Best Buy Co., Inc. (BBY) Q2 2012 Earnings Report, Transcript and Summary

Welcome to the Best Buy's Conference Call for the Second Quarter of Fiscal 2012. [Operator Instructions] And as a reminder, this call is being recorded for playback and will be available by 12:00 p.m. Eastern Time today. [Operator Instructions] I would now like to turn the conference over to Mr. Bill Seymour, Vice President of Investor Relations. Please go ahead.

Thank you, Alicia. Good morning, everyone. Thank you for joining us on our fiscal second quarter 2012 conference call. We have 2 speakers today, Brian Dunn, our CEO; and Jim Muehlbauer, our CFO. And after our prepared remarks, we should have plenty of time for your questions. Before I pass the call over to Brian, I'd like to take care of a few housekeeping items. [Operator Instructions] And let me remind you that comments made by me or by others representing Best Buy may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. With those housekeeping items aside, I'd like to turn the call over to Brian Dunn.

Good morning, everyone, and thanks for joining us on our second quarter earnings conference call. My comments this morning will focus on our second quarter performance, how we're progressing on our strategic priorities and how we see the rest of the year playing out. But before I jump into my comments on the quarter, I would like to thank our employees for another quarter of outstanding effort in bringing the Connected World to life for our customers across all of our channels and geographies. I'm especially proud of the way our teams in London pulled together to ensure the safety of their employees and customers during the riots in London last month and how our U.S. employees helped their communities and each other through the extreme difficulties of Hurricane Irene and the recent battering of the East Coast. We continue to execute on our strategy in times of challenge and continue to see opportunity. We're responding to the needs of our customers in each segment and channel where we conduct business. Before I turn it over to Jim for more specific details, I want to put our results and outlook in the context of our overall business strategy. As you know, our strategy is to drive the 3 elements: one, our financial strength and flexibility; two, a unique multichannel approach that allows us to connect wherever and whenever people shop; and three, optimizing our scale to drive growth through new categories, new store formats and share gains in key categories. Let's begin our look at the financial strength that is enabling us to continue to invest and return value to our shareholders. Looking at the big picture worldwide, we're still facing an uncertain macro environment with volatile consumer shopping behavior, and this was evident in our results for the second quarter. Despite that, we generated significantly more cash in Q2 and ended the quarter with more than $2 billion of cash on hand. Our free cash flow was $1.1 billion in the first half. This has helped us to continue to fuel our share repurchase strategy and we were on target -- we are on target to buy back approximately $1.5 billion for fiscal year 2012. We remain disciplined in our use of capital while continuing to invest for growth geographically, by channel and by category. Geographically, in China, we are continuing our rapid rollout of Five Star stores. We added 7 more stores in the second quarter, taking us to a total of 178. In addition, Five Star's continuing operations were once again a highlight of the quarter, delivering 7% comps and increased margins. In Canada, where we are facing a challenging economic environment very similar to that of the U.S., the team did a great job of delivering solid gross margin rate improvement. And we continue to see solid performance in Mexico. While the contributions of our Mexican operations are still relatively small within the context of our enterprise, we are pleased with the growth in revenue and gross profit rate the team posted this quarter. Our performance in Europe reflected the challenging economic situation and the resulting effect on consumer spending. In our Domestic segment, we've made solid progress on the strategic initiatives we introduced earlier this year while prudently managing our business. Beginning with our channels, last week we launched the Best Buy Marketplace. That allows third-party sellers to offer thousands of additional products through BestBuy.com and enables us to expand our range of assortments, price points and brands. Marketplace is one step in our plan to double our domestic online revenue in the next 3 to 5 years. Also under the heading of channels, we continue to invest in expanding the portfolio in our Services business, which delivered its third consecutive quarter of positive comps, including more than 3% in Q2. I'll provide more detail shortly on both of these multichannel initiatives that will help us drive revenue and margin in the future. By category, we are continuing to see positive momentum from our investments in the 2 hottest consumer electronics products: tablets and mobile phones. The rapid growth in tablets was the primary catalyst that drove the strong momentum in mobile computing during the quarter. iPad sales were strong in the quarter as we expected, but sales of Android devices also were solid and better than we expected. Going forward, we continue to be bullish on the growth of this new computing form factor and are encouraged by the new models in the pipeline over the next several months that will offer our customers even more choice, both online and in stores. We believe Tablet Central, fueled by smart friendly Blue Shirts that will help customers select a device with the right operating system, accessories and connections to get the most of their purchase, has positioned us well to capitalize on the momentum this new product category is bringing the industry. The mobile phone industry was facing difficult comparisons, with no major phone launches in the second quarter compared with several new models in the summer of 2010. While the lack of traffic driving launches led to a year-over-year decline in comps, our mobile teams were able to overcome the industry's situation and deliver share growth. With the product cycle shifting from summer to fall, we expect several iconic devices to hit the market in the back half and drive customers into our stores and online as they look to upgrade their phones. And we're ready for that expected uptick as we continued to invest to expand our points of presence by adding 25 mobile standalone stores across the country in Q2, bringing our total to 222 to complement with the mobile stores already located in our 1,100 big box stores and our online mobile presence. Our mobile expansion strategy is just one example of our second strategic imperative, our multichannel business model. The TV industry continues to be challenged and our TV comps in Q2 were down low double digits. However, we continue to progress