Bill Seymour - VP, IR Brian Dunn - CEO Jim Muehlbauer - CFO Mike Vitelli - EVP, President-Americas Shari Ballard - EVP, President-Americas

Gary Balter - Credit Suisse Dan Binder - Jefferies David Schick - Stifel Nicolaus Mike Baker - Deutsche Bank Scot Ciccarelli - RBC Capital Markets Chris Horvers - JPMorgan Brad Thomas - KeyBanc Capital Markets Alan Rifkin - Bank of America Matthew Fassler - Goldman Sachs Mitch Kaiser - Piper Jaffray

Welcome to Best Buy's conference call for first quarter fiscal 2011. (Operator instructions) I would now like to turn the conference over to Bill Seymour, Vice President of Investor Relations.

Good morning, everyone, and thank you for participating in our fiscal 2011 first quarter earnings conference call. We have two speakers for you today. First, Brian Dunn, our CEO, will share his thoughts on the first quarter and give you a quick update on what we are seeing with the consumer and our plans for the rest of the year. Second, Jim Muehlbauer, our CFO, will recap the financial performance and then provide you with our perspective to how the balance of the year will play out. And finally, after our prepared remarks, I anticipate we will have ample time for your questions. As usual, we have a broad management group here in the room with me today to answer your questions after we make our formal remarks. Before I pass the call over to Brian, I'd like to take care of a few housekeeping items. First, we would like to request that callers limit themselves to a single question during the Q&A portion of the call, so that we can get to as many questions as possible during the next hour. Second, I'd like to remind you that comments made 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. Third, as usual, the media are participating in this call in a listen-only mode. And lastly, I'd like to remind you that our fiscal 2010 first quarter results last year included restructuring charges, which impacted our net earnings by $25 million or $0.06 per diluted share. The balance of our discussion on this morning's call will exclude these charges. That means the comparisons we make will be on an adjusted non-GAAP basis. For a comprehensive GAAP to non-GAAP reconciliation of our reported to adjusted results, please refer to the supplemental schedule on page 10 of this morning's news release. With that, I'd like to turn the call over to Brian Dunn.

