Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Q4 2019 Fiscal 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 approximately 1:00 P.M. Eastern Time today. [Operator Instructions]. I will now turn the conference call over to Mollie O'Brien, Vice President of Investor Relations.

Thank you and good morning everyone. Joining me on the call today are Hubert Joly, our Chairman and CEO; and Corie Barry, our CFO. During the call today, we will be discussing both GAAP and non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful, can be found in this morning's earning release, which is available on our website, investors.bestbuy.com. Some of the statements we'll make today are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may address the financial conditions, business initiatives, growth plans, investments and expected performance of the company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current earnings release and our most recent 10-K for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. As a reminder, the fourth quarter we are reporting today includes 13 weeks compared to last year's 14 week quarter. We estimate the extra week last year was approximately $760 million in revenue and approximately $0.20 of non-GAAP diluted EPS. Last year's extra week is excluded from our comparable sales calculations. I will now turn the call over to Hubert.

Good morning everyone. And thank you for joining us. I will begin today with a review of our fourth quarter and our fiscal 2019 annual performance, will provide an update on our progress as we implement our Best Buy 2020, building the New Blue strategy. And I will discuss our priorities for fiscal 2020. I will then turn the call over to Corie for additional details on our quarterly results and our financial outlook. But first, we are very proud of the financial results we've just delivered. In the fourth quarter we grew our Enterprise comparable sales by 3%, which is on top of 9% last year. We also expanded our non-GAAP operating income rate by 30 basis points and delivered non-GAAP diluted EPS of $2.72, which is up 23% compared to last year excluding the extra week on a reported basis. Including last year's extra week, our non-GAAP EPS was up 12%. On a full year basis, we grew our Enterprise comparable sales by 4.8% on top of 5.6% in fiscal 2018. This is the best two year stacked comparable sales in 14 years. We expanded our operating income rate approximately 10 basis points and grew our non-GAAP EPS by 26% on a 52 week comparable basis. I note that with the annual revenue of $42.9 billion and non-GAAP operating income of $2 billion we just delivered, we essentially met our fiscal 2021 target provided at our Investor Day in 2017, two years earlier than we said we would. From a capital allocation standpoint, we returned $2 billion to our shareholders through dividends and share repurchases. And our non-GAAP return on invested capital now stands at 25.8% indicating that our formula of investments in our future, revenue growth and cost takeout is producing very attractive returns. In addition to…

Good morning, everyone. Before I talk about our fourth quarter results versus last year, I would like to talk about them versus the expectations we shared with you last quarter. On Enterprise revenue of $14.8 billion, we delivered non-GAAP diluted earnings per share of $2.72. The EPS result exceeded our expectations and our revenue performance was at the high end of our guidance range. From a product category standpoint, we saw better than expected comparable sales results in our wearable and gaming categories and lower than expected sales in mobile phones. Our operating income rate exceeded our expectations, primarily due to strong expense management. I will now talk about our fourth quarter results versus last year. As Mollie stated, this year's fourth quarter included 13 weeks, which compares to last year's 14 week quarter. We estimate the extra week last year was approximately $760 million in revenue and approximately $0.20 of non-GAAP diluted EPS. Enterprise comparable sales increased 3%. Revenue decreased 3.7% to $14.8 billion, primarily driven by the lapping of last year's extra week. Enterprise non-GAAP diluted EPS increased $0.30 or 12% to $2.72. This increase was primarily driven by: higher operating income, a $0.22 per share benefit from the net share count change and an $0.08 per share benefit driven by a lower non-GAAP effective income tax rate. These items were partially offset by non-GAAP diluted EPS of approximately $0.20 from the extra week last year. As we expected and shared with you last quarter, our comparable sales growth of 3% included a positive 50 basis point impact from the calendar shift. As a reminder, our reported comparable sales are computed on like-for-like fiscal weeks and are not shifted to more closely aligned calendar weeks following last year's 53 week year. In our Domestic segment, comparable sales increased…

Thank you, ma'am. [Operator Instructions]. Our first question will come from Scott Mushkin with Wolfe Research.

