Best Buy Co. Inc (BBY) — Q4 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 comparisons, which should not be considered superior to, as a substitute for, and should be read in conjunction with the GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release. Today's earnings release and conference call also include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial conditions, 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, excluding 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, Apple Watch, movies, and music. A final housekeeping item before I turn the call over to Hubert: beginning in January fiscal 2017, we will no longer issue an interim holiday press release due to the increasing significance of the month of January for overall fourth quarter financial results. I will now turn the call over to Hubert.

Good morning, everyone, and thank you for joining us. I'll begin today with a review of our fourth quarter and annual performance and then provide an overview of the next phase of our Renew Blue strategy. In the fourth quarter, we delivered Enterprise revenue of $13.62 billion, improved our non-GAAP operating rate by 10 basis points to 5.9%, and delivered a better-than-expected non-GAAP EPS of $1.53 versus $1.48 last year. In our Domestic business, we exceeded our bottom line expectations due to a well-executed holiday plan, a disciplined promotional strategy, better recovery on returns and clearance products, and strong expense management. While Domestic revenue declined 1.5%, it was against a backdrop where the NPD-reported categories were down 5.1%. Strong performance in health & wearables, home theater, and appliances was more than offset by softness in the mobile phone category and continued declines in tablets. Additionally, we continued to drive significant growth in the online channel, with e-commerce revenue increasing nearly 14% to 15.6% of total Domestic revenue. In the International business, our performance was better than expected on both the top and bottom lines. While revenue declined 26.2% due to the expected impacts of foreign currency and store closures in Canada, revenue retention from the brand consolidation continued to exceed our expectations. This high retention, in addition to a more effective promotional strategy, drove a 30 basis point increase in the International non-GAAP operating income rate to 4.7%. On a full-year basis, fiscal 2016 marks the second year in a row we increased our Domestic revenue and expanded our operating margin. We also continued to make significant progress against our Renew Blue strategy. During the year, we continued to gain share in appliances in nearly all of our traditional consumer electronics categories, grew Domestic online revenue 13% to over $4 billion or 11% of total Domestic revenue, increased our Net Promoter Score by over 300 basis points, improved our employee engagement scores, and decreased employee turnover. We deepened our partnerships with the top tech companies in the world. We delivered $150 million against our $400 million Renew Blue Phase 2 cost reduction and gross profit optimization programs. We consolidated brands and embarked on a significant transformation in Canada, including the closure of 68 stores. Finally, in one year, we returned $1.5 billion in cash to shareholders, including $1 billion in share repurchases, which was originally planned to be completed over three years. This performance is the direct result of the execution of our Renew Blue strategy and the hard work, dedication, and customer focus on the part of all of our associates. I am proud to recognize them publicly this morning. Turning to fiscal 2017, we are entering the next phase of our Renew Blue strategy. Our purpose, from the customer's standpoint, is to build a company that does a unique job of helping customers learn about and enjoy the latest technologies. As we begin this next phase in fiscal 2017, we will execute against the following priorities: Number one, build on our strong industry position and multichannel capabilities to drive the existing business; number two, drive cost reduction and efficiencies; and number three, advance key initiatives to drive future growth and differentiation. Our first priority is to build on our strong industry position and multichannel capabilities to drive the existing business. Specifically, we will implement initiatives across merchandising, marketing, digital, stores, services, and supply chain. For example, in home theater, we will build on the superior customer experience we've created in partnership with our key vendors and leverage the strength of our market-leading share in 4K and large-screen televisions. We will also add five Magnolia Design Center stores within stores, bringing our total to 84 by year-end. In appliances, we expect to continue to grow our market share by adding an incremental 27 Pacific Kitchen & Home stores within stores, bringing our total to 203 at year-end, and by leveraging the new vendor appliance experiences that were launched in Q3 of last year. Additionally, we expect to see incremental growth from our enhanced delivery and installation offerings, which are driving higher conversion and material improvements in NPS, or Net Promoter Score. In connected home, we will