Best Buy Co. Inc (BBY) — Q4 2015 Earnings Call Transcript

Good morning and thank you. Joining me on the call today are Hubert Joly, our President and CEO, and Sharon McCollam, our CAO and CFO. As usual, the media will be participating in this call in a listen-only mode. This morning's conference call must be considered in conjunction with the two press releases that we issued earlier this morning, including our Q4 earnings release and the second release announcing our plan to return capital to our shareholders. The Q4 earnings release and today's conference both contain non-GAAP financial measures that exclude the impact of certain business events. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons but should not be considered superior to, as a substitute for, and should be read in conjunction with, the GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release. As previously announced on December 04, 2014, the company entered into a definitive agreement to sell its Five Star business in China. As a result of this agreement, Five Star was classified as held-for-sale as of the end of fiscal '15, and its results were included in discontinued operations for the current and prior year period. On February 13th, Best Buy completed the sale of Five Star; we have recast certain financial information for fiscal 2014 and 2015 to reflect the results from the Five Star business as discontinued operations. This recast financial information is available in the exhibit 99.2 in the company's Q4 earnings release 8-K filed this morning and on our IR website investors.bestbuy.com. 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 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, gaming, movies, music, appliances, or services. I will now turn the call over to Hubert.

Good morning everyone and thank you for joining us. I'll begin today with an overview of our fourth quarter results and full year results and then discuss the status of the Renew Blue transformation and our priority for fiscal 2016. Before turning the call over to Sharon for additional details on our quarterly results and commentary and our financial outlook. So first, our financial results; In the fourth quarter, our teams delivered positive comparable sales, improved profitability, and continued progress in our Renew Blue transformation. This resulted in a 1.3% increase in revenue to $14.2 billion and a 23% increase in non-GAAP diluted EPS to $1.48 versus $1.20 last year, primarily driven by growth in our domestic segment. A compelling merchandise assortment and strong multi-channel execution drove these better-than-expected results as we capitalized on the product cycles in large screen televisions and mobile phones. These two categories were the primary drivers of our year-over-year revenue growth and more than offset weakness in the tablet category, which was impacted by material industry declines. Our value proposition of expert service and competitive pricing resonated with customers, whether they come to us in-store, online, or both. We delivered to our customers a strong multi-channel experience and we were uniquely positioned to serve them through our national retail footprint, online experience, knowledgeable Blue Shirts, and Geek Squad agents in our stores within a store. We also benefited during the fourth quarter from our investments in inventory availability, mobile phone installment billing, and the supply chain, including faster store replenishment and online delivery, as well as more effective and relevant marketing. Altogether, these results reflect the successful delivery of our holiday plan. We stated that we would execute a highly disciplined operating and promotional plan that would drive a better year-over-year financial outcome for our shareholders, and these results reflect that. On a full year basis, we continued to make progress against the two main issues we have to solve that we outlined in November of 2012: number one, declining accounts, and number two, declining operating margins. In fiscal 2015, we stabilized comparable sales on a full-year basis and delivered incremental non-GAAP SG&A reductions of approximately $420 million, resulting in a non-GAAP operating income rate expansion of 80 basis points and a 26% increase in non-GAAP diluted EPS to $2.60. We also ended the year with $3.9 billion in cash versus $2.6 billion last year. These results reflect cumulative progress since 2012 that we have made against our Renew Blue transformation initiatives. To date, we have improved our NPS score by 450 basis points; we’ve rolled out 71 Pacific Kitchen and Home and 34 Magnolia Design Center stores-within-a-store, in addition to our enhanced vendor experiences; we’ve implemented ship-from-store across the whole chain, driving significant growth for our business; we’ve increased domestic online penetration from 7% to 9.8% of our revenue; we’ve gained share across multiple categories; we’ve delivered $1.02 billion in Renew Blue cost reductions, exceeding our $1 billion target; we’ve divested underperforming European and Chinese businesses; and we’ve intensively managed our capital resources, significantly strengthening our balance sheet. In light of this progress, and as a demonstration of our commitment to our shareholders, we were pleased to announce this morning our plan to return excess capital. This plan allows us to continue to invest in the growth of our business while preserving a strong balance sheet. It includes: a special one-time dividend of $0.51 per share, or approximately $180 million related to the net after-tax proceeds from LCD-related legal settlements received in the last three fiscal years; a 21% increase in our regular quarterly dividend to $0.23 per share; and the resumption of share repurchases with the intent to repurchase $1 billion worth of shares over the next three years. Before I turn to our plan for this year, I want to publicly thank our employees for the impact of their hard work. We have a very talented and dedicated set of leaders and employees at Best Buy, and it is an honor to lead this group of amazing individuals and a privilege to work with each of them. Now as we look forward to fiscal 2016 and beyond, it is imperative that we continue to focus on driving comparable sales and improving operating margins while spending investments in our future. As we have previously shared, we are pursuing a strategy that focuses on delivering advice, service, and convenience at competitive prices to our customers. Within this strategy, we’re focused on driving a number of growth initiatives around key product categories, live events, and services, and to drive these initiatives we’re pursuing and investing in the transformation of our key functions and processes. To provide more color on these initiatives, which reflect complete execution against the 24-month roadmap that we were planning a year ago, I will now provide specific actions we intend to pursue in fiscal 2016. So the first initiative of our roadmap is merchandising, our goal is to create a compelling assortment online and in the stores with a superior end-to-end customer experience that yields enhanced financial returns. In pursuit of that, we plan to: capitalize on the ultra-high definition TV cycle to create a best-in-class merchandising assortment and customer experience, including opening approximately 20 additional Magnolia Design Center stores-within-a-store