well on our strategy to drive sales of larger screen TVs. Jim will provide more detail on this category in his remarks. The second strategic imperative I mentioned earlier is our multichannel approach to serving customer needs. As you know, we intend to double our Domestic online business in the next 3 to 5 years. While we're pleased with the continued double-digit revenue growth we've been seeing, we're even more pleased with the new digital capabilities we're deploying, unique tools, platforms and promotional strategies that capitalize on the evolving shopping habits and expectations of today's tech-savvy multichannel customers. Earlier, I mentioned the launch last week of Best Buy Marketplace. It's good for our customers, who get access to a broader, deeper pool of products. It's good for our partners, who are able to leverage the power of our brand in the 800 million visits a year to our e-commerce site. And it's great for us. We expand our online assortment, drive incremental traffic and revenue, and create opportunities to attach additional products and services. Best Buy receives a percentage commission on each Marketplace sale, incremental income that falls to the bottom line. This is an element of our multichannel strategy that provides us with the ability to grow margin, revenue and/or share, depending on the channel. We will continue to update you on the progress of Marketplace in the quarters to come. We are also creating new innovative digital marketing strategies. Our recently launched Deal of the Day program is one example. Deal of the Day is a promotion we have on BestBuy.com in which customers sign up to be notified of a great new deal via e-mail, text or by visiting the site on a specific product each day. The objectives of the program are to drive additional traffic and new customers to BestBuy.com, improve conversion and also to add to our database of customers with whom we regularly communicate. We have also significantly enhanced our own online assortment to the tune of 20,000 new online SKUs this fiscal year. Finally, customers continue to value the option of picking up their online order in stores. In the second quarter, in-store pickup accounted for over 40% of our domestic online sales volume, up more than 100 basis points year-over-year. These multichannel initiatives are critical in helping us grow in new categories, gain share in existing categories and develop new store formats aimed at helping us differentiate our business and optimize sales to drive growth. That leads me to the third element of our strategy that I discussed at the front end: optimizing our scale to drive growth. One of our greatest differentiators and one which offers both revenue and margin growth opportunities is our Services business. We've committed to expanding our Services portfolio and I'll provide just a few high-level examples of work we've done to test the growth of the model. We've expanded our new Geek Squad Tech Support program which offers customers 1 or 2 years of comprehensive computer service via remote chat session, a store visit, phone call or e-mail, a true example of a multichannel value proposition. Even though it's been available for a fairly short period, our attach rate has been significantly better than we expected. This program creates connections with our customers that extend well beyond the initial purchase. We provide help with their product regardless of where they purchased it in whatever way is most convenient to them. Our Buy Back Program, which was launched at the beginning of the year, has resonated well, especially with our mobile phone customers. Appliances is another category where we're using our considerable size and scale to deliver growth. This category had its third quarter in a row of positive comps, a particularly impressive performance by our team as we were up against difficult comparisons from last year. We're very pleased with the continued strong performance and market share gains in the category, which we believe provide a long runway of growth for Best Buy. Next, gaming. Gaming is an area of significant opportunity for us. We have completed the physical and operational transformation of the gaming departments throughout our stores and are pleased with our progress in trade-in volume and pre-order volume. One data point that illustrates the momentum we've had in gaming, our Reward Zone Gamer's Club membership grew 25% in the last year and now totals 2.6 million members. This number is very important as we build our base of core gamer customers, who are the most active purchasers of both new and pre-owned titles. The gaming industry experienced softness in the first half of this year due to a lack of new titles and this impacted our results in the second quarter. While there is a stream of new titles coming in the months ahead, it remains unclear where the customer will choose to spend. Regardless of the state of the industry, however, we are confident we have the people and promotions to continue growing share and making progress in this category. As I mentioned earlier, we knew this year was going to be a volatile and uncertain consumer environment. While we have updated our outlook for the year, we continue to believe in our multichannel approach and are cautiously optimistic about the back half for a number of reasons. We are taking action to invest in areas where we believe we can grow returns and where customers expect and need us to be. As we see more examples of what connections can do for consumers, we become increasingly convinced of the strength of our multichannel position in the areas where we plan to win. We also believe there is a lot to be excited about this upcoming holiday. I'll provide a brief, high-level rundown of what's coming. We see tremendous opportunity for Best Buy Mobile and expect several iconic products to be launched in the next few weeks and months. We are on track to deliver our annual target of 10 million total connections in our Domestic segment. We expect tablets will be big and believe BestBuy.com and Tablet Central will continue to be the destination for tablet choice. As I noted earlier, we believe we are well positioned for the new title releases in the gaming category, and we're introducing compelling offers across all of our product categories and channels that we believe will continue to add value for our customers. Our strategic approach remains clear and the fundamentals of our business are strong. Our multichannel advantages, including the progress we're making in digital platforms and promotions, differentiate us from competitors. We offer competitive pricing, selection and services for customers. And we remain disciplined in our use of capital and we're a financially strong, cash-generative business. And we continue to ensure we are prudently managing our costs. That financial strength and the differentiation of our multichannel business model are big assets for us in these uncertain economic times. With that, I'll hand it over to Jim.

