Best Buy Co. Inc (BBY) — Q1 2020 Earnings Call Transcript

Thank you and good morning everyone. Joining me on the call today are Hubert Joly, our Chairman and CEO, Corie Barry, our CFO and Chief Transformation Officer, and Mike Mohan, our U.S. Chief Operating Officer. 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 will 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.

Thank you, Mollie, and good morning everyone. Thank you for joining us for what is my last earnings call as CEO of this great company. As you know, we made an exciting announcement last month. On June 11, Corie Barry will become the fifth CEO in Best Buy's 53-year history. At that time, I will transition to the newly created role of Executive Chairman of the Board. Also, Mike Mohan's role will be elevated as he moves from being our domestic Chief Operating Officer to the company's President and Chief Operating Officer. I am very proud of the seamless transition we have decided to implement as it reflects positively on our momentum as well as on our focus on executive development and succession planning. It is clearly designed to ensure strategic and leadership continuity, and I am grateful to the members of our Board of Directors for their diligence and care in overseeing this critical process. Before I share more thoughts on our leadership transition, let me first review our quarterly performance and provide an update on our progress as we implement our Best Buy 2020: Building the New Blue strategy. Q1 was a strong quarter and a good start to the year. We reported $9.14 billion in revenue and grew our enterprise comparable sales by 1.1%, which was at the high end of our guidance. We also delivered better-than-expected profitability. We expanded our non-GAAP operating income rate by 50 basis points and delivered on non-GAAP diluted EPS of $1.02, which was up 24% compared to the first quarter of last year. I want to thank our associates across the company for their hard work and dedication in delivering these strong results. Before I discuss the progress we made on our Best Buy 2020 strategy, I would like to share some brief thoughts on tariffs on goods from China. First, let me say that the administration has so far done a very good job of minimizing the impact of tariffs on U.S. consumers by limiting the number of consumer products on the tariff list. They have done this in part by taking input from companies like us. And so far, we have been able to minimize the impact of these tariffs by employing a number of mitigation strategies, including by buying products ahead of the tariffs being implemented and by working with our vendors. Second, no decision has been made by the administration at this point on the actual implementation of tariffs on additional product categories. There is a comprehensive process the administration will be going through to take inputs, and we intend to be actively engaged in this process to help the administration continue to minimize the impact of tariffs on U.S. consumers. In addition, there is time for the trade negotiations to progress before any decision gets made. As Corie will discuss, our fiscal 2020 guidance incorporates the estimated impact of the recent move from 10% to 25% tariffs on this List 3. As a reminder, we estimate that List 3, which is the $200 billion list that went into effect last September, is only about 7% of our total annual cost of goods sold. Many of the products on this list are accessories. While we understand List 4 as proposed is comprised of many consumer items, including many electronics, we think it is premature to speculate on the impact of further tariffs as it is unclear whether List 4 will actually be implemented, what products would ultimately be included, at what rates, and when. But one thing is of course certain, as other retailers have noted, the impact of tariffs at 25% will result in price increases that will be shouldered by U.S. consumers. We will, of course, continue to work to minimize the impact of the trade negotiations on U.S. consumers and will continue to update you on this matter. Now let me update you on our progress as we implement our Best Buy 2020 strategy to enrich lives with technology and further develop our competitive differentiation. In health, we continue to make progress, both in terms of scaling the GreatCall consumer devices and services and advancing our commercial monitoring service with a focus on aging seniors. Our focus is to enable seniors to live longer in their homes and help reduce their healthcare costs. We believe that the combination of technology and our human touch provided through the ability to access and engage people in their home is a highly relevant and differentiated proposition. We are excited to continue to build our capabilities to support the growth of this business. First, we will be opening a third GreatCall caring center in October. The center, located in San Antonio, Texas, will have 400 care agents and provide 24/7 technical phone support, concierge services, and urgent response services to customers. Second, this month we have acquired a senior-focused health services company called Critical Signal Technologies or CST to help scale the commercial monitoring business. CST has approximately 100,000 senior subscribers. Some of their services are provided as supplemental benefits under their Medicare Advantage plan. Coverage under Medicare Advantage plans is helpful to growing our commercial business because it allows us to engage with insurers and build our service into their plans as a way to both improve their member experience and help them save on costs. The acquisition of CST will thereby help facilitate our access to and penetration of the commercial market. We are excited about the prospects of combining CST's services and relationships with the existing GreatCall business. More broadly, this tuck-in acquisition, together with GreatCall, complements our existing capabilities like Geek Squad and In-Home Advisors to better serve both the seniors in their homes and those who support them, such as payors and providers. During Q1, we also continued to expand our Total Tech Support program, which provides members unlimited Geek Squad support for all their technology, no matter where or when they bought it. We continue to grow the member base at a steady rate while executing on our roadmap to drive the customer experience. Another first-quarter example of how we are expanding what we do for customers is the rollout of our lease-to-own program. The financing provided through our Best Buy credit card is an important benefit we offer customers where there are people who are interested in getting a credit card but are unable to qualify for it because of low credit scores or, in many cases, simply no credit history. Our lease-to-own program provides another option for enabling customers to make periodic payments over a fixed period, eventually leading to full ownership of the product once the agreement has been fulfilled. During the quarter, we launched the offer across 36 states or about 70% of our stores and expect to roll it out to another nine states later this year. Customers are using the option to acquire products across a wide variety of categories, with the largest being computing. In addition, we found during the pilot that a significant number of customers are choosing to take advantage of Progressive Leasing's 90-day purchase option, which consists of a $79 initial payment plus the retail price. The offering is consistent with our strategy to enrich lives