continue to increase our assortment in emerging categories including security, lighting, and video monitoring, expand our in-store presentation, and leverage our leading position in routers and networking equipment, which form the backbone of the connected home. In mobile phones, we will capitalize on the customer experience investments we implemented late last year, with the expectation to drive increased conversion as well as reduced wait time for our customers. Our strategy is to be an advocate for every phone order by offering the best deal on plans and devices, impartial advice, and clarity and efficiency in what can be a complex process. In the very short term, we believe high smartphone penetration combined with low consumer demand for current product offerings is depressing the category. However, over the course of the year, we believe that more compelling phone launches can fuel renewed growth in the category. From an online standpoint, we will continue to build out new digital capabilities, prioritizing the customer shopping experience on phone and tablet devices. Examples of recent advances include the successful Q4 launch of BlueAssist, which allows customers to simply shake their device to get live help with products and orders through chat, call, and email. Another example is Touch ID login, including our latest mobile app updates and, of course, our recently launched Geek Squad app. In our retail stores, we will continue to drive increased sales proficiency and leverage our service capabilities. In fiscal 2016, our Blue Shirts and Geek Squad Agents contributed significantly to our NPS and market share gains, and we believe there continues to be significant further opportunity to take this competitive advantage to the next level. Finally, in our International business, we remain focused on our Canadian transformation, and we will continue to invest in our stores and online channel to improve the customer experience and financial performance. Our second priority for fiscal 2017 is to reduce cost and drive efficiencies throughout the business. Reducing costs is essential for us to be able to fund our investments, build our resilience to product cycles, and increase our profitability over time. Furthermore, based on current economic factors and softness in the consumer electronics industry, it is essential that we be proactive on the cost reduction front. The key elements of our approach to achieving this are to simplify our business processes to simultaneously improve the customer experience and drive costs out. For example, we have a project focused on reducing the number of open box appliances we take into our stores by addressing root cause issues. This project has the potential to not only improve the customer experience but also to drive material savings through lower markdowns, lower transportation costs, and better use of labor in our stores and distribution centers. More broadly, we aspire to achieve world-class operational levels of performance defined in terms of quality, service, and cost. This focus has to be a way of life, especially given our margin structure and the volatility of our industry. Last year, we announced a specific cost reduction and gross profit optimization program called Renew Blue Phase 2, with a goal of $400 million over three years on top of the $1 billion we eliminated as part of Phase 1. Against that goal, in fiscal 2016, we achieved $150 million, leaving us with $250 million. In light of our increased focus on cost and productivity, we believe there are incremental savings that can be achieved above and beyond our current goal, which we will update you on as we progress. Partially offsetting these savings will be our expected future investments in labor expertise, services pricing, and key growth initiatives, which I will discuss in a moment. In fiscal 2016, these investments totaled approximately $100 million, and we expect a similar level in fiscal 2017, which, to be clear, will be funded by our cost savings. Our third priority is to advance key initiatives to more deeply transform Best Buy in order to drive future growth and differentiation. While there may be short-term pressures, we continue to believe we operate in an opportunity-rich environment. The advent of the Internet of Things is providing a new technology wave that is making Best Buy's operating model increasingly relevant to customers. We are investing to be the leading technology expert who makes it easy to learn about and confidently enjoy the best tech. In this context, we believe we have ongoing growth opportunities around key product categories as well as from increasing share of wallet with existing customers and acquiring new customers within our target segments who are passionate about technology and need help with it. Capturing these opportunities will require that we do the following: Number one, develop and bring to market curated, solution-driven merchandise to solve key customer problems, particularly in new growth areas. Number two, ensure we have an inspirational and educational sales approach across all sales channels that helps customers understand the value that technology can create for them. Number three, help customers unleash what's possible from their technologies, and number four, provide