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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to Best Buy's third-quarter FY13 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, the 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 conference call over to Mollie O'Brien, Vice President, Investor Relations.
- VP of IR
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 risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.
Please refer to the Company's current earnings release and SEC filings for more information on these risks and uncertainties.
The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.
In today's earnings release and conference call, we refer to the consumer electronics industry trends.
The consumer electronics industry, as defined by the NPD Group, includes TVs, desktops, 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.
- President and CEO
Thank you Marie, and good morning everyone, and thank you for joining us.
I will begin today with an overview of our third-quarter results, and update you on the progress we are making against our Renew Blue priorities.
I'll then provide thoughts on the upcoming holiday season, and a discussion of our priorities beyond holiday, before turning the call over to Sharon for additional details on our quarterly results, and commentary on our financial outlook.
First, our financial results.
In the third quarter, our team delivered positive comparable sales, improved profitability, and continued progress in our Renew Blue transformation.
This resulted in a $9.4 billion in revenue, and $0.32 in non-GAAP diluted earnings per share, versus $0.18 last year.
Operationally, this year-over-year improvement was primarily driven by a 0.6% revenue growth, and the benefits from our Renew Blue and other SG&A cost-reduction initiatives, partially offset by strategic pricing investments, and the ongoing competitive pressure on our gross profit rate.
On the top line, while sales in the NPD-reported consumer electronics categories declined 0.2%, our strengths in televisions, computing, and tablets versus the industry, in addition to our growth in gaming and appliances, drove a domestic-comparable sales increase of 2.4%, excluding the 80 basis point estimated benefit associated with the classification of revenue for the new mobile carrier installment billing plans.
Domestic online comparable sales increased 22%.
Also during the quarter, we continued to make progress against our Renew Blue priorities.
In merchandising, we continue to expand our appliance offering, through the opening of 15 Pacific Kitchen & Home stores within the store, and our on track to end the year with 117 stores, versus 67 last year.
In Home Theater, we opened 10 Magnolia Design Center stores within the store, and are on track to end the year with 50 stores, versus 33 last year.
We also continue to expand our ultra-high definition, or 4K, TV assortment.
In mobile, despite major phone launches being quantity constrained, the adoption of installment billing plans continued to accelerate throughout the quarter.
Within these plans, we saw higher average phone prices, and higher attach rates of services and phone accessories.
In phone accessories, we significantly expanded exclusive assortment through new partnerships with fashion designers, and growth in our own private label brands, which allowed us to offer our customers an industry-leading phone case assortment in time for the new iPhone launch.
In marketing, we continued to shift marketing dollars away from TV and print to digital media and display campaigns, including a successful, traffic-generating back-to-school initiative.
We also continued to drive increasingly powerful customer communication through the leveraging of our new Athena database.
While we remain in the early stages of being able to personalize marketing messages to individual customers, we're beginning to see better click-through rates on these new campaigns when compared to mass, non-targeted e-mails.
In our online business in the third 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 half of the year, ship-from-store represented over half of this growth.
We also launched several customer-facing site improvements, including significantly richer visual and editorial content for the Home Theater, Mobile, Appliance, and Gaming categories; expanded Wish List capabilities; an expanded and more inspirational Holiday Gift Center; and an improved check-out process that provides faster and precise get-it-by delivery dates on approximately 60% of Best-Buy-delivered SKUs, rather than up to 5- to 8-day range.
In our retail stores during the quarter, we continued to improve the physical presence and shopping experience by expanding our fleet of Appliance and Home Theater stores within the store, increasing our investment in store-refresh initiatives, adding compelling vendor displays, increasing sales training, and integrating new vendor-funded labor into our premium customer experiences.
While traffic throughout stores continued to decline year-over-year, the trend improved compared to the first half of the year.
In Services, we continued to increase our NPS, or net promoter scores, and drive down costs through operational efficiencies.
We also launched a loss and theft mobile phone insurance program, to supplement our historical Geek Squad protection plans.
However, service revenue continued to decline, as Sharon will discuss in more detail later.
In our supply chain, we continue to transform our distribution and fulfillment capabilities by operationalizing a faster and more precise delivery experience for our online customers, and locking a significant percentage of our major appliance and large-screen TV inventory that was systemically trapped in a single market, and not available to be purchased by a customer outside of that market.
In returns replacement -- there is some echo.
I will continue.
In returns, replacements, and damages, we launched a new section of the website called Best Buy Outlet, which expands the online visibility of open-box inventory that can be purchased online and picked up in store.
We also expanded the percentage of return products that we are Geek-Squad certifying, which while small, is leading to higher margin recovery, due to customer confidence in the quality statement that Geek-Squad certification inspires.
