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Best Buy Co., Inc. (NYSE:BBY)
Q2 2019 Earnings Conference Call
Aug. 28, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Best Buy's Q2 fiscal year 2019 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press *1 on your phone. If you choose to be taken out of the queue, please press * 2. As a reminder, this call is being recorded for playback and will be available by approximately 11 a.m.. Eastern Time today. If you need assistance on the call at any time, please press *0 and an operator will assist you.

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

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 Corie Barry, our CFO. During the call today, we will be discussing both GAAP and non-GAAP financial measures. 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, which is available on our website, investors.bestbuy.com.

Some of the statements we will make today are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may address the financial condition, business initiatives, growth plans, investments, and expected performance 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 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. I will now turn the call over to Hubert.

Hubert Joly -- Chief Executive Officer

Good morning, everyone and thank you for joining us. I will begin today with a review of our second quarter performance and provide an update on our progress as we continue to implement our "Best Buy 2020 Building the New Blue" strategy. I will then turn the call over to Corie for additional details on our quarterly results and our outlook.

We are happy to report strong top and bottom line results for the second quarter that exceeded our expectations. We grew our enterprise comparable sales by 6.2%, and we delivered non-GAAP diluted EPS of $0.91, which is up 32% compared to last year. The top line performance was broad-based with positive comparable sales across all channels, geographies, and most product categories.

Our strong revenue growth was helped by the favorable environment in which we operate and driven by how customers are responding to the unique and innovative experience we are building. We are particularly encouraged with the continued progress of our Net Promoter scores and our continued market share gains.

We also saw our second quarter non-GAAP operating income rate expand by 20 basis points to 3.8%. This fits with our guidance for flat operating income rate for the year driven by our ability to drive cost take-outs that helps offset investments and pressures in the business. I want to thank all of our associates across the company for their hard work in delivering these great results.

While we're pleased with the strength of our financial performance, we are also excited about the progress we're making as we execute our Best Buy 2020 strategy, which entails expanding what we sell and evolving how we sell. Let me provide a few highlights, starting with our acquisition of GreatCall. Earlier this month, we announced our intent to acquire GreatCall, the leading connected health services provider for aging consumers. GreatCall offers easy-to-use mobile products and connected devices tailored for seniors. These are combined with a range of services, including a simple one-touch connection to U.S.-based specially trained agents who can connect the user to family caregivers, provide concierge services, and dispatch emergency personnel.

Our acquisition of GreatCall is exciting for 5 reasons. First, it is right in line with our strategy. Our purpose as a company is clear. It is to enrich lives with technology by addressing key human needs. One of these needs we highlighted during our Investor Day meeting last September, is health and wellness, a space we decided to expand into with a focus on aging consumers and how technology can help them live a more independent life.

The second reason is the health market is an exciting space, especially as it relates to seniors. There are approximately 50 million people over the age of 65, a number expected to grow by more than 50% within the next 20 next years. Helping this fast-growing population live longer in their homes, provide significant benefits not only for seniors and their families, but also for payers and providers.

The third reason is we are acquiring a great company. GreatCall is a profitable, growing, recurring revenue business that already has more than 900,000 paying subscribers and more than $300 million in annual revenue. They have an established expertise in serving the aging population and their caregivers, and they have a strong management team and a culture that is well-aligned with Best Buy.

The fourth reason is we see significant value creation opportunities, driving an attractive return on investment. The combination of their products, services, and expertise with Best Buy assets, including our merchandising, marketing, sales, and service capabilities, provides the opportunity to both scale their existing consumer business and pursue commercial opportunities with payers and providers.

Finally, we believe this acquisition can be a beachhead for Best Buy in the health space, providing the entry point to more growth opportunities. We expect to close this transaction by the end of the third quarter. We anticipate the impact on our non-GAAP earnings to be neutral this year and next year as we invest in the business, and accretive to earnings by our fiscal '21.

Our second highlight of the quarter is the rollout of our new Total Tech Support program. We launched the program nationally at the end of May and we are pleased with the initial results. Our retail teams are very engaged and excited about the program and customer sign-ups are in line with our expectations. From a financial standpoint, the impact of the rollout on our domestic gross profit was in line with the expectation we shared last quarter.

As a reminder, the $199 per year Total Tech Support members get unlimited Geek Squad support online, via chat, in stores, and in the palm of their hands with the new Best Buy Home app. All their technology is covered, no matter where or when bought it, as we believe that support should not be limited to a specific product and that the customer need is to have all their technology work together. Members will still receive free internet security software and discounts on in-home services and purchases of annual Geek Squad protection and Apple Care service plans.

We are working on additional capabilities as we continue to advance the program and we believe our current rollout is just the beginning in terms of the benefits we will offer members all the time. I think you'll all be happy to know you'll be able to purchase a Total Tech Support membership as a gift for someone else this holiday season, which is something customers have been asking us for.

The third highlight of the quarter is the launch of the first Fire TV edition Smart TV that's part of our product development partnership with Amazon. This partnership is a great example of how we are leveraging our expertise and unique merchandising, marketing, and sales assets to help leading technology companies commercialize their new products. As a reminder, the TVs are available only in Best Buy stores, on Bestbuy.com and on Amazon.com through Best Buy as the third-party seller. We're planning to launch additional models in September and October.