Good morning, everyone, and thanks for joining us on our first quarter earnings conference call. My comments this morning will center on our first quarter performance, what we are seeing from the consumer, the progress we've made against our strategic objectives and our focus for the rest of the year. First things first. While there were some positive signs in our results, this quarter's earnings were below our expectations, and that's something I and everyone in this management team take very seriously. There are two primary drivers behind these results. First, we experienced some variability in customer traffic in the U.S. over the course of the last three months, which resulted in a slightly lower comp than we were expecting. Second, we planned for higher SG&A during Q1 to accelerate some of the capabilities to sell more robust solutions for customers; however, our SG&A spend still came in higher than we had targeted for the quarter. On the consumer front, we experienced some volatility in customer traffic week-to-week and month-to-month. Consumer spending has been episodic and it appears that our customers are operating on cues from the broader environment. But while spending has clearly rallied from low levels of 2009, our data paints a picture of the consumer coming out to spend and spend well during important events, but taking pauses in between. We can adapt to this environment and maximize the customer opportunity as our spending appeared to run parallel to the economic recovery. The SG&A increase year-over-year is largely a function of timing, but it also is a function of investments we are making for the future. This is part of our plan to improve the profitability of our business model beginning this year. However, this work requires some initial SG&A investments to achieve higher ongoing gross profit margins to better performance in existing businesses and extensions into new profit pools. All that said, we remain committed to delivering our SG&A budget for this fiscal year and expanding our operating margins. Jim will provide more color on SG&A spending and the investments we're making in just a few moments. As I mentioned earlier, there are several positive indicators in our first quarter results. Our gross profit rate performance on a year-over-year basis was encouraging and sets us up nicely for achieving our operating margin expansion targets this year. We continue to grow our business in Q1 with our international segment growing comparable store sales faster than the domestic segment. That tells us that customers continue to respond positively to the wide range of products, services and the knowledgeable assistance our employees provide, all of which are central to the differentiation of the Best Buy experience. These results speak to the benefits of an international portfolio and what it brings to the company, as we made significant traction in our strategic investments outside of the U.S. In China, our Five Star business continued to shine as it delivered a low single-digit operating profit margin on a comparable store sales gain of nearly 35%. In Europe, our operating income rates significantly improved year-over-year on a 5% comparable store sales gain. We were thrilled by the performance of our Best Buy branded stores brand openings in the U.K. In fact, our first U.K. brand opening at our third store outside of London was the largest brand opening weekend in the history of Best Buy. Even though our international results in Q1 were encouraging, we still remain focused on maximizing returns across our entire portfolio of brands and businesses. Each business will earn its way to additional capital. We're closely monitoring the performance of our Best Buy branded ventures in Mexico, China and Turkey. Like our investments in the U.K., we will not expand our footprint significantly until we're confident that we have a model that will create value for our customers and generate acceptable returns for our shareholders. And the performance of our 180,000 employees is in itself a highlight of the quarter and I'd be remiss if I didn't thank them for their hard work and dedication. Our people are our true competitive advantage, and they continue to create better and better experiences for our customers who're responding by choosing Best Buy and our family of brands over the competition at a convincing rate. We remain both optimistic and committed to our strategy, and I believe that by the end of this year we will benefit from the investments we've made during the first quarter. And as we've said all along, we're keeping our eye on a few key strategic indicators, and they're very encouraging. Let me take a minute or two to detail a few specific wins that support what I'm saying. First, our internal measures of customer satisfaction rose to a new high, over 83%. Likewise, market share gains continued to grow on top of the record gains we posted last year. We estimate that our domestic market share during the three months ending April 30 increased 100 basis points versus the prior year's period. We added share in TVs, computing, mobile phones and digital imaging during that period. And also important to our strategy, employee retention is at an all time high. We've never had turnover below 40% before, and our 12 months rolling rate for turnover sits at 37% today. We believe that's a reflection of our employees' belief in our strategic direction. Looking at our dot com business, I'm pleased with the 26% revenue growth we achieved this quarter. We do not see dot com as a separate channel for us, but think of it as a great complement to our store model. In fact, nearly 35% of the products we sell online in the U.S. are picked up in one of our stores. That's a competitive advantage for us, especially versus our online competitors. But more importantly, it allows us the additional benefits of leveraging our strengths of a blue shirt interacting with the customer when they come into the store, which gives us another opportunity to sell a complete solution. Now let's turn to the rest of the year. We spent fiscal 2010 adding market share at a record pace. Through our focus on the customer and our strong strategic relationships with our vendors, we plan to use our customer acquisition model of 1 billion interactions per year in the U.S. alone to drive new value for customers, vendors and shareholders. Best Buy is known for having the latest and greatest in CE. Vendors and partners see us as the best place to showcase new technology and customers see us as the best place to experience technology. There will be no shortage of enhancements in consumer technology this year. Here are a few examples of where Best Buy's family of brands is bringing consumers closer to the connected world. First, smart TVs, by helping customers understand what is possible with Google TV and IPTV, Best Buy will shape the market for smart TVs. Even though 3D TV is still in the early days, we've already seen a great deal of interest in events like the World Cup broadcast in 3D will help drive consumer interest around the world. Next, a store reset. Later this month, we will begin to launch a store reset focused on IPTV connectivity solutions, mobile broadband and home broadband. This is a great opportunity for us to drive incremental margin by attaching connections to the millions of connectible devices we sell. Gaming. We believe gaming is set for an exciting back half of the year. With Chester-based gaming platforms like Microsoft's Kinect announced at E3 yesterday and firmware updates making millions of Sony PlayStations 3D-ready, we are on the front end of a new generation of gaming solutions. Also, as we just announced this morning, we will launch a used gaming business across all of our U.S. stores later this summer. Next, tablet computing. Customers are really beginning to live the connected world in tablet computing. We were thrilled to bring the iPad to our customers in Q1. Tablets have been great for the industry and are the next wave in the PC-based connectivity movement. As the industry's leading retailer mobile computers, we can't wait to see what new innovation this category brings and the opportunities to provide value-added features like broadband connections. Finally, Best Buy Mobile. This is the spearhead of our connected world story, driving incremental growth and profitability. The 4G HTC EVO on Sprint was the best selling pre-order phone in the history of Best Buy Mobile. The customer response to that smart phone along with many others within the Android platform has been outstanding. As a major addition to our in-store mobile effort, we launched an enhanced online presence for Best Buy mobile that will offer customers unparalleled choice of phones and service plans. And of course, we're very excited about the iPhone 4 which will be available at Best Buy on June 24. I'll wrap up my comments now by reiterating that while I'm neither pleased nor satisfied with our first quarter financial results, it does not change my confidence that we can and will deliver our annual guidance and drive value for the long term. With that, I'll turn it over to Jim who'll offer some additional color on our first quarter results.