Thanks, Brian, and good morning, everyone. Today, I'd like to cover the financial highlights of our second quarter results and provide you with a progress update on several of our key initiatives for the year. I will also discuss some of the background around the changes we announced to our annual EPS outlook this morning based on what we have observed so far this year. Earlier, Brian touched on what we are seeing in the macro environment and its dampening impact on consumer spending and the CE industry. Together, we have seen this play out through the first half in various industry data points as well as in the commentary of some of our vendor partners and competitors. Viewed in the context of these current macro and industry headwinds, our business faired comparatively well. But still, our Q2 results were below our original expectations. With this as important context, our second quarter revenue came in about flat to last year. The favorable impact of foreign currency and new store growth were offset by a comparable store sales decline of 2.8%. In the Domestic segment, sales declined 1.5% and comparable store sales were down 2.7%. These results were relatively consistent with the sales trends we experienced in the first quarter of the year. The biggest positive drivers in the Domestic comp included tablets, appliances and e-readers. Total mobile computing had strong comparable store sales growth of 9% in the quarter. The growth was driven by a very strong tablet sales supported by the benefits of implementing our Tablet Central model, which leverages a broad assortment of devices side by side with dedicated expert labor. Also in computing, it's worth noting that traditional notebook comp trends, while still negative, improved again during the quarter. Appliances continued its momentum with strong comp sales of 12% on top of positive comps in the prior year. We believe the benefits of both the operational changes we made in the appliance area and improved competitive offers have helped us grow market share on this business. Another product category worth noting is e-readers, which once again delivered triple-digit comps and had a meaningful impact on the total Domestic segment. These products, along with mobile phones and tablets, highlight the continuing consumer appetite for mobile technologies and the revenue growth that can be derived by bringing the complete mobile experience together, along with a broad assortment of products and employees who can provide advice to help customers select the best solution for their individual needs. Let's also spend a moment on the performance of the Best Buy Mobile business in Q2. As noted in the release this morning, mobile phone sales performance in Q2 decelerated from the strong growth trends experienced in the recent quarters due to shifting product cycles of new handset launches by vendors. Specifically, Q2 lacked the type of significant device launches like iPhone 4 and the HTC EVO that were a major catalyst during Q2 in the prior year. Putting our sales into context compared to the broader mobile phone industry, we estimate that we continued to gain significant share during the quarter compared to last year. As we've discussed before, in Best Buy Mobile the sales comp only tells part of the financial story. While the timing shift of major smartphone launches adversely impacted ASPs and postpaid connection volumes, our overall connection volumes in Best Buy Mobile continued to grow during Q2, driven by strong growth in prepaid phones and additional Best Buy Mobile standalone store locations. As Brian discussed, we anticipate a stronger lineup of new handsets in the second half and continue to expect that this business will deliver its top line and profit goals for the year. TV comps in Q2 finished down low double digits, a result similar to the previous 2 quarters and very much in line with overall industry trends. As you recall, we went into this year with the expectation that the TV business would be soft. But given what the industry experienced with last year and the continued macro headwinds, accordingly, we focused our plans this year on helping customers with their purchase decisions on larger screen sizes with more advanced features. So far this year, our sales mix of larger screen sizes had been growing with nearly 60% of our business coming from screen sizes 46 inches and up. This represented double-digit unit growth on large screens during the quarter. In serving the premium home theater enthusiasts, our Magnolia Home Theater business, which is in 385 of our U.S. stores, continues to perform very well and delivered mid-double-digit comparable store sales gains during the quarter. In our gaming business, we had planned for stronger sales performance in the quarter. We believe that the softness in gaming was driven by the lack of major software title launches during the period. We remain on track in delivering the enhanced capabilities to our customers via improvements in pre-order and pre-owned title capabilities coupled with additional labor investments we made in the space to help customers with their purchase decisions. Sales in our International segment increased approximately 5%, driven primarily by the favorable impact of foreign currency and new store growth, which offset a 3.2% comparable store sales decline. Our Five Star business in China continued its solid growth with a comparable store sales gain of 7%, which was on top of almost a 22% comp last year. We remain on track for 40 to 50 new Five Star openings this year in this important market for the future. Canada and Best Buy Europe experienced high and low single-digit comparable store sales declines, respectively. Turning to gross profit. Second quarter gross profit dollars of $2.9 billion were down 2%. Within the Domestic segment, the gross profit rate declined 50 basis points on a difficult comparison to the previous year, when gross profit rate was up 150 basis points. This will be our most difficult comparison period of the year. There were several factors that influenced the rate decline in Q2. Consistent with Q1, we continued to take competitive action to successfully drive revenue improvements in key categories like appliances, computing and gaming. Additionally, the new Geek Squad Tech Support service offering that Brian discussed earlier had a negative impact on our gross profit rate in the second quarter. Under this program, customers enter into an ongoing service relationship with us for 1 to 2 years. Accordingly, we recognize the revenue and profits over the life of the agreement. In the past, if a customer purchased a service product for assistance with a onetime repair, we recognized the profit at full at the time of the service. If this program continues to prove successful, we would expect the Tech Support membership sales to drive both increased margin dollars and improved rate over time. Partially offsetting the items that negatively impacted gross margin was rate strength in mobile phones, largely from increased sales of accessory and service solutions as well as handset mix. Within the International segment, we had a 4% increase in gross profit dollars driven largely by FX. Overall, the International gross profit margin rate was 25.4%, a slight decrease of 20 basis points year-over-year. This decline was driven primarily by a more promotional environment in the mobile phone business in Europe that's facing a backdrop of reduced upgrade volume in the industry, due to the migration of U.K. customers from 18-month to 24-month contracts which began taking place roughly 1.5 years ago. We are very pleased with the progress made by our businesses in Canada and Five Star to improve their gross margin rates in Q2. The rate improvement in Canada was driven by increased