Best Buy Co., Inc. (BBY) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy’s First Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by 11:00 a.m. Eastern Time today. [Operator Instructions] I would now like to turn the conference call over to Mollie O'Brien, Vice President, Investor Relations.

Good morning, and thank you. Joining me on the call today are Hubert Joly, our Chairman and CEO; and Sharon McCollam, our CAO and CFO. This morning's conference call must be considered in conjunction with the earnings press release we issued this morning. Today's release and conference call both contain certain non-GAAP financial measures that exclude the impact of certain business events. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, which should not be considered superior to, as a substitute for, and should be read in conjunction with the GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release or our most recent Form 10-K. Today's earnings release and conference call also include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial conditions, results of operations, business initiatives, growth plans, operational investments and prospects of the company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current earnings release and SEC filings for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. In today's earnings release and conference call, we refer to consumer electronics industry trends. The consumer electronics industry, as defined and tracked by the NPD Group, includes TVs, desktop and notebook computers, tablets, not including Kindle, digital imaging and other categories. Sales of these products represent approximately 65% of our Domestic revenue. It does not include mobile phones, appliances, services, gaming, Apple Watch, movies and music. I will now turn the call over to Hubert

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

Yes, I do, Hubert. Thank you. While I remain in advisory capacity through the end of the year, this is my last official call as CFO and as such, I want to take this opportunity to express what an immense privilege it has been to be part of this incredible transformation. With our team of more than 125,000 people, we have worked hand-in-hand to Renew Blue. And today, as I prepare to step down to my current role, and spend more time with my husband and my family, I do so knowing that we have never been as well positioned as we are today to take Best Buy to a new level. I’d like to thank my peers, our corporate and field teams, and in particular, my direct reports for their exceptional contributions that have made this possible. I would also like to thank our Board and you, our shareholders and analysts for your confidence and support. Additionally, I want to publicly congratulate Corie. Corie has been my strategic right-hand partner since I joined Best Buy. With her exceptional financial acumen and deep understanding of Best Buy’s operations, she has been an influential leader over the financial and cost disciplines that have been established across the company over the past several years. She has also a highly respected cross-functional leader and will be an incredible CFO of whom I could not be more proud or confident. So congratulations Corie. And of course, I want to thank Hubert, he is an extraordinary leader and an inspiring business partner and a friend. I will be forever grateful to have had the opportunity to share this journey with you and our entire Best Buy family.

Okay, thank you, Sharon. We owe you so much. Thank you.

