百思買 (BBY) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Best Buy's second-quarter fiscal year 2015 earnings conference call.

(Operator Instructions).

As a reminder this call is being recorded for playback and will be available by 11 AM Eastern time today.

(Operator Instructions).

I would now like to turn the call over to Mollie O'Brien, Vice President, 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 which 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 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 or circumstances that may arise after the date of this call.

In today's earnings release and conference call we refer to consumer electronic or CE industry trends.

The CE industry as defined by the NPD Group include TVs, desktop and notebook computers, tablets not including Kindle, digital imaging and other categories.

Sales of these products represent approximately 65% of our domestic revenue.

It does not include mobile phones, gaming, movies, music, appliances or services.

I will now turn the call over to Hubert.

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

I will begin today with an overview of our second-quarter results and then update you on the progress we are making against our Renew Blue priorities.

Then I will turn the call over to Sharon for additional details on our quarterly results and commentary on our financial outlook.

So first, our financial results.

In the second quarter we delivered $8.9 billion in revenue and $0.44 in non-GAAP diluted earnings per share versus $0.32 last year.

The ongoing benefits of our Renew Blue cost reduction and other SG&A cost containment initiatives drove these better-than-expected results.

On the top line as expected, sales in the NPD track consumer electronics category declined 2.5%, in line with our domestic comparable sales decline of 2.0%.

Like other retailers and as reflected in this quarter's performance, we continued to see a shift in consumer behavior.

Consumers are increasingly researching and buying online.

As a result traffic to our brick-and-mortar stores continued to decline and yet our in-store conversion and online traffic continue to increase due to the execution of our Renew Blue strategy which is in direct alignment with this shift.

Our Renew Blue strategy is designed to grow our online business, enhance our in-store customer experience, and leverage our multichannel capabilities all to deliver to our customers great advice, service and convenience at competitive prices in the channel they want to be served.

Each of these initiatives contributed to our second-quarter results.

So I'm pleased to update you today on the progress we are making against our Renew Blue transformation roadmap which is built around the following areas; merchandising, marketing, online, stores, Geek Squad services, supply chain, cost structure and employee engagements.

So the first of these areas is merchandising.

We believe we are raising the bar in our retail channel by continuing to roll out compelling and differentiated customer experiences across major categories such as appliances, home theater and mobile.

In the appliance category, we opened 18 new Pacific Kitchen and Home stores within a store and are on track to end the year with approximately 115 stores versus 67 last year.

In the home theater category, we opened seven new Magnolia Design Center store within a store and are on track to end the year with approximately 50 stores versus 33 last year.

Both of these premium stores within a store concept continue to outperform our expectations.

We also rolled out over 800 Samsung and Sony home theater stores within a store during the quarter.

This represents the first major merchandising transformation in Best Buy's home theater department in almost 10 years.

We believe this home theater transformation further solidifies our position as the destination for customers to discover and interact with industry-leading home theater technology particularly Ultra High Definition or 4K TVs and we are encouraged by the early consumer response to our expanded Ultra High Definition assortment.

We are excited about the future of this technology window.

We believe that the impact to our business this year will be limited.

In the mobile category in the second quarter, we began offering customers the option to purchase installment billing plans with the top three US carriers.

While mobile phone demand in the second quarter including year-over-year trading volume declined as customers wait for highly anticipated new product launches, the penetration of installment billing progressively increased during the quarter and we believe we are well positioned to capitalize on the new products when they are introduced.

In the area of marketing, we made progress in our evolution from analog in mass to digital and targeted communications with our customers.

During the quarter we continued to shift our marketing investment dollars toward digital media campaigns and away from print and television advertising.

We are also leveraging our -- [seeding] our customer database to pilot new targeted email campaigns.

We are in the early stages of being able to personalize marketing messages to individual customers which we view as a two- or three-year journey.

We do however expect to see gradual and incremental improvements in marketing effectiveness every quarter as our customer insights improve and our new personalization capabilities are rolled out.

In our online business in the second quarter, we continued to leverage our ship-from-store, digital marketing, and enhanced website functionality to drive a 22% increase in domestic comparable online sales.

Similar to the first quarter, ship-from-store represented over half of the online sales growth.

We are also using ship-from-store to drive gross profit improvement on our clearance and end-of-life inventory by exposing it not only to our retail customers but also to our online customers.

We also launched several customer-facing improvements on the website to drive increased engagement in a more seamless online shopping experience including number one, a new global homepage that is easier for customers to navigate.

Number two, significantly richer visual and editorial content for the Ultra High Definition digital imaging in the health and wearables category.

Number three, new text messaging options for order confirmation and delivery that are garnering significant customer adoption.

And number four, visibility to customers' Geek Squad purchases inside of their My Best Buy accounts on Best Buy.com.

