Mollie O'Brien - IR Hubert Joly - CEO Sharon McCollam - CFO

Greg Melich - Evercore ISI Dan Binder - Jefferies Simeon Gutman - Morgan Stanley Mike Baker - Deutsche Bank David Magee - SunTrust Robinson Humphrey Joe Feldman - Telsey Advisory Group

Ladies and gentleman thank you for standing by. Welcome to Best Buy's Fourth 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 of 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 two press releases that we issued earlier this morning including our Q4 earnings release and the second release announcing our plan to return capital to our shareholders. The Q4 earnings release and today's conference 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. As previously announced on December 04, 2014 the company entered into a definitive agreement to sell its Five Star business in China. As a result of this agreement Five Star was classified as held-for-sale as of end of fiscal '15 and its results were included in discontinued operations for the current to prior year period. On February 13th Best Buy completed the sale of Five Star; we have recast certain financial information for fiscal 2014 and 2015 to reflect the results from the Five Star business as discontinued operations. This recast financial information is available in the exhibit 99.2 in the company's Q4 earnings release 8-K filed this morning and on our IR website investors.bestbuy.com. 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 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.

Good morning everyone and thank you for joining us. I'll begin today with an overview of our fourth quarter results and full year results and will then discussed the status of Renew Blue transformation and our priority for fiscal 2016. Before turning the call over to Sharon for additional details on our quarterly results and commentary and our financial outlook. So first our financial results; In the fourth quarter our teams delivered positive comparable sales, improved profitability and continued progress in our Renew Blue transformation. This resulted in a 1.3% increase in revenue to $14.2 billion and a 23% increase in non-GAAP diluted EPS to $1.48 versus $1.20 last year primarily driven by growth in our domestic segment. A compelling merchandise assortment and strong multi-channel execution drove these better-than-expected results as we capitalized on the product cycles in large screen televisions and mobile phones. These two categories were the primary drivers of our year-over-year revenue growth, and more than offset weakness in the tablet category which was impacted by material industry declines. Our value proposition of expert service and billable price resonating with customers whether they come to us in-store, online or both. We delivered to our customers a strong multi-channel experience and we were uniquely positioned to serve them to our national retail footprint, online experience, knowledgeable Blue shares and Geek Squad agents in our stores within a store. We also benefitted during the fourth quarter from our investments in inventory availability, mobile phone installment billing, and supply chain including faster store replenishment and online delivery, as well as more effective and relevant marketing. Altogether, these results reflect the successful delivery of our holiday plan. We said that we would execute a highly disciplined operating and promotional plan that would drive a better year-over-year financial outcome for our shareholders and these results reflect that. On a full year basis we continue to make progress against the two main problems we have to solve that we outlines in November of 2012; number one, declining accounts and number two, declining operating margins. In fiscal 2015, we stabilize comparable sales on a full year basis and delivered incremental non-GAAP SG&A reductions of approximately $420 million, resulting in a non-GAAP operating income rate expansion of 80 basis points and 26% increase in non-GAAP diluted EPS to $2.60. We also ended the year with $3.9 billion in cash versus $2.6 billion last year. These results reflect accumulative progress since 2012 that we have made against our Renew Blue transformation initiatives. So to-date we have number one improved our NPS score by 450 basis points; number two we’ve rolled out 71 Pacific Kitchen and Home and 34 Magnolia Design Center stores-within-a-store, in addition to our enhanced vendor experiences. Number three, we’ve implemented ship-from-store across the whole chain driving significant growth for our business; number four, we’ve increased domestic online penetrations from 7% to 9.8% of our revenue; number five, we’ve gain share across multiple categories; number six, we’ve delivered $1.02 billion in Renew Blue cost reductions exceeding our $1 billion target; number seven, we’ve divested underperforming European and Chinese businesses and number eight, we’ve intensively managed our capital resources and significantly strengthen balance sheet. In light of this progress and as a demonstration of our commitment our shareholders, we were pleased to announce this morning our plan to return excess capital. This plan allows us to continue to invest in the growth of our business and preserves a strong balance sheet, it includes number one; special one-time dividend of $0.51 per share or approximately $180 million [related] to the net after tax proceeds from LCD-related legal settlement received in the last three fiscal years. Number two, a 21% increase in our regular quarterly dividend to $0.23 per share and number three, the resumption of share repurchases with the intent to repurchase $1 billion worth of shares over the next three years. So before I turn to our plan for this year, I want to publicly thank our employees for the impact of their hard work. We have a very talented and dedicated set of leaders and employees at Best Buy and it is an honor to lead this group of amazing individuals and a privilege to work with each and every one of them. Now as we look forward to fiscal 2016 and beyond, it is imperative that we continue to focus on driving comparable sales and improving operating margins while spending investments in our future. As we have previously shared, we are pursuing a strategy that is focus on delivering advice, service and convenience at competitive prices to our customers, within this strategy we’re focused on driving a number of growth initiatives around key product categories, live events and services and to drive these initiatives we’re pursuing and investing in the transformation of our key functions and processes. To provide more color on these initiatives which reflect complete execution against the 24 months road map that we were planning a year ago, I will now provide specific actions we intend to pursue in fiscal 2016. So the first initiative of our roadmap is merchandising, our goal is to create a compelling assortment online and in the stores with a superior end-to-end customer experience that yield enhanced financial returns. In pursuit of that, we plan number one; to capitalize on the ultra-high definition TV cycle to best-in-class merchandising assortment in customer experience including opening approximately 20 additional Magnolia Design Center stores-within-a-store to end fiscal 2016 with 78. Number two, we plan to accelerate our expansion in growing categories with structural barriers to entry like large appliances and mobile phone, including opening approximately 50 additional Pacific Kitchen and Home stores-within-a-store to end fiscal 2016 with 