Mollie O'Brien - Senior Director, Investor Relations Hubert Joly - President and CEO Sharon McCollam - CAO and CFO

Kate McShane - Citi Investment Research Gary Balter - Credit Suisse Dan Wewer - Raymond James David Strasser - Janney Montgomery Scott Michael Lasser - UBS Investment Bank Christopher Horvers - JPMorgan Matt Fassler - Goldman Sachs Peter Keith - Piper Jaffray

Welcome to Best Buy's Third Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, the call is being recorded for playback and will be available by 11 a.m. Eastern Time today. [Operator Instructions] I would now like to turn the conference call over to Mollie O'Brien, Vice President, Investor Relations. Mollie O'Brien: Good morning and thank you. Joining me on the call today are Hubert Joly, our President and CEO, and Sharon McCollam, our CAO and CFO. As usual, the media will be participating in this call in a listen-only mode. This morning's conference call must be considered in conjunction with the earnings release that we issued earlier today. They both contain non-GAAP financial measures that exclude the impact of certain business events. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, but should not be considered superior to, as a substitute for, and should be read in conjunction with, the GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release. Today's earnings release and conference call also include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial condition, results of operations, business initiatives, growth plans, operational investments and prospects of the Company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the Company's current earnings release and SEC filings for more information on these risks and uncertainties. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. In today's earnings release and conference call, we refer to the consumer electronics industry trends. The consumer electronics industry, as defined by the NPD Group, includes TVs, desktop and notebook computers, tablets not including Kindle, digital imaging, and other categories. Sales of these products represent approximately 65% of our Domestic revenue. It does not include mobile phones, gaming, movies, music, appliances or services. I will now turn the call over to Hubert.