As we head into the back half of the year, we will continue to launch online shopping experience improvements such as additional product category redesigns, expanded wish list capabilities, an improved checkout process, and an expanded and more inspirational holiday gift center.

Of course we will also be continuing our significant behind the scenes work on the transformation of our e-commerce platform.

In our retail stores, the field and store structure changes we implemented last quarter are to date generating results in line with our expectations.

We have consolidated and simplified the field organization, we organized to help drive local strategies and reduce the number of management level roles.

In total while our year-over-year retail labor costs are now lower, other investment in customer facing labor including vendor funded labor has increased.

While we still have much to do in reinvigorating the customer experience, we are making progress and are pleased to see our in-store experience contribute significantly to the 400 basis point improvement in our overall NPS or Net Promoter Score that we saw in the second quarter.

In our Geek Squad services business, we continue to increase our Net Promoter Scores and drive down costs through operational efficiencies.

We also continued to focus on refining our existing service offerings, improving the merchandising of our services, and building new offerings that meet the needs of customers in the context of today's rapidly evolving technology environment.

In our supply chain, we continue to leverage and transform our distribution and fulfillment capabilities.

In May, we implemented significant changes to our distribution operating model that aligned work schedules with customer demand including expanding our days and hours of operation.

This implementation was seamless and we are now able to replenish inventory to our stores and deliver to our online customers faster which is both a competitive topline and improved customer service opportunity particularly in advance of the holiday season.

We also continue to leverage our ship-from-store capability.

Not only does it continue to be a significant contributor to our online sales growth, it has also been expanded to drive increased sales out of our retail stores.

Now let me explain.

In the past when blue shirts were looking for a product that was out of stock in a store, the system they used could only see available inventory in their individual store and the distribution centers.

Today using the exact same system, the blue shirts can now see all available inventory in our distribution centers and our 1400 stores.

As a result, our blue shirts are gaining increased confidence in being able to serve their customer and drive incremental sales.

In the area of returns, replacement and damages, we continued to make progress in the second quarter including launching a Company-wide awareness program for our blue shirts, our Geek Squad agents and our corporate support teams.

This program is focused on raising awareness of the operational behaviors that are contributing to the over $400 million in annual losses that we have historically been incurring.

The program is also rolling out new operating procedures to reduce these losses.

These procedures include: number one, selling the right product the first time; number two, enforcing the Company's return policy and increasing the frequency of exchanges; number three, inspecting return inventory; number four, culturally resetting in-store perception of the value of return inventory; and number five, exposing this inventory to our online shoppers.

As we have consistently said, this online exposure is critical to optimize margin recovery because the majority of open box inventory is searched for and purchased online.

In the second quarter, we began offering Geek Squad certified open box inventory online primarily in the computing and tablet categories.

In the fourth quarter as new systems are implemented, we will begin offering additional open box inventory that is in excellent condition which represents the majority of our open box returns.

We are seeing early sales and margin improvement from the rollout of these new procedures and we expect to see stronger results as the program matures and we improve the online searchability and overall multichannel customer experience over the next several quarters.

Relating to our overall cost reduction initiatives in the second quarter, we eliminated an additional $40 million in annualized costs taking our total Renew Blue cost reductions to $900 million towards our target of $1 billion.

Now as it relates to our international segment, while we have made considerable progress in our Renew Blue cost reduction initiatives, we have substantial work to do on topline stabilization.

To address this we are following the same kind of Renew Blue transformation roadmap that we are pursuing in the US.

So to recap, while the overall consumer electronics environment continued to be soft, the second quarter ended better than expected primarily due to strong expense control.

In addition, we made significant progress against our Renew Blue priorities and clearly demonstrated our increasing ability to tightly manage what we can control.

In looking ahead, our goal is to create a significantly differentiated multichannel customer experience such that every interaction customers have with us regardless of channel, makes them a promoter of the Best Buy brand.

In support of this we will be intensifying our investments in customer-facing initiatives across those channels in the back half of the year and Sharon will elaborate on this later in the call.

In fact, I will now turn the call over to Sharon to cover more details on our second-quarter financial performance and our financial outlook.

Thank you, Hubert, and good morning, everyone.

Before I talk about our second-quarter earnings results versus last year, I would like to talk about them versus our expectations.

As Hubert said, during the quarter we continued to make meaningful progress against our Renew Blue priorities which resulted in a better-than-expected non-GAAP operating margin rate of 2.9% and non-GAAP diluted earnings per share of $0.44.

These results versus our expectations were primarily driven by stronger SG&A cost containment initiatives, greater promotional effectiveness and better performance of our new credit card agreement.

I will now talk about the second-quarter results versus last year.

Enterprise revenue decline 4% to $8.9 billion.

Enterprise non-GAAP diluted EPS increased 38% to $0.44 primarily driven by the flow-through of our Renew Blue cost savings and other cost containment initiatives.