through technology by opening up the experiences that we offer to new customers who might not otherwise have the chance to acquire the kind of solutions that we sell. In many cases, it allows us to catch customers early on in their credit history and build a relationship with them over time. In addition to expanding what we do for customers, we are continuing to evolve the way we interact with our customers across their homes, our stores, and digitally. As we mentioned during our last call, we are developing a holistic home strategy to leverage all of the ways we currently interact with customers in their homes to create meaningful relationships and further differentiate Best Buy. Our in-home consultation program is one of the ways that we deliver experiences in the home today. The program continues to build, and it is clear there is a real customer need we are addressing. From a financial standpoint, we continue to see higher revenue per order and higher gross profit from these interactions in the store and online. We expect to add a similar number of advisors this year as we did last year, which would put us around 700 advisors at the end of the year. In addition, we are working to enhance the productivity of our advisors by eliminating manual processes so that they can focus more time on their customers. For example, starting this quarter we will begin automating our proposal and client telling processes and enable the ability for customers to chat online in real-time with their advisor. I would also like to say a few words about how we are transforming our supply chain to improve the experience for our customers. When we laid out a multi-year plan at our Investor Day in 2017, we shared our belief that the vast majority of our assortment needed to be available anywhere you wanted the next day at the latest. Through a combination of initiatives, including expanded partnerships, the deployment of metro e-commerce centers across key cities, and automation, we continue to improve our speed of delivery to customers and expand next-day and same-day delivery options. As we shared last quarter, we offer same-day delivery on thousands of items in 40 metro areas. Additionally, we offer next-day delivery options in 60 metro areas on orders over $35 for free with no membership fees. In fact, customers can order as late as 8 P.M. in Los Angeles and New York City and 5:30 P.M. in other metro areas and will get their package delivered the next day. 77% of Best Buy customers are in a ZIP Code where we are able to offer this service today, and thousands of SKUs are eligible. In addition to our various shipping options, all of our customers also have the extremely convenient option to pick up their products in our stores within one hour of placing their order. Even with all the improved shipping options and enhancements available to our customers, they are increasingly choosing to pick up their products in one of our nearly 1,000 stores. So in-store pickup of online orders is now about 40% of our online revenue and growing. Automation is an important part of our supply chain transformation and starting in Q4 of last year, we have been rolling out new automated boxing technology in our distribution center that builds real-time custom boxes for products coming down a conveyor belt. Earlier this year, we were named number one on Barron's list of the 100 Most Sustainable Companies. This cutting-edge boxing technology is an example of our sustainability efforts. In addition to driving productivity, it reduces environmental waste by eliminating excess corrugated cardboard and all-plastic packaging fillers. Overall, our supply chain strategy is to leverage our assets of stores, distribution centers, and metro e-commerce centers in a portfolio approach. That allows us to optimize speed, convenience, and cost to meet customer needs at the right time and place. We are still in the midst of this multi-year transformation, but we like where we are and where we are going. Of course, we also continue to drive efficiencies and reduce costs in order to fund investments and offset pressures. During the first quarter, we achieved $35 million in annualized cost reductions and efficiencies, bringing the cumulative total to $575 million since Q2 fiscal 2018. This is towards our fiscal 2021 goal of $600 million. Before I turn the call over to Corie, I would now like to say a few words about our upcoming management transition and my excitement about the future of our company. The choice of timing of the CEO transition is probably more of an art than a science. I personally felt it was the right time for me to trigger this leadership transition for several reasons. First, I had felt we had achieved what I had hoped to accomplish when I joined the company in 2012. I am proud of what we have delivered for customers, our employees, our vendors, our shareholders, and our communities. Second, I felt we had built the depth and breadth of talent necessary to carry Best Buy into the future. Last September, we put in place a new leadership organization by elevating Corie and Mike to new roles with greater responsibilities. In the time since then, I have been very impressed by the effectiveness of our team and these leaders. Third, with a clear and exciting purpose to enrich lives with technology, we set out two years ago to implement a strategy focused on addressing key human needs in entertainment, productivity, communication, food, security, and health and wellness. We have essentially achieved fiscal 2021 revenue and non-GAAP operating income targets two years ahead of plan. While we still have a lot to do from a transformation standpoint, it is clear that we are on the right path. Fourth, we have announced plans to host a meeting with the investment community later this year. I thought it was important that the leaders who stand in front of this audience to lay out our roadmap for the future, are also the team that is responsible for carrying that strategy forward. In my new role, I will continue to lead the Board of Directors. I will also advise and support Corie on key matters such as strategy, capability building, M&A, and external relationships. I will assume certain responsibilities at Corie's request in areas like government affairs, community relations, and leadership development. In closing, let me say that I could not be more excited about the opportunities ahead of us and confident in the team we have built, as well as our talents, culture, heart, and soul. I look forward to continuing to work with Corie, the team, and the Board in my new role to help them continue with strategy and transformation with one goal in mind: fulfilling our purpose to enrich lives with technology; doing well by doing good. And I want to thank you, our shareholders and journalists who cover us, for your support over the past several years. I have thoroughly enjoyed our ongoing dialogue. Our interactions have not only been stimulating, but they have also challenged us to be better as a management team and as a company. Likewise, I want to thank my colleagues for our collaboration and their friendship. Working together, we turned around and then began growing this wonderful company. It has been the honor of my professional life to work with all of you as we did this. The company is in good hands with our new leadership and the best talent we have. I am confident that the journey we began in 2012 will continue well into the years ahead. And now, I am very excited to turn the call over to our CFO and future CEO, Corie Barry.

