百思買 (BBY) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Best Buy's conference call for first-quarter fiscal 2011.

At this time all participants are in a listen-only mode.

Later we'll conduct a question-and-answer session.

(Operator Instructions).

As a reminder this call is being recorded for playback and will be available by 12 PM Eastern Time today.

(Operator Instructions).

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

Thank you, Luke.

Good morning everyone, and thank you for participating in our fiscal 2011 first-quarter earnings conference call.

We have two speakers for you today.

First Brian Dunn, our CEO, will share his thoughts on the first quarter and give you a quick update a what we are seeing with the consumer and our plans for the rest of the year.

Second, Jim Muehlbauer, our CFO, will recap the financial performance and then provide with you our prospective to how the balance of the year will play out.

Finally, after our prepared remarks, I anticipate we will have ample time for your questions.

As usual we have a broad management group here 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 few 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 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 such 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 fiscal 2010 first quarter results last year included restructuring charges, which impacted our net earnings by $25 million, or $0.06 per diluted share.

The balance of our discussion on this morning's call will exclude these charges.

That means the comparisons we make will be on an adjusted non-GAAP basis.

For a comprehensive GAAP to non-GAAP reconciliation of our reported to adjusted results, please refer to the supplemental schedule on page ten of this morning's news release.

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

Good morning, everyone and thanks for joining us on our first-quarter earnings conference call.

My comments this morning will center on our first-quarter performance, what we're seeing from the consumer, the progress we made against our strategic objectives, and our focus for the rest of the year.

First things first.

While there were positive signs in our results, this quarter's earnings were below our expectations and that's something I and everyone on this management team take very seriously.

There are two primary drivers behind these results.

First, we experienced some variability in customer traffic in the US over of the course of the last three months, which resulted in a slightly-lower comp than we were expecting.

Second, we planned for higher SG&A during Q1 to accelerate some of the capabilities to sell more robust solutions for customers.

However, our SG&A spend still came in higher than we had targeted for the quarter.

On the consumer front we experienced some volatility in customer traffic week to week and month to month.

Consumer spending has been episodic and it appears that our customers are operating on queues from the broader environment.

But while spending has clearly rallied from low levels of 2009, our data paints a picture of a consumer coming out to spend and spend well during important events but taking pauses in between.

We can adapt to this environment and maximize the customer opportunity as their spending appears to run parallel to the economic recovery.

The SG&A increase year over year is largely a function of timing, but it also was a function of investments we are making for the future.

This is part of our plan to improve the profitability of our business model beginning this year.

However, this work requires some initial SG&A investments to achieve higher ongoing gross profit margins through better performance in existing businesses and extensions into new profit pools.

All of that said, we remain committed to delivering our SG&A budget for this fiscal year and expanding our operating margins.

Jim will provide more color on SG&A spending and the investments we're making in just a few moments.

As I mentioned earlier, there are several positive indicators in our first-quarter results.

Our gross profit rate performance on a year-over-year basis was encouraging and sets us up nicely for achieving our operating margin expansion targets this year.

We continue to grow our business in Q1, with our international segment growing comparable-store sales faster than the domestic segment.

That tells us that customers continue to respond positively to the wide range of products, services, and the knowledgeable assistance our employees provide, all of which are central to the differentiation of the Best Buy experience.

These results speak to the benefits of an international portfolio and what it brings to the Company, as we made significant traction in our strategic investments outside of the US.

In China our Five Star business continued to shine as it delivered a low single-digit operating profit margin on a comparable-store sales gain of nearly 35%.

In Europe our operating income rate significantly improved year-over year on a 5% comparable store sales gain.

We were thrilled by the performance of our Best Buy-branded stores grand openings in the UK.

In fact, our first UK grand opening and our third store outside of London was the largest grand opening weekend in the history of Best Buy.

Even though our international results in Q1 were encouraging, we still remain focused on maximizing returns across our entire portfolio of brands and businesses.

Each business must earn its right to additional capital, period.

We are closely monitoring the performance of our Best Buy-branded ventures in Mexico, China and Turkey.

Like our investments in the UK, we will not expand our footprint significantly until we are confident that we have a model that will create value for our customers and generate acceptable returns for our shareholders.

And the performance of our 180,000 employees is in itself a highlight of the quarter and I'd be remiss if I didn't thank them for their hard work and dedication.

Our people are our true competitive advantage and they continue to create better and better experiences for our customers, who are responding by choosing Best Buy and our family of brands over the competition at a convincing rate.

We remain both optimistic and committed to our strategy, and I believe by the end of this year we will benefit from the investments we have made during the first quarter.

And as we have said all along, we're keeping our eye on a few key strategic indicators and they are very encouraging.

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

First, our internal measures of customer satisfaction rose to a new high, over 83%.

Likewise, market share gains continued to grow on top of the record gains we posted last year.

We estimate that our domestic market share during the three months ending April 30th increased 100-basis points versus the prior-year's period.

We added share in TVs, computing, mobile phones and digital imaging during that period.

And also important to our strategy, employee retention is at an all-time high.

We've never had turnover below 40% before and our 12-month rolling rate for turnover sits at 37% today.

We believe that's a reflection of our employee's belief in our strategic direction.

Looking at our .com business, I'm pleased with the 26% revenue growth we achieved this quarter.

We do not see .com as a separate channel for us but think of it as a great complement to our store model.

In fact, nearly 35% of the products we sell online in the US are picked up in one of our stores.

