Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Q2 Fiscal Year twenty nineteen Earnings. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this call is being recorded for playback and will be available by approximately 11 am Eastern Time today.
I will now turn the conference call over to Molly O'Brien, Vice President of Investor Relations.
Good morning and thank you. Joining me on the call today are Hubert Joly, our Chairman and CEO and Corey Barry, our CFO. During the call today, we will be discussing both GAAP and non GAAP financial measures. A reconciliation of these non GAAP financial measures to the most directly comparable GAAP 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 ks for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the call over to Hubert.
Good morning, everyone, and thank you for joining us. I will begin today with a review of our Q2 performance and provide an update on our progress as we continue to implement our Best Buy 2020 Building the New Blue strategy. I will then turn the call over to Corey for additional details on our quarterly results and our outlook. We are happy to report strong top and bottom line results for the Q2 that exceeded our expectations. We grew our enterprise comparable sales by 6.2 percent and we delivered non GAAP diluted EPS of $0.91 which is up 32% compared to last year.
The top line performance was broad based with positive comparable sales across all channels, geographies and most product categories. Our strong revenue growth was helped by the favorable environment in which we operate and driven by how customers are responding to the unique and elevated experience we're building. We're particularly encouraged with the continued progress of our net promoter scores and our continued market share gains. We also saw our 2nd quarter non GAAP operating income rate expand by 20 basis points to 3.8%. This fits with our guidance for flat operating income rate for the year, driven by our ability to drive cost takeout that helps offset investments and pressures in the business.
So I want to thank all of our associates across the company for their hard work in delivering these great results. So we're pleased with the strength of our financial performance. We are also excited about the progress we're making as we execute our Best Buy 2020 strategy, which entails expanding what we sell and evolving how we sell. Let me provide a few highlights starting with our acquisition of GreatCall. Earlier this month, we announced our intent to acquire GreatCall, a leading connected health services provider for aging consumers.
Graco offers easy to use mobile products and connected devices tailored for seniors. These are combined with a range of services including a simple one touch connection to U. S.-based specially trained agents who can connect the user to family caregivers, provide concierge services and dispatch emergency personnel. Acquisition of Graco is exciting for 5 reasons. First, it is right in line with our strategy.
Our purpose as a company is clear, it is to enrich lives through technology by addressing key human needs. 1 of these needs we highlighted during our Investor Day meeting last September is health and wellness, the space we've decided to expand into with a focus on aging consumers and how technology can help them live a more independent life. 2nd reason, the health market is an exciting space, especially as it relates to seniors. There are approximately 50,000,000 people over the age of 65, a number expected to grow by more than 50% within the next 20 years. Helping this fast growing population live longer in their homes provides significant benefits not only for seniors and their families, but also for payers and providers.
3rd reason, we are acquiring a great company. GreatCall is a profitable, growing, recurring revenue business that already has more than 900,000 paying subscribers and more than $300,000,000 in annual revenue. We have an established expertise in serving the aging population and their caregivers and we have a strong management team and a culture that is well aligned with Best Buy. Both reason we see significant value creation opportunities driving an attractive return on investment. The combination of their products, services and expertise with Best Buy assets including our merchandising, marketing, sales and service capabilities provides the opportunity to both scale their existing consumer business and pursue commercial opportunities with payers and providers.
Finally, we believe this acquisition can be a beachhead for Best Buy in the health space providing the entry point to more growth opportunities. We expect to close this transaction by the end of Q3. We anticipate the impact on our non GAAP earnings to be neutral this year and next year as we invest in the business and accretive to earnings by our fiscal 2021. The second highlight of the quarter is the rollout of our new Total Tech Support program. We launched the program nationally at the end of May and we are pleased with the initial results.
Our retail teams are very engaged and excited about the program and customer sign ups are in line with our expectations. From a financial standpoint, the impact of the rollout on our domestic gross profit was in line with the expectation we shared last quarter. As a reminder, dollars 1 $199 per year, total tech support members get unlimited Geek Squad support online via chat, in stores and in the palm of their hands with the new Best Buy Home app. All their technology is covered no matter where or when they bought it as we believe that support should not be limited to a specific product and that the customer need is to have all their technology work together. Members also receive free internet security software and discounts on in home services and purchases of annual Geek Squad Protection and Apple Care Service Plans.
