior year.

  • Based on the strength of our fiscal 2010 performance and our expectations for the coming year, we have the capacity to increase CapEx spending and leverage profitable growth opportunities in the connected world.

  • We also have $2.5 billion of remaining availability under our existing share repurchase authorization approved by the Board of Directors.

  • For those of you that have been following us closely over the past several years, you probably recall that we have utilized both of these levers to improve ROIC and invest in our business.

  • As a matter of fact, over the past five years we have returned approximately $5.8 billion to shareholders in the form of share repurchases and dividend payments.

  • So, while I anticipate that we will return to the market to buyback shares, our earnings and EPS guidance for fiscal 2011 does not reflect the impact of share repurchases.

  • To conclude the overall P&L outlook for fiscal 2011, we expect a tax rate of 38% to 38.5%.

  • Bringing it all together, we are forecasting annual EPS of $3.45 to $3.60 for fiscal 2011 representing an improvement range of 10% to 14% year-over-year versus our fiscal 2010 adjusted earnings.

  • In summary, we see tremendous opportunities for our investors and our employees in fiscal 2011 and beyond.

  • The entire Best Buy team more than ever is aligned to follow and anticipate customer needs resulting from their transformation into the connected digital world.

  • We remain to committed -- we remain committed on executing and prudently investing in this strategy in order to drive profitable and sustainable growth and returns for our shareholders.

  • And finally, I'd like to personally welcome Bill to the IR team.

  • We are excited to add his background and experience to Best Buy.

  • I am confident that you will enjoy working with him and leveraging his knowledge in the mobility and connectible device space.

  • With that, Brandy, we are ready for questions.

  • Operator

  • Thank you, sir.

  • (Operator Instructions) Our first question comes from the line of Michael Lasser with Barclays Capital.

  • Please go ahead.

  • Michael Lasser - Analyst

  • Good morning.

  • Thanks a lot for taking my question.

  • I'm sure this will be the only one on the gross margin this morning, but can you talk a little bit about the break down in the domestic segment, the mix versus rate impact in the fourth quarter, and then how you see that proceeding through the course of the year?

  • And it would seem like if you're going to build on some of the relationships that you built with customers this year and improve your profit rate, it would suggest that those folks are going to be less price sensitive this year than last, so maybe you can clarify that as well?

  • Jim Muehlbauer - EVP-Finance, CFO

  • Michael, do you promise this will be the only question on gross margins?

  • Michael Lasser - Analyst

  • I can't make that promise.

  • Jim Muehlbauer - EVP-Finance, CFO

  • The only question from you, right?

  • Michael Lasser - Analyst

  • Right.

  • Jim Muehlbauer - EVP-Finance, CFO

  • So happy to give a little context.

  • In the fourth quarter, the domestic margins basically played out exactly where they thought they would play out.

  • We anticipated when we gave guidance for the balance of the year at the end of our Q3 call that we were going to continue to see margin pressure from growth in our computing business and that's exactly what we saw.

  • So the margins came in about where we thought.

  • I think the context that we also talked about in this call about why growth in our computing business is important for the future in the connected world, but also drives return on invested capital in our model today.

  • I think is important context as we look at that margin rate not only this year, but the activities that we see in connectible devices, be it TVs, computing, mobile phones, and other connectible devices into next year.

  • Mike, do you want to chat a little bit?

  • Michael Vitelli - EVP - Customer Operating Groups

  • Well two things I'd like to add to that, Michael.

  • One is that when you do the comparison of one year to the last, there's always things in each of the years that are unique and different about them.

  • So when you look at last year, we're down.

  • Last year had in it some favorable things that didn't reoccur, which is that we were lean on inventory so we were lean on promotional goods when we finished the fourth quarter and that was our explanation for last year of why last year was up.

  • So that comparison is different.

  • We also were selling profitable once in a lifetime converter boxes last year which was also favorable.

  • But I think as Jim said, the biggest opportunity is we had material increases in units in televisions and in computing especially, and the opportunity for us, as you talk about going forward, is being able to create solutions in connections and content and services for those computers that are relevant and present them in a really impactful way, and an easy way for our employees to present, and we know that that's possible.

  • We're working on that.

  • That's what the center of the store is about and that's why we're optimistic as we move into next year.

  • Michael Lasser - Analyst

  • Okay, so if I could just clarify, how much of the gross margin expansion in the domestic segment for the upcoming year is going to be driven by things that you already sell in the store versus what you might have to rollout, new servicing offerings, et cetera, that you might have to rollout later in the year?

