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Best Buy Co., Inc. (NYSE:BBY)
Q3 2019 Earnings Conference Call
Nov. 20, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thanks for standing by. Welcome to Best Buy's Fiscal Year 2019 Q3 Earnings Release. 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 touchtone phone. If you choose to be taken out of the question queue, please press *2. As a reminder, this call is being recorded for playback and will be available by approximately 1:00 pm 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 of 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 within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may address the financial conditions, business initiatives, growth plans, investments and expected performance of the Company and are subject to risks and uncertainties that could cause 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 -- Chairman and Chief Executive Officer

Good morning, everyone, and thank you for joining us. We'll begin today with a review of our third quarter performance, provide updates on our progress as we implement our Best Buy 2020: Building the New Blue strategy and share our excitement for the holiday season. I will then turn the call over to Corie for additional details on our quarterly results and our outlook for the fourth quarter.

In summary, our team just delivered another strong quarter and we continue to make progress in the implementation of our strategy. We are excited about our continued momentum and the opportunities we have ahead of us. Specifically, in the third quarter, we grew enterprise comparable sales by 4.3% on top of 4.4% last year, and we delivered non-GAPP diluted EPS of $0.93, which is up 19% compared to last year. We also continue to enhance the experience we provide to our customers across the many ways they interact with us.

Top line performance was driven by positive comparable sales across all channels, geographies, and most product categories. Similar to the first half of the year, strong revenue growth in the quarter was helped by a favorable environment and driven by how customers are responding to the unique and elevated experience we're building. Our non-GAPP earnings per share outperformance was driven by a better than expected gross margin rate and helped by a lower than the expected tax rate.

I want to thank our associates across the company for their hard work and dedication in delivering these great results. I am equally appreciative of their passionate focus on implementing our Best Buy 2020 strategy and are continuing to build a company that has a unique competitive positioning and a strong, human, purposeful culture.

Let me start with how we are expanding what we do for our customers. Last month, we completed the acquisition of GreatCall, a leading connected health services provider for aging consumers. GreatCall's life in its new home is off to a great start. We're working together to bring existing solutions to more customers and help fuel future growth in both the consumer and commercial markets. As such, and as a first step, we recently rolled out new dedicated NCAPs in our mobile department that showcase GreatCall's easy to use mobile phone products and connected devices that are tailored for seniors and come with a range of relevant services.

For example, with GreatCall's five-star service to a simple one-touch connection, customers can talk to US-based, specially trained agents who can connect them to family caregivers, provide concierge services, and dispatch emergency personnel. Beyond this, we're excited about the opportunities that lie ahead for us to help aging consumers live longer in their homes with the use of technology, something that can provide significant benefits and their families, as well as for payers and providers.

During the third quarter, we also continued to see encouraging results from our Total Tech Support program that we rolled out nationally in May. Customer sign-ups, as well as fulfillment costs, are tracking in line with our expectations. Having a service that provides unlimited Geek Squad support for all their technology, no matter where or when they bought it, is a compelling and unique value proposition for our members. In addition, discounts on installations, protection, and in-home services provide customers with another reason to grow their relationship with Best Buy.

Let me now say a few words about how we are evolving how we sell. During the quarter, we expanded our free in-home advisor consultation program to approximately 530 advisors, compared to 300 at the nationwide launch a year ago. We are pleased by both the ongoing customer demands and the fact that the performance of the program continues to track in line with our expectations. As expected, it is proving out to be an important part of our strategy to build deeper and more relationship-based experiences with our customers.

We're continuing to invest in customer experience enhancements. For example, we just rolled out the ability for our customers to make an appointment with an advisor while they are still in our stores, rather than leaving the store and waiting for us to call and schedule an appointment.

Regarding our efforts to improve the multichannel shopping experience, we're especially excited about the ways in which we are making it easier for our customers to use the Best Buy app to shop online and in our stores. Let me give you a few examples. Frequently, we see customers in stores trying to compare multiple products to one another including specs, price, reviews, or features. With the Best Buy app, they can now use their phone to scan products and use an in-app feature to easily compare the results. If they want, they can save these results for later if they're still researching a purchase. We also recently launched a new functionality that makes it much easier for customers to find open box items, both online and in-store.

In addition to increasing the ease of shopping, this feature raises customer confidence in purchasing these types of products by being more clear about the meaning of different condition categories, as well as the eligibility of any existing manufacturer's warranty or Geek Squad protection. The app also makes it easier for customers to determine whether a given product is currently available in the local store.

Taking it one step further, we just launched a feature that can notify a customer if a product in their online cart is currently available in the store that they're in. This is helpful because customers often use the online cart as a way of keeping track of products that they're interested in. In fact, 72% of customers who use the app come into one of our stores with an item already in their cart, and we now have the ability to tell them at the moment that the product is available for purchase.

The last example is one of our customers' favorites. We call it the On My Way feature, which allows customers buying large items to use the app to tell their local store that they are on their way to pick up their purchase. This message allows our blue shirts to have the item ready for pickup at the front of the store, making the in-store pickup experience faster and more pleasant for the customer.

These innovations, along with the dozens we've rolled out in recent quarters, continue to blur the lines between online and physical shopping. This is increasingly how our customers want to shop and our innovation pipeline closely mirrors and enables this changing behavior. Consequently, our in-app conversion rate is up and the usage of the Best Buy app by customers while they are in our stores has increased significantly.

In Q3, we continued our focus on driving productivity and cost takeout to help offset investments and pressures in the business. We achieved approximately $90 million in additional annualized cost reductions, bringing the cumulative total to $455 million to Q2 of fiscal 2018 toward our goal, fiscal '21 goal of $600 million.

As we have discussed, we are investing in a range of enablers that are necessary to execute our Best Buy 2020 strategy. Most of them are multi-year investments in areas such as specialty labor, enterprise customer relationship management, knowledge management capabilities, our services platform, and our supply chain.