As expected the positive impact of these cost savings were partially offset by the negative impact of lower volume, higher year-over-year sales in the lower margin gaming and computing categories and the previously communicated negative impact from our credit card agreement and structural price investments.

Domestic revenue of $7.6 billion declined 2.4% versus last year.

This decline was primarily driven by a comparable sales decline of 2% and a revenue decline of $20 million or 25 basis points due to the less favorable economics of the new credit card agreement.

Domestic comparable online revenue however increased 22% to $581 million due to substantially improved inventory availability made possible by the chain-wide rollout of ship-from-store last January, a higher average order value, and increased traffic driven by greater investment in online digital marketing.

As a percentage of total domestic revenue, online revenue increased 160 basis points to 7.7% versus 6.1% last year.

From a merchandising perspective, growth in gaming, computing, appliances and televisions was more than offset by declines in other categories including mobile phones, tablets and services.

Services comparable sales declined 8.9% primarily driven by lower mobile repair revenue due to our success in decreasing claim severity and frequency, lower attach rates, and higher mobile warranty premium costs which translate into lower commission revenue.

These were partially offset by a factory warranty recovery related impact that occurred in Q2 fiscal 2014 that did not recur this year.

International revenue of $1.3 billion declined 12% versus last year.

This decline was primarily driven by a comparable sales decline of 6.7%, the negative impact of foreign currency exchange rate fluctuation and the loss of revenue from store closures in China.

Turning now to the gross profit, the enterprise non-GAAP gross profit rate for the second quarter was 23.1% versus 23.7% last year, an expected decline of 60 basis points.

The domestic non-GAAP gross profit rate declined 50 basis points to 23.4% versus 23.9% last year.

This decline was primarily due to a mix shift into the lower margin gaming and computing categories, structural investments in price competitiveness particularly in accessories, and a 20 basis point negative impact related to the less favorable economics of the new credit card agreement.

These declines were partially offset by an increased mix of higher-margin large-screen televisions and the realization of our Renew Blue cost reductions and other supply chain cost containment initiatives.

The international gross profit rate was 21.1% versus 22.3% last year.

This 120 basis point decline was primarily driven by our Canadian business due to increased promotional activity and an increased mix into the lower margin gaming category.

Now turning to SG&A, enterprise-level non-GAAP SG&A was $1.8 billion or 20.2% of revenue versus 21.5% last year, a decline of $189 million or 130 basis points.

Domestic non-GAAP SG&A was $1.5 billion or 19.9% of revenue versus 21.3% last year, a decline of $147 million or 140 basis points.

This rate decline was primary driven by the realization of our Renew Blue cost reduction initiatives and tighter expense management throughout the Company.

International non-GAAP SG&A was $290 million or 22.1% of revenue versus 22.3% last year, a decline of $42 million or 20 basis points.

This rate decline was primarily driven by Renew Blue cost reductions and tighter expense management in Canada and to a lesser extent, China.

Merchandise inventories increased $146 million or 2.7% to $5.6 billion primarily due to deliberate investments in high demand back to school computing inventory and inventory to support our over 800 Samsung and Sony home theater stores within a store.

As we enter the back half, we expect this increased level of inventory to continue in order to support our Ultra High Definition TV and Pacific Kitchen and Home expansions as well as our initiatives to reduce retail out of stocks.

In our consumer surveys, one of the top reasons customers say that they do not buy when they are in a Best Buy store is that the product they are looking for is not in stock in that store at that time.

Now looking forward to the back half, as Hubert remarked earlier, industrywide sales are continuing to decline in many of the consumer electronics categories in which we compete.

We are also seeing ongoing softness in the mobile phone category ahead of highly anticipated new product launches.

Therefore absent any changes in these declining industry trends and with limited visibility to new product launch quantities, we continue to expect comparable sales to decline in the low single digits in both the third and fourth quarter.

From an operating income rate perspective in the back half, we are expecting the following business drivers versus last year.

One, a similar promotional competitive environment but with better promotional effectiveness internally; two, a greater mix of online revenue that will put pressure on the overall operating income rate; three, continued industry softness and higher promotionality in Canada and China; and four, a net positive impact from our Renew Blue cost reductions as they will more than offset our investments in structural pricing, the new credit card agreement and the new incremental investments we are making in the back half of the year totaling $40 million to $50 million or $0.07 to $0.09 per diluted share to support the customer-facing initiatives that Hubert referenced earlier.

This $40 million to $50 million will break down by quarter as follows, $10 million to $15 million in Q3 and $30 million to $35 million in Q4.

As a result of all of these business drivers and particularly in light of the fixed cost deleverage that will accompany an expected low single-digit comparable sales decline, we are expecting the non-GAAP operating income rate in Q3 and Q4 to increase in line with the year-over-year improvement that we saw in the first half.

