百思買 (BBY) 2016 Q2 法說會逐字稿

Welcome to the Best Buy second-quarter FY16 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 conference call over to Mollie O'Brien, Vice President Investor Relations.

Good morning.

Thank you.

Joining me on the call today are Hubert Joly, our Chairman and CEO and Sharon McCollam, our CAO and CFO.

This morning's conference call must be considered in conjunction with the earnings press release we issued this morning.

Today's release and conference call 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 comparison 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 referred to consumer electronics industry trends.

The consumer electronics industry as defined and tracked by the NPD Group includes TV's, 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.

Thank you, Mollie.

Good morning, everyone.

Thank you for joining us.

I'll begin today with an overview of our second-quarter results.

I will then provide highlights of the progress we are making against our priorities and then turn the call over to Sharon for additional details on our quarterly results and commentary on our financial outlook.

So first, our financial results.

The results we are reporting today are strong, with both significant top line and bottom line growth in the Domestic business.

We believe these better than expected results are affirmation that our strategy of offering advice, service and convenience at competitive prices is paying off.

So more specifically, Enterprise revenue grew 0.8% to $8.5 billion, driven by a 3.9% increase in the Domestic segment, partially offset by the impact of the Canadian brand consolidation and 120 basis points of pressure from foreign currency.

Better year-over-year performance in the Domestic segment drove a 50 basis point increase in the Enterprise non-GAAP operating income rate to 3.4% and a 17% increase in non-GAAP diluted EPS to $0.49.

We also returned $321 million in cash to shareholders through share repurchases, in addition to $81 million in regular dividends.

In the Domestic business, our comparable sales increased 2.7% excluding the impact of installment billing, driven by continued strong performance in major appliances, large screen televisions and mobile phones.

Online comparable sales increased 17% as our investments in new capabilities continue to drive increased traffic and higher conversion rates.

We also saw industry revenue in the NPD-tracked categories, which represent 65% of our revenue, improve from a decline of 5.3% in Q1 to a decline of 1.3% in Q2.

In the International business, while revenue declined due to store closures and foreign currency, we're seeing higher than expected retention from the 66 permanently closed Future Shop locations in Canada.

We're now in the midst of converting the remaining 65 Future Shop locations to the Best Buy brands.

Much of the work and investments around building a superior multi-channel customer experience are still ahead of us, as we will discuss later in the call today.

Now, before I share specific highlights on our progress on key FY16 initiatives, I'd like to discuss a few strategic observations about what we believe has been driving our recent performance.

While recognizing the current turbulence in the financial markets, we do feel this is an opportune time to do this, as it is almost three years to the day of my appointment and nearly three years since the launch of our Renew Blue strategy.

Our first observation is that overall consumer demand for technology products and services, including appliances and mobile phones, is growing.

This growth is driven by technology product innovation -- excuse me, by technology and product innovation and by micro factors such as population growth, the housing recovery and healthy living trends that are driving momentum in our appliance, home theatre, connected home, and health and wearables businesses, which we believe will remain positive catalysts in quarters to come.

In addition, the increasing complexity and interoperability of technology products and the advent of the internet-of-things are making Best Buy's operating model increasingly relevant as customers want and need more help selecting, installing, connecting, integrating, using, maintaining and taking full advantage of their products.

Our second observation, which I mentioned earlier, is that the investments that we have made in our Renew Blue strategy to offer advice, service and convenience at competitive prices are paying off.

This is evidenced by the market share gains we have achieved in the NPD-tracked categories, our growth in appliances and mobile phones and the overall positive Domestic comps and expanded operating income rate that we have delivered both last year and year-to-date this year.

Our third and final observation is that we have three distinct, competitive advantages that help us win with customers, drive better financial results and are hard for competitors to replicate.

The first competitive advantage is our ability to serve our customers online, in-store and in their home; what does this mean?

We now offer a leading edge digital shopping experience to our customers, online and in our new mobile app.

We have stores within 15 minutes of 70% of the US population that not only provide advice, service and convenience to our in-store customers but also operate as local distribution centers to provide online customers with greater inventory availability and faster delivery.

Through Geek Squad, we're able to provide an array of services to our customers remotely, in our stores and in their home.

The second competitive advantage is our positioning in the marketplace, which allows us to benefit from early adopters who choose Best Buy when new, exciting technology is released.

Our strong merchandising and vendor partnerships will allow us to showcase the best of what is selling, which in turn positions us to outperform the sales trends within the NPD-tracked consumer electronics categories even when they are negative.

