百思買 (BBY) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Best Buy's Fiscal Year 2019 Q3 Earnings Release.

(Operator Instructions) As a reminder, this call is being recorded for playback and will be available by approximately 1:00 p.m.

Eastern Time today.

(Operator Instructions)

I will now turn the conference call over to Mollie O'Brien, Vice President of Investor Relations.

Good morning, and thank you.

Joining me on the call today are Hubert Joly, our Chairman and CEO; and Corie Barry, our CFO.

During the call today, we will be discussing both GAAP and non-GAAP financial measures.

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, which is available on our website, investors.bestbuy.com.

Some of the statements we will make today are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements may address the financial condition, business initiatives, growth plans, investments and expected performance 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 our most recent 10-K 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.

I will now turn the call over to Hubert.

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

I will begin today with a review of our third quarter performance, provide updates on our progress as we implement our Best Buy 2020: Building The New Blue strategy and share our excitement for the holiday season.

I will then turn the call over to Corie for additional details on our quarterly results and our outlook for the fourth quarter.

In summary, our team just delivered another strong quarter, and we continue to make progress in the implementation of our strategy.

We are excited about our continued momentum and the opportunities we have ahead of us.

So specifically, in the third quarter, we grew our Enterprise comparable sales by 4.3% on top of 4.4% last year, and we delivered non-GAAP diluted EPS of $0.93, which is up 19% compared to last year.

We also continued to enhance the experience we provide to our customers across the many ways they interact with us.

Our top line performance was driven by positive comparable sales across all channels, geographies and most product categories.

Similar to the first half of the year, our strong revenue growth in the quarter was helped by favorable environment and driven by how customers are responding to the unique and elevated experience we are building.

Our non-GAAP earnings per share outperformance was driven by a better-than-expected gross margin rate and helped by a lower-than-expected tax rate.

And I want to thank our associates across the company for their hard work and dedication in delivering these great results.

I am equally appreciative of their passionate focus on implementing our Best Buy 2020 strategy and on continuing to a build company that has a unique, competitive positioning and a strong human purposeful culture.

Let me start with how we are expanding what we do for our customers.

Last month, we completed the acquisition of GreatCall, a leading connected health services provider for aging consumers.

GreatCall's life in its new home is off to a great start.

We're working together to bring existing solutions to more customers and help fuel future growth in both the consumer and commercial markets.

As such, and as a first step, we recently rolled out new dedicated [M-Cabs] in our Mobile department that showcase GreatCall's easy-to-use mobile phone products and connected devices that are tailored for seniors and come with a range of relevant services.

For example, with GreatCall's 5Star service to a simple one-touch connection, customers can talk to U.S.-based specially trained agents who can connect them to family caregivers, provide concierge services and dispatch emergency personnel.

Beyond this, we're excited about the opportunities that lie ahead for us to help aging consumers live longer in their homes with the use of technology, something that can provide significant benefits for the seniors and their families as well as for payers and providers.

During the third quarter, we also continued to see encouraging results from our Total Tech Support program that we rolled out nationally in May.

Customer sign-ups as well as fulfillment costs are tracking in line with our expectations.

Having a service that provides unlimited Geek Squad support for all their technology, no matter where or when they bought it, is a compelling and unique value proposition for our members.

In addition, discounts on installations, protection and in-home services provide customers with another reason to grow their relationship with Best Buy.

Let me now say a few words about how we are evolving how we sell.

During the quarter, we expanded our free In-Home Advisor consultation program to approximately 530 advisers compared to 300 at the nationwide launch a year ago.

We are pleased by both the ongoing customer demand and the fact that the performance of the program continues to track in line with our expectations.

As expected, it is proving out to be an important part of our strategy to build deeper and more relationship-based experiences with our customers.

We're continuing to invest in customer experience enhancements.

For example, we just rolled out the ability for our customers to make an appointment with an adviser, while they are still in our stores, rather than leaving the store and waiting for us to call and schedule an appointment.

Regarding our efforts to improve the multichannel shopping experience, we're especially excited about the ways in which we are making it easier for our customers to use the Best Buy app to shop online and in our stores.

Let me give you a few examples.

Frequently, we see customers in stores trying to compare multiple products to one another, including specs, price, reviews or features.

With the Best Buy app, they can now use their phone to scan products and use an in-app feature to easily compare the results.

If they want, they can save these results for later if they're still researching a purchase.

We also recently launched a new functionality that makes it much easier for customers to find open box items, both online and in-store.

In addition to increasing the ease of shopping, this feature raises customer confidence in purchasing these types of products by being more clear about the meaning of different condition categories as well as the eligibility of any existing manufacturer's warranty or Geek Squad protection.

The app also makes it easier for customers to determine whether a given product is currently available in the local store.

Taking it one step further, we just launched a feature that can notify a customer if a product in their online cart is currently available in the store they are in.

This is helpful because customers often use the online cart as a way of keeping track of products they are interested in.

In fact, 72% of customers who use the app come into one of our stores with an item already in their cart and we now have the ability to tell them in the moment that the product is available for purchase.

The last example is one of our customers' favorites.

We call it the On My Way feature, which allows customers buying large items to use the app to tell their local store that they're on their way to pick up their purchase.

This message allows our Blue Shirts to have the item ready for pickup at the front of the store, making the in-store pickup experience faster and more pleasant for the customer.

These innovations, along with the dozens we've rolled out in recent quarters, continue to blur the lines between online and physical shopping.

This is increasingly how our customers want to shop, and our innovation pipeline closely mirrors and enables this changing behavior.

Consequently, our in-app conversion rate is up and the usage of the Best Buy app by customers while they are in our stores has increased significantly.