177, as well as extending our installment bidding spending capability online; number three, we plan to grow our connected home and health and wearable businesses to an optimized assortment and improved multi-channel customer experience; number four, we plan to increase our branded exclusive and private label assortment; number five, we plan to expand our secondary market growth strategy to offer consumers better access to these types of products and improve our margin recovery on returns we placed in damaged products and number six, we plan to acquire strides behind our promotional and pricing strategies. We will also, as part of this merchandizing trust expand our programs to capture customers at the time of key life events and build long-term relationships with them including our new mobile program and our wedding gift registry which we launched in February. The second initiative is marketing which provides of course crucial support for our merchandizing growth opportunities. In marketing we will accelerate our targeted marketing programs by leveraging a senior customer data base to expand personalization beyond email campaigns. We will expand the personalization of our targeted email campaigns by dynamic serving relevant landing pages when customers click through to our website. We will continue the evolution of our marketing spend from analog and mass to digital and personalized medium such as search, mobile devices and retargeting. And we will continue to increase the number of addressable emails in our customer data base. The next initiative on our road map is online, our goal here is to serve our customers based on how where and when they want to be served and capture online shares. In pursuit of that goal we will continue to develop true omni-channel experiences including; number one, improving the online visibility of returns open box inventory; number two, extending our installment bidding selling capability online; number three, enhancing the online experience for appliance purchases; number four, expanding capability for life events like the wedding registry and wish list. And number five providing an integrated Geek Squad customer experience across channels and devices and driving increased attach rates. We will also be continuing the transformation of our e-commerce technology platform and accelerating the transformation of our mobile customer expense which we will support for our new technology development center in Seattle. Similar to general industry trends our traffic for mobile phones is growing much faster than traditional desktop traffic and we're increasing our mobile investments accordingly. It is imperative that we engage mobile customers with improved and streamlined access to essential rich product information during the discovery, research and check out processes. The next initiative in our roadmap is retail stores. In our retail stores we're building on the great momentum from our success in fiscal 2015 and we'll be driving increased sales effectiveness and favorable leverage from focus on the individual sales productivity of our associates. We will be enhancing our in-store customer experience from both an expert service and physical environment perspective including expanding product training for associates, and we will be driving growth by implementing market plans that are tailored to specific geographies. The next initiative in our roadmap is services. In fiscal 2015 we significantly reduced legacy cost structure and improved services related NPS growth, we also lunched a lost and theft mobile phone insurance program and will complete technology support bundles. Now despite these accomplishments revenue has been declining largely due to lower attach rates of traditional extended warranties and lower mobile revenue due to our success in decreasing claims severity and frequency which is an operational positive. So in fiscal 2016, we'll be focused on continuing to transform our traditional service offerings to better address customer needs, we will be integrating the Geek Squad customer experience into bestbuy.com to provide an enhanced service experience to our customers and to increase online attach rates. We'll be continuing to improve our delivery and installation experience and we'll be increasing the investment in marketing and selling our service offerings. The next initiative in our roadmap is supply chain. Our goal in supply chain is to leverage our network and improve our customer experience with increased inventory availability improve speed to customer and improved home delivery and installation capability for a large [CUBE] Assortments. In pursuit of that goal we will unlock additional inventory for ship-from-store, we will continue to pursue cost efficiencies through technology enhancements including the replacement of our warehouse management system. We will drive growth in large appliances and large TVs by leveraging new regional inventory capabilities launched in October and we will invest in improving our home delivery and installation services NPS. The last initiative on our roadmap is our cost structure. So with the $55 million in additional annualized cost reductions announced today, in the past few years we have delivered over $1 billion in North American Renew Blue cost reductions. In fiscal 2016 we're launching Phase 2 of our Renew Blue cost reduction and gross profit optimization program with a target of approximately $400 million over three years including the remaining benefit of approximately $250 million from our previously discussed returns, replacements and damages opportunity. These savings because they are structural in nature are not expected to begin until the back half of fiscal 2016 and will be driven by streamline processes and operational efficiencies that will be primarily enabled to investments in systems. We expect however that this incremental savings would be significantly offset by the investment we need to make to fund our growth initiatives; in fiscal 2016 we expect these incremental investments to total approximately $100 million to $120 million, $0.17 to $0.21 in diluted EPS and [indiscernible] main bucket. One is the customer experience online and in our retail stores, two is information technology and three is marketing. We also expect to increase fiscal 2016’s capital expenditures to approximately $650 million to $700 million from $550 million in fiscal 2015. So the strategy we just outlined is the foundation for our fiscal 2016 operating plan. And we are confident in our ability to execute against this as we have demonstrated this past year. But we will also be facing industry and economic pressure that we discussed last quarter in our holiday sales press release that we expect to impact our business including more rapidly declining average spending prices in key product categories, weak industry demand in certain product categories, declining demands and in price pressures from our extended warranties and increasingly competitive and costly cost in the service expectations like free and faster shipping. So to win against this back drop investing now is imperative and while these investment will put pressure on our fiscal 2016 operating income rate as Sharon will discussed, we believe they’ll leverage our exceptional momentum and will allow us to build a differentiated customer experience and the foundation for long term success. I will now turn the call over to Sharon to discuss the details of our fourth quarter financials and our financial outlook for the first half of fiscal 2016.