Thank you, Mollie, and good morning everyone and thank you for joining us. I will begin today with an overview of our third quarter results and update you on the progress we are making against our Renew Blue priorities. I'll then provide thoughts on the upcoming holiday season and a discussion of our priorities beyond holiday before turning the call over to Sharon for additional details on our quarterly results and commentary on our financial outlook. So first, our financial results. In the third quarter, our teams delivered positive comparable sales, improved profitability and continued progress in our Renew Blue transformation. This resulted in a $9.4 billion in revenue and $0.32 in non-GAAP diluted earnings per share versus $0.18 last year. Operationally, this year-over-year improvement was primarily driven by a 0.6% revenue growth and the benefits from our Renew Blue and other SG&A cost reduction initiatives, partially offset by strategic pricing investments and the ongoing competitive pressure on our gross profit rate. On the top line, while sales in the NPD-reported Consumer Electronics categories declined 0.2%, our strength in televisions, computing, and tablets versus the industry, in addition to our growth in gaming and appliances, drove a Domestic comparable sales increase of 2.4%, excluding the 80 basis point estimated benefit associated with the classification of revenue for the new mobile carrier installment billing plans. Domestic online comparable sales increased 22%. Also during the quarter, we continued to make progress against our Renew Blue priorities. In merchandising, we continued to expand our appliance offering through the opening of 15 Pacific Kitchen and Home stores-within-a-store and are on track to end the year with 117 stores versus 67 last year. In home theater, we opened 10 Magnolia Design Center stores-within-a-store and are on track to end the year with 50 stores versus 33 last year. We also continued to expand our ultra-high definition or 4K TV assortment. In mobile, despite major phone launches being quantity constrained, the adoption of installment billing plans continued to accelerate throughout the quarter. Within these plans, we saw higher average phone prices and higher attach rates of services and phone accessories. In phone accessories, we significantly expanded our exclusive assortment through new partnerships with fashion designers and growth in our own private label brands, which allowed us to offer our customers an industry leading phone case assortment in time for the new iPhone launch. In marketing, we continued to shift marketing dollars away from TV and print to digital media and display campaigns including a successful traffic-generating back-to-school initiative. We also continue to drive increasingly powerful customer communication through the leveraging of our new Athena database. While we remain in the early stages of being able to personalize marketing messages to individual customers, we're beginning to see better click-through rates on these new campaigns when compared to mass non-targeted e-mails. In our online business in the third quarter, we continued to leverage our ship-from-store, digital marketing and enhanced Web-site functionality to drive a 22% increase in Domestic comparable online sales. Similar to the first half of the year, ship-from-store represented over half of this growth. We also launched several customer-facing site improvements including significantly richer visual and editorial content for the home theater, mobile, appliance and gaming categories, expanded 'wish list' capabilities, and expanded in more inspirational holiday gift center, and an improved checkout process that provides faster and precise 'get it by' delivery dates on approximately 60% of Best Buy delivered SKUs rather than up to five to eight day range. In our retail stores during the quarter, we continued to improve the physical presence and shopping experience by expanding our fleet of appliance in home theater stores-within-a-store, increasing our investments in store refresh initiatives adding compelling vendor displays, increasing sales training and integrating new vendor-funded labor into our premium customer experiences. While traffic to our stores continue to decline year-over-year, the trends improved compared to the first half of the year. In services, we continued to increase our NPS or Net Promoter Score and drive down costs through operational efficiencies. We also launched a lost and theft mobile phone insurance program to supplement our historical Geek Squad Protection Plan. However, service revenue continued to decline, as Sharon will discuss in more detail later. In our supply chain, we continued to transform our distribution and fulfillment capabilities by operationalizing a faster and more precise delivery experience to our online customers and locking a significant percentage of our major appliance and large-screen TV inventory that was systematically trapped in a single market and not available to be purchased by customer outside of that market. In returns, replacements and damages, we launched a new section of the Web-site called Best Buy Outlet which expands the online visibility of open box inventory that can be purchased online and picked up in store. We also expanded the percentage of return products that we are Geek Squad certifying which while small is leading to higher margin recovery due to customer confidence in the quality statement that Geek Squad certification inspires. Our Net Promoter Score was flat year-over-year in the third quarter, which we believe was driven in part by the impact of product availability associated with the launch of new phones. This plateau follows a 400 basis point year-over-year improvement last year. And relating to our overall cost reduction initiatives, in the third quarter we eliminated an additional $65 million in annualized cost taking our total renewable cost reductions to $965 million, towards our target of $1 billion. Now as we enter the fourth quarter, we are excited about our holiday plan, which has been built around; number one, the cumulative progress we have made against our Renew Blue priorities; number two, an operational roadmap that incorporates the specific learnings that we gained from last year; and number three, our current views on the consumer and competitive environment. Within this plan, I would like to highlight the following growth, customer experience and profitability initiatives