Best Buy Co. Inc (BBY) — Q3 2019 Earnings Call Transcript

Good morning and thank you. Joining me on the call today are Hubert Joly, our Chairman and CEO; and Corie Barry, our CFO. During the call today, we will be discussing both GAAP and Non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning’s earnings release, which is available on our website. Some of the statements we’ll make today are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may address the financial conditions, business initiatives, growth plans, investments and expected performance of the Company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the Company’s current earnings release and our most recent 10-K for more information on these risks and uncertainties. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the call over to Hubert.

Good morning, everyone, and thank you for joining us. I will begin today with a review of our third-quarter performance, provide an update on our progress as we implement our Best Buy 2020: Building the New Blue strategy and share our excitement for the holiday season. I will then turn the call over to Corie for additional details on our quarterly results and our outlook for the fourth quarter. In summary, the team just delivered another strong quarter and we continued to make progress in the implementation of our strategy. We are excited about our continued momentum and the opportunities we have ahead of us. Specifically, in the third quarter, we grew enterprise comparable sales by 4.3% on top of 4.4% last year, and we delivered non-GAAP diluted EPS of $0.93, which is up 19% compared to last year. We also continued to enhance the experience we provide to our customers across the many ways they interact with us. Our top-line performance was driven by positive comparable sales across all channels, geographies, and most product categories. Similar to the first half of the year, our strong revenue growth in the quarter was helped by a favorable environment and driven by how customers are responding to the unique and elevated experience we are building. Our non-GAAP earnings per share outperformance was driven by a better than expected gross margin rate and helped by a lower than expected tax rate. I would like to thank our associates across the Company for their hard work and dedication in delivering these great results. I am equally appreciative of their passionate focus on implementing our Best Buy 2020 strategy and on continuing to build a Company that has a unique, competitive positioning and a strong human, purposeful culture. Let me start with how we are expanding what we do for our customers. Last month, we completed the acquisition of GreatCall, a leading connected health services provider for aging consumers. GreatCall’s life in its new home is off to a great start. We are working together to bring existing solutions to more customers and help fuel future growth in both consumer and commercial markets. As such, and as a first step, we’ve recently rolled out new dedicated endcaps in our mobile department that showcase GreatCall’s easy-to-use mobile phone products and connected devices tailored for seniors, which come with a range of relevant services. For example, with GreatCall’s five-star service through a simple one-touch connection, customers can talk to U.S.-based specially trained agents who can connect them to family caregivers, provide concierge services and dispatch emergency personnel. Beyond this, we are excited about the opportunities that lie ahead for us to help aging consumers live longer in their homes with the use of technology, something that can provide significant benefits for seniors and their families, as well as for payers and providers. During the third quarter, we also continued to see encouraging results from our Total Tech Support program that we rolled out nationally in May. Customer signups as well as fulfillment costs are tracking in line with our expectations. Having a service that provides unlimited Geek Squad support for all technology, no matter where or when they bought it, is a compelling and unique value proposition for our members. In addition, discounts on installations, protection, and in-home services provide customers with another reason to grow their relationship with Best Buy. Let me now say a few words about how we are evolving and how we sell. During the quarter, we expanded our free in-home advisor consultation program to approximately 530 advisors, compared to 300 at the nationwide launch a year ago. We are pleased by both the ongoing customer demand and the fact that the performance of the program continues to track in line with our expectations. As expected, it is proving to be an important part of our strategy to build deeper and more relationship-based experiences with our customers. We are continuing to invest in customer experience enhancements. For example, we just rolled out the ability for our customers to make an appointment with an advisor while they are still in our stores, rather than leaving the store and waiting for us to call and schedule an appointment. Regarding our efforts to improve the multi-channel shopping experience, we’re especially excited about the ways in which we are making it easier for our customers to use the Best Buy app to shop online and in our stores. Let me give you a few examples. Frequently, we see customers in-store trying to compare multiple products to one another, including specs, price, reviews, or features. With the Best Buy app, they can now use their phone to scan products and use an in-app feature to easily compare the results. If they want, they can save these results for later if they’re still researching a purchase. We also recently launched a new functionality that makes it much easier for customers to find open box items both online and in-store. In addition to increasing the ease of shopping, this feature raises customer confidence in purchasing these types of products by being clearer about the meaning of different condition categories, as well as the eligibility of any existing manufacturer’s warranty or Geek Squad protection. The app also makes it easier for customers to determine whether a given product is currently available in the local store. Taking it one step further, we just launched a feature that can notify a customer if a product in their online cart is currently available in the store they are in. This is helpful because customers often use the online cart as a way of keeping track of products they’re interested in. In fact, 72% of customers who use the app come into one of our stores with an item already in their cart and we now have the ability to tell them in the moment that the product is available for purchase. The last example is one of our customers’ favorites. We call it the On My Way feature, which allows customers buying large items to use the app to tell their local store that they are on their way to pick up their purchase. This message allows our Blue Shirt associates to have the item ready for pickup at the front of the store, making the in-store pickup experience faster and more pleasant for the customer. These innovations, along with the dozens we've rolled out in recent quarters, continue to blur the lines between online and physical shopping. This is increasingly how our customers want to shop, and our innovation pipeline closely mirrors and enables this changing behavior. Consequently, our in-app conversion rate is up, and the usage of the Best Buy app by customers while they are in our stores has increased significantly. In Q3, we continued our focus on driving productivity and cost takeout to help offset investments and pressures in the business. We achieved approximately $90 million in additional annualized cost reductions bringing the cumulative total to $465 million since Q2 of fiscal 2018 towards our goal of fiscal '21 goal of $600 million. As we’ve discussed, we are investing in a range of enablers that are necessary to execute our Best Buy 2020 strategy. Most of them are multi-year investments in areas such as specialty labor, enterprise customer relationship management, knowledge management capabilities, our services platform, and our supply chain. We’re tracking according to plan on our investments, and we are pleased to see how they are beginning to return. For example, in supply chain, we’ve seen our net promoter score for metro home delivery of large appliances and TVs increase more than 1,700 basis points over the last two years. This is due to investments in things like new metro delivery pads located close to customers, as well as a 