百思買 (BBY) 2012 Q1 法說會逐字稿

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for playback and will be available by 12 p.m.

Eastern Time today.

(Operator Instructions).

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

Please go ahead, sir.

Thank you, Alicia.

Good morning, everyone.

Thank you for joining us on our fiscal first-quarter 2012 conference call.

We have two speakers today -- Brian Dunn, our CEO and Jim Muehlbauer, our CFO.

And after our prepared remarks, we should have plenty of time to answer your 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 so that we can include more people in our Q&A session.

Also, as usual, the media are participating in this call in a listen-only mode.

I would like to highlight several enhancements we've made to our earnings material this quarter.

First, we have included slides this quarter that complement the results.

You will find these slides on our IR site.

We have also included a quarterly cash flow statement and we have included -- started reporting total domestic connections quarterly and we started reporting Best Buy Mobile comps.

You will also see that we renamed the category Home Office to Computing and Mobile Phones to better reflect what is in the category.

Nothing in the category itself has changed.

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

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

You will also note that our reported results this morning included information regarding the impact of the restructuring activities we announced on February 22.

I ask that you please refer to our earnings release to understand how our announced restructuring affected our first-quarter results within our domestic international segments and across the Company as a whole.

The adjusted numbers we will be discussing today do not include these charges and should not be confused with GAAP numbers we reported this morning in our earnings release and the GAAP numbers we will report in our 10-Q.

With those housekeeping items aside, 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 focus on our first-quarter performance and an update on our strategic priorities and opportunities.

It's early, but I feel good about our start to this fiscal year.

We delivered improved sales trends and continue to generate significant cash flow, which illustrates the financial health and strength of our Company.

Our multichannel strategy clearly differentiates us from competitors and gives us unique opportunities to grow.

We are optimizing our scale for growth in the key areas we have previously discussed -- new products and services, like tablets and connections; categories where we have a competitive advantage and significant upside, such as appliances and gaming; and formats in new locations like Five Star in China and Best Buy Mobile standalone stores throughout the US.

But before I jump into the highlights of the quarter, I would like to thank our employees worldwide, those who will help create compelling offers and value propositions, as well as the men and women who work so diligently to bring the Connected World to life for our customers.

Thank you for everything you do to make Best Buy a great place to shop and work.

Now let's take a look at some of the key items from the quarter.

Our sales performance was better than planned.

I will provide more color on this in a minute.

Our domestic online sales continue to grow at double-digit rates.

As you know, we are committed to accelerating growth in our Internet business and our progress here shows that our focus on this channel and our overall multichannel strategy is progressing.

Total domestic connections grew 20% in the quarter.

This growth showed the momentum of our Connected World vision, both in Best Buy Mobile and the increasingly rapid growth of connections in our TV and computing businesses.

And we continue to take actions to improve (technical difficulty) shareholders.

During the first quarter, we bought back $0.5 billion worth of stock, representing 4% of our outstanding shares.

Summarizing Q1, the quarter unfolded largely as we anticipated.

We have been very deliberate in creating new offers that leverage our unique capabilities and leading position in the marketplace and consumers are responding.

Let me review some drivers of our domestic performance in Q1.

In mobile computing, we had improved performance overall, even against strong comparisons from last year.

The biggest catalyst of our positive performance was the rapid growth in tablets as we successfully kicked off the launch of the iPad 2.

Notebooks also improved versus the steeper declines we experienced in the second half of last year.

Best Buy Mobile continued its excellent performance, delivering comps of 28% with strong margins.

We were a lead retailer for the launch of the Verizon iPhone and as we're positioned in our marketing, we are the home of 4G with phones like the HT Inspire and the Samsung Epic leading the way.

Allow me to share a brief example of the kinds of unique, compelling offers that our customers have responded to.

In the last week of the quarter, we ran a promotion of a free smartphone combined with Lady Gaga's latest CD.

The promotion was such a success that it was one of Mobile's best weeks of the year and we believe we captured number one marketshare in sales of the physical CD as well.

The results were great, but the real story here is the value of our cross-category promotions that drive incremental revenue and traffic.

Gaming sales trends also improved as we partnered with Nintendo on a very successful multichannel launch of the new 3DS portable gaming system during the quarter.

Our sales performance is a positive sign because we are just ramping up many of the changes we are making to our gaming business.

I will talk more about that in a bit.

We also activated targeted promotional programs across additional product categories online and in-store during the quarter.

These were promotions with specific customer-focused value propositions designed to drive incremental sales.

While this promotional activity factored into the quarter's gross margin rate decline, which Jim will cover in more detail later, we are pleased with the incremental sales volumes we produced.

Our ability to create compelling offers that cause customers to respond shows that our operating model has elasticity and that we are clearly selling products and services at values consumers can't pass up.

Looking at the financial performance in total, our goal is to deliver bottom-line results and operating income and EPS.

We are consistent with our expectations for the quarter.

Looking next at our international business, revenue and operating profit grew significantly.

These improved results are emerging even before we've fully realized the benefits from our increased focus on the international business, including the recent restructuring and strategic investments in assets like Five Star, which was up to 170 stores at the close of the quarter.

