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Best Buy Co., Inc. (NYSE:BBY)

F1Q09 Earnings Call

June 17, 2008 10:00 am ET

Executives

Jennifer Driscoll - Vice President, Investor Relations

Brian J. Dunn - President, Chief Operating Officer

Chris Geigle - Manager Store 22, Davenport, Iowa

Mike Vitelli - Executive Vice President, Customer Operating Groups

Robert A. Willett - Chief Executive Officer Best Buy International

James L. Muehlbauer - Senior Vice President and Interim Chief Financial Officer

Barry Judge - Senior Vice President, Consumer and Brand Marketing

Shari L. Ballard - Executive Vice President, Retail Channel Management

Bradbury H. Anderson - Vice Chairman of the Board, Chief Executive Officer

Wade Bronson - Investor Relations

Analysts

Jack Murphy - William Blair

Brian Nagel - UBS

Michael Lasser - Lehman Brothers

Gregory Melich - Morgan Stanley

Colin McGranahan - Sanford Bernstein

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's conference call for the first quarter of fiscal 2009. (Operator Instructions) I would now like to turn the conference over to Jennifer Driscoll, Vice President of Investor Relations. Please go ahead.

Jennifer Driscoll

Thank you, Brittany. Good morning, everyone. Thank you for participating in our fiscal first quarter conference call. We have five speakers for you today. First up is Brian Dunn, our President and Chief Operating Officer; second, Chris [Geigle], General Manager of Store Number 22 in Davenport, Iowa; third we have Mike Vitelli, Executive Vice President of Customer Operating Group calling in; fourth, Bob Willett, CEO of International and Chief Information Officer; and we will wrap up with Jim Muehlbauer, Executive Vice President of Finance and our CFO.

As usual, we have a broad management group here with me, including our CEO, available to answer your questions after our formal remarks.

We would like to request that our callers limit themselves to a single question so we can include more people in our Q&A session, and consistent with our approach on prior calls, we will move to the end of the queue those who asked a question on last quarter’s conference call.

We’d like to remind you that our comments made either by me or by others representing Best Buy may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management’s expectations.

May we also remind you that as usual, the media are participating in this call in a listen-only mode.

And with that, let’s turn the call over to Brian Dunn, who will begin our prepared remarks.

Brian J. Dunn

Thanks, Jennifer. Good morning, everyone. We are very pleased to be reporting a great start to our new fiscal year, with a 3.7% comparable store sales gain and $0.43 in diluted earnings per share, I am pleased for our customers, our shareholders, and most importantly our employees. Our employees see the results of their individual efforts every day but it is awesome to see the results of their combined efforts on the main stage like they are today.

On top of the financial results, we continue to see positive strategic results. First, we continue to grow our market share and we are confident that our value proposition is working. We picked up share across the board -- in TVs, gaming, computing, and mobile phones, while delivering sold gross profit rate performance in the quarter.

Second, our customer satisfaction scores hit a record high during the quarter, and finally, we have made record improvements in our employee turnover. In short, these results suggest that we are growing our business in the right ways and that should fuel our continued growth.

With those highlights as the backdrop, I want to give some examples where we see our strategy playing out very well. My first example is our continued success in the computing space. We have the complete product lineup, outstanding employees, and the service brand in the marketplace. Nobody else can match that today, and we believe this market position puts us at main and main of the connected world. Our trend has continued in this fiscal year as we gained another 3.5 points of computing market share in the first quarter. This quarter marked the 22nd consecutive quarter with double-digit comparable store sales gains in notebooks, and it is more than just the products.

Our Geek Squad services grew at twice the rate as the rest of the business in the first quarter. Our in-store Geek Squad attachment rates in computing were up. We think that is incredibly compelling evidence that customers want more than just a transaction and that our commitment to never leaving our customers hanging has massive implications across every part of our business.

I also want to point out that services was at the top of nearly every territory local growth plans that we talked about on the last call. I have no doubt that there is a high correlation between those local plans and these enterprise results.

Improving the extended service experience was also very high on all of those territory growth plans in the U.S. and it also grew faster than the base business in the quarter. Extended service attachment rates on TV over 30-inches were up in the quarter. It was also up in computing. We’ve been investing in the back-end of our service capability and our overall proposition and our blue shirts are confidently offering those solutions to our customers and we are seeing the proof. There is a customer need. We have the skill to serve it and the employees are engaged to make it right for the customer, and it takes all three. These are important clues and they are examples of why we are so optimistic and confident in our core hypothesis of igniting human ingenuity.

Which brings me to my second example, the crossroad of that intersection, mobile phones. We have taken a giant step forward this quarter by announcing our deeper relationship with the Carphone Warehouse. It was the culmination of a ton of work by a lot of people at both companies and I want to thank all of them.

Mobile connectivity is exploding around the world and our two companies have a shared vision about serving human beings in that new world. If the evidence from our initial work in best plan mobile is any indicator, we would predict a very bright future together. Fully 599 U.S. Best Buy locations are now equipped with the Best Buy mobile experience and the results continue to impress. Even with only half the chain converted for the majority of the quarter, our wireless comparable store sales gains was 50% in the quarter. The strong double-digit comp at the converted stores was four times that of the unconverted stores, or as I guess I should call them the soon-to-be-converted stores, as we’ll have the U.S. chain converted in its entirety by the end of the calendar year.

So we are very optimistic about how we are positioned in the macro trends in the industry but that’s only part of the equation, and meaningless without the people who are the strategic differentiator for this company; the people who are the culture of this company and the face and voice of Best Buy to our customers.

With that, I want to introduce Chris [Geigle], store 22 in Davenport, Iowa. As context, Chris has been with Best Buy for 10 years and has been a GM for the last five years. Store 22 is 23 years young and just posted a 15% comp for the first quarter. Last year’s team delivered a 5% comp and a 10% profit growth. He is going to talk about how he is using the assets that we have put in place as a $40 billion enterprise to better understand his customers and his store’s growth on a local level. Chris.

Chris Geigle

Thanks, Brian. Good morning, everyone. As Brian said, I became the general manager of the Davenport, Iowa location just about three years ago, after spending my first two years as a general manager of the Dubuque, Iowa location.

Our story really started about six months ago when Brian and Shari challenged our team and every store in the company to really figure out new ways to grow at a local level. So we began thinking about who shops in our store and what could we do to serve them better, what did they need that we could probably provide them better than anybody else?