Thank you, Hubert, and good morning everyone. Before I talk about our fourth quarter results versus last year, I would like to talk about them versus our expectations we shared with you in our holiday sales release. From a top line perspective enterprise comparable sales growth of 1.3% excluding the 70 basis points impact of installment billing was slightly above our near 1% expectations. Our non-GAAP operating income rate expansion of 130 basis points was also above our 75 to 90 basis points expectations due to higher than expected vendor participation in our holiday promotional activity, combined these better than expected outcome equated to an incremental $0.10 of EPS. We also saw a positive $0.03 per diluted share of a non-recurring tax benefit which partially offset the previously communicated negative $0.10 impact from the reorganization of our European legal entities. I'll now talk about our fourth quarter results versus last year enterprise revenue increased 1.3% to 14.2 billion enterprise non-GAAP diluted EPS increased $0.28 to $1.48 primarily driven by a more structured and analytical approach to our promotional strategy better performance of our credit card agreement, the positive flow through our gross profit enhancement initiatives, the flow through of higher year over year revenue and the positive impact of changes in our mobile warranty plan which resulted in lower cost due to lower claim frequency. This favorable impact was partially offset however by the negative $0.07 per diluted share impact in income tax expense that I just discussed. In our domestic segment revenue increased 3.2% to 12.7 billion despite a 3.2% declining in the NPD-reported Consumer Electronics categories. Our revenue growth was driven by comparable sales growth of 2% excluding the estimated 80 basis points benefit associated with installment billing and a 68 million or 55 basis points improvement in the performance of our credit card agreement versus a negative 65 million or 50 basis points impact last year. Domestic online revenue on a comparable basis increased 9.7% to 1.7 billion primarily due to substantially improved inventory availability made possible by the chain-wide rollout of ship-from-store in January 2014. Higher conversion rates and increased traffic driven by greater investment in online marketing also contributed to our year over year growth. This growth, however, was substantially offset by material industry softness in tablets, a category with high online penetration, and a channel shift in mobile revenue that resulted from customer enthusiasm for installment billing plans which could only be sold in our retail stores. As a percentage of total domestic revenue online revenue increased 90 basis points to $13.5% versus 12.6% last year; versus last year's online growth this year's online comparable sales growth of 9% was lower for two primary reasons, first, we saw the expected 600 basis points of pressure from lapping last year gaming console introductions and our initial 400 store ship-from-store rollout. We also saw approximately 500 basis points of unexpected additional pressure from tablets and mobile for the regions that I just discussed. As all of these pressures however, are expected to continue into Q1 and the impact of gaming and our chain-wide rollout of ship-from-store will increase from 600 basis points of pressure in Q4 to a 1000 basis points in Q1, online growth in Q1 is expected to be in the mid-single-digit range. From a merchandising perspective during the fourth quarter, comparable sales growth in Televisions, mobile phones and computing was significantly offset by the material decline in tablets. The growth in mobile phone was primarily driven by higher year-over-year selling prices. We also saw continued comparable sales declines in services in Q4. This decline of 11.4% was primarily driven by lower mobile repair revenue due to our success in decreasing claim frequency and lower attach rates. In our international segment, revenue did decline 12.4% to 1.5 billion due to a negative foreign currency impact of 750 basis points. A comparable sales decline of 4% due to industry declines in Canada and the loss of revenue from store closures in Canada. From a merchandising perspective, comparable sales growth in mobile phones was more than offset by declines in tablets, gaming