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Best Buy Co. (NYSE:BBY)

Q1 2014 Earnings Conference Call

May 21, 2013 08:00 AM ET

Executives

Hubert Joly - President and CEO

Sharon McCollam - CAO and CFO

Bill Seymour - VP, Investor Relations

Analysts

David Schick - Stifel, Nicolaus & Co., Inc.

Peter Keith - Piper Jaffray & Co.

David Strasser - Janney Montgomery Scott, LLC

Brian Nagel - Oppenheimer & Co.

Bradley Thomas - KeyBanc Capital Markets, Inc.

Alan Rifkin - Barclays Capital

Anthony Chukumba – BB&T Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy’s First Quarter Fiscal 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for playback and will be available by 12 p.m. Eastern Time today. (Operator Instructions) The call will end at 8.50 am Eastern Time.

I’d now like to turn the conference call over to Bill Seymour, Vice President of Investor Relations.

Bill Seymour

Good morning and thank you. Joining me on the call today are Hubert Joly, our President and CEO and Sharon McCollam, CAO and CFO. As usual, the media will be participating in this call in a listen-only mode. This morning’s conference call must be considered in conjunction with the press release that we issued earlier today. They both contain non-GAAP financial measures that exclude the impact of certain business events. These non-GAAP financial measures are provided to facilitate meaningful year-on-year comparisons, which should not be considered superior to or as a substitute for and should not be read in conjunction with the GAAP financial measures for the period.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful is discussed in the supplemental schedule in this morning’s earnings release. Today’s press 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 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 press release and SEC filings for more information on these risks and uncertainties.

The Company undertakes no obligation to update or revise any forward-looking statements to reflect events, circumstances that may arise after the date of this call. As a reminder, the first quarter of fiscal 2014 was the 13 week quarter versus 14 weeks in fiscal year 2013.

The extra week in fiscal 2013 added approximately $735 million in revenue, including $660 million in domestic and $75 million in international and $0.12 in diluted EPS.

It is also important to note that as a result of our previously announced definitive agreement to sell our 50% interest in Best Buy Europe, financial results for that business are now presented as discontinued operations in our financial statements. To assist investors with the financial modeling of this presentation, we have provided recast financial statements by quarter for fiscal years 2012 and 2013 on our Investor Relations website.

I will now turn the call over to Hubert.

Hubert Joly

Thank you, Bill, and good morning, everyone. Thank you for joining us. I'd like to begin today with an overview of our first quarter results as well as an update of our Renew Blue priorities. Then I'll turn the call over to Sharon to provide further details.

Before I do that, I would like to extend our thoughts and prayers to our teams and all of the people in Oklahoma City who have been affected by the tremendous devastation from the tornadoes yesterday. It is a terrible tragedy and our heartfelt sympathies and wishes our extended to all of them. At this moment, not all of our employees or employee families has been accounted for and remain in close contact with our regional leadership to ensure we're doing all that we can to support them in the moment of their greatness need and in the days and months ahead.

In the first quarter, we continued to make substantial progress on our Renew Blue priorities. This progress included number one, driving a 16% increase in Domestic comparable online sales; number two, improving our customer Net Promoter Score by over 300 basis points; number three, reaching an agreement with Samsung to establish Samsung Experience Shops in our retail stores and beginning their roll out; number four, negotiating overall rent reductions for a number of our stores and closing one large format store; and number five, eliminating $175 million in annualized SG&A and supply chain costs in addition to $150 million last quarter. We also entered into a definitive agreement to sell our 50% interest in our European joint venture as announced last month.

In addition, we reached an agreement with our founder and largest shareholder, Dick Shulze, to rejoin Best Buy as our Chairman Emeritus. Dick has been publicly support of Renew Blue and while he has decided not to rejoin our Board of Directors, we are thrilled and grateful to have his entrepreneurial mindset in these nearly five decades of experience available to us.

We've also added three new Board members, each strengthening the Board with their important contributions. Russ Fradin, the President and CEO of SunGard is the newest member of our Board. Before taking the hand of SunGard, Russ was CEO of Aon Hewitt and brings substantial experience in operations and executive compensation to the Board.