Five Star is off to a good start to the year.

Comp sales were up 9% on top of over 30% comps last year.

In addition, Five Star's gross and operating profit significantly improved from last year.

We are very proud of the outcomes the teams in China are delivering.

During our recent Analyst Day, we discussed several key initiatives in the US that we expect will enhance our competitiveness and returns as we leverage the advantages inherent in our portfolio of physical and digital assets -- multiple ways to shop, buy and interact with us online, a variety of store formats and sizes, call-center staff with knowledgeable blue shirts and agents, as well as a wide range of in-store remote and in-home services.

I would like to provide some color and updates around these priorities.

Let's start with online.

We are determined to double our US online business in the next three to five years, and as I mentioned, our online revenue grew double digits in Q1.

Our business in this channel strengthened throughout the quarter as we started to ramp up many new activities to drive traffic, including the significant expansion of our online assortment.

This is a key component to improving our competitive position online and we have made good progress to date, adding over 10,000 SKUs online since Q1 of last year.

Another important part of our multichannel strategy is leveraging our complementary physical channels with the Internet to provide even greater points of presence.

A couple of good examples.

Best Buy Mobile standalone stores now sell tablets as well and also take in pre-owned video game titles.

This is important because our Mobile stores have differentiated traffic and attract a unique customer base.

25% of shoppers in our Mobile stores are first-time Best Buy customers and these locations also will have a higher proportion of female shoppers than our big-box stores.

Next, let's take a look at a few strategic areas where we intend to leverage our scale to grow tablets, mobile phones, appliances and gaming.

First, tablets.

As we have said, we are making a big push in tablets this year and expect to have the strongest assortment in the marketplace.

We started rolling out Tablet Central in May.

In the beginning of July, we expect it will be in all of our big-box stores.

Tablet Central will be a zone within our computing department with a value proposition modeled after Best Buy Mobile.

It will be a one-stop shop showcasing the features, connections and accessory opportunities for tablets.

We believe that this will play directly to our strengths of demonstrating new technology in helping customers navigate their way through the important choices.

The tablet space is heating up now and our vendor partners are aggressively advertising to build awareness.

So we expect to see the number of tablets ramp up quickly in this quarter.

We are excited about the variety of models we will offer, complete with a wide range of features and price points that will drive consumer interest, as well as our business.

Next, mobile phones.

As I mentioned, Mobile comps were up 28% for the quarter and our data shows that we significantly increased our smartphone share in the quarter.

We also opened about 20 standalone stores in Q1, taking the total to almost 200.

You may recall that we began increasing the Mobile footprint in our big-box stores last year and now have the expanded space allocation in 600 stores.

We believe we have a very differentiated model in this category and mobile upgrade checks are a great example of that.

We did almost 4 million upgrade checks for customers last quarter compared to 9 million for all of last year.

Over a third of these customers opted into the program and want us to contact them when they are due for an upgrade.

This provides us a great opportunity to engage new customers on a requested basis.

Appliances and gaming.

These are areas where we believe we can bring more to customers than our competition, and we are on track to reach the goals we have set for these businesses.

In the appliance category, we have focused on timing promotions to match the seasonality of the appliance market consumer demand.

This, combined with the continued rollout of operating model improvements, resulted in a solid financial performance in a down market this quarter.

Finally, gaming.

We are making a lot of important changes to our gaming business and specifically how we approach the full lifecycle of the gaming customer.

We have made progress and as I said before, our new model is not yet fully rolled out.

For example, we have launched a new dedicated desk in the gaming department with an adjacent pre-order touchscreen to help customers get the games they want.

Our results have shown that when we have the pre-owned trade-in desk within the gaming department, both trade-ins and pre-owned sales improve by a 2 to 1 ratio.

One important advantage we have allows customers to trade in used games and receive a Best Buy gift card that can be used on anything online and in the store, not just another game.

Right now, we are seeing about half of the value of these gift cards being spent outside of the gaming department, which shows us that our value proposition truly is adding value and differentiating.

Trade-ins and pre-owned sales are still relatively new, but we are making good progress.

E3 was last week, and we made several important gaming-related announcements at the event.

Let me highlight one that is another example of our multichannel advantage.

In order to drive our gaming business, we are giving over 2 million Reward Zone Gamers Club members $100 in Reward Zone points to spend on anything in the store or online when they pre-order and pick up five games.

Wrapping things up, we have mentioned the various ways we can leverage our physical and digital assets to strengthen competitive advantage.

Our multichannel strategy, which includes big-box stores, small footprint stores, our e-commerce channel, mobile Web and apps, digital content delivery, compelling Reward Zone benefits, call center staff with blue shirts and agents, in-home remote and in-store services allows us to uniquely serve customers within and across a variety of channels.

It is much, much more than simply stores on a website.

I would like to once again thank our employees for the results they have delivered this quarter.

We are making steady progress toward the priorities we talked about during our Analyst Day.

We are financially strong and we manage a highly cash-generative business.

We continue to be disciplined in our capital allocation on a core set of growth initiatives, as well as returning cash to our shareholders.