The fourth highlight of the quarter has been the rollout of our new brand's rallying cry, "let's talk about what's possible." The rollout included training sessions or brand rallies across our company, including our stores. Each store dedicated significant time on a Saturday in June to immerse all store associates in the new rallying cry. The rally cry and the related guiding behaviors which are: "be human," "make it real," and "think about tomorrow," are resonating strongly with our associates and are a source of inspiration for all of us.

In line with this, the fifth highlight of the quarter is the continuing progress of the proficiency of our associates and of the quality of our execution across channels that is driving enhanced Net Promoter scores and revenue growth. The level of knowledge of our sales associates and their focus on addressing the needs of our customers in a helpful and inspiring fashion is exciting to watch. In fact, I am pleased to announce that according to the JD Power 2018 appliance retailer satisfaction study, Best Buy ranked highest in customer satisfaction among appliance retailers for the second year in a row.

Another highlight of the quarter is the continued expansion of our in-home advisor program. Based on the strength of demand, we've increased the numbers of advisors from 300 in September last year at the beginning of the nationwide launch, to more than 430 at the end of the second quarter. As a reminder, our in-home advisors provide free in-home consultations to help customers address their needs across our full range of products and services. The goal of the program is that the initial consultation is the beginning of a deeper and more relationship-based experience with Best Buy over the long term.

[Inaudible] support offer, we are early in the journey and expect the program to continue to improve and mature as our advisors are in their roles longer and master our sophisticated skills as we further enhance the sophistications of the tools and systems that help them do their job. In addition, we are continuing to use technology to improve and streamline the online buying experience for our customers and to bring together the advantages of our various channels in a way that is seamless and intuitive to customers.

As a result, based on the data we have, we believe we are continuing to gain market share online. While we are, of course, focused on continuing to drive online revenue, we are more and more focused on how to build deeper relationships and drive total revenue from customers. We are pleased with our overall revenue growth and the progress we are making on continuing to improve the customer experience across all the ways our customers want to engage with us.

For example, to further improve the buy online, pick up in store experience, our mobile app home screen will display the order ID barcode when an online order is ready for pick up in a store, reducing the amount of time a customer has to spend at the pickup counter. Another example is related to improving the research process. Customers perform research in stores by scanning product fact tags and then reading information and reviews. However, they often lose track of what products they scanned once they leave the store. And so we added a feature called "scan history" to the Best Buy app to retain customers' product scans and scan to compare history so that they can reference it and continue research after leaving the store.

As we implement our Best Buy 2020 strategy and in support of expanding what we sell and evolving how we sell as I've just outlined, we are continuing to invest in a range of enablers across technology, people, and specialty. Specifically, we are continuing to invest in areas such as specialty labor, enterprise customer relationship management, knowledge management capabilities, and our new service platform.

In the supply chain area, we are investing to increase capacity, further increase speed of delivery, and drive efficiency. As a example of this, we recently opened a new distribution center in Compton, California. Compared to the old center we were leasing in Chino, California, the new distribution center is closer to consumers, with 50 million consumers within 50 miles. This center has significantly more capacity for our growing large-cube categories like large appliances and large TVs, and as a result, we've seen significant improvement in our productivity and home delivery Net Promoter stores.

We are also using a section of this 600,000 square foot facility to build out a completely new automated system that will facilitate faster and more efficient online order delivery to the local metro area, as well as the whole West Coast. To help offset our investments and pressures in the business, we continue our long-standing diligence on increasing productivity and decreasing costs. Our current target, established in Q2 of last fiscal year, is $600 million in additional annualized cost reductions and gross profit optimization to be completed by the end of fiscal '21. During the second quarter, we achieved approximately $70 million in additional annualized reductions, bringing the cumulative total to $335 million toward our goal.

Looking ahead, as a result of the strong performance in the first half of the year and our updated expectations for the back half, we are raising our full-year sales and earnings guidance. We now expect fiscal 2019 comparable sales growth of 3.5% to 4.5% versus our original guidance of flat to 2%, and we are raising our expectations for our non-GAAP diluted EPS to a range of $4.95 to $5.10 versus our original of $4.80 to $5.00. We continue to expect an approximately flat non-GAAP operating income rate of 4.5% for the year. Corie will provide further details on our outlook for the full year and Q3.

You will note that the profile of the next two quarters is not completely linear, as we're expecting an operating income rate decline in Q3, followed by an increase in Q4, to result in an approximately flat rate for the year. Similar to the past several years, we remain focused on managing the business for long-term success, rather than ensuring a straight line quarterly margin performance.

In conclusion, we are very excited about the opportunities in front of us from enriching lives with technology and providing services and solutions that solve real customer needs and build deeper customer relationships and the retailed value creation opportunities that this entails. I want to reiterate how much I appreciate the leadership, passion, talent, ingenuity, and hard work of our associates across the company. You are making it all possible. Now, I'd like to turn the call over to our CFO, Corie Barry, for more details on our Q2 performance and our fiscal 2019 guidance.

Corie Barry -- Chief Financial Officer

Good morning, everyone. 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. On enterprise revenue of $9.4 billion, we delivered non-GAAP earnings per share of $0.91, both of which exceeded our expectations. We saw better-than-expected top line results across multiple categories, with home theater, gaming, health and wearables, and mobile phones being the largest drivers.