Also joining the Board are two individuals who know Best Buy well and together they bring decades of retail experience to Best Buy. Brad Anderson and Lenzmeier of course we're instrumental in growing Best Buy into the world's largest consumer electronics retailer and I speak for the entire Board when I welcome them back to Best Buy as directors.

From a financial perspective during the quarter, while below last year we delivered better than expected results on both the top and bottom lines. On total company revenue from continuing operations of $9.4 billion which excludes Europe, we delivered non-GAAP diluted earnings per share of $0.32. Now that's important to eliminate any confusion, revenues including Europe would have been $10.8 billion and diluted earnings per share would have been $0.36.

As expected, Domestic comparable store sales were down 1.1%, but this was driven by an 80 basis point impact from this year's Super Bowl shifting into last year's fourth quarter and a 30 basis point impact from our decision to reduce sales in certain non-core businesses. Excluding these impacts, Domestic comparable store sales were flat despite no new major product launches and late deliveries in the smartphone category.

Impactful traffic generating and conversion initiatives with an increasing investment in price competitiveness drove the stronger than expected sales performance. Other performance for the quarter was driven by proactive solid execution and we continue to be encouraged by the intensity, collaboration and momentum that are Renew Blue priorities instilling into the organization.

To build on this momentum, we’re remaining focused on the two problems we have to solve, stabilizing and improving our comparable store sales and profitability across all types of our business. To solve these problems, we’re continuing to focus on six Renew Blue priorities that we outlined for you last quarter.

Number one, accelerating online growth; number two, escalating the multi-channel customer experience; number three, increasing revenue and gross profit per square foot to enhance store space optimization and merchandising; number four, driving down cost of goods sold to supply chain efficiencies; number five, continuing to gradually optimize the U.S. real estate portfolio and number six further reducing our SG&A costs.

And I will now provide you with an update on each of these priorities. So to accelerate online growth, we’re focusing on those initiatives that will drive increased traffic and conversion. In Q1, these initiatives included, number one, deploying best-in-class search engine marketing tools and correspondingly increasing our investment in paid search. Number two, expanding affiliate marketing and three adding dynamic product recommendation optionality to the checkout process to bring customers back into the shopping path.

Collectively, these initiatives drove a 16% increase in domestic comparable online sales during the quarter. In Q2 initiatives to optimize our natural search or SEO ranking, are a top priority. These initiatives include redesigning certain aspects of the website, such as navigation, user interface and mobile and tablet experience, improving the quality structure and uniqueness of our content and enhancing our keyword in tag optimization.

These SEO optimization initiatives are top priority because 80% of all customers who are planning to buy $100 plus hard line product in a retail store are researching the product online before going to the store and using the first page of search results to decide where they’re going to buy it. That means that show rooming is not starting in our retail store, it is starting online and we’re now showing up today on the first page, a fair share of the time.

Also in Q2 to accelerate online growth, we’re retiring our 10-year old onsite search platform and replacing it with new industry leading technology that will produce more relevant results based on the customer specific search criteria. We are creating a consistent customer experience across mobile, tablet, and PC devices including common navigation and product information. We are implementing technology enhancements that will make it easier to add Geek Squad Services to the shopping cart and we’re adding functionality based on customer browsing behavior that will dynamically recommend products if no item has been added to the shopping cart.

Then as we enter Q3 and holiday, we will begin migrating rewards on customers to a seamless sign on, we will enhance the in store pick up customer experience by creating an easier process for customers to add additional products and services to their basket when they arrive in the store and will add new marketplace partners to increase our online only product assortments.

Now, well many of these online initiatives may sound like just basic functionality upgrades, they’re actually game changing when online retailer of our size as we’ve historically underinvested in the online channel. So, increasing our online investments and implementing these upgrades will significantly improve our online effectiveness and in some cases like in the area of onsite search take us to industry leading levels.