promotional effectiveness, operating model changes made by the business to focus on driving profitable sales and the growth in the mix of mobile phones. Five Star margins increased based on improved cost programs with vendors. Given the lower sales environment we experienced in the second quarter, we also took action to reduce expenses while maintaining focus on areas which will provide benefits in the second half and beyond. Excluding the impact of FX, total company SG&A increased 1% during the quarter. The modest increase year-over-year in SG&A spending was driven primarily by the addition of new stores and increased advertising, mostly offset by proactive adjustments to our spending profile during the quarter. For the first half of the year, total SG&A expense was essentially flat excluding FX. Since we're talking about expenses, this is also a good opportunity to provide you with a quick update on the progress we have made with our initiative to reduce our Domestic big box square footage. As you will recall, we are making plans to evolve the operating model in our U.S. big box stores to better support the increased growth opportunities we see in connected businesses and to improve our overall experience for customers and employees. As a part of this work, we are planning to reduce our big box square footage by 10% over the next 3 to 5 years. Our test results so far in this space continue to indicate that a store prototype which combines the enhanced operating model with reduced space and lower operating cost has not materially lowered our sales volumes in these stores. With almost 40% of our leases set to expire over the next 5 years, we have a significant opportunity to execute a portion of these planned space reductions at the natural end of the lease, which of course is very cost effective. Additionally, we are actively pursuing options to both sublease and return space to landlords where opportunities exist. By way of example, in FY '12, we estimate that in total that we will work with landlords on approximately 30 store locations. We currently expect to reduce space in well over 50% of these locations to achieve a total square footage reduction of 10% to 15% against this entire tranche of 30 stores. To be clear, we still have work to do with subleasing all of these sites to achieve the full financial benefit, but we continue to be encouraged by our discussions to date with prospective tenants. As these plans continue to develop, we look forward to updating you on our progress. A few more items I wanted to touch on before discussing our guidance for the year. We have actively managed our inventory to lower balances from where we started the year. Domestic comp store inventories finished down 5% in the second quarter. In addition, our receivable positions and payables have also made good progress in returning to more normalized levels from where we finished fiscal 2011. Free cash flow for the first half was very strong at $1.1 billion, up significantly from last year. As previously discussed, the biggest driver of the first half free cash flow increase was the reversal of year-end timing differences in several key working capital items. We believe we are still on track to hit our free cash flow target for the year of $2 billion to $2.5 billion. The cash generation -- the cash generative nature of our business continues to be one of the key strengths of our model. During the quarter, we also continued share repurchase activity. Total repurchases during the first half of the year totaled $863 million, which reflects 29.2 million shares or approximately 7% of our outstanding shares. Looking back at the first half of the year, while the environment remained challenging, we feel good about the solid progress we have made on our key growth initiatives. We will continue to invest and push forward on these opportunities for profitable growth and improve shareholder returns. Our outlook for the year has evolved, based on what we have seen so far from both the consumer and in the profile of our margins year-to-date. Based on these factors and our expectations for the balance of the year, we have modified our full year earnings expectations. We continue to expect full year revenue in the range of $51 billion to $52.5 billion, with full year comps of flat to down 3%. Specifically, in the second half, we're expecting continued strong growth in tablets from industry growth and from the benefits of our Tablet Central work. We expect strong growth of Best Buy Mobile from significant device launches and the continued strength of our differentiated model. We also expect meaningful improvement in the gaming industry from a stronger lineup of software title releases and the progression in our pre-order and pre-owned capabilities. Our expectation for the second half has not assumed a significant improvement in the trends of 2 of our largest categories, TVs and notebooks, consistent with our outlook at the beginning of the year. As a reminder, another item that impacts full year total revenue is the inclusion of the 53rd week during the fiscal fourth quarter. We estimate that the 53rd week will favorably impact full year total revenue growth by approximately 1.5% to 2%. Moving onto gross profit rate expectation for the year, which is the most significant driver in our updated outlook, the first half gross profit rate was down 50 basis points from the prior year, driven primarily by targeted promotional activity to drive revenue, several nonrecurring items in Q1 and the impact of new tech support services which temporarily lowered our margin rates. In the second half, we expect gross profit rate trend to improve, driven primarily by improved performance in mobile phones based on anticipated sales increases and solutions attach, improvements in gaming driven by stronger title releases and a higher mix of pre-owned gaming software, and improved attach rates and solution sales in our mobile computing space. For the full year, we now expect that our gross profit rate will be modestly down. We have also lowered our annual spending profile in SG&A and now expect SG&A to be up 3% to 4% excluding FX, or approximately 1% to 2% excluding the impact of higher incentive comp and the 53rd week. The reduction in SG&A growth reflects lower discretionary and project spending as we prudently manage our spending in this environment, striking an important balance of pushing forward on the profitable growth areas while managing our spending in the more uncertain near term. So rolling it all up, we anticipate that total operating income dollars for the year will be in the range of a 5% decline to 2% growth, reflecting the impact of lower expected gross profit rate partially mitigated by lower SG&A spend. We are updating our annual EPS guidance range to $3.35 to $3.65. For clarity, this range now includes the impact of $1.5 billion of expected share repurchases for this fiscal year, or approximately $0.20 to $0.25, depending upon where earnings finalize for the year. As a reminder, our original fiscal 2012 EPS guidance of $3.30 to $3.55 excluded fiscal '12 share repurchases. So in closing, while we expect to see continued volatility in consumer behavior in the second half of the year given the uncertainties in the macro, we continue to be fluid and purposeful with our plans and will follow customers where they need us to go. We will focus our resources on driving the profitable strategic growth opportunities we see in the business. We are confident that our unique combination of multichannel assets, service capabilities and strong financial foundation, coupled with our biggest differentiator, our outstanding people, puts us in a position to drive shareholder returns over time. So with that, Alicia, we are ready for questions.