Our gross profit rate was in line with our expectations, whereas our SG&A rate was favorable due to the higher revenue combined with slightly lower-than-expected spend. I will now talk about our second quarterly results versus last year. Enterprise revenue increased 4.9% to $9.4 billion, primarily due to the comparable sales increase of 6.2%. Enterprise non-GAAP diluted EPS increased $0.22 or 32% to $0.91. This increase was primarily driven by an $0.08 per-share benefit driven by a lower non-GAAP effective income tax rate, an $0.08 per-share benefit from the net share count change, and the flow-through of higher revenue.

Our comparable sales growth of 6.2% included a 150 basis point benefit from the calendar shift. As we discussed last quarter, our reported comparable sales are computed on like-for-like fiscal weeks and are not shifted to more closely aligned calendar weeks, following last year's 53-week year. For the remainder of the year, in Q3 we expect the calendar shift to have a negative impact of approximately 70 basis points on our reported comparable sales, and in Q4, we expect a positive impact of approximately 50 basis points.

In our domestic segment, revenue increased 4.4% to $8.6 billion. This increase was primarily driven by a comparable sales increase of 6%, partially offset by the loss of revenue from 292 Best Buy Mobile and 17 large-format store closures in the past year.

From a merchandising perspective, the largest comparable sales growth drivers were home theater, computing, appliances, gaming, mobile phones, and Smart Home. These drivers were partially by declines in our digital imaging and tablet categories. Domestic online revenue of $1.21 billion was 14% of domestic revenue compared to 13.2% last year. On a comparable basis, our online revenue increased 10.1% on top of 31.2% growth in the second quarter of last year, primarily driven by higher conversions and increased traffic.

Let me take a minute to provide a couple of additional points on this topic. As Hubert said, we are pleased with our overall revenue growth and the progress we are making on improving the customer experience. We believe, based on the most recent data we have, we are continuing to gain market share online. Regarding our online comps specifically, I would add that the consumer electronics category is a more mature online category than several other retail categories, with customer buying patterns moving online earlier than most.

As many of you know, we have been focused on our multi-channel capabilities and have been investing heavily for several years. For example, we have been offering our customers the option to buy online and pick up in store for more than 10 years, and all our stores have been shipping products to fulfill online orders since the beginning of 2014. In the last 5 years, we have doubled on online sales and on an annual basis, they are now approximately 15% of our total domestic sales.

Now, back to our Q2 sales results. In our international segment, revenue increased 10.8% to $740 million. This is primarily driven by comparable sales growth of 7.6%, driven by both Canada and Mexico; incremental revenue associated with 6 new large-format store openings in Mexico over the past year; and approximately 60 basis points of positive foreign currency impact.

Turning now to gross profit. The enterprise gross profit rate decreased 30 basis points to 23.8%. The domestic growth profit rate was 23.8% versus 24% last year. The rate decline of approximately 20 basis points was driven primarily by higher supply chain costs from both investments and higher transportation expense, as well as the national rollout of our Total Tech Support offering. Both of these were in line with the expectations we shared last quarter of approximately 25 basis points of pressure each. These pressures were partially offset by higher overall product margin rates, which included the benefit of our gross profit optimization initiative.

From a category perspective, increases in the Smart Home and appliance categories were partially offset by rate pressure in mobile phones and computing. The international non-GAAP gross profit rate decreased 200 basis points to 23.1%, primarily due to a lower year-over-year gross profit rate in Canada, driven by lower rates in the home theater and mobile phone categories.

Now turning to SG&A, enterprise SG&A was $1.88 billion or 20% of revenue, which increased $47 million, but decreased approximately 50 basis points versus last year. Domestic SG&A was $1.71 billion or 19.8% of revenue versus $1.67 billion or 20.2% of revenue last year. The $43 million increase was primarily due to growth investments, which include specialty labor, higher depreciation expense, and higher variable costs due to increased revenue. These increases were partially offset by cost reductions and lower incentive compensation.

The specialty labor investments include additional dedicated labor in areas such as in-home advisor, appliances, and Smart Home. In addition, it also includes the impact of competitive wage and benefit investments we have made in relation to rising wage rates across the retail industry. As we have stated in prior quarters and on our Investor Day, increasing wage rates are an ongoing pressure in our business that we are balancing with a combination of returns from new initiatives and ongoing cost reductions and efficiencies.

International SG&A was $165 million or 22.3% of revenue versus $161 million or 24.1% of revenue last year. The $4 million increase was primarily due to increased variable costs associated with higher revenue and the negative impact of foreign exchange rages. On a GAAP basis, the effective tax rate decreased to 25.4% from 32.6% last year. The lower effective tax rate was primarily due to the reduction in the U.S. statutory corporate tax rate as a result of tax reform.

From a cash flow perspective, we ended the second quarter in line with our expectations. We returned approximately $500 million to shareholders in the form of share repurchases and dividends. As it relates to our acquisition of GreatCall, we plan to use existing cash for the $800 purchase. The acquisition of GreatCall is not expected to impact our previously communicated plan to spend $1.5 billion on share repurchases this fiscal year.

I would now like to talk about our annual and Q3 guidance. As Hubert mentioned, we are raising our full-year guidance for revenue and EPS to reflect the out-performance in the first half of the year and our expectations for the back half. For the full-year, we are now expecting the following: enterprise revenue in the range of $42.3 billion to $42.7 billion; enterprise comparable sales increase of 3.5% to 4.5%; non-GAAP operating income rate of approximately 4.5%, which is flat to fiscal 2018 rate on a 52-week basis; non-GAAP diluted EPS in the range of $4.95 to $5.10, an increase of 12% to 15% -- this represents an increase of 17% to 21% when compared to fiscal 2018 on a 52-week basis; Non-GAAP effective income tax rate of approximately 24.5%; and capital expenditures of approximately $850 million.