to end fiscal 2016 with 78; accelerate our expansion in growing categories with structural barriers to entry like large appliances and mobile phones, including opening approximately 50 additional Pacific Kitchen and Home stores-within-a-store to end fiscal 2016 with 177, as well as extending our installment billing capabilities online; grow our connected home, health, and wearable businesses to an optimized assortment and improved multi-channel customer experience; increase our branded exclusive and private label assortment; expand our secondary market growth strategy to offer consumers better access to products in this category and improve our margin recovery on returned and damaged products; and enhance our promotional pricing strategies. We will also, as part of this merchandising thrust, expand our programs to capture customers at the time of key life events and build long-term relationships with them, including our new mobile program and our wedding gift registry, which we launched in February. The second initiative is marketing which provides crucial support for our merchandising growth opportunities. In marketing, we will accelerate our targeted marketing programs by leveraging a senior customer database to expand personalization beyond email campaigns. We will expand the personalization of our targeted email campaigns by dynamically serving relevant landing pages when customers click through to our website. We will continue the evolution of our marketing spend from analog and mass to digital and personalized mediums such as search, mobile devices, and retargeting. And we will continue to increase the number of addressable emails in our customer database. The next initiative on our roadmap is online; our goal here is to serve our customers based on how, where, and when they want to be served and capture online shares. In pursuit of that goal we will continue to develop true omni-channel experiences, including: improving the online visibility of returns and open box inventory; extending our installment selling capability online; enhancing the online experience for appliance purchases; expanding capabilities for life events like the wedding registry and wish list; and providing an integrated Geek Squad customer experience across channels and devices and driving increased attach rates. We will also be continuing the transformation of our e-commerce technology platform and accelerating the transformation of our mobile customer experience, which we will support through our new technology development center in Seattle. Similar to general industry trends, our traffic for mobile phones is growing much faster than traditional desktop traffic, and we're increasing our mobile investments accordingly. It is imperative that we engage mobile customers with improved and streamlined access to essential rich product information during the discovery, research, and check-out processes. The next initiative in our roadmap is retail stores. In our retail stores, we're building on the great momentum from our success in fiscal 2015 and driving increased sales effectiveness and favorable leverage from a focus on the individual sales productivity of our associates. We will enhance our in-store customer experience from both an expert service and physical environment perspective, including expanding product training for associates, and driving growth by implementing market plans that are tailored to specific geographies. The next initiative in our roadmap is services. In fiscal 2015, we significantly reduced our legacy cost structure and improved services-related NPS growth. We also launched a lost and theft mobile phone insurance program and will complete technology support bundles. Now despite these accomplishments, revenue has been declining largely due to lower attach rates of traditional extended warranties and lower mobile revenue due to our success in decreasing claims severity and frequency, which is an operational positive. In fiscal 2016, we'll focus on continuing to transform our traditional service offerings to better address customer needs. We will be integrating the Geek Squad customer experience into bestbuy.com to provide an enhanced service experience to our customers and to increase online attach rates. We'll be continuing to improve our delivery and installation experience and will be increasing the investment in marketing and selling our service offerings. The next initiative in our roadmap is supply chain. Our goal in supply chain is to leverage our network and improve our customer experience with increased inventory availability, improved speed to customer, and improved home delivery and installation capability for a large assortment of goods. In pursuit of that goal, we will unlock additional inventory for ship-from-store, we will continue to pursue cost efficiencies through technology enhancements, including the replacement of our warehouse management system. We will drive growth in large appliances and large TVs by leveraging new regional inventory capabilities launched in October, and we will invest in improving our home delivery and installation services NPS. The last initiative on our roadmap is our cost structure. With the $55 million in additional annualized cost reductions announced today, in the past few years we have delivered over $1 billion in North American Renew Blue cost reductions. In fiscal 2016, we're launching Phase 2 of our Renew Blue cost reduction and gross profit optimization program with a target of approximately $400 million over three years, including the remaining benefit of approximately $250 million from our previously discussed returns, replacements, and damages opportunity. These savings, because they are structural in nature, are not expected to begin until the back half of fiscal 2016 and will be driven by streamlined processes and operational efficiencies that will be primarily enabled by investments in systems. We expect, however, that this incremental savings will be significantly offset by the investment we need to make to fund our growth initiatives; in fiscal 2016, we expect these incremental investments to total approximately $100 million to $120 million, or $0.17 to $0.21 in diluted EPS. We also expect to increase fiscal 2016 capital expenditures to approximately $650 million to $700 million from $550 million in fiscal 2015. The strategy we just outlined is the foundation for our fiscal 2016 operating plan, and we are confident in our ability to execute against this as we have demonstrated this past year. However, we will also be facing industry and economic pressures that we discussed last quarter in our holiday sales press release. We expect to impact our business including more rapidly declining average spending prices in key product categories, weak industry demand in certain product categories, declining demands and price pressures from our extended warranties, and increasingly costly service expectations, like free and faster shipping. Therefore, investing now is imperative, and while these investments will put pressure on our fiscal 2016 operating income rate, as Sharon will discuss, we believe they’ll leverage our exceptional momentum and allow us to build a differentiated customer experience and the foundation for long-term success. I will now turn the call over to Sharon to discuss the details of our fourth quarter financials and our outlook for the first half of fiscal 2016.

