Best Buy Co. Inc (BBY) — Q3 2016 Earnings Call Transcript

Good morning, and thank you. Joining me on the call today are Hubert Joly, our Chairman and CEO; and Sharon McCollam, our CAO and CFO. This morning's conference call must be considered in conjunction with the earnings press release we issued this morning. Today's release and conference call both contain non-GAAP financial measures that exclude the impact of certain business events. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparison, which should not be considered superior to or as a substitute for GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release. Today's earnings release and conference call also include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial condition, results of operations, business initiatives, growth plans, operational investments, and prospects of the company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current earnings release and SEC filings for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. In today's earnings release and conference call, we refer to consumer electronics industry trends. The consumer electronics industry, as defined and tracked by The NPD Group, includes: TVs; desktop and notebook computers; tablets, not including Kindle; digital imaging; and other categories. Sales of these products represent approximately 65% of our Domestic revenue. It does not include mobile phones, appliances, services, gaming, movies, or music. I will now turn the call over to Hubert.

Good morning, everyone, and thank you for joining us. I will start with our third-quarter results and an overview of the progress we've made on our priorities. After that, I'll share highlights of our holiday plans and then hand things over to Sharon for more details on our quarterly results and financial outlook. First, our Q3 results. Overall, we achieved another quarter of growth in Domestic comparable sales and operating income. At the Enterprise level, with revenue of $8.8 billion, we raised our non-GAAP operating income rate by 40 basis points to 2.8% and increased our non-GAAP diluted EPS by $0.07 to $0.41, showing a 21% increase. In our Domestic business, comparable sales, excluding installment billing, rose by 0.5%. This growth was driven by increases in computing, major appliances, health and wearables, and large-screen televisions, though it was partly offset by declines in tablets, mobile phones, digital imaging, and services. Online sales increased by 18% as our new mobile site and improved website capabilities boosted conversion rates and traffic. During Q3, industry sales in categories tracked by NPD fell by 4.3%. In our International business, we’re still experiencing revenue impacts from the Canadian brand consolidation, store closures, foreign currency fluctuations, and weak demand in the Canadian economy and consumer electronics sector. However, a better product mix and more effective promotions have led to unexpectedly strong profitability. Now, let’s discuss our progress on key priorities, starting with merchandising. In Appliances, we completed our planned rollout of Pacific Kitchen & Home stores-within-a-store, adding 59 locations for a total of 176. We also introduced 225 Samsung Open House appliance experiences, and after 20 consecutive quarters of growth in Appliances, we believe our investments are helping us succeed in this market. Additionally, our investments in appliance delivery and installation have significantly improved our Net Promoter Scores. In home theater, our 630 Samsung and 380 Sony stores-within-a-store, along with our 78 Magnolia Design Centers, have enhanced our customers’ experience with home theater technology, especially 4K TVs. This is a considerable competitive edge for us, given the expected rise in 4K unit sales in the fourth quarter. In computing, we opened over 150 additional Windows stores in the third quarter, bringing our total to over 800. We also refreshed more than 130 of our Apple stores-within-a-store, and we now have 500 latest-generation Apple stores-within-a-store. In mobile phones, we added 225 stores-within-a-store for both Verizon and AT&T, staffed with trained specialists to help customers learn about a wide range of connected devices. We also introduced the ability for customers to purchase installment billing plans online for Sprint, making us the only retailer to offer these options both online and in-store for AT&T, Sprint, and Verizon. Turning to digital, our investments continue to yield positive results, as shown by the 18% increase in Domestic online sales. In the third quarter, we provided free two-day shipping to a larger number of our online customers. We benefited from increased visibility and searchability of open box and clearance inventory, and we expanded online-only flash sales. We introduced Blue Assist, a new feature in our highly rated mobile app, allowing customers to easily access live support for products and orders. We also launched a dedicated Windows 10 online experience that showcases its functionalities and new devices. In marketing, our campaign significantly boosted back-to-school performance. We shifted our focus toward social media campaigns targeting Millennials. We increased addressable emails and improved our customer click-through rate to enhance targeted marketing, backed by our Athena customer database. In Services, we began to invest more to enhance the role we expect Services to play in our Renew Blue transformation. This investment included launching our new Geek Squad Services in computing and tablets on September 13. We also started selling AppleCare and piloting Apple-authorized service provider capabilities in over 60 stores. Our new Geek Squad Services go beyond extended warranties; they provide 24/7 support and help customers make the most of their technology. We anticipate this focus will improve NPS scores and increase attachment rates over time, but we expect initial pricing investments related to these rollouts to negatively impact gross profit by approximately $40 million or 25 basis points in the fourth quarter. Now, regarding costs, we've eliminated $110 million in annualized costs this year as part of our Renew Blue Phase 2 program, targeting $400 million in savings over three years. These savings will be partially offset by the approximately $85 million in SG&A investments made so far this year, with $20 million occurring in the third quarter. We now expect SG&A investments to total around $100 million this year, reduced from the previously discussed $120 million, as we adjusted plans to fund the $40 million investment in Services pricing. Looking ahead to the holiday season, we’re excited about our offerings for customers. We’ve prepared a vast assortment of technology products at attractive prices, particularly in 4K TVs, health and wearables, Appliances, smart devices, drones, and other gift items. We have also enhanced our digital capabilities, including Blue Assist; added 1,100 stores-within-a-store; improved the expertise of our sales staff; and optimized our multichannel delivery with faster shipping options and improved in-store pickup experiences. Our supply chain is better equipped for timely restocking and fulfilling orders. We offer services like free Geek Squad setup for tech gifts and options for customers to gift Geek Squad assistance. We recognize we are up against strong performance from last year's fourth quarter and the continuing decline in the NPD industry throughout Q3 may persist into this fourth quarter. We have also made incremental investments in Services pricing and SG&A, which are pressuring our fourth quarter earnings outlook, which Sharon will expound upon shortly. One thing we are confident about is our team's ability to perform exceptionally well during the holiday season. We have clear priorities and plans in place, backed by a well-trained, engaged, and highly motivated team. I appreciate their accomplishments this year and take pride in their commitment and ability to succeed. I am confident they are ready to deliver an excellent performance this holiday season. I'll now pass the call to Sharon for an overview of our third quarter financials and our outlook for the fourth quarter.