Additionally in the back half, the estimated diluted earnings per share impact of the discrete tax items that we discussed last quarter will continue to be in the ranges of flat to negative $0.01 in Q3 and negative $0.09 to $0.10 in Q4.

With that, I will now turn the call back over to the operator for questions.

Thank you.

(Operator Instructions).

Simeon Gutman, Morgan Stanley.

Good morning.

Just a couple of questions.

First on the top line I think you called out TVs both in the printed release and in the script and then there should be product launches on the mobile side and those are two pretty important categories between TVs and mobiles.

And so we appreciate the status quo view on the top line but shouldn't one look at I guess some of these trends and have a little bit more of a constructive outlook in the back half of the year?

Simeon, good morning and thank you for your question.

I think anyone can have their view on the future.

I think we have shared ours this morning.

We have the backdrop of a consumer environment that is a bit fragile.

We see the trends -- of course in our space, you always have ups and you always have downs so the net effect is what you have to look at.

Specifically as it relates to TV, while we are excited by the new technology and the customer response, I think we all have to appreciate the fact that the actual impact this year will still be relatively limited before we ramp up into next year.

So that is something to take into consideration.

Of course as it relates to mobile, the uncertainties around the quantities you get at this point in time and frankly we have little visibility , you know a limited visibility at this point in time.

So I think you can develop the view that there is upside but we want to highlight that there are some factors that limit the potential topline in the back half of the year.

But again Simeon, forecasting is difficult so we shared our view and we respect yours.

That is fair.

And then my follow-up is regarding the intensifying of investments.

Can you hash out whether that is how you are reacting to some to some opportunity that you see or is something changing that is unfavorable?

Because I think the topline outlook or picture that we see doesn't seem so different from the way that it was laid out or forecast by you and so what is prompting the change?

I think what is prompting change is from a strategic direction standpoint, there is no change meaning that our moves are completely consistent with the roadmap that we have outlined over the last couple of years and certainly this year.

I think the investments are a combination of us seeing the potential of some of the initiatives we are working on as well as the need to be in the game for some of these initiatives.

So no dramatic change but increasing confidence and sense of reality around these opportunities.

I don't know whether, Sharon, you want to add any color to this but that is what I would say.

Absolutely.

I just will follow up on what Hubert said.

There are areas where as you guys know, we are seeing substantial improvements in the way our business is operating that we believe we can accelerate faster.

This is really about intensifying and accelerating our efforts into this year.

They surround things that you would completely expect like improved shipping times to our customers, better fulfillment, customer-facing initiatives in our stores, some online investments that are highly competitive that we would like to not go into great detail on here today.

But they are all surrounding the customer and things that actually are facing the customer which we think is going to very important.

To your point, Simeon, about the possibilities for Q3 and Q4, we think these will competitively position us much stronger as we go into the back half especially Q4.

Okay, thanks.

Good luck in the back half.

Thank you.

David Schick, Stifel.

Good morning.

Could you give us any sense of what these capabilities like ship-from-store to the customer at home or that inventory lookup that you talked about with associates in stores and we have certainly experienced that when we are in stores, the frustration in the past with the associate's ability to say yes right now.

As you look at turning that on, how much do you think you gave up an opportunity over time and in particular last year's fourth quarter?

Sure.

David, I have to believe that it is an important number.

First, let's just ground ourselves on ship-from-store, that aspect of our business right now, which was over half of our online growth this quarter.

In the store what we are seeing with that number is we launched it late April and the stores are just now starting to use it.

We are seeing the numbers increase each day and we are looking again in these customer-facing initiatives I was talking about.

We are looking at some opportunities there to make that even a more efficient process once they found the inventory and getting it to the customer faster.

So I think that last year we didn't have it at all.

Similar to ship-from-store, you are seeing what that is doing for us obviously.

In the store side of it, they did not have this capability and then in ship-from-store when you think about the back half of last year if you recall, in Q2 and Q3, we really only had 50 stores that were shipping.

Then in October last year, we went to 400 stores shipping and then in January of 2014 this year, we went to all 1400 stores.

So in the back half, we also expect the ship-from-store capability to benefit us in three ways.

One of course is serving the customer where, when and how they want it.

They want that inventory and we have opened up that $2 billion of inventory to give to them.

The second is the margin improvement that we are seeing particularly on our clearance end of life inventory.

It is creating a much more efficient clearing method because we have so many viewers online to supplement the retail traffic thus driving a better outcome on the markdowns.

Another benefit that we have seen from ship-from-store is that when we are allocating the inventory to all the stores, we used to send a lot of that inventory back for reallocation when we are out of balance.

We have significant, more than half the inventory returned a year ago, we didn't have to return this year thus the cost and the complexity that goes along with that.

So those are what we are seeing now.

