百思買 (BBY) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Best Buy's third-quarter FY '11 earnings conference call.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(Operator Instructions) This conference is being recorded today, Tuesday, December 14, 2010.

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

Please go ahead.

Thank you, Alicia.

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

We have two speakers for you today.

First, Brian Dunn, our CEO, will share his thoughts on the quarter and the rest of the year.

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

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

Before I pass the call over to Brian, I would 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 would like to remind you that the 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 would 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 that 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 in 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 third-quarter earnings conference call.

First, I want to take this opportunity to thank our employees for their tremendous effort this quarter and during the Black Friday weekend.

And I want to extend our sincere appreciation to our customers for shopping at Best Buy.

I would also like to wish everyone a Merry Christmas and happy holidays.

Our third-quarter results fell short of our expectations in some respects, and I want to address that in detail, but I would like to begin by emphasizing the many positive trends we have identified this year.

These trends, which provide further validation of our strategic direction, gained powerful momentum in the third quarter.

Our growth in connections in the quarter led to continued gross margin strength.

Margins were up 90 basis points in our domestic business, driven primarily by the growth of Best Buy Mobile.

Gross margin expansion is a key indicator of our progress and our connected world strategy, and I'm pleased with the continued gross margin progress this year.

Central to our connected world strategy is driving gross margin outside of our traditional hardware categories.

As a proof point, we had strong connections revenue growth in Best Buy Mobile, computing, and TV.

Solutions as a percentage of our sales mix increased year-over-year, driven by the strength in connections, as well as services, accessories, and Black Tie Protection.

Going forward, I expect that the growth of Best Buy Mobile, as well as the continued momentum of our other connected world initiatives, will continue to drive our margin expansion.

Our expense control was tight in the quarter.

Total Company SG&A was up only 1% year-on-year, which is good considering the lower sales than expected.

Our in-store execution continues to be solid.

Our international business maintained its momentum this year, with performance to plan in the third quarter.

And we continued to return cash to our shareholders, buying back more than $1.1 billion of stock this year.

Our sales in the US, however, were lower than we expected for the quarter.

And as a result, earnings were less than we anticipated.

I'll walk you through the reasons for this as we see them, starting with a few thoughts on Black Friday weekend.

Our employees in the field and our merchant and supply chain teams all performed at a high level of efficiency.

For the weekend, our teams improved close rate, increased units per transaction, delivered a higher average ticket, and increased dilutions as a percent of our sales, driven by connectivity.

All of these year-on-year metrics were better for the weekend than they were for the whole quarter, which testifies to the razor-sharp focus of our associates.

Another bright spot was our online channel, which had more than 14 million site visits from Thanksgiving through cyber Monday, and delivered low double-digit comp sales growth for the period.

Here are the facts.

Our forecast and the forecasts of the vendor community were looking for an improvement in the TV industry in the third quarter, supported by a more promotional environment and pent-up consumer demand for new technologies.

While we did see sequential month-to-month improvement in our TV business, the quarterly results fell below our expectations.

In fact, estimates show the TV market was down double digits in value terms in the third quarter.

We think this was driven by a weaker overall demand environment for TV, along with slower adoption of new technologies.

Current products have proliferated this year, in part due to a significant increase in channels of distribution.

Much of the industry's promotional activity in TVs this quarter was centered on third-tier brands as loss leaders.

Our value proposition is based on the best selection of the world's greatest brands, with leading-edge technology and great prices.

The newer technologies, like 3D and IPTV, which we assort more broadly than anyone, have been slower to take hold.

We are confident that these exciting new technologies will take off.

And when they do, we expect to benefit from being the leader.

A good indicator of this is Magnolia Home Theater, our premium home theater business.

The growth of Magnolia has been very strong recently, and we consider that an encouraging bellwether of future consumer adoption of new home theater technology.

Next, I would like to talk about mobile computing.

The notebook market was weaker than we expected, and we estimate the notebook market declined year-on-year.

There were a number of factors driving this.

The Windows 7 launch last year was more significant than we and the industry forecasted, and we saw two main shifts occur in the tablet space -- more overall customers migrating to tablets, and customers waiting, as they considered their purchase decisions on tablets versus netbooks and notebooks.

While we're pleased with our market share in tablets thus far, we believe we are positioned to become the primary destination for this category, as our vendor partners bring an array of exciting new tablets to market in the first half of next year.

The gaming sector lagged our expectations.

We did not perform as well on some of the new game titles as we had expected, especially coming off a 20-month high in market share a year ago, driven by Wii and PS3 hardware and title sales.

We believe we are well-positioned to grow this product segment, because of our relationship with so many gaming enthusiasts.

In the short term, we feel very good about the launch of the new gaming peripherals, Kinect and Move.

We estimate that we have the number-one market share in Kinect and Move, which already have had a positive impact in November.

We also continue to be excited about our opportunities in used gaming, which is a lucrative market that we have just recently entered.

In general, the combination of technology innovations and improvements in our own value proposition leaves us optimistic that we're positioned to grow our share in the gaming business.

In summary, we need to remember that we had difficult comparisons for many of our core businesses, comparing market share and comps last year.

The lower-than-expected sales performance in the third quarter that I talked about and our current visibility to the rest of the year has resulted in us lowering our view for the full year.

Jim will provide more color on that in a few minutes.