That's a competitive advantage for us, especially versus our online competitors, but more importantly allows us the additional benefits of leveraging our strengths of a blue shirt interacting with the customer when they come into the store, which gives us another opportunity to sell a complete solution.

Now let's turn to the rest of the year.

We spent fiscal 2010 adding market share at a record pace.

Through our focus on the customer and our strong strategic relationships with our vendors, we plan to use our customer acquisition model of one billion interactions per year in the US alone to drive new value for customers, vendors and shareholders.

Best Buy is known for having the latest and greatest in CE.

Vendors and partners see us as the best place to showcase new technology and customers see us as the best place to experience technology.

There will be no shortage of enhancements in consumer technology this year.

Here are a few examples of where Best Buy's family of brands are bringing consumers closer to the connected world.

First, smart TVs.

By helping customers understand what is possible with Google TV and IPTV, Best Buy will shape the market for smart TVs.

And though 3D TV is still in the early days, we've already seen a great deal of interest and events like the World Cup broadcast in 3D will help drive consumer interest around the world.

Next, a store reset.

Later this month we will begin to launch a store reset focused on IPTV connectivity solutions, mobile broadband and home broadband.

This is a great opportunity for us to drive incremental margin by attaching connections to the millions of connectible devices we sell.

Gaming.

We believe gaming is set for an exciting back half of the year.

With gesture based gaming platforms like Microsoft's Connect announced at E-3 yesterday and firmware updates making millions of Sony PlayStations 3D ready, we are on the front end of a new generation of gaming solutions.

Also, as we just announced this morning, we will launch a used gaming business across all of our US stores later this summer.

Next, tablet computing.

Customers are really beginning to live the connected world in tablet computing.

We were thrilled to bring the iPad to our customers in Q1.

Tablets have been great for the industry and are the next wave in the PC-based connectivity movement.

As the industry's leading retailer of mobile computers, we can't wait to see what new innovation this category brings and the opportunities to provide value-added features like broadband connections.

Finally, Best Buy Mobile.

This is the spearhead of our connected world story, driving incremental growth and profitability.

The 4G HTC EVO on Sprint was the best-selling preorder phone in the history of Best Buy Mobile.

The customer response to that smart phone, along with many others running the android platform has been outstanding.

As a major addition to our in-store mobile effort we launched an enhanced online presence for Best Buy Mobile that will offer customers unparalleled choice of phones and service plans.

And of course, we're very excited about the iPhone 4, which will be available at Best Buy on June 24th.

I'll wrap up my comments now by reiterating that while I'm neither pleased nor satisfied with our first-quarter financial results, it does not change my confidence that we can and will deliver our annual guidance and drive value for the long-term.

With that I'll turn it over to Jim, who will offer some additional color around our first-quarter results.

Jim?

Thanks, Brian, and good morning.

As noted in our release this morning there were a number of significant elements, which impacted our first-quarter results.

I would like to take this opportunity to give you some important color on these items and discuss their implications on our performance going forward.

I will also provide a perspective on how we think of the balance of the year may play out.

The key take away here is that we continue to expect our annual performance to be consistent with original expectations.

More on that in a moment.

As Brian commented up front, the net earnings of $0.36 per share in the quarter was below our expectations and Street estimates.

One thing to note was that while consensus estimates for our annual EPS results have been within our guidance range, consensus expectations for the first quarter were above our internal plans.

In general, Street estimates for the first quarter had assumed lower levels of SG&A growth in the quarter.

The shortfall to our first-quarter plan was driven primarily by the combination of sales softness due to variability we saw in both consumer spending and lower CE industry growth and the timing of SG&A expenditures.

Much of the SG&A spending during the quarter was used to drive focused initiatives that will allow us to build enhanced margins going forward.

While we are never happy about our shortfall to plan in any quarter, it remains very early in the year, especially given the significant portion of sales and profits in front of us.

Taking a deeper look at some of the specific headlines for the quarter, top-line revenue grew 7% to nearly $10.8 billion.

Total comparable-store sales grew 2.8% versus last year, which included domestic comparable-store sales growth of 1.9%, driven primarily by continued strength of connected business lines, like Best Buy Mobile and mobile computing.

While we saw slight comparable-store sales declines in some of our categories, like gaming and home theater, our market share remained essentially in line with expectations.

This data point tells us that the top-line softness to our plan was driven primarily by choppiness and lower spending in the category by consumers.

The international comparable-store sales growth was 6.3%.

Europe's 5% comparable-store sales gain reflects strength in smartphones and post-paid connections.

China had approximately 30% growth in comparable-store sales due to continued government stimulus activity and strong store execution.

Offsetting these gains was a 2% comparable-store sales decline in Canada due to softness in consumer spending, as market share in this business also remained stable.

As we discussed during our last call, we set out purposely to improve our operating margins in fiscal 2011 by selling higher-margin connected solutions to customers.

At that time, I also indicated that we would have our most difficult gross margin comparisons in the first half due to the performance of last-year's first quarter, when gross margins in our domestic segment were up 70-basis points.

Considering that background context, we were pleased that first-quarter gross profit dollars grew 9%, which includes some benefit due to changes in FX, and that the quarter's 25.9% enterprise margin rate reflected a 60-basis points improvement year over year.

Additionally, we were pleased to see rate expansion in both our domestic and international segments.

For the first quarter domestic gross profit dollars grew 8%, while the gross profit rate of 25.7% was a 65-basis points improvement year over year.

The quarter's strong gross profit performance is attributed to a few main drivers, some of which we expect to sustain, and others that were more event driven or timing in nature.

First, we experienced improved promotional effectiveness across several key product categories, driven by lower incentive spending, reduced discounting, and better product life cycle management.