Thank you, Hubert, and good morning, everyone. Before I talk about our third quarter results versus last year, I'd like to talk about them versus the expectations we shared with you last quarter. Enterprise revenue of $8.8 billion was in line with expectations. Our non-GAAP operating income rate of 2.8% exceeded our expectations due to a Domestic $0.04 periodic profit-sharing benefit from our externally managed service plan portfolio and better-than-expected profitability in our International business. Additionally, our non-GAAP effective income tax rate was 37.1% versus our expectations of 39% to 40%, resulting in additional $0.01 of EPS versus expectations. I will now talk about our third quarter results versus last year. Again, Enterprise revenue of $8.8 billion decreased 2.4%, driven primarily by the Canadian brand consolidation, the impact of foreign currency fluctuations, and softness in the Canadian economy. Enterprise non-GAAP diluted EPS increased $0.07 or 21% to $0.41. This increase was primarily driven by a stronger year-over-year performance in the Domestic business and the $0.04 periodic profit-sharing benefit that I just discussed. These increases were partially offset by a $0.02 negative impact of the Canadian brand consolidation and the lapping of a prior year inventory-related legal settlement of $0.02 that did not recur this year. In our Domestic segment, revenue increased 1.2% to $8.1 billion. Our revenue growth was primarily driven by comparable sales growth of 0.5%, excluding the benefit from installment billing; an estimated 30 basis point benefit associated with installment billing; and a 30 basis point benefit from the periodic profit-sharing benefit. Our Domestic comparable online revenue increased 18.3%, driven by increased traffic and higher conversion rates. As a percentage of total Domestic revenue, online revenue increased 130 basis points to 8.8% versus 7.5% last year. From a merchandising perspective, comparable sales growth in computing, major appliances, health and wearables, and large-screen televisions was partially offset by declines in tablets, mobile phones, digital imaging, and services. In Services, comparable revenue declined 11.1%, almost entirely due to lower repair revenue, and to a much lesser extent, declining attach rates of our traditional warranty plan. As we explained last quarter, the reduced frequency and severity of claims on our extended warranty has had the impact of reducing our repair revenue. While at face value, this appears negative, it is actually financially beneficial because this repair revenue produces very little profit, and it is contributing to the positive performance of the externally managed portfolio. Additionally, in Q3, as Hubert discussed, we increased our investment in Services pricing as we expand and improve our price competitiveness in this category, particularly in computing and tablets. The impact of this price investment is expected to continue into the fourth quarter and throughout next year, of course. As we are discussing Services, I'd like to take a moment to provide more insight into the periodic profit-sharing benefits we are receiving from our externally managed extended service plan portfolio, as they have positively impacted our gross profit rate and earnings in the last 2 quarters. We are expecting a positive 55 basis point impact in Q4. These periodic benefits have been driven by substantial changes we have made to our insured warranty plan from both a plan design and cost-to-fulfill perspective. The portfolio has also seen an overall industry reduction in frequency of claims. All of these positive loss drivers have resulted in an overall lower-than-expected cost of our extended service plans, and we contractually share in that outperformance. As these periodic benefits are based on the actual claims history of the externally managed portfolio, however, it is difficult to estimate any future potential impact, but we do not currently expect to see the same level of periodic profit-sharing benefits in fiscal '17. Now I will continue with our Q3 results. In our International segment, revenue declined 29.9% to $729 million due to the loss of revenue associated with closed stores as part of the Canadian brand consolidation, a negative foreign currency impact of approximately 1,350 basis points, and ongoing softness in the Canadian economy and consumer electronics industry overall. Turning now to gross profit. The Enterprise non-GAAP gross profit rate increased 90 basis points to 23.9%. The Domestic non-GAAP gross profit rate increased 110 basis points to 24.1%. This increase was primarily due to the positive impact of changes in mobile warranty plans, which resulted in lower costs due to lower claim frequency and severity, which we will begin lapping in Q4; an increased mix of higher-margin large-screen televisions; a positive mix benefit from significantly decreased revenue in the lower-margin tablet category; a greater portion of vendor funding being recorded as an offset to cost of goods sold rather than SG&A; and