百思買 (BBY) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Best Buy's third-quarter fiscal 2014 earnings conference call.

(Operator Instructions)

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

(Operator Instructions)

The call will end at 8.55 AM Eastern time.

I will now turn the call over to Bill Seymour, Vice President of Investor Relations.

Please go ahead, sir.

Good morning and thank you.

Joining me on the call today are Hubert Joly, our President and CEO, and Sharon McCollam, our CAO and CFO As usual the media will be participating in this call on a listen-only mode.

This morning's conference call must be considered in conjunction with the earnings release that we issued earlier today.

They both contain non-GAAP financial measures that exclude the impact of certain business events.

These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, which should not be considered superior to, or as a substitute for, and should be read in conjunction with, the GAAP financial measures for the period.

A reconciliation of these non-GAAP financial measures to the most directly comparable financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release.

Today's earnings release and conference call also include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements address the financial condition, results of operations, business initiatives, growth plans, operational investments and prospects of the Company, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the Company's current earnings release and SEC filings for more information on these risks and uncertainties.

The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

I will now turn the call over to Hubert.

Thank you, Bill.

And good morning, everyone.

And thank you for joining us.

I'd like to begin today with an overview of our third-quarter results, as well as an update on our Renew Blue priorities.

Then I will turn the call over to Sharon to provide further details.

And finally she and I will share a few thoughts about holiday.

Our third-quarter top-line results make it clear that our focus on delivering our unique customer promises is starting to pay off.

It is also clear that our efforts to control costs and to bring greater efficiency to our operations are improving our profitability.

While we remain mindful of the fact that we still have a long way to go, we are pleased with the progress of our Renew Blue transformation efforts.

Specifically, during the quarter we delivered domestic comparable store sales increase of 1.7% and non-GAAP diluted EPS of a better-than-expected $0.18.

In addition, we continued to make substantial progress on our key Renew Blue priorities.

This progress included, most notably, number one, driving a 15.1% increase in domestic comparable online sales.

Number two, continuing to enhance our multi-channel customer experience with a nearly 400 basis point increase in our Net Promoter Score.

Three, completing this year's retail floor space optimization, including the deployment of vendor experiences.

And, four, eliminating an additional $115 million in annualized costs, bringing our total annualized cost reductions to $505 million toward our eventual target of $725 million.

Let me know provide more details on our key Renew Blue priorities.

First, to accelerate online growth we are continuing to focus on those initiatives that are designed to drive increased traffic, an improved customer experience, and higher conversion.

In Q3 these initiatives included the continued optimization of site navigation through an improved taxonomy, which is driving improved natural search results and making it easier for customers to find the products they are looking for.

Second, the narrowing of search results in browse pages with dropdown menus.

Three is the implementation of a single site sign-on capability, allowing loyalty program customers to see their My Best Buy points, rewards certificates and other information directly on MyBestBuy.com instead of going to a separate website.

Fourth is the enhancement of our buy online, pick up in store experience by creating an easier process for customers to add service plans to their final purchase upon arrival in the store.

And then, five, a significant increase in the number of product reviews.

In fact, we have already exceeded this year's goal of quadrupling the number of product reviews.

As we enter the holiday season the superior multi-channel customer experience is what we are focused on.

As such, our fourth-quarter online initiatives include, number one, the introduction of new product buying guides.

Two, the expansion of product information across categories.

Three, the addition of new marketplace partners to increase our online-only product assortment.

And, four, the leveraging of over 400 ship-from-store stores and two new online shipping locations within our existing DCs.

Based on the early results from our ship-from-store pilots, we continue to believe that we will see the long-term benefits that we have previously shared, including improving our online conversion, more profitably selling returns and clearance inventory that is trapped in our stores, reducing markdown risk on product transitions, and improving inventory management by increasing visibility to true multi-channel customer demands.

Our second Renew Blue priority for this year is to escalate the multi-channel customer experience.

We use NPS, or Net Promoter Score, to measure not only the satisfaction of customers that buy but also the customers who don't.

In the third quarter, our Net Promoter Score improved by nearly 400 basis points year over year.

And while we know there is still much to do to provide a consistently great experience to our customers, we are seeing improvement in all of our customer-facing functions, including stores, online, services, and customer care.

And we are particularly pleased to see the improvements -- the strong improvements -- being driven by the service provided by our Blue Shirts and Geek Squad agents.

In addition during the third quarter, we took another step to improve the customer experience by reinventing our Reward Zone loyalty program and replacing it with an enhanced program that we've created, My Best Buy.

This program has been designed to deepen our relationship with our customers by going beyond points, and developing personalized shopping experiences, exclusive services and financial rewards that are not available from other retailers.

The third Renew Blue priority is to increase revenue and gross profit per square foot to enhance floor space optimization and merchandising.