60% increase in our distribution center square footage, which significantly decreases reliance on outside space and increases efficiency and accuracy. We have been a pioneer in fast and free delivery, and we continue to invest in our capabilities because we know how important speed is to our customers. So, in Q3, we delivered about 80% of small packages in two days and almost a third were delivered the next day for free and with no membership fee required. We have also been one of the leaders in buy online and pickup in-store, even with all of the great shipping options. Many customers find significant value in picking up their purchases in our stores whether it is because they want it right away or simply want to control the timing. In fact, we have seen seven straight quarters of growth for in-store pick-up as a percentage of online sales, and more than 40% of our online revenue is now picked up in our stores. We are continuing to invest in labor. We’re investing in specialty labor in areas such as in-home advisory, appliances, and smart home. We are also investing in the compensation and benefit of our associates. Two things I want to highlight. Number one, because of the investments we’ve made, we are competitive in the marketplace. In fact, our employee turnover rate in stores has been materially reduced over the last couple of years and is now in the low 30%. Second, the current industry trends we are all seeing are relatively in line with the expectations we had when we addressed the topic of wage pressure at our Investor Day last year. Our strategy here has been to approach the topic holistically. While starting base pay is of course important, we always look at creating an attractive overall employee value proposition including hourly wages, incentives for both full-time and part-time associates, employee benefits, skill developments, career advancement, and importantly, a purposeful human culture. And on the topic of benefits, we are excited about some of the unique benefits we offer to our employees including the employee discount on all of the cool stuff we are selling and tuition reimbursement, as well as four newly announced benefits including paid caregiver leave, backup childcare, paid time off for part-time employees, and enhanced mental health resources. Staying on the topic of people, I am excited to share that during the quarter, we promoted two key leaders to new and expanded roles in support of our Best Buy 2020 strategy and to help us accelerate our progress. So, first, Corie Barry, our Chief Financial Officer, has been promoted to Senior Executive Vice President, Chief Transformation and Finance Officer responsible for orchestrating our transformation. In addition to finance, Corie now oversees our strategic growth office, our health business, and a newly created transformation team in our digital and technology organization. All of you know Corie of course, and the strong skills and experience she brings to this expanded role. This focus on transformation underscores the major pivot we’re making as an organization with our Best Buy 2020 strategy as we are moving from a transaction to a relationship orientation and evolving from a product to a need-based solution orientation. Second, Mike Mohan has been promoted to Chief Operating Officer of our U.S. business, responsible for running the domestic business and in partnership with Corie, getting us to where we want to be as a company. As you know, Mike has been with Best Buy since 2004 and has been responsible for our merchandising, marketing, and supply chain functions. He now has added all the channels including online, in-store, home, and our services teams to his scope. Over the last several years, Mike has demonstrated his ability to lead and drive change in large and complex businesses. I am personally very excited to work with Corie and Mike in this new construct and continue to work with our team on our strategy and our growth plans and on continuing to strengthen our culture. I could not be more inspired by the opportunities ahead of us as we implement our Best Buy 2020’s Building the New Blue strategy. I know that you would all want to join me in congratulating Corie and Mike for their new expanded responsibilities. Looking immediately ahead, we are excited about our holiday plans and everything we have to offer our customers this holiday season. What matters, of course, during the holiday includes assortments, deals, product availability, help, convenience, and speed. Our team has put together a best-in-class assortment, prepared an amazing set of deals, and ensured we have great inventory availability across other product categories we carry. This makes us a natural destination for everything tech related, including TVs, computing, gaming, a growing toy assortment, phones, smart home devices, and large and small appliances. We released our Black Friday ad two weeks ago with 52 pages of the best deals of the holiday to help our customers find the best deals for their friends and families. Notably, this will be our first holiday with Total Tech Support and we are excited to offer it to customers as a giftable item. This is the number one thing our retail teams have been asking for since the launch of Total Tech Support last May. It is a great way for gift givers to ensure the technology they’re giving to their loved ones will be set up and working as it should be. Once again, this year, we offer our customers compelling delivery options such as free shipping on everything all season long, fast in-store pickup that can be ready in one hour, and same-day and next-day delivery options. We also materially upgraded our online gift center and our new gift finder will make it easier to get just the right gifts for kids, teens, parents, grandparents, significant others, and families. For customers in our stores, our Blue Shirt associates, Geek Squad agents, and in-home advisors are ready to help our customers find great gifts and solutions. Whether you’re shopping digitally or in our stores, Best Buy can help customers find gifts for everyone on their gift list. Now, beyond the holiday, we continue to be excited by the opportunities that exist for us in the marketplace. We like the continued rate of technology innovation and the capabilities technology can bring to people’s lives. We like our opportunity to offer customers a more consultative approach to truly address their needs, provide them an increasing range of services and solutions, expand our relationship with them, and become a bigger part of their lives. And we particularly like the opportunities we have in the connected health space following the acquisition of GreatCall. Before I turn the call over to Corie to review the results and our outlook, I’d like to share some key facts and thoughts on the subject of tariffs. We estimate that the latest $200 billion list, the 22 affecting September touches only about 7% or about $2.3 billion of our total cost of goods sold, and many of the products on this list are accessories. The expected impact of tariffs on our business for the remainder of this fiscal year is reflected in our guidance and is expected to be minimal. The reasons why it is expected to be minimal that the tariffs only impact a very small portion of our business, the current rate is only 10% and their costs are being mitigated in a variety of ways. Looking into next year, I would say three things today. One, as you know, this is a dynamic situation with the expectation as of now that the tariff on the current list increases to 25% on January 1; two, my personal view is that while the journey may not be linear, the trade negotiations with China will progress; three, we believe that working together, our vendors and our team have at their disposal a range of effective ways to mitigate the effects of tariffs, which is precisely what we are working on. And we will, of course, continue to update you on this matter. In conclusion, we are, as you can tell, energized by our continued momentum and overall performance and encouraged by the progress we’re making in implementing Best Buy 2020: Building the New Blue strategy. We see significant value generation opportunities ahead of us by successfully enriching lives with technology and providing services and solutions that solve real customer needs. Lastly, I want to extend my sincere appreciation to our associates for everything they are doing for customers this holiday season. You are amazing. Thank you for what you do. I’d like to turn the call over to Corie for more details on our Q3 performance and our Q4 guidance.