Thank you, Hubert. Okay, so now let’s talk about our Q1 results. Before I talk about these results last year, I would like to discuss them versus the expectations we shared with you in our Q4 call. Enterprise revenue of $8.44 billion exceeded our expectations driven equally by the outperformance of our domestic and international businesses. Non-GAAP earnings per share of $0.44 also exceeded our expectations primarily due to the flow through of higher revenues. Additionally, a lower effective income tax rate contributed to an incremental penny of EPS versus our expectations. I will now talk about our Q1 results versus last year. On a constant currency basis, Enterprise revenue declined 0.8% to $8.44 billion primarily due to the impact of domestic and Canadian store closures. On a reported basis, Enterprise revenue declined 1.3% reflecting approximately 55 basis points of negative foreign currency impact. Enterprise non-GAAP diluted EPS increased $0.07 or 19% to $0.44. This increase was primarily driven by Canada which is lapping the disrupted impact from the brand consolidation last year and a $0.04 per share benefit from share repurchases. These increases were partially offset by the negative impact of lower revenue in the Domestic segment, and a higher non-GAAP effective income tax rate. In our Domestic segment, revenue decreased a less than expected 0.8% to $7.8 billion. This decrease was primarily driven by the loss of revenues from 13 large format and 24 Best Buy mobile store closures. Comparable sales were essentially flat. From a merchandizing perspective, comparable sales growth in health and wearables, home theater, major appliances and computing was offset by decline in mobile phones, tablets and gaming. As expected, television sales related to the shift of the Super Bowl into Q1 2017 positively impacted the Domestic segment by approximately 70 basis points. In Services, comparable revenue declined 10.7% due to investments in services pricing and the ongoing reduction of repair revenue driven by lower frequency of claims on extended warranties. Domestic comparable online revenue increased 23.9% to $832 million, primarily due to higher conversion rate and increased traffic. As a percentage of total Domestic revenue, online revenue increased 210 basis points to 10.6% versus 8.5% last year. In our International segment, on a constant currency basis, revenue declined 1.2% to $614 million due primarily to closed stores in Canada. On a reported basis, International revenue declined 8.1% reflecting approximately 690 basis points of negative foreign currency impacts. Turning now to gross profit, the Enterprise non-GAAP gross profit rate increased 30 basis points to 23.2%. The Domestic non-GAAP gross profit rate increased 10 basis points to 23% primarily due to a prior year reserve on non-iconic phone inventory which did not recur this year and improved rates primarily driven by our more disciplined promotional strategy across product categories. These increases were partially offset by our investments in service pricing. The International non-GAAP gross profit rate increased 310 basis points to 25.9% primarily driven by a higher year-over-year gross profit rate in Canada as we lapped the significant disruption and corresponding increased promotional activities related to the brand consolidation in Q1 fiscal 2016 and we received a higher periodic profit sharing payment in our Services business. Now turning to SG&A, Enterprise level non-GAAP SG&A was $1.7 billion or 20.3% of revenue, a decrease of $24 million or flat on a rate basis. Domestic non-GAAP SG&A was $1.56 billion or 19.9% of revenue, which was flat year-over-year as investments in the business were offset by the flow through of Renew Blue phase two cost reductions. From a rate perspective, non-GAAP SG&A increased 10 basis points, primarily driven by year-over-year sales deleverage. International non-GAAP SG&A was $156 million or 25.4% of revenue, a decrease of $23 million or 140 basis points. This decrease was primarily driven by the elimination of expenses associated with the Canadian brand consolidation and the positive impact of foreign exchange rates. I will now discuss our fiscal 2017 and Q2 2017 outlook. As Hubert said, from a financial outlook perspective, we are reaffirming our expectations of approximately flat revenues and flat non-GAAP operating income for the full year including lapping the significant periodic profit-sharing benefits from our Services plans portfolio that we earned in fiscal 2016. A key element to achieve this, will be the delivery of our cost reduction and gross profit optimization initiatives. Based on current industry dynamic and how we see the various product cycles playing out, we are expecting slight declines in revenue in the first half followed by growth in the back half. As we discussed on our last earnings call, we recognize this will be challenging without a stronger mobile cycle and improvement in the NPD reported categories overall. I would now like to talk about our Q2 financial guidance. For Q2, we are expecting enterprise revenue in the range of $8.35 billion to $8.45 and both Enterprise and Domestic comparable sales of approximately flat. We expect International revenue to decline approximately 5% to 10% on a reported basis, but to be flat on a constant currency basis. We expect our Q2 non-GAAP diluted earnings per share to be in the range of $0.38 to $0.42, assuming a diluted weighted average share count of approximately $325 million and a non-GAAP effective income tax rate in the range of 36% to 36.5%. Inline with our original expectations, there are two factors impacting our Q2 year-over-year non-GAAP EPS guidance. First, we are expecting an approximate $0.03 net negative impact from the lapping of the periodic profit sharing payment from our services plan portfolio that we received in the second quarter of last year. Second, we are expecting an approximate $0.06 negative impact from the carryover of last September’s Services pricing investment. In addition, in digital imaging, we are now expecting an approximate $0.03 to $0.04 negative impact due to the April 2016 earthquake in Japan, which is impacting inventory availability in this high marking category. Combined, these are putting $0.12 to $0.13 of pressure on Q2 fiscal 2017 which will be partially offset by approximate $0.04 benefit from share repurchases. I would now like to turn the call over to the operator for questions.

Thank you. [Operator Instructions] And we will take our first question from Matt McClintock with Barclays.

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

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

Thank you very much.

And our next question is from Scott Mushkin with Wolfe Research.

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

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

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

Great. Thank you.

And our next question is from Matthew Fassler with Goldman Sachs.

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

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

And just adding to that, Matt, adding to that, it is I think important to note though, that when there were some new product launches in the quarter, we did see an improvement in performance and so that gives us confidence that, as new things, I don’t want to exaggerate that, as new things come to market, we have seen a slight improvement in that in the back half of the quarter.

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

Yes, so, computing, we have a very strong position in computing. We’ve in partnership with key vendors we built a superior customer experience we've a place where to shop for computer - we are gaining share and we’ve accelerated our momentum in the quarter compared to the previous quarter, absolutely.

Great. Thank you.

And we will go next to Greg Melich with Evercore ISI.

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

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

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

Great. Thanks.

The next question is from Brad Thomas with KeyBanc Capital Markets.