We're tracking according to plan on our investments and we are pleased to see how they are beginning to return. For example, in the supply chain, we've seen our net promoter score for metro home delivery of large appliances and TVs increase more than 1,700 basis points over the last two years. This is due to investments in things like new metro delivery pads located close to customers, as well as a 60% increase in our distribution center square footage, which significantly decreases the reliance on outside space and increases efficiency and accuracy.

We have been a pioneer in fast and free delivery and we continue to invest in our capabilities because we know how important speed is to our customers. During Q3, we delivered about 80% of small packages in two days, and almost a third were delivered the next day. A third was delivered next day for free and with no membership fee required.

We have also been one of the leaders to buy online and pick up in store, even with all of the great shipping options. Many customers find significant value in picking up their purchases in our stores, whether it is because they want it right away or simply want to control the timing. In fact, we have seen seven straight quarters of growth for in-store pickup as a percentage of online sales and more than 40% of our online revenue is now picked up in our stores.

We are continuing to invest in labor. We're investing in specialty labor in areas such as in-home advisor, appliances, and smart home, and we are also investing in the compensation and benefits of our associates. Two things I want to highlight; number one, because of the investments we've made, we are competitive in the marketplace. In fact, employee turnover rate in stores has been materially reduced over the last couple of years and is now in the low 30%. Second, the current industry trends we are all seeing are relatively in line with the expectations we had when we addressed the topic of wage pressure at our Investor Day last year. Our strategy here has been to approach the topic holistically.

While starting base pay is, of course, important, we always look at creating an attractive overall employee value proposition, including hourly wages, incentives for both full-time and part-time associates, employee benefits, skill development, career advancement, and importantly, a purposeful human culture, and on the topic of benefits, we're excited about some of the unique benefits we offer to our employees, including the employee discount on all of the cool stuff we are selling and tuition reimbursement, as well as four newly announced benefits including paid caregiver leave, backup child care, paid time off for part-time employees, and enhanced mental health resources.

Staying on the topic of people, I am excited to share that during the quarter, we promoted two key leaders to new and expanded roles in support of our Best Buy 2020 strategy and to help us accelerate our progress. First, Corie Barry, our chief financial officer, has been promoted to senior executive vice president, chief transformation and finance officer responsible for orchestrating our transformation. In addition to finance, Corie now oversees our strategic growth office, our health business, a newly created transformation team, and our digital and technology organization.

All of you know Corie, of course, and the strong skills and experience she brings to this expanded role. This focus on transformation underscores the major pivots we're making as an organization with our Best Buy 2020 strategy as we are moving from a transaction to a relationship orientation and evolving from a product to a need-based solution orientation.

Second, Mike Mohan has been promoted to chief operating officer of our US business, responsible for running the domestic business, and in partnership with Corie getting us to where we want to be as a company. As you know, Mike has been with Best Buy since 2004 and had been responsible for our merchandising, marketing, and supply chain functions. He now has added all the channels including online, in-store, in-home, and our services teams to his scope. Over the last several years, Mike has demonstrated his ability to lead and drive changing ways in large and complex business.

I am personally very excited to work with Corie and Mike in this new construct and to continue to work with our team on our strategy and our growth plans, and on continuing to strengthen our culture. I could not be more inspired by the opportunities ahead of us as we implement our Best Buy 2020: Building the New Blue strategy, and I know that you'll want to join me in congratulating Corie and Mike for their new expanded responsibilities.

Looking immediately ahead, we are excited about our holiday plans and everything we have to offer our customers this holiday season. What matters, of course, during holidays includes assortments, deals, product availability, help, convenience, and speed, and our team has put together a best-in-class assortment, prepared an amazing set of deals, and ensured we have great inventory availability across all the product categories we carry. This makes us a natural destination for everything tech-related including TVs, computing, gaming, a growing toy assortment, phones, smart home devices, and large and small appliances.

We released our Black Friday ad two weeks ago with 52 pages of the best deals of the holiday to help our customers find the best gifts for their friends and family. Notably, this will be our first holiday with Total Tech Support and we're excited to offer it to customers as a giftable item. It is the number one thing our retail teams have been asking for since the launch of total tech support last May. It is a great way for gift-givers to ensure the technology they are giving to their loved ones will be set up and working as it should be.

Once again, this year, we offer our customers compelling delivery options such as free shipping on everything all season long, a fast in-store pickup that can be ready in one hour, and same day and next day delivery options. We've also materially upgraded our online gift center, and our new gift finder will make it easier to get just the right gift for kids, teens, parents, grandparents, significant others, and families. For customers in our stores, our blue shirt associates, Geek Squad agents, and in-home advisors are ready to help our customers find great gifts and solutions. Whether you're shopping digitally or in our stores, Best Buy can help customers find gifts for everyone on their gift lists.

Now, beyond holiday, we continue to be excited by the opportunities that exist for us in the marketplace. We like the continued rate of technology innovation and the capabilities technology can bring to people's lives. We like our opportunity to offer customers a more consultative approach to truly address their needs, provide them an increasing range of services and solutions, expand our relationship with them, and become a bigger part of their lives, and we particularly like the opportunities we have in the connected health space following the acquisition of GreatCall.

Before I turn the call over to Corie to review the results and our outlook, I'd like to share some key facts and thoughts on the subject of tariffs. We estimate that the latest $200 billion list that went into effect in September touches only about seven percent or about $2.3 billion of our total cost of goods sold, and many of the products on this list are accessories. The expected impact of tariffs on our business for the remainder of this fiscal year is reflected in our guidance and is expected to be minimal. The reasons why it is expected to be minimal are that the tariffs only impact a very small portion of our business, the current rate is only 10%, and their costs are being litigated in a variety of ways.

