百思買 (BBY) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

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 call is being recorded for playback and will be available by 12 PM Eastern time today.

(Operator Instructions).

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

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 in 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 but should not be considered superior to, 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 GAAP 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 risk 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.

All information regarding the Company's results pertain to continuing operations and do not include the impact of the European business which was sold on June 26, 2013, or mindSHIFT Technologies which was sold on February 1, 2014.

In today's earnings release and conference call as we did in our holiday release, we refer to consumer electronics or CE industry trends and our market share.

Share gain is determined by reference to the information from The NPD Group.

The CE industry as defined by The NPD Group includes TV, desktops and notebooks computers, tablets not including Kindle, digital imaging and other categories but does not include mobile phones, gaming, movies, music, appliances or services.

I will now turn the call over to Hubert.

Thank you, Bill.

Good morning, everyone, and thank you for joining us.

In today's call we are going to start with a recap of our fourth-quarter results and an overview of the progress we have made against our fiscal 2014 Renew Blue priorities.

Then we will provide an update on our Renew Blue strategy and our outlook for fiscal 2015.

As we discussed in our holiday sales call, the fourth quarter was an environment of declining retail traffic, intense promotion, fewer holiday shopping days and severe weather.

It was also an environment of weaker than expected industry sales in the consumer electronics category and an environment of evolving consumer behavior as the customers' affinity for online shopping continued to escalate.

So what did we do?

We focused on the things we can control without losing sight of what was really important, our customers and the promises that we made to them.

As such, we continued to invest in our price competitiveness albeit at a cost and intensified our focus on improving our personal efficiencies driving down our costs and lowering our inventories.

The net financial result of these efforts was a comparable store sales decline of 1.2% and an operating margin decline of 120 basis points.

While of course we cannot be satisfied with a fourth-quarter operating margin decline of 120 basis points, the decline included the expected approximate 100 basis points negative impact associated with our mobile warranty and new credit card agreement economics that we called out in our Q3 call.

Thus, we were able to materially offset the price investments we have been making with substantial cost savings and other operational improvements.

Within these results though were mixed outcomes I would like to highlight.

First, we gained market share and as I said it came at a cost.

When we entered the quarter we knew that pricing would be table stakes and we are planning to invest 40 basis points in structural and promotional pricing.

To defend our market share and stimulate traffic, we increased our price investment by an estimated 85 basis points to 125 basis points.

Make no mistake though, while we know we have opportunity to improve the effectiveness of our marketing and promotional activity, this price investment was strategically important.

Why?

Because it is imperative in our transformation that we retain and attract new customers to our brand and to do so we have to live up to our customer promise to be price competitive and we were and the customer noticed.

In the environment we were operating in where industry sales and our own store traffic were down, our price investment and improved customer experience allowed us to mitigate our adjusted domestic comparable store sales decline to 0.6% and improved our overall Net Promoter Score by 300 basis points.

It also allowed us to aggressively drive our online business which grew more than 25% in the quarter compared to 11% last year.

Additionally during the quarter, the shift to the online channel crystallized for us what we have believed all year, that the pace at which consumers would migrate to the online channel would accelerate in the fourth quarter and we were prepared.

Operationally virtually every metric that we use to measure success in the online channel was up in the fourth quarter and our domestic online sales reached 12.7% of total domestic sales versus 10% last year.

But this too came at a price as profitability in the online channel today is lower than retail.

Why?

Because today the online channel has a higher mix of lower margin hardware sales and attach rates on services and access rates are lower.

So while we are working on our online capabilities to increase attach rates and drive a more profitable sales mix, we expect the improvement to come gradually and incrementally over time.

Now to close on fiscal 2014 as a whole, I would like to take a moment and take stock on the progress we have made on our Renew Blue priorities.

First, after only one year we have exceeded our Renew Blue cost reduction target of $725 million by delivering Renew Blue cost reductions totaling $765 million.

Second, we have made progress in stabilizing our top and bottom lines.

Domestic comparable store sales for the year were virtually flat.

Domestic operating margin however was down 70 basis points as compared to 130 basis points in the previous year.

Again, excluding the impact of the increased mobile warranty expense, our cost savings and other operational improvements have materially offset our pricing and other Renew Blue investments.

Third and very important for our future, we have enhanced how we serve our customers and we have been building key foundational capabilities.

Most notably, we have increased domestic online sales for the year by 20%; we have significantly increased our price competitiveness.

We have rolled out ship-from-store to more than 1400 locations.

We have opened 1400 Samsung and 600 Windows stores-within-a-store and completed the first phase of our floor space optimization.

We have increased our Net Promoter Score by more than 300 basis points.

We have relaunched our loyalty and credit card program.

