Mollie O’Brien - Vice President, Investor Relations Hubert Joly - Chairman and Chief Executive Officer Corie Barry - Chief Financial Officer

Dan Wewer - Raymond James Peter Keith - Piper Jaffray Brian Nagel - Oppenheimer Dan Binder - Jefferies David Schick - Consumer Edge Brad Thomas - KeyBanc Capital Matthew Fassler - Goldman Sachs Michael Lasser - UBS David Magee - SunTrust Joseph Feldman - Telsey Advisory Group Alan Rifkin - BTIG Seth Sigman - Credit Suisse

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy’s Second Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by 10:00 a.m. Central Start Time today. [Operator Instructions] I would now like to turn the conference 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 Chairman and CEO and Corie Barry, our CFO. This morning’s conference call must be considered in conjunction with the earnings press release we issued this morning. Today’s release and conference call 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, which 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 conditions, 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, including our most recent 10-K 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 NPD tracked categories. The categories tracked by the NPD Group, includes TVs, desktop and notebook computers, tablets, digital imaging and other categories. Sales of these products represent approximately 64% of our domestic revenue. It did not include mobile phones, appliances, services, gaming, Apple Watch, movies, music or Amazon branded products. I will now turn the call over to Hubert.

Good morning, everyone and thank you for joining us. I will begin today with a review of our second quarter performance and then provide an overview of the progress we are making against our fiscal 2017 priorities. I will then turn the call over to Corie for additional details on our quarterly results and commentary on our financial outlook. So, in the second quarter, we delivered better than expected enterprise revenue of $8.53 billion and non-GAAP EPS of $0.57 versus $0.49 last year, an increase of 16%. These results were due to the strong performance of both our domestic and international segments. In our domestic business, we delivered comparable sales of 0.8% versus our guidance of approximately flat. This was on top of comparable sales growth of 3.8% last year. We saw continued positive momentum in our online channel delivering a second straight quarter of 24% revenue growth. Similar to last quarter’s trends from an overall merchandising perspective, we saw year-over-year sales growth in health and wearables, home theater, and appliances, partially offset by continued softness in mobile phones and gaming. Industry sales in the NPD tracked categories, which don’t include important categories such as mobile phones and appliances, declined 3.2%. We also continued to see considerable year-over-year improvement in our overall net promoter score, which increased approximately 500 basis points over Q2 last year. In our international business, strong execution and higher than expected sales retention in Canada contributed to revenue growth of 4.1% on a constant currency basis versus our guidance of flat. On a reported basis, international revenue declined 1% versus our guidance of a 5% to 10% decline. So, altogether, we have delivered a strong first half ahead of our expectations, and I want to thank all of our associates for their focus, passion, and work they have put into delivering these results. We have also continued to make progress against our fiscal 2017 priorities. Our first priority is to build on our strong industry position in multi-channel capabilities to drive the existing business. In home theater, our market leading customer experience around 4K and large screen premium technologies in our 79 Magnolia Design Center stores within a store continued to drive sales growth and market share gains. During the quarter, we rolled out 376 new LG experiences in our stores in addition to our existing 660 Samsung and 388 Sony experiences. In appliances, we leveraged our 200 Pacific Kitchen and Home stores within a store and ongoing market share gains to deliver our 23rd consecutive quarter of comp sales growth. We reported 8.2% comparable sales growth this quarter on top of 21% in Q2 of last year. During the quarter, we implemented a number of improvements to our installation and delivery capabilities, including the ability for online and in-store customers to choose a shorter delivery time window at the point of purchase. In the long-term, we believe these innovative improvements will contribute to the continued growth of our appliance business. However, they did result in short-term disruptions that negatively impacted this quarter’s growth rate. In computing, similar to home theater, our partnerships with key vendors, the strength of our market leading position, and our focus on assortment management and solution selling have created a superior customer experience that is driving continued market share gains. In the mobile category, as expected, revenue declined during the first half of the year, we expect this trend to reverse in the second half as anticipated product launches stimulate consumer demand and as we lap the sales declines seen in the category last year. In the entertainment category, we have been rolling out virtual reality merchandising. By holiday, we expect to be selling an expanded assortment of virtual reality products in the vast majority of our stores and more than 500 stores will be equipped with demo stations, so customers can try out this exciting new technology. We believe virtual reality has the potential to contribute to our growth in the future, but I am not expecting a material financial impact this year given the timing of launches, inventory availability, and the fact that we are early in the cycle. In services, we continue to drive improvements in our service quality and increased our net promoter score. As expected, overall services comparable sales declined during the quarter due to the carryover effect of the pricing investments we made last September as well as the ongoing reduction of repair revenue driven by lower frequency of