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

Yes, good morning, Brad, and thank you for your question. We are very excited about the changes we have made in Canada. It’s going to take a while before things settle, because year-over-year comparisons are going to be little bit difficult to assess, that sort of with a lot of disruptions in Q1, Q2 and going into Q3. So, but altogether, the decision to consolidate the two brands was very fundamental to our future. As you remember, that these two brands often time, two stores in the same parking lot made it difficult for us to invest in the stores, because many of them were sort of critical mass and so, we have unlocked that. The retention has been materially better than expected and much better than what we are seeing in the US and that’s a strong capability. Probably the reflection on our strong leadership position in the market and the combination of higher retention and closing stores of course, will have a positive impact on the profitability. This is going to be a smaller more profitable business for us, but above and beyond the short-term profit improvement, the long-term commitment with now that we have simplified the business is the ability that we have to invest in the customer experience online, in the stores and in the home. So, that’s what’s it. I don’t know that we’ve given specific numbers on the retention materially, but we can almost do the math, because Canada is the bulk of the international business. We have given you the dates at which we’ve closed the stores. The number of stores and you can almost do the math. It’s a pretty significant retention. So we are very happy about it.

Great. Thank you.

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

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

Yes, absolutely, because the – said in the first part of my response, the year-over-year comparison is going to be very muddy for the few quarters. Think about last quarter. We closed stores in the middle of the quarter. We actually closed the Future Shop for a full week. The Future Shop that continued, we closed them for a full week to retrain the associates. For several months, the Future Shop stores, even though we have announced that we were closing Future Shops, the Future Shop store still look like Future Shop stores. It took us let into the summer to rebrand them as Best Buy stores. So if you can imagine the Canadian customer who is very confused. Then there was some extraordinary expenses last year as we were going through the transition. And so, it’s really difficult to – you should not extrapolate. Let me be very clear. The Q1 results, and assume that’s the kind of improvement is going to be something, we fully expect it’s going to be better, but it’s going to be rocky comparison from the first few quarters.

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

Gotcha. Thank you very much.

The next question is from Michael Lasser with UBS

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

So, good morning, Michael. I appreciate it’s hard to track, because what we have when we report our earnings, is NPD, and NPD for us is a meaningful part of the categories we talk about 60% flat. But it excludes appliances and phones. And so, why the NPD category has improved, and bear in mind that there is a suitable, but it’s not 1.9% probably may be between 2.5% and 3% decline of NPD when normalizing for the suitable. You have a very material decline in phones. And so, we estimated that we are continuing to gain share at a pretty consistent pattern. We have not seen any material change there. Of course, it varies by category. We think that, I mean, if the entire strategy of the company over the last three years on top of the cost reductions was made, is the very systematic and significant improvements in the customer experience across all touch points across all channels that are resulting in us gaining share and being able to reach the revenue for this quarter. So, no material change Michael. We will continue to monitor this, but bear in mind, the softness in mobile.

Okay. Thank you so much.

We will go next to Chris Horvers with J.P. Morgan.

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

So, Chris, good morning. In the quarter, I think, compared to our expectations, computing was better. No doubt about this. Again the results of our partnerships with the key vendors and great customer experience across all of the touch points, computing was better and phones was softer. And, the week-to-week, month-to-month variations are not going to go there because it’s they go with this or that. But on a quarterly basis, yes, you’ve heard our Q2 guidance and it’s very consistent with Q1. And so, we will continue move for this. One element of philosophy for the company is that, there maybe situations in the customer buying intentions and mood and so forth, we know what we can control. And the focus on execution, the ability to control what we can control is the key mantra to the company across all touch points, and believe me, while we are proud of what we’ve done, we have so much more to do across all channels in driving our performance, we will continue to be focused on that. When we manage our teams, we are not interested in excuses of any sorts. It’s all about the performance they can drive.

And then on the TV share question?

Yes, we did gain share in television and we’d expect to, based on the premium experience that we have to offer the customer in our store. We continue with the tremendous partnership that we have with Samsung and Sony and LG, et cetera. With our partnerships, we have an exceptional experience in our stores. These are still new technologies for all the customers that are buying new 4K TVs and we are continuing to offer the customer a very, very strong experience and I think that’s differentiating us from others. I also think that as you are looking at these weeks and months as industry data, including even the NPD data, this Super Bowl shift is really a big shift for all of us. So, I think that the conversation gets a little sloppy, because of the Super Bowl shift. So, t that’s just a broad statement for all when you are interpreting all of the results that are coming out, I think that is an issue.

