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Edited Transcript of BBY earnings conference call or presentation 1-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Best Buy Co Inc Earnings Call

Richfield Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Best Buy Co Inc earnings conference call or presentation Wednesday, March 1, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mollie O'Brien

Best Buy Co., Inc. - VP of IR

* Hubert Joly

Best Buy Co., Inc. - Chairman and CEO

* Corie Barry

Best Buy Co., Inc. - CFO

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Conference Call Participants

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* Kate McShane

Citigroup - Analyst

* Dan Binder

Jefferies LLC - Analyst

* Brad Thomas

KeyBanc Capital Markets - Analyst

* Michael Lasser

UBS - Analyst

* Matt Fassler

Goldman Sachs - Analyst

* Simeon Gutman

Morgan Stanley - Analyst

* Alan Rifkin

Barclays Capital - Analyst

* Anthony Chukumba

BB&T Capital Markets - Analyst

* Brian Nagel

Oppenheimer & Co. - Analyst

* Mike Lehrhoff

RBC Capital Markets - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's fourth-quarter FY17 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded for playback and will be available by approximately 11:00 AM Eastern time today.

(Operator Instructions)

I will now turn the conference call over Mollie O'Brien, Vice President of Investor Relations. Please go ahead.

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Mollie O'Brien, Best Buy Co., Inc. - VP of IR [2]

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Good morning, and thank you. Joining me on the call today are Hubert Joly, our Chairman and CEO, and Corie Barry, our CFO.

This morning's conference call must be considered in conjunction with today's release and conference call both contain non-GAAP financial measures. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, but should not be considered superior to, as a substitute for, and should be read in conjunction with the GAAP financial measures for the period. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures. An explanation of why these non-GAAP measures are useful, can be found in this morning's earnings release, which is available in the investor section of our website, investors. BestBuy.com.

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 condition, results of operation, 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 including 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.

Today's release and conference. (technical issues) The categories tracked by the NPD Group include TVs, desktop and notebook computers, tablets, digital imaging, and other categories. Sales of these products represent approximately 65% of our domestic revenue but do not include mobile phones, appliances, services, gaming, Apple Watch, movies, or Amazon branded products. I will now turn the call over to Hubert.

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [3]

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Thank you, Mollie, and good morning everyone. Thank you for joining us. I'll begin today with a review of our fourth-quarter performance and the progress we made against our FY17 priorities. I will then provide a preview of what we are focused on for FY18 before turning the call over to Corie for additional he details on our quarterly results and our financial outlook. We're pleased today to report very solid results for the fourth quarter and for the full year.

In the fourth quarter, we delivered enterprise revenue of $13.5 billion which is near the midpoint of our guidance range. We improved our non-GAAP operating income rate by 80 basis points to 6.7%, and we delivered higher than expected non-GAAP EPS of $1.95, up 27% compared to $1.53 last year. Our strong bottom line performance was driven by a disciplined promotional strategy, continued optimization of merchandise margins, and strong expense management. Our non-GAAP EPS results also benefited approximately $0.10 year-over-year from a lower tax rate.

Domestically, we continued to gain share across the majority of categories and we believe in aggregate this was due to the quality of our you assortment, the strong advertising and promotional cadence and the superior customer experience across channels. From an overall merchandising perspective we saw year-over-year sales growth in connected home, computing, headphones and home theater. This was more than offset by declines in gaming, tablets, health and wearables, and mobile phones.

We continue to drive significant growth in the online channel, with e-commerce revenue increasing 17.5%. E-commerce revenue was 18.6% of total domestic revenue, compared to 15.6% in the fourth quarter of last year.

From the a top line perspective, our revenue was hindered by constrained product availability across multiple vendors and categories, only some of which was anticipated. While we've experienced constrained product availability before, the situation felt unprecedented, given how widespread these issues were. As you may have noticed, there have been public reports regarding several of our vendors on this topic. These issues impacted multiple categories including phones, tablets, wearables, computing, and drones, and were on top of the of previously communicated $200 million of top line pressure related to the Samsung product recalls.

Also, significantly impacting our top line results was the softness in the gaming category. We expected some decline in gaming sales heading into the quarter, but the level of industry softness across both gaming hardware and software was much steeper than anticipated. As a note, the fourth quarter is a much more material quarter for the gaming category, as 50% of the annual revenue from gaming occurs in the fourth quarter.

In the international business, our teams drove a significant improvement in profitability, increasing operating income rate 240 basis points to 7.1%. On a full year basis, we delivered the top line performance we outlined at the beginning of the year, with materially better earnings growth than originally expected. For the year on revenue of $13.4 billion, we increased our non-GAAP operating income rate from 4% to 4.5%, and grew non-GAAP EPS by 28% from $2.78 to $3.56.

Our free cash flow for the year was $2 billion, compared to $633 million last year, and we ended the year with $3.9 billion in cash and short-term investments. We returned $1.2 billion to our shareholders through dividends and share repurchases, and today we announced plans to increase our cash return to shareholders over the next two years. During FY17, we executed against the three priorities we shared at the beginning of the year, which were to build on our strong industry position in multi-channel capabilities to drive the existing be business, to drive cost reduction and efficiencies, and to advance key initiatives to drive future growth and differentiation.

The successful execution against these priorities drove our positive results. Let me take a minute to provide some highlights. One, we continued to gain share in home theater, appliances, computing, and nearly all of the major C categories.