During the third quarter we continued our floor space optimization efforts, which included, number one, increasing space for growing in profitable categories like mobile phones, tablets and large and small appliances.

Number two, creating space to more effectively showcase clearance and open box inventory.

Three, completing the rollout of 500 Windows stores.

Four, redesigning space to support new gaming product launches.

And, five, adding expanded Google displays in 750 large-format stores.

These initiatives, of course, are in addition to rolling out the Samsung Experience shops earlier this year.

The customer feedback on all of our stores-within-a-store continues to be very positive.

The fourth Renew Blue priority for this year is to drive down cost of goods sold through supply chain efficiencies and reverse logistics.

In the third quarter we completed the online expansion of our final two of eight distribution centers to improve the time and cost of online delivery.

We expanded the existing online fulfillment capabilities in one additional distribution center.

And we continued to reduce costs through competitive bidding and rate negotiations.

We also implemented new retail store replenishment processes, which will allow us to shorten our inventory replenishment windows during this year's holiday season.

Reverse logistics was also a primary focus during the quarter.

As we have discussed, customer returns, replacements and damages represent approximately 10% of our revenue, and over $400 million a year in losses.

In the third quarter we took our first step to reduce these losses by creating space in our stores to more effectively showcase clearance and open box inventory.

In the first quarter we plan to begin adding initial quantities of returns and open box inventory to our online assortments.

Today only immaterial amounts of this inventory are available online.

And adding it will be a gradual and incremental process due to system complexities and the time required to build our capability to assess the condition of the inventory prior to displaying it.

By the end of next year we expect to have made significant progress in creating greater consumer visibility to these pools of inventory.

Through these and other supply chain services and loyalty program-related cost initiatives this quarter, we have eliminated $100 million in cost of goods sold, bringing our total annualized cost reductions to $165 million toward our eventual target of $325 million.

Our fifth Renew Blue priority is to continue to gradually optimize our US real estate portfolio.

Occupancy cost reduction and retail capital allocation remain a key focus.

As such, during the quarter we continued to renegotiate overall rent reductions on expiring leases.

And we closed two mobile and four Pacific Sales standalone stores.

In our large-format US stores, we did not close any stores this quarter, but will be closing one additional store at the end of the year.

As you can see from our year-to-date results our retail performance is improving, and the financial economics of closing stores is becoming less compelling.

Additionally, with the rollout of ship-from-store, we are now looking at our stores strategically in relation to our longer-term supply chain strategy as we strive to deliver inventory to our customers when and where they want to receive it.

Within our large format US stores, we are continuing with our rollout of five Magnolia Design Centers and 12 Pacific Kitchen and Home stores within a store this fiscal year.

These concepts are providing a higher and end and higher touch customer experience and are testing well in the pilot stores.

Our sixth Renew Blue priority is to further reduce SG&A costs.

As we laid out at our investor meeting last November, we believe there's an opportunity to remove $400 million in SG&A from our North American business.

And we're making substantial progress.

Since our last earnings release we have eliminated an additional $15 million in annualized SG&A costs.

And this brings our annualized cost reduction to a total of $340 million towards our eventual target of $400 million.

Beyond the US we are also running out our Renew Blue priorities in our international business.

While we are continuing to address ongoing top-line challenges, we are pleased with the international cost reductions we have made to date.

I will now turn the call over to Sharon to cover more details on our third-quarter financial performance.

Thank you.

Good morning, everyone.

Like Hubert, I'd like to reiterate how pleased we were with the strong operational execution that we saw in the third quarter.

This is a capability that is fundamental to our transformation.

And the progressively better outcomes that we are seeing each quarter are not only contributing to higher NPS scores but also to better-than-expected financial results.

The highlights of these results in the third quarter were as follows.

Enterprise revenue declined 0.2% to $9.4 billion, primarily due to prior-quarter store closings and continued softness in international.

Non-GAAP diluted EPS, however, increased $0.14 to $0.18 versus $0.04 last year.

This increase was primarily driven by Renew Blue cost savings, a short-term benefit from the transition of the new credit card agreement, and strong expense management, partially offset by higher year-over-year investments in price competitiveness.

Domestic revenue increased 2.3% to $7.8 billion.

This increase was primarily driven by comparable store sales growth of 1.7%.

And if you exclude the impact of short-term disruptions during the quarter due to the floor space optimization and Windows stores rollouts, comparable store sales growth would have been approximately 2%.

From a merchandising perspective growth in mobile phones, appliances and notebooks was partially offset by expected declines in gaming, movies and digital imaging.

The online channel also delivered strong growth during the quarter as comparable sales increased over 15%.

This increase was driven by the online initiatives that Hubert shared with you earlier, in addition to increased online marketing and a significantly higher number of online orders being placed in our retail stores.

In addition, increased traffic, higher average order value, and improved inventory availability contributed to these stronger-than-expected results.