and digital imaging. Turning now to gross profit, the enterprise non-GAAP gross profit rates for the fourth quarter was 21.3% versus 20.2% last year, an increase of a 110 basis points. The domestic gross profit rate increased 120 basis points to 21.2% versus 20% last year. This increase was primarily due to the more structured and analytical approach to our promotional strategy. The on-going improvements in supply chain efficiencies and higher margin recovery on returned, replace and damage products, a 40 basis points positive impact related to our credit card agreement as compared to a negative 40 basis point impact in Q4 of last year and the positive impact of changes in our mobile warranty plans which resulted in lower cost due to lower claim frequency. These increases were partially offset by structural investment and price competitiveness particularly in accessory. The international gross profit rate was flat year-over-year at 21.7%. Now turning to SG&A, enterprise level non-GAAP SG&A was 2.2 billion or 15.5% of revenue versus 15.7% last year, an increase of 9 million in dollars but a reduction of 20 basis points in rates. Domestic non-GAAP SG&A was 1.9 billion of 15.3% of revenue versus 15.5% last year, an increase of 41 million. This dollar increase was primarily driven by higher incentive compensation and Renew Blue investment in customer phasing initiatives. These increases were partially offset by the realization of Renew Blue cost reduction initiatives and tighter expense management throughout the company. The 20 basis point rate improvement was driven by year-over-year sales leverage. International non-GAAP SG&A was 262 million or 17.3% of revenue versus 17% of revenue last year, a decline in dollars of 32 million. This dollar increase was primarily driven by the positive impact of foreign currency, lower expenses due to store closures in Canada and the realization of our Renew Blue cost reductions in Canada. The 30 basis point rate increase was driven by year-over-year sales deleverage. Also as it relates to the international segment, we completed the sale of our Five Star business in China and continue to focus on the Renew Blue transformation in Canada. I would now like to talk about fiscal ’16, in fiscal ’16, we expect a financial impact of the investments of economic pressures that Hubert discussed earlier to begin in Q1 and continue throughout the year. From a top-line perspective, our current expectation is consistent with the outlook we provided in our holiday sales release. While we are optimistic about the potential of new product launches, our limited visibility due to timing and quantity keep us cautious. As such, our Q1 and Q2 expectation for enterprise revenue and comparable sales growth excluding the estimated impact of installment building continues to be in the range of flat to negative low single-digit. This change in trend versus Q4 is primarily driven by ongoing material declines in the tablet category, in addition to holiday momentum around high profile gift able products not continuing post-holiday. We will also be [anniversarying] approximately 80 basis points of enterprise growth in the first-half of last year driven by the chain wide rollout of ship-from-store. From a non-GAAP operating income rate perspective, we are also reiterating our outlook for Q1 and Q2 as down approximately 30 basis points to 50 basis points, including lapping last year’s Q1 15 basis point one-time benefit associated with the new credit card agreement. This decline reflects the economic and growth pressures that we just outlined, the investments we are making to drive our fiscal 2016 growth initiatives and our anticipated SG&A inflations. Additionally, we expect the Q1 and Q2 non-GAAP continuing operations effected income tax rate to be in the range of 39% to 40%. But despite these first half pressures we are in encouraged by the execution and momentum that we saw in the fourth quarter and are excited about the opportunities that lie ahead for next year. While we remain cautious on the overall industry the strength of the Best Buy brands and our track record of improving our operational performance provide us with a strong confidence in our ability to deliver against the roadmap that we outlined today. I would now like to turn the call over to the operator for questions.