In Q3, we continued our focus on driving productivity and cost takeout to help offset investments and pressures in the business.

We achieved approximately many million dollars in additional annualized cost reductions, bringing the cumulative total to $455 million since Q2 of fiscal 2018 towards our goal of fiscal '21 goal of $600 million.

As we've discussed, we are investing in a range of enablers that are necessary to execute our Best Buy 2020 strategy.

Most of them are multiyear investment scenarios, such as specialty labor, enterprise customer relationship management, knowledge management capabilities, our services platform and our supply chain.

We're tracking according to plan on our investments and we are pleased to see how they are beginning to return.

So for example, in supply chain, we've seen a Net Promoter Score for metro home delivery of large appliances in TVs increase more than 1,700 basis points, 1,700 basis points over the last 2 years.

This is due to investments in things like new metro delivery pads located close to customers as well as a 60% increase in our distribution center square footage, which significantly decreases the reliance on offsite space and increases efficiency and accuracy.

We have been a pioneer in fast and free delivery, and we continue to invest in our capabilities, because we know how important speed is to our customers.

So in Q3, we delivered about 80% of small packages in 2 days and almost 1/3 were delivered next day, 1/3 were delivered next day for free and with no membership fee required.

We have also been one of the leaders in buy online and pick-up in-store.

Even with all of the great shipping options, many customers find significant value in picking up their purchases in our stores, whether it is because they want it right away or simply want to control the timing.

In fact, we have seen 7 straight quarters of growth for in-store pick-up as a percentage of online sales and more than 40% of our online revenue is now picked up in our stores.

We are continuing to invest in labor.

We are investing in specialty labor in areas, such as In-Home Advisor, appliances and smartphone.

And we are also investing in the compensation and benefit of our associates.

Two things I want to highlight.

Number one, because of the investments we've made, we are competitive in the marketplace.

In fact, our employee turnover rate in stores has been materially reduced over the last couple of years and is now in the low 30%.

Second, the current industry trends we are all seeing are relatively in line with the expectations we had when we addressed the topic of wage pressure at our Investor Day last year.

Our strategy here has been to approach the topic holistically.

While starting base pay is, of course, important, we always look at creating an attractive overall employee value proposition, including hourly wages, incentives for both full-time and part-time associates, employee benefits, skill development, career advancement, and importantly, the purposeful human culture.

And on the topic of benefits, we're excited about some of the unique benefits we offer to our employees, including the employee discount on all of the cool stuff we are selling and tuition reimbursement as well as 4 newly announced benefits, including paid caregiver leave, backup childcare, paid time off for part-time employees and enhanced mental health resources.

Staying on the topic of people, I am excited to share that during the quarter, we promoted 2 key leaders to new and expanded roles in support of our Best Buy 2020 strategy and to help us accelerate our progress.

So first, Corie Barry, our Chief Financial Officer, has been promoted to Senior Executive Vice President, Chief Transformation and Finance Officer, responsible for orchestrating our transformation.

In addition to finance, Corie now overseas our strategic growth office, our health business, a newly created transformation team and our digital and technology organization.

All of you know Corie, of course, and the strong skills and experience she brings to this expanded role.

This focus on transformation underscores the major pivot we're making as an organization with our Best Buy 2020 strategy as we are moving from a transaction to a relationship orientation and evolving from a product to a need-based solution orientation.

Second, Mike Mohan has been promoted to Chief Operating Officer of our U.S. business, responsible for running the domestic business and, in partnership with Corie, getting us to where we want to be as a company.

As you know, Mike has been with Best Buy since 2004 and has been responsible for our merchandising, marketing and supply chain functions.

He now has added all the channels, including online, in-store and home and our services teams to his scope.

Over the last several years, Mike has demonstrated his ability to lead and drive change in what is a large and complex business.

I am personally very excited to work with Corie and Mike in this new construct and to continue to work with our team on our strategy and our growth plans and on continuing to strengthen our culture.

I could not be more inspired by the opportunities ahead of us as we implement our Best Buy 2020: Building The New Blue strategy.

And I know that you all want to join me in congratulating Corie and Mike for their new expanded responsibilities.

Looking immediately ahead, we are excited about our holiday plans and everything we have to offer our customers this holiday season.

What matters, of course, during holiday includes assortments, deals, product availability, help, convenience and speed.

And our team has put together a best-in-class assortment, prepared an amazing set of deals and ensured we have great inventory availability across all the product categories we carry.

This makes us a natural destination for everything tech-related, including TVs, computing, gaming, a growing toy assortment, phones, smart home devices and large and small appliances.

We released our Black Friday ad 2 weeks ago with 52 pages of the best deals of the holiday to help our customers find the best gifts for their friends and family.

Notably, this will be our first holiday with Total Tech Support and we're excited to offer it to customers as a gift-able item.

It is the number one thing our retail teams have been asking for since the launch of Total Tech Support last May, and it's a great way for gift givers to ensure the technology they are giving to their loved ones will be set up and working as it should be.

Once again, this year, we offer our customers compelling delivery options, such as free shipping on everything, all season long, fast in-store pick-up that can be ready in 1 hour and same-day and next-day delivery options.

We've also materially upgraded our online Gift Center and our new gift finder will make it easier to get just the right gifts for kids, teens, parents, grandparents, significant others and families.

For customers in our stores, our Blue Shirt associates, Geek Squad agents and In-Home Advisors are ready to help our customers find great gifts and solutions.

Whether you're shopping digitally or in our stores, Best Buy can help customers find gifts for everyone on their gift list.