Our net promoter score was flat year-over-year in the third quarter, which we believe was driven in part by the impact of product availability associated with the launch of new phones.
This plateau follows a 400 basis point, year-over-year improvement last year.
In relating to our overall cost-reduction initiatives, in the third quarter we eliminated an additional $65 million in annualized cost, taking our total Renew Blue cost reductions to $965 million towards our target of $1 billion.
Now as we enter the fourth quarter, we are excited about our holiday plan, which has been built around number one, the cumulative progress we have made against our Renew Blue priorities; number two, an operational road map that incorporates the specific learnings that we gained from last year; and number three, our current views on the consumer and competitive environment.
Within this plan, I would like to highlight the following growth, customer experience, and profitability initiatives that we believe will drive better year-over-year outcomes.
Number one, is the customer-facing changes that we have made on our site and in our stores, including the merchandising and labor upgrade I discussed earlier that touched many of our key categories, especially Home Theater, Accessories, Appliances, emerging categories such as Health and Wearable and Connected Home, and then Digital Imaging.
Second, our ability this year to sell installment billing plans in the mobile phone category.
Third, a more inspirational gifting strategy, including a greater assortment of products below $100.
Fourth is a more defined and structured approach to our promotional strategy, including greater analytics around competitive response plans.
Fifth, more relevant and targeted marketing investments, including a more concise statement of our value proposition, express service, and biddable price.
Sixth, increased inventory availability due to the roll out of ship-from-store to 1,400 stores versus 400 stores last year, the regional unlock of large appliances and TVs, and additional online exposure of certain open-box inventory.
Now like every holiday though, of course, we believe the outcome of these initiatives is and will continue to be tempered by external and internal factors, including the investments that are required to drive them.
The external factors includes number one, an intensely promotional competitive environment; number two, a possible constraint in product availability in recent high-profile product launches; and number three, a potential supply-chain disruption related to the West Coast port delays.
The internal factors include number one, the increased mix of faster-growing but lower margin products in our revenue, number two the potential impact of higher-incentive compensation, particularly in our retail stores, based on our expected year-over-year improvement in performance; number three, higher growth in our lower-margin online channel; and number four, intensified investments in customer-facing initiatives.
We believe the net financial impact of these factors in the fourth quarter, assuming near-flat revenue and comparable sales growth, will be a year-over-year improvement in our gross profit rate, but flat year-over-year SG&A dollars.
Sharon will provide more color on this later in the call.
Now before this, I would like to briefly share with you some thoughts about our priorities beyond holiday, as we continue our Renew Blue transformation.
At this point in our transformation, we have eliminated close to $1 billion in costs, reduced our domestic SG&A rate by approximately 170 basis points compared to two years ago, and made progress toward stabilizing our domestic comparable sales.
As we look at to our environment, we see continued economic pressures, including more rapidly declining average selling prices in key product categories in expectation of competitively matched prices.
We see declining demand and increasing pricing pressures for extended warranties, driven by improving product reliability and declining average selling prices for parent products.
We see increasing customer service investments like free and faster shipping or expert service in our retail stores, and we see greater customer expectations around large-cube supply chain experiences.
With our more affluent demographic and complex product offerings, we're becoming more of a specialty retailer in this evolution, and must offer our customers a high-touch experience.
Now against this back drop, at the beginning of this fiscal year we outlined a road map for the next couple of years of our transformation.
We are pursuing a strategy that is focused on delivering advice, service, and convenience at competitive prices.
We are focused on driving the number of profitable growth initiatives around key product categories, life events, and services.
These initiatives include number one, capitalizing on the ultra-high definition TV and gaming cycles; number two, increasing market share in growing categories with structural barriers to entry, like large appliances, mobile, and connected home; number three, establishing Best Buy as the destination for health and wearables; number four, further expanding our branded exclusive and private label assortments; number five, continuing to expand our secondary market growth strategy to improve our margin recovery on returns, replaced, and damaged products.
Number six, expanding our life events programs such as Wish List and the gift registry; and number seven, evolving our service offerings to make them more relevant to today's customer needs.
In support of these initiatives, we are transforming major facets of the Company.
We are applying more science behind our promotional and pricing strategies.
We are accelerating our targeted and personalized marketing programs.
We are transforming our desktop and mobile site customer experience.
We are enhancing our in-store customer experience from both a service and physical environment perspective, and we are taking steps to drive increased sales effectiveness and payroll leverage.
It is our expectation that delivering better advice, service, and convenience at competitive prices, and successfully executing our initiatives, will help grow comparable sales, and increase operating margins.
It also requires investments.