claims on our extended warranties. We did see less of the sales decline this quarter compared to the past several quarters, and as we begin to anniversary the pricing investment, we expect comparable sales in our services business to be flat to slightly positive in the back half of the year. In our online business, our 24% online comparable sales growth was driven by the continued improvements to our digital customer experience and enhanced dot-com capabilities. These include, for example, faster shipping, responsive design, a more streamlined checkout process, improved search functionality, better visibility for open box and clearance items, and more relevant product recommendations. Also in our mobile app, we have implemented distilled reviews on over 40,000 SKUs. This means customers don’t have to wait through hundreds or sometimes thousands of reviews, but can instead read a quick summary of the pros and cons of a product. In addition, across platforms, we can show customers’ product that are available. Actually, we can show customers products that are available in the store closest to them and show which products are actually displayed in stores near them if they are interested in experiencing the product before they buy. Our e-commerce focus has evolved from the phase of building foundations to a phase of driving innovations for our customers, and we are excited about the customer experience improvements still in the pipeline yet for this year. In our stores, we are continuing to raise the bar and are seeing continued progress in our ability to deliver on our mission to help customers live their lives and pursue their passions with the help of technology. Given the complexity of technology and the needs of our customers, our store is our key asset for us. The level of proficiency and engagement of our associates is continuing to increase as manifested by the significant increase of our net promoter scores. This is the result of a deliberate and systematic effort to lift the capabilities and performance of each individual associates. This effort includes investment in training and daily coaching with their heightened focus on product knowledge and selling skills. Additionally, we are ensuring that our store general managers and assistant managers are staying in their stores longer, allowing them to be more effective at training, coaching, and more broadly leading their teams. We are also improving our store associate retention rates, particularly across our sales roles. We are not done, but the progress is noteworthy and encouraging. In our international business, Canadian transformation is continuing to make good progress as reflected in our revenue performance, customer retention is proving to be higher than expected. Our team is focused on continuing to invest in our stores and online channel to improve the customer experience and financial performance, something that has been enabled by the consolidation of the two brands we had in Canada. Similar to the domestic business, we are partnering with key vendors to upgrade our Canadian stores. Our second fiscal 2017 priority is to reduce costs and drive efficiency throughout the business. As we stated previously, we do think cost is essential for us to be able to fund our investments, build our resilience to product cycles and increase our profitability over time. A key element to achieving this is simplify and streamlining our core business processes, simultaneously improving the customer and employee experience and driving costs out. As it relates to our Renew Blue Phase 2 cost reduction and gross profit optimization target of $400 million over 3 years, we achieved another $50 million in the second quarter, bringing our current total to $250 million. Our third fiscal 2017 priority is to advance key initiatives to drive future growth and differentiation. We intend to be the company that makes it easy for customers to learn about and enjoy the latest technology as they pursue their passions and take care of what is important to them in their lives. With our combination of digital, store and in-home assets, we feel we have a great opportunity to address key customer pain points, build stronger ongoing relationships with our customers and unleash growth opportunities. Fiscal ‘17 is a year of exploration and experimentation and we are testing several concepts across the country that have the potential to be compelling customer experiences. For example in a few markets, we are piloting an in-home advisor program, which involves a free in-home consultation with an experienced technology advisor, who can identify customers’ needs, design a personalized solution and become a personal resource over time. In a few other markets, we are testing in-store classes on topics such as digital photography, home automation, maximizing your WiFi and helping parents ensure that their kids have a safe online experience. We are also testing Geek Squad on-demand services, including same day for customers who need immediate technology help or advice. So in summary, we are encouraged by the quality of our execution, the momentum in our business and the strength of our first half financial results and we are excited by our mission to help customers live their lives and pursue their passions with the help of technology and the growth opportunities of this mission and the related customer needs creates for us. Again, I want to thank everyone across the company for their focus, their passion and work to deliver everyday on this mission. Now I cannot close without mentioning that yesterday, we celebrated our 50th anniversary. 50 years ago to today, Dick Schulze opened the first Sound of Music store in St. Paul, Minnesota. And so as we celebrate this anniversary, we honor 50 years of innovation. We honor our values and we honor the individuals who helped build this company. We are also celebrating the future and the opportunity we have to build on our rich history and our values to shape this next chapter of our history and build a company that customers and employees can love and that richly rewards our shareholders, so happy anniversary, Best Buy. And now I am very happy to turn the call over to our new CFO, Corie Barry.

