百思買 (BBY) 2016 Q3 法說會逐字稿

Welcome to the Best Buy's third-quarter fiscal 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded for playback and will be available approximately by 11:00 AM Eastern time today.

(Operator Instructions)

I would now like to turn the conference over to Mollie O'Brien, Vice President Investor Relations.

Good morning and 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 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.

The 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 consumer electronics industry trends.

The consumer electronics industry, as defined and tracked by the NPD Group, includes TVs, desktop and notebook computers, tablets not including Kindle, digital imaging and other categories.

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

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

I will now turn the call over to Hubert.

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

I will begin today with our third-quarter results and an overview of the progress we are continuing to make against our priorities.

I will then provide highlights of our holiday plans before turning the call over to Sharon for additional details on our quarterly results and commentary on our financial outlook.

First, our Q3 results.

In summary, we have delivered another quarter of domestic comparable sales growth and operating income expansion.

At the enterprise level, on revenue of $8.8 billion, we increased our non-GAAP operating income rate by 40 basis points to 2.8% and our non-GAAP diluted EPS by $0.07 to $0.41, an increase of 21%.

In the domestic business, our comparable sales, excluding the impact of installment billing, increased 0.5%.

This increase was the result of growth in computing, major appliances, health and wearables and large screen televisions, partially offset by declines in tablets, mobile phones, digital imaging and services.

Online comparable sales increased 18% as our new mobile site and enhanced dot-com capabilities continue to drive higher conversion rates and increase traffic.

I note that during Q3, industry sales in the NPD-tracked categories were down 4.3%.

In the international business, we continue to see the ongoing revenue impacts of the Canadian brand consolidation store closures, foreign currency and softness in the Canadian economy and consumer electronics industry.

However, the stronger product mix and a more effective promotional strategy have resulted in better than expected profitability.

I would now like to discuss our progress on our key priorities starting with merchandising.

In appliances, we've completed our planned rollouts of Pacific Kitchen & Home stores-within-a-store for the year, adding 59 stores for a total of 176.

We also rolled out 225 Samsung Open House appliance experiences.

And with 20 consecutive quarters of growth in appliances, we believe the investments we're making in this business are helping us win in the market.

Furthermore, the appliance delivery and installation investments we have made this year are also driving significant improvements in our net promoter scores.

In home theater, with our 630 Samsung and 380 Sony stores-within-a-store and our 78 Magnolia Design Centers, we have continued to expand our industry leading experience for customers to discover, learn about and enjoy home theater technology, especially 4K TVs.

This is a significant competitive advantage for us as 4K unit sales are expected to materially increase in the fourth quarter.

In computing, we rolled out more than 150 additional Windows' stores in the quarter -- in the third quarter and now have over 800.

We also updated more than 130 of our Apple stores-within-a-store and now we have 500 latest generation Apple stores-within-a-store.

In mobile phones, we added 225 Verizon and 225 AT&T stores-within-a-store.

These shops feature highly trained specialists who provide access to the carriers' products and services and the ability to learn about a wide set of connected or smart devices.

Additionally in mobile, we've added the ability for customers to buy installment billing plans online for Sprint.

At this time, we are the only retailer who can offer these types of plans, both online and in-store for AT&T, Sprint and Verizon.

Turning to digital.

Our investments continue to drive results as illustrated by the 18% increase in domestic online sales.

In the third quarter, we provided free two-day shipping to a significantly increased number of our online customers.

We further benefited from the visibility and searchability of open box and clearance inventory.

We expanded online-only flash sales.

We introduced BlueAssist, a new feature in our highly rated mobile app, which allows customers to simply shake their device to get live help with products and orders through chat, call, e-mail or through scheduling of Blue Shirt in-stores.

And we also launched a dedicated Windows 10 online experience that showcases the functionalities of Windows 10, offers customer training and highlights new Windows 10 devices.

In addition right after the end of the quarter, we launched the Best Buy app for iPad.

Turning to marketing.

Our marketing campaign helped drive a strong back-to-school performance.

In the third quarter, we continued to shift our focus to social media campaigns in ?- at millennials.

We continued to increase the number of addressable e-mails.

And we continued to improve the customer click-through rate to our website to enhance targeted marketing programs enabled by our Athena customer database.

In services, as we discussed last quarter, we began increasing our investments to support the expanded role we're expecting services to play in our Renew Blue transformation.

The first of these investments was the September 13 launch of our new Geek Squad services in computing and tablets.

We also began selling AppleCare and piloting our new Apple authorized service provider capabilities in more than 60 stores.

Like AppleCare, our new Geek Squad services are much more than extended warranties.

They include providing 24/7 support to our customers and helping them take advantage of their technology products.

We believe this focus will result in higher NPS scores and increased attached rates over time.

Initially, however, we are expecting the price investments related to these rollouts to have an approximately $40 million or 25 basis points negative gross profit rate impact in the fourth quarter.