And we believe the total market for our product categories was down low single digits in calendar 2016, so clearly, our market share gains helped us offset the market decline. We increased our Net Promoter Score by over 350 basis points. We grew domestic online revenue 21%.

The successful Canadian transformation was the primary driver of more than $100 million in international operating income, compared to a loss of $4 million last year. Including an additional $50 million in the fourth quarter, we've now achieved $350 million of our three-year target to reduce cost and optimize gross profit by $400 million, enabling us to invest in customer experience improvements, while maintaining near flat SG&A.

As for the third priority, FY17 was a year of exploration and experimentation. We're continuing to test several concepts around the country that have the potential to be compelling customer experiences, and we will be rolling out a number of them in FY18, something I'll talk about in a minute.

So overall, another year of significant progress. I'm very proud of what we've accomplished, and I want to thank all of our associates for their hard work, their dedication, and customer focus. As you may recall, in November 2012 we introduced our transformation strategy called Renew Blue. Since then, we've stabilized comparable sales, increased our non-GAAP operating income rate 110 basis points from 3.4% to 4.5%, and grew our non-GAAP EPS from $2.54 to $3.56, at an average rate of 9% per year.

We also increased our return on invested capital or ROIC 810 basis points from 10.8% to 18.9%. A little more than four years later, we figured it is time to call Renew Blue officially over and enter the next phase of our journey. Today we are unveiling Best Buy 2020, building the new blue.

In this next phase, we go from turning around the Company to shaping our future, and creating a Company that customers and employees love, and that continues to generate a superior return for our shareholders. At the core of Best Buy 2020 is of course the customer.

Technology is evolving and is more and more exciting, with new capabilities that are opening up an increasing range of possibilities. It's also more complex, and many of us need help with it. So we believe we're uniquely positioned to help our customers in a meaningful way with our combination of unique assets, including our online, store, and in-home capabilities.

As we look ahead, our purpose is to help customers pursue their passions and enrich their lives, with the help of technology. We want to play two roles for them. Be their trusted advisor and solution provider, and be their source for technology services for their home. Our customer value proposition is to be the leading technology expert, who makes is easy for them to learn about and confidently enjoy the best technology.

We believe we can and should go beyond selling products to customers. We want to focus on their underlying needs which is entertainment, communications, security, energy management, and health. We believe this approach will better meet their needs, and build a stronger relationship with them. This will also allow us to expand our addressable market.

From a financial standpoint, the equation that we're seeking to solve with Best Buy 2020 is to gradually increase our rate of top line growth, pursue material ongoing cost savings necessary to both offset inflationary pressures and fund investments, and build a more predictable set of revenue streams, built on more recurring revenues and stickier customer relationships. More specifically, with Best Buy 2020, there are three growth pillars we will be pursuing:

One is to maximize the multi-channel retail business. Two is to provide services and solutions that solve real customer needs, and help us build deeper customer relationships. And three is to accelerate growth in Canada and Mexico.

With the first pillar, maximize the multi-channel retail business, we plan to continue to enhance the customer experience and drive revenue by growing both existing and new channels, growing certain key product categories, and developing broader, stickier customer relationships. With the second pillar, provide services and solutions that solve real customer needs, we plan to meet the significant technical support needs of customers across their home, whether or not they have bought their products at Best Buy.

We also plan to offer more complete solutions to our customers that meet their underlying needs. As an example, instead of just selling them security cameras, this would mean selling an ongoing security monitoring and home automation service.

With our third pillar, after significant transformation efforts, we believe Canada and Mexico have the opportunity to accelerate their growth. All together, we're quite excited about the range of opportunities we have in each of these areas. We also know we have work to do to capture them and create a meaningful impact on our results.

As with Renew Blue, we will regularly update you on our progress on our journey to build the new blue. In this context, we see FY18 as a step in the direction of building the new blue. Completely, we'll be executing against the following four priorities:

First, we will explore and pursue growth opportunities around the pillars I just discussed. Most notably, we will continue to innovate our digital capability to effectively help our customers in their shopping journey. We will pursue growth around key product categories, including emerging product categories like connected home, appliances where we believe we can continue to grow share and revenue, and mobile, where we have the opportunity to return to growth by providing a more compelling experience to our customers.

We plan to expand our In-Home Advisor program, or IHA to more markets. With our IHA program, customers receive a free in-home consultation with our experienced technology advisor, who can identify their needs, design personalized solutions, and become a personal resource over time.

We will continue to test new concepts around the country that have the potential to be compelling customer experiences. We have a pipeline of opportunities, some of which we will expect to ramp up later in the year. And we'll drive growth in the international business by continuing to drive our e-commerce channel, and by expanding the rollout of the successful store remodels in Canada, and opening nine new stores in Mexico over the next two years.

The second priority is to improve our execution in key areas. We believe we continue to have significant opportunities from improving our sales effectiveness and proficiency, improving our supply chain for large product fulfillment and small package delivery and developing our services fulfillment capabilities.

The third priority is to continue to reduce costs and drive efficiency throughout the business. As I mentioned before, we've achieved $350 million of our current $400 million cost reduction target. We're working on the next phase of cost savings and we will update you on the next goal once we complete our current program. The fourth priority is to build the capabilities necessary to deliver on the first three, which will involve making investments in people and systems to drive growth, execution and efficiencies.