I'll turn now to our other businesses and comment on the trends we're seeing there.

Our mobile phone business had another great quarter, with almost 30% comps and the highest gross profit dollar growth of any of our businesses.

We introduced many new products, including four new tablets and five smartphones that are exclusive to Best Buy.

As I said, Black Friday was strong for mobile.

During that weekend, connections were up significantly.

We also grew our accessory sales, our Geek Squad Black Tie Protection sales, and the number of upgrade checks.

Upgrade checks were a primary driver of our Best Buy Mobile business, because so many customers have no idea that they can upgrade to a great new phone for little or no out-of-pocket expense for the hardware.

We believe that Best Buy Mobile continues as a huge growth opportunity for us, and will continue to contribute positively to our future earnings.

We estimate that we have only about 5% market share, and we plan to more than double that share over time.

We also saw very high demand for eReaders.

This is a growing category for us.

We sell all three major eReader brands, and sales were very strong.

This is noteworthy, because it illustrates customers' appetite to be connected and to engage in new technology.

We are the only store where the customer can compare all brands, models, and features, side by side, with expert help for any questions they may have.

Our US online business grew 7% in revenue in the quarter.

About 40% of the products we sold online were picked up in-store.

This trend continues to be a key advantage for us, and we believe will be increasingly important to consumers as we get deeper into December.

We plan to accelerate the use of this channel as an important way to deliver great value and shopping convenience to our customers.

We've talked to you about how we're bringing the connected world to life for our customers and our investors.

Best Buy Mobile is the tip of the spear for the connected world, and we've shown the positive impact mobile has had on our margins.

When we look outside of mobile, we are making good progress in other areas that we expect to translate into incremental margin as well.

A few examples -- in computing, we've seen good growth in attachment of mobile broadband onto laptops and netbooks.

Aircards and MyFi cards grew significantly in the quarter.

In TV, we continue to see very strong growth in connections.

Connections revenue grew triple digits.

As I mentioned earlier, a very important theme for this quarter and during Black Friday weekend was the strong store execution in the US.

We are proud of the great work of our blue shirts and agents, with their commitment to providing a great experience for our customers.

Let me share with you a few metrics that continue to provide encouraging news about our store execution.

In the third quarter, our retail satisfaction scores were up to over 80%.

Our customers likelihood to recommend across all channels was up to over 85%.

Customer complaints for transaction were down 17%, and our closed rate improved year-on-year.

Therefore, while we're not satisfied with our sales at this early juncture of the holiday season, we're very pleased with the experiences our employees are providing.

Shifting gears now to our international business.

Our strategy continues to be to grow the profitable businesses and invest in the others only when they have a proven operating model.

We see encouraging signs on several fronts.

Our international operating margin was up significantly year-on-year, and our year-to-date operating profit was the highest in several years.

There are two parts to our international business -- established businesses, and new Best Buy emerging ventures.

In our established international businesses, the performance of our Five Star chain in China once again stands out.

I'm very pleased with the continued growth and the profitability of that business.

Five Star had comps approaching 30%, and significantly improved operating margins.

And, looking forward to the fourth quarter, the continued margin development and our store execution are very encouraging, but the sales performance has been challenging, and it colors our view for the balance of the year.

We have our biggest quarter ahead of us, and we'll do our very best to make sure we capture more than our fair share of the holiday.

Here are just a few examples of some of the actions we are taking to drive the business forward in the fourth quarter.

To complement the availability of iPad in all of our 1,100 big-box stores and in all of the Best Buy Mobile standalone stores, we just started selling the iPad on BestBuy.com for home delivery.

Starting last week, we extended the opening times of our stores to make it even more convenient for customers to do their holiday shopping.

To help customers buy and give the items they really want this season, we've lowered the minimum purchase requirements for some of our financing offers.

The holidays will be big for Best Buy Mobile.

We have lots of new products, including several new smartphones and tablets, and we're very excited to be the exclusive retailer of the Nexus S, which we'll start selling this Thursday.

And based on the overwhelming success and customer feedback from the Free Phone Fridays campaign in October, we will offer free smartphones every day during the remainder of the holiday shopping season.

To wrap up, I believe that this holiday season will again demonstrate the power of Best Buy's model.

We add value because we stay closest to our customers to get them great name brand products at great prices, packaged with great service.

We offer them a place where they can talk to knowledgeable, unbiased, and engaged sales people who demonstrate the art of what's possible, the full array of what this amazing industry has to offer, and put together solutions for them based on what they truly need.

We believe this makes Best Buy the best place to shop for the holidays.

With that, I'll turn it over to Jim for some additional color on our third-quarter results and the financial outlook.

Jim?

Thanks, Brian, and good morning, everyone.

My comments today will cover our third-quarter results and how they compared with our plans.

I will also provide you an update on how we are thinking about our annual guidance based on these results and potential outcomes in the fourth quarter.

The net earnings of $0.54 per share we reported in the third quarter was below our expectation and Street estimates.

While we are clearly not satisfied with the sales outcomes, which drove the earnings shortfall this quarter, there were several key items embedded in these results that continue to be encouraging trends on the progress we are making in the operating model.

These items include the strong continued expansion of gross margins driven by sales of connections, solid controls over variable expenses, and share buyback activity, all of which are core elements of our plans to improve shareholder returns.

