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Executives

Hubert Joly – President and Chief Executive Officer

Sharon McCollam – Chief Administrative Officer and Chief Financial Officer

Analysts

Colin McGranahan – Sanford Bernstein

Best Buy Co., Inc. (BBY) Sanford C Bernstein Strategic Decisions Conference Call May 29, 2013 8:00 AM ET

Colin McGranahan – Sanford Bernstein

As way of introduction, we are thrilled to have Best Buy at the Strategic Decisions conference this year, the first time in many, many years may be ever because you move the end of the fiscal year back a month, you can now come to our conference. With me today is Best Buy’s President and CEO, Hubert Joly and CFO and CAO, Sharon McCollam. As I am sure many of you are aware, Hubert joined Best Buy in late 2012. And I would say sometimes the new CEO brings a breath of fresh air to a company. I think in this case, Hubert has brought a hurricane of fresh air to the company. And prior to Best Buy, Hubert was the CEO of Carlson and previously have a long career at McKinsey and then turnaround experience at Vivendi’s video game business and EDS in France.

And one of Hubert’s key heirs is Sharon McCollam as the CFO and CAO. Again, I am sure many of you are aware, Sharon was previously the CFO and COO at Williams-Sonoma where she led strategic planning as well as the key operating and finance functions, and I think we can all agree as widely regarded as one of the best operating CFO's anywhere in retail today. I believe that Hubert is going to start with some opening comments, so I’ll turn the floor over to you.

Hubert Joly

Well thank you, Colin, and thank you for hosting us, and thank you for attending this session this morning. Evidently these are exciting times for us at Best Buy, I would highlight three things in our floor that’s in contrast with the situation, the perspective that existed just back in the fall, when it was quite different.

So the three points I would highlight is number one, we continue to be impressed by the strengths of the company. From a customer perspective, we offer a very unique value proposition with the broad assortment, noticeable objective advice, competitive prices and then the Geek Squad services.

And importantly that may be something that surprised everyone vis-a-vis the vendors of course right now probably have met with many of the CEOs, most are vendors. We are so critical to them and we offer something that’s very unique. We are the only place of scale in the U.S, where they can showcase the billions of dollars, the fruit of the billions of dollars of R&D investment they make every year, and this is the only place where it can be showcased in a real way with advice and so forth, and of course the Samsung deal that we announced at the beginning of April that we are in the process of rolling out signals, so that’s a very strong strategic platform.

Number two, I think we can all agree that we've been making some progress. We are very pleased with the fact that for two consecutive quarters we've had flat comps in the U.S. In Q1 you have to adjust for the moving Super Bowl and a couple of other things, but we're very proud of that. And also very proud of the fact that we're making significant progress on our key renewable priority, so let me just highlight a few of them.

Number one, the fact that we grew our online business in Q1 by 16% year-over-year. We’ve made online a huge priority with – our market share online is only 7% compared to 18% in the physical world. There is no reason why it should be lower. We’ve improved and it was a big area of focus on net promoter score by 300 basis points since November.

The company used to measure customer satisfaction of course, but only with buyers. And of course once you’ve bought your TV or your computer or your phone at Best Buy you are happy. We are now also asking the non-buyers and of course they have a different perspective, and we are doing this across channels. What this has allowed us, and of course if you look at the fans and the detractors, which gives us a more sober perspective.

What this has done is it has established a burning platform for every one at the company to improve that and we are proud of the fact that we’ve improved by 300 basis points. The Samsung Viera is a very significant milestone also for us, great reaction from the customers. And I think that it’s triggering of course interest in a dozen number of vendors, $325 million of cost take-out.

Back in November, we announced that we would take out a total of $725 million of cost versus SG&A and cost of gross profit margin improvement opportunities. And then we are announcing every quarter what we’ve done and we are now at $325 million, so that’s pleasing. And of course we concluded a definitive agreement to exit Europe, which allows us to simplify the company, reduce the leverage and strengths in our balance sheet. So a set of accomplishments.

And the third point I would highlight is beyond strengths and accomplishment of progress is the amazing opportunities we have in front of us. And many of them have a great operational incremental, very concrete, very tangible, improvement nature. So no star wars, no shiny objects and they are focused on the six elements we’ve been talking about on our March 1 earnings call and in our call last week.