Now beyond holiday, we continue to be excited by the opportunities that exist for us in the marketplace.

We like the continued rate of technology innovation and the capabilities technology can bring to people's lives.

We like our opportunity to offer customers a more consultative approach to truly address their needs, provide them an increasing range of services and solutions, expand our relationship with them and become a bigger part of their lives, and we particularly like the opportunities we have in the connected health space following the acquisition of GreatCall.

Before I turn the call over to Corie to review the results and our outlook, I'd like to share some key facts and thoughts on the subject of tariffs.

We estimate that the latest $200 billion list that went into effect in September touches only about 7%, or about $2.3 billion, of our total cost of goods sold, and many of the products on this list are accessories.

The expected impact of tariffs on our business for the remainder of this fiscal year is reflected in our guidance and is expected to be minimal.

The reasons why it is expected to be minimal are that the tariffs only impact a very small portion of our business.

The current rate is only 10% and their costs are being mitigated in a variety of ways.

Looking into next year, I would say 3 things today.

One, as you know, this is a dynamic situation with the expectation as of now that the tariff on the current list increases to 25% on January 1. Two, my personal view is that while the journey may not be linear, the trade negotiations with China will progress.

Three, we believe that working together, our vendors and our team have at their disposal a range of effective ways to mitigate the effects of tariffs, which is precisely what we're working on.

We will, of course, continue to update you on this matter.

So in conclusion, we are, as you can tell, very energized by our continued momentum and overall performance and encouraged by the progress we're making in implementing our Best Buy 2020: Building The New Blue strategy.

We see significant value-generation opportunity ahead of us by successfully enriching lives with technology and providing services and solutions that solve real customer needs.

And so lastly, I want to extend my sincere appreciation to our associates for everything they are doing for customers this holiday season.

You are amazing.

Thank you for what you do.

And now, I'd like to turn the call over to Corie for more details on our Q3 performance and our Q4 guidance.

Good morning, everyone.

Before I talk about our third quarter results versus last year, I would like to talk about them versus the expectations we shared with you last quarter.

On Enterprise revenue of $9.6 billion, we delivered non-GAAP diluted earnings per share of $0.93, both of which exceeded our expectations.

We saw better-than-expected top line results in our mobile phone, gaming and wearables categories.

Our operating income rate was at the high end of our expectations, driven by a slightly favorable gross profit rate.

Compared to the guidance we provided last quarter, a lower-than-expected tax rate provided a $0.03 benefit that was partially offset by the impact of hurricanes Florence and Michael, which had a negative impact of approximately $0.02, with only a minor impact on revenue.

Consistent with last year, we made decisions to support our employees, our customers and our communities, like continuing to pay our employees who performed volunteer work while their store was closed.

These efforts come at a cost, but they are the right things to do.

Additionally, the inclusion of GreatCall had a negative impact of approximately $0.02 per share, which was not included in the guidance we provided last quarter.

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

Enterprise revenue increased 2.9% to $9.6 billion, primarily due to the comparable sales increase of 4.3%.

Enterprise non-GAAP diluted EPS increased $0.15 or 19% to $0.93.

This increase was primarily driven by a $0.09 per share benefit driven by a lower non-GAAP effective income tax rate and an $0.08 per share benefit from the net share count change.

Our Q3 operating income rate was higher-than-expected, but still lower than last year, as expected, due mainly to higher supply chain costs and the rollout of our Total Tech Support program.

Our comparable sales growth of 4.3% included a negative 70-basis-point impact from the calendar shift.

As we have discussed in previous quarters, our reported comparable sales are computed on like-for-like fiscal weeks and are not shifted to more closely aligned calendar weeks following last year's 53-week year.

As we shared with you last quarter, in Q4, we expect the calendar shift to have a positive impact of approximately 50 basis points on our reported comparable sales.

In our Domestic segment, revenue increased 3.1% to $8.8 billion.

This increase was primarily driven by a comparable sales increase of 4.3%, partially offset by the loss of revenue from 287 Best Buy Mobile and 19 large-format store closures in the past year.

From a merchandising perspective, the largest comparable sales growth drivers were mobile phones, gaming, appliances, wearables, headphones and smartphones.

These drivers were partially offset by declines in our tablet category.

Domestic online revenue of $1.21 billion was 13.8% of Domestic revenue compared to 12.7% last year.

On a comparable basis, our online revenue increased 12.6% on top of 22.3% growth in the third quarter of last year, primarily driven by higher conversion and increased traffic.

In our International segment, revenue increased 0.6% to $834 million.

This was primarily driven by comparable sales growth of 3.7% driven by both Canada and Mexico, and incremental revenue associated with 6 new large-format store openings in Mexico over the past year.

Partially offsetting these gains was approximately 460 basis points of negative foreign currency impact.

Turning now to gross profit.

The Enterprise gross profit rate decreased 30 basis points to 24.2%.

The Domestic gross profit rate was 24.4% versus 24.7% last year.

The rate decline of approximately 30 basis points was driven primarily by higher supply chain costs from both investments and higher transportation expense as well as the national rollout of our Total Tech Support offer.

Both of these were in line with the expectations we shared last quarter of approximately 50 basis points of combined pressure.

These pressures were partially offset by higher overall product margin rate, which included the benefit from our gross profit optimization initiatives.

The International gross profit rate of 22.2% was flat to last year.

Now turning to SG&A.

Enterprise non-GAAP SG&A was $1.98 billion or 20.7% of revenue, which increased $52 million and was flat to last year as a percentage of revenue.

Domestic non-GAAP SG&A was $1.81 billion or 20.6% of revenue versus $1.75 billion or 20.6% of revenue last year.