And if you include this quarter's online demand for new gaming console pre-orders which were not shipped and will not be recognized as revenue until the fourth quarter, comparable online demand would have increased approximately 20%.

In international we had a challenging quarter as revenue declined 11.3% to $1.5 billion.

This decrease was primarily driven by a comparable store sales decline of 6.4%, of which almost one-third was driven by mobile phone inventory constraints in Canada.

Additionally, lost revenue from 35 previously closed stores, including 15 in Canada and 20 in China, and the negative impact of foreign currency, impacted the comp.

The balance of the comparable store sales decline was driven by lower industry demand for consumer electronics in Canada and the May 2013 expiration of government subsidies in China.

Turning now to gross profit, the enterprise gross profit rate for the third quarter was 23.2% versus 23.8% last year, a decline of 60 basis points.

The domestic gross profit rate was 23.6% versus 24.2% last year, also a decline of 60 basis points.

This decline was primarily driven by increased product warranty costs in the mobile phone category, a lower mix of mobile phone service plans, and a greater investment in price competitiveness.

These impacts were partially offset, however, by a short-term transition benefit from the new credit card agreement with Citibank.

In future quarters, as we discussed in Q2, the new agreement with Citibank will negatively impact the Company's gross profit rate as the economics are significantly less favorable that the expired agreement long term.

International gross profit rate was 21.2% versus 21.8% last year, again a decline of 60 basis points.

This decline was primarily driven by increased promotional activity in Canada and an unfavorable product mix in Canada.

Now turning to SG&A, enterprise level non-GAAP SG&A was $2 billion, or 21.8% of revenue, versus 23.4% last year, a decline of over $150 million or 160 basis points.

Domestic non-GAAP SG&A was $1.7 billion, or 21.7% of revenue versus 23.5% of revenue last year, a decline of nearly $100 million or 180 basis points.

This decline was primarily driven by the realization of our Renew Blue cost reduction initiatives, tighter expense management throughout the Company, lower store labor-related expenses, and executive transition costs last year that did not recur this year.

These impacts were partially offset by Renew Blue investments in mobile advertising and the re-platforming of BestBuy.com.

International non-GAAP SG&A expenses were $333 million, or 22% of revenue versus 22.7% of revenue last year, a decline of over $50 million or 70 basis points.

This decline was primarily driven by Renew Blue cost reductions and tighter expense management in Canada, and, to a lesser extent, the elimination of expenses associated with previously closed stores.

From a working capital perspective we continued to strengthen our balance sheet during the quarter.

Cash and cash equivalents increased $1.9 billion to $2.2 billion.

This increase was primarily driven by the sale of Best Buy Europe and proactive working capital management.

Receivables increased $98 million or 9.6% to $1.1 billion, primarily due to the agreed-upon timing of payments related to the LCD litigation settlement that we discussed in Q2.

Merchandise inventory decreased $678 million, or 8.9%, to $7 billion, primarily due to aggressive inventory management, including an ongoing reduction in our clearance and at-risk inventory.

Accounts payable decreased $482 million, or 6.8%, to $6.6 billion, primarily due to lower inventory and the timing of inventory purchases for the holiday season.

And now as we look forward to the fourth quarter, I would like to turn the call back over to Hubert to talk about our holiday strategy.

Thank you, Sharon.

Looking ahead to the holiday season and beyond, our strategy is to continue to drive our Renew Blue transformation.

Our mission is to be the destination and authority for technology products and services.

We are here to help our customers discover, choose, purchase, finance, activate, enjoy, and eventually replace their technology products and solutions.

We also help our vendor partners market their products by providing them the best showroom for technology products, both online and in our stores.

Now, specifically for holiday, we have worked to enhance and deliver on our unique customer promises.

First, we're offering highly competitive prices and compelling promotions, as we believe that price competitiveness is table stakes.

Our price competitiveness is augmented by a number of things.

One is up to 6% in rewards value with the use of My Best Buy credit card.

Second, valuable trading promotions.

Next is our low-price guarantee.

And, four, is free shipping for online orders over $25.

We also are delivering a curated assortment of exciting new products, including two new gaming platforms, new mobile phones, new tablets.

In fact, on new tablets Best Buy is the only national retailer where you can touch, try and buy the top five brands of tablets, so new tablets, and then a number of branded exclusive, only at Best Buy, products and services for the holiday season.

Beyond assortment, we will be providing significantly enhanced knowledgeable and impartial advice to our customers, including through the online channel with an improved taxonomy, a new search engine, new buying guides and expanded product information, as I discussed earlier.

In our stores, we've continued to invest in training and coaching.

And have begun the process of equipping our Blue Shirts with new tablet-based tools that allow them to access online resources to aid customers wherever they may be on the retail sales floor.

And, of course, through our strategic vendor partnerships we are providing a renewed shopping experience with the presence of Apple, Samsung and Windows Express in our stores.