  • Michael Vitelli - EVP - Customer Operating Groups

  • I think they're all in the store.

  • The challenge is, they are invisible.

  • So a mobile broadband connection is invisible.

  • CinemaNow and Napster are invisible.

  • There's no place to see them.

  • And what the center of the store is about is to put those literally and figuratively front and center for our customers to see the art of the possible and what's there for them when they connect the computers, the phones and televisions to the internet via mobile broadband and wireless broadband in their home.

  • That's really what it's about.

  • So most of the services are there.

  • They're just not presented in a compelling enough way for it to be something that consumer's say, gee, I want that.

  • And we want to make sure that's where it is, is that they can see it and want that, and then we can deliver it.

  • Brian Dunn - CEO

  • So, Michael I would add one -- Michael, this is Brian.

  • I would add one other thing and I think it's really important we call this out.

  • I mentioned on the call that we had moved to a new operating model in the stores.

  • We're now entering our first full year end-to-end where we'll have that model and I would remind you that our history is really about getting a concept, growing share, and then building out solutions for our customers and as that engine of our 140,000, 150,000 store employees really have chance to become more experienced and sharper in building solutions for our customers, we tend to gain good momentum quickly in that second year.

  • Michael Lasser - Analyst

  • Thanks a lot and good luck this year.

  • Brian Dunn - CEO

  • Thank you, Michael.

  • Operator

  • Thank you.

  • Our next question comes from the line of Matthew Fassler with Goldman Sachs.

  • Please go ahead.

  • Matthew Fassler - Analyst

  • Thanks a lot.

  • This might be in a sense a follow-up on Michael's question, but it sounds like you're looking for a material change in direction in margin momentum particularly gross margin and particularly in the US.

  • And it would be very helpful if you could give us some more details about the business model drivers and the degree to which those should contribute in 2010.

  • Brian Dunn - CEO

  • Yes, good morning, Matt, this is Brian.

  • I think that we will call on Mike and Shari, the leaders of that business to give a little commentary there.

  • Matthew Fassler - Analyst

  • Great.

  • Michael Vitelli - EVP - Customer Operating Groups

  • So to amplify a little bit more what we talked about earlier, connections, content, and services are the three drivers, or three big of the --- the three big drivers in the profitability with all of the televisions, computers and cell phones that we sell.

  • And we know and believe that we present those in a compelling way and show people what's possible now with mobile broadband with internet connected televisions and with the digital services that are growing every single day and that we will sell more of those and present them more impactfully and that's really where part of our margin plan is for next year.

  • Matthew Fassler - Analyst

  • How much of that has been substantiated by results that you've seen to date?

  • Michael Vitelli - EVP - Customer Operating Groups

  • We've seen, since we've started putting tests into the market of presenting simple things like television connections to high-definition cable and satellite services and showing mobile broadband more impactfully in the computer department and in the cell phone department, we've seen improvements that have been pretty substantial albeit small in the fourth quarter.

  • As we roll that out more aggressively across the entire chain, that's why we're confident about the improvement and it takes a small improvement to create a large impact on margins in those areas.

  • Brian Dunn - CEO

  • One of the things you might think about, Matt, is the number of televisions we sell each year and they have been, traditionally that has been a low attachment category for us for connected services.

  • This year as we go into -- - as IPTV becomes not just new and exciting, but becomes the norm on models, it creates an opportunity for us to create a much broader array of experiences for people on their televisions and that's very good space for us.

  • Matthew Fassler - Analyst

  • And then I guess my follow-up question goes to Jim.

  • You spoke about the improvement in operating margins being more heavily weighted to the second half of the year.

  • If you could give us any visibility on trajectory there, any more detailed visibility on trajectory that would be very helpful.

  • Brian Dunn - CEO

  • We're taking follow-up questions only from Matt today, Jim.

  • Matthew Fassler - Analyst

  • My apologies.

  • Jim Muehlbauer - EVP-Finance, CFO

  • No, I mean, the phasing certainly over the last two years has been very interesting given the macroeconomic environment, number one, and certainly how we've been driving parts of our business, number two.

  • If you look at the operating margin and the pressure that our margin saw in the back half of this year, Matt, given the mix of sales that we've seen, we're just going to be up against some easier compares in the gross margin line in the back half of the year.

  • We're going to be up against more difficult compares in the back half of the year from a sales standpoint.

  • All in, like I said I expect that our operating margins are going to expand both in the first and second half but we're going to see more of that in the back half of the year.