Thanks, Brian, and good morning. As noted in our release this morning, there were a number of significant elements which impacted our first quarter results. I would like to take this opportunity to give you some important color on these items and discuss their implications on our performance going forward. I will also provide a perspective on how we think the balance of the year may play out. The key takeaway here is that we continue to expect our annual performance to be consistent with original expectations. More on that in a moment. As Brian commented upfront, the net earnings of $0.36 per share in the quarter was below was our expectations and Street estimates. One thing to note was that while consensus estimates for our annual EPS results have been within our guidance range, consensus expectations for the first quarter were above our internal plans. In general, Street estimates for the first quarter had assumed lower levels of SG&A growth in the quarter. The shortfall to our first quarter plan was driven primarily by the combination of sales softness due to variability we saw in both consumer spending and lower CE industry growth and the timing of SG&A expenditures. Much of the SG&A spending during the quarter was used to drive focused initiatives that will allow us to build enhanced margins going forward. While we are never happy about a shortfall to plan in any quarter, it remains very early in the year, especially given the significant portion of sales and profits in front of us. Taking a deeper look at some of the specific headlines for quarter, top-line revenue grew 7% to nearly $10.8 billion. Total comparable store sales grew 2.8% versus last year, which included domestic comparable store sales growth of 1.9%, driven primarily by continued strength of connected business lines like Best Buy Mobile and Mobile Computing. While we saw slight comparable store sales declines in some of our categories like gaming and home theater, our market share remained essentially in line with expectations. This data point tells us that the top-line softness to our plan was driven primarily by choppiness and lower spending in the category by consumers. The international comparable store sales growth was 6.3%. Europe's 5% comparable store sales gain reflects strength in smart phones and postpaid connections. China had approximately 30% growth in comparable store sales due to continued government stimulus activity and strong store execution. Offsetting these gains was a 2% comparable store sale decline in Canada due to softness in consumer spending as market share in this business also remained stable. As we discussed during our last call, we set out purposely to improve our operating margins in fiscal 2011 by selling higher margin connection solutions to customers. At that time, I also indicated that we would have our most difficult gross margin comparisons in the first half due to the performance of last year's first quarter when gross margins in our domestic segment were up 70 basis points. Considering that background context, we were pleased that first quarter gross profit dollars grew 9%, which includes some benefit due to changes in OpEx, and that the quarter's 25.9% enterprise margin rate reflected a 60-basis point improvement year-over-year. Additionally, we were pleased to see rate expansion in both our domestic and international segments. For the first quarter, domestic growth profit dollars grew 8%, while the gross profit rate of 25.7% was a 65-basis point improvement year-over-year. The quarter's strong gross profit performance is attributed to a few main drivers, some of which we expect to sustain, and others that were more event-driven or timing in nature. First, we experienced improved promotional effectiveness across several key product categories, driven by lower incentive spending, reduced discounting and better product lifecycle management. Second, continued strength in Best Buy Mobile positively impacted both rate and mix during the quarter, as consumers continue to respond positively to our blue shirts, non-biased expertise in our broad handset and carrier offerings. Next, we realized a non-recurring benefit from the finalization of a certain vendor rebate related to an annual incentive program. And lastly, our gross margin also improved, as a larger portion of our vendor programs are orientated towards purchase incentives, instead of advertising support, which is recorded as a reduction in SG&A. When looking at our first quarter gross profit performance, we estimate that approximately 40 basis points of the year-over-year growth was driven by non-recurring items. Excluding these items, gross margin still improved significantly over the declines experienced in the prior quarter. Within the International segment, gross profit rate of 26.3% reflects a 30-basis point year-over-year growth, and was driven primarily by rate strength in Canada due to improved promotional effectiveness in home theater and computing. Looking ahead, we believe that we are well positioned to deliver improved gross margin performance throughout the year. Many of the margin enhancing initiatives we discussed with you last quarter will build momentum as the year progresses. Initiatives such as advanced home theater experiences in our Magnolia stores within a store, mobile broadband connections, video content connections with partners like DirecTV and Comcast, and Geek Squad Ask an Agent are examples of solutions that while in their early stages provide significant opportunities to improve our gross margins. As a result, we remain confident in our plans to deliver gross margin expansion that was included in our full year guidance. Total SG&A for the quarter of $2.5 billion, or 23% of revenue increased 12%. Approximately one quarter of this increase was driven by FX. The balance of the growth in spending was primarily driven by several key areas. First, volume related expenses related to the addition of new domestic big box stores, and the impact of a comparable store sales growth during the quarter drove an increase in year-over-year SG&A spend. Second, we made expanding investments in key growth areas during the quarter, such as our Best Buy Mobile business where we are opening up new standalone stores, and the launch of our new dotcom experience for mobile phones. Third, a portion of the spending increase was driven by higher discretionary expenses like IT projects, employee cost, and outside services. Lastly, the balance of the spending increase was driven by the net impact of several non-recurring items incurred during the first quarters of both fiscal 2011 and 2010. Our plan for the year included the expectation that the first quarter would be the high watermark for the year with respect to SG&A dollar growth. We knew we would be undertaking a number of strategic and tactical projects, as we prepared for the key selling seasons in the back half of the year. For example, this spring we began resetting our home theatre and computing departments to improve the presence of connectivity offerings like air cards, embedded mobile broadband, home broadband, and IPTV connectivity solutions. We are also leveraging our Best Buy Mobile earnings as it relates to the deployment of labor in the computing department to begin to realize opportunities of a connected, focused labor model. We are happy to report that many of these initiatives are well underway, and are tracking inline with our expectations. So while the timing of certain expense items had a negative impact on our first quarter results, I can assure you that our SG&A spending plans for the year remain unchanged from our original expectations. So when you bring it all together, the net result is first quarter operating income of $313 million, or a 10% decrease versus last year. From an inventory perspective, we finished the quarter with domestic inventory levels up approximately 10% on a comparable basis. Inventory increases were largely a function of investment in higher growth product categories, combined with a slight shortfall to our Q1 sales plan. We are comfortable with the overall quality and availability of product going into the second quarter. That brings me to our outlook for the year. As I said upfront, while the first quarter results were below what we had planned, it is still very early in the fiscal year. At the outset of the year, we laid out expectations for full year diluted earnings per share of $3.45 to $3.60, which represented a growth rate of 10% to 14%. While our initial operating margin growth guidance did not provide specific components around gross profit or SG&A, we stated that you should anticipate seeing both gross profit rate expansion and SG&A leverage for the full year. Looking at gross profit, we are pleased that the year is off to a good start on this front, and we expect to see gross profit rate growth in subsequent quarters. This expansion will be the result of the investments we have made to date in connected solutions, strong store execution, and easing year-over-year comparisons as the year progresses. Given the performance in the first quarter, and to assist your modeling for the balance of the year, I would like to provide more color on SG&A expectations for the year. Looking at the balance of the year and coming off our planned spending growth peak in Q1, we anticipate that SG&A dollar growth will slow in subsequent quarters from the levels experienced in the first quarter. Based on our current expectations at annual sales, we anticipate total SG&A dollars will increase by approximately 6% to 6.5% for the year, which remains consistent with our original plan. Bringing these assumptions together, we still expect full year consolidated operating income rate of approximately 5%, which reflects a 30 to 40 basis points of growth from last year, with the domestic business coming in at the top end of that range. From a (phasing) perspective, we currently anticipate that we will see (OI) rate expansion in each of the remaining quarters with a higher amount of leverage in the second half of the year. One of my objectives this morning was to cover several of the key areas where I knew you would have further questions given the quarter's results. In wrapping up our prepared remarks, I also wanted to make sure that we helicopter up and not lose sight of the broader picture on the first quarter and what these insights mean to the year. First and foremost, after a very strong turnout in the Q4 holiday selling season, consumer spending became more variable in the first quarter. While our plans for the year were not predicated on robust improvements in consumer spending, they did reflect some improvements in anticipated overall CE industry sales versus the difficult prior year. In our history, we have not found that the first quarter is a strong predictor of future consumer demand in the CE sector for the key selling seasons ahead. Accordingly, it's still very early, and we continue to monitor consumer behavior and will adjust our plans as necessary. Second, we plan to grow gross profit for the year based on leveraging our connection strategy, selling solutions that provide customers with clear benefits, and continuing to be more effective with promotions. Our first quarter results demonstrate that we are off to a good start on this front, and while there is a long way to go, we believe we are moving in the right direction. Third, our annual SG&A spending plans remain unchanged from previous expectations. First quarter spending growth trends are expected to subside as the year progresses. As we have demonstrated in the past, this is the area in which we have the most control over the levers. And finally, we continue to expect to deliver our financial goals for the year. We are maintaining our annual guidance expectations of strong EPS growth of 10% to 14% driven by top-line growth and expansion of our operating margins. With that, we are happy to take questions from the audience.