In case you haven’t been to Davenport -- and really, most people haven’t -- I’ll give you a little background on our town. Davenport’s your typical Midwestern small city. We’ve got a population of around 100,000 people with a total of about 400,000 people in our trade area. We call it the [Cross] Cities. We are located right on the Mississippi River on the border with Illinois. Agriculture is a big part of our economy and John Deere is on of the largest employers in our area.

Our team did a deep dive into the customer segment shopping in our stores using a tool that we didn’t even have when I first became a GM. We found that the empty nesters, we kind of think of them as baby boomers who are retired or just about to retire, call them Charlie and Helen, were the largest customer demographic in the [Cross] Cities. The problem we saw was that these customers didn’t shop with us and they made up the smaller percentage of our revenue of any customer segment.

Our strategy was simple -- we had to figure out a way to get this huge customer segment into our stores and shopping with us. We tried a couple of things and we failed. Helen and Charlie didn’t want to shop with us; they didn’t even want to come into our stores. We reached out to some of our community partners to see what they thought. One of them had a great idea -- why not go to public library, talk to these customers, and figure out what they need? So we did. What we learned surprised us. Helen and Charlie were intimidated by us. They sometimes didn’t understand the terminology we used. They often didn’t know how technology can make their lives simpler. Most importantly, they didn’t want to be sold to.

That’s when Brett Jones, one of our part-time home theater employees, had a fantastic idea. Let’s go to the library and start training classes at the public library. If we could share our knowledge with Helen and Charlie around technology and what it could do to enhance their lifestyle, maybe they’d feel more comfortable coming to our store.

So Brett developed a plan -- he didn’t have a manual to figure this out. There really was no standard operating procedure. He worked with the library to arrange classes. He developed course materials, and he leveraged other experts on our team. He used his passion around growing our store and he shared it with our customers.

It’s working. Slowly at first, customers started coming to our store asking for Brett. They were more prepared to make their buying decisions. They used the terms he taught them the night before and they wanted the solutions he showed them. They’ve even shared their knowledge with friends and family. We continue to learn so much from this specific customer segment as we get more and more interactive with them due to this program.

I’ve got no doubt that we are better serving our community that we live in. We’ve already had requests for more trainings in the community and recent sessions at the library have been standing room only.

What I am most proud of is we’ve been able to share our story throughout our territory and other stores in the area are learning from us and making it their own and growing their business as well.

Thank you, Brian, Shari, Brad, for inviting me up here to tell our story and the store is absolutely excited. They think this is really cool. They just told me not to mess it up, so hopefully we did good. Back to you, Brian.

Brian J. Dunn

Thanks, Chris, and congratulations to your entire team on outstanding work and rest assured you didn’t mess it up and I am sure your team is very proud, just as we are. Chris is probably too humble to point it out himself, but he has fostered a culture of growth in his store and that is the long-term power of his story -- really awesome.

We’ve covered a lot of ground so I want to wrap up our section and at the risk of trying to describe our company in a couple of sentences, I’ll try. Our strategy includes three inter-connected elements, all of which were woven throughout our examples. First, a zealous focus on unmet customer needs and customer insights, both at the macro level and at the local level; second, building a network of people, companies, partnerships, and capabilities, all aimed at addressing those needs; third, and maybe most important of all, an engaged customer focused and growth oriented culture that aims to connect those first two elements and serve customers.

It’s hard putting all three together but it’s also hard to copy. We also think that it yields exponential growth options. Consider the possible pairings of a unique employee, one of 140,000, with a unique insight with a network of capabilities supporting her. The number of combinations is staggering. That is why we feel so confident. We are getting very sharp about the brand promise we are making to customers. We are playing offense in the market place and we are very excited about the future.

With that, I’ll turn it over to Mike Vitelli. He has a couple of more great illustrations of customer value propositions from this past quarter, and at the risk of embarrassing Mike, I want to tell you a quick story. When we asked Mike to lead the U.S. Operating Groups, he said he would on one condition, and that condition was that he would go and work in a store in a blue shirt for a few weeks before he took on his new role. He did just that and I think it showed us a lot about who Mike is. It also showed us that while Mike can sell a lot of TVs in the macro, he can’t sell a TV face-to-face with a customer if his life depends on it. Mike, you have the floor.

Mike Vitelli

Well, thanks, Brian. Good morning. Brian talks about what customer-centricity means to us, focusing on customers’ unmet needs, utilizing customer insights and employee insights, and doing so both at the macro level and at the local level, so here’s my view.

Generally, local independent retailers in any industry tend to excel at customer care, having committed employees who really know their customers, who their best customers are, and then bending over backwards to meet their needs.

In contrast, larger, national retailers often excel at the benefits of scale, offering broader and deeper assortments of products and services, pricing power, brand awareness, and vendor relationships that give them a window into seeing upcoming trends and cycles.

I believe that the company that can do both, exploit the economies of scale and deliver that hometown customer experience like Chris described earlier through inspired employees, we will indeed be the winning company, and that’s precisely what we are building here at Best Buy every day, one customer and one employee at a time, both in the stores and here at the corporate campus.

I would like to give you some local examples and examples from headquarters of how we are doing that, offering the benefits of scale plus local service to drive growth, so let’s start local. And I’ve been at Best Buy about four years and really never had significant retail experience, so as Brian mentioned, as a prelude to my new assignment, I decided to work for a few weeks in a Best Buy store. My intent was to see first-hand how the work we do here at the corporate campus shows up in the stores and how we are helping or hurting our store employees and their ability to create memorable customer experiences.

So I worked in our Apple Valley, Minnesota, store 245, for general manager Paul [Zindrick]. A few of you met him last month when you visited Minneapolis. Most importantly, I worked a few days in several departments, from helping at the customer service counter with Brittany to unloading trucks and stocking shelves with Scott and Mike, scheduling labor hours with Adam, working the entertainment department with Robin, trying to sell flat panel TVs with Alan and Christine.

And when I reflect back on those weeks, one takeaway is there are certainly many things we can do here at the support center to help the team, and in a single word it would be simplicity -- simplicity in our systems and how they work, simplicity in processes, making them easier to learn and to execute, and simplicity in promotions and programs, so that they are easier to understand for our customers and our employees alike.

