Best Buy Co. Inc (BBY) — Q1 2017 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 certain 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 or our most recent Form 10-K. 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, 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. I will now turn the call over to Hubert.

Thank you, Mollie, and good morning, everyone, and thank you for joining us. Let me begin by discussing the announcements we made today regarding Sharon McCollam and Corie Barry. First, I want to thank Sharon for the profound and lasting impact she has had on Best Buy and her amazing partnership. As you all know, Sharon came out of retirement in 2012 to help revitalize Best Buy when the company faced a multifaceted crisis. Three-and-a-half years later, we are in a very different place and are entering the next phase of our journey as a company. As she transitions out of her role, Sharon can look forward to spending more time with her husband with a sense of accomplishment and confidence in Best Buy's future. One of Sharon’s legacies is our successor in the CFO role, Corie Barry. Corie is a 16-year veteran of Best Buy and our current Chief Strategic Growth Officer. She has been groomed by Sharon for the CFO role almost since the time Sharon joined the company, and the two have collaborated on succession planning with the goal of making this a seamless transition. Over her many years at Best Buy, Corie has held a number of operational and financial roles in the field and at the corporate level, including as Senior Vice President of US Finance and as the Interim Head of our Services business. The Board, Sharon, and I firmly believe that Corie has the kind of experience, skills, and passion for Best Buy that make her the perfect choice for this position. I look forward to working with her in her new role. Sharon will remain as CFO until our Annual Shareholder Meeting on June 14, at which point Corie will assume her responsibilities. As part of this transition plan, Sharon will remain with Best Buy in an advisory role until the end of the fiscal year. The duties Sharon has as Chief Administrative Officer will be assumed by several members of our executive team. So let me say once again how grateful we are to Sharon for all that she has done. Her legacy will endure. So, Corie, allow me to publicly extend my congratulations. She has been a key player in Best Buy's resurgence, and I am confident she will be a great leader for our company in the years ahead. Altogether, I feel this is a remarkable time for our company. We have an exciting set of assets and opportunities and a very strong team committed to creating great results for all our stakeholders. I will now provide an overview of our first quarter performance and an update on our progress against our fiscal 2017 priorities, and I will then turn the call over to Sharon for additional details on our quarterly results and commentary on our financial outlook. In the first quarter, we delivered better-than-expected enterprise revenue of $8.44 billion, a 30 basis point improvement in our non-GAAP operating income rate to 2.9%, and non-GAAP earnings per share of $0.44 versus $0.37 last year. In our domestic business, we delivered better-than-expected, essentially flat comparable sales versus our guidance of 1% to 2% decline. Contributing to these better-than-expected results was the strong performance in our online channel which grew 24% in the quarter; and similar to last quarter's trends, from a merchandising perspective, we saw strong year-over-year sales growth in health and wearables, home theater, and appliances, offset by continued softness in mobile phones and tablets. Industry sales in the NPD reported categories, which don't reflect mobile phone and appliance sales, declined 1.9% including the benefit of the shift of the Super Bowl into Q1 fiscal 2017. We also saw significant gains in our net promoter score, which improved more than 600 basis points compared to this time last year. In our International business, strong execution and higher sales retention in our Canadian business drove a better-than-expected revenue decline of 1.2% on a constant currency basis, despite closing approximately one-third or 66 of our large format stores on March 28th of last year. On a reported basis, revenue declined 8% versus our guidance of 15% to 20% decline, primarily due to a lower than expected negative impact from foreign currency and the higher sales retention we have seen in Canada. Overall, a strong quarter, and I want to thank our teams across all functions for delivering these results. Now I’d like to share highlights of the progress we are making against our fiscal 2017 priorities. As we discussed on our Q4 call, our first priority is to build on our strong industry position in multi-channel capabilities to drive the existing business. This involves implementing several initiatives across merchandising, marketing, digital, stores, supply chain, services, and customer care. In Appliances, we leveraged our 176 specific kitchen and home stores-within-a-store and ongoing market share gains to deliver a 14% increase in revenue and our 22nd consecutive quarter of comp sales growth. As a reminder, we will continue to roll out incremental stores-within-a-store