As you noticed in our release this morning, the single largest driver of our softer-than-expected performance in the quarter was the comparable store sales decline in the domestic segment.

So let's turn straight to the domestic sales story in the quarter.

Domestically, third-quarter revenue decreased 3% from last year, to $8.7 billion.

The quarter saw a comparable store sales decline of 5%, versus our expectation of flat to modest growth.

In setting our plans for the quarter, we knew that we would be up against very strong comparisons from the prior year.

If you recall, unlike many retailers, our domestic segment comps last year in the third quarter were up approximately 5%, and November was up even a stronger 8%.

Looking at this year's actual sales performance in the third quarter, Brian has summarized the key drivers of what was different versus our expectations, including a softer industry environment in key categories, and changes in our share in TVs, mobile computers, and gaming.

While these trends resulted in declines in store traffic, strong coordinated execution by our store and corporate teams during the quarter drove increases in key metrics, such as close rate and attach rates.

These gains helped to partially offset the traffic declines, and average ticket was down only slightly for the quarter.

Rounding off the impact in our domestic segment from the softer sales performance, inventory levels naturally ended higher at quarter-end.

Comparable domestic inventory levels finished up approximately 8%.

The increase was largely driven by the revenue softness versus our expectations for categories such as TVs, notebook computers, and gaming.

Looking ahead to the fourth quarter, we do not expect a significant risk from actions required to rebalance our inventory positions.

We have a significant volume of business ahead of us -- still ahead of us in the largest quarter, and have the ability to moderate future purchases.

In addition, the items currently on hand are of good quality.

Turning now to sales in the international segment, third-quarter revenues increased approximately 3% from last year, to $3.2 billion.

In the quarter, we saw comparable store sales gain of 2.3%, which was in line with our expectations.

The revenue growth was led by comparable store sales gains in our established international businesses, such as the 27% gain in Five Star, and a 2% gain in Best Buy Europe.

These gains were partially offset by a 4% comparable store sales decline in Canada, which had many of the same top-line headwinds that were experienced in the domestic segment.

In aggregate, total revenue for the Company declined 1%, to $11.9 billion, during the fiscal third quarter.

We continue to be very pleased with the progress we are making on improving gross profit rate performance.

The third quarter's gross profit rate of 25.1% reflected a 60-basis point year-over-year improvement.

The domestic gross profit rate increased 90 basis points year-over-year.

This performance was modestly better than we had expected and was driven by several familiar themes, which served to more than offset softness in TV category margins.

First, as mentioned earlier, we delivered strong growth in our Best Buy Mobile business, as customers continue to respond positively to this value proposition and our exciting exclusives and compelling offers such as Free Phone Friday.

Second, we continued to improve our promotional effectiveness, and drove gains from lower financing costs and improved pricing strategies in categories such as appliances.

Finally, similar to the first half of the year, the gross margin rate improved slightly, as a larger portion of our vendor programs were orientated towards purchase incentives instead of advertising support, which is recorded as a reduction in SG&A.

Within the international segment, the gross profit rate declined 20 basis points year-over-year, which was driven primarily by growth in our lower margin Five Star business.

Partially offsetting this mix impact was strong margin growth in our Canadian business, as strength in mobile computing and solid store execution increased gross margins.

Turning to SG&A, we were pleased to report that third-quarter expenses only grew by 1% to $2.5 billion.

The SG&A dollar growth was limited due to tight cost controls on variable spending items, like labor, project costs, and outside services.

SG&A also benefited from lower management incentive compensation when compared to the prior year, given our expected performance for fiscal '11.

While we spent less in SG&A than we planned in the quarter, on a rate basis, SG&A delevered 50 basis points versus last year.

This deleverage was in line with what we would expect, given the lower revenue in the quarter.

So when you bring it all together, the net result is that third-quarter operating income increased 2% versus last year to $385 million, which represents a 10-basis point rate improvement.

Domestic operating income decreased $13 million, and the operating income rate decreased 10 basis points.

International operating income doubled to $45 million, and the rate improved 70 basis points.

During the quarter, we also continued our share repurchase activity, acquiring $420 million, or 11 million shares.

This brings our year-to-date total to more than $1.1 billion, or roughly 31 million shares, which is nearly 7% of the Company.

We estimate that repurchase activity had a $0.03 favorable impact to our third-quarter EPS.

Given the shares repurchased year-to-date, this fiscal year will be the second largest year of repurchase activity in the history of the Company.

We continued to see share repurchases as an important element of improving our returns for shareholders over time.

With that overview of the third quarter complete, I would like to turn the discussion to our expectations for the balance of the fiscal year.

One of the inherent challenges of having a fiscal quarter that ends right after the Thanksgiving holiday is that we are right in the middle of the holiday selling season and only have partial visibility to customer behaviors.

Based on the shortfall to sales and earnings experienced in the third quarter, combined with the current visibility we have to potential outcomes in the fourth quarter, we now expect annual diluted EPS in the range of $3.20 to $3.40 for fiscal 2011.

This amount includes a roughly $0.12 impact of share repurchases made year-to-date through the end of the third fiscal quarter.

I want to be clear that this reduction in our guidance is primarily driven by lower expectations of comparable store sales in the domestic segment.

We continue to expect to see improved gross margin rates and strong control over variable expenses in the fourth quarter.