In addition, we've enhanced the multi-channel convenience of shopping at Best Buy by offering our customers the ability to shop when and where they want, including shopping online with either in-home delivery or in-store pickup options, offering expanded Black Friday hours, opening at 6 PM Thanksgiving evening and remaining open until 10 PM on Black Friday.

Increasing the number of Black Friday door buster deal events, and hosting a number of exclusive access events for My Best Buy members.

In addition to offering customers the ability to shop when and where they want, we've also taken great steps to ensure maximum product availability for our customers through the leveraging of our ship-from-store capabilities and new online shipping locations.

Finally, our fifth promise is our ability to offer support for the life of the product, including in-store product set up, holiday help line, delivery, installation, technical advice and services provided by Geek Squad.

Altogether I am excited about the focus and even the obsession our management team has in delighting our customers and on winning.

This bodes well for the future steps in our journey to make Best Buy a company with which customers develop a deep and rich relationship.

I will now turn the call back to Sharon to cover our outlook for the fourth quarter.

Thank you.

As Hubert said, we are encouraged by the progress we have made against our Renew Blue priorities and are optimistic about the strength of our holiday-specific merchandising, marketing and customer experience initiatives.

We are also optimistic about the traffic generation and holiday electronic focus that the new big gaming launches will bring to our stores and our website, albeit at low margins.

But as we enter the fourth quarter we are also highly aware of the public statements that are being made by our competitors as it relates to their promotional plans for Black Friday and the fourth quarter.

We know that we will be facing an increasingly promotional environment.

As such, we want to give you color on our response to this competitive situation and our perspective on how these pressures could financially impact the fourth quarter.

First and foremost, we are committed to being competitive on price.

As Hubert mentioned it's table stakes in our transformation.

So if our competition is in fact more promotional in the fourth quarter, we will be, too.

And that will have a negative impact on our gross margin.

We are also committed to serving our customers when and where they want to be served.

And in light of our competitors' decisions to open early for Black Friday, we too are opening our stores early.

This requires increased promotional offers and an incremental investment in store payroll.

But, again, it's table stakes.

In addition, you will recall from last quarter's earnings release that we had already identified other P&L drivers that we expected to negatively impact our fourth-quarter operating income rate, which we quantified at a negative 40 to 70 basis point impact to last year's fourth-quarter non-GAAP operating income rate of 5.7%.

This 40 to 70 basis point impact reflects the negative impact of ongoing pricing investments, the negative impact of our $150 million to $200 million in fiscal 2014 incremental Renew Blue SG&A investments, the temporary negative impact of our mobile warranty costs, and the negative impact of the economics of our new credit card agreement, all substantially offset by the positive impact of the $505 million in annualized Renew Blue cost savings.

But now as a result of the additional holiday pressures we just discussed, we believe it's prudent to narrow this range to 60 to 70 basis points for the fourth quarter, made up of an estimated 80 to 90 basis point negative impact on gross margin, and an estimated positive 10 to 20 basis point impact on SG&A.

But this 60 to 70 basis point impact only pertains to the specific fourth-quarter P&L drivers.

And it is not intended to be interpreted as financial guidance on our overall perspective on the fourth quarter results.

The reason we say this is that over the last several quarters, above and beyond our Renew Blue cost savings, our core business performance has stabilized, and our product mix and non Renew Blue cost containment initiatives have been stronger than expected.

So, assuming this level of performance continues, we do expect to be able to offset some or all of this impact.

As it relates to these P&L drivers for fiscal 2015, the projections we laid out in last quarter's earnings release have not changed, and are reiterated as follows.

Negative 60 to 90 basis points in Q1 fiscal 2015, negative 70 to 100 basis points in Q2 fiscal 2015, and a negative 30 to 60 basis points in Q3 of fiscal 2015.

With that, I'll turn the call back over to the operator for Q&A.

Thank you.

(Operator Instructions)

Greg Melich with ISI Group.

Thanks, guys, and thanks for all the detail on the release.

I do want to get a little more into the Renew Blue strategy.

We went a lot through how the costs are coming out, and you can certainly see that in the leverage.

Can you get more specific on how the top-line improvement is coming around, particularly traffic sequentially, whether it's the store-within-a-store programs, the new TV merchandising?

You mentioned mobile hurting from a margin perspective but did that help from a top-line perspective?

Any detail on that would be great.

Thanks.

Yes, good morning, Greg, and thank you for your question.

I think you're asking for the driver of the growth in our comps in the US.

It's really a combination of things.

One is there is category growth.

We've highlighted that -- mobile, tablet, appliances.

I think you've seen very significant, I think it's 25% year-over-year growth in appliances.

So there is a good pull from these categories which is, of course, further helped by the floor space optimization initiatives, as well as the deployment of the vendor experiences.

So we are very pleased that this is producing results.