So I think, first of all, great results and I think probably played better than people thought. But as we look at the outlook, one of the things that we've struggled with a lot with Best Buy is just how do we grow the business and look at the growth of the business going forward? I mean, obviously, the guidance is fairly de minimis growth on the EBIT line. How should we look at it, over a more multi-year period driving comps over a longer term? And what's that level? I mean, can we think of it as a 2% to 3% comp grow or is that still hard to do?

Thank you for the question and also the compliment on the results. The longer term outlook, if you go back to the Investor Day that we had in the fall of 2017, we put an outlook out there that said we believe strongly we have the ability to grow in that low-single-digits range with flattish operating income at least in the mid-term with that point going through fiscal 2021. We delivered a bit ahead of that the last couple years. Obviously the guide over the next year is right in line with that. And given the environment as Hubert talked about the amount of excitement we have about technology, the execution and just how strongly we feel our strategy is positioned well with our customers, we feel like that line of thinking is appropriate as we look out at least through that 2021 range. And then obviously we'll update you more as we have our Investor Day in Q3 on how we're thinking about any longer term after that. But I think you've seen our guides consistent with that point of view and we don't see anything in front of us that changes our belief in that trajectory.

Our next question comes from Peter Keith with Piper Jaffray.

Corie, I just want to dig into the margin guidance, so I can appreciate you guys want to stick to the flat EBIT margin year-on-year. However, going into this year, I was thinking you had some easier compares because the Total Tech Support launch was about 15 to 20 basis points of pressure, which was like in my clawback. So can you just walk us through that EBIT margin outlook in the face of these easy compares, what some of the offsets are?

Yes, you bet. So one of the things that we wanted to make sure we landed as well, we had hit the financial goals that we laid out when we had our Investor Day in the fall of 2017. I think all of us would say we still have room to grow in terms of our strategic goals, meaning bringing to life some of those customer solutions that Hubert talked about, and really finding ways to improve those relationships with our customers. And we started down that road with offerings like the IHA experience, TTS as an example and even just the early interactions we have and offerings we have with GreatCall. That being said, we still feel strongly we have a long way to go to make those really stickier and more repetitive relationship-based offerings with our customers. And so there are additional investments which we had always pondered since we talked with you all at Investor Day that we knew we would need to make over time. And while Total Tech Support was kind of one part of that in launching that last year, there are continued investments and things like supply chain. We specifically called out specialty labor in our stores and we also specifically called out a continued technology build that will help us enable some of the strategies and bring those to life. And so, the reason that we laid out a longer kind of mid-term view in 2017 is because we knew this would be a multi-year journey of investments and while Total Tech Support represented one type of those, there will continue to be additional investments as we go into future. Now, obviously, we're offsetting a number of those with the continued cost reduction. But we're trying to find that balance between making sure we actually -- and Hubert said it, continue to actually accelerate our investments because we like what we're seeing in a way that's going to create those differentiated customer experiences. And so you’ll see those continuing into FY '20 in a way that we think we'll develop better experiences for our customers.

In other words, Peter, this is a choice. We could decide to slow down the investments and increase the operating income rate. We believe the best way for us to create long-term value for our shareholders is to continue to play to win, invest in our future, because we think the reward, the medium-term, long-term rewards of building this unique differentiation, these relationships, these solutions, is very exciting. And so that's why we're managing the business this way.

Okay. But can't argue with the returns you're getting thus far. I may bend the rules a little bit here. I just want to stick on that Total Tech Support. The comp in the services segment, nearly 14% was as high as I can remember. I'm curious if that was due to the change in the revenue recognition policy. And just as we play that forward, should those services kind of run at a above average rate for the next couple of quarters as a result of the change?

Yes, about half of the growth that we saw in that services comp was due to the refinement in the revenue recognition policy. And you're going to continue to see that into the next couple of quarters, while we roll that out over the last few year's straight line. So that will continue to be -- but the good news is with there being half still sitting under that is a good healthy growth in that services business. Operator Thank you. Our next question comes from Dan Wewer with Raymond James.

Thanks. Just looking to see if you could comment a bit further on the changes in the Total Tech Support offer. And then also with respect to the accounting change, Corie, you talked about the impact the next few quarters, will it benefit all of 2020 EBIT rate as it did in the fourth quarter?