[Operator Instructions] Our first question is from the line of Peter Keith with Piper Jaffray.

I know you provided some background information on the International segment performance, but that overall was perhaps the biggest delta with your results relative to what I was expecting. It sounds like some areas that you are looking for improvement did get better, specifically with China and perhaps Canada. But I guess it looked like in terms of an operating profit growth that it took a turn for the worse relative to Q1, where you did show nice improvement, and it seemed like it was SG&A dollars embedded in there. I'm wondering if you could just provide a little more discussion around what happened in International and if things changed within the last 6 months, or if you would anticipate that becomes more of a operating profit driver going forward here in the back half of the year.

Thanks for the question, Peter. It's Jim. I'd be happy to talk a little bit more about the components under our International segment performance. You rightly point out that our operating profits in Q1 in International increased significantly year-over-year. When you would take a look at what happened in Q2, we saw many of the same trends and improved operating profits that we saw in Q1 actually happen in Q2 as well. The primary difference in our operating income performance in Q2 for International was driven by the result in our European business. When I look at the performance of our business in Canada, Five Star and Mexico, coupled with the restructuring activities we did in Turkey and China, our profits actually increased pretty dramatically in the International segment. Europe profits were actually down significantly in Q2 after being up in Q1, primarily driven by 2 factors. Very difficult macro environments in consumer spending in Europe similar to what we've seen in other parts of the world. Quite frankly, that environment is more difficult than what we're experiencing in the U.S. market from a consumer standpoint. The other thing not to be underestimated, and that is the commentary that both Brian and I provided on what's going on with mobile phone connections in Europe, specifically in the U.K. About 1.5 years ago, the carriers in that market switched from 18-month contracts for customers to 24-month contracts. We are now in the middle of that lull period were typically we would have more contracts that are coming up for renewal that aren't available for the marketplace to basically upgrade those customers. So we'll start to see that later towards the tail end of this year, but a combination of the macro environment in Europe and that significant change in contract terms and kind of being in that valley right now is what's driving our European operating profit down.

I would just add one thing. This is Brian, Peter. And that is, and Jim touched on this, the impact of those iconic phone launches being pushed later into the year has an even bigger impact in Europe where it is such a larger percentage of our business there. Thanks for the question.

The next question is from the line of Dan Binder with Jefferies & Company. Daniel T. Binder - Jefferies & Company, Inc., Research Division: I was wondering if you can give us a sense of the type of price and labor investments you'll be making in the back half of this year versus last year. And then as a follow-on, what we should expect inventory to look like in terms of growth over the next 2 quarters.