Which leads us to our third competitive advantage, which is our vendor partnerships.

Not only do we showcase the best of what our vendors offer, we are also benefiting from the material investments that several of the world's leading technology companies are making in our stores.

With these partnerships, we're able to bring to life interactive technology experiences that again make the Best Buy operating model more relevant for customers.

As you'll hear later in the call, our vendor partnerships are continuing to grow, confirming that they are bringing value not only to our customers and Best Buy but also to our vendor partners.

So now with these observations as a back drop, I'd like to discuss our progress on key FY16 initiatives.

This quarter, I'm going to start with services, as it is a critical component of our Renew Blue strategy.

We have significant services assets today including our ability to assist customers in our stores, remotely and in their homes.

We currently have approximately 20,000 Geek Squad agents and Magnolia system designers.

We're proud of the services we offer as they generate some of our highest NPS scores.

Now, two things have been negatively impacting our services top line.

The first is the reduced frequency and severity of claims on our extended warranties.

This had the impact of reducing our repair revenue, which at face value appears negative, but is actually beneficial both financially and operationally.

The second is the decline of our traditional warranty business.

We are addressing this decline by materially renewing our service offerings to make them compelling and price competitive.

More broadly, we are ramping up our strategic investments in our services business to make it play an increasing role in our Renew Blue transformation as a differentiator, as a business driver and as a profit center in its own right.

In this context, we have several new developments to share this quarter.

They are all part of evolving this business from a traditional warranty business to a valuated services business that addresses the help our customers need.

So first, in our computing and tablet service categories, beginning September 13, we're launching a range of services including Geek Squad Protect & Support Plus, which combines hardware support, 24x7 software support and accidental damage in one plan, priced very competitively.

Second, we will also begin selling Apple Care later this quarter.

Additionally, we will proceed to rollout our capabilities as an Apple Authorized Service Provider, first with install pilots in 50 locations by holiday.

Third, we've begun to offer a range of classes to help customers take advantage of their technology products including in our digital imaging hubs, in our Samsung experience shops, and in our Windows stores around the launch of Windows 10.

In support of this services strategy, we are investing in talent, systems and processes to further enhance the quality and scope of the services we deliver to our customers.

We are also continuing to drive operational and cost efficiencies, which are resulting in reduced repair costs and a higher year-over-year gross profit rate.

I'll now turn to our progress on our merchandising initiatives.

In appliances, we've rolled out 35 of the 60 additional Pacific kitchen and home stores-within-a-store planned for this year, increasing their presence to 152 of our stores.

We also began the rollout of our expanded Samsung appliance experiences and expect to rollout approximately 225 Samsung open houses by the end of the year, which will be the largest dedicated in-store display of Samsung appliances in the US.

In home theatre, we've continued to solidify our position as the destination for customers to discover and interact with industry leading home theatre technology particularly Hi-Definition -- excuse me, Ultra Hi-Definition or 4K TVs.

We've expanded our Samsung home theatre stores-within-a-store from 500 at launch to 603 and the Sony home theatre stores-within-a-store from 350 at launch to 372.

We've also rolled out 5 of the 20 planned Magnolia Design Center stores-within-a-store for this year increasing their presence to 63 of our stores.

As we enter the back half of the year and as pricing of these technologies becomes even more affordable, we believe that we will continue to benefit from the customer moving to larger screen televisions and 4K technology.

In computing, we believe we are optimally positioned to help customers transition to the new Windows 10 operating system that was introduced at the end of July.

We have a very large selection of laptops with Windows 10 already installed and a compelling in-store experience with our Windows store-within-a-store.

Today, we have over 600 of these in the US and expect to have over 800 by holiday.

We've also been working with Apple to update the 740 stores-within-a-store that were first implemented in 2007.

The stores-within-a-store will have new Apple fixtures and are larger with more display tables of phones, computers and tablets.

We've already implemented approximately 350 of them and expect to upgrade a total of approximately 520 by holiday.

The additional display tables are great for the merchandising of Apple Watch, which went on sale on BestBuy.com and in more than 100 of our stores in August.

Now because demand for Apple Watch has been so strong in these stores and online, we are excited to share that beginning September 4, we will be carrying Apple Watch in more than 900 of our big box stores.

Apple Watch will be available in all 1,050 of our big box stores and approximately 30 of our Best Buy mobile stores by the end of September.

Now I'd like to share some of the recent developments related to our online experience.

In the second quarter, we continued to leverage our ship-from-store digital marketing and enhanced website functionality to drive a 17% increase in Domestic comparable online sales.