Another big takeaway was that if we can make things simpler, then Paul and his team can spend their time and energy doing what they do best -- unleashing an unbridled enthusiasm to thrill their customers all the time every day, and we can absolutely count on them and indeed, all the people in our thousand domestic Best Buy store teams to do the right thing for the customer in the moment every time, and that’s a key part of the growth strategy.

Working in Best Buy's Apple Valley store was really inspirational for me. I now better understand why Brad and Brian and others often go to the stores for ideas and in fact, renewed energy.

But our story is the story of the [and], and our growth coming from both inside [store] at the local level and the macro level, so let’s look at a couple of the macro examples.

The first is around the next generation DVD format war, so old news. Blu-Ray emerged as the victor and while we were very pleased that the format war ended, we were concerned about the HD DVD customers, the conquered, if you will, and that’s where the story starts.

With the help of our marketing department, we looked into our customer database and found out, not surprisingly, that HD DVD early adopters included some of our very best customers. And armed with that information, and knowing that our strategy is about building customer relationships, not creating transactions with customers, the decision became obvious. We chose to offer a $50 gift card to all customers who had purchased an HD DVD player. We had no obligation to do it. Customers who are early adopters often make decisions like this knowing the inherent risks. We could have easily rationalized things -- oh, these players still play standard DVDs and even up-convert them, and it certainly was hard, perhaps impossible, to predict the financial outcome based upon customers’ feeling better about Best Buy.

Ultimately, we felt it was the right thing to do, consistent with our customer-centric strategy, even though we expected a financial hit, and we did it. The story had a happy ending. Our customers actually surprised us by spending 50% more than we normally get when they redeem a gift card, including an average basket significantly higher than norm, and all of that dramatically reducing the cost of offering the gift card. So we interpreted this behavior as the customers’ way of saying hey thanks, Best Buy, for not leaving me hanging and valuing my relationship with you. And we expect that these customers will be more loyal than ever and likely telling others of their experience.

Now afterwards, a well-known competitor offered a gift card on purchases of new Blu-Ray players. It was a somewhat flattering imitation but the idea wasn’t to sell more Blu-Ray players, although that happened too. Our point was to acknowledge the customer relationships we already had and to make them stronger in Apple Valley, in Davenport, and across the chain.

My second example is another customer-centric story where our scale in the macro helps us to compete locally, so when we began planning for the first quarter, we looked at the macro environment, with rising oil costs, falling home prices, and all the other various indicators which we are all too familiar. Now, buried in that bad news were falling interest rates, lowering our financing costs.

We also saw an opportunity to simplify our financing promotions for customers and employees. They’ve been telling us guess what? They both get confused when our financing offers differed by department and change week after week, so we had a hypothesis that consumers are concerned about the economic environment, I believe they feel better in their pocket book when the financing expired 18 or 24 months from now. At the very least, we are guaranteed to have a new President by then.

So we developed a store-wide promotion offering 0% financing on all purchases over $999 across the store, and we think this offer resonated with our consumers and made Best Buy an attractive place to shop, even for consumers using the government stimulus check to pay off existing high interest debt, but still wanted the flexibility to purchase items with no interest financing.

We believe what resulted were higher sales, market share gains, and some consumers literally adding items to their shopping cart so they could hit the $999 minimum purchase. So like the gift card story, the financing story reflects customer insights based on customer data, a culture of testing and trying new things, and a habit of looking at things differently than anybody else.

Now as a non-practicing CPA, my colleagues joke that I’m one of those people that [speak in spreadsheets], and they’re right. So I could understand if some of our listeners are saying okay, you just got lucky or how could you prove you wouldn’t have had the same sales without these promotions, or what’s so different about those ideas? And even more skeptically, won’t all this dry up after your second quarter when there’s fewer checks in the market?

I understand. But what I’m attempting to describe is simply how retailing is done here and not at most other companies, and this is coming from a very pragmatic East Coast guy. I understand you don’t have to have all the advantages that I’ve had of being at the territory meetings and seeing first-hand how differently we are running the company, nor are you likely to spend a month working at a Best Buy store. And Brian, I did sell a TV or two, though I am glad my life and my continued employment at Best Buy didn’t depend on it.

And that sure the mass merchants are [aiming] at some of our product categories and adding SKUs, but as I said before the mass merchants have always had a decent share in selling things like inexpensive televisions. And with no analog tube TVs left, they are going to sell LCD digital TVs.

But the higher end of the CE industry is not an easy space, and while flat panel TVs, notebook PCs, and mobile phones are becoming ubiquitous, we like our odds, as we see what we can offer our customers versus anybody else in the industry.

Ours is a space fraught with complexity, focused on higher price points and complete solutions. The customer experience is only truly enhanced through the growth of services, which is an even harder business than retail.

So that’s what we plan to continue to do. Our plan is to exploit our economies of scale and deliver a hometown customer experience through inspired employees. We think this approach will benefit customers, employees, and shareholders alike.

With that, I would like to turn the call over to Bob Willett, CEO of Best Buy International. Bob.

Robert A. Willett

Thanks, Mike. Good morning, everyone. I am here today to share with you an overview of our international results by country from the first quarter, plus what we see ahead for the balance of the year.

We talked last quarter about how we believe no other retailer in the world is attempting to accomplish customer-centricity the Best Buy way. We also said this strategy, coupled with our faith in our employees, quality of execution are the reasons we believe we can expand internationally carefully and less risk.

So let me give you an update on how we are performing in this increasingly large segment of our business. Like the domestic segment, we are very much focused on customer insights and analytics using our [Dunholm] relationship, combined with an energized employee population to build customer relationships. We are also learning from our operations in the U.S. and Canada, applying those insights in the other countries where we operate.

Overall, we are comfortable with our progress. However, we need to keep our operating model simply and continue to raise the quality of our execution so it’s steady as she goes.

Our international business unit delivered top line growth of 26%, driven by foreign currency fluctuations, new store openings, and solid comparable store sales gains. International results continued to lead the chain in comparable store sales, finishing the quarter with a comp of 4.7%. Consumers are responding well to our offers, including the choice of two unique brands in both Canada and China. Canada with 184 stores had a comparable store sales gain of 4.3%, including improvement at both FutureShop and Best Buy stores there. Canada’s solid results came on top of 12.8% comp in the prior year’s period, thanks to a steadily improving average selling price and solid in-store execution.