(Operator Instructions) Our first question comes from the line of Gary Balter with Credit Suisse. Gary Balter - Credit Suisse: Just one quick math question before we answer this question, which is, in the guidance you're giving, that includes the one-time gross margin benefits if you got this quarter?

That's correct, Gary. Gary Balter - Credit Suisse: Okay. So how much has that been mathematically for the full year? Because as (I'm not) sure we think about 10 basis points basically in gross margin?

Gary, as I called out, most of the non-recurring benefit that we saw in the quarter, the 40 basis points in Q1 that we do not expect to repeat is driven by that one-time item. So you are right, on the balance of the year, it's going to be roughly nine or 10 points. Gary Balter - Credit Suisse: Okay. So that's not so big. As we step back, obviously, it seems like things slowed as the quarter went on, from your commentary, because you got, call it a little bit too much inventory, and spending was a bit too high, what's your prognosis for spending the rest of the year? How do you drive customers into your store in what's going to probably stay as a variable consumer spending environment?

We follow the same news and read the same reports and have the same data points you do. Certainly, the CE industry was a bit weaker as the quarter unfolded than we had anticipated. Our traffic's been choppy sort of month by month. I think there are couple of things; one, clearly the event customers are still coming out, and as I mentioned in my prepared remarks, spending and spending well around sort of traditional drive times for us. I also think this industry is loaded for a lot of very interesting product launches in the back-half, and I think that will help drive consumer interest. And again, we're reading the same things you are, but this quarter was a bit choppier than we thought it would be in terms of demand. Gary Balter - Credit Suisse: That's part of that. If things slow down, are you in a position to pull down the SG&A? Like, could we see it much lower at 6 or 6.5?

Yes, we can Gary, because once again it's predicated on the sales volume that we see. The leverage that we traditionally pulled, and you saw us do it over the last certainly a couple of years is that we'll adjust labor accordingly as we see sales move up or down versus our expectation, so there is clearly a variable component of that. The other element that impacts SG&A certainly is the amount of incentive pay that we'll pay up for the year. It's predicated on us delivering our annual operating objectives. So if we incur higher profitability in the year like we did last year, we'll be taking the extent of expense up, but that would be net good news on the bottom-line; conversely, if we see consumer behavior and the water level a little short of where we expect, we'll see some benefits from lower incentive expense year-over-year. So those levers are there. I think the thing that we do see in our base performance obviously is that the investments that we're making for the long-term in connectivity around setting stores, opening up Best Buy Mobile standalone stores, as long as we continue to see consumer appetite for those, even if we have a blip in the quarter around consumer behavior, those are going to be good investments for the long-term, and they are traditionally the things that we would not pull back on just to hit a short-term quarter number, if we just think it's a blip in the environment.

Our next question comes from the line of Dan Binder with Jefferies. Dan Binder - Jefferies: Recognizing that there was some choppiness around traffic, there also seem to be a lot tighter TV inventory in the industry, which appears to have resulted in slower ASP declines, particularly in LED. And as a result, there's still a fairly good premium between LED and LCD. I was just curious in terms to your outlook, whether or not that includes perhaps more reasonable ASP declines as supply improves and the outlook for LED in the balance of the year?

We're going to ask Mike Vitelli to comment on that for you.

Actually we've seen, to your point, a warm, modest decline in the cost per inch in flat panel TV this first quarter, compared to any of the probably last eight or nine quarters. That's good news overall for ASPs. A lot of that's coming from larger screen sizes. As you mentioned, the addition of LED TV, Internet IPTV, 3D TV, all of those are increasing the average selling price in the industry. And Brian mentioned just a little bit earlier, the industry is yet to begin to promote some of those as we move into the second half, as manufacturers are still getting their production in place and there are certain products that are still being set as we speak in the industry. So I think there's a lot of opportunity there, both for some excitement and promotion as all of the manufacturers get into the space. And ASPs right now are not declining at the rate that they have been for last eight quarters. Dan Binder - Jefferies: Just as a follow-up to that, can you comment on your access to the more popular SKUs given the tightness that we've seen in the industry?