Now, before I turn the call over to Corie, I'd like to provide some thoughts about our financial outlook and updated return of capital plan for FY18. For FY18, which is a 53-week year, we're expecting enterprise revenue growth of approximately 1.5%, and an operating income growth rate in the low single digits. On a 52-week basis, we're expecting approximately flat revenue and operating income.

Our annual outlook is influenced by a number of factors including expected share gains and the positive impact from our new initiatives, offset by our assumption that the industry growth will remain negative, and product availability issues will continue, particularly in the first half of the year. We are also expecting our investments and ongoing pressures in the business, including approximately $60 million of lower profit share revenue, to be offset by a combination of returns from new initiatives, and ongoing cost reductions and efficiencies.

While we're expecting flat top and bottom line results for the full year, of course, our quarterly performance can fluctuate, based on product cycles, inventory availability issues, and industry dynamics. In our Q1 FY18 guidance reflects the softness we've seen and reported so far this quarter in the NPD tracked categories, and continued softness in the mobile phone category, due both to last year's product recall and the assumption that new product launches will occur later in the quarter than they did last year. Corie will provide more detail about our Q1 guidance.

Let me now say a few words about our return of cash to our shareholders. We have a strong cash position today, and continue to drive significant cash flow generation. We remain committed to our previously articulated capital allocation strategy, which is to first fund operations and growth investments, including potential partnerships and acquisitions, and then to return the remaining excess free cash flow to our shareholders over time with dividends and share repurchases, while maintaining investment grade credit metrics.

We continue to believe it is important to reward our shareholders by being a premium dividend payer, and increasing our earnings per share through ongoing share repurchases. As such, we announced this morning that our Board approved 21% increase in our quarterly dividend to $0.34 per share or $1.36 per year. The Board also approved our plan to spend $3 billion on share repurchases over the next two years.

Last year we announced a plan to spend $1 billion over two years and we spent $750 million in the first year. So with this new plan, we intend to accelerate our repurchases over the next two years.

So in summary, we're very proud of the results we delivered in FY17, and we are excited about our opportunities and the strategy we're pursuing. I want to again thank all of our associates for what they do every day, and for their passion to build the new blue. Now, I'd like to turn the call over to our CFO, Corie Barry.

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Corie Barry, Best Buy Co., Inc. - CFO [4]

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Thank you, Hubert and 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.

As Hubert mentioned earlier, our disciplined promotional strategy was key to delivering better than expected profitability, despite enterprise revenue near the midpoint of our fourth-quarter guidance. On enterprise revenue of $13.5 billion, we delivered non-GAAP earnings per share of $1.95, which exceeded our expectations, primarily due to a lower than expected effective income tax rate, and outperformance in the domestic business from both a higher gross profit rate and lower than expected SG&A.

I will now talk about our fourth-quarter results versus last year. Enterprise revenue decreased 1% to $13.5 billion, primarily due to an enterprise comparable sales decline of 0.7%. Enterprise non-GAAP diluted EPS increased $0.42 or 27% to $1.95.

This increase was primarily driven by, one, a $0.14 per share benefit from the net share count change. Two, the domestic business, primarily due to a higher gross profit rate and lower SG&A including the expected $30 million or $0.06 per share of net negative impact from the lapping of the periodic profit sharing benefit from our services plan portfolio. And three, a $0.10 per share benefit from a lower effective income tax rate, due to the resolution of certain discrete tax matters.

In our domestic segment, revenue decreased 1.4% to $12.3 billion. This decrease was primarily driven by a comparable sales decline of 0.9%, and the loss of revenue from 11 large format and 31 Best Buy mobile stores closed during the past year. Industry sales in the NPD tracked categories, which don't include categories such as mobile phones and appliances, declined 2.8%.

From a merchandising perspective, comparable sales growth in connected homes, computing, headphones and home theater was more than offset by declines in gaming, tablets, health and wearables and mobile phones. In services, the comparable revenue growth of 6.3% was primarily driven by higher warranty sales, as we have now lapped the investments in services pricing from last September.

Domestic online revenue of $2.3 billion increased 17.5% on a comparable basis, primarily due to increased traffic and higher conversion rates. As a percentage of total domestic revenue, online revenue increased 300 basis points to 18.6%, versus 15.6% last year. In our international segment, revenue increased 2.5% to $1.14 billion, driven by comparable sales growth of 0.9%, primarily from our business in Mexico, and approximately 90 basis point periodic profit sharing benefit from our services plan portfolio, which is excluded from comparable sales, and approximately 70 basis points of positive foreign currency impact.

Turning now to gross profit. The enterprise non-GAAP gross profit rate increased 90 basis points to 22.5%.

The domestic non-GAAP gross profit rate increased 70 basis points to 22.3%, primarily due to improved margin rates in the computing and home theater categories, and the positive impact of decreased sales in the lower margin categories of gaming and wearables. These rate increases were partially offset by margin pressure in the mobile category and approximately $30 million or 20 basis points of net negative impact due to lapping the periodic profit sharing benefit.

The international non-GAAP gross profit rate increased 280 basis points to 24.6%, driven by a higher year-over-year gross profit rate in Canada due to improved margin rates in the computing and home theater categories, and approximately $10 million or 65 basis point periodic profit sharing benefit, and the positive impact of decreased sales in the lower margin gaming category.

Now turning to SG&A. Enterprise level non-GAAP SG&A was $2.1 billion or 15.8% of revenue, a decrease of $10 million. Domestic non-GAAP SG&A was $1.93 billion or 15.6% of revenue, a decrease of $18 million. This decrease was primarily driven by lower variable costs, as a result of decreased year-over-year revenue. Additionally Renew Blue phase two cost reductions continued to offset investments in the business.