Thank you. [Operator Instructions]. We'll take our first question from Greg Melich with Evercore ISI.

Sharon could you give us a little more detail on the guidance, the 30 bps to 50 bps of margin pressure in the first half, how that breaks down between gross margin and SG&A? And then also what's taking CapEx up this year, what that's been spent on?

Greg we expect the decline primarily to come from the SG&A line. We're making these investments as we've discussed last quarter and we expect those to begin in the first quarter -- we've actually already begun and those will continue obviously throughout this year. We will continue to be working on the disciplined approach that we're taking to our promotional strategies and continuing to also work on our Renew Blue cost reductions as it relates to the gross profit. But predominantly our pressures in 2016 are clearly coming from the SG&A line. As we talk about the incremental investments that we're making, baring capability, competitively we're going to be more cautious this year about talking about specifically where we're putting them but when you think about the things that you Hubert outlined in quite a bit of detail we're investing in our categories where we see big barriers to entry such as appliances and in the mobile business. We're investing in our supply chain, we're investing behind our roll out of life events and gift registry, remember those are initiatives that will have an extended tail as far as revenue goes. So we're going to invest in the marketing and the capabilities upfront and then the revenues to flow at a later date. So again you end up with early on investments. Well also as we talked about making some major investments in systems, we talked about a new warehouse management system. Of course we have our ongoing investments in online, Hubert talk about the integration of Geek Squad into our business as well as some of the initiatives we have around our services businesses which will also require from both capital and expense investments in 2016. So those would be major buckets under which we will be investing, I will add one more which I know you all have seen the benefit of, Hubert talked about the adding of the packed sales and the Magnolia design stores within our stores. These have been very successful for us; we expect to continue to do that. The other thing you saw last year and certainly you saw us do it and you saw the customer response to it through the comp that went along with it. With the investments that we've made in our stores either the vendor investment in the physical presence of our stores or what we have done there, we're finding that there are ways for us to significantly enhance the customer experience through investment in the transformation of the footprint within the four walls of our stores. And we expect to continue to invest in that this year as well because like -- we're really very much seeing the customer react and respond to what we have done there.

We'll go next to Dan Binder with Jefferies.

My questions were around the payback on these investments, this investment spending that you're doing. Maybe if you can give us a little bit of color on how you think about that payback in the back half of this year and into next?

Dan this is Sharon, I'll take that. The payback on these investments is going to be back loaded the initial payback on some of these investments will happen in the back half of the year. The difference between the investments we've been making the last two years of Renew Blue and the investments that we're making now. These are much more structural and they will actually come incrementally. As an example some of the work that we're doing in the supply chain, we will roll out a portion this year, a portion next year and a portion after that. Returns replacements and damages is another one. We will create the capability online this year, then there are things that we will add to the system that we’ll implement going into Q4 and that will go into next year and year after. So when we looked it’s at 400 million that Hubert laid out we were very deliberate in how we talked about that because those are the areas where we are going to see improvement and cost reduction and margin enhancement. But they are going to be very gradual and incremental as they flow through. So that is how we see it and obviously we're not going be guiding it by quarter by year but basically over the next three years we expect to see these both not only driving the cost line but also driving the top line. Most of our investments right now and the once that I think are going be most substantial are actually going to be investments that are to drive top line growth. And so you're going see it both on the top line and coming through the operating income rate.

