Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Best Buy Co Inc (NYSE:BBY)
Q3 2020 Earnings Call
Nov 26, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Fiscal Year 2020 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1:00 PM Eastern Time today. [Operator Instructions]

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

Mollie O'Brien -- Vice President of Investor Relations

Thank you, and good morning everyone. Joining me on the call today are Corie Barry, our CEO; Matt Bilunas, our CFO; and Mike Mohan, our President and COO.

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 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 Corie.

Corie Barry -- Chief Executive Officer

Good morning, everyone, and thank you for joining us. Today we reported $9.76 billion in revenue, expanded our non-GAAP operating income rate by 70 basis points and delivered non-GAAP diluted earnings per share of $1.13, which was up 22% compared to the third quarter of last year. We delivered another strong quarter and are excited about our continued momentum and the opportunities we have ahead of us. Our teams continue to execute well and navigate ever increasing customer expectations, our consistently competitive retail environment and the uncertain tariff situation, and they are doing all of this while making significant progress against our Building the New Blue strategy, which we believe will uniquely position us over the long term.

Specifically, our comparable sales growth of 1.7% was on top of 4.3% last year and above the high end of our guidance range for the quarter. Our domestic segment comparable sales were up 2% as we continue to focus on the customer experience across online, stores and home. From a product category standpoint, the comp growth was driven by strength in appliances, headphones, tablets and computing, partially offset by declines in gaming and home theater.

The Q3 profitability was better than expected. This was primarily the result of lower SG&A due to strong expense management, a reflection of the culture we have built around driving cost reduction and efficiencies to help fund investments and offset pressures.

The Q3 gross profit rate was flat on a year-over-year basis. Due to the strong Q3 results, we are updating our annual guidance today. Matt will discuss in more detail later in the call, but at a high level, we are maintaining the top line guidance we shared last quarter while raising the non-GAAP EPS guidance. We are now expecting non-GAAP EPS of $5.81 to $5.91, this compares to the original guidance of $5.45 to $5.65 that we provided last February as we entered the year.

As it relates to tariffs, our assumptions of the impact on our business are basically unchanged from our last call. As a reminder, our guidance includes our best estimate of the impact of all tariff, both implemented and planned, including List 3 at 25%, List 4a at 15%, which was implemented on September 1st, and List 4b be at 15%, which is planned for December 15th.

As we shared at our Investor Update in September, we are entering the second chapter of Building the New Blue. Our purpose remains the same, to enrich lives through technology. Our strategy is to leverage our unique combination of tech and touch to meet everyday human needs and build more and deeper relationships with our customers. We introduced three five-year goals at our Investor Update focused on employees, customers and financials.

As a reminder, they are, first, to be one of the Best Companies to Work For in the US, exemplified by being named to Fortune's 100 Best Companies to Work For US. Second, to double the number of significant customer relationship events to $50 million. This includes Total Tech Support membership, homes visited, active digital engagement, financial services and senior life support. And third, to deliver continued top and bottom line growth over time, specifically, to get to $50 billion in revenue and a 5% non-GAAP operating income rate in fiscal 2025. We believe our strategy will translate to an economic model that delivers results by better serving existing customers, capturing new demand, entering new spaces, and building capabilities while maintaining profitability over time.

Last quarter, we talked about how our penetration by geographic market varies widely, our tools and structure have been one size fits all for our local markets. To better serve existing customers, we made strategic changes to our field operations to accelerate growth and to create a more seamless experience across channels, putting single leaders in a position to be accountable for stores, services, supply chain and home propositions in their market. These leaders are supported by a channel-agnostic program centered around insights, data and analytics, to be the markets largest opportunities and fast track initiatives that will make a financial impact, as well as provide a more seamless customer experience.

For example, in the New York area, we are focused on expanding both our fulfillment options and in-home resources. During the quarter, we launched 175 alternate pick up locations for customers in areas where either our store locations are not convenient or the shift to home option is not desired. These alternate locations are in UPS stores and CVS stores in the New York market.

In New York, as well as Los Angeles and Chicago, online customers can order as late as 8:00 PM and still receive their products the next day for free. Starting in New York, we are also adding the ability for online customers who want their product the same day to select specific three-hour delivery windows for that same day delivery. And for those online customers who prefer to pick up the products themselves, we are beginning the process of rolling out curbside pickup at stores in the New York market, where our Best Buy employee will bring the product directly to the customer's car. To build awareness of these expanded experiences, we have already kicked off a comprehensive local marketing campaign that includes stores, train stations, billboards, digital and email.

Based on our data, we believe there is much untapped opportunity to serve New York clients in their homes. To capitalize on that opportunity, we are building capacity by adding additional in-home advisors and also increasing the training for existing advisors. We have combined additional resources from both the field and corporate teams to provide these new advisors an accelerated locally focused training program that we believe will speed up their ramp-up time. This will free up capacity for our existing advisors in the market to receive more training designed to strengthen their client telling skills, which will lead to deeper customer relationships.

Based on local market analysis, we have also added capacity across the country where we continue to see strong customer demand for our in-home consultation program. On a national level, during the quarter, we added 100 in-home advisors to end the quarter with approximately 720 advisors. As we shared at our Investor Update, 95% of those polled said they would continue working with their in-home advisor and we continue to see higher spend at a higher gross profit rate from our in-home advisor customers versus other customers. We expect our advisors will become more and more productive as we advance our CRM system and enhance our digital tools.