International non-GAAP SG&A was $200 million or 17.5% of revenue, an increase of $8 million. This increase was primarily driven by slightly higher payroll and benefits and advertising costs. From a cash flow perspective, FY17 was another year of strong cash flow generation, driven primarily by working capital changes and increased profitability.

The decrease in working capital was primarily due to a higher accounts payable to inventory ratio, which was the result of, one, timing from last year when we brought in inventory early and subsequently paid for it before year-end, thereby reducing our accounts payable to inventory ratio in FY16. And two, the lack of product availability in certain key categories during Q4 FY17.

On a two year basis, our working capital was relatively in line with our historic cash flow impact. The continued strong cash flow generation allowed us to return a significant amount of cash to our shareholders for the second year in a row. This year, we returned over $1.2 billion in cash in addition to the $1.5 billion we returned in FY16. As it relates to capital expenditures, we ended FY17 with $582 million in capital spend, and we expect FY18 capital expenditures to be approximately $650 million.

I would now like to talk about our Q1 FY18 guidance. As Hubert mentioned, in the domestic business, we are seeing softness in the NPD tracked categories, due in part we believe to the delay in tax refunds that resulted in many consumers not having their refunds in time for the Presidents' Day retail holiday.

Additionally, we expect pressure in the mobile category, which is not included in the NPD tracked categories we referenced due to, one, the continued impact of the Samsung Note 7 recall, which is estimated at $50 million in lower revenue year-over-year. And two, the assumption that potential new phone launches will occur later in the quarter than they did last year.

With these items factored in, we expect enterprise revenue in the range of $8.2 billion to $8.3 billion, and an enterprise comparable sales decline in the range of negative 1% to negative 2%. On a segment basis, we are estimating domestic comparable sales to decline in the range of negative 1.5% to negative 2.5%, and international comparable sales in the range of flat to positive 3%.

It is important to note that due to expected foreign currency headwinds, we anticipate international revenue growth to decline low single digits. We expect to deliver non-GAAP diluted EPS from continuing operations in the range of $0.35 to $0.40, assuming a non-GAAP effective income tax rate of 38% to 38.5%, and a diluted weighted average share count of approximately 313 million shares. This guidance range includes lapping approximately $15 million or $0.03 per share of net negative impact from the periodic profit sharing benefit from our Canadian service plan portfolio that was recorded in Q1 FY17.

As Hubert mentioned earlier, when talking about our full year expectations, we will have a 53rd week in FY18, which will occur in the fourth quarter. We expect that extra week to add approximately 1.5% of annual sales at an operating income rate that is materially higher than the fourth quarter. This operating income rate differential is driven by the added leverage of our fixed costs, which are not impacted by the extra week.

We expect to provide more detailed expectations of the 53rd week impact when we provide Q4 FY18 guidance later in the year. I would also add that we are expecting the FY18 full-year non-GAAP effective income tax rate to be approximately 36.5%, compared to 33.2% in FY17. I will now turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Kate McShane. Your line is open. Please go ahead.

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Kate McShane, Citigroup - Analyst [2]

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Hubert, I was wondering if you could maybe walk us through the promotional environment in the fourth quarter, and how you managed through it. I think that was a highlight in the press release today, that it was better managed. So if you could give a little bit more perspective on that versus last year, that would be helpful.

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [3]

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Thank you, Kate. I think we've developed that capability. This is not the first year we're doing this. I think it's been a theme for us, I would say, over the last three years. I have to commend our merchant and marketing team for this.

There's a greater science that's being applied to our marketing and promotional activities that is resulting in this outcome. We're trying to combine being very price competitive, and as we had said three years ago, not chasing every rat into every rat hole. From time to time a competitor will have a very aggressive promotion with very limited quantities available, or not necessarily the products that our customers actually want, and we'll be thoughtful in terms of what we want to do from that standpoint. So that's at the highest level, that's what I would describe.

The other driver of course has been the optimization of our merchandising activities, and the resulting impact on gross profit margin. As you've noticed, our customers like the more advanced, tend to prefer the higher-end premium products oftentimes, and we've been able in multiple product categories to really develop a superior merchandising and customer experience both online and in our stores around this. That will be true in TVs. That will be true in computing, for example. And we are also benefiting from that. Corie, anything I missed?

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Corie Barry, Best Buy Co., Inc. - CFO [4]

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No, I think you hit most of it.

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Kate McShane, Citigroup - Analyst [5]

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Thank you.

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Operator [6]

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Our next question comes from Dan Binder. Your line is open. Please go ahead.

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Dan Binder, Jefferies LLC - Analyst [7]

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Hubert, I was hoping maybe you could talk a little bit more about the opportunity on in-home advisory services an products, what you saw in the tests, and in terms of average spend, and the type of customers you're targeting, and the scalability of that?

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [8]

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Thank you, Dan. I think we're very excited about the customer experience from this program. As a reminder for everyone, this is an expert technology advisor, who has got great both product proficiency across everything we sell, and great customer relationship skills, will typically go to the customer's house.

Why is it important to go to the customer's house? In many cases if we want to have a discussion about your networking needs, or your home theater, or how you want to automate your home, we really need to have this conversation they your home.