Thank you, Hubert and good morning everyone. I am excited to be on this, my first earnings call as the CFO of Best Buy. I want to take a moment to thank everyone in the Best Buy family for your confidence and continued commitment to our future. I am thrilled to be a part of this team and feel fortunate to be able to tell our collective story. I also want to take a moment to publicly thank Sharon McCollam for the active advisory role she is playing. Her wisdom and advice have been invaluable to me over the past 3.5 years and she has been instrumental in this transition. Finally, I want to think Hubert and our Board for this opportunity. I look forward to our collective partnership. Before I talk about our second quarter results versus last year, I would like to talk about them versus the expectations we shared with you last quarter. Enterprise revenue of $8.53 billion exceeded our expectations, driven by out-performance in the domestic and international businesses. Non-GAAP earnings per share of $0.57 also exceeded our expectations, primarily due to higher gross profit rates and the flow-through of the higher revenue in both businesses. The higher than expected gross profit rate in the domestic business was primarily driven by lower than expected negative impact from our investments in services, pricing and the impact of inventory availability in the high margin digital imaging category caused by the Japanese earthquakes in April. I will now talk about our Q2 results versus last year. On a constant currency basis, enterprise revenue increased 0.4% to $8.53 billion, primarily due to higher sales retention in Canada and comparable sales growth in the domestic business. On a reported basis, enterprise revenue increased 0.1%, reflecting approximately 30 basis points of negative foreign currency impact. Enterprise non-GAAP diluted EPS increased $0.08 or 16% to $0.57. This increase was primarily driven by Canada, which is lapping the disruptive impact from the brand consolidation last year a $0.05 per share benefit from the net share count change and a $0.02 per share benefit from a lower tax rate. These increases were partially offset by the expected year-over-year pressure in the domestic business from one, our investment in services pricing. Two, lapping the periodic profit sharing benefit from our services plan portfolio and an extended warranty deferred revenue adjustments. And three, the inventory availability impact from the Japanese earthquakes that I just mentioned. Collectively, these items resulted in approximately $0.08 of year-over-year pressure versus our expectation of $0.12 to $0.13. In our domestic segment, revenue increased a greater than expected 0.1% to $7.9 billion. This increase was primarily driven by comparable sales of 0.8%, which were partially offset by the loss of revenue from 12 large formats and 22 Best Buy mobile store closures since last year. From a merchandising perspective, comparable sales growth in health and wearables, home theater, major appliances and computing was offset by declines in mobile phones and gaming. In services, comparable revenue declined 7.2% due to investments in services pricing and the ongoing reduction of repair revenue, driven by lower frequency of claims on extended warranties. Domestic comparable online revenue increased 23.7% to $835 million, primarily due to increased traffic, higher average order values and higher conversion rates. As a percentage of total domestic revenue, online revenue increased 200 basis points to 10.6% versus 8.6% last year. In our international segment, on a constant currency basis, revenue increased 4.1% to $644 million, driven by growth in both Canada and Mexico. On a reported basis, international revenue declined 1%, reflecting approximately 510 basis points of negative foreign currency impact. Turning now to gross profit, the enterprise non-GAAP gross profit rate decreased 20 basis points to 24.2%. The domestic non-GAAP gross profit rate decreased 60 basis points to 24%, primarily due to the net negative impact of approximately 20 basis points from lapping the periodic profit sharing benefit and the extended warranty deferred revenue adjustment in Q2 FY ‘16, investments in services pricing and the impact of inventory availability in the high margin digital imaging category caused by the Japanese earthquakes. The international non-GAAP gross profit rate increased 300 basis points to 25.9%, primarily driven by a higher year-over-year gross profit rate in Canada as the company lapped the significant disruption and corresponding increased promotional activity related to the brand consolidation, which started in Q1 FY ‘16. Now turning to SG&A, enterprise level non-GAAP SG&A was $1.77 billion or 20.7% of revenue, a decrease of $24 million or 30 basis points. Domestic non-GAAP SG&A was $1.61 billion or 20.3% of revenue, a decrease of $18 million or 30 basis points. This decrease was primarily driven by the flow-through of cost reductions, which were partially offset by strategic investments. International non-GAAP SG&A was $164 million or 25.5% of revenue, a decrease of $6 million or 70 basis points. This dollar decrease was primarily driven by the positive impact of foreign exchange rates. From a cash flow perspective, we generated $1 billion in free cash flow, which we define as cash flow from operations less cash used to fund additions to property and equipment during the first half of the year compared to $15 million for the first half of last year. While this is due to solid financial results and disciplined working capital management, it is also significantly influenced by the timing of inventory and payable positions. As a reminder, our decision last year to bring holiday inventory in early resulted in us holding inventory longer and having to settle accounts payable prior to year end. In Q1 and Q2 of this year, our accounts payable to inventory ratio has increased as expected. In the second quarter, we returned $309 million in cash to our shareholders, $219 million through share repurchases and $90 million in regular dividends. This brings our year-to-date total cash returned to over $640 million. Also, during the quarter, S&P returned our debt rating to investment grade. We are now rated investment grade by all three of the major rating agencies. I would now like to talk about our Q3 guidance and our full year outlook. For our Q3 fiscal 2017 guidance, we are expecting enterprise revenue in the range of $8.8 billion to $8.9 billion or flat to 1% growth. We anticipate both enterprise and domestic comparable sales growth of approximately 1%. We expect international revenue to be approximately flat to down 5% on a reported basis and to be approximately flat on a constant currency basis. We anticipate our Q3 non-GAAP diluted earnings per share to be in the range of $0.43 to $0.47 assuming a diluted weighted average share count of approximately 319 million and a non-GAAP effective income tax rate in the range of 37.5% to 38%. As it relates to our full year financial outlook, we are reaffirming our expectation of approximately flat revenue and raising our full year non-GAAP operating income outlook. We continue to expect the slight revenue decline in the first half to be offset by slight growth in the back half. And in light of our first half performance, we are now expecting a full year non-GAAP operating income growth rate in the low single-digits versus our previous expectation of approximately flat. This includes lapping the significant periodic profit sharing benefits from our services plan portfolio that we earned in fiscal 2016. As we discussed on our previous earnings calls, our full year outlook assumes one, a relatively better mobile cycle; two, a trend in the NPD tracked categories consistent with the last two quarters; and three, delivering our cost reduction and gross profit optimization initiatives. I will now turn the call over to the operator for questions.