The $55 million increase was primarily due to: one, growth investments, which includes specialty labor and higher depreciation expense; two, higher incentive compensation; three, GreatCall operating expenses; and four, higher variable costs due to increased revenue.

These increases were partially offset by cost reductions.

International SG&A was $178 million or 21.3% of revenue versus $181 million or 21.8% of revenue last year.

The $3 million decrease was primarily due to the favorable impact of foreign exchange rates.

On a constant currency basis, SG&A increased $5 million.

The increase was primarily driven by new stores opened in Mexico in the past year and higher depreciation expense in Canada.

On a non-GAAP basis, the effective tax rate decreased to 22.7% from 30.4% last year.

The lower effective tax rate was primarily due to the reduction in the U.S. statutory corporate tax rate as a result of tax reform.

From a cash flow perspective, we ended the third quarter in line with our expectations.

We returned $493 million to shareholders in the form of share repurchases and dividends.

In Q3, we completed a public bond offering for $500 million in 4.45% notes due in October 2028.

The net proceeds from the sale will be used for general corporate purposes and replace the $500 million in 5% notes that matured and were retired earlier this year during our second fiscal quarter.

Our acquisition of GreatCall for $792 million in net cash consideration was funded with existing cash and is not expected to impact our previously communicated plans to spend $1.5 billion on share repurchases this fiscal year.

Finally, our ending inventory balance increased 23% and our accounts payable increased 21% compared to the third quarter of last year.

These increases were primarily due to the calendar shift this year, which results in Q3 ending a week closer to the holiday season.

On a like-for-like calendar basis, our Q3 ending inventory balance increased approximately 7%, which was slightly higher than the expectation we provided last quarter.

This was due to decisions we made to bring in receipts early in response to pressure within the international and domestic transportation industry, due primarily to tariffs and weather as well as some product launch timing shifts.

Overall, I'm very pleased with the health of our inventory.

I would now like to talk about our guidance.

We are raising our full year guidance for revenue and EPS to reflect the outperformance in the third quarter.

For Q4, our guidance is consistent with the expectations that were implied in the guidance provided on our last call.

This is despite approximately $0.04 of negative impact that was not contemplated on our Q2 call from GreatCall and a lower profit share benefit from our services plan portfolio than originally expected.

As a reminder, the extra week in the fourth quarter of last year added approximately $760 million in revenue and approximately $0.20 of earnings per share.

Our Q4 outlook is as follows: Enterprise revenue in the range of $14.4 billion to $14.8 billion.

Comparable sales growth of flat to up 3%.

Domestic comparable sales growth of flat to up 3%.

And International comparable sales growth of flat to up 3%.

Non-GAAP diluted EPS of $2.48 to $2.58.

A non-GAAP effective income tax rate of approximately 25% and a diluted weighted average share count of approximately 275 million shares.

A few additional comments on the fourth quarter guidance.

As I mentioned earlier, the calendar shift is estimated to be a benefit to Q4 domestic comparable sales of approximately 50 basis points.

We expect to see a flattish gross profit rate compared to last year as approximately 25 basis points of supply chain pressure and a $50 million lower profit sharing benefit are partially offset by slightly better year-over-year merchandise margins, including the impacts on gross profit optimization initiatives and the impact of GreatCall.

The $50 million negative impact from the lower profit share payment is $10 million higher than what we guided last quarter.

We expect our SG&A dollars to decline in the low single digits due to the extra week last year and lower short-term incentive compensation, partially offset by the impact of GreatCall's operating expenses.

Our full year guidance now stands at: Enterprise revenue in the range of $42.5 billion to $42.9 billion.

Enterprise comparable sales increase of 4% to 5%.

Non-GAAP operating income rate of approximately 4.5%, which is flat to fiscal 2018 rate on a 52-week basis.

Non-GAAP diluted earnings per share in the range of $5.09 to $5.19, an increase of 15% to 17%.

This represents an increase of 21% to 23% when compared to fiscal 2018 on a 52-week basis.

A non-GAAP effective income tax rate of approximately 24% and capital expenditures of approximately $800 million to $850 million.

I will now turn the call over to the operator for questions.

(Operator Instructions) Our first question will come from Kate McShane with Citi.

One of the statistics that you'd put in your prepared comments was that more of your product is being picked up in store, and I know that's been a big initiative for you guys and a lot of retailers.

So as you leverage the store and as customers come to pick up a product, I just wondered if you could walk us through how that contributes to the overall profitability and how we can expect that contributing going forward?

Yes, Kate.

That has been a trend that we've been seeing.

And one of the things we've actually talked about because the other kind of flavor on this question is how do you think about the difference in profitability between the various channels and how is that evolving over time, and we've talked a lot about in our business what we actually see is less difference between the profitability in the channels always with the caveat that things like this exactly make it very hard for us to pull the channels apart.

But this is part of the reason that the overall profitability of our online channel, in particular, has continued to improve over time.

And it's a combination of both experiences on the site, but also ways in which the customer is choosing to come pick up their own merchandise versus necessarily wanting it shipped straight to their home in every instance.

So this is definitely part of when we talk about the lesser difference between the profitability of our channels, this is a big part of what has helped us create a more robust online profitability profile.

Okay, great.

And if I can ask one other unrelated question just about GreatCall.

I know it's early days, only been a couple of weeks, but just wondered if there have been any early learnings since it's been part of your portfolio, and how should we think about your strategy with regards to M&A going forward?

Any early warnings?

Learnings.

Oh learnings.

Yes.

Thank you, Kate.

So yes, we are very excited about the GreatCall acquisition.

It's completely in line with our strategy of addressing key human needs.