And if I could just a follow on the management change or departure today. Can you just give us a little color on what you're looking for in the next executive that will head up services, maybe a profile of what you're looking for and how you think you can counter the negative trends in that business?

This is Hubert and thank you for your comment. Of course we won't comment on the departing individual, but before I answer your asked question, let me say a couple of things about services. Number one, I'm very proud of the work that our 20,000 Geek Squad agents do every day in our stores online or when they go into clients’ homes to help install or support some of the toys that we sell to our customers. Number two, I'm very proud of the progress that we've made with our net promoter score in services in some of the new offers we introduced. Now clearly we also have a lot of work to do to continue to transformation I’ve laid out, a number of priorities around the transformation of our traditional services offering developing the Geek Squad experience, online and in a multi-channel fashion improving delivery installation and increasing the investments in marketing and selling our services and more boldly speaking supporting our growth in integrated fashion as we go to market with a customer experience that leverages our unique capabilities which of course includes the Geek Squad. So just in case anyone of you would like to apply for the job let me answer your question now around the profile we're looking for somebody -- almost a CEO for that business. This is a real business within our business, somebody who combines strong operational performance as well as a strong strategic and growth oriented approach somebody who is good with cost and customers, somebody who is good with technology and online as well as high touched experiences. And somebody who is going to help us improve what we have which is a great set of asset; but take you to the next levels. So of course we are launching -- we’ve launched an external search. In the meantime services will report directly to me, we will have great help from several of my collages, but the fact that services will report directly to me is of course an indication of the strategic importance we see for services today and in our future strategy.

We'll take our next question from Simeon Gutman with Morgan Stanley.

First on the top line I guess if my math is right that the contribution to the comp or the top line from TV is somewhere in the mid-single digits. We realize that tablets are weak but laptops are helping, but I think you also appliances that are healthy. So I'm just trying to get a little more color on bridging the gap from where that contribution is coming from TV to how we get back to flat to negative low singles. Is it more slippage in healthy categories or do you see some of the declining categories getting a little weaker?

We see the tablet decline was the substantial and we need to make sure that it's in perspective. In Q4 we saw the tablet category down 30% approximately the NPD reported category down 30% and at any point in time Best Buy is going have a 20% plus share of that category. So it has a significant impact on our top line, has a lesser impact on our profitability's. As you know it's not one of our most profitable categories but certainly it drives a lot of traffic to our stores. The other contributors from Q3 or Q4 to Q1 is what we called out which was the 80 basis points of growth that was driven last year by the 1400 store roll out of ship-from-store 80 basis points is substantial. And so that is another pressure because remember last year in Q4 we only rolled out all of the stores starting in January. So we only had 400 store shipping in the first two months of the fourth quarter and then we had 1400 shipping in fourth quarter. So the year over year comp for Q1 is much, much more difficult than it was in Q4. Another area and we're not going into extensive detail on, it highly competitive, is also the discussion we had in the Q3 conference call around a more disciplined promotional strategy, Hubert cleverly defined it as following the rat into the rat hole so to speak around the Back Friday holiday sort of timeframe. But there are other times during the year when you see similar behaviors and so there is a very rationalized approach and we’ll continue to execute that, I am sure that you can see it flowing through in the gross profit rate. So that’s another area, but certainly less impactful than the other two that I just described.

And then one follow-up on the capital return, and congratulations for reaching -- getting back to the buyback. We could all do the math on sort of what the dollars are going to look like, $1 billion, you said 180 million from the special div, and I think the increased dividend itself is relatively minor. You will probably walk before you run on this capital return, but I mean there is still a lot of cash on the balance sheet. It looks like you're going to generate a lot of cash next year. I mean sitting from here it looks like there is still a lot of upside to that capital return plan. I mean is that fair, Sharon? And then how soon could you unlock some of that upside?