throughout the year. In home theater, our market-leading customer experiences around 4K and large screen technologies continued to drive sales growth and market share gains. We continue to build on this experience by rolling out 376 new LG experiences in addition to our existing Sony and Samsung experiences. In Computing, similar to home theater, our partnership with key vendors and the strength of our market-leading position has created a superior customer experience that is driving continued market share gains. In mobile, we added 25 incremental Verizon and AT&T stores-within-a-store to the 250 we rolled out in the back half of last year. However, the mobile phone category remains challenging as industry demand continues to be soft. Despite this current softness, we continue to believe that over the course of the year, iconic new phone launches can drive renewed growth in this category. In our online business, our 24% sales growth was driven by continued improvement to our digital customer experience and enhanced dot-com capabilities, including faster shipping. We continue to focus on improving the shopping journey for our customers, including streamlining the checkout process, providing visibility earlier in the shopping funnel for local store product availability, improving the quality and relevance of product recommendations and increasing search relevancy and accuracy. In our retail stores, the level of proficiency and engagement of our associates is continuing to drive meaningful improvements in our net promoter score among both purchasers and non-purchasers and is contributing to our market share gains. In our services business, we continue to drive improvements in our service quality and increased our Net Promoter Score. Year-over-year, our Geek Squad agents also drove more customer interactions across our channels and helped more customers use and enjoy their technology products. As expected, overall services revenue declined during the quarter due to the carryover effect of the pricing investments we made last September, as well as the ongoing reductions of retail revenue driven by lower frequency of claims on our extended warranty. While at face value this repair revenue decline appears negative, it is actually financially beneficial because it reflects a reduction of our extended warranty costs. In our international business, we remain focused on our Canadian transformation as reflected in our revenue performance, customer retention is proving to be higher than expected. Looking ahead, our team is focused on continuing to invest in our stores and online channel to improve the customer experience and financial performance, something that is enabled by the consolidation of the two brands. The second fiscal 2017 priority is to reduce costs and drive efficiencies throughout the business. Reducing costs is essential for us to be able to fund our investments, support our resilience to product cycles, and increase our profitability over time. A key element to achieving this is simplification and streamlining our core business processes, simultaneously improving the customer and employee experience and driving costs out. This work is well underway. This is not an isolated short-term cost reduction program; we are establishing a lean culture focused on systematically eliminating non-quality and defects. This approach requires collaboration across teams and functions, and we are building the organizational capabilities, mindset, and habits necessary to sustain changes. As for our renewed Blue Phase 2 cost reduction and gross profit optimization target of $400 million over three years, we achieved another $50 million in the first quarter bringing our current achievement to $200 million. The third fiscal 2017 priority is to advance key initiatives to drive future growth and differentiation. While there may be short-term pressures, we continue to believe we operate in an opportunity-rich environment. We are investing to make it easy for customers to learn about and enjoy the latest technology as they pursue their passions and take care of what is important in their lives. We see fiscal 2017 as a year of exploration and experimentation around creating compelling customer experiences that have the potential to unlock growth. Throughout the year, we will be testing and piloting several concepts around the country and with our combination of digital, store, and in-home assets, we feel we have a great opportunity to address key customer pain points, build stronger ongoing relationships with our customers, and unleash growth opportunities. So to recap, we delivered a strong first quarter and are reaffirming our fiscal 2017 full-year financial outlook that we provided in our Q4 call. That outlook includes approximately flat revenue and non-GAAP operating income, with EPS growth driven by share repurchases. Although we are reporting better-than-expected results today, we are not raising our full-year outlook as the first quarter represents less than 15% of full-year earnings and at this stage, we have no new material information as it relates to product launches throughout the year. Now, and of course, it's a bit emotional, let me turn the call over to my friend, Sharon McCollam. Sharon, anything you’d like to share with us this morning?