So I'll start with the last question. It won't be the entire year because obviously we're going to lap the change necessarily when we get to Q4, so you'll see some of it as you run the early part of the year but you'll ultimately lap the change. Your first question was to expand a little bit on the change and exactly why we refined the methodology. Basically, we have sufficient history now. We've had the program long enough. We ran full rollout last year around May. And once we have the sufficient history it was much easier for us to actually match the revenue with the actual usage, because we had enough history for us to know that customers were using it a bit more upfront than ratably over the life of the contract, which is how we were initially recognizing it. And so that means you pull a bit more of the revenue to match more precisely with the fulfillment cost early in the life of the contract versus ratably over the contract. We'll keep watching the usage and make sure we're continuing to match the revenue with the usage. Because the truth is, all the things the team is working on is to make sure people are using it more consistently over the life of the contract. And so I think you'll see us continue to tweak the offering and tweak what do those customers get in a way that will help us drive more consistent usage throughout the life of the contract, but for now we're -- really it’s just a matching principle making sure that the revenue is in line with the fulfillment cost.

If the customers are front-loading the usage of Total Tech Support, is there a risk that data renewal rate could drop more than you would expect, because they're probably not using Total Tech Support in maybe months 10, 11 and 12?

I was going to say, Dan, the renewal rates are in line with our expectations. In my prepared remarks, I did comment on the fact that we were going to continue to invest in the development of the customer experience, in order precisely to build these stickier customer relationships. So I've talked about more self service capabilities, also more proactive support. So for example, to proactively tell you that your firmware needs to be upgraded or that maybe you have opportunities to clean up your computer to get back to that speed that you had initially, or maybe advice around parental control and security, so self service proactive. And also in my prepared remarks I talked about how we are expanding the vendor partnerships in new ways, getting into more of these service areas. And so, you'll see us continue to innovate, because one of our -- precisely one of our goals is to expand these customer relationships and measures that’s stickier over time. So again, in line with expectations, but opportunity to continue to evolve our customer relationships.

Our next question comes from Anthony Chukumba with Loop Capital Markets.

So I just wanted to kind of take a step back because I was little looking through my notes. When we had this call a year ago, you're coming off of your best year in quite some time. You did that 9% comp in the fourth quarter of 2017. That was your best comp I believe in 13 years. And you got it to $4.80 to $5 a share on EPS and a zero to 2% comp for the full year. You did $5.32 in EPS and a 4.8% comp. And that was with flowing iPhone sales that was with Amazon carry more Apple products. So I'm just trying to understand like clearly there's a lot that broke right in 2018. I would just love your comments just in terms of what went right in 2018 that maybe you weren't expecting or are you just being very conservative when you guided to the $4.80 to $5 and the zero to 2% comp.

There were a couple of things that we actually talked about at the start of the year that broke rights here rising. One, we've talked about our belief that the gaming cycle might actually slow a bit heading into last year and we were very clear. That tends to be a more cyclical business after having such great switch results. What we didn't have line of visibility to was a phenomenon that would become fortnight in particular and the social gaming side of things, because that carries not only the switch as a console, but listed all those in gaming. It listed computing gaming, it listed peripherals or the headphones and the things that are used in gaming, it listed all of those. And that genuinely was something that we didn't see in front of us being quite as strong as it turned out to be for the year. And that was a material change versus our original expectations. If you look at the rest of the business and I think Hubert talked about this a little bit, when you're talking about what is it that makes us excited about where we are, I also think there was an execution element around the strategy that continued to be early on a little bit of what our initial expectations were at the start of the year. Obviously a good consumer environment health, but on the back of a good consumer environment and clear interest in technology, our execution and our ability to deliver on that more relationship-based experience in our stores, in homes, online, I think actually genuinely performed even better than necessarily going into the year and when you have a better consumer environment then necessarily you imagine -- and you put on top of that even better execution and better acceleration of the strategy. I think you also just end up accelerating the results in a way you didn't necessarily expect at the beginning of the year.