customers with ongoing, convenient post-purchase support. Inherent in all of this is the desire to build a stronger ongoing relationship with our customers. Our services capabilities and Geek Squad are key building blocks of this strategy. We understand that we've discussed service-related opportunities many times in the past. While it is not visible in our services top-line results today, we are making progress to bring these opportunities to life. To do so, we've had to spend time in the last two years fixing many aspects of our traditional warranty and repair businesses. We've also had to adjust our pricing in the warranty business. We are seeing the results of our efforts through substantial increases in Net Promoter Scores, higher total customer interactions, and periodic profit-sharing payments we earned this year. We are also beginning to see improved attach rates as we enter fiscal 2017. Building on this, we will continue our work to improve the customer experience and enhance our service offerings and capabilities in support of our mission to help customers learn about and enjoy the latest tech. While we are energized by the potential of this opportunity, the work necessary to capture it takes time. Thus, fiscal 2017 will be another year of gradual and incremental improvement, with more meaningful results expected in fiscal 2018. Now, before I turn the call over to Sharon, I would like to provide some thoughts about our fiscal 2017 outlook and return of capital plan. In summary, Best Buy is a specialty retailer that excels in an industry characterized by product innovation cycles. We are undeterred by this fact, as we believe there will always be technology innovation. Our imperative is that in these cycles, we continue to deliver superior execution against what is in our control, recognizing that the cycles rarely align at any point in time. In fiscal 2017, we are focused on continuing to build on our foundation to both drive and capitalize on these technology cycles. Furthermore, we are focused on building the key initiatives that we discussed today that we believe will result in stronger relationships with our customers, provide profitable revenue even during down cycles, and continue to create long-term shareholder value. Over time, as the fruits of these key initiatives materialize, we expect to accelerate our revenue and operating income growth by taking advantage of opportunities provided by ongoing technology innovation and the need customers have for help. In the short term, we will be characterized by our strong cash flow-generating capabilities and our intent to regularly return excess free cash flow to shareholders. From a financial outlook perspective for fiscal 2017, based on current industry dynamics and how we see the various product cycles playing out in our Domestic business, we are expecting revenue declines in the first half, followed by growth in the back half. We also expect that our strong execution and operational capabilities will allow us to continue to gain market share. In this context, we are targeting flat Domestic revenue for the full year, due to continued growth in appliances, connected home, and home theater in particular, but recognize that being flat will be challenging without a strong mobile cycle and improvements in the NPD-reported categories overall. Despite the soft top-line environment, we will target flattish operating income, including the lapping of the significant periodic profit-sharing benefit from our services plan portfolio that we earned in fiscal 2016. A key element to achieve this will be the delivery of our cost reduction and gross profit optimization initiatives. In addition, we intend to reward our shareholders by being a premium dividend payer and increasing our earnings per share through ongoing share repurchases. I would now like to talk about our fiscal 2017 return of capital plan. After three consecutive years of strong cash flow generation and the Renew Blue, we believe that now is an ideal time to provide a view of our long-term capital allocation strategy. This strategy is based on our strong cash position today and our ongoing confidence in our future cash flow generation. At the core of this strategy is our intent to first fund our operations and gross investments, including potential acquisitions, and then to return the remaining excess free cash flow to our shareholders over time through dividends and share repurchases while maintaining investment-grade credit metrics. This strategy targets the return of excess free cash flow to shareholders through a 35% to 45% non-GAAP dividend payout ratio and regular share repurchases with a minimum annual expectation of offsetting dilution from equity compensation. In line with this strategy, our fiscal 2017 return of capital plan includes: number one, a 22% increase in the regular quarterly dividend to $0.28 per share; number two, the intent to repurchase $1 billion worth of shares over the next two years; and number three, a special dividend of $0.45 per share or approximately $145 million. This is in addition to the $1.5 billion in cash we returned to shareholders in fiscal 2016. I will now turn the call over to Sharon to discuss the details of our fourth quarter financials and our Q1 fiscal 2017 guidance.