Thank you, Hubert, and good morning everyone. Before I talk about our fourth quarter results versus last year, I would like to talk about them versus our expectations we shared with you in our holiday sales release. From a top line perspective, enterprise comparable sales growth of 1.3%, excluding the 70 basis points impact of installment billing, was slightly above our near 1% expectations. Our non-GAAP operating income rate expansion of 130 basis points was also above our 75 to 90 basis points expectations due to higher than expected vendor participation in our holiday promotional activity, combined these better than expected outcomes equated to an incremental $0.10 of EPS. We also saw a positive $0.03 per diluted share of a non-recurring tax benefit which partially offset the previously communicated negative $0.10 impact from the reorganization of our European legal entities. I'll now talk about our fourth quarter results versus last year; enterprise revenue increased 1.3% to $14.2 billion; enterprise non-GAAP diluted EPS increased $0.28 to $1.48, primarily driven by a more structured and analytical approach to our promotional strategy, better performance of our credit card agreement, the positive flow through our gross profit enhancement initiatives, the flow through of higher year-over-year revenue, and the positive impact of changes in our mobile warranty plan, which resulted in lower costs due to lower claim frequency. This favorable impact was partially offset, however, by the negative $0.07 per diluted share impact in income tax expense that I just discussed. In our domestic segment, revenue increased 3.2% to $12.7 billion despite a 3.2% decline in the NPD-reported Consumer Electronics categories. Our revenue growth was driven by comparable sales growth of 2%, excluding the estimated 80 basis points benefit associated with installment billing and a $68 million or 55 basis points improvement in the performance of our credit card agreement versus a negative $65 million or 50 basis points impact last year. Domestic online revenue on a comparable basis increased 9.7% to $1.7 billion primarily due to substantially improved inventory availability made possible by the chain-wide rollout of ship-from-store in January 2014. Higher conversion rates and increased traffic driven by greater investment in online marketing also contributed to our year-over-year growth. This growth, however, was substantially offset by material industry softness in tablets, a category with high online penetration, and a channel shift in mobile revenue that resulted from customer enthusiasm for installment billing plans, which could only be sold in our retail stores. As a percentage of total domestic revenue, online revenue increased 90 basis points to 13.5% versus 12.6% last year; compared to last year's online growth, this year's online comparable sales growth of 9% was lower for two primary reasons. First, we saw the expected 600 basis points of pressure from lapping last year’s gaming console introductions and our initial 400-store ship-from-store rollout. We also saw approximately 500 basis points of unexpected additional pressure from tablets and mobile for the regions that I just discussed. As all of these pressures, however, are expected to continue into Q1 and the impact of gaming and our chain-wide rollout of ship-from-store will increase from 600 basis points of pressure in Q4 to 1000 basis points in Q1, online growth in Q1 is expected to be in the mid-single-digit range. From a merchandising perspective during the fourth quarter, comparable sales growth in televisions, mobile phones, and computing was significantly offset by the material decline in tablets. The growth in mobile phones was primarily driven by higher year-over-year selling prices. We also saw continued comparable sales declines in services in Q4. This decline of 11.4% was primarily driven by lower mobile repair revenue due to our success in decreasing claim frequency and lower attach rates. In our international segment, revenue did decline 12.4% to $1.5 billion due to a negative foreign currency impact of 750 basis points. A comparable sales decline of 4% was attributed to industry declines in Canada and the loss of revenue from store closures in Canada. From a merchandising perspective, comparable sales growth in mobile phones was more than offset by declines