There are assumptions in our annual guidance that I would like to remind you of. We continue to expect the Best Buy Mobile small-format store closures to negatively impact revenue by approximately $225 million with flat to slightly positive impact on our operating income. Our investments, in particular in specialty labor, supply chain, and increased depreciation related to strategic capital investments, and ongoing pressures in the business, including approximately $40 million of lower profit share revenue in the fourth quarter, will be partially offset by a combination of returns from new initiatives and ongoing cost reductions and efficiencies.

Specifically, the higher supply chain cost from increased investments and higher transportation expense are expected to pressure the domestic gross profit rate by approximately 25 basis points. The national rollout of Total Tech Support is expected to pressure the domestic gross profit rate by approximately 15 to 20 basis points. Also, our guidance reflects lower annual incentive compensation expense in the fourth quarter, as at the beginning of the year, we reset our performance targets to align with our fiscal 2019 expectations.

Finally, our guidance does not reflect any impact from the GreatCall acquisition, as we are pending close of the deal. As Hubert stated earlier, we expect the impact of the acquisition to be neutral to our non-GAAP earnings in fiscal 2019. As Hubert also mentioned earlier, the quarterly composition in terms of year-over-year operating income rate performance is not linear and we expect more pressure on our operating income rate in Q3 than the other quarters in the year. I would note this is consistent with how we saw the composition of the quarters unfolding at the beginning of the year.

Our Q3 outlook is as follows: enterprise revenue in the range of $9.4 billion to $9.5 billion; comparable sales growth of 2.5% to 3.5%; domestic comparable sales growth of 2.5% to 3.5%; international comparable sales growth of 2% to 4%; non-GAAP diluted EPS of $0.79 to $0.84; a non-GAAP effective income tax rate of approximately 25%; and a diluted weighted average share count of approximately 281 million shares.

A few additional comments specific to our third quarter guidance. As I mentioned earlier, the calendar shift is estimated to negatively impact Q3 domestic comparable sales by approximately 70 basis points. We expect to see our gross profit rate pressured due to the following: (1) approximately 30 basis points of gross profit pressure for supply chain, including increased investments, as well as higher transportation costs; (2) approximately 20 basis points from the rollout of Total Tech Support, as we incur costs as members tend to receive services and discounts immediately when they join the program, while we recognize the related revenue equally over 12 months; and (3) while we experience these pressures in Q2, as well, we partially offset them with better year-over-year merchandise margins, including the impact from gross profit optimization initiatives.

As we knew and planned for when we entered the year, we are lapping a unique collection of benefits that incurred in Q3 of last year and thus do not expect as much merchandise margin expansion in Q3 of this year. We expect the SG&A dollar growth rate to be in the low single digits. This is largely due to higher investments, particularly higher depreciation expense, and specialty labor, including investments in competitive wages and benefits. In addition, due to timing of incentive compensation accruals last year, we expect to see slightly higher incentive compensation cost in Q3 before the material year-over-year decline expected in Q4.

Due to the calendar shift this year, which results in Q3 ending a week closer to the holiday season, we expense to end the third quarter with an inventory balance increase of approximately 18% compared to the third quarter of last year. On a like-for-like kl basis, our Q3 ending inventory balance is expected to be up just slightly compared to last year.

I will now turn the call over to the operator for questions.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. As a reminder, to allow everyone an opportunity to ask questions, please limit yourself to one question. Again, please press *1 to ask a question.

We'll take our first question from Michael Lasser with UBS.

Michael Lasser -- UBS Investment Bank -- Analyst

Good morning. Thanks a lot for taking my question. What's the slope of the growth services going to look like from here? Should we expect that that particular comp rate should accelerate? As that becomes a bigger piece of the business, how is that going to affect the gross margin over time?

Corie Barry -- Chief Financial Officer

I'll start it and then Hubert can add. You were cutting out a little bit, but I think what you were looking for was the slope of the growth on services and how that could potentially impact the margin profile. Obviously, pleased with the growth that we saw and reported in Q2. Though most of that growth, transparently, is still coming from our more traditional warranty business. Obviously, we're starting to see revenue flow from the Total Tech Support offer but that is, as we've talked about, amortized over 12 months, so it's takes a little bit longer to ramp.

We're excited about the trajectory of the business and believe, especially as we start getting deeper into the growth trajectory with Total Tech Support that will help add some of that ongoing growth to the top line and the stability of the business. We're not going to guide services in particular but at the end of the day, subscriptions are right in line with where we thought we'd be at this point and they're going to start to add value, particularly as consumers still see value in the existing warranty portfolio that we offer in the business.

To your point around the margins, specifically, as we delve deeper into and have more of that kind of recurring relationship with our customers, that is certainly not harmful on a margin basis over time but what's more important to us, genuinely, transparently, is making sure that we're serving the customers and we're developing that longer-term, stickier relationship with them. That's really what we're most focused on at this point.