Yes, I do, Hubert. Thank you. While I remain in an advisory capacity through the end of the year, this is my last official call as CFO, and as such, I want to take this opportunity to express what an immense privilege it has been to be part of this incredible transformation. With our team of more than 125,000 people, we have worked hand-in-hand to Renew Blue. And today, as I prepare to step down from my current role and spend more time with my husband and my family, I do so knowing that we have never been as well positioned as we are today to take Best Buy to a new level. I’d like to thank my peers, our corporate and field teams, and in particular, my direct reports for their exceptional contributions that have made this possible. I would also like to thank our Board and you, our shareholders and analysts for your confidence and support. Additionally, I want to publicly congratulate Corie. Corie has been my strategic right-hand partner since I joined Best Buy. With her exceptional financial acumen and deep understanding of Best Buy’s operations, she has been an influential leader over the financial and cost disciplines that have been established across the company over the past several years. She is a highly respected cross-functional leader and will be an incredible CFO of whom I could not be more proud or confident. So, congratulations, Corie. And of course, I want to thank Hubert; he is an extraordinary leader and an inspiring business partner and a friend. I will be forever grateful to have had the opportunity to share this journey with you and our entire Best Buy family. Okay, so now let’s talk about our Q1 results. Before I talk about these results last year, I would like to discuss them versus the expectations we shared with you in our Q4 call. Enterprise revenue of $8.44 billion exceeded our expectations driven equally by the outperformance of our domestic and international businesses. Non-GAAP earnings per share of $0.44 also exceeded our expectations primarily due to the flow-through of higher revenues. Additionally, a lower effective income tax rate contributed to an incremental penny of EPS versus our expectations. I will now talk about our Q1 results versus last year. On a constant currency basis, enterprise revenue declined 0.8% to $8.44 billion primarily due to the impact of domestic and Canadian store closures. On a reported basis, enterprise revenue declined 1.3% reflecting approximately 55 basis points of negative foreign currency impact. Enterprise non-GAAP diluted EPS increased $0.07 or 19% to $0.44. This increase was primarily driven by Canada which is lapping the disrupted impact from the brand consolidation last year and a $0.04 per share benefit from share repurchases. These increases were partially offset by the negative impact of lower revenue in the domestic segment and a higher non-GAAP effective income tax rate. In our domestic segment, revenue decreased a less than expected 0.8% to $7.8 billion. This decrease was primarily driven by the loss of revenues from 13 large format and 24 Best Buy mobile store closures. Comparable sales were essentially flat. From a merchandising perspective, comparable sales growth in health and wearables, home theater, major appliances, and computing was offset by a decline in mobile phones, tablets, and gaming. As expected, television sales related to the shift of the Super Bowl into Q1 2017 positively impacted the domestic segment by approximately 70 basis points. In services, comparable revenue declined 10.7% due to investments in services pricing and the ongoing reduction of repair revenue driven by lower frequency of claims on extended warranties. Domestic comparable online revenue increased 23.9% to $832 million, primarily due to a higher conversion rate and increased traffic. As a percentage of total domestic revenue, online revenue increased 210 basis points to 10.6% versus 8.5% last year. In our international segment, on a constant currency basis, revenue declined 1.2% to $614 million due primarily to closed stores in Canada. On a reported basis, international revenue declined 8.1% reflecting approximately 690 basis points of negative foreign currency impacts. Turning now to gross profit, the Enterprise non-GAAP gross profit rate increased 30 basis points to 23.2%. The Domestic non-GAAP gross profit rate increased 10 basis points to 23% primarily due to a prior year reserve on non-iconic phone inventory which did not recur this year and improved rates primarily driven by our more disciplined promotional strategy across product categories. These increases were partially offset by our investments in service pricing. The International non-GAAP gross profit rate increased 310 basis points to 25.9% primarily driven by a higher year-over-year gross profit rate in Canada as we lapped the significant disruption and corresponding increased promotional activities related to the brand consolidation in Q1 fiscal 2016, and we received a higher periodic profit-sharing payment in our services business. Now turning to SG&A, enterprise level non-GAAP SG&A was $1.7 billion or 20.3% of revenue, a decrease of $24 million or flat on a rate basis. Domestic non-GAAP SG&A was $1.56 billion or 19.9% of revenue, which was flat year-over-year as investments in the business were offset by the flow through of Renew Blue Phase Two cost reductions. From a rate perspective, non-GAAP SG&A increased 10 basis points, primarily driven by year-over-year sales deleverage. International non-GAAP SG&A was $156 million or 25.4% of revenue, a decrease of $23 million or 140 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. I will now discuss our fiscal 2017 and Q2 2017 outlook. As Hubert said, from a financial outlook perspective, we are reaffirming our expectations of approximately flat revenues and flat non-GAAP operating income for the full year, including lapping the significant periodic profit-sharing benefits from our Services plans 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. Based on current industry dynamics and how we see the various product cycles playing out, we are expecting slight declines in revenue in the first half followed by growth in the back half. As we discussed on our last earnings call, we recognize this will be challenging without a stronger mobile cycle and improvement in the NPD reported categories overall. I would now like to talk about our Q2 financial guidance. For Q2, we are expecting enterprise revenue in the range of $8.35 billion to $8.45 billion and both enterprise and domestic comparable sales of approximately flat. We expect international revenue to decline approximately 5% to 10% on a reported basis, but to be flat on a constant currency basis. We expect our Q2 non-GAAP diluted earnings per share to be in the range of $0.38 to $0.42, assuming a diluted weighted average share count of approximately 325 million and a non-GAAP effective income tax rate in the range of 36% to 36.5%. In line with our original expectations, there are two factors impacting our Q2 year-over-year non-GAAP EPS guidance. First, we are expecting an approximate $0.03 net negative impact from the lapping of the periodic profit-sharing payment from our services plan portfolio that we received in the second quarter of last year. Second, we are expecting an approximate $0.06 negative impact from the carryover of last September’s services pricing investment. In addition, in digital imaging, we are now expecting an approximate $0.03 to $0.04 negative impact due to the April 2016 earthquake in Japan, which is impacting inventory availability in this high-demand category. Combined, these factors are putting $0.12 to $0.13 of pressure on Q2 fiscal 2017, which will be partially offset by an approximate $0.04 benefit from share repurchases. I would now like to turn the call over to the operator for questions.