In light of our environment, we believe it is imperative that we move quickly and invest aggressively against these initiatives that we believe will allow us to continue to advance our growth and improve our financial and performance.
All of these initiatives will be part of our [FY16] operating plan, and we are excited about both our short- and long-term growth prospects.
We're also confident in our ability to execute against these initiatives, as we have demonstrated over the past two years.
The external pressures, however, are driving structural industry changes.
To win, we have to lead.
To do that, incremental investments like those I have already discussed will be required.
While these investments will put pressure on our operating income rates, we believe that they will also allow us to build a different-shaded customer experience and drive our long-term success.
We will more deeply discuss these external pressures, gross opportunities, and investments in our fourth-quarter earnings call, after we have completed our FY16 operating plans.
I will now turn the call over to Sharon to discuss the details of our third-quarter financials and our fourth-quarter outlook.
- Chief Administrative Officer and CFO
Thank you Hubert, and good morning everyone.
Before I talk about our third-quarter results versus last year, I'd 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 better-than-expected non-GAAP diluted earnings per share of $0.32.
This result versus our expectations was primarily driven by the sales declines in the NPD-reported consumer electronics category being lower than previous quarters; higher-than-expected revenue in computing and tablets; higher mobile revenue, due to better-than-expected results from new phone launches; better performance of our new credit card agreement; and greater pricing and promotional effectiveness, partially offset by increased investments in customer-facing initiatives.
I'll now talk about our third-quarter results versus last year.
Enterprise revenue increased 0.6% to $9.4 billion.
Enterprise non-GAAP diluted EPS increased $0.14 to $0.32, primarily driven by higher revenues, and the flow-through of our Renew Blue and other cost-reduction initiatives.
We also saw a $0.02 per share benefit associated with the restitution from a legal claim.
In addition, the lower tax rate this year drove an incremental $0.02 per share benefit, due to favorable discreet tax events.
These favorable impacts were partially offset, however, by ongoing competitive pressure on our gross profit rate.
Domestic revenue of $8 billion increased 2.3% versus last year.
This increase was driven by comparable sales growth of 3.2%, but excluding an 80 basis point estimated benefit associated with the classification of revenue for the new mobile carrier installment billing plans, comparable sales increased 2.4%.
This increase was partially offset by the timing of recovery on mobile phone trade-in liquidations, store closures, and $8 million, or 15 basis points in less favorable economics of the new credit card agreement.
Domestic online revenue was $601 million, and comparable online sales increased 21.6% due to substantially improved inventory availability, made possible by the chain-wide roll-out of ship-from-store in January of 2014; a higher average order value; and increased traffic, driven by greater investment in online marketing.
As a percentage of total domestic revenue, online revenue increased 110 basis points to 7.5%, versus 6.4% last year.
As we enter the fourth quarter in the online channel, we will be comping last year's gaming console introductions in our initial 400 store ship-from-store roll-out.
Therefore, as the fourth quarter last year was the first quarter we benefited from these growth drivers, this year's fourth quarter will experience approximately 600 basis points of growth pressure that we did not have in the first three quarters of this year.
From a merchandising perspective in the third quarter, comparable sales growth in computing, gaming, televisions, and appliances was partially offset by declines in other categories, including services, mobile excluding the impact of installment billing, and tablets.
The services comparable sales decline of 10.3% was primarily driven by lower mobile repair revenue, due to our success in decreasing claim severity and frequency, which is an operational positive, and lower attach rates.
International revenue of $1.4 billion declined 8.4%.
This decline was primarily driven by the negative impact of foreign currency exchange rate fluctuations, a comparable sales decline of 3% driven by China, and the loss of revenue from store closures in Canada and China.
Turning now to gross profits, the Enterprise non-GAAP gross profit rate for the third quarter was 22.7%, versus 23.1% last year, a decline of 40 basis points.
The domestic non-gross profit rate declined 50 basis points to 23%, versus 23.5% last year.
This decline was primarily due to a lower gross profit rate in the mobile business, including ongoing declines in customer demand for stand-alone mobile broadband products, structural investments in price competitiveness, particularly in accessories, increased revenue in the lower-margin gaming category, a highly competitive promotional environment in tablets, and a 10 basis point negative impact related to the less-favorable economics of the new credit card agreement.
These declines were partially offset, though, by increased revenue in higher-margin large-screen televisions, the realization of our Renew Blue cost reductions and other supply chain cost-containment initiatives, and the receipt of $11.5 million, or 15 basis points, in restitution from a legal claim related to an inventory dispute.
The international gross profit rate was 20.7%, versus 21.2% last year.
This 50 basis point decline was primarily driven by our Canadian business, due to a highly competitive promotional environment in tablets, and higher revenue in the lower-margin gaming category.