Hubert Joly -- Chief Executive Officer

I was going to comment that Best Buy 2020 strategy is a strong solutions and services orientation, but it's not always translated into services revenue. An extreme example of that is the in-home advisor program. As I said on the call and as you know, the first visit is free and it results in, if there's a sale, into products and some services revenue. The broader orientation is really focusing all of our activities on the customer needs and building the relationship with the customer.

The biggest opportunity is in the expansion of our share of wallet of our existing and prospective customers, which is still today around 25%-26%, as we discussed at our Investor Day. While we report and track services revenue, the strategy is much bigger than this particular line in revenue breakdown.

Michael Lasser -- UBS Investment Bank -- Analyst

Hubert, I have one more question for you. Given the healthy results that the bath merchants achieved in the consumer electronics category this quarter, is this the point in the cycle where there's going to be a handoff from the specialty channel to the mass channel? And if not, why is this time different?

Hubert Joly -- Chief Executive Officer

Again, you're cutting a little bit in and out. I think you were asking about whether we intend to have a handoff of our business to the mass channel. The clear answer is absolutely not. We noted, like everyone else, the strong results of a number of other retailers, including in the category. Bear in mind that everybody's business is different in terms of mix. So, depending on the category and the quarter, the headline number can be high. But we note that we continue to gain market share across all of the categories that we compete in and there's absolutely no intention to have a handoff. We are polite and Minnesota-nice, but not to this point.

We think that we are building an elevated and unique customer experience. If your customer that is excited about technology and is looking for help and support and a relationship, we are building something that is very, very special and we feel it's working. I know in the past there's been this idea that once technology matured it flows to the mass channel and then we have to move on. That's not at all what we're seeing and that's not at all our intention and we're very excited about the opportunities we have to build a very unique customer experience and deep, sticky customer relationships.

Michael Lasser -- UBS Investment Bank -- Analyst

Best of luck.

Corie Barry -- Chief Financial Officer

Thank you.

Operator

We'll take our next question from Matt Fassler with Goldman Sachs.

Matt Fassler -- Goldman Sachs -- Analyst

Thanks a lot and good morning. I'd like a little more color on the comments you made on online and the maturation of online. Obviously, there's lots of nuance, I'm sure, within that. Are there categories that are still growing at a rapid rate online? Is there ongoing innovation that you think could reignite elements of the categories as you think about your e-commerce opportunity here?

Hubert Joly -- Chief Executive Officer

Thank you, Matt. To be clear, we continue to be very excited by online and all of the digital capabilities we are building for our customers. When I see how we've evolved over the last 5 or 6 years, with customer experience on the site, in the app, with delivery, all of this, I look at things and I say oh, my God, our teams are really doing some great things.

What we are referring to is a number of things. One is, as you will all appreciate, consumer electronics was one of the first categories that started to move online and so the overall penetration in higher than in our categories. In fact, in our business, online is about 15% of our business. So, we've doubled the business. We've gone from $3 billion 6 years ago to now $6 billion. You'll also note that we've been a pioneer. Meaning we've been doing in-store pickup for more than 10 years. We started ship-from-store in 2014.

So, with our teams, we continue to be investing in the shopping experience, but the angle is shifting a bit and it's in line with our Best Buy 2020 strategy, which is to build a broader customer relationship with our customers across all of the touch points, and to use technology to improve the experience, whether it's in research, whether it's in the shopping, whether it's in the delivery, or whether it's in services with our Geek Squad able to remotely help you with the support of your products.

Now, on a category-by-category basis, there's some products when there's a hot gaming console that tends to fly off the shelf, whether it's a 3D or well-known product in commodity. When it's a more complex buying experience than the customers will appreciate, having conversations, seeing the experience, experiencing the products in the stores and so on and so forth. So, yes, it's maturing. We continue to invest. But it's a broader approach in the category. Corie, anything you'd like to add? No, OK?

Corie Barry -- Chief Financial Officer

No, nothing.

Matt Fassler -- Goldman Sachs -- Analyst

If there's an opportunity for a very brief follow-up within that context, the entertainment software business reaccelerated, having declined in Q1 and outperformed the chain against a very tough compare. Any specific drivers of that category's bounce back?

Corie Barry -- Chief Financial Officer

Yeah, so what we saw there was a little bit unexpected strength in gaming. A couple facets on that. One, as we've talked about before, we tend to over-index on gaming consoles. That is where we saw some particular strength across consoles. Secondarily, as we mentioned last quarter, we continue to see strength in some of the accessories and peripherals, as games, social games, in particular like Fortnite's takeoff, there are accessories that tend to make that a more compelling gaming experience. So, we saw a little bit better results even than we expected in that category.

Matt Fassler -- Goldman Sachs -- Analyst

Thank you so much, guys.

Hubert Joly -- Chief Executive Officer

Thank you, Matt.

Operator

Our next question comes from Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Good morning, guys. Can you please talk about your latest thoughts on the potential impact of tariffs and specifically how you view the price elasticity in the categories where you see risk?

Hubert Joly -- Chief Executive Officer

Thank you, Scott. There's been a number of waves of tariff increases over the last several months, starting with appliances and then the $36 billion with China followed by another $14 billion with China, at a rate of 25%. Those results in our guidance reflect the impact of these tariffs. Not surprisingly, when there's a price increase, there is an impact. In that context, why we, I'm going to say applaud, the administration is pursuing some very important international trade goals. These are difficult negotiations. We've been in dialogue with them on how to minimize the impact on consumers. You've seen that in the $50 billion or $36 billion plus $14 billion, there's less consumer electronics products than originally contemplated.