Turning now to cost.

To date this year, we've eliminated a total of $110 million in annualized cost as part of our Renew Blue Phase Two cost reduction and gross profit optimization program, which has a goal of $400 million over three years.

These savings will continue to be offset, however, by the incremental SG&A investment in our future growth initiatives, which have totaled approximately $85 million so far this year, of which $20 million was in the third quarter.

We do, however, now expect the SG&A investment to reach only $100 million this year versus the $120 million we discussed last quarter, due to reducing the SG&A investment plan to partially fund the $40 million investment in services pricing that I just discussed.

Let me now turn to holiday.

We are excited by what we are offering and delivering to our customers during this holiday shopping season.

First, we have created an expansive assortment of amazing technology products, especially in 4K TVs, health and wearables, appliances, connected or smart devices, drones and many other giftable items.

These products will be offered at very attractive prices to our customers throughout the holiday season.

Second, we have built some terrific new capabilities since last year including, number one, a range of new digital capabilities especially Blue Assist that I described earlier.

Number two, an additional 1,100 stores-within-a-store, which come on top of the over 3,700 we had a year ago.

Number three, the increasing expertise and proficiency of our salespeople.

Number four, our enhanced multi-channel delivery capabilities illustrated by faster shipping, which is enabled by ship-from-store, and a better in-store pick up experience.

Number five, the optimization of our supply chain to enable earlier store replenishments and higher order fill rates.

And number six, a range of services offered to our customers including free Geek Squad setup on top-tech gifts and the ability for customers to give a gift of a Geek Squad agent's time.

Also from a marketing perspective, we believe we are entering the quarter with a high performing mid-year campaign, a significantly greater social media presence and more refined personalization capabilities to our investments in our Athena database.

We, of course, recognize that we are up against a strong performance in the fourth quarter of last year and that the NPD industry declines that we saw in the third quarter, both sequentially and year over year, may continue throughout this year's fourth quarter.

We've also made incremental investments in services pricing and SG&A that are putting pressure on our fourth-quarter earnings outlook, which Sharon will discuss in more detail in a moment.

Now, one thing we are certain about is our team's ability to execute exceptionally well throughout the holiday.

We're going into the holiday clearer on our priorities and our plans and with a better trained, engaged and most importantly highly determined team.

I am grateful for what they've accomplished so far this year and extremely proud of their capabilities and passion to win.

I know that they are ready to deliver an outstanding performance this holiday.

I'll now turn the call over to Sharon to discuss the details of our third-quarter financials and our fourth-quarter outlook.

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 the expectations we shared with you last quarter.

Enterprise revenue of $8.8 billion was in line with expectations.

Our non-GAAP operating income rate of 2.8% exceeded our expectations, due to a domestic $0.04 periodic profit sharing benefit from our externally managed service plan portfolio and better than expected profitability in our international business.

Additionally, our non-GAAP effective income tax rate was 37.1% versus our expectations of 39% to 40%, resulting in an additional $0.01 of EPS versus expectations.

I will now talk about our third-quarter results versus last year.

Again, Enterprise revenue of $8.8 billion decreased 2.4%, driven primarily by the Canadian brand consolidation, the impact of foreign currency fluctuations and softness in the Canadian economy.

Enterprise non-GAAP diluted EPS increased $0.07 or 21% to $0.41.

This increase was primarily driven by a stronger year-over-year performance in the domestic business and the $0.04 periodic profit sharing benefit that I just discussed.

These increases were partially offset by a $0.02 negative impact of the Canadian brand consolidation and the lapping of a prior-year inventory related legal settlement of $0.02 that did not recur this year.

In our domestic segment, revenue increased 1.2% to $8.1 billion.

Our revenue growth was primarily driven by comparable sales growth of 0.5%, excluding the benefit from installment billing, an estimated 30 basis point benefit associated with installment billing and a 30 basis point benefit from the periodic profit sharing benefit.

Our domestic comparable online revenue increased 18.3% driven by increased traffic and higher conversion rates.

As a percentage of total domestic revenue, online revenue increased 130 basis points to 8.8% versus 7.5% last year.

From a merchandising perspective, comparable sales growth in computing, major appliances, health and wearables and large screen televisions was partially offset by declines in tablets, mobile phones, digital imaging and services.

In services, comparable revenue declined 11.1%, almost entirely due to lower repair revenue and to a much lesser extent declining attach rates of our traditional warranty plans.

As we explained last quarter, the reduced frequency and severity of claims on our extended warranty has had the impact of reducing our repair revenue.

While at face value this appears negative, it is actually financially beneficial because this repair revenue produces very little profit and it is contributing to the positive performance of the externally managed portfolio.

Additionally in Q3, as Hubert discussed, we increased our investment in services pricing as we expand and improve our price competitiveness in this category, particularly in computing and tablets.