Good morning everyone. I am deeply grateful to Hubert and the rest of the Board of Directors for their confidence in me and their clear belief that this leadership evolution is in the best interests of Best Buy and all its stakeholders. Nearly seven years ago, the Board made a stunningly good decision when they asked a Frenchman with no retail experience to save this company, and he brought his remarkable brain, boundless energy, and deep passion to the job. My personal gratitude to Hubert knows no bounds, and I am delighted to have him nearby to call upon for advice and counsel in his new role as Executive Chair. As I think about my new role, I could not be more fortunate to have Mike Mohan at my side as our President and COO. I have worked closely with Mike for the past 15 years, and I am so excited to continue to work with him and the rest of the leadership team in this next chapter as we implement the strategy that we helped build together. Now on to the Q1 financial details. Before I talk about our first 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 $9.14 billion, we delivered non-GAAP diluted earnings per share of $1.02. The EPS result exceeded our expectations, and our revenue performance was near the high end of our guidance range. Our operating income rate exceeded our expectations, primarily due to a higher gross profit rate and strong expense management. The lower effective tax rate also provided a benefit of approximately $0.03 versus our earnings per share guidance. I will now talk about our first quarter results versus last year. Enterprise revenue increased 0.4% to $9.14 billion, primarily due to the 1.1% comparable sales increase. Enterprise non-GAAP diluted EPS increased $0.20 or 24% to $1.02. This increase was primarily due to higher operating income, which was driven by lower incentive compensation and a $0.06 per share benefit from the net share count change. In our domestic segment, revenue increased 0.8% to $8.48 billion. This increase was driven by a comparable sales increase of 1.3% and revenue from GreatCall, which was acquired in October 2018, partially offset by the loss of revenue from 105 Best Buy mobile and 12 large-format store closures in the past year. From a merchandising perspective, the largest comparable sales growth drivers were appliances, which includes both major and small appliances, wearables, and tablets. These drivers were partially offset by declines in our entertainment category. Domestic online revenue of $1.31 billion was 15.4% of domestic revenue, up from 13.6% last year. On a comparable basis, our online revenue increased 14.5% on top of 12% growth in the first quarter of last year, which was primarily driven by higher average order values and increased traffic. In our international segment, revenue decreased 5.2% to $661 million. This was primarily driven by approximately 390 basis points of negative foreign currency impact and a comparable sales decline of 1.2%. The comparable sales decline was driven by Canada and was partially offset by positive comparable sales in Mexico. Turning now to gross profit. The enterprise gross profit rate increased 40 basis points to 23.7%. The domestic gross profit rate was 23.7% versus 23.3% last year. The 40-basis point increase was primarily driven by the impact of GreatCall's higher gross profit rate and improved product margin rates, which included the benefit of our gross profit optimization initiative. These favorable items were partially offset by higher supply chain costs. The international non-GAAP gross profit rate increased 80 basis points to 24.2%, primarily due to higher year-over-year gross profit rate in Canada, which included improved gross profit rates in several product categories and increased revenue in the higher-margin rate services category. Now turning to SG&A. Enterprise non-GAAP SG&A was $1.82 billion or 19.9% of revenue, which decreased $5 million and 10 basis points to last year as a percentage of revenue. Domestic non-GAAP SG&A was $1.66 billion or 19.6% of revenue versus 19.7% of revenue last year. SG&A dollars were essentially flat to last year as GreatCall operating expenses were primarily offset by lower incentive compensation expense. International non-GAAP SG&A was $158 million or 23.9% of revenue versus $164 million or 23.5% of revenue last year. The $6 million decrease was primarily due to the favorable impact of foreign exchange rates, which were partially offset by the impact of new stores opened in Mexico in the past year. On a non-GAAP basis, the effective tax rate of 20.1% compared to 20% last year. Versus our guidance, the effective