Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's first quarter fiscal year 2020 earnings 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 over to Mollie O'Brien, Vice President of Investor Relations. Please go ahead.

Thank you and good morning everyone. Joining me on the call today are Hubert Joly, our Chairman and CEO, Corie Barry, our CFO and Chief Transformation Officer and Mike Mohan, our U.S. Chief Operating Officer. During the call today, we will be discussing both GAAP and non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earning release, which is available on our website. Some of the statements we will make today are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may address the financial conditions, business initiatives, growth plans, investments and expected performance of the company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current earnings release and our most recent 10-K for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the call over to Hubert.

Thank you Mollie and good morning everyone. Thank you for joining us for what is my last earnings call as CEO of this great company. As you know, we made an exciting announcement last month. On June 11, Corie Barry will become the fifth CEO in Best Buy's 53 year history. At that time, I will transition to the newly created role of Executive Chairman of the Board. Also, Mike Mohan role will be elevated as he moves from being our domestic Chief Operating Officer to the company's President and Chief Operating Officer. I am very proud of the seamless transition we have decided to implement as it reflects positively on our momentum as well as on our focus on executive development and succession planning. It is clearly designed to ensure strategic and leadership continuity and I am grateful to the members of our Board of Directors for their diligence and care in overseeing this critical process. Before I share more thoughts on our leadership transition, let me first review our quarterly performance and provide an update on our progress as we implement our Best Buy 2020: Building the New Blue strategy. I will then turn the call over to Corie for additional details on our financial results and outlook. So Q1 was a strong quarter and a good start to the year. We reported $9.14 billion in revenue and grew our enterprise comparable sales by 1.1%, which was at the high end of our guidance. We also delivered better-than-expected profitability. We expanded our non-GAAP operating income rate by 50 basis points and delivered on non-GAAP diluted EPS of $1.02, which was up 24% compared to the first quarter of last year. I want to thank our associates across the company for their hard work and dedication in delivering these strong results. Before I discuss the progress we made on our Best Buy 2020 strategy, I would like to share some brief thoughts on tariffs on goods from China. First, let me say that the administration has so far done a very good job of minimizing the impact of tariffs on U.S. consumers by limiting the number of consumer products on the tariff list. They have done this in part by taking input from companies like us. And so far, we have been able to minimize the impact of these tariffs by employing a number of mitigation strategies, including by buying products ahead of the tariffs being implemented and by working with our vendors. Second, -- [AUDIO GAP]

Pardon the interruption. This is the operator. We are having a little bit of trouble hearing you, sir. Sir, we are still unable to hear you.

Okay.

Sir, we are still having a little bit of trouble hearing you. Ladies and gentlemen, we are experiencing a temporary interruption in today's call. Please stand by and the call will recommence very shortly. Ladies and gentlemen, we thank you for your patience. The conference will now recommence.

We are sorry for the interruption because of and I apologize for that, technical issue. I will recommence my comments with when I started to talk about tariffs and tariffs on goods from China. So what I was saying is that first, the administration has so far done a very good job of minimizing the impact of tariffs on U.S. consumers by limiting the number of consumer products on the tariff list. And they have done is in part by taking input from companies like us. And so far, we have been able to minimize the impact of these tariffs by employing a number of mitigation strategies, including by buying products ahead of the tariffs being implemented and by working with our vendors. Second, no decision has been made by the administration at this point on the actual implementation of tariffs on additional product categories. There is a comprehensive process the administration will be going through to take inputs and we intend to be actively engaged in this process to help the administration continue to minimize the impact of tariffs on U.S. consumers. In addition, there is time for the trade negotiations to progress before any decision gets made. As Corie will discuss, our fiscal 2020 guidance incorporates the estimated impact of the recent move from 10% to 25% tariffs on this List 3. As a reminder, we estimate that List 3, which is the $200 billion list that went into effect last September is only about 7% of our total annual cost of goods sold. Many of the products on this list are accessories. And while we understand List 4 as proposed is comprised of many consumer items, including many electronics, we think it is premature to speculate on the impact of further tariffs as it is unclear whether…