Now turning to SG&A, enterprise-level non-GAAP SG&A was $1.9 billion, or 20.5% of revenue, versus 21.7% last year, a decline of $104 million, or 120 basis points.
Domestic non-GAAP SG&A was $1.6 billion, or 20.3% of revenue, versus 21.7% of revenue last year, a decline of $68 million, or 140 basis points.
This rate decline was primarily driven by the realization of our Renew Blue cost-reduction initiatives, and tighter expense management throughout the Company.
These declines were partially offset by Renew Blue investments in online growth and other customer-facing initiatives.
International non-GAAP SG&A was $297 million, or 21.4% of revenue, versus 22% of revenue last year, a decline of $36 million, or 60 basis points.
This rate decline was primarily driven by Renew Blue cost reductions and tighter expense management in Canada, and to a lesser extent in China.
As it relates to the international segment, while we've made considerable progress on our Renew Blue cost-reduction initiatives, we have substantial work to do on top-line stabilization.
To address this, we are executing against the same Renew Blue transformation road map that we are pursuing in the US.
From a balance sheet perspective, merchandise inventories decreased $78 million, or 1.1%, to $6.9 billion.
Although we accelerated inventory purchases in anticipation of West Coast port delays, these incremental receipts were more than offset by better-than-expected revenues.
But as we said last quarter, we do expect to end the year with higher inventory levels in the range of $150 million in order to support our ultra-high definition television, accessories, and Pacific Kitchen and Home expansions, as well as our initiatives to reduce retail out of stock.
I'd now like to talk about the financial outlook for the fourth quarter.
As Hubert outlined earlier, there are internal and external factors with both positive and negative implications that we believe will influence our enterprise financial results in the fourth quarter.
Considering these factors, we are expecting the following impacts in the fourth quarter.
Near flat year-over-year revenue and comparable sales growth, assuming revenue declines in the NPD-reported consumer electronic categories are in line with Q3; an improvement in the year-over-year gross-profit rate; and flat year-over-year SG&A dollars, due to higher incentive compensation and intensified investments in customer-facing initiatives.
We will also recognize an incremental $20 million on the SG&A line due to a greater proportion of our vendor funding being recorded as an offset to cost of goods sold, rather than an offset to SG&A.
The net result of all these impacts similar to last quarter's outlook is an approximate 50 basis point year-over-year expansion in the Q4 non-GAAP operating income rate.
Additionally in the fourth quarter, as we said before, the estimated diluted earnings per share impact of the discreet tax items that we discussed will continue to be in the range of a negative $0.09 to $0.10 in Q4.
With that, I will now turn the call over to the operator for questions.
Operator
Thank you.
(Operator Instructions)
Kate McShane, Citi.
- Analyst
Thank you.
Good morning, and congratulations.
- President and CEO
Thank you, Kate.
- Analyst
I was wondering if you could walk through in a little bit more detail the impact of mobile in Q3.
Obviously there was the big launch in September, but I wondered if you could walk through what some of the dynamics were with the launch, and how you think this will maybe differ in Q4.
- President and CEO
Yes, thank you.
There's a couple or three things I would highlight.
Prior to this iconic launch, we saw continued pent-up demand, so the market dried up, and had a significantly negative impact on our mobile revenue.
Then, at the launch, we did quite well, but then supply was uneven during the quarter, so that's a positive followed by a negative.
We did see nice positives from our expanded accessories assortment.
If you visited our store or the site, I think you will have seen that.
So, that was a positive.
Then you have the shift into installment billing.
If you remember, last year we didn't have installment billing.
We started in the spring.
It's now grown very significantly, with the impact you've seen on our comps that Sharon has -- and I have split out.
A benefit of installment billing is the increased attach rate on services and accessories, as well as the mixing it to more expensive phones.
For the customer, it's a great -- installment billing is a great value proposition from a customer standpoint.
We ourselves, we want to be agnostic.
We want to sell whatever makes sense to the customers.
But it's a great value proposition for the customer, and therefore they tend to buy a little bit more.
So, these are the various drivers.
Now, looking into Q4, a main uncertainty remains the availability of iconic phones.
There's a number there but we can think of at least one or two.
That's very difficult to focus, so we do expect to continue to be constrained during the quarter on that standpoint.
What you will see, however, of course compared to last year, is the fact that we now have installment billing which we didn't have last year.
I think in our prepared remarks we touched on that.
So, Kate, these are the factors I would highlight.
I'm turning to Sharon to see whether I forgot anything notable.
- Chief Administrative Officer and CFO
No, Hubert, I think you've covered it.
- President and CEO
Thank you.
- Analyst
Okay.
Thank you very much.