tax rate was approximately 250 basis points better than expected, which was primarily driven by a larger tax benefit related to stock-based compensation. From a cash flow perspective, we ended the quarter in line with our expectations. We returned a total of $232 million to shareholders through share repurchases of $98 million and dividends of $134 million. Our regular quarterly dividend of $0.50 per share was an increase of 11% compared to the prior year. As we announced last quarter, we intend to spend between $750 million and $1 billion on share repurchases in fiscal 2020. In the first quarter, we adopted a new standard for lease accounting. The most significant impact of adoption was the recognition of operating lease assets of $2.7 billion and operating lease liabilities of $2.8 billion, respectively. The standard does not materially affect our consolidated statements of earnings or cash flows. Lastly, I will discuss our outlook. Our original full-year guidance, provided last quarter, reflected our estimated impact from the List 3 tariffs at 10%. Today, we are reiterating that guidance. It balances our better-than-expected Q1 earnings, the fact that it is early in the year, and our best estimate of the impact associated with the recent increase in tariffs on goods imported from China. Specifically, I am referring to the increase in tariffs from 10% to 25% on the products on the $200 billion List 3 that originally went into effect last September. Our fiscal 2020 guidance does not incorporate a List 4. As a reminder, our full-year fiscal 2020 guidance includes enterprise revenue in the range of $42.9 billion to $43.9 billion and enterprise comparable sales of 0.5% to 2.5%. This topline growth expectation is on top of the best two-year stack in 14 years and reflects factors such as the anticipated cyclical slowdown of the traditional console gaming category and the continued maturation of the mobile phone category. We expect our enterprise non-GAAP operating income rate to be approximately 4.6%, which is flat to fiscal 2019's rate and reflects our focus on balancing investments in our strategy, pressures in the business, and efficiencies. We expect our non-GAAP effective income tax rate to be approximately 24.5% and our non-GAAP diluted EPS to be in the range of $5.45 to $5.65. Finally, we expect capital expenditures to be in the range of $850 million to $900 million. I would like to reiterate the assumptions reflected in our annual guidance that we shared last quarter. Our investments, in particular in specialty labor, technology, and increased depreciation related to strategic capital investments, and ongoing pressures in the business will be partially offset by a combination of returns from new initiatives and ongoing cost reductions and efficiencies. Although there will be variations between quarters, our outlook for the full year assumes gross profit as a percent of revenue will be approximately flat to fiscal 2019, as continued investments in supply chain and higher transportation costs are offset by the higher margin rate of GreatCall. SG&A dollars are expected to grow as a percentage in the low single digits and be approximately flat as a percent of revenue to fiscal 2019. Increased expenses of GreatCall and continued investments in technology and wages are expected to be partially offset by lower incentive compensation expense as we reset our performance targets to align with our fiscal 2020 expectations. For the second quarter specifically, we are expecting enterprise revenue in the range of $9.5 billion to $9.6 billion, enterprise comparable sales growth of 1.5% to 2.5%, non-GAAP diluted EPS of $0.95 to $1.00, non-GAAP effective income tax rate of approximately 24.5%, and a diluted weighted average share count of approximately 269 million shares. I would also like to provide a few notes of color for Q2. We expect our Q2 gross profit rate to expand slightly versus last year. We also expect our SG&A dollars to grow as a percentage in the low to mid-single digits. This increase in SG&A is expected to come primarily from the higher GreatCall operating expenses and increased advertising spend. Although the higher SG&A will be partially offset by lower incentive compensation expense, the benefit of last year is anticipated to be considerably lower than the year-over-year benefit we realized in Q1. Lastly, the acquisition of CST closed during Q2 and was funded with existing cash. The acquisition is not expected to have a material impact on our revenue or non-GAAP operating income this fiscal year. I will now turn the call over to the operator for questions.