So in closing, while we have seen a softer start in the top line that we had hoped, there is much holiday business that remains ahead.

As always, we will continue to drive to the finish line for the year, and we remain very encouraged by the positive elements from the first nine months of fiscal 2011, including strong margin expansion and SG&A management and improved returns for shareholders via share repurchases.

From all of us at Best Buy, we wish you and your families a wonderful holiday season and a very Merry Christmas.

With that, Alicia, we are ready to take questions from the callers.

(Operator Instructions) And our first question is from the line of Gary Balter with Credit Suisse.

Please go ahead.

Thank you.

Just a question on -- you mentioned in the press release about loss of market share.

Could you discuss who you believe you lost that share to, and what you're doing to -- to regain it?

Sure, Gary.

Good morning.

Happy to take a run at that.

As we discussed in our commentary around -- or in my prepared remarks, there was an awful lot of activity at opening price points, particularly in home theater, and this was primarily at some of the large discounters.

And this was a space, as you well know, our strategy is really focused on great name brands, the big sort of tier-one, tier-two name brands, and great prices.

There was an awful lot of activity at the sort of tier-three brands at opening price points, and candidly, that was a place we elected not to chase.

So it's mostly in TVs, is what you're saying, or all in TVs?

Mike, do you want to add a little color to that?

Yes.

Hi, Gary.

This is Mike Vitelli.

It's a little bit in television and a little bit in computing.

And when we calculate our share -- one point for everybody listening is, there are categories like smartphones where our greatest growth is -- that is not in that calculation, it's mainly the tradition CEIT.

So that's why it's TV and computing, is the big story, or the big difference.

But let's talk about what we're comparing to.

Best Buy is about the latest and greatest.

And last year that really played to that strength, as we had the digital TV transition.

We had the launch of LED, LCD televisions.

We had the launch of Windows 7.

We had record high shares in all of those areas.

So we knew that we were going to get some of that decline coming off.

We saw a little bit there.

And as Brian said, a little bit in entry-level television and in entry-level computing in November, where we have that promotion going on more actively in December.

So in the 32-inch television, we did that a lot last year around the Black Friday time period.

This year, we didn't do it then.

We're doing our -- a lot of our 32-inch television promotions right now.

And just following up on that market share question, you talked about how the TV sales -- the high end isn't really catching on right now.

What does that imply for you in terms of your outlook for this month, and for, I guess, January and February?

But into next year, what do you think is holding back that consumer from buying either the LED TV or 3D TV?

Is it pricing, is it just not enough differentiation from what they could get on a cheaper LCD?

And how are you adapting to that?

Let's break those two things apart.

LED TV is actually selling quite well.

Okay.

Its distribution has broadened.

And that's part of our share going from really record-high, early-adopter launch shares last year, to slightly more normalized but still well above our average TV.

We're well above our average TV share in LED TVs.

So that's going well.

The other thing that I would say is going well is plasma is very, very strong.

The -- the growth in units in plasma was offset by their ASP decline -- your biggest ASP declines in the quarter and year-over-year are in plasma TV and large screen.

In that case, we see growth in both of those places, growth in units of greater than 43-inch LCD TV, and growth in units of plasma TV.

Their ASP declines are offsetting it, though, so we're not seeing the growth there.

The place where you're mentioning that we're not seeing the -- both the industry and our expectations in growth right now are 3D television and Internet-connected television.

They are a little bit slower than the industry wanted it to be.

LED, is just one of those that has to ramp up, it needs to be more content forward, and we'll be able to see a little bit more of that over time as their retail prices start to change.

3D, not LED, right?

3D.

Gary, can I add one thing?

In my remarks, I mentioned Magnolia.

We're actually doing -- we're quite pleased in the high end.

It is an adoption in the middle which we see as a next year sort of value proposition for the consumers in the middle, around 3D and IPTV.

Thanks for the questions.

Okay, thank you.

Next question, please.

The next question is from the line of Christopher Horvers with JPMorgan.

Please go ahead.

Thanks, and good morning.

Want to step back and try to focus big picture.

There's been a constant back and forth with the street, people saying product cycle is weak, and you've consistently countered that point.

As you think about retail sales, hearing very strong sales in nearly every other category, as you think about those market share comparisons ahead, can you talk about your ability to really drive sales and margins simultaneously?

And perhaps as you think about your top-line outlook, is it really a function of labor markets getting better in driving a replacement cycle of what's a relatively young stock of electronics in people's homes, particularly TV and notebook?

Yes, Chris, it's Jim.

Why don't I just take the first part of that, and pull it apart a little bit.

Your commentary on the overall performance in retail so far this holiday season, appearing to be relatively solid, certainly is valid as we look across other retailers.

Part of that, from our perspective, is that we also had an anomaly last year in the performance in our business during Q3 in November, and specifically in December.

We posted very strong comparable store sales gains.

Most of the folks that are comping up against those numbers are comping up against much weaker comparisons, maybe even negative comparisons from last year.

So, as I look on a two-year basis, we're not that far off of what most of retail is doing.

Maybe a little bit behind at this point in the holiday season.

Clearly, like a lot of retail, but in the CE space, there we talked about headwinds from a macro standpoint around employment and housing and jobs for quite a period of time.

So I don't think there's any new news in that phenomena.