This growth was driven, number one, by a significantly increased number of our online customers who received and took advantage of our free two day shipping promise enabled by enhancements to our ship-from-store capability and supply chain investments that are driving improved speed, convenience and reliability.

Number two, increase -- by the increased visibility of open box and clearance inventory.

Number three, by the expansion of online only/sales.

We also launched several customer facing site improvements including expanded payment options for our customers through partnering with American Express to offer Pay With Points, the ability to search and shop by brand and a significantly more relevant recommendation engine.

Turning to costs.

To date, we have eliminated $100 million in annualized costs as part of our Renew Blue Phase II, cost reduction and gross profit optimization program, which has a goal of $400 million over the next -- over three years.

These savings will be offset, however by the incremental investments in our future growth initiatives, which for this year, we expect to be approximately $120 million.

To date, we've invested approximately $65 million to fund these initiatives of which $35 million was in the second quarter.

So to repeat.

We are proud of the results we are reporting today.

As we look forward, the combination of an opportunity rich environments and the strength of our competitive advantages lead us to have a positive outlook about our future prospects, starting with the important back-to-school third quarter.

So of course we would like to thank all of our associates for their hard work and contributions to our success.

The opportunities we have before us today are possible because of the talent and engagement of our entire team.

I am extraordinarily proud of their performance and ability to win.

I will now turn the call over to Sharon to discuss the details of our second-quarter financials and our third-quarter outlook.

Thank you, Hubert.

Good morning, everyone.

Before I talk about our second-quarter better than expected results versus last year, I would like to talk about them versus the expectations we shared with you last quarter.

Our Enterprise revenue of $8.5 billion exceeded our expectations due to a stronger than expected overall performance in our Domestic business, in addition to higher sales retention from previously closed stores in our Canadian brand consolidation.

Our non-GAAP operating income rate of 3.4% also exceeded our expectations, due to a higher gross profit rate in our computing business, a higher gross profit rate in our services business due to a periodic profit-sharing payment from our externally managed extended service plan portfolio and an extended warranty deferred revenue adjustment and a better than expected performance of our credit card portfolio.

As Hubert said, we are extremely proud of the team who drove these better than expected results.

I will now talk to you about our second-quarter results versus last year.

Enterprise revenue increased 0.8% to $8.5 billion.

Enterprise non-GAAP diluted EPS increased $0.07 to $0.49, driven primarily by stronger year-over-year performance in the Domestic business from higher sales volume, improved gross profit rates and a $0.04 periodic profit-sharing payment and deferred revenue adjustment that we just discussed.

These year-over-year increases were partially offset by a negative $0.02 impact from a higher effective income tax rate, due to a discrete tax benefit in Q2 FY15 that did not recur this year.

In our Domestic segment, revenue increased 3.9% to $7.9 billion.

Our revenue growth was primarily driven by comparable sales growth of 2.7% excluding the benefit from installment billings, an estimated 110 basis point benefit associated with installment billing and a 30 basis point benefit from the periodic profit-sharing payment and deferred revenue adjustment in services.

Our Domestic comparable online revenue increased 17% driven by increased traffic and higher conversion rates.

As a percentage of total Domestic revenue, online revenue increased 90 basis points to 8.6% versus 7.7% last year.

Versus last year's growth rate of 22%, this year's online growth rate of 17% was lower primarily due to lapping over 1,000 basis points of growth from ship-from-store in Q2 last year.

This ship-from-store impact will continue through the back half of this year.

From a merchandising perspective, comparable sales growth in major appliances, televisions, mobile phones and health and fitness was partially offset by ongoing declines in tablets.

In services, revenues declined 13.1%.

As Hubert discussed earlier, this was primarily due to lower repair revenue and to a much lesser extent, declining attach rates in our traditional warranty business.

Since we expect this trend of lower repair revenue to continue, which is a positive, comparable sales and services are expected to continue to decline through the back half of this year.

In our International segment, revenue declined 25.6% to $650 million due to the loss of revenue associated with the closed stores as part of the Canadian brand consolidation, a negative foreign currency impact of approximately 1,200 basis points and ongoing softness in the Canadian economy and Canadian consumer electronics industry.

Turning now to gross profit.

The Enterprise non-GAAP gross profit rate increased 100 basis points to 24.4%.

The Domestic non-GAAP gross profit rate increased 120 basis points to 24.6%.