From a customer standpoint, this is not limited to luxury and premium. We've had this motto that Corie introduced when she was leading this program of no order too small, no sale is too small. We see as the beginning of a beautiful friendship, as we would say in Casablanca, or the beginning of a customer relationship, as the In-Home Advisor can become an ongoing resource for the customer.

The results are very encouraging, Dan. The customer satisfaction from this is very material. Our stores -- the front liners are a good test of whether something makes sense or not. The level of excitement in the field, I think, is very high.

Financially, this is resulting in positive results. There is a higher sale, average sale per visit, tend to be also a better gross profit margin, because it's going to be a more complete solution. And then of course, what we expect is the tail, that again this is going to be a strong ongoing relationship, a higher share of the basket.

Now, this is something that from a scaling standpoint we're not rushing, because we want to make sure we get this right, and we scale this right. This is -- it's easy to talk about, but finding the right personnel, training them appropriately, managing them effectively, giving them the right tools, CRM tools, for example, the ability also to build a customer in their home.

So we're pacing ourselves. We do believe this is going to scale. In fact, in my prepared remarks, I commented on the fact that we would go to more markets.

But because this is almost a professional services business, you don't want to go overnight to full scale. So we'll pace our self, and we'll update you as we move forward. So all together, very, very exciting.

It's a good illustration if you will, Dan, of where the Company is going. We go beyond just selling products and solving real customer needs, touching people's lives. There's so many great stories about how our In-Home Advisors have really touched people in their lives, changing how they live. It's not just about using technology, it's about touching their lives. I'm becoming emotional, so I'll stop.

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Dan Binder, Jefferies LLC - Analyst [9]

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Great. Thank you.

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Operator [10]

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And our next question comes from Brad Thomas. Your line is open. Please go ahead.

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Brad Thomas, KeyBanc Capital Markets - Analyst [11]

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I wanted to ask about the consumer electronics category. Really a nice performance in that category in the quarter, and hoping you could talk about some of the potential catalysts for that category in 2017, particularly the performance of the home theater area?

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Corie Barry, Best Buy Co., Inc. - CFO [12]

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Yes, so good morning, Brad. This is Corie. There's a few things going on there. I'm going to start with home theater.

Home theater continues to perform well but it is not the biggest driver of this quarter of some of the increase we're seeing. Other things that are included in the consumer electronics category are our connected home products. We've seen some very nice growth out of our home automation products, in particular. And we also actually have our headphone category in consumer electronics which has been a strong performer for us over the last quarter. And then finally, we actually saw a bit of a tick-up in our digital imaging business, as well that contributed.

Really, in home theater we continued to see good results. Sequentially that's been pretty consistent. It was some of those other categories that really outperformed in Q4.

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Brad Thomas, KeyBanc Capital Markets - Analyst [13]

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Got you. And how are you thinking about home theater in particular in 2017? Thank you.

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Corie Barry, Best Buy Co., Inc. - CFO [14]

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So obviously, I'm not going to give category guidance, but in general what I'd say is we expect the same dynamic to play out, which is, we've seen good unit growth over time as new technologies become more and more accessible. But that has obviously come at lower ASPs, and what we like for us is that the balance between those two things, and the mix of business for us, back to what Hubert commented on, this ability for us to sell the more fully-featured, the more up and coming technology, to really experience what a 60, 70, 90-inch TV looks and feels like, that mix of business for us has been very helpful and very strong.

Now, obviously we'd expect continued proliferation of technologies, always means a moderation in the ASP gains and we've said we'd expect some of the share gains to moderate, but we don't expect this to look like a cliff for us. We expect continued evolution and development in the category, and we think we're really well positioned to continue to see this category through the next year.

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Brad Thomas, KeyBanc Capital Markets - Analyst [15]

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Very helpful. Thank you, Corie.

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Operator [16]

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(Operator Instructions)

Our next question is from Michael Lasser. Please go ahead.

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Michael Lasser, UBS - Analyst [17]

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It dovetails on the whole market share conversation. Can you describe why this spread between your sales and the NPD results narrowed this quarter? And as part of that, where is your absolute level of market share today across all categories, and is it just harder to grow share at that level, absent more store closings from competitors?

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Corie Barry, Best Buy Co., Inc. - CFO [18]

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Okay. I'll try these one at a time. First, on the spread question, in the actual categories that are included in NPD, our spread was actually very similar in Q4 as it has been in Q2, Q3, and if anything, it actually might have grown a little bit.

The tricky part is the categories that are not included in NPD, and a couple of those we specifically called out multiple times in the release and that is mobile and gaming. In those categories, we said we saw pressure, due to a couple different factors. But it's those categories that are creating a little bit of the shrink in the differential between our results, and what you see in NPD.

In terms of the overall share of the markets, we haven't ever publicly released what we think the overall market share looks like. We did talk a little bit in the release about the fact we just generally believe that the overall market has been down, certainly down in the last calendar year, and that we've been able to gain share, and we continue as we said, going forward, we continue to believe we're well positioned to do that.

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [19]

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Maybe if I can add a couple of sentences to what Corie said. I think back in the Renew Blue presentation in November 2012, we actually had some aggregate market share numbers, and Michael, if you go back, they were in the mid-teens. That's if you go across all of the categories.

And so one of the things we're very clear internally is that as long as we're not at 100% market share, we have opportunity to grow. This is still a very fragmented market. Of course, our share varies across product categories. We think that the needs of customers in our categories are very sophisticated.