Looking into next year, I would say three things today. One, as you know, this is a dynamic situation with the expectation as of now that the tariff on the current list increases to 25% on January 1st. Two, my personal view is that, while the journey may not be linear, the trade negotiations with China will progress. Three, we believe that working together, vendors and our team have at their disposal a range of effective ways to mitigate the effects of tariffs, which is precisely what we're working on, and we'll, of course, continue to update you on this matter.

In conclusion, we are, as you can tell, very energized by our continued momentum in overall performance and encouraged by the progress we're making in implementing Best Buy 2020: Building the New Blue strategy. We see significant value generation opportunity ahead of us by successfully enriching lives with technology and providing services and solutions that solve real customer needs.

Lastly, I want to extend my sincere appreciation to our associates for everything they are doing for customers this holiday season. You are amazing. Thank you for what you do.

Now, I'd like to turn the call over to Corie for more details on our Q3 performance and our Q4 guidance.

Corie Barry -- Chief Financial Officer

Good morning, everyone. Before I talk about our third quarter results versus last year, I would like to talk about them versus the expectations we shared with you last quarter. Enterprise revenue of $9.6 billion, we delivered non-GAAP diluted earnings per share of $0.93, both of which exceeded our expectations. We saw better than expected top-line results in our mobile phone, gaming, and wearables categories. Our operating income rate was at the high end of our expectations, driven by a slightly favorable gross profit rate.

Compared to the guidance we provided last quarter, a lower than expected tax rate provided a $0.03 benefit that was partially offset by the impact of hurricane Florence and Michael, which had a negative impact of approximately $0.02, with only a minor impact on revenue. Consistent with last year, we made decisions to support our employees, our customers, and our communities, like continuing to pay our employees who perform volunteer work while their store was closed. These efforts come at a cost, but they are the right things to do. Additionally, the inclusion of GreatCall had a negative impact of approximately $0.02 per share, which was not included in the guidance we provided last quarter.

I will now talk about our third quarter results versus last year. Enterprise revenue increased 2.9% to $9.6 billion primarily due to the comparable sales increase of 4.3%. Enterprise non-GAAP diluted EPS increased $0.15 or 19% to $0.93. This increase was primarily driven by a $0.09 per share benefit, driven by a lower non-GAAP effective income tax rate and a $0.08 per share benefit from the net share count change. Our Q3 operating income rate was higher than expected but still lower than last year, as expected, due mainly to higher supply chain cost and the rollout of our Total Tech Support program.

Our comparable sales growth of 4.3% included a -70-basis-point impact from the calendar shift. As we have discussed in previous quarters, 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. As we shared with you last quarter, in Q4, we expect the calendar shift to have a positive impact of approximately 50 basis points on our reported comparable sales.

In our domestic segment, revenue increased 3.1% to $8.8 billion. This increase was primarily driven by a comparable sales increase of 4.3%, partially offset by the loss of revenue from 287 Best Buy Mobile and 19 large format store closures in the past year.

From a merchandising perspective, the largest comparable sales growth drivers were mobile phones, gaming, appliances, wearables, headphones, and smart home. These drivers were partially offset by declines in our tablet category. Domestic online revenue of $1.21 billion was 13.8% of domestic revenue compared to 12.7% last year. On a comparable basis, our online revenue increased 12.6% on top of 22.3% growth in the third quarter of last year, primarily driven by higher conversion and increased traffic.

In our international segment, revenue increased 0.6% to $834 million This is primarily driven by comparable sales growth of 3.7%, driven by both Canada and Mexico, and incremental revenue associated with six new large-format store openings in Mexico over the past year. Partially offsetting these gains were approximately 460 basis points of negative foreign currency impact.

Turning now to gross profit, the enterprise gross profit rate decreased 30 basis points to 24.2%. The domestic gross profit rate was 24.4% versus 24.7% last year. The rate decline of approximately 30 basis points, which have been primarily by higher supply chain cost from both investments and higher transportation expense, as well as the national rollout of our Total Tech Support offer. Both of these were in line with the expectations we shared last quarter of approximately 50 basis points of combined pressure. These pressures were partially offset by higher overall product margin rates, which included the benefit from our gross profit optimization initiative. The international gross profit rate of 22.2% was flat to last year.

Now turning to SG&A, enterprise non-GAAP SG&A was $1.98 billion, or 20.7% of revenue, which increased $52 million and was flat to last year as a percentage of revenue. Domestic non-GAAP SG&A was $1.81 billion, or 20.6% of revenue, versus $1.75 billion, or 20.6 percent of revenue last year. The $55 million increase was primarily due to, one, growth investments, which include specialty labor and higher depreciation expense, two, higher incentive compensation, three, GreatCall operating expenses, and four, higher variable costs due to increased revenue. These increases were partially offset by cost reductions.

International SG&A was $178 million, or 21.3% of revenue, versus $181 million, or 21% of revenue last year. The $3 million decrease was primarily due to the favorable impact of foreign exchange rates. On a constant currency basis, SG&A increased $5 million. The increase was primarily driven by new stores opened in Mexico in the past year and higher depreciation expense in Canada. On a non-GAAP basis, the effective tax rate decreased to 22.7% from 30.4% last year. The lower effective tax rate was primarily due to the reduction in the US statutory corporate tax rates as the result of tax reform.

From a cash flow perspective, we ended the third quarter in line with our expectations. We returned $493 million to shareholders in the form of share repurchases and dividends. In Q3, we completed a public bond offering for $500 million in 4.45% notes due in October 2028. The net proceeds from the sale will be used for general corporate purposes and replace the 500 million in five percent notes that matured and were retired earlier this year during our second fiscal quarter.

Our acquisition of GreatCall for $792 million in net cash consideration was funded with existing cash and is not expected to impact our previously communicated plans to spend $1.5 billion on share repurchases this fiscal year.