I think, specifically, it's been reported that the tariffs have had some impact on appliances during the first half of the year. It's not completely easy to measure because a lot of the appliance purchases, the situation where your fridge is broken and it's not a discretionary decision, and which is why we're going to continue to be in close dialogue with the administration as we look ahead to minimize the disruption on the U.S. consumer and the U.S. economy.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Are there specific areas in terms of price elasticity where to the degree that there's price increases that you're kind of forced to pass on where you don't think you make it up in the unit velocity?

Hubert Joly -- Chief Executive Officer

Yeah, specifically, the impact is going to be tightly linked to the gross profit margin rates on the products. When a gross profit rate is very low, then, let's say the gross profit rate is 20% on that particular product. A 25% increase in the tariff is going to essentially result in a 20% price increase. These are material numbers. On the other hand, any time a gross profit rate is materially higher, let's say 50%, then the impact if we pass everything along, is cut in half. And so that's a key differentiator.

Of course, it's also related to the ability of our vendors to absorb the tariffs. And, of course, we are having negotiations. Or over time, usually not in the short term, but over time, to diversify their supply base. Of course, we are very much following this and ongoing dialogue continues, as we want to be sensitive, and I know the administration is as well, to the impact on American families, workers, small businesses, and so forth.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Understood. Thank you.

Hubert Joly -- Chief Executive Officer

Thank you.

Operator

We'll take our next question from Chris Horvers with JPMorgan.

Christopher Horvers -- JPMorgan -- Analyst

Thanks, good morning. Can you talk you talk a little bit about the home theater strength that you saw in the quarter? Maybe parse out the share that you're seeing there, unit growth versus ASP and whether or not the Amazon partnership sort of lifted that comp as a result of Prime Day and the [inaudible] product?

Corie Barry -- Chief Financial Officer

Good morning, Chris. What we did see and what we like is very strong market growth leading to very strong consumer interest in the category. That is one of the most exciting things. Obviously, per what we can see in NPD, as TVs were up double-digit growth in Q2. That is excellent. Also, similar to the industry and what we can see in the industry, units were up while ASPs were down. We are lapping some pretty significant share gains from TVs last year and we saw just a little bit of share decline.

But honestly, on the size of the industry strength we saw, very minimal. And, in fact, less than we saw in Q1. We like the positioning. We're excited that the consumer is adopting it. We've always said we'd expect our share gain to moderate over time. We also said we wouldn't expect them to drop off a cliff and to completely acquiesce the business, to Hubert's point. And so, we like that the consumer is excited. We like the amount of volume that we're seeing in the category and we very much like our positioning within it.

Christopher Horvers -- JPMorgan -- Analyst

Understood.

Corie Barry -- Chief Financial Officer

Sorry, the second part of your question. Let me make sure I hit on it. You asked specifically about Amazon. Obviously, we're not going to comment on specific SKUs. But partnerships like this and the idea of interesting technology evolution continuing in categories like this, I think that's what's actually more important. Because this idea that we can showcase these technologies in a unique way that no one else can, that's what's the real differentiator here. So, while I'm not going to give you exactly what those SKUs delivered, certainly we like the idea of being able to showcase this technology that no one else really can.

Christopher Horvers -- JPMorgan -- Analyst

Understood. Then can you help us think about the fourth quarter? It looks like your implied comp for the fourth quarter based on the raise is sort of flattish I think at the high end. Can you just reflect back and talk about the 9, last year what you thought was sort of one-time in shift versus what you think the underlying business will look like in the fourth quarter X those shifts?

Corie Barry -- Chief Financial Officer

Yeah, so based on the comp deltas that we're seeing -- and remember, you have the 53rd week in Q4, so it gets a little tricky -- the guide would imply a comp of basically flat to up 3%, somewhere in that range for Q4. Within that, as we're lapping from what we saw last year, remember, last year we specifically called out some incredible strength in gaming, particularly due to the Switch, which we knew we would be comping against this year. And last year, we were comping against some of the product availability issues from the year prior. So, two years ago.

Those are the pieces that we factored out and instead what we're looking at we head into Q4 this year is some of that continued strength in those very core categories -- Smart Home, computing, home theater, appliances, the places that we feel very strong about our positioning with the consumer and what we bring to the table.

Christopher Horvers -- JPMorgan -- Analyst

Thanks very much.

Operator

We'll take our next question from Zach Fadem with Wells Fargo.

Zachary Fadem -- Wells Fargo Securities -- Analyst

To clarify on the tariffs on appliance prices in the category, it looks like the category was up 10% in the U.S. But could you speak to the impact of pricing here versus unit sales? And with higher prices, are you seeing any signs that demand could be softening or perhaps behavior is changing in favor of trade down in the category? Anything like that?

Hubert Joly -- Chief Executive Officer

Thank you, Zach. We are, of course, very pleased to report I think it's the 31st consecutive quarter of positive comps in appliances. We believe that the low double-digit comps we're reporting represent another market share gain in the category. It is true that in certain sub-segments, laundry in particular, this is where you've seen the price increase. But laundry is about a quarter maybe of the total category. So, it's not the end of the world.

In terms of macro factors, which is your question with what's happening in housing and so forth, appliances are driven by new housing but also renovations and moves and so forth. So, we're watching the sector. But we're also watching the fact that as we discussed in previous quarters, there's a significant change in the competitive landscape and significant tailwinds from the competitive situation.

