Q4 2020 Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the best buys the school year 24th quarter earnings call. At this time all participants are in listen only mode. Later.

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I'll now turn the conference call ever Tamales, Brian Vice President Investor Relations.

Please go ahead.

Thank you and good morning, everyone. Joining me on the call today, our Corie, Barry our CEO, not balloonists, Rcs and Mike Monahan, our president and COO.

During the call today, we will be discussing both GAAP and non-GAAP financial measures 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 you still can be found in this morning's earnings release, which is available on our website investors dot best buy dot com.

Some of the statements will make today are considered forward looking within the meaning of the private Securities Litigation Reform Act ever 1995. These statements may address the financial condition business initiatives girls planned investments and expected performance as a 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 Corey.

Good morning, everyone and thank you for joining US today. We're excited to report strong Q4 results with revenue was $15.2 billion and non-GAAP earnings per share of $2 and nineties.

Our enterprise comparable sales growth for the quarter was 3.2% above the high end of our guidance range and on top of 3% last year.

We are posting archibald straight quarter of comparable sales growth and showing our strength as a successful multichannel retailers, who can make customers when and where they want we offer compelling holiday deals that resonated with customers and provided a seamless shopping experience wait inventory availability and fast free delivery.

Online home and stores, we're fulfilling architects help enriched people's lives with technology, while also helping technology company commercialize their product innovation.

Our domestic segment comparable sales were up 3.4% from a product category standpoint, the comp growth was driven by strength in headphone computing appliances mobile phones and tablets, partially offset by gains.

We also saw continued growth from our transformative initiatives like total tech support an in home consultation.

Yeah Enterprise Q4, non-GAAP operating income rate of 6.5% was better than we expected due to lower DNA expense on the gross profit rate line the mix of products, we sold in the quarter drop a lower rates than we anticipated.

For the full year, we grew at a price comparable sales, 2.1% expanded our non-GAAP operating income rate 30 basis points and increased our non-GAAP earnings per share a 14% to $6 and status that we.

We also returned $1.5 billion to our shareholders through dividends and share repurchases [noise].

In summary, we are proud of these results and I want to thank all of our associates for their hard work commitment to serving customers an amazing execution as we navigate an ever increasing customer expectations I consistently competitive retail environment and the challenging situation.

Against that backdrop, our associates also continued to drive significant progress against our building the new Blue strategy.

We believe our strategy will uniquely position us over the long term by leveraging our combination of pets and touch to meet every day, you many adult more and deeper relationships with customers.

Provide some highlights of our progress starting with how we are better serving our existing customer.

We continue to innovate and design digital experiences that solve customer needs across online and physical shopping.

Includes enhancing our digital shopping platforms with new functionality and evolving our marketing strategy to drive engagement with our customer.

Our focus on our App, our App continues to see strong customer rating and use it grew significantly through the year.

It's difficult 20 customer visits to the Aperek, 22% overall and usage of our out within our stores was approximately 17%.

Customers on the back by App engage with US eight times more frequently than those who solely use our website or mobile site.

At the same time, we continued to transform our supply chain using automation and process improvements to expand fulfillment options increased delivery speed.

The delivery and installation experience. We also continue to improve the buy online pick up in store experience for our customers, including the introduction of curbside pickup and alternate locations.

As a result of all the work our teams have done throughout our supply chain transformations. In Q4, we promised free next day delivery thousands of items all season long to 99% to our customers with no membership or minimum purchase required.

And we also promised on my customers, who want to pick up in store that their items would be ready within one hour, placing an order as a result store pickup was up over 500 basis points to 42% of online sales in Q4.

All of these improvements for me, but their customer experiences in mind and they contributed to continued on my girlfriend here. We saw particularly strong result in the fourth quarter, where online sales grew 18.7% and represent a 25% or total domestic revenue for the year online sales represented almost 24.

That's our domestic revenue.

We also focused on enhancing the in home experience for our customers.

In fiscal 2008, we expanded our in home consultation [laughter] 530 to 725 advisors.

Combined with tool to maximize their productivity helped us decrease the amount of time customers were waiting for an advisor appointment a key driver of Npls and close rate and allowed us to provide more than 250000 free in home consultations to customers across the nation.

Ladies and customer can you talk about it the net promoter score for purchasers is high at 87 and the advisor in play turnover remains low.

Additionally, we're now seeing a growing percentage of repeat purchases as customers develop and take advantage of their relationship with your advisors.

That's of course with the intent when we began the program and we're delighted to see these relationships being though as we continue to increase investment in technology that is perfectly suited to this new kind of seamless customer interaction.

Providing 24 by seven support for all their technology needs is another way, we don't relationships with our customers. Our total tech support program grew steadily during fiscal 2010 year with almost 2.3 million members.

It continues to get strong customer reviews, and member spend more and our twice as likely to use other services than non members. The average number uses the program approximately 2.5 times per year.

During the year, we also rolled out pilot test new member requested benefits related networking parental control and data storage.

We also made progress on our initiatives to capture new demand and enter newspapers.

Oh 20, we became the nations largest physical destination in terms of points of presence for Apple authorized repair services, including same day I phone repairs almost 40% at these apple repair customers are either huge best buy or haven't made a purchase in the last year.

Turning to best buy held during fiscal 2008, we continue to advance our initiatives designed to help seniors live longer in their homes with the help of technology. We successfully integrated two additional acquisitions, given that's unique and essential capabilities and infrastructure talent and a based customer relationships.

