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

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

Operating Income

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

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

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

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

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

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