Good morning, everyone, and best of luck, Sharon. I was wondering if we could talk about the online growth rate for the quarter. I think that's the best growth rate you guys have achieved in two years, and it's interesting because it's coming at a time that we're seeing other retailers, their growth rates decelerate and your growth rate online is accelerating. Can you maybe talk a little bit more in detail on what's going on in that business specifically? Thank you.

Yes, thank you, Matt, and good morning. We are very focused on the digital experience for a couple of reasons: one is the e-commerce channel is growing, and two, it’s impacting the entire business. Specifically, to the growth rate in e-commerce, the 24% growth rate is a very good number. It’s really the cumulative effect of the investments we’ve been making in the last three years that are impacting the customer experience. We are shipping faster, that’s a very important point. If you go on the site—and I hope all of you are regular shoppers on the site—three years ago, we’d have described our site as being clunky. Today, there are all sorts of good surprises as you shop, as you research, and as you look for information about the products. We’ve made improvements in the quarter on the checkout process. So, it’s a lot of small changes, both on the site itself and, of course, the mobile experience that we’ve been investing significantly in. So it’s the cumulative impact of the investment and improvements we’ve been making over the last three years.

Thank you very much.

Hey guys, and congratulations to Corie, and good luck, Sharon. I guess I wanted to go the same route with the e-commerce, and just as it grows—and I am actually on your website right now, and clearly, you guys have done a lot of work. How does it fit into the stores? In other words, how does it fit into the asset base and your thought process around the asset base if the growth in e-commerce continues at such a rapid clip? Does it make you think that maybe some further store closures would be on the table or no?

Well, thank you for the question. If we think of the company as a company that is here to provide a great experience for the customer across all channels, it will increasingly be difficult to measure the contribution of each channel because, as you know, the shopping journey starts online but may then be completed online or in the stores. There is a journey to the store. If you are going to buy a 4K TV, the only way to see the quality of the picture and ask questions is really in the store, but then the transaction may be completed in the store or online. Our overall goal as a company is to accelerate total revenue growth from existing and new customers so that we can create shareholder value and value for all stakeholders. In a context where total revenue would be flat, yes, it would put pressure on the economics of the business. Since the beginning of the Renew Blue journey, we have said that we would over time optimize the store footprint, and we're doing this on an ongoing basis and we are ready to continue to do that. The overriding objective, however, is to accelerate growth so that it can lift us in our journey. Sharon, anything you would like to add to this?