We are encouraged by the integration with best buy and the conversations we're having with potential partners.

Of course, our success with customers and the progress we are making on our building the new Blue strategy is driven by the enthusiasm talent and purposeful leadership of our employee.

During fiscal 20, we continue to invest in wages training and many new employee benefits, including paid time off for a part time employees take care giver leaves expanded mental health benefit.

Enhanced adoption assistance and a new surrogacy assistance benefit.

Employee engagement is high and our turnover rate in our stores remain in the low 30% range compared to 50% five years ago I.

Additionally, our average store general manager has been in his or her store for about six years, which is incredibly important from a short leadership and community perspective [noise].

In parallel to the customer experience work during fiscal 2008, we continue to drive efficiencies and reduce cost in order to funded investments and offset pressure in the middle of the year. We completed the existing 600 million dollar cost reduction target that we have set and fiscal 18.

In September we announced our new target of an additional $1 billion, an annualized cost reductions and efficiency by the end up the sold 25, we achieved approximately $160 million toward our new goal in the back half a year.

We're also proud of our progress in advancing our corporate social responsibility and sustainability efforts that we were just named the top five on Barents annual 100, most sustainable companies list for the third consecutive year you can find more information about our efforts in our annual corporate responsibility of sustainability report, which can be found.

At investors that best buy dotcom.

Similarly, I would like to note our progress related to our team Tech centers a program. We're very proud of it passionate about these centers are after school learning spaces equipped with cutting edge technology, where team learn new tech skills gain exposure to new career possibilities and benefit from positive adult and pure relationship. We have added 11 team tech centers in the past or for a total.

33 locations across the country moving forward, we will continue to invest in this program with plans to open a 11 new centers this year.

We know this work is making a difference 91% of teams say they are more optimistic about their future because if they're trying to ascertain tech centers and 73% say they are interested we're very interested and studying some aspect of step in the future.

I'm also incredibly proud to report that I was once again the top partner for the Saint Jude Thanksgiving campaign, helping razor record $22 million through customer and employee donation in our stores and online this holiday season.

That pushes our cumulative totaled more than $100 million raised for the kids are Saint Jude since we first heard in 2013.

As we enter fiscal 21, we are excited about our opportunities and are encouraged fire momentum.

As a reminder back in September we set three fiscal 2005 target focused on employees customers and financials first to be one of the best companies to work for in the U.S. exemplified by being named to Fortune 100, best companies to work more or less.

Second double the number of significant customer relationship events to 50 million.

Total tech support membership homes visited active digital engagement financial services and senior life support it.

Third delivered continued top and bottom line growth overtime.

Late to get to $50 billion in revenue and a 5% non-GAAP operating income right in fiscal 2005.

We believe our strategy will translate to an economic model that delivers results that are serving existing customers, capturing new demand entering new spaces and building capabilities, while maintaining profitability over time I.

I would like to highlight some focus areas for this year.

First in service of our existing customers, we will continue to bring our deep sea expertise and unique ability to partner with vendors to commercialize their new technology offering customers rate products and solutions.

In this context, we are excited by the opportunities related to technology innovation over the next several years as we have discussed previously.

Technologies like 8-K, a widely D dual screen notebook computers multiple phones consumer health products connected fitness, new gaming console and new products that leveraged by GE capability.

We will also launched new categories, where we can leverage our digital first mindset supported by our expertise around curations and supply chain.

Some of these will be online only and include areas such as hearing AIDS sustainable living products expanded connected fitness initiatives and traveler levels.

These are categories that we believe our customers, but expect to find at bye bye.

From a digital standpoint, we will continue to drive engagement with customers during their shopping and ownership.

While making it as seamless as possible for customers as they interact with us crosscheck.

For example in the AFE, we will make it much easier for customers to discover and benefit from the support services, we offer including scheduling appointments, which is something that currently requires a separate app downloads. We also plan to utilize location data to make it easier and more intuitive for customers, India to see both product availability and the expanding option.

For fulfillment.

From an in home standpoint, we will continue to enhance the experience for customers well at the same time testing new opportunities for girls and becoming more efficient in the way we are serving customers in their home.

As I mentioned earlier, we now have over 720 in Homeadvisor and we continue to receive great customer feedback in fiscal 21, we are testing new tiered adviser rules that will match the right employee with the right customers.

We're also continuing to enhance our clienteling technology platform to drive better customer experiences.

For example, the platform can increasingly help our advisors use knowledge about the clients current and future need to proactively communicate new promotions and product launches overtime that can help meet those customers.

In addition to our in home advisers. We also have approximately 900 Magnolia system designers all of whom are supported by nearly 6000 Geek squad agents portrayed in premium home theater and custom installation.

Looking forward, we see an opportunity to build upon all of these great resources collectively to enhance the customer experience.

Our stores remain incredibly important and must work in tandem with our digital and at home experiences in fiscal 21, we will continue to enhance both the proficiency of our store associates and optimize the way they work in August drive stronger customer relationship.

We're also investing in technology, including the rollout of electronic shelf label to all of our stores to enhance the customer experience and generate cost savings through atas efficiency.

Additionally, we will test and learn from a small number of new store and remodel pilots with a focus on fulfillment and differentiated shopping experiences for our customers.