Finally, our ending inventory balance increased by 23% and our accounts payable increased 21% compared to the third quarter of last year. These increases were primarily due to the calendar shift this year, which results in Q3 ended a week closer to the holiday season. On a like-for-like calendar basis, our Q3 ending inventory balance increased approximately seven percent, which was slightly higher than the expectation we provided last quarter. This is due to decisions we made to bring in receipts early in response to pressure within the international and domestic transportation industry, due primarily to tariffs and weather, as well as some product launch timing shifts. Overall, I am very pleased with the health of our inventory.

I would now like to talk about our guidance. We are raising our full-year guidance for revenue and EPS to reflect the outperformance in the third quarter. For Q4, our guidance is consistent with the expectations that were implied in the guidance provided on our last call. This is despite approximately $0.04 of a negative impact that was not contemplated on our Q2 call, from GreatCall, and a lower profit share benefit from our services plan portfolio than originally expected. As a reminder, the extra week in the fourth quarter of last year added approximately $760 million in revenue and approximately $0.20 of earnings per share.

Our Q4 outlook is as follows. Enterprise revenue in the range of $14.4-14.8 billion, comparable sales growth of flat to up three percent, domestic comparable sales growth of flat to up three percent, and international comparable sales growth of flat to up three percent. Non-GAAP diluted EPS of $2.48 to $2.58, a non-GAAP effective income tax rate of approximately 25%, and a diluted weighted average share count of approximately 275 million shares.

A few additional comments on the fourth quarter guidance. As I mentioned earlier, the calendar shift is estimated to be a benefit to Q4 domestic comparable sales of approximately 50 basis points. We expect to see a flattish gross profit rate compared to last year as approximately 25 basis points of supply chain pressure and a $50 million lower profit-sharing benefit are partially offset by slightly better year-over-year merchandise margins, including the impact from gross profit optimization initiatives, and the impact of GreatCall. The $50 million negative impact from the lower profit share payment is $10 million higher than what we guided last quarter. We expect our SG&A dollars to decline in the low single-digits due to the extra week last year and lower short-term incentive compensation partially offset by the impact of GreatCall's operating expenses.

Our full-year guidance now stands at enterprise revenue in the range of $42.5-42.9 billion, Enterprise comparable sales increase four to five percent, non-GAAP operating income 4.5%, which is flat to fiscal 2018's rates on a 52-week basis, non-GAAP diluted earnings per share in the range of $5.09 to $5.19, an increase of 15-17%. This represents an increase of 21 to 23% when compared to fiscal 2018 on a 52-week basis. A non-GAAP effective income tax rate of approximately 24% and capital expenditures of approximately $800-850 million.

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. Again, press *1 to ask a question. Our first question will come from Kate McShane with Citi.

Kate McShane -- Citigroup Global Markets -- Analyst

Hi, good morning. Thanks for taking my question. One of the statistics that you've put in your prepared comments was that more of your product is being picked up in-store, and I know that's been a big initiative for you guys and a lot of retailers, so as you leverage the store and as customers come to pick up the product, I just wondered if you could walk us through how that contributes the overall profitability and how we can expect that contributing going forward.

Corie Barry -- Chief Financial Officer

Yeah, Kate, that has been a trend that we've been seeing, and one of the things we've actually talked about because the other kind of flavor on this question is, how do you think about the difference in profitability between the various channels and how is that evolving over time, and we've talked a lot about, in our business, what we actually see is less difference between the profitability in the channels, always with the caveat that things like this exactly make it very hard for us to pull the channels apart, but this is part of the reason that the overall profitability of our online channel, in particular, has continued to improve over time and it's a combination of both experiences on the site, but also ways in which the customer is choosing to come to pick up their own merchandise versus necessarily wanting it shipped straight to their home in every instance. This is definitely part of when we talk about the lesser difference between the profitability of our channel. This is a big part of what has helped us create a more robust online profitability profile.

Kate McShane -- Citigroup Global Markets -- Analyst

Okay, great. Thank you, and if I could ask one other unrelated question, just about GreatCall, I know it's early days, only been a couple of weeks, but just wondered if there have been any early learnings since it's been part of your portfolio and how we should think about your strategy with regards to M&A going forward.

Hubert Joly -- Chairman and Chief Executive Officer

Any early warnings?

Corie Barry -- Chief Financial Officer

Learning.

Hubert Joly -- Chairman and Chief Executive Officer

Oh, learnings. Yeah, thank you, Kate. Yes, we are very excited about the GreatCall acquisition. It's completely in line with our strategy of addressing key human needs. The company we acquired, I have to commend our team for the extensive due diligence we did, in particular ensuring the cultural fit when you acquire a small company. It's really important that it's in the alignment of missions is really very strong. All of the -- a lesson for us maybe, Kate, because we have not done acquisitions in a long time, was all of the pre-signing and preclosing preparation to ensure a very smooth integration has been very positive.

The other lesson for us is the opportunities for us to help aging seniors stay in their home longer through technology. We are more excited than ever about this and sometimes you wake up after an acquisition and go, oh my god what have we done? No, we feel very positive about this, and we've said in capital allocation strategy that our priority was to invest the cash flow in improving the business both organically and inorganically and this gives us -- we're paying a lot of attention to this first acquisition because success there, of course, increases our confidence to do more, and so our level of excitement is very good and I want to take the opportunity to salute anybody from GreatCall listening. They're a great member of our team, teams are working really well together, so I feel very good. Corie, anything you would add?

Corie Barry -- Chief Financial Officer

I would just add one more financial clarifier so that it doesn't send unintended messages. We are very excited about working with the team. We do still expect the impact to be -- of the acquisition to be neutral on a 12-month basis, but you heard me call out a couple impacts here in Q3 and Q4. Those are more about the early part of the business, one, we had some revised opening balance sheet assumptions which can happen anytime you have an acquisition like this and then two, we're accelerating some of the customer acquisition costs, which is what I'm gonna call a high test problem, meaning we believe some of the things we can do together means we can acquire more customers here early in our life together and that obviously pays dividends over time as that customer is on their plan and is a customer with us, hopefully for life. I just want to make sure people understand, that's not that the business is performing differently than we thought, it's just a bit of how it times out among the quarters.