China had a comparable store sales gain of 6.3%, which is somewhat amazing given the strong revenue growth last year, as well as the unusual snow this year, which shut down traffic in large parts of the country. Since then, as you know, the region suffered a massive earthquake and our thoughts are with those who suffered the loss of loved ones. We salute the China team’s response to the tragedy and thank them for giving to the relief efforts and for collecting customer contributions at the checkouts as well.

Our Five Star stores comprised the majority of China’s revenue for Best Buy, although our Best Buy store there now is included in the comp as well, adding to this quarter’s performance.

We made solid gains on the gross profit line as well, reporting an improvement of 40 basis points for the international segment. The improvement was driven by Canada, where solid lifecycle management drove a reduction in markdowns and more private label products offset the impact of more low margin gaming in the revenue mix. Our stores in China also had a modest improvement in the gross profit rate due to the lower product costs.

Our SG&A rate increased on a plan basis by 10 points for the international segment. If you look at the sub-components, however, you will see that we actually had material improvement in Canada due to the continued cost controls and optimization work. Profit growth in Canada and Five Star continues to fund investments for future growth in China, Turkey, Mexico, and Europe.

On a related note, our first store in Mexico currently is expected to open in the fourth quarter of the current fiscal year. I feel terrific about the talent of our local team in Mexico, their confidence in our value proposition and the quality of our real estate pipeline. We are also excited about a new thrust in the credit arena for these consumers -- a credit offer which brings more choice and attractive terms.

In China, our Best Buy store continues to learn and apply customer insights with the goal of reinventing the way Chinese consumers shop. Opening stores in China requires us to gain government approval, a process that we are learning to manage better. As we learn, we are adjusting our expectations for new store openings, as noted in our press release.

Turning to Turkey, this very exciting and vibrant market will see us open our first store in Istanbul next spring in our fiscal 2010. We are also reviewing our approach, utilizing the capabilities already present in our partners, CPW.

Altogether, our international results showed a sizable increase in revenue and a $4 million improvement in operating income. As we continue to expand our capabilities, the 30 basis point improvement in the international operating profit rate largely reflected our work to both grow and optimize Canada’s performance. In fact, Canada delivered its 10th straight quarter of strong performance, more than doubling its profit versus the prior year’s quarter, while massively improving its operating profit rate. This improvement more than offset the impact of higher investments to help us scale more quickly in new countries.

In many ways, fiscal 2009 is a transformational year which will see us accelerate the build-up of our capabilities and growth engines while continuing to deliver shareholder expectations.

So how do we plan to grow profits in Canada and China, which arguably will face a choppy macro environment? We plan to mitigate those factors through a combination of offensive strategies, such as the launch of Dell in Canada and an Apple Store-within-store in China. We are also aggressively managing our expenses, including indirect marketing costs, work more closely with our Chinese vendors in global sourcing or private label, and increase our global sourcing across all geographies.

We will be a little busy yet we have a strong foundation, including experience selling our private label goods to other retailers, [Kasidanki] in Japan and CPW in Europe. And we are expecting our first order from the Future Group in India shortly.

We are plowing these earnings gains from Canada and China back into the business, accelerating our investments in information technology, supply chain infrastructure, and customer research, as we build capacity to consolidate and efficiently operate in these countries we’ve entered. In the short-term, these investments will more than offset the profit growth we are planning to drive, resulting in our expectations of an overall profit decline for the international segment, as already described.

We will be in a great position, however, when the environment changes, as surely it will, and when the up-tick comes we will be in great shape to help consumers enter the connected world.

Next I’d like to update you on our relationship with Carphone Warehouse, Europe’s largest independent retailer of mobile phones. CPW will have a tremendous impact on our international business. As you know, based on the results of our relationship in the U.S. and further opportunities we see, on May the 8th we announced that we’d agreed to form a new venture. The new venture is expected to accelerate both companies’ growth by capitalizing on the European consumers’ evolving appetite for consumer electronics and the connected world. This new venture includes Carphone Warehouse’s 2,400 stores and websites in nine countries, and their share of our existing relationships, including the Best Buy Mobile experience in the States and Geek Squad in the U.K. and now Spain.

Through this new venture, we expect to essentially double our international footprint and enlarge our operating profit contribution, while adding a high quality management team, new avenues of growth and more capabilities to serve customers’ evolving needs.

We are already building on our successful U.S. relationship. For example, Best Buy and CPW recently made the decision to bring Best Buy Mobile brand to Canada, China, Mexico, and Turkey in order to offer this unique wireless phone experience for consumers in those countries, utilizing the expertise of Charles Dunstone, who is the CEO of CPW.

Together with CPW, our employees have demonstrated that we can create good value for both our customers and our shareholders. We believe that passion for the customer experience and customer-centricity has global applications. Charles is an innovative entrepreneur who helped to build a market leading position in independent mobile phone retailing in the United Kingdom and a strong position in many other European countries. He will play a key role as we expand Best Buy Mobile internationally.

We will start in Canada with the launch of a standalone Best Buy Mobile store later this calendar year. We anticipate that new Best Buy Mobile stores will be located in shopping malls and offer mobile phones, voice, and data plans, mobile accessories, and related items.

The first stores are planned for construction in the greater Toronto area and are slated to open before the 2008 holiday shopping season. Expansion plans also include upgrading the mobile sections of select Best Buy stores across Canada for the Best Buy Mobile store-within-store experience.

Some time in September we plan to share with you more information on our specific expectations from our various initiatives and for our new venture. At that time, we also hope to share with you our plans for greenfielding new stores carefully in the United Kingdom and Europe. So far, we’ve been very pleased with the availability of good locations for potential stores.

At this point, I would like to thank all of our international employees for some great results on our journey. Thank you for your attention. Now I’d like to hand over to my friend and colleague, Jim. Over to you, Jim.

James L. Muehlbauer

Thanks, Bob and good morning, everyone. As Brian mentioned up-front, we are very pleased with both our strategic indicators and our financial results in the first quarter, particularly considering the continued uncertainty of the underlying economic environment. Our $0.43 of diluted EPS was better than we expected and we continue to grow our market share. The results in the quarter continued to support our confidence that our core strategy is working.

I want to walk you through the highlights of our performance in the quarter, update you on our investment spending and capital structure, and briefly review our thinking on guidance for fiscal 2009.