We will continue to develop and hone our local market focus by leveraging the strategic changes, we made last year to our field operation.

Designed to create a more seamless experience across channels. These changes put 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, because youre markets largest opportunities and stuff.

Track initiative to accelerate growth.

In total tech support our focus will be on driving new membership and ensuring our members continue to see the offering something they can't live without.

We know that our members tend to use the offering more in the initial months after becoming a member.

And our goal is to continue to see the usage increase overtime across their membership.

As we shared at our Investor update last September we see an opportunity overtime to evolve our many customer membership, which also includes our millions of my best fight.

We plan to rollout pilots during the year as we work on the best way to simplify offering and moved from managing the economic offer by offer which is how we look at it today tomorrow holistic and streamlined offerings that are centered on the customer.

Turning to our focus on capturing new demand and entering new spaces in fiscal 2001, we plan to expand our leased to own purchase option by building awareness throughout the year, and then adding an option for customers to use least selling for online transactions in the third quarter.

Now I would like to talk about best buy health as we shared before most of the seniors. We currently serve our utilizing 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 our health and safety services customers can talk to USAID specially trained age.

Who can connect them to family care Givers provide concierge services and dispatch emergency personnel.

As we enter fiscal 21, there are a number of developments that we believe will accelerate the growth of this direct to consumer business.

First we're launching a number of new products and services, including a new mobile medical alert device also called her as a wearable device and apps designed for both seniors and their caregivers.

Second we are enhancing the customer experience at or about five stores. This includes expanded shelf space and merchandising presentation as well as the ability for sales associates to help customers activate their devices at the time of purchase so they can start using the services right away.

Third we have a new distribution agreement with Walgreens to carry our new person device and 6600 walgreen stores across the country and Walgreens dotcom.

Fourth we signed a new eight RP agreement, whereby the organization 38 million members will get exclusive discounts on our health and safety devices.

At the same time, we will continue to focus on the commercial health opportunity, where the services. We provide for seniors are paid for by health plan health systems and others in the senior care industry.

There's a high level of interest and our unique combination of tech and pass and potentially have to reduce healthcare costs and bring greater peace of mind for seniors and their families and caregivers.

We expected when we entered the state the health care industry has long sale cycles and the side of the business will take longer to rather than the direct to consumer side.

Turning to supply chain, we will focus on leveraging automation across the supply chain network and offering customers free next day delivery, which we view it table stakes across the industry.

We will also continue to roll out enhancements to buy online pick up in store to make it even more convenient for our customers to get their products, including alternate pick up locations as well as curbside pickup at best buy stores.

We have just expanded alternate pick up to approximately 2000 locations across nine markets and plan to expand to more market throughout fiscal 21.

These alternative pickup location or in areas, where either our store locations are not convenience for the ship to home option is not desired.

Last quarter, we also introduced curbside pickup at approximately 100 stores, which allows customers to pick up their tech without even getting out of their car customers are finding value in this option as curbside already accounts for 15% of store pickup units at those locations and we plan to expand the service to the majority of our stores in fiscal.

21.

Of course to break all of the initiatives, we have justice got to light, we will need to invest in technology. It is imperative to the success of our strategy that we continue to improve our clienteling and CRM program enhance our data and analytics capabilities and drive artificial intelligence machine learning and automation.

Before I turn the call over its Matt I want to know that we're closely monitoring the developments related to the Corona virus and our thoughts are with all of those who have been affected we remain focused on supporting our people and vendor partners. During this time.

As you all know this is a very fluid situation that is changing daily and thus it is very difficult to determine the exact financial impacts.

Our guidance ranges verbal he won and the full year reflect our best estimate at this time based on what we know today, we have assumed the majority of any impacts occur in the first half of the year. Therefore, we view this as a relatively short term disruption that does not impact our long term strategies and initiatives.

For the year, we expect comp growth up flat to up 2% and a non-GAAP operating income rate of approximately 4.8%.

This guy's reflects our continued investment in those areas necessary to make strategic progress and deliver enhanced employee and customer experiences as well as our continued focus on driving cost savings and efficiencies.

We remain confident that our fiscal 2001 plant moves us along the path to achieve our fiscal 2005 target.

Specifically, the financial targets, a $50 billion and revenue at a 5% operating income right.

In summary, we are pleased to report strong results for the fourth quarter and full year and our amazing teams are motivated and ready to deliver on our fiscal 2001 initiative and you can see you have a lot of exciting work underway and ahead of us.

With that I'll now turn the call over to map for more details on our fourth quarter results and I've got.

Good morning.

Before I talk about our fourth quarter results versus last year, I would like to talk about them versus expectations, we shared with you last quarter.

Enterprise revenue of $15.2 billion, we delivered non-GAAP diluted earnings per share $2, a 90 cents, both of which exceeded our expectations, we had better than expected revenue results, both online and within our international business.

Category perspective, we saw stronger than expected performance from computing.

Gaming of smartphones were a bit softer compared to our previous estimates.

As Corey mentioned, our non-GAAP operating income rate also exceeded the high end of our expectations for the quarter.

The higher operating income rate was driven by lower S. teenage which was primarily the result of lower than expected incentive compensation expense and strong expense management.

This was partially offset by lower than expected gross profit rate I will share additional details on the gross profit rate drivers later in my prepared remarks.