Yes, Hubert, I also want to point out the strategic portfolio that we have at stores because about a third of our customers still today actually choose to pick their orders up in our stores. This alignment between the online channel and the ability to let the customer receive their product either through the mail or in our store, is more about how they choose to receive it. Additionally, our stores are the magic that go behind our ship-from-store and our delivery times, which as you know, we’ve created North Star, with Amazon Prime. Our stores are essential to that process. While we have rationalized the portfolio and we will continue to do so, the stores are also working hard on a concept we’ve talked about for a long time: our value-add. The stores have a critical role in the growth, not only of our store channel but the e-commerce channel. Today, the number of orders that are actually being placed in our stores online and that capability, that Hubert talked about—capabilities that we’ve been building—have made it easier for us to convert a customer when there may be something that may not be in a store, and they want it in the stores. Our Blue Shirts are doing a remarkable job of converting that order in the store which turns into an online order. So, from a portfolio standpoint, I think our store portfolio is extremely strategic, and we will continue to rationalize it, but quite frankly, it just continues to lift its performance, and that’s great news for us.

Great. Thank you.

Thanks a lot. Good morning, Sharon. All the best to you, of course. My question relates to wireless. If you could talk about, within that mobile and computing line item, which was picked up a little bit of ground versus Q4, what you saw specifically for the wireless trend in Q1 relative to the Q4 decline that you had noted?

Yes, good morning, Matt. The wireless industry market, and there is some public information around this, has continued to be quite soft in the quarter as we anniversary a more iconic launch, the previous year. So, it’s continued to be soft, and we continue to believe that significant launches in the back half of the year can revert the trends. So really, very consistent pattern compared to the previous quarter, to be specifically answering your question.

Just adding to that, Matt, it is important to note though that when there were some new product launches in the quarter, we did see an improvement in performance, and so that gives us confidence that, as new things come to market, we have seen slight improvement in that in the back half of the quarter.

And to the extent that your same-store sales declined in Domestic computing and mobile moderated to 3.5% from 6.5%, was that improvement then in computing as opposed to wireless?

Yes, in computing, we have a very strong position. We’ve partnered with key vendors and built a superior customer experience. We are gaining share, and we accelerated our momentum in the quarter compared to the previous quarter, absolutely.

Great. Thank you.

Thanks. Wanted to follow up on the SG&A comment, and I think in the prepared comments, Hubert and Sharon, you talked about taking out costs to increase investment. So if you look at that number, if you just look at the Domestic SG&A, which was flat year-over-year, how much of that was cost out and how much of that was investment, and if we thought about it going forward, is the first quarter sort of typical if you think about the rest of the year in terms of that investment?

Thank you for the question. Strategically, we are very focused on driving efficiencies throughout the business so as to fund investments and increase our resilient cycles and improve our profitability over time. Quarter-to-quarter, things will fluctuate a little based on variable compensation and marketing. In the first quarter, we are very proud of the cost reductions we’ve made that have offset the investments. For the full year, that’s the pattern. We have talked about and will continue to drive and pace ourselves with the discipline we have. We are pacing the investment based on the cost reduction. Sharon, anything you’d like to add?

Yes, Hubert. And as you just mentioned, remember that as you look towards Q2, we are expecting to see a similar SG&A outcome dollar decline in Q2 as well. Again, that will be investments being offset by the recognition of our Renew Blue phase two cost reductions. But sequentially, Q2 is always a bigger SG&A quarter for us, especially because our advertising kicks in for our back-to-school. So when you are looking at it sequentially quarter-to-quarter, it is better to consider it year-over-year. But in the Q2 outlook, we are anticipating that SG&A at the enterprise level will look very similar to Q1 on a year-over-year basis.

Great. Thanks.