- President and CEO
Thank you.
Operator
Gary Balter, Credit Suisse.
- Analyst
Thank you.
First of all, congratulations to both of you on --.
- President and CEO
Gary, we can barely hear you.
I'm sorry.
Good morning, Gary.
- Analyst
Okay, I'll speak up.
- President and CEO
Yes, thank you.
- Analyst
Hopefully it won't be too loud.
Congratulations to both of you on results to date and, I'm sure, further progress.
- President and CEO
Thank you.
- Analyst
The question I had was, last year -- and you touched on it, Hubert and Sharon, last year between Black Friday and Christmas you had trouble driving traffic to the stores.
I don't want you to give your competitive -- given competitors are probably listening to this call, I don't want you to give competitive-sensitive information, but could you describe, if anything -- whatever you can share with us -- what your plans are between Black Friday and Christmas to create more excitement in the stores?
- President and CEO
Yes.
You're right to highlight that week two and week three of December last year were quite extraordinarily bad -- not just for us.
This was industry-wide.
If you remember, you had a bit of a perfect storm last year, with a rapid shift to online and traffic to the malls and the stores that was quite extraordinary.
I think last year we all agreed was -- there were so many unique factors that it's going to be hard to replicate the kind of drama that we had last year.
I think we have detailed on the call our overall elements of our plan for holiday.
I'm not going to give you the play by play, day by day, because I know our friends in [Benton] here who are on the phone would appreciate that too much, or other places in the world.
I think that the plans we've built really combine three elements.
One is the cumulative effect of everything we've been working on over the last year to improve the customer service with our device service, convenience, as well as all of the lessons from that, including -- one I would highlight is gifting, as well as in particular gifting below $100.
I think our improved messaging as well -- marketing messaging, more targeted.
Last year, if you remember, it was a little bit too much of buy in the next two days, otherwise it's going to be too late.
Then three days later we would tell you buy in the next two days, as well.
I think we're going to be -- our marketing messages, you may have noticed that, were a bit more balanced, more targeted, and hopefully create some more excitement.
To be candid, we are also prepared from the standpoint of being -- combining science and judgment in our promotional activities, and so forth.
I must say that, last year, during these last two weeks, many of us were perplexed, and there was a bit of over-reaction at that time last year.
The program combines that -- Renew Blue transformation and then the lessons from last year.
Then wish us some luck, okay?
Thank you, Gary.
- Analyst
Thank you.
- VP of IR
Operator, next question?
Operator
Dan Wewer, Raymond James.
- Analyst
Thanks.
Hubert, I wanted to follow up on your comments beyond the fourth quarter of this year -- specifically, if you continue to believe Best Buy has the potential to reach a 5% operating margin rate.
If so, how do you envision the amount of square footage changing going forward -- either closing Best Buy mobility stores, reducing the size of big-box stores, or perhaps closing big-box stores as those leases expire?
- President and CEO
Yes.
Thank you, Dan.
On the 5% to 6% operating income, we do believe that the structural industry changes we are seeing are going to put pressure on that range; but we also believe that these changes could drive opportunities for us, as well.
So, we'll continue to monitor both as we progress through the next phase of our transformation.
As relates to the store footprint, the way we think about this -- and we've been very consistent in talking about ongoing thoughtful rationalization of our store footprint -- I repeat something we said on the last call and maybe elaborate a little bit.
We do see, like all retailers, a shift to online.
Customers are starting their shopping journey online.
It's so convenient.
Sometimes they're completing the shopping journey online.
We like that.
In our case, by the way, 40% of revenue then gets picked up in the stores.
And sometimes the transaction itself is completed in the stores.
But the result of this is fewer trips to the stores, right, either because you've completed the transaction online, or because you've done so much research that you don't need as many trips to the store per purchase to complete the transaction.
So, what does it mean for the stores?
It means that the trip to the stores need to be extraordinary from a customer experience standpoint.
For the transactions that are high touch and large cube, it needs to be an amazing customer experience.
And it needs to be very efficient for in-store pickup, or the -- I'm on a business trip, I forgot my phone charger, and I need one quickly.
And, by the way, the stores are still and probably forever will be the best solution if you want it now.
Now is convenient.
So, our vision for the store footprint is related to this.
Now, the other factor we take into consideration is the fact that we have very few stores -- and we have been very consistent in saying this -- we have very few stores that are not cash-flow positive.
So, we continue to feel that closing stores ahead of lease expiration is simply not helpful from a shareholder standpoint.
And, the other thing that everybody has to recognize, as we certainly do, is that when you close stores you don't retain all of the customers.
So, one of the things we are excited about is our ability to personalize and target our communication with customers that, as it increases over time, will be very helpful to be able to help the customers work the journey of ongoing floor space optimization.