The favorite ability to favorable earnings per share results versus our guidance also included a three cents per share benefit from a lower effective tax rate that was partially offset by a higher share count.

I will now talk about a fourth quarter results versus last year.

Enterprise revenue increased 2.7% to $15.2 billion, primarily due to the comparable sales increased 3.2%.

Enterprise non-GAAP diluted EPS increased 18 cents for 7% to $2 a 90 cents.

This increase was driven by 12 cents per share benefits from the net share count change and a six cents per share benefits the lower effective tax rate.

And our domestic segment revenue increased 2.6% $13.85 billion. The comparable sales increased 3.4% was partially offset by the loss of revenue per store closures the past year.

From a merchandising perspective, the largest comparable sales growth drivers were headphones computing appliances mobile phones and tablets. These drivers were partially offset by declines in our gaming category.

In addition, comparable sales in the services category were essentially flat to last year as we shared previously the slower growth as compared to previous quarters is primarily due to lapping the refinement of revenue recognition for a total tech support offer we made in Q4 of last year.

Within the quarter.

From total tech support revenue was largely offset by a decline in warranty revenue.

Looking forward, we expect comparable sales growth in the services category to be the mid single digit range next quarter.

Domestic online revenue $3.5 billion was 25.4% of domestic revenue up from 21.9% last year.

On a comparable basis or online revenue increased 18.7%.

The fourth quarter last year.

The growth was primarily driven by higher average order values, but also benefited from increased traffic and improved conversion rates.

Our international segment revenue increased 3.4%, it's $1.35 billion, primarily driven by comparable sales growth of 1.6% and approximately 160 basis points a positive foreign currency impact.

Turning now to gross profit the domestic gross profit rate was 21.2% versus 22.1% last year.

90 basis points decrease was primarily driven by items, we share last quarter's call. These include one an unfavorable sales mix of products to rate pressure in our services category three impacts associated with heres a good imported from China, which was largely aligned with our expectations heading into the quarter.

During the quarter, we experienced more pressure from product mix than we previously expected due to heavier mix certain vendor products.

International gross profit rate decreased 30 basis points to 22.6%.

Primarily due to a lower year over year gross profit rate in Canada.

Moving to US you name domestic non-GAAP yesterday decreased $48 million compared to last year. The decrease was primarily due to lower incentive compensation expense, which was partially offset by a number of items, including variable expenses associated with higher revenue and higher advertising as a percentage of revenue SJ decreased.

Approximately 70 basis points to 14.7 or so.

I would like to see a few words on incentive compensation expense, which has been a driver of lower she may expense compared to last year throughout fiscal 2000.

Most of the favorability over the course of the year has been due to last year result results significantly exceeding or incentive performance targets.

Impair to our original expectations at the start of the year lower than planned incentive compensation at an approximately 10 basis point favorable impact for full year fiscal 20 operating income rate with nearly all the impact occurring in fourth quarter.

International Us today of $215 billion increased $8 million and it was flat to last year as a percentage of revenue.

Any dollar increase was primarily driven by expense associated with new store locations in Mexico, and the negative impact of foreign exchange rates as Corey said during fiscal 20, we returned $1.5 billion to shareholders through $1 billion share repurchases $527 million dividends. This morning, we announced that we increased.

Quarterly dividend, 10% to 55 cents per share.

Got it and outlook for share repurchases of $750 million to $1 billion physical 21.

I would now like to talk about our outlook.

Our full year fiscal 21 financial guidance is the following enterprise revenue in the range of $43.3 billion to $44.3 billion enterprise comparable sales flat to 2%.

Enterprise non-GAAP operating income rate of approximately 4.8%.

[noise] enterprise non-GAAP diluted deep, yes in the range of $6, a 10 cents to $6.30 in a non-GAAP effective income tax rate approximately 23%.

I would like to call. It a number of assumptions, we expect to continue to operate in a positive consumer environment 2020.

Corey mentioned earlier, our revenue guidance also includes our best estimate the impacts from supply chain disruptions caused by the Corona virus outbreak.

We expect our gross profit rate to be approximately flat on a year over year basis.

Hey, as a percentage of revenue is expected to be slightly up to physical 20.

As it relates to capital expenditures, we plan to spend the range of $800 million to $900 million as we continue to build the capabilities needed to execute our strategy.

The increase in capital expenditures will include some of the areas. Corey noted previously such as deploying electronics family meals to continued investments in technology health and supply chain.

As it relates to the first quarter, we're expecting the following.

Enterprise revenue in the range of $9.1 billion to $9.2 billion enterprise comparable sales growth a flat to 1%.

Non-GAAP diluted EPS for the range of one dollar to one dollar five cents.

Non-GAAP effective income tax rate of approximately 22.5% in a diluted weighted average share count approximately 260 million shares.

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

Thank you if he would like to ask your question. Please signal by pressing star one on your Touchtone phone, if you're using a speaker phone. Please make sure to switch to your handset and make sure. Your mute function is turned off to allow your signal to reach our equipment. As a reminder, due to high interest in time. Please limit yourself to one question. We will now pause for just a moment to allow.

When the opportunity to signal for questions.

My first question will come from Peter Keith with Piper seem there.

Hi, good morning, Thanks for taking the question.

I just wanted to ask Scott on the full year guidance. So it looks like at the midpoint, you're guiding to about 2% earnings growth, which is a little bit below last year's initial range.