We have advanced the transformation of our e-commerce platform and customer database and we have significantly strengthened our balance sheet through a renewed focus on our core business and a substantially more disciplined capital allocation process.

Before I talk about the next phase of Renew Blue, I will now turn the call over to Sharon for additional color on our fourth-quarter financial results.

Thank you and good morning, everyone.

Before I talk about our fourth-quarter results versus last year, I would like to talk about them versus the expectations we shared with you in our holiday sales press release.

In the holiday sales press release, we said that we expected our fourth-quarter operating margin to decline 175 to 180 basis points due to the intense pricing pressure in the holiday season.

What we reported this morning was an operating margin decline of 120 basis points.

This 55 to 60 basis point favorability all in the month of January of course, was primarily driven by an overall less promotional retail environment, stronger than expected participation from our vendors in the support of our holiday price investments and tighter expense management.

I will now talk about the fourth quarter versus last year.

Enterprise revenue declined 3% to $14.5 billion.

Enterprise non-GAAP diluted EPS declined to $1.24 versus $1.47 last year.

This decline was primarily driven by a significant investment in price competitiveness, the negative impact associated with our mobile warranty and new credit card economics and a lower gross margin in mobile due to the lower attachment rates on mobile service plans.

These declines however were substantially offset by a $0.15 per diluted share favorable income tax resolution in fiscal 2014 that did not occur in fiscal 2013; the favorable impact of our Renew Blue cost reduction initiatives; tighter expense management throughout the Company; and lower incentive compensation.

Domestic revenue of $12.3 billion declined 1.8% versus last year.

This decline was primarily driven by a comparable store sales decline of 1.2% but excluding a 30 basis point impact from the rationalization of non-core businesses and an additional 30 basis point impact from a services related profit-sharing payment that occurred in January 2013 but did not occur in January fiscal 2014, domestic comparable store sales would have declined approximately 0.6%.

From a merchandising perspective, growth in computing, appliances and gaming was more than offset by declines in other categories including digital imaging, movies and home theater.

The domestic online channels delivered strong growth during the quarter as comparable store sales increased 25.8% to $1.6 billion.

This increase was driven by a higher average order value, improved inventory availability supported by ship-from-store and the expansion of our online distribution network, increased traffic and higher conversion on both our core and mobile sites.

As a percentage of total domestic revenue, online sales increased 270 basis points to 12.7% from 10% last year.

As we expect this online mix shift to continue, it is important to recall from Hubert's earlier comment, that the profitability of the online channel today is lower than our retail store.

Over time though, through a series of initiatives to improve online attach rates and strategic pricing, we do expect online profitability to gradually and incrementally improve but in the short term, it will remain under pressure due to the investments necessary to achieve these outcomes as well as to significantly improve the customer experience.

In international, revenue declined 9.6% to $2.2 billion.

This decrease was primarily driven by the negative impact of foreign exchange fluctuations, the loss of revenue from large-format store closures in Canada and China and a comparable store sales decline of 1.7% driven by declining industry trends in Canada and Mexico.

Turning now to gross profit, the enterprise gross profit rate for the fourth quarter was 20.2% versus 22.3% last year, a decline of 210 basis points.

The domestic gross profit rate declined 230 basis points to 20% versus 22.3% last year.

Excluding the 30 basis point impact from the periodic profit-sharing payment that we just discussed, the domestic gross profit rate declined 200 basis points.

This decline was primarily driven by the 125 basis point incremental year-over-year investment in structural and promotional pricing, a 40 basis point negative impact associated with the new credit card agreement, a 35 basis point negative impact from the increased mobile warranty cost, and a lower gross margin in mobile due to the lower attachment rates on mobile service plans.

These impacts were substantially offset however by the realization of the Renew Blue cost reductions and other supply chain cost containment initiatives.

The international gross profit rate was 21.3% versus 22.3% last year.

This 100 basis point decline was primarily driven by increased promotional activity and a mix shift into lower margin products in Canada.

Now turning to SG&A, enterprise-level non-GAAP SG&A was $2.3 billion or 15.7% of revenue versus 16.6% last year, a decline of over $200 million or 90 basis points.

Non-GAAP domestic SG&A expenses declined approximately $150 million or 90 basis points to $1.9 billion or 15.5% of revenue versus 16.4% of revenue last year.

This 90 basis point rate decline was primarily driven by the realization of Renew Blue cost reduction initiatives, tighter expense management throughout the Company, lower legal-related expenses and lower incentive compensation.

These impacts were partially offset by Renew Blue investments in online growth and advertising.

International non-GAAP SG&A expenses were $363 million or 16.7% of revenue versus 17.7% of revenue last year, a decline of over $62 million or 100 basis points.

This decline was primarily driven by Renew Blue cost reductions and tighter expense management in Canada.