We continue to see that as a gradual and thoughtful process.
Now, as we close stores -- everything else being equal -- we will, even with increased personalization, see some lost revenue.
And, therefore, you'll see an increase in profitability with slightly less revenue -- everything else being equal -- because, of course, we can also find other ways to grow the revenue.
These are our current thoughts on this continued transformation on the fourth quarter.
- Analyst
Okay.
Sharon, one real quick question.
You talked about a 15-basis-point or a $0.02-per-share benefit from tax settlement -- I think you said regarding inventory.
Does that show up on the income statement on gross margin rate?
- Chief Administrative Officer and CFO
Yes.
This was a legal settlement, not a tax settlement.
We have the tax issue and then the legal settlement.
- Analyst
Right.
- Chief Administrative Officer and CFO
The legal settlement was around inventory, thus it's a reduction of cost of goods sold, and it shows up in the gross profit.
- Analyst
Okay, thank you.
Operator
David Strasser, Janney Capital Markets.
- Analyst
Thank you very much.
A question to you, one of the things I've noticed more and more in the stores are the third-party sales people.
I'm trying to understand the dynamic of that, as far as whether or not -- I've heard some people say -- I'm pretty sure they're not your employees, but they're employees of the vendors.
I'm trying to understand that a little bit better -- and, as we go into the holiday season, how that will be -- how substantial you think that could be?
Is that helping on ASP?
Is it helping on close rates?
What times of the week these types of employees will be there?
A related question to that, which could be construed as a follow-up, would be, as I'm trying to look at the TV category, how much is ASP versus units in the TV-category strength that you saw in the third quarter?
- President and CEO
Thank you, David.
Let me be very clear about the sales staff in the stores.
With a couple of exceptions that date back a while, the labor that we have for our various vendor experiences is Best Buy labor.
We get funding from the vendors.
They may have on their shirts some reference to a specific vendor to indicate their expertise.
But they are Best Buy labor.
I spend -- as you would expect and appreciate -- a lot of times in the stores.
And we pay a lot of attention to continuing to provide customers knowledgeable, unbiased advice.
Because we feel that this is very valuable to the customers, and it's also a very strong part of our culture.
This being said, we like the fact that we have put an emphasis on customer-facing labor, even though we've reduced our SG&A.
Materially, as you know, we've put emphasis on customer-facing labor.
We like the fact that we are getting help from our vendors from that standpoint, and we love the impact on the customer experience, and, of course, the ability to sell more and sell better.
We briefly alluded, incidentally, in our prepared remarks, on an opportunity that we have that we are quite excited about, which is efforts in our retail stores to improve sales effectiveness and increase our leverage from labor that, over time, we'll be able to talk to you all about.
That's what I would say in general about store labor.
Now, Sharon do you want to answer the question about TV ASPs and units?
- Chief Administrative Officer and CFO
Absolutely.
As you'd expect, Dave, we're seeing favorability in both.
- Analyst
Is there one more dramatic than the other?
- Chief Administrative Officer and CFO
From a competitive point of view, we are not going to be disclosing a lot about the UHD cycle.
But, obviously, you can see in the stores the pricing on the TVs, et cetera, so you're going to have an ASP benefit at the high end.
Then you're going to have -- we're also -- as you know, we play across the entire category, so a large piece of our TV business is not actually in UHD, as well.
We're seeing -- we saw very strong television category this quarter, but we're going to be short on details from a competitive point of view as we go into holiday.
- Analyst
I guess I have to accept that.
Thank you.
- Chief Administrative Officer and CFO
Okay, sorry (laughter).
Operator
Michael Lasser, UBS.
- Analyst
Good morning.
Thanks a lot for taking my question.
As you look across the promotional landscape for the holidays, and the deals that you're already able to see from others, what is your impression about the margin that your competition is willing to invest this year versus last year?
How does that ebb and flow over the course of the period?
- President and CEO
Good morning, Michael.
I would answer the following way.
In general, we -- in line with our expectation, the promotional environment is very intense.
It is certainly not less intense than last year.
If anything, it's probably a little bit more intense than last year.
I think that all of you follow the sector, so I don't need to point you to this or that player.
I don't know, of course, how much money people are spending.
I don't have access to their P&L, but the promotional season is off to a very vibrant start.
I would put it this way.
As a result, in our outlook for the Q, we've not been betting on help from that standpoint.
In fact, we've been quite realistic.
The one thing I would highlight in that context in terms of what we do about it is, again, the combination of science and judgment on our own promotional activities and competitive reaction.
- Analyst
Okay, that's helpful.
