Best Buy Co., Inc. (BBY) Q3 2012 Earnings Report, Transcript and Summary

Thank you for standing by. Welcome to the Best Buy's conference call for the third quarter of fiscal 2012. [Operator Instructions] 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 Bill Seymour, Vice President of Investor Relations. Please go ahead.

Thank you, Alicia. Good morning, everyone. Thank you for joining us on our fiscal third 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 hand the call over to Brian, I'd like to take care of a few housekeeping items. [Operator Instructions] 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. You will also note that our reported results this morning include non-GAAP financial measures excluding the gain on sale of investments as well as the impact of restructuring charges, which are largely related to the restructuring activities we announced on November 7. These results should not be confused with the GAAP numbers we reported this morning in our earnings release and in the GAAP numbers we report in our 10-Q. In addition, the 2012 fiscal year adjusted guidance we'll be discussing today excludes the gain on sale of investments and the impact from restructuring charges, estimated impairment charges and the purchase of CPW share of the Mobile profit share agreement. For a GAAP to non-GAAP reconciliation of our reported to adjusted results and guidance, please refer to the supplemental schedules in this morning's news release. Also, we refer to free cash flow in today's results in our discussion today. Our definition of free cash flow is operating cash flow minus CapEx. With those housekeeping items aside, I would like to turn the call over to Brian Dunn.