a 20 basis point impact from the periodic profit-sharing benefit. These increases were partially offset by the lapping of the 15 basis point prior year inventory-related legal settlement I just discussed. The International non-GAAP gross profit rate decreased 20 basis points to 22.4%. While both Canada and Mexico had higher year-over-year gross profit rates, a higher mix of sales from our Mexico business, which carries a lower gross profit rate, drove the 20 basis point International rate decline. Now turning to SG&A. Enterprise-level non-GAAP SG&A was $1.9 billion or 21.1% of revenue, an increase of $4 million or 50 basis points. Domestic non-GAAP SG&A was $1.7 billion or 20.9% of revenues, an increase of $67 million or 60 basis points. This increase was primarily driven by a greater portion of our vendor funding being recorded as an offset to cost of goods sold rather than SG&A, investments in future growth initiatives, and higher incentive compensation. This was partially offset by the flow-through of our Renew Blue Phase 2 cost reductions. International non-GAAP SG&A was $171 million or 23.5% of revenue, a decrease of $63 million, but a rate increase of 100 basis points. This dollar increase is primarily driven by the positive impact of foreign exchange rates and the elimination of expenses associated with closed stores as part of the Canadian brand consolidation. The 100 basis point increase is driven by the year-over-year sales deleverage. As it relates to the Canadian brand consolidation, we incurred a better-than-expected negative impact of $0.02 of non-GAAP diluted EPS in the third quarter. This was the result of a more effective promotional strategy, partially offset by a weaker-than-expected Canadian economy and consumer electronics market and from a lesser extent, lower costs from our decision to transform only a limited number of stores this year. As such, we are narrowing our estimated EPS impact of the consolidation this year to a range of negative $0.10 to $0.12, versus our previous estimate of negative $0.10 to $0.17. This expectation is broken down as follows: The negative $0.04 that we've incurred in the first 9 months of this year and a negative $0.06 to $0.08 in Q4. Ultimately, when our consolidation initiatives are complete, we are expecting our Canadian business to be a more vibrant and profitable business with profitability being defined as both higher operating income dollars and a higher operating income rate. From a balance sheet perspective in the third quarter, we returned over $140 million in cash to our shareholders, $64 million through share repurchases and $79 million in regular dividends, bringing our year-to-date total cash returned to over $800 million. Also during the quarter, Fitch returned our debt rating to investment grade. I would now like to talk about our financial outlook. As Hubert said earlier, we are excited about our holiday plans and new capabilities and confident in our ability to execute our plans. This gives us a positive outlook on our Domestic performance versus the industry. However, the 4.3% decline we saw in the NPD-reported categories got progressively worse throughout the quarter, which adds a level of caution to our outlook. With that, our year-over-year non-GAAP outlook for Q4 fiscal '16 is as follows: in the Domestic business, we are expecting near-flat revenue, assuming industry declines in the NPD-recorded categories are in line with Q3 at approximately negative 4%, and that the timing of the Super Bowl shift results in approximately 40 basis points of sales moving out of Q4 into Q1 fiscal '17; and a non-GAAP operating income rate decline of 20 to 35 basis points, driven by gross profit rate pressure and higher SG&A. The gross profit rate pressure is primarily driven by a 25 basis point investment in Services pricing, higher distribution costs associated with our growth in the online channel and the appliance and large-screen television categories, and product mix and product cycle pressures. Largely offsetting these gross profit pressures is the expected 55 basis point periodic profit-sharing benefit from our externally managed extended service plan portfolio. The higher SG&A is due to our investment in growth initiatives, partially offset by cost savings. In the International business, due to the ongoing impact of the Canadian brand consolidation, foreign currency fluctuations, and softness in the Canadian market, we are expecting an International revenue decline of approximately 30% and an International non-GAAP operating income rate in the range of positive 2% to 3%. With these expectations, our enterprise-level outlook is as follows: a negative low single-digit revenue growth rate and a non-GAAP operating income rate decline of 25 to 45 basis points. From a tax rate perspective, we expect a non-GAAP effective income tax rate to be in the range of 36% to 37% versus 34.2% last year, which is expected to result in a negative $0.04 to $0.06 year-over-year in Q4 '16. I would now like to turn the call over to the operator for questions.