We're raising the bar. There's probably a couple of competitors who are also raising the bar, but it's hard for people to compete in this category at the same pace and level of investments we're making. So we think there is a lot of runway in terms of gaining market share.

Now, as we introduce Best Buy 2020, building the New Blue, our strategy is not just to gain market share in these product categories. It's to go beyond that and address underlying customer needs in terms of services and solutions, which significantly expands our addressable market. While there's a lot of work we have to do to capture these opportunities, that's another axis, if you will of our growth potential.

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Michael Lasser, UBS - Analyst [20]

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Thanks so much.

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Operator [21]

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Our next question is from Matt Fassler. Please go ahead.

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Matt Fassler, Goldman Sachs - Analyst [22]

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My question revolves around the mobile category. It's been challenging now, I guess, for a year or more. And I understand there's some idiosyncratic challenges with products and recalls, et cetera. Can this return to being a growth category for you, as you think about market growth, your market share, and the profitability of the category?

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [23]

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Yes, there's several factors. One is the market, the other one is market share. Clearly after many years of increasing penetration of smartphones in this country, the penetration is now at a very high level, and you're more in a replacement market, specifically during the quarter, in addition, the market which we think from a handset standpoint in calendar Q4 was down, the market was hindered by the product recall issue, and then by demand supply issues that the other vendor had in this category and that was reported on their call.

So we don't expect significant growth in this category from a market standpoint. What we briefly commented upon in my prepared remarks, is that we believe that we have the opportunity, and that's going to be our goal, to gain market share. As you know, this is one of the categories where our share is the lowest, in single digits.

We continue to believe buying a phone today at any retailer is not a pleasant experience. It's actually quite painful, and our ambition is to provide a smoother, easier, more compelling customer experience, and on that basis, leveraging the rest of our assets including the very large traffic we have both online and in our stores to do this. So we're working on that, and so we have the ambition to grow a little bit our market share. It's much more that, than expecting the market to grow.

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Matt Fassler, Goldman Sachs - Analyst [24]

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If I could just ask a brief follow-up. If you think about the various pricing models and the way they have evolved over the past year or two, and I know that remains dynamic, does that impact the margin structure of the category for you, or can the margins be as good as they are, say, today?

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Corie Barry, Best Buy Co., Inc. - CFO [25]

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Matt, it's Corie. I think it's reasonable to say that we'd expect there to be a bit of margin pressure in the category. It's not just the changes -- it's broader than just the changes in how people are paying. It's also, as you think about the unlocked and prepaid businesses being much more viable models as well for customers, which again we think is great space for us to play in because it offers choice and gives us a different way to position ourselves in the category. You've seen it for the last few quarters at least, listed as one of the margin pressures for us, and I think that continues.

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Matt Fassler, Goldman Sachs - Analyst [26]

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Got it. Thank you so much.

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Operator [27]

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Our next question is from Simeon Gutman. Your line is open. Please go ahead.

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Simeon Gutman, Morgan Stanley - Analyst [28]

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Thanks. Good morning. My he question is on the operating profit outlook. So it's mentioned in the release, you have the $60 million headwind from profit share, and then there's just natural cost creep. I played with some numbers. You can get anywhere $50 million, $60 million, maybe $100 million. Then you're investing in businesses.

I don't know if the size is as important, but this idea that you're still able to reduce meaningful expenses, which is where the guidance implies, can you talk about where it's coming from, especially as you continue to make investments? Incrementally, is it getting to find? But it looks like there's some sizable numbers embedded in the FY18 guide.

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Corie Barry, Best Buy Co., Inc. - CFO [29]

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There's a couple things going on with the guide. Number one, let's take the cost side first. Obviously, we're very pleased with the progress we've made thus far on the Renew Blue phase two cost reductions. $150 million in FY16, $200 million in FY17, and we feel like we're well positioned to close that out this year, and then talk more openly about what comes next.

In those buckets, the places where we've seen some really nice progress, if you remember back to when Sharon would talk a lot about some of the returns, replacements and damaged inventory, the teams have done some really exceptional work across those areas, and across the board have created profitability. Remember, sometimes these show up in gross profit. Sometimes they show up in SG&A.

Some of this is the work that actually ends up showing up in gross profit, and is improving some of that return and damaged inventory. Another place where we've seen some good improvements is across supply chain and across contractually how we think about some of our agreements with our carriers and the way we're making some of our supply chain choices. We've seen some nice cost reductions there as well.

I think we've said it from the beginning, that this phase, it is more cross functional. It is very different than the first $1 billion we took out. It requires us to think differently about our processes.

To your question about, is there really going to be more, isn't it just going to get harder? I'm not saying it's easy, but I think we all fundamentally believe that. Just like you would expect in manufacturing. We have to continue to find productivity in our business, and better and more efficient ways of doing things.

Frankly, at the end of the day, they typically also result in a better employee and a better customer experience. The truth is if we have costs that we're embedding, somewhere down the line, it's breaking.

The second piece, Simeon, I want to make sure that I call out, and we said it in the release, is that we also are expecting to roll out some of these new initiatives, and we're expecting some return on those initiatives, as well. It's not just the cost reduction side. It's also an expectation that we see returns on these initiatives that to be clear, we're vetting very carefully, based on the tests and pilots that we're running thus far. Does that help?

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Simeon Gutman, Morgan Stanley - Analyst [30]

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Yes. Thanks very much, good luck.