Thank you. [Operator Instructions] We will take our first question from Dan Wewer of Raymond James. Your line is open.

Good morning. I want to follow-up on the comments about the sales retention rate exceeding expectations in Canada. What do you think is contributing to that and if you could compare that experience to the sales retention rate in the U.S. following store closures?

Good morning, Dan. We have strong retention rates in Canada, stronger than in the U.S. for the reason that as the two brands were built over time in Canada, you found many, many situations where the 2 stores, the Future Shop store and the Best Buy store were very close to each other, sometimes in the same parking lot. And so, of course, that’s different from the store footprint in the U.S., so difficult to compare. As it relates to -- compared to our expectations, maybe our expectations were too low. But the other thing is that frankly our team is executing extremely well. And what the brand’s consolidation has done is it has unlocked the ability of our teams to invest in the customer experience and great work for customers. As you know, Future Shop had a commission-based system in a multi-channel environment with the importance of online. This was limiting some of our abilities, and so great execution, kudos, really impressive performance on the part of our Canadian team. We have to give credit to where credit is due.

And then this is a follow-up. There has been growing discussion about the average selling prices for 4K televisions dropping roughly 30% year-over-year, whether that’s a benefit because it accelerates the adoption rate of that technology or if that’s a headwind for our company such as Best Buy because of margin pressure. And then also your perspective on the growing assortment of 4K televisions at the discounters, and if -- whether or not that’s a risk factor in the second half of the year?

So, Dan, thank you for your question on this. Let me first say that our outlook for the rest of the year incorporates best forecast for this category as well as all of the other categories. There’s always cycles from a product standpoint and price deflation in these categories. There is nothing new here. What is noteworthy is the superior customer experience that we have built around home theater. That’s true in the stores from an assortment standpoint, from a merchandising standpoint, the ability to see, touch, and experience the products, the expertise that we now have in the stores in part in partnership with key vendors. All of this is very, very strong. And then we, of course, have online experience and our ability to help customers in the home. As you know, we will come to you to help design the right solution around your – in particular, your home theater needs. So, all of this has been driven our superior performance and again in terms of outlook, all of the factors you are laying out, price deflation, competition and so on and so forth is factored in our outlook for the back half of the year, and we know that there’s cycles. Corie, anything you would like to add?

Yes, the only thing that I would add is Dan as you well know price compression in 4K TV is not a new phenomenon. That is a phenomenon that’s been happening pretty strongly for the last eight quarters. And so to Hubert’s point, we continue to factor that in, but the excitement and the accessibility that that drives for our customers is very exciting to us. And to underscore what Hubert said, our ability to really help people understand the differentiated experiences in 4K in a really unique way in our stores we see as a definite advantage for us.

Right, thank you.

Thank you, Dan.

Thank you. [Operator Instructions] We will move next to Peter Keith of Piper Jaffray. Your line is open.

Hey, thank you. Good morning and congratulations on the good execution. I wanted to see if you could provide a little more color on the computing and mobile phone category. That was an area of outperformance from what we expected, and I guess, even thinking back to 2 years ago prior to the launch of the iPhone 6, that was a category that was under tremendous pressure. So surprising that you comped positive with a negative mobile dynamic, could you give us some insight on what’s driving that and is that sustainable in that category?