The company we acquired, I have to commend our team for the extensive due diligence we did, in particular, in showing the cultural fit.

When you acquire a small company, it's really important that this fits and the alignment of missions is really very, very strong.

And so all of the -- a lesson for us maybe, Kate, because we have not done acquisitions in a long time, was all of the pre-signing and pre-closing preparation to ensure a very smooth integration has been very positive.

The other lesson for us is that the opportunities for us to help aging seniors stay in their home longer through technology, we are more excited than ever about this.

And sometimes you wake up after an acquisition, and say, "Oh my God, what have we done?" No, no, we feel very, very positive about this, and we've said in capital allocation strategy that our priority was to invest the cash flow in improving the business, both organically and inorganically, and this gives us -- we're paying a lot of attention to this first acquisition because success there, of course, increases our confidence to do more.

And so our level of excitement is very good, and I want to take the opportunity to salute anybody from GreatCall listening.

They are great member of our team.

Teams are working really well together.

So it feels very good.

Corie, anything you want to add?

I would just add one more financial clarifier so that it doesn't send unintended messages.

We are very excited about working with the team.

We do still expect the impact to be -- of the acquisition to be neutral on a 12-month basis, but you heard me call out a couple impacts here in Q3 and Q4.

Those are more about the early part of the business.

One, we had some revised opening balance sheet assumptions, which can happen anytime you have an acquisition like this.

And then two, we're accelerating some of the customer acquisition cost, which is what I'm going to call a high test problem, meaning we believe some of the things we can do together means we can acquire more customers here early in our life together and that, obviously, pays dividends over time as that customer is on their plan and is a customer with us, hopefully, for life.

So I just want to make sure people understand that's not that that business is performing differently than we thought.

It's just a bit of how it timed-out amongst the quarters.

Our next question comes from Simeon Gutman with Morgan Stanley.

Congratulations, Corie and Mike, on the promotion.

My first question is on the 0% to 3% guide for Q4.

I think, Corie, you suggested the same on the Q3 call.

The consumer seems fine and Hubert reiterated the favorable backdrop.

What's changed a little, at least since then, is you've had some competitor actions maybe around shipping and then Amazon apparently will have some product they didn't have.

And I'm sure you factored competition in, but I was curious if anything surprised you, sort of, from when you, sort of, started thinking about the 0% to 3% to now?

Not so much surprised.

I mean, look, the consumer and competitive environment this time of the year in particular is always evolving, and it's one of the things that we actually talk about pretty often how the behavior even of the consumer, how we think about the marketplace in Q4, is always a bit different than how we think about it the rest of the year.

You're absolutely right in that we are doing everything we can to take into account both what we see in a consumer and a competitive positioning as we think about Q4.

And yes, there have been changes, but at the same time, we've continued to accelerate some of our own strategic advantages and continue to feel very well placed in the marketplace.

And maybe Hubert can hum a few bars on how we're also thinking about even just our own Apple business and the things we do with our Apple products as it relates us and Amazon.

Yes.

We've -- I mean, as you know -- and, Simeon, thank you for the congratulations to my 2 colleagues and sharing the excitement.

We've had a longstanding relationship with Amazon and Apple, of course.

We've built over the years a very unique experience selling Apple products.

In fact, Apple would say that Best Buy provides the best retail experience for their products and services outside of their own home.

As you know, we have 900 Apple stores within our stores and they do a great job of showcasing the products and services.

We have 3,000 Apple ecosystem experts in our stores, that includes Apple masters and sales consultants and agents and Apple employees.

And the online experience was built over the years.

It's been years since we've been doing this workflow.

And then from a service standpoint, I think we're the largest third-party seller of AppleCare and the largest third-party authorized service provider for Apple products.

So our focus, as a company, has always been on the customer in building a unique customer experience.

I think the announcement pertaining to Amazon -- Amazon has always been selling Apple products, including first party for the laptops and whatnot.

Our understanding is that they'll reduce massively the number of third-party sellers and, of course, they'll start selling phones or the watch themselves.

But it's unclear at this point what the net effect is going to be.

And our focus on continuing to enhance the customer experience, work with our vendor partners, Apple is a key one, on continuing to innovate and make sure we have a competitive advantage in the marketplace.

So I think that the 0% to 3% is probably is -- it's in line with what we had said a quarter ago.

I know that there's been a lot of noise in the media about a lot of things, but we're sticking to our perspective on Q4, and we're ready to serve every customer, including you guys on the phone.

My follow-up may be for you, Hubert.

Just to drill down a bit on the Mobile business.

How do you, sort of, put a fortress around it?

And then can you share with us, like if you look at your elite plus customers, what percentage of them are buying mobile through Best Buy, just shopping the category, I'm thinking like, just as a phone as a primary purchase?

So Simeon, you said build the Mobile business -- a fortress about the -- around the Mobile business.

Can you elaborate on your question a little bit because we're not in the fortress building business.

So tell me more about your question.

Yes.

Look, how do you maintain -- how do you keep that customer loyal to buying, upgrading their phone, renewing through Best Buy as the years go on?

I think some customer survey research that we have from a couple of years ago, which show that the captive as well as, sort of, the Apple Store seem to be taking share as a whole.

And so now, there's just -- there's some more competitive entrants, if you will, if Amazon does become a first-party seller of the phone.

So how do you keep the customer there?

And just what is the importance of that customer to the business?

Yes.

I'll start and then, Mike, if you want to elaborate, that would be great.

We have been investing significantly in that part of the business in our stores, in particular, through the initiative called Mobile 2020, and you may have seen that in our stores.

So that's in partnership with the carriers.