This Mike Vitelli. Thanks for the question. You asked about price. Did you say price and labor investments? Daniel T. Binder - Jefferies & Company, Inc., Research Division: Yes.

As far as pricing, we intend to continue the competitive actions that we've taken since the fourth quarter of last year into the first and second of this year. We've seen that pay off for us well as we continue to grow share in categories that we've been trying to grow share with, like appliances, gaming. And what we've seen also is as we've been more aggressive on our pricing in categories that do well online like digital imaging and MP3, our aggressive price actions there have really paid off. We're going to continue that as we move to the second half and we expect the second half to be as competitive as it did in the past years and the situation that we're seeing today. As far as labor is concerned, when Jim talked about the SG&A changes that we've been making, we've been very point-ful to not be making any material reductions in our store labor. In fact, just the opposite. We're making investments in our store labor areas by having key labor investments in our gaming area, in our computer, in tablet area, in Best Buy Mobile. All the places where we're seeing the growth, that's where we're putting our labor there. And as far as our inventory is concerned, we've made very good progress in reducing our inventory and getting it in line with what our expectations are on our days of supply, and our inventory positions both at the end of each of the next 2 quarters would be commensurate with the days of supply we'd expect for those periods in time.

Yes, and key for us in that obviously is remaining fluid based on what we see the consumer actually doing in the back half of the year. At this point in time, we've got the opportunity to influence both our inventory purchases on the front end and what we can do after the holiday season. So in large respect, Dan, what we're doing is we're preparing for a wide range of outcomes because when the consumer continues to demonstrates interest in the areas we have seen interest in so far, we're going to make sure we have the right level of inventory in place. And if those demands are a little greater, we'll have opportunities to flex up a little bit. If they turn out to be a little softer in some areas, making sure that we can flex down on that inventory so we can keep the product in the store that's freshest and is actually moving for the benefit of customers.

This is Brian, Dan. And as reflected in our first half margin performance in the commentary Jim made, run-all [ph] we expect in the second half we are not going to hesitate to be where the customer needs us to be and we will not hesitate to let people know that we are the best buy.

The next question is from the line of David Strasser with Janney Montgomery Scott.

I'd like to go back to the question on Europe. It seems you've been struggling there. Obviously, part of that is macro. But what about the Best Buy stores there in particular? I mean, does it cause you or force you to think a little bit about whether that fits into the long-term strategic rationale for you guys? It seems in -- for example, even in China, you kind of cut bait there. You realized that the Best Buy store wasn't the right model and Five Star is a better model, and you seem to be thriving there. So just a just a little thought about that.

Yes, sure. I'm happy to, David. So the first -- maybe a little more context on China. You correctly point out that the model that we had launched within Best Buy and the roughly 10 stores we had there wasn't giving the type of benefit that we had expected. We certainly think that there's opportunities that remain in China under some type of Best Buy-branded business. But the reason we started a test there in the first place is to figure out where we could provide a meaningful level of differentiation over time that makes a sense for the current customer there. So we haven't given up on Best Buy in China. As a matter of fact, we think we have other opportunities there. But we are absolutely focused on growing the opportunity that we have right in front of us in the profitable Five Star business in the here and now. In Europe specifically, as I look at the run rate change of operating profits, Q1 to Q2, the biggest driver of that performance is not the big box performance. It's actually the performance of our roughly 2,400 small box stores, driven by once again the macro environment and the carrier contract changes we talked about. As we launched those big box stores in the U.K., we purposely said we want to test to see how that value proposition works with customers. We certainly, as has the rest of the market, have been met with a very challenging macro setup in that space and we certainly -- like all of our tests, we continue to evaluate what makes the most sense in that marketplace from a multichannel approach. And quite candidly, we need to make sure, as we do in all of our businesses both domestically and internationally, that each of those businesses earn its right to future capital in the space. So things we know for sure. We know for sure that our teams in the U.K. have done a great job of landing a model in that place where customers recognize the value that a service environment provides and a customer experience that's differentiated. We're very pleased with what our teams had landed there from a customer and a service perspective. We haven't come to a conclusion yet on what the long-term model should look like for multichannel and big box but, David, we absolutely look at it all the time and think about the best bets that we make to grow the portfolio profitably over time.

David, this is Brian. You and I have discussed this, and we've discussed this on the call. As Jim correctly calls out, we're in the sort of early innings of leveraging our multichannel capability. We have an online business there that is making good progress. We have the 10-store big box test, as Jim called out, and we have a network of 2,400 CPW stores. And what we're really working through is, how do we leverage all of those things to create a network or web that customers can leverage in the multichannel fashion they're living? And again, to reiterate Jim's comment, I think we've got a pretty good track record that all of our businesses have to earn their right to capital over appropriate time horizon or we'll make decisions on it. Thank you.

The next question is from the line of Alan Rifkin with Barclays Capital.