Thank you, Hubert, and good morning, everyone. Before I talk about our fourth quarter results versus last year, I would like to discuss them versus the expectations we shared with you in our holiday sales release. Enterprise revenue of $13.6 billion was in line with expectations. Our non-GAAP operating income rate of 5.9%, however, exceeded our expectations due to better-than-expected profitability in both our Domestic and International businesses driven by a more effective, disciplined promotional strategy, better recovery on returned and clearance products, and an approximate $0.02 of additional EPS from the periodic profit sharing benefit from our externally-managed extended service plan portfolio. Additionally, our non-GAAP effective income tax rate was 34%, resulting in an incremental $0.02 of EPS versus expectations. I will now talk about our fourth quarter results versus last year. Enterprise revenue declined 4.1% to $13.6 billion primarily due to a 1.8% comparable sales decline in the Domestic business, a negative foreign currency impact of approximately 140 basis points, and the negative impact of Canadian store closures. Enterprise non-GAAP diluted EPS increased $0.05 or 3% to $1.53. This increase was primarily driven by the service periodic profit-sharing benefit of $0.19 and a share repurchase benefit of $0.06. These benefits were partially offset by Domestic revenue declines in the mobile phone, tablet, and digital imaging categories and the expected $0.03 negative impact from the Canadian brand consolidation. In our Domestic segment, revenue decreased 1.5% to $12.5 billion. This decline was primarily driven by a comparable sales decline of 1.8%, excluding the estimated 10 basis point benefit associated with installment billing and the loss of revenue from 13 large-format and 17 small-format Best Buy mobile store closures. These declines were partially offset by the 10 basis point benefit associated with installment billing and the approximate 80 basis point services periodic profit-sharing benefit, which is not included in our comparable sales calculation. From a merchandising perspective, comparable sales growth in health & wearables, home theater, and major appliances was more than offset by significant declines in mobile phones, tablets, digital imaging, and services. In services, comparable revenue declined 11.9% due to investments in services pricing and the ongoing reduction of repair revenue driven by lower frequency and severity of claims on extended warranties. In our International segment, revenue declined 26.2% to $1.1 billion, due to a negative foreign currency impact of approximately 1,350 basis points, the loss of revenue associated with closed stores as part of the Canadian brand consolidation, and ongoing softness in the Canadian economy and consumer electronics industry. Turning now to gross profit, the Enterprise non-GAAP gross profit rate increased 30 basis points to 21.6%. The Domestic non-GAAP gross profit rate increased 40 basis points to 21.6%. This increase was primarily due to a 65 basis point impact from the services periodic profit-sharing benefit and improved rates in the mobile and computing categories, primarily due to a more disciplined promotional strategy. These increases were partially offset by an increased mix of lower margin wearable devices, a decreased mix of higher-margin digital imaging products, a lower rate in televisions driven by a decline in average selling prices and higher distribution costs, and our investments in services pricing. The International non-GAAP gross profit rate increased 10 basis points to 21.8%. This increase was primarily driven by higher year-over-year gross profit rates in both Canada and Mexico, due to a more disciplined promotional strategy. Now, turning to SG&A, Enterprise-level non-GAAP SG&A was $2.1 billion or 15.7% of revenue, a decrease of $68 million, but an increase of 20 basis points. Domestic non-GAAP SG&A was $1.95 billion or 15.6% of revenue and was nearly flat in dollars year-over-year as investments in future growth initiatives and lower vendor funding being recorded as an offset to SG&A were offset by the flow of Renew Blue Phase 2 cost reductions and lower incentive compensation. From a rate perspective, non-GAAP SG&A increased 30 basis points, primarily driven by year-over-year sales deleverage. International non-GAAP SG&A was $192 million or 17.2% of revenue, a decrease of $70 million or 10 basis points. This decrease was primarily driven by the elimination of expenses associated with the Canadian brand consolidation and the positive impact of foreign exchange rates. Specific to the Canadian brand consolidation, we incurred a non-GAAP diluted EPS impact of negative $0.03 in the fourth quarter and negative $0.07 for fiscal 2016. These impacts were lower than expected due to higher sales retention from closed stores, a more disciplined promotional strategy, and our decision to transform only a limited number of stores this year in order to pilot results. In Q1 of fiscal 2017, Canada will still be lapping 68 of its store closures last year and facing ongoing foreign-currency and Canadian economic headwinds. As such, in Q1, we expect International revenue to decline 15% to 20%. Beginning in the second quarter and throughout the balance of the year, while currency and economic headwinds will continue to be a challenge, in constant currency, the International business is expected to be near flat on both the top and bottom line. From a cash flow perspective, on a full-year basis, capital expenditures totaled $649 million, and we returned $1.5 billion in cash to our shareholders. In working capital, our decision to bring holiday inventory in early, as well as the Super Bowl moving into Q1 fiscal 2017, resulted in us holding inventory longer and having to settle accounts payable before year-end. This created a timing issue that led to our ratio of accounts payable to inventory being lower at year-end than last year. As we look forward to next year, capital expenditures are expected to be in the range of $650 million to $700 million, and the accounts payable to inventory ratio is expected to increase. I would now like to talk about our Q1 financial guidance. In the Domestic business, we believe that the softness we saw in the NPD-tracked categories and mobile phones will continue into Q1. We also believe that in the International business, revenue will be down approximately 15% to 20% due to the ongoing impacts of foreign currency and the Canadian brand consolidation, which was not executed until late March of 2015. With that backdrop, we are expecting Enterprise revenue in the range of $8.25 billion to $8.35 billion and Enterprise comparable sales in the range of negative 1% to negative 2%, primarily driven by continued softness in the mobile and tablet categories. Our non-GAAP effective income tax rate is expected to be in the range of 39% to 39.5%, and our Q1 non-GAAP diluted earnings per share is expected to be in the range of $0.31 to $0.35, assuming a diluted weighted average share count of approximately 326 million. I would now like to turn the call back over to the operator for questions.