We believe our revenue growth is principally driven by the continued strength in the category. Because if it fluctuates, it's still a positive category. The market share gains, which themselves are driven by the competitive situation, and the continued improvement we've made in our proficiency, the specialty labor investments we've made, the supply chain investments we've made and so forth. So, we continue to be a bit positive around this category.

As we move forward, we have talked about, in addition to this, during Investor Day, about the favorable demographic aspects with the millennials finally leaving their parents' house, which leads them to have to invest in all of the shiny objects we sell in our stores -- appliances and others, as well. We continue to monitor this, but this is how we see it at this point.

Zachary Fadem -- Wells Fargo Securities -- Analyst

Thanks, Hubert. That's helpful. With the national Total Tech rollout, could you speak to how your initial customer adoption trends compare to your test markets? And for the pilot markets where you've now been there for more than a year, could you also comment on what you're seeing on the renewal rates there and if you're seeing any easing of the initial gross margin pressure? Thanks.

Hubert Joly -- Chief Executive Officer

Sales activities are very consistent with the pilots in the U.S., even though, of course, during the pilots we had a whole range of options we were testing. But at the highest level, it's very consistent. In terms of the renewal rate, the pilot is not truly indicative at this point because we did not have a credit card on file as an option when we were initially piloting and we rolled this out as part of the national expansion. So, we're going to have to wait longer to have a read of that. I think as I said in the prepared remarks, the impact on gross profit is very much in line with the expectations we had indicated when we launched this. The situation is different from what we had seen in Canada.

Zachary Fadem -- Wells Fargo Securities -- Analyst

Thanks so much. Appreciate the time.

Operator

We'll take our next question from Greg Melich with MoffettNathanson.

Greg Melich -- MoffettNathanson -- Analyst

Hi, thanks. I really had one follow-up question and then one longer term. The longer-term one I would say is about the cash flow. I think Corie, you mentioned cash will be used for the acquisition. As you're thinking about next year, now that a lot has changed since the analyst day, how much cash do you want to run the business and how are you thinking about the dividend versus buyback structure and leverage ratios going into next year?

Corie Barry -- Chief Financial Officer

Obviously, I'm not going to guide at this point an exact cash balance, but it's clear that we've been working that cash balance down here over the last couple years, in particular with some of the more aggressive buy-backs and dividends. We're not going to guide next year at this point. We'll do that as we head in. But you can see the fact and especially us using cash on hand as well for the acquisition of GreatCall, that we continue to work that down to a place that we feel is not just suitable to run the business, but suitable to the help us in any large kinds of unexpected risk. We'll continue to work that down. As it relates to our capital allocation strategy, we've stayed very consistent with that, not just at Investor Day, but prior to that, where we've said Priority 1 is to invest in the business, whether that's in the form of the capital we're using internally or whether that's in the form of an acquisition like GreatCall. After that, the next priority being a premium dividend payer for our shareholders, and then finally returning excess cash through share repurchases. That remains our strategy going forward. We'll provide more clarity on exactly what that means for next year as we head in.

Greg Melich -- MoffettNathanson -- Analyst

Got it. Then the follow-up was just to understand the comp a little better, the makeup of it. There's been a lot of talk of pricing and tariffs, etc. Could you help us understand of that 6% comp, how much would've been ticket growth as opposed to number of transactions? Just maybe a mix or a balance of it? Thanks.

Corie Barry -- Chief Financial Officer

Let me take a big step back. Broadly, across our channels, what we saw was actually increases in traffic, increases in our transactions, and increases in our close rate or our conversion, if you think about it that way. So when we meld all our channels together, and that's what's most important to us, that's what we saw across everything. That's been relatively consistent as we've headed through these last few quarters here.

In terms specifically of tariffs, super minimal at this point. Because you're basically talking about laundry, where they've been impacted, or a few smaller categories. So, it's just a tiny, little slice. That is not going to be the driver at this point. More so, what we're excited about is that the underlying drivers across the channels have remained pretty consistent with good traffic, good conversion, and therefore very nice transaction growth.

Greg Melich -- MoffettNathanson -- Analyst

Thanks. Good luck with the back half.

Hubert Joly -- Chief Executive Officer

Thank you, Greg.

Operator

Our next question comes from Anthony Chukumba with Loop Capital Markets.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Good morning and congrats on another very strong quarter against a very tough comparison.

Hubert Joly -- Chief Executive Officer

Thank you.

Anthony Chukumba -- Loop Capital Markets -- Analyst

I wanted to just quickly touch base on the GreatCall acquisition. You mentioned some of the different opportunities to scale the business and integrate the business. I was wondering about Assured Living from two perspectives. One, how did your experience with Assured Living inform the GreatCall acquisition? In other words, I would assume that maybe you were happy with the results of Assured Living and that's why you decided to do the GreatCall acquisition. And then, too, how are you planning to integrate, if at all, GreatCall with Assured Living? Thank you.

Hubert Joly -- Chief Executive Officer

Thank you, Anthony. Let me start with the second part. We will be initially running GreatCall as a separate entity, because it's a different business. We will be, and we've studied, we have a number, as you would expect, integration task forces pursuing targeted value creation opportunities. In particular related to selling their existing products like the Jitterbug phones, more aggressively, if I can put it this way. Of course, they've been in our stores for a long while but both GreatCall and the Best Buy team feel that there's more than we can do there. It's going to be a separate business with targeted point of integration targeted at the valuation creation opportunities.