Our top line grew 13% as we continued to grow our market share in key categories like TV, gaming, notebooks, and mobile phones. Overall, we added more than a point-and-a-half to our already industry leading market share position in the quarter. Our 3.7% comparable store sales gain was modestly above our expectations, as both gaming and flat panel TVs were above plan.

The domestic segments comparable store sales gain of 3.5% was certainly above the trends exiting the fourth quarter, and included continued mix into higher ASP products, plus an online comp of over 30%.

Canada’s 4.3% comp was on plan and impressive, considering its near 13% comparable store sales gain in the prior year. Similarly, China posted a 6.3% comp, which included our sole Best Buy store in China for the first time.

Total international revenue grew 26%, or roughly 13% excluding the impact of foreign currency. We had a solid performance around the globe across our largest brands.

Candidly, there were a lot of factors in play in the first quarter in the U.S., including the team’s ability to add to their own growth with local insights and solutions, which they did. We believe that we are making sustainable progress in our growth story -- not just that we are growing, but how we are growing. We are certainly not declaring victory but we are very encouraged that we are strengthening new growth muscles, ones that we can expect to get stronger as we keep challenging ourselves to adapt and change faster and faster, both at the macro and at the local levels.

We are also encouraged by the underlying strength of our consumer relationship, as evidenced by our market share gains, customer satisfaction scores, and record reward zone membership. We added 3 million members to our -- 3 million customers to our loyalty program this quarter and now we have more than 29 million customers earnings rewards from Best Buy. The way we look at it, we’re capitalizing on an immediate opportunity to distance ourselves further from the competition, which we believe will pay dividends both today and well into the future.

Clearly there were also other factors at work in the quarter which favorably impacted our performance -- factors such as stimulus checks, strong value propositions including financing offers, which levers our customer insights and partner relationships, and improved gaming product availability. It is difficult to dissect and quantify the individual impact of each of these factors which they had on the quarter but we believe that they worked in conjunction with our local execution to drive our results.

From a gross margin perspective, the 15 basis point decline was a little below what we planned but within our expected range for the quarter. Gaming and computer sales continue to grow in the mix, and so those categories presented the same headwind as they did in the fourth quarter of approximately 40 basis points. But that’s a problem we welcome.

As expected, mobile phones grew in the mix, which helped offset some of that headwind. Additionally, we improved our home theater margins in the first quarter. As you’ll recall, the rate was hurt last year as a function of the record number of product transitions. As you saw, we successfully positioned a great customer value proposition that included financing based on our customer insights, and given our partner relationships, we were able to meet a customer need, significantly grow our share, and slightly improve our home theater margins in the quarter.

Our SG&A dollar spending was in line with our expectations for the quarter and the 10 basis points of deleverage was actually better than we expected, due to the solid top line performance.

As you’ll recall, our guidance for the year assumed an SG&A rate increase of 30 to 40 basis points. As we discussed on our last call, we plan to purposefully invest in our growth runways, and that’s exactly what we are doing. We rolled out 418 Best Buy mobile locations in the quarter and we plan to have the entire chain converted by the end of the calendar year.

We are also continuing to invest in our POS systems, our customer management capabilities, and our multi-channel experience for customers. Multi-channel customers shop us more frequently and spend more.

Our continued strength in online revenue, 30% this quarter, is evidence of this customer demand. Internationally, we continue to invest in the underlying infrastructure for a long runway of growth, such as an ERP system and building customer analytic capabilities. We are also spending in preparation for additional store openings in China, as well as our debuts in Mexico and Turkey.

Our strong revenue growth around the globe is encouraging, but we are in the very early stages of that journey and we are investing in the long-term infrastructure to support that growth.

All in all, our operating income rate was slightly better than we expected and we are pleased with the momentum we started to build in the first quarter, especially in the difficult environment.

Next, I want to give you a status update on our use of capital to drive growth and shareholder returns. Fiscal year-to-date, we have opened up 35 net new stores globally, including 26 Best Buy stores in the U.S. Our number one priority continues to be prudently investing in high return parts of the business for our shareholders.

The big new item announced in the quarter was, of course, our intended roughly $2 billion investment for 50% of Carphone Warehouse’s retail business in Europe. We currently expect to complete that transaction around June 30, 2008. As mentioned previously, we no longer expect to repurchase any of our shares this year in order to fund this investment in Car Phone. Everything else held equal, continuing to invest in growth and paying down some of the incremental debt used to fund the Car Phone transaction are higher priorities for us than turning the share repurchases back on in the near-term. That said, we do generate more than $2 billion of operating cash flow a year, so we feel that we have not over-extended the balance sheet, meaning future growth investments or share repurchases certainly haven’t left our vocabulary forever.

As I said, we still expect to close the CPW transaction in our fiscal second quarter. In fact, we are in the very final stage now. Additionally, we now plan to initially report this venture on a two-month lag basis, the same way we do for our business in China. This is slightly different than what we had planned earlier. As a result, we now expect the net impact of the CPW transaction and lower share repurchases will be modestly below the range of $0.05 to $0.07 of accretion that we provided earlier.

To be clear, our operating expectations for the venture have not changed -- just the timing of when they will show up in our reported results.

I expect to update our annual guidance element on our second quarter call after we have closed the transaction. This update will provide an integrated outlook, including our second half expectations for our existing business, as well as the performance expectations for the new venture, which will be included in our international segments results.

That brings me to my final point before we open it up for Q&A; our current earnings outlook for the year. We are off to a solid start for the year and we are on track to deliver the $3.25 to $3.40 of EPS this fiscal year. We are a few pennies ahead of where we thought we would be after the first quarter and all of our strategic indicators are still green. That said, we recognize that it is very early in the year and the environment will continue to be difficult for consumers. We believe it is prudent to drive our strategy and continue to monitor macro consumer spending trends as the year continues to develop.

To conclude, we are off to a good start for the year and we are excited about the traction our local growth plans are building for the entire organization. We know it will continue to be a choppy environment for our customers, but we are confident in the growth drivers for our future that are within our control. We will continue to invest where we see customer opportunities and where our employees can drive growth.

With that, I would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Jack Murphy with William Blair. Please go ahead.

Jack Murphy - William Blair

Thank you. Good morning. I wonder if you could give us a little bit of color around the regional comp or the regional trends, particularly different areas of impact on the economy and housing, that or maybe even -- and possibly competitive closings and what impact they may have on different regions.