And also below the long term CAGR that 2025 from about 4% before buyback so I would assume there's some corona virus.

Back to the numbers, but could you just kind of frame up why the overall earnings growth, it's a little bit below or maybe normalized run rate.

Sure. This is Matt I'll start with that first.

ARX <unk> lead were dropping in a very positive consumer environment similar to last year. All the data points indicated a good consumer unemployment is a good wage growth was good consumer spending and there's good reach workout.

That being said separately.

Or is some supply chain and related issues as a result with road alaris. So on the low end of our guidance, we would assume that theres material disruption a supply chain disruptions from that and we and that we can't make it all up in the year. So that's one reason as we said we did factor in the current a virus outbreak into the overall guidance.

And the range, we're still very.

Positive about.

Issues that we have such as I, Ajay TTS growth, there's certain categories that we still expect to perform strongly nextera such as appliances and headphones.

Like I said tool Tech support is still an area of growth prospects year gaming would be an area, where we are expecting it to be down or your your basis as well, we do expect to see new console launches and holiday periods next year, but the first three quarters.

Or will be will be down or we expect to be down and then we still have modern assumptions for Tvs and mobile phones.

I expect that there's a better adoption some of those technologies like Fiveg and AJ, then that could help what was up towards salary. So too early point, yes, we did try to factor in.

The core of ours I break into the overall you're in that did have some impact to the world.

Okay. Thanks, maybe a quick follow on their way to think about the impact of chronic buyers on the first half the year maybe from a.

Sales perspective understanding that.

And it might be wrong, but.

How much is factoring in at this point.

So Peter this is Corey I think trying to size perfectly the Corona Byron impact at this point, it's incredibly difficult I think you as much as anyone with respect to this isn't.

Incredibly fluid situation, we are trying to for Q1 and the full year estimate as best we can the impacts mainly in the form of lower sales volume as you can imagine and we literally so far it's on vendor by vendor to analyze the size the impact.

But it is complicated and very difficult to buy it and we're trying to way things like which factories are back up and running and they're all in varying capacities across Asia, even if the product isn't finalized produced in Asia. As some people are waiting for components that may flow from their their varying levels of safety stock across the industry and global.

All vendors have varying levels of global in inventory and then obviously estimating the transportation situation. Once the production comes back is also difficult and so based on what we know today, we're assuming the majority of the impact is in the first half and we do we do view it as a relatively short term disruption that doesn't impact our longer term strata.

The but obviously right now we are isolating our coach the supply chain in tasks and as Matt said, we're assuming the consumer continues on a relatively good pace. So there's there's still a lot for us to learn there was no sizing it perfectly just doesn't seem appropriate at this point.

Okay Fair enough that's helpful and thank you very much.

Thank you.

Thank you. Our next question comes from Simeon Gutman with Morgan Stanley.

Hi, This is Josh Entresto and thanks for taking my questions. The complexity of your margin guidance, just a little bit different from the recent past what are you doing to stabilize gross margins when some of the headwinds like tariffs appeared to be rising and those are the internal or external factors responsible for the reversal on the issue and I live which that you've seen over the past few years.

Sure as it relates to.

Gross profit in Q4, I think the implied guidance going into the quarter excuse me.

Assumed about 60 to 70 basis points or pressure.

What we saw the core everybody put out with what we expected in the system the same areas.

A reminder, what we said was.

One of the box was unfavorable sales mix of products and vendor mixing because part of that up services pressured was another aspect to the sort of especially going into the quarter and then as well we backing chairs and sporting goods from China, largely those all still played out what we did you see was a little bit more pressure on these sales and better mix than we expected.

During the quarter, we made a point to meet the market in a few key categories, we weren't leading the market come up emotional perspective.

In those categories the customer it was very high even harder than we probably even expect going into it and the mix. So that had a negative impact on margins I'm. So we don't believe that wouldn't characterize it as a rational or only promotional more more or less just meeting that must customer demand.

Very thoughtful way and is if you step back and look at the entire year just for your gross probably was down 20 basis points Q4 was of most of that most of that decrease and as we said next year, we're expecting gross margin rates to be flat I'm. So we do we do believe that pressure will start to stabilize next year. So when I think that every quarter and.

So that obviously stainless Mccain of perspective, you do you expect some of that says to stabilize to the next year.

I think so.

Let me your question.

Sorry go forward and nature for next year and the reason, we think they stabilize a bit more there's a couple things one well parents had some impact on Q4 for the next year, we would expect there to be very minimal impact over the years. The teams work through their own efforts to mitigate.

And obviously that gets a little hard to measure along with the current a virus impact, but we feel like the teams are very well positioned to mitigate the vast majority the tariff impact for the next year. So that's part of what changes the trajectory of that margin pressure as we head into next year as more of a stabilization other services business as Matt talked about as we lap.

All of the changes to the total factory worker and all those things next year, you have a bit of a stabilization there as well in terms of your ass DNA leverage question I think we would characterize that as a two things one that much in the incentive comp implications over the last year and we're pretty specific about that and then to the costs a reduction in efficiencies work that.

He has done at least the portion that also pulled through S. DNA and that's a bit of wherever else looking out some of that leverage.

Great. Thank you.

Thank you. Our next question comes from Brian Nagel with Oppenheimer.

Hi, good morning, Thanks for taking my question.