So a question on the fourth quarter outlook. So it sounds like the expectation is that the industry is going to be similar to Q3 overall, but you did note that the business got progressively worse throughout the quarter. So it would seem to imply that trends will improve throughout Q4? I mean, how should we be thinking about the drivers of that overall?

The factors influencing our industry forecast are crucial in a hit-driven business. We are confident in what we can control, and we are well positioned to deliver results. We have been gaining market share, which boosts our confidence. There has been considerable volatility across retail categories recently, making it challenging to predict exact demand for the upcoming quarter. We want to be open with our shareholders. Our forecast is based on the information we currently have, and we are committed to navigating whatever the market presents us. We have control over various aspects of our operations, and our capabilities enable us to succeed. While it is difficult to provide a precise answer regarding future demand, we aim to offer as much transparency as possible about the categories. There is considerable enthusiasm in several product areas, such as the strong demand for 4K TVs, which showcases our potential. Although appliances may not be seen as giftable, we continue to see robust momentum in that category. Additionally, the health and wearables segment is gaining excitement, and I personally plan to purchase a drone. We have observed notable trends at the end of the quarter that we want to share with our investors during this period of openness.

And Seth, this is Sharon. I'll just add that we believe there was another factor in October, which is pent-up demand as people were anticipating Black Friday deals. Black Friday has effectively become Black November, and we think this trend particularly influences the consumer electronics category more than others. Comparing the last weeks of October to the first week of November, we recently received data showing significant improvement during that time. This context was part of our perspective as we evaluated our Q4 outlook.