Good morning, everyone, and happy holidays and thank you for joining us on our third quarter earnings conference call. My comments this morning will focus on our third quarter performance and what we have seen at this early stage in this holiday season. First, I want to take this opportunity to thank our employees for their world-class execution this quarter. I am especially proud of their extraordinary efforts in serving our customers during Black Friday weekend. For me, the key takeaways of the quarter were: we took decisive actions to drive our business, specifically in revenue and market share, both in-store and aggressively online. These actions, while negatively impacting gross margin, significantly resonated with customers and resulted in improved traffic and comp sales, including a significant increase in our online growth. We still have most of the holiday season in front of us, and we are on track to deliver both our revenue and earnings guidance for the year as adjusted. We remain committed to utilizing our strong cash flow to both invest in the profitable segments of our business and improve returns via share repurchases. I'd also like to highlight the strategic announcements we made on November 7. These structural changes are critical elements in driving our strategy in the future and improving returns for our shareholders. All of these actions are expected to be accretive to adjusted operating income and EPS next year and beyond. On balance, we continue to execute well on, and benefit from, the 3 foundational elements of our strategy: one, our unique multichannel approach that allows us to connect with customers wherever and whenever they want to shop; two, optimizing our scale to drive growth to new categories, new store formats and to gain share in key categories; and three, leveraging our financial strength and flexibility. In a moment, we'll take a closer look at our third quarter results in the context of this strategy. But first, I want to comment briefly on what we saw in the marketplace. We were at the early stage of the holiday season. But as we've all observed so far, retail has been very promotional and consumers have been value-conscious. As we'll talk about later, we purposely plan to take a leadership stance in the marketplace and step up our promotional efforts to do so. In terms of our Domestic sales performance, our Domestic comp was up 1% for the quarter and was strengthened by November's performance. Our in-store comps on Black Friday were strong, helping us to deliver overall comp of 7% for the day. We're pleased that traffic and comp sales were up across all channels for the quarter, including at the store level and very strong growth in our dot com channel. As I mentioned earlier, we took a number of actions to drive our business, including running effective promotions across multiple channels, significantly expanding our online assortment and ensuring we are competitively priced. During Black Friday, we delivered a number of records in our Domestic business; the number of people in line outside the stores, as well as overall traffic, sales and transactions. According to third-party customer surveys, Best Buy was the #1 place to shop in CE and technology and for all of retail, Best Buy ranked #2 in initial shopping destination. In addition, BestBuy.com was the third most visited U.S. retail website on Black Friday, up from fourth last year. Our multichannel strategy clearly paid dividends in the quarter. As you know, we have a target to double our online business in the next 3 to 5 years and our third quarter online sales were a significant driver of the quarter's total comp growth. Our Domestic online comp was up 20% for the quarter compared to online growth of 13% for the first half of the year. For November, our online business was up over 30%, which was double the online growth of the overall industry according to ComScore. There were several important factors driving this performance. We had a strong and deliberate online plan to reach customers, drive traffic and improve conversion, all of which we plan to execute throughout the season and beyond. We delivered a meaningful increase in our online conversion rate, on top of higher customer traffic. We offered free shipping for all items during the holiday season and we're early in the market with this powerful value message, and we continue to enhance our own online assortment. We've more than doubled our online only SKU count to approximately 50,000 products since last year. We continue to be pleased with our growing assortment. In our online only SKUs, we're already having a material impact on our revenue in this channel. It is also important to note that more than 1.4 million customers chose to pick up their online orders at the store location this quarter, representing approximately 40% growth versus the prior year, a testament to the importance of our multichannel approach. As we entered the second half of our fiscal year, we highlighted mobile phones, tablets, eReaders, appliances and gaming as the key anticipated drivers of Domestic comp store sales for the back half. I'll provide you with a brief update on each of those categories. Best Buy Mobile posted positive comp growth in the quarter, following the introduction of the iPhone 4S in mid-October. And we continue to expand our points of presence by adding more than 100 of our profitable mobile stand-alone stores across the country year-to-date, bringing our total to more than 280 stores. Tablets have been very popular so far this holiday with continued triple digit growth in the category, resulting in significant share gains for us. This growth is coming from the continued strength of iPads, coupled with the increasing popularity of Android-based models. We believe our Tablet Central strategy has positioned us to capitalize on the momentum this new product is bringing the industry. Importantly, we anticipate that tablets will we be one of the first areas where we leverage our expanded connection strategy as we grow profitable connections revenue beyond just mobile phones. eReaders are seeing similar trends as tablets and are proving to be very popular gift items this season. We have been leveraging the introduction of the new Kindle Fire and the Nook to drive triple digit growth, new customers and share gains in eReaders. Appliances continued its strong momentum, with the fourth consecutive quarter of positive comps and continued share gains. As we discussed last quarter, we expected the gaming industry would improve with more new titles in the second half. However, industry sales have been weaker than we anticipated so far in the second half. While we're pleased with the strong demand we saw over Black Friday weekend, we'll have to see how the rest of the year plays out. As you recall, we'd had conservative assumptions for TVs for this year, based on consumer demand. The good news is that TVs did pickup compared to expectations. Our total TV units grew over 10% in the quarter, delivering a TV comp that was down slightly. Growth was stronger in large screen sizes. Units in this segment were up more than 15% and comps were in the positive mid-single digits. Additionally, our Magnolia Home Theater business continued to deliver mid-double-digit comparable store sales gains. While we're not yet ready to declare a new trend in TVs, our third quarter performance represents a significant change compared to declines we and the industry experienced the last several quarters. We have also stabilized TV share and have actually driven share gains through October. Connections are a key component to our growth strategy, and overall connections grew 8% in the quarter, driven by Best Buy Mobile. As an example of the potential for expanding connections beyond phones, mobile postpaid broadband cards grew 50% in Q3 and 60% during Black Friday weekend. Moving on to our International business this quarter. Our International business delivered strong gross margin improvement and operating income growth of over 80%. The highlight was the very strong margin performance from our business in Canada. Our International performance also reflects the benefit of restructuring in Turkey and China from earlier this year. And we expect to see continued positive impact in our International segment as a result of our strategic actions announced November 7. Five Star flat comps for the quarter, driven largely by lower industry appliance sales. Five Star continues to be an important part of our International strategy, and we continue to build our footprint of stores in China. Through the first 3 quarters of the fiscal year, we generated $2 billion in free cash flow, on track to meeting our adjusted free cash flow objective of $2 billion to $2.5 billion for the end of the year. This year, you have seen us continue to deploy cash to make investments in proven and profitable businesses like Best Buy Mobile, services and Five Star. We are on target to purchase approximately $1.5 billion of our stock for the fiscal year 2012. Given our strong cash flow, current valuation and the existing board authorization, we intend to continue buybacks going forward. Rolling up the quarter, I'm especially pleased with the improved momentum in Q3 and our success in driving the top line. As I mentioned earlier, given the current landscape, value-conscious consumers in a competitive promotional environment, we are making purposeful decisions that focus on revenue and market share, while still planning to achieve our earnings commitment for the year. We will continue to focus on lowering costs. We've also accelerated our efforts to grow operating income with strategic expansion in more profitable areas, such as connections and services in a very capital-efficient way. To summarize, while it's still early in the holiday season, we're pleased with our start. We're excited about momentum we've seen in hot products like mobile phones, tablets and eReaders for the rest of the holiday season and we remain confident about our ability to execute on our strategy, deliver our key objectives and meet our earnings outlook. Now I'll turn the call over to Jim for more details on our financial performance.