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [31]

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I want to amplify what Corie said. I don't want there to be any doubt. Not that there was any ambiguity in what Corie said, but in terms of the cost take-out and we said it on previous calls, this is for us an ongoing focus and discipline, and while we've not communicated today the goal for the next phase because our tradition is to first complete the phase, and then we announce the next phase, we believe there is going to be ongoing continued material opportunity for improving performance, our effectiveness, efficiency across our key processes.

Lean is a term that's been used throughout the Company, and there is ample opportunity. So while we've announced today a new strategy, Best Buy 2020, building the New Blue that has a strong growth orientation, customer orientation, equally important is this focus on cost, which is critical to offset the pressures. We don't have cost creep, we have some pressures sometimes. Cost creep is not part of our vocabulary.

We have some pressures and then we have investments to fund. So this continues to be a balancing act, but I don't want any doubts about the sense we have about the opportunity, and our commitment to ongoing cost optimization. Am I clear?

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Simeon Gutman, Morgan Stanley - Analyst [32]

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Yes. Thanks, Hubert. Very clear.

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Operator [33]

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Our next question is from Alan Rifkin. Your line is open. Please go ahead.

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Alan Rifkin, Barclays Capital - Analyst [34]

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My question has to do with the product availability. At the beginning of the quarter, you had said that there would be about 150 basis point impact to your guidance for the fourth-quarter comp due to Samsung alone. Obviously the product availability in the quarter spread beyond Samsung. I was wondering either with respect to dollars or comp, what was the impact of difficulty in procuring some of the product, and what gives you the confidence that these difficulties will be alleviated at the beginning of the second half? Thank you.

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [35]

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Good morning, Alan. Thank you for the questions. Calculating the missed opportunity is not an exact science. We have tried to quantify what we believe is the impact in the quarter from these really unprecedented constrained product availability issues.

We believe it was well over $100 million of missed sales in the quarter, and frankly could be close or around $200 million, and that's on top of the $200 million impact from the Samsung recalls. And this was across multiple vendors, I won't go through all of the details but many vendors have spoken about this supply/demand imbalances on their calls, or the press has reported, and you may have experienced yourself in our stores or online because I know all of you are frequent shoppers. That's about the order of magnitude, Alan.

In terms of next year or this fiscal year, in our prepared remarks, both Corie and I have spoken about the impact in the first half, notably from the product recall from last year, meaning the Note 7 not being available for sale. This year that's about $50 million. And then at least there's an assumption on our part based on various public indications that the launch of a new phone would happen later in the quarter, even though we don't have a firm date at this point in time.

So some of these things erode in the second half. So clearly a bit like last year, in aggregate, we're seeing a softer beginning of the year, and then a recovery in the second half. We have to be humble in terms of forecasting, because frankly, these product availability issues could not have been anticipated at the beginning of last year, none of them, and so we're sharing with you some assumptions. But it's hard to be certain of course, at this point in time.

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Alan Rifkin, Barclays Capital - Analyst [36]

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Okay. Thank you, Hubert.

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Operator [37]

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Our next question is from Anthony Chukumba. Your line is open. Please go ahead.

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Anthony Chukumba, BB&T Capital Markets - Analyst [38]

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I had two questions. The first one was just in terms of the domestic gross margin. Obviously, the performance was very strong. Looks like you continue to do a very nice job of having very effective promotions.

But I wonder, do you worry that you might have left some sales on the table, maybe some gross margin dollars on the table, by maybe not being a little bit more aggressive promotionally? How do you think about that?

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [39]

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This is something we constantly look at, particularly during this holiday quarter, which is very dynamic and so forth. If we could have generated more sales, more profitable sales through more promotional activity, we would have done it. I think the cap on our revenue is really the two things we highlighted.

One was the product availability issues. No point in promoting a product that's not available, obviously. And then the very material softness in gaming.

So the short answer to your question, Anthony, is no, we don't feel -- this is not completely scientific. We don't feel we left money on the table from a top line standpoint based on promotional decisions.

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Anthony Chukumba, BB&T Capital Markets - Analyst [40]

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Okay. Great. And then real quickly --

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [41]

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I want to reiterate, profitable top line. You can always lose money, but that's not what you want us to do.

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Anthony Chukumba, BB&T Capital Markets - Analyst [42]

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Understood. Agreed. Agreed. Just real quickly.

One of your competitors, a multi-regional appliance and consumer electronics retailer, seems like they're in a pretty bad spot right now. They may be filing for bankruptcy. How do you sort of think about the market share gain opportunity, if and when that happens, and to the extent that leads to significant store closings?

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [43]

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So thank you for this question. So we're not going to mention the name of this particular retailer, but I think that if we're thinking about the same, they have about 200 stores roughly, so it's about 20% of our stores have an overlap with them. I think they do about $1 billion of revenue in appliances, and the rest of their business is mainly furniture, don't have much electronics left.

If they do file and close their stores, which we have no information about, then you can assume that the $1 billion would be shared across a variety of players. These are the orders of magnitude, so not something transformative for us. There's been a pattern in this category of some players consistent generous share donors, and we do expect that to continue in the quarter, which is one of the reasons we're excited about the appliance category.

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Anthony Chukumba, BB&T Capital Markets - Analyst [44]

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Got it. That's very helpful. Thank you.

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Operator [45]

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Our next question comes from Brian Nagel. Your line is open. Please go ahead.