Buying a phone is actually a complex experience, and we do well compared to other players when the items that we're selling are either very large or complex to buy.

So that's -- it's a strength.

And so we've invested in systems to streamline the buying process in the stores, making it shorter.

We've had these menu boards to make it clearer for customers to know what the promotions were.

Of course, the fact that we have Verizon, AT&T and Sprint in our stores is a unique advantage.

We have increased labor and the proficiency of the associates, both our own associates and the carriers' associates.

We have, of course, the display of the major brands of phones, Apple, Samsung and increasingly, Google.

So that's the unique experience.

Now that being said, phones is not the category where have the highest market share.

So there is a lot of options and the carriers and Apple do have an advantage, but we feel good about our momentum and our continued investment in the customer experience.

Mike, what would you add to this?

Thanks, Hubert.

Good to talk to you, Simeon.

What I would add to complement what Hubert said is our phone business is complicated, so for people when they think about their relationship with the carriers.

And so the one thing that Best Buy has done is tried to simplify that experience, whether it's in our stores or online, where you can actually talk to a qualified expert, you can review your plan with us, we can compare plans to other carriers, we're very objective about that, and you can compare an iOS ecosystem to an Android ecosystem.

And we still believe even though that consumer is truly -- and you know the statistics probably better than I do around delaying their upgrade purchase.

That means they're keeping their phone longer than they want to do other things with it.

So we are rolling out the amount of stores we can do Apple glass repair in this quarter as well.

This is a key thing that consumers are going to need more help with as they keep their devices longer.

So I think we look at that as a stand of what we can do for customers that's different then an e-commerce only distribution avenue or even what Apple can handle on their own stores.

Your next question comes from Joe Feldman with Telsey Advisory Group.

I wanted to ask about the inventory.

Again, I know it sounds like it's in good shape and you guys did bring forward.

What was causing the early receipts though?

Was it trying to get in front of like tariffs at the turn of the year?

Or was it a logjam created by others related to tariffs?

Or can you share a little more color there?

Yes, absolutely.

So let me just try to parse it apart one more time to make sure that I'm clear.

Of the 23% increase that we saw in inventory, about, call it, 16%, 17% of that was just due to the shift in the calendar week.

So literally, once you line up the calendar week, this is how much a difference it makes because you bring so much inventory in each week here.

So literally, if I just line up calendar weeks, that leaves a 7% overall increase in inventory.

First of all, not that out of line with the sales trends we saw coming out of the quarter.

And then second of all, yes, we absolutely made some proactive decisions.

There has been more activity in especially the ports and in some of the deconsolidation areas, both due to a lot of companies bringing more in due to tariffs, but also, even just some of the typhoons have caused some weather delays and things being more lumpy and spotty.

And so I give our inventory, demand planning teams a ton of credit who are working really hard to make sure that we were well prepared in saving that inventory in early so that you would absolutely have it.

I mean, one of the largest NPS drivers that we've had continues to be inventory availability and we felt like it is really important for us to have the stuff that people want as we bring it in.

You can it's all basically new and fresh, given the corresponding increase in the payables balance as well.

And then just to follow-up, as you think about the holidays, and the season, obviously, the promotions seem like they've started sooner or at least getting better sooner.

Have you guys seen or can you comment on any response, I know it's a current quarter, but if there's any color you can give there?

Or asked another way, are there any particular catalysts that you're looking for this holiday season, any key products that you think might be the big winners for the season?

Yes.

There are such an amazing set of exciting products for the holiday, and that's one of the things that makes us excited about this category, which is the continuous flow of innovation.

And what's great about this holiday is that there is excitement across many, many different categories.

So gaming is going to be particularly hot.

There's a number of great titles, the Nintendo Super Smash Bros.

Red Dead Redemption 2 and Call of Duty: Black Ops 4. TVs, they continue to be a big item, people moving to larger screen and smart TVs, and, of course, we have a partnership with Amazon there with the Insignia and Toshiba 4K UHD Fire TV Editions.

But broadly speaking, a lot of excitement around TVs; streaming devices; voice assistants with screen.

So screen is going to be a big item.

If you bought a voice assistant last year, here is the good news, you can buy a new one with a screen and I have a few on my kitchen table, a lot of functionalities there.

New phones, there' been a number of great new phones that have been launched, health both Fitbit and Apple.

Appliances, lots of excitement.

Small appliances, great gifting items across mixers, pressure cookers, I don't cook but I've heard, right, air fryers.

Major appliances, there's a lot of -- this is a more promotional time of the year for appliances than I think ever before.

And then security, doorbells, security here.

So there's a lot of excitement for people to come to our stores or shop online with us or again, we will come to you.

So that's one of the reasons why we're excited about this holiday.

Of course, there is the general consumer confidence, but there's a lot of reasons, and we can take care of your entire list.

So just one trip and you're done.

Joe, specific to your question around -- just so I make sure we hit it on the competitive environment.

I mean, I think the earlier and earlier start to the season is definitely a phenomenon that we've been seeing over the last few years.

It's something we have taken into account in our own competitive positioning and in our own promotional cadences.

It's reflected in, as best we could, the guidance that we gave you for Q4.

And so we always talk about how this -- the holiday continues to change, it continues to shape differently, and we continue to have a team that does just an amazing amount of work to make sure we feel really prepared to compete as that holiday season continues to evolve.

Our next question comes from Brian Nagel with Oppenheimer.

First off, congrats to Corie and Mike on your new responsibilities.

Thank you.

So with regard to the buy online and pick-up in-store, in your prepared comments, you talked about this and, I guess, the business -- that part of the business continuing to strengthen.