Also during the fourth quarter, the Company recorded pretax restructuring charges totaling $115 million primarily related to severance charges associated with the optimization of the sales and store operating models in the US and Canada.

The majority of this $115 million is expected to be paid in cash this year.

The Company also recorded $65 million of non-restructuring asset impairment.

These non-cash impairments were primarily related to our US stores, both big box and mobile.

In light of these impairments and our continued focus on the evolving retail environment, we will continue to focus on optimizing the real estate portfolio over time.

These restructuring and impairment charges are excluded from our non-GAAP results.

I will now turn the call back over to Hubert to talk about our plans for 2015 and beyond.

Thank you, Sharon.

I would now like to discuss our plans going forward.

Our strategy is clear, it is to be the authority and destination for technology products and services.

As our transformation is a multiyear journey and we are operating in an ever-changing retail environment, we thought it was important today to share with you our Renew Blue roadmap for the next 24 months.

During this time, we will continue to address three business imperatives.

Number one, improving our operational performance.

Number two, building foundational capabilities necessary to unlock future growth strategies, and number three, leveraging our unique assets to create significant differentiation that is meaningful for our customers and our vendors.

Our roadmap for achieving these business imperatives is built around the following areas merchandising, marketing, online, stores, supply chain, Geek Squad services, cost structure and employee engagement.

Let me cover each of these.

Our first area is merchandising.

Our goal is to create a compelling assortment online and in the stores with a superior end-to-end customer experience that yields enhanced financial returns.

Our priorities in merchandising over the next 24 months are to develop compelling and differentiated strategies for key categories that make promoters out of customers and that leverage Best Buy's competitive assets; to strengthen our vendor partnerships including launching new vendor shopping experiences; it is to implement enhanced online shopping experience for key categories; it is to continue to optimize space and shopability in our stores as well as improving visual merchandising; it is to expand our private label and branded exclusive product assortments; it is to expand specific kitchen and home and Magnolia design centers stores-within-a-store which are proving to provide a superior customer experience; and then of course, optimizing returns, replacements and damages through operational improvements like ship-from-store.

And of course we will continue to refine our pricing and promotional strategy.

That is for merchandising.

Next is marketing.

Our goal here is to unlock growth opportunities by creating and effectively communicating new compelling value propositions for customers that go beyond price.

Our priorities in marketing over the next 24 months include developing more targeted, more relevant, more personalized digital customer communication for key touch points of the customer experience and shopping journey in support of our category strategies.

Next is to implement programs for key buying occasions like gifting, life events and registry and new movers and it is to create greater engagement with customers through our loyalty program and our credit card offering.

Let me highlight here the opportunity we have related to developing a more relevant and personalized marketing approach.

As you know, Best Buy is one of the biggest house (inaudible) in retail.

We have been working on a big data project called Athena that will enable a more targeted approach for customer marketing based for example on past purchases, browse history, location and demographics.

With Athena in place over time, we will be able to shift more of our marketing efforts to targeted email messages and offers.

The next area is online.

Our goal here is to continue to capture online share and serve the customers based on how, where and when they want to be served.

Our online priorities over the next 24 months are to further improve the online shopping experience by enhancing search tools, recommendations and product and price information to make it easier for customers to find and choose products.

It is to encourage customers to complete their technology solutions by improving the presentation and messaging of accessories and services in enabling customers to build their own bundle.

It is to leverage our expanded supply-chain capabilities to provide superior fulfillment solutions and it is to continue to reengineer our e-commerce technology platform so that new features and functions can be developed quickly and optimized across platforms.

The fourth area is our retail stores.

Our ability to transform Best Buy is of course highly dependent on our ability to transform our in-store experience.

To that end we are evolving our field organization based on what we see as the mission of retail which is number one, the maniacal execution of category and functional strategies.

Number two, the development and implementation of effective market level strategies that take into account local specificities.

And number three, the ability to lift our performance in terms of employee engagement, customer satisfaction, sales and profitability.

To do this we are making significant changes to the field and store structure.

We are organizing retail around the stores, we are making the stores fully accountable for their performance under the leadership of the store general managers.

We are designing the structure above the stores to support the general managers and their teams by providing those strategies that are readily executable and the tools and support necessary to execute them.

And we are organizing around key markets with a goal of having a winning strategy for each of these markets.

And finally, we are ensuring that any investment we make is customer facing and adds value while minimizing indirect expense.

What we expect from these changes is a high level of performance.

In addition, our customers will see complete changes in the stores stemming from our collaboration with key vendors as we started last year and the improvements in the visual merchandising we mentioned earlier as well as from better tools made available to our sales consultants and customers.

The fifth area is supply chain.

Our supply chain is a competitive advantage that is driven by a powerful network of strategically located distribution centers and now with ship-from-store, our national retail footprint with shipping capabilities.