So we continue to be focused number one, on driving online sales, through investment in SCM and search engine optimization in affiliate marketing, improving the performance of the site, to improve the close rate and a very exciting initiative that we now have in pilot mode, which is ship from store, which I am sure we will talk about, but has the opportunity to transform online performance as 2% to 4% of the visits on the sites today, people who want to buy, people are not able to buy, because we tell them we don’t have it in stock, whereas in 80% of the cases we actually have it in-stock in one of our stores.

So unlocking this potential is an enormous opportunity, we think. So online is a big deal, continuing to drive on multichannel customer experience, building on the progress of the Net Promoter Score through price competitiveness, which are investments we are making and this ship from store initiative, as well as, continue to drive the customer experience both on-line and in the stores.

The floor space optimization project for us is a huge very concrete, very tangible opportunity, we have deployed the Samsung Stores in our stores in 600 of our big-box stores by now, 400 of our small stores and by the middle of August we will have touched all of our stores shrinking what’s not working so well in physical media and expanding growing profitable categories where we have the opportunity to gain share, mobile accessories, tablets and appliances, small appliances in particular.

We’re continuing to drive the supply chain optimization, returns, exchanges and damages, is our opportunity – opportunities around services that’s we’re going after. Continuing to go after SG&A, to complete our task of taking our $400 million of SG&A cost of about $295 million at this point. And then continuing to up gradually optimize real estate, through the rents, renegotiations when the leases are up and gradually pruning the portfolio even though we don’t have any significant number of unprofitable stores. So, lots of work ahead of us, significant opportunities building on the momentums I was seeing, quiet a bit of excitement coming at the company today.

Colin McGranahan – Sanford Bernstein

That’s fantastic. Obviously you’re working in an environment that is maybe not as favorable as it has been in the past, some of the bigger categories that you, your TV’s, PC category have been struggling a bit. Can you talk a little bit about, how you see the demand for consumer electronics this year, how that might evolve over the next couple of years and how you think about the product cycles in a business where product cycles are pretty key to success?

Hubert Joly

Indeed, that’s one of the things I looked at when I joined the company. What market? What is the market like? The truth is that we have a large growing market. It is more than $200 billion in the U.S. it’s been growing in the low single digits. So frankly no complaints around that. Now of course this goes through cycles in terms of the individual products.

We are not doing do well anymore with VCRs because you guys are not buying them anymore, but in the last, in America in the last few years we’ve had significant growth in Smartphones, the introduction of tablets. And then with the housing recovery you have significant growth in appliances. So we feel good about the market and our focus frankly is on doing, what we need to do to grab our fair share of the market and if possible increase share. We have overall 16% market share, there is no reason why we couldn’t increase it. Now looking ahead, I have always found that in this Industry when you look back it’s always very difficult to predict what’s going to happen.

Back in 1995, when Bill Gates wrote his book, it was not, it’s well known right, there was not a single page, where there was – no where in his book a word about the Internet and that’s Bill Gates, so who am I to make predictions. What we know is that companies are continuing to invest billions of dollars in R&D. We have two new gaming platforms coming up this year, that’s pretty exciting. I think the housing recovery and there were some good numbers in the last couple of days, that’s a positive. And so we look ahead mainly focused – without counting on the sea level of rise to address our opportunities we are very focused on effecting what we can control.

Colin McGranahan – Sanford Bernstein

And in terms of product mix, I thought one of the interesting points you made back in the November Analyst Day was that given the mix of products that you had that actually was the more significant contributor to your market share loss over the last few years than the channel shift was – the growth in the internet. How do you think about that today and what are you doing to adjust your product mix to try to overcome that negative mix where you’re underpenetrated on things like tablets and Apple?

Hubert Joly

Tablets actually were the (inaudible). So let me answer your question. Very striking, so I started my career at Best Buy long time ago last September working in stores and the first thing that struck me is that, we had about 20% of the floor space that was dedicated to CDs, DVDs and video games. I love these categories, ten years ago I was in this room on the occasion of the Vivendi Universal merger, so – but that was ten years ago. And of course the Tuesday release is not a factor anymore, is not a driver anymore. So the floor space optimization project again is to shrink these categories and emphasis the categories where we can grow. Let me highlight a couple of opportunities.