This increase was primarily due to the positive impact of changes in our mobile warranty plan, which resulted in lower costs due to lower claim frequency and severity, a rate improvement in computing hardware, an increased mix of higher margin large screen televisions, a 25 basis point impact from the periodic profit-sharing payment and deferred revenue adjustment we previously discussed and a positive mix benefit from significantly decreased revenue in the lower margin tablet category.

These increases were partially offset by a lower rate in the mobile category driven by increased sales of higher priced iconic mobile phones, which deliver higher gross profit dollars but carry a lower gross profit rate.

The International non-GAAP gross profit rate was flat year-over-year at 22.9%.

Now turning to SG&A.

Enterprise level non-GAAP SG&A was $1.8 billion or 21% of revenue, an increase of $57 million or 50 basis points.

Domestic non-GAAP SG&A was $1.6 billion or 20.6% of revenue, an increase of $114 million or 70 basis points.

This increase was primarily driven by investments in future growth initiatives, in addition to SG&A inflation and the higher incentive compensation.

International non-GAAP SG&A was $170 million or 26.2% of revenue, a decrease of $57 million but a rate increase of 20 basis points.

This dollar decrease was primarily driven by the elimination of expenses associated with closed stores as part of the Canadian brand consolidation and the positive impact of foreign exchange rates.

The 20 basis point increase is driven by year-over-year sales deleverage.

As it relates to the Canadian brand consolidation we incurred approximately $0.02 of negative non-GAAP diluted EPS in the first half of the year, which was lower than expected due to retaining sales at a higher than expected rate.

As such, we are reducing our estimated impact of the consolidation to a range of $0.10 to $0.17 in FY16 versus our original estimate of a negative $0.10 to $0.20 as the retention rate trends are expected to continue in the back half of the year.

By quarter, this expectation is broken down as follows.

The negative $0.02 per share we incurred in the first half, a negative $0.04 to $0.06 per share in Q3 and a negative $0.04 to $0.09 per share in Q4.

Ultimately when our consolidation initiatives are complete, we are expecting our Canadian business to be a more vibrant and more profitable business with profitability being defined as both higher operating income dollars and a higher operating income rate.

From a balance sheet perspective in the second quarter, we returned over $400 million in cash to our shareholders, $321 million through share repurchases and $81 million in regular dividends.

In addition, in the last two weeks, both Moody's and Standard & Poor's upgraded Best Buy's debt rating by one notch.

Moody's raised their rating to BAA1 and Standard & Poor's raised there's to BB-plus.

I would now like to talk about our financial outlook.

As Hubert said earlier, our competitive advantages and strong execution give us a positive outlook on our Domestic performance versus the industry, which bodes well for us as we enter the third quarter.

It is difficult to know though if the recent volatility in the financial markets will affect overall consumer spending.

To date, however, we have not seen a measurable impact versus our original expectation, so as such, our outlook assumes that there will be no material changes in consumer spending in the third quarter.

With that said, our year-over-year non-GAAP outlook for Q3 FY16 is as follows.

In the Domestic business, we are expecting flat to low single-digit revenue growth and an approximately flat operating income rate driven by a higher gross profit rate offset by increased SG&A due to inflation and growth related investments.

In the International business, due to the ongoing impacts of the Canadian brand consolidation and foreign currency, we are expecting an International revenue decline of approximately 30% and an International non-GAAP operating income rate in the range of negative 2.5% to negative 3.5%.

With these expectations, which assumed continued strength in our Domestic business offset by the near-term impacts of Canada.

At the Enterprise level, we expect a flat to negative low single-digit revenue growth rate and an operating income rate growth of flat to negative 20 basis points.

This includes an approximately 15 basis point negative year-over-year impact in the Domestic business due to an $11.5 million or $0.02 per share legal settlement that we received in Q3 of last year that will not recur this year.

Additionally, we expect the non-GAAP effective income tax rate from continuing operations to be in the range of 39% to 40% versus 38.1% last year, which could result in a negative $0.01 year-over-year non-GAAP diluted EPS impact in Q3 FY16.

I would now like to turn the call over to the operator for questions.

(Operator Instructions)

Anthony Chukumba, BB&T.

First off, congrats on a blowout quarter.

One thing that jumped out at me or one of the many things that jumped out at me was the 21% comp store sales growth in appliances.

I was just wondering, what would you attribute that to?

Then second off, how sustainable do you think that is going forward?

Maybe not at that rate, but a double-digit rate?

Thank you.

Good morning, Anthony.

Thank you for your comments.

So we are seeing sustained growth now over many, many quarters in our appliance business.