Sure Paul just for each month hitting on the current buyers issue, obviously topic I mean clearly it was you mentioned its words I guess my question I have is as you start to try to contemplate what do you taxes could have on on 2000 2020 trench could you help us understand what your she'd if anything right now where you actually.

Are you seeing indications.

Supply chain disruptions got the bonus for comedy Bury your future. Thank you.

Hi, Brian as Mike Thanks.

When we do all of our part forecast or restructure processes, we have full visibility to what's coming into the country. If your Roger sources from or top vendors, including the things we sourced directly so what we're trying to infer a guy this thing and she is there's a handful of issues around some items that are going to either be delayed or we have some.

Constraints that.

No full transparency at any time.

Yes, if we could be commensurate.

You don't have yet and what it would work.

He also speculating as any delays glosses or technologies and so no I think about this a little bit how we thought about tariffs last year's U.S. market is the most important remote torchmark in the world.

We're very significant part of that and so when we think about high valued goods and new technology were consumer demand is everything gets prioritized for this part of the World I don't think that's going to change when things are best running at full speed.

Or partners I want to work with best buy just like we're making sure a everything we can do to help them. During the strike time is in place that's probably the best visibility I can give you right now.

That's really helpful. Thank you didn't like the suits with one quick follow up and as we look at the fourth quarter gross margin you called out a number of Youre kind of.

Transitory or unique factors contributed to that decline because or where you could portion onboard the should we understand the true margin performance of the business since we take into consideration guidance for flat margins here in the next year.

Sure sure I.

As we went into the quarter. We gave I gave you the big buckets, where the pressure was it was the product mix sales.

In better mix, and then a services category as well as tariffs.

Last time, we spoke we did got to indicate that mostly those buckets kind of equally weighted and you're going to be applied to the guidance to be down about 60 to 70 basis point I'm. So you can do them out there.

As we went through the quarter. We also as we just got a second ago, we did see a little bit more pressure on the on the mix for products and vendor make so that would make that a little bit more of the of the increase from where we expected to be that helps.

That's very helpful. Thank you.

Thank you. My next question comes from Anthony Chukumba with <unk> capital markets.

Good morning, I actually will not be a corner fiber slated question.

Oh, I actually wanted to 'em talk little about about rent to own I guess I've. Two questions. First off is you know was all from a don't financing a significant contributor to the domestic comp performance and then the second question you mentioned, a that's how much you wouldn't be maybe drama advertising.

<unk> for you also mentioned.

<unk> third quarter and I just wonder if you can just give a little more color in terms of on the advertising piece in terms. What your plans are there for rent to own. Thank you.

So good morning at the other part with the significant.

And [laughter].

No.

And having a bit of a positive impact, but it is still relatively small in the scheme of things and so.

Now I would not characterize it as significant to the nature of your question is a second in terms of advertising more or going online. We definitely think that having this as a digital offering is important just giving the way we're seeing our customer shops, we want to be able to have this as an option on mine. So yes, you'll see that in Q3 [laughter] from an advertising our market.

Perspective, but we've been doing some regional testing on that I wouldn't expect to see if go full scale put a ton of muscle behind a big marketing or advertising campaign I think we still right. Now this is mainly a referral process as we've talked about before we tend to start customers with our own brand and private label card and if for any reason there on.

Able to qualify for that than we moved on to the lease to own the option and so I think it's a little bit last about a large scale advertising efforts and we continue to see it as a night a secondary option look financing and purchasing is all about different purchase options and that's what we feel like we can provide here.

That's very helpful. Thank you.

[laughter].

Thank you. Our next question comes from Michael Lasser with deep yes.

Good morning speaks a lot for taking my question Keith can one of focused on the either the aggressiveness or the conservative nature of the gross margin expectation for 20.

Fiscal 2021, so can you give us the sense.

For the cadence so gross margin over the course of the year do you expect to be down in the front half and up in the back half in what would have to go right.

Sure it can be better than that and what would have to be go wrong for.

Worsened then the question comes just.

On the heels of you missing your gross margin expectation in the fourth quarter because of <unk>.

Yeah. Thank you up in terms of next year's gross profit rate I would I would characterize again, the you're expected to be flat and we.

I would like a little bit of the of the puts and takes there I think went better than perspective were we expect to see continued growth in our health business and as Gordon mentioned continued cost reduction efficiencies, helping us on the margin rate on the other pressures side, what we will see a little bit pressure on the supply chain as being bigger products through our.

Our.

Supply chain system, I will see a little bit of fresh there too.

This will be a little doesn't impact, but again not immaterial impact next year and services. When you take out health will be a little bit of a pressure next year as again as real moving more electronic so you kind of a major things that are benefiting and putting a little pressure on it we're not gonna give exact quarter guidance things aren't always going to be the same and every quarter, but I wouldn't expect.

Any quarter to be.

Much different than that that basic make up meaning one materially down versus the others at least as far as we can see right now we do expect it to the stabilize for most of the year.

And we will some of that pressure. We saw this Q4, we would expect to lap it as we look into next year.

AH you if I can also add one clarifying question.

If you only assumed.

18 disruptions in your guidance, how long do you assume those will persist and have you assumed anything about changes in behavior consumer behavior because of all the headlines were seeing.

Right now we have isolated that to supply chain disruption because it literally every consumer indicator and every more macro forecast that we can get our hands on right. Now would say you continue to see growth in the consumer and for us to predict exactly how that consumers going to react given how quickly this is evolving and chain.