With that, I will hand the call over to Jim.

Thanks, Brian.

Today, I would like to cover some of the financial highlights of our first-quarter results, discuss our outlook for the year and provide you some additional color on how we are progressing on several of the key value drivers in our business.

Before we get started, I want to call your attention to a couple of specific new additions that Bill noted upfront to our quarterly reporting that we know you will find helpful.

First, to better highlight the growth trends and momentum tied to our profitable Connected World initiatives, we are adding both domestic mobile phone comp sales and total connections growth information to our regular quarterly reporting rhythm.

Second, we have accelerated the disclosure of our condensed cash flow statement information to the quarterly press release.

With those public service announcements out of the way, let's turn to some of the key highlights and insights from Q1.

Total first-quarter revenue grew by a little over 1%, driven primarily by net new store growth and the favorable impact of foreign currency.

These gains were partially offset by a comparable store sales decline of 1.7%.

In the domestic segment, sales declined 1% and comparable store sales were down 2.4%.

As we discussed at the beginning of the year, we plan for the domestic comps to be down in Q1.

The performance in Q1 was actually better than we had expected and also represented a significant sequential improvement over the fourth-quarter comp sales trends that were down 5.5%.

The improvement in this trend was driven primarily by mobile computing and gaming.

Mobile computing comp was up mid single digits, driven by strong tablet sales growth as we continue to make a big push in tablets with the rollout of Tablet Central and also by improved trends in notebooks.

Gaming trends also improved significantly from Q4 with comps only down slightly.

As Brian already highlighted, we continue to see strong growth in domestic mobile phones where comps were up 28% as we experienced the benefits from both our differentiated model in Best Buy Mobile and strong customer interest in smartphones.

Next, high consumer interest in eReaders, coupled with our broad assortment in this space, drove triple digit comp growth.

I mention this because while this category is still relatively small in overall dollar terms, its growth was strong enough this quarter to meaningfully benefit our overall domestic comp.

It also serves as a reminder of the excitement customers are demonstrating in mobile technologies and showcases our ability to bring this experience together for them, both online and in-store to drive growth.

Our appliance comps were up almost 3% due to successful promotional activities and actions taken during focused customer drive times in Q1.

This result is encouraging given the difficult housing environment in the industry and based on the fact that we were lapping last year's significant low double digit comp gains driven by rebate incentives.

TV comps were down high single digits, which was similar to what we experienced in the fourth quarter.

Given the current macro environment, we continue to plan for a modest near-term outlook in this category and note that our Q1 performance in TVs was consistent with our plans.

During the quarter, it also became evident that digital camera sales in the industry would be negatively impacted by component shortages driven by the events in Japan.

Looking forward, we currently expect product availability will improve as we progress further in the year.

Sales in our international segment increased approximately 8%, driven primarily by the favorable impact of foreign currency, net new store growth and a 0.4% comparable store sales gain.

This gain was primarily the result of high single-digit comparable store sales gains in our Five Star business, which was on top of an almost 35% comp last year.

Canada and Best Buy Europe experienced low single digit comp declines.

Turning to gross profit, first-quarter gross profit dollars of $2.8 billion were down approximately 1%.

As I have discussed previously, driving gross profit dollar growth is a key priority for this organization, which we continue to plan on delivering for the year.

Looking closer at the domestic segment gross profit rates, you will recall that the comparisons to last year will be difficult in fiscal 2012 given our very strong domestic rate performance of up 90 basis points last year, including up 60 basis points in the first quarter of last year.

This is not new information; it just provides you important context for our comparisons throughout the year.

The Q1 domestic gross profit rate declined 60 basis points year-over-year and was driven primarily by rate declines, partially offset by a favorable mix impact from the continued growth in Best Buy Mobile.

Four key items contributed to the lower rates in the quarter.

First, we took offensive actions and targeted promotional activity designed to drive revenue improvements in key categories like computing, appliances and gaming.

Second, product availability issues in higher-margin digital cameras impacted our sales and margins as the industry was adversely affected by the events in Japan that I spoke about earlier.

Third, we experienced higher transportation costs driven in part by higher fuel costs.

And finally, the Q1 margins were also impacted as we anniversaried the large annual vendor rebate that we received in the first fiscal quarter of 2011 that we discussed with you last year.

So when you put all these pieces together, and you normalize for the items that were more one-time in nature, we estimate that the domestic gross margin rate would have been down closer to 30 to 35 basis points for the quarter.

Within the international segment, we had strong 6% increase in gross profit dollars, driven by growth in sales, gross profit rate growth within Five Star and improved margin performance in Canada.

Overall, the international gross margin rate of 25.9%, a decrease of 40 basis points year-over-year, was driven largely by the mix impact of higher B2B sales in Europe, which provide incremental gross margin dollars, but at a lower rate.

Turning to SG&A, first-quarter expenses were essentially flat year-over-year at $2.5 billion and we leveraged 30 basis points on a rate basis.

Consistent with our previous plans, we expect that Q1 will represent the lowest level of SG&A dollar spending growth for the year.

As you will recall, we had our highest spending growth levels in Q1 last year.