Our goal over the next 24 months is to leverage this network and improve our customer experience by providing number one, increased inventory availability; number two, improved speed to customer; and number three, improved home delivery and installation capabilities for our large cube assortments.

To achieve this we will continue to invest in systems and infrastructure to drive significantly enhanced delivery options.

One example which has proven to be transformational has been ship-from-store.

In the fourth quarter even in its early stages and with limited deployment, ship-from-store enabled significant online growth, improved online conversion and increased store comps.

Now that we have ship-from-store across our full store chain, in the first half of this year we will be able to use our over 1400 stores and eight well-located distribution centers to improve speed to customer enabling faster delivery of online purchases at lower cost to Best Buy.

In fact we have recently reduced delivery windows promise to customers by two full days.

And we will also begin adding returns and open box items that are sitting in our stores to our online inventory.

Along with the clear customer experience benefit, this capability will accelerate our online growth and provide us a major opportunity to further reduce the over $400 million we lose each year from returned products.

Our next priority focus is on Geek Squad services.

The Geek Squad is one of Best Buy's biggest competitive advantages and yet at the same time, it is an underutilized asset.

Our goal for the Geek Squad is to deliver an amazing and lasting customer experience while providing a key revenue and profit growth engine for the Company.

Our goals for the Geek Squad over the next 24 months are the following.

Number one, to continue to reduce our legacy cost structure to help fund our price competitiveness.

Number two, it is to improve our service delivery and the service experience we provide to our customers.

Number three, it is to refine existing service offerings like our extended warranty services.

Number four, it is to improve the merchandising of our services.

Number five, it is to build new offerings that meet the needs of customers in the context of today's technology environment.

The next area is our cost structure.

Our goal here is to more quickly and deeply reduce our costs.

We announced this morning that we have eliminated a total of $765 million in annualized costs out of the original $725 million North American opportunity.

We are now increasing our target from $725 million to $1 billion and these additional cost reductions will be coming primarily from returns, replacements and damages, logistics and supply chain and procurement.

Of course, we will continue to rationalize our organization and as we have done in the past, we will report on these savings when they have been executed.

One key opportunity worth highlighting is returns, replacement and damages which are approximately 10% of revenue and are costing the Company over $400 million a year in P&L losses.

We feel confident that we can meaningfully reduce these losses.

Actions we are taking include making this inventory more visible and easily purchased by customers by leveraging store clearance areas and ship-from-store.

Also improving the shopping experience for buying online clearance items to better site design, assortment and clearance pricing and by expanding clearance pricing to more core categories and to open box products.

Finally, let me talk about a key foundational area focus for us which is employee engagement.

Across the Company we must have a passionate commitment to serving our customers in such an extraordinary manner that they become promoters of Best Buy.

Key to achieving this goal is the talent and engagement of our people.

In line with this, we will be pursuing the following key initiatives over the next 24 months.

Number one, successfully implementing our new field and store operating model.

Number two, strengthening our talent in the critical areas of e-commerce and targeted personalized marketing.

Number three, enhancing our performance management process by streamlining the number of metrics and aligning team objectives across the Company.

And number four, redefining key business processes to better support our multichannel customer-focused strategy.

Now let me say one word about international before I conclude.

In our international business, we will continue to focus on improving our performance.

Largely as a part of our Renew Blue initiatives, we reduced international SG&A by 12% in fiscal 2014.

In the first quarter of this year, we have taken significant further actions to reduce Canada's cost structure.

So in summary, while our transformation is off to an encouraging start it is still in its early stages.

During fiscal 2014, we began the strong foundational work that will allow us to begin improving our performance and quite frankly, we continue to be very excited by our increased operational improvement opportunities and of course all of these initiatives we discussed today are in the pursuit of our long-term non-GAAP target of 5% to 6% operating margin and 13% to 15% return on invested capital.

Let me now turn the call back over to Sharon for more comments about our financial outlook.

Thank you, Hubert.

In fiscal 2015 as Hubert shared with you, we are focused on three imperatives to drive our Renew Blue transformation, improving our operational performance including more quickly and more deeply reducing our costs; building foundational capabilities necessary to unlock future growth strategies which will require incremental investment; and leveraging our unique assets like our customer database to create significant differentiation that is meaningful for our customers and our vendors.

With each of these imperatives that Hubert outlined comes year-over-year financial change, both positive and negative and we know that modeling such changes absent additional information in a transformation like ours is extremely difficult.

Therefore as we've done in the past several quarters, we are providing you today with our quarterly estimates of how these discrete financial impacts will affect our quarterly operating income rate for 2015.