As a quick follow-up, can you give us a flavor for how well you're able to not only attach, but also cross sell that traffic that came into your stores in the third quarter for iPhones?
Do you think you'll be able to sustain that type of performance into the fourth quarter?
Thank you so much.
- President and CEO
Yes.
Thank you for relating that.
These iconic launches generate significant traffic.
We are happy with the accessories and services attach.
Now is it in fact related to the installment billing?
I think we've said that.
In general, one of the things we've said in our prepared remarks is that the traffic trend to our retail stores was still negative, as improved compared to the first half of the year.
Now, what is the weight of these phone launches versus other factors?
I would actually say that the mobile part of our stores is by far not the only place in the stores where we have transformed the experience.
I wouldn't exaggerate the impact from a traffic standpoint of these launches.
- Analyst
Okay.
Good luck with the holidays.
Thank you so much.
- President and CEO
Thank you.
Operator
Chris Horvers, JPMorgan.
- Analyst
You've flipped the positive comps here.
You're talking about flat revenues in the fourth quarter, gross margin up.
All these point to a building cash balance in the balance sheet.
I know it's been very important to see things like gross margin stabilize and sales stabilize.
How are you thinking about the cash as you get beyond the fourth quarter?
- Chief Administrative Officer and CFO
Chris, I'll take that.
The really -- of course, have we said consistently we're going to continue to maintain a very strong balance sheet.
Once we get past the fourth quarter, of course, the cash flows in the fourth quarter are significant.
We understand that, at that point, there's going to be significant cash on the balance sheet, and we will, at that point, start looking at alternatives.
As you know, we continue to be deeply committed to our dividends.
I know your question is really about, are you going to begin implementing share repurchase programs?
That is a discussion that we are not prepared and not wanting to have today; but when we go into next year, rest assured, that we know how important this is to our investors, and we will continue to evaluate that.
The number one use of cash for us is investing in future growth right now.
So, where we can utilize that cash to drive these customer-facing initiatives, that will be our top priority, and then we will look to other vehicles for using the cash beyond that.
- Analyst
Understood.
As you -- but another way to think about it is, where -- based on the updated results, it would seem like you're going to have about $4 billion of cash in the balance sheet.
Is there a level that your key vendor partners look to in saying that's -- a cash value of that is something that is a strong show of confidence, and makes us feel really good about providing you great terms?
It's sort of a minimum cash balance level?
- Chief Administrative Officer and CFO
I think that we have an obligation to our vendors to maintain a strong balance sheet.
When you look at the investments that our vendors have made in our stores in the last 12 months -- 12 to 18 months -- it is incredible.
It is hundreds -- it is literally hundreds of millions of dollars that they have put into our stores to represent their customer experience.
So, we believe very strongly that our strong balance sheet has been one of the reasons why they have had great confidence in putting that kind of capital into their customer experience in our Best Buy stores.
You can never exactly square root what number is it that they're looking for on the balance sheet, but let's keep in mind that we are a $40-billion-plus retailer, and we are heavily fourth quarter weighted.
So, I think that we need to be very -- we're going to be very thoughtful about the intangibles, as well as the tangible implications of any cash decision that we make.
I know that we've had this conversation, and I so recognize and we recognize the importance of the discussion of uses of cash for our shareholders.
I like the fact that you guys all understand how important it is to our vendors, because I think we used this example in a couple of our meetings earlier this year.
But, when you think about it from a vendor point of view, right now, some of our largest vendors are sitting with receivables from Best Buy unsecured.
Nobody wants their inventory back.
They may be lending you up to $2 billion at any point in time.
So, what looks like a lot to some doesn't look like so much to another board sitting across the country, right?
That's where we sit on that topic.
- Analyst
Understood.
Thanks very much, and good luck in the fourth quarter.
- Chief Administrative Officer and CFO
Thank you so much.
- President and CEO
Thank you.
Operator
Matthew Fassler, Goldman Sachs.
- Analyst
Good morning.
My questions are focused on wireless.
As you look at all the significant changes in this market place, focusing on installment billing, and also the trade-in dynamic, which I know upsides into many more transactions, how are these impacting the consumer's perception of affordability and the frequency of wireless purchases, and also the basket that they seem to be looking for?
- President and CEO
Yes, thank you, Matthew.
Good morning.
We continue to believe a number of things.
One is the wireless space is obviously a large and very dynamic market.
Of course there's a bit of saturations from a smartphone penetration, but there's also new usage.
The phone -- the mobile phone is really the center of people's lives, in that it's highly connected, if I can use that phrase to other topics, such as connected home and health and fitness.
It is a very -- it's an area of very intense interest on our part, and of our industry.