Kate McShane -- Citi -- Analyst

Thank you.

Hubert Joly -- Chairman and Chief Executive Officer

Thank you, Kate.

Operator

Our next question comes from Simeon Gutman with Morgan Stanley.

Simeon Gutman -- Morgan Stanley -- Analyst

Good morning. Congratulations Corie and Mike on the promotion. My first question is on the zero to three guide for Q4. I think Corie, you suggested the same on the Q3 call. The consumer seems fine and Hubert reiterated the favorable backdrop. What's changed a little at least since then, is you've had some competitor actions, maybe around shipping, and then Amazon, apparently will have some product they didn't have and I'm sure you factored competition in, but I'm most curious if anything surprised you sort of from when you sort of started thinking about the zero to three to now.

Corie Barry -- Chief Financial Officer

Not so much surprised. I mean, look, the consumer and competitive environment this time of the year, in particular, is always evolving and it's one of the things that we actually talk about pretty often how the behavior even of the consumer, how we think about the marketplace in Q4 is always a bit different than how we think about it the rest of the year. You're absolutely right in that we are doing everything we can to take into account both what we see in a consumer and a competitive positioning as we think about Q4, and yes, there have been changes, but at the same time, we've continued to accelerate some of our strategic advantages, and continue to feel very well placed in the marketplace, and maybe Hubert can hum a few bars on how we're also thinking about even just our own Apple business and the things we do with our Apple products are a little bit different than Amazon.

Hubert Joly -- Chairman and Chief Executive Officer

Yeah, we've -- I mean, as you know and thank you for the congratulations to my two colleagues and sharing the excitement. We've had a long-standing relationship with Amazon, and Apple of course. We've built over the years a very unique experience selling Apple products. In fact, Apple would say that Best Buy provides the best retail experience for their products and services outside of their own home. As you know, we have 900 Apple stores within our store and they do a great job of showcasing the products and services. We have 3,000 Apple ecosystem experts in our stores, that includes the Apple masters and sales consultants and agents and Apple employees, and the online experience we've built over the years, it's been years since we've been doing this, is one point, and from a service standpoint, I think we're the largest third-party Apple Care and the largest third-party authorized service provider for Apple products.

Our focus as a company has always been on the customer in building a unique customer experience. I think the announcement pertaining to Amazon, Amazon had always been selling Apple products, including first-party for the laptops and whatnot. Our understanding is that they'll reduce massively the number of third-party sellers, and of course they'll start selling the phones or the watch themselves, but it's unclear at this point what the net effect is gonna be and our focus on continuing to enhance the customer experience, work with our vendor partners, Apple is a key one on continuing to innovate and make sure we have a competitive advantage in the marketplace. I think that the zero to three percent, Corie, it's in line with what we had said a quarter ago. I know there's been a lot of noise in the media about a lot of things, but we're sticking to our perspective on Q4, and we're ready to serve every customer including you guys on the phone.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks. My followup maybe for you Hubert, just to drill down a bit on the mobile business, how do you sort of put a fortress around it, and then can you share with us, like if you look at your elite plus customers, what percentage of them are buying mobile through Best Buy, just shopping the category. I' thinking, like, just as a phone as a primary purchase.

Hubert Joly -- Chairman and Chief Executive Officer

Simeon, you said, build the mobile business -- fortress around the mobile business. Can you elaborate on your question a little bit, because we're not in the fortress building business? Tell me more about your question.

Simeon Gutman -- Morgan Stanley -- Analyst

Yeah, look, how do you keep that customer loyal to buying -- upgrading their phone, renewing through Best Buy as the years go on? I think some customer survey research that we have from a couple years ago would show that the captive, as well as sort of the Apple stores, seem to be taking share as a whole, and so now there's some more competitive entrance if you will, if Amazon does become a first party seller of the phone. So, how do you keep the customer there and what is the importance of that customer to the business?

Hubert Joly -- Chairman and Chief Executive Officer

Yeah, I'll start and then, Mike, if you want to elaborate that would be great. We have been investing significantly in that part of the business in our stores in particular through the initiative called mobile 20/20 and you may have seen that in our stores. So, that's in partnership with the carriers. Buying a phone is actually a complex experience, and we do well compared to other players when the items that we're sending are either very large or complex to buy. So, that's a -- it's a strength and we've invested in systems to streamline the buying process n the stores, making it shorter.

We've had these menu boards to make it clearer for customers to know what the promotions were. Of course, the fact that we have Verizon, AT&T, and Sprint in our stores is a unique advantage. We have increased labor and the proficiency of the associates, both our own associates and the carriers' associates. We have, of course, the display of the major brands of phones, Apple, Samsung, and increasingly Google. So, that's the unique experience. Now, that being said, phones are not the category where we have the highest market share, so there's a lot of options in the carriers and Apple do have an advantage, but we feel good about momentum and our continued investment in the customer experience. Mike, what would you add to this?

Michael Mohan -- Chief Operating Officer

Thanks, Hubert. Good to talk to you, Simeon. What I would add to compliment what Hubert said is , our phone business is complicated, so for people when they think about their relationship with the carriers and the one thing that Best Buy has done is try to simplify that experience, whether it's in our stores or online when you can actually talk to a qualified expert, you can review your plan with us, we can compare plans to other carriers, we're very objective about that and you can compare an IOS ecosystem to an Android ecosystem. And we still believe, even though the consumer is truly -- and you know the statistics probably, better than I do around delaying their upgrade purchase, that means they're keeping their phone longer, and they want to do other things with it. We are ruling out the amount of stores. We can do Apple glass repair in this quarter as well. This is a key thing that customers are going to need more help with as they keep their devices longer. So, I think we look at that as a stance of what we can do for customers that's different than an e-commerce only distribution avenue or even what Apple can handle in their own stores.