Smartphones of course is an attractive category. Our market share in Smartphones has been increasing, but it’s still in the low teens compared to the high teens for the rest of the category. And we have a unique value proposition for Smartphones. We are the only place in the country that offers all of the carriers and lot of devices and great service with the work out working service we have, so it’s a great opportunity for us, number one. Second one is appliances; our market share in small appliances is below 2%. This is a great opportunity for us because anybody that's technology driven, we have very legitimate. We have huge traffic in our stores. 600 million visits to our physical stores, 1 million visits to our website, I think we can do better in these categories. So the consumer electronic space is a dynamic space, it’s up to us to catch the ways and catch the opportunity.

Colin McGranahan – Sanford Bernstein

Okay.

Hubert Joly

And of course online I talked already about it, our goal is to have a market share online that will be commensurate with our market share of the physical world and to be in the sense diagnostic and distribute of customers, sell to customers the way they want to buy, there is no reason why we should prefer one channel over to the other.

Colin McGranahan – Sanford Bernstein

And just focusing on smartphones and mobile phones, obviously that category has been a huge win for Best Buy over the last several years. It's a substantial part of the domestic profits today. Can you talk a little bit about how that category is evolving and smartphone penetration is started to level off, we’re starting to hear some talk about maybe extending the period between subsidizing upgrades. And the opportunity for market share gains whereas you point out you’re still lower than you are in the rest of the house. So where can you pick up share from?

Hubert Joly

Yeah, any category will go through take-off maturity and decline. I think in the smartphone category, we still have some good years ahead of us, because phones penetration is very high but smartphone and postpaid penetration still has some significant way to go, so we like that, and again because we have this unique winning value proposition. We’re excited about our market share and we’re also excited whenever there is competition in the supplier world, it’s beneficial for us because we are the place of choice. So competition between the handset manufacturers, competition between the carriers is all good for us. And we can therefore capture opportunities really to the growth of the market as well as opportunities to move market share around.

Colin McGranahan – Sanford Bernstein

Okay. Let’s focus on the stores first, and then we’ll talk about the online opportunity. Given I think still about 92% of your sales come out of the boxes. Now traffic has been declining, even in the first quarter where comps were relatively flat that includes the online which grew strongly, so store traffic, I think was down 2% or 3%. How do you think about store traffic going forward and talk a little bit about your opportunity to increase the close rate of the stores?

Hubert Joly

So, excuse me, as I said ton of opportunities here. One of the things that we are highlighting is that thinking about the two channels, physical stores and the web in separate ways would be inappropriate. I think it’s in 80% of the cases, shopping for a [online] item above $100 starts from the internet, and a key opportunity we have as a company is to put more emphasis on showing upon the first Google page, first page of Google when people search for an item, a flat panel TV or an appliance. And historically the company is now been focused on either SCM or SEO affiliate marketing and what not.

We said that showrooming actually starts on the web, and we have to do much better from that standpoint, which is then a key driver of traffic to the stores. So we cannot think of both competition between the web and the stores, it’s a very holistic synergistic approach. So investments there are very important.

Other aspects of driving traffic to the stores have to do with emphasizing these growing categories that I was talking about as well as the vendor partnerships. One of the aspect of the Samsung deal, Samsung, of course has got momentum and they’ve spend a $1 billion on marketing, and because we are really their store in the U.S. You can imagine that a portion of that marketing is being directed to generating traffic to Best Buy. So we expect good things from that.

As we did for the close rate, both online and in the stores, we are focused on the items that are in the way of closing because we love the absolute traffic and we see the opportunity to take care of the customers. So the shift from store initiative is huge from that standpoint.

The investments we’ve made in price competitiveness also are very significant. They’ve impacted a little bit our gross profit margin and I’m sure we’ll come back to this in Q1, but we have decided we are here to win. So we have to be price competitive, it’s in our name, we are the Best Buy, and want to make sure that we take care of this. This is on top of the price-matching policy which we introduced last fall. The price-matching policy has not had any significant cost of the company, because of lower frequency and because our prices are actually quite competitive, but what it has done, it has enhanced the confidence of the Blue Shirt in dealing with the customers.