This combined with the timing of our investments to support growth in areas like Best Buy Mobile standalone stores, Tablet Central and the rollout of U gaming this year and the addition of the 53rd week together are expected to result in higher year-over-year spending growth in Qs 2 through Q4 over the flat growth we experienced in the first quarter.

To be clear, our expectation for annual SG&A dollar growth of approximately 4%, excluding the impact of FX, remains unchanged.

As you would expect, given the impact of the 53rd week in the fourth quarter, we anticipate that SG&A dollar growth in the second half will be higher than the annual 4% rate and the first half will finish at lower than this rate.

Overall, we are pleased that the operational and promotional actions we took in the quarter drove improved sales trends.

While these investments resulted in a slight decline in gross profit dollars, we continue to demonstrate solid expense management and delivered operating income and EPS within our expectations for the first quarter.

Cash flow in the quarter was also very strong and continues to highlight one of the key strengths of our model.

Operating cash flow for Q1 was $1.3 billion, up significantly from last year.

As I discussed at length during last quarter's call, the biggest driver of the Q1 operating cash flow increase was the reversal of year-end timing differences in several key working capital items.

We successfully lowered Q1 inventory levels and domestic comp store inventories finished down 4%.

Receivable positions and payables also made good progress to returning to more normalized levels from where we finished fiscal 2011.

Before we leave the quarter, I also wanted to provide an update on the progress we have made on several key value drivers in the business.

Brian has already commented on the performance on the online channel, so I will start with connections.

We believe that connections are an important proxy for you to assess our progress in our Connected World strategy that we have discussed.

Connections are clearly a very profitable part of the [hacks] model that we are intent on growing.

Our target for this year is to grow our total domestic connections from 8 million units last year to 10 million units.

We have made good progress towards that goal with domestic connections growth of up 20% for the first quarter.

To add a little color to that number, within mobile phones, we had higher growth of mobile phone postpaid connections, which drove strong mobile comp sales and importantly mobile gross margin dollars.

Connections within both mobile computing and TVs also increased significantly during the quarter.

During our recent Analyst Day, we also talked about structural opportunities that would help us further improve our strong model.

One of the key goals we have in this space is to reduce our big-box square footage in the US by 10% over the next three to five years.

We have made good initial progress in our plans to achieve this goal and have started space reduction discussions with several landlords.

We will keep you updated on this initiative as it progresses.

That brings me to our outlook for the year.

As we mentioned upfront, we delivered our plan for the first quarter.

With the vast majority of this year's sales and earnings still in front of us, we still anticipate delivering on our financial goals for the year.

Based on what we can see so far, we expect full-year revenue towards the higher end of the guided range of $51 billion to $52.5 billion.

We also continue to expect annual operating income dollars of flat to growth of 7%.

Additionally, we still anticipate delivering on our expectations for operating income dollars in the first half of FY '12 consistent with our original plans.

Bringing it all together, we are maintaining our annual non-GAAP EPS guidance of $3.30 to $3.55, excluding restructuring-related charges and the impact of FY '12 share repurchases.

So to summarize, the year is off to a good start.

We took actions to improve the sales trajectory of our business and delivered earnings in line with our plans.

We are excited about the growth opportunities we continue to see in expanding technology and service offerings for customers and know that the combination of our physical and digital assets puts us in a unique position to compete and win.

At the same time, we also know that the customer is stretched thin in the current environment.

So we will be fluid and purposeful with our plans and follow them where they need us to go and we will be competitive in the marketplace.

And finally, we are leveraging our strong financial condition and taking actions to improve our returns by improving growth, capitalizing on structural opportunities and generating cash to both invest in the business and to return to shareholders.

So with that, Alicia, we are ready for the callers' questions.

(Operator Instructions).

Alan Rifkin, Barclays Capital.

Thank you very much.

In light of the apparent success that you have in the promotional environment, can you maybe just provide a little bit of color on what the prognosis is for continued promotions throughout the course of the year in an effort to drive revenues?

Then I have a follow-up.

Alan, it's Jim.

Thank you for the question.

Certainly as we set out to plan this year, we said we are going to follow the customer where the customer wants to be based on the categories that they have the most interest in.

And we knew we had more elasticity in the demand as we tightened up our promotional model across several key categories.

We made specific emphasis in the quarter to focus on areas that we thought we could benefit from customer traffic early, especially in the gaming, appliance and computing businesses and we are very pleased, as Brian mentioned, that we saw progress in that space.

So we anticipate that the year is going to continue to be competitive as it always is every year, and we are just excited that we have the opportunity to use some of the multichannel assets we have to continue to drive the top-line growth in our business throughout the year.

We will see where the customer goes, but we are quite encouraged by what we have seen so far in that space.

Okay, thank you, Jim.

If I could just ask a quick follow-up for Brian.

Sure, Alan.

It certainly sounds like relative to your internal expectations Q1 beat those expectations on both the earnings and the comp line, but to be fair, in absolute terms, obviously, it is a difficult environment.

Clearly, the economic environment in the last six or eight weeks has kind of taken a downward turn across the board.