Another important way we are better serving customers and building relationships if there are Total Tech Support program. Total Tech Support provides members unlimited Geek Squad support for all their technology, no matter where or when they bought it, in addition to great discounts on installations, protection and in-home services. We have grown the membership to over 2 million members from about 200,000 when we launched nationally in May of last year. It continues to get strong customer reviews and member spend more and are twice as likely to use other services than non-members. We are building on this early success to continue to deliver more benefits our members are asking for.

For example, we are piloting a program we are calling Total Tech Support with networking, that includes router setup and installations, parental control to manage every device on the network, a subscription to Microsoft Office 365, and one terabyte of cloud storage along with all the standard Total Tech Support benefits. We are also continuing to add new services and capabilities that have the potential to attract new customers.

As we shared last quarter, Best Buy is now fully certified chainwide as an Apple authorized service provider, becoming the nation's largest physical destination in terms of points of presence for Apple authorized repair services, including same day iPhone repairs. Almost 40% of these Apple repair customers are either new to Best Buy or haven't made a purchase in the last year.

Our lease-to-own purchasing option is now fully rolled out to 45 states after we added the last 9 states, including California and New York just a few weeks ago. This provides another purchasing option in addition to our existing strong credit card offer, allowing us to help customers make purchases they might not otherwise be able to. Since we began rolling out the program nationally in March, approximately 65% of lease to own customers are either new to Best Buy or haven't made a purchase in the last year.

We also remain focused on developing digital innovation and marketing strategies to drive engagement with our customers. We continue to enhance our digital shopping platforms, both online and on our mobile app, with new functionality and a better customer experience. Our app continues to see strong customer ratings. And year-to-date, usage of the app is up more than 20% and usage of our app within our stores is up more than 30%.

Our store employees love the app, which has also been approved with their needs in mind. They can now much more quickly see pricing, promotions, inventory and fulfillment times through features such as top deal, which I will discuss in a moment and expanded availability options. The app also provides them place other recommended products if a certain product is out of stock in their stores.

During the quarter, we materially changed the way we present product deals to our customers. Several years ago, we created a digital version of our weekly ad as we transitioned away from the paper weekly ad that was distributed every Sunday. We no longer distribute any paper weekly ad. And during Q3, we sunsetted the rigid digital weekly ad technology platform and launched a top deal section in our app and on our website. This leverages cost and gives us more flexibility to introduce multiple promotional cycles within the week, and I'm sure we are featuring our best offers. Most importantly, top deals provides a better user experience and help customers to find products faster with fewer clicks, resulting in higher and more consistent traffic throughout the week and better conversion compared to the old experience.

At our Investor Update in September, we also spent time talking about the significant opportunity we see in the health space. Specifically, we reiterated our focus on helping seniors live longer in their homes through our unique combination of tech and touch, thereby reducing their healthcare costs and bringing greater peace of mind for them and their families and caregivers. We serve approximately 1 million seniors right now and we shared our goal to serve 5 million seniors in fiscal 2025. Today, most of the seniors we serve are utilizing easy to use mobile phone products and connected devices that are tailored for seniors and come with a range of relevant services.

With our five-star service, customers can talk to US-based specialty trade agents who can connect them to family caregivers, provide concierge services and dispatch emergency personnel. We expect to continue to scale this business over time. In order to reach our five-year target, we also expect to advance our commercial business where the services we provide for seniors are paid for by insurance providers. This includes services such as remote monitoring based solutions that provide meaningful insights to improve timely care and reduce the cost to serve frail seniors. As previously discussed, we have successfully closed and integrated three acquisitions that have given us unique and essential capabilities and infrastructure, talent and a base of customer relationships to build from.

We have also hired additional talent to deepen our expertise that includes Dr. Daniel Grossman, our new Chief Medical Officer for Best Buy Health. He is a practicing emergency medicine physician at a major academic medical center in Rochester, Minnesota, with extensive strategy and business development experiences at leading health tech company. He has been on all sides of healthcare, physician, patient, payer, disruptor and educator. We are excited to have him on our team.

As we have reiterated many times, our continued focus on reducing cost and driving efficiencies in order to fund the investments and help offset pressures is a key element of our long-term strategy. In September, we announced a new cost reduction and efficiency target of $1 billion by the end of fiscal 2025. We made good progress against this new goal during the third quarter and plan to provide more detailed annual updates on our Q4 call going forward.

In addition to our strong business results, we have continued to make stride toward our goal of becoming one of the Best Companies to Work For in the United States. For example, we have recently added a variety of employee benefits, including pay caregiver lease, pay time off for part-time employees, back up child care, a PTO purchase plan and enhanced mental health resources. We also increased our adoption assistance benefit and introduced a new surrogacy benefit as part of our efforts to support employees who want to grow their families.

And finally, last month, we announced an updated dress code that allows employees to wear jeans and comfortable shoes. This is something our store employees have been asking for, and importantly, save some money. These changes have all been extremely well received by our store teams across the country. These are just a few examples of the ways we are continuing to invest in our people and underscores our commitment to be a great place to work, and these investments have produced some very positive results. Our store turnover remains in the low 30% range compared to 50% five years ago, and our average store general manager has been in his or her role for about six years. In fact, as we enter Q4, more than 92% of our store general managers already have experience leading their stores through a holiday season.

Our progress has also been noticed outside the company. We are proud of the breadth of recognition we have received in recent months, including ranking Number 66 on Forbes list of the World's Best employers and being named the Number 1 Best Company to Work For during the holiday season by Glassdoor. We are also honored to be ranked one of the top employers for students and graduates of historically black colleges and universities. Our culture at Best Buy is incredibly strong. It's the reason I'm here and I firmly believe it is our competitive advantage.

