Mollie O'Brien - Vice President, Investor Relations Hubert Joly - Chairman and Chief Executive Officer Sharon L. McCollam - Chief Administrative Officer and Chief Financial Officer.

Anthony Chinonye Chukumba - BB&T Capital Markets Christopher Michael Horvers - JPMorgan Securities LLC Katharine McShane - Citigroup Global Markets, Inc. (Broker) David A. Schick - Stifel, Nicolaus & Co., Inc. Mike Baker - Deutsche Bank Securities, Inc. Daniel Thomas Binder - Jefferies LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Best Buy Second Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded for playback and will be available by 11:00 A.M. Eastern Time today.

I would now like to turn the conference call over to Mollie O'Brien, Vice President, Investor Relations..

Good morning and thank you. Joining me on the call today are Hubert Joly, our Chairman and CEO; and Sharon McCollam, our CAO and 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 comparison, but should not be considered superior to, as a substitute for and should be read in conjunction with the GAAP financial measures for the period.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release.

Today's earnings release and conference call also include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements address the financial condition, results of operations, business initiatives, growth plans, operational investments and prospects of the company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the company's current earnings release and SEC filings for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

In today's earnings release and conference call we refer to consumer electronics industry trends. The consumer electronics industry, as defined and tracked by The NPD Group, includes TVs, desktop and notebook computers, tablets, not including Kindle, digital imaging and other categories.

Sales of these products represent approximately 65% of our domestic revenue. It does not include mobile phones, gaming, movies, music, appliances or services. I will now turn the call over to Hubert..

Thank you, Mollie, and good morning, everyone, and thank you for joining us. I'll begin today with an overview of our second quarter results. We'll then provide highlights of the progress we're making against our priorities and then turn the call over to Sharon for additional details on our quarterly results and commentary on our financial outlook.

So first, our financial results. The results we're reporting today are strong with both significant top line and bottom line growth in the domestic business. We believe these better-than-expected results are affirmation that our strategy of offering advice, service and convenience at competitive prices is paying off.

So more specifically, Enterprise revenue grew 0.8% to $8.5 billion, driven by a 3.9% increase in the domestic segment, partially offset by the impact of the Canadian brand consolidation and 120 basis points of pressure from foreign currency.

Better year-over-year performance in the Domestic segment drove a 50-basis-point increase in the Enterprise non-GAAP operating income rate to 3.4%, and a 17% increase in non-GAAP diluted EPS to $0.49. We also returned $321 million in cash to shareholders through share repurchases in addition to $81 million in regular dividends.

In the Domestic business, our comparable sales increased 2.7%, excluding the impact of installment billing, driven by continued strong performance in major appliances, large-screen televisions and mobile phones.

Online comparable sales increased 17%, as our investments in new capabilities continued to drive increased traffic and higher conversion rates. We also saw industry revenue in the NPD-tracked categories, which represents 65% of our revenue, improved from a decline of 5.3% in Q1 to a decline of 1.3% in Q2.

In the International business, while revenue declined due to store closures and foreign currency, we're seeing higher-than-expected retention from the 66 permanently-closed Future Shop locations in Canada. We're now in the midst of converting the remaining 65 Future Shop locations to the Best Buy brands.

And much of the work in investments around building a superior multi-channel customer experience are still ahead of us, as we will discuss later in the call today.

Now before I share specific highlights on our progress on key fiscal 2016 initiatives, I'd like to discuss a few strategic observations about what we believe has been driving our recent performance.

And while recognizing the current turbulence in the financial market, we do feel this is an opportune time to do this as it is almost three years to the day of my appointment and nearly three years since the launch of our Renew Blue strategy.

Our first observation is that overall consumer demand for technology products and services including appliances and mobile phones is growing.

This growth is driven by technology and product innovation and by micro factors such as population growth, the housing recovery and healthy living trends that are driving momentum in our appliance, home theater, connected homes and health and wearables business, which, we believe, will remain positive catalyst in quarters to come.

In addition, the increasing complexity and interoperability of technology products and the advent of the Internet of Things are making Best Buy's operating model increasingly relevant as customers want and need more help selecting, installing, connecting, integrating, using, maintaining and taking full advantage of their products.

Our second observation, which I mentioned earlier, is that the investments that we've made in our Renew Blue strategy to offer advice, service and convenience at competitive prices are paying off.

This is evidenced by the market share gains we have achieved in the NPD-tracked categories, our growth in appliances and mobile phones and the overall positive domestic comps and expanded operating income rate that we have delivered both last year and year-to-date this year.

Our third and final observation is that we have three distinct competitive advantages that help us win with customers, drive better financial results and are hard for competitors to replicate. The first competitive advantage is our ability to serve our customers online, in-store, and in their home.