Jennifer Driscoll

We normally don’t comment on our comp by geography, so we’ll talk about them domestically and internationally but not by state or territory. Do you have another question you’d like to ask?

Jack Murphy - William Blair

Let me try another one -- could you talk a little bit about the international fit here -- pardon me, your Internet sales -- you do mention a growth rate so could you talk a little bit about acceleration from the fourth quarter and what type of contribution that’s making to the comp? And also if you could, related to that, give -- contrast to what you are seeing in online sales versus offline sales from a mix perspective.

James L. Muehlbauer

Certainly, Jack. If you look at our comp sales performance over the last number of quarters, we have certainly seen consumer interest continue to develop into the online space. I’d say our trend in the back-half of last year continued to accelerate in the online space and that’s really what drove our strategy this year to continue to invest more in the infrastructure. So we recognize that the multi-channel experience that we offer consumers today has an opportunity honestly to get much better, based on the feedback that they’ve given us.

The trend of the business and certainly the mix of the business is a little different online than it’s been in our stores, and I think one of the most impressive things about how consumers are reacting that even when we saw a slowdown in our core business at the back-half of last year, our online business continued to explode. So it’s clearly something that they continue to favor, and I think as Bob and the international team have learned in Europe, we certainly think we have opportunities to leverage our infrastructure from a dot.com standpoint as we build our new venture plans internationally as well.

Barry Judge

You know, if you were trying to get underneath our comp, at least in the U.S., online continued to grow strongly, as Jim mentioned. However, the comp store in the U.S. is really around comp store sales increasing and not just PCs and gaming but in home theater and in mobile phones. And really all those categories, they kind of connect to the -- sort of the core idea that we’ve got, which is when there’s complexity in the category, how do we build a dominant position in consumers’ minds and then deliver it locally? So all those categories, really what it is is a great help in the store, really industry leading assortment, the ability to connect all those things through Geek Squad and services, and then at the local level, the ability to see, to take that dominant value proposition that we call it and kind of tailor it to the opportunities that exist. So some of the examples that I’ve heard just recently around that idea are just the incredible success we are having with digital TV converters. I mean, you wouldn’t -- at the national level, we never would have seen that but in middle America, places where empty nesters are strong, middle American consumers are strong, we’ve been able to take that value proposition and really drive what we think is a 5X improvement in sales on that particular item.

So I think that that -- you know, when Mike and the others were talking about how we connect the strategy, so what tools can we develop that can help drive our business macroly, but then how do we take them locally? And there’s stories like that and we talked about them earlier that help us do that, which then drives that comp and that share performance in those complex categories.

Brian J. Dunn

One last comment I’d make about our dot.com business in particular, while we are very pleased with the tremendous growth the team has connected with our customers on, I think we are most pleased with the job the team has done in starting to make the experience more and more personalized for each of our customers, allowing them to drill down in areas that are of interest to them. So one size doesn’t fit all on our site, and I think the team, if they were here, would tell you there’s an awful lot of work to do there. But from where I’m sitting, I’m very pleased with the progress they are making in terms of how they are making it easier and easier for the customer to connect with the Best Buy brand.

Robert A. Willett

Just talking a little bit about online Canada, the online business in Canada is tracking a little below our overall comp. But I think the point to point out is that we are promoting more and more, if you like, buy online, pick up at the store, and we are also promoting the online capability as a part of the catalog. And people are definitely visiting online. They are doing a lot of research and then coming in to shop. So we are looking more and more at the customer experience overall across all channels as opposed to just what one gets online. And certainly as we enter Europe, we’re looking at this to become a major part of our marketing. The propensity to spend online in Europe in our product categories is higher than it is here now in the U.S., a phenomena that’s taken place over the last three years. So we are already looking at infrastructure to do just that and if you like, start to look much more at direct marketing through the web, et cetera, as opposed to indirect, reducing indirect.

Jennifer Driscoll

Thank you. That was Jim, then Barry, Brian, and Bob. Next question, please, Operator.

Operator

Thank you. Our next question is from Brian Nagel with UBS.

Brian Nagel - UBS

Good morning. I wanted to ask a question; there was other news out this morning talking about your expansion of your used game test in Canada. I just wanted to maybe elaborate a little bit on that, what you’ve seen -- saw in the test stores to give you confidence to expand in Canada and what does that potentially mean for any type of test or expansion in the United States in the category? Thanks.

Robert A. Willett

I think it would be too soon to make any comment about the success of this. We are confident from consumer research and as you know, in Europe this is massive. There are a couple of chains over there, Game Store, Gamestop, who do nothing other than this sort of exchange club. And it’s a phenomenal way of getting to a younger consumer, 12 to 14 years, who really are the drivers of this.

We’ve seen this and we are starting the pilot in Canada, but it’s too soon to really give you any hard results because -- as they were just started, but we are very, very hopeful that this is going to be another avenue of increasing our relationship with the consumer generally.

Jennifer Driscoll

Thank you, Bob. Next question, please.

Operator

Thank you. Our next question is from Michael Lasser with Lehman Brothers.

Michael Lasser - Lehman Brothers

Good morning. Thank you for taking my question. I appreciate it. When you originally set forth your guidance for the fiscal year back in April, the macroeconomic environment was difficult and it continues to be difficult today, yet you guys exceeded your own internal expectations for the quarter and it sounds like some of that strength is carrying through to June. So are there specific data points within your business that you look at that are giving you caution?

And then secondly, on the financing, it sounds like some of the benefit of the financing was -- impacted the basket size, such that perhaps if folks were buying an $899 TV, they added a $130 ESP plan. Does that influence how you think about offering financing promotions moving forward? Because even in light of lapping the renegotiation of the HSBC deal and perhaps rising interest rates, the benefit from a profitability perspective could be greater given what’s happening in the trend. Thank you.

Brian J. Dunn

Michael, why don’t I start with that and then I’ll turn it over to some of my partners in the room here to maybe provide some color, but your first question was what do we see in the environment that’s different than what we started the year from a guidance standpoint. And I can give you a couple of examples. Certainly when we provided guidance early in the year, we saw a market that was going to be very choppy from a customer perspective. We saw the same headwinds that we experienced in the back half of last year and certainly we, like many others, found it difficult to predict exactly what consumer behavior was going to be.