As we look ahead, we are excited about our holiday plans and everything we have to offer our customers this holiday season. Our team has once again 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. And we're supporting that work with a steady drumbeat of marketing and promotions that will keep Best Buy top of mind with shoppers throughout the holiday season.

Earlier this month, we released our Black Friday ad through a thousands of deals on the hottest tech. Hundreds of those deals were available immediately and we will continue to provide compelling offers throughout the holiday season. On the fulfillment side, we're making it even easier and much faster for customers this year. We are promising free next day delivery on thousands of items all season long with no membership or minimum purchase required. The fact that we are able to make that promise to our customers is a huge testament to all the work our team have done throughout our supply chain transformation. About 99% of our customers now live in the zip code where next day delivery is available, up from 80% last quarter. And if a customer within an area where free next day delivery isn't available or they are shopping for an item that isn't eligible for it, they can still get free standard shipping.

As we have shared previously, we also offer same-day delivery on thousands of items in 42 markets. And of course, store pickup remains a fast and convenient option for our customers. More than 70% of Americans live within 10 miles of a Best Buy store, and we promise that their items will be ready within one hour of placing an order. And on average, 80% of online orders are ready for store pickup in less than 30 minute. The NPS score for the experience continues to increase and about 40% of our online sales are picked up in our stores.

Finally, as I mentioned earlier, we are offering curbside pickup in a few stores in New York and other select markets across the country, allowing customers to pick up their tech without even getting out of the car. Our fulfillment options are all focused on providing customers with the choice and convenience they expect and deserve. And with the digital shopping experience and the Best Buy mobile app, it is now easy and intuitive to see your options for when and where you can get your order, whether you offer delivery or store pickup.

I also want to highlight that once again this year, we are supporting the St. Jude Thanks and Giving campaign, with customer and employee donations in our stores and online. We have been the program's top fundraising partner for three consecutive years, helping to raise $80 million for St. Jude lifesaving work since we first partnered in 2013. We hope to bring that cumulative total to more than $100 million with this holiday season.

In summary, we are pleased to report strong results for the third quarter and our teams are excited and ready to deliver an outstanding holiday season. I want to thank our amazing Best Buy employees in advance for all their hard work this week and throughout the holidays. Whether you work in one of our stores, spend your time making house calls to our customers' homes or work in a distribution center or the corporate office, please note that you are a critical part of what makes Best Buy so special. The holidays can be a fun and very busy time in retail, and I want you to know how much we sincerely appreciate all that you do.

And with that, I'll now turn the call over to Matt.

Matt Bilunas -- Chief Financial Officer

Good morning, and hello 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.

On enterprise revenue of $9.76 billion, we delivered non-GAAP diluted earnings per share of $1.13, both of which exceeded our expectations. We saw better-than-expected top line results in the computing category and a bit softer than planned in the home theater category. Our operating income rate also exceeded the high end of our expectations for the quarter. The higher operating income rate was primarily driven by strong expense management, which was partially offset by a lower gross profit rate than expected. Consistent with our expectations heading into the quarter, recently implemented tariffs on imported goods from China did not have a material impact on our Q3 results. From an international standpoint, we generated slightly higher operating income than we expected despite our top line results being below expectations. Lastly, the favorable earnings per share results versus our guidance also included $0.03 per share benefit from a lower effective tax rate.

I will now talk about our third quarter results versus last year. Enterprise revenue increased 1.8% to $9.76 billion, primarily due to the comparable sales increase of 1.7%. Enterprise non-GAAP diluted EPS increased $0.20 or 22% to $1.13. This increase was driven by, one, increased operating income dollars from both the higher operating income rate to higher revenue; and two, a $0.06 per share benefit from the net share count change. These favorable items were partially offset by negative $0.03 per share impact from a higher effective tax rate.

In our Domestic segment, the revenue increased 2.4% to $8.96 billion. This increase was driven by a comparable sales increase of 2% and revenue from GreatCall, which was acquired in October of 2018, partially offset by the loss of revenue from store closures in the past year. GreatCall revenue will be included in our comparable sales calculation beginning at the start of this year's fiscal fourth quarter.

From a merchandising perspective, the largest comparable sales growth drivers were appliances, which includes both major and small appliances, headphones, tablets and computing. These drivers were partially offset by declines in our gaming and home theater categories. In addition, comparable sales in the services category increased 12.9% versus last year. Similar to the past few quarters, part of the services growth was due to a refinement of revenue recognition for our Total Tech Support offer. As a reminder, we will begin to lap this revenue refinement during the year's Q4, so we expect the services year-over-year growth rate to slow materially compared to Q3.

Domestic online revenue of $1.4 billion was 15.6% of domestic revenue, up from 13.8% last year. On a comparable basis, our online revenue increased 15% on top of 12.6% growth in the third quarter of last year, which was primarily driven by higher average order values. In our International segment, revenue decreased 4.1% to $800 million. This was primarily driven by a comparable sales decline of 1.9% and approximately 170 basis points of negative foreign currency impact.

Turning now to gross profit. The Enterprise gross profit rate was 24.2% was flat to last year. The Domestic gross profit rate was 24.3% versus 24.4% last year. The 10 basis point decrease was primarily driven by mix into lower margin products, which was partially offset by the impact of GreatCall's higher gross profit rate. International gross profit rate increased 30 basis points to 22.5%, primarily due to higher year-over-year gross profit rate in Canada, which was driven by higher margin from the services category.

Now turning to SG&A. Domestic non-GAAP SG&A was $1.78 billion or 19.9% of revenue versus 20.6% of revenue last year. SG&A dollars decreased $24 million, primarily due to lower incentive compensation expense and strong expense management. These favorable items were partially offset by GreatCall operating expenses. International SG&A was $173 million or 21.6% of revenue versus $178 million or 21.3% of revenue last year. The $5 million decrease was primarily driven by the favorable impact of foreign exchange rates.