The back half of course is a very different time of year and there is nothing in what I just shared with you that would say to us here that we are not going to see the types of benefits at a much higher rate occurring in the back half for us.

Particularly again this is so big around Q4 when I have to have it, I need that gift, those kinds of demands from our customers and we will be shipping faster and that will be important.

Great.

That is very helpful.

And as a follow-up, the original Renew Blue take on the business was -- or the outline was the long-term 5% to 6% operating margin.

Now there has been a lot of puts and takes to the industry and you guys have worked on initiatives, there has been incremental pressures, there is opportunities all over the last 18 months.

But do you think all those things together still boil down to a 5% to 6% operating margin opportunity long-term for the business?

Yes, I think that it is important though to recall that when we gave that we said we need very low single-digit but single-digit positive comp sales.

When you think about the revenue leverage that you see especially in quarters like Q4 on the fixed cost which I called out earlier in my business drivers for Q4, it is so significant.

And with our categories, these NPD categories tracking at this negative 2.5% rate, I know it makes it hard to see but that 5% to 6% is predicated on that.

What we are particularly pleased with right now while not excited about negative comps, don't get me wrong, is that with the things that are within our control operationally and executionally, we are continuing to improve in those areas.

What that says is that when we get to that point where we see the cycle come back into CE that we are going to have the operational infrastructure and the cost structure that will highly leverage those sales and that is the part that we are greatly looking forward to and I know as investors, you guys are too.

But that is how we see getting to that number is going to be through some topline growth and then in addition to that, continuing to make progress against these kinds of initiatives that we spoke of today.

I guess we will have to see if anybody ever makes a new phone or anybody wants a nicer TV again in the future.

Thanks.

Thank you, David.

Alan Rifkin, Barclays.

Thank you very much.

So first question surrounds the Renew Blue program.

You had targeted $1 billion in cuts but for the last few quarters the expense savings have been declining sequentially with only $40 million realized in this quarter.

As you look further out over the next couple of years, do you think $1 billion in totality is still the number?

And in breaking it down between SG&A and cost of goods, where do you see the greatest incremental savings going forward coming from?

Thank you, Alan.

Yes, in the spirit of on the SG&A side of the Renew Blue cost reductions, we have obviously taken substantial costs out of the Company and of course they have slowed.

The $40 million is less than it was in the previous quarter.

The place that as you know we have not included in that $1 billion a large percentages is of the returns, replacements and damages.

We within the numbers we are reporting on our achievement of Renew Blue has an amount associated with returns, replacements and damages but it is actually very small to date.

And of that, as you recall, let's all just get grounded, we said we are losing over approximately $450 million and we expect to lose $100 million so we see a $300 million to $350 million opportunity there.

It is very structural in how we go after it.

In the fourth quarter, you will start seeing a lot of that online inventory show up.

And then Hubert in his prepared remarks, to help give you guys more visibility to some of the other things that are happening in the Company because while showing the inventory online is very important and quite frankly getting those viewers and getting that population when the majority of this inventory is sold online anyway is critical.

But there are other operating things happening internally right now and plans being put into place and changes in operating procedures happening that we think are going to accelerate that for us as we -- this would be a 2016 opportunity for us as well.

So that is where I see it coming from, Alan.

Going forward, we will continue however, there are areas operationally in the Company I would speak to are our services areas and some of our other what I would call tasking related activities in our stores and some of our replenishment processes where I think that there is higher efficiency to be garnered.

But again, many of these require structural system changes so are slower in coming.

Okay.

One more question if I may.

Sharon, this is really the first time you have given definitive guidance on your comp outlook for the all-important fourth quarter and you are now saying it will be down low single digits.

Where does this number really compare to where your plan was at the beginning of the year and what really has changed if anything in terms of your guidance on the comp for Q4 specifically?

Alan, we certainly believed that early in the year that we would see less softness in those NPD categories.

We also were more optimistic about the innovation in mobile and after last year having the Samsung Galaxy other things came out -- we don't want to go vendor by vendor -- we had a few exciting things last year.

But the fact that the innovation in mobile has been pretty soft this year was different than we had hoped.

Now the good news is that we have remained very conservative and you know us.

We don't live on our wishes and hopes here.

We live on what the data says.

So based on the industry data around these categories, it still does not paint a positive picture.

If you look at the people who write about this industry, even with a highly anticipated phone, not speaking to any one vendor but one highly anticipated phone launch, the saturation in the mobile phone category makes this complicated to forecast.

We think it is exciting and we think the installment billing programs which by the way Hubert also called out, we are seeing an acceleration in that and it is very fast.

The disruption of the carriers could be a dynamic that we did not anticipate.

What is happening with the carrier plans right now which you are observing I'm sure, we did not anticipate.

Now again until we see what that means, we are not going to put that into a forecast.