So if they are going to spend 30 minutes or 40 minutes with you to take care of your TV or phone needs, they want to be confident that in the end they can close the deal and there’s no obstacle related to pricing. We are also very focused on energizing the Blue Shirts, we’re making sure that they’re fully staffed and qualified and trained. The addition of the Samsung consultancy is also a great way to help the customers given their deep expertise. So I can see we have a number of levers to boost drive traffic, as well as improve the close rates. And indeed the close rates have been improving both online and in the store since November, so we’re proud about this.

Colin McGranahan – Sanford Bernstein

Okay.

Sharon McCollam

I would like to add one thing to what Hubert said about driving traffic. You’ve made, you’ve come to a conclusion that with that 16% online growth, that backs into a traffic number for retail, but it's really important to understand as it relates to our online traffic. Despite the fact that we have free shipping across our websites, it’s all free shipping. 40% of our customers choose to pick up in the store. So of that online traffic, 40% of those individuals actually are still entering our stores to pick it up, we think this is an enormous competitive advantage, because the customer wants it now, no matter what the online competitors do, they cannot deliver it now. So I think that as you think about the traffic, there is no traffic coming to stores despite the online growth, it is approximately 40% of that is actually entering our store which we think is very excited.

Colin McGranahan – Sanford Bernstein

You actually anticipated my next question there. Given such a big chunk of that is coming to the store and given the peculiar aspects of the Consumer Electronics market where there is a lot of margin not into item itself, but in the services and the attachments of accessories, what can you do, where the online experience is more often times in the item experienced on buying a single item. When that person comes to the store, how do you migrate them to attaching accessories, attaching services making sure they get the whole package?

Sharon McCollam

Well, what's happening right now is that when a customer comes into store, they have already selected a basket for them. So when the customer comes to the counters, they have picked a few items and they try to up sell it. The challenge that we have is that from a systems point of view, we cannot easily add on to the existing order. They have to get their credit card out again. They have to do another transaction. And generally when they come, they want to be efficient and coming in and out of the store, so we have a top priority on implementing that new functionality.

So that by the end of the Q3 and then we go into holiday that we actually, you will be able to come in our store, you will be able to come in our store, you will be able to view or buy online, pick up in store, we will show you a basket and if you say yes, I would like to have that, we will be able to instantly add that to your transaction and then you can walk out of the store.

Colin McGranahan – Sanford Bernstein

That’s interesting. So it’s kind of like pre-selected baskets for buying this item, these are the high probability items that…

Sharon McCollam

Exactly, if somebody is buying, if they’ve ordered an iPhone and they’ve ordered an iPad, it’s very likely that the basket they will select is a charger for the car, and they might select a cover that they would normally pick a very generic one, a black or a grey. And often times it’s first the idea for the customer, which is, oh, I forgot about that, my charger from the iPad 1 is not going to work on the iPad 3, I need to get that switch.

So that is what we are doing today, it’s less effective because we are forcing a new transaction by the customer. By the time we get into holiday, we will be able to really serve that customer, but that traffic is very important to us. But it doesn’t actually show up in traffic numbers because the order actually started online.

Colin McGranahan – Sanford Bernstein

Okay, great. Then in the online business, and I know, I’m still artificially separate and use to and it’s an omni-channel world, but just talk about the different issues. Your BestBuy.com generates some massive amount of traffic, stay holes are not quite as robust and obviously the problem there is the conversion rate hasn’t been as high as some of your competitors. Why isn’t conversion higher, how do you drive it up?

Hubert Joly

So this is worth of opportunities. Our conversion ratio is about 1.3%, 1.4%. We can all agree that this is not the goal. So what we’ve done is, we have looked at what are the drivers of how do we lose the sales? The largest driver has been this 2% to 4% of the visits that where people want to buy something and we tell them on the sites, its not in stock. This is the largest driver. And in 80% of the cases, the item is actually in the stores. And the good news for us today is that, the company has actually made the investment in the past in a system that actually enables to unlock this inventory. And we – Sharon is leading a pilot in 50 stores at this point, with 10,000 SKUs in 50 stores where we are actually shifting from stores and we are of course looking at the various details we need to figure out to make this work. And we think that within six to 12 months of being able to run this up.