Thank you. Good morning. Sharon, best wishes to you and Corie, congratulations. I wanted to ask a question about International and I was just hoping for an update on how things are progressing in Canada. What kind of transfer rate you've been seeing from the brand consolidation and what sort of operating income and EPS benefit you are looking forward to this year? Thank you.

Yes, good morning, Brad, and thank you for your question. We are very excited about the changes we have made in Canada. It's going to take a while before things settle, because year-over-year comparisons are going to be a bit difficult to assess. The retention has been materially better than expected and much better than what we are seeing in the US. That’s a strong capability. This reflects our strong leadership position in the market and the combination of higher retention and closing stores, of course, will have a positive impact on profitability. This is going to be a smaller, more profitable business for us, and beyond the short-term profit improvement, our long-term commitment now that we have simplified the business is the ability we have to invest in the customer experience online, in stores, and in the home.

Yes, Brad—just take a look at the reported revenue on a constant currency basis, which just declined a little over 1%, and obviously, at the end of March last year, we closed a third of our stores, about 60 plus stores. When you look at that, you can see the retention is pretty exceptional, and the execution of that team has been remarkable.

And of course, it looks like it's shaping up to be a nice contributor here this year; any reason the pace of benefit that we saw in the first quarter may not continue at this rate going forward?

Yes, absolutely. The year-over-year comparison is going to be very muddy for the first few quarters. We closed stores in the middle of the quarter. We actually closed Future Shop for a full week to retrain the associates. For several months, the Future Shop stores still looked like Future Shop stores. It took us until the summer to rebrand them as Best Buy stores. If you can imagine the Canadian customer, who is very confused. There were extraordinary expenses last year as we were going through the transition. So, it’s really difficult to extrapolate. Let me be very clear. You should not assume that the Q1 results indicate the kind of improvement expected to continue. We fully expect it to be better, but year-over-year comparisons are going to be rocky for the first few quarters.

And, Brad, as a reminder, we talked about when we did the Canadian brand consolidation, which was exciting. We've been testing some work in our stores. We indicated there would be a capital investment this year; that was when we gave our outlook on CapEx for this year. There was a little more CapEx because we were going to do more work in Canada. We’ve been doing it very methodically, testing what works, and as Hubert is speaking, while we work through the year, there will be periods, especially before holiday, where we will make some of those investments, and it will lead to some puts and takes in the next couple of quarters around Canada. But there is no question that we are expecting improvement in their performance.

Gotcha. Thank you very much.

Good morning. Thanks a lot for taking my question. Best of luck, Sharon and congratulations, Corie. Hubert, the spread between Best Buy's Domestic same-store sales and the change in the category as measured by NPD compressed a bit this quarter, suggesting that your share gains moderated a bit. Why do you think that was, and is it right to expect that this tighter spread from the first quarter will persist moving forward or might it even compress a bit further from here?

Good morning, Michael. I appreciate it’s hard to track because, when we report our earnings, NPD—NPD for us is a meaningful part of the categories we talk about: 60% flat. But it excludes appliances and phones. Why the NPD category has improved, bear in mind that there is a suitable; it’s not 1.9% but probably may be between 2.5% and 3% decline of NPD when normalizing for the suitable. You have a very material decline in phones. We believe we are continuing to gain share at a pretty consistent pattern. We have not seen any material change there. Of course, it varies by category. We think that the entire strategy of the company over the last three years, on top of the cost reductions, has been systematic and significant improvements in customer experience across all touchpoints in driving share and revenue growth for this quarter. So no material changes, Michael. We will continue to monitor this, but bear in mind the softness in mobile.

Okay. Thank you so much.

Thanks. Good morning. Sharon, first off, congratulations on how much you contributed to the Best Buy turnaround, and congratulations Corie, as well. So, just following up on that question, can you talk about share in the TV category? A lot of retailers talk about deceleration in the April, May timeframe. It doesn't seem like that actually happened to you, because ex-Super Bowl shift, you are still guiding to about the same comp in the second quarter. So, what changed in the business during that timeframe? Was that PC getting better? Was that Mobile picking up a little bit more?