These financial impacts continue to include the following business drivers, the negative impact of ongoing pricing investments, the negative impact of our incremental Renew Blue SG&A investments, the temporary negative impact of our mobile warranty costs, the negative impact of the economics of our new credit card agreement, and the offsetting positive impact of the realization of Renew Blue cost savings which now total $765 million on an annualized basis.

In our Q3 fiscal 2014 earnings release, we quantified the net year-over-year impact of these drivers to the operating income rate by quarter as follows.

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

Today due to a higher than expected negative impact from the economics of the new credit card agreement and the incremental year-over-year pricing investment, we are now expecting the net impact of these drivers to be a negative 70 to negative 90 basis points in Q1 fiscal 2015.

But for Q2 and Q3 fiscal 2015, we have good news.

Because due to the timing of the benefits associated with the greater Renew Blue cost savings that we discussed this morning we will be able to significantly offset the impact of the negative P&L drivers that we provided in Q3 for those quarters.

We will also have discrete year-over-year impacts related to income tax in fiscal 2015.

In Q1 fiscal 2015, we expect to reorganize certain foreign legal entities to simplify our overall structure.

This reorganization will accelerate a non-cash tax benefit of approximately $0.87 to $1.01 per diluted share.

Due to its materiality, this benefit will be treated as a non-GAAP adjustment.

In prior years this benefit has been historically recognized though on a periodic basis so as a result of this acceleration, the Company will have a higher quarterly income tax expense and income tax rate going forward on both a GAAP and a non-GAAP basis.

For tax purposes this benefit will continue to be amortized.

In addition, there are other discrete year-over-year income tax related items that we also expect will have a negative impact on the fiscal 2015 income tax expense and the fiscal 2015 income tax rate.

We estimate the combine diluted EPS impact of these discrete income tax related items on both a GAAP and a non-GAAP basis to be as follows -- negative $0.03 to negative $0.04 in Q1 fiscal 2015; flat to positive $0.01 in Q2 fiscal 2015; flat to negative $0.01 in Q3 fiscal 2015; and negative $0.09 to negative $0.10 in Q4 fiscal 2015.

From a revenue perspective in light of overall economic concerns, we are assuming that the industry declines in the consumer electronics category that we saw in the fourth quarter will continue.

As a result it is reasonable to expect that total Company revenue and comparable store sales will remain slightly negative similar to Q4 fiscal 2014 in the first half of the year.

But it is important to note that while it appears that our comparable store sales actually declined in January in fact, they were actually slightly better than the holiday but due to the 30 basis point profit-sharing payment that occurred in fiscal 2013 that did not occur in fiscal 2014, it appears that the comp was down but in fact it was in line.

Thank you.

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

(Operator Instructions).

Michael Lasser, UBS.

Good morning.

Thanks for taking my question.

I was hoping to get a little more clarity on what is driving your expectation for the industry to be down in the first half of the year and then how that translates to your comp performance?

You have done a good job of taking shares so why wouldn't we necessarily believe that share gains could offset a difficult environment?

Thanks.

Good morning, Michael.

Thanks for your question.

As we go through our expectations, we've seen the industry trend in Q4.

We also see -- and many retailers have reported and commenting on this, an environment that is -- where there is economic uncertainty, there is retail challenges and of course in consumer electronics, a lot of the market is dependent on new product introductions.

Until you know what the products are going to be, it is hard to predict.

So we find that it is appropriate for us to be planning in a relatively prudent fashion if you will that the market will not turn.

Until we see evidence that it turns we should assume it will not turn and focus on as we have done in Q4 on what we can control.

So therefore, the comment that Sharon made at the end of her observations that we are not planning positive comps during the first half of the year -- now we won't complain if the comps turn positive -- but in our planning and therefore, you highlight everything we have said about more deeply and more quickly reducing the cost, improving our operational performance, driving the efficiencies, building the foundations for our future and so forth.

So we are focused on what we can control and approaching the year in a prudent fashion, Michael.

It is more planning assumption than true forecast if you will.

That is helpful.

If I could add just one quick follow-up question, what is the spread between the profitability of the online business and the store based business now if you could give some quantification of it and how long do you think it will take to close that gap?

Thank you very much.

Let me have Sharon respond to it.

Yes.

Michael, we are not going to quantify that.

We think it is highly competitive I think you would agree as we compete with some of the giants.

But what I would say is that what we expect is gradual and incremental improvement.

And as you can see on the cost side once we get the Athena project up and running, productivity of email and other aspects of online, see changes in performance.

So I won't reiterate all of the initiatives we had online but when you look at those and you look at how they will benefit conversion.

The other area that is significant for us in the online channel is attach rates and right now we just launched the ability to attach services.

That is a new capability that we brought on in Q4 but there is so much that needs to be done there because you know that in our business, hardware comes at very low margins and to improve the margin it is about the baskets.

So we have to be able online to compel the customer to fill out that hardware purchase with different -- with services, accessories, etc.