So if you can just imagine, let’s imagine out of the two to four, we can get 1.5 unlocked from this initiative, this would more than double conversion ratio and therefore the sales on the website. That’s one aspect. There’s other aspect, the information, you log it when previous management team leaves you a set of opportunities. So on our website, we have a ton of opportunities. The information about the products is not very detailed, for example, there is no – the measures of a particular appliance or TV are not available, the details of why this DVDs at $29.99 whereas (inaudible) is at $7.99 and are available. When people have filled their basket and are moving to checkout, we lose still at this point 50% of the customers. Our checkout process has got seven steps. We can agree that this is too many. So this is a range of opportunities that we love.

In addition, there is a related opportunity that we are very excited about, which is our customer database. We have 41 million active members in our loyalty program. And of course we know a lot about them, about you, which you have bought, we probably know the exact printer you have in your home, the exact TV and so forth. And yes, in our history, we’ve never send you a personalized email. We send you a letter of blast emails all about deals and prices. And everybody knows that the conversion ratio, the click rates, and the conversion ratio on a personalized e-mail is order of magnitude is higher than in the blast email.

If I know the exact printer you have, I can deduct because of science the impact it gives you and I can talk to you about this, just one example, or if I know that your phone has been active for two years maybe I can talk to you or if I know that you've had your TV for five years, I can talk to you. We are doing none of this, and of course this is likely to generate traffic and higher sales both online as well as in the stores.

This is an opportunity that's completely unlocked, so this is going to take another few quarters. You have to understand that this year is very much a year of transition where, as I've reported, we've been pretty busy and active, but not everything is going to happen overnight. So some of these initiatives take a few quarters. So this year is very much a year of transition to set us up for the change in trajectory starting next year.

Colin McGranahan – Sanford Bernstein

Okay.

Sharon McCollam

Adding on conversion, the buy online and be able to shift from the stores unlock a tremendous amount of other opportunity for us, but I don't think it can be overlooked. This initiative has taken some retailers like Nordstrom and others four years and $100 million to execute. Best Buy has this capability and within six months to 12 months we will be upscale taking that online traffic and converting it, but it has other significant benefits. For instance, today, if you are standing in a Best Buy store and obviously there's going to be another store in the market and you want to buy something. And we say, we don’t have it, but the 80s like if you were 44th and 45th and we said we don’t have it here, but the [80-63] store has it.

You would say, you could go down there and you could pick it up. But if you did not want to go down there, our store today from a systems point of view cannot order that for you and have it shipped to your home. Even though we have free shipping across our site, the stores associated at that point can’t convert to you. This happens all the time in our stores. So obviously by unlocking the buy online and then ship it from the store, is an opportunity that doesn’t only take place online, it gets into the fact that online versus store are inseparable. In a company like Best Buy or really any retailer we really want to talk about it, so it unlocks that as well.

The other thing that this unlocks which you haven’t asked about, but I am just going to finish the thought, is the ability to much more cost effectively manage our returns, replacements and damages in our stores. One of the things we disclosed in the last conference call is that today at Best Buy our domestic returns are over 10%. That means you’ve got $3.5 billion in reverse logistics. It is bigger than 80% of all retailers in this country, just the reverse logistics. And today in that business, we are losing over $400 million on those returns.

Now, you say why are we losing that kind of money? Because reverse logistics has never been a focus for Best Buy. Best Buy has been a growth company, we’ve always had runway in front of us to open a lot of stores and so a session over these cost related details was not the focus in the company. But here is the issue, you better talked about a couple of initiatives, on that $400 million, have you go after that $400 million? First issue is this, in our stores today. There is no area in the store dedicated to clearance.

We are one of the very few large retailers that have no place in our store dedicated to clearance. What basically happens to the majority of that inventory is that the sales associate puts in a box and they ship it to a Central Return Center and then that inventory has broken, you think about what we sell flash drives and flat screen, it's a difficult transportation model and when things aren’t boxed properly they get damaged, they get ruin, so the opportunity by shipping from store.