  • Operator

  • Thank you.

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

  • Please go ahead.

  • Dan Wewer - Analyst

  • Thanks.

  • Good morning.

  • You noted that the new selling space composition is going to change, moving away from the big box stores and focusing primarily on the Best Buy Mobility standalone stores as well as the Wireless World stores in Europe.

  • I think it would be important if you could help compare the store economic model between those formats and the blue boxes, perhaps talking about sales per square foot, margins and SG&A.

  • Jim Muehlbauer - EVP-Finance, CFO

  • Yes, Dan, it's Jim.

  • We won't get into the specific details of each of the concepts for I think obvious proprietary reasons at this point in time, but if I helicopter up and I look at where the business had options to grow in the previous five years, really we were limited by what we initially saw in the domestic market by focusing on 45K and 30K boxes.

  • And over time, through the launching of 20K boxes in the domestic business and working with a team over, really a period of two, two and a half years to refine the operating model in those boxes, we've gotten to the point within our domestic business where our 20K boxes, 30K boxes and 45K boxes all deliver very similar returns on invested capital over their life.

  • So as we look at the smaller footprint boxes going forward, in many respects, we see an opportunity to drive returns much greater than that for a couple of key reasons.

  • Obviously the cost of those boxes is much less just given the square footage but the devices that are -- and the connections that are being made within those boxes especially today in the Best Buy Mobile business and in the Wireless World business we have in the UK, they are very margin rich sales that sit both in computing connections, mobile phone connections, and where we see the world going from an overall connected world standpoint.

  • So we're confident that we have a model that does a couple things.

  • A - allows Best Buy's strengthen in kind of portraying the different options for the customers in standing for choice, to show up in places where customers are looking for those goods, in malls, with high traffic area where it makes sense, and allowing them to get the same experience in the connected world suite of products that they would get within a big box store.

  • Brian Dunn - CEO

  • Over the course of that year, Dan, this is Brian, I would add that we now have another year of data and we continue to see the same trend that we saw initially as we rolled these and that is that these sales, the vast majority of them, the vast majority of the sales and the connections are incremental.

  • As we put these stores into these malls around the country they are not having any sort of material cannibalization on the big stores they're adjacent to.

  • We're accessing a new group of customers and we're particularly scoring with women, female customers in those places and that is very, very encouraging to us.

  • Dan Wewer - Analyst

  • With the higher margin rates in these stores, is it safe to assume that the sales per square foot is less than it is in a big box?

  • Jim Muehlbauer - EVP-Finance, CFO

  • Sorry, say that again?

  • Dan Wewer - Analyst

  • Would the sales per square foot in the smaller format stores be lower than a blue box, but then that is offset by the higher margin rate?

  • Jim Muehlbauer - EVP-Finance, CFO

  • Yes, I think over time we're going to depend on the concept but we could actually see sales per square foot and more importantly what I ask you to focus on as we go forward, is really margin per square foot.

  • Dan Wewer - Analyst

  • Okay.

  • Jim Muehlbauer - EVP-Finance, CFO

  • Because once again, the profitability of that business is based on the margins that we drive.

  • The margin per square foot will be much higher.

  • Dan Wewer - Analyst

  • Great.

  • Thank you.

  • Bill Seymour - Vice President of Investor Relations

  • Thanks, Dan.

  • Operator

  • Thank you.

  • Our next question comes from the line of Will Truelove with UBS.

  • Please go ahead.

  • Will Truelove - Analyst

  • Hi, thanks.

  • Can you give us a little more detail about the rollout of the connectivity center as well as, is there any more detail you can provide in terms of the amount of connections, or the amount of revenue changes once the connectivity center is in place for a certain amount of time?

  • Thanks.

  • Bill Seymour - Vice President of Investor Relations

  • So Brian, the question was the status of the connectivity center or the connected world within our (multiple speakers).

  • Brian Dunn - CEO

  • We have, and this is actually falls on me, I have talked about this frequently asked, the center of the store initiative and it truly becomes much broader than that.

  • It's not just a center of the store.

  • It is essentially we do not believe that our store fully reflects all the things that customers can do today and we believe that there is a huge opportunity for us to re-engineer that in a way that's going to be very, very compelling.

  • And one of the things we've talked to our vendor partners around the world about is, how do we build this stage, if you will, to show the very best, Mike Vitelli calls it The Invisible, what it actually is is the connected, the sort of the tissue of the connected world.