What does this mean? We now offer a leading-edge digital shopping experience to our customers online and in our new mobile app and we also have stores within 15 minutes of 70% of the U.S.

population that not only provide advice, service and convenience to our in-store customers, but also operate as local distribution centers to provide online customers with greater inventory availability and faster delivery. And for Geek Squad, we're able to provide an array of services to our customers remotely in our stores and in their home.

The second competitive advantage is our positioning in the marketplace, which allows us to benefit from early adopters, who choose Best Buy when new exciting technology is released.

And our strong merchandising and vendor partnerships allow us to showcase the best of what is selling, which, in turn, positions us to outperform the sales trends within the NPD-tracked consumer electronic categories even when they are negative. This leads us to our third competitive advantage, which is our vendor partnerships.

Not only do we showcase the best of what our vendors offer, we're also benefiting from the material investments that several of the world's leading technology companies are making in our stores.

With these partnerships, we're able to bring to life interactive technology experiences that again make the Best Buy operating model more relevant for customers.

And as you'll hear later in the call, our vendor partnerships are continuing to grow, confirming that they're bringing value not only to our customers and Best Buy, but also to our vendor partners. So now with these observations as a backdrop, I'd like to discuss our progress on key fiscal 2016 initiatives.

This quarter, I'm going to start with services as it is a critical component of our Renew Blue strategy. We have significant services assets today, including our ability to assist customers in our stores remotely and in their homes.

We currently have approximately 20,000 Geek Squad agents and Magnolia System designers, and we're proud of the services we offer as we generate some of our highest NPS scores. Now, two things have been negatively impacting our services top line. The first is the reduced frequency and severity of claims on our extended warranties.

This has the impact of reducing our repair revenue, which at face value appears negative, but it's actually beneficial both financially and operationally. The second is the decline of our traditional warranty business. We are addressing this decline by materially renewing our service offerings to make them compelling and price competitive.

More broadly, we're ramping up our strategic investments in our services business to make it play an increasing role in our Renew Blue transformation, as a differentiator, as a business driver and as a profit center in its own right. In this context, we have several new developments to share this quarter.

They're all part of evolving this business from a traditional warranty business to a value-added services business that addresses the help our customers need.

So first, in our computing and tablet service categories, beginning September 13, we're launching a range of services, including Geek Squad Protect & Support Plus, which combines hardware support, 24/7 software support and accidental damage in one plan priced very competitively.

Second, we will also begin selling AppleCare later this quarter, and additionally, we will proceed to roll out our capabilities as an Apple-authorized service provider first with in-store pilots in 50 locations by holiday.

Third, we've begun to offer a range of classes to help customers take advantage of their technology products, including in our digital imaging hubs, in our Samsung Experience Shops and in our Windows Stores around the launch of Windows 10.

In support of this services strategy, we are investing in talent, systems and processes to further enhance the quality and scope of the services we deliver to our customers. We're also continuing to drive operational and cost efficiencies, which are resulting in reduced repair costs and a higher year-over-year gross profit rate.

I'll now turn to our progress on our merchandising initiatives. In appliances, we've rolled out 35 of the 60 additional Pacific Kitchen & Home stores-within-a-store planned for this year, increasing their presence to 152 of our stores.

We also began the rollout of our expanded Samsung Appliance Experiences and expect to roll out approximately 225 Samsung Open Houses by the end of the year, which will be the largest dedicated in-store display of Samsung appliances in the U.S.

In home theater, we've continued to solidify our position as the destination for customers to discover and interact with industry-leading home theater technology, particularly, ultra-high definition or 4K TVs.

We've expanded our Samsung home theater stores-within-a-store from 500 at launch to 603 and the Sony home theater stores-within-a-store from 350 at launch to 372. We've also rolled out 5 of the 20 planned Magnolia Design Center stores-within-a-store for this year, increasing their presence to 63 of our stores.

And as we enter the back half of the year and as pricing of these technologies becomes even more affordable, we believe that we will continue to benefit from the customer moving to larger-screen televisions and 4K technology.

In computing, we believe we are optimally positioned to help customers transition to the new Windows 10 operating system that was introduced at the end of July. We have a very large selection of laptops with Windows 10 already installed and a compelling in-store experience with Windows store-within-a-store. Today, we have over 600 of these in the U.S.

and expect to have over 800 by holiday. We've also been working with Apple to update the 740 stores-within-a-store that were first implemented in 2007. The stores-within-a-store will have new Apple fixtures and are larger with more display tables for phones, computers and tablets.

We've already implemented approximately 350 of them and expect to upgrade a total of approximately 520 by holiday. The additional display tables are great for the merchandising of Apple Watch, which went on sale on BestBuy.com and in more than 100 of our stores in August.