Now we can take that open box inventory, which people by the way love to buy I might add. And we have a lot of searches online for that, we will be able to receive it into the inventory and remember the inventory is visible to the entire network. We will then be able to show that product and then when the customers wants to buy an open box, it doesn't matter if it's in the store you are standing and it can be anywhere in the network, and we can ship it to you, which will dramatically allow us to optimize the margin.

The other thing that people don't think about as it relates to buy online and ship from store is the issue related to transition of product, which happens in Best Buy everyday. A vendor is always introducing a similar product or a new product in some change, right, it’s either a blue camera and now it's a purple camera, or there is various changes that occur. But let's talk about a massive change, like the transition from iPad 1 to iPad 2. The way our systems work today, if you’re store and you have 115 of those and the iPad 2 is out, iPad 1 obviously it's got the camera, it's a totally different product selling ones is not easy.

So the store with a lot of inventory might be taking a 50% markdown, while a store that only has 75% might be taking 40% and then one that only has 15% might be taking 30%. The reason they’re doing that, if you don’t have enough foot traffic, to be able to liquidate that store with over 100 of those iPads potentially, so they take a deeper markdown. Today, what we will do with that inventory is [a bit difficult]. You will immediately advertise it online, promote it we believe that you can take the first markdown and then remove most of that inventory from the system and then you’re only left with a very small quantity that actually becomes excess.

So as you think about the fact that Best Buy already has made this massive systems investment to create the capability to buy online, ship from store, it have to be one of the greatest competitive advantages that will be introduced Colin to us and we were able to do it in such a short period of time and I just think it’s important to understand the magnitude of opportunity.

Question-and-Answer Session

Colin McGranahan – Sanford Bernstein

That’s great. That’s good performance. Just in the interest of time, why don’t we go to questions from the audience here and I’m going to encourage you to write your questions, we’ll collect them. We knew this one is going to come up, what is the price difference between the Amazon and what does that mean for your pricing in gross margins?

Hubert Joly

Best Buy today after the investments we’ve made is very price competitive. Now the competitors do vary significantly by category. And last year, I was struck by – everybody was talking about Amazon, where as Amazon is actually by far not our biggest competitor. There’s multiple categories where they’re simply are not present like large appliances, they’re not there; smartphones postpaid, they’re not significant in anyway; they don’t sell the iPads [Tim] doesn’t led them to sell the iPad. And so what we look at is our price competitiveness vis-à-vis the various competitors in the various categories.

And today, in hardware, we’re extremely price competitive. You’re talking about depending on the competitor by the way the prices are very homogenous because these to a large degree many of the products are commodity products. So it’s all within minus 1% or 2% or cheaper than some of our largest competitors and within menu share of [Amazon]. And one of the things that’s intriguing though is that of course the value proposition is not quite the same. It should take a protective shield for a smartphone, if you buy it online, its interesting right, you’re going to have to install it yourself.

I’m sure many of you are experts at cleanly installing the shield on the smartphone. If you buy it at Best Buy, of course, we are going to install it for you. Is it exactly the same product or service? No. Should it be the same price online, in the store? It’s an interesting question. But certainly the strategic decision we’ve made is to be price competitive in the various price categories because we have to and we are playing this game to win. This has had some impact on our gross profit margin in the last two quarters I’d like Sharon to may be elaborate a little bit on this because we both to be clear about what this means in terms of future trends and so forth.

Sharon McCollam

We are continuing to invest in price competitiveness and since you were joined, we started with the price match and incredibly created decision. But then we have actually come back behind price match, and really put ourselves at parity on items that we believe that a customer would expect Best Buy to be at parity on. The impact of that, there were some discussion in Q1 about the decline in Best Buy’s gross margin. And I think its important to clarify quickly that the gross margin did go down in Q1 about 190 basis points, but going back to Q1 of last year is not a trend that you can actually compare to because what happened after Q1 last year is the industry got so much more price competitive.