Sure, Simeon we continue to believe that having an extremely strong balance sheet is important to the transformation; we also believe that maintaining on our balance sheet flexibility in order to pursue possible growth strategy is important too. However, we do also -- as I told you guys we would, we do also believe there is a point where you're carrying too much cash, thus the reason for our return on capital plan. So, we feel that this is our first step as we go into our third year of the transformation as we talked about we have some additional investments to make this year and as we get through this year and we see how we progress of course this will be a conversation we have each year. We obviously are committed to returning excess capital to our shareholders, I think -- I hope at least that today’s announcement demonstrates that and we continue to believe that our approach is prudent at this point. So more to come, coming into next year, we got a year to deliver, let's just keep in mind we got a whole year to deliver here, but obviously today’s announcement shows our first step.

We’ll take our next question from Mike Baker with Deutsche Bank.

So a couple of questions. One, can you talk about your store footprint? Do you have any store closures expected of the big boxes? And maybe looking at some of the stores you have closed over the last couple of years, anything you can talk about in terms of transfer rates or EBIT benefit from closing a store? Thanks.

Consistently in the last few years we’ve said that we would gradually and continuously optimize our store footprint and every quarter you can see the numbers both in our mobile stores and in our big box stores, these are minor numbers at this point in time, we’ve been very clear that we would not make big announcement because our priority has been in fact -- the biggest leverage for us has been to improve the performance of our stores through investments in the customer experience, the multi-channel approach and so forth. So it's been a good approach. In terms of retention, one of the things we’re very excited about is our investments in our Athena customer database and our more personalized communications as we develop these -- continue to develop these capabilities, we’ve made progress last year, we’ve made more progress this year. This will be very important strategic weapon for us as we move forward, as we can talk to the individual customer. Closing stores when you don’t have this capability is a waste of a lot of resource. So, I think we’re seeing the continuation of what we’ve been saying and what we’ve been doing.

Okay, thanks, helpful. If I could ask one more just to Sharon or maybe both of you, I think your operating profit dollars on a non-GAAP basis enterprise-wide for the full year, I think I calculated up 29%, it's a big number. Is that what you expected heading into the year? And I guess the question is what came in better than expected? Is it really all three of the big line items of sales, gross profit and SG&A or was it one more than another that really beat your plan? Thanks.

Yes, so versus our original expectations for this year if you just go back to the beginning of the year as we’ve been giving you an outlook each quarter. The place where the year really exceeded our expectation was on the gross profit line. In the first-half of the year, we had the tremendous SG&A savings, but then in the back half we made some investments. So while the SG&A was certainly a highlight and year-over-year certainly a huge driver of our year-over-year improvement, the place where we really made more progress than we expected was in our gross profit. Two drivers of that, one is the investments that we’ve made, one came from some of the SG&A we invested of course which was in this pricing and promotional capability and some of the decisions that we made around that. The other thing in Q4 that we would attribute our success to was a highly disciplined marketing plan to back up the merchandising, clearly if the merchandise assortment was very strong in Q4 and then that was of course supported by the marketing which was extremely targeted, focused and affected. We told you guys, that the year prior that this was an area we had to work on, there was great emphasis put in that area. But in the end the other place where we saw an exceptional outcome was merchandising, inventory, there was a lot of drama in Q4, [put aside] various things. One of the core competencies at Best Buy is inventory management. And obviously our positioning from a merchandising point of view with the vendors also contributed, there were some great products and Best Buy had the great products. So it was a combination of a lot of things but when you look at the P&L and you want to put it down on a piece of paper, it was really the top line and the gross profit improvements that we've been able to drive.

We'll go to our next question from David Magee with SunTrust Robinson Humphrey.

My first question has to do with just the commentary around making services more attractive to consumers, and I think probably that plays into a better warranty attachment rate in the future for the company. Could you just give a little more color about how that -- how you sort of see that playing out?