Now because demand for Apple Watch has been so strong in these stores and online, we are excited to share that beginning September 4 we will be carrying Apple Watch in more than 900 of our big-box stores. Apple Watch will be available in all 1,050 of our big-box stores and in approximately 30 of our Best Buy Mobile Stores by the end of September.

Now I'd like to share some of the recent developments related to our online experience. In the second quarter, we continued to leverage our ship-from-store, digital marketing and enhanced website functionality to drive a 17% increase in domestic comparable online sales.

This growth was driven, number one, by a significantly increased number of our online customers, who received and took advantage of our free two-day shipping promise, enabled by enhancements through our ship-from-store capability and supply-chain investments that are driving improved speed, convenience and reliability.

Number two, increased by the increased visibility of open-box and clearance inventory and number three by the expansion of online-only flash sales.

We also launched several customer-facing site improvements, including expanded payment options for our customers through partnering with American Express to offer Pay With Points, the ability to search and shop by brand, and a significantly more relevant recommendation engine. Turning to costs.

To-date, we have eliminated $100 million in annualized cost as part of our Renew Blue Phase 2 cost reduction and gross profit optimization program, which has a goal of $400 million over three years.

These savings will be offset, however, by the incremental investments in our future growth initiatives, which, for this year, we expect to be approximately $120 million. To-date, we've invested approximately $65 million to fund these initiatives of which $35 million was in the second quarter.

So to repeat, we're proud of the results we're reporting today. As we look forward, the combination of an opportunity-rich environment and the strength of our competitive advantages lead us to have a positive outlook about our future prospects, starting with the important back-to-school third quarter.

And so, of course, we'd like to thank all of our associates for their hard work and contributions to our success. The opportunities we have before us today are possible because of the talent and engagement of our entire team, and I'm extremely proud of their performance and ability to win.

I will now turn the call over to Sharon to discuss the details of our second quarter financials and our third quarter outlook..

Thank you, Hubert, and good morning, everyone. Before I talk about our second quarter better-than-expected results versus last year, I would like to talk about them versus the expectations we shared with you last quarter.

Our Enterprise revenue of $8.5 billion exceeded our expectations due to a stronger-than-expected overall performance in our Domestic business in addition to higher sales retention from previously closed stores in our Canadian brand consolidation.

Our non-GAAP operating income rate of 3.4% also exceeded our expectations due to a higher gross profit rate in our computing business, a higher gross profit rate in our services business due to a periodic profit-sharing payment from our externally-managed extended service plan portfolio and an extended warranty deferred revenue adjustment and a better-than-expected performance of our credit card portfolio.

As Hubert said, we are extremely proud of the team who drove these better-than-expected results. I will now talk to you about our second quarter results versus last year. Enterprise revenue increased 0.8% to $8.5 billion.

Enterprise non-GAAP diluted EPS increased $0.07 to $0.49, driven primarily by stronger year-over-year performance in the Domestic business from higher sales volume, improved gross profit rates and a $0.04 periodic profit-sharing payment in deferred revenue adjustments that we just discussed.

These year-over-year increases were partially offset by a negative $0.02 impact from a higher effective income tax rate due to a discrete tax benefit in Q2 fiscal 2015 that did not recur this year. In our Domestic segment, revenue increased 3.9% to $7.9 billion.

Our revenue growth was primarily driven by comparable sales growth of 2.7%, excluding the benefit from installment billing, an estimated 110-basis-point benefit associated with installment billing, and a 30-basis-point benefit from the periodic profit-sharing payment and deferred revenue adjustment in services.

Our Domestic comparable online revenue increased 17%, driven by increased traffic and higher conversion rates. As a percentage of total Domestic revenue, online revenue increased 90 basis points to 8.6% versus 7.7% last year.

Versus last year's growth rate of 22%, this year's online growth rate of 17% was lower primarily due to lapping over 100,000 basis points of growth from ship-from-store in Q2 last year. The ship-from-store impact will continue through the back half of this year.

From a merchandising perspective, comparable sales growth in major appliances, televisions, mobile phones and health and fitness was partially offset by ongoing declines in tablets. In services, revenues declined 13.1%.

As Hubert discussed earlier, this is primarily due to lower repair revenue and, to a much lesser extent, declining attach rates in our traditional warranty business. Since we expect this trend of lower repair revenue to continue, which is a positive, comparable sales and services are expected to continue to decline through the back half of this year.

In our International segment, revenue declined 25.6% to $650 million due to the loss of revenue associated with the closed stores as part of the Canadian brand consolidation, a negative foreign currency impact of approximately 1,200 basis points and ongoing softness in the Canadian economy and Canadian consumer electronics industry.