The margin in Q2 last year dropped a 100 basis points, it had already dropped sequentially. And in Q3, it dropped again and in Q4, it dropped again. So we began to get to parity. Best Buy’s margin came down, thus the cost reductions that were focused on in order to offset what we are investing in price competitiveness. But I had some questions, Hubert and I’ve been meeting with investors and we’ve had some questions about how to think about that.

Because last year from Q1 to Q4, the margin went down about 300 basis points and the question we’ve been getting is, we totally get the Q1 margin and we understand what you’re saying, should we be expecting to see that kind of distance between Q1 and Q4 this year because that would be alarming to us. The answer is absolutely not because we are already in the game and being price competitive and remember we weren’t – we chose not to be price competitive in Q1 last year and then we now have gotten in the game.

So we do not in any way expect that margin distance from Q1 to Q4 of 2014 to look like that. You will always be slightly lower in Q4 than any other quarter because you have a promotional time frame that of course everyone sees. But as far as thinking about that, you’ve got to look sequentially on Best Buy now. You can’t go back to the prior year. Starting in Q3 or Q4, you might start looking there but until you get to Q4, the year-over-year on the margin is not going to be a realistic measure. So that’s what we wanted to share.

Hubert Joly

And in addition over time, we have the opportunity to have some offsets to these price investments in the form of some of the cost of goods sold, supply chain, gross profit margin improvement opportunities notably the returns, exchanges, and damages a discussion that Sharon covered, in the services world also there is opportunities for us to drive this in supply chain. So overtime, we actually expect our gross profit margin to improve and go up.

Colin McGranahan – Sanford Bernstein

Okay. Well, that was going to be my question. When that’s obviously 2013, fiscal 2014 is this transition year. You get to Q4 it sounds like you think you're going to be price competitive, no more price and significant price investment. Obviously the COGS initiatives start to build overtime, so should we think about gross margin expansion toward the end of this year or that more in next year or is that's kind of a long-term of getting margins back up?

Hubert Joly

Thank you. We don’t provide guidance at this point in time because this year is a transition year, so there's a lot of moving pieces. Our conviction is that from a medium-term perspective, last November, we said our goal in the U.S. or North America was to get to an operating income margin of 5% to 6% and return on invested capital, a key area of focus for us, in the 13% to 15% range, which would bring us back to levels that we were at a few years ago. This is going to be a journey for us to get there from here. From time to time, we’ll accelerate the savings or the price investments and so forth, so that's why quarter-to-quarter it's hard to predict. But the conviction is that there is significant upside from the various initiatives we have to drive operating income margin.

Sharon McCollam

And Colin, once you've get there, once we get through Q4 and get into next year, if I was forecasting at this point, what I believe is when we unlock buy online pick up, you know different store and unlock all of this and can deal effectively with our clearance. I believe that what you're going to see is gradual incremental improvement in the margin over time. I think that there should be an expectation that once we are through the transition and the transformation part of what we're doing that investors should in effect should expect us to keep getting better each quarter, because you bet how it would play.

Colin McGranahan – Sanford Bernstein

Okay. I have a bunch of questions here on expenses and cost. Essentially they boil down to the fact that we’ve identified 725 million, you are already at $325 and six months of work. So the question since you brought on, a great job, should we expect more and where are you on that trajectory?

Sharon McCollam

Great job. What have you done from (inaudible).

Colin McGranahan – Sanford Bernstein

Yes. We’ll take the 300 versus my next 300.

Sharon McCollam

Yeah, exactly.

Hubert Joly

So when we are at $7.25 where we port back and tell you what’s next, but until then we are very focused on delivering on that. And if anything there is a conviction that its there and its doable, but hard work for sure but its there.

Sharon McCollam

About every quarter, the investors need to expect to be getting big numbers from us on cost reduction. So on the SG&A side and on the cost of goods sold size, the economy got it identified, we know how to get it, now it’s all about execution.

Colin McGranahan – Sanford Bernstein

Okay. Couple of questions here on top line, how are you going to grow the top line and what should steady-state comp growth looks like?