Good morning, everyone. Before I talk about our third-quarter results versus last year, I would like to talk about them versus the expectations we shared with you last quarter. On enterprise revenue of $9.6 billion, we delivered non-GAAP diluted earnings per share of $0.93, both of which exceeded our expectations. We saw better-than-expected top-line results in our mobile phones, gaming, and wearables categories. Our operating income rate was at the high end of our expectations, driven by a slightly favorable gross profit rate. Compared to the guidance we provided last quarter, a lower-than-expected tax rate provided a $0.03 benefit that was partially offset by the impact of Hurricane Florence and Michael, which had a negative impact of approximately $0.02 with only a minor impact on revenue. Consistent with last year, we made decisions to support our employees, our customers, and our communities by continuing to pay our employees who performed volunteer work while their store was closed. These efforts come at a cost, but they are the right things to do. Additionally, the inclusion of GreatCall had a negative impact of approximately $0.02 per share, which was not included in the guidance we provided last quarter. I will now talk about our third-quarter results versus last year. Enterprise revenue increased 2.9% to $9.6 billion, primarily due to the comparable sales increase of 4.3%. Enterprise non-GAAP diluted EPS increased by $0.15 to $0.93. This increase was primarily driven by a $0.09 per share benefit driven by a lower non-GAAP effective income tax rate and an $0.08 per share benefit from the net share count change. Our Q3 operating income rate was higher than expected but still lower than last year, as expected, due mainly to higher supply chain costs and the rollout of our Total Tech Support program. Our comparable sales growth of 4.3% included a negative 70 basis-point impact from the calendar shift. As we have discussed in previous quarters, our reported comparable sales are computed on like-for-like fiscal weeks and are not shifted to more closely align calendar weeks, following last year’s 53-week year. As we shared with you last quarter, in Q4, we expect the calendar shift to have a positive impact of approximately 50 basis points on our reported comparable sales. In our domestic segment, revenue increased 3.1% to $8.8 billion. This increase was primarily driven by a comparable sales increase of 4.3%, partially offset by the loss of revenue from 287 Best Buy Mobile and 19 large-format store closures in the past year. From a merchandising perspective, the largest comparable sales growth drivers were mobile phones, gaming, appliances, wearables, headphones, and smartphones. These drivers were partially offset by declines in our tablet category. Domestic online revenue of $1.21 billion was 13.8% of domestic revenue compared to 12.7% last year. On a comparable basis, our online revenue increased 12.6% on top of 22.3% growth in the third quarter of last year, primarily driven by higher conversion and increased traffic. In our international segment, revenue increased 0.6% to $834 million. This was primarily driven by comparable sales growth of 3.7% in both Canada and Mexico and incremental revenue associated with six new large format store openings in Mexico over the past year. Partially offsetting these gains was an approximate 460 basis points of negative foreign currency impact. Turning now to gross profit, the enterprise gross profit rate decreased 30 basis points to 24.2%. The domestic gross profit rate was 24.4% versus 24.7% last year. The rate decline of approximately 30 basis points was driven primarily by higher supply chain costs from both investments and higher transportation expenses as well as the national rollout of our Total Tech Support offer. Both of these were in line with the expectations we shared last quarter of approximately 50 basis points of combined pressure. These pressures were partially offset by higher overall product margin rates, which included the benefit from our gross profit optimization initiative. The international gross profit rate of 22.2% was flat to last year. Now, turning to SG&A. Enterprise non-GAAP SG&A was $1.98 billion or 20.7% of revenue, which increased $52 million and was flat to last year as a percentage of revenue. Domestic non-GAAP SG&A was $1.81 billion or 20.6% of revenue versus $1.75 billion or 20.6% of revenue last year. The $55 million increase was primarily due to growth investments including specialty labor and higher depreciation expense; higher incentive compensation; GreatCall operating expenses; and higher variable costs