Thanks, Brian, and good morning, everyone. Today I plan on covering the financial highlights of our third quarter results, along with some additional context on our outlook for the rest of the fiscal year. Before we get into the details of the quarter, for the benefit of our listeners who might be newer to the Best Buy story, it's worth mentioning that the Q3 results we are discussing today really reflect 2 different periods of consumer purchase behavior. First is a non-holiday period, including activity in September and October; and second is the beginnings of the important holiday selling season in November, especially the big Black Friday kickoff weekend. Looking back on the past several years, we have learned that it is important to assess the performance for the full November and December period to get a more complete view of customer behavior and performance for the holidays. For Best Buy, this is especially relevant considering the significant weighting of earnings derived from the month of December. This was also part of the rationale to change our fiscal year, which will result in the month of November, December and January being reported together in our new Q4 next year. Given that as important context, as we look at our Q3 results and current expectations for the fourth quarter, we believe that we remain on track to deliver both the revenue and adjusted earnings performance for the year, consistent with the guidance ranges that we discussed on last quarter's call. Moving into the highlights from the third quarter. Our Domestic business delivered both positive store traffic and comparable store sales growth. This was the first period that we've seen positive Domestic comps since the first quarter of fiscal 2011. In-store traffic is growing for the first time since Q3 of FY '10. Customer response to our multichannel offers were strong, and we performed well in the most popular CE categories for the holidays. Our online sales performance also accelerated significantly in the quarter as Brian discussed earlier. We were pleased with our top line results and the improvements in our traffic metrics during the quarter. The investments we made to improve sales and market share, coupled with customer purchases that were more heavily weighted towards value and promotional items, resulted in a lower gross profit rate in the quarter. I'll provide more color on that in a minute, but the big takeaway is that these activities paid off in positive comparable store sales growth of 1% for the quarter that were strengthened by November and concluded with a plus 7% sales growth on Black Friday. The biggest positive sales drivers in the Q3 Domestic comp included tablets, appliances, eReaders, mobile phones and movies. Total mobile computing had very strong comparable store sales growth of 16% in the quarter. Within this performance, notebook comp sales trends improved for the third straight quarter, delivering a mid-single-digit decline that was slightly ahead of our plan for the quarter. Appliances continued its momentum with comparable store sales growth of 14%. The operational changes we've made in the appliance area and the improved competitive offers continue to help us grow our market share in this business. eReader products delivered triple digit comps that once again had a meaningful impact on the total Domestic segment revenue growth. Consistent with our commentary in the second quarter call, the mobile phone business benefited from the launch of the new iPhone 4S halfway through our third quarter, as well as other new devices introduced during the period. These new devices were a key driver of the 9% comparable store sales gain achieved during the quarter in mobile phones. We expect even stronger growth in mobile phones during our fourth quarter given that these products will be available for the full quarter. The movies category also delivered comparable store sales growth as we drove strong promotional activity in this area to improve traffic. Movie sales also benefited from a stronger lineup of new releases that occurred during the quarter. As Brian highlighted earlier, our online channel was critical in driving growth throughout the quarter and especially in November and Black Friday weekend. The 20% increase in Q3 online sales was led by double-digit growth across nearly all key product categories, with tablets, televisions and laptops having the biggest impact. Television comparable store sales trends improved significantly, down low-single digits versus the double-digit declines in previous quarters. This was above our plan and represents an important improvement on one of our largest businesses. Notable areas of Domestic segment comparable store sales declined during the quarter included digital imaging and gaming. Digital imaging's revenue decline was due to continued overall industry softness and the decline in gaming was driven by industry weakness, primarily on gaming hardware. Total gaming comparable store sales did show meaningful improvement from the prior quarter, led by high single-digit growth in gaming software, driven by strength in both new and pre-owned titles. Sales in our International segment increased 1%, with favorable impact of foreign currency and net new store growth offset by a 1.7% comparable store sales decline. Our Five Star business in China delivered flat comparable store sales, which included a strong Golden Week performance. Best Buy Europe experienced mid-single-digit comp declines similar to the trend experienced in Q2. In Canada comp sales were flat, reflecting a strong sequential improvement from the prior quarter when comps were down high single digits. Key improvements versus the prior quarter came in areas like gaming, software computing and televisions. Turning now to gross profit performance in the quarter, total gross profit of $2.9 billion was down 1%. Domestic gross profit dollars declined 3% as the rate declined 130 basis points after being up approximately 90 basis points in the previous year. From a macro perspective, the decline in the Domestic gross profit rate was driven by a combination of investments we made in promotional activity in key categories and customers purchasing more value-orientated items. Getting into the specifics, the 130-point basis reduction was driven by much stronger promotional activity, notably in mobile computing, televisions and movies versus the previous year. Within the television and computing categories, consumers also purchased a relatively higher mix of value-orientated priced items. We also saw strong consumer demand in mobile computing products, which have lower gross margin rate on