Thank you Peter for your kind words. So, our computing and phones, of course a different story. Phones, we anniversary still the comparison with a very strong phone launch, so as expected softness that we expect to reverse in the back half of the year. In computing, this is another great example of how in partnership with key vendors and with a very strong focus on the customer experience, we are able to lead a category and change the outcome for the category. I think 4K is the other example. This is a great example. The experience online, the experience in the store, our service capabilities, our ability to create a unique assortment, and again working closely with key vendors helped make us a key destinations and allow us to deliver a very strong customer experience leading to market share gains and great NPS scores. So, this is an illustration of when Best Buy has all of the functions working together, we can create – we can shape the outcome for ourselves, our customers and our vendors from a performance standpoint. So, you are right to highlight this strong performance. Thank you for your comments.

And Peter, one of the things that I would make sure that I add to that is that we definitely saw tablets was also a bit less bad than what we have seen sequentially in Q1. So, I think the computing story for us continues to be a very good story, but both tablets and mobile were slightly less down as what we have seen in Q1. So sequentially, that’s a bit of what happened that highlighted that overarching category.

Okay, thank you very much.

Thank you.

Our next question is from Brian Nagel of Oppenheimer. Your line is open.

Congratulations on nice quarter.

Thank you.

Thank you, Brian.

My question on the gross – I just have two questions together here. But on the gross margin side, we saw weakness in the domestic gross margin, where you laid out a number of seemingly one-timeish type factors. I guess the question is was there, to any extent, price promotions that impacted the domestic gross margins that may have helped the domestic comps?

Yes. Thanks for the question, Brian. So we were very clear in calling out some of the very specific pressures to our business in the quarter, namely what we saw happening in services, both from a pricing perspective and from lapping last year’s unique profit sharing benefit as well as some of the softness we expected in DI. I also just mentioned that we saw a quarter where tablets sequentially was not as low as what we had seen in the prior quarter and just the mix of that in our business creates a bit of a different profit profile. We have been very clear historically, we called it out I know in Q1 around our pricing and promotionality and we have been clear that we are working to be very targeted in where we are promotional and be very thoughtful about what the right drive times are and what the right events are for us. And so I characterize it less as massively more promotional in the quarter and more as a combination of some of these discrete events and a bit of a change in the mix of our business for the quarter.

That’s very helpful. Maybe second question if I could, with respect to the second half guidance and you mentioned in your prepared comments, Hubert you did as well the mobile phone launches, it’s maybe kind of more qualitative statement, I mean to what extent do the mobile phone launches in some of the leading carriers or the manufacturers out there need to be successful in order to help your guidance?

So I think we have been – we are explicit about this. Clearly, our outlook for the back half assumes a better, relatively better phone profile in the back half. This said, phone is not the only story. There is quite a bit of innovation excitement for customers. I said some words about virtual reality, but that’s not the only one and of course, we are not here to announce new product launches for – on behalf of our vendors. But phone is a factor. It’s not the only factor. And as you can feel from the outlook and our tone certainly, we think the back half is going to be pretty exciting from a product innovation and the consumer standpoint.

Great. Congrats again. Thank you.

Thank you.

Thank you

Thank you. We will take our next question from Dan Binder of Jefferies. Your line is open.

Thanks. I was wondering if you could comment at all on how the back-to-school, back-to-college season is doing for you. And just as a follow-on to the last question on innovation and product cycles, I was just curious, as you think about the holiday period, is virtual reality something that can actually be a needle mover this holiday or is it still too small, too high price?

Yes. So thanks, Dan. Back-to-school, back-to-college is performing according to our expectations and of course is reflected in our outlook. As it relates to virtual reality, I mean candidly, this is an exciting new technology. The impact this year is going to be not material on our performance. We through the assortment and the demo stations that I talked about, we certainly do expect to be a destination for this and to have excitement with our customers. From a financial standpoint, limited impact early in the cycle, limited product availability and so forth, but excitement from a customer and store standpoint because this is yet another example of a product that if you want to learn about it, experience it, even though it says virtual reality, the reality is that you need to experience it physically to be able to see that virtual reality, but this is true. So thank you, Dan.

Thanks.

Thank you. We will take our next question from David Schick of Consumer Edge. Your line is open.

Hi, good morning. Thanks for taking my question. My question is around the experimentation you talked about early in the call Hubert, around services, around in-store classes, what you have been able to do by partnering with the brands and the vendors have a better experience while controlling costs. As you think about these other initiatives that are going to play into the overall Best Buy experience, how are you working with or thinking about the brands in that experimentation around services or store classes, is it part of that thinking or is this purely Best Buy thought process and if so, how do you think through the ROI and things like that?

Yes. Thank you, David. Partnership with vendors continues to be a key pillar of our strategy. And the stores as well as our ability to go into people’s homes are very unique assets that are highly valued by several of our vendors. And so as we explore and experiment, we are involving and we will be involving key vendors from that standpoint, it’s not difficult to see how around classes, you would partner with key vendors as appropriate. So I think you are spot on. It continues to be a key pillar. I think it’s premature to talk about the ROI on some of these investments. That’s why we are talking about exploration and experimentation, but there is a lot of excitement from the customer standpoint around this experimentation as well as the vendors and the ability for us to demonstrate and really pursue this mission of helping customers pursue their passions and live their lives with the help of technology takes these kinds of new approaches. So hopefully shedding some light on what we are doing there, David.