On a non-GAAP basis, the effective tax rate of 24.8% compared to 22.7% last year, higher rate versus last year was primarily driven by the favorable resolution of certain tax matters in the prior year. We returned a total of $499 million to shareholders through share repurchases of $368 million and dividends of $131 million. For the year-to-date share buyback spend of $700 million, we expect to be in the high side of our target of $750 million to $1 billion in share repurchases this year. Our ending inventory position was down approximately 7% compared to last year. This decrease is primarily due to the timing of Black Friday and Cyber Monday which occur a week later this year versus last year. Finally, we are still planning capital expenditures for the year to be in the range of $750 million to $800 million. Now I will discuss our outlook.

Let me start with a few comments specific to tariffs. As Corie mentioned earlier, the guidance we are providing today continues to include the estimated impact of all tariffs met the mitigating actions we are taking. These include, one, bringing in products ahead of the tariff implementation; two, decisions around vendor and SKU assortment; three, promotional and pricing strategies; four, sourcing changes; and five, other strategies employed in partnership with our vendors.

As a quick reminder, the List 4 tariffs are at a 15% level and have two effective dates. The first effective date was September 1st, and the most notable affected categories relative to Best Buy are televisions, smart watches and headphones. The second effective date is December 15th, and the most notable categories relative to Best Buy are computing, mobile phones and gaming consoles.

Now back to our outlook. Today we are raising our full-year non-GAAP EPS range to reflect the strong Q3 profitability, as well as our improved expectations for Q4. As we shared last quarter, operating income rate expansion in Q3 followed by operating income rate decline in Q4 was assumed in the original guidance we provided the start of the year. In Q4, we expect a decline in gross profit rate. We expect our SG&A rate to be slightly favorable on a year-over-year basis, primarily driven by lower incentive compensation expense.

To provide some color on the expected gross profit rate decline, there are three primary drivers, all roughly similarly sized. First, we expect the mix of products that have a negative impact on our product margin rates. As I shared last -- on last quarter's call, this is due in part to giving our teams a little more flexibility to navigate through the holiday season. Second, we anticipate rate pressure in our services category, with the largest driver being higher delivery and installation costs. And three -- and third, our outlook, of course, also includes the estimated impacts of all tariffs.

One more note on Q4 expected gross profit rate from a sequential point of view. As I reminded you last quarter, we fully lapped the acquisition of GreatCall and the revenue recognition refinement to our Total Tech Support offer in Q4. So they will no longer be a source of gross profit rate expansion as they have been in the last four quarters.

Specifically, our guidance for the fourth quarter is, Enterprise revenue in the range of $14.75 billion to $15.15 billion. Enterprise comparable sales growth of 0.5% to 3%. Non-GAAP diluted EPS of $2.65 to $2.75, and non-GAAP effective income tax rate of approximately 24%, and a diluted weighted average share count of approximately 261 million shares.

On a full year basis, we are now expecting Enterprise revenue in the range of $43.2 billion to $43.6 billion, and Enterprise comparable sales growth of 1% to 2%. Enterprise non-GAAP operating income rate slightly up to fiscal 2019's rate of 4.6%, non-GAAP effective income tax rate of approximately 23.3%, and non-GAAP diluted EPS in the range of $5.81 to $5.91, which compares to our previous guidance of $5.60 to $5.75.

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

Questions and Answers:

Operator

Thank you sir. [Operator Instructions] We'll now take our first question over the phone from Karen Short from Barclays. Please go ahead. Your line is open.

Karen Short -- Barclays Capital -- Analyst

Hi. Thanks for taking my question. Wonder if you could just give a little bit of more color on the puts and takes on what would get you to the low versus the high end of the comp guidance range for the year -- for the fourth quarter, and then kind of looking into what that would imply on the operating margin as well, just some -- a little more color on the puts and takes?

Matt Bilunas -- Chief Financial Officer

Sure. This is Matt. I'll take that question. First, in terms of the revenue guidance range, I think I would say, holiday is always a special season for consumer electronics. Pricing convenience is very important, and like any holiday we took a very disciplined approach to setting the range. And so what we've said we feel is very appropriate. I think in terms of what we're excited about that could be a good guys. We have a lot of exciting plans and offers and lot of those includes very strong fulfillment options for our consumers. We still feel like the consumer is relatively strong and the economic indicators are in a good spot, although there has been some -- a little bit of waning of consumer confidence. We still feel like that consumers are in a good position, so that's a good thing for us.

Sequentially, mobile phones and computing are expected to improve a little bit in Q4. Home theater is also expected to get a little better than it has been on trend. In terms of what could go the other way, I think obviously the holiday period. A lot of other retailers use our category sometimes to drive traffic. So we're thoughtful about -- thinking about that in our guidance range. Also there's always the possibility of inventory constraints. We don't see things at this point, but that's always a possibility. And in terms of gaming, that's -- it's been soft all year and that's something that we're thoughtful about the range.

On the gross profit side, I think the puts and takes, I think we talked about what the pressure was in Q4. I think obviously as you go through the holiday, you're never quite sure exactly what all the consumers are going to purchase. And then sales mix can sometimes put a little bit of pressure either to the good or to the bad on your margin, also to the extent that our services offerings hold -- hold and continue to generate some excitement to the, how that could be a good guy as well.

Karen Short -- Barclays Capital -- Analyst

Okay. And thanks. Very helpful. Just a follow-up. On the lease-to-own, you rolled that out to nine new states. Any early read on that, maybe percent of customers new versus existing and then any color on -- any impact on the comp, although I realize it's still very small?