due to increased revenue. These increases were partially offset by cost reductions. International SG&A was $178 million or 21.3% of revenue versus $181 million or 21.8% of revenue last year. The $3 million decrease was primarily due to the favorable impact of foreign exchange rates. On a constant currency basis, SG&A increased $5 million. The increase was primarily driven by new stores opened in Mexico in the past year and higher depreciation expense in Canada. On a non-GAAP basis, the effective tax rate decreased to 22.7% from 30.4% last year. The lower effective tax rate was primarily due to the reduction in the U.S. statutory corporate tax rates as a result of tax reform. From a cash flow perspective, we ended the third quarter in line with our expectations. We returned $493 million to shareholders in the form of share repurchases and dividends. In Q3, we completed a public bond offering for $500 million and 4.45% notes due in October 2028. The net proceeds from the sale will be used for general corporate purposes and replaced the $500 million and 5% notes that matured and were retired earlier this year during our second fiscal quarter. Our acquisition of GreatCall for $792 million in net cash consideration was funded with existing cash and is not expected to impact our previously communicated plan to spend $1.5 billion on share repurchases this fiscal year. Finally, our ending inventory balance increased 23% and our accounts payable increased 21% compared to the third quarter of last year. These increases were primarily due to the calendar shift this year, which results in Q3 ending a week closer to the holiday season. On a like-for-like calendar basis, our Q3 ending inventory balance increased approximately 7%, which was slightly higher than expectations from last quarter. This was due to decisions we made to bring in receipts early in response to pressure within the international and domestic transportation industry due primarily to tariffs and weather, as well as some product launch timing shifts. Overall, I am very pleased with the health of our inventory. I would now like to discuss our guidance. We are raising our full year guidance for revenue and EPS to reflect the outperformance in the third quarter. For Q4, our guidance is consistent with the expectations that were implied in the guidance provided on our last call. This is despite approximately $0.04 of negative impact that was not contemplated in our Q2 call from GreatCall and a lower profit share benefit from our services plan portfolio than originally expected. As a reminder, the extra week in the fourth quarter of last year added approximately $760 million in revenue and approximately $0.20 of earnings per share. Our Q4 outlook is as follows: Enterprise revenue in the range of $14.4 billion to $14.8 billion; comparable sales growth of flat to up 3%; domestic comparable sales growth of flat to up 3%; and international comparable sales growth of flat to up 3%. Non-GAAP diluted EPS of $2.48 to $2.58; our Non-GAAP effective income tax rate of approximately 25%; and our diluted weighted average share count of approximately 275 million shares. A few additional comments on the fourth-quarter guidance. As I mentioned earlier, the calendar shift is estimated to be a benefit to Q4 domestic comparable sales of approximately 50 basis points. We expect to see a flattish gross profit rate compared to last year as approximately 25 basis points of supply chain pressure and a $50 million lower profit-sharing benefit are partially offset by slightly better year-over-year merchandise margins, including the impact from the gross profit optimization initiative and the impact of GreatCall. The $50 million negative impact from the lower profit share payment is $10 million higher than what we guided last quarter. We expect our SG&A dollars to decline in the low single digits due to the extra week last year and lower short-term incentive compensation, partially offset by the impact of GreatCall’s operating expenses. Our full-year guidance now stands at: Enterprise revenue in the range of $42.5 billion to $42.9 billion; enterprise comparable sales increase of 4% to 5%; non-GAAP operating income rate of approximately 4.5%, which is flat to fiscal 2018’s rate on a 52-week basis; non-GAAP diluted earnings per share in the range of $5.09 to $5.19, an increase of 15% to 17%, this represents an increase of 21% to 23% when compared to fiscal 2018 on a 52-week basis; a non-GAAP effective income tax rate of approximately 24%; and capital expenditures of approximately $800 million to $850 million. I will now turn the call over to the operator for questions.