So those are the big opportunities for us online.

But as you look at our investments, this is going to be gradual and incremental and quite frankly there is only one direction that we would expect it to be going.

It is a multiyear journey for sure.

There is a distance between these two numbers today and that is why there is so much opportunity.

Thanks for all the great color.

David Magee, SunTrust.

Good morning.

I had a question about the vendor shops in 2013 and during the holiday.

Just net net, how happy are you with the performance of those shops and could we expect to see additional shops in 2014?

Thank you.

Thank you, David, for your question.

The way we evaluate the shops in the shops is what the customers think, what the vendors think and what we see.

The customers have been very happy with the shopping experience, it is really transformational, very helpful.

I think the vendors -- I don't want to speak for them, maybe you can ask them directly -- but let's say I think they are quite happy.

And for us the way we measure the aggregate performance efficiencies in the overall performance of the Company, it is definitely having a positive contribution.

So while we are not making specific announcements today in our good tradition of talking about things once they are in place, you can expect more and better of the same in this fiscal year.

Great.

Thank you.

Aram Rubinson, Wolfe Research.

Thanks.

Good morning.

Your online business was up 25%, your retail business was down 5%.

I think some of the historical definitions of retail looking at things on a per square foot or per store basis are getting a little bit archaic.

Can you talk to us a little bit about the behavior of your customer and how your revenue per active customer is looking and if your online initiatives are making new customers or just kind of preventing existing ones from defecting?

Thank you for your question.

You're absolutely right that thinking about the two channels independently makes no sense any more even though technically you can track when the transaction is completed.

What we see is that the front door of our shopping experience is online.

Customers start their shopping experience online and that is why strategic investments in the online shopping experience, both the traffic and then the experience on the site is fundamental.

It is fundamental to our online business and to our store business.

So throughout the Company, it is online first.

Our merchants are now thinking about the overall strategy.

They have spent so much time on that part and improving the shopping experience but of course there is no Blue Shirt on the site so you have to expand the shopability on the site.

Now whether or not the transaction gets completed on the site for us is a little bit irrelevant.

This is up to the customer.

We don't have a bias even though the economics in the short-term are different, we don't have a bias.

We are so incredibly customer focused and so we drive this based on what the customer wants to do.

I don't know, Sharon, whether there is anything you want to add to this principle?

No.

I think also that when you look at the competitive advantage that we have realistically we have a store within 15 minutes of the US population.

So when you think about that and you think about the online channel being the window into our business, the one thing that our online competitors cannot do is give it to them now at this moment.

There are some abilities out there that are being developed but if I want control of my purchase, we have a moat that makes it very easy for the customer to be served where and when they want to be served.

The interesting fact about that, which Hubert alluded to, is that today a very high percentage of our online sales actually are customers that pick the inventory up in our stores.

And we love that because that gives us the opportunity to interact with the customers, that gives us the opportunity to continue to build that personal relationship with the customer and going forward we see that as a tremendous competitive advantage as we continue to get better and better at it and we are making some very significant investments in that area so that the customer has a completely seamless experience as they go through the entire process.

I appreciate that.

I am also curious if you guys have a way of measuring whether or not you are attracting new customers with these initiatives or whether we are preventing customers from defecting the channel?

I knew I was not completely answering your question.

Thank you for reiterating.

It is both.

A significant portion of our growth is coming from new customers and one of our key opportunities by the way as a Company is to expand our presence and become the preferred brand for the millennial population.

We do extremely well with the boomers.

I think we have opportunities with the millennials and our online push is going to be very helpful from that standpoint.

Of course online is a way to expand the relationship with existing customers so it is really both and we will continue to push in this area.

But to highlight some of the opportunities we have, attract new customers, expand the relationship with existing customers, and expand our share of wallet as we look at the various buying opportunities they have.

We saw that in the fourth quarter.

In Hubert's remarks, he talked about the fact that we relaunched My Best Buy and the credit card.

We saw a significant number of new members join My Best Buy.

In addition to that we saw a higher penetration of customers using our financing and our credit card.

So again engaging that customer and putting our arms around them so that long-term when they look to where they want to buy their consumer electronics, they will choose Best Buy.

In fact I would like to highlight one thing.

One of the things that is very gratifying both for the quarter and for the year is to see how customers are responding because we are gaining market share so that is clear.

While the topline comps are slightly down of course, it is also the effect of deflation.

From a transaction standpoint, customers are voting with their feet both on online and in aggregate and giving us more of their business.

So the combination of enhanced price competitiveness and improving -- improved customer experience resulting in these gains shows the strength of the Best Buy franchise and of the foundations or platform we have for growth looking ahead.

That is very, very important.

Thanks so much.

Mike Baker, Deutsche Bank.