What we have been focused on is, all year long where we've seen products that have strong customer appeal that are the latest and greatest, we've seen people opening up their pocketbooks.

So whether it's been the launch of new smartphones, the launch of the early changes to the gaming platforms we've seen, what we've seen in the tablet space overall, consumers are out spending in those categories.

It's just that the way that those new things right now during the current year hasn't been able to overcome the size of the core growth in our televisions and core notebook business overall.

So, as Brian mentioned, our business is beyond just selling the hardware.

The reason we have the shares we do in the hardware business is because we've been able to find a way to make money around those transactions, and that's certainly the evolution we've been making further into the connected world and the strong gross margin performance we've driven as a result of that.

But as we get into what the balance of this year looks like, we certainly expect to see the trends we started to see in -- in Q3.

How they will actually play out in Q4 -- there's a lot of business yet to come.

But as we get into next year, what's exciting from our standpoint is, there's interest there from consumers on the latest and greatest.

But really, they are making trade-offs in their discretionary spending, not only across CE, but within CE categories, where there are periods of time we may have historically seen them buy multiple large products in a year.

They are being more choosy at this point in time.

But as you think about that your business mix is your business mix, as it stands.

And part of that comparison is -- is you drew market share so much, kind of in the absence of Circuit City, so now you sit here, the easy Circuit compares are behind you.

You have other smaller growth electronics retailers starting to pick up space.

So, can you -- at the end of the day, can you really drive top-line -- as you think about the next three quarters, can you really drive -- have sales expanding at the same time that you're expanding your gross margin?

Or is the promotions on the 32-inch TVs and free phones every Friday right now really a reaction to a sales miss that surprised you?

Yes, Mike, go ahead.

The -- the point on phones is, the way the phone business is, and the way that phones are sold and subsidized, a free phone is not a new phenomenon.

What it is, is we're being aggressive in the smartphone category, which is the fastest growing one.

That is a -- still a -- while it doesn't address the top line, the way it flows in, it's very significant to our margins, and you're seeing that happening.

And we believe that category is going to continue to grow, and continue to grow aggressively, and we're going to be a significant part of that.

The smartphone business, and our Best Buy Mobile business in general, is a significant trend that's going to continue in the quarter that you described.

The other thing that we're optimistic about is it's clear that the tablet concept is very hot in consumers' minds.

It's extracted a lot of early adopter dollars right now.

A lot of those dollars are going outside of Best Buy this minute, because there's a very limited number of manufacturers and products in that space.

But that's going to rapidly change as we head into next year, over the four quarters of next year.

And that gives us a strong opportunity, as when there's a broad array of products and suppliers in this area, we do great.

And as far as television, I'll just add, as we get into next year, you asked about the next three quarters.

Certainly over the next year, you're going to see the second and third generation of IPTV, which we will think will come out more appropriately featured and be more and more interesting to consumers.

Thanks for the questions.

Next question, please.

The next question is from the line of Mitch Kaiser with Piper Jaffray.

Please go ahead.

Thanks, guys.

Good morning.

Good morning, Mitch.

I was hoping you could talk a little bit just on your philosophy around opening price point products.

Last year you really chose to participate on the computing and TV category.

Sounds like you pulled back a little bit this year relative to last.

And then, if we stay kind of in this -- where the advance featured products are still going to be somewhat challenged, would you -- would you step on the accelerator on the opening price point, do you think?

Let me start with the frame here, and then I'll ask Mike to give a little detail.

I mentioned in our remarks -- my prepared remarks that we were not focused on that opening price point.

We certainly had the opening price point represented in our store, and we'll continue to have that kind of value represented in our store.

We chose not to lead with it, Mitch, because we have a -- I have a strong view that where we really add value is with those great name brands and that sort of latest and greatest technology at a great price that our people can help you put together better than anyone.

And, Mike, perhaps you want to speak a little bit of how we're thinking about future promotion?

In TV, I had mentioned it earlier, but it's worth repeating.

We did our entry-level 32-inch promotion in November.

This year we're doing it in December.

We're aggressive with that right now.

On the computing side, we've made price adjustments in the third quarter and in the fourth quarter to be more aggressive, because the consumer is definitely showing a propensity at the low end.

And as we look at it -- our share, if there was any loss in computing, it was in the below $400 range, where we were trying to make sure we have more competitive offers there.

Yes.

And Mitch, if I could just -- you asked about our philosophy.

We're absolutely interested in increasing our presence in lower price points.

We're always going to be mindful of profitability.

You'll see us leverage our presence online to do some of that sort of hot price points, and you're going to see us do what we do very well -- we're going to implement promotions to drive traffic to our stores, to our online channel, to our phone channel.

And then, just as you think about -- you mentioned the weakness in IPTV and 3D.

Is it more a pricing issue, or is it customer perception issue, or is it -- is it a combination of both?

How should we think about that?

Thanks.

I'll take a stab at this, Mike.

There's a couple of things.

There was confusion about 3D early.

It was a little short on content.

As this fall now we've had big gaming titles that have come out with 3D.

More and more cinematic releases are coming out in 3D.

3D will become top of mind as an important feature for television as we get into next year.

And as far as IPTV, it's still really new, and the idea and the notion of it is still new, and I don't know if it is enough by itself to get people off the couch to go buy a new TV, as we sit today.