Can you maybe just provide a little bit of color, Brian, on what the proclivity is for the Board to maybe -- in the wake of a difficult environment for the back half of the year, can we expect a greater proclivity on ROIC and share buybacks and dividend increases in the back half of the year and less towards CapEx?

So Alan, thanks for the question and first, on your first part of that question, I was very pleased with what we saw in the top line.

We are on track for the year, so I am pleased with that.

As I think everyone knows, our plan contemplated a difficult environment for the customer.

We have been very focused for the two years I have been in this chair and for the years before that on being disciplined with our capital allocation.

You can rightly expect that focus and that discipline to continue.

We have talked about what we have left under authorized for our share repurchases, and you will certainly see us continue to leverage that as a tool.

You can also expect that we will have a balance between -- in our capital portfolio between where we can invest for growth and where we can return money most efficiently to our shareholders.

And you should expect to see that continue.

Thanks, Alan.

Thank you very much.

Next question please.

Michael Baker, Deutsche Bank.

Thanks.

So I wanted to ask you just specifically on the online business, where you are in terms of your ability to compete better with Amazon.

I think you have talked about a lot of the SKUs that you have added.

Are those mostly in the TVs to compete with Amazon and what is going on with pricing online?

And then I guess related to that, in the past, you have shared some share data with us.

Can you update on that as well?

Thanks.

This is Shari.

From an online competitiveness perspective, Brian mentioned this, we have executed and will continue to on expanded assortment online.

To the question that came up earlier around promotions, that is another place that we invested in the quarter, in key categories online, categories like computing, DI, MP3 and our portable electronics business and we were pleased with what we saw in terms of the customer response and we were also pleased with what we saw in the latest share data in those categories for April.

And you will continue to see us do that.

We have not obviously fully closed all the competitive gaps that we want to close, but we're making good progress and as Brian mentioned, May was much better than March from a performance of the online channel and we would expect that to continue.

And you think that is a function of some of the SKUs and maybe some of the pricing action that you took in May?

I think it is a combination of definitely the expanded assortment, the way we are seeing customers respond to that.

We know that for sure.

We also believe the pricing actions helped and to the question of how the channels play together, we also had a 700 basis point increase in in-store pickup in the month of April as well.

Okay, thank you.

Anthony Chukumba, BB&T Capital Markets.

Good morning.

Thanks for taking the question.

I just had a question on -- you mentioned the pickup in your tablet business, and I guess I was just wondering was that because, A, you got a higher allocation of the iPad 2 than you did the original iPad?

B, you had increased sales of some of the non-iPad models.

Obviously there has been a proliferation over the last couple of months.

Or C, sort of a combination of the two?

Or maybe even D, the start of the rollout of Tablet Central.

So I guess if you could just provide a little color around that, I would appreciate it.

Thanks, Anthony.

This is Mike Vitelli.

To answer your question, I think right now it is the product that is coming in.

We have been able to sell virtually everything that we are getting as this category continues to generate excitement.

The impact of Tablet Central is still ahead of us to be realized as that is rolling out to all of our stores right now in June.

It will be in every store in July and the product introductions from other players in the tablet community are starting to come into the store in July and August.

This is Brian.

I would just add to Mike's answer.

Not only are they coming into the stores, online we have and will have an increasingly dominant assortment of the very best of the innovations that are coming from all the OEMs in the tablet space.

And we believe that consumers will be very, very pleased with what they see there.

And our suppliers are very excited about Tablet Central about how it is laid out, having all those products together, eReaders in the area, all the accessories.

It is something that is exciting to the entire vending community.

Okay, thank you.

Matthew Fassler, Goldman Sachs.

Thanks a lot and good morning.

My questions relate to gross margin.

You gave us a lot of color on your promotional steps for the quarter.

You obviously entered the quarter with heavy inventory and that had really been the case for several quarters running.

You have now -- you exited the quarter with inventory up essentially in line with sales and it sounds like in the US somewhat better than that.

Does that impact the stance that you intend to take on the promotional front for the rest of the year and given that there is less of an imperative to clear out aging goods?

Hey, Matt.

It's Jim.

I guess on the first point on inventory, I wouldn't suggest at all that we took any out of the ordinary course of business actions to lower our inventories level.

As we have mentioned the last couple quarters, we are working those -- we were working those down in response to the slower sales trends we saw last year and actually did not see big margin degradation impacts on those.

So our stance on inventory and promotions going forward is more in light of what we see in the environment and the competitive opportunities we have to grow our businesses with the customers.

We are not reacting to trying to get specific inventory positions in line.

We have enough (inaudible) in our model to manage that in the ordinary course.

Matt, this is Brian.

I just want to add one thing.

You should expect to see us to continue to bring strong promotions to categories that matter to our customers.

Best Buy has a long history of being there in setting new product launches and setting new technologies and you should absolutely expect to see us with exciting promotions as we launch things like Tablet Central.

That's helpful.

If I could just follow up on that.

On the last conference call, I am just reading from the transcript, you talked about expected to grow gross margins in the current fiscal year at a slower rate than you did last year.