The other drivers of the total comp are, of course, online, the 15% is helpful.

And in the stores we are seeing better execution, frankly.

The customers' feedback is very positive as it relates to the Blue Shirts.

So we've seen movement, positive movements, in the close rates.

The total traffic is up.

Increasingly, I think, the traffic is going to be difficult to interpret from the standpoint that the shopping experience really changes.

People are starting their shopping experience online, which highlights the importance of our online strategy.

And the number of visits to the stores may actually go down.

But I don't think it really matters at the end.

Our overall focus is on the overall top line and comps.

And if I could follow-up on that, Hubert, if the traffic is changing as the conversion rate goes up, if you've measured it in terms of transactions, because maybe people are more likely to close but there's fewer people coming, was that positive in the quarter or was that still a challenge?

I think that we are seeing -- there are multiple drivers here.

One element where we've seen some positive trends is the average order value, in particular online, as well as in the stores.

For example, we've highlighted the ability to get Geek Squad protection at the time of in-store pickup.

We think that's a very positive element.

Again, another driver of traffic, Greg, is, as you know, we are reducing the focus on the high-velocity music, physical media products.

And that is impacting traffic.

As we move to, let's say, appliances, I think you and I would agree that the frequency by which we replace our oven, our washing machine, and so forth, is less than a music CD.

So we are seeing structural changes that can impact the traffic in the short term.

The reason why I'm highlighting that is that I don't think it's a big issue.

What matters from an economic standpoint, again, is the dollar value of the appliance.

So, how it's constructed is changing.

And as we move forward we will continue to deepen our understanding of that.

But I'm not obsessing about these traffic drivers because they are all of these changes.

And again, in total, when you include online, traffic is significantly up.

So the attraction of Best Buy vis-a-vis the customers is moving forward in the right direction.

So I hope that helps in the understanding.

Greg, I might add one thing to all the information that Hubert provided, as well.

We are also, on the online side this quarter, we launched our new My Best Buy.

And we are working actually very hard to use the website as a source of relationship building and information for our customers.

And we are going to great ends to make that happen because we believe that customers coming to the site over and over gets them used to coming to our site.

It makes it more of a destination.

So, Scott is working and the teams are working very hard to get that traffic to the site so that we can continue to interact with our customers.

So, you're going to see a big push here and continuing over the next several quarters as we make all these new changes to our website.

We want to bring customers there.

So, of course, when you bring traffic that you're not intending per se to convert, you are going to affect that conversion rate in the online site.

Great.

Thanks.

I'll give someone else a shot.

Dan Binder with Jefferies.

Hi, good morning.

My question was regarding price competition.

I'm just curious, as you have made price investments over the course of the first three quarters, if you're seeing anything in terms of competitive response, and also the level at which customers are asking for price match requests against competitors.

Thank you, Dan.

Clearly we've established our strategy for pricing.

Our strategy is to be price competitive and we are continuing to invest.

We will continue to invest in Q4 and in the first few quarters of fiscal '15 as we continue to optimize all of this.

The primary driver we are using is the actual price that we set.

The low price guarantee, which is our price matching policy, which includes online, is a nice tool for the Blue Shirts to close the sale.

From a frequency and cost standpoint it's a relatively minor driver.

But it is an effective tool to give the comforts to the customers that they're getting the right price.

Competitive response, it's hard for me to speak on behalf of our competitors.

I don't want to say this.

But I think both Sharon and I have said it -- we are in this to win, and we're in this to play to win as opposed to not lose.

So, you are seeing a Best Buy that is back, and we're in there fighting.

And there are some statements that have been made in the last several days by a number of competitors, and we are continuously monitoring the situation.

And like we did last year we are going to drive the outcome.

We will not be shy about investing in winning the holiday season.

I think the question about the reaction from the competitors, I think it would be fair for you to ask them.

I don't want to comment on them, but hopefully I'm giving you a sense of the spirit that is here at Best Buy.

Great.

Thanks.

David Strasser with Janney Capital Markets.

Thank you very much.

Can I talk -- TV, I don't know if you gave what TV specifically.

Were you able to comp positive for the quarter in the television category?

David, thank you for your question.

In TV from a dollar standpoint we were flat.

Which I think is a nice trend compared to the past.

TV remains a very important category for us.

In terms of product innovation, I think the movement towards ultra high definition 4K TV is going to be an interesting development for next year, less so probably for this year in terms of quantities and overall impact.

But I think we love the fact that there is innovation, meaningful innovation, for the customer.

And then when prices are starting to go down for these new products, I think this has the potential to continue to drive life into this category.

When you look at -- when -- Vizio came in after the holiday last year, so you're having that this year versus not having it last year.

How much has that helped you from a market share standpoint, from a comp standpoint, adding that price point into your mix?

I think the right assortment is a very important part of our strategy.