average. And finally, similar to last quarter, our successful tech support service offering had a negative impact on our year-over-year gross profit rate. As discussed last quarter, revenue and profits from this program are recognized over the life of the agreement, which is typically 1 to 2 years. While that explains the key drivers of the rate decline from last year, the appropriate follow-up question is why was the decline larger than was anticipated at the beginning of the quarter? Our original plans for Q3 anticipated the Domestic gross profit rate that would be down less than this. I would point to 3 key areas which drove the majority of the difference between our actual and expected results. First, during the quarter we made incremental decisions to invest in additional promotional activity. We focused these actions on areas with competitive opportunities like computing, television and movies, and we're satisfied with the strong response we saw from consumers. Second, consistent with my earlier comments, consumer purchases mixed more heavily into promotional and value items. Consumers' response was strongest in lower margin computing and promoted televisions and movies. And lastly, a higher mix of our sales during the quarter took place in the month of November and especially Black Friday, which is more promotional by nature. Within the International segment, gross profit dollars increased 4%. This dollar growth was the result of foreign currency exchange rates and a rate increase of 80 basis points. Rate strength was driven by continued work by our Canadian team to improve promotional effectiveness in large categories like notebooks and televisions. We are also benefiting from the actions we've taken in our International portfolio to exit the lower margin big box test stores in China and Turkey. Another key story from Q3 is the continued progress we have made to lower expenses and help fund the pricing and promotional investments discussed above. Excluding the impact of FX, total company SG&A was actually flat during the quarter. We have driven spending reductions in discretionary areas and have improved labor effectiveness while increasing our TV and online advertising to build traffic and awareness. Fiscal year-to-date, total SG&A expense versus the prior year excluding FX is essentially flat. Strong International operating growth of over 80% in the quarter and excellent SG&A cost control partially mitigated the total company operating income declined of 15% in the quarter. The overall decline was driven almost entirely by the lower gross profit rate in Domestic business. We continue to generate significant cash. Free cash flow through the third quarter was very strong at $2 billion. FY '12 cash flow has benefited from the reversal of year-end timing items that we have previously discussed and from proactive management of our inventory. In fact, our Domestic comparable store inventories finished down 11% in the third quarter. As Brian said, we are currently on track to deliver our adjusted free cash flow target for the year of $2 billion to $2.5 billion. Before we move on to our outlook, I also wanted to call your attention to a couple of other items included in our Q3 results. During the quarter, we incurred a total of $150 million of pretax restructuring costs that were largely associated with the planned closure of the 11 big box pilot stores in the U.K. These charges were consistent with our previous announcement on this matter. Also within the quarter, we sold our investments in the shares of TalkTalk Group PLC and Carphone Warehouse Group PLC. The $55 million pretax gain associated with these transactions, or $0.13 of EPS, has been excluded from our adjusted diluted earnings per share of $0.47 for the third quarter. With the Q3 summary behind us, let's move on to talk about our outlook for the balance of the year. As I mentioned upfront, we continue to expect adjusted annual diluted EPS in the range of $3.35 to $3.65, consistent with the previous guidance when excluding the items outlined in today's release and by Bill at the outset of this call. Based on where we see the consumer, the competitive environment and our expectations for the balance of the year, we are updating a couple of items in our full year outlook to arrive at the adjusted EPS range for our outlook. Summarizing the key elements of our updated outlook, our revenue range has remained unchanged for the entire year at $51 billion to $52.5 billion, representing full year comp sales of flat to down 3%. Based on our year-to-date sales and our expectations for Q4, we currently expect to finish around the midpoint of this dollar range. We now expect the full year gross profit rate to decline approximately 50 basis points. This includes a fourth quarter gross profit rate that is a modest decline compared to the prior year and better than the rate decline in Q3. The improvement in the sequential Q4 rate is based on a few key items. First, an improved Domestic rate in computing as promotional investments were more heavily weighted to Q3. Also in computing, we have reduced inventory transition costs due to lower levels of inventory this year. And the impact of tech support is expected to be less of a drag given the timing recognition of deferred revenue on this program. Also within Domestic, we anticipate a lower mix of gain in sales and reduced year-over-year promotions in movies, both of which should improve the rates relative to Q3. Finally, we also expect to improve International gross margins, primarily a function of easier comparisons and from the impact of incremental vendor programs both in Europe and Five Star in Q4. To offset the impact of lower gross margin expectations, we have also lowered our SG&A for the year. We now expect full year SG&A dollar growth to be approximately 2%. Excluding the impact of the 53rd week in FY '12 and FX, SG&A is now planned to be slightly down for the full year. So rolling it all up, our expectations on total operating income dollars remained within our prior range, which was a 5% decline to 2% growth. Our adjusted diluted EPS guidance range of $3.35 to $3.65 represents a range of down 2% to up 6%. In closing, we were pleased with the traffic and sales improvement in the quarter and the successful execution of the Black Friday weekend. The holiday season is just getting started and we clearly have a lot of business still in front of us this year. We believe that we have taken strong and aggressive steps to position ourselves for the balance of the holidays and to deliver our performance commitments for the year. So with that, Alicia, we're ready to take the questions.