in tablets, gaming, and digital imaging. Turning now to gross profit; the enterprise non-GAAP gross profit rate for the fourth quarter was 21.3% versus 20.2% last year, an increase of 110 basis points. The domestic gross profit rate increased 120 basis points to 21.2% versus 20% last year. This increase was primarily due to the more structured and analytical approach to our promotional strategy, the ongoing improvements in supply chain efficiencies and higher margin recovery on returned, replaced, and damaged products, as well as a 40 basis points positive impact related to our credit card agreement compared to a negative 40 basis point impact in Q4 of last year, and the positive impact of changes in our mobile warranty plans, which resulted in lower costs due to lower claim frequency. These increases were partially offset by structural investment and price competitiveness, particularly in accessories. The international gross profit rate was flat year-over-year at 21.7%. Now turning to SG&A, enterprise-level non-GAAP SG&A was $2.2 billion or 15.5% of revenue versus 15.7% last year, an increase of $9 million in dollars but a reduction of 20 basis points in rates. Domestic non-GAAP SG&A was $1.9 billion or 15.3% of revenue versus 15.5% last year, an increase of $41 million. This dollar increase was primarily driven by higher incentive compensation and Renew Blue investments in customer-facing initiatives. These increases were partially offset by the realization of Renew Blue cost reduction initiatives and tighter expense management throughout the company. The 20 basis points rate improvement was driven by year-over-year sales leverage. International non-GAAP SG&A was $262 million or 17.3% of revenue versus 17% last year, a decline in dollars of $32 million. This dollar decrease was primarily driven by the positive impact of foreign currency, lower expenses due to store closures in Canada, and the realization of our Renew Blue cost reductions in Canada. The 30 basis points rate increase was driven by year-over-year sales deleverage. Also, as it relates to the international segment, we completed the sale of our Five Star business in China and continue to focus on the Renew Blue transformation in Canada. I would now like to talk about fiscal '16. In fiscal '16, we expect a financial impact of the investments and economic pressures that Hubert discussed earlier to begin in Q1 and continue throughout the year. From a top-line perspective, our current expectation is consistent with the outlook we provided in our holiday sales release. While we are optimistic about the potential of new product launches, our limited visibility due to timing and quantity keeps us cautious. As such, our Q1 and Q2 expectation for enterprise revenue and comparable sales growth, excluding the estimated impact of installment billing, continues to be in the range of flat to negative low single-digit. This change in trend versus Q4 is primarily driven by ongoing material declines in the tablet category, in addition to holiday momentum around high-profile giftable products not continuing post-holiday. We will also be anniversarying approximately 80 basis points of enterprise growth in the first half of last year driven by the chain-wide rollout of ship-from-store. From a non-GAAP operating income rate perspective, we are also reiterating our outlook for Q1 and Q2 as down approximately 30 basis points to 50 basis points, including lapping last year’s Q1 15 basis point one-time benefit associated with the new credit card agreement. This decline reflects the economic and growth pressures that we just outlined, the investments we are making to drive our fiscal 2016 growth initiatives, and our anticipated SG&A inflations. Additionally, we expect the Q1 and Q2 non-GAAP continuing operations effective income tax rate to be in the range of 39% to 40%. But despite these first half pressures, we are encouraged by the execution and momentum that we saw in the fourth quarter and are excited about the opportunities that lie ahead for next year. While we remain cautious on the overall industry, the strength of the Best Buy brands and our track record of improving our operational performance provide us with strong confidence in our ability to deliver against the roadmap that we outlined today. I would now like to turn the call over to the operator for questions.