Turning now to gross profit, the Enterprise non-GAAP gross profit rate increased 100 basis points to 24.4%. The Domestic non-GAAP gross profit rate increased 120 basis points to 24.6%.

This increase was primarily due to the positive impact of changes in our mobile warranty plans, which resulted in lower costs due to lower claim frequency and severity, a rate improvement in computing hardware, an increased mix of higher-margin, large-screen televisions, a 25-basis-point impact from the periodic profit-sharing payment in deferred revenue adjustment we previously discussed, and a positive mix benefit from significantly decreased revenue in the lower margin tablet category.

These increases were partially offset by a lower rate in the mobile category, driven by increased sales of higher-priced iconic mobile phones, which deliver higher gross profit dollars, but carry a lower gross profit rate. The international non-GAAP gross profit rate was flat year-over-year at 22.9%.

Now turning to SG&A, Enterprise-level non-GAAP SG&A was $1.8 billion, or 21% of revenue, an increase of $57 million, or 50 basis points. Domestic non-GAAP SG&A was $1.6 billion, or 26% of revenue, an increase of $114 million, or 70 basis points.

This increase was primarily driven by investments in future growth initiatives, in addition to SG&A inflation and higher incentive compensation. International non-GAAP SG&A was $170 million, or 26.2% of revenue, a decrease of $57 million, at a rate increase of 20 basis points.

This dollar decrease was primarily driven by the elimination of expenses associated with closed stores as part of the Canadian brand consolidation and the positive impact of foreign exchange rates. The 20-basis-point increase is driven by year-over-year sales deleverage.

As it relates to the Canadian brand consolidation, we incurred approximately $0.02 of negative non-GAAP diluted EPS in the first half of the year, which was lower than expected due to retaining sales at a higher-than-expected rate.

As such, we are reducing our estimated impact of the consolidation to a range of $0.10 to $0.17 in fiscal 2016 versus our original estimate of negative $0.10 to $0.20 as the retention rate trends are expected to continue in the back half of the year. By quarter, this expectation is broken down as follows.

The negative $0.02 per share that we incurred in the first half, a negative $0.04 to $0.06 per share in Q3 and a negative $0.04 to $0.09 per share in Q4.

Ultimately, when our consolidation initiatives are complete, we are expecting our Canadian business to be a more vibrant and more profitable business with profitability being defined as both higher operating income dollars and a higher operating income rate.

From a balance sheet perspective in the second quarter, we returned over $400 million in cash to our shareholders, $321 million through share repurchases and $81 million in regular dividends. In addition, in the last two weeks, both Moody's and Standard & Poor's upgraded Best Buy's debt rating by one notch.

Moody's raised their rating to Baa1 and Standard & Poor's raised theirs to BB+. I would now like to talk about our financial outlook. As Hubert said earlier, our competitive advantages and strong execution give us a positive outlook on our domestic performance versus the industry, which bodes well for us, as we enter the third quarter.

It is difficult to know, though, if the recent volatility in the financial markets will affect overall consumer spending. To-date, however, we have not seen a measurable impact versus our original expectations. So, as such, our outlook assumes that there will be no material changes in consumer spending in the third quarter.

With that said, our year-over-year non-GAAP outlook for Q3 fiscal 2016 is as follows. In the Domestic business, we are expecting flat to low-single-digit revenue growth, and an approximately flat operating income rate driven by a higher gross profit rate offset by increased SG&A due to inflation and growth-related investments.

In the International business due to the ongoing impacts of the Canadian brand consolidation and foreign currency, we are expecting an international revenue decline of approximately 30% and an international non-GAAP operating income rate in the range of negative 2.5% to negative 3.5%.

With these expectations, which assume continued strength in our domestic business offset by the near-term impacts of Canada, at the Enterprise level, we expect a flat to negative low-single-digit revenue growth rate and an operating income rate growth of flat to negative 20 basis points.

This includes an approximately 15-basis-point negative year-over-year impact in the Domestic business due to an $11.5 million or $0.02 per share legal settlement that we received in Q3 of last year that will not recur this year.

Additionally, we expect the non-GAAP effective income tax rate from continuing operations to be in the range of 39% to 40% versus 38.1% last year, which could result in a negative $0.01 year-over-year non-GAAP diluted EPS impact in Q3 fiscal 2016. I would now like to turn the call over to the operator for questions..

Thank you. We'll go first to Anthony Chukumba from BB&T..

Good morning. Thanks for taking my question. First off, congrats on a blowout quarter. One thing that jumped out at me or one of the many things that jumped out at me was the 21% comps or sales growth in appliances.