Hi. Good morning. Thanks for taking my question.

Good morning, Brian.

First off, congratulations to everyone on their new roles. Very well deserved. So I wanted to ask you one question. I just want to talk about the lease-to-own program, Hubert, you mentioned in your prepared comments, but you have started to roll this out now. I guess the question is, if you look at this program, how big could it be? And the consumer that you are serving with this, is it truly an incremental consumer to Best Buy? And how should we think about any financial implications to Best Buy from these sales?

Yes. So I will start and Hubert can add on. I think what I would start with first is what we want to offer is a variety of customer purchase options. So I think that's really important and you know that. But I think it's important to start with, our branded credit card is already 25% of the business that we do. You can see that in any of our filings. So that's kind of our starting point in terms of customer purchase options. What we like then is adding Progressive on top of that because it's what you are digging at - there is another suite of customers who just might not be able to qualify for the branded cards or frankly might not want to and would like to look at something that's a little bit different. We are seeing so far that the customers that engage with this program do think of the incremental to Best Buy, and so they are not customers who would be necessarily, for the most part, maybe seen before or haven't certainly seen in a while. And you heard in our prepared remarks, we have now rolled out to almost 700 stores, 689. So that's two-thirds right now. We are hoping that by the end of the year, we can roll out to another nine states before holiday. That will get us significantly across our store base. We are not sizing it right now because we are still rolling; we are learning a lot even as we roll. Like we said in our prepared remarks, we rolled halfway through the quarter. One of the things we know for sure is that as the stores are on the program longer, they become more and more proficient around the program. We like what we are seeing. We feel like we really are addressing a customer need, very in line with the strategy, and that we are providing a whole other suite of purchase options. We will continue to see how it grows over time.

Perfect. Thank you very much. And congratulations.

Thank you.

Yes. Hi guys. Good morning and congratulations to everybody. I just wanted to ask, I noticed inventory was up a little bit. Is anything going on there that you can talk about? Maybe it's just bringing in goods ahead of the tariff list? Or just ready for the spring or anything with that?

Thank you Joe. A little bit more of the latter, honestly. Because if you think about when the tariffs are going out, it was actually very close to the end of our quarter. This is really about us making sure we felt we have a good position heading into Memorial Day and then Father's Day, really light in a couple of spots last year. As a team, we had the opportunity to bring inventory to make sure we were well set. The other thing I would say, I am incredibly impressed by our merchant demand planning team and the health of the inventory is some of the best that we have ever seen. We have very low inventory left right now, and we have been moving to the inventory nicely. So really nothing to read into there, just preparing for what is that string of kind of secondary holidays that happen during 2Q.

Got it. Thanks. And then, I know you mentioned that part of the SG&A maybe being up a little bit in the second quarter. You talked about ad expenses being a little higher. Is there a different strategy that you guys are employing this year to go after some of those like Father's Day, graduation, holidays? Or what would be the reason for that?

Yes. I think we have liked so far what we have seen in some of our newer brand positioning. And you are absolutely right if we are going to over-index in a quarter, Q2 makes a lot of sense, given the string of secondary holidays we have. You have got Memorial Day, Father's Day, the Fourth of July, even heading into prime day later. You have got a whole string here, and we feel like if we are going to over-index and prefer a return on that spend, this is the right period of time for us to do it. We can lift up some new and refreshed brand messaging, and we felt like it's an important time of the year for us to push a few more of our chips in on that.

That's helpful. Thanks and good luck with this quarter, guys.

Thank you.

Please go ahead, Mr. Baker. Your line is open.

Hi. Good morning. Hubert, I have a feeling that my name gets like that. I think it happened on the first call that you did a long time ago. So my first question or I guess my only question is, anything surprise you about sales in the first quarter with regard to cadence, with regard to categories? And just drilling into the computing and mobile category, can we talk about laptops, desktop trends? And then anything with mobile as far as replacement rate, uptake in the category in general? Thank you.