If I may, add one word on TVs, looking ahead, I think that everybody would expect that. Various product cycles and Best Buy tends to do particularly well in the first part of the – every product cycle and then as the technology gets more mass, then it gets into more places. And at some point, the growth in TVs will slow down, if not revert on them, at some point, we would expect, could not be able to hold the kind of great share we’ve had. We are not surrendering in advance, but as investors, you guys are been around, you know that this is the kind of thing that happens. So when it happens, don’t be surprised.

Thank you.

We will go next to Simeon Gutman with Morgan Stanley.

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

Yes, the pattern in the last few years has been to increase the number when we achieve the number. Remember, when we had announced $725 million, we increased it to $1 billion when we had achieved that $725 million. So, we fully expect to continue that pattern. This said, in this new phase, I think this is a very exciting new phase, this notion of ongoing process improvements and lean approach, I think is very exciting, because it because it simultaneously improves the employee experience, the customer experience and the cost structure. The buckets we are attacking has a lot to do which causes overall product flow integrated supply chain as you would like which of course includes the work we still have to do on returns, replacements and damages and end of life and so forth. While we have a pattern of humbly looking at one step at a time, the overall cost structure there and process improvement opportunities give us a lot of optimism around what can be done. So, the teams are very busy at work. They are very methodical and we’ll keep you updated. We are not going to give a number today, but we are confident that we will be able to have a gift that keeps giving over many years coming from that broad area.

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

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

Okay. Thank you.

The next question is from Seth Sigman with Credit Suisse.

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

Yes, good morning. I think the categories that we expect to continue to do well are those that we’ve mentioned, health and wearables or home theater and appliances where we have a strong continued track record offset by phones and tablets and we have referenced the digital imaging piece. Frankly, the variations you are talking about from one quarter to the other are pretty small. So this is our team’s best estimate based on the improvement in the customer experience. The promotional calendar, the momentum in the various product categories and then we are focused on delivering that. No massive shifts, it’s a lot of small moving pieces that equates to this aggregate number which is not a huge variation again. Even if you take the Super Bowl piece, it’s less than 100 basis points. So it’s really small, but we are on it.

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

Do you want to take that?

Sure, I’d be happy to. So, our Best Buy mobile stores actually play a very strategic marketing role for us at Best Buy. And we are going to have cycles in mobile ups and downs. These are obviously our smaller stores. But these teams in our mobile stores have some of the highest NPS scores in the entire mobile business, because of the specialty nature of how we can serve our customers in those stores. They also tend to fit in malls versus our big box stores which do not fit in malls. So they play a very interesting strategic marketing role. Now we have said for the last several years that when you are thinking about in modeling our business, you really need to model the big boxes. The mobile stores, our goal for the mobile stores is to make them a colorful marketing customer service vehicle, a convenience place for our customers, but as far as increases in profits over the years et cetera, that is not a modeling that we are doing and we’d certainly wouldn’t want you guys to do that, only to be plus or minus a little, but they are quite small. And as far as the rationalization, we have closed some of the stores, again, very similar to our view on the big box stores. We want to continue to offer to our customers these retail locations where it makes sense. When a store doesn’t make sense, you guys know we have not been shy about closing a few here and there. But at this point, there is no major plan out there to further rationalize that portfolio. I don’t know about you guys, that I love free marketing and the fact that they can pay for themselves and offer our customers such an exceptional experience is a pretty compelling reason to let this fleet run.

Okay. Thanks again and best of luck.

Thank you.

Next is Scot Ciccarelli with RBC Capital Markets.

Hey guys. Scot Ciccarelli. Can you provide any more color on the TV business? Namely, what are you seeing today in terms of unit velocity versus ASP compression and then how do you expect that to play out in the second half? Thanks.

Yes, good morning, Scot. You do have ASP compression year-over-year, which makes it – which makes 4K large screen TVs very exciting to buy and help with the penetration. So, that’s, of course the characteristic of our business and it’s quite material. I think for NPD, the decline for 4K average selling price is approximately 30% during the period we’ve had. So that’s very material. We expect this will continue in the back half and so forth which will make the category very exciting from a consumer standpoint. And again, we’ll start to bring this to a more mass status. We remain very confident in the amazing customer experience that we’ve built both online, but notably in our stores. If you want to buy a 4K TV, we are the place to do this. Our teams are ready.