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Brian Nagel, Oppenheimer & Co. - Analyst [46]

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Thanks for taking my question. So I wanted to ask, just on e-commerce. We've seen a very strong performance out of your e-commerce sales now for the past several quarters, it's pushing up towards almost 20% of your business. Two parts.

One, any thoughts on where that ultimately drives to as a share of total sales? And second, as e-commerce now is a much more significant part of your business, any thoughts on or how should we think about the profitability of those sales versus more traditional sales in your stores? Thanks.

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [47]

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Thank you, Brian. So let me take the first part, and then Corie will lead the second part on the economic impact. So number one, very proud of the performance of our e-commerce channel. I think if you go back four years ago, the experience on our site and the experience on our site today and mobile app, this is a sea change, complete transformation, both on the shopping experience, as well as the supply chain, so very, very proud of that.

From the beginning, we said that we wanted to be driven by how customers want to buy, and shop and buy. And so, in the way we run the business, we're not trying to steer the customer towards one channel or the other. And in fact, it's increasingly difficult to identify what channel is responsible for the business, because the customers will usually start online, maybe complete the sale online, may go to the store and back and forth, and of course 40% of the orders are picked up in the store or shipped from the store. So there's a blurring of the two channels.

There is clearly a trend, though, in particular for the smaller, simpler items, for customers to buy online, something that you're familiar with. It's hard to know how high it's going to be. What we also know is that for the larger cube, higher touch categories where seeing the product, having access to an experienced sales associate, and then having the in-home experience, that set of assets is really critical for us.

So we're driven by innovating the customer experience, developing competitive experience, combining our two sets of assets. In general, that means we believe the online piece will continue to expand, and we do believe that our stores have a critical role to play. Now, from an economic standpoint, Corie, tells us how we see it.

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Corie Barry, Best Buy Co., Inc. - CFO [48]

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From a channel shift perspective, while it's true that in general, we tend to see lower profitability in gross profit online, and a lot of that due to obviously some of the attach, the things that you do in the store in a relationship, that are a little bit harder to do online. The team has done an exceptional job of improving the profitability of our online business year-over-year.

And so while you have the mix impact, that puts a little bit of pressure, you have a rate improvement in the channel in and of itself which has really been helping us mitigate that channel shift. Additionally, one of the things that's a little bit different for us is that we obviously invest in our in-store expertise, and we spend time with our customers, and we invest in that expertise, which means obviously when you're in store, there is an expense profile associated with being in store. And that helps create a balance with actually the expense profile that we have, and usually associated with shipping and some of the other supply chain metrics online.

So we don't find the disparity between the channels to be as great as some people would talk about, but at the same time, we're very clear about our belief that this continues, and it continues because of how people like to shop, and it's also a big part of the reason that Hubert talked about. We believe strongly that cost control continues to be something that's really important for us, as we think about our business going forward.

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Brian Nagel, Oppenheimer & Co. - Analyst [49]

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Great. Thank you. Very helpful.

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Operator [50]

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We'll take our last question from Scot Ciccarelli. Your line is open. Please go ahead.

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Mike Lehrhoff, RBC Capital Markets - Analyst [51]

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This is Mike Lehrhoff on for Scot Ciccarelli. I was wondering if you could discuss your expectations for the gaming category in the coming year, as well as any guidance on future store closures this year?

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Corie Barry, Best Buy Co., Inc. - CFO [52]

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All right. We'll start with gaming. Obviously we've seen, like we said, softness coming out of Q4.

Gaming is very interesting for us. We tend to over-index on the hardware side of gaming. And so we tend to be very tied to major releases and the demand around the excitement on those releases, and so it's a little bit difficult for us to understand exactly what some of those product launches will look like.

In general, we don't expect a massive change in the trajectory, other than the extent to which those releases are exciting for people. So obviously, as we go into Q1 here, we have the switch as part of the guidance that we gave you for Q1, and the excitement around that. From there on out, we don't have a ton of visibility to how the market will change over time, but we'll continue to update you as we know more about the product cycle on that one.

But in general, I think that's the hardware side. On the software side, we definitely continue to see a move towards digital and that obviously, from the way that we sell, puts some pressure on our sales, because we tend to be more of a physical gaming retailer versus a digital one. I think I would expect that shift to continue and that pressure to continue to be there, as we go forward.

Your second question on store closures, and so, we obviously have a very stringent process here for looking at our stores. Within the next, oh, call it five years, we're going to see about 70% of our leases -- we see about 100 a year. That gives us some flexibility. As we look at those leases, as you would expect, we do have a pretty high bar that we set for our stores.

We talked earlier about our expectation that online growth continues at the pace we've seen it. We build those expectations into the expectations for our store performance. And we assume that there's a definite chunk of that, that cannibalizes those stores.

And so as we think about the store performance, we're setting a high bar, based on what the store actually needs to perform, assuming that online growth. Given that, you can see over the last two years we've closed about 24 stores, and so I would expect us to continue to see that store closure effort going forward, and that will continue to use those high expectations for growth in the online channel.

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Hubert Joly, Best Buy Co., Inc. - Chairman and CEO [53]

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Thank you Corie. Maybe in closing, let me just say a couple of things. As we close FY17, clearly we're very proud of the results we've delivered in this last year, and as we begin FY18, we're very excited about the next phase of our journey that we've announced today, Best Buy 2020.

We're also excited about the return of capital plans that we've announced this morning. Thank you very much for your attention this morning and your continued support. Have a great day.

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Operator [54]

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That concludes today's conference. Thank you for your participation. You may now disconnect.