And David, I think you are already starting to see some examples of whether it’s specifically related to these initiatives or others of vendors partnering with us and looking for other areas of interest. We talked about Apple authorized service provider historically, and you will also see some very specific offerings that we provide on some of the high end merchandise around more white glove kind of delivery and service offerings. So I think that’s where you are tangibly starting to see some of the value that we bring to the table, but done in partnership with some of our vendors in unique ways. And I think what Hubert is highlighting how we continued to evolve that in light of some of these more targeted strategic initiatives.

Thank you so much.

Thank you.

Thank you. We will take our next question from Brad Thomas of KeyBanc Capital. Your line is open.

Yes. Thank you and let me add my congratulations as well on a great execution here. My question is around the strong growth in online and just hoping to get your latest thoughts on where perhaps this 10% to 11% of sales ends up going over the medium and longer term and what your latest thoughts are on how that might affect the profitability of the company longer term? Thank you.

So thank you for your kind words. The performance of online continues to be strong. We think about online in two ways; one is the channel itself and then the other digital experience and how it helps customers because most of the visits on that site actually result in sales in the stores or visits to the stores and then completing the transaction online. So it’s quite intertwined. Projecting the percentage is going to be down the road of our business. It’s not something we have done. The – there is a way to think about it, which is there is growth online, which is clearly fast, but I think our stores have a very strong role to play. So this is – we don’t see it as a zero sum game. So I think that as we explore these growth opportunities, as we look at how to really help customers, we will see how we can best leverage each one of our assets. So I want apologize for not providing a direct answer to this question because it implies a zero sum game and that’s not how we are thinking about it. We see growth opportunities, frankly across the business.

Thank you.

Thank you, Brad.

Thank you. We will take our next question from Matthew Fassler of Goldman Sachs. Your line is open.

Thanks a lot and good morning. Looking at your domestic same-store sales against the NPD data, you disclosed – suggest that the gap has widened out in your favor in the second quarter after two quarters of narrowing share gains, so I am interested in where you think your share gains accelerated within the NPD categories or whether you think the improvement relative to that basket came from some of the categories that they don’t measure?

Yes. Matt, this is Corie. So there were a few places and I actually mentioned one sequentially already where we saw a bit more strength than we have seen in Q1 and that was tablets. And we actually saw a bit of a trajectory change there versus Q1 in our business. And then a lot of the other categories, we just saw some of the continued strength that we have been seeing out of Q1, but it was really that tablets number that was one of the biggest trajectory changes for us in Q2.

And you think, Corie, that, that was relative to the market not just the category improvement?

No, it was relative to the market as well based on the information that we can see.

Great. And then just by way of quick follow-up, you called out I think as the first category in the press release in terms of domestic growth, the wearables and wellness business. And I know that some of the vendors have spoken with lots of excitement about new product rollouts in the second half of the year. I know it’s still, I think, a fairly small business for you. So, can you kind of dimensionalize how important that was to the overall domestic comp and whether that can become even more important as you make your way to the second half?

Yes, absolutely, Matt. There was a reason we listed it first. It was very impactful overall to our business and again I think highlights a nice partnership for us. We are interested and excited and Hubert mentioned it already. The back half isn’t just about phones. They are – we think there could be some interesting things on the horizon. So, we are watching just like you are to see what else there might be in the back half. But from a holiday perspective obviously, we like our positioning in the category. Hubert, I don’t know if you have something to add?

Yes, couple of things to add. Clearly, in health and wearables, I mean, we really don’t get into products, but it’s factual to remember that in Q2 of last year, we didn’t have an iconic watch that was introduced during – more in August, so more in Q3. So, that’s a factor, and of course, we are going to lap that in the second half. What I wanted to add is maybe to deemphasize the focus on the NPD tracked categories, because there is so many exclusions now that it’s – what’s convenient with the NPD report is that it’s available when we report our earnings, but there is so many exclusions that it’s hard to use it as a true spotlight for the performance. So, we have provided this again this quarter for convenience. Our real focus is actually on growing the top line more than anything else. So, I am just looking at that for now.

Thank you.

Our next question is from Michael Lasser of UBS. Your line is open.

Good morning. Thanks for taking my question. So, I wanted to talk a little bit more about the gross margin. A lot of the low hanging fruit that you have been able to harvest on the gross margin side just kind of already into the base, the gross margin here we should think about as just be inherently more volatile moving forward? More specifically, what are your gross margin expectations for the back half of the year?