You shaded your revenue guidance towards the high end and reiterated your expense guidance.

So is there any color to give us than on gross margin relative to that initial statement that you gave us back in March?

Yes, Matt, the only thing you didn't cover in your summary there was we also said the operating income performance from a dollar standpoint is still in line with original expectations.

Sitting here at Q1 with so much of the business in front of us and given the fact that we are focused first and foremost on driving gross margin dollars, we are going to have to see where the customer is at this year around what they want to buy in the business.

So the good news is we have seen elasticity in categories like notebooks and tablets, early days yet, that suggest there might be a little bit more room in those spaces.

You know how those play out in the gross margin rates overall, but the exciting part for us is that we get that traffic in the store and we get a chance to drive the hacks model that we have shared with you.

So I think it is early in the day to kind of predict where exactly gross margin rates are going to land, but we still feel very confident on delivering the gross margin dollars and our overall guidance and we will just see how that plays out with the customer mix in the balance of the year.

Got it.

Thank you so much.

David Schick, Stifel Nicolaus.

Good morning.

On the TV category, you gave detail about the results being in line with plan for the quarter or the decline in line with your plan for the quarter.

Some others in the industry have talked about improved demand at the high end and what that could mean.

Could you just give us a point of view on both the supply and the demand and I guess how that leads to pricing point of view for now and sort of as the year plays out?

Thanks, David.

This is Mike Vitelli.

We are, in fact, seeing increased demand of larger screen sizes.

That was part of our plan for this year is to focus in that area.

The first quarter is a period of new products and resets, so it is still early in the year.

But overall we had modest expectations for this category.

That is still where we are looking at that to be, but we are pleased with what we saw in the first quarter as we achieved the plan.

David, this is Brian.

I would add just one thing.

We are very pleased with the growth we are seeing in our Magnolia space at the very high end of our mix and assortment.

It is very consistent with what you have heard.

We are quite pleased with how the consumer is responding to what is happening there.

Thanks a lot.

Scott Ciccarelli, RBC Capital Markets.

Good morning, guys.

A little bit of a strategic question I guess.

Given your positioning in the industry, what can you do, if anything, to help build your portfolio of exclusive products and offerings to battle the Internet?

In other words, being more price-competitive with guys like Amazon is one thing, but I would think if you had maybe more access to exclusive products or exclusive selling windows, that would be materially more powerful.

So I am just wondering if that is something we might see in the future of if there is any plans to try and increase that offering.

Scott, this is Brian.

We are actually very proud of the lineup we have produced of exclusives from some of our OEM partners throughout the back half of last year and into this year.

And we are excited about what we have teed up for this year.

We are also quite pleased with what we have with our own exclusive brand and the growth there.

Maybe, Mike, you would like to opine on that.

Yes, I would say that is one of the areas that we are very proud over the last several years of growing our exclusive brand in multiple categories, particularly in television where our Dynex and Insignia brands are a significant part of our unit growth in those categories.

So we have exclusives from our suppliers and we have exclusives from ourselves both in hardware and obviously the service offerings that we have.

And do you think you get fair credit for those exclusive offerings?

I think we do.

I think when you have a product -- we have seen it in the computing business for several seasons now where we get exclusive blue-label products that we bring to the market that have unique features that we are able to show to the consumer and demonstrate to the consumer and that is in -- we have seen that in multiple categories, but computing is a great example of it and that is where we get unique growth.

And the vendors are real pleased with it too because these are products that have higher ASPs, higher margins for everybody.

It plays out well for both sides.

I think also, to just add to Mike's answer, our Best Buy Mobile value proposition, what we have done with the freestanding stores and the store in a store, there has been a full range of exclusive product offerings here that have been very, very successful.

And we are really -- customers are very clear from the research we have done on how important that is and they give us full credit for that.

Thank you.

Gary Balter, Credit Suisse.

Thank you.

There have been some stories in the paper about leasing out some space in Texas and possibly closing or not growing anymore the big boxes in Europe.

Could you refresh us on what you are doing in the real estate side of things and talk about what is going on in Texas?

Hey, Gary, it's Jim.

I will talk a little bit about what we are doing certainly on the real estate side in the domestic business and then I will let Brian talk a little bit about what the plans are in Europe.

As I mentioned in my prepared remarks, we are making good progress in some initial conversations with landlords around looking for opportunities to reduce big-box square footage.

And as we said during the Analyst Day, what we are most encouraged by so far is the opportunities we have to reduce square footage with our existing stores by shrinking the footprint.

We have landlords that are very excited about that opportunity and we have subtenants who are very interested to step into those spaces and leverage off the traffic that we have coming to the Best Buy model overall.

So we continue to be encouraged on our progress around the tactical things we can do in real estate in the domestic portfolio.

As we mentioned in the past, we have a large number of natural renewals that come up over the next three to four years that we will be able to leverage as well.

So those plans are progressing as anticipated at this point in time.

Gary, this is Brian.

I would just add to Jim's answer.

First, on the real estate here in the States, we have already started that work.

It is a small number.

It is less than 50 stores we have touched so far, but that work is already underway and we are very pleased with what we are seeing thus far.