that we believe will drive better year-over-year outcomes. So number one is the customer-facing changes that we have made on our site and in our stores, including the merchandizing and labor upgrade I discussed earlier, that touch many of our key categories, especially home theater, accessories, appliances, emerging categories such as health and wearables and connected home, and digital imaging. Second, our ability this year to sell installment billing plans in the mobile phone category. Third, a more inspirational gifting strategy, including a greater assortment of products below $100. Fourth is a more defined and structured approach to our promotional strategy, including greater analytics around competitive response plans. Fifth, more relevant and targeted marketing investments, including a more concise statement of our value proposition, 'Expert Service Unbeatable Price'. And sixth, increased inventory availability due to the rollout of ship-from-store to 1,400 stores versus 400 stores last year, the regional unlock of large appliances and TVs and additional online exposure of certain open box inventory. Now, like every holiday though, of course we believe the outcome of these initiatives is and will continue to be tempered by external and internal factors, including the investments that are required to drive them. The external factors include; number one, an intensely promotional competitive environment; number two, a possible constraint in product availability in recent high-profile product launches; and number three, a potential supply chain disruption related to the West Coast port delays. The internal factors include; number one, the increased mix of faster growing but lower-margin products in our revenue; number two, the potential impact of higher incentive compensation, particularly in our retail stores, based on our expected year-over-year improvement in performance; number three, higher growth in our lower-margin online channel; and number four, intensified investments in customer-facing initiatives. We believe the net financial impact of these factors in the fourth quarter assuming near flat revenue and comparable sales growth will be a year-over-year improvement in our gross profit rate but flat year-over-year SG&A dollars, and Sharon will provide more color on this later in the call. Now before this, I would like to briefly share with you some thoughts about our priorities beyond holiday as we continue our Renew Blue transformation. So at this point in our transformation, we have eliminated close to $1 billion in cost, reduced our Domestic SG&A rate by approximately 170 basis points compared to two years ago, and made progress towards stabilizing our Domestic comparable sales. As we look to our environment, we see continued economic pressures including more rapidly declining average selling prices in key product categories in expectation of competitively matched prices, we see declining demand and increasing pricing pressures for extended warranties driven by improving product reliability and declining average selling prices for parent products, we see increasing customer service investments like free and faster shipping or expert service in our retail stores, and we see greater customer expectations around large cube supply-chain experiences. And with our more affluent demographic and complex product offerings, we are becoming more of a specialty retailer in this evolution and must offer our customer a high-touch experience. Now against this backdrop, at the beginning of this fiscal year we outlined a roadmap for the next couple of years of our transformation. We are pursuing a strategy that is focused on delivering advice, service and convenience at competitive prices, we're focused on driving a number of profitable growth initiatives around key product categories, life events and services. These initiatives include; number one, capitalizing on the ultra-high definition TV and gaming cycles; number two, increasing market share in growing categories with structural barriers to entry like large appliances, mobile and connected home; number three, establishing Best Buy as the destination for health and wearables; number four, further expanding branded, exclusive and private-label assortments; number five, continuing to expand our secondary market growth strategy to improve our margin recovery on returned, replaced and damaged products; number six, expanding our life events program such as 'wish list' and a gift registry; and number seven, evolving our service offerings to make them more relevant to today's customer needs. And in support of these initiatives, we are transforming major facets of the Company. We're applying more science behind our promotional and pricing strategies, we are accelerating targeted and personalized marketing programs, we are transforming desktop and mobile site customer experience, we are enhancing our in-store customer experience from both a service and physical environment perspective, and we are taking steps to drive increased sales effectiveness and payroll leverage. It is our expectation that delivering better advice, service and convenience at competitive prices and successfully executing our initiatives will help grow comparable sales and increase operating margins. It also requires investments. In light of our environment, we believe it is imperative that we move quickly and invest aggressively against these initiatives that we believe will allow us to continue to advance our growth and improve our financial performance. All of these initiatives would be part of our fiscal '16 operating plan and we are excited about both our short and long-term growth prospects. We're also confident in our ability to execute against these initiatives as we have demonstrated over the past two years. The external pressures however are driving structural industry changes, and to win we have to lead. To do that, incremental investment like those I have already discussed will be required and while these investments will put pressure on our operating income rate, we believe that they will also allow us to build a differentiated customer experience and drive our long-term success. We will more deeply discuss these external pressures, growth opportunities and investments in our fourth quarter earnings call after we have completed our fiscal '16 operating plans. I will now turn the call over to Sharon to discuss the details of our third quarter financials and our fourth quarter outlook.