Okay. That's very helpful. So to follow up, thinking about the promotional outlook and whether that's going to be a driver in the fourth quarter here. And you talked a lot about the price investments you're making in Services. Maybe looking beyond Services, you've made a lot of price investments over the last few years that have helped drive market share. How do you feel about your pricing in kind of the rest of the business today? And do you think there's a need to be more aggressive through this holiday period?

We are very confident in our pricing. Beyond Services, we have invested significantly in hardware and accessories over time. If you look at some of the blogs related to Black Friday deals, especially in the TV category, it seems that there is a broad consensus that we offer the best holiday deals for TVs. Therefore, we are pleased with our pricing strategy, which I mentioned in my prepared remarks. We not only have a fantastic selection and competitive prices, but we also have sufficient inventory for consumers. It’s important to have attractive pricing, but having limited quantities undermines competitiveness. Thus, we will maintain a robust inventory to ensure our products are available to customers.

Thanks a lot, Sharon, for that last point on the quarter-to-date trends, but I want to focus for a moment on the NPD trends that you saw over the course of Q3. Can you talk about where the erosion took place? Was it broad-based? Or was it category focused? And then along with that, I know the phone market is not included in the NPD data. I also know that wireless shifted from a sales driver for you in Q2 to a category that declined in Q3. So any color you can give us on the outlook for phones, product-wise and otherwise, would be terrific.

Yes, Matt, regarding the NPD data, it may sound unusual, but the positive aspect is that it was observed across all categories. This is encouraging for us as it supports our premise, particularly in October, related to pent-up demand. It's not specific to one product but rather to specific categories. In our view, this serves as another indication that customers were anticipating Black Friday. Keep in mind that the first Black Friday deals were introduced in the first week of November, with some retailers offering deals in the second week; we released eight deals during that time. October was particularly significant within the three-month span. As you noted, there are categories outside of this, and appliances are one of those categories that fall outside the NPD data. In this quarter, we experienced outstanding growth in that area, and we are very encouraged by our efforts regarding appliances. In the mobile category, we believe the industry as a whole saw growth. While it can be challenging to assess overall industry performance in mobile, we think there was growth based on unit sales. However, for us at Best Buy, the one-week delay of the iPhone launch did not help our situation. As we mentioned earlier, mobile was not our strongest category and was one of our weakest categories this time.

I'm going to try to frame this as a question, but it may come off more as a comment that we can discuss. This follows up on the previous two questions. Looking at today's results, there's a noticeable disconnect between what seemed to be a decent third quarter, the qualitative observations you're making about the third quarter and the upcoming holiday season, and the guidance we've provided. Most importantly, there's an implied earnings decline within that guidance. So, I'm curious if there’s some sort of hidden factor at play here. Is there a sense of conservatism as you approach the holidays? Is it related to a ramped-up investment cycle in the coming months? What exactly is going on?

I would like to highlight two points. As Hubert noted in his remarks and as I mentioned, with NPD down 4, which was a significant shift compared to Q2, we believe we should approach Q4 with a suitable industry context based on the outlook we provided today. Regarding your question about our perspective on the current environment, we did take that into account. In looking at other retailers that have reported in the last couple of weeks, we've observed a mix of positive and negative news. Retailers that typically cater to higher-end consumers and have a narrower customer base appeared to have a more cautious outlook for the fourth quarter. We've made an effort to weigh these different perspectives, but undoubtedly, we are entering this period with that context in mind. Does that clarify things?

No, that's very helpful, Sharon. It's very helpful. To dig a bit deeper, regarding price promotions, having followed consumer electronics for a long time, this is typically the biggest challenge, particularly with competitive price promotions as we approach the holidays. It doesn't seem, based on all the points you've mentioned, that you are anticipating an overly aggressive promotional holiday, at least for now. Is that correct?