I was just wondering what would you attribute that to? And then second off, how sustainable do you think that is going forward – I mean, maybe not at that rate, but the double-digit rate? Thank you..

Good morning, Anthony. Thank you for your comments. So we are seeing sustained growth now over many, many quarters in our appliance business. This is driven by, number one, the markets. The housing recovery continues to be strong and you're seeing the customers equip their new house or replace their old appliances. That's a very positive factor.

And then second, investments in the appliance sector continue to be very strong.

The deployment of the Pacific Kitchen & Home stores-within-a-store, in particular, is helping us drive better customer experience and market share, in particular, not only in the extreme high-end but also in the better and best part of the market, which is where a lot of the interesting action is.

We're also investing in the customer experience from an appliance delivery and installation standpoint. So these are very fundamental and sustained improvements.

Now, Anthony, this may fluctuate a little bit quarter-after-quarter, but we do expect continued traction, including given the competitive environments that I won't elaborate on, but we expect to continue to see positive performance in that segment..

And, Anthony, in addition to that, I'll just add one supply chain driver of this as well. We made a significant change in how we source inventories through our distribution network in the U.S., which unlocked a substantial amount of inventory for both our online business and for our individual stores in market.

And that is also a driver of this and that will, too, continue as we move forward..

Okay. That's helpful. Thank you..

We'll go next to Chris Horvers of JPMorgan..

Thanks. Good morning..

Good morning, Chris..

I wanted to ask about the TV category. It seems like we're in a sweet spot here.

How did – the pace of price drops in the category, are they occurring, sort of, in line with expectations? How did performance trend, let's say, in the second quarter relative to the past couple of quarters? And is the elasticity there such that you can continue to see accelerating comps into the back half?.

Yes, Chris. The price drops that every one of us, as a consumer can track, are very material. And so the prices at which one can buy a 4K TV now very, very exciting. We expect that this will continue in the second half. As we've mentioned in the prepared remarks, these TVs are becoming very affordable.

And, of course, the innovation and the material change in picture quality is very helpful. So we expect the market to continue to do well in large TVs and 4K TVs.

And, of course, the second factor, a bit like in appliances, the way we merchandise and the customer experience in our stores, with investments we've made together with some of our key partners, with Samsung, with Sony, with LG, and the Magnolia Design Centers allow us to really perform particularly well in that market.

So we see a number of very strong drivers of performance getting into the back half of the year. Now, of course, as we get into the start of the cycle, as you would expect, the margins are not going to continue at the same level, so, factor this in, but it's a very powerful cycle..

And then, as a follow-up, I think, Sharon, last year you talked about some back-to-school timing shifting some demand into July. And we've heard a lot of other retailers talk about this shift unwinding and going the other way into August.

So any commentary that you can share on the cadence and your thoughts on August so far and any potential lifts you've seen from shift..

Yeah....

Go ahead....

Oh, go ahead....

Yeah. I was just going to say the outlook that we've provided today on back-to-school in the quarter incorporates what we've seen so far, right, as you would expect. And so the projection reflects what has been happening since the beginning of the quarter. So I think we've made some positive comments on the overall back-to-school in our Q3 in general.

So that's reflected..

But, Chris, we also last year – that may have been a discussion from other retailers, but that was not a dialog that we had in our conference call last year..

Okay. Fair enough. Thanks very much..

Thank you, Chris..

We'll go next to Kate McShane of Citi..

Hi. Thank you. Good morning. My question centered around holiday 2015 and the expectations for the promotional environment.

Just with some of the robustness, especially, in TVs, do you expect any alleviation in price competition as innovation remains pretty exciting going into the holiday season year-over-year?.

Yeah. Good morning, Kate. Let me say one thing about Q4. Because we are the leader in the category and because any comments I would make today are highly sensitive from a competitive standpoint, you're going to find us relatively shy in terms of making comments that could be used against us, if I can put it this way.

What we have said in our prepared remarks is that we believe there are powerful trends from a demand standpoint around appliances, around TVs, around health and fitness and wearables and around connected home.

The other thing I would say, more broadly speaking, not specific to Q4 from a competitive standpoint, if we step back a little bit and I could have included that in my remarks about the last three years, it feels – I don't know whether all of you will agree with that, but that the competitive landscape has, indeed, changed a little bit in the last three years.

There's a number of players, who have decided to de-emphasize or, in some cases, exit their category. And so that's an important factor. It's true that it's a tough category. So here you go. The other thing that has changed in the last three years, that is actually very notable, is the fact that today 89% of the U.S.

population lives within states, where one of our online competitor, headquartered in Seattle, now collects the sales tax. And so three years ago, it was less than 50%. It was probably around 40%. So that's a very material change over a period of three years.