Brian, more of a philosophical question, if I may, for you. We've been strong advocates of companies needing to either increase their run on IC [ph] via share buybacks as you're leaning towards or raising the dividend. And your comment today to commit to $1.5 billion in total, which implies another $600 million in the back half, I'm wondering how you go about deciding to allocate greater capital towards buying back stock in this uncertain environment as opposed to increasing dividends going forward?

Thanks for the question, Alan. The first thing we look at is, as we're looking to deploy our capital, where can we invest our capital that grow -- that will provide growth for our enterprise and payback for our shareholders? So as you know, that's the first place we go. And as we work our way through that, we then look very carefully at where we want to go relative to buyback and dividends. We have a strong track record, as you know, of returning capital to our shareholders. It has largely been through buybacks over the last 5 years. It has been perhaps a bit lumpy and we're a little steadier now on how we deploy it. And we take a hard look at, do we want to invest in buyback? Do we want to invest in dividends? We believe our share price is such that we're undervalued in the market and we think over time that's the best investment and the best deployment in this scenario.

The next question is from the line of Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: I understand your -- the comparisons in wireless clearly played against you in the second quarter. Was it something that you saw coming? And perhaps you can speak to the more near-term general trends in wireless now that the initial launches have passed, you've anniversary-ed that. And then -- and related to that in a bigger picture side, household penetration of smartphones probably reaches near 50% by the end of this year. It seems innovation may be a little more incremental than we've seen in the past. How are you thinking about wireless growth, both in the back half of this year and then longer term into '12, given industry dynamics?

Thanks for the question. I'll tell you what. It's an interesting phenomenon that happens when there's an iconic launch. It's not just the month that it launches. It tends to raise the boat in the entire industry. The phenomenon we're seeing now is customers really are sitting on the sidelines. They read the hype and the whispers and the drumbeats about new iconic launches coming and they start to wait. And relative to the household penetration of 50%, one of the phenomenons that we find most interesting and exciting about this business is the customers' desire to upgrade and the rate at which people are flipping over in the new smartphones. It is at the end of those contracts, that 18 to 24-month window, where consumers are very consistently flipping into new technology, into new phones.

And the other thing I'd like to add is -- this is Mike Vitelli again -- is in the mobile business, we have a relatively moderate share. We're in the 6% to 7% range and we've been increasing that quarter after quarter. We have a lot of runway where we're offering all the smartphones, all of the plans from all of the carriers to customers so they could see them all in one place. That is a value proposition that has been significant for us and still gives us a lot of runway regardless of what happens with the individual flow from one period at a time. I would also add that increasingly, the ability to connect more things than phones is going to be an important part of what our connection strategy is in Best Buy Mobile and throughout the store.

The next question is from the line of Colin McGranahan with Sanford Bernstein. Colin McGranahan - Sanford C. Bernstein & Co., Inc., Research Division: Just thinking about the improved -- your outlook for improving trends into the back half, it sounds like the categories that you're really looking to improve are gaming, mobile and tablets. So kind of drilling down to that. On gaming, can you give us what the comp was in the quarter? It sounded like it was negative. Obviously, you don't have a lot of new releases in the first half, but are you seeing any traction yet on the used gaming? How much is that impacting it? And what kind of improvement relative to the back half are you expecting versus whatever you saw in the second quarter? Moving to mobile, kind of following up on Chris' question, can you help us quantify on what you think the impact of that shift of the iPhone 4 year-over-year was? And then finally on tablets, what's going to drive the improving trend relative to the first half given the iPad 2 launch in this year in the first half? It seems like the trend would be pretty steady going forward unless you expect to get a Kindle tablet or something like that.

Those were several questions, Colin. So let's start with gaming. The comps were down negative mid -- kind of low to mid double digits. That's where the industry were. We actually did better than the industry. We improved our share in that period as we're beginning to have a more compelling offer both with the ability to do pre-owned -- pre-order, rather, and do trade-in and start to sell pre-owned. Pre-owned itself was relatively modest in the first half in the second quarter. What's happening now is we are beginning to do trade-ins. We're doing that successfully by having a really compelling offer on our price points of what we offer for trade-in, that we're starting to build that inventory that will allow us to have those sales in the second half. And the ability to pre-order on new iconic games is going to be impactful. So that's what we see gaming being very different for us in the second half as well as the industry being different, as it has a lot of new releases in the second half. On the tablet question, what we're looking for is continued triple-digit growth that we're seeing there as both the existing products, one that you named and additional products, come to market in the second half. And this has proven to be a very strong second half and holiday item. And that's part of our plan that we have for this year. We're seeing that with -- being one of the places, we have the most tablets that you can see both in our stores and a significant online-only set of SKUs as well. So we're the place where the operating systems come out from different people in the space. We're going to be a great place to be.

I'd add just one thing, Colin, to your exhaustive question. We also see growth from appliances in the second half. And you mentioned the Kindle tablet. You know that we have a thriving e-reader business. Kindle is an important piece to that mix. And obviously, we can't comment on anything that is new and not announced.