The second Renew Blue priority for us this year is to escalate the multi-channel customer experience. Late last year we introduced a new metric to drive the customer experience known as Net Promoter Score, NPS. We use NPS to measure not only the satisfaction of customers who buy, but also the customers who don’t. NPS here at Best Buy is tracked on a monthly basis for individual stores, the online channel in our service organization.

It is also a key component of all corporate incentive plans from the Store Manager to the CEO. And since November, when we first began using NPS as a key performance indicator, we've increased our score by more than 300 basis points. We've also increased year-over-year in-store and online conversion rates. In addition to the rollout of NPS, we've also invested in two initiatives that we believe over time will have significant impact on our top and bottom lines in the customer experience.

The first is our new low price guaranteed initiative that was launched in March as a follow-up program to our first quarter price match program. Another related opportunity to improve our price competitiveness was not in our control is of course sales tax liquidity in the online channel. By the end of this fiscal year, as most states implement their laws, Amazon.com will be collecting sales taxes in states that cover 50% of the U.S. population. And in states that are already collecting, we're seeing an incremental benefit in our online and retail store sales.

The second initiative there is our buy online, ship from store initiative. This initiative is critical in resolving the number one customer [pinpoint] in our online channel which is product not in stock. Depending on the months, 2% to 4% of all of our online traffic does not buy because we do not have the inventory in our online distribution centers and we are telling them it is out of stock and yet, an estimated 80% of the time we're actually headed in one or more of our retail stores. So as this initiative progresses, we expect to gradually see an increase in online conversion, online sales and customer satisfaction.

The most multi-channel retailers buy online, ship from store is a complex IT and operational undertaking, but we at Best Buy have actually already made a vast majority of the investment necessary to move this initiative forward over the next six to 12 months. This quarter we began piloting this initiative in 50 of our retail stores and if the pilot is successful, we will extend it to our new stores as necessary to fulfill online demand.

And so buy online, ship from store and other significant operational benefits as well, it will allow us to improve our inventory management by helping us to more effectively manage new product inventory and more efficiently clear Returned, Open box and Clearance inventory in our stores by being able to display the return product on the web and be able to ship it out of the store when it was returned.

The third Renew Blue priority is to increase revenue and gross profit per square foot to enhanced store space optimization and merchandizing. As I said last quarter, our plan this year to reduce space allocated to the negative growth and low margin CD and DVD categories and replace it with higher growth, higher margin categories like mobile, appliances and accessories while deepening strategic partnerships with key vendors.

These changes are being made in two phases. In Phase 1 which is complete, we've opened 525 Samsung Experience Shops in our large format stores and 390 in our standalone mobile stores. In Phase 2 which is expected to complete by the end of the summer, we will open the remaining Samsung Experience Shops and complete the large format store space allocation initiative.

Both of these are expected to enhance our forward profitability in our in-store consumer experience by increasing space in higher demand product categories, improving product adjacencies and offering more in-depth product knowledge. We are also taking a more holistic approach to managing Clearance inventory by creating dedicated clearance zones in selected stores and enabling customers to buy in-store clearance items for the online channel regardless of where the inventory is located.

The fourth Renew Blue priority for this year is to drive down cost of goods sold through supply chain efficiencies. Our first supply chain initiative is to optimize our weaker store inventory replenishment model. In the first quarter, we have enhanced our algorithms to optimize our retail store delivery model for half of the U.S. which has resulted in the improved cubing of our [trucks] and a corresponding reduction in the number of loads and miles driven. The remainder of the U.S. will be addressed in the back half of the year.

Our second supply chain initiative is to continue to expand our online delivery capability that we continue to grow the online business. To achieve this in time for holiday, we expect to extend our online fulfillment capabilities to our final three of eight distribution centers, and then reallocate the inventory to the distribution center closest to the customer. We are also rationalizing our population of supply chain vendors and working across the industry to further drive down cost and improve our overall distribution network management.

Another supply chain priority is reverse logistics, which is actually one of the most financially punitive business processes in the Company. Customer returns, replacement and damages are approximately 10% of our revenue, and are costing the company over $400 million a year in P&L losses. To less these losses, as I mentioned earlier we are creating clearance zones in our stores and implementing buy online, ship from store capabilities for this merchandize.