Hi. Thanks. Good morning. My questions today focus on the return of capital plan that you outlined, just two questions around that. One, can you explain to us the thinking behind the special dividend versus just increasing the regular dividend or doing more share buyback with that cash? And could you remind us how you are thinking about possible acquisitions and how that can enhance Best Buy over the long term?

Absolutely, Kate. On the special dividend, very similar to last year, we had these legal settlements from prior years and they're substantial. You see them when you look at the GAAP to non-GAAP reconciliation. Last year, we returned that through the special dividend to our shareholders. In addition to that, we had asset disposals; one was the sale of Europe last year and then we had some small entities that we sold this year. As those were assets that were part of the existing core base of our business, we think giving that cash back to our existing shareholders makes sense, and it's an elegant way to get cash back to our shareholders.

And Kate, to your question about acquisitions, we do mention acquisitions in the press release and I mentioned them in my prepared remarks. In answer to your question, the framework is as follows: we have a clear mission, which is to do this unique job of helping customers learn about and enjoy technology. Acquisitions would be helpful inasmuch as they bring us capabilities to accelerate our transformation in this direction; that's the first criteria. And, of course, the second important criterion, as you would appreciate, is that they be financially accretive over time. So that’s the backdrop of that—nothing imminent, but we thought it was appropriate to share that with you this morning.

Thank you. From an execution standpoint, it seems that you're doing everything you should and you don't have a lot of control over these cycles, but I did want to focus a little bit on the cycles for a minute and get your view on things like virtual reality, what's in the pipe for mobile that you think is going to turn that business around? Can we get another year out of TV and where do you think connected home starts to hit a sweet spot?

Thank you. Talking about the future in this industry is always interesting. Let me try to be as helpful as possible. As we look ahead, particularly for fiscal 2017, the areas where we see key growth opportunities for us, around appliances where, as you know, we had multiple quarters, multiple years now of growth, and that's going to continue to be driven by the housing recovery. Second is connected objects, so one of the Internet of Things, connected home, and then of course there is the continued TV cycle. The specific categories you talk about, so in particular order, virtual reality, we're very excited; we have this promotion: if anybody is interested in buying the Galaxy S7, you can preorder now at Best Buy and you get a free virtual-reality gear and then some additional memory—great value. Clearly, this is an interesting category. I think it will still be small this year. It may help in the computing category with higher-end computers because you're going to need that computing power, but from a financial standpoint, it's going to be limited. Mobile, I will stick to my prepared remarks. It's going to be a function of new products revising the category. And I'm not going to make any forward-looking statement on that particular point. TVs, of course, we've been very excited and performing really well with 4K and large screen TVs. Our share has been increasing. Like any cycle, this is not going to continue forever, so it won't be as strong going forward as it has been from a growth rate standpoint. Connected home, I think, is an exciting category. Increasingly, it's not just about the security cameras or the smart locks and so forth. Everything in your home is connected. Your smart TV is connected, your music, your streaming, your home office is connected, gaming is connected, and of course getting into security, home automation, energy management. The complexity of this, think about this with the control layer, the security layer, the networking layer, the access layer provides a lot of complexity. The continued innovation and the complexity creates a big opportunity for us. We are seeing growth. I've made comments about the fact that we are increasing the assortments, the presentation. We are building on our strengths in routers and networking. So we will see continued growth in that growth space of connected objects and the Internet of Things.

And, Daniel, if I could just follow up on Canada. I think you said operating income flat year-over-year. With the expenses related to the store closings, I thought there was supposed to be a year-over-year swing this year that would be positive. I was wondering if you could just add a little color to that flat operating profit outlook? Absolutely. First, there are two things. One is the impact of foreign currency which has been substantial. Remember that averages into the cost of inventory over time. As that has been prolonged, that will affect them from a gross profit standpoint. In addition to that, the Canadian economy has also been pretty soft, and we are playing that into our outlook, ensuring we’ve accounted for what we think is happening there right now. We could not be more pleased with the consolidation, the retention rate, the execution that has happened up there. Also, lastly, there will also be some additional investments next year, but remember, we're saying we're going to offset our investments as a company. But there will be some investments in these new pilot stores that we are working on. There is disruption when we’re approaching that. So that will be another aspect of it. We’re not going to be announcing every quarter the impact of the Canadian brand consolidation and the stores. We’re going to treat it pretty much as business as usual. But there is significant investment; and it is why the CapEx next year is going up just slightly because that will be higher in Canada.

Hi. Thanks. Two questions. One, just on the cost savings versus offset. So you saved about $150 million this year. Did you tell us what the investments were? And then what I'm getting at is then over the next two years, you've quantified $250 million in savings but $200 million in offsets. So over the course of the three years, that $400 million in savings, how much of that should we expect to flow to the bottom line?