We expect things to proceed as usual, generally speaking. I want to add a few comments to what Sharon mentioned and in response to your question. The trend we're observing is that we are outperforming the industry due to our value proposition and strong execution. This was evident in Q3. You've seen how other retailers are performing in consumer electronics, and our results reflect our confidence as we head into Q4 regarding our ability to succeed and implement the investments we're making amidst some market uncertainty, which we will address openly. Regarding pricing and promotions, we don't anticipate anything out of the ordinary for this quarter. In fact, it seems likely that, given certain industry trends and challenges in the consumer electronics sector, some retailers are becoming less enthusiastic about this category, as we noted last quarter. However, the potential downside is that if the market worsens, there could be a risk of retailers wanting to liquidate their inventory, but that is not our current assumption. We believe we are competitively priced and confident in our success moving forward.

I wanted to just ask about the growth investments that you're making, $100 million for this year. It clearly looks like these are working, and it's allowing you to take share. How should we think about this on a go-forward basis? Is this something now that we should expect maybe $100 million per year next year and going forward?

Yes, we will continue to make investments. However, as we look towards fiscal '17 and begin to see benefits from other initiatives we are working on, we expect that the growth investments will be balanced by cost reductions and other efficiencies within the company.

So just to understand, would that be a net neutral impact? Or do you think with the Renew Blue cost reductions that seem to be pretty comparable to the growth investments this year that looking forward, the cost reductions would outpace the growth investments?

I think that next year, we will definitely offset the investments, and then what we recover out of the Renew Blue Phase 2 cost reductions, we will see some upside, but a large portion of the savings next year, again, will be offset with the investments.

Your guidance implies that you're going to sustain this rate of outperformance versus the industry of about 400 to 500 basis points. How long do you think you can maintain that gap with the sector?

Thank you, Michael, for your question regarding how significantly we are outperforming the competition in the marketplace. We believe we have a substantial opportunity ahead of us. On average, our market share across all categories where we compete is about 15%. This figure varies by product category and customer type, but our share of spending from existing customers is still relatively low. I often remind our teams that as long as we remain below 90% market share, we have plenty of room for growth, and they appreciate that perspective. Clearly, there is significant opportunity ahead. Additionally, we are focused on anticipating industry trends and technological advancements, which is a strength of Best Buy. As the market shifts towards connected devices and the Internet of Things, we are exceptionally well positioned to capitalize on these developments. In the short term, we see no limits to our growth potential.

That's helpful. My follow-up question is, Hubert, the fourth quarter in the consumer electronics space is a little different than the first 3 quarters of the year. The first 3 quarters of the year, you have to be price competitive against other players who are trafficking in consumer electronics. In the fourth quarter, in the holiday, you're competing against other product categories for wallet share. So I think everyone appreciates that your prices on consumer electronics for the Black Friday ad are competitive, but how do you think about the cross-price elasticity of demand? So if sweaters are going to be 75% off, perhaps that will look more compelling to a consumer over the next couple of months versus buying a TV that may not have as much of a discount. And if we see that shape up, will you have to get progressively more promotional as we get closer to Christmas? Especially in light of what looks like pretty heavy inventory positions, given that your inventory outpaced your sales by a few basis points. Wal-Mart and Target talked about their weakness in consumer electronics, and so arguably, the industry's heading into this holiday with a pretty heavy inventory position.

Thank you, Michael. There is a risk we mentioned earlier regarding a soft industry, which could lead to desperation and inventory liquidation. However, we don't believe this is our primary concern at the moment. Our teams are well aware of the challenges we face, and I'm proud of their efforts, which is why we start our marketing campaigns early in the season. As you've noticed, we began engaging with customers before the end of October to ensure we stay prominent. While the apparel category has shown noticeable softness, the products within it don't seem to be connecting well with consumers. In the consumer electronics market, strong supply can drive demand, and we believe our product selection and customer experience are promising. Although I could enthusiastically discuss our great products, I won't take that liberty. We recognize that we are tackling a larger challenge and that our approach differs from other times of the year, with a focus on product availability, competitive pricing, and convenient delivery. Our free 2-day delivery service is a significant asset, and we're excited about the competition. We're ready to take it on.