Second, continued strength in Best Buy Mobile positively impacted both rate and mix during the quarter, as consumers' continue to respond positively to our blue shirt's non-biased expertise and our broad handset and carrier offerings.

Next, we realized a nonrecurring benefit from the finalization of a certain vendor rebate related to an annual incentive program.

And lastly, our gross margin also improved, as a larger portion of our vendor programs are oriented towards purchase incentives instead of advertising support, which is recorded as a reduction in SG&A.

When looking at our first-quarter gross profit performance, we estimate that approximately 40-basis points of the year-over-year growth was driven by nonrecurring items.

Excluding these items, gross margins still improved significantly over the decline experienced in the prior quarter.

Within the international segment gross profit rate of 26.3% reflects a 30-basis points year-over-year growth and was driven primarily by rate strength in Canada due to improved promotional effectiveness in home theater and computing.

Looking ahead we believe that we are well-positioned to deliver improved gross margin performance throughout the year.

Many of the margin-enhancing initiatives we discussed with you last quarter will build momentum as the year progresses.

Initiatives such as advanced home theater experiences and our magnolia stores within a store, mobile broadband connections, video content connections with partners like DirecTV and Comcast, and Geek Squad Ask-An-Agent are examples of solutions that, while in their early stages, provide significant opportunities to improve our gross margins.

As a result, we remain confident in our plan to deliver gross margin expansion that was included in our full-year guidance.

Total SG&A for the quarter of $2.5 billion, or 23% of revenue, increased 12%.

Approximately one quarter of this increase was driven by FX.

The balance of the growth in spending was primarily by -- driven by several key areas.

First, volume-related expenses related to the addition of new domestic big box stores and the impact of comparable-store sales growth during the quarter drove an increase in year-over-year SG&A spend.

Second, we made expanding investments in key growth areas during the quarter, such as our Best Buy Mobile business, where we are opening up new stand-alone stores, and the launch of our new .com experience for mobile phones.

Third, a portion of the spending increase was driven by higher discretionary expenses, like IT projects, employee costs and outside services.

Lastly, the balance of the spending increase was driven by the net impact of several nonrecurring items incurred during the first quarter's of both fiscal 2011 and 2010.

Our plan for the year included the expectation that the first quarter would be the high watermark for the year with respect to SG&A dollar growth.

We knew we would be undertaking a number of strategic and tactile projects as we prepared for the key selling seasons in the back half of the year.

For example, this spring we began resetting our home theater and computing departments to improve the presence of connectivity offerings.

Like air cards, embedded mobile broadband, home broadband, and IPTV connectivity solutions.

We are also leveraging our Best Buy Mobile learnings as it relates to the deployment of labor in the computing department to begin to realize opportunities of a connected focus labor model.

We are happy to report that many of these initiatives are well under way and are tracking in line with our expectations.

So while the timing of certain expense items had a negative impact on our first-quarter results, I can assure you that our SG&A spending plans for the year remain unchanged from our original expectations.

So when you bring it all together the net result is first-quarter operating income of $313 million, or a 10% decrease versus last year.

From an inventory perspective, we finished the quarter with domestic inventory levels up approximately 10% on a comparable basis.

Inventory increases were largely a function of investments in higher growth product categories, combined with a slight shortfall to our Q1 sales plan.

We are comfortable with the overall quality and availability of product going into the second quarter.

That brings me to our outlook for the year.

As I said up front, while the first-quarter results were below what we had planned, it is still very early in the fiscal year.

At the outset of the year we laid out expectations for full-year diluted earnings per share of $3.45 to $3.60, which represented a growth rate of 10% to 14%.

While our initial operating margin growth guidance did not provide specific components around gross profit or SG&A, we stated that you should anticipate seeing both gross profit rate expansion and SG&A leverage for the full year.

Looking at gross profit, we are pleased that the year is off to a good start on this front, and we expect to see gross profit rate growth in subsequent quarters.

This expansion will be the result of the investments we have made to date in connected solutions, strong store execution, and easing year-over-year comparisons as the year progresses.

Given the performance in the first quarter and to assist your modeling for the balance of the year, I would like to provide more color on SG&A expectations for the year.

Looking at the balance of the year and coming off our planned spending growth peak in Q1, we anticipate that SG&A dollar growth will slow in subsequent quarters from the levels experienced in the first quarter.

Based on our current expectations of annual sales, we anticipate total SG&A dollars will increase by approximately 6% to 6.5% for the year, which remains consistent with our original plan.

Bringing these assumptions together, we still expect full-year consolidated operating income rate of approximately 5%, which reflects a 30 to 40-basis points of growth from last year, with the domestic business coming in at the top end of that range.

From a phasing perspective, we currently anticipate that we will see OI rate expansion in each of the remaining quarters, with a higher amount of leverage in the second half of the year.

One of my objectives this morning was to cover several of the key areas where I knew you would have further questions given the quarter's results.

In wrapping up our prepared remarks, I also wanted to make sure we helicopter up and not lose sight of the broader picture on the first quarter and what these insights mean to the year.

First and foremost, after a very strong turnout in the Q4 holiday selling season, consumer spending became more variable in the first quarter.

While our plans for the year were not predicated on robust improvements in consumer spending, they did reflect some improvements in anticipated overall CE industry sales versus the difficult prior year.

In our history we have not found that the first quarter is a strong predictor of future consumer demand in the CE sector for the key selling seasons ahead.

Accordingly, it's still very early and we continue to monitor consumer behavior and will adjust our plans as necessary.