Sharon, could you give us a little more detail on the guidance, the 30 basis points to 50 basis points of margin pressure in the first half, how that breaks down between gross margin and SG&A? And then also what's taking CapEx up this year, what that's been spent on?

We expect the decline to primarily come from the SG&A line. We're making investments that we discussed last quarter, and we anticipate those will start in the first quarter. In fact, we've already begun, and these efforts will continue throughout the year. We will maintain our disciplined approach to promotional strategies and continue working on our Renew Blue cost reductions related to gross profit. However, our main pressures in 2016 are clearly from the SG&A line. When we talk about our incremental investments, we will be more cautious this year in specifying where we are allocating them. As you outlined in detail, we are investing in categories with high barriers to entry, like appliances and the mobile business. We're also investing in our supply chain and behind our rollout of life events and gift registry, which are initiatives that will drive revenue in the long term. We plan to invest in marketing and capabilities upfront, with revenue coming later. Thus, we will have early investments. Additionally, we are making significant investments in systems, including a new warehouse management system. We continue to invest online, particularly in integrating Geek Squad into our business, along with other initiatives in our services sector that will require both capital and expense investments in 2016. Another area to mention, which you have likely noticed, is the addition of the Pacific sales and Magnolia design stores within our locations. These have been quite successful for us, and we expect to keep expanding in this area.

My questions were around the payback on these investments, this investment spending that you're doing. Maybe if you can give us a little bit of color on how you think about that payback in the back half of this year and into next?