If you look at industry data regarding anticipated holiday bestsellers, even NPD released a holiday outlook indicating that video games and tech items are among the top categories expected to perform well. Additionally, they projected that big screen TVs would be significant drivers this holiday season, and we have a strong market share as well as one of the best assortments available in retail. We are fully prepared to capitalize on this opportunity, as Hubert mentioned, and as noted in the prepared remarks. Our inventory is in the best shape it has been entering a fourth quarter in recent history, and we are confident in our ability to execute our plans. It's challenging to manage categories that require large physical space, and strong capabilities are essential whether we are selling in stores or online. Not everyone will excel in this area right away. There are several competitive advantages we hold, and numerous external data points support the expectation that these categories will be strong performers this holiday season.

Actually had a little bit of a different question specifically on, I guess, capital allocation. You bought back over $300 million of common stock in Q2 and then you only bought back $64 million in Q3, and your stock price was pretty depressed throughout the quarter. So I guess, I was just wondering first off, why the sequential decline in terms of share repurchases in Q3 versus Q2 and also what your thoughts are going forward.

Thank you, Anthony. We will continue. As you know, we've got $1 billion authorization out there. As you pointed out, we bought over $300 million in Q2 and then the additional in Q3. We do expect to continue to purchase our shares under that program, and we see our stock currently just like you do, as a value.

All-in.

I just had two questions. The first is regarding the NPD data; what do you think is causing that number to decline recently? The second question is whether you believe it's due to the weather, the impact from Texas, or a mix of both. My other question is about the service investment in price and how you plan to communicate that to customers.

Regarding the NPD data, there are two parts to your question. One concerns why Q3 was lower than Q2 from a trend perspective, and the other addresses what occurred during the quarter. First, it’s important to recognize that this industry is inherently volatile due to its product-driven nature and hit-or-miss dynamics. Additionally, Q2 performed better than previous trends, which explains part of the variance. The most significant aspect of the change in trajectory during the quarter was quite pronounced. The factors driving this change are twofold: there is a broad-based decline, but there are also product-specific issues. A widely recognized factor is the sharp decline in tablet sales, which significantly affects us due to our large market share in that category. Fortunately, there have been new product launches recently, which we all are aware of. Regarding the weather, I think the apparel industry has noted its impact. People in Minnesota, for example, prefer to spend time at the lake rather than shopping, though I’m not convinced it plays a major role. Looking ahead, the introduction of exceptional new products can benefit the industry and us, and we will capitalize on that. I would appreciate it if you could repeat your question about service, as I want to ensure I fully understand it to provide a thorough answer.

Sure, Hubert. My second question has to do with just the price investments you're making on service, and I know that's a big part of the future there in terms of developing that business further. I'm curious what the plans would be in terms of getting consumers aware of Geek Squad and, perhaps, a lower pricing, and just improving that awareness?

Thank you for your question. Let me clarify what we have done, the impact of those actions, and what lies ahead. We have redefined our service offerings with Geek Squad for computing and tablets, launching Geek Squad Protect and Support Plus on September 13. We've also introduced AppleCare to enhance our capabilities as an Apple service provider. The new offerings focus on being more helpful to customers rather than just providing warranties, and we have significantly reduced our prices. We aim to be competitive in pricing, and our teams in the field and stores are enthusiastic about these changes. The early response has shown an increase in attach rates, which is promising. However, we recognize that changes in perception take time. While we don't expect to fully offset the price investments in this category immediately, we do look forward to making progress. To support customer awareness, we are investing in training for our Blue Shirts and Geek Squad agents, as well as enhancing our online presence. We anticipate continued progress in the upcoming quarters. This is merely the first step in our broader Services strategy, which will play a more significant role beyond just generating revenue. For instance, when customers purchase a large TV, they typically want delivery and installation services. We are well-equipped to provide these services. We're also seeing services contribute to growth as we send professionals to homes to understand needs and create tailored solutions. While we won't charge for in-home visits, this approach can help drive business, as we've experienced with our Magnolia Design Centers and beyond. As we innovate our services and evolve our brand positioning, you'll see more promotion through our marketing channels, including our website and store circulars. Our transformation over the last three years has been gradual and intentional, and we are committed to continuing this journey. More updates will come.