[Operator Instructions] And our first question comes from the line of Mike Baker with Deutsche Bank.

If I'm going to ask one question, I guess it's going to be how you longer term view the balance between driving traffic and gross profit rate including not in longer term, but in the fourth quarter. At some point, I think we need to see sales and margins get better, gross profit margin, that is. How do you drive that combination?

Mike, that is the age-old question in retail and what our focus really is, our focus is to grow our business, our top line, grow our customer base and to grow up income as we do so. You've heard us talk about how important services are to us and it's our intent to grow that business. You also -- on November 7, we talked about our transaction with our partners, Carphone Warehouse. That is entirely designed to take what we've learned in smartphones and spread those connections across fast-growing categories like tablets to bring that connection capability to places where the customer is interested. And SG&A is a critical component as well. We believe that there continues to be room for us to improve our efficiency and you will see us aggressively pursue those things. And the bottom line here is we are absolutely confident we can grow our top line and our operating income and do so in a capital-efficient manner.

If I were to ask a follow-up it would be, operating profits down 25% year-to-date. So when do we think that starts to get better? That's Domestic operating profit.

Yes, Mike, it's Jim. It is. And just recall that we had planned for operating profit to be down year-to-date through Q3. And certainly given the weighting of our earnings in Q4, we had planned operating profit to be up in Q4. We still expect it to be up in Q4. But I think the core point of your first question is where do we see the opportunities in the business to grow both the top line and to grow the gross margin dollars in the business. And consistent with Brian's response, Michael, we are investing into higher margins basis around connections and services. And actually, we saw some comparable store sales growth in Q3. The key for us is to make sure that our relevance stays high with consumers and we get the opportunity to grow those businesses given the footsteps we will have both in-store and online. So we've got to bring that mix to the right level of top line growth and margin growth. But one thing is for certain, we're not going to be able to execute our strategies in growing connections and services without the strong foot traffic and brand relevance that comes along with it. And secondly, in order to grow operating income, we've got to sell the more profitable mix of products and we're seeing progress in that space, to Brian's point, around what's happening in mobility and services. We also have significant opportunities to continue to work on our cost structure, which you've also seen great progress on this year. So it's going to take a combination of all those factors, but we're certainly encouraged by where we're starting to see some of our biggest business display. As we mentioned upfront, we had very conservative assumptions for what the notebook category was going to do this year and the television category and year-to-date, we're exceeding our expectations on both of those 2 very big businesses. So in light of the macro headwinds and what we see in the CE industry, we're using this time to make sure that we may remain relevant with customers from a traffic standpoint, while focusing on the profitable growth opportunities that will actually grow op income going forward. Probably a way longer answer than you're looking for, Mike, but I appreciate the question around about finding that balance and making sure we drive op income going forward.

Our next question comes from the line of Dan Binder with Jefferies & Company. Daniel T. Binder - Jefferies & Company, Inc., Research Division: My question was just tied to some of the sourcing issues computer makers might have with the hard drives and the Thailand issues, if that's going to or you're expecting to have an impact on you in the fourth quarter?

Thanks for the question. This is Mike Vitelli. We're going to have moderate impact with hard drives in the fourth quarter. The manufacturers are doing the best they can to get that into the best products for them and for us which means it will have less of an impact on the higher-end SKUs and probably more impact on some of their really entry-level value SKUs as they put the hard drives in the best return products that they offer for the industry. I would also add that that's been contemplated in everything we just told you this morning. Daniel T. Binder - Jefferies & Company, Inc., Research Division: So if you had to take your best guess in quantifying the comp impact either on computing or the overall comp, is it meaningful?

On the overall versus what we just told you, it's not meaningful. It's within what we've been looking at for the year with mobile computing and notebooks overall.

Our next question comes from the line of Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: Last year, you seemed to be very focused on gross margin rates. And this year, really starting with the first quarter, you shifted to driving sales and a much greater willingness to use promotion. So just curious, at a very high level, what drove this shift? Was it a change in focus about what the competitive environment is? Was it the realization that perhaps the economy and the product cycle wasn't going to help you anytime soon? It seems very distinct and I was just curious what the, kind of, at the senior management level, what drove that distinct shift?

This is Brian. It is distinct, and we have been very purposeful in being, in our steady case it's always been that we need to be where the customers needs us to be. Value is critically important to consumers right now, and there's nothing more important to us than our customer franchise. So maintaining and growing that share in the places where there is growth is critically important to us because it sets up and has historically set up for us our strategies around connections and services and all the value-added things that we do better than anybody else.

Yes, Chris, just to build on Brian's point; in addition to that, if you look at the margin performance last year, specifically in our Domestic business, remember that a good portion of that was being simply driven by the mix impact of lower computer sales just based on the industry, where they were, in general. Now that notebooks have come back in -- and I'm sorry tablets have come back in and reignited that industry, last year we actually saw a benefit to the overall company rate by selling fewer computers. This year, selling more computers is actually a drag on our rate. We're happy with that because that means more dollars are coming into the till, and an opportunity for us to attach connections to those, but a big part of that change year-over-year is just driven by the mix of the computing industry in our business. Christopher Horvers - JP Morgan Chase & Co, Research Division: Also, I'll slide in a follow up and follow my peers. You talked about 3% to 4% SG&A growth for the year earlier this year and it was supposed to increase throughout the year and now you're talking about 2%, which includes the 53rd week. So I guess what allowed you, where did you find the money and what did you take off the table to try to manage what's happening on the gross margin line?