Dan, this is Sharon, I'll take that. The payback on these investments is going to be backloaded; the initial payback on some of these investments will happen in the back half of the year. The difference between the investments we've been making the last two years of Renew Blue and the investments that we're making now are much more structural, and they will actually come incrementally. As an example, some of the work that we're doing in the supply chain, we will roll out a portion this year, a portion next year, and a portion after that. Returns, replacements, and damages is another one. We will create the capability online this year. Then there are things that we will add to the system that we’ll implement going into Q4, and that will go into next year and the year after. So when we look at the $400 million that Hubert laid out, we were very deliberate in how we talked about that because those are the areas where we are going to see improvement and cost reduction and margin enhancement. But they are going to be very gradual and incremental as they flow through. So that’s how we see it, and obviously we're not going to be guiding it by quarter by year but basically over the next three years we expect to see these both not only driving the cost line but also driving the top line. Most of our investments right now and the ones that I think are going to be most substantial are actually going to be investments that are to drive top line growth. And so you’re going to see it both on the top line and coming through the operating income rate.

And if I could just follow up on the management change or departure today. Can you just give us a little color on what you're looking for in the next executive that will head up services, maybe a profile of what you're looking for and how you think you can counter the negative trends in that business?

This is Hubert, and I appreciate your comment. While I won't discuss the individual who is leaving, I want to highlight a couple of points about our services before addressing your question. First, I take great pride in the work of our 20,000 Geek Squad agents who assist our customers in stores, online, or in their homes with product installations and support. Second, I’m pleased with the improvements we’ve made in our net promoter score for services and the introduction of new offers. However, we recognize that there is still much work to do to further transform our services. I’ve outlined several priorities for this transformation, including enhancing our traditional service offerings, developing the Geek Squad experience across multiple channels, improving delivery and installation, and increasing our marketing and sales investments in services. Overall, we aim to integrate our growth with a customer experience that utilizes our unique strengths, including the Geek Squad. If any of you are interested in applying for the role, I can tell you that we are looking for someone who can function almost like a CEO for this business. This person will need to blend strong operational capabilities with a strategic and growth-focused mindset. They should excel in managing costs and understanding customer needs, be knowledgeable in technology and online interactions, as well as high-touch experiences, and be committed to enhancing our existing assets. We have initiated an external search for this role, and in the interim, services will report directly to me, with support from several colleagues. This direct reporting structure underscores the strategic importance we attach to services in our current and future strategy.

First, on the top line, I guess if my math is right, the contribution to the comp or the top line from TV is somewhere in the mid-single digits. We realize that tablets are weak, but laptops are helping, but I think you also have appliances that are healthy. So I'm just trying to get a little more color on bridging the gap from where that contribution is coming from TV to how we get back to flat to negative low singles. Is it more slippage in healthy categories or do you see some of the declining categories getting a little weaker?

We see the tablet decline was substantial, and we need to make sure that it's in perspective. In Q4, we saw the tablet category down approximately 30%, according to the NPD reported category down 30% and at any point in time, Best Buy is going to have a 20% plus share of that category. So it has a significant impact on our top line but a lesser impact on our profitability. As you know, it's not one of our most profitable categories, but certainly it drives a lot of traffic to our stores. The other contributors from Q3 or Q4 to Q1 is what we called out, which was the 80 basis points of growth driven last year by the 1400 store rollout of ship-from-store. 80 basis points is substantial. And so that's another pressure because remember last year in Q4 we only rolled out all of the stores starting in January. So we only had 400 stores shipping in the first two months of the fourth quarter, and then we had 1400 shipping in the fourth quarter. So the year-over-year comp for Q1 is much, much more difficult than it was in Q4. Another area, and we’re not going into extensive detail on, it’s highly competitive, is also the discussion we had in the Q3 conference call around a more disciplined promotional strategy. Hubert cleverly defined it as following the rat into the rat hole, so to speak, around the Black Friday holiday timeframe. But there are other times during the year when you see similar behaviors, and so there is a very rationalized approach that we’ll continue to execute that. I am sure that you can see it flowing through in the gross profit rate. So that’s another area, but certainly less impactful than the other two that I just described.