The impact of this price investment is expected to continue into the fourth quarter and throughout next year, of course.

As we are discussing services, I'd like to take a moment to provide more insight into the periodic profit sharing benefits we are receiving from our externally managed extended service plan portfolio, as they have positively impacted our gross profit rate and earnings the last two quarters.

And we are expecting a positive 55 basis point impact in Q4.

These periodic benefits have been driven by substantial changes we have made to our insured warranty plans from both a plan design and cost-to-fulfill perspective.

The portfolio has also seen an overall industry reduction in frequency of claims.

All of these positive loss drivers have resulted in an overall lower than expected cost of our extended service plans.

And we contractually share in that outperformance.

As these periodic benefits are based on actual claims history of the externally managed portfolio, however, it is difficult to estimate any future potential impact but we do not currently expect to see the same level of periodic profit sharing benefits in fiscal 2017.

Now, I will continue with our Q3 results.

In our international segment, revenue declined 29.9% to $729 million, due to the loss of revenue associated with closed stores as part of the Canadian brand consolidation, a negative foreign currency impact of approximately 1,350 basis points and ongoing softness in the Canadian economy and consumer electronics industry overall.

Turning now to gross profit.

The Enterprise non-GAAP gross profit rate increased 90 basis points to 23.9%.

The domestic non-GAAP gross profit rate increased 110 basis points to 24.1%.

This increase was primarily due to: the positive impact of changes in mobile warranty plans, which resulted in lower cost due to lower claims frequency and severity, which we will begin lapping in Q4; an increased mix of higher margin, large screen televisions; a positive mix benefit from significantly decreased revenue in the lower margin tablet category; a greater portion of vendor funding being recorded as an offset to cost of goods sold rather than SG&A; and a 20 basis point impact from the periodic profit sharing benefit.

These increases were partially offset by the lapping of the 15 basis point prior-year inventory related legal settlement I just discussed.

The international non-GAAP gross profit rate decreased 20 basis points to 22.4%.

While both Canada and Mexico had higher year-over-year gross profit rates, a higher mix of sales from our Mexico business, which carries a lower gross profit rate, drove the 20 basis point international rate decline.

Now turning to SG&A.

Enterprise level non-GAAP SG&A was $1.9 billion or 21.1% of revenue, an increase of $4 million or 50 basis points.

Domestic non-GAAP SG&A was $1.7 billion or 20.9% of revenue, an increase of $67 million or 60 basis points.

This increase was primarily driven by a greater portion of our vendor funding being recorded as an offset to cost of goods sold rather than SG&A, investments in future growth initiatives and higher incentive compensation.

This was partially offset by the flow-through of our Renew Blue Phase Two cost reductions.

International non-GAAP SG&A was $171 million or 23.5% of revenue, a decrease of $63 million but a rate increase of 100 basis points.

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

The 100 basis point increase is driven by the year-over-year sales deleverage.

As it relates to the Canadian brand consolidation, we incurred a better than expected negative impact of $0.02 of non-GAAP diluted EPS in the third quarter.

This was the result of the more effective promotional strategy, partially offset by a weaker than expected Canadian economy in consumer electronics markets and from a lesser extent, lower cost from our decision to transform only a limited number of stores this year.

As such, we are narrowing our estimated EPS impact of the consolidation this year to a range of negative $0.10 to $0.12 versus our previous estimate of negative $0.10 to $0.17.

This expectation is broken down as follows: the negative $0.04 that we've incurred in the first nine months of this year and a negative $0.06 to $0.08 in Q4.

Ultimately when our consolidation initiatives are complete, we are expecting our Canadian business to be a more vibrant and 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 third quarter, we returned over $140 million in cash to our shareholders, $64 million through share repurchases and $79 million in regular dividends, bringing our year-to-date total cash returned to over $800 million.

Also during the quarter, Fitch returned our debt rating to investment grade.

I would now like to talk about our financial outlook.

As Hubert said earlier, we are excited about our holiday plans and new capabilities and confident in our ability to execute our plans.

This gives us a positive outlook on our domestic performance versus the industry.

However, the 4.3% decline we saw in the NPD reported categories got progressively worse throughout the quarter, which adds a level of caution to our outlook.

With that, our year-over-year non-GAAP outlook for Q4 fiscal 2016 is as follows: in the domestic business, we are expecting near flat revenue, assuming industry declines in the NPD reported categories are in line with Q3 at approximately negative 4%; and that the timing of the Super Bowl shift results in approximately 40 basis points of sales moving out of Q4, into Q1, fiscal 2017; and a non-GAAP operating income rate decline of 20 to 35 basis points driven by gross profit rate pressure and higher SG&A.

The gross profit rate pressure is primarily driven by a 25 basis point investment in services pricing, higher distribution costs associated with our growth in the online channel and the appliance and large screen television categories and product mix and product cycle pressures.