So Mike, thank you for your question. An important consideration for fiscal 2017 is the fact we are lapping the periodic payment related to our service portfolio. That’s a meaningful thing. Achieving flattish operating income rate domestically is made possible by these cost savings and this renewed focus. But the general principle is we are offsetting all of our investments with cost savings, and then we are able to lap the periodic payment.

Okay. So sort of a net neutral over the three years, it sounds like? If I could ask one more question, just in terms of your stores in the U.S. It looks like you closed about 10 of the big box stores in the U.S., I think about 10 in the quarter, 13 for the year. How should we think about that going forward? I know you don't announce store closures specifically, but should we expect that to continue to come down?

Yes, every year here on out is a big year for expirations. We have well over 100 expirations coming into fiscal 2016. And Michael, we will continue to do what we have been doing, which is methodically rationalize the real estate portfolio. The diligence around the renewals is substantial if we are renewing. You can see it in the lease disclosures every year that the term we’re committing to with these leases is shorter. We will continue to do that to maintain flexibility in the portfolio. Rest assured that we will continue to rationalize as we deem it appropriate. The great news is that the stores that remain in our portfolio are performing. The key for us is improving and increasing our retention rates in the U.S. Unlike Canada where the stores were literally in the same parking lot or a mile away, in the U.S., we never built our portfolio that way. So you can't immediately extract these really strong results from Canada and assume that if we did that in the U.S., it would look exactly the same.

So what are the expected transfer rates in the U.S. or the experience in the 13 or so stores you closed this year?

We haven't given that publicly, and we don’t know yet, obviously, because many of those stores closed October 1, so you won't know until you've cycled the full year. We don’t have, as you know, over the last several years, we closed about 49 stores prior to Hubert and I joining the company, and we've only had a small number of stores since that time that have actually closed. From a retention point of view, we're looking at something in the low to mid-30%s, and in some of these stores, you would need higher retention rates than that in order to justify the store closures.

Thanks. Good morning, everybody. First on a follow up on the Super Bowl shift, in retrospect now that you've lapped it, can you talk about how much the Super Bowl hurt the fourth-quarter comps and what the lateral benefit is expected to the first quarter?

Chris, we quantified the impact of the Super Bowl, and obviously, the Super Bowl did move. The one thing to keep in mind, just about February, is we had substantial store closures this year as a result of the weather situation, so that put a little offset to that. But we were very— we gave you the estimate, and we continue to believe that that is what it played out to be.

Okay. Understood. And follow up on the prior question about the cycles in the back half outlook, how are you thinking about TV, the TV category as the year progresses from the sales and gross profit dollar perspective? And are you expecting tablets to see any sort of a rebound in the back half as you think about the revenue recovery in the back half?

Chris, good morning. The further out you go and the more specific the questions are, the harder it is to predict. I shared in my prepared remarks our view that in aggregate for the year, we can be flattish from a top and bottom-line standpoint in the U.S.—there’s going to be a lot of moving pieces. TVs, the cycle has been very strong—we've performed extremely well. We expect to continue to perform and do a great job for our customers. We don't expect the growth rates to remain the same, so this is going to slow down. Tablets, I think that's anybody's guess. I think one of the vendors has made forward-looking comments about tablets; I don't know that I have anything to add to this. So we thought it was helpful and this is the first time we're actually doing this to provide a full-year perspective, so taking a bit of a risk here and it's a portfolio view, and then things will move within that. That's probably the best I can tell you this morning.

Thanks. Good morning. First, you're targeting flattish operating income next year. You mentioned the CapEx a little bit elevated. Is the flattish operating income, notwithstanding that CapEx, is that a reasonable proxy for direction of free cash flow, or are there other items on working capital that will go in your favor?

I believe that from a working capital point of view, as I mentioned, this accounts payable to inventory ratio this year was extremely low because of the decisions and the shift of the Super Bowl. Next year, the Super Bowl will continue to be around the same time, but obviously we'll be lapping that, so that won't change. On the other side of our business, we do expect to be increasing that accounts payable to inventory ratio by year-end. So I expect to see a little bit of a benefit from that.

Okay. And then a follow up on the services investment, can you tell us how much of the sales pressure is now self-induced because of lower prices versus the change in units or attach rate? Can you remind us, is there any additional benefit from the profit-sharing in 2016?