Yes, it's a great question, Chris, and similar to Brian's tee off [ph] earlier. We see significant opportunities to continue to lower our cost structure in the business. We have been moving labor around very effectively within the stores, focusing on where we can provide the most help and assistance for customers and support our business models and being aggressive in places where the labor isn't providing the returns that we need. Also if you look at our cost structure, we have been trimming back on discretionary expenses and really focusing on those expenses that would drive the business most. We're very happy with the fact that we've been able to increase support in advertising our brand during that period while at the same time lowering expenses. And quite candidly, as we get sharper on what we have to invest to drive traffic so we can sell those connections and services, we're purposely going to pull back on those investments to fund some of those gross margins and pricing and promotional investments that we made in the quarter. So more to come on opportunities in that space, but we are certainly not priced for perfection yet on the SG&A line of the business. We've got work to do and I think you'll continue to see progress in that space.

Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

I guess my question is given the mid-quarter launch of the iPhone, would you have expected the mobile business to improve more than it did? And kind of related to that, is there anything else that might been a drag in that segment, especially given the very strong growth you highlight in tablets and eReaders, which I think is all part of that category?

The iPhone, as you said, happened in the middle of the quarter and continues to gain momentum for us as our inventory positions improve in that category. I would also say I think, again to Jim's point earlier about mixing in November and different periods, the Black Friday week, which is extraordinarily strong for us, is a -- even while we had record connections in that day, people coming in and doing mobile phone set up is more challenging in that environment than it is in probably of any other week of the year. So when you look at it in balance of where we're growing overall connections and where it will continue to grow in December, January and February, we're pleased with it. And the inventory positions continue to improve there as well.

Scott, was the back-end of your question about our tablets and eReaders part of how we report our mobile sales?

Yes. I mean I guess my thought was if iPhone launched, I would expect pretty strong demand for that. Again, I don't know the supply situation as well as you guys, but then also you highlight triple digit growth in tablets and eReaders, and I was assuming that was all part of the mobile segment.

No, let's be clear that mobile computing includes notebooks, netbooks, all the accessories related to that and tablets and eReaders. Mobile itself is just the mobile phone business.

All right. That's mobile phones only. All right, got it.

Our next question comes from the line of Michael Lasser with UBS.

So digging into Domestic connections a bit more, they improved from the second to the third quarter but not at the same pace as the increase in mobile phone sales. So did you see a deterioration in other areas of Domestic connections? And does that strategy become harder to execute during periods of high velocity sales and say something about the low longer-term outlook?

We were actually pleased with the growth of some of the other areas of Domestic connections we talked about with mobile broadband in the computing department, where we put in an effort over the last month or so to get more connection specials in that area and start to, as Brian said earlier, connect tablets and connect computers as well as we're connecting phones. That's very, very early in our stages of trying to get that done, but we were actually pleased. We saw strong double-digit growth that were mentioned earlier in both of those areas. So yes, I would say that week 4 of November is going to be a challenge for any high touch type of connection or set up or install, but that is what that week is; it's a very exciting and start to the holiday season. But December, we're looking forward to that momentum improving in our connection space.

So you've already seen an improvement in December? And does that speak broadly about the gross margin for the business in December as well?

We're just talking about what we saw in Q3 at this point.

Our next question comes from the line of Matthew Fassler with Goldman Sachs.

In the past, you had spoken about being somewhat selective in terms of the kind of offers you extended to customers. You were sensitive about customers who cherry-picked, and I guess this is the time of the year that's really susceptible to that. But it seems like that selectivity has abated a bit and your push for market share was much more pronounced. So is this a permanent change in your point of view? Is it something that we'll tend to see more often during seasonal peaks when you feel like that market share proposition is more critical? Any elaboration there would be great.

Our business, Matt, this is Brian, it is absolutely critical to us. There's nothing more important than our customer franchise. And you're going to see us be very focused on providing great values to our customers so that we can get them, keep them or grow them into the Best Buy fold so that we can do all the things that we can do better than anybody else, and that's connect with services, that's to help customers with connections, all in service of helping customers get the most out of this technology. At its core, that's what we do. It's what we do better than anybody else, so you will continue to see us be sharp in providing great value to bring customers to us so that we can help them complete with connections and services their full technology suite of needs.

If I can just follow up on that. Last year I guess, and it's always been your focus, last year you had more of a focus on margin this year, more of a focus on share, any chance the gross profit dollars were under pressure. So I know that Jim spoke earlier about some of the new opportunities you hope to pursue but if you think about the legacy business, is it just going to be tougher to grow gross profit dollars in that regard if you were to maintain shares, has the environment changed?

Matt, you followed this business for a long time. You know that that is largely dependent on product cycles in various categories. It's no secret that home theater has not been in a robust product cycle. You're going to see us remain focused on driving top line with our customers, share with our customers and growing our operating income. That's where we're going to focus our time and our energy.

Our next question comes from the line of Anthony Chukumba with BB&T Capital Markets. Anthony C. Chukumba - BB&T Capital Markets, Research Division: I had a question about the sequential improvement that you saw in the television business being sort of down low single digits. I mean that's quite an improvement from what we've seen the last few quarters. And I guess I was wondering what really drove that? Was it just simply increased promotional activity or were there some other things that were going on there as well, including a shift to larger screen sizes?