Corie Barry -- Chief Executive Officer

Yeah, I'll add a little bit about lease-to-own. First, as we were going to start in the same place which is this is an offering we think is really good for our customers and that's why we always start with the branded credit card, but now we have another option for people who may not want to get into a credit card offering or may just have a more challenged credit history. We have talked a little bit of that at our Investor Day, it is still a relatively small portion of the comp growth that we're seeing.

But it is, importantly, an incremental either new or what have been a last customer for us. And so we really like this opportunity to bring that customer back in. We didn't launch the next nine states, the new nine states, including New York and California until just a couple of weeks ago with very late into the third quarter. So we'll see how that plays over the holiday season and into next year. Next year is really where we feel like we have a chance to continue to accelerate our growth here. This is something you can imagine that takes our associate some time to get comfortable with. It's a different type of offer and they need to definitely feel like they have good comfort in offering it. And we also continue to improve our experiences, both in-store, the information ask for, but importantly, next year, we want to be able to also offer it online, which would be a great addition for us. So we like it. It is a good secondary offer, but still relatively small in terms of the overall comp.

Karen Short -- Barclays Capital -- Analyst

Thank you.

Operator

We'll now take our next question over the phone from Scot Ciccarelli from RBC Capital Markets. Please go ahead. Your line is open.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

A new twist [Indecipherable]. Good morning guys. So can you talk about the estimated impact on margins from GreatCall and Total Tech Support, just seems to me those are higher margin businesses, I guess, I would have expected maybe a little better gross margin performance just given the growth of those two segments? Thanks.

Matt Bilunas -- Chief Financial Officer

Yeah, thank you. I think in the prepared remarks we talked about how those are -- those both benefits to us for the last four quarters. So they have been helping on the margin side. I think it's important to remember that from a GreatCall perspective, it increases the margin rate a bit, but it also increases the operating income. So from an OI perspective, it's still relatively neutral.

On TTS, what we call out is a specific part to the revenue recognition refinement that we made. Services are much bigger category that includes, obviously all of the other runoff of legacy system -- legacy support offers, as well as installation delivery. And so when you put them together, which I think of services and totality, and that is a -- it does not -- as we talked about is the pressure in Q4. So that's kind of that way to think about those two.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

I guess I was looking for any kind of quantification, but are you -- but basically the way we should think about is on an EBIT basis, it's pretty similar to the rest of the corporate run rate. Is that what you're saying? No real contribution to the EBIT line.

Matt Bilunas -- Chief Financial Officer

At an EBIT line, it's pretty -- it's relatively neutral to both of those two things, as you consider all the factors of services into the TTS as well.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Got it. Okay. Thanks guys.

Operator

Our next question comes from Greg Melich from Evercore. Please go ahead. Your line is open.

Greg Melich -- Evercore ISI -- Analyst

Hi, thanks. Just a follow-up on the operating profit in the fourth quarter, kind of, a more strategic question. Operating rate should be down in the fourth quarter, but on SG&A dollars, I missed -- what do you expect as part of that. If it wasn't for the cycling, the incentive comp, a year ago, how much would dollars have been up in the third quarter and where would you expect in the fourth quarter?

Matt Bilunas -- Chief Financial Officer

Yeah, we're not going to give specific on how much dollars would have been without low incentive compensation. In Q4, we do expect to carry on some strong SG&A management in Q4. So in Q4, the puts and takes are really lower incentive compensation, but we are also investing a little bit more in advertising and labor. So it is going to be -- it is expected to be favorable comparatively, but we're not giving any specifics on the lower incentive number.

Greg Melich -- Evercore ISI -- Analyst

Got it. And then if you look overall, I mean, obviously the comp look solid, you're driving some categories where maybe we didn't -- we keep seeing nice growth like appliances. If we were to take the comp in the third quarter and even look into the fourth quarter of next year, how much of that comp is driven by average ticket and how much of it is by continued traffic or transaction growth, whether it'd be online or in-store?

Corie Barry -- Chief Executive Officer

So the wonderful thing about being more omni-channel now that tends to be how we look at our organic metrics where we're looking at all of our metrics together. And what we saw in Q3, with traffic across all our channels was up a bit as was our average order value. And so those two were up and total transactions down just a little bit, but broadly, like the health we're seeing in broad traffic up, and those order values up as well.

Greg Melich -- Evercore ISI -- Analyst

That's great. And then the last one on just tariffs. I will make sure I'm clear that -- we're talking -- we talk about List 4, do you assume that the 15% is going to happen in December or is it just not material because it's so late in the quarter?

Corie Barry -- Chief Executive Officer

It's a little bit of both. We are assuming that that close in at the 15th, and at the same time, it's not very much that portion, that tranche is not very material on the quarter. That tranche becomes more of a conversation piece for next year.

Greg Melich -- Evercore ISI -- Analyst

That's great. Well, happy holidays, and good luck guys.

Corie Barry -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Matt McClintock from Raymond James. Please go ahead. Your line is open.

Matt McClintock -- Raymond James -- Analyst

Hi, yes. Good morning everyone. Corie, I wanted to dig into IHA a little bit. You talked about hiring an additional hundred IHA this quarter, but then you also talked about putting in an accelerated trading program for IHA and it seems like you're building out an infrastructure to maybe meaningfully accelerate the number of IHAs that you have. Can you just dig into that a little bit? Am I reading that right? Can you talk more to that? Thank you.