Can you discuss the promotional activity currently, what has changed since the holidays?

It sounds to me -- correct me if I'm wrong -- that the holidays just got extremely brutal and promotional and maybe things are more normal now.

And so how do we therefore then think about gross margin trends in the first half of 2015 and all of 2015 relative to that decline that you saw in the fourth quarter?

Thanks.

Michael, in my prepared remarks I mentioned that in January that we saw a less promotional environment.

Once we exited the holiday, while it is still more promotional than a year ago from a cadence through the quarter point of view, we clearly saw the promotional environment be mitigated.

As we look forward to 2015, obviously in the forecast or the estimates that I gave you, one of those investments is pricing and on a year-over-year basis as you know from Q1 to Q2 to Q3 to Q4, we had two pieces of our pricing.

One is structural and then one is the competitive side of it in price matching, etc.

So as we progressed through 2015 in Q1 as an example, all of the investments we made in Q2, Q3 and Q4 were not in Q1 last year.

So in Q1 we are seeing the biggest impact and then it starts to mitigate in Q2 and then in Q3 it mitigates again.

And then of course, our perspective as Hubert said, is we believe that even in an equal environment of promotional cadence next holiday, we believe that based on the tools and the marketing and the capabilities that we are building this year that our marketing effectiveness is going to be substantially better and that when we go into the fourth quarter even in that kind of an environment, we would see a much better margin outcome.

So that is how we are thinking about it for 2015.

Thanks.

Very helpful.

I will stick to the just one question and turn it over to someone else.

Gary Balter, Credit Suisse.

Thank you.

Here is the question.

First of all, I think you are doing a great job in the direction you are taking the Company and look forward to the rest of the year and future years.

But my question is you were kind of set going into Christmas this past year and then -- .

Gary, first I what to thank you for your kind comments but also say that you are cutting out a little bit.

I want to make sure we do a good job of understanding your question.

The question is you went into Christmas kind of prepared and then Walmart and Amazon, and Target and everybody else went crazy.

As we go into this Christmas, as we go into next Christmas essentially, what do you envision would have changed?

Will you have more vendor support?

Will there be better control over UPC or how do you envision Christmas happening because it seems like every year we hit that point when people go wacko on pricing.

Thank you.

I think, Gary, a key thing that we are working on is we continue to improve capabilities of the foundational elements that I was talking about.

Let me highlight a few.

One is our marketing and promotional effectiveness.

The ability for us to communicate to our customers in a relevant and more personalized fashion, we think as we develop it gradually is going to be helpful compared to blast emails only talking about price.

We think that is the first thing.

The second thing is our continued improvements of the shopping experience.

Both I think Sharon and I highlighted how on the sites we are going to continue to make these improvements.

Similarly the shopping experience in the stores.

So our strategy is to be price competitive and to build meaningful customer differentiation in terms of the unique value propositions we can offer to them as well as how we talk to them about this.

So these are new capabilities that we are developing and that we think are going to be helpful.

Are we planning the year with the assumption that all of a sudden the worlds are going to become cheap?

No, of course not.

And we are going to continue to be in there ready to compete and so forth.

It is possible that with what happened during holiday, the players -- the industry will be -- you used the word crazy, I'm not going to say our competitors were crazy.

But the intensity may go down but we are focused again on what we can control which is what we do for our customers, how we talk to them and then of course our efficiencies.

Gary, I would just like to add to that that there is a couple of other things that we did this year that because of the timing of our transformation when Hubert came in, etc., a lot of these things got launched in October right before the holiday season.

So take My Best Buy, the launch of the new credit card, some of the e-commerce capabilities, we put new buying guides on the website, there was a litany of things that we did.

Obviously when you do that you are putting in new capabilities, you are learning from those capabilities and a year down the road is like a lifetime.

So all of these programs, all of this investment which was substantial as you know, you can see our CapEx, that going into 2015 holiday we are going to have a lot more experience in that.

The other area that Hubert alluded to was pricing.

We are investing in pricing capabilities this year.

He said from the day he started that we have had a very underdeveloped pricing modeling capability in the Company.

So when you start working on those things, they make a substantial difference and we will continue to invest in those all year, they will get better and better and by the time we get into holiday, we think that we will be able to put all of those together and come to market and to our customer in a substantially more compelling way.

Thank you.

David Schick, Stifel.

Good morning.

I would like to go back to online.

Your online sales had accelerated quite nicely 10% up into the teens.

Even looks like they accelerated from holiday to the full quarter so out of the holiday.

How much of that is just the way consumers are thinking or interacting with Best Buy the way you talked about prior?

Or how much of that is new capabilities you are turning on and/or anything you are doing with compensation for store associates, store management regarding the online trend?

Thank you.

Thank you, David.