Hi. Good morning. Thanks for taking my question. One of the statistics that you put in your prepared comments was that more of your product is being picked up in-store. I know that’s been a big initiative for you guys and a lot of retailers. As you leverage the store and as customers come to pick up their products, I just wondered if you could walk us through how that contributes to the overall profitability and how we can expect that contributing going forward.

Yes, Kate. That has been a trend that we’ve been seeing. One of the things we’ve actually talked about, because the other kind of flavor on this question is, how do you think about the difference in profitability between the various channels and how is that evolving over time? We’ve talked a lot about, in our business, what we actually see as less difference between the profitability in the channels always with the caveat that things like this exactly make it very hard for us to pull the channels apart. But, this is part of the reason that the overall profitability of our online channel in particular has continued to improve over time. It’s a combination of both experiences on the site, but also ways in which the customer is choosing to come pick up their own merchandise versus necessarily wanting to shift straight to their home in every instance. This is definitely a big part of what has helped us create a more robust online profitability profile.

If I can ask one other unrelated question just about GreatCall. I know it’s early days; it has only been a couple of weeks. But, I just wondered if there have been any early learnings since it’s been part of your portfolio and how we should think about your strategy with regards to M&A going forward?

Any early warnings?

Learnings.

Oh, learnings, yes. Thank you, Kate. So, yes, we are very excited about the GreatCall acquisition. It’s completely in line with our strategy of addressing key human needs. The company we acquired, I have to commend our team for the extensive due diligence we did, in particular, ensuring the cultural fit. When we acquire a small company, it’s really important that the alignment of missions is very, very strong. So, the lesson for us, Kate, because we’ve not done acquisitions in a long time, was all of the pre-signing and pre-closing preparation to ensure a very smooth integration has been very positive. The other lesson for us is that the opportunities for us to help aging seniors stay in their homes longer through technology—we are more excited than ever about this. Sometimes, you wake up after an acquisition, and think, oh, my God, what have we done? No, we feel very, very positive about this. We’ve said in our capital allocation strategy that our priority was to invest cash flow in improving the business, both organically and inorganically. This gives us—we’re paying a lot of attention to this first acquisition because success there, of course, increases our confidence to do more. Our level of excitement is very good. I want to take the opportunity to salute anybody from GreatCall listening; they’re a great member of our team, and teams are working really well together, so we feel very good. Corie, anything you would add?

I would just add one more financial clarifier, so that it doesn’t send unintended messages. We are very excited about working with the team. We do still expect the impact of the acquisition to be neutral on a 12-month basis. But you heard me call out a couple of impacts here in Q3 and Q4. Those are more about the early part of the business. One, we have some revised opening balance sheet assumptions, which can happen anytime you have an acquisition like this. Two, we're accelerating some of the customer acquisition costs, which I’m going to call a high test problem, meaning we believe some of the things we can do together means we can acquire more customers here early in our life together, and that obviously pays dividends over time as that customer is on their plan and is a customer with us hopefully for life. I just want to make sure people understand that, that's not that that business is performing differently than we thought, it's just a bit of how it timed out amongst the quarters.

Good morning. Congratulations, Corie and Mike, on the promotion. My first question is on the zero to 3 guide for Q4. I think Corie, you suggested the same on the Q3 call. The consumer seems fine, and Hubert reiterated the favorable backdrop. What's changed a little, at least since then, is you had some competitor actions maybe around shipping, and then Amazon apparently will have some product they didn't have. I’m sure you’ve factored competition in, but I was curious if anything surprised you from when you started thinking about the zero to 3 to now?

Not so much the price. I mean, look, the consumer and competitive environment during this time of the year in particular is always evolving. It’s one of the things that we’ve actually talked about pretty often; how the behavior even of the consumer, how we think about the marketplace in Q4 is a little bit different than how we think about it for the rest of the year. You're absolutely right that we are doing everything we can to take into account both what we see in a consumer and a competitive positioning as we think about Q4. And yes, there have been changes, but at the same time, we continue to accelerate some of our own strategic advantages and continue to feel very well placed in the marketplace.

Thanks. My follow-up, maybe for you Hubert. Just to drill down a bit on the mobile business. How do you sort of put a fortress around it? And then, can you share with us, like if you look at your Elite Plus customers, what percentage of them are buying mobile through Best Buy, just shopping the category, I’m thinking like just as a phone as a primary purchase?

So, Simeon, you said build a mobile business fortress around the mobile business. Can you elaborate on your question a little bit? Because we’re not in the fortress building business. So, tell me more about your question.