Simeon Gutman -- Morgan Stanley -- Analyst

Great, thanks. Good luck in the fourth quarter

Hubert Joly -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Joe Feldman with Telsey Advisory Group.

Joseph Feldman -- Telsey Advisory Group -- Analyst

Hi, you guys. Thanks for taking the question, I wanted to ask about the inventory. Again, I know it sounds like it's in good shape and you guys did bring forward, what was causing the early receipts though, was it trying to get in front of Paris at the turn of the year or was it a logjam created by others related to tariffs or -- can you share a little more color there?

Corie Barry -- Chief Financial Officer

Yeah, absolutely. Let me just try to parse it apart one more time to make sure that I'm clear. Of the 23% increase that we saw in inventory, about, call it, 16, 17% of that was just due to the shift of the calendar week. Literally, once you line up the calendar week, this is how much a difference it makes because you bring so much inventory in each week here. Literally, if I just line up the calendar weeks, that leaves a 7% overall increase in inventory. First of all, not that out of line with the sales price we saw coming out of the quarter, and then, second of all, yes, we absolutely made some proactive decisions.

There has been more activity in especially the ports and in some of the deconsolidation areas, both due to a lot of companies bringing more in due to tariffs, but also even just some of the typhoons have caused some weather delays and things being more lumpy and spotty and so, I give our inventory demand planning team a ton of credit for working really hard to make sure that we were well prepared in phasing that inventory in early so that you would absolutely have it. I mean, one of the largest NPS drivers that we've had continues to be inventory availability and we felt like it is really important to have the stuff that people want. As we bring it in, you can see it's all basically new and fresh given the corresponding increase in the payable balance as well.

Joseph Feldman -- Telsey Advisory Group -- Analyst

Thank you and then just a follow-up. As you think about the holidays and the season, obviously the promotions seem like they've started sooner or at least getting better sooner. Have you guys seen, or can you comment on any response? I know it's a current quarter, but if there's any color you can give there or asked another way, are there any particular catalysts that you're looking for this holiday season, any key products that you think might be the big winners for the season?

Hubert Joly -- Chairman and Chief Executive Officer

Yes. There are such amazing sets of exciting products for the holiday That's one of the things that makes us excited about this category, which is the continued flow innovation, and what's great about this holiday is that there's excitement across many different categories, so gaming is gonna be particularly hard. There's a number of great titles, the Nintendo Super Smash Brothers, Red Redemption 2 and Call of Duty Black Ops 4, TVs, I think, continue to be a big item, people moving to a larger screen and smart TVs, and of course we have a partnership with Amazon that would be Insignia and Toshiba 4K Fire USB Fire TV additions, but broadly speaking, a lot of excitement around TVs, streaming devices, voice assistance with screen, so screens are gonna be a big item. If you bought a voice assistance last year, here's the good news, you can buy a new one with a screen, and I have a few on my kitchen table, a lot of functionalities there.

New phones, there's been a number of great new phones that have been launched. Health, Fitbit and Apple appliances, lots of excitement. Small appliances, great gifting items across mixers, pressure cookers, I don't cook, but I've heard, air fryers, major appliances there's a lot of -- this is more promotional time of the year for appliances than I think ever before and then security doorbells, security -- so there's a lot of excitement for people to come to our stores or shop online with us or, again, we'll come to you. That's one of the reasons we're excited about this holiday. Of course, there is the general consumer confidence, but there's a lot of reasons -- and we can take care of your entire list. One trip and you're done.

Corie Barry -- Chief Financial Officer

Joe, specific to your question around -- just so I make sure we hit it too on the competitive environment. I mean, I think the earlier and earlier start to the season is definitely a phenomenon that we've been seeing over the last few years is something we have taken into account in our own competitive positioning and in our own promotional cadences is reflected in as best we could the guidance that we gave you for Q4 and so we always talk about how the holiday continues to change, it continues to shape differently and we continue to have a team that does just an amazing amount of work to make sure we feel really prepared to compete as that holiday season continues to evolve.

Joseph Feldman -- Telsey Advisory Group -- Analyst

Great, thanks, guys. Good luck with the quarter.

Hubert Joly -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Brian Nagel with Oppenheimer.

Brian Nagel -- Oppenheimer -- Analyst

Good morning. Nice quarter

Hubert Joly -- Chairman and Chief Executive Officer

Thank you, Brian.

Brian Nagel -- Oppenheimer -- Analyst

Thanks for taking my question. And first off, congrats to Corie and Mike on your new responsibilities.

Corie Barry -- Chief Financial Officer

Thank you.

Brian Nagel -- Oppenheimer -- Analyst

With regard to the buy online, pick up in-store, in your prepared comments you talked about this and that part of the business' continuing strength, and the questions I have there are, one is this something that Best Buy is doing -- is Best Buy encouraging customers to -- or is it more reflection of the natural evolution of the online market? And then, as far as -- and I'm sure you've looked at this, as a customer chooses to pick up a product in store versus having it shipped to their homes, where's the benefit for -- how do you look at the benefits for Best Buy? Does the overall, maybe better profitability or the add-on sales as that customer comes to the store?

Hubert Joly -- Chairman and Chief Executive Officer

Yeah, so on the first point yes. We're -- this is the customer choice. As a customer focused, customer-obsessed company, we're not going to try to make the decisions for the customer. If you look on our site or in the app, it's really the customer. There are no financial incentives one way or the other It's really up to the customer and that's what we said in the prepared remarks. There's a unique benefit of picking up in store. You can get it in less than an hour, so speed is pretty great, knowing that 30 percent of US population lives within 15 minutes of a Best Buy store, and then if it's a -- you may want to control when you're gonna get it.