So on the overall sales cadence, it actually played relatively closely to how we thought. If you remember, how we kind of set up the quarter we said, we felt like the consumer environment remains relatively favorable, and I think most metrics point to that continuing to be a good environment. We did have a little bit of pause around tax refunds that we mentioned. If you remember, when we were into the quarter, refunds both in quantity and amount were down about 40%. We were still gauging how much of that will come back. You ended up, based on the IRS data, with tax return total amounts down about 2.4%. We think that probably is like just a little bit of softness in this quarter, which again was kind of in line with how we guided for the quarter. It is important to note; we also said we saw softer than expected revenue in international. That situation is very much tied to the macro environment there; GDP is down in Canada and oil prices are struggling. You have got a bunch of things happening there that we think are more macro-side. But in general, that wasn't anything that was an outlier. In terms of the computing and mobile business, I am going to take those a little bit separately. We kind of look at computing and tablets together. We talk about tablets as being an area of strength, but it’s a lot of the higher-end, higher processing power tablets, which you can imagine looking at it in light of computing. We didn't see a major change in trajectory there as we think about those categories together. A little bit more strength on the tablet side, a little bit less on the computing side. But we can see people making trade-offs between those two spaces. From our mobile perspective, that was actually just slightly better than we thought it would be, but it was still down year-over-year. Again, that's a category where we have said for a while; we have moderate expectations around growth there. It's definitely matured, and we continue to see a highly penetrated category, where there are not as many reasons to buy.

Great. Thank you.

Great. Thanks for taking my question. So Total Tech Support seems to have some nice momentum lately in terms of enrollments and some healthy renewal rates based on our work. Could you just spend some time talking about the bigger picture here and the behavior of a typical Total Tech Support member since you rolled out the program, acknowledging the fact that the initiative is still new? So when you are looking at the data, are you able to see a lift in the number of categories that these customers shop after joining or an increase in the number of visits to the store or better online engagement or anything along those trends? And I guess related to that, when do you typically see a ramp in any of these changes? Is it after they utilize the membership a few times or after they renew their membership or some other guidepost? Thanks.

Absolutely. First, I want to take one step back and say, the most important thing around Total Tech Support is that we strategically like the relationship it helps us build with our customers. Now what's tricky is that we are just now lapping our nationwide rollout of Total Tech Support. We are just starting to see in a larger quantity what renewal rates look like and customer behavior over a year. And again with us, it's a little trickier because our customers tend to have lower frequency overall than some other retailers. It takes us a long time to figure out what the longer-term customer behavioral implications are. We talked a little bit about it on the last call. We are definitely seeing nice usage upfront in the program, and renewal rates have stuck at the levels we thought they would. We are seeing usage in line with what we thought. We are seeing renewal rates in line with what we thought. We are not seeing a ton of surprises but we just don't have a lot of data on yet that tells us whether this is pushing more purchase behavior or keeping people engaged with Best Buy longer. We need a little bit longer on the program to be able to give you more information and data around that. In terms of what we see when we try to ramp programs like this, it's not just about ramping the program because that has proficiency implications with how we sell at the store. Our associates have done an amazing job really learning about this program and helping customers see the true benefit of it. It's a very different service sale than anything we have done historically. I think our associates have learned a lot over the last year and continue to just get better and better helping a customer understand why this would be perfect for them. The other thing we are also behind the scenes working on is continuously improving the customer experience, both from a digital perspective - how can we sell, how can customers see what they have, how can we help them repair something themselves - but also importantly from how we help you, how we prioritize your service visits, and how we make sure we are helping you in the moment as quickly as possible. You can expect to see a ramp in performance here, and it's not just proficiency; it’s also how do we continue to add customer value propositions behind the scenes that make us more and more appealing for customers as a way to stay engaged with Best Buy.

Great. That's helpful. Thank you.

Thanks.

Great. Thanks Hubert. Thanks for everything over the years. And Corie, my congratulations, well-deserved.

Thank you.

So no good deed goes unpunished. Thank you for the tariff information. If you were to look at List 4 now, what percentage of your COGS would that be? It was nice to have the 7% on the current list, but could you help us on that front? And then I have a follow-up.

So I think the trick with List 4 is that it hasn't actually been defined. It hasn't even been put in place yet. There’s a lot of discussions that Hubert alluded to in his opening statement around what exactly will be included on that list and when it will go into implementation. It's very difficult right now, given the amount of change that's happening in that list, for us to size it at this point, and we haven't come out yet with any sizing on that list. I think Hubert might have something to add.