And then one follow-up on the capital return, and congratulations for getting back to the buyback. We could all do the math on sort of what the dollars are going to look like, $1 billion. You said 180 million from the special div; I think the increased dividend itself is relatively minor. You will probably walk before you run on this capital return, but there is still a lot of cash on the balance sheet. It looks like you're going to generate a lot of cash next year. I mean, sitting from here, it looks like there is still a lot of upside to that capital return plan. I mean, is that fair, Sharon? And then how soon could you unlock some of that upside?

Simeon, we continue to believe that having an extremely strong balance sheet is important to the transformation; we also believe that maintaining flexibility on our balance sheet in order to pursue possible growth strategies is important too. However, we do also, as I told you guys we would, believe there is a point where you're carrying too much cash, thus the reason for our return on capital plan. So we feel that this is our first step as we go into our third year of the transformation. As we talked about, we have some additional investments to make this year. As we get through this year and we see how we progress, of course this will be a conversation we have each year. We obviously are committed to returning excess capital to our shareholders, and I hope at least that today’s announcement demonstrates that. We continue to believe that our approach is prudent at this point, so more to come in the coming year. We have a year to deliver; let's just keep in mind, we have a whole year to deliver here. But obviously today’s announcement shows our first step towards that.

So a couple of questions. One, can you talk about your store footprint? Do you have any store closures expected of the big boxes? And maybe looking at some of the stores you have closed over the last couple of years, anything you can talk about in terms of transfer rates or EBIT benefit from closing a store? Thanks.

Consistently in the last few years, we’ve said that we would gradually and continuously optimize our store footprint. Every quarter you can see the numbers both in our mobile stores and in our big box stores; these are minor numbers at this point in time. We’ve been very clear that we would not make big announcements because our priority has been, in fact, the biggest leverage for us has been to improve the performance of our stores through investments in the customer experience, the multi-channel approach, and so forth. So it's been a good approach. In terms of retention, one of the things we’re very excited about is our investments in our Athena customer database and our more personalized communications. As we continue to develop these capabilities, we’ve made progress last year and we’ve made more progress this year. This will be a very important strategic weapon for us moving forward, as we can personalize communication with our customers. Closing stores when you don’t have this capability is a waste of a lot of resources. This is the continuation of what we’ve been saying and what we’ve been doing.

Okay, thanks, that's helpful. If I could ask one more just to Sharon or maybe both of you, I think your operating profit dollars on a non-GAAP basis enterprise-wide for the full year, I think I calculated up 29%, it's a big number. Is that what you expected heading into the year? And I guess the question is what came in better than expected? Is it really all three of the big line items of sales, gross profit, and SG&A, or was it one more than another that really beat your plan? Thanks.

Yes, so versus our original expectations for this year, if you just go back to the beginning of the year, as we’ve been giving you an outlook each quarter, the place where the year really exceeded our expectation was on the gross profit line. In the first half of the year, we had tremendous SG&A savings, but then in the back half, we made some investments. So while the SG&A was certainly a highlight and year-over-year certainly a huge driver of our year-over-year improvement, the place where we really made more progress than we expected was in our gross profit. Two drivers of that: one is the investments that we’ve made; one came from some of the SG&A we invested in, of course, which was in this pricing and promotional capability and some of the decisions that we made around that. The other thing in Q4 that we would attribute our success to was a highly disciplined marketing plan to back up the merchandising. Clearly, the merchandise assortment was very strong in Q4, and that was supported by marketing that was extremely targeted, focused, and effective. We told you guys that the year prior; this was an area we had to work on, and there was a great emphasis put in that area. But in the end, the other place where we saw an exceptional outcome was in merchandising, inventory management. One of Best Buy's core competencies is inventory management, and obviously our positioning from a merchandising point of view with the vendors also contributed, as there were some great products, and Best Buy had the right products at the right time. So it was a combination of a lot of things but, when you look at the P&L and you want to put it down on a piece of paper, it was really the top line and the gross profit improvements that we were able to drive.

My first question is about the commentary on enhancing services to make them more appealing to consumers. I believe this could lead to a higher warranty attachment rate for the company in the future. Can you provide more insight into how you envision this developing?