Second, we plan to grow gross profit for the year based on leveraging our connection strategy, selling solutions that provide customers with clear benefits, and continuing to be more effective with promotions.

Our first-quarter results demonstrate that we are off to a good start on this front and while there is a long way to go, we believe we are moving in the right direction.

Third, our annual SG&A spending plans remain unchanged from previous expectations.

First quarter spending growth trends are expected to subside as the year progresses.

As we have demonstrated in the past, this is the area in which we have the most control over the levers.

Finally, we continue to expect to deliver our financial goals for the year.

We are maintaining our annual guidance expectations of strong EPS growth of 10% to 14%, driven by top-line growth and expansion of our operating margins.

With that, Luke, we are happy to take questions from the audience.

Thank you.

(Operator Instructions).

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

Please go ahead.

Hello?

Hey, Gary.

Morning, Gary.

Hi.

Sorry, had to unmute the phone.

Just one quick math question before we ask a different question, which is, in the guidance you're giving that includes the one-time gross margin benefits that you got this quarter?

That's correct, Gary.

So how much is that mathematically for the full year because should we think about 10-basis points basically in gross margin?

Yes, Gary, as I called out, most of the nonrecurring benefit that we saw in the quarter, the 40-basis points in Q1 that we do not expect to repeat, is driven by that one-time item.

So, yes, you're right.

On the balance of the year it's going to be roughly nine of ten points.

Okay, so that's not so big.

As we step back, obviously it seems like things slowed as the quarter went on from your commentary because you got caught with a little too much inventory and spending was a bit too high.

How do you -- what's your prognosis for spending the rest of the year?

How do you drive customers into your store in what's probably going to stay as a variable consumer spending environment?

Gary, this is Brian.

We follow the same news and read the same reports and have the same data points you do.

Certainly the CE industry was a bit weaker as the quarter unfolded than we had anticipated.

Our traffic's been choppy month by month.

I think there are a couple of things.

One, clearly the events.

Customers are still coming out, and as I mentioned in my prepared remarks, spending and spending well around traditional drive times for us.

I also think there's a lot of -- industry is loaded for a lot of very interesting product launches in the back half, and I think that will help drive consumer interest.

And again, we're reading the same things you are, but this quarter was a bit choppier than we thought it would be in terms of demand.

As part of that, so this is same question.

If things slow down are you in a position to pull down the SG&A significantly, like could we see it much lower than 6% to 6.5?

Yes, we can, Gary, because once again, it's predicated on the sales volume that we see.

The leverage that we traditionally pulled and you saw us do over the last couple of years is that we'll adjust labor accordingly as we see sales move up or down versus our expectations, so there's clearly a variable component of that.

The other element that impacts SG&A certainly is the amount of incentive pay that we'll pay up for the year.

It's predicated on us delivering our annual operating objectives.

So if we incur higher profitability in the year like we did last year, we'll be taking the extent of expense up, but that will be net good news on the bottom line.

Conversely, if we see consumer behavior and the water level a little short of where we expect, we'll see some benefit from lower intentive expense year over year.

Those levers are there.

I think the thing that we do see in our base performance obviously is that the investments that we're making for the long term in connectivity around setting stores, opening up Best Buy Mobile stand-alone stores, as long as we continue to see consumer appetite for those, even if we have a blip in a quarter around consumer behavior, those are going to be good investments for the long term and they're traditionally the things that we would not pull back on just to hit a short-term quarter number if we just think it's a blip in the environment.

Great, thank you very much.

Thanks, Gary.

Next question, please.

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

Please go ahead.

Hi, good morning.

Morning.

Recognizing there was some choppiness around traffic, there also seemed to be a lot tighter TV inventory in the industry, which appears to have resulted in slower ASP declines, particularly in LED, and as a result there's still a fairly good premium between LED and LCD.

I was just curious in terms of your outlook whether or not that includes perhaps more reasonable ASP declines as supply improves and the outlook for LED in the balance of the year?

We're going to ask Mike Vitelli to comment on that for you.

Thanks for the question, Dan.

Actually we've seen, to your point, a more modest decline in the cost per inch in flat panel TV this first quarter compared to any of the probably last eight or nine quarters.

That's good news overall for ASPs.

A lot of that's coming from larger screen sizes.

As you mentioned the addition of LED TV, internet IPTV, 3D TV, all of those are increasing the average selling price in the industry.

At the same time, and Brian mentioned this a little bit earlier, the industry has yet to begun -- to begin to promote some of those as we move into the second half, as manufacturers are still getting their production in place and there are certain products that are still being set, as we speak, in the industry.

So I think there's a lot of opportunity there, both for some excitement in promotion as all of the manufacturers get into the space, and ASPs right now are not declining at the rate they have been for the last eight quarters.

Just as a follow up to that, can you comment on your access to the more popular SKUs, given the tightness we have seen in the industry?

We believe that we continue to get our unfair positive share of that as we move out every month and based upon our pretty extensive collaborative planning with our suppliers.

Great.

Thank you.

Next question, please.

Our next question is from the line of David Schick with Stifel Nicolaus.

Please go ahead.

Hi, good morning.

Good morning.

Try to turn this into one question.

You've run mid-18s on the SG&A on an annual basis in low single-digit comp environments and so we have precedent there.

You have a connectivity move in international.

Can we tie together the pieces and say over no specific timeframe but in the medium or whatever future, how do we see the connectivity monetize and that SG&A -- is the opportunity to get SG&A back to something like that while what I would assume is gross profit dollar growth from connectivity happens?