We believe that we continue to get our unfair positive share of that as we move out every month based upon our pretty extensive collaborative planning with our suppliers.

Our next question comes from the line of David Schick with Stifel Nicolaus. David Schick - Stifel Nicolaus: Turn this into one question; you've run mid-18s on the SG&A on an annual basis in low single digit comp environments, so we have precedent there. You've got a connectivity move in international. I mean, can we try to get at the pieces and sort of say, over no specific timeframe, but in the medium or whatever future, how do we see the connectivity monetize? Is the opportunity to get SG&A back to something like that while what I would assume is gross profit dollar growth from connectivity happens, I mean, can that all happen, or is there just such a constant level of investment in that medium term that we can't get that magnitude or that meaningful move without just the constant sort of churn of investment?

Dave, I think that it's a very good question. I think, first let me talk on the connectivity. You're going to see that show up first and foremost in gross margin rate expansion as the year and then years unfold, and there is no doubt that there is some front-end investing and capabilities that we need to put forward to realize those. I certainly think over time you will see us begin to basically leverage those, but it does require investment from us to realize and create those differentiated experiences that delivers the gross margin expansion for us.

Dave, we're happy to invest in more labor dollars when they're driving higher gross profit dollars. So examples that we see, like our Best Buy Mobile business, our cost to execute that within the stores given the model that we have in place is one of our more cost-intensive areas. But the profit dollars that come along with that are also much higher. So as we mix the business going forward, we see kind of a couple of things happening. Number one is, we're going to invest more in putting our blue shirts in a position to talk to customers about the connectivity offerings and solutions that will work for them. That is the differentiator in our model; we actually engineer people into the equation to help them get what they want. That comes with a cost, but the margins and the profit pools that we're now competing in will afford us to do that. Secondly, we still see some opportunities to continue to get leverage in SG&A from our core operations behind the scenes. So on balance, I think the leverage you'll see going forward will be more gross margin orientated with still SG&A leverage, but a little less. I think if you look at our SG&A spending versus our top quartile retail peers, we're not online on what we spend, and we're actually, as I said earlier, engineering people into the equation. But our focus is really clear; driving higher connections, which are more profitable to our business model, putting labor in the right amounts in the right spaces to make that connection for customers, and then continuing to leverage the scale that we have as a business. And I think as we've talked before, the other significant leverage opportunity that sits in SG&A is that we think we can derive a large amount of our future growth and profitability without the relative expansion of new stores that we've experienced over the last five or ten years. So without that new bricks and mortar component we're certainly going to see leverage in SG&A as well.

From a historical perspective at Best Buy, David, as you know, we have a long history of moving into new spaces aggressively and looking to differentiate for our customers. We also have a long history of bringing efficiency to those spaces as we learn how to operate in those businesses. That's sort of right in our wheelhouse.

Our next question comes from the line of Mike Baker with Deutsche Bank. Mike Baker - Deutsche Bank: So my question is going to be really a two part question. One, within your reiteration of your guidance, I don't remember as you specifically reiterated the sales guidance to as 5% to 7% total and a 1% to 3% comp. And then I guess within that, what do you expect to see from things like LED TV, is that ramping up or are customers buying that? Is that becoming a bigger part of your mix? And I guess 3D is probably really small, but does that become more meaningful later in the year?

Just taking your one question and two parts apart, we've not changed our guidance expectations for the top-line either in total revenue growth or in comp sales. Brian, I think you were going to comment?

I was actually going to say, we reiterated our guidance in full. Is there anything you want to mention on LED, Michael?

Well, LED is an increasing percentage of business, as has been an increasing percentage of the industry, but we're leading-edge in that area. And all of the new areas that Brian talked about earlier, we think we're pretty balanced from a TV perspective and a computing perspective and a phone perspective and an entertainment perspective. All of the new things that Brian talked about whether its 3D and IPTV, most of those are LED based. The new motion control gaming, tablet, these are all things that are yet to be in the marketplace in an exciting way. And we'll all be part of the growth as we go forward.

Now, earlier to the question Mike, I mentioned that the customer had been choppy for us in the first quarter, and that's absolutely true. But that really hasn't done anything to mitigate our confidence that the customer is going to be there, and looking for the sort of the latest and greatest technology, the connected solutions that we bring together. In fact, we remain quite confident about that. Mike Baker - Deutsche Bank: And I guess, as a follow up, if LED and 3D and IP, if those are all good, excuse my words, I think you're trying to decelerate TVs.

Say that again, Michael. Mike Baker - Deutsche Bank: If your TV trends decelerate, right, I think you were down low single digits. Previous quarters you were up, as (inaudible) high-single digits. So something slowed in the TV business. Was it lower end TV, small screen sizes et cetera?

The 32 to 37 area which was shorter for us this quarter, you have two reasons for that; one is, as someone mentioned earlier, the industry itself got a pull back in production in this area. Another thing we all should take into consideration; last year at this time, we were entering the digital TV transition, incredibly aggressively. You talk about what noise there was and what promotion there was in the marketplace; that's why everybody else in the world including the US government was talking about this everyday. So in May last year, there were a lot of small TVs that were sold as the consumer's answer instead of getting a converter box. That was a big part of what was happening right now a year ago, in May and June; it's not happening this year. So that's where we're seeing the difference and the slowdown for us.

Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Scot Ciccarelli - RBC Capital Markets: Question on the traffic; obviously the phrasing was, it's been choppy month-to-month. I guess what I'm wondering is, has that trend been more evident in certain categories, more or so than others? In other words, are customers treating certain categories with more discretion than others, or is there sensitivity to price points? Can you just be more descriptive on what we're seeing in terms of the choppiness?

Mike, do you want to give a little commentary overview or a category overview?

I think a portion of the traffic decline for us has been entertainment media. There's been continued declines year-over-year in CDs. And even DVDs now are starting to have that trend. Part of the reason of the acceleration and the enhancement of the used gaming today is part of that solution, is to try to bring people into the store with another offer. So we're trying to offset some of the traffic declines that come from that part of entertainment with new entertainment areas. So trading of used games and the purchase of new games is something we're trying to enter that. You're seeing increasing space that we're utilizing of prior media space for different areas like increased e-readers, et cetera. We're trying to add things into that center of the store to replace both the space and the traffic that started to decline in traditional packaged media. Scot Ciccarelli - RBC Capital Markets: And then just a housekeeping item. You mentioned non-recurring items in gross margin, but in the release you've mentioned something in SG&A. Can you just size the non-recurring items in SG&A for us?

As listed in the indexes that was the smallest driver of our SG&A overall. And every quarter we're going to have a few things, whether a settlement of legal matters or one-time costs, et cetera in the ramp of SG&A year-over-year. And more importantly, as they compare to our plans in the quarter, it was a driver but it wasn't a material driver.

Our next question comes from the line of Chris Horvers with JPMorgan. Chris Horvers - JPMorgan: One step back on a bigger picture question. Your PC sales slowdown just a bit probably helped mix. It sounds like the lower end TVs which have been a drag on gross margin also slowdown and probably helped your gross margin mix. I think the cynic steps back and says, you've done a great job in 2009, driving sales at the expense of some gross margin. Coming to the first quarter, the sales slowdown and then you get the gross margin up and you're investing to drive that gross margin. So you step back and say, can Best Buy drive sales and gross margin higher simultaneously? How are you thinking about that, and is that a discussion that you've had internally?

I think I would pull that apart just a little differently to be honest with you I think if you look at how the business performed last year in Q4, when we posted the seven comp in our domestic business. So if we talked at that time, we purposely chose to assort products that consumers had high interest in, around smaller screen sized TVs, as Mike Vitelli just talked about the impact of the DTV conversion and the explosive growth that was happening in the notebook business. If I look at the rates in the categories that we are selling, we had stable to growing rates in those categories. The overall margin rate went down solely due to mix. As we look into business now in Q1, we see a little bit overall consumer softness more than what we had planned, and we see some rate improvement. Certainly some of that has been driven by just (lapping) the mix that we saw last year in the business. But also, as I mentioned in my prepared remarks, we're seeing much bigger impact around kind of the promotional effectiveness we've seen to drive business in areas where we're providing the consumer benefit. We're learning that there's ways to do that without as much incentive support as we provided in the past. So as we talk internally, we clearly talk about, we are going to grow our gross margin rate by selling customer solutions that they're looking for. It's not a game that we're deciding, hey, let's have a higher comp sales number, lower gross margin rate or vice versa quarter-by-quarter. We're trying to go where the customer's going, with the solutions that they need, and then actually use all parts of our model to improve the gross profit rate.

Two points I'd add to Jim's answer; one, we didn't do anything in Q1 to close the pipe in terms of being out there in the marketplace and priced right and offering the right sort of value. So we didn't do anything that purposely mitigate or remediate the revenue we see. And I would also remind you that Q1 was probably our toughest gross margin comparison year-over-year, as a year ago in Q1 we had a 70 basis point improvement year-over-year, and now here we are with an improvement on top of that. So we're not taking any victory laps about it but we see it as a positive sign as we move forward in this year.

One last thing I'd like to add, from an overall promotional environment, I mean 'promotional' in the sense of creating excitement, not from just a price point of view, very few of the CE players, whether it's manufacturers or retailers were aggressively talking about this in the first quarter. And I think to what Brian mentioned earlier is, product releases that people have scheduled are in different times of the year. So I actually think the voice of the industry is going to get louder as the months go by, and the product releases will increase as the months go by and I think therefore the consumer response will increase as the months go by.

Longest answer ever, I apologize to everybody in the call. We're seeing the consumer response where they have interest. On the call I mentioned the response to the new Android 4G HTC EVO. It was our largest pre-sell ever. So the consumer is coming out when there are new things that are sparking their interest, and they all tend to be around this connected world, this notion of connectivity that we've been discussing. Chris Horvers - JPMorgan: So as a quick follow-up, do you need to expand the pipe right now? When you hit these soft points in innovation and new product introduction and whether a manufacturer is stepping in or out, do you need to step in and add some promotional dollars to drive traffic to the store? How do you think about going forward?

Yes, well, it's part of the benefit, Chris, of having just a broad portfolio of products. So versus some of our competitors who have much more narrow scope of product selection in the categories they talk about, certainly it's what we see as an opportunity as we talk about connected solutions and the business models associated with those. That is still very hot. But I think to Mike Vitelli's point, the most efficient way to drive traffic for the long term is when we line up what's real new news in the marketplace around spending our vendors are doing that drives people into our business, as Brian mentioned, during key drive times. So as we look at our business going forward, certainly if customers are going to be there doing the key drive times and new products, that's the most effective time for us to do it in the portfolio. Trying to pulse the business off a drive time has not historically provided a better customer experience or a longer-term financial proposition that has made sense for us.