That's -- that's right.

It's both of those areas, and I also think the realities -- again, the strength of the tablet category has captured mind share and wallet share of early adopters in new technologies this year.

That's -- it's hard to suggest that a tablet is taking TV share.

It's not because -- but it's not because it's doing the same thing.

It's a mind and dollar placement.

This isn't a year where people are going to come out and buy a new television and a new computer or tablet.

Thanks, Mitch.

Next question, please.

Thanks.

The next question is from the line of Matthew Fassler with Goldman Sachs.

Please go ahead.

Thanks a lot, and good morning.

If we could just get a little more clarity on how you see some of the moving pieces playing out during the fourth quarter, you often give us sales guidance, as well as earnings guidance.

I didn't see that here.

What I hear from you is perhaps a little more of a promotional stance on television, as you talked about moving the lower price promotions into December, presumably some of the sales weakness as well is baked into that guidance.

But any color you could give us on the contours of those expectations would be terrific.

Yes, Matt.

It's Jim.

Thanks for the question.

Just given where we're at in the quarter and given the predominance that the month of December has in the quarter -- yes, wish that would be more useful, that -- we'll wait to get through December sales, and we'll do our December sales release, and then we'll give color and context around what we actually see.

But as we look at what the potential range of outcomes could be through Q4, there's a multiple -- there's multiple scenarios that are playing out in that new guidance range.

What I would tell you is that the primary driver in the range is, really, what does comparable store sales look like through the holiday season?

There are some variables we have on that, both plus and minus on the margin standpoint, but the key lever I'm looking at in that sales range -- I'm sorry, in that EPS range, is what the top line looks like overall.

And if I could just ask, as a very quick follow up to that, as TV pricing has started to come down, there's been some discussion of how elastic this category is.

Can you give us your updated thoughts on that?

It sounds like it might be elastic to some degree, but perhaps in some price points that you chose not to plan in the third quarter.

But as you take a high-level look at the impact of vendors lowering prices, what do you think it's doing for the market?

What we're seeing is, is plasma television had pretty significant price declines year-over-year, probably in the 15% range, and it dramatically changed their unit take rate slightly higher than that, so it offset -- gave us some positives.

So there is some elasticity -- elasticity at the high end.

We see that.

I will tell you, though, even at the highest end, it's been less than we've seen in the past.

And that's a comment on the consumer in general, is that we've seen at the high end, a price change doesn't have the same impact as it would have had a year or two years ago.

Thank you so much, guys.

Thanks, Matt.

Thanks, Matt.

Next question, please.

The next question is from the line of David Strasser with Janney Montgomery Scott.

Please go ahead.

Thank you very much.

Going back a little bit more to the market share, and I guess it's somewhat related.

It's been touched on a bit already on the call, but when you look at the market share, do you worry that maybe -- that the promotional calendar or your promotional strategy was too focused on the -- around the wireless, particularly at this time of year?

Walking through the stores, particularly around Black Friday weekend, it's a relatively tough sale.

Yet if you saw that it's in the TV and wireless -- TV and circulars tends to be highly focused on that category.

And do you think you lost message elsewhere?

And just as a follow up to that, too, does it make you think a little bit about the wireless strategy, about rolling out the Best Buy Mobiles quicker to try and maybe differentiate those offerings a little bit?

Yes, David, we certainly look at the wireless activity as the way customers have been responding to that for a period of time.

And we have been, obviously, moving very quickly in that phase, both within our store within a stores within Best Buy, whether it's expanding square footage that we dedicate to the wireless space, and as we've ramped up the number of stand-alone stores we have in that space.

And as tablets come on, that category, from a mobility and connectivity standpoint, even gets more interesting going forward.

So, we have been accelerating that space, and as Brian mentioned in his comments, we've got a long way to go from a market share standpoint.

So that business is going to continue to be very exciting for us.

As far as --

I'm sorry, go on.

As far as, to your question around -- boy, how did we look at the promotional activity in Q3, specifically in November, wireless versus other categories.

Customers who shop with the Best Buy experience are accustomed to seeing a wide variety of things featured during that period of time, and customers obviously come in with different need states.

So from our lens, I don't think we overemphasized the wireless category at the expense of our television and our computing business.

To Brian's point, we felt actually very good about the offers we had out there in both of those categories overall, based on who our customer is and how they shop us.

One of the great benefits that we have, given the reward zone database, is that we've been able to track customer behaviors on Black Fridays for years, and understand which customers just shop us that day to cherry pick and actually don't come back into the model overall.

So what we've spent more of our time doing is putting our promotional dollars against customers and against experiences where we add the most value.

So whether that is inviting our Reward Zone Silver customers to promotional events in advance of Black Friday, and using that energy around better experience for those best customers, or partnering with our vendors to come up with offers on Black Friday that really demonstrate what the best of what we do together, versus driving a higher top line, with actually less profitability.

So we know that top line -- in some cases, when they are in third-tier type products, does not translate into more customer loyalty, does not translate into more profitability for our business.

So it's always about balancing where we put the promotional effort versus the long-term strategy of the Company.

And that balance, David -- this is Brian -- is the tightrope we always walk, and you're asking what is a very good question, when we're right in the middle of the game.

We'll have a much better understanding as we get through December and into January, and we'll be able to provide a little color then.