Yes. So, Michael, I will do my best here. Obviously, we don’t break out separately the margin and SG&A expectations. That being said, its part of the reason we were trying to be so clear on the individual drivers in Q2 is that many of them are kind of more structural or we have called them out individually as large kind of more one-time in nature. So, we have talked multiple times about the profit sharing. You will continue to see us lapping that in the back half. We are very clear last year about when we saw those different pockets. Additionally, the services pricing pressure, we start to lap the changes that we made to our services portfolio last year about midway through Q3 and so you are going to see that even out a bit. And so I think we have tried to be very clear about what are those structural pieces versus some of the underlying. And keep in mind, we also continued to work on from a waste reduction and efficiency perspective, remember that doesn’t just impact our SG&A. That also continues to flow through portions of it in our margin line as well. And so yes, there are some puts and takes there, but we are trying to be very clear about what are kind of the larger events that we are lapping year-over-year versus some of the just more structural baselines.

And then if I could add just a quick follow-up on the spread between your comp and the NPD category. It seems like you are calling out strength in share gains within a particular vendor when you mentioned tablets, you mentioned the wearables category. Do you think your share gains occurred mostly in – amongst the one particular vendor who coincidentally we heard like a particular weakness at another big box retailer during the quarter or was it more evenly spread across multiple vendors?

Yes. So to be clear, Michael, I want to make a couple of things. One, wearables in the way that we are talking about it is not included in the NPD tracked categories. So, that’s not going to be a factor in NPD. Broadly when I had spoken about tablets that was more a trajectory change from Q1 to Q2, in total, what we saw was overarching continued share gains across the categories and inherently across our vendor portfolio as well.

Okay, thank you so much.

Thank you, Michael.

Thank you. We will take our next question from David Magee of SunTrust.

Yes. Hi, everybody. Good morning.

Good morning.

I wanted to ask about the services business and just noticing that the year-to-year declines are lessening sequentially and I think you all mentioned that it wasn’t as much of a drag on gross margins as you thought it might be. So, the momentum is picking up. I am curious well, first of all, with regard to the gross margin drag, is that because of the vendor relationships? Is that why that’s less of a drag?

So, to answer that one specifically, nope, that is not due to vendor relationships. That is a combination of our portfolio changes that we made and some of the better attach that we are seeing as well as continued tweaking of our portfolios to ensure we actually believe we are offering the best possible, most compelling offers for our customers. It is not vendor specific.

Okay. And then as you go into next year and just given that we are late in certain product cycles, do you expect that this momentum that you are seeing will continue with that category?

Yes. So, we commented in the release that we actually even expected in the back half for some of that year-over-year decline to abate, flatten out, if not add to growth, which is what we have been expecting. It’s why we made the portfolio changes that we made. And then obviously, we continue to work as Hubert noted in the innovation space in the things that we are trying. We continue to look for new opportunities to grow the business as we head into next year.

Okay, great. Thank you.

Thank you. We will take our next question from Joseph Feldman of Telsey Advisory Group. Your line is open.

Hey, guys. It’s Joe Feldman. Congratulations on the quarter. Wanted to ask a couple of questions, one of which was with the customers that are shopping the store today and obviously the trends are a little bit better, are you seeing new customers that are different from your everyday customer or are you seeing the same ones buying more? And effectively, I am trying to get a sense of like what the change in customer profile might look like if at all?

Thank you for your question. It’s – and customer focus is a key part of our strategy. So, I think as we look ahead, you will see us focus more and more in building these relationships, deepening the relationship with customers as we help them more deeply. As it relates to specifically your question where there is many things that are contributing to the strong performance, including attracting new customers. We have had good track record from that standpoint. In terms of deepening the relationship with customers, I think we have a lot of opportunities ahead of us, frankly. And even though we are a category leader, our market share in aggregate across all of the consumer technology spend is only in the teens. And even with our existing customers, our share of wallet is far from being exhaustive. So, I think we have opportunities there that we have not fully captured. So in summary, we have a good momentum with attracting new customers and having opportunities with deepening the relationship with existing customers.

Great, thanks. If I could ask one quick follow-up sort of unrelated, but on the appliances, you guys mentioned a number of changes that you are starting to make. Can you discuss that in a little more detail like the installation improvements I think it was in delivery improvements? And you said it had a little bit of disruption and I was wondering if you could quantify that in some way?