Thank you. Our next question comes from Michael Lasser with UBS.

Can you break down your outlook, your comp outlook for 2020 in terms of what you expect the consumer electronics market to grow at and what you think your share gains are going to be in the year ahead? Also, you rolled out a new leasing program, lease to own, how much have you factored into your guidance that, that will contribute in the year ahead?

So let's start with the first question around kind of what we're thinking through the industry. The last couple years, the industry depending on the quarter obviously there's ebbs and flows, but you've seen flat up slightly across the industry. And remember, this is a broader definition of the industry, not just NPD, you have to think about things like gaming and phones and appliances and the Apple products. You've definitely seen flash up a little bit. As Hubert informed in some of his opening remarks, we don't see anything in front of us as the trajectory of the industry massively changes. And so we're expecting that same kind of ranges of maybe it's flattish, maybe up a little bit or something in that realm would make sense given the guide that we're seeing. Therefore, share gains is anywhere from maintaining the share that we have today to maybe slight share gains over the year. In terms of the leasing program, we have -- we were testing an expanded leasing program in a couple of markets. We were pleased with the results that we've been seeing and therefore are now going to expand the number of stores with our leasing solution. I think what we like about it is it actually opens up the opportunity for customers who might not otherwise be able to have credit or otherwise be able to have access to the kind of products that we sell. It opens up access to that product at a whole new customer base for us. That is included in the guide that we gave you and so you can assume that we’ve factored that in. But most importantly we like that we can potentially open up the experiences that we offer to a whole customer base that might not otherwise have the chance to purchase the set of products that we sell.

If I could just sneak one last question in. We're getting the question, what was the contribution from the accounting change around Total Tech Support in the fourth quarter?

So remember, not an accounting change. It is a refinement of how we're recognizing the revenue just to be very clear. We haven't called out exactly what the amount is, but I would think about it as roughly enough to kind of offset the impact that we saw or about half the impact that we saw from our warranty program. So the downside of the warranty, about half of that was offset by the upside from the refinement of the revenue recognition on Total Tech Support.

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

So can you help us understand how you're thinking about the impact of Apple's expanded distribution on a 1P basis to Amazon and Costco, obviously, they're incredibly important partner of yours. And just trying to think about the potential dilutive impact of their expanded distribution on your business?

Yes. Thank you, Scot. So we reported in Q4 comps that were at the top end of our range of 3% and that reflected or that included the impact of the expanded distribution of Apple. So we feel good about this. What I would say is that when we work with our key vendor partners, we work to make sure that the customer experience we offer is very unique and really meets the customer expectations. And frankly, in the case of Apple in particular we're very proud, the experience we provide both in our stores in our -- we have 900 Apple Stores within our stores. We have 3,000 Apple experts in our stores. We've also expanded our relationship with them around services. We probably are the largest reseller of Apple Care. And we provide Apple service in some of our stores. And frankly, as is the case with our key vendor partner, we'll continue to innovate and move the relationship forward in ways that are in line with the goals of that vendor partner and advance the customer experience. So we live in a world, where we get to compete with some of the world's foremost companies. You've named a couple and there's a few others and that makes our sport stimulating. And so these kinds of move forwards are encouragement to keep moving because some experience forward so that we offer a unique customer experience and we drive innovation and experiences for our customers.

Just to be clear it looks like mobile phones actually declined in the quarter. Is the expectation as we kind of roll through calendar '19, mobile is in kind of a perpetual decline situation or was this kind of like the initial impact and you guys expect to your share and obviously failed in mobile to continue to ramp?

So just to be clear, I’d separate the mobile discussion a little bit from the expanded distribution discussion. Mobile, what we're seeing in mobile is a different question. I think you've seen lots -- written in a lot in the public, about just in general a maturation of the mobile cycle, the replacement cycles extending for people who are buying mobile phones and general softness. We actually don't feel like this was as much a question of share loss associated with any kinds of distribution changes. This is more just a question of broadly how often are people buying what are now pretty trendy phones and replacing them. And we've taken that -- and we said it specifically in our prepared remarks, we've taken some of that expectation and pushed it forward into our guide for next year. And by the way, we've been pretty consistent on our expectations for the mobile business over the last couple of years.