Thank you.

Next question, please.

Thanks.

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

Please go ahead.

Thanks, good morning.

Wanted to follow up on the SG&A, very well controlled during the quarter.

As you, as a Company, evolved from being more of a growth company several years ago to being more expense and return focused now and more margin focused, how should we think about SG&A growth as we look ahead to 2011, in light of perhaps some of these more challenged top-line trends?

I have to jump in.

We sort of reject the notion that we're not a growth Company as well.

You're absolutely right that we're focused on expanding on our margin rate and extracting value for what we're able to do for customers, and actively pursuing businesses where we can make a difference that are margin-rich.

But we absolutely see ourselves as a growth Company.

And certainly, the investments that we have made, Brad, have focused on areas where we can drive profitable growth.

So we've been spending more money in categories like mobile phones, whether it's in-store or outside of the store.

We're going to continue to spend money where the customer is going in those spaces.

The good news is, from an SG&A standpoint, we spend on average a little bit more in transacting that business with customers, but the returns we get, from a margin standpoint, are also much greater.

So that's a great trade-off, overall.

As we look at the portfolio, certainly going forward, we're always making adjustments to the operating model, and when I look at the expense profile for this year, with expenses being up planned for the year, 5%-ish, a little over 5%, versus the trajectory we've been on historically, it's a much, much lower run rate than we've experienced overall.

So, as we plan expenses in the environment, we're looking at the levers around where's the customer going, what type of support do we need to provide from an in-store experience and labor model around that, and then, if we see parts of the portfolio that aren't performing at the same level we anticipated, we have the ability to dial back those investments in-store as we go forward.

So we're not getting into guidance for next year yet.

But certainly, every year when we set expenses, we are mindful of the environment that we are moving into.

And you saw us take a big step down over the last year.

To Brian's point, we are going to continue to invest expenses in places that are good for our shareholders, and we're not bashful about doing that at all.

At the same time, harvesting expenses from areas that aren't delivering the same levels of return that they historically did.

That's right.

You'll also see us, Brad, while I -- while I would sort of emphatically state that we are a growth company, you'll also see us -- we have an awful lot of investment deployed that we should be able to leverage, and will leverage, benefit from over the quarters and years ahead.

And you will see us continue to be focused on returning excess cash to our shareholders.

Thank you.

Okay, thank you, Brian and Jim.

And if I could just ask one follow-up question on the inventory commentary that you had earlier, Jim.

Sure.

Could you just maybe talk a little bit more about the levers that you're able to pull, above and beyond just getting a bit more promotional, with the slightly elevated inventory levels that you have going into the holiday season?

Yes, Brad, we're focused on inventory at a moment in time year-to-Q3, with the enormous amount of volume we have in the -- in Q4.

So, we want a very high velocity business during this time of year.

And even if you go back two years ago when the environment changed dramatically, we actually -- we were at peak inventory levels before the holiday season when the environment changed.

We were able to manage and navigate through that successfully with our vendor partners and our customers.

So, looking at what inventory trends are sitting there today -- and more specifically, what the specific inventory is, we feel that we're in a good position to move that inventory through the balance of Q4, and actually moderate purchases of future inventory.

A lot of that stuff that's in our balance sheet today, 30 days from now, it will be gone.

So we're really talking about what's our reorder pattern going forward.

Great.

Thanks, Brian.

Thanks, Jim.

Best of luck here for these next couple of weeks.

Thank you very much.

Thank you.

Next question, please.

The next question is from the line of Greg Melich with ISI.

Please go ahead.

Thanks.

I want to talk about the traffic side of it.

You had mentioned that ASPs were down a little bit, or transaction side, so traffic may be running down 4%.

How is that trending, and what do you think is driving that, and how do you actually get that to improve?

And one thing that did look better was services.

I'm just curious, what was driving services in the quarter to at least do better than the Company?

Greg, you were garbled there at the back end.

Can you restate the question for me, please?

On the services side, what helped services do better than the rest of the Company?

What area was strong?

Greg, this is Mike Vitelli again.

On the traffic side, I would say the biggest portion of the traffic declines are consistent with the story we've been telling for several years now.

Package media sales have declined in units, and that's a significant part of the overall traffic and has declined.

And a little bit was in the television and computing area that we discussed.

So that wasn't -- it wasn't a new or big story from what we described earlier.

Our close rates are improving, which includes -- is improving our overall transaction count, which is better than the traffic move.

And to your point, what's happening in that close rate, in addition to the individual units themselves, is the complete solution.

So we're seeing, whether it's computing or home theater, increased attachment rates at every price span of television and every price span of computing in Geek Squad Black Tie Protection.

And that has been a significant part of the service growth, as our close rate and our complete solution are the two biggest categories as we prove.

I would also just add -- reiterate the terrific, on top of everything Mike just said, the terrific job our sales associates are doing in presenting the value that those plans represent to our consumers.

Thanks.

Thank you.

Next question, please.

The next question is from the line of Mike Baker with Deutsche Bank.

Please go ahead.

Thanks.

Two -- two questions.

One, on your fourth-quarter outlook, wondering how you're balancing what sounds like being more promotional with, as I look at it, you have more difficult comparisons.

So, I just want to understand how those play into your range of outcomes for the fourth quarter.