Largely offsetting these gross profit pressures is the expected 55 basis point periodic profit sharing benefit from our externally managed extended service plan portfolio.

The higher SG&A is due to our investment in growth initiatives, partially offset by cost savings.

In the international business, due to the ongoing impacts of the Canadian brand consolidation, foreign currency fluctuations and softness in the Canadian market, we are expecting an international revenue decline of approximately 30% and an international non-GAAP operating income rate in the range of positive 2% to 3%.

With these expectations, our Enterprise-level outlook is as follows: a negative low single-digit revenue growth rate, and a non-GAAP operating income rate decline of 25 to 45 basis points.

From a tax rate perspective, we expect the non-GAAP effective income tax rate to be in the range of 36% to 37% versus 34.2% last year, which is expected to result in a negative $0.04 to $0.06 year over year in Q4 2016.

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

(Operator Instructions)

We'll go first to Seth Sigman.

A question on the fourth-quarter outlook.

So it sounds like the expectation is that the industry's going to be similar to Q3 overall, but you did note that the business got progressively worse throughout the quarter.

So it would seem to imply that trends will improve throughout Q4?

I mean, how should we be thinking about the drivers of that overall?

The drivers of forecasting the industry will come to forecasting in a [hit] driven business.

What we're very clear about is what we control.

As we said, we're extremely well-positioned to deliver.

Clearly, we've been gaining market share, so that gives us enormous confidence.

Exactly what's going to be the demand during the quarter, you've seen a lot of volatility across retail categories in the last few months, so we've noted these facts.

We want to be transparent with our shareholders.

Our forecast reflects everything we know at this point.

And you see us determined to, irrespective of what's going to happen in the market -- there's so much we control and what we've put in place, the capabilities we have allow us to win.

So we're in this to win this.

So I'm afraid that it's hard to directly answer your question about exactly what the demand is going to be, but we've tried our best today to give you as much transparency as possible around the categories.

I would say there's a lot of excitement in a number of product categories.

TVs -- the demand for 4K TVs and our customer experience in this category is a great example of what we can accomplish.

Appliances is less of a giftable item maybe, but our momentum continues to be strong in the market and that category continues to be very strong.

There's a lot of excitement in health and wearables, connected devices, I'm planning to buy a drone myself, so if you want to join me.

But there's this recent trends we saw at the end of the quarter that we wanted to highlight for our investors in the spirit of transparency.

Seth, this is Sharon.

I'll just add to that, that we believe there was another dynamic in October, which is pent-up demand with people waiting to anticipate Black Friday deals.

Because Black Friday, as we all know, has turned into Black November.

We believe that has a particularly stronger impact on the consumer electronics category than other categories.

So even going from the last weeks of October to the first week of November, we just got that data off the press, we actually saw a significant improvement from the last weeks of October and the first week of November.

So again, that was in our backdrop and in our purview when we were looking at our Q4 outlook.

Okay.

That's very helpful.

So to follow-up, thinking about the promotional outlook and whether that's going to be a driver in the fourth quarter here.

You talked a lot about the price investments you're making in services.

Maybe looking beyond services, you've made a lot of price investments over the last few years that have helped drive market share.

How do you feel about your pricing in the rest of the business today?

Do you think there's a need to be more aggressive through this holiday period?

Seth, we feel very good about our pricing in the -- outside of services, we've made these investments over time in hardware and accessories.

I think, if you follow -- if you have time to follow some of the blogs around the Black Friday deals, in particular in the TV category, which is the hot category, my sense is that the widespread sentiment is that we have the best deals for holiday in TVs.

So we feel really good about our price positioning, which is what I highlighted in my prepared remarks.

We have not only an amazing assortment, amazing prices and we have the quantities for consumers.

So it's one thing to have an item at a price that looks great, but if you have five of those and then you're done, not particularly compelling.

We're going to have deep inventory making the products available to the customers.

Thanks so much.

Good luck on the holiday.

Thank you.

We'll go next to Matthew Fassler.

Thanks a lot, Sharon, for that last point on the quarter-to-date trends.

But I want to focus for a moment on the NPD trends that you saw over the course of Q3.

Can you talk about where the erosion took place?

Was it broad based or was it category focused?

Then along with that, I know the phone market is not included in the NPD data.

I also know that wireless shifted from a sales driver for you in Q2 to a category that declined in Q3.

So any color you can give us on the outlook for phones, product-wise and otherwise would be terrific.

Yes, Matt.

On the NPD, I know this will sound like a strange statement, but the good news is it actually was across all the categories.

We like that because that's what really led us to our premise, especially in October, around the pent-up demand.

Because it really isn't product specific.

It was sort of categorically specific.

So that was in our minds, again, another data point which just says the customer was looking forward to Black Friday.

Because remember, the first Black Friday deals were released in the first week of November, by some retailers; second week, we released eight deals.

So we'll just follow through on that.

October was the most notable month during the three-month period.