Thank you, Hubert, and good morning everyone. Before I talk about our third quarter results versus last year, I would like to talk about them versus our expectations. As Hubert said, during the quarter we continued to make meaningful progress against our Renew Blue priorities which resulted in better than expected non-GAAP diluted earnings per share of $0.32. This result versus our expectation was primarily driven by the sales declines in the NPD-reported Consumer Electronics categories being lower than previous quarters, higher than expected revenue in computing and tablets, higher mobile revenues due to better than expected results from new phone launches, better performance of our new credit card agreement, and greater pricing and promotional effectiveness, partially offset by increased investments in customer-facing initiatives. I'll now talk about our third quarter results versus last year. Enterprise revenue increased 0.6% to $9.4 billion. Enterprise non-GAAP diluted EPS increased $0.14 to $0.32, primarily driven by higher revenues and the flow-through of our Renew Blue and other cost reduction initiatives. We also saw a $0.02 per share benefit associated with the restitution from a legal claim. In addition, the lower tax rate this year drove an incremental $0.02 per share benefit due to favorable discrete tax events. These favorable impacts were partially offset however by ongoing competitive pressure on our gross profit rate. Domestic revenue of $8 billion increased 2.3% versus last year. This increase was driven by comparable sales growth of 3.2%, but excluding an 80 basis point estimated benefit associated with the classification of revenue for the new mobile carrier installment billing plans comparable sales increased 2.4%. This increase was partially offset by the timing of recovery on mobile phone trade-in liquidations, store closures, and $8 million or 15 basis points in less favorable economics of the new credit card agreement. Domestic online revenue was $601 million and comparable online sales increased 21.6% due to substantially improved inventory availability made possible by the chain-wide rollout of ship-from-store in January of 2014, a higher average order value, and increased traffic driven by greater investment in online marketing. As a percentage of total Domestic revenue, online revenue increased 110 basis points to 7.5% versus 6.4% last year. As we enter the fourth quarter in the online channel, we will be comping last year's gaming console introductions and our initial 400 ship-from-store rollout. Therefore, as the fourth quarter last year was the first quarter we benefited from these growth drivers, this year's fourth quarter will experience approximately 600 basis points of growth pressure that we did not have in the first three quarters of this year. From a merchandising perspective in the third quarter, comparable sales growth in computing, gaming, televisions, and appliances was partially offset by declines in other categories, including services, mobile excluding the impact of installment billing, and tablets. The services comparable sales decline of 10.3% was primarily driven by lower mobile repair revenue due to our success in decreasing claim severity and frequency, which is an operational positive, and lower attach rates. International revenue of $1.4 billion declined 8.4%. This decline was primarily driven by the negative impact of foreign currency exchange rate fluctuations, a comparable sales decline of 3% driven by China, and the loss of revenue from store closures in Canada and China. Turning now to gross profit, the enterprise non-GAAP gross profit rate for the third quarter was 22.7% versus 23.1% last year, a decline of 40 basis points. The Domestic non-gross profit rate declined 50 basis points to 23% versus 23.5% last year. This decline was primarily due to a lower gross profit rate in the mobile business, including ongoing declines in customer demand for standalone mobile broadband products, structural investments and price competitiveness particularly in accessories, increased revenue in the lower margin gaming category, a highly competitive promotional environment in tablets, and a 10 basis point negative impact related to the less favorable economics of the new credit card agreement. These declines were partially offset though by increased revenue in higher-margin large-screen televisions, the realization of our Renew Blue cost reduction and other supply-chain cost-containment initiatives, and the receipt of $11.5 million or 15 basis points in restitution from a legal claim related to an inventory dispute. The International gross profit rate was 20.7% versus 21.2% last year. This 50 basis point decline was primarily driven by our Canadian business due to a highly competitive promotional environment in tablets and higher revenue in the lower-margin gaming category. Now turning to SG&A, enterprise-level non-GAAP SG&A was $1.9 billion or 20.5% of revenue versus 21.7% last year, a decline of $104 million or 120 basis points. Domestic non-GAAP SG&A was $1.6 billion or 20.3% of revenues versus 21.7% of revenue last year, a decline of $68 million or 140 basis points. This rate decline was primarily driven by the realization of our Renew Blue cost reduction initiatives and tighter expense management throughout the Company. These declines were partially offset by Renew Blue investments in online growth and other customer facing initiatives. International non-GAAP SG&A was $297 million or 21.4% of revenue versus 22% of revenue last year, a decline of $36 million or 60 basis points. This rate decline was primarily driven by Renew Blue cost reductions and tighter expense management in Canada and to a lesser extent in China. As it relates to the International segment, while we made considerable progress on our Renew Blue cost reduction initiatives, we have substantial work to do on top line stabilization. To address this, we are executing against the same Renew Blue transformation roadmap that we are pursuing in the U.S. From a balance sheet perspective, merchandise inventories decreased $78 million or 1.1% to $6.9 billion. Although we accelerated inventory purchases in anticipation of West Coast port delays, these incremental receipts were more than offset by better than expected revenues. But as we said last quarter, we do expect to end the year with higher inventory levels in the range of $150 million in order to support our ultra-high definition television, accessories and Pacific Kitchen and Home expansions, as well as our initiatives to reduce retail out-of-stocks. I'd now like to talk about the financial outlook for the fourth quarter. As Hubert outlined earlier, there are internal and external factors with both positive and negative implications that we believe will influence our enterprise financial results in the fourth quarter. Considering these factors, we are expecting the following impacts in the fourth quarter. Near flat year-over-year revenue and comparable sales growth, assuming revenue declines in the NPD-reported Consumer Electronics categories are in line with Q3; an improvement in the year-over-year gross profit rate; and flat year-over-year SG&A dollars due to higher incentive compensation and intensified investments in customer-facing initiatives. We will also recognize an incremental $20 million on the SG&A line due to a greater proportion of our vendor funding being recorded as an offset to cost of goods sold rather than an offset to SG&A. The net result of all these impacts, similar to last quarter's outlook, is an approximate 50 basis point year-over-year expansion in the Q4 non-GAAP operating income rate. Additionally, in the fourth quarter, as we said before, the estimated diluted earnings per share impact of the discrete tax items that we discussed will continue to be in the range of a negative $0.09 to $0.10 in Q4. With that, I will now turn the call over to the operator for questions.