Can that all happen or is there just such a constant level of investment in that medium term that we can't get that magnitude or that meaningful move without just the constant churn of investment?

David, I think that's a very good question.

I think -- first let me tackle the connectivity.

You're going to see that show up first and foremost in gross margin rate expansion as the year and then years unfold, and there is no doubt there is some front-end investing in capabilities that we need to put forward to realize those.

But I certainly think over time you will see us begin aggressively leverage those, but it is -- it does require investment from us to realize and create those differentiated experiences that delivers the gross margin expansion for us.

Yes, David, we're happy to invest in more labor dollars when they're driving higher gross profit dollars, so examples that we see like our Best Buy Mobile business, our cost to execute that within the stores given the model that we have in place is one of our more cost-intensive areas but the profit dollars that come along with that are also much higher.

So as we mix the business going forward we see a couple of things happening.

Number one is we're going to invest more in putting our blue shirts in a position to talk to customers about the connectivity offerings and solutions that will work for them.

That is the differentiator in our model.

We actually engineer people into the equation to help them get what they want.

That comes with a cost but the margins in the profit pools that we're now competing in will afford us to do that.

Secondly, we still see some students to continue to get leverage in SG&A from our core operations behind the scenes.

So on balance I think the leverage you'll see moving going forward will be more gross margin oriented with still SG&A leverage but a little less.

I think if you look at our SG&A spending versus our top quartile retail peers we're not out of line with what we spend and we're actually, as I said earlier, engineering people into the equation.

But our focus is really clear, driving higher connections, which are more profitable to our business model, putting labor in the right amounts and the rate spaces to make that connection for customers, and then continuing to leverage the scale that we have as a business.

And I think as we've talked before, the other significant leverage opportunity that sits in SG&A is that we think we can drive a large amount of our future growth and profitability without the relative expansion of new stores that we've experienced over the last five or ten years.

So without that new bricks-and-mortar component, we're certainly going to see leverage in SG&A, as well.

From a historical perspective at Best Buy, David, as you know, we have a long history of moving into new spaces aggressively and looking to differentiate for our customers.

We also have a long history of bringing efficiency to those spaces as we learn how to operate in those businesses.

That's sort of right in our wheel house.

Thanks for the question.

Great.

Next question, please.

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

Please go ahead.

Hi.

Thanks, guys, can you hear me okay?

Yes.

Go ahead, Mike.

Okay, good.

So my question going to be really a two-part question.

One, within your reiteration of your guidance I don't remember if you specifically reiterated the sales guidance, which was 5% to 7% total and 1% to 3% comp?

And then I guess within that, what do you expect to see from things like LED TV.

Is that ramping up, are customers buying that?

Is that becoming a bigger part of your mix?

And I guess 3D is probably really small but that become more meaningful later in the year?

Thanks.

Yes.

Just taking your one question in two parts apart, we've not changed our guidance expectations for the top line, either in total revenue growth or in comp sales.

With that, Brian, I think you were going to comment on television?

I was actually going to see we reiterate our guidance in full.

I was wondering if you want to mention on LED, Michael?

Well, LED is an increasing percentage of our business as it's an increasing percent of the industry, but we're a leading edge in that area, and all of the new areas that Brian talked about earlier we think we're pretty balanced from a TV perspective and a computing perspective and a phone perspective and an entertainment perspective.

All of the new things that Brian talked about, whether it's 3D and IP TV, most of those are LED based.

The new motion control gaming, tablet, these are all things that are yet to be in the marketplace in an exciting way and will all be part of the growth as we move forward.

Earlier question, Mike, I mentioned that the customer had been choppy for us in the first quarter and that's absolutely true, but that really hasn't done anything to mitigate our confidence that the customer's going to be there and looking for the connect, the latest and greatest technology, the connected solution that is we bring together.

In fact, we remain quite confident about that.

Okay.

And I guess as a follow up, if LED and 3D and IP, if those are all good what TV -- what type of TV SKUs will work because I think your trends decelerate in TVs?

Say that again, Michael.

What -- your TV trends did decelerate, right?

I think you were down low single digits, previous quarters you were up, if memory serves, high single digits, so something slowed in the TV business, was it lower-end TVs, smaller screen sizes, et cetera?

Yes, the 32 to 37 area was shorter for us this quarter.

You have two reasons for that.

One is, as someone mentioned earlier, the industry itself kind of pulled back in production on that area.

Another thing we all should take into consideration, last year at this time we were entering the digital TV transition incredibly aggressively.

You talk about what noise there was and what promotion there was in the marketplace, Best Buy and everybody else in the world, including the US government, was talking about this every day, so in May last year there were a lot of small TVs that were sold as the consumers answered instead of getting a converter box.

So that was a big part of what was happening right now a year ago in May and June.

It's not happening this year, so that's where we're seeing the difference in the slowdown for us.

Okay.

Thank you.

Next question, please.

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

Please go ahead.

Hey, guys, Scot Ciccarelli.

Good morning, Scot.

Hi.

Question on the traffic.

Obviously the phrasing was it's been choppy month to month, I guess I'm wondering, has that trend been more evident in certain categories more so than others?

In other words, are customers treating certain categories with more discretion than others or is there a sensitivity to price points?

Can you just be any more descriptive on what we're seeing in terms of the choppiness?

Mike, do you want to give a little commentary overview -- or category overview?

I think the big por -- a portion of the traffic decline for us has been entertainment media.

There's been continued declines year over year in CDs and even DVDs now are starting to have that trend.