We’re also implementing in-store procedures to ensure a greater level of diligence around the returns that are accepted from customers, and a high level of rigger around inventory that is then ultimately returned by the stores to our centralized return centers. Our sense of urgency around this initiative is extraordinarily high due to the substantial financial opportunity it represents.

Based on the magnitude of this opportunity and the others we’ve discussed, and you can see now why we are so confident in our Renew Blue commitment to reduce cost of goods sold by $325 million. To date we’ve delivered $30 million and expect to deliver substantially more over the next several quarters. As this is an area that is such virtually every operating area in the company and carry a significant contractual commitments, progress will be gradual and incremental but substantial.

Our six Renew Blue priorities to continue to gradually optimize our U.S. real estate portfolio, occupancy cost reduction and retail capital allocation remains a key focus. As such, during the quarter we renegotiated overall rent reductions for a number of our stores and closed one large-format store.

As for new store openings, we’re continuing to extend the timeframe by which we’re measuring the performance of new prototype stores. This includes our Richfield prototype store in our Best Buy Mobile standalone stores, there are however a small number of select and opportunistic markets where we’re moving forward with new store openings including 10 new Best Buy Mobile standalone stores that we’re opening in Q1 and two additional Best Buy Mobile standalone stores that will be opened later this year.

Our six Renew Blue priorities to further reduce the SG&A cost. As we laid out at our Analyst Day in November we believe there’s an opportunity to remove $400 million in SG&A from our North American business and we’re making substantial progress. In the first quarter we eliminated $135 million in annualized SG&A cost including $40 million in Canada, but in addition to the $150 million in annualized reductions we announced in March. This brings us to $295 million and we will take out additional cost as the year progresses.

Moving to international; improving the performance of our international businesses is also one of the key priorities for us we announced last quarter and we’re making progress there too. To this end as I said earlier we have agreed to sell 50% interest in Best Buy Europe to California warehouse. This transaction allows us to simplify our business to specially improve our return on invested capital which is one of the five priorities of our Renew Blue transformation and of course strengthen our balance sheet. We continue to expect that this transaction will close in June 2013. Also in international we’re letting out our Renew Blue priorities this year to lead us in our international Renew Blue transformation we’ve recently hired new leaders in both Canada and China.

I will now turn the call over to Sharon to cover more details on our Q1 financial performance and our outlook for the year. Sharon.

Sharon McCollam

Thank you, Hubert, and good morning everyone. Well non-GAAP financial results for the quarter were above expectation. They were also below last year. The highlights of the financial quarter were as follows. Enterprise revenue excluding the additional week last year declined 2.6% to $9.38 billion, and non-GAAP diluted earnings per share declined to $0.32. These declines were primarily driven by a significantly greater investment in price competitiveness, and the year-over-year impact of high velocity product launches that occurred in the first quarter of last year that did not recur this year. These impacts were partially offset by the impact of companywide SG&A and cost containment initiatives.

Domestic revenue, excluding the additional week last year, declined 2.2% to 7.98 billion. This decline was driven by the loss of revenue from 49 large format stores that were closed last year and a comparable store sales decline of 1.1% that Hubert described earlier. Domestic comparable online sales increased 16.3%. This increase was driven by higher traffic and higher conversion across all online platforms.

From a merchandizing perspective, strong growth in mobile phones and appliances was more than offset by declines in home theater and gaming. International revenue, excluding the additional week last year and our European discontinued operations, declined 5.1% to 1.4 billion.

This decline was primarily driven by the loss of revenue from 15 large format stores that were closed last year in Canada and a comparable store sales decline of 2.8%. Comparable store sales were negatively impacted by ongoing competitive pressure in Canada, partially offset by effective promotions that drove positive comparable store sales in China.