I would say it was -- this is Mike Vitelli again. I would say it was both. We were clearly more promotional in the third quarter than we were last year, which is why we know we've gained share in televisions in the month of October and why we don't have December, November results yet. We would imagine that would continue to be true. But to your point, one of the places we saw the biggest gain, Brian mentioned it in his opening comments, that we saw a greater than 50% growth in greater than 46-inch units. So that's where you certainly see revenue opportunity. Also, that's a great category for us to attach services and connections as we've seen both 3D and IPTV grow as a percentage as well.

Our next question comes from the line of Gary Balter with Crédit Suisse. Gary Balter - Crédit Suisse AG, Research Division: Following up from the questions, Brian, and just trying to bring it all together. Could you talk about, like you mentioned SG&A will be lower, but can you talk about your plans in terms of store closings into next year and as you see your Internet growth be at 20% and your store growth be potentially flattish or around flattish, does that change your thinking about how quickly we should be shrinking store size and closing stores? And as part of that, when you made the decision to go to more aggressive pricing, were you disappointed in the comps that you ended up generating from that?

Gary, no. Let me start by saying no, we weren't disappointed with the comps we saw coming from that. We're very pleased with how traffic grew across all our channels in the quarter. We're very pleased how they accelerated into the holiday season. That's traffic and that's top line. And we have done work on rationalizing some of our square footage. But again, I need to remind the audience, Gary, we believe that installed base of stores is a huge advantage with us. The way customers are leveraging our website, the way customers are gravitating to an in-store pickup type environment, the way the services business and the connections business is growing, and I'll just remind everybody on the call that connections business, about $150 billion of it is addressable by us a year, and we have about a 1% share of that. We see that as a massive growth opportunity. Those stores are a very important place for us to do that customer acquisition and make those connections with customers. We are doing a lot of work in getting our stores rightsized where we think that makes sense. So for me it's not about closing huge tranches of stores, it's about being where the customer needs us to be, online, in stores, on the phone and it's about us being priced competitively so that we can get into the world of connections and attachments and services that help customers put this technology and service of what it is they're trying to do. That really is our game plan and it's the hypothesis at a very simple level.

And Gary just to follow up, this is Jim. As Brian talked about, the key focus of us resetting the stores to perform stronger in a connected world also gives us the opportunity as we focus on the big improvements that, that will drive to the operating model. Brian mentioned the efficiencies that we also see in continuing to rightsize the stores based on the business we see going forward, which incorporates the assumptions you made around what's going to happen in connections and services and what's going to happen online. We continue to be on track to deliver the square footage reduction that we've talked about over the 3- to 5-year window. Last quarter, I gave a little update on the progress we had made on the first tranches of stores. We're actually doing a few more stores this year than we had planned, and we remain on track to see anywhere between 10% to 15% square footage reduction in those stores. But just back to Brian's broader point, that work is being done in service of making the operating model better, the efficiencies that we'll get out of the SG&A cost. That's a small portion of the story. The bigger portion of the story is the gains we'll see in growth and services and in connections while we increase those points of presence.

Gary, it's Brian. Let me just add on to the longest answer ever. We have every intention of being relentless around 3 things: about driving our customers to our brand across all the channels that we conserve them in and we're going to be purposely driving them across our channels; two, you're going to see us be relentlessly focused on providing connections and services better than anybody in the world for those customers when they come in; and third, you can and should expect us to be relentless again in driving efficiencies throughout our business wherever they exist. We'll look at every dollar so that we can provide the best of those 3 dimensions for our customers and our shareholders. Thanks for the question, Gary.

Our next question comes from the line of David Gober with Morgan Stanley.

We've touched on this a couple of times kind of tangentially. But I was just wondering if you could speak more specifically about attach and whether that's services or accessories maybe in computing. Could you just talk a little bit about what you saw in the quarter? It sounds like the big-ticket items in the stores sold very well, but the attach rates were less than you might normally expect. Can you talk at all about what you're seeing there? Is it just a function of the environment? Or are you seeing any kind of share gains or losses from other players in terms of maybe some of the smaller items that you would normally get a nice margin on even if they are smaller kind of dollar items?

Yes, David. It's Jim. Looking at that from a couple different perspective, one of the things we've continued to see in the quarter is that our relative attach rate of services across the board is primarily driven by the price points people are purchasing at or above computing items and television items. When we look at the attachment rate across those price points, they have actually held pretty stable and in some cases have actually grown year-over-year. My comments around the mix of what people are buying in lower dollar value in more promotional items, as they skew more into those, those generally come with a lower attach rate. So by ASPs by brand [ph] we've seen attach rates pretty consistent with previous years and actually growth in a number of the categories. But when our mix shifts to lower ASP items, we see a little less attach in that space. To the comment Mike Vitelli made earlier, also it's beginning to more promotional periods around November. Those are typically just lower attach months in general, just given the velocity with which we're moving traffic through the store during -- especially the Black Friday promotional weekend, weekend.