So, altogether, from a strategic standpoint, we see these growth drivers, and I would add, based on your question that the competitive landscape has changed somewhat in the last three years..

I appreciate that. Thank you. And just another question.

I mean, the number of initiatives with the shop-in-shops and some of the new news that you announced with Apple today with AppleCare and the updating of the shop-in-shop, how do you let your customers know about all these changes? And is it something that you're seeing the customers respond to?.

Yeah. Thank you, Kate. Marketing, we've not commented on marketing on this call. We've commented on marketing on every one of our previous call. We've had a very material transformation of our marketing efforts in the last three years, with the headline being, of course, more personalized.

We went from analog and mass communication to much more targeted, relevant, personalized and digital communications. So as it relates to the shops-within-the-shop, one of the things, of course, is that there's not one of each in every store.

So, as an example, we have the ability to target the messages in a relevant fashion, or we have the ability to target previous users of a particular brand and communicate the news and excitement about new product introductions. More broadly speaking, I am very excited about these how these partnerships with our key vendors have evolved.

It's more than just about the physical layout in the stores. These are very close partnerships. These leading tech companies invest billions of dollars in R&D. They have some very exciting new products, of course, regularly coming to market.

And the collaboration that Best Buy has with some of these, of the foremost companies on the planet in the tech sector, is very inspiring. That includes from a merchandising standpoint, that's from a marketing standpoint and now also from a services standpoint. And so, yes, it's an entire collaboration.

And I think we can attribute some of our performance to this more targeted, more relevant communications, customer database Athena has been now busy at work. Athena is a very busy company over the last one or two years. And we had always said it would be a gradual implementation and exploitation. And I think we're getting better and better at this..

Thank you..

We'll go next to David Schick of Stifel..

Good morning..

Good morning, David..

You talked about the Canadian recapture rate being better than, I think, you had expected. Just a quick question there. Is that conservative assumptions as you planned it, or something that you're doing or adapting to? I'm curious how that's working..

Yeah. I mean, David, in general, we're very pleased with the way the Canadian strategy is being implemented. Our team – this was heavy lifting consolidating two brands into one, closing 66 doors, converting 65 stores and then investing in the customer experience. So, so far, things are really progressing very nicely.

The reason we don't give specific numbers, again, in part, for competitive reasons; two, it's early days; and three, as all of you know, North of the border, the economy, which is highly dependent on raw materials and the oil sector in particular has been impacted.

The exchange rate is down, which is, of course, increasing the prices of consumer electronics product, which is slowing down demand. So today, the better-than-expected retention is somewhat offset, of course, by the weakness of the Canadian economy.

I think we'll be able to assess with reliability the final results once we're through the conversion and once we've upgraded the customer experience. But altogether, it was obviously the right thing to do. And it's progressing quite nicely in a somewhat challenged Canadian economy..

Great. As a follow-up question, you talked a little bit about the closer work with vendors and product launches, I think, in response to Kate's prior question.

Could you talk about how a product launch from a vendor works today versus a few years ago? How Best Buy's interaction with a vendor on launching a product if we stepped back and looked at it versus three years ago?.

David, that's – how much time do you have?.

(40:37) as long as you keep going..

Because it really varies by vendor base. We have such a variety of vendors. In some cases, we actually work very much upstream, including in terms of product design and the choice of feature functionalities, and then this co-designing, the customer experience and in the marketing. In some cases, it's more about the merchandising and the marketing.

So there's a whole range, but it's – in general, what I would highlight is that it is – it happens earlier on. It's more strategic, it's more integrated and it's working. That would be the summary. Now to our conference we would need to schedule separately..

Got it. Thanks very much..

We'll go next to Simeon Gutman of Morgan Stanley..

Good morning. This is actually (41:32) for Simeon. I just have a question around lapping the iPhone 6 sales from last year.

Can you measure the incremental traffic that brought to the stores? And then, what do you see as a potential impact from – maybe iWatch is potentially offsetting that?.

So your question is, does the launch of an iconic product generate traffic to the stores? The answer is yes. And increasingly, again, that's one of the things we're working on with our key vendors is to make it more dramatic and more unique and more differentiated vis-à-vis any of the other retailers. So I would say yes to that question.

As it relates to your second question is, does the Apple Watch momentum compared to the phone – that would be too much detail, I think, at this point.

I think I would say we're very excited by, again, the early momentum of Apple Watch in our stores, which, obviously, a triggered decision that we've made with Apple to have an accelerated and expanded rollout. So we think that's a very exciting news.

It's also reflective of how these partnerships, the strength of these partnerships lead to more opportunities..

All right. Great. Thanks.