I have two questions. Hopefully, one is for Sharon and the other is for Hubert. Sharon, I want to understand the impact of Services pricing on gross margins and how we should consider it in relation to the periodic profit share. If I understand correctly, that goes from 20 basis points in the third quarter to 50 basis points in the fourth quarter. We should think of Services as a 20 to 25 basis point offset for the pricing. Am I thinking about that correctly?

Yes, that's correct. Let's take a look at Q4, Greg. Last year, we earned $1.48 in Q4. The Canadian brand consolidation will cost us about $0.06 to $0.08. Additionally, the tax rate has increased from 34.5% last year to the current rate, resulting in about $0.05 to $0.06 in costs. So, when you compare that to last year, it effectively adjusts last year's EPS to roughly $1.35 on a comparable basis to this year. Looking at the outlook I provided, there's a 25 basis point investment in Services pricing, which will affect gross profit. We're also facing higher distribution costs due to growth in the online channel, as well as costs related to appliances and large-screen TVs that will impact us in Q4. While we will see revenue, we are also anticipating some product mix challenges in Q4. However, all these downsides will be mitigated by a 55 basis point profit-sharing benefit. So, considering this outlook, when we calculate the EPS range with the Enterprise level reduction on the OI rate, it seems to be aligning closely with last year and possibly even slightly better at the higher end.

And the 55, how much of that is catch-up? By the end of this year, are you adjusting for the fact that warranties aren't costing as much, or is this just a consistent figure?

Yes. The periodic payment represents a reconciliation of past reserves, typically occurring once a year. Historically, there have been years with such payments and years without. However, we've made significant enhancements to the program. Best Buy has implemented deductibles for phone repairs, which is something we were unique in not having previously. Additionally, we offered multiyear plans, made reductions in repair costs, and sourced parts differently. These operational changes over the past couple of years are contributing to our performance. Simultaneously, we've improved the claims process related to extended warranties, and from an industry perspective, the device durability has been exceptional, leading to fewer claims. All of these factors are interconnected and impact our results. In our statements for fiscal '17, we indicated uncertainty about future payments, suggesting they wouldn't be as high as this year. However, we anticipate there will be some periodic payment next year. This year’s figures are unusually high. Additionally, every new warranty sold incurs premiums paid to the insurer. These factors contributed to a decrease in our premiums during the latter half of this year, which we expect to continue into next year, along with a potential further decrease in premiums. I'm open to discussing this more in a one-on-one call for additional details, allowing me to address your second question as well.

That's very helpful. I did want to ask a bigger-picture one that I think is important. I think, Hubert, in your prepared comments, you mentioned all the store-within-a-store programs, the Samsung Open Houses, the new Apple stores. Could you give us some metrics as to how that's really helping drive the business and bigger ASPs and conversion? If you think about it over the last 2 or 3 years, have we moved from 10% to 25% of sales that are store-within-a-store or one of these type programs? Or how can we kind of frame that? Or how do you think about it?

Thank you for your question. The stores-within-a-store concept has been a crucial element of our journey, primarily evidenced by our market share gains. We've significantly enhanced the customer experience, leading to notable improvements. Customers are having a markedly better experience, which is reflected in our market share growth across all categories. Vendors have also recognized this trend and are observing our success. This process is ongoing, and moving forward, maintaining a focus on profitability, particularly profit per square foot, will be vital. As we collaborate with various vendors across our stores, we aim to optimize outcomes for both customers and vendors, driving success for our company as well. In our stores, especially where the concept has been implemented alongside offerings like the Pacific Kitchen & Home and Magnolia Design Centers, these areas play a substantial role in our customer engagement and success. Overall, we experienced a strong Q3, marked by growth in online revenue and margin expansion amidst a challenging environment. We are excited about Q4 and have provided as much insight as possible regarding our outlook. We look forward to seeing you either in stores or online. Don't forget to use the app to connect with our agents. Thank you for your continued support, and have a wonderful holiday season.