As you pointed out, there are categories that are outside of that.

Appliances is another category that is actually outside of NPD.

With that, we saw exceptional growth again this quarter.

We are so encouraged by the work that we're doing on the appliance side.

In the mobile category, we did see, I believe that we believe, the industry grew, knowing what the industry did for mobile is very difficult.

But we do believe if you look just at units that there was growth.

But for us at Best Buy, the shift of the iPhone launch by a week was not helpful; so we will see.

But as you know from our remarks this morning, mobile was not our strongest category, it was one of our down categories.

Okay.

Thank you so much.

We'll go next to Brian Nagel.

I'm going to try to phrase this in a question, but it's probably going to come across more as a comment that we can just opined upon.

And it's a follow-up to, I guess, the prior two questions, as well.

But as I look at the results today, I just see a real disconnect between what seemed to be actually a decent Q3, and even in some of the qualitative commentary you're making about the third quarter and then into the holiday.

And then the guidance that we put out there, most importantly, the implied earnings decline that's implied in that guidance.

I guess what I'm wondering is, is there some type of X factor here?

Is there an air of conservatism as you head into the holiday, which is -- I get.

Is it a stepped-up investment cycle the next few months?

What's actually happening here?

So I would say two things.

Hubert mentioned it in his prepared remarks and I mentioned it in my own.

With NPD down 4%, which was a significant change versus Q2, we believe that going into Q4 we should enter the quarter and enter the outlook that we provided today with the appropriate industry backdrop.

So to your question about, did we go into this with a lens around what the environment feels like?

We did.

When you look at other retailers that have come out in the last two weeks, we have seen what you've seen, which is a smattering of good news and not so good news.

In several of the areas where the retailers tend to be catering to the higher end consumers and have a less broad customer base, they seem to have had a slightly more impactful outlook for the fourth quarter.

So we've tried to balance that between the two, but without question, we are coming into this with that as our backdrop.

So is that helpful?

No, it's very helpful, Sharon.

It's very helpful.

I guess to drill down one, with respect to price promotions and having followed consumer electronics now for a very long time, that's typically the biggest hurdle, if you will, competitive price promotions as we head into the holidays.

It doesn't seem, again, in all the points you've laid out, it's kind of what frames your guidance.

It doesn't seem as though that you're expecting a overly aggressive promotional holiday as of now.

Is that correct?

I think we expect something as usual, in general terms.

Let me add a couple of comments to what Sharon was saying and to your question.

The trend we're seeing is that we are outperforming the industry and based on our value proposition and great execution.

You saw that in Q3.

You've seen what other retailers have reported as it relates to consumer electronics.

You've seen our results.

You've seen -- you've heard our confidence getting into Q4, in terms of our ability to win and execute some of the investments we're making and some uncertainty around the market.

I think you'll see us transparent on that.

Regarding the price promotionality, we don't see anything unusual for this quarter.

In fact, if anything, it's possible that given some of the industry trends and the difficulty of competing in consumer electronics, some retailers, and we have commented on that last quarter, are less than enthusiastic about this category.

The potential flipside that you could see, of course, again in the spirit of transparency, if the market is bad, you can always have the risk of people wanting to liquidate their inventory.

But that's not the ongoing assumption.

We think we're competitively priced.

And we think we're going to win.

Got it.

That's very helpful.

I appreciate all the color.

Thank you.

We'll go next to Peter Keith.

I wanted just to ask about the growth investments that you're making, $100 million for this year.

It clearly looks like these are working and it's allowing you to take share.

How should we think about this on a go-forward basis?

Is this something now that we should expect to maybe $100 million per year next year and going forward?

No.

As a matter -- yes, we are going to continue to make investments.

But as we look to fiscal 2017 and we start to see benefits coming from other initiatives that we are currently working on, what our anticipation is in fiscal 2017 is that the growth investments are going to be offset with cost reductions and other eliminations of waste inefficiency in the Company.

So just to understand, would that be a net neutral impact?

Or do you think with the Renew Blue cost reductions, which seem to be pretty comparable to the growth investments this year, that looking forward, the cost reductions would outpace the growth investments?

I think that next year we will definitely offset the investments.

Then what we recover out of the Renew Blue Phase Two cost reductions, we will see some upside, but a large portion of the savings next year, again, will be offset with the investments.

Okay.

Very good.

I just wanted to pivot quickly to mobile.

It seems the industry is changing to more broad-based installment billing platform.

I wanted to get your take on how that might change your competitive positioning.

Does that change your ability to take share?

And what might it do to the frequency of upgrades in your view?

Yes.

We're excited about the shift to installment billing.

We're, as a retailer, we are very well-positioned to offer these plans, both online and in the stores; again, the only one to offer that from the three retailers.

Another thing that's going to be helpful to us is these carrier stores-within-the-stores that will continue to improve the experience for the customer.

The churn in the industry is very low.