Corie Barry -- Chief Executive Officer

I think -- thank you for the question. I think since day one we've said our focus here is on making the very best-in-home experience we can seamlessly across all of the ways that we interact with people in their home. And we've said repeatedly over the last couple of years, we're going to take our time piecing this, because we definitely want to ensure, creating client telling at scale is not an easy task and we want to do everything we can to make sure we exceed the customers expectations when we get a chance to be in their home.

I think some of what we've learned around how best to train is now being translated into to your point, a bit of a different approach to training. It used to be when we pulled someone on board, we would use other IHAs, to a very large extent, to really help them understand what was expected of them, how to build a base of business and how to continue to build the client talent. I think what we've got better now is created a much more standardized training program upfront that we can administer and allows the existing IHAs to continue to build a more robust client telling capability, while we're bringing new IHAs up to speed and getting them ready and working quickly.

And so I think the team is learning a lot about how to bring people on, what you train them in first, how do you pick your more experienced IHAs and put them against some of the more complex jobs, all of those are turning -- helping us continue to refine the IHA model. So to your point, I don't know if I would say it's just accelerated as much as robust continuing to take the learning and paste where we think is appropriate based on the demand we're seeing.

Importantly, I would also underscore the example that we gave in the New York market, which is we also think there are specific markets where this offering could be and should be even more relevant than others. When we look at the data about how people want to interact with us, how they want help in their homes, we think we uniquely have a really interesting opportunity to help people in their homes in these markets and therefore are ramping and training a little bit differently for some of these markets.

Matt McClintock -- Raymond James -- Analyst

Thanks for the color. And then just as a follow-up. You talked a lot about your next day, same day fulfillment, and how you're -- how you've improve that year-over-year. How do you look at that strategically for the fourth quarter, specifically this holiday season, given that it's a shorter holiday season and how does that compare competitively to other people to sell your products. Clearly some of your peers have those options, but for the breadth of product that you sell, it would seem like a lot of -- a lot of your -- competitors just can't match that?

Mike Mohan -- President and Chief Operating Officer

Hey, Matt, it's Mike. Thanks for the question. I'll start with the last part. We feel really good about how we're positioned competitively. Our teams -- just call it, two-thirds the way through our supply chain transformation, and the progress we've seen to date and the customer response has been fantastic. And we look at all aspects, but the customers see on our site versus competitors and what we're able to deliver. I think what makes it unique at Best Buy is the combination of automation. We're putting our large facilities, the metro e-commerce facilities that we added to some of our major markets, and then we've been doing store fulfillment, both in-store pickup and ship from store longer than anybody else and I think we've got ways to refine that so we can actually deliver on promises on the products that people want the most. So these high value consumer electronic items and depending on where you live in a country, we are just as good as anybody at getting you stuff right away, you will come to our stores or you can get stuff the very next day.

And to complement that, I think that has to be said as you've got to be in-stock on these items too, I think that's something that our teams have just got proven expertise. And so you put those all together and that's what lets us deliver on we think a very compelling fulfillment promise. One, that doesn't cost us a lot of extra money because of the investments we've made, and it's something that Matt talked about it is remarks, we're going to lead into, help drive the comp in our fourth quarter.

Matt McClintock -- Raymond James -- Analyst

Thanks a lot, Mike. Best of luck everyone.

Corie Barry -- Chief Executive Officer

Thank you.

Operator

We'll now take our next question from Joe Feldman from Telsey Advisory Group. Please go ahead. Your line is open.

Joe Feldman -- Telsey Advisory Group -- Analyst

Thanks, guys. Congratulation on the quarter. Wanted to go back to inventory for a moment. You had mentioned you know -- you knew it was down timing related to the holiday, but how should we think about it for the fourth quarter. Presumably you've brought in a lot more at this point, but just what type of rate of increase should we expect for the fourth quarter if any?

Matt Bilunas -- Chief Financial Officer

Sure. This is Matt. I think we're not going to get the rate of increase at the end of the year at this point, but I think the teams are feeling very well positioned for the holiday. We -- like we said, we had a lower inventory position at the end of Q3 simply because of the holiday shift and timing being a little -- a week later this year. The teams will do what they need to do to be in a good position. I think we're always very thoughtful about bringing in the right amount and how much of that is owned versus not, I think. So we're not going to give the specific amount, but I would expect to continue to match that with the pace of sales that we expect as we head into next year.

Joe Feldman -- Telsey Advisory Group -- Analyst

Thanks. And then, just to get more specific on appliances. Can you talk about what continues to drive the strength there. I mean, presumably you guys are taking some market share and I'm wondering where you think that's coming from, but also just what is driving such good strength on top of prior strength?

Mike Mohan -- President and Chief Operating Officer

Hey, Joe, it's Mike. I'll amplify a bit of the fulfillment comment to Matt. That's part of the reason why we've improved our appliance business with the investments we made in fulfillment, wasn't just speed and small parcel and leveraging our store network. It was our large product delivery and how we both supported with our own teams and with partners and we've materially improved that. And it's complemented with the investments we've made in training, marketing, the in-store experience and we've thought about this category end-to-end.

And as I think, most of you know is, a large percentage of appliance purchases happened was something that you don't expect occurs in appliance you have breaks. And frankly, a few years ago, we just weren't very good at that, and we've made some really big improvements on how we can help customers navigate for items they can get the very next day, the things they can take with them from our stores and then we continue to reinforce with our in-home advisors the ability for us to help sell appliances when we're in your homes and continue to expand our assortment.

So it's a suite of investments across the board that helped drive this. And as you know, we're now in our eighth year and counting at consecutive comp growth, and we've been awarded JD Power's top honors for the third year in appliances. And we like the category a lot and we like the customer response to what we're doing right now.