I think every day didnt seem prudent.

Very much.

Thank you. Our next question comes from Steve Forbes with Guggenheim Securities.

Good morning.

You just given all the near term noise here with the virus or kind of want to step back and revisit the 5% long term EBIT margin target right given the achievement of that level.

The U.S. segment. This year. So he can maybe just discuss how the expectation breaks down on a segment basis right as we look out.

If possible provide some directional color.

Around the EBIT margin structure for 2020 or 2021, I'm on a segment basis.

Sure. So overall I think.

Try to achieve ours, we look to achieve the 5% Golodetz by 25, I think we've always talked about the path or wasn't good exact would be linear we did it we did achieve a pretty high gross operating income raises and ended the year a chunk of that was actually due to the <unk> as the short term incentive favorability that we had so as we look at next year.

And the years out we still expect health to be a good contributor to that expansion of oli rate internationally I would say more more of the same probably.

Operating income rate more stabilize over that her time domestic is where we'll probably see more of the expansion as we're looking to ask why 25 from a segment perspective.

[laughter].

Thank you.

Thank you My next question comes from Kate Mcshane.

Goldman Sachs.

Hi, good morning, Thanks for taking my question.

I wondered if I could talk about the holiday season, just how you manage the six fewer gazing didn't see any changing patterns or demand.

And just from a promotional standpoint with promotions coming earlier, it's not something not impacting crush margins during the quarter.

So I'll start and my can add anything he would like to I think one of the things where most proud of in terms of Q4 is that it really felt like our investments in our digital experiences and our supply chain, we're really paying off and I would definitely extend kudos to our merchandising and marketing teams. He just did a great.

Jobs hitting a promotion early in the holidays and ensuring that we had a really consistent plan throughout the holiday events. We sat in our lack problem. We guided we felt like the number of days was not nearly as large and in past this year at that happen in the past, meaning because there are so many ways in which you can get.

Got it fulfilled and how we felt about our strength was next day same day, and particularly in store pickup, which we started with 42% of what we sold online we had a really unique ability to offer customers what they want it on the terms that they want it and so I think this was a period, where we really felt like you can see the investments that we had chosen.

Make up to this point Shine, Mike I don't get anything else you going out I would just a thanks Corey I would just reinforce the.

Efforts that we you know we talked about at the Investor Oh event in September you know really thinking about customer experience around fulfillment and what the role best buy could play a more on a long term basis, we knew the bottom it would be different than we've historically thought about the timeframe broader than just the days between Thanksgiving and Christmas and.

Being able to deliver things that consumers wanted when they wanted and where the played out well for us and I think that's a big part of a show just going forward.

[laughter].

Okay. Thank you and just one follow up on unrelated question I think he talked about the decline in warranty claims during the quarter, but within the guidance for services for 2020. It sounds like you said it would be up mid single digit. So I just wanted to know what if you if I'm warranties within that guidance or what the majority of.

The pound the total tech support.

Yes. Thank you for the question. The next years total Tech support a will drive most of our service growth next year I think in Q4, we did see a bit of lower warranty revenue.

Maybe if you think about the mix of products, we sold and heavier on like mix as well those tend to put a little bit pressure on the warranty revenue.

Which we saw in Q4 next year, we believe that stabilizes a bit and but most of that growth. We're going to see you next year is.

The total exports.

Thank you.

Thank you.

Thank you. My next question comes from Mike Baker with Nomura.

Great. Thanks, a couple of follow ups in fact, I'll follow up right on that services question. So mid single digit from told Tuck sport. Yet you have 2.3 million people signed up no I think a year ago. It was like a million sounds like a double so I guess why wouldn't that be growing more than mid single digit. That's one question the second.

Fall off is on incentive comp.

You said 10 basis points. It helps [laughter] relative to your plan for the year and you had already been planning it down and that 10 basis points. If it was mostly in the fourth quarter, it's like 30 basis points for the quarter I guess the two questions. There is one of the it includes a short on time, how qubits was better than planned.

The sell through the fourth quarter being a pretty strong quarter why wouldn't have come in so much lower than planned and in total how much it help year over year not just relative to plan. Thank you.

So I havent been P.T.S. that total tech support side.

The growth that we're driving there were absolutely seeing that grow and I think we got to remember as this is one of those recurring revenue business. That's that's going to payback over time, there is growth there on the flip side. We also plan to invest more in pre installation and delivery with eat away at some of that growth and also shows up in the services line I think broadly I would go back to though with them.

<unk> losses, what we talked about at Investor Day, which is there a services as it's defined in that line on our 10-Q and then there's services as we think about it which is a much broader definition includes things like the membership that we talked about in home consultations like the broad range of things we offer for customers and so I would absolutely ask do not.

I think about services as the revenue that you see there, but as the broader suite of things that we provide for our customers.

Can I follow <unk>, so what I paid a total touch sport, which I am a member by the way a though it was 199 of spread out over over year does that does that fall into that services line item.

Yes.

Okay.

Thanks, and I don't mean set the crop again, how could it have been [laughter] was better than plan. If the poor is pretty good and and then and what was the plant I guess.

Yes, you get as you can imagine every year, we set the Sci based on this year's budget and going into the quarter. We had four maybe changed to guide and forecast every every core game here going into Q4, we simply had a forecast that had is achieving some of those budgeted expectations that are the basis for both our store plans in our corporate plans.