In the quarter, I think, compared to our expectations, computing was better. No doubt about this. The results of our partnerships with key vendors and great customer experience across all touchpoints, computing was better, and phones were softer. The week-to-week, month-to-month variations are not going to go there, because they go with this or that. But on a quarterly basis, yes, you’ve heard our Q2 guidance, and it’s very consistent with Q1. And so, we will continue to move forward with this. One element of the philosophy for the company is to manage what we can control. The focus on execution and the ability to control what we can control is key. While we are proud of what we’ve done, we have so much more to do across all channels in driving our performance, and we will continue to be focused on that.

Yes, we did gain share in television, and we’d expect to do so based on the premium experience we offer customers in our stores. We continue with the tremendous partnerships that we have with Samsung, Sony, LG, etc. With our partnerships, we have an exceptional experience in our stores. These are still new technologies for all the customers buying new 4K TVs, and we continue to offer the customer a very strong experience, which differentiates us from others. As you look at these weeks and months and interpret all the results coming out in the industry, including even the NPD data, this Super Bowl shift is a big shift for all of us.

If I may, add one word on TVs, looking ahead. Everyone would expect that various product cycles would lead to a point where we should expect to see ASP declines impact overall revenue. We do particularly well in the first part of every product cycle, and as the technology gets more mass, it gets into more places. We would expect at some point that growth in TVs will slow down or revert. We are not surrendering in advance, but as investors, be aware that this is the kind of thing that happens, so don’t be surprised when it happens.

Thank you.

Thanks, congratulations, Sharon—and we'd welcome you out of retirement anytime. A question on Renew Blue Two. I think you are now at $200 million of savings, about halfway to that $400 million goal. It seems like it's going well and maybe faster than you've been expecting. There are any large items on a future list that’s not part of that bucket yet that you can’t touch because you are waiting for other capabilities to fall into place? Just thinking about ways you can get upside to those numbers.

Yes, the pattern over the last few years has been to increase the number when we achieve the initial target. Remember, when we had announced $725 million, we later increased it to $1 billion once we had achieved that $725 million. We fully expect to continue that pattern. This said, in this new phase, this lean approach is very exciting, as it simultaneously improves the employee experience, customer experience, and cost structure. There are a lot of opportunities with overall product flow integrated supply chain, which includes work we still need to do on returns, replacements, damages, and end of life. While we typically look at one step at a time, the overall cost structure and process improvement opportunities give us optimism about what can be achieved. The teams are very busy at work, they are methodical, and we’ll keep you updated. We are not going to give a specific number today, but we are confident that we will have ongoing improvements in this area.

And the $400 million goal is by the end of next fiscal year?

We had given three years. So that would be correct.

Thanks. Good morning, and Sharon, congrats again and obviously Corie, congrats to you, as well. I just want to follow up on one of the last questions about the near-term outlook. You just did flat comps basically with a 70 basis point benefit from the Super Bowl. You are guiding to flat comps in Q2, which would imply something is getting better, and you have a pretty difficult comparison in that quarter. So, any more color on how you are thinking about that and what gives you confidence in that underlying trend? Thanks.

Yes, so the categories that we expect to continue to do well are those we’ve mentioned—health and wearables, home theater, and appliances—where we have a strong continued track record, offset by phones and tablets, and we have referenced the digital imaging piece. The variations you’re talking about from one quarter to the other are pretty small. So this is our team’s best estimate based on the improvement in customer experience, the promotional calendar, and momentum in various product categories. We are focused on delivering that. Even if you take the Super Bowl piece, it's less than 100 basis points. It is pretty small, but we are on it.

Okay, that's helpful. And just one follow-up question about the mobile category, specifically, how you are thinking about Best Buy Mobile standalone stores? So I realize there is some optimism about the second half outlook, but the growth of the category has been a little bit more challenged. Is there any more color you can provide on how those Best Buy mobile standalone stores have performed, even just in relative terms, from a profit perspective, and if there is an opportunity to maybe accelerate some of the closings, I think you still have about 350 of those stores?