Joe Feldman -- Telsey Advisory Group -- Analyst

Great, thanks. Good luck with the holiday period.

Mike Mohan -- President and Chief Operating Officer

Thank you.

Corie Barry -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Jonathan Matuszewski from Jefferies. Please go ahead. Your line is open.

Jonathan Matuszewski -- Jefferies -- Analyst

Yeah. Thanks for taking my questions. So some retailers have called out lengthened purchase decision cycles resulting from tariff driven price increases. From the strength of your comp, I'd imagine you're not, but maybe just comment on that and speak to how consumers may be digesting some of the selected price increases you've instituted and whether you're baking in expectations for greater elasticity in 4Q? Thanks.

Corie Barry -- Chief Executive Officer

This one is so difficult. And we talked about before, there just really isn't a precedence for where we are right now and there are a lot of moving pieces. And as you can imagine, both our teams and our vendors are employing a number of strategies. In the third quarter specifically, we definitely saw a limited number of small price increases.

And if you look at the items that were on the left on for a things like TVs, and especially some of the smaller screen size, I think in general what's difficult though is that you now have quite a few items that are on any of the list, and elasticities for any given individual item are incredibly difficult. And in fact, I think it's even more difficult if you had in the Q4, which is a highly promotional season and will be less about whether or not there's a tariff on any individual item, it will be about promotional positioning throughout the quarter.

And so I give our teams a great deal of credit for pretty carefully navigating thus far and to have really good plans in to Q4. And we're seeing a variety of mitigation tactics go into place. We talked about this last time we had the call. Obviously, we are thinking about where we assort and who we assort, definitely we're seeing promotional decisions being made by every single retailer out there as we head into this period. Obviously, some of these are global vendors and they're thinking about how they move their supply chain, what pieces and parts they put into and how they decide to structure any of their different assemblies and we're already seeing some of the manufacturing. And so, yes, we saw a little bit of impact into Q3, but as Matt said, it wasn't material enough for us to quantify our call out. Q4 I think it's all about price and promotion and how you're positioning, and we'll see how this evolves as we head into next year.

Jonathan Matuszewski -- Jefferies -- Analyst

Great. That's helpful. And then just you mentioned some exciting new kind of fulfillment options in kind of the New York City area. So just help us think about what's the timeframe as you think about maybe rolling out some of those options elsewhere in the country?

Mike Mohan -- President and Chief Operating Officer

Yeah, Jonathan, it's Mike. New York is a great place for us to start, primarily because of the density of consumers and our sheer lack of stores in some of the areas we'd like to support customers. And where if we see opportunities with alternative pickup locations and curbside, those are primarily the two things that we launched in New York. First, we see an opportunity to scale those both naturally as we get past this holiday, because there are clearly things that add value to the shopping experience at Best Buy and it's something that we think we can do. So that's a great question. Thank you for asking it.

Jonathan Matuszewski -- Jefferies -- Analyst

Thank you.

Operator

Our next question comes from Scott Mushkin from R5 Capital. Please go ahead. Your line is open.

Scott Mushkin -- R5 Capital -- Analyst

Hey guys. Thanks for taking my questions. So one was a thought about, as we think about next year, it looks like you guys are putting a pretty strong comps even though there's really not a product cycle going on, at least that's my -- my thought. And as we get into next year, it seems like you have a number of drivers as we get 8K TVs coming down, in price, we get a 5G iPhone and we have two new gaming consoles. So how are you guys thinking about this year versus next year? And are my thoughts right?

Corie Barry -- Chief Executive Officer

So obviously we're not going to guide for next year yet, but I think what we like about this year is it underscores what has been our strategic point of view and that is people want and need electronics and those are going to continue to evolve over time. And we have a very unique offering digitally in our stores and in homes that will help people make the best decisions and keep the products working. As we head into next year, there is obviously some things to be excited about, and counterpoint to that or at least something else to consider is the ongoing impact of tariff potentially as we head into next year.

So the teams are doing right now, as you can imagine, is working through all of that, all the mitigation strategies that I just talked about and thinking about how we can put together the right suite of offers and experiences for our customers next year. I think no matter what, we feel like strategically we are positioned in the right way to capitalize on and commercialize new technology which consistently we are able to do in a way that is very unique in the marketplace.

Scott Mushkin -- R5 Capital -- Analyst

Great. And then my second question actually is, I guess, more strategic. Obviously, you guys have been active -- somewhat active in M&A with GreatCall and others that you've done. As you look at interconnected home more broadly Corie, is there more you can do here as we look out rather you know very pointed at healthcare right now, but it seems like there is a huge market and huge opportunity especially as you layer in 5G capabilities?

Corie Barry -- Chief Executive Officer

It's interesting. We don't talk about it as much or talk about the M&A in it as much, but if you go into our stores, almost every -- what we would commit to or refer to as department is connected to the next one or could be connected to the next one. And our associates are uniquely well suited to help people navigate through the compatibility or the ability for people to connect broadly in their homes.

5G, we've talked about, it's going to be a slow roll, it's going to be market-by-market, but we've also said, we think there will be some interesting product, innovation, and that we again uniquely are able to help the consumer through what's available specifically for them in their market and how could it show up for them in their home in a very seamless and integrated way. And I think you'll see -- and you have been in the stores continue to evolve in ways that highlight that interconnected ability, and I think again our team will obviously capitalize on that ability to commercialize any new technology that's coming down the pipe that will help capitalize on 5G and just processing and information power that we will provide.

Matt Bilunas -- Chief Financial Officer

Next question please?

Operator

Our next question comes from Zach Fadem from Wells Fargo. Please go ahead. Your line is open.