Most of GreatCall's business today is this consumer product. They have a small but promising business that's analogous to Assured Living. Across both Assured Living and GreatCall, we believe there is an exciting opportunity in this idea of monitoring the behaviors and health of frail seniors in their homes with potentially very significant benefits, of course, for the aging seniors, their caregivers, as well as the payers and providers. Today, in both cases, this is a small business. We think the potential is material. It rests in part on the ability to demonstrate that the solution has a material benefit, as I indicated, and we're going to be working together to see how we go after this market. Think in this area small parallel tracks with a big opportunity down the road.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Got it. Not even a follow-up question, just more of a comment. I'm really glad to hear that being Minnesota-nice means that you're not going to give away all your market share away to the mass market. So, good to hear.

Hubert Joly -- Chief Executive Officer

How is that coming from a Frenchmen who's been in Minnesota for 10 years and learning still the local practices?

Corie Barry -- Chief Financial Officer

Thank you, Anthony.

Anthony Chukumba -- Loop Capital Markets -- Analyst

Got it. Thank you.

Operator

Our next question comes from Curtis Nagle with Bank of America.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Good morning. Thanks for taking the question. I just wanted to follow up a little on the growth in home theater. As commented, it did see a nice pickup, particularly in units. What's driving it? Is it interest in OLED, HDR, some new trade-up or something else that's caused the pickup?

Corie Barry -- Chief Financial Officer

I think we've got a couple things going on. We've been talking about them for a while. I think the seed of adoption has increased. So, it's a combination of larger screen sizes. So, the idea of more fits in the home and you have the very nice form factor that's coming with new TVs. Then secondarily, those being coupled with higher technologies, 4K, HDR, particularly in those spaces, incredibly available now. I think those two combined with price points now that have come down to a range that feels like more and more people are ready for adoption here. I think you've just hit a bit of a sweet spot between those things.

Again, it's part of why we've said we feel uniquely well positioned because when those become some of the most important pieces, being able to see it and being able to really have a line of sight to how this will look in my home and exactly what technology I'm buying is pretty important. But I think you just have this real sweet spot now between a lot more size for the money, a great technology that sits behind it, more 4K, HDR kind of technologies, and then a price point that makes sense for my budget.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Okay. That makes sense. Then just a quick follow-up. Forgive me if you gave this out already, but what's the expectation for free cash flow for the year?

Corie Barry -- Chief Financial Officer

We haven't guided free cash flow specifically. That's why we're just kind of updating you each quarter as we come, but where we are right now is exactly where we expected to be at this point in the year.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks very much for taking the questions.

Corie Barry -- Chief Financial Officer

Thank you.

Operator

We'll take our last question from Peter Keith with Piper Jaffray.

Peter Keith -- Piper Jaffray -- Analyst

Thanks. Good morning. Good quarter, guys. I wanted to just dig into the in-home advisor a little bit. You clearly ramped that up. Could you give us an update if that's starting to move the needle on the same-store sales now that you're annualizing that rollout? As a follow-on, are there any categories where IHAs over-indexing to that that we might be able to see some of the out-performance working?

Corie Barry -- Chief Financial Officer

Peter, as you said, we've continued to expand our IHA program and have done that, as we said we always would, in line with the demand that we're seeing in the marketplace. Obviously, we're not going to give out exactly what the revenue associated with the IHA is, but you can be rest assured that it was both part of how we guided and part of overarchingly where we're seeing strength in the business.

In terms of categories where we tend to see strength, as we've talked about before, home theater is a very nice lead-in to things that you want to do in your home. But we've also seen some nice strength in what I'll call broadly Smart Home and networking. This idea that somebody can come in and help me figure out how these things work together, as well as a better foray into some of the appliance space. Where I can actually have someone physically help me walk through. I mean, one of the hardest things about appliances is just figuring out how to measure them. So, when you have someone who is there to help you with what's counter depth, what's not, what exactly am I trying to get in this space, we've also found that to be helpful.

So, as you'd expect, those tend to be the leading categories. Now, what we're just starting to get our arms around and don't even have a great feel for yet, is as you use those as kind of your foray or your first-run categories, then what do you see over time in some of those more secondary categories? We're still, like I said, learning in that space, but we like that it's stretching across the home into a few of the different rooms and capabilities.

Hubert Joly -- Chief Executive Officer

Very good. As we conclude this call, I want to thank you for your continued interest and your work on our company. And, of course, reiterate our immense appreciation for the Best Buy teams across the business for what they do for our customers and for shareholders every day. You all have a great day. Thank you.

Operator

That does conclude our conference. Thank you for your participation. You may now disconnect.

Duration: 60 minutes

Call participants:

Hubert Joly -- Chief Executive Officer

Corie Barry -- Chief Financial Officer

Mollie O'Brien -- Vice President, Investor Relations

Michael Lasser -- UBS Investment Bank -- Analyst

Matt Fassler -- Goldman Sachs -- Analyst

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Christopher Horvers -- JPMorgan -- Analyst

Zachary Fadem -- Wells Fargo Securities -- Analyst

Greg Melich -- MoffettNathanson -- Analyst

Anthony Chukumba -- Loop Capital Markets -- Analyst

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Peter Keith -- Piper Jaffray -- Analyst

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