Yes. Greg, what I would highlight is that the administration will be going through a process of listening. And as I said in my prepared remarks, no decision has been made. Secretary Mnuchin made a comment about the fact that he will be very attentive to the impact on consumers. This is a complex discussion. Even when decisions are made, what rate will be applied, to what products, and when, is going to be very important. We have always assumed that this negotiation process with China would not be linear. There is a meeting at the end of June, and so rather than trying to forecast something, I think our actions today are to be engaged in the discussion process. We would like to be as helpful as we can in support of the administration's goals to minimize the impact on U.S. consumers. So expect us to be very active on this front in the future to be helpful.

Yes. Maybe given your experience with the washing machine and laundry product tariffs, maybe walk us through how that played out and the impact on consumers and any sort of demand response? If you can glean anything from that, that would be helpful.

Yes. The appliances tariff is tricky, specifically washing machines, and the price increases were certainly passed on directly to begin with. Units did decline, but that impact was offset somewhat by higher prices. The hard part is that I would not try to drive comparisons with that category because that’s a category where you go buy a washing machine because of duress or need, and it doesn't have the same elasticity as some of the other products that we sell. I don't think that's a great indicator of how behaviorally people will respond, especially at the different levels of 10% to 25%. I think you are going to end up with potentially some different consumer buying behaviors.

And also across more categories, right, because ultimately people have to make decisions. All right. Okay. Thanks a lot, and good luck to all of you and congrats.

Thank you.

Hi. Good morning. Just wanted to talk about the demand you have seen over the years for appliances, home theater, smart home, etc.? And could you walk us through how much of your business you believe is related or tied to housing? Whether you see that as a headwind today? And maybe talk about how you see home services fitting into this ecosystem? Thanks.

Yes. Actually, we have done some correlations with how we actually don't have a super high correlation to housing. Some of those individual categories might have a slightly higher correlation, but we don't tend to have a large one in total. In terms of how we see services playing with those categories, definitely, as we have grown larger in TVs and large appliances, we have seen services like installation, delivery, those types of services expanded materially as we have been able to grow those businesses. The nice part is, we haven't seen correlations right now in our business to housing, and we continue to see nice results in those categories.

And what I would add, Corie, is it’s above and beyond what the market does, which we continue to be very excited about. That's the essence of our strategy, the opportunity to deepen the relationships with our customers. We highlighted at our Investor Day back in 2017 that our share of wallet of existing customers was around a quarter, and a lot of the initiatives we have underway are designed to strengthen and deepen and broaden the relationship with these customers. When you have a relatively low market share, which we think is our case, then you are excited about the upside from increasing that penetration, which could very much outweigh any kind of short-term situation in the underlying macro.

I appreciate the color, and congratulations as well.

Thank you.

Hi. Thanks for taking my questions. I have a question on, I guess more of a two-part. Sales drivers, I want to talk about the back half of the year, how you guys are thinking of what can maybe move the needle as we get into back half? But then I want to think more long-term and kind of looking out how we should view some of the strategic initiatives like GreatCall, CST, In-Home Advisor, Total Tech Support, the move to 5G in relation to kind of how you guys are thinking about your longer-term sales growth rate? Thanks.

Yes. So we will start with the back half. Definitely, some of the consistent sales drivers that we have even seen coming into the first part of the year here, we continue to see appliances as an ongoing opportunity for us and feel very well situated there. There continue to be interesting innovations in some of the other categories like what we are seeing in smart home and what we are even seeing in newer technology. Additionally, you can see the different categories at different times. A new wave of tablets creates new interest, some of the new in-home automation products create new interest, some of the new TV evolutions continue to drive interest. This combination of continued strength in some of the underlying categories like appliances, the continued evolution of technology in a few of the other categories is driving a lot of interest in the products that we carry. Importantly, as we look ahead, I will spend just a moment on health. We have shared from day one that health is a longer-term value driver for us. We absolutely like what we are starting to see in health. If I just take you back for a second to why we think we are uniquely well-positioned in this space and why we built the relationship with GreatCall: we feel like it's very much in line with our strategy. It addresses that key human need question around health and wellness. In particular for us, we are really trying to get pointed around our purpose; this is a very important purpose question around helping older Americans live a more independent life in their homes with the help of technology, which aligns very well to what we are trying to accomplish overall. That space is exciting. There are 50 million people over 65, and that number is going to grow more than 50% in the next 20 years. You have a real population of people who would like to have some assistance. We felt that with GreatCall, we really acquired a great asset with already 900,000 members, plus a good profitable business. Importantly, between the two companies now what we are seeing is that we jointly provide a number of interesting value creation opportunities. We are the only players that have a nationwide footprint of in-home capabilities around technology, as well as importantly the support backbone that keeps those things running over time. We are agnostic across ecosystems, so we will assist you with whatever technology you already have or whatever technology you want to implement. As we bring on GreatCall's assets and their ability to help us with human touch combined with more predictive analytics, it becomes very powerful because then you not only start to see major medical events that might happen, but we have some of that human intervention as well. We are continuing to build on that thesis and you can hear us every time we talk; we just get a little more clear about the space we play in and feel no one else can. That being said, it's going to take us some time to build the capabilities and then to build the footprint. Right now we just have a few small publicly announced partnerships with Senior Whole Health of Massachusetts and long-term care insurance of CNA, one of the largest U.S. commercial property and casualty insurance companies. Those are a couple of small proof points, and we are going to continue to build on those over time. I think that's likely a longer-term thesis for us but a very exciting one in terms of a unique space where we have capabilities. As I think about other growth mechanisms like 5G, I might actually turn it over to Mike and ask him to add a little color to what we think that could do for us.