Part of the reason of the acceleration and the announcement of the used gaming today is part of that solution is to try to bring people into the store with another offer, so we're trying to offset some of the traffic declines that come from that part of entertainment with newer entertainment areas.

So used gaming, both trade in and the pur -- the trade in of new games and the purchase of new games is something we're trying to add to that.

You're seeing increasing space that we're utilizing of prior media space for different areas like increased E-readers, et cetera.

We're trying to add things into that center of the store to replace both the space and the traffic that started to decline in traditional package media.

Okay, and then just a housekeeping item.

You mentioned nonrecurring items in gross margin but in the release it mentioned something in SG&A.

Can you just size the nonrecurring items in SG&A for us?

Yes.

It actually was -- as listed in the index it was the smallest driver of our SG&A overall and every quarter we're going to have a few things that, whether it's settlement of legal matters or one-time costs, I would not --in the ramp of SG&A year over year and more importantly, as the compared to our plans in the quarter, it was a driver, but it wasn't a material driver.

Okay.

Thanks a lot, guys.

Next question, please.

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

Please go ahead.

Thanks and good morning.

I want step back on a bigger picture question.

Your PC sales slowed down just a bit, probably helped mix.

It sounds like the lower-end TVs, which have been a drag on gross margin, also slowed down, and probably helped your gross margin mix.

I think the cynic steps back and says you've done a great job in 2009 driving sales at the expense of some gross margin.

You come into the first quarter the sales slow down and then you get the gross margin up and you're investing to drive that gross margin, so you step back and say can Best Buy drive sales and gross margin higher simultaneously, or is that just given competition, given innovation, the challenge here and the rub in something that -- how are you thinking about that and is that a discussion that you've had internally?

Yes, it certainly is, Chris -- it's Jim -- and I think I would pull that apart just a little differently, to be honest with you, I think, if you look at how the business performed last year in Q4, when we posted the seven comp in our domestic business.

So as we talked at that time, we purposely chose to assort products that consumers' had high interest in around smaller screen-size TVs, as Mike Vitelli just talked about, the impact of the DTV conversion, and the explosive growth that was happening in the notebook business.

So when I look at our margins last year on that 7% comp, as I look at the rates in the categories that we were selling we had stable to growing rates in those categories.

The overall margin rate went down solely due to mix.

As we look into business now in Q1 and we see a little bit of overall consumer softness, more than what we had planned, and we see rate improve -- and we see some rate improvement, certainly some of that is being driven by just lapping the mix that we saw last year in the business.

But also, as I mentioned in my prepared remarks, we're seeing much bigger impact around the promotional effectiveness that we've seen to drive business in areas where we're providing the consumer benefit.

We're learning that there's ways to do that without as much incentive support as we provided in the past.

So as we talk internally, we clearly talk about we are going to grow our gross margin rate by selling customer solutions that they're looking for.

It is not a game that we're deciding, hey, let's have a higher comp sales number but lower gross margin rate or vice versa quarter by quarter.

We're trying to go where the customer is going with the solutions that they need, and then actually use all parts of our model to improve the gross profit rate.

Two points I'd add to Jim's answer.

One, we didn't do anything in Q1 to turn down the -- close the pipe in terms of being out there in the marketplace and price right and offering the right value, so we didn't do anything to purposely mitigate or remediate the revenue we see.

And I would also remind you that Q1 was probably our toughest gross margin comparison year over year, as a year ago in Q1 we had a 70-basis points improvement year over year and now here we are with an improvement on top of that, so we're actually not taking any victory laps about it but we see it as a positive sign as we move forward in this year.

This is Mike Vitelli, one last thing I'd like to add.

From an overall promotional environment, and I mean promotional in the sense of creating excitement, not from just a price point of view, very few of the CE players, whether it's manufacture's or retail's,were aggressively talking about this in the first quarter and I think it's to what Brian mentioned earlier, is product releases that people have scheduled are in different times of the year so that I actually think the voice of the industry is going to get louder as the months go by and the product releases will increase as the months go by, and I think, therefore, the consumer response will increase as the months go by.

In fact we're -- longest answer ever and I apologize to everybody on the call.

We're seeing the consumer response where they have interest.

On the call I mentioned the response to the new Sprint -- the new Android 4G HTC EVO.

It was our largest presell ever [on a multiple], so the consumer is coming out when there are new things that are sparking their interest and they all tend to be around this connected world, this notion of connectivity that we've been discussing.

Thank you.

So as a quick follow up, as you -- do you need to expand the pipe right now?

When you hit the soft points in innovation and new product introduction and whether a manufacturer's stepping up or stepping in or out, do you need to step in and add some promotional dollars to drive traffic to the store?

How do you think about that going forward?

Yes, it's part of the benefit, Chris, of having just a broad portfolio of product versus some of our competitors who have much more narrow scope of products, selection in the categories they talk about.

Certainly it's what we see as an opportunity as we talk about connected solutions and the business models associated with those, that is still very hot.

But I think to Mike's Vitelli's point, the most efficient way to drive traffic for the long term is when we lineup what's real new news in the marketplace around spending our vendors are doing that drives people into our business, as Brian mentioned, during key drive times.

So as we look at our business going forward, certainly if customers are going to be there during those key drive times on new products that that's the most effective time for us to do it as [in portfolio].

Trying to pulse the business off a drive time has not historically provided a better customer experience or a longer-term financial proposition that has made sense for us.

As the year unfolds, at the appropriate times and places you will see our voice get very loud.

You will see us get very loud behind new technologies.

You will see the voice.