But, specifically, around the iPhone 6, are you able to like quantify the incremental traffic from last year?.

We didn't release anything last year, Simeon, (43:00) around the traffic, but, obviously, we had substantial traffic associated because, as you'll recall, one of our big callouts in our revenue in Q3 was related to the iPhone 6.

But it was actually from a revenue point of view and from a units point of view, if you recall, it was very much about the revenue, and not the units. So when you think about that, because it's higher dollars. So I would say that it was certainly a traffic driver and we are thrilled to have a new traffic driver this year, something very iconic.

I think we can all agree the Apple Watch is certainly iconic and having it in all 1,000 stores by the end of September is a big deal for us..

Okay, guys, thanks. And then, my follow-up is around Project Athena and some of your price optimization initiatives.

Can you just talk about where you are with those and are they expected to be in place by the holidays?.

So there's two components. Athena is really our customer database, which allows us to have this greater personalization and more relevant, more targeted communication. So I think that we'll benefit from that during holiday. I think what you've seen these last couple of quarters is very indicative of our capabilities.

And we'll continue to incrementally improve that in the coming quarters. As it relates to the second part of your question, which is the promotional discipline, this is an area we have invested in. I think if I step back over the last three years, we've had several phases. One is we established a price match policy.

Two, we have invested significantly in our price competitiveness, starting with hardware and then accessories. You've heard me talk this morning about services. We have previewed that in previous quarter, but with the launch of Geek Squad Protect & Support Plus that's another step forward.

And then, the other dimension we're talking about, which we had talked about last year, is the promotional discipline. We're applying more science and more tools to this area to make sure that the return on the promotional dollars is getting better and better. So we're continuing to see improved progress in this area.

And we'll continue to deploy this as we move forward. We are a very data and science-driven management team here on matters like that..

And, Simeon, (45:33) going into holiday, though, and Q3 as well, with Athena, Athena is gradually and incrementally getting better and smarter every quarter. We have made substantial investments every single quarter.

When you look at these growth investments that we have been making, a significant number of those have been directly in our ability to use Athena and the database. We've also brought in additional talent into the company in that area; some very sophisticated talent. And that, of course, is advancing us.

So when we go into holiday this year, we are definitely going to have a more robust experience for our customers coming out of the efforts that we put forward with Athena..

All right. Great. That was very helpful. Thank you..

Thank you..

We'll go next to Mike Baker of Deutsche Bank..

Thanks. Two questions. One, just on your store count, you're about flat year-over-year. I think you've closed maybe 50 stores out of 1,100 stores since you guys became the management team. As I recall from past conversations, you have a lot of leases that come up for renewal in 2016.

Can you just update us on your thoughts on what your long-term store count should be?.

Yes. So first, the 49 stores that you might be thinking of, actually, were closed prior to us joining the company. So the first point that you made was actually just prior to Hubert joining, so just to round set on that fact. Since then, what we are doing, we do have a significant amount of our leases expiring.

It's a substantial number and our strategy has not changed. As we are looking at each lease, we will rationalize as we think is appropriate. Last year, we closed five stores. And this year, we'll walk into the year and we will be assessing the leases and determining what that would look like. But there is no announcement to be made.

We consistently have said that targeting a store count, we're targeting rationalization of our footprint, particularly, in our multi-store markets, and to the extent that we have redundancy or stores that we feel should not be in the network long-term. Of course, we'll close those. We're not reluctant to close them.

But, right now, as we've talked about consistently, we do not have – look at these numbers – we do not have a list of stores that we have negative cash flows, or significant issues with. So, that's the great news. We don't have a story to tell about our portfolio that is not performing..

Right. Yeah, excellent point. A second question, if I could, can you quantify the gross profit rate benefit of the change in the mobile warranty plan this quarter? I mean, do you list them in your press release in order of the magnitude? And then, a related question. I think you start to lap up against that in the fourth quarter of this year.

Is that right?.

Yes. That's right. We do list them in order of magnitude. So that's all the information, because, again, some of this is pretty competitive. But we definitely list them in order. And I think you've got one that was quantified below it. So it's more than that..

Right. Yes. Understood. Okay. Thanks. I'll pass it on to someone else..

Yeah. And, Mike, what I would say amplifying what Sharon just said, you'll find us increasingly prudent about releasing product category detailed information, because we are only focused on technology, because it's natural to ask these questions.

And we're very focused on transparency, but we are also thoughtful about the help it provides to our competitors. So, hopefully, you'll understand when we feel that too much information can hurt us as a company, and therefore, can hurt our investors' trade secrets, we think, are valuable to our investors as well..

Thanks. Appreciate it..

We'll go next to Dan Binder of Jefferies..