Hi Scott, it's Mike. You brought up IHA and 5G, and they both apply in different ways, but we think there’s some good excitement. I will start with IHA. We already know it's an incremental part of our business, and it just helps us build a deeper relationship with our customers, expanding the share of wallet. Looking ahead, it's an area we think we just started; we are in the first few innings of what that could look like to drive longer and deeper relationships with customers across a whole host of products and services. When I think about 5G, it’s a place where we are really in a good spot to help our carrier partners and OEMs bring new technology solutions to life. Because this one's being rolled out market by market, you will need an environment where you can actually get into people's homes and businesses with qualified and trained teams, and then use our stores for opportunities to showcase what's possible with a higher network speed. So we are optimistic about it. It's just beginning, and we think it's going to be a great journey to be participating.

Of course, specific numbers will be shared at the meeting in September in Q3, where the team will have the opportunity to update long-term prospects, which is something we had announced on our call at the end of February.

Great guys. I look forward to the meeting. It sounds like we could see some sales acceleration. So I do look forward to the meeting. I offer my congratulations too; it's just a wonderful group of people, and I look forward to the next chapter. Thanks.

Thank you.

Thank you.

Good morning, guys. Unfortunately, I do have another tariff question. Corie, you have highlighted that tariffs were expected to impact about 7% of your COGS. I guess what I'm trying to figure out is: of that 7% exposure, can you help us understand how much of your mitigation process was handled or managed through vendor negotiations, basically pushing that price increase, if you will, back onto vendors? How much was handled through you guys having to increase prices? Just so we can kind of think about how the forward tariffs may work? Thanks.

Yes. I will try to give some color. We talked last time about some of the ways that we are going to mitigate tariffs. We broke that into a few buckets. In some cases, we obviously have worldwide vendors who might make some decisions to push that across their whole global business. In some cases, we also know that we have vendors who would absorb costs as a way to retain some of the business. In then some cases, we have people already moving supply chains, moving the business around, finding other ways to bring things. And then finally, there is the question of increasing costs. I think what's difficult is at 10% for that List 3, you have a much greater ability to influence using a variety of methods, and even the absorbing method becomes easier because at 10%, if you are not sure if it’s a limited period or extended period, you might be willing to absorb that. As you move to 25%, the discussion becomes quite different because there is far less likelihood that you can absorb that as a vendor completely. You have to think differently about how quickly you can actually move your distribution. It takes longer in the consumer electronic space. I wouldn’t say that what we have seen in the 10% scenario - where I think we haven’t seen as much of an impact - is necessarily applicable to the 25%. Hubert said in the prepared remarks that at 25%, there will be higher prices for consumers. It’s tricky, and you have heard that from a variety of retailers; figuring out SKU by SKU, vendor by vendor, which of those tactics are going to work and which ones aren't, then how that will play into the back half, that's the work the team is doing, and we did our very best to try to size it. There’s still a lot of work to do there.

I certainly want to commend the skills of our merchant teams. Given the size of the U.S. market and the size of Best Buy in those markets, these teams do a wonderful job of navigating these waters. That's one of the areas where we have wonderful assets, and when I talk about the depth and breadth of talent at the company, that's clearly one of those areas. And looking at the clock, this is not only my last call as CEO but also the last minutes of my last call as CEO before we have to end. I will quickly say this: I am clearly passing the baton, which is a French word, to Corie and the team with a very happy and full heart and with a strong conviction that the right team is in place for this pivotal moment in Best Buy's history. I very much look forward to watching Corie and her team do their magic. My thanks to all of you. Have a great day. Thank you.