Turning now to gross profit, the enterprise gross profit rate for the first quarter was 23.1% versus 24.9% last year, a decline of 180 basis points. If you exclude the additional week last year, the enterprise gross profit also declined 180 basis points. The Domestic gross profit rate was 23.4% versus 25.3% last year, a decline of 190 basis points. Excluding the additional week last year, the Domestic gross profit rate additionally declined 190 basis points.

This decline was primarily driven by a greater investment and price competitiveness including higher promotional activity in mobile and computing, higher inventory shrinkage and increased product warranty-related costs. These impacts were partially offset by proceeds from legal settlements.

The international gross profit rate was 21.3% versus 22.6% last year, a 130 basis point decline. Excluding the additional week last year, international gross profit also declined 130 basis points. This decline was primarily driven by a higher mix of China revenue that carries a lower gross profit rate and a more promotional environment in China.

Now turning to SG&A, enterprise level non-GAAP SG&A was 1.98 billion or 21.2% of revenue versus 21% last year, an increase of 20 basis points. Excluding the additional week last year, however, non-GAAP SG&A as a percentage of revenue declined 10 basis points.

Domestic non-GAAP SG&A was 1.64 billion or 20.6% of revenue versus 1.8 billion or 20.4% of revenue last year, an increase of 20 basis points. Excluding the additional week last year, domestic non-GAAP SG&A as a percentage of revenue declined 10 basis points again. This 10 basis point decline was primarily driven by lower payroll and incentive compensation costs and tighter expense management throughout the company.

International non-GAAP SG&A expenses were 340 million or 24.3% of revenue versus 381 million or 24.6% of revenue last year, a decline of 30 basis points. Excluding the additional week last year, international non-GAAP SG&A expenses as a percentage of revenue also declined 30 basis points. This decline was primarily driven by SG&A leverage in China.

As we look forward to the second quarter, while not providing financial guidance we believe that the ongoing investment and price competitiveness that contributed to our gross profit and EPS declines in the first quarter will continue into the second quarter. Additionally, disruptions caused by the physical deployment of the Samsung Experience Shops and the optimization of our retail floor space are expected to have short-term operational impacts during the second quarter.

We also expect to see a greater negative impact from our Renew Blue capital and SG&A investments in the second quarter in the areas of online, mobile, the multi-channel customer experience and the replatforming of bestbuy.com from which substantial financial benefits are not expected to be realized until fiscal ’15 and beyond.

These Renew Blue SG&A investments, however, are expected to be substantially offset, particularly in the back half of the year by the fiscal 2014 realization of our Renew Blue annualized cost reduction initiatives, including the $175 million be eliminated this quarter, the $150 million be eliminated in last quarter, and the additional reductions that we expect to announce over the balance of the year.

As we sit here today, we’re encouraged by the progress we’re making against our Renew Blue priorities and excited about the opportunities that lie ahead for the balance of the year. Our better than expected results in the first quarter, following our better than expected results from the fourth quarter, are reaffirming what you bear and I believe since the days we both join the Company, thus by is the market leader in a highly fragmented and growing market.

We have a powerful platform from which to deliver a superior multi-channel shopping and service experience for our customers. We’re already the 10th largest eCommerce retailer in the U.S., we’re under penetrated from the market share perspective in early investment returns and the momentum we’re seeing in the growth of the channel today validate the potential of this significant growth opportunity and the runway to improve financial returns through increased online growth, enhance retail execution and extensive structural cost is tremendous.

I’ll now turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of David Schick with Stifel. Please go ahead.

David Schick - Stifel, Nicolaus & Co., Inc.

Hi. Good morning. It’s Schick. Thank you. I guess, I would ask about, it seems like obviously the calendar of product cycle as you mentioned, and your competitors are talking about sort of these headwinds and retail overall as talked about it, quarter with some awful sentiment early in the quarter and [translator]. Would you agree talked about some of the pressures on the business in the first quarter? Would you agree that the product cycle should start to help you more and update on how you’re thinking about that as the year plays out and probably the consumer as well?