  • And as was mentioned on the call, we have tests in the wireless world, in the UK that we're very, very pleased with.

  • We have a test in Vancouver that's showing us we're learning some interesting things from, and we have a couple of tests right in the United States.

  • So I think you should also think about the continued evolution of our Best Buy Mobile stores within our big blue box, our big stores today, the continued elevation of our digital boats, those things are all coming together and they are all really important clues as to how that's all going to create this new footprint for us.

  • And I don't know if Mike or Shari has any color they would like to add to the work specifically here in the States, but --.

  • Shari Ballard - EVP - Retail Channel Management

  • Yes, I would just underscore that each of the, each of the tests is teaching us something different.

  • Brian Dunn - CEO

  • Yes.

  • Shari Ballard - EVP - Retail Channel Management

  • So there are component parts that we're learning around the physical aspect of the store which has been a lot of what we talk about here.

  • Also, the people aspect of the store.

  • What kind of labor model do you want?

  • What kind of selling model do we want to sell in a connected world?

  • So that's one of the tests that's happening in one of the stores.

  • And then we're also looking at the technology infrastructure you need to actually bring this to life not only for customers but in the way employees do their jobs and I think, from a progress standpoint, really pleased on what we're learning in each of the tests and they are generally on the timeline.

  • And I know there's a real hunger for concreteness around it and there is us, too.

  • And I think as soon as we've got something that looks like it's a winner we'll be out loud about it but we don't have that yet.

  • Brian Dunn - CEO

  • And I'd also just call out that we are not sort of sitting on our heels and waiting for this all to come to fruition and to this perfect and tie a bow on it.

  • We're taking what we're learning and we're deploying it every day, and part of what you see in our confidence, in our margin expansion plans for this year and our operating income expansion for this year, is based on things we've learned and are going to be able to deploy around the world.

  • Will Truelove - Analyst

  • Great.

  • Thanks so much.

  • Bill Seymour - Vice President of Investor Relations

  • Thanks, Will.

  • Operator

  • Thank you.

  • Our next question comes from the line of David Strasser with Janney Montgomery.

  • Please go ahead.

  • David Strasser - Analyst

  • Thank you.

  • I'm going to just touch on 3D a little bit.

  • Just two questions.

  • I won't do a follow-up, I'll just keep the two of them together.

  • Brian Dunn - CEO

  • We appreciate the honesty.

  • David Strasser - Analyst

  • The first one would be just sort of -- I know you've rolled it out, it's only been a week or two, but anything that's jumped out at you, plus or minus, from consumers, or from the store base, anything that surprised you one way or the other?

  • And if any color on how it started?

  • And then Mike Vitelli, I know you've spoken at some conferences about interoperability of the glasses and I'm just getting -- trying to get a sense from you if you think that that trend is going to happen or not?

  • And what you're hearing from the vendors as you talk about that more publicly?

  • Michael Vitelli - EVP - Customer Operating Groups

  • Okay, great.

  • Thanks for the questions.

  • And in the first one, what we're seeing is the customers and the employees are excited about what they're seeing, and we think that's great because it's going to continue to bring excitement in to the store which is what we try to do for our customers all the time.

  • And I think as the momentum builds and the quantities of units sold, that will bring some confidence and excitement into the content production community.

  • So we feel good about it, though it's in its early stages and anything like this that comes out has its growth curves, but it is bringing excitement to the store, we're pleased with what we're seeing.

  • Your point about the interoperability of 3D glasses we feel strongly about that representing the customer's point of view as we would like a common set of glasses that we could use on all those TVs.

  • All of the manufacturers agree that's a very good goal, and they each have specific points with their individual benefits with the technologies that you're using.

  • So we'll keep pushing that point because we believe it's correct and right for the long term, and confident that it will eventually get there.

  • Brian Dunn - CEO

  • Just a quick comment, now I'm going to follow on to your follow on.

  • I think one of the things that's very interesting that we're seeing in 3D is the amount of traffic and the curiosity that people are coming in and looking at television and it really screams to me that innovation is not dead in TV.

  • We're in the early innings and it continues to advance, and it is the appetite for this home theatre experience and this sort of the Holy Grail of this magnificent home theatre experience continues to evolve in the consumer appetite where it's very, very strong.

  • Barry Judge - EVP, Chief Marketing Officer

  • And I think the evidence today at the movie theatres, many of them announced increasing prices for 3D attendance which reinforces the consumer interest in it, which then reinforces the opportunity for the television.