Across the various categories we have this amazing assortment.

Vizio has been a very nice addition from a competitive standpoint and from a value standpoint for our customers.

So, I think that you are highlighting something that is meaningful.

And just the last comment.

One of the things that seemed to really step up this holiday season was the one-hour guarantee from Walmart.

To me, I haven't seen anything that dramatic in a very long time around the Black Friday weekend.

And then the action came out today also, and I'm just curious if this was included in your comments this morning also, about trying to match Black Friday prices a week ahead of time.

You've made, obviously, a very strong statement today about what the promotional environment is like.

Do you think you're cautious enough even as dramatic as it has been out there?

Obviously, David, we are watching the developments on a day-by-day basis.

And I cannot comment on what I don't know because there may be new things happening in the next several weeks.

I want to highlight that our promotional plans for Black Friday and Power Week, emotionally speaking, is very strong.

The number of door-buster deals, the quantities that we have available are very meaningful.

So, I don't want to comment specifically about Walmart's announcements from this morning.

It's part of the day-to-day business.

This morning certainly Sharon and I wanted to give you, again, a flavor of our mindset.

We need to be in the game.

So that's what we're going to do.

I would highlight that the plans we've prepared, even before the Walmart announcements, were very significant.

Again, they were designed to win.

I think that is as much as we can say at this point.

Thank you.

I figured as much.

I just was figuring I just would ask because I've just been watching this in somewhat awe what they're saying.

So, anyway, thanks a lot.

Good luck with the holiday.

Brian Nagel with Oppenheimer.

Good morning.

My question, I wanted to focus on sales.

You put up the domestic comp of 1.7% -- or 2% if you didn't have some of the disruption.

It may be a difficult question to answer but if you look at the sales growth we saw here in the third quarter versus other quarters, how much do you think that improvement reflected internal initiatives as opposed to just a strengthening underlying environment for the consumer electronics space?

Your question is how much of the 2% -- or 1.7% -- is driven by what we've done versus the environment.

Yes.

Is there a way to parse it out?

I'm not sure I have a finite breakdown of this.

I can share the spirit in which we are fighting this war.

If you remember, a year or two ago, the message from this Company was all about the headwinds and to explain the results.

We never talk about the headwinds.

We said, starting in November of last year, that the overall environment was a positive one.

There's a lot of product innovation.

In fact, for this holiday season, there's probably more product innovation that we've seen in a long time and we're focused on the leverage that we can control.

Our overall market share, even though we are by far the leader in this space, is only in the mid teens.

So we don't think it's illegal, immoral or unethical to grow market share.

And so that's the focus.

We are pleased with the environment.

We know that there is uncertainty about how the consumer feels, with everything that's going on in the country and in the world.

But we don't really focus that much on that.

Our emphasis is on what we can control because, again, we are only 15% of the market.

So, what we do has more impact, we think, than the overall environment.

That's the mindset.

I wish I could give you the detailed answer.

It's hard because there are so many moving pieces but that's just the mindset.

That's helpful.

And if I could just follow-up -- and I know it's very early in this next video gaming product cycle.

We did have PlayStation 4 launch last week and then Xbox is going to be launched here shortly.

Can you just describe -- again I know it's early -- but can you describe maybe the behavior of the customers coming in to buy those machines?

Are you seeing additional purchases as they buy the machines or is it a one-off type of event?

This is a very exciting development.

And, of course, with my video games background from 10 or 15 years ago I'm personally excited about it.

I was, of course, in the stores Thursday night for PS4 launch, and I'll do the same with the Xbox One launch.

There is so much excitement on the part of these gamers.

And so we think it's a very positive development from a consumer standpoint.

Gaming is still very much alive.

The quantities Sony has reported, 1 million units shipped, which is much faster than the PS3, so that's very encouraging.

Best Buy tends to do well in hardware, even though, as Sharon has highlighted, the margins are not as excited as the volumes.

But that is very good.

We will get more inventory next week.

We have a plan to keep some of that inventory for our best customers.

We will have some of that going on.

So, very exciting developments from a top-line perspective.

And more broadly speaking, again, if you look across all of the categories, this is a holiday season where there is really life from an innovation standpoint.

So, all of these discussions about product cycles and so forth that I was hearing last year, I think there's a lot of great stuff developed by our vendor partners.

And I think consumer electronics toys, if I can put it this way, are going to be exciting for shoppers this holiday season.

And because of our strength in that space and the improved customer experience we think we are a very attractive place, where to shop.

Thank you.

David Schick with Stifel.

Good morning.

In walking your stores of late, there is a lot of things going on.

There was a Google representative talking about the Nexus products at Chromebooks, with a Google shirt.

I believe third party, however, but there to talk and explain things.

At least in the market where we were, this was someone with a finite period of time that were going to be doing this through the holidays.