Yes. The services revenue decline—there's a piece which we've called nonproductive revenue, which is driven by the lower frequency and cost severity related to the claims. As it relates to the productive revenue, which is the one that we care about, the trend is starting to evolve. Because we have the price investment, and we have quantified it for you in Q4, and that's going to carry over into this fiscal year, and it is partially offset by the— we're seeing the beginning of an increase in the attach rate. We never expected the attach rates to fully offset the price investment. This is an area where frankly the elasticity is much lower than on the key hardware categories, but we thought it was the right thing to do from a customer standpoint as we looked ahead. As for the periodic payment from the warranty portfolio, last year was an exceptional year. We’ve disclosed every quarter the amounts. It was driven by, again, the improved performance of our service portfolio, so nothing to be shy about around that. This was an exceptional year because it was multiple— it was twice the amount. Now, looking ahead in this fiscal year, we'll get some continued improvement in that business as the improved operational performance, severity, and frequency will carry over—not so much in the form of periodic payment but in terms of lower costs charged to the portfolio. Not nearly close to the amount of fiscal 2016, but some portion. What's exciting for us is that we get to lap the partly exceptional payment last year, and we are able to do this through the increased focus on cost and efficiency.

And Simeon, I’ll just add that Hubert also, in his prepared remarks, mentioned that as we got towards Q4, the pricing was in place, et cetera, we did start seeing some uptick in our attach rates in the services business, which was the foundation of the investment in the services pricing and the launch of AppleCare, et cetera. So on that side of it, we are pleased with how that is playing out for us from a strategic point of view.

Hi, guys. Scot Ciccarelli. I think, one of the things you talked about as a benefit for this past holiday season was the expectation for improved in-stock levels given the prior year’s launch of ship from store. Can you help quantify what the comp impact was that you think you experienced from the improved inventory levels? And related to that, are there opportunities to further improve in stock, or are you where you want to be at this stage?

Thanks for the questions, Scot. Yes, there is no question that we improved our in-stock levels, and what is terrific is that our customers noticed it. This was an area where we received recognition in our Net Promoter Score from our customers. To do that, you heard me just mention this accounts payable to inventory ratio. We did bring our inventories in earlier, and customers are shopping earlier and earlier. In retrospect, that turned out to be an excellent decision for us. Additionally, we have had a significant focus on restocking in our stores and have made some operational changes in our stores for down stocking. That also paid dividends during the fourth quarter. In addition, on ship from store, we continue to believe that strategically ship from store will go down in our history at Best Buy as one of the most important and strategic decisions we made because it is allowing us to utilize both our online and retail inventories to serve the online customer. You've seen the strength of our online growth; that business is now over $4 billion. Ship from store is allowing us to, on a consistent basis, make marketing promises to customers about speed of delivery. To your question about whether we said we were going to do this, did it have a positive outcome? Clearly, there was a balance sheet investment as it related to that accounts payable to inventory ratio. The answer is yes, we did it, it worked, and we're very pleased with it. We will continue to make additional changes where we believe it's necessary, but Hubert and I in no way believe that we have solved our in-stock issue.

Yeah, in my prepared remarks more broadly, going beyond inventory and in-stock, we believe that operationally, from sales proficiency in particular, we have the opportunity to continue to drive increased performance in our stores and, of course, in our online channel as well—we are not finished. That fits with the first priority I laid out; we have multiple opportunities there, and we are very clear about them.

Hi, guys. Good morning. Thanks for taking my question. I wanted to ask something a little broader maybe about the consumer. Just kind of what you're seeing from the consumer, or from your market research and studies and surveys of the consumer. Are you seeing any changes, I guess, within categories of what consumers are buying? Is there any change in appetite for services? I mean, I know what the service sales rates are, but I guess I'm trying to get at, like, has there been a demand change, more broadly speaking, and within economic classifications like high or low income?

Yeah, the U.S. consumer—we could spend the next 30 minutes on that. We are pleased with the mind and the spirit of the U.S. consumer, certainly compared to many other geographies outside of the U.S. Demand is there; you see it with the growth in appliances, continued growth in appliances—that is a very strong wave. In our category, I think we all have to bear in mind that demand is driven by supply, so when there’s great, exciting innovation you get that. Most of what we sell is not the basic Maslovian need on the part of our customer. This is an industry where great supply creates demand, and we're excited about the technology waves that are coming, above and beyond the softness that has existed in phones. From a services standpoint, I would say two things. One is there's clear demand for help on the part of the customer. Now, the customer, all of us, don't always want to pay for service, and we will provide and we're providing service today to generate more demand. So when we have Magnolia system designers coming to your home—that's going to generate demand—but their visit is free, and we're happy to come to your home, everybody on the call; we’ll come to you. Tech support, however, above and beyond the self-help is something that customers are happy to pay for, and we are seeing increased demand in this area. The summary is that we believe we have an opportunity-rich environment, and that the key trends are made for Best Buy, based on these technology waves and the need that customers have for help.