Thank you. Our next question comes from Chris Horvers with JP Morgan.

I wanted to follow up on the operating margin question which I -- clearly a focal point out there. So Corie can you share what the operating margin expanded on a 52 versus 52 week basis, presumably if it was up 30 in against the 53 week or the 14 week, it would have been up something higher than that. So the question on '19 is basically so are investments accelerating because it doesn't sound like the expense opportunity is slowing or is the level of comp perhaps the difference? So if you did a 3% comp in 19, like you did in 4Q, would you actually see operating margin expansion?

So for the year, if I were to adjust, FY19 versus FY18 on a 52 to 52 week basis, we have 10 basis points of operating income rate expansion. If you remember at the beginning year, we had guided flat on a 52 week basis, which would have been the 4.5%. We had 10 basis points of operating income rate expansion. And that was on a pretty significantly higher top-line than we expected, obviously, almost the 5% comp on the top-line. And so I think as you look into next year, obviously we gave you the range and we believe that will lead to a flattish operating income rate. I wouldn't say the investments have accelerated, I think it goes back to the original conversation we were having, which is we continue to make targeted investments in the places that we told you in the fall of '17 that will help us accelerate our progress on our initiatives. They are different really in pace than we had expected at the beginning. And we feel pretty comfortable that we actually like the pacing in they are in line with what we had thought at the time that we gave the original guidance. And so to your question, yes, if you massively outperform the top-line, obviously we may come back to you with a different economic equation. But from what we see in front of us, I feel pretty comfortable about what we're showing. It takes into account both the cost reductions we see in front of us and the investment profile.

Understood. And then -- and as a follow up, there's a lot of noise out there around tax refunds. Can you remind us a few years ago, when they were delayed, did that actually impact your business and is there anything that you're seeing in the business now with tax refund dollars being lower year-over-year such that, are you expecting some catch-up in the latter part of the quarter?

So it was two years ago we actually specifically commented, as to exact time, I remember the call distinctly, on there being a slowdown in the quantity of tax returns. In that year what we saw was actually most of that did come back to us and most of it back in Q1 as the quantity of tax returns evened out throughout the quarter. We're feeling a little bit of softness right now due to what has very clearly publicly been both a quantity of tax returns being down but also the amount for return right now is down. And what we're keeping an eye on is not as much even just the quantity question but also the amount for return and how that ultimately will impact our business over the quarter. The good news is at the end of the day, people will see reductions in their tax rates meaning their take home pay throughout the year no matter what the amount of the return is in and of itself. So it kind of becomes a timing question throughout the year. But we're definitely watching and have incorporated some of those thoughts into the Q1 guide.

Our next question comes from Curtis Nagle with Bank of America Merrill Lynch.

So just want to focus a little bit more on the lease to own program, I guess how much is it is in the guide? And then B, just I guess more of a theoretical question. Why did you choose to roll it out, I know you guys said that it's helping. But -- and I know in terms of credit risk you're probably not going to bear any, but inherently it is a lower quality business and process is arguably less sustainable given that these are customers who typically can’t qualify credit or typically lower income. So I guess do you see any risk to that?

So first of all, obviously, we're not going to comment on the exact amount that's included in the guide. But we've included some amounts in the guide. We specifically did test this in a couple of markets. And I think what's important here is that this genuinely is a whole new tranche of customers that would not be able to purchase products with us. The agreements that we have, we don't bear the risk over the longer term of the agreement. And so it is -- I think it makes a ton of sense for us. That being said, I think it makes even more sense for the customers. At the end of the day, what we want to do is be able to serve the widest lots of customers we can and give them access to the type of products that we sell. And these are customers who likely would not qualify for the credit offering that we have. And therefore this gives them an option to be able to actually qualify for some type of agreement with Best Buy and then be able to pay that off over time. And so I think we feel pretty passionately, so there is actually opens the doors to a whole new -- I mean think about it, sometimes this isn't just people who have bad credit, this is people who in some cases just have no credit. And this is the start for them to be able to build a credit portfolio and actually will lead to a much more robust credit portfolio over time. And history has shown up very, very, very few to the less than 1% range of these customers go delinquent on their agreements. And so this is actually a very nice offering and in fact I think helps a lot the population create credit when they might not otherwise have some.