As the year unfolds at the appropriate times and places, you will see our voice get very loud. You will see us get very loud behind new technologies. You will see us on television more frequently as we approach drive times and product offerings that make sense to our customers.

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Brad Thomas - KeyBanc Capital Markets: Wanted to follow up on the computing category. I know you broke it out, but notebooks were up low double digits. I was hoping you'd just talk a little bit more about the trends in the category and the outlook for the back half of the year, especially as netbooks become a bigger portion of the mix, as tablets continue to grow. And what you are seeing from a unit standpoint or price standpoint?

This is Mike Vitelli again. I think the first thing that Jim had mentioned specifically called the mobile computing, because to your comment the category is expanding. It has notebooks in it, has netbooks in it, and now it's beginning to have its new tablets. There is one really important one there right now, and there is a lineup of folks ready to enter that foray as well. What we're seeing right this second is the growth overall has slowed, because I believe what's happening is the new announcements have got people thinking. And you saw some of that hesitation at the end of this quarter. As availability improves in all of the areas, I think as the back-to-school launch happens, which is coming out as the next big drive time that comes for us, we believe we're going to see the computer area continuing to expand over the course of the year. Brad Thomas - Keybanc Capital Markets: Just to follow up on that, Mike, what signs are you seeing in terms of the slowing growth to give you confidence that this would put consumer perhaps waiting for new products to come out rather than perhaps a greater maturity of the product category than what you had previously thought?

Because of the backorder situation you see in some new categories so you know the consumer demand is out there, it's something that the production capability has to catch up to. And we clearly see multiple manufacturers in their products plans as they move through the rest of the year.

Our next question comes from the line Alan Rifkin with Bank of America. Alan Rifkin - Bank of America: One more question on the guidance if you don't mind. I certainly understand you've made it quite clear that your SG&A spending for the year is unchanged. However, in the first quarter, to be fair, your revenues did fall short of expectations. When you look at the guidance for the full year, is your confidence still in the $3.45 to $3.60 range predicated on recapturing those revenues or do you think that SG&A spending may axe to be lower than what was first anticipated? And then as a follow-up, does your guidance now for the year assume a continued stronger dollar and what's the incremental benefit to your full year guidance from the stronger dollar?

A couple of pieces there, Alan. We've maintained all aspects of our guidance. So we still see the comp of 1 to 3 for the year. As I mentioned in my comments, Q1 has not been a historically strong indicator of what consumer behavior is going to be for the year. So it's just too early to call out. So we did fall a little short of our plan in maintaining a guidance of 1 to 3. There is room in that guidance range, but clearly we expect to recoup that as we move through the year given the product cycles that we see coming. And we'll just have to see what happens during our key selling season around the holiday time. So no changes on that front. Correspondingly, same with the EPS guidance. Based on what we see today in Q1, $3.45 to $3.60 is still the best range we have for the year. Certainly we'll continue to evaluate it and adjust it, like we have in previous years, when we have a better indicator. But overall, I think that the SG&A spend is what we spent in advance to Q1 versus what we thought was actually $30 million to $50 million more than our internal plans. So on the balance of the SG&A spend for the entire wasn't a huge mover. We have plenty of flexibility to moderate that overall. The point to reiterating our SG&A conversation is when you have a small dollar quarter like Q1, small changes in SG&A obviously have a big EPS impact. On balance for the year, we still feel very good about the guidance range we have out there. Alan Rifkin - Bank of America: Jim, are you assuming a greater benefit from the stronger dollar as part of your guidance than your original guidance back in March?

Actually the impact of the dollar change on our bottom-line, given the overall profitability of those countries, is not a real meaningful impact. It certainly impacts total sales dollars and SG&A dollars overall, but the net bottom-line impact is not a big mover in the mix. Alan Rifkin - Bank of America: I guess I still don't understand, all things being equal, how given your performance in Q1 you could be more optimistic about the remainder of the year than you were in March?

We're getting more optimistic, Alan. Alan Rifkin - Bank of America: Maybe you fell short of your expectations in Q1. You're still backing guidance, which means that you have to feed your original expectations in the remaining quarters. Is that not a fair assumption?

That is fair. But if you look at the weight of the business that's in Q1 versus previous quarters, Q1 is our smallest, it's 10% of our year. So as I look at the opportunity to make up that shortfall in Q1, we have a significant opportunity to make it up in Q2, Q3 and especially Q4. You've been watching the business for a number of years. Look at last year for instance. We took guidance about in Q3, and we finished there even stronger than we thought by many sense more than what we're talking about in Q1. And we did this last year in Q1 from a different lens when we over-delivered on expectations through higher gross margin performance. We are very careful in saying don't get overly excited about the level of improvement in gross margins in Q1 last year, because we see that tempering as the year goes on. Our callout here in Q1 is that while we're disappointed, don't get overly pessimistic, that we think the year is going to pan out materially different than we originally thought. It's still very early. We control many of the levers from the spending standpoint, and we'll see what the consumer actually does. We're confident that our plans in driving margin expanse into the gross profit lever are going to continue to ramp and we're excited to put those in front of customers and see their reaction to it. So in general, we feel good based on where we're at in the yearend guidance.