This is driven by, number one, the markets.

The housing recovery continues to be strong.

You're seeing customers equip their new house or replace their old appliances.

That's a very positive factor.

Then second, our investments in the appliance sector continue to be very strong.

The deployment of the Pacific kitchen and home stores-within-a-store in particular is helping us drive better customer experience and market share.

In particular -- not only in the extreme high end but also in the better and best part of the market, which is where a lot of the interesting action is.

We are also investing in the customer experience from an appliance delivery and installation standpoint, so these are very fundamental and sustained improvements.

Now, Anthony this may fluctuate a little bit quarter after quarter but we do expect continued traction including given the competitive environment that I won't elaborate on.

But we expect to continue to see positive performance in that segment.

Anthony, in addition to that, I'll just add one supply chain driver of this as well.

We made a significant change in how we source inventories through our distribution network in the US, which unlocked a substantial amount of inventory for both our online business and for our individual stores in market.

That is also a driver of this and that will too continue as we move forward.

Okay.

That's helpful.

Thank you.

Chris Horvers, JPMorgan.

I wanted to ask about the TV category.

It seems like we're in a sweet spot here.

How did the pace of price drops in the category -- are they occurring in line with expectations?

How did the performance trend, let's say, in the second quarter relative to the past couple quarters?

Is the elasticity there such that you can continue to see accelerating comps into the back half?

Yes.

Chris, the price drops that every one of us as a consumer can track are very material.

So the prices at which one can buy a 4K TV now are very, very exciting because we expect that this will continue in the second half.

As we've mentioned in the prepared remarks, these TVs are becoming very affordable.

Of course, the innovation and the material change in picture quality is very helpful.

So we expect the market to continue to do well in large TVs and 4K TVs.

Of course the second factor, a bit like in appliances, is the way we merchandise and the customer experience in our stores with the investments we've made together with some of our key partners -- with Samsung, with Sony, with LG and the Magnolia Design Centers allow us to really perform particularly well in that market.

So we see a number of very strong drivers of performance getting into the back half of the year.

Now, of course, as we get into the start of the cycle, as you would expect, the margins are not going to continue there at the same level, so factor this in.

But it's a very powerful cycle.

Then as a follow-up, I think, Sharon, last year, you talked about some back-to-school timing, shifting some demand into July.

We've heard a lot of other retailers talk about this shift unwinding and going the other way into August.

So any commentary that you can share on the cadence?

Your thoughts on August so far?

Any potential lift you've seen from shift?

I was going to say, the outlook that we've provided today on back-to-school in the quarter incorporates what we've seen so far; right?

As you would expect.

So the projection reflects what has been happening since the beginning of the quarter.

So I think we've made some positive comments on the overall back-to-school in our Q3 in general, so that's reflected.

But Chris, we also last year, that may have been a discussion from other retailers but that was not a dialogue that we had in our conference call last year.

Okay.

Fair enough.

Thanks very much.

Thank you, Chris.

Kate McShane, Citi.

My question centered around holiday 2015 and the expectations for the promotional environment.

This was some of the robustness especially in TVs.

Do you expect any alleviation in price competition as innovation remains pretty exciting going into the holiday season year-over-year?

Yes.

Good morning, Kate.

Let me say one thing about Q4.

Because we are the leader in the category and because any comment I would make today are highly sensitive from a competitive standpoint, you're going to find us relatively shy in terms of making comments that could be used against us, if I can put it this way.

What we have said in our prepared remarks is that we believe there are powerful trends from a demand standpoint around appliances, around TVs, around health and fitness and wearables and around connect at home.

The other thing I would say, more broadly speaking, not specific to Q4 from a competitive standpoint, if we step back a little bit -- I could have included that in my remarks about the last three years, it feels, I don't know whether all of you will agree with that, but that the competitive landscape has indeed changed a little bit in the last three years.

There's a number of players who have decided to de-emphasize or in some cases exit their category.

So that's an important factor.

It's true that it's a tough category.

So -- there you go.

The other thing that has changed in the last three years that is actually very notable, is the fact that today, 89% of the US population lives within states where one of our online competitors headquartered in Seattle, now collects the sales tax.

So three years ago, it was less than 50%.

It was probably around 40%.

So that's a very material change over a period of three years.

So altogether from a strategic standpoint, we see these growth drivers -- I would add based on your question that the competitive landscape has changed somewhat in the last three years.

I appreciate that.

Thank you.

Just another question, I mean the number of initiatives with the shop-in-shops and some of the new news that you announced with Apple today with Apple Care and the updating of the shop-in-shop, how do you let your customers know about all these changes?