[Operator Instructions] We'll take our first question from Kate McShane with Citi.

Good morning and congratulations. I was wondering if you could walk through in a little bit more detail the impact of mobile in Q3. Obviously there was the big launch in September. But I wondered if you could walk through what some of the dynamics were with the launch and how you think this will maybe differ in Q4.

So there are a couple of things I would highlight. Prior to this iconic launch, we saw continued pent-up demand. So the market dried up and had a significantly negative impact on our mobile revenue. Then at the launch we did quite well but then supply was uneven during the quarter. So that's a positive followed by a negative. We did see nice positives from our expanded accessories assortment. If you visited our store or the sites, I think you will have seen that. So that was a positive. Then you have the shift into installment billing. So if you remember last year, we didn't have installment billing. We started in the spring. It's now grown very significantly with the impact you've seen on our comps, that Sharon and I have split out. The benefit of installment billing is the increased attach rate on services and accessories as well as the mix into more expensive phones. This for the customer, it's great – installment billing is a great value proposition from a customer standpoint. Now we ourselves, we want to be agnostic, we want to sell whatever makes sense to the customers, it's a great value proposition for the customer and therefore they tend to buy a little bit more. So these are the various drivers. Now looking into Q4, a main uncertainty remains the availability of iconic phones, there's a number of them but we can think of at least one or two, and that's very difficult to focus. So we do expect to continue to be constrained during the quarter on that standpoint, which you will see however of course compared to last year is the fact that we now have installment billing which we didn't have last year. So I think in our prepared remarks we touched on that. So these are the factors I would highlight. I'm turning to Sharon to see whether I forgot anything notable.

No, Hubert, I think you've covered it.

We'll take our next question from Gary Balter with Credit Suisse.

First of all, congratulations to both of you on results to date and I'm sure further progress. The question I had was, last year – and you touched on it, Hubert and Sharon – last year between Black Friday and Christmas, you had trouble driving traffic to the stores, and I don't want you to give your competitive – given competitors are probably listening to this call, I don't want you to give competitive sensitive information, but could you describe if anything whatever you can share with us what your plans are between Black Friday and Christmas to create more excitement in the stores?

So you are right to highlight that week two and week three of December last year were quite extraordinarily bad, candidly not just for us, this was industry-wide. If you remember, you had a bit of a perfect storm last year with a rapid shift to online and traffic to the malls and the stores that was quite extraordinary. I think last year we all agreed was, there were so many unique factors that it's going to be hard to replicate the kind of drama that we had last year. I think we have detailed on the call the overall elements of our plan for holiday, I'm not going to give you the play-by-play, day-by-day because I know our friends [indiscernible] who are on the phone wouldn't appreciate that too much or other places in the world, but I think that the plans we've built really combine three elements. One is the cumulative effect of everything we've been working on over the last year to improve the customer experience with our advice, service, convenience, as well as all of the lessons from that including one I would highlight is gifting, as well as in particular gifting below $100 and improved – I think our improved messaging as well, marketing messaging, more targeted. Last year if you remember it was a little bit too much of, buy in the next two days otherwise it's going to be too late, and then three days later we would tell you, buy in the next two days or it's going to… So I think we're going to be – our marketing messages, you may have noticed that, were a bit more balanced, more targeted and hopefully create some more excitement. But to be candid, we are also prepared from the standpoint of combining science and judgment in our promotional activities and so forth. I must say that last year during these last two weeks, many of us were perplexed and there was a bit of overreaction at that time last year. So the program combines that, Renew Blue transformation and then the lessons from last year, and then wish us some luck, okay.

We'll move along to our next question, Dan Wewer from Raymond James.

Hubert, I just wanted to follow up on your comments beyond the fourth quarter of this year and specifically if you continue to believe Best Buy has the potential to reach a 5% operating margin rate, and if so, how do you envision the amount of square footage changing going forward, either closing Best Buy mobility stores, reducing the size of big-box stores and perhaps closing big-box stores if those leases expire?