  • So I think we're pleased at the moment.

  • Brian Dunn - CEO

  • And the strength of Avatar, and the strength of Alice, and Barry has seen that six times.

  • David Strasser - Analyst

  • Thank you very much.

  • I appreciate it.

  • Bill Seymour - Vice President of Investor Relations

  • Thank you.

  • Operator

  • Thank you.

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

  • Please go ahead.

  • Mitch Kaiser - Analyst

  • Thanks guys, good morning.

  • Nice quarter.

  • Jim, maybe you could talk a little bit about, you intimated that you might start tapping into the $2.5 billion, you finished the year with I think $1.8 billion in cash at the end of the year, and you said that your free cash is going to be greater than $1.6 billion.

  • Can you just give us some parameters on how you might think about that as we progress over time?

  • Jim Muehlbauer - EVP-Finance, CFO

  • Yes.

  • I'd be happy to, Mitch.

  • As we think about that, I provided the historical context on purpose and that is we look at the cash flow abilities of the business to both allow us to invest in where we're going to go for the future, so we keep the machine moving for the long term, but also using opportunities to overall improve our return on invested capital.

  • We've shown the tendency in the past to obviously do both.

  • As a matter of fact, as I mention over -- we had over $5 billion in share repurchases alone over the last five years.

  • So as we move on a track forward over the next several years growing our top line, expanding margins, we know we're going to have cash flow available to enhance returns for shareholders by repurchasing our shares.

  • The timing and the windows of that will be determined in the future specifically but it's certainly a great opportunity for us based on what we see going ahead to create value through our shareholders.

  • Mitch Kaiser - Analyst

  • Okay.

  • Is there any parameters that we can think about that then as we progress?

  • Jim Muehlbauer - EVP-Finance, CFO

  • What we purposely have tried to do, Mitch, is -- and I think Matt identified this certainly appropriately through his question, is we specifically want, not only our shareholders but our employees, to focus on what we're doing in our operating model.

  • That is the future of the Company, and making the transformation of the connective world and growing our operating margins and growing our top line for the long term are the most critical points.

  • What we want -- what we don't want to lose focus on is that this is not a won and done return to shareholder story and then we move on to a chapter that looks different.

  • We're going to grow the operating earnings of the business, we're focused on driving ROIC over the long term, share repurchases will be a component of that over the long term, and you know, we are very fortunate that for our shareholders and our business model that we're going to have the capacity to do both.

  • Mitch Kaiser - Analyst

  • Okay, understood, thanks guys and good luck.

  • Jim Muehlbauer - EVP-Finance, CFO

  • Thanks, Mitch.

  • Operator

  • Thank you.

  • Our next question comes from the line of Kate McShane with Citi Investment Research.

  • Please go ahead.

  • Kate McShane - Analyst

  • Thank you, good morning.

  • Brian Dunn - CEO

  • Good morning.

  • Kate McShane - Analyst

  • With some of the non-traditional retailers of consumer electronics, and even the traditional retailers, your competition doing more on the service side, what is the risk that some of your competition gets more aggressive on service over the next 12 months while you do and that it could put pressure on the prices you charge for this service and its margins, and has it been incorporated in your guidance?

  • Brian Dunn - CEO

  • Well I'll turn it over I think to Mike for some context but first let me just frame it a little bit and tell you, we expect that there will be competition in that space.

  • We welcome the competition in this space.

  • We think our Geek Squad and the men and women, the 20,000 agents we have across the world, are in a position to do more for our consumers and consumers around the world than any other unit.

  • This is hard business.

  • This is heavy lifting to get into and we have a team that we're very, very proud of and we think that it actually positively calls attention to the capability we have as more people step into it.

  • Michael Vitelli - EVP - Customer Operating Groups

  • It would be hard to add more to that, but that's right.

  • There will be competition that is extremely hard work and we're thrilled that we have our own employees doing that work, which is really great because they are part of the whole team that executes it.

  • We have capacity and capability to do it.

  • We're improving our customer satisfaction and the work that we do in the store and in the home every day.

  • So we're -- and to your other point, yes, we are not naive to what the pressure might do to the margins and it's in the plan.

  • Brian Dunn - CEO

  • And as we do in any kind of competitive environment, we'll be very knowledgeable about what our competition is doing, but we'll be extremely focused on what it is we're doing to deepen our relationship, to deepen our connection with our customers, and we'll focus learning more about our customers and doing more for them.