Yes. Look, how do you keep that customer loyal to buying, upgrading their phone, renewing through Best Buy as the years go on? I think some customer survey research that we have from a couple of years ago, which shows that the captive, as well as the Apple Stores, seem to be taking share as a whole. So, now, there’s some more competitive entrants, if you will, if Amazon does become a first-party seller of the phone. So, how do you keep the customer there? And just what is the importance of that customer to the business?

Yes. I will start, and then Mike, if you want to elaborate, that would be great. We have been investing significantly in that part of the business, particularly through the initiative for Mobile 2020. You’ve seen that in our stores. So, that’s in partnership with the carriers. Buying a phone is actually a complex experience. We do well compared to other players when the items that we’re selling are either very large or complex to buy. We’ve invested in systems to streamline the buying process in the stores, making it shorter. We’ve had these menu boards to make it clear for customers to know what the promotions were. Of course, the fact that we have Verizon, AT&T, and Sprint in our stores is a unique advantage. We’ve increased labor and the proficiency of the associates, both our own associates and the carriers’ associates. We have, of course, the display of the major brands of phones, Apple, Samsung, and increasingly Google. So, that’s the unique experience. That being said, phones are now the category where we have the highest market share. There’s a lot of options with the carriers, and Apple does have an advantage, but we feel good about our momentum and our continued investment in the customer experience.

Thanks, Hubert. Good to talk to you, Simeon. What I would add to complement what Hubert said is, our phone business is complicated; so people want to think about their relationship with the carriers. The one thing that Best Buy has done is try to simplify the experience, whether it’s in our stores or online, when you can actually talk to a qualified expert. You can review your plan with us, we can compare plans to other carriers—we’re very objective about that—and you can compare an iOS ecosystem to an Android ecosystem. We still believe, even though the consumer is truly, and you know the statistics probably better than I do, delaying their upgrade purchase, that means they’re keeping their phone longer and they want to do other things with it. We are rolling out the number of stores we can do Apple Glass repairs in this quarter as well. This is a key thing that consumers are going to need more help with as they keep their devices longer. We look at that as a stand for what we can do for customers that's different than an e-commerce-only distribution avenue or even what Apple can handle in their own stores.

Great. Thanks. Good luck in the fourth quarter.

Thank you. Operator, the next question comes from Joe Feldman with Telsey Advisory Group.

Hi, guys. Thanks for taking the question. I wanted to ask about the inventory again. I know it sounds like it's in good shape, and you guys did bring forward. What was causing the early receipts? Was it trying to get in front of tariffs at the turn of the year, or was it a logjam created by others related to tariffs, or can you share a little more color there?

Yes, absolutely. Let me try first. The 23% increase that we saw in inventory, about call it 16%, 17% of that was just due to the shift of the calendar weeks. So, literally, once you line up the calendar weeks to how much difference it makes, because you bring in so much inventory each week here. So, literally, if I just line up the calendar weeks, that leads to a 7% overall increase in inventory, first of all, not that out of line with the sales happening in the quarter. Second of all, yes, we have clearly made some proactive decisions. There has been more activity in especially the ports and some of the deconsolidation areas, both due to a lot of companies bringing more in due to tariffs and also some of the typhoons that have caused some weather delays and things being more lumpy and spotty. I give our inventory demand planning teams a lot of credit for working hard to ensure we were well prepared in phasing that inventory in early so that you would absolutely have it. One of the largest NPS drivers that we've had continues to be inventory availability. We felt it was really important for us to have the products that people want as we bring them in. You can see it's all basically new and fresh given the corresponding increase in the payables balance as well.

Thank you. And then, just a follow-up. As you think about the holidays and the season, obviously, the promotions seem like they've started sooner or at least getting better sooner. Have you guys seen—or can you comment on any response? I know it's a current quarter, but if there is any color you can give there, or asked another way, are there any particular catalysts that you're looking for this holiday season or any key products that you think might be the big winners for the season?

There is such an amazing set of exciting products for the holiday. One of the things that I'm excited about this category is the continued innovation. What's great about this holiday is that there is excitement across many, many different categories. Gaming is going to be particularly hot. There is a number of great titles, the Nintendo, Super Smash Bros; Red Dead Redemption 2; and Call of Duty: Black Ops 4. TVs, I think continue to be a big item: people moving to larger screen and smart TVs. We have a partnership with Amazon there with the Insignia and Toshiba 4K USB Fire TV additions. Broadly speaking, a lot of excitement around TVs, streaming devices, voice assistants with screens. If you bought a voice assistant last year, here is the good news: you can buy a new one with a screen. I have a few on my kitchen table—lots of functionalities there. New phones, there have been a number of great new phones that have been launched: health, both Fitbit and Apple. Appliances, lots of excitement, small appliances—great gifting items across mixers, pressure cookers. I don’t cook, but I’ve heard major appliances. There is a lot of—this is a more promotional time of the year for appliances than I think ever before—and then security doorbells. So, there is a lot of excitement for people to come to our stores or shop online with us, or we will come to you. That’s one of the reasons why we’re excited about this holiday; of course, there is the general consumer confidence, but there are a lot of reasons. We can take care of your entire list, so just one trip and you’re done.