By the way, if it's a gift during the holiday, you may not want to have the gift show up at your home and whatnot. It's really a customer-driven phenomenon. The benefits to Best Buy, of course, there's shipping, there are additional items and we love to see the customers in our stores and we can help them with any question, they'll tend to buy more stuff, as well, but this is not what is driving us. We want the customer to have the opportunity to choose and get the best possible experience and only in-store pickup, because we've been doing this for so long, we've had the opportunity to really improve the process, invest in the systems, invest in the labor, invest in the overall customer experience and we're seeing great results. Corie or Mike, anything you would add?

Corie Barry -- Chief Financial Officer

No, that was great.

Brian Nagel -- Oppenheimer -- Analyst

Okay, that's very helpful and just one quick follow up question with regard to real estate. In your release you mentioned, obviously, we had the Best Buy mobile store has closed and then some reposition of your larger format stores too. Any thoughts on how we should expect that effort going forward -- we should expect to see on the topic of real estate positioning going forward, or repositioning?

Corie Barry -- Chief Financial Officer

We've been pretty consistent on our real estate positioning, which is, we're lucky in that we get to see a number of leases every year. Right now, we're seeing about 130 leases per year. We're looking at all of those stores and not just the stores, but importantly also the markets to try to understand, how do we very best serve the consumers in those markets? And we continue to make sure we're making the best decisions for every market and therefore refining down the market positioning. But, I don't think you're gonna see any massive speed up. You're not going to see a change in the overall positioning, you're just going to see a continue to make sure that we feel like the footprint by market reflects the needs of the consumers in that market.

Brian Nagel -- Oppenheimer -- Analyst

All right, thank you and best of luck for the holidays.

Hubert Joly -- Chairman and Chief Executive Officer

Thank you.

Operator

Next question --

Corie Barry -- Chief Financial Officer

Next question, please.

Operator

-- is from David Schick, Consumer Edge Research

David Schick -- Consumer Edge Research -- Analyst

Hi good morning. Thanks for taking my question. There's always this tension of looking in the near term of what product or latest announcement whether it's holiday or Apple, Amazon competitor announcement is going on, and then there's the temptation to go back to product cycles that have been there historically in thinking about your business. I guess it would be helpful if you could talk about, maybe neither of those. You've talked about services, but what other products, when you have these suites of products at the front of the store that is more discovery for consumers, how are those conversations going with vendors? What does that look like, what does the front of your store, things we haven't seen yet look like over the next several years?

Michael Mohan -- Chief Operating Officer

David, it's Mike, good morning. That's a great question to talk about. The biggest evolution that you've seen in our stores because I know you shop in them is trying to have people understand what a connected home or a connected product ecosystem can do for them and I think you're gonna see that continue to evolve. We're just starting to scratch the surface around digital assistant technology both with a screen, without a screen, how people can think about personal security and as it morphs into what they think about their own version of health and wellness.

What you do see at the front of your stores is an exciting amount of real estate, there's tremendous interest from both current vendors and those who are just starting to emerge to get a chance to be able to have us leverage our team members and show customers what we truly can do and try to solve one of these lifestyle needs. We've spoken about them at our Investor Day specifically around health and wellness and security and I think you're gonna see more of that as we move into the next few years. I don't know Hubert if you want to add anything?

Hubert Joly -- Chairman and Chief Executive Officer

The other thing from an equity story standpoint, this discussion -- you can't have a discussion around product cycles in specific categories and so forth. The way, increasingly, we look at it and of course, next year we'll have opportunities to update you guys around targets and whatnot, but the way we look at it is in aggregate, the different product categories we sell within the portfolio, their cycles. As a whole, it's a pretty stable basket of things that customers buy and there's always innovation, you never know what's gonna come two years from now, but there's always that.

The growth opportunity for us is not driven specifically by a particular product launch, it's driven by the opportunity to extend the relationship with the customers. A key fact that I always go back to is that our share of wallet of existing customers is 26% and as we continue to build the customer experience and the ability to build relationship with customers, the growth opportunities from expanding this share of wallet and imagine it's not an updated forecast, but imagine the impact of growing the share from a quarter to a third, and that's the opportunity, that's the obsession we have, and that goes through really understanding the customer needs, knowing the customer, bringing solutions, hardware services, and then being a part of their life.

That's where in-home advisor plays a key role, that's why toll text support as a way to be in people's lives in an ongoing basis, that's why getting into the health space gives us these opportunities. What's very exciting, if you look back at the last year or two is we've now demonstrated the ability to grow the company and comp ourselves, and the growth opportunity looking ahead is driven by this expansion of the customer relationship. Its gonna take time, but it's very exciting.

David Schick -- Consumer Edge Research -- Analyst

And is it fair to say there will be -- as there has been in the past, there will be Best Buy exclusives as part of what is presented to the consumer?

Michael Mohan -- Chief Operating Officer

I think that would always be a fair assumption. We talk about our ability to make and curate markets and part of that is ensuring consumers know what the products will do and a solution for them, and that provides us with a great opportunity to do that, David

David Schick -- Consumer Edge Research -- Analyst

Thank you so much.

Operator

The next question comes from Matthew McClintock with Barclays.

Matthew McClintock -- Barclays -- Analyst

Hi, yes, good morning, everyone, and congrats, Corie and mike, as well. Two quick questions. The first one, just Corie, you talked about a lot of investments that you're making, Hubert, you did, as well, and you've been making investments for three, four-plus years. I was wondering, as we look forward, what are the bigger buckets of investments that need to be made in the business that could potentially limit the flow through on earnings thinking into 2019 and beyond? Thank you That would be my first question.