The questions I have there are: one, is this something that Best Buy is doing what -- is Best Buy encouraging customers to it, or is it more a reflection of just the natural evolution of the online market?

And then as far as -- when I -- and I'm sure you've looked at this, as a customer chooses to pick up a product in-store versus having it shipped to their homes, where is the benefit for -- how do you look at the benefits for Best Buy there?

Is just the overall maybe better profitability or the add-on sales as that customer comes to the store?

Yes.

So on the first point, yes, we -- this is the customer choice.

As a customer-focused, customer-obsessed company, we're not going to try to make the decision for the customers.

So if you look on our site or in the app, it's really the customer.

There is no financial incentive one way or the other.

It's really up to the customer.

That's what we said in the prepared remarks, that there's a unique benefit of picking up in-store.

You can get it in less than an hour.

So speed is pretty great, knowing that 30% of the U.S. population lives within 15 minutes of a Best Buy store.

And then if it's a -- you do want to control when you're going to get it.

By the way, if it's a gift during holiday, you may not want to have the gift show up at your home and whatnot.

So it's really a customer-driven phenomenon.

The benefits to Best Buy, of course, there is shipping, there is additional items and we love to see the customers in our stores and we can help them with any question, they will tend to buy more stuff as well.

But this is not what is driving it.

We want the customer to have the opportunity to choose and get the best possible experience.

And on this topic, because we've been doing this for so long, we've had the opportunity to really improve the process, invest in the systems, invest in the labor, invest in the overall customer experience and we're seeing great results out of this.

Corie or Mike, anything you would add?

No.

That looks great.

Okay.

That's very helpful.

And just one quick follow-up question.

With regard to real estate, in your release you mentioned, obviously, we had the Best Buy Mobile stores close and then some repositioning of your larger format stores, too.

Any thoughts on how we should expect that effort going forward -- or, I guess, what should we expect to see on the topic of real estate positioning going forward -- or repositioning?

We've been pretty consistent on our real estate positioning, which is, we're lucky in that we get to see a number of leases every year.

Right now, we're seeing about 130 leases per year.

We're looking at all of those stores, and not just the stores, but importantly, also the markets to try to understand how do we very best serve the consumers in those markets.

And we continue to make sure we're making the best decisions for every market and, therefore, refining down the market positioning.

But I don't think you're going to see any massive speed up.

You're not going to see a change in the overall positioning.

You're just going to see us continue to make sure that we feel like the footprint by market reflects the needs of the consumers in that market.

Next question comes from David Schick with Consumer Edge Research.

So there's always this tension of, sort of, looking in the near term at what product or latest announcement, whether it's holiday or Apple, Amazon, competitor announcement is going on.

And then there's the temptation to go back to product cycles that have been there historically, right, and sort of thinking about your business.

I guess, it would be helpful if you could talk about maybe neither of those -- you've talked about services, but what other products, when you have these suite of products at the front of the store that are more discovery for consumers, how are those conversations going with vendors?

What does that look like?

What is the front of your store, things we haven't seen yet, look like over the next several years?

David, it's Mike.

That's a great question to talk about.

The biggest evolution that you've seen in our stores, because I know you shop in them, is trying to have people understand what a connected home or a connected product ecosystem can do for them.

And I think you're going to see that continue to evolve.

We're just starting to scratch the surface around how assistant -- the digital assistant technology both with a screen, without a screen, how people can think about personal security and as it morphs into what they think about their own version of health and wellness.

So what you do see at the front of our stores is an exciting amount of real estate.

There's tremendous interest from both current vendors and those who are just starting to emerge to get a chance to be able to have us leverage our team members and show customers what we truly can do and try to solve.

One of these lifestyle needs we spoke about them at our Investor Day, specifically, around health and wellness and security, and I think you're going to see more of that as we move into the next few years.

I don't know, Hubert, do you want to add anything?

Yes.

The other thing from an equity story standpoint, David, this discussion -- you kind of have a discussion around product cycles and specific categories, and so forth.

The way increasingly we look at it and, of course, next year, we'll have opportunities to update you guys around targets and whatnot, but the way we look at is in aggregate, the different product categories we sell, while within the portfolio, there's cycles, as a whole, it's a pretty stable basket of things that customers buy.

And there's always innovation, you never know what's going to come 2 years from now, but there's always that.

The growth opportunity for us is not driven specifically by a particular product launch; it's driven by the opportunity to extend the relationship with the customers.

A key fact that I always go back to is that our share of wallet of existing customers is 26%.

And as we continue to build the customer experience and the ability to build relationship with customers, the growth opportunities from expanding this share of wallet, and imagine -- this is not an updated forecast, but imagine the impact of growing the share of wallet from, let's say, 1/4 to 1/3.

And that's the opportunity, that's the obsession we have and that goes through really understanding the customer needs, knowing the customer, bringing solutions, hardware, services and then being a part of their life.

So that's why In-Home Advisor plays a key role; that's why Total Tech Support as a way to be in people's lives on an ongoing basis; that's why getting into the health space gives us these opportunities.

So the -- what's very exciting, if you look back at the last year or 2, is we've now demonstrated the ability to grow the company and comp ourself, and the growth opportunity looking ahead is driven by this expansion of the customer relationship.

It's going to take time, but it's very, very exciting.

And is it fair to say these-- there will be Best -- as there has been in the past, there will be Best Buy exclusives as part of what is presented to the consumer?

I think that would always be a fair assumption.

We talk about our ability to making curate markets, and part of that is ensuring consumers know what the products will do and a solution for them and that provides us with a great opportunity to do that, David.

Next question comes from Matthew McClintock with Barclays.