So on the 5% to 6% operating income, we do believe that the structural industry changes we are seeing are going to put pressure on that range, but we also believe that these changes could drive opportunities for us as well. And so we'll continue to monitor both as we progress to the next phase of our transformation. As it relates to the store footprint, the way we think about this, and we've been very consistent in talking about ongoing thoughtful rationalization of our store footprint, I'll repeat something we said on the last call and maybe elaborate a little bit. We do see retailers shift to online. Customers are starting their shopping journey online. It's so convenient. Sometimes they are completing the shopping journey online. We like that. In our case, by the way, 40% of the revenue then gets picked up in the stores. And sometimes the transaction itself is completed in the stores. But the result of this is fewer trips to the store, right, either because you've completed the transaction online or because you've done so much research that you don't need as many trips to the store per purchase to complete the transaction. So what does it mean for the stores? It means that the trip to the stores need to be extraordinary from a customer experience standpoint for the transactions that are high-touch and large-cube, it needs to be an amazing customer experience, and it needs to be very efficient for in-store pickup or, I'm on a business trip, I forgot my phone charger and I need one quickly, and by the way the stores are still and probably forever will be the best solution if you want it now. Now is convenience. And so, our vision for the store footprint is related to this. Now the other factor we take into consideration is the fact that we have very few stores, and we've been very consistent in saying this, we have very few stores that are not cash flow positive. So we feel, we continue to feel that closing stores ahead of lease expiration is simply not helpful from a shareholder standpoint. And the other thing that everybody has to recognize, and we certainly do, is that when you close stores you don't retain all of the customers. So one of the things we are excited about is our ability to personalize and target our communication with customers, as it increases over time will be very helpful to be able to help the customers with the journey of ongoing floor space optimization. So we continue to see that as a gradual and thoughtful process. Now as we close stores, everything else being equal, we will even with increased personalization see some lost revenue and therefore you will see an increase in profitability with slightly less revenue everything else being equal, because of course we can also find other ways to grow the revenue. So these are our current thoughts on this continued transformation in the fourth quarter.

Okay. And Sharon, one real quick question, you talked about a 15 basis point or $0.02 per share benefit from a tax settlement I think you said regarding inventory. Does that show up on the income statement on gross margin rate?

Yes. This was a legal settlement not a tax settlement. We have the tax issue and then the legal settlement. The legal settlement was around inventory, thus it's a reduction of cost of goods sold and it shows up in the gross profit.

We'll move along to our next question from David Strasser with Janney Capital Markets.

I guess a question, one of the things I notice more and more in the stores is the third-party salespeople and I'm trying to understand sort of the dynamic of that as far as whether or not – I've heard some people say, I'm pretty sure they're not your employees but they are employees of the vendors, I'm trying to understand that a little bit better, and as we go into the holiday season, how substantial you think that could be, is that helping on ASP, is that helping on close rates, at what times of the week these type of employees will be there? And I guess sort of a related question, that which could be construed as a follow-up would be, as I'm trying to look at the TV category, how much is ASP versus units in sort of the TV category strength that you saw in the third quarter?

So let me be very clear about the sales staff in the stores. With a couple of exceptions that date back a while, the labor that we have for our various vendor experiences is Best Buy labor. We get something from the vendors and they may have on their search, in reference to a specific vendor, to indicate their expertise but they are Best Buy labor. And they spend, as you would expect and appreciate, a lot of time in the stores and we pay a lot of attention to continuing to provide customers knowledgeable and biased advise because we feel that this is very valuable to the customers and so a very strong part of our culture. This being said, we like the fact that we have put an emphasis on customer facing labor, even though we've reduced our SG&A materially. As you know, we've put emphasis on customer facing labor. We like the fact that we are getting help from our vendors from that standpoint and we love the impact on the customer experience and of course the ability to sell more and sell better. We briefly alluded incidentally in our prepared remarks on an opportunity that we have that we are quite excited about, which is efforts in our retail stores to improve sales effectiveness and increase our leverage from labor that over time we'll be able to talk to you all about. And so that's what I would say in general about store labor. Now, Sharon, do you want to answer the question about TV ASPs and units?

Absolutely. As you'd expect, Dave, we're seeing favorability in both.

Is there one more dramatic than the other?

From a competitive point of view, we are not going to be disclosing a lot about the UHD cycle, but obviously you can see in the stores the pricing on the TVs, et cetera. So you're going to have an ASP benefit at the high end and then you're going to have – we're also as you know we play across the entire category. So a large piece of our TV business is not actually in UHD as well and we saw very strong television category this quarter, but we're going to be short on details from a competitive point of view as we go into holiday.

I guess I have to accept that. Thank you.

Okay, sorry.

And we'll move along to our next question from Michael Lasser with UBS.

As you look across the promotional landscape for the holidays and the deals that you're already able to see from others, what is your impression about the margin that your competition is willing to invest this year versus last year, and then how does that ebb and flow over the course of the period?