Corie Barry -- Chief Financial Officer

Yeah, there are a few different suites of investments that are what I'm going to call a little bit more ongoing in nature, and when we talked about it at Investor Day, we talked about it in both a larger sloth of investments and pressures. And so, as you think about things like our ongoing investment in people, that's come from both very specialized areas like a smart home experience in our stores or an in-home advisor experience. It's also come broadly from our investment in wages and in benefits, and in the list of things that Hubert talked about that are important to our employees. That is a suite of investments that is ongoing, and we believe -- and that's why we talked about it in terms of our longer-range plan. That's going to continue to be a space where we invest.

A second major area of ongoing investment is going to be what I will call our technology capabilities or those tools that will help our associates and help our customers have better experiences. Things like we talked about, CRM, knowledge management, those are longer-term builds, and we're going to continue to refine those and make those tools better and easier to use over time, including the investments in the digital experiences that Hubert did a really nice job of outlining in his part of the prepared remarks.

Then, three, we specifically said we were making a major investment in our supply chain infrastructure, and we were, again, very clear that that was going to be a multi-year journey for us as we worked on both the space required to fulfill on our larger products, as well as the efficacy required to deliver at-speed on our smaller products, and that, again, is going to be a longer-term journey for us. It's part of the reason we teed all those up at Investor Day and said these are going to be the longer-term investments and pressures and part of the reason we have remained so committed the cost reduction side of things, as well.

Matthew McClintock -- Barclays -- Analyst

Thank you, that's very helpful for the update, and then, just my second question is on home theater. Hubert, you sounded really excited about the home theater options for the holiday, and the category ledger comp last quarter, but I didn't see it listed this quarter. So, I'm just trying to understand what happened to home theater this quarter? And then, as we go into the holiday, you benefited a lot from a trade up to higher size, bigger TVs. Is there still room to increase the mix of bigger TVs in your sales mix to offset ASP pressure as we look at holiday? Thank you.

Corie Barry -- Chief Financial Officer

Matt, there is always room to sell bigger TVs. One of the -- we definitely saw a bit of moderation in the TV industry compared to what we saw in Q2. I'd call it a little bit more like what we saw in Q1, so it slowed a bit. Good news is, units continue to be up at a pretty good clip, and what you alluded to, ASP's down a bit. The nice part is we continue to see people mix into, specifically to your question, larger TVs, and we get really caught up in 4K and the technologies, but genuinely, what people want is a larger, great TV experience in their home and we continue to see excitement around that, which kind of props up this concept that this isn't one of those cycles that automatically falls off the cliff. It is more of this idea that we keep providing new and different ways for customers to get bigger TVs with better technologies, and so, yes, it moderated a bit from the last quarter, but it's clearly gonna be a hot item heading into the holidays and we feel very well prepared.

Matthew McClintock -- Barclays -- Analyst

It's -- sorry, go ahead, Hubert.

Hubert Joly -- Chairman and Chief Executive Officer

I was wondering with Mollie, we have time for one more, so I think we do. All right.

Operator

Our last question will come from Mike Baker with Deutsche Bank.

Mike Baker -- Deutsche Bank -- Analyst

Hi. Thanks, guys. I guess this would be a longer-term question, I suppose, and I don't know if you're prepared to talk about this, but relative to the analyst day that you just referenced, it looks to me as if you're going to come in, you're gonna beat the sales plan of 43 billion because you're well on your way to hitting that this year, maybe a little bit below it, but by 2020, you should be there. Does that necessarily translate into better-operating margins or should we still think about a similar operating margin to what you laid out few -- I guess last year? And if the mark is not going up, then why not?

Corie Barry -- Chief Financial Officer

So, for right now, what we're focused on is finishing out this year and making sure that we deliver on the commitments that we made for this year. We're absolutely gonna update everyone as we get to the end of the fiscal year here on what we think our mid-term outlook looks like and how it should be updated. What I said on the call, and what we alluded to, this idea of continuing to make sure we invest in the business in a way that we feel like it's gonna set us up for future success remains our focus, and then, we'll help you through the future financial implications of that once we get through the rest of this fiscal year.

Mike Baker -- Deutsche Bank -- Analyst

Okay, well, and I guess, as a follow-up, I'd ask, the same store sales are gonna end up being at least four percent for the second year in a row. How sustainable is that, how much of that is due to really strong products for the last couple of years that might not repeat, and do you need services to accelerate to replace some growth in products?

Hubert Joly -- Chairman and Chief Executive Officer

I think that we're obviously excited about the fact that we've been able to demonstrate this very positive trend. As Corie said, we'll provide an update on our Q4 earnings call, and to the point of product cycles versus customer relationship, our main theme, the big long-term opportunity for us is the expansion of the relationship with customers. We've demonstrated at Investor Day that the volatility in the sector is actually much lower than people think. We like, of course, the environment in which we've been operating this year and we'll provide the updates on the Q4 call, but very excited about the future for our business.

With this, maybe I'd like to wrap. I know this is an incredibly busy day for all of you. We were not apparently the only retailer reporting today, to say the least, so thank you so much for your attention. I want to say one word because I'm sure many of us have friends and family in California that are impacted by the fire, so our heart is with the population in both Northern and Southern California. We wish all of you a very safe and very happy holiday, and I know one way to increase your happiness, which is to focus your list with us, so I look forward to seeing you in our stores or online. Thank you so much for your attention and look forward to catching up with you in three months. Thank you.

Operator

Thank you, everyone. This concludes today's teleconference. You may now disconnect.

Duration: 64 minutes

Call participants:

Mollie O'Brien -- Vice President of Investor Relations

Hubert Joly -- Chairman and Chief Executive Officer

Corie Barry -- Chief Financial Officer

Kate McShane -- Citigroup Global Markets -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Joseph Feldman -- Telsey Advisory Group -- Analyst

Brian Nagel -- Oppenheimer -- Analyst

David Schick -- Consumer Edge Research -- Analyst

Matthew McClintock -- Barclays -- Analyst

Mike Baker -- Deutsche Bank -- Analyst

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