Zachary Fadem -- Wells Fargo Securities -- Analyst

Hey, good morning. Can you walk us through your view of the impact of some of the Q4 headwinds around six fewer selling days, and then the Intel supply issues and to what extent you've incorporated these items in your outlook?

Corie Barry -- Chief Executive Officer

So first on the holiday selling season. Every bit of consumer data would say consumers are starting earlier in the hopes that they actually can finish earlier. We don't ever know exactly how that plays out for them, but that is -- that is every bit of consumer data that we're seeing. And I think every bit of data that we have seen certainly over the last five years is that that promotional cycle continues to pull earlier and earlier, and that more and more people are watching ads and deals earlier and earlier.

Additionally, the fulfillment options that are available to people have completely changed the competitive landscape in terms of how quickly you can get your items, with next day, same day, in-store pickup, all of these are being available and we feel particularly strategically relevant for us with our physical locations, our ability to be in your home, our next day available to 99% of the zip code. This really suits us well. And so our point of view is that the last days is much less relevant than it used to be historically and that you're going to capture that demand slightly differently, but that demand is coming. We like to joke and say there is still the same number of days between Halloween and Christmas, and so we feel like shoppers are going to meet their needs the way that they want given all the fulfillment options.

In terms of the Intel news, our teams would say they feel very well equipped for holiday and that we have the right products. We have -- Matt has got the inventory, very good inventory levels, lots of availability, both in our stores and online, and then we'll continue to work on that issue as we head into the next year. And I would argue, our merchants are very good at navigating situations like this and are working toward the impact for next year.

Zachary Fadem -- Wells Fargo Securities -- Analyst

Got it. Thanks Corie. And then on the gaming category weakness, curious if you could expand on that in a little more detail, whether you think it's primary -- primarily innovation driven or if there's something structural there. Just curious on your thoughts on when the category could turnaround?

Mike Mohan -- President and Chief Operating Officer

Hey, Zach, it's Mike. I think the gaming category still is exciting. We think about it more broadly than just the console category based on what we think and where consumers are looking for experiences to be enhanced. Obviously, we're on the year cycle of new devices coming out next holiday. So you've got kind of the best of both worlds for consumers thinking about what they want to do and the thinking now -- between now and next holiday what we fill in. So we've talked about gaming not being a driver for our business and we're seeing that reflect ourselves in the results.

But also the categories promotional drives good footsteps and clearly in this holiday, you can see by what we're promoting, there is some exciting offers and there is still demand for that, just at lower price points than they historically have been. I think there is a sizable shift and there will be, for the foreseeable future, how software complements the experience. We've seen that for some time. So as the consumer wants to move into higher-powered console devices and more connected, that plays really good to our strength on getting the right devices and the right accessories to meet the solution. And we think it is still a great category for us as we move forward.

Zachary Fadem -- Wells Fargo Securities -- Analyst

Got it. Appreciate that. Thank you so much.

Mike Mohan -- President and Chief Operating Officer

Thank you.

Corie Barry -- Chief Executive Officer

Thank you.

Operator

And our last question will come from Chris Horvers from JPMorgan. Please go ahead. Your line is open.

Christopher Horvers -- JP Morgan -- Analyst

Thanks. Good morning. Can you talk about what drove the improvement in the computing category relative to the prior trend. It seems like that perked up, which is great for your business. And then, as you look to the fourth quarter, how are you thinking about that category and what drives the expected improvement in home theater?

Mike Mohan -- President and Chief Operating Officer

Yeah, Chris, it's Mike. I'll start and then Corie and Matt can just chime in. We don't segment our selling season interdependent of our quarters, but we came out of what we would argue is a really strong back-to-school season for Best Buy. Corie talked about in our remarks about the evolution of our weekly ad to top deals, which lets us to be more flexible and how we offered deals to everybody that greatly benefited our back-to-school program with our ability to offer students more directly.

We focused on a new marketing segment and went for a younger demographics with where we placed our media and our team, as we already talked about briefly. They do a fantastic job of funding the right value propositions to get things in place, and then get a handful of new products shipped during the quarter, which was excellent and we did super job on operating pre-orders and the ability to get rid of your old devices. And so, when I look at that in Q3, it plays itself going in to Q4 quite well and there we're seeing great demand on our holiday products right now. We see no reason why it won't continue. And so we feel good about that. The experience we've been investing in for years continues to pay dividends for us.

Corie, would you add anything?

Corie Barry -- Chief Executive Officer

Well, I would just underscore. I think this is a place where the teams done a great job. Every computer that you could want to look at, feel and touch, and get help with is available. And in spaces like now when there's clearly interest in processing power, interest in high-end tablets, interest in computing, we're just very well positioned to capitalize on that.

So thank you all so much for joining us today as we look forward to updating you in our Q4 call in February, and we all hope -- we hope that you all have a safe and very happy holidays. Thank you.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Mollie O'Brien -- Vice President of Investor Relations

Corie Barry -- Chief Executive Officer

Matt Bilunas -- Chief Financial Officer

Mike Mohan -- President and Chief Operating Officer

Karen Short -- Barclays Capital -- Analyst

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Greg Melich -- Evercore ISI -- Analyst

Matt McClintock -- Raymond James -- Analyst

Joe Feldman -- Telsey Advisory Group -- Analyst

Jonathan Matuszewski -- Jefferies -- Analyst

Scott Mushkin -- R5 Capital -- Analyst

Zachary Fadem -- Wells Fargo Securities -- Analyst

Christopher Horvers -- JP Morgan -- Analyst

More BBY analysis

All earnings call transcripts

AlphaStreet Logo