So this is the customer acquisition play with catching people early on in their credit history and with a view to build relationships over time. So this is actually consistent with our overall strategy of helping customers, we are going to help more customers and allow them to neutralize with technology with a view of a relationship over time. This is not a deviation from the strategy. So we're excited about it, it makes sense from a customer standpoint and obviously from a financial standpoint as well.

And just really quick on the buyback, it looks like guidance is lower than what you did for this year, is that just some conservatism? It does look like your cash flow probably would support more. So I'm just curious how to think about that?

Obviously behind the scenes we're always taking a look at the cash flow making sure we feel like we have a minimum level of cash that makes sense and would support us through a number of different scenarios. We clearly spent almost $1 billion last year on our GreatCall acquisition and so very in line with our capital allocation strategy. We've always said, we're first going to invest in the business either to fund operations or through acquisition. Second, premium dividend payer. And then third with that access and by access we mean above and beyond whatever that minimum balance is we feel we need, we will then return that to shareholders and so that's in essence not that we did this year and we'll keep revisiting that every single year depending on the cash flow that we generate, that this seem like the right amount given what has historically been our capital positioning.

Thank you. We have time for one final question. And last question comes from Matt McClintock with Barclays.

I was wondering Hubert two questions real quick. The first one is just you talk about the customer relationship extensively on this call and creating that relationship with In-Home Advisors. And I was wondering now that the program has been out for well over a year, what efforts have you made in terms of monetizing the tale of that relationship throughout the year? Have you had some success there?

Yes, I think we're still at the beginning of our journey to build ongoing customer relationships. The -- I think In-Home Advisor provides us opportunity, I think we're still learning, kind of setting up scale, it’s interesting as a retailer, certainly, we've been -- and we’ve said this before we've been focused on transactions and selling products. So moving towards selling solutions and building relationships. This journey is at the beginning and we're learning, I think we're seeing, we're very excited by the results. But building that's institutional capability is something that will take time. As an illustration that involves modifying or adding a new focus on new key performance indicators. As a retailer, you would focus on transactions, growth rates, basket and so forth. As a customer relationship focused retailer, you're going to be focused in a local market, that how many households are there. How many of them are Best Buy customers with whom we have a relationship, what’s my share of wallet. Just by saying these things, I think you can feel the magnitude of the change we're operating and that relates to the investments we're making, the training, the tools and so forth. And which is at the beginning of that journey which personally for me is a side of excitement because you can see the upside and we have captured any meaningful part of the upside from there. So very early on in the innings of that journey.

Thanks for that. And then if I could squeeze one more in, just in terms of mobile, you brought up 5G and you brought up the foldable phone. Could you talk about how that could revitalize the category overall and potentially be a game changer, meaning it seems like with the ASPs of the foldable phone, you might be looking at something similar to historically how tablets impacted your business overall?

And with us on the call we have Mike Mohan our Chief Operating Officer for the US business. And Mike is going to take that question and then we'll just wrap.

Thanks for the question, Matt. It's an exciting time to see what's happening in technology. Clearly, we have talked about the increasing price of all mobile devices. And so all of this new technology is going to have a fairly limited appeal from an acquisition standpoint, but an extremely high level of interest from consumer, what it can do for them, and how does it solve used cases. So what we're most excited about is showcasing the technology, inviting customers into our stores, onto our site, and even having some of the products in our In-Home Advisor when you go visit people so we can show people what we can do. And I think it positions us in a very unique place to show how technology will continue help enrich people's lives and I think that's probably the best way to put our excitement in this area. We will always lean forward on something that will help customers solve a problem and I think they would expect us to take a leadership position here.

I just want to say thank you Mike. And in closing, I want to again show my hats-off appreciation for the work and talent and passion of all of our associates across all functions in the business. You guys are amazing. And I want to thank you for joining our call and your interest in Best Buy. And we look forward to continue to update you as we continue to move forward. So you have a great day. Thank you.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.