The installment billing development is a positive development from the customer standpoint, because it provides much more flexibility to the customer.
As you know, after one year you can actually upgrade.
So, while the previous contractual arrangements of post-paid was a two-year contractual commitment, you now have the ability to upgrade after one year.
The fact that it's a monthly billing also is an encouragement -- facilitates, we find, attaching, or from a customer standpoint, buying services and accessories.
These are positive developments.
You mentioned trade-in.
Trade-in, in effect, with the installment billing, is embedded into the program.
So, which was a phenomenon in the last couple of years is now structurally integrated in these new offerings.
All of this constitutes a set of positive developments.
It's an area where we continue to see opportunities for us above and beyond simply the phone functionalities, as we represent in our stores a broad range of products that can get connected in the homes and the lives of the customers.
- Analyst
If I could ask a very brief follow-up, Sharon, you talked about the consumer electronics market expectation that drove your near-flat comp assumption for the fourth quarter.
What kind of wireless expectation is embedded into that alongside that CE number?
- Chief Administrative Officer and CFO
We're not guiding, Matt, by category; but, clearly, when you think about -- last year, we had two issues in mobile.
The first was that, because of installment billing, the carriers stopped upgrades -- early upgrades, remember?
In addition, we couldn't sell installment billing.
So, we had structural impediments in the fourth quarter of last year that we do not have this year.
Therefore, you could obviously expect that we would hope to see a significantly better mobile business in the fourth quarter this year versus last year.
- President and CEO
What I would add to this, Matthew, is that the flat revenue and comp indication we are providing this morning incorporates -- includes the mobile phone business.
It's not limited to the NPD categories.
As you know, Q4 is an intensively competitive arena, where a lot of retailers use CE to generate excitement in our stores and so forth, so flat overall is the number we have shared this morning.
- Analyst
Thanks, guys.
- President and CEO
Thank you.
Operator
Peter Keith, Piper Jaffray.
- President and CEO
This may be the last question, so that people can move on to their rest of the day.
- Analyst
Thanks, everyone.
Good morning, and congratulations.
I'll just keep it to one question.
As a follow-up to the last comment around the Q4 comp guide for Q4, one of the things that looked impressive in Q3 was that your GAAP relative to the NPD data widened.
It looks like for Q4 you're calling for it tighten up again.
I'm wondering, structurally, is there anything going on with product sales that's going to cause that tightening that we should be aware of?
Thank you.
- President and CEO
Yes.
Good morning, and thank you.
One thing I would highlight is the comment on discipline around promotional activities.
We are interested in comps, but not empty calories.
In some cases -- in other words, we don't want to be so addicted to the notion of positive comps that we would do unnatural thing from a promotional standpoint.
That may be what impacts the comments this morning on the outlook.
With that, I'd like to -- or maybe, Sharon, you want to add something?
- Chief Administrative Officer and CFO
I'll just add -- two more points.
The first is, recall that last year that we had launched 400 stores that were shipping from stores, so we created that inventory availability last year.
Now, this year, we have the 1,400 stores shipping, but the 400 stores did, as you'll recall, drive increased revenue last year.
The second point is, which I also mentioned in my prepared remarks, is that last year the new gaming consoles were launched, and their deliveries were in the fourth quarter.
We had the pre-order revenue in Q3 but the deliveries in Q4, and those were substantial.
So, as we look to the fourth quarter, we are expecting to see some potential differences in the strength of the hardware related to those consoles, obviously, so those would be two other pressures.
Remember that the gaming is not in those NPD categories that we discussed.
Those are a couple of other points just to consider.
We quantified that on the online growth last year at about 600 basis points of benefit last year -- because, remember, we had over a 25% growth in online last year.
I would not want you to put that in there when you're trying to do the math.
Those two factors are necessary in order to get in line with the outcomes that we put into the outlook.
- President and CEO
Yes, thank you so much, Sharon.
In closing, I wanted to do a couple of things.
One, obviously, thank our teams in all functions and geographies for the progress -- continued progress and results that we, collectively -- they, collectively, have delivered, and, of course, for their very exciting mobilization for holiday.
It's always a very special moment of the year.
Our teams are ready to welcome all of our customers, including all of you on the call, and I want to salute them for their preparedness.
And, of course, I want to thank you, everyone on the call, for your continued support, and wish you a wonderful holiday season, which I know will include a few trips to Best Buy.
You have at least two reasons to do that: one is, check how prepared we are; and, of course, at the same time, you can make progress on your holiday shopping adventures.
So, we'll see you in the stores, or on our site, at your convenience.
Have a great holiday with your families, and we'll continue to be with you on the journey.
Thank you so much.
Operator
That concludes today's conference call.
We thank you for your participation.