I would answer the following way. In general we are in line with our expectation. The promotional environment is very intense. It is certainly not less intense. I'm not sure, if anything it's probably a little bit more intense than last year. I think that all of you follow the sector, so I don't need to point you to this or that player. Don't know of course how much money people are spending, I don't have access to their P&L, but the promotional season is off to a very vibrant start, I would put it this way. So as a result, in our outlook for the Q, we've not been betting on help from that standpoint. In fact we've been quite realistic. The one thing I would highlight in that context in terms of what we do about it, is again the combination of science and judgment on our own promotional activities and competitive reaction.

Okay, that's helpful. And as a quick follow-up, can you give us a flavor for how well you are able to not only attach but also cross-sell that traffic that came into your stores in the third quarter for iPhones, and do you think you'll be able to sustain that type of performance into the fourth quarter?

Thank you for highlighting that. These iconic launches generate significant traffic. We are happy with the accessories and services attached. Now is that impact related to the installment billing? I think we've said that, and in general what one of the things we've said in our prepared remarks is that the traffic trend to our retail stores was still negative has improved compared to the first half of the year. Now, what is the weight of these phone launches versus other factors, I would actually say that the mobile part of our stores is by far not the only place in the stores where we have transformed the experience. So I wouldn't exaggerate the impact from a traffic standpoint of these launches.

Okay. Good luck with the holidays. Thank you so much.

We'll move along to our next question from Chris Horvers with JPMorgan.

So you've flipped to positive comps here, you're talking about sort of flat revenues in the fourth quarter, gross margin up, and all of these point to a building cash balance in the balance sheet, and I know it's been very important to see things like gross margin stabilize and sales stabilize, so how are you thinking about the cash as you get beyond the fourth quarter?

Chris, I'll take that. We of course have said consistently we're going to continue to maintain a very strong balance sheet. And once we get past the fourth quarter, of course the cash flows in the fourth quarter are significant, we understand that at that point there's going to be significant cash on the balance sheet and we will at that point start looking at alternatives. As you know, we continue to be deeply committed to our dividend. I know your question is really about, are you going to begin implementing share repurchase programs, and that is a discussion that we are not prepared and not wanting to have today, but when we go into next year rest assured that we know how important this is to our investors and we will continue to evaluate that. But the number one use of cash for us is investing in future growth right now. So where we can utilize that cash to drive these customer-facing initiatives, that will be our top priority, and then we will look to other vehicles for using the cash beyond that.

Understood. So as you – but I guess another way to think about it is, based on the up to date results, it would seem like you're going to have about $4 billion of cash in the balance sheet. Is there a level that your key vendor partners look to in saying, that's a cash value that is something that is a strong show of confidence and makes us feel really good about providing you great terms, as sort of a minimum cash balance level?

I think that we have an obligation to our vendors to maintain a strong balance sheet. When you look at the investment that our vendors have made in our stores in the last 12 months, 12 to 18 months, it is incredible, it is literally hundreds of millions of dollars that they have put into our stores to represent their customer experience. So we believe very strongly that our strong balance sheet has been one of the reasons why they have had great confidence in putting that kind of capital into their customer experience in our Best Buy stores. So you can never exactly square root what number is it that they are looking for on the balance sheet, but let's keep in mind that we are a 40-plus billion dollar retailer and we are heavily fourth quarter weighted. So I think that we need to be very – we're going to be very thoughtful about the intangibles as well as the tangible implications of any cash decision that we make. So I know that we've had this conversation and I so recognize and we recognize the importance of the discussion of uses of cash for our shareholders, I like the fact that you guys all understand how important it is to our vendors because I think we used this example in a couple of our meetings earlier this year, but when you think about it from a vendor point of view, right now some of our largest vendors are sitting with receivables from Best Buy unsecured, nobody wants their inventory back, and they may be lending you up to $2 billion at any point in time. So what looks like a lot to some, doesn't look like so much to another Board sitting across the country, right. So that's where we sit on that topic.

Understood. Thanks very much and good luck in the fourth quarter.

We'll move along to our next question from Matthew Fassler with Goldman Sachs.

My questions are focused on wireless. I guess as you look at all the significant changes in this marketplace focusing on installment billing and also the trade-in dynamic, which I know are present to many more transactions, how are these impacting the consumers' perception of affordability and the frequency of wireless purchases and also the basket that they seem to be looking for?