Hubert Joly

We established very clearly internally that I was allergic to negative comps. So everybody they set the company. I used to be excited by flat comps, but that’s eroding quickly, so our goal we’ve said that we need to stabilize and then begin improving the comps. I think, once we’ve stabilized for a number of quarters, the vision in the short term is going to be, low single-digits positive comps driven number one, by the market growth, we believe the market is growing in the low single-digit, the new product introductions can help driven by our growth online. We have market share recapture to perform and we talked about a number of the initiatives online, the customer database, or the traffic generation close rates opportunities. We also have opportunities to gain share, it’s not illegal, immoral and unethical to gain share, so we’re going to try to gain share. So our goal is going to be to, first stabilize and then go to a path or pattern of low single-digits positive comps in this country.

Colin McGranahan – Sanford Bernstein

Okay, great. Interesting question here, cultural evolution of the firm, how is that progressing? What needs to be done and what cultural inning are we in? I might broaden the question as well and say you’ve come in there’s been a world wind of change, there’s been some painful headcount reductions, how is the morale at Best Buy with the excitement of change versus and what’s the cultural evolution (inaudible).

Hubert Joly

So Best Buy is an amazing company. It’s a company that I have admired for a long time since I was in video games, back in ’09 attracted Brad Anderson a former CEO to the Board of Directors of Carlson, which was the company that I was at, so lot of admiration for the culture. The company probably suffered from a disease that is effect to successful company which is complacency. Today, the (inaudible) twice per year we look at employee engagement. We looked at – and we measured employee engagement in somewhere in the middle of the layoffs to your point. And assuming the tool we are using today is consistent with the tools that were used in the past, the level of engagement would be the highest since fiscal of 2006.

So there is a determination to win and of course, it’s a virtues cycle, right, once you start winning, people will get more excited, confidence. We got an email, wonderful email from one of the GM's, store general managers in January after we have reported the flat comps for holiday, saying the case of victory is so good, so sweet. And I was sick and tired of looking for excuses, where here to win. So that's a bit of the mindset of the company incredible mobilization, building on an amazing legacy for this company.

Colin McGranahan – Sanford Bernstein

Sharon, you come from a firm where the online or direct businesses far more profitable in the retail business, how does that compare to Best Buy and what the shift from store due to the profitability online business?

Sharon McCollam

Sure. The profitability that we saw in William-Sonoma, of course comes from a very different business model than Best Buy. And predominantly a big piece of that’s coming out of property bonds, it’s vertical, et cetera. So Best Buy is selling branded products, we are selling it online, and some of its commodity. We don't have as many excuses that William-Sonoma does. So from a profitability point right now, the online business is an enormous opportunity for Best Buy, because of the reasons that you were articulated earlier about the size. Remember that five years ago the management team of Best Buy made a decision to start investing in online.

And as a result of that, there are basic fundamental things the companies like William-Sonoma are leading the industry using the customer house file to recommend products to customers, based on what they’ve bought, they’ve reduced their blast email exponentially I don't know what the numbers are today I’ve been gone for quite a while, but they leave the industry in this and we chose not to invest during that time.

Now what the great news is, and what you should be inspired by, is that all of those technology exists, all these capabilities exists and all the companies to make it happen exists and you can execute this very quickly. So in order to do that, why is that so important, because Colin we need to attach, you raised the issue, online right now if you go on Best Buy and you would be looking – you would expect us to say what you might like or what you might need, more importantly you are buying something, and we're not telling you that when you get this home you're going to need two cables and something else in order to make this system work.

So once we start attaching online, the online business fundamentally does not need to have significantly lower profitability because of lack of attachment. As a matter of fact, we should be able with some rates we might be able to even do a better job, because you can remember everything the system automatically remembers. So I think that going forward our businesses will never, I do not believe that the online business at Best Buy will have the same dynamic and something like William-Sonoma were more profitable than the retail stores. But because remember we thought a big rent, because we got a big rent difference than we wanted to, remember we are just small. So that's the opportunity for online business every day – I wake up as I drew at the opportunity of this online business because we just haven't focused.

Colin McGranahan – Sanford Bernstein

I've got about 4,562 additional questions, but unfortunately we are out of time. So appreciate it very much, really helpful and good, best of luck.

Sharon McCollam

Thank you everybody for coming.

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