Our next question comes from the line of Matthew Fassler with Goldman Sachs. Matthew Fassler - Goldman Sachs: Just a question I guess that combines your expense outlook and some of your strategic initiatives. You spoke about the investments that you made in the first part of the year. You also spoke about at least two initiatives that seem to be starting more or less now. One is the used game rollout. And the second is store reset that sounds relatively comprehensive. And it'd be great if you could reconcile those pretty significant initiatives of your expectations for SG&A spend coming in. And as you do that, you can talk about sort of logistics associated with each of those efforts.

I think what we'll do here is we'll ask Shari to comment on the store reset then we'll ask Michael comment on our new used game business.

In terms of the resets aspect of it, the resets are built into what we already see for the SG&A up for the back half of the year. So there's not a concern there in terms of is that a surprise, are we doing it at accelerated pace, etcetera. Two, we feel like they're additional tools that will help of the consumers and the employees in the store actually physically show customers what's possible in the connected world, that's true specifically in computing and home theatre. And some of the other resets will help us with, Michael mentioned this earlier, but will help us with the way we've got the space laid out in the store and giving more space to expanding categories. And so I can let my touch on use gaming specifically, but the plans for that are baked into the SG&A number that we're already looking at for the year.

Matt, hi, it's Michael. On the used gaming initiative, logistically what we're doing is each store is going to have two things, the ability to take end used games at a price that we'll be able to get to all of the stores on a regular basis, consumers will get a Best Buy gift card that's usable throughout the store for anything at Best Buy for the value of the game that they traded. And an additional space in the gaming department to sell used games; both of those initiatives I think that we've been working on for several years and have finally got to a point that we believe there operationally sound that we can expand them across the chain. And as I mentioned earlier, I think that's going to be a significant increase traffic driver to the store that we lost in traditional media.

And I'll just add one thing, Matt. The dollar amounts associated with resets are not gargantuan. Matthew Fassler - Goldman Sachs: Got it. And just a follow-up on the used gaming. Is that a staff intensive or system intensive initiative for you?

It's neither actually, the system that gets to the stores of pricing, and then in certain stores we actually have dedicated areas where people can trade games with certain stores (inaudible) customer service that's sort of relatively safe. But certainly if the volume increases at the rate that we hope, we're going to double the transition some of the steps that we have used for media to work on this issue.

We think the timing of this business, Matt, is really terrific too. As we look at what's happening in gaming, as I mentioned in my prepared remarks, with Microsoft's announcement of E3 yesterday around Kinect, their interactive motion-based gaming, and the firmware updates that are happening with PS3 which we think will accelerate the adoption of 3D gaming, we think the timing for us to get into used games business and help our customers realize some currency from their older games we think is a very strong customer preposition.

Our last question comes from the line of Mitch Kaiser with Piper Jaffray. Mitch Kaiser - Piper Jaffray: Sorry to harp on the guidance, but just relative to Q1 and just thinking about the gross margin rate, it seems like it came in above the expectations. Just as you think about that, is there a better opportunity on the gross margin than you had originally anticipated? Then just from investors I'm also getting a lot of questions just on the inventory build and kind of what you're seeing there relative to the payables? If you can talk about that Jim, that'll be great.

Yes, you're right. As we called out, the gross margin performance in the quarter was better than we anticipated. And all things being equal, that makes us feel better on the gross margin for the year. But candidly, it's so early in the year. There are going to be so many movers in the gross margin whether its product mix or other things that will happen during the year, it's too early to call the big upper a big down for the year on gross margin. So while we're very happy with the performance in Q1, we have recognized it's Q1 and there's a long way to go yet. On the inventory question specifically, if you look at the inventory increases we saw year-over-year, as I mentioned in my comments, we were up roughly 10%. If you look at the amount of products that we set in Q1, essentially we deal with a lot of very fresh inventory across key categories and the major reason for the increase in growth was primarily investments we made in the computing space that we'll have no problem working through as the balance of the year goes on. So I get more concerned about inventory levels heading into holiday season and what we do with them afterwards. And I think as we showed a couple of years ago during the economic meltdown, one of the benefits of Best Buy in the relationships that we also have with vendors and the velocity in our business is we can work through a lot of inventory without big problems in a relatively short period of time. So as we sit here at the end of Q1, with inventory up 10%, that's very easily worked through in our normal cycle and our teams are very accustomed to doing that. So no concerns for managements perspective on those points. Mitch Kaiser - Piper Jaffray: And then just on the payables?

On the payable side, it's really more of a function of where we stand in the mix of inventory based on the terms we have from the vendors that we're building. And so, once again, what's early in the year, I get more concerned about looking at payables when we have a mix issue and sales softness later in the year in key holiday season. But at this point of time, it's just a function of which vendors we're buying product from.

Management, please proceed.

Thanks to our audience for participating in our first quarter earnings conference call. As a reminder, a replay will be available in the United States by dialing 800-406-7325 or 303-590-3030 internationally. The personal ID number is 4310296. The replay will be available from 11.30 AM Central today through the next Tuesday, June 22. You can also hear the replay on our website under For Our Investors. If you have any additional questions, please call Andrew Lacko at 612-291-6992, or myself at 612-291-6122. Reporters on the other hand should call Su Busch at 612-291-6114. Thank you for your attention. That concludes our call.

Ladies and gentlemen, this concludes Best Buy's conference call for first quarter fiscal 2011. You may now disconnect. Thank you for using ACT Conferencing.