And as far as Europe goes, I saw the reports that were in the paper over the weekend in the UK, obviously and Gary, as you well know, and just to remind the other folks on the call, our strategy in Europe is multiformat, multibrand, multichannel.

We have 2400 small box Carphone Warehouse stores across Europe in partnership with our CPW -- and our CPW joint venture.

Last year, we opened six big-box stores in the UK.

We are really pleased with what we have seen in terms of consumers and the net promoter scores and the sort of experience we are delivering.

But that being said, we manage our business as a portfolio of brands and businesses and all of them over time have to earned their right to capital and we don't have any imminent announcement about our business in the UK and you know that I don't comment on rumors.

Thanks for the question, Gary.

Could I just follow up?

Well, could I stop you if I wanted to, Gary?

Yes, you can.

I could, but I won't.

Go ahead.

Just on a different topic, social media, we know you signed up for Shopkick and we have been playing around with it in your stores.

Can you talk about what you have done in some of those areas and how you see that progressing going forward?

This is Barry Judge.

Within social media, as with many big brands, we are very active on Facebook.

We are active on Twitter with our Twelpforce value proposition, which trys to help people answer their questions as it relates to technology.

Your specific question around Shopkick relates to opportunities within the mobile space.

We have got multiple shopping apps that we are utilizing within gaming.

You can buy and shop with our Best Buy Mobile app in-store.

We are also, in marketing, looking at different ways of utilizing couponing and you mentioned Shopkick.

We are an investor in the Shopkick business and we are seeing interesting results as it relates to getting consumers to buy as they are driving by a store or whether they are in the store highlighting different promotions that are available to them.

But it is early to talk about whether -- the success of that at this point.

Gary, this is Brian, just to close out Barry's comments there.

This is -- you should -- we are a multichannel player and you should expect us to be very, very aggressive in leveraging social media any way the customers can connect with each other with a brand and you will see us doing more and more in that space.

But to Barry's point, to be fair, it is early in terms of our efforts there, but it is not lost on us the trend and how important we think that is going to be in the future.

Great, thank you very much.

Daniel Binder, Jefferies & Co.

Hi, good morning.

I was curious if you could comment on what the trend looked like through the quarter.

I think you said on the online it got better May versus March.

I was just curious how the stores performed through the quarter.

And then secondly, as you tweak the labor model and add things like Tablet Central and dedicated resources in gaming and I think in appliances too, as you think about that investment over the course of the next 12 to 18 months, do you think that it is going to require a lot more training dollars and labor compensation model changes and things that would require more a -- even into next year --?

Hey, Dan, it's Jim Muehlbauer.

I will take the first part of that question and I know Shari wants to jump in on the second piece.

We typically don't provide commentary on trends within the quarter.

Brian specifically wanted to highlight the progress that we are making in the online space given the goals we laid out in our Analyst Day around doubling the size of that business.

And as we were pulling those levers throughout the quarter, we actually saw customer behavior progress, which we thought was worth highlighting specifically on this call, but normally we don't talk about the core trends within the quarter.

And quite honestly, looking in Q1 and Q2, it is not particularly informative to the meat of our earnings season in the back half of the year anyway.

So with that, (inaudible).

Good morning, it's Shari.

A few comments.

One, first in terms of the question around labor, we have already done work and will continue to do it around pulling out nonproductive, non-customer-facing, tasking and operating tasks labor.

And the team did a very good job of that at the very beginning of this year that we then turned around and reinvested into gaming category-specific labor.

So we funded the gaming value proposition and dedicated labor by taking unproductive labor out of other places in the store.

So that is always the first choice, and we will keep doing that.

Secondarily, to your question about training, yes, we absolutely have to be better in what we are delivering to the customer and the level of knowledge, selling interaction and skill that we deliver in our stores.

We have got, I think, a good legacy of being very good at that.

And given who our competitors are today and given what the demands are of the customers, we have to be better.

And to that, we have put a significant investment in training across all of our stores, specifically focused on both the product knowledge side of it, as well as the selling skills side of it, and we are in process of doing that right now.

And then thirdly, in terms of op model changes, we have talked before about some of the things we are testing in the connected stores, of which we now have about 30 plus stores operating with that operating model.

And yes, we have found that in particular in the spaces where there is more complexity for the consumers.

Mobile is a good example that you already know about.

Computing is another example of that where we get the right level of dedicated labor to that, and we have got them in both a different compensation model that includes compensation around their overall productivity, as well as how their customers rate them, as well as their demonstrated level of knowledge.

We like the early results we are seeing there.

In fact, in our test stores we now have the two tiers of different selling skills and selling roles in the stores.

And it is still early, but we like what we are seeing so far.

So yes would be the answer to number three.

And as always, we have just got to make sure that we get the return that we need on the changes, but there is no doubt there is opportunity there.

Dan Wewer, Raymond James.

Thanks.

So, Brian, we have another quarter where your online business achieves significantly better growth than bricks and mortar.

Back at the Analyst Day when I raised this question, you indicated that you are agnostic between growth and e-commerce between bricks and mortar.

