Best Buy Co Earnings Call Insights: Operating Income and Gross Margin Outlook

On Tuesday, Best Buy Co Inc (NYSE:BBY) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Operating Income

Christopher Horvers – JPMorgan: You mentioned that you don’t expect the operating income rate to decline at the same pace in the fourth quarter as it did in the third quarter. Can you talk about maybe more specifically what changes in the fourth quarter versus the third quarter, whether it’s domestic sales, international sales, domestic gross margin, international gross margin, and then, on the PC category, it sounds like you are increasingly positive about Windows 8. Can you talk about the performance of PCs before and after the launch of Windows 8?

Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.

Jim Muehlbauer – EVP – Finance and CFO: Yeah. Chris, it’s Jim. Thank you very much for the question. Looking at the fourth quarter in comparison to what we’ve seen so far this year. If you recall all year long, we’ve been talking about product launches that we expect to be back-end loaded towards the holidays and certainly the performance that we’ve seen and others in the marketplace have seen in advance of the computing launches and phone launches so far this year has had an impact on dampening sales, so now that we have those products in our stores, we expect certainly more momentum behind those things. So that is one of the key attributes that we’ve been looking at all year from a sales trend performance. The other element that’s related to that sales trend performance impacts our gross margins. In preparation for moving inventory in advance of those new products releases, we took actions in Q3 to make sure that our inventories were in clean position and that we were all set with the new products, so we expect benefits in that and the gross margin line. We also have talked historically about one of the key elements that’s driving our margin rate down in Q3 and Q4 is the lapping of the smartphone mix in our Best Buy mobile business. We’re actually going to anniversary that in Q4, so we’ll have an easier comparison from a margin rate perspective in mobile phones in Q4, so the combinations of new products, less transition cost and easier comparisons from a lapping standpoint of mobile phones are all factors that we’re looking at as we think about whether that run rate is going to continue or not and which is why we’re confident in saying it will not in Q4 Chris.

Christopher Horvers – JPMorgan: So just as a follow-up, do you think will Windows 8 cause a positive inflection in comps in the PC category?

Jim Muehlbauer – EVP – Finance and CFO: I am not going to comment on specific products within the PC category, but given the trends, certainly in Q3 in computing in general, consumers are going to have a great opportunity to look at not only the Windows 8 products, but the other new computing products out there and also the array of tablets and eReaders and I’ll let Mike Vitelli to comment further on some of the specifics.

Mike Vitelli – President, United States – Enterprise EVP: Chris, this is Mike Vitelli. Couple things I want to say, we put a tremendous amount of training and emphasis on the Windows 8 launch and one of the things that we are excited about is that we have 45 exclusive models to Best Buy on Windows 8, in which 25 of those have touchscreen, which is one of the key attributes of that. So with the training, the product launch, the emphasis that the industry is putting on it and the effort that we are putting on it is something we feel good about going into the fourth quarter.

Gross Margin Outlook

Colin McGranahan – Sanford Bernstein: Just following up on the gross margin outlook, two other questions. First, how are you thinking about the holiday price match in terms of impacting gross margin in Q4? And secondly, the international business, the gross margins performance there was very difficult obviously related to mobile mix in Europe primarily. Would you expect that to continue going forward as well?

Mike Vitelli – President, United States – Enterprise EVP: Colin, this is Mike Vitelli. We’re very early in the price match process for the holiday season. We feel good about it from a couple of vantage points, and what I mean by that is our Blue Shirts are very positive about this and very empowered about this by giving them the ability to match prices in areas where they have seen and we’ve been showing them that we’ve been competitive relatively close, particular in hardware category. So we’re moving into the fourth competitive quarter with that empowerment, engagement and the ability for our Blue Shirts to make the decision in the moment to take care of our customers.

Jim Muehlbauer – EVP – Finance and CFO: And Colin, the second part of your question related to international, our margins in international have been challenged all year long, as we noted in our comments, predominantly driven by the European business. We do expect the margin to get little bit better in Europe in Q4 as once again we’re anniversarying some of the effects of the pricing changes we made last year, but I would tell you they are not going to be demonstrably different in International as we look at the fourth quarter based on our current outlook.

Colin McGranahan – Sanford Bernstein: Jim, while I’ve got you, just back on the price match, what kind of a margin impact do you think that will have and I understand that you expect it to drive incremental sales and hence gross profit dollars, but just in terms of a rate impact, what should you’d be thinking about?

Jim Muehlbauer – EVP – Finance and CFO: Colin, we are not going to go through the specific exceptions of that in our rate for a couple of reasons. One is, we’d have the price-match out there relatively short period of time. We feel really good about the prices that we have in place along our key product categories, and as always, during the holidays selling season especially during Black Friday, we feel very comfortable about the competitiveness of our prices in general. So, how that actually plays out into later December, well, we’ll need to see, but we’ve tried to consider various scenarios in our outcome and certainly we look forward to the increase benefit and confidence that our Blue Shirts get from knowing that they are going to be able to offer the customers the best price in the marketplace and the benefits that come along with that for our model.

A Closer Look: Best Buy Earnings Cheat Sheet>>