Services have really two major components. One is the extended warranties, which is more an assurance business, and the other is services that help customers take advantage of and implement these products that we sell to them. We see enormous opportunities there. When you step back, the technology that's available today is more complex than ever before, and there is a growing gap between what these technologies can do and the understanding of customers about the possibilities. It’s increasingly connected; think about it. Fifteen years ago, we had a personal computer, maybe connected to a printer and a fax line with dial-up service, and then we had a CRT TV alongside some audio equipment. Now, everything is connected; we have multiple networks in our homes, and it's complex to implement and support these connections, as well as take advantage of them. We see enormous opportunities to help customers in this area as part of our strategy to grow in the various categories we've talked about and we’re uniquely positioned there. Because there is only so much you can do remotely; today we can troubleshoot your computer remotely with online tools, but there is a limit. We have 20,000 Geek Squad agents of the company, including those who go into people's homes to support and set up networks and everything that goes around this; that's a very unique capability. I think that's going to be a core theme, so there is going to be work on making sure that extended warranties and product-specific services are highly competitive and effectively marketed and promoted and sold. And then there is building, you could say this, a professional services offering to help our customers.

And as a quick follow-up, the company's ability to sell return merchandise online after the holiday. Does that help narrow the profitability gap between online and retail? Is that meaningful?

Well, it's an interesting shift because these return products, or end-of-life products, have lower margins by definition. So, if you sell them online rather than in stores, it has an impact on the margin of the online activities, which, by the way, means that both the online channel and the store channel, from both a revenue and profit standpoint, increasingly become blurred. Our focus, first and foremost, is on improving overall performance; we pay attention to each of these channels, but they are becoming increasingly blurred from a customer experience and from a P&L standpoint.

Why don't you just give a little more color around the returns and damages and that opportunity there and the impact maybe that you have in the quarter, are you seeing an uptick in that? And I know it's been a focus, but feels like there are definitely ways that you can emphasize and improve that.

Yes, if you look back at the transcript, we saw benefits this year in almost every quarter, with Q4 being our strongest, where we experienced incremental returns from that initiative. We noted that within the $400 million projected over the next three years, approximately $250 million is left for returns, replacements, and damages, indicating a potential impact of around $350 million. We have made significant progress in this area, reaching a point where we can't make further advancements without implementing structural changes to our systems. The structural investments we are making this year will be crucial in advancing this initiative. Although we have launched that product, it's currently harder to locate than we would prefer due to our inventory system integration. We will need to put in considerable effort to make it easily searchable on the site, and we believe that will lead to the next level of benefits from this initiative.

And if could follow up with you guys mentioning that from this more scientific promotional approach this holiday season, just was hoping to get a little more color on that. I recall last year you guys kind of went deeper than you had wanted to on promotions. But anything like were you leveraging the system? How was the approach different from year over year?

Yes, Joe would mention a few things. Pricing and promotion involve a science where tools, knowledge, and experience play crucial roles. Last year, we invested in teams, tools, and capabilities that improved our information access, and I believe our team drew significantly from their experience as well. To illustrate, there may be a competitor with a certain product in limited supply and a price designed to attract customers. In some instances, it might be beneficial for us to match that price, while in other situations, it may not be wise if we have a larger supply and they have limited options. The way we navigated competitive reactions this year, aided by this additional data-driven approach, was very effective. I take great pride in our team's efforts, which were further supported by a strong product assortment and marketing strategy that instilled confidence in our execution. Retail fundamentally revolves around execution, and enabling our teams to implement plans smoothly was a critical element of our holiday strategy. I hope this information is useful.

That was very helpful. Thank you guys and good luck with this quarter.

Thank you so much, and in closing, earlier on the call I thanked our teams at Best Buy for delivering these great results. I would like to thank our shareholders for your support and the confidence you are placing in us. I hope that this morning we did a good job of conveying our excitement about our Q4 results and about our opportunities. We look forward to continuing the dialogue and again, thank you so very much for your confidence and your support. Have a great day. Thank you.