We are looking at economic data just like you, our consumer trending data and this is what it is showing.

Now that is the same data I might add that told us to tell you last quarter that Q2 would be negative low single-digit comps which is exactly where we ended up and we still in those NPD categories gained share.

So that is what we are using, Alan.

Could it be better?

Yes.

Is the acceleration of Ultra High Definition TV happening?

There is no question about it.

I saw an analyst report out this morning on the topic.

So if that happens when you read what I wrote, this is predicated what I explained and laid out is predicated on a low single-digit negative comp and the environment we are in now with only slight excitement and not any other offsets to this phone and UHD opportunity.

Clearly I don't know of anyone is out there that is better positioned than Best Buy with our new 800 Samsung and Sony home theater stores within the stores.

I don't know how you could be better positioned to go after this new opportunity not to mention -- and I have to call this out -- is the blue shirts that are supporting that in our stores.

The knowledge of UHD in Best Buy I have to say we would put it up against anything in the industry right now and we are very proud of that.

So those are the possibilities, Alan.

That is not something I am telling you that the data does not support it and then there also you need to get -- you would also have to have an excessive amount of inventory as well.

So we will see what happens but right now we see the data says that we could see similar NPD performance, track the categories performance.

Thank you very much, Sharon.

I appreciate it.

Aram Rubinson, Wolfe Research.

Thanks, good morning and we can feel just how hard you guys are working to achieve these results so appreciate you sharing the time with us.

A couple of things.

If you looked at the NPD categories that you referenced, can you give us a sense of what the e-commerce penetration is of those categories and maybe kind of how you compare against that?

Also how the profitability shift to e-commerce is affecting the margins, SG&A, etc.?

I'm just not sure we have gotten any quantification around that.

Good morning and thank you for your kind comments.

So e-commerce penetration in our categories is higher than in retail in general.

We are one of the most highly penetrated sector from an e-commerce standpoint and it continues to shift.

That is one of the things I said earlier, we are seeing a continued and rapid shift in consumer behavior, in researching and then buying online but if not buying online, studying the research process online before going to the stores which reduces, for a given purchase, it reduces the number of trips to the store because you come to the store very well equipped and you complete it.

This is not new but this is continuing and very significant.

This has been the premise of the entire Renew Blue strategy and transformation.

Now we are very encouraged by the growth of our online business, 22% this quarter.

The reason why we are excited about this is that, as we said before, is to achieve the same kind of market share online as we are experiencing in the stores and we have much to do.

So all of this is happening in a context where we are able to improve our operating income rate year-over-year which is something that we are very excited about.

Now as it relates to your question pertaining to the profitability online versus the stores, I would first preface this by saying that trying to construct a meaningful P&L by channel is actually a fairly futile exercise because it is so interdependent.

How should I count and allocate the marketing expenses, how should I count and allocate the investment that I make online for which a lot of the conversion is actually happening in the stores?

So this is an exercise with limited practicality.

This being said in general online today, the mix of products we sell -- let me say that the profitability for a given product is not materially different online versus in the stores.

What we do see today is that from a mix standpoint not surprisingly, the kinds of products that we tend to sell more online would be lower cube, lower touch, more commodity type products, simpler to buy, convenient and so forth whereas in the stores, you are going to buy higher cube, higher touch products.

You are going to have online still today despite our great progress lower attachments of accessories and services and I don't think that this is necessarily something that will continue.

In fact we are determined to change that by helping customers buy the entire solution online and so down the road we would expect the profitability to be extended, we can calculate profitability to converge between the two channels.

But today as we shift more towards the online channel, this is having a slightly negative impact on the overall gross profit rate because of these lower attachments.

So thank you for that.

Just a clarification and then a follow-up.

Of your business which is 7.7% penetrated online, what is your guys best guess as to where the industry is on that same penetration?

In the Renew Blue presentation back in November of 2012, we had tried to estimate that and from memory we had estimated that the market share or the penetration of online in our industry was in the high teens.

So clearly we have room to grow here.

Our mindset as a Company is that we see no reason why our online market share, our market share online should be lower than in the stores.

We are determined to be agnostic from a channel standpoint and a profitability standpoint so as to be able to serve the customers the way they want to buy.

And if you can just help by telling us in your fourth-quarter guidance or your back-half guidance what you have contemplated for the promotional environment in Q4 specifically as you compare it against last year's kind of free for all?

In our prepared remarks or in my prepared remarks, I said and was very clear and this is for both Q3 and Q4 that we expected a similar promotional competitive environment, I left out irrational.

But okay, that was your adjective.

But what we said is that we are going to have better promotional effectiveness internally.

After Q4 last year you will recall Hubert made many comments about what we would be doing differently this year and has really done that each quarter and we have seen it work each quarter.