And I guess just a quick follow up, more specifically on tablets where you're seeing maybe a little bit of share shift away from the iPad, and maybe that's because there are some lower ASP SKUs there. But are you seeing anything changing there in terms of the value of the basket? I know you previously talked about tablet baskets being as good if not better than notebooks.

There's no change. That's still true, okay. Total tablet basket is better than a notebook basket.

And we continue, by the way, to be very pleased with the iPad sales in both online and in our stores.

Our next question comes from the line of Dan Wewer with Raymond James. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Change the topic to the balance sheet. There are some fairly significant changes year-over-year. Maybe, Jim, you could talk about the 8.4% drop in inventories, yet receivables are up 15% year-over-year. And then looking to payables, the inventory rate, it jumped from 98% to 109%. And were these big slings related to the dispositions of some of your businesses or is there some strategy, different strategy behind the exchanges?

Yes, Dan. Appreciate the question. There's a number of different things going on there. Let me unpack that for you a little bit. First and foremost, we're very pleased with the way that we've managed the balance sheet this year, especially the inventory levels within the business. If you recall last year in Q3, inventories grew pretty substantially based on a softer level of sales than we anticipated last year. So a lot of the improvement that you're seeing year-over-year in inventory is based on we had too high inventories at the end of last Q3. We've done a much more effective job and it had stronger sales this year that's one component of it. Another component of it is related to some of the timing differences we talked about at year end around our payables and receivable positions. We knew that we had benefits coming in Q1 and Q2 of this year, which we've been talking about all year long. That's lifting the cash, free cash flow from those items. The other item that you mentioned specifically is the growth in accounts receivable, principally driven by 2 things. As our mobile phone business continues to grow, the bounties that were due from the carriers are a higher percentage of our receivables overall. That's one part of the growth. The other anomaly that sits a little bit in Q3 is just given the strength of our Black Friday sales, a lot of the credit card receivables we generated over the Black Friday weekend don't get collected until the next week. So we get a little bit of just a timing issue at the year end, at the quarter end of Q3 around that piece. So those are the 2 biggest pieces that explain what's going on in the receivable balance. In general, though, as we look forward to the end of the year, we're going to be in a much better accounts payable position than we were at year end. Our inventories won't be down as much as they are in Q3 because by the time we got to the end of Q4 last year, we had managed down a lot of the inventories. But we are still going to be in that camp of free cash flow $2 billion to $2.5 billion. So we're very happy and satisfied with the progress the teams have made on driving our cash flow for the year. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Okay. And then in terms of expenses, you're obviously not giving any outlook for next year but based on your enthusiasm and Brian's enthusiasm, it sounds like this flat SG&A dollar trend you would expect will continue into next year. My question is if you're simultaneously growing your connection business at a faster rate and there's a lot more labor needed to sell connections than let's say a cash and carry item like a Blu-ray DVD player you have stacked up by the cash register, how do you go about cutting your store payroll while maintaining your service levels that you want and growing connections?

Yes, it's really about balancing it, Dan, right? So we need to reduce our cost structure in places so we can redeploy labor against high margin areas. We've been doing that all year. So as you'd expect looking at our SG&A this year being down a little bit, we're investing more labor in the mobile phone space, for instance, than we did last year. We're investing more labor in the services space than we did last year. So in spite of investing in those areas for growth, we're still bringing expenses down. Part of our goal, obviously, is to manage that portfolio and hold expenses flat to bring them down while still funding those profitable growth levers in the business. We do see significant opportunities to continue to do that in the portfolio. The square footage reduction is just one element in doing that. But across the P&L, we see opportunities to be more efficient in our labor model and other things in the business.

We have time for one final question. Our final question comes from the line of David Magee with SunTrust Robinson Humphrey.

I'm just curious just after being in the stores during Black Friday weekend seeing a lot of the product brand TVs featured, how did that subcategory do? And does that -- your approach to that category change at all as you go to next year given your pricing strategy?

David, this is Michael Vitelli. I'm not sure I understand the point of your question.

I'm curious how the private brand TVs performed as a subcategory. And as you become maybe a little more promotional driving traffic, does your approach towards that business change?

Yes, as we reported we were pleased with the momentum that we saw in television. There was a positive change sequentially in what we saw in the business. But if you were there on Black Friday and watching that, that is a unique period of time for promotionality. So whether that's going to be done by us or by manufacturers at different points of time, that changes every year. But fundamentally, television is a core part of our business. We're going to drive the millions of units there. It's another area where connections are important as Internet connected television, DIRECTV, cable companies, all of those are part of those connections that we need to accelerate. And we still continue to use our private label brands as a way to drive the television category as well.

Okay. And so you still feel confident regarding the product brand approach to the business?

Absolutely.

This is Brian. Exclusive brands are a very important part of our portfolio. We're very pleased with their performance and actually very pleased with their performance. Thank you for the question.

Thank you, Alicia, and thanks to our audience for participating in our third quarter earnings conference call. That concludes our call.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.