You will see us on television more frequently as we approach drive times and product offerings that make sense to our customers.

Thanks, Chris.

Thank you.

Next question, please.

Thanks.

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

Please go ahead.

Thanks, good morning.

Wanted to follow up on the computing category.

I know you broke out that notebooks were up low double digits bit I was hoping you'd just talk a little bit more about the trend in the category and the outlook for the back half of the year, especially as netbooks become a bigger portion of the mix, as tablets continue to grow, and what you're seeing from a unit standpoint and price point standpoint?

This is Mike Vitelli again.

I think the first thing is, as Jim had mentioned specifically called the mobile computing, because to your comments the category is expanding.

It has notebooks in it, has netbooks in it, and now it's beginning to have its new tablets, and there's one really important one there right now and there's a lineup of folks ready to enter that fray, as well.

What we're seeing right this second is that growth overall has slowed because I believe what's happening is the new announcements have people thinking, and you saw some of that hesitation as of the end of this quarter.

As availability improves in all of the areas I think as the back-to-school launch happens, which is coming up, that's the next big drive time that comes from us, we believe we're going to see the computer area continue to expand over the course of the year.

And just to follow up on that, Mike, what signs are you seeing in terms of the slowing growth to give you confidence that this is just the consumer perhaps waiting for new products to come out rather than perhaps a greater maturity of the product category than what you had previously thought?

It's because of the back-order situation you'd see in some new categories so you know that the consumer demand is out there.

It's something that the production capability has to catch up to, and we clearly see multiple manufacturers and their product plans as they move through the rest of the year.

Great, thanks so much.

Thanks for the questions.

Nex --

Our next question is from Alan Rifkin with Banc of America.

Please go ahead.

Thank you very much and good morning.

Good morning, Alan.

One more question on the guidance, if you don't mind.

I certainly understand, you made it quite clear that your SG&A spending for the year is unchanged.

However, in the first quarter, to be fair, your revenues did fall short of expectations.

When you look at the guidance for the full year, is your confidence still in the $3.45 to $3.60 range predicated on recapturing those revenues, or do you think that SG&A spending may actually be lower than what was first anticipated?

And then as a follow up, does your guidance now for the year assume a continued stronger dollar and what's the incremental benefit to your full-year guidance from the stronger dollar?

A couple of pieces there, Alan.

So we've maintained all aspects of our guidance, so we still see the comp of 1% to 3% for the year.

As I mentioned in my comments, Q1 has just not been a historically strong indicator of what consumer behavior is going to be for the year, so it's just too early to call out.

So we did fall a little short of our plan in maintaining our guidance of 1% to 3%.

Clearly we ex -- there's room in that guidance range but clearly we expect to recoup that as we move through the year given the product cycles we see coming and we'll have to see what happens during the key selling season around the holiday time, so no changes on that front.

Correspondingly same with the EPS guidance.

Based on what we see today in Q1, $3.45 to $3.60 is still the best range we have for the year.

Certainly we'll continue to evaluate it and move it and adjust it, like we have in previous years, when is we have a better indicator.

But overall I think that the SG&A spend is -- what, I want to say, $30 million to $50 million more than our internal plans.

So the balance of the SG&A spend for the entire year wasn't a huge mover and we have plenty of flexibility to moderate that overall.

A point in reiterating our SG&A conversation is when you have a small dollar quarter like Q1, small changes in SG&A obviously have a big EPS impact.

On balance for the year we still feel very good about the guidance range we have out there.

Jim, are you assuming a greater benefit from a stronger dollar as part of your guidance today than your original guidance back in March?

Yes, thanks, Alan.

Actually the impact of the dollar change on our bottom line given the overall profitability of those countries is not a real meaningful impact.

It certainly impacts total sales dollars and SG&A dollars overall, but the net bottom-line impact is not a big mover in the mix.

Okay.

I guess still don't understand, all things being equal, how given your performance in Q1 you could be more optimistic about the remainder of the year than where you were in March?

We're getting more optimistic, Alan.

I think what we're saying --

Well, admittedly you fell short of your expectations in Q1, you're still backing guidance, which means that you have to exceed your original expectations in the remaining quarters.

Is that not a fair assumption?

That is fair, but if you look at the weight of the business that's in Q1 versus previous quarters, Q1 is our smallest quar -- it's 10% of our year.

Oh, okay.

So as I look at the opportunity to make up that shortfall in Q1, we have significant opportunity to make it up in Q2, Q3, and especially Q4.

If you look at -- you've been watching the business for a number of years -- if you look at how the business has performed, look at last year, for instance, we took guidance at both at Q3 and we finished there even stronger than we thought by many cents more than what we're talking about in Q1.

I think the key headline, and we did this last year in Q1 from a different lens when we over-delivered on expectations through higher gross margin performance, we were very careful in saying don't get overly excited about the level of improvement in gross margins in Q1 last year because we see that tempering as the year goes on.

Our callout in Q1 is that while we're disappointed don't get overly pessimistic that we think the year is going to pan out materially different than we originally thought.

It's still very early.

We control many of the levers from a spending standpoint and we'll see what the consumer actually does.

We're confident that our plans in driving margin expansion into the gross profit lever are going to continue to ramp, and we're excited to put those in front of customers and see their reaction to it.

So in general we feel good based on where we're at in the year on guidance.

Okay.

Jim, thank you very much for the clarification.

Appreciate the question.

Thank you, Alan.

Next question, please.

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

Please go ahead.

Thanks a lot and good morning.

Just a question that combines your expense outlook and some of your strategic initiatives.

You spoke about the investments that you made in the first part of the year.