Hubert Joly

Good morning, David. Thank you for your question. I’d say a couple of things. Yes, in Q1 the product cycle was at a bit lighter than last year and the rest of the year is more exciting. As the management team though, we’re less focused on headwinds and more focused on what we can control. We continue to believe that our role in the market is large and growing and that we’ve ample opportunities to impact our destiny from that standpoint.

David Schick - Stifel, Nicolaus & Co., Inc.

Okay, great. Thank you.

Operator

And our next question comes from the line of Peter Keith. Please go ahead.

Peter Keith - Piper Jaffray & Co.

Little bit on the gross margin and the price competitiveness, and understand if anything changed from Q4 to Q1, it looks like the gross margin pressure intensified a little bit, was there more pressure in Q1 from the price match or would that price competitiveness you did call out mobile and computing, the last quarter you called out home theater, could you just provide a little more detail on what’s going on there and kind of how we think about that trend going forward?

Hubert Joly

Thank you, Peter. It’s a good opportunity for us to clarify what’s taking place. What we’ve had really starting in Q4, is greater investment as part of the Company to strengthen its price competitiveness, that’s independent from the price match policy. Meaning we’ve ensured that our prices are more competitive that we’ve enhanced our price competitiveness in the marketplace. The cost of the price matching is eventually quite low for two reasons. One, our price is actually now quite competitive. Indeed the frequency of the price matching is actually low, but the price matching policy and tool as done notably has enhanced the confidence of our Blue Shirt as they work with the customers to understand and even then close the sale. We've eliminated any obstacle to this. So the impact from the gross profit margin to retail is primarily coming from the greater investments starting in Q4 of last year into our price competitiveness.

Peter Keith - Piper Jaffray & Co.

Okay, very helpful. Thank you very much.

Hubert Joly

Thank you, Peter.

Operator

Our next question comes from the line of David Strasser with Janney Capital Markets. Please go ahead.

David Strasser - Janney Montgomery Scott, LLC

Thank you very much. I want to change the topic a little bit and talk about Samsung. I guess it's in, I don't know how many stores, over 500 maybe not quite 1,000 yet. When you look at that, what has been – has there been anything that really has jumped out at you to-date either positive or negative about this strategy and about having those stores in there? And as you sort of look at it, do you think there's opportunity for other brands to do similar type things? And I guess the last one maybe a little sensitive as part of this is – as you look at where it's been placed in the store – front center in a store, have you heard anything from other vendors as far as complains that maybe Samsung's getting too much visibility inside the store being placed so well and so prominently in the store? Thank you.

Hubert Joly

Good morning, David. Thank you for your question. I think that the one thing that struck me the most over the last several months is the feedback from many, many of our vendors about how valuable distribution capability is, of course in the store as well as online, in many ways making our real estates in their eyes and assets rather than the liability quite frankly. So specifically as we did to Samsung, what's really positive is the customer experience.

These vendors invest billions of dollars in R&D to develop these great products and showcasing the experience, the functionalities and the experience of the individual products as well across products is very challenging if you don't have the space and the available advice. And Best Buy is very unique today in providing the opportunity to do just that. So the customer experience is just terrific. The feedback we're getting from customers is very positive, including in that – related to your second and third question, because customers can now look at the Samsung set of products and customer experiences as well as other competing universes and ecosystem that some people call these things.

So this is a very positive thing. If anything the announcement of Samsung and the deployment of Samsung has triggered more competitions with other vendors who are agreeing that this is a very positive. And the more traffic is attracted to our stores, the better this is for everybody. So there will be more – there's nothing to talk about today, but we are interested in doing more and we see it as win-win-win. It's winning for the customers, it's winning for the vendors and it's winning for Best Buy. So this is exciting.

David Strasser - Janney Montgomery Scott, LLC

Thank you very much.

Operator

Our next question comes from the line of Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel - Oppenheimer & Co.

Hi, good morning. So my question's on, I guess, recent sales trends. A competitive of yours last night, a smaller regional competitor, when they report their quarterly results talked very clearly about a pickup in sales trends throughout this year and in particularly the recent month or so. They didn't specify specifically between consumer electronics and appliances, but are you seeing is Best Buy seeing that in your business as well?