Oh by the into the quarter, we simply just didn't get to those to those budget expectations as the did better than expected instead of conversation before.

So presumably there were gross margin plans rather than sales for him.

We have.

Predominance of our plans are both revenue and operating income.

Okay. Thank you understood.

Thank you. Our next question comes from Rice don't show with consumer edge research.

Great. Thanks for taking my question could you talk a little bit more about the electronic signed label investment I think we've seen that in stores, what what exactly are you referring to there how significant is it and how you're thinking about our and high ROI in strategy there.

Hey, raise Mike. Thanks for the question, Yes, you're correct, we have rolled out approximately 200 stores and our chain.

Electronic signs and we've been testing a variety of different ways of doing two things to truly see how to improve the customer experience with more accurate information on the tags more flexibility our pricing.

Which has a significant coronary benefit of having less people needed to physically change price tags and as you can imagine and this omni channel world.

Highly promotional time frames like you know the end of November to the Christmas selling season.

We still have a lot of our employee labor dedicated to resetting the store reprinting tags setting up bundled promotions, we do a lot of you need things we need it's really a pilot this understanding to handle all the aspects of pricing for best buy because were far different than a mass retailer or from store.

Very happy with the outcomes that we were seeing Oh, we.

Finalize a program to scale. This the balance of change so we see as a net benefit for as long term <unk> cost standpoint, or the employee engagement standpoint, and most important customer experience standpoint.

Great. Thanks, and then could you give us a sense about around how toys perform for you. All this holiday it looks like you've grown assortment over the last few years without toysrus in the market is it's a meaningful business real now and are you seeing any of the overhang said other retailers disgust. Thanks.

Well, we are growing or toy assortment right, but it is not a meaningful business for us and I don't think it will be yeah. We look at toys is a nice coloratura gaming business and while traditional gaming has been down computing gaming is up significantly and there were always trying to find ways to meet our customers where they are from our shopping experience and we'll continue to do that but it's not a suburb.

As part of our business today, I don't see it being out in the future I think the wonderful thing is the vast majority of our assortment has not been employees by kids. When you think about ipods and think about competing gaming I mean hoist process, such a bigger answer because the way kids are growing up today, what they value wouldn't want so it's not just about the 20 start my process about being positioned right.

At holiday to finish the less like Mike said.

Great. Thanks again.

Thank you. My next question comes from Scott Mushkin with our five capital.

Thanks, guys, Yeah, I think I wanted to touch on just the.

Kind of the cadence of new technology common tomorrow or are you kind of outlined some of the things in the next couple of years, but I know there's been some spot spot G.

Really be 2021 event and that the K TB cycle like this went a little bits always trying to get your your view on kind of the cadence with new technology coming to market.

[noise], Yeah, Scott I'll start and then of course is up because I mean, we're I mean, we're always excited about where technology is given that the role we play.

I think.

It's both a it's a short term and a long term game would've made by the short term, there's a lot of noise out there around what five GE is or isn't from the mobile that works is a consolidation not likely is going to occur and that's what's going to create confusion for consumers will that happen or the best buy plays a significant role there was an advantage with a bunch network will do today, but we're just.

And just scratched the surface or what it will do longer term was good but from an overall standpoint of being conducted both mobile and then your home I I think that's buys position is will be so we're excited about it will get you can you did lead in innovation.

Currently helping consumers understand what it can do they will drive some demand on the mobile stuck to regardless because of the new devices that come out that people want to understand.

The second question really key T.V. I think the technology wells, it's interesting what does what it really does it enables customers to get a better quality larger television set and that is one of the you driving things that we see consumers bring something on one of the reasons, we actually get T.V.'s return today, one of the properties as if it didnt buy as big of a TV as they thought they should have even though the.

The space.

And the better the TV can look which is 80 resolution that helps the user is to have that conversation with the consumer and get them, what they really need so we see as a driver for large screen TV. That's been a significant part of the business segment today and I think it will continue to drive going forward and the only thing I would add to what makes that is that when it relates to five T. I think we haven't really unique advantage.

Sure when we think about our very localized market based strategy and combined with our ability to commercialize new products, which will be coming over the next tierpoint multitude of years, we can help customers because it's going to be market by market and it's going to be confusing for customer because you. Some phones will be available some phone and this is where I think.

Our <unk> market strategy, and our ability to commercialize technology really will show up over on a multitude of years here.

And with that.

No I was just going to someone touched on it he and I just wanted to quick thought on the health care initiatives and what kind of the pushback you're getting from health care providers I know, it's one of the on but I was just wanted to give us color. Thanks.

Yeah, I think I mean, you're probably mainly referring to the commercial side of the business, which is why we're working on some partner.

With provider I think it's less about push back and it's more about how do we collectively move.

Very new it's very different actually everyone is very interested in health care in the home there isn't a partner we talk is not interested it's a question of how do you fit it into the existing reimbursement methodologies existing systems existing way, we think about care and how do you provide enough room to test and pilot at a small level.

Leasing learned enough that it makes it worthwhile to rollout on a larger scale. So it's not it's not actually pushed back there's a lot of interest. It's a question of how that you start to pilot and I'm scale.

And with that I think that's my last question when I say you all for joining US today and we look forward to updating you on our next call in me regarding our Q1 results have a great day [noise].

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

[noise].