How should we think about other stores within a store -- and there was a build out there -- other stores within a store, other vendors coming to you to forge these partnerships as we go into next year?

Thank you, David.

Clearly these vendor partnerships have been a major development for us this year.

We had Apple stores for a while in our stores.

And we've added Samsung and Windows in a very meaningful way this year.

Thank you for highlighting Google.

For those of you -- I hope there is very few -- who have not seen our stores recently, there is a meaningful table and a meaningful endcap -- I think it's in 750 of our stores -- with some staffing on the part of Google.

Google's hardware business is obviously expanding and there is a lot of interest in product innovation.

I know the Chromebook, Chromecast, Nexus tablet is very interesting.

The customer feedback from all of these vendor experiences, as I said, is very positive.

And, strategically, I think what we've all seen is how meaningful Best Buy is as a platform for these vendor partners because we're the only place of scale where they can showcase the fruit of their billions of dollars of technology investment.

And the ability of the customers to touch and feel these products across these ecosystems, if I can use this word, is very meaningful.

So a lot of positive developments.

Excitement on the part of the vendors.

I think your question is looking ahead what's coming.

We don't have the vision of transforming the entire store in a collection of boutiques from these vendors.

We use three criteria to decide whether we do additional stores in the stores.

Is it good for the customer?

And by that I mean does it make sense to shop a vendor experience as opposed to shop the category.

Is it good for the vendor?

And is it good for Best Buy?

You probably have in mind a number of names that could make sense.

If you have them in mind probably assume that there is discussions with all of them.

But that doesn't mean they're going to bear fruit because it needs to make sense, again, for the customer, the vendor and for ourselves.

But I think the basic idea is there, which is that, strategically, it has been very helpful from a customer standpoint, a vendor standpoint and of course for Best Buy.

But more to come on that.

Thank you.

And just a quick follow-up with the cash balance.

Any comment on the potential for share repurchase?

I would just reiterate what we said.

We're going to get through this holiday season.

We believe that going into this season with the strength of the balance sheet that we currently have is a huge competitive advantage for us and certainly something that we feel our vendors deserve.

So when we get past this year we will start talking about what our plans are going into next year.

But at this point our perspective on continuing to keep a much stronger cash balance on the balance sheet versus the past continues intact.

Thank you.

Scot Ciccarelli with RBC Capital Markets.

Hi, guys, Scot Ciccarelli.

I actually had a follow-up regarding the vendor stores.

Can you guys provide any details or color around the economics?

How should we think about the vendor stores in terms of how they are performing or expected to perform?

And then just a housekeeping item.

What was the impact of the credit card on gross margin in the quarter, Sharon?

Let me start with the vendor stores and then Sharon will take the credit card.

Good morning, Scot.

Each vendor store, of course, is going to be different.

But, generally speaking, Best Buy's main activity is not philanthropy so we're doing this because it makes sense from a financial standpoint.

Generally speaking, there is more help provided from the vendor as related to the cost of operating the stores within the stores in terms of -- it could be the labor, the fixtures, the space, all of these things.

There is a financial contribution.

We take contributions.

There is improved margins.

It can be improved margins on the products.

Then, of course, importantly, as well as sometimes typically marketing support.

Because these vendors can see their stores within Best Buy as their store -- which it is -- and therefore directing traffic to Best Buy makes sense.

I think you've seen some examples of that during the year.

And of course for us, as we think about the optimization of our economics in the floor space, we move the allocation of the floor space to growing profitable categories.

And so mechanically, when you replace, let's say, physical music, or reducing physical music and you have more phones and tablets, as examples, mechanically from a mix standpoint you also have help.

So these are some of the drivers as we see that.

The final one that I would add is that because we do this with the top vendors, of course traffic, this is attractive for the customers.

And that's the feedback we are getting.

And, again, what's unique about Best Buy that makes it unique both for the customers and the vendor is the ability to touch and experience all of these ecosystems.

So, in the same store you're going to be able to touch and feel an Apple product, a Samsung product, a Windows product.

So that is also very meaningful and is helpful to our journey.

And then on the question regarding the quantification of the credit cards, we haven't quantified it.

Obviously we have an agreement with Citibank and we can't be disclosing the terms.

But I would say that, just by the fact that we've called it out, it is an offset and it's an important number.

So we have never quantified anything less than 10 or 20 basis points so you can take it from there and work with that.

Got it.

Thanks a lot, guys.

Gary Balter with Credit Suisse.

Thank you.

Could you talk, Hubert and Sharon -- you talked a lot about what's working -- could you talk about some areas possibly where you feel that you've been a little slower, things are running a little bit behind, and what you're doing to deal with that, if you go all the way back to Renew Blue?

Your question is on what is not working.

The way I would answer this is that if you look at our glass, and can look at the half-full glass, or part of the glass, believe me, there is another part that's half empty.

And when I say half, that's because that's how the phrase comes in English -- I think.