Is it something that you're seeing the customers respond to?

Yes.

Thank you, Kate.

Marketing, we've not commented on marketing on this call.

We commented on marketing on every one of our previous calls.

We've had a very material transformation of our marketing efforts in the last three years, with our headline being of course more personalized.

We went from analog and mass communication to much more targeted relevant personalized and digital communication.

So as it relates to the shops-within-a-shop, one of the things of course is that there's not one of these in every store.

So as an example, we have the ability to target the messages in a relevant fashion.

Or we have the ability to target previous users of a particular brand and communicate the news and excitement about new product introductions.

More broadly speaking, I am very excited about how these partnerships with our key vendors have evolved.

It's more than just about the physical layout in the stores.

These are very close partnerships.

These leading tech companies invest billions of dollars in R&D.

They have some very exciting new products, of course regularly coming to market.

The collaboration that Best Buy has with some of these performance companies on the planet, in the tech sector, is very inspiring.

That includes from a merchandising standpoint.

That's from a marketing standpoint.

Now also from a services standpoint.

So yes, it's an entire collaboration.

I think we can attribute some of our performance to this more targeted, more relevant communication.

Customer database, Athena, has been now busy at work, Athena is very busy at our Company over the last one or two years.

We had always said it would be a gradual implementation and exploitation.

I think we are getting better and better at this.

Thank you.

David Schick, Stifel Nicolaus.

You talked about the Canadian recapture rate being better than I think you'd expected.

Just a quick question there.

Is that conservative assumptions as you planned it?

Or something that you're doing or adapting to?

I'm curious how that's working.

Yes, I mean, David, in general, we are very pleased with the way the Canadian strategy is being implemented.

Our team -- this was heavy lifting consolidating two brands into one, closing 66 stores, converting 65 stores.

Then investing in the customer experience.

So far things are really progressing very nicely.

The reason we don't give a specific number is again in part for competitive reason.

Two, it's early days.

Three, as all of you know, north of the border, the economy which is highly dependent on raw materials and the oil sector in particular has been impacted.

The exchange rate is down which is, of course, increasing the prices of consumer electronics product, which is slowing down demand.

So today, the better than expected retention is somewhat offset of course by the weakness of the Canadian economy.

I think we'll be able to assess with reliability the final results once we're through the conversion and once we've upgraded the customer experience, but altogether, it was obviously the right thing to do.

It's progressing quite nicely in a somewhat challenged Canadian economy.

Great.

As a follow-up question, you talked a little bit about the closer work with vendors and product launches.

I think in response to Kate's prior question, could you talk about how a product launch from a vendor works today versus a few years ago?

How Best Buy's interaction with a vendor on launching a product, if we step back and looked at it versus three years ago?

David, that's -- how much time do you have?

(laughter)

As long as you keep going.

Yes.

Because it really varies by vendor.

We have such a variety of vendors.

In some cases, we actually work very much upstream including in terms of product design and the choice of feature functionality.

Then this co-designing the customer experience and in the marketing.

In some cases, it's more about the merchandising and the market.

So there's a whole range.

But it's -- in general, what I would highlight is it happens earlier on.

It's more strategic.

It's more integrated.

It's working.

That would be the summary.

Now, a two hour conference we would need to schedule separately.

Got it.

Thanks very much.

Simeon Gutman, Morgan Stanley.

This is actually Tim [Terrazach] on for Simeon.

I just had a question around lapping the iPhone 6 sales from last year.

Can you measure the incremental traffic that -- brought to the stores?

Then what do you see as a potential impact from maybe iWatches potentially offsetting that?

So your question, does the launch of an iconic product generate traffic to the stores?

The answer is yes.

Increasingly again, that's one of the things we're working on with our key vendors is to make it more dramatic and more unique and more differentiated vis-a-vis any of the other retailers.

So I would say yes to that question.

As relates to your second question is, how does the Apple Watch momentum compare to the phone?

That would be too much detail I think at this point.

I think I would say we're very excited by again the early momentum of Apple Watch in our stores, which obviously have triggered the decision that we've made with Apple to have an accelerated and expanded rollout.

So we think that's very exciting news.

That's also reflective of how these partnerships -- the strength of these partnerships lead to more opportunities.

Okay.

Great, thanks.

But specifically around the iPhone 6, are you able to quantify the incremental traffic from last year?