So most of the customers are interested in having a very tight connection to the carrier.

The degree of expertise in our stores, the dedication to individual carriers, the access, the complete access to the carriers' products and services, systems and so forth is going to be very helpful.

Then beyond mobile, as the business shifts towards connected and smart devices, one of the great assets we have that we've talked about in the past, is our ability to connect to other devices and win in that next wave of technology innovation.

So as the business transitions, we're evolving the business model and we're excited about the opportunities.

Okay.

Thank you very much.

Good luck this holiday.

Thank you.

We'll go next to Michael Lasser.

Your guidance implies that you're going to sustain this rate of outperformance versus the industry of about 400 to 500 basis points.

How long do you think you can maintain that gap with the sector?

Thank you, Michael, for your question and highlighting by how much we are beating competition or winning in the marketplace.

We think we have a long runway.

If you average market share across all of the categories in which we compete, it's around 15%.

Now, of course, it varies by product categories and types of customers.

But our share of wallet of existing customers is not that high.

So jokingly, I tell our teams, as long as we're below 90% market share, we have a long runway.

As you can appreciate, they love that.

Clearly, we have a lot of runway to continue to grow.

Then of course, we're going to play where the puck is going.

Industry and our business is characterized by waves of technology and playing where the next waves are is something that Best Buy is very good at.

As the business moves to the connected devices, the Internet of Things, we're extremely well-positioned to win these waves.

So we see, in the short term, we see no limits to our ability to grow that -- continue to grow that.

That's helpful.

My follow-up question is, Hubert, the fourth quarter in the consumer electronics space is a little different than the first three quarters of the year.

In the first three quarters of the year, you have to be price competitive against other players who are trafficking in consumer electronics.

In the fourth quarter, in the holiday, you're competing against other product categories for wallet share.

So I think everyone appreciates that your prices on consumer electronics for the Black Friday ad are competitive, but how do you think about the cross-price elasticity of demand.

So if sweaters are going to be 75% off, perhaps that will look more compelling to a consumer over the next couple of months versus buying a TV that may not have as much of a discount?

And if we see that shape up, will you have to get progressively more promotional, as we get closer to Christmas, especially in light of what looks like pretty heavy inventory positions, given that your inventory outpaced your sales by a few hundred basis points.

Walmart and Target talked about their weakness in consumer electronics.

So, arguably, the industry's heading into this holiday with a pretty heavy industry inventory position.

Thank you, Michael.

There is indeed a risk that I mentioned and that we've talked about, which is if the industry is soft then there's this risk of people being desperate and liquidating their inventory.

We don't think that's the main thesis at this point in time.

But going back to the fight against the sweaters, our teams completely understand that, I'm very proud of our team, which is one of the reasons why we vote early and often.

We start our marketing campaigns early in the season.

You've seen us, in fact before the end of October starting to talk to customers, because we want to be front and center.

I think that in the apparel category I think you've seen a lot of softness, frankly.

Somehow the products in that category don't seem to be resonating that well with consumers.

In many ways in the consumer market, in consumer electronics in particular, great supply creates demand.

I think the products we have, the assortment, the customer experience can be extremely exciting.

If you gave me time, I could try to sell each one of you on the call some great products.

But I'm not sure Sharon will let me do that.

So, yes, we understand it's a broader battle.

We understand the game is different.

We play it slightly differently than in the rest of the year, focusing on product, product availability, being price competitive and being very convenient with delivery.

Our free two-day delivery capabilities are very significant.

So you can feel how excited and good we feel about this fight.

Bring them over; we're ready.

If you take a look -- I'll just add to that, when you look at the outside of Best Buy industry data points about what people believe is going to be big sellers for holiday.

Even NPD put out a holiday outlook.

Within that, one of the top categories that they expected was around video games and tech-type items.

In addition to that, they thought that one of the biggest sellers this holiday, big drivers of holiday is going to be big screen TVs, where we continue to have such substantial share and, as you guys know, probably the best assortment in all of retail.

So we are so prepared to take advantage of those.

As Hubert pointed out and we discussed in the prepared remarks, our inventories are in probably the best position that we've ever entered fourth quarter in recent history.

We feel very confident in our ability to execute that.

And reminder, that it's hard to execute.

When you are going into these categories that carry such large queue, you really need capabilities in that area.

I don't -- whether you're selling it through the stores or selling it online, you need very strong capabilities.

Not everyone is going to come out of the chute really great at this.

So, I think there are a list of competitive advantages.

But there are numerous external data points that you can research that are saying that this is going to be a very strong category this holiday.

Understood.

Thanks so much.

Have a good holiday.

Thank you.

We'll go next to Anthony Chukumba.

I actually had a little bit of a different question, specifically on I guess capital allocation.

You bought back over $300 million of common stock in Q2.

Then you only bought back $64 million in Q3.

Your stock price is pretty depressed throughout the quarter.