And then, following up, Brian, on your point of stating you're a growth Company, what -- is that a square footage growth Company?

I guess what I'm getting at is, what do you see as your square footage expansion over time, domestically, but perhaps more importantly, overseas?

Or is that growth more of growing the existing assets, growing margins, growing earnings perhaps, even through buybacks, et cetera?

I'll answer that first, I'm going to go to the first part of the question.

It is about profitable growth.

It is about growth in connections, and if you want to sort of back up and look at us historically, for many, many years we were a strong product-centric company.

Then we moved into an era of customer-centricity, very focused on our customer.

You should think about us taking the best elements of both and moving them into this connected world.

Best Buy Mobile is the example -- we cite that most frequently, because it's the most developed.

You should think of it as profitable growth around connections and geography, but primarily different by profitable growth with connections.

And, Mike, we -- just to round that off, talking about square footage, we've talked for a long time about the level of square footage growth during the next five years and our traditional big-box model being way different than it was the previous ten years, so that's not a surprise.

Where you will see us continue to invest in square footage is where it makes sense in our connected eBusinesses, like our Best Buy Mobile stand-alone stores.

So when you pull apart that square footage story, it's not the big-box retailer continuing a run rate of new store expansions like we've done historically.

It's leveraging the install base of stores that we have, to Brian's point, investing in the growth that we can drive in those stores through connections, and then building our square footage where appropriate to meet customer needs in other spaces where those big-box stores don't fit.

And as we get to year-end, we'll be updating you on how we are thinking about that.

The second part of your question, around the outlook for the quarter, as I mentioned -- fourth quarter.

As I mentioned earlier, we've got a variety of scenarios that play out.

One thing you shouldn't take away from that is that we've seen the results in the third quarter, and now we've pulled the massive promotional lever and are going to drive the top line at the sole expense of margins.

That's not what we're talking about here.

What we're doing, as we always do at every holiday season, we're playing out our plans and adjusting to the market as we see it.

The promotional activities that Mike predominantly talked about earlier was stuff that we already had planned in the next, for the most part, for Q4, versus how we want to spread the TV promotions between Q3 and Q4.

When you helicopter back all the way up and kind of set context for the year, we set out this year to expand our margins through changes in the operating model, and to grow our top line with a little bit of market share growth.

What we're learning now, as we have seen the customer play out, is that our top-line growth assumptions earlier in the year turned out to be too aggressive, based on the environment that we see for demand, specifically in the TV industry, and the continuing industry overall.

And we're getting the activity that we wanted to get out of the margin expansion overall.

So as we look structurally going forward, given where our model adds the most value for customers in representing those new launches of technology in those top tier brands, we feel great about the position that we have built around that and our ability to drive even more profits out of that.

We find ourselves just more challenged on the top line from an industry standpoint than we set out, especially when a lot of that growth that did happen in the continued space happens -- is happening in a form factor that we don't participate in proportionally as we do in the rest of the eBusiness.

Thank you for your questions, Mike.

Yes, thanks, Mike.

This will be our last question, operator.

Thank you.

One more question, please.

Okay.

The next question is from the line of Anthony Chukumba with CB&T Capital Markets.

Please go ahead.

Good morning.

I just had a question related to the markets -- the top market share in the video game.

I certainly understand some of the market share losses in -- in the TV categories, some of the slowness in the TV category and the way you're positioned there, also in PCs, where you're not really chasing that opening price point.

I guess I'm just a little confused in terms of video games, because that doesn't really seem -- was there a lot of promotional activity?

What do you attribute that to?

Because it seemed like you had the right product, you're now in the used video game business, you reset a number of your stores to emphasize that category more.

And I'm just sort of wondering, kind of post-mortem, why didn't the markets -- you get the market share that you thought you were going to in video games?

This is Mike Vitelli again, Anthony.

The second part of your question is, we've just started what we're doing with trade-in and used games.

We're very pleased with the reaction that we're getting in the about 800 stores that it's in.

And the stores where we actually have trade-in counters inside the gaming department, which is a few hundred, the exchange rate is much, much higher than the stores that don't have it.

So that's something we're going to continue to expand.

So we're pleased with that, and getting us into that part of the business that we virtually have zero in today.

As far as gaming in the third quarter, our hardware was good.

Our software was softer than we would have liked, and that's basically because of the titles that were launched in that time.

Last year at this time, we were into a lot of Wii business and that kind of family category, where we did strong in.

We were lapping that against titles that were much more core gamer, which is the share and the business that we're trying to go after with the trade-in and used.

So that's what happens in it.

But we're optimistic and very aggressive in what we're doing in that space going forward.

We also know, just to add, how important the trade-in value proposition is to that core gamer, and that is an area and an opportunity for us that we're very enthusiastic about for next year.

Thank you for the question.

Thank you.

Okay.

That was the last question, operator.

Okay.

Ladies and gentlemen, that's all the time we have for the question-and-answer session.

I will turn it back over to Mr.

Seymour for any closing remarks.

Thank you, Alicia, and thanks to our audience for participating in our third 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 438-7850.

The replay will be available from 11.30 AM Central Time today through December 21.

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

Thank you for your attention.

That concludes our call.

Ladies and gentlemen, this concludes the Best Buy third-quarter FY '11 earnings conference call.

You may now disconnect.

Thank you for using AT&T conferencing.