We didn't release anything last year, Simeon, around the traffic but obviously we had substantial traffic associated because as you'll recall one of our big call outs in our revenue in Q3 was related to the iPhone 6. But it was actually from a revenue point of view and from a units point of view, if you'll recall.

It was very much about the revenue and not the unit.

So when you think about that because it's higher dollars.

So I would say that it was certainly a traffic driver and we are thrilled to have a new traffic driver this year, something very iconic.

I think we can all agree the Apple Watch is certainly iconic and having it in all 1,000 stores by the end of September is a big deal for us.

Okay.

Great.

Thanks.

Then my follow-up is around project Athena and some of your price optimization initiatives.

Can you just talk about where you are with those and are they expected to be in place by the holidays?

So there's two components.

Athena is really our customer database, which allows us to have this greater personalization and more relevant, more targeted communication.

So I think that we'll benefit from that during holiday.

I think what you've seen these last couple of quarters is very indicative of our capabilities.

We'll continue to incrementally improve back in the coming quarters.

As relates to the second part of your question, which is the promotional discipline, this is an area we have invested in.

I think, if I have to back over the last three years, we've had several phases.

One is we established a price match policy.

Two, we have invested significantly in our price competitiveness starting with hardware and then accessories.

You've heard me talk this morning about services.

We have previewed that in previous quarter but the launch of Geek Squad protect and support plus that's another step forward.

Then the other dimension you were talking about which we talked about last year is the promotional discipline.

We're applying more science and more tools to this area to make sure that the return on the promotional dollars is getting better and better.

So we're continuing to see improved progress in this area.

We'll continue to deploy this as we move forward.

We are a very data and science driven management team here on matters like that.

Simeon, going into holiday though and Q3 as well, with Athena, Athena is gradually and incrementally getting better and smarter every quarter.

We have made substantial investments every single quarter.

When you look at these growth investments we have been making, a significant number of those have been directly in our ability to use Athena and the database.

We've also brought in additional talent into the Company in that area -- some very sophisticated talent.

That of course is advancing us.

So when we go into holiday this year, we are definitely going to have a more robust experience for our customers coming out of the efforts that we've put forward with Athena.

All right, great.

That was very helpful.

Thank you.

Thank you.

Mike Baker, Deutsche Bank.

Two questions.

One, just on your store count.

You're about flat year-over-year.

I think you've closed 50 out of 1,100 since you became the management team.

As I recall from past conversations do you have a lot of leases that come up for renewal in 2016.

Can you just update us on your thoughts on what your long term store count should be?

Yes, so first, the 49 stores that you might be thinking of actually were closed prior to us joining the Company, so the first point that you made was actually just prior to Hubert joining so just to round set on that fact.

Since then what we are doing, we do have a significant amount of our leases expiring.

It's a substantial number and our strategy has not changed.

As we are looking at each lease, we will rationalize as we think is appropriate.

Last year, we closed five stores and this year, we will walk into the year and we will be assessing the leases and determining what that would look like, so but there is no announcement to be made.

We consistently have said that targeting a store count, we're targeting rationalization of our footprint particularly in our multi-store markets and to the extent that we have redundancy or stores that we feel should not be in the network long term of course will close those.

We aren't reluctant to close them but right now as we talked about consistently -- we do not have -- look at these numbers, we do not have a list of stores that we have negative cash flows or significant issues with.

So that's the great news.

We don't have a story to tell about our portfolio that is not performing.

Right.

Yes.

Excellent point.

A second question if I could, can you quantify the gross profit rate benefit of the change in the mobile warranty plan this quarter?

This quarter, I mean, do you list them in your press release in order of the magnitude?

Then a related question, I think you start to lap up against that in the fourth quarter of this year.

Is that right?

Yes, that's right.

We do list them in order of magnitude, so that's all the information because again, some of this is pretty competitive.

But we definitely list them in order.

I think you've got one that was quantified below it so you know it's more than that.

Right.

Yes, understood.

Okay, thanks.

I'll pass it on to someone else.

Mike what I would say amplifying what Sharon just said, you'll find us increasingly prudent about releasing product category detailed information because we are only focused on technology, because it's natural to ask these questions.

We are very focused on transparency.

But we also are thoughtful about the help it provides to our competitors.

So hopefully you'll understand when we feel too much information can hurt us as a Company and therefore can hurt our investors.

Trade secrets we think are valuable to our investors as well.

Thanks.

Appreciate it.

Dan Binder, Jefferies.

Congratulations on a good quarter.

Thank you.

There were two things I wanted to touch on.

First, you talked about increased conversion.