I think the last point you made was that your 4-part question was about phones and the impact on phones. There's no question that there was a material impact when we -- just looking at the amount of dollars we did last year in Q2 with the iPhone and with the HTC EVO, it was significant. And as Brian mentioned, not only is it a comparison difference in the sense of what did you sell versus -- 1 year versus another, there it creates a sense of "we're going to wait to see what that is," as that -- some of those iconic phones change from Q2 to Q3. And we believe that's going to be a positive impact both here in the United States, in Canada and in Europe.

The next question is from the line of Gary Balter with Crédit Suisse. Gary Balter - Crédit Suisse AG, Research Division: Your reported results, they were essentially in line with expectations, give or take a few pennies, and your stock's down 8%. It seems like there's a disconnect right now with investors. Investors are hoping that you close stores quicker and that you maybe spend a bit more money on the website. I think, improve it. As you think longer term, what do you think the market's getting wrong about your company at the current time? And ignoring the market because you don't want to work to shareholders. When we hear something like, "The stores, we haven't seen a material lower sales volume," why wouldn't you shrink the store size even quicker given that you've got 40% of the leases coming up? And I'll to the back of that. Can you comment on the tax situation in California and the positive impact that may be?

Okay, Gary, I'll try to unpack those 4 questions again from the "Colin School of One Question." First, I think the core fundamental thesis that investors are missing about us right now is that this world isn't moving to a place where it's digital all by itself or physical all by itself. Neither alone will be sufficient. What we firmly, fanatically believe is that where those things come together in multichannel so you can where the customer needs you to be, wants you to be when they need you there, we believe is the winning proposition for us and for our shareholders and we're -- our faith and confidence in that is unshaken. As to your specific question about square footage, I'm very -- many, many companies talk about what they're going to do with square footage. We're actually doing it and were doing it in a systemic fashion that I absolutely believe is the right pathway for us to take. I have extraordinary confidence in the job our real estate team and our finance team and our U.S. leadership team is taking on a pathway to getting us right size. And in many cases, that doesn't mean smaller stores. And in many cases, it does mean. It's really market by market, and we're working through that. And what was the third or fourth part of Gary's question?

California.

California. We see this as a very positive development. And we see it as a march to the inevitable leveling of what has been an atrociously unfair playing field. And we're very confident that this will act as an accelerant, bringing us to a place that is as American as apple pie where companies can compete on a level playing field. Thanks, Gary.

The next question is from the line of Dan Wewer with Raymond James. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Brian, in the Marketplace, you have 2 formidable competitors with Amazon and eBay. From a consumer's perspective, what's different or better about your effort with Marketplace?

I think what's better about it and what it does for our consumers, it allows them access to all the value-added things we're able to do. It allows us access to our customers to Geek Squad. It allows them access our store network and we think in a way that is compelling and differentiating. And again, when consumers think about CE and technology, and we know this from exhaustive research, the first place they think about is Best Buy and we think this opens up a broad array of choices that we're able to offer the consumers now that we weren't able to offer 6 months ago, and we'll be able to continue to grow that broad spectrum. And we think the combination of that and the might of Best Buy standing behind it is a compelling value proposition.

The last question is from the line of Michael Lasser with UBS.

Inherent in the full year gross margin guidance would be a flattish to positive result in the back half of the year. Can you provide greater dimension on this outlook both domestically and internationally, where if the trends from the second quarter continue, would that put downside risk to the expectation?

It's Jim. If the trend from the second quarter continued, which we don't -- we're not planning that it will, it would have lower gross margin rate than what we outlined in the outlook. What I tried to laid out in the commentary and through the follow-up on Q&A, the key things that we see influencing the run rate of gross profit in the back half of the year versus what we saw in the first half of the year is really that increased sales mix of mobile phones, higher mix of gaming titles given industry trends and the things that we've done from a pre-order and a used-gaming business, which carries higher margin in our portfolio. And specific things that we're doing around utilizing that labor attachment that Mike -- that labor investment that Mike Vitelli talked about to improve our attachment rates of solution sales both in mobile phones, gaming and in our computing business overall. We'll see how the mix of sales pans out in the back half of the year with customers. But I'd also remind you that our margin rate comparisons get much easier in the back half of the year than what we saw in the first half of the year as well. So a combination of those factors domestically. Internationally, the biggest change in the expected gross profit rate is really coming from the European business as more of those available upgrades become available. We're going to start to hit the end of that window of the valley of the 18 to 24-month cycle. We'll see the margins in the U.K. business improve as well. That will be a different phenomenon than what we saw in the first half.

Thank you, and thank you, Alicia, and thanks to our audience for participating in our first -- second quarter earnings conference call. As a reminder, a telephone replay will be available from 11:30 a.m. Central Time today through September 20. You can find the dial-in number and PIN information in our earnings press release issued today and available on our website. You can also hear the replay on our website at investors.bestbuy.com. Thank you for your attention. That concludes our call.

Ladies and gentlemen, that does conclude the conference call. You may now disconnect and thank you for your participation.