Best Buy Co., Inc. (BBY)
Q1 2010 Earnings Call Transcript
June 16, 2009 10:00 a.m. ET

Executives

Andrew Lacko - Senior Director of Investor Relations
Brian J. Dunn - President, Chief Operating Officer
James L. Muehlbauer - Senior Vice President and Interim Chief Financial Officer
Mike Vitelli - Executive Vice President, Customer Operating Groups
Robert A. Willett - Chief Executive Officer Best Buy International
Shari L. Ballard - Executive Vice President, Retail Channel Management

Analysts

Gary Balter - Credit Suisse
Gregory Melich - Morgan Stanley
Matthew Fassler - Goldman Sachs
Colin McGranahan - Sanford Bernstein
Jack Murphy - William Blair
Scot Ciccarelli - RBC Capital Markets
Chris Horvers – JP Morgan

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Best Buy conference call for the first quarter of fiscal 2010. (Operator Instructions) At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session. At that time if you have a question you will need to press”*1” on your touchtone phone. If you need to be taken out of the question queue please “*2”. As a reminder this call is being recorded for playback and will be on the web by 12:00 p.m. Eastern Time today. If you need assistance during the call at any time please press “*0” and an operator will assist you. I would now like to turn the conference call over to Andrew Lacko, Senior Director of Investor Relations.

Andrew Lacko – Senior Director of Investor Relations

Thank you Richard, and good morning, everyone. Thanks for participating in our fiscal 2010 first quarter earnings conference call. We have two speakers for you today. First, Brian Dunn, our President and COO, who will become CEO next week, will share his thoughts on the results we reported this morning and provide you an update as to how we are performing versus our priorities for fiscal 2010. Second, Jim Muehlbauer, EVP of Finance and CFO, will recap our first quarter financial performance and comment on our fiscal 2010 guidance for the remainder of the year. After our prepared remarks, we’ll leave ample time for your questions. As usual, we also have a broad management group here in the room with me today to answer your questions after we make our formal remarks. We would like to request that callers limit themselves to a single question so that we can include more people in our Q&A session. Consistent with our approach on prior calls, we will move to the end of the queue those who asked a question on last quarter’s conference call.

We’d also like to remind you that comments made by me or by others representing Best Buy may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management’s expectations. May we also remind you that as usual, the media are participating in this call in a listen-only mode.

Before we jump into the details of the quarter, I would like to take care of a couple of housekeeping items. First, as you likely noticed this morning, we launched a new format for our quarterly earnings news release. We believe this better matches the length and content of the quarterly release with the needs of our investors. We anticipate that the revised format will be well-received but as always, we welcome any feedback, both positive and constructive, that you may have. Secondly, I want to comment briefly on the restructuring charges you saw in this morning’s news release. Our first quarter fiscal 2010 results included restructuring charges which impacted our net earnings by $25 million, or $0.06 per diluted share. These restructuring charges were related to the store operating model changes in the domestic segment and corporate restructuring costs in Best Buy Europe. The balance of our discussion on this morning’s call about the quarter will exclude these charges. That means the comparisons we make will be on an adjusted non-GAAP basis. For a comprehensive GAAP to non-GAAP reconciliation of our reported to adjusted results, please refer to the supplemental schedule on page 10 of this morning’s news release. With those housekeeping items aside, I would like to turn the call over to Brian Dunn. Brian.

Brian J. Dunn – Chief Operating Officer

Good morning, everyone. Thanks, Andrew and thanks to all of our listeners for joining us on our first quarter earnings conference call. This morning we were pleased to report adjusted quarterly net earnings of $0.42 per diluted share, which were essentially flat versus last year and better than our expectations for the quarter. Before I dig a little deeper into our performance, I want to take a moment to thank our employees worldwide who once again delivered results well ahead of the market in the face of an extremely challenging environment. We’ve introduced some necessary changes to our business model during the past couple of quarters, which is never an easy task. But the performance we are seeing from our teams shows that they have embraced the work with the kind of energy and optimism that we have come to expect from them and maybe even take for granted. Our people are the heart of Best Buy and performance like we’ve seen thus far this year is due entirely to them.

Perhaps even more important than the financial results we are seeing are the encouraging strategic results we see. First and foremost, we continued to grow our market share. Our share gains accelerated during the quarter since a major competitor closed its doors, something we’ve been very purposeful in planning for and to be blunt, taking advantage of. We saw significant share gains in each of the three screens, in TVs, computing, and mobile phones. More on that in a moment when I give a short overview of our progress and our four strategic priorities, but the headline for us is this. We are confident that our value proposition is working.

Second, despite the fact that our people around the world are dealing with some very difficult changes, our voluntary employee turnover improved once again to 41%. In fact, for the past five quarters, we’ve seen a turnover ratio below 50%, a level rarely seen in the world of retail. Our strategy is predicated on our ability to build relationships with customers and that begins and ends with experience and engaged employees, and that’s why we’ll continue to work to drive our turnover down and our employee engagement up.

Finally, and not coincidentally, our customer satisfaction scores hit a record high during the quarter. Despite the many challenges our employees face on a daily basis, they continue to connect meaningfully with customers as evidenced by our CSI score, which is a measure of overall customer satisfaction. We consider anything above 80 as best in class, and our first quarter score came in at 82. We’ve talked a lot over the past nine months about the current economic environment. It’s the most challenging we’ve ever faced as an enterprise. But to me, the real question is what are we learning? And beyond that, how are we applying those learnings to create value for customers, employees, and shareholders? I think we’re seeing that the current climate is forcing companies to focus like never before, to become very clear and very articulate about why they exist and what differentiates them from the others.

While we would never wish for a situation like this one, in many respects we have embraced the opportunity to bring additional rigor to our company strategies and how we help you understand them. That’s why last quarter I provided an outline of the four strategic priorities we plan to use as our compass for the next several years. Our core strategy remains unchanged and these priorities will provide the framework to prioritize our investments and maintain our innovative culture. So today, I would like to provide you an update on the progress we’ve made and some of the opportunities still ahead of us for each of these priorities. The first is growing our local market share. Contrary to what some macro industry data points may have suggested, we saw significant market share gains during the quarter and in fact, we believe those gains build as the quarter progressed. For the three-month period ended April, we estimate that our overall domestic market share climbed nearly 200 basis points. In March alone, our market share increased 240 basis points, the single largest monthly increase I have ever seen at the company. The strong gains were driven by improved product assortments, the efforts of the team to grow the businesses through a local lens, our employees’ strong execution at the store level, and a tailwind from the recent exit of Circuit City.

We get asked daily what impact each of these drivers has had on our market share position, especially the liquidation of Circuit. Candidly, while we have performed our internal estimates in a manner similar to many of your models, it is difficult if not impossible to peel back the onion and precisely quantify the relative contribution of each. However, regardless of the source of the gains, we are encouraged by the fact that we saw significant gains across a broad range of product categories during the three months ending in April, including a more than 400 basis point increase in computing, a more than 350 basis point increase in digital imaging, and a more than 250 basis point increase in home theater.

I want to talk for just a minute about how I think about our market share gains and why I think you will continue to see us take share. Simply put, we believe that if we combine the assets of our entire enterprise with the insights of local leaders and service of customers, we will grow our business around the world. We believe that now more than ever, we have a unique opportunity to present a compelling and unmatched experience for the customer who has never shopped with us before. And in a market with diminishing traditional options for customers, we have a new opportunity to win the loyalty of the customer who might have shopped us in the past and found the experience lacking. The quality of that experience directly shaped by the insights and energy of our employees will determine if these customers continue to shop with us.