The other thing that we determined was looking at history and how things like stimulus checks have impacted us in the past. We have typically gotten a benefit from those in the past but honestly if we thought about that at the beginning of the year, given the other pressures on the consumer, particularly driven by the housing environment and energy costs, we did not expect a major lift in our business coming from rebates at the beginning of the year. And we actually don’t know how that’s going to play out this year, so I’d say one of the factors that we continue to look at is we know the consumer environment on spending is going to be choppy. Our outlook on that has not changed since the beginning of the year. But we are also more confident on our -- the things that we can control, specifically around our strategies from a local growth standpoint. And I’ll let Shari give some examples of that, but I’ll tell you what’s building our confidence is in one part, the performance in the quarter but how we perform. We know we drafted some good news but more importantly from a long-term standpoint, we know it’s the customer insights an the local growth engine that’s going to drive our growth long-term. We see opportunities to continue to build that muscle. We’re in the very early days of that.

Shari L. Ballard

Good morning. I think the first part of your question was whether there’s anything that gives us caution and then I think there was a part of your question around what indicators do we look at. There’s nothing from my perspective that we can see today inside the company that gives me caution. In fact, I feel quite strongly the other way -- there’s a lot of stuff I see inside the company at the store level in the dot.com space, at the call centers, at the corporate office, that make me as optimistic as I was on the first quarter call.

The things that we look at, you know, we look at the indicators that everybody else looks at in terms of how the business is performing, what’s driving top line and bottom line, what’s our traffic look like, what’s our close rate look like, average selling price. So we look at those indicators and the trends look terrific. But more than anything else, to be frank I listen to what the store teams are saying they see in terms of opportunity. We listen to what they are trying to actually take advantage of the opportunity they can see, and then we look at whether it’s working or not and what we think it’s worth if it continues to work. And I’m extraordinarily optimistic based on that. We just finished, as an example, yesterday in Chicago with that team listening to the first quarter check-in on their local growth plan and I left that discussion extraordinarily optimistic about what they see in terms of our opportunities with the customer, what they are learning, and the performance that’s coming with it. So that’s I guess a view from the inside.

James L. Muehlbauer

Michael, I’ll come back to your second question around financing and how we view that going forward, but I also want to take an opportunity to provide a little additional perspective about how we are thinking about guidance based on the first part of your question.

To be clear, our guidance expectations for the year have not changed from our original guidance. So the $3.25 to $3.40 that we reiterated today still includes a base assumption that we are going to buy back shares. What we’ve chosen to do, honestly, just to try to keep it as clean and straightforward for both internal folks and external folks, is to consolidate the impact of both the CPW transaction and our turning off the share repurchase lever into the what we’ve now said is modestly below the $0.05 to $0.07 of accretion that we talked about earlier in the year when we announced the CPW deal.

So we’ve kept our guidance clean for both CPW and for the expected change in share repurchases. We will roll that net impact in on the second quarter call after we close the transactions. Honestly, I didn’t want to take you through a process where we started with our annual guidance, take it down because of share repurchase, and then take it back up because of the CPW accretion. We’ve decided to net all that together post-closing when we do our Q2 call.

Your question also then on how does our learnings around financing in the quarter influence how we think about some of the levers we have to meet customer demands in the back half of the year. One of the advantages that we have with our reward zone program and the strong partnership relationships we’ve put together with our financing partners, as well as our vendor partners, is really to have the ability to test a hypothesis like Mike Vitelli talked about in the call around do we have an offer that really simplifies the experience for our customers, simplifies the experience for our store employees to communicate a financing offer, and actually allow them to go out and purchase the products that they want, that meet their needs to fill a solution. So versus having a financing offer on a particular set of SKUs or a particular category, what we’ve actually done is try to turn on a customer insight that says we want to get you the things that you need to make the solution work in your home. And we’re agnostic as to where they fit in the store but we want to provide you with a financing alternative that works across that whole basket.

So that’s what you really saw us do with our storewide programs this year and we were very pleased to leverage our customer insights in developing that, certainly our employees gave us great feedback around how much easier it was to execute. And then even though we increased the level of duration we had on our financing offers in the quarter versus last year, our enhanced financial services agreement really allowed us to do that and still improve our overall margin rates in the categories where we typically use financing, such as home theater.

So really it was an example of what Brian refers to all the time, is that our employees connecting to the network of options and partners that we have to deliver a solution that both meets the customer needs and drives a better financial return for our shareholders. Certainly this will continue to influence our thinking as we go forward to how to use our scale as an organization to find opportunities that our store employees in the local environment can leverage and certainly credit is a very important offer in the marketplace for us.

Barry Judge

And just the last point on that, when you look at it then at the customer viewpoint and figure out how we are going to compete with Wal-Mart and other big box players out there, you can see -- in our data, you can see that this financing offer really connected with middle American empty nesters. They were our fastest growing segments in May, faster than the other segments that we have out there. And as we are thinking about how to compete with them again at the local level, here’s some tools that we can then use to figure out what the customer need might be. And so I think that’s how it plays out in the macro and in the micro.

Jennifer Driscoll

Thanks, Barry, and thanks, Jim. Next question, please.

Jennifer Driscoll

Thank you, Bob. Next question, please.

Operator

Thank you. Our next question is from Gregory Melich with Morgan Stanley.

Gregory Melich - Morgan Stanley

I just have a quick follow-up, and then my question, and also congrats to everyone on executing in a pretty choppy environment. Traffic versus ticket, ASP was up a lot. Was comp traffic up in the quarter?

Brian J. Dunn

You know, we actually saw traffic improve a little bit in the quarter versus the trends that we were experiencing coming out of Q4.

Gregory Melich - Morgan Stanley

So it improved, but was it positive?

Brian J. Dunn

Yeah, it was not positive. It continued to be negative.

Barry Judge

And part of that again is our high frequency categories -- music, movies, particularly are declining at a pretty significant rate. And when you look at our complex categories, home theater, mobile, PC, et cetera, traffic in those businesses was up, so you have to look at -- you have to get underneath the macro trend.

Gregory Melich - Morgan Stanley

Okay, great. And then on the financing, just to follow-up on that, how much of your sales were financed versus a year ago, or however you can -- you want to give us that number would be super helpful. And also the strategy going forward -- if interest rates start to go back up, do you feel like you guys are committed to this program now with your customer or was it something that you could look to change again in a couple of quarter?