So then that leaves me to the opportunities that we still have lying ahead.

I think there is more efficiencies to be driven out.

We're not stopping where we are by any stretch of the imagination.

And then increasingly we turn to focus on the growth.

I think our economic engine really become interesting if we combine the power of proficiency with the power of more top line to our fixed-cost base.

And to get the growth there is a number of governing thoughts here.

It's all about the customer experience.

Our key strategy in the context of price competitiveness is to drive the customer experience.

You've heard us talk about the customer promises.

Continuing to enhance and improve our delivery of our customer promises is going to be essential to our journey, around the assortment and the selection, the advice, the convenience, the service, the personalization.

I think that in terms of the growth engine, looking at the category strategies, how do we grow in a meaningful way in the key categories in which we are operating, and maybe some that are more longer-term growth potential, as this is a very dynamic space.

I think from a channel perspective, online -- are we happy with where we are with online?

We're happy with the progress -- back to your point -- but, candidly, there's a lot of obsession on how to further drive this -- drive the customer experience on the site in a very meaningful way.

I think how we address certain customer segments.

Think about millennials, think about buying occasions.

As an example, we don't have a registry as a retailer.

We are probably the only one who does not.

And so on and so forth.

I think that we are very pleased and proud of the progress we've made, but there is so much more to come.

Again, from a cost standpoint, I could have highlighted returns, replacements and damages.

We've talked about it; we've barely begun to take steps to address it.

It's all in our future; the opportunity is all in our future.

So, cost and revenue.

Everything I've said here is completely consistent with what we've been saying since November of last year, exactly a year ago.

And we have to continue to drive this.

So hopefully this answers your question.

Yes.

Just a follow-up and then I'll get off.

I was going to follow up on the customer return and damages area that you've highlighted in the past.

Because, visiting some of your stores we've seen in the corner, where I think you said music in some stores is clearance, et cetera, I think it was called -- is that part of the solution to the customer returns and damages?

Are you planning to roll that out?

Actually in all of our stores we have created a more significant presence to showcase the returned inventory.

But the longer-term opportunity for us is today.

The majority of our online inventory is not visible in the online channel.

So the returns, replacements and damages, open box, et cetera, is not visible.

And as a result of that, there are steps that have to be taken and systems changes that have to be made in order to make that possible.

Because today, if you take one SKU -- for instance, let's take, you've got one SKU and it's a computer, it's some sort of computer.

Each one that gets returned that's open box may have a different dynamic.

One of them may not have the original cord, so we've had to replace a cord because the customer returned it in a different way.

One might have a very small imperfection somewhere on the case, and you have to be able to describe that.

Now, we do that today.

We have a site that you may or may not be highly familiar with called CowBoom.

And, as we go forward, the capability -- that's a small site, it was never really intended to handle the kind of volume that Best Buy creates from a returns point of view.

But that type of capability is what we are building and looking for.

And when we can open up the open box and return inventory to that channel, we believe that is when we really reach scale.

And that's why in the prepared remarks that Hubert put out today we went into further discussion on that because it's something we're very encouraged by.

Great, thank you very much.

Anthony Chukumba with BB&T Capital Markets.

Good morning.

Thanks for taking the question.

I just had a question on the appliance business.

You had such a strong comp there, and comps have sequentially accelerated now for several quarters in a row.

And I was just wondering if you could give us a little color on what's driving that.

Is it the housing market?

Is it adding small appliances?

Is it better execution?

Or some sort of combination of all three?

Just wanted to see if you could give a little color there.

Thanks.

Sure.

Good morning, Anthony.

Thank you for your questions.

The key drivers of our strong performance in Q3, of course the housing market is helpful.

But back to my comment on focusing on our drivers.

There's four main drivers of our performance in appliances in Q3.

We believe our promotions have been quite effective.

We've added also appliance sales specialists in a number of our stores.

This is a specialized area, so having more specialists is helpful.

We've also expanded the small appliances category, which is a very exciting category where our market share is below 2%.

So we can probably all agree that this is a growth opportunity.

And then there is a positive impact of the Pacific Kitchen and Home stores-within-a-store rollout and ramp up.

So these are the four drivers of performance with appliances, Anthony.

Okay, that's very helpful.

Thank you.

Thank you.

And I'll turn the call back to management for closing comments.

Thank you so much.

And as we end the call, of course I'd like to take a moment to thank our leadership team, our associates, and our vendor partners, and, of course, their families for what they've done and what they will be doing to serve our customers and win during the holiday season.

I also want to thank our shareholders for their ongoing support.

And I want to wish all of them and all of you a very happy and joyful holiday season which would not be complete without a trip that or several trips to BestBuy.com or our stores.

So I'll see you there.

Thank you.

Ladies and gentlemen, this concludes our conference.

Thank you for your participation.

You may now disconnect.