You also, though, spoke about at two -- at least two initiatives that seem to be starting more or less now.

One is the used game rollout and the second is store resets that sounds relatively comprehensive.

It'd be great if you can reconcile those pretty significant initiatives with your expectations for SG&A spend coming in and if as you do that you could talk about logistics associated with each of those efforts?

I think what we'll do here, Matt -- thank you for the questions -- is we'll ask Shari to comment on the store resets and then we'll ask Mike to comment on our new used game business.

I think -- good morning, Matt.

In terms of the reset aspect of it, the resets are built into what we already see for the SG&A for the back half of the year, so there's not a concern there in terms of, is that a surprise or are we doing it at an accelerated pace, et cetera, one.

Two, we feel like they're additional tools that will help both the consumers and the employees in the store, actually physically show customers what's possible in the connected world; that's true specifically in computing and home theater.

And some of the other resets will help with -- Mike mentioned this earlier, but will help us with the way we've the space laid out in the store and giving more space to expanding categories.

So I can let Mike touch on used gaming specifically, but the plans for that are baked into the SG&A number that we're already looking at for the year.

Matt, hi, it's Mike.

On the used gaming industry logistically, what we're doing is each store is going to have two things, the ability to take in used games at a price that we'll be able to get to all of the stores a regular basis.

Consumers will get a gift card -- a Best Buy gift card that's usable throughout the store for anything at Best Buy for the value of the game that they trade in.

And then additional, we're going to have additional space in the gaming department to sell used games.

Both of those are things that we've been working on for several years and finely gotten to it to a point that we believe they're operationally sound that we can expand them across the chain.

And as I mentioned earlier, we think that's going to be a significant increased traffic driver to the store that we lost in traditional types of media.

I'm sorry, and add one thing, Matt.

The dollar amounts associated with resets are not gargantuan either, just to make sure you're clear on that.

Got it.

And on the -- just to follow up on the used gaming, is that a staff-intensive or systems-intensive initiative for you?

It's neither, actually.

The system that gets to the stores is the pricing and then in certain stores we'll actually have dedicated areas where people can trade in games.

In certain stores they'll do it at the customer service desk (inaudible), but certainly there's going to -- if the volume increases at the rate that we hope, we're going to be available to transition some of the staff that we have used for media to work on this initiative.

We think the timing of this business, Matt, is really terrific, too, as we look at what's happening in gaming.

As a mentioned in my prepared remarks, with Microsoft's announcement at E-3 yesterday around Kinetic, their interactive motion-based gaming, and the firmware updates that are happening with PS3, which we think will accelerate the adoption of 3D gaming, we think the timing for us to get into the used game business and help our customers realize some currency from their older games we think is a very strong customer proposition for us right now.

Thank you, guys, so much.

Thank you, Matt.

Last question, please, operator.

Our last question comes from the line of Mitch Kaiser with Piper Jaffray.

Please go ahead.

Thanks, guys.

Good morning.

Good morning, Mitch.

Sorry to harp on the guidance, but just relative to Q1 and just thinking about the gross margin rate, seems like it came in above expectations.

Just as you think about that, is there a better opportunity in the gross margin than you had originally anticipated than just from investors?

I'm also getting a lot of questions just the inventory build and what you're seeing there relative to the payables?

If you could talk about that, Jim, that'd be great.

Sure, be happy to, Mitch.

So, yes, you're right.

As we called out, the gross margin performance in the quarter was better than we anticipated and all things being equal that makes us feel better on the gross margin for the year.

But candidly it's so early in the year there's going to be so many movers in the gross margin, whether it's product mix or other things that will happen during the year, it's too early to call a big up or a big down for the year on gross margin.

So while we're very happy with the performance in Q1 we recognize it's Q1 and there is a long way to go yet.

On the inventory question specifically, if you look at the inventory increases we saw year over year as I mentioned in my comments we were up roughly 10%.

If you look at the amount of products that we reset in Q1 we're essentially dealing with a lot of fresh inventory across key categories and the major increase for -- the reason for the increase in growth was primarily that which we made in the computing space that we'll have no problem working through as the balance of the year goes on.

I get more concerned about inventory levels heading into holiday season and what we do with them afterwards, and I think as we showed a couple of years ago during the economic meltdown one of the benefits of Best Buy and the relationships that we also have with vendors and the velocity in our business is we can work through a lot of inventory without big problems in a relatively short period of time.

So as we sit here at the end of Q1 with inventory up 10%, that's very easily worked through in our normal cycle and our teams are very accustomed to doing that, So no concerns for management's perspectives on those points.

And just on the payables?

On the payable side it's really more of a function of where we stand in the mix of inventory based on the terms we have from the vendors that we're building, so once again it's early in the year.

I get more concerned about looking at payables when we have a mix issue and sales softness later in the year in key holiday season, but at this point in time it's just a function of which vendors we're buying product from.

Okay, fair enough.

Thanks, guys, good luck.

Thanks, Mitch.

Thanks, Mitch.

And management, please proceed.

Okay, thank you, Luke, and thanks to our audience for participating in our first-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.

The personal ID number is 4310296.

The replay will be available from 11:30 AM Central today through the next Tuesday June 22nd.

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

If you have any additional questions please call Andrew Lacko at 612-291-6992,or myself at 612-29-6122.

Reporters, on the other hand, should call Sue Bush at 612-291-6114.

Thank you for your attention, that concludes our call.

Ladies and gentlemen, this concludes Best Buy's conference call for first-quarter fiscal 2011.

You may now disconnect.

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