James L. Muehlbauer

Greg, we don’t talk about how much of our business is attached via financing, but I would tell you our percentage of branded payments, and we consider branded payments both payments that are done on our private label card and our reward zone MasterCard, actually increased year over year. So not surprising, given the strength of the financing offers we put in place but as we get more of those reward zone MasterCards out there and customers see the benefit of being part of that program, that is lowering our payment costs. Also with strong credit offers, our private label card increases so we saw an increase, a meaningful increase quarter over quarter in that space.

As we look forward, as we think about interest rates moving, we obviously have a couple of dynamics. We have a program through our third-party bank that we renegotiated last year. That’s providing us year-over-year benefits, irregardless of the magnitude of the shift in the external interest rates. So as interest rates, if they move up going forward, certainly that’s going to impact our profitability but biggest lever right now is we actually have favorable benefits from our renegotiated rates with our third party last year that will continue to provide value to us through the balance of the year.

So we are going to continuously adjust those offers based on a number of factors; based on what customers are telling us, where we have the greatest opportunity to grow and what the cost of those offers are. But we really look at those components not unlike the entire solution that we are trying to provide for customers. So financing is just one piece of the equation. We certainly have many other levers to drive behavior, whether it’s reward zone points, whether it’s all on sale events, things of that nature. So we are constantly monitoring that mix of promotion activity to get the best outcome.

Gregory Melich - Morgan Stanley

And just to be clear on that, when exactly did you sign and was the deal effective?

James L. Muehlbauer

I think we will start to lap that, if I recall it’s in the second or third quarter. I want to say the second quarter.

Jennifer Driscoll

All right. We have time for a final question. If you’ll bear with us, we’re about our hour here.

Jennifer Driscoll

Thank you, Bob. Next question, please.

Operator

Thank you. Our next question is from Colin McGranahan with Bernstein.

Colin McGranahan - Sanford Bernstein

Good morning. Actually, two quick ones; a painful third follow-up on financing, I think you signed that relationship on July 10th, so it looks like you start to anniversary it here next month. But it sounds like, Jim, from what you are talking about, you continue to see benefits through the year. And it also sounded like you, in this current quarter, financing was a year-over-year positive, even though you had more promotional financing go on. So one, can you confirm that and help me understand why you are going to get more benefits when you start to anniversary this in the next month, and any comment on what underlying delinquencies look like or what you would anticipate as well?

The second question is more just a broad one on the PC business; obviously very impressive comp there. I would hope you could give us a little bit more color on what kind of contribution you thought got from the Apple product, the Dell product, and then Geek Squad as well. I think you said it grew twice the rate of the overall company, so am I correct in assuming it grew 26%, which sounds like it would be one of the better growth rates for Geek Squad in quite some time?

Jennifer Driscoll

Mike, would you like to take the first part and then Jim will handle the financing?

Mike Vitelli

Well in the first part, I think what you are seeing is our consumers’ enthusiastic response to literally carrying virtually every PC solution option that there is in the country. And in fact, that’s what we are trying to do in every one of our categories, whether it was Best Buy Mobile or carrying all the carriers and all the phones there, and the PC space. So there’s no doubt that having a broad assortment and the Geek Squad has presented to customers a solution in the notebook space that they can’t get any place else. So whether their option is at the lowest end or the highest end, everything we have is available and it’s that breadth of solutions that we can provide, both in products and in services, that the customer is responding to and the employees can get enthusiastic about.

Colin McGranahan - Sanford Bernstein

Okay, Mike, so let me just jump in there -- so would you say then you had positive comp transactions in the PC category?

Mike Vitelli

Absolutely.

Colin McGranahan - Sanford Bernstein

Okay. So it wasn’t really a ticket driven comp; it was transaction driven?

Mike Vitelli

Yes, no question it was transactions. In fact, with ASPs generally dropping in SKUs, we are constantly increasing transactions just to get the revenue growth that we have.

Colin McGranahan - Sanford Bernstein

Okay.

James L. Muehlbauer

So then Colin, the second part of your question, back to financing again, a couple of different elements going on, is that why we expect to continue to see benefits even as we anniversary the agreement -- clearly after signing the agreement last year, we just started to build traction on how we want to use both our private label card and our reward zone MasterCard, so we didn’t see those account balances from a number of members increase dramatically until we got later in the year.

And secondly, the overall interest rates in the marketplace are still going to be lower than they were last year at this time, so I think the combination of both of those, plus we can also impact the types of financing programs that we use, so the cost of financing across different programs, whether it’s nine months, 12 months, 18 months, 24 months, are dramatically different. So we also get benefit depending upon the mix that we deploy in the back half of the year versus what we did last year.

So the good news is there’s a number of different levers we can pull in that space and having 30 million members in our reward zone program also gives us a lot of insight of, to Barry’s point earlier, what customers are most interested in that value prop and how do we target that use of financing to get the overall solution.

Your last question was really on the delinquency rates, and just to remind the audience on the call that Best Buy does not maintain the receivables for our credit card balances. We actually have our financing partner manage those, so we have no exposure to the existing business that’s booked on the card. But clearly, as we look at the credit card industry and the cascading impacts of the housing market across credit card portfolios, there is pressure being put on banks and credit card lenders to improve the rate of delinquencies and I would expect that we’ll continue to see tightening approval rates in certain parts of the market where it’s warranted by our third parties, but it’s something that we’ve managed in the past and we’ll continue to manage with our good partnership network.

Colin McGranahan - Sanford Bernstein

Great. Thank you very much.

Jennifer Driscoll

Thanks, and Wade to wrap up.

Wade Bronson

So thank you and thanks to our audience for participating in our first quarter earnings conference call. As a reminder, a replay will be available in the U.S. by dialing 800-405-2236, or 303-590-3000 internationally. The personal identification number is 11115132. The replay will be available from 11:00 a.m. Central Time today until noon Central Time next Tuesday, June 24th. You can also hear the replay on our website under For Our Investors. If you have additional questions, please call Jennifer Driscoll at 612-291-6110, Charles Marentette at 612-291-6184, or me, Wade Bronson, at 612-291-5693. Reporters please contact Sue Busch at 612-291-6114. That concludes our call.

Operator

Thank you, ladies and gentlemen. This does conclude the Best Buy conference call for the first quarter of fiscal 2009. Thank you for your participation. You may now disconnect.

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