Hubert Joly

Brian, so your question is, are we seeing an acceleration of trends from a market standpoint? I personally find that months to months it's going to be hard to track because there is so much noise in the system really to new product introductions. The governing start we have Brian is that we see the market as being a large growing market, in that the – if anything, the next few months and quarters we’ll see a number of exciting new product introductions that will help the market. This is one of the extraordinary things about this industry is that new products keep coming up.

And of course we don’t do so well in VCRs anymore, so you have to be focused on the new categories, but so yes we see a positive environment, a very competitive environment as well but we don’t want to give the impression of the rosy picture, but one where we have a very fair opportunity to compete and drive for stabilize and then begin increasing comps which is in our profitability, which has been our theme since November.

Brian Nagel - Oppenheimer & Co.

Thank you.

Operator

And our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Bradley Thomas - KeyBanc Capital Markets, Inc.

Thanks, good morning. I wanted to ask about the opportunity to improve cost of goods sold. You guys have been very clear about the savings that you’ve realized on the SG&A side of things. You’ve also mentioned I believe it was $30 million you’ve seen already on the cost of good sold side. Could you sub quantify for us maybe what that run rate is today and the timing with which you could start to see more benefits on that side of the equation?

Hubert Joly

Hey Sharon, would you like to take this?

Sharon McCollam

Absolutely. Yes, Brad I’d be happy to. The cost of goods opportunity is actually one of the most compelling cost reduction opportunities that we have in the company right now. And in Hubert’s prepared remarks he talked about the biggest of those opportunities which is this returns replacement and damages. Today the reverse logistics process in the company is resulting in a business model that is loosing well over $400 million a year on a revenue base, reverse logistics revenue base returned from customers above $3.5 billion. Well that’s why he’s focused on a lot of things over the years.

This particular area is one where it has received virtually no focused attention on as the company had been growing and growing the reverse logistics side of it are not obviously the primary focus. But today it is our number one priority to address this. So, when we look at that we’ve quantified that for you clearly, you’ve got to get your arms around what portion of those losses you can effectively go after, but it is clearly a substantial opportunity and Hubert even went on to point out that because of the magnitude of this challenge the confidence that we have in achieving that is extraordinarily high. The other place in the supply chain that we have significant opportunity is in the optimization of our shipping lanes.

We again have opportunity through systems enhancements and other areas to be able to further cube out our retail replenishment model which is a substantial cost when you think about our cube. Another area that we are aggressively going after is the vendor selection -- vendor management aspect of supply chain and that is an area again where there has been less focus in some of the other areas in the company. So collectively when you look at that and you think about what we shipped here between the flash drives and the flat screen it is a very large cubic endeavor.

So, going forward now let’s talk about how you’ll get there, and I think in your question, that you’re looking at the SG&A and saying we’ve taken out substantially more SG&A than we have cost of goods. When you’re talking about the supply chain, what you need to be thinking about is a gradual and incremental ongoing improvement in the process. Remember the supply chain touches every operational activity that we have in the company, and a lot of that business is contractually committed at any point in time.

So in order to make progress on that you have to work through those contractual obligations. So what you need to expect from us every single quarter is as just as we said with SG&A is a consistent and gradual recovery of this tremendous amount of costs, but there is nothing structural in the company right now that would indicate anything other than this is all about execution and going to get it.

Bradley Thomas - KeyBanc Capital Markets, Inc.

That's very helpful. Thank you, Sharon. Thank you, Hubert.

Operator

Our next question comes from the line of Alan Rifkin with Barclays. Please go ahead.

Alan Rifkin - Barclays Capital

Thank you very much. My question will focus on the SG&A side of the cost reduction efforts. In only six months you have very admirably realized about 75% of the targeted SG&A reductions. I was wondering if the opportunity exists for those reductions to actually be over and above the 400 million. The second question, if I may, is with the disposition of Europe and it seems like for now, you're suddenly committed to China. I know up to now, you've been reluctant to talk about the cost reduction opportunities on the international front, but Hubert or Sharon, can you maybe just address what you think those opportunities could be?