Joe, specific to your question around the competitive environment. I mean, I think the earlier start to the season is definitely a phenomenon that we’ve been seeing over the last few years; it’s something we have taken into account in our own competitive positioning and in our own promotional cadences, as reflected in the guidance that we give you for Q4. We always talk about how the holiday continues to change, it continues to shape differently, and we continue to have a team that does an amazing amount of work to make sure we feel really prepared to compete as that holiday season continues to evolve.

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

Thank you.

So, with regard to the buy online pick-up in store, in your prepared comments, you talked about this part of the business continuing to strengthen. One, is this something that Best Buy is encouraging customers to do or is it more of a reflection of the natural evolution of the online market? And then, as far as—and I’m sure you’ve looked at this—as a customer chooses to pick up a product in store versus having it shipped to their homes, where is the benefit for Best Buy? Is that the overall maybe better profitability or the add-on sales as that customer comes to the store?

Yes. On the first point, yes, this is the customer choice. As a customer-focused, customer-obsessed company, we’re not going to try to make the decision for the customer. If you look on our site or in the app, the decision is really up to the customer. There is no financial incentive one way or the other. That’s what we said in the prepared remarks. There are unique benefits to picking up in-store. You can get it in less than an hour. The speed is pretty crazy, knowing that 30% of the U.S. population lives within 15 minutes of a Best Buy store. You can control when you’re going to get it. By the way, if it’s a gift during the holiday, you may not want to have the gift show up at your home and whatnot. It’s really a customer-driven phenomenon. The benefits to Best Buy—of course, there’s shipping, there are additional items, and we love to see the customers in our stores. We can help them with any questions, and they tend to buy more stuff as well, which we love. But this is not what is driving it. We want the customer to have the opportunity to choose and get the best possible experience. Because we’ve been doing this for so long, we’ve had the opportunity to really improve the process, invest in the systems, invest in the labor, invest in the overall customer experience, and we’re seeing good results. Corie or Mike, if you want to add?

No. That’s okay.

Okay. That’s very helpful. Just one quick follow-up question. With regard to real estate, in your release, you mentioned, obviously we had the Best Buy mobile stores closed and then some repositioning of your larger format stores too. Any thoughts on how we should expect that effort going forward—repositioning?

We've been pretty consistent on our real estate positioning, which is we're lucky in that we get to see a number of leases every year. Right now, we're seeing about 130 leases per year. We're looking at all of those stores, and not just the stores, but importantly also the markets to try to understand how best we can serve the consumers in those markets. We continue to make sure we're making the best decisions for every market and therefore refining down the market positioning. But, I don't think you're going to see any massive speed up; you're not going to see a change in the overall positioning. You're just going to see us continue to make sure that we feel like the footprint by market reflects the needs of the consumers in that market.

Alright. Thank you and best of luck for the holiday.

Thank you.

Hi. Good morning. Thanks for taking my question. So, there is always this tension of sort of looking in the near term at what products or latest announcement, whether it's holiday or Apple, Amazon competitor announcement is going on, and then, there is a temptation to go back to product cycles that have been there historically and sort of thinking about your business. It would be helpful if you could talk about maybe neither of those. You talked about services, but what other products? When you have these suite of products at the front of the store that are more discovery for consumers, how are those conversations going with vendors? What does that look like?

Hey, David, it's Mike. Good morning. That's a great question to talk about. The biggest evolution you’ve seen in our stores because I know you shop in them is trying to have people understand what our connected home or connected product ecosystem can do for them. I think you're going to see that continue to evolve. We're just starting to scratch the surface around assistant, Digital Assistant technology, both with and without a screen. People can think about personal security as it morphs into what they think about their own version of health and wellness. What you do see at the front of our stores is an exciting amount of real estate. There is tremendous interest from both current vendors and those who are just starting to emerge to have the opportunity to leverage our team members and to show customers what we can truly do and try to solve one of these lifestyle needs we spoke about at our Investor Day, specifically around health and wellness, and security. I think you're going to see more of that in the next few years.

The other thing from an equity story standpoint is that this discussion—kind of a discussion around product cycles and specific categories—how we look at it, of course, we will have opportunities to update you around targets, but the way we look at it is in aggregate the different product categories we sell while within the portfolio can cycle, as a whole it’s a pretty stable basket of things that customers buy. There is always innovation; you never know what's going to come in your genre, but there is always that. The growth opportunity for us is not driven specifically by a particular product launch; it’s driven by the opportunity to build a relationship with the customers. A key fact that I always go back to is that our share of wallet of existing customers is 26%. As we continue to build the customer experience and our ability to build relationships with customers, the growth opportunities from expanding this share of wallet. And imagine this—not in updated forecasts—but imagine the impact of growing from a quarter to a third. That’s the opportunity; that’s the obsession we have, and that goes through really understanding customer needs, knowing the customer, bringing solutions, hardware services, and being a part of their life.

Is it fair to say there will continue to be Best Buy exclusives as part of what is presented to the consumer?