Yes, so a couple of things. One, we have been on a journey and we have talked about it on several of our calls to improve the quality of service around delivery and installation. From an industry standpoint, by the way, this is an area that where there is a lot of opportunities and we have had a strong focus on that and the progress we have made in the last several quarters has been very, very notable achieving NPS scores that frankly we did not necessarily thought were possible even though quite – we are far from being where we want to be specifically then as it relates to this quarter. So, we introduced a change in our – we introduced the ability of the customer to choose the narrower delivery window, like 4 hours at the point of sales both in stores and online and specifically – so, that’s obviously a great benefit from a customer standpoint. Who wants to sit around and wait for the entire day for the appliance to show up, I think we can do a survey on this call, probably no one. And so we are narrowing the delivery window and the ability of the customer to choose. In the very short-term, this has led to disruptions. Sometimes, when you introduce innovation, there are some kinks to be worked out. So we are in the process of working them out. We have highlighted that because the growth rate of our appliance business in the quarter of roughly 8% was slower than some of what was still 23 quarters of consecutive comp sales growth, but relatively slower than what we have seen before. I think if we have not had these disruption so okay, so probably we would have been in the double-digits growth rate and we do expect looking ahead that these continued improvements and again we have a long way to go in terms of creating an amazing customer experience for when you buy – when you shop for and then buy and use appliances that this is going continue to drive our performance.

Got it. Thanks. Good luck with this quarter.

Thank you, Joe.

Thank you.

Thank you. Our next question is from Alan Rifkin of BTIG. Your line is open.

Thank you very much and congratulations on a nice quarter.

Thank you, Alan.

My first question is as you continue to roll out the store within stores, whether it’s LG or Samsung, Sony, Oculus, collectively, what proportion of your revenues do these store in store businesses now represent?

Well, that’s a – yes, do you want to take that?

Yes, I will take that. Thanks Alan. We haven’t specifically talked about performance of our store in stores. And frankly, almost like the online channel, it’s a little difficult to break out exactly what’s attributable to that store and that experience and that vendor. Obviously, we have vendor presences across all of our stores. We like however, obviously and I think Hubert hit on it, especially as it relates to Oculus as an example, that ability for us to showcase a technology in a very unique way and our vendor partners coming with us on that road. So that’s why you continue to see us and you continue to see vendors want to partner with us in those experiences. So while we haven’t called out the specific proportion of revenue related to those experiences, we continued to be pleased with offering the customer that kind of visibility and experience in our stores.

Let me add something Alan, to your question. The stores within a store are very important component of our strategy. And as Corie said, like online, it’s hard to isolate because what we are is much more than a collection of stores within a store. From the customers standpoint, as customers look for solutions around their entertainment needs, their food preparation needs, their productivity needs, their home automation needs, the reality is that you need usually to assemble a solution that takes from various vendors. And the role that Best Buy plays is certainly to showcase the latest and greatest technology and we show customers of the ability to run about it and experience it, but it’s much more than this. It’s also to understand the needs of the customer and create a solution that meets their needs and there is an integration need or value added that exists there. And therefore that makes it difficult to track or not necessarily meaningful to track the performance of individual stores because of that more a crosscutting solution selling approach. I hope that’s helpful Alan to your understanding.

That is. Thank you very much. And I do have a follow-up, if I may. In your guidance, you had said that the charge would be $0.12 to $0.13 related to the Japanese earthquake and the services pricing investment and the profit sharing payment and that charge came out to be $0.08, so I was curious where the delta of $0.13 really came from the within those three variables?

Yes. There were two main places that were a little bit better than we thought. One was, as we mentioned, the services pricing, where we both saw a little bit better attach and made some changes to our portfolios that were accepted well by our customers. And then the second was some of the disruption expectations around inventory supply, where we saw our customers just make some different choices in terms of demand and what they wanted to purchase. Those were the two biggest drivers.

Okay. Thank you very much.

Thank you, Alan.

Thank you. We will take our next question from Seth Sigman of Credit Suisse. Your line is open.

Thanks. Good morning. Nice quarter guys.

Thank you, Seth.

Thank you.

So I wanted to follow-up on the services business and the guidance for flat to slightly positive in the second half of the year, I know you are lapping some price changes, but would seem to imply that maybe transactions stabilize if not maybe improve, is that something that you are already seeing, I was wondering if you could talk a little bit about the responses that you have seen so far to the changes you made last year, how attachment rates are trending, etcetera? Thanks.

Yes. So Seth, the response to the portfolio teams we made have been positive. We have seen improvement in attach rates in those categories. Now as expected, those improved attach rates haven’t been enough to completely offset the price investment. Hence, the reason we have been calling it out as a piece of the pressure is on gross profit. But that being said, what we like is that we start to lap making that investment. We like the trend of the business that we have seeing heading into the back half.

So I think this concludes our call and I want to thank you, of course for your attention. I will not hide from you that I am and the company was very proud of the accomplishments of our teams during the quarter and we are excited about our prospects in the back half. And of course, we look forward to speaking with you in November. Have a great day. Thank you.

Thank you.

Thank you. This does conclude today’s Best Buy’s Q2 fiscal year 2017 earnings conference call. You may all now disconnect your lines. And everyone have a great day.