And Joe, I’ll just add that from a metric point of view, what you can see, the average order value at Best Buy, again when you look at what contributed to the outcome of Q4, we saw that again increase. The high-end consumer—there is a lot of noise around the high-end consumer which we, of course, cater to here at Best Buy, and the data supports what the metrics would tell you about that consumer. Obviously, conversion was up and average order value, both retail and online.

Good morning. Thanks for taking my question. I wanted to just circle back on the shop-in-shops. Obviously, you've had some of those for quite some time now, and I wanted to get an update just in terms of how they're performing versus the rest of the house. And then just any indication if you think that there might be additional shop-in-shops to come? Thank you.

Good morning, Anthony. The shop-in-shops—there are two types of shop-in-shops: the vendors, the vendor’s shop-in-shop and then there are the Magnolia Design Centers and Pacific. In general, these enhanced customer experiences have been a key element of our transformation because it has allowed us to renovate our stores, increase the customer experience, and provide more expertise to our customers. We’re very excited about this. Increasingly, it’s difficult to measure, because, as many of you visit our stores, the shop-in-shops are in many, many of our stores, so it's really hard to measure scientifically with great precision. However, when you see increased market share, there is no doubt; and as an example, increased market share in 4K, in high-end TVs, or in appliances—there's no doubt this has been a key driver of our performance. Looking ahead, there's no doubt that in terms of physical shop-in-shop, there's less to be done, right? Because we have high penetration of these shop-in-shops. I think that looking ahead, we have the opportunity to partner, in some cases, more deeply with the vendors in particular in how we deliver this promise of making it easy to learn about and enjoy the technologies. So around help, service, and classes, I think there are deeper integration opportunities with the vendors, and we're excited about that as well.

Thanks, guys. Good morning. I was wondering if you could help us understand the complexion of that remaining $250 million of Renew Blue savings that you are attacking? I realize it's early, but any examples of the incremental opportunities that you alluded to earlier and the timing of that?

From a identification standpoint, we have a robust list of actions that we are going against; and we believe that we will be revealing those over time to you. We've put the $400 million out there, and obviously, you know that we don't communicate anything that we don't have the exact execution plan behind it to you guys. As we start developing those plans and they become more crystallized, we will definitely be communicating that. What we wanted to assure you is that the $400 million is the bottom of what we believe is possible, and that with these additional opportunities we've been identifying in the back half of this year, we continue to believe that there is substantially more opportunity there. So we'll keep you posted as we go; let's get the $400 million delivered as well, and then we can talk about more. But there's no doubt that based on some of what we're looking at, and you guys, these are very structural, and they're going to come through the product flow and how it comes through Best Buy; they're going to come through our return process, especially on large cube inventory—there's so much opportunity there. There's recovery on inventory that is returned; it's how we handle the movement across the U.S. of some of our larger cube inventory. This comes in many forms. The great news is it comes in many forms. And there is no lap of opportunity, and I'm going to take one more minute just to lay a backdrop for why is there this much opportunity at Best Buy. The reason we have these opportunities is because, if you think about the growth years for Best Buy, they were opening 50 stores a year and adding $1 to $2 billion a year of incremental revenue. During that time, when you have that kind of growth, trying to keep pace with all of the operational excellence that goes behind that, what you end up doing is creating a large number of triage processes, meaning that, well, we don’t have the systems to do this, so we’re going to create this workaround, and it will work. Then the workaround gets bigger and bigger as the company continues to grow. Just about the time they get ready to fix it, they just added another 50 stores and another $2 billion worth of revenue, and of course, that was the focus back then. Now that the company has reached such scale, these workarounds have become very costly—and thus the opportunity we have to take them out. But let me emphasize that they are structural and a lot of change has to happen, and that’s why you don’t just throw them out there on a list and say, ‘Yeah, I totally am going to be communicating that.’ We need to give you guys clarity to the roadmap.

So maybe it’s time for a few words of closing remarks. First of all, of course, we were pleased this morning to share some of our good news about earnings and our plans to return capital to shareholders. Hopefully, you feel that we’re quite excited about opportunities going forward and proud of our execution capabilities. I certainly want to again thank our associates who are behind this execution capability, and thank you for your continued support. All of us here wish you a terrific day. Thank you.