I think we continue to believe in a number of things. One is the wireless space is obviously a large and very dynamic market. Of course there's a bit of saturation from a smartphone penetration, but there's also new usage. The phone, the mobile phone is really the center of people's lives since it's highly connected, if I can use that phrase, to other topics such as connected home and health and fitness. So it's an area of very intense interest on our part and of the overall industry. The installment billing development is a positive development from a customer standpoint because it provides much more flexibility to the customer. As you know, after one year you can actually upgrade. And so while the previous contractual arrangement of post-paid was a two-year contractual commitment, you now have the ability to upgrade after one year. The fact that it's a monthly billing also is an encouragement to facilitate we find attaching, from a customer standpoint buying services and accessories. And so these are positive development. You mentioned trade-in. Trade-in, in effect with the installment billing is embedded into the program, and so which was a phenomenon in the last couple of years is now structurally integrated in these new offerings. So all of this constitutes a set of positive development and it's an area where we continue to see opportunities for us above and beyond simply the phone functionalities as we represent in our stores a broad range of products that can get connected in the homes and the lives of the customers.

And if I can just ask a brief follow-up, Sharon, you talked about the consumer electronics market expectation that drove your near flat comp assumption for the fourth quarter. What kind of wireless expectation is embedded into that [upside] [ph] of that CE number?

We're not guiding, Matt, by category but clearly when you think about – you know last year we had two issues in mobile. The first was that because of installment billing, the carriers stopped upgrades, early upgrades. Remember? In addition, we couldn't sell installment billing. So we had structural impediments in the fourth quarter of last year that we do not have this year. Therefore you could obviously expect that we would hope to see a significantly better mobile business in the fourth quarter this year versus last year.

What I would add to this, Matthew, is that the flat revenue and comp indication we are providing this morning incorporate, includes the mobile phone business, it's not limited to the NPD categories. As you know, Q4 is in an intensively competitive area where a lot of retailers use CE to carry the excitement in our stores and so forth. So flat overall is the number we have shared this morning.

We'll move along to our next question from Peter Keith with Piper Jaffray.

And this may be the last question so that people can move on to their rest of the day.

Good morning and congratulations. I'll just keep it to one question. As a follow-up to the last comment around the Q4, comp guide for Q4, one of the things that looked impressive in Q3 was that your GAAP relative to the NPD data widened, and it looks like for Q4 your comps were to kind of tighten up again. I guess I'm just wondering, structurally is there anything going on with product sales that's going to cause that tightening that we should be aware of?

I think one of the things I would highlight is the comment on discipline around promotional activities, and we are interested in comps but not [empty calories] [ph]. And so in some cases that – so in other words we don't want to be so addicted to the notion of positive comps that we would do unnatural thing from a promotional standpoint. So that may be what impacts our comments this morning on the outlook. And with that, I'd like to – or maybe, Sharon, you want to add something?

I'll just add, there's two more points. The first is that recall that last year that we had launched 400 stores that were shipping from store. So we created that inventory availability last year. Now this year we have the 1,400 stores shipping, but the 400 stores did, as you'll recall, drive increased revenue last year. The second point is, which I also mentioned in my prepared remarks, is that last year the new gaming consoles were launched and their deliveries were in the fourth quarter. We had the pre-order revenue in Q3 but the deliveries in Q4 and those were substantial. So as we look to the fourth quarter, we are expecting to see some potential differences in the strength of the hardware related to those consoles obviously. So those would be two other pressures, and remember that the gaming is not in those NPD categories that we discussed. So those are a couple of other points just to consider. We quantified that on the online growth last year at about 600 basis points of benefit last year, because remember we had over 25% growth in online last year. So I would not want you to put that in there when you're trying to do the math, that those two factors are necessary in order to get in line with the outcome that we put into the outlook.

Thank you so much, Sharon. And in closing, I wanted to do a couple of things. One, obviously thank our teams in all functions and geographies for the progress, continued progress and results that we collectively, they collectively have delivered, and of course for their very exciting mobilization for holiday. It's always a very special moment of the year. Our teams are ready to welcome all of our customers, including all of you on the call, and I want to salute them for their preparedness. And of course I want to thank you and everyone on the call for your continued support and wish you a wonderful holiday season, which I know would include a few trips to Best Buy. You have at least two reasons to do that, one is check how prepared we are, and of course at the same time you can make progress on your holiday shopping adventure. So we'll see you in the stores or on our site at your convenience. So have a great holiday with your families and we'll continue to be with you on the journey. Thank you so much.

That concludes today's conference call. We thank you for your participation.