Services has really to say two major components. One is the extended warranties which is more an insurance business or an assurance business and two, services that help customers take advantage of -- implements these toys that we sell them. We see enormous opportunities there. When you step back, the technology that's available today is more complex mixture than it's ever been and there is a growing gap between what these technologies, these products can do and the understanding of customers about the possibilities also it's increasingly connected, think about it 15 years ago and that's a long time ago. In our homes we had a personal computer, maybe connected to a printer and a fax line with dial up service and then we had a CRT TV, some audio equipment. Now everything is connected, we have multiple networks in your house and its complex and it's complex to implement, it's complex to support, its complex to take advantage of. So we see enormous opportunities to help customers in this area as part of our strategy to grow in the various categories we've talked about and we're uniquely positioned there. Because there is only so much you can -- I mean there is a lot we can do remotely and today we can troubleshoot your computer remotely using online tools. But there is a limit to this. And we have this gift which is we have 20,000 people, Geek Squad agents of the company and including those who get into people's homes and to support and set up a network and everything that goes around this, that's a very unique capability. So I think that's going to be a core theme, so there is going to be work on making sure that the extended warranty and products specific services are highly competitive and are effectively marketed and promoted and sold. And then there is building, you can say this professional services offering instead of capabilities to help our customers.

And as a quick follow up, the company's ability to sell return merchandise online after the holiday. Does that help narrow the profitability gap between online and retail? Is that meaningful?

Why it’s an ingesting shift, right, because when these return products or this could be also end-of-life products, the margin on these products is actually lower by definition. And so if you sell them online as oppose to in the stores, it has an impact on the margin of the online activities which by the way means that in many ways the online channel and the store channel both from a revenue and a profit standpoint, increasingly become blurred. And so our focused first and foremost on improving as a whole, we pay attention to each of these channels but they are increasingly blurred from a customer experience and then at P&L standpoint.

We'll take our last question from Joe Feldman with Telsey Advisory Group.

Why don't you just give a little more color around the returns and damages and that opportunity there and the impact maybe that you have in the quarter, are you seeing an uptick in that? And I know it's been a focus but feels like there are defiantly ways that you can emphasize and improve that.

Yes, if you take a look at the -- go back to the transcript and what we said. We did see benefit this year virtually in every quarter and in Q4 was our biggest quarter obviously, where we saw incremental return from that initiative at this point we said and within that 400 million over the next three years there is about 250 left out of returns, replacements and damages. So that’s kind of an indication because that was potential impact of about $350 million. We have made substantial progress in this area and we’ve made about as much progress as we can make without measure structural changes to our system and our capabilities of being able to show that product in the online channel. So that’s the structural investments that we're making this year in order to take that initiative to the next level. So you are seeing -- your recollection of things we’ve said is absolutely correct and we expect to see more going into 2016. As you know we did bring up that product on the website it's harder to find then we would like it to be. Because of the way our impact and inventory systems comes together. So we're having to make do a lot of work there in order to make it easily searchable on this site and we believe that will be the next evolution of our benefits that we'll see from that initiatives.

And if could follow up with a -- you guys mention that from this more scientific promotional approach this holiday season, just was hoping to get a little more color on that. I recall last year you guys kind of went deeper then you had wanted to on promotions. But anything like were you leveraging the system? How was the approach different from year over year?

Yes Joe would say a couple of things, pricing and promotion of course is a science where tools and science and experience are really important. And last year we invested in teams and tools and capabilities that allowed us to have better information also I think that our team probably would use more wisdom as well -- it's a combination right to illustrate the point. In some cases you may have a particular competitor that has a certain product with limited quantities and a price set up to or promotion set up to drive traffic to their outlet. In some cases it may make sense for us to match, in other case it may not make sense to match when we have much bigger quantities and they have very limited capabilities. So I would say the way we manage competitive reaction this year with the help of this additional science which is very helpful. So was very proud of our team there and its combined with a very strong assortment and marketing also give us more confidence to execute. Retail is really about execution and giving the ability of our teams to execute in an orderly fashion where I think a very important point of our holiday. So I hope these comments are helpful.

That was very helpful. Thank you guys and good luck with this quarter.

Thank you so much and in closing, earlier on the call I thanked our teams at Best Buy for delivering these great results and in closing I'd like to of course thank our shareholders for your support and the confidence you are placing in us. I hope that this morning we did good job of conveying our excitement about our Q4 results and about our opportunities and we look forward to continuing the dialogue and again thank you so very much for your confidence and your support. Have a great day. Thank you.

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