So I guess I was just wondering, first off, why the sequential decline in terms of share repurchases in Q3 versus Q2?

Also what your thoughts are going forward?

Thanks.

Thank you, Anthony.

We will continue -- as you know, we've got $1 billion authorization out there.

As you pointed out, we bought over $300 million in Q3 and then the -- in Q2 and then the additional in Q3.

We do expect to continue to purchase our shares under that program.

We see our stock currently just like you do, (laughter) as a value.

(Laughter) All in.

Okay.

That's helpful.

Thank you.

We'll go next to David Magee.

I just had two questions.

One being with regard to the NPD data, what do you think is driving that number lower of late?

Then my second question is -- I'm curious whether you think it's the weather or is it the Texas impact or some combination?

Then my second question has to do with the service investment and price.

What your plans might be to communicate those to customers?

Thank you.

So, as it relates to NPD, the change in trajectory -- so, you have two parts in your question.

One is why was Q3 lower than Q2 in a sense, from a trend standpoint?

And what has happened during the quarter?

The first thing I think we all have to recognize is the nature of this industry is to have some volatility; right?

Because it's so hit driven, product innovation driven and so forth.

I think we also have to remember that Q2 was relatively better compared to previous trends, so we saw a difference; the most significant in a sense is the change in trajectory within the quarter that was quite significant.

What exactly drove the change in trajectory was -- there's two aspects.

One is, it was broad based but then there's some product specific elements.

I think it's a widespread elements that's widely known is, the sharp declines of tablets.

It is -- this is a category in which we have a very large market share, of course, so it impacts us.

But from any industry standpoint, there was a significant decline in that.

Now, since then, there's been newer product introductions that we can all be very familiar with.

Does the weather play a role?

I think the apparel players would have spoken about this.

Our science is not sophisticated enough, the people in particular in Minnesota like to go to their lake rather than shopping.

I don't think so.

So that's the color I would give.

Looking ahead, again to the extent that there is amazing great products and so forth, number one it can help the industry and certainly will help us and we'll take advantage of it.

I would like to ask you, David, to repeat your question around service, because I'm not sure I fully understand it.

Do you mind repeating it, because I want to do a great job of answering your question.

Sure, Hubert.

Thank you for that answer.

My second question has to do with just the price investments you're making on service.

I know that's a big part of the future there in terms of developing that business further.

I'm curious what the plans would be in terms of getting consumers aware of Geek Squad and perhaps the lower pricing and just improving that awareness?

Yes, thank you for that question.

So let's clarify first what we've done, what the impact is and what we have still ahead of us around that.

So what we've done is, we've redefined the service offering -- the Geek Squad services for computing and tablets.

We launched that on September 13 with Geek Squad Protection & Support Plus.

And we also launched AppleCare.

And we're ramping up our Apple-authorized service provider's capabilities.

So, we've changed the offering, moving away from pure warranties to something that is helpful to customers.

We've materially lowered the price.

I think that this is something -- we've been consistent in wanting to be price competitive.

Our field stores are very excited about this.

The service offering is very good.

We've seen initial pickup in the attach rates; we're very excited about that.

We also know that perceptions change slowly and like our previous investments, we do expect that it's going to take time before it picks up fully.

We don't expect in this category to completely offset -- to have the elasticity completely offset the price investments.

But we do expect to make progress.

The actions we're taking to help the customers be aware of that is the training and the proficiency of our Blue Shirts and of course the Geek Squad agents.

We're also investing on the site.

I think that in the quarters ahead, we'll see continued progress.

More broadly -- because this is just one small first step in our services strategy.

If you step back, what we've said is that services is actually playing, will play a bigger role than just being a revenue and profit center.

Services for us can be a part of the value proposition.

So if you're going to buy a big TV, if it's going to be above 55 or 60 inches, you want somebody to deliver it and install it for you and do it really well and of course, we have unique capabilities.

We also see services being a growth driver.

So when we have somebody coming to your house who understand your needs and build a solution for you, we're not going to charge for the in-home visit, but this has the ability to drive business.

We see it today with our Magnolia Design Centers.

There's more where it's coming from.

Then as we continue to innovate our services and evolve the positioning of the brand, you're going to see it appear more and more in our various marketing vehicles.

It's true today a little bit on the site.

It's true in the circular in the stores.

With everything we've done -- and that's going to be consistent, in the last three years of our transformation, is gradual and incremental.

We've started that journey.

And you're going to see us continue moving forward in that direction.

So more to come.

Great.

Thank you for that.

We'll go to our last question from Greg Melich.

I had two questions.

Hopefully, one that's more for Sharon, another one more for Hubert.

Sharon, I want to understand the gross margin impact that you were calling out on services pricing?

And how we should think about it vis-a-vis, the periodic profit share?

If I got this right, that goes from 20 bps in the third quarter to 50 bps in the fourth quarter of help.