So our Best Buy Mobile stores actually play a very strategic marketing role for us at Best Buy. We are going to have cycles in mobile ups and downs. These are our smaller stores. These teams, in our mobile stores, have some of the highest NPS scores in the entire mobile business due to the specialty nature of how we can serve our customers in those stores. They also tend to fit in malls, while our big box stores do not. This means they have a very strategic marketing role. We’ve stated for several years now that when you are modeling our business, you really need to model the big boxes; the mobile stores serve more as marketing and customer service vehicles. With that said, we’d certainly not want you to model for significant increases in profits over the years—these stores are quite small. Rationalization is always an option, and we have closed some stores. But at this point, there is no major plan to further rationalize that portfolio. We think the free marketing these stores provide while also allowing customers a great experience is a compelling reason to keep this fleet running.

Okay. Thanks again, and best of luck.

Thank you.

Hey guys! Can you provide any more color on the TV business? What are you seeing today in terms of unit velocity versus ASP compression and how do you expect that to play out in the second half?

Yes, you do have ASP compression year-over-year, which makes 4K large screen TVs very exciting to buy. Average selling prices are quite material. For NPD, the decline for 4K average selling price is approximately 30% during the period we’ve had. We expect this to continue in the back half. We remain very confident in the experience we have built for customers in stores; customers wanting to buy a 4K TV will want to buy it from us.

Great, and just a clarification there. If we continue to see ASP declines, with presumably some further acceleration just from a seasonal standpoint, what are we thinking about, in terms of actual revenue from the TV category? Is unit velocity enough to offset the ASP declines, or are we getting to that point where, as you referenced earlier, TVs may not necessarily being growing at that point?

Yes, of course. Looking into the back half of the year, last year we had some significant ASP declines, but, to your point, there will be a point in time to call exactly when the ASP decline impacts overall revenue in the industry. This is a big category for us; we are doing well with it, but there will be a point where we should expect to see that.

Okay, I'll follow-up. Thank you.

Thank you.

Thanks. Two questions: One, just on product category, and I know it's early, but just wondering your thoughts on virtual reality, and if that can help drive the mobile business at all in the second half. And then, my unrelated but thrown in question: buybacks appear a little bit lower than of course in the fourth quarter, but it looks like, if we look at last year, you also did not buy a lot of shares in the first quarter. So do we expect a similar type pattern to play out, not a lot of buybacks in the first quarter, and then accelerating through the year?

Yes, I’ll let Hubert take virtual reality; I’ll come back to you on share repurchase.

Yes, virtual reality is a very exciting technology. I bet you have all seen that we were the exclusive place where you could try the Oculus in our stores, so there’s a lot of excitement there. The impact on the business this year will be very marginal, so I think it’s exciting from a consumer standpoint but very small from a revenue standpoint.

Yes, Hubert. It really is the way our pattern has been since we’ve been buying shares back. Remember that we are out of the market until we get our information out there due to year-end earnings releases. So, we are always going to be a little lower in the first quarter, and you guys can probably expect that. We are absolutely committed to our $1 billion repurchase over the next couple of years. We are all in on that.

Thank you.

Hi, good morning, and I will add my congratulations to Sharon and Corie—the long list of congratulations. In our store checks, we see the Blue Shirts very engaged and consultative over the last quarter or two, not that they weren't before, but sort of reaching a new level. I know you've been working on that. Could you talk about how that focus works at the store level? Could you talk about how we should think about that impacting the business? Is it building steam, or is there some sort of lap we should understand in that emphasis?

David, thank you so much for your comment! The engagement and proficiency our Blue Shirts are exhibiting has been a key area for us, and I want to publicly recognize their work. The work on developing that engagement has been focused on developing coaching. This entails spending time with your supervisor every day looking at results and discussing ways to improve. The individual performance of each associate drives the performance of Best Buy, and we believe there is room to continue driving that performance. Our teams are not only focused on providing value but also looking at product knowledge and selling skills, which is crucial. All of this manifests itself as stores get traffic, and the focus should remain on performance across all channels. So, in conclusion, thank you for joining us today. We had a very strong quarter. I want to congratulate all of our teams. We are very excited to continue working on our key priorities, and I want to join everybody in congratulating Sharon and Corie. I know Corie is very much looking forward to it, and Sharon will be here in an advisory role until the end of the year to help make a seamless transition. Thank you for your attention, and have a great day.

Bye guys.