So going into Q4, the rational disciplines that we have implemented and some of this additionally is also very operating procedure and systematic internal -- or systemic internally, we did not have the capabilities, pricing capabilities and promotional tracking capabilities a year ago that prepared us well for that kind of an environment.

This year we have made investments in those areas.

We have talked about those in previous calls and our teams are getting stronger obviously every quarter.

So we anticipate our ability to do better but honestly we just believe that our competition will continue with similar behaviors to previous years.

Thanks so much.

Good luck.

Thank you.

David Magee, SunTrust Robinson Humphrey.

On that last question, I was curious it seemed like last year the sector business sort of softened late in the year and people were culling too much inventory in the channel and then panic ensued.

Are you seeing a similar build up this year or do you think you will see a build up this year of the same level of inventory throughout the sector going into the fourth quarter?

David, you might be on a cell phone and we got a cut out on about every third or fourth word.

Could you just repeat your question for us, please?

Yes, I am sorry.

Last year I recall it seemed like that the business for the sector softened late in the year and inventory levels were too high across the retail sector and there was panic afterwards.

I am curious as you sort of think about this year being similar, are you seeing inventory levels growing at the same rate as they did last year?

I think we don't know of course the inventory levels of our competitors.

What I would say is if you rewind to last year, the market environment, the demand in our space in Q2 and Q3 as well as our own comps trended relatively positively in Q2 and Q3.

I think in Q3 we were positive in the low single digits and while we were probably gaining market share this was also representative of a more supportive business environment including in the very important mobile category.

And whereas this year I think to repeat, when we look at the markets in Q1 and Q2 including in mobile, you have a very different picture.

Sharon talked about it in mobile, everybody is talking and expecting new products in the back half but the penetration of smartphones in the country has really reached very high levels so how big of an impact is it going to have above and beyond the question of the availability of the inventory.

So you have I think a very different environment.

Forecasting into Q4 is really hard.

We are giving you our best shot.

I think that after Q3, we all may be able to get a better perspective.

There will be more information but certainly the sentiment going into the back half of the year is very different from what it is today.

Now we are not sitting here thinking and hoping that everybody therefore will say okay, so we won't compete in consumer electronics.

We are not counting on that.

What we are highlighting is that we ourselves are approaching the holidays this year with a different set of tools than last year.

Sharon talked about the better -- enhanced effectiveness around promotions and of course we have a whole list of things that we have been working on during the year that I mentioned including our gifting strategy and wish list which are being deployed, the better in-store experience with the additional stores within the stores and expert labor in particular around Ultra High Definition TV but also appliances and whatnot.

The more targeted marketing communication, the ship-from-store of course which will be in all of the stores was not in all of these stores last year, it was deployed in all of the stores in January.

And then the increased effectiveness as a result of the organizational changes we have made in the stores.

So as a management team, as you can feel, we are very focused on what we can control and executing everything that is not in our control and then we will take the environment as it is.

Thank you.

Just a quick follow-up.

Some people think that back-to-school is a harbinger of what is to come with holidays sales.

Are you seeing anything with back-to-school that gives you reason for hope or cautiousness?

Thank you for the question.

I would say that back-to-school so far is in line with our expectations.

There is potentially I think in retail in general a more positive environment.

We are not just going to take a couple or three weeks as a source of excitement.

This is an economy in general in a sector where there is a lot of volatility week to week and month to month depending on this and that.

But just in general, there is a sense that the retail environment in the last few weeks has been better and certainly the beginning of the quarter has been in line with our expectations.

David, I will just add.

We are very focused on the calendar at Best Buy and the things that go on around the calendar.

One thing to consider which I'm sure you are all considering, I have seen several reports, is that because of the weather last year many school districts are going back to school early and we are also very focused on how much of this is lift versus shift because of the timing of earlier back-to-school dates than a year ago to cover up for snow days.

So that is just an add for you on some things that we are looking at internally just to make sure we don't get ahead of our lights in this.

Great.

Thank you and good luck.

Thank you.

Mike Baker, Deutsche Bank.

Thanks.

A couple of questions.

First, on phones, you have talked a few times about not sure what the volumes you guys are going to get or the inventory.

How has that played out in the past iPhone launches?

Can you remind us what kind of allocations you have gotten and has it actually been a positive to your business when it launches or is it maybe perhaps can be a negative because people are going to go to the Apple stores because you guys won't have the allocations?

Yes, what I would say without getting into excessive details, we have a very good relationship with all of our key vendors in that space.

I think we are mutually important to each other and we value their relationship.

I think they value the channels.

So in general that would be true in our business.

Any time there is significant innovation from a product standpoint, that is far from being a negative, if I can put it this way.

So we look forward to the launch.

I think our comments pertain to the fact that every time in the initial week, there is limited inventory and now I think we are being treated by our vendors very, very fairly.