Hi. Good morning and congratulations on a good quarter..

Thank you..

There were two things I wanted to touch on. First, you talked about increased conversion.

I was wondering if you could talk a little bit about the change in the labor model and the dot-com acceleration, I suspect – I think you said it was a function of conversion how maybe average time to customer is coming down, if you could just touch on those two things?.

Yeah. Thank you for your question. There's multiple facets in your question. So let's start with the online components. Which we report online sales and it's an important part of our business, but we believe that online and mobile are a much bigger part of the business than just the online sales, because it's really front door to the store.

This is where we all notice. This is where the customers start the research. So we are excited about the growth of online. We are excited about the increased traffic and the increased conversion rate. I think the improvements that have been made on the site and in the app over the last three years are just extraordinary.

Now we have a long way to go, but I'm very proud now of where we are. Still continued progress to be made in the checkout, in the customer experience, significant improvement from a supply chain standpoint, it's been transformative.

The speed at which we're shipping now, in particular, enabled by ship-from-store, that's been a phenomenal transformation. Now the customers may start the journey online, they often go to the stores.

Now, we've always believed that as a result of these trends in consumer behavior, the store experience need to be so much better, right? Because when the customer gets to the store, she has done a lot of research and she's much more educated than maybe a few years ago.

And so it's maybe that in some cases we see fewer trips to the store, because so much time has been spent before the store. And so the focus in the store is on the customer experience. So first physically and together with these vendors, we've invested significantly in the physical experience in the stores, and candidly, it is so helpful.

You cannot use your senses online to see the difference in picture quality of the TV or the sound quality of a headphone. You really have to go to the store. And then, of course, there's the blue shirts. Our associates are such a formidable weapon for us.

And I hope we're doing a good job this morning on thanking them on the call for their amazing performance in the entire leadership in retail.

I think your question refers, in particular, to the comments we've made about the increased proficiency that we've made – that the associates have in the stores, even though we've taken $1 billion of cost out, we've actually increased the amount of customer-facing labor, and we've increased the product knowledge, the engagement and the overall sales proficiency.

So we've talked about it as IST, individual sales productivity, individual sales tracking. This program has continued to be deployed. And we can measure the improvements as a particular area of focus. Our store leadership is focused on what they call – what we call value-add, which is the difference between the comps in the stores and the traffic.

So it's really focused on what they control in the stores. And we're seeing continued progress from that standpoint. I'm incredibly proud of what we're seeing in the stores. Now there's more to come. I think that I'd be lying to you, if I was going to tell you that we are consistently excellent.

We have a number of stores, a number of associates that still have progress to make.

But it's the combination of this better in-store performance and the excellent merchandising, the supply chain, the marketing, the service components, really the integration of all these capabilities that is resulting in these better-than-expected and better period results. So continued progress on all of these fronts..

And I'll just add that last year, we talked about the investments that we were going to be making in IST, because our systems and our HR management tools were not set up to manage IST. We've been making progress on that.

The stores are able to much more easily see performance individuals, and our stores are being able to see their actual performance and be able to be coached and to be able to work on improving that performance. And we believe, without a question, that the efforts that we have seen related to this in-store are absolutely driving these positive comps.

So the implementation of IST last year, if you just go back and look at when we first started talking about IST and you look at the outcomes that we have been seeing in the retail stores, because, remember, that the retail stores delivered significantly positive comps this quarter.

So we definitely believe that there is a correlation there and we are optimistic that we will continue to see longer-term improvements, as Hubert described, the proficiency that we're trying to build through this program..

And if I could, just a follow-up on leverage and buyback. Obviously, the results have been showing improvement. Net of cash, you don't have a lot of leverage. Just curious if your thoughts around that are changing in any way..

No, not at – I mean, obviously, in the first quarter, we did repurchase about $321 million worth of shares. When we launched the program last quarter, I believe, we said we were going to do $1 billion over three years. There's no doubt that we are going to achieve that quicker just based on what we did in the second quarter.

And we will continue to be there to support our stock. So I don't think anything's changed from our lens around maintaining a strong balance sheet. The performance clearly justifies us accelerating against that $1 billion, which you've already seen us do. So that's how we're going to – that's the best answer I can give you at this point..

Great. Thank you..

At this time, I would like to turn the call back over to Hubert for any additional or closing comments..

Well, thank you so much. In closing, I'll just repeat this. Very proud of the results. We're excited about our prospects and opportunities. Very grateful for the work of our team and continue to be very grateful for your support, as we continue to unfold our story.

So we look forward to seeing you first in our stores or online, we'll be there for you, and then on our next call. So thank you very much. Have a great day. Thank you..

That does conclude our conference for today. We thank you for your participation..