I think you are absolutely right to note the acceleration and we hope to continue to accelerate the acceleration.

We have to wait now.

I think the fact that we are gaining share online which of course is our goal, we have some catching up to do.

So this is the result of more traffic going to the site and we are doing a better job converting that traffic both on the site and then in the store.

So to take some examples of the latter, meaning the new capabilities, let's take ship-from-store.

We had highlighted how in the past a portion of the traffic on the site looking for a product, the product was not available in the online distribution centers but was available in the stores.

The unlocking of ship-from-store up to 400 stores during holiday, now all of the stores, has allowed us to accelerate the online growth in a significant fashion.

Our in-store pick up capabilities are a very strong competitive advantage.

It is roughly half of the online purchases that are picked up in the stores showing how meaningful are stores as an asset.

And please note that Best Buy, the store general managers and their team are compensated not only on the brick-and-mortar revenue but on the holistic revenue and clearly with all of our stores now involved in ship-from-store, they completely get it.

And increasingly the focus in the store same as online if the product is not available in the store, how can I get it to you from another store, from a DC; not available is not part of our vocabulary and finding an answer is always part of our vocabulary.

So I think we are appealing to new customers and gradually we are doing a better job of responding to our customers.

Another very important aspect of that especially in holiday this year was the implementation of a new search engine on our website.

Earlier last year we talked to you about the fact that the search engine that was operating on the site was nearly 10 years old and customers were coming to the site and they were searching for products and of course, the search engine was not robust enough for them to find what they were looking for.

And when customers are trained by companies like Google, I type it in and it shows up, that is what they expect and they are not going to type very many times until they get bored and walk away.

The new search engine is state-of-the-art technology and these search engines get smarter over time.

Again this gets into the discussion of the fact that we launched it right before holiday and again it is getting better and better as we move forward.

But during holiday, the new search engine certainly made a substantial difference as well.

Another investment that we made that made a big difference.

David Strasser, Janney Capital Markets.

Just one question around pricing optimization I guess.

You had talked about that in the past and is there an opportunity there as you go into this year?

Where does that play into what you have talked about?

And I guess along those lines you had also -- during the call, you had mentioned vendor support and I was just curious if you could give a little bit more detail how that vendor support changed from December to January and helped sort of the gross margin from what you have seen over holiday and how that happened?

Thank you.

Thank you, David.

So price optimization, our strategy is to be price competitive and we will continue to invest in that as we have done last year.

But of course we can be smart about it and pricing is a very sophisticated science so I would highlight a couple of areas to think about.

One is marketing and promotional effectiveness.

I don't know any company in the world that doesn't have opportunities in this area and believe me we do.

So making sure that the promotions we do have the right return on investments, it is back to relevant communication to the customers, of how we talk to them, to whom, when and how.

And then there is also a tactical optimization.

There are questions -- I don't want to get too much into too much detail but there is more optimization at the regional level and so forth.

As it relates to vendors, I'm not going to give a lot of color around this but one of the key assets that has always struck me ever since I joined the Company is how important Best Buy is for key vendors and important to their success and so our teams work closely with them.

There was some dialogs after the holidays and there was good contributions as is always the case.

There was nothing extraordinary but until it is in the bank, we don't necessarily bank on it.

So we will continue to work with our vendor partners to optimize the business for the customers, for themselves and for ourselves.

So it was part of the positive surprise the change in our expectations as it relates to the EPS for the quarter.

Can I just go one last question?

I'm sorry to break the rule but any thought on buybacks?

I know you have kind of gone back and forth on that throughout last year.

Any further thoughts when you look at your cash balance and cash flow and just talk about this year in buyback?

Dave, we are going to continue to evaluate our cash balance obviously.

Our premise, Hubert and I believe deeply that putting a fortress on this balance sheet is really important.

Obviously we know what bumps in the road look like but we also know that over time that there is a level of cash that makes sense and is a fortress and then there is a time when you exceed that.

At this point we are very comfortable with where we are sitting on our balance sheet and we will be talking about this over the next 12 months.

But at this time, we do not have any plans on a share buyback.

Thank you very much.

I appreciate it.

Thank you.

I will now turn the call back to Hubert for closing comments.

Thanks, everyone, and before I close I absolutely have to say something which is of course, these accomplishments that we are excited about would not have been possible without the dedication, the commitment, the hard work of the entire Best Buy team throughout the country and the world and our vendor partners.

And I have to thank all of them for their unbelievable contributions.

And of course I have to thank all of you and our customers and hopefully all of you are customers for the business and your ongoing loyalty and support to our Company and our brand.

And with this, I would like to thank you for your attention, your continued interest in our Company.

I wish you a very good day.

Thank you all.

Ladies and gentlemen, this concludes our conference.

Thank you for your participation.

You may now disconnect.