And we should think of services as like a 20, 25 bps offset to pricing.

Is that -- am I thinking about that right?

Yes, that's right.

Just -- when you take a look at Q4, Greg, let me try to reconcile it for you.

Last year in Q4, we earned $1.48.

The Canadian brand consolidation is costing us about $0.06 to $0.08.

Then in addition to that, the tax rate last year at 34.5% going up to the current rate is going to cost us about $0.05 to $0.06.

So, on a -- if you just go back and you take those up against last year, that really puts last year's EPS at about $1.35 on a comparable basis to what we have this year.

Got it.

Then when you go into the outlook I gave you, we talked about the fact that we've got the 25 basis point investment in services pricing.

So that's going to come off the gross profit, right?

We have the higher distribution cost associated with growth in the online channel and then the appliance and large screen TVs, large cube costs will hit us in Q4.

Of course, we're going to have the revenue as well.

Then there's some product mix issues that we're expecting to hit us in Q4.

Then all of those down sides will be offset by the 55 basis point profit sharing benefit.

So when you're really thinking about this outlook, when you get down to the EPS range that you get when you take the Enterprise level reductions on the OI rate, quite frankly, it's not starting to look a lot like last year.

Maybe even on the high end a little bit better.

The 55, how much of that is catch-up, effectively where at the end of the year you're truing-up, but they're just -- the warranties just aren't costing as much?

Or is this an ongoing type number?

Yes.

So it is always -- the way this periodic payment works, it is always a settling up of prior reserves.

The settlement is usually only done once a year.

If you go back in history, some years we had one, some years we didn't.

But we have made such substantial changes in the programs.

Best Buy has taken action.

We put deductibles in on the phone repair, which we were the only ones in the industry historically that didn't have one, you recall that.

We had some plans that were multi-year plans.

We have had repair reductions where we're doing the repairs.

We are sourcing parts differently.

There are all kinds of changes that we have made in the last couple of years, Greg, that operationally are driving this.

In addition, at the same time that we were making operational improvement around the fulfillment of claims associated with the extended warranties, from an industry point of view, and this is really a quality, vendor quality point of view, the devices have been extremely durable.

And we have not seen the frequency of claims.

So the combination of those are driving that.

Now, I can tell you that in fiscal 2017 in the prepared remarks, we said we do not know what this will be.

And we do not believe it will be as high as it is this year.

There will be next year, it will come in Q4.

There will be some level.

Our gut tells us -- you never know for sure, but we believe there will be a periodic payment next year.

This year we think it is unusually high.

In addition, there's the premiums we pay.

Every time we sell a new warranty, there will be premiums that we pay to the insurer to take on that liability.

And because of these factors, our premiums went down in the back half of this year.

They will continue into next year.

Then on top of that, we will see another likely premium adjustment downward next year.

So we can talk more about it in the one-on-one call if you'd like further color, so that I can get to your second question.

But --

Great.

No, that's very helpful.

I did want to ask a bigger picture one that I think is important.

I think, Hubert, in your prepared comments, you mentioned all the store-within-a-store programs, the Samsung Open Houses, the new Apple stores.

Could you give us some metrics as to how that's really helping drive the business and bigger ASPs and conversion.

If you think about it, over the last two or three years, have we moved from 10% to 25% of sales that are store-within-a-store or one of these type programs?

Or how can we frame that?

Or how do you think about it?

Thank you for your question.

It's been such an important part of our journey.

For me, the most important driver, or impact of these stores-within-the-stores has manifested itself in our market share gains.

The customer experience we provide is massively better and improved.

The experience of the customers has changed dramatically.

So we're seeing more expertise, better experience resulting in market share gains.

And we see that in all of the categories.

Clearly, the vendors see that as well because they continued to look at that.

Now, it's an ongoing process.

Looking ahead, we'll want to make sure that a key factor for our profitability is profit per square feet, per square foot.

So as we look ahead with our various vendors and the various parts of our stores, we'll want to continue to optimize that so that we win with the customer.

Certainly, we want to win for our vendors but we also want to win for us and continue to drive great outcomes.

When you are in our stores -- of course, every store is different but there are some stores where these stores-within-the-stores, with the addition of the Pacific Kitchen & Home and Magnolia Design Centers, today occupy a large part of the store.

So they are a big part of our winning with customers.

That's great.

Have a happy Thanksgiving.

Good luck.

Thank you so much, Greg.

So in summary, we feel a great quarter in Q3.

The combination of online revenue growth and margin expansion in Q3.

In the environment that we're all familiar with, is a great outcome.

Hopefully, you felt our excitement for Q4.

Hopefully you felt that we tried to provide as much color as possible on the outlook.

We'll see you either in stores or online.

Remember to shake your phone with the app to get access to our agents and Blue Shirts.

And thank you for your continued support in the Company.

Have a great day -- great holiday everyone.

That does conclude our conference for today.

We thank you for your participation.