I was wondering if you could talk a little bit about the change in the labor model and the dotcom acceleration I suspect I think you said was a function of conversion, how maybe average time to customer is coming down if you could just touch on those two things?

Yes.

Thank you for your question.

There's multiple facet to your question.

So let's start with the online component.

Which we report online sales it's an important part of our business but we believe that online mobile is a much bigger part of the business than just the online sales because it's really the front door to the store.

This is where we all notice and this is where the customers start their research.

So we are excited about the growth of online.

We are excited about the increased traffic and the increased conversion rate.

I think the improvements that have been made on the site and in the app over the last three years are just extraordinary.

Now we had a long way to go but I'm very proud now of where we are still.

Our continued progress can be made in the check out, in the customer experience, significant improvement from a supply chain standpoint it's been transformative, the speed at which we're shipping now in particular enabled by ship-from-store that's been a phenomenal transformation.

Now the customers may start their journey online.

They often go to the stores.

Now we believe that as a result of these trends in consumer behavior, the store experience needs to be so much better; right?

Because when the customer gets to the store, she has done a lot of research.

She's much more educated than maybe a few years ago.

So it may be that in some cases we see fewer trips to the store because so much time has been spent before the store.

So the focus in the store is on the customer experience.

So first, physically and together with these vendors, we've invested significantly in the physical experience in the stores and candidly, it is so helpful.

You can not use your senses online to see the difference in picture quality of a TV, or the sound quality of a headphone.

You really have to go to the store.

Then of course there's the blue shirts.

Our associates are such a formidable weapon for us.

I hope we're doing a good job this morning on thanking them on the call for their amazing performance in the entire leadership in retail.

I think your question refers in particular to the comments we've made about the increased proficiency that we've made the associates in the stores even though we've taken $1 billion of cost out, we've actually increased the amount of customer facing labor.

We've increased the product knowledge, the engagements, and the overall sales proficiency.

So we've talked about it as IST, individual sales and productivity, and it's dual sales tracking.

This program has continued to be deployed.

We can measure the improvements as a particular area of focus.

Our store leadership is focused on what we call value add, which is the difference between the comps in the stores and the traffic so it's really focused on what they control in the stores.

We're seeing continued progress from that standpoint.

I'm incredibly proud of what we are seeing in the stores.

Now there's more to come and I'd be lying to you if I would tell you that we are consistently excellent.

We have a number of stores, a number of associates that still have progress to make.

But it's the combination of this better in-store performance and the excellent merchandising, the supply chain, the marketing, the service compliance.

Really the integration of all these capabilities that is resulting in these better than expected and better period results.

So continued progress on all of these fronts.

I'll just add that last year, we talked about the investments that we were going to be making in IST because our systems and our HR Management tools were not set up to manage IST.

We have been making progress on that.

The stores are able to much more easily see performance individuals.

Our stores are being able to see their actual performance and be able to be coached and be able to work on improving that performance.

We believe without a question that the efforts that we have seen related to this in the store are absolutely driving these positive comps.

So the implementation of IST last year, if you just go back and look at when we first started talking about IST and you look at the outcomes that we have been seeing in the retail stores -- because remember, that the retail stores delivered significantly positive comps this quarter.

So we definitely believe there's a correlation there.

We are optimistic that we will continue to see longer term improvements as Hubert described the proficiency we're trying to build through this program.

If I could just have a follow-up on leverage and buyback.

Obviously, the results have been showing improvement net of cash or you don't have a lot of leverage, just curious if your thoughts around that are changing in any way?

No not at all -- obviously in the first quarter, we did repurchase about $321 million worth of shares.

When we launched the program, last quarter I believe, we said we were going to do $1 billion over three years.

There's no doubt that we are going to achieve that quicker, just based on what we did in the second quarter.

We will continue to be there to support our stock.

So I don't think anything has changed from our lens around maintaining a strong balance sheet.

The performance clearly justifies us accelerating against that $1 billion which you've already seen us do.

So that's how we're going to -- that's the best answer I can give you at this point.

Great.

Thank you.

At this time, I would like to turn the call back over to Hubert for any additional or closing comments.

Well thank you so much.

In closing, I'll just repeat this.

Very proud of the results.

We're excited about our prospects and opportunities, very grateful for the work of our team and can be very grateful for your support as we continue to unfold our story.

So we look forward to seeing you first in our stores or online, we'll be there for you and then on our next call.

So thank you very much.

Have a great day.

Thank you.

That does conclude our conference for today.

We thank you for your participation.