I think that will always be a fair assumption. We talk about our ability to make curated markets, and part of that is ensuring consumers know what the products will do and solutions for them, and that provides us with a great opportunity to do that, David.

Two quick questions. The first one, just Corie, you talked about a lot of investments that you’re making, Hubert, you did as well. You’ve been making investments for 3, 4 plus years. I was wondering, as we look forward, what are the bigger buckets of investments that need to be made in the business that could potentially flow through on earnings, thinking into 2019 and beyond? That would be my first question.

Yes. There’s a few different suites of investments that are what I’m going to call a little bit more ongoing in nature. When we talked about it at Investor Day, we broke it down into both larger slots of investments and pressures. Think about our ongoing investment in people; that comes from both specialty areas like smart home experience in our stores and in-home advisory experience. It could also come broadly from our investment in wages and benefits and in the list of things that Hubert talked about that are important to our employees. That is a suite of ongoing investments. A second major area of ongoing investment is going to be what I will call our technology capabilities, or those tools that will help our associates and help our customers have better experiences. Things like we talked about CRM, knowledge management—those are longer-term builds, and we’re going to continue to refine those and make those tools better and easier to use over time, including the investments in the digital experiences we outlined in Hubert’s prepared remarks. Then three, we specifically said we were making a major investment in our supply chain infrastructure. We were again very clear that that was going to be a multi-year journey for us as we worked on both the space required to facilitate our larger product, as well as the efficacy required to deliver at-speed on our smaller products. That again is going to be a longer-term journey for us. That’s part of the reason we teed all of those up at Investor Day and said these are going to be the longer-term investments and pressures and part of the reason we have remained so committed to the cost reduction side of things as well.

My second question is on home theater. Hubert, you sounded really excited about the home theater options for the holiday, and the category ledger comp last quarter, but I didn’t see it listed this quarter. I’m trying to understand what happened to home theater this quarter. As we go into the holiday, you benefited a lot from a trade-up to higher size, bigger TVs. Is there still room to increase the mix of bigger TVs in your sales mix to offset ASP pressure as we look at the holidays? Thank you.

Yes, there is always room for some bigger TVs. One of the—we definitely saw a bit of moderation in the TV industry compared to what we saw in Q2. I’d call a little bit more like what we saw in Q1. So, it slowed a bit. The good news is units continued to be up at a pretty good clip; and what you alluded to, ASPs down a bit. The nice part is we continue to see people mix into, specifically to your question, larger TVs. We get really caught up in 4K and the technologies, but genuinely what people want is a larger great TV experience in their home. We continue to see excitement around that, which kind of propels this concept that this is one of those cycles that doesn’t automatically fall off the cliff. It is more this idea that we keep providing new and different ways for customers to get bigger TVs with better technologies. Yes, it moderated a bit from the last quarter, but it's clearly going to be a hot item heading into the holidays, and we feel very well prepared.

Sorry, go ahead, Hubert.

I was wondering with Mollie, we have time for one more. So, I think we do, all right.

Hi. Thanks, guys. This would be a longer-term question and I don't know if you're prepared to talk about this. Relative to the analyst day that you just referenced, it looks to me as if you're going to come in, you're going to beat the sales plan of $43 billion because you're well on your way to hitting that this year, maybe a little bit below it, but by 2020, you should be there. Does that necessarily translate into that operating margins? Or should we still think about a similar operating margin to what you laid out last year? And if the mark is not going up, then why not?

For right now, what we're focused on is finishing out this year and making sure that we deliver on the commitments that we made for this year. We're absolutely going to update everyone as we get to the end of the fiscal year here on what we think our mid-term outlook looks like and how it should be updated. What I said on the call, and what we alluded to this idea of continuing to make sure we invest in the business in a way that we feel like it's going to set us up for future success remains our focus. Then we will help you through the future financial implications of that once we get through the rest of this fiscal year.

I guess, as a follow-up, I'd ask, the same store sales are going to end up being at least 4% for the second year in a row. How sustainable is that; how much of that is due to really strong products for the last couple of years that might not repeat? Do you need services to accelerate to replace some growth in products?

I think that we’re obviously excited about the fact that we've been able to demonstrate this very positive trend. As Corie said, we'll provide an update on our Q4 earnings call. To the point of product cycles versus customer relationships, our main theme—the big long-term opportunity for us is the expansion of the relationship with customers. We've demonstrated at Investor Day that the volatility in the sectors is actually much lower than people think. We like the environment in which we’ve been operating this year, and we’ll provide updates on the Q4 call. We’re very excited about the future for our business. With this, maybe I’d like to wrap. I know this is an incredibly busy day for all of you. We were not apparently the only retailer reporting today, to say the least. Thank you so much for your attention. I want to say one word because I’m sure many of those friends and family in California that are impacted by the fire—our heart is with the population in both Northern and Southern California. We wish all of you a very safe and happy holiday. And I know one way to increase your happiness, which is to focus your list with us. So, look forward to seeing you in our stores or online.