Congrats, Corie and Mike, as well.

I was -- 2 quick questions.

The first one just, Corie, you talked about a lot of investments that you're making, Hubert you did as well.

And you've been making investments for, I mean, 3, 4 -- 4 plus years.

I was wondering, as we look forward, what are the bigger buckets of investments that need to be made in the business that could potentially, one, at the flow-through on earnings thinking into 2019 and beyond?

That would be my first question.

Yes.

There's a few different suites of investments that are what I'm going to call a little bit more ongoing in nature.

And when we talked about it at Investor Day, we talked about it in both a larger swathe of investment and pressures.

And so as you think about things like our ongoing investment in people, that's come from both very specialized areas, like a smart home experience in our stores or an In-Home Advisor experience.

It's also come broadly from our investment in wages and in benefits and in the list of things that Hubert talked about that are important to our employees.

That is a suite of investments that is ongoing, and we believe -- and that's why we talked about it in terms of our longer-range plan, that's going to continue to be a space where we invest.

A second major area of ongoing investment is going to be what I will call our technology capabilities, or those tools that will help our associates and help our customers have better experiences.

Things like, we talked about CRM, knowledge management, those are longer-term builds, and we're going to continue to refine those and make those tools better and easier to use over time, including the investments in the digital experience that Hubert did a really nice job outlining in his part of the prepared remarks.

And then three, we specifically said we were making a major investment in our supply chain infrastructure.

And we were, again, very clear that, that was going to be a multiyear journey for us as we worked on both the space required to fulfill on our larger product as well as the efficacy required to deliver at speed on our smaller product.

And that, again, is going to be a longer-term journey for us.

So it's part of the reason we feed all those up at Investor Day and said, these are going to be the longer-term investments and pressures, and part of the reason we have remained so committed to the cost reduction side of things as well.

That's very helpful for the update.

And then just my second question is on home theater.

Hubert, you sounded really excited about the home theater options for the holiday and the category ledger comp last quarter, but I didn't see it listed this quarter.

So I'm just trying to understand, what happened to home theater this quarter?

And then as we go into holiday, you've benefited a lot from a trade up to a higher size, bigger, bigger TVs, is there still room to increase the mix of bigger TVs in your sales mix to offset ASP pressure as we look at holiday?

Matt, there's always room to sell bigger TVs.

One of the -- definitely -- we definitely saw a bit of a moderation in the TV industry compared to what we saw in Q2.

I'd call it a little bit more like what we saw in Q1.

So it slowed a bit.

Good news is, units continue to be up at a pretty good clip and, to what you alluded to, ASP is down a bit.

The nice part is, we continue to see people mix into, specifically to your question, larger TVs, and we get really caught up in 4K and the technologies, but genuinely, what people want is a larger great TV experience in their home, and we continue to see excitement around that, which kind of props up the concept that this isn't one of those cycles that just automatically falls of the cliff.

It is more this idea that we keep providing new and different ways for customers to get bigger TVs with better technologies.

And so, yes, it moderated a bit from the last quarter, but it's really going to be a hot item having in for the holidays and we feel very well prepared.

Very good, so…

Sorry, go ahead, Hubert.

No, go ahead.

I was wondering with Mollie whether we had time for one more.

So I think we do.

All right.

Our last question will come from Mike Baker with Deutsche Bank.

So I guess, this would be a longer-term question, I suppose, and I don't know if you're prepared to talk about this.

But the -- relative to the Analyst Day that you just referenced, it looks to me as if you're going to come in, you're going to beat the sales plan of $43 billion, because you're well on your way to hitting that this year, maybe a little bit below that, but by 2020, you should be there.

Any -- does that necessarily translate into better operating margins?

Or should we still think about a similar operating margin to what you laid out a few -- I guess, last year?

And if the margin's not going up, then why not?

So for right now, what we're focused on is finishing out this year and making sure that we deliver on the commitments that we made for this year.

We're absolutely going to update everyone as we get to the end of the fiscal year here on what we think our midterm outlook looks like and how it should be updated.

What I said on the call, and what we alluded to, this idea of continuing to make sure we invest in the business in a way that we feel like it's going to set us up for future success remains our focus, and then we'll help you through the future financial implications of that once we get through the rest of this fiscal year.

Okay.

Well -- and, I guess, as a follow-up, I'd ask, the same-store sales are going to end up being at least 4% for the second year in a row.

How sustainable is that?

How much of that is due to really strong products over the last couple of years that might not repeat?

And do you need services to accelerate to replace some growth in products?

So I think that's we're obviously excited about the fact that we've been able to demonstrate this very positive trend.

As Corie said, we'll provide an update on our Q4 earnings call.

And to the point of product cycles versus customer relationship, our main theme, the big long-term opportunity for us is the expansion of the relationship with customers.

We've demonstrated at Investor Day that the volatility in this sector is actually much lower than people think.

We like, of course, the environment in which we've been operating this year and we'll provide the update at the -- on the Q4 call, but very excited about the future for our business.

So with this, maybe I'd like to wrap.

I know that this is an incredibly busy day for all of you.

We were not, apparently, the only retailer reporting today, to say the least.

So thank you so much for your attention.

I want to say one word, because I'm sure many of us have friends and family in California that are impacted by the fire.

So our heart is with the population in both Northern and Southern California.

We wish all of you a very safe and a very happy holiday.

And I know one way to increase your happiness, which is to focus your list with us.

So I look forward to seeing you in our stores or online.

Thank you so much for your attention, and look forward to catching up with you in 3 months.

Thank you.

Thank you, everyone.

This concludes today's teleconference.

You may now disconnect.