Good morning everyone. I am deeply grateful to Hubert and the rest of the Board of Directors for their confidence in me and their clear belief that this leadership evolution is in the best interests of Best Buy and all its stakeholders. Nearly seven years ago, the Board made a stunningly good decision when they asked a Frenchman with no retail experience to save this company and he brought his remarkable brain, boundless energy and deep passion to the job. My personal gratitude to Hubert knows no limits and I am delighted to have him nearby to call upon for advice and counsel in his new role as Executive Chair. As I think about my new role, I could not be more fortunate to have Mike Mohan at my side as our President and COO. I have worked closely with Mike for the past 15 years and I am so excited to continue to work with him and the rest of the leadership team in this next chapter as we implement the strategy that we helped build together. As far as my successor in the CFO role, we are in the midst of the search process for a new Chief Financial Officer. Now on to the Q1 financial details. Before I talk about our first quarter results versus last year, I would like to talk about them versus the expectations we shared with you last quarter. On enterprise revenue of $9.14 billion, we delivered non-GAAP diluted earnings per share of $1.02. The EPS result exceeded our expectations and our revenue performance was near the high end of our guidance range. Our operating income rate exceeded our expectations, primarily due to a higher gross profit rate and strong expense management. The lower effective tax rate also provided a benefit of approximately…

[Operator Instructions]. We will now take our first question from Brian Nagel of Oppenheimer. Please go ahead.

Hi. Good morning. Thanks for taking my question.

Good morning Brian.

First off, congratulations to everyone on their new roles. Very well deserved.

Thank you.

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

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

Perfect. Thank you very much. And congratulations.

Thank you.

Our next question will come from Joseph Feldman of Telsey.

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

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

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

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

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

Thank you.

Our next question will come from Mike Baker of Deutsche Bank. Please go ahead. Please go ahead. Mr. Baker. Your line is open. It appears Mr. Baker has stepped away from the phone. We will go to our next question from Simeon Gutman of Morgan Stanley. Please go ahead.

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

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

Great. Thank you.

Our next question will come from Jonathan Matuszewski of Jefferies. Please go ahead.

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

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

Great. That's helpful. Thank you.

Thanks.

Our next question will come from Gregory Melich of Evercore ISI. Please go ahead.

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

Thank you.

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

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

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

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

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

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

Thank you.

Our next question will come from Zach Fadem of Wells Fargo. Please go ahead.

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

Yes. So actually, we have done some correlations with how it, we actually don't have a super high correlation to housing. Some of those individual categories might have a slightly higher correlation, but we don't tend to have a very large one in total. In terms of how we see services playing with those categories, definitely as we have grown larger TV and large appliances, we have seen services like installation, delivery, those type of services expands materially as we have been able to grow those businesses. And so I think even part of what you are seeing and the reason people like Total Tech Support is, it can help them with some of those delivery and installation experiences as they are buying these larger products. And so the nice part is, we haven't seen kind of correlations right now in our business to housing and we continue to see nice results in those categories.

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

I appreciate the color and congratulations as well.

Thank you.

Our next question comes from Scott Mushkin of Wolfe Research. Please go ahead.

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

Yes. So we will start with the back half. Definitely, some of the consistent sales drivers that we have even seen coming in to the first part of the year here, we continue to see appliances as an ongoing opportunity for us and feel very well situated there. There continues to be interesting innovation in some of the other categories like what we are seeing in smart home and what we are even seeing in innovation. And you can see the different categories at different times. A new wave of tablets creates new interest. Some of the new in-home automation products creates new interest. Some of the new TV even evolutions, continued penetration in 4K and even the ability to see 8K and some of the new technologies, that continue to drive interest. And so I think this combination of continued strength in some of the underlying categories like appliances and then a continued evolution of technology in a few of the other categories, we continue to see a lot of interest in the products that we carry. Importantly, as we look ahead, I will spend just a moment on health. And we have said from day one, even when we had our Investor Day, health is a bit of a longer term value driver for us. But we absolutely like what we are starting to see in health. And if I just take you back for a second to why is it that we think we are uniquely well-positioned in this space and why is it that we built the relationship with GreatCall, I think importantly, number one, we have always said, we feel like it's very in line with our strategy. It addresses that key human need question around health and wellness. And in particular for us, when…

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

And then of course in terms of specific numbers, that's why we have this meeting in September in Q3, where the team will have the opportunity to try to update long term prospects and that's something we had announced on our call at the end of February.

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

Thank you.

Thank you.

Our next question will come from Scot Ciccarelli of RBC Capital Markets. Please go ahead.

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

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

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

Ladies and gentlemen, this concludes today's question-and-answer session and this concludes today's call. Thank you for your participation. You may now disconnect.