  • Jim Muehlbauer - EVP-Finance, CFO

  • Also to a relevant point that plays into our performance over the last year is being the strong customer acquisition platform for technology allows us an opportunity to be relevant in the mind of the consumer which is not only valuable to our vendor partners, but think of our services business.

  • People don't come into our store necessarily asking for a service.

  • They come in looking for an experience.

  • And as part of that experience, if we can marry a service capability and a solution that we've already got built within our model, it becomes part of the entire transaction overall.

  • So from a competitive standpoint, we know that customers don't look at services 100% of the time.

  • It's just the service.

  • They're looking at it as part of an overall solution.

  • That's where I think we've excelled in bundling these things over the last few years.

  • It's also why it's important in moments like we had during the last year that we use our leverage to build opportunities to continue high traffic flow into our business and give us the ability to take that share that we've built this year and monetize it going forward.

  • Kate McShane - Analyst

  • Thank you.

  • Jim Muehlbauer - EVP-Finance, CFO

  • Thanks, Kate.

  • Operator

  • Thank you.

  • Our next question comes from the line of Peter Keith with JMP Securities.

  • Please go ahead.

  • Peter Keith - Analyst

  • Hi, thanks for taking the question and congratulations on the results.

  • I was hoping you could provide some perspective on how you're thinking about market share gains going forward on an annual basis.

  • I know this past year was a bit of an anomaly, but you've captured any where from 80 basis points to 100 basis points in year's past.

  • But now, going forward, you know longer have Circuit as a shared donor and the square footage growth is slower.

  • So how are you thinking about that on an annual basis both on the near and medium term?

  • Barry Judge - EVP, Chief Marketing Officer

  • This is Barry Judge.

  • You're right in how you quoted the stats.

  • Our history over the last decade has been to grow about 100 basis points -- anywhere between 80 basis points and 120 basis points in market share, and in the past year we gained over 200 basis points as we noted in the release.

  • As we go forward, we think the market -- we will continue to gain market share for all of the reasons we've talked about in the call, great execution, driving people into the stores, bundling services, content, connections to our connected devices, but we think that market share gains will return closer to our historic level.

  • When you look at the gains and you look at our total market share, we have somewhere between, somewhere in the mid 20s in terms of market share.

  • So obviously there's a lot of market share to get.

  • Often we hear a lot about Wal-Mart, and we look at Wal-Mart closely, and Amazon, et cetera, but when you add up our combined market share it's still below 50.

  • So there's a lot of market share to get.

  • And when you look at the last year much of the market share gains actually came from other channels and competitors than the ones I just noted.

  • So we look at, we look at opportunity to grow.

  • And I didn't call out, but I should call out, our opportunity to gain market share in the dot Com channel as well which is where we gained significant market share last year as

  • Peter Keith - Analyst

  • Okay, that's helpful color.

  • I appreciate it.

  • And just to clarify, so you do see that potential to return to that band of sort of 80 to 100 on an annual basis going forward?

  • Jim Muehlbauer - EVP-Finance, CFO

  • Yes, we absolutely do and I think the other broader opportunity to outline, and it's certainly embedded in our strategy going forward is, we've defined the marketplace and the industry defined the marketplace today, relatively narrowly, around the hardware products that we sell, right?

  • So in the market share that we talk about, mobile phones isn't appropriately represented in that, appliances is not represented in that, certainly the connected digital devices, DirectTV, cable providers, the things that we are going to use to help customers light up their experiences are not refined in that world, and we really see in this connected world a much bigger marketplace for us to play in.

  • Brian Dunn - CEO

  • The long and the short of it is we actually see that we have a much smaller share in a much bigger, broader world and we're very enthusiastic about that.

  • Peter Keith - Analyst

  • Okay, thank you very much.

  • Operator

  • Thank you.

  • At this time I'd like to turn the call back over to Management for any closing comments.

  • Bill Seymour - Vice President of Investor Relations

  • Okay.

  • Thank you, Brandy, and thanks to our audience for participating in our fourth quarter earnings conference call.

  • As a reminder, a replay will be available in the US by dialing 800-406-7325, or 303-590-3030 internationally.

  • The personal ID number is 424-2094, the replay will be available from 11:30 a.m.

  • Central Time today through next Thursday, April 1.

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

  • If you have any additional questions please call Wade Bronson at 612-291-5693, Andrew Lacko 612-291-6992, or me at 612-291-6122.

  • Reporters should contact Lisa Hawks at 612-291-6150.

  • Thank you for your attention.

  • That concludes our call.