Great, and just a clarification there, Hubert. If we continue to see the ASP declines that we are and presumably there tends to be some even further acceleration just from a seasonal standpoint, what are we thinking about, in terms of actual revenue from the TV category in terms of - is unit velocity, unit growth enough to offset the ASP declines or are we getting to that point where, as you referenced earlier, TV isn't necessarily growing at that point? Thanks.

Yes, of course, looking into the back half of the year, last year where we had some pretty significant ASP declines, but, to your point and my comment earlier, there will be a point of time to call exactly when, when the ASP decline will in fact impact the overall revenue in the industry. So, this is a big category for us. We are doing well with it, but there will be a point where we should expect to see that.

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

Thank you.

The next question is from Mike Baker with Deutsche Bank.

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

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

Yes, virtual reality is a very exciting technology. I bet you all have seen that we were the exclusive place where you could try the Oculus in our stores. So a lot of excitement there. The impact on the business this year is going to be very marginal. So, I think exciting from a consumer NPR standpoint, very small at this point from a revenue standpoint. Sharon, on the buyback, why didn’t we buy more shares in the first quarter?

Hubert, yes, it really is the way our pattern has been since we’ve been buying shares back. Remember that, we – because of year end earnings releases, there is a period in the middle of the first quarter where we are out of the market until we get our information out there. So we are always going to be a little bit lower probably in the first quarter, you guys can probably expect that, because that’ll be probably be the case and then of course, we are absolutely committed to our $1 billion repurchase over the next couple of years. So, we are all in on that.

Yes.

Thank you.

And our final question will come from David Schick with Consumer Edge Research.

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

David, thank you, so much for your comment. This will go to the heart of all of our Blue Shirts, the fact that we are telling them that we are seeing it, it’s great the fact that you are seeing is just terrific and I want to publicly again recognize their work. The work on developing the engagement and proficiency in the stores has been a key area for us and I have to give credit – where credit is due to Shari Ballard and her team across the country in driving that. What is the form that it takes is your question. It’s a number of things. The most impressive thing is that the individual level. The philosophy is that the performance of Best Buy is really the sum of the individual performance of each individual associate. The way you lift the performance of Best Buy is by getting more of the associates to be very proficient, very engaged and to achieve their individual sales targets. As you know we are not commissioned, but we are driving performance. The form it takes in the stores is through daily coaching. Every morning, when you check in as an associate, you spend time with your supervisor looking at the results and getting a one-on-one and it’s absolutely world-class and coaching about how you can get better at your job. The individual associates - looking at the performance will look at whatever things they can get better, they may get some ideas from their manager and then check ins during the day and then check-in at the end of the day. It’s a systematic approach. Now, on top of that, we are increasingly focused on listing the product knowledge, the proficiencies, selling skills and product knowledge with moving to certify the associates and raising the bar in terms of what’s expected. All of the executive team at Best Buy is certified to sell 4K TV and high-end networking equipment showing that it’s part of the job. If the boss says kind of do the job, then, it’s not a good company. So, there is a – and then of course, it goes to all of the associates. So it’s really beautiful to see, we believe there is a lot more room to drive performance on that basis. We look at, Shari, the percentage of - and her team, we look at the percentage of associates who are achieving the individual sales targets, we see a lot of room for improvement. And that’s a continued focus of the way it manifests itself is that, a store gets the traffic it gets, that’s not within essentially the control of the store, but they are focused on, what we call value-add, which is the difference between the traffic and then the comp stores in the stores and with a given traffic, you can get different results. And so, with the same amount of payroll, you can get different results. So, we think that this is another gift that we will keep giving and truly a remarkable set of accomplishment so far. So, Shari, congratulations for your work. But beyond, Shari, well done to the entire Best Buy team across the stores. Couldn't be more proud. So, I need to conclude the call. I want to thank all of you for our joining us today. Again, a very strong quarter. Again, I want to congratulate all of our teams. We are - as you can see, we are very excited to have the opportunity to continue to work on our key priorities and with the opportunities that are related to that. I want to join everybody, of course, on the call in congratulating Sharon and Corie. I know, Corie is very much looking forward to meeting all of you and working with all of you. I know, Sharon is very much looking forward to introducing. As a reminder, Sharon is not going away, as she is going to be here until the end of the year in an advisory role. She will introduce Corie to each of the investors and analysts and work with Corie to make this an incredibly seamless transition. It’s going to be one of Sharon’s legacy to have successfully onboarded – chosen and onboarded and grooomed and onboarded Corie. So, very exciting time ahead. Thank you so much for your attention. You all have a great day.

Bye guys.

And this concludes today’s call. Thank you for your participation.