The key is growing the Best Buy brand.

But how do we reconcile that with the fact that you are migrating a chunk of your market share to a business that has inherently lower margins and, therefore, will make it difficult to improve your overall operating margin in the long run?

Thanks for the question.

I recall the discussion at Analyst Day.

We need to be where the customer needs us to be, and there is a segment of the customer that wants and needs to be fulfilled online.

We are thrilled to be there.

So I wouldn't say that we are actively migrating consumers to online.

I believe consumers have migrated to online, and we are going to be there in a way, in a space that allows them to fulfill with Best Buy in the way that best suits them.

I also think to Shari's comment earlier, the fact that our in-store pickup grew so materially in April, I think -- and May -- is such an important indicator about what the consumer actually wants.

And we know when we get consumers in the store to make an in-store pickup, it is a good -- not only good for the consumer, it is a good experience for our shareholders as well.

So we are not overly concerned with the migration we are making from bricks to online.

We believe that our strategy again is the winning formula and that is leveraging online, our small box stores, our big-box stores, our call centers, all the customer touch points we have in a web around the customer.

Thanks.

And just to follow up on that, there is always the focus on Amazon as a competitor, but there are some other significant online competitors.

I have seen recently that Newegg.com is taking some very aggressive marketing against Best Buy.

Does there come a point where Best Buy needs to consider opening a different, maybe call it, a fighter brand on e-commerce to react to those type of competitors?

I appreciate the question.

I think that Best Buy is a fighter brand.

That is our history.

We are a tough fighting brand and we have risen up and won every fight we have been in.

And there is not a doubt in my mind that that will be the case as we roll forward over the next 40 years of our history.

So no, I don't anticipate at this moment in time a fighter brand and I also want to go back to the original part of your question about online and in-store pickup.

It really -- online really only contemplates the hardware sale and not what we do better than anybody in the world.

We not only deliver hardware at a great price as well as anybody in the world, but we are able to offer the full suite of goods and services and accessories that complete the experience, that complete the sale for the customer in a way that is compelling.

And I have got to tell you I just absolutely believe that that is a winning formula for us.

Thanks for your question.

Thank you.

This will be the last question, operator.

Brian Nagel, Oppenheimer.

Hi, good morning.

A couple questions.

First, I want to follow-up on the gross margin conversation, which I know we have talked about at length here, but just to be clear, so it sounded -- you instituted some what sound like very tactical pricing decisions through the quarter that led to better sales.

What I am still not clear on now, and this is a question for Jim, to the extent this stance continues through the year, I mean how will that ultimately impact gross margins in the domestic segment compared to what we were originally planning for?

Yes, Brian, it's Jim.

As I mentioned earlier, we are going to have to see.

I mean clearly we are focused on delivering our gross margin dollar goals for the year.

As you know from our history, a lot of the margin rate that we see, especially within our domestic business, is driven by the types of products that people want to buy.

So last year was softer in the computing space overall.

As tablets took off, we saw mixed favorability last year.

Two years ago, we saw strong notebook sales with the release of things like Windows 7.

We saw very high notebook sales, which impacted our mix negatively.

So as we look and pull apart where does the customer want to go, how do we balance our promotion to drive both top line, to get those customers in stores over the weekend, sell them that suite of services in our hacks model that really differentiates us not only for customers, but also for shareholders.

We are going to be there on price with them in the categories they want us to be in.

So sitting here, as you look at the results in Q1, we certainly don't expect that our margin rates are going to continue in the same space that we have seen in Q1, but it is just too early in the year to know exactly where it is going to be.

We are focused on delivering margin dollars and we are going to grow them for the year and our plan is to grow operating income in the range we have provided of zero to 7% and we will see where the customer needs us to be.

Got it.

Go ahead, Brian.

Just one follow-up on a separate topic, on the buybacks.

So you bought back just over $500 million of stock in the first quarter.

At the Analyst Day, you had talked about $1.3 billion through the year, so you are tracking ahead of that.

How should we think about it?

Did you buy back stock more aggressively in Q1 or should we think about being more front-end loaded through the year?

Yes, well, the way you should think about it is what we said in the past.

We intend to fully utilize our existing authorization of $1.3 billion for the year.

The timing of that is going to depend on market conditions and we will see how that plays out.

What we are -- I think the higher headline really is the strength of the Best Buy model allows us the flexibility to invest in spaces that we know where we will get benefit for the customer that are profitable for our shareholders like the expansion of our small box stores and Best Buy Mobile, the resets that we are doing for used gaming and what we are doing in the Tablet Central space.

Having the ability to do that as a company while also increasing returns to shareholders by buying back shares on a more consistent basis over the long term we think is a great formula to improve return on invested capital, which we are committed to doing as a management team.

Thanks for the questions.

Thank you, Alicia and thanks to our audience for participating in our first-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 pin is 4446363.

The replay will be available from 11.30 a.m.

Central Time today through June 21.

You can also hear the replay on our IR website.

Thank you for your attention and this concludes our call.

Ladies and gentlemen, this does conclude the conference call.

You may now disconnect and thank you for using ACT Conferencing.