Hubert Joly

Hi, Alan. Thank you for your very kind comments. As Sharon who of course is leading our work on SG&A to answer your question.

Alan Rifkin - Barclays Capital

Thank you.

Sharon McCollam

Alan, our $400 million target I believe is one that just like I just explained on the cost of goods side is evident and extremely achievable. As Hubert and I learn more and more about the organization and quite frankly what I would tell you is when you look at the results even of the first quarter, this has become an organizational mission on SG&A. The results that we delivered this quarter were as the collected efforts of this entire organization and the leaders in Best Buy have embraced these initiatives at a level that you could only hope you could accomplish in such a short period of time. So while I am extraordinarily encouraged about the potential, today when I get the 400, I'll start talking to you about bigger numbers. But what I can tell you is that we see nothing that says that you don't put that 400 in the bank – that 400 million in the bank over time.

Alan Rifkin - Barclays Capital

Okay. Thank you, Sharon. And on the international cost reduction opportunity…?

Sharon McCollam

On the international side, I would say that we are in early innings. Hubert mentioned in his prepared remarks that Canada did take out $40 million of SG&A in the first quarter but as we've discussed in previous calls and continues to discuss, we have only just begun to instill our Renew Blue priorities in our Canadian and China businesses. So I believe that that opportunity continues to be significant as well. And as we get more deeply into it, of course we'll continue to communicate on our progress there. We have two extraordinarily wonderful new leaders, one in Canada and one in China and they have come in blazing. And I think that they are going to lay the foundation for very similar progress against Renew Blue that we are seeing here in the U.S.

Alan Rifkin - Barclays Capital

Okay. Thank you very much.

Bill Seymour

Last question please, operator.

Operator

The next question comes from Anthony Chukumba with BB&T Capital Markets. Please go ahead.

Anthony Chukumba – BB&T Capital Markets

Good morning. Just had a quick question, just want to kind of circle back to the price investment. Would you say that those are largely behind the company or should we expect some additional level of price investments going forward? Thanks.

Hubert Joly

Anthony, thank you so much for your questions and your continued support. Your question is do we plan to expand the investments. Similarly, we say we plan to maintain the investments. We feel that being competitive, price competitive is of utmost importance at this particular time. It's possible that we will selectively increase the investments as we look ahead. And as we – I think there's going to be a balancing act from between these price investments and then the capture of the cost of goods sold – cost reduction opportunities that Sharon highlighted. So I’m not giving you very specific guidance, but rather a general sense of direction of the importance we place on these investments and also the fiscal responsibility we feel to over time balance this. So, I think as we look at having the next quarter’s we will continue to update you of course on this, but count on us to be in there fighting to attract and keep customers.

Sharon McCollam

And I will just add to that Anthony, that the one area that we’ll add to the margin impact of the investments that we’re making in price will be the optimization of our footprints in our retail stores and focusing on balancing that mix along with all the other initiatives that Hubert is talking about. By the end of the summer, we’re going to be complete with our first phase of the floor space optimization and of course once we made those changes we’ll be treating that going forward and we think that is a very important opportunity for us as we focus on the balance that Hubert mentioned between the investments in price and the optimization of our margin while having to invest in price.

Hubert Joly

So, altogether as we ramp this conference call, first of all, I wanted to thank you for your attention and your support. I want to convey the fact that these continue to be very exciting times for Best Buy. We feel very encouraged by the actions we’ve been taking in this quarter, the opportunities we have that I think we tried to detail on the call today as we look ahead and the early results in our efforts to stabilize and begin improving the performance of the business. So, these are very intensive and exciting times for us and we look forward to continued dialogues. So, Bill over back to you.

Bill Seymour

Yep. That’s the end of the call operator. Thank you.

Operator

Thank you, ladies and gentlemen. That concludes the first quarter Best Buy earnings conference call. As a reminder, this call has been recorded for playback and is available after 12 PM Eastern Time by dialing 800-406-7325 and entering the access code 4617853 followed by the #. Thank you for using ACT. You may now disconnect.

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