There is no doubt about this and then I think in phones in the US, we have to keep in mind that while in the last five years you have seen a rapid increase of the penetration of smartphones, you have reached a point of penetration which is about 70% which is quite high.

Now about 90% plus of the new phones that are being sold being smartphones but there is a point where there is a cap to the penetration of the phone.

So expecting a huge lift is not something that we would contemplate.

When do you expect that to launch, by the way?

Is that a third-quarter or a fourth-quarter event?

I can give you a phone number in California to call for further details.

We have no more visibility to these things than you do.

Understood.

One more question if I could on a different topic and just looking at the expenses that you referenced the November 2012 Analyst Day documented a few times.

In that presentation I think at the time you had said that your North American corporate G&A was about $4.2 billion which I think was 10% of your North American sales at that time.

Can you update us on where that number is 18 months later?

We have not been continuing to publish that number.

We actually -- because of the investments we have made in the stores and other things, we feel that it is a little more competitive than it used to be so we have made a decision to not continue to report on segments of our G&A.

Okay, thanks.

Brian Nagel, Oppenheimer.

Good morning.

My first question, you have mentioned the Ultra HD TV quite a bit and others have as well.

As we look at that product category, what do you see -- maybe more from a qualitative standpoint, the consumer response right now?

And are there certain things that need to change whether it be content and such to make Ultra HD maybe a bigger driver of better topline results at Best Buy?

Thank you, Brian.

What is very exciting about Ultra High Definition TV compared to 3D a few years ago is that the customer benefits immediately tangible and meaningful in the form of improved image quality which is of course a huge driver of demand in particular when you get to these very large screens, the number of pixels become critically important.

And what is really positive today is that even without new content, you have the upscaling and so with the current content, the customers see a material difference.

And when they go to our stores, we can show them the difference between high definition and Ultra High Definition TV and I encourage everyone on the call as well as the rest of the country to pay a visit to one of our stores where you have the Samsung and Sony customer experiences.

When you walk into the store, you don't know that you need an Ultra High Definition TV.

After 10 minutes seeing the product and talking with (inaudible) blue shirt who is hyper trained in Ultra High Definition TV, you will know that you need it.

The only question you will have is when and which one it will be.

Now beyond that of course, the various media companies are working on 4K content.

I think you can hear Netflix, you get your Amazon, you can hear a variety of sources but again, we don't need to wait for that to have that.

The TV, Samsung and Sony also have storage devices that allow you to have access to.

So what is going to drive the penetration is the price decline.

Prices have started to go down and probably for many of you on the phone, it is going to be highly affordable this holiday.

But for the vast majority of the public, they may want to wait until next year and the following year.

There are price points that are significant from that standpoint.

So we think it is essentially a price discussion but the product itself is very ready and exciting.

That is why we said this morning we are excited by the potential but do realize that the impact this year will still be rather limited.

Got it.

That is really helpful.

A second question is a follow-up if I may.

I think someone else asked about back-to-school.

In recognizing back-to-school period has shifted a little bit this year and it is obviously not nearly as big as the holiday season but the question I have is we talked about some of these better internal promotional effectiveness.

Are you seeing -- is there a way to say that here in back-to-school we have seen these efforts on the part of Best Buy to drive better results and maybe that is a harbinger of how we should think about your promotional effectiveness come the holiday selling season?

Yes.

I think that obviously every day we are practicing better promotional effectiveness and when we look at our performance as it relates to all periods but back-to-school as well, we have been using that rigor, that promotional rigor around all that we are doing and obviously we are seeing outcomes similar to outcomes that we saw in the second quarter.

So yes, I believe that what you are seeing from us today as it relates to pricing and promotional rigor is going to be no different than what you see -- actually I actually believe in Q4 it will be better because you guys have got to remember there were some things in Q4 last year that of course were above and beyond exceptional target reaches and other things which I don't even want to raise here.

So I believe that all the disciplines we put in around and then those things that will not recur may put us in a very strong position, thus the reason that in the prepared remarks today we talked about the fact that despite all of these things, we are still expecting operating margin expansion in the back half equal to what we have seen in the first half of this year.

So despite some of these negative things that we are talking about, despite the fact that we are we have guided to you slightly negative single-digit comps, we are still saying we are going to expand our operating margin even though versus some of the first call estimates we could have $300 million or so less revenue.

So it is that promotional effectiveness and of course then there is the G&A side of it as well that is driving that but we are expecting to see benefiting Q4 on both.

Thank you, Sharon.

I think we are going to wrap this at this point.

And in closing obviously I want to thank our teams across the business for their outstanding commitment and hard work serving customers every day and driving the transformation of our Company and of course I would like to thank all of you on this call for your participation this morning and your ongoing support.

Thank you and have a terrific day.

That concludes today's conference.

We thank you for your participation.