We're working on additional capabilities as we continue to advance the program and we believe our current rollout is just the beginning in terms of the benefits we will offer members all the time. I think you'll all be happy to know that you'll be able to purchase a total tech support membership as a gift for someone else this holiday season, which is something customers have been asking us for. The 3rd highlight of the quarter is the launch of the 1st Pirate TV Edition Smart TV as part of our product development partnership with Amazon. This partnership is a great example of how we are leveraging our expertise and unique merchandising, marketing and sales assets to help leading technology companies commercialize their new products. As a reminder, the TVs are available only in Best Buy stores, on bestbuy.com and on amazon.com through Best Buy as a third party seller.
We're planning to launch additional models in September October. The 4th highlight of the quarter has been the rollout of our new brand Rally and Cry. Let's talk about what's possible. The rollout included training sessions or brand rallies across the company including our stores. Each store dedicated significant time on a Saturday in June to immerse all store associates in the new rallying cry.
The rallying cry and the related guiding behaviors, which are be human, make it real and think about tomorrow are resonating strongly with our associates and are a source of inspiration for all of us. In line with this, the 5th highlight of the quarter is the continuing progress of the proficiency of our associates and of the quality of our execution across channels that is driving enhanced Net Promoter Scores and revenue growth. The level of knowledge of our sales associates and their focus on addressing the needs of our customers in a helpful and inspiring fashion is exciting to watch. In fact, I'm pleased to announce that according to the JD Power 2018 appliance retailer satisfaction study, Best Buy ranks highest in customer satisfaction amongst appliance retailers for the 2nd year in a row. Another highlight of the quarter is the continued expansion of our in home advisor program.
Based on the strength of demand, we've increased the number of advisors from 300 in September last year at the beginning of the nationwide launch to more than 430 at the end of the second quarter. As a reminder, our in home advisors provide free in home consultations to help customers address their needs across our full range of products and services. The goal of the program is that the initial consultation is the beginning of a deeper and more relationship based experience with Best Buy over the long term. Like our Toltec support offer, we are early in the journey and expect the program to continue to improve and mature as our advisors and their roles longer and master what our sophisticated skills and as we further enhance the sophistication of the tools and systems that help them do their job. In addition, we're continuing to use technology to improve and streamline the online buying experience for our customers and to bring together the advantages of our various channels in a way that is seamless and intuitive to customers.
As a result, based on the data we have, we believe we are continuing to gain market share online. And while we are, of course, focused on continuing to drive online revenue, we are more and more focused on how to build deeper relationships and drive total revenue from customers. We're pleased with our overall revenue growth and the progress we're making on continuing to improve the customer experience across all the ways our customers want to engage with us. For example, to further improve the buy online pickup in store experience, our mobile app home screen will display the order ID barcode when an online order is ready for pickup in a store, reducing the amount of time a customer has to spend at the pickup counter. Another example is related to improving this research process.
Customers perform research in stores by scanning product fact tags and then reading information and reviews. However, they often lose track of what products they scans once they leave the store. And so we've added a feature called scan history to the Best Buy app to retain customers product scan and scan to compare history so that they can reference it and continue research after leaving the store. So as we implement our Best Buy 2020 strategy and in support of expanding what we sell and evolving how we sell as I've just outlined, we're continuing to invest in a range of enablers across technology, people and supply chain. Specifically, we're continuing to invest in areas such as specialty labor, enterprise customer relationship management, knowledge management capabilities and our new service platform.
In the supply chain area, we are investing to increase capacity, further increase speed of delivery and drive efficiency. As an example of this, we recently opened a new distribution center in Compton, California. Compared to the old center we were leasing in Chino, California, the new distribution center is closer to consumers with 50,000,000 consumers within 50 miles. This center has significantly more capacity for our growing large cube categories like large appliances and large TVs. And as a result, we've seen significant improvements in our productivity and home delivery net promoter scores.
We're also using a section of this 600,000 square foot facility to build out a completely new automated system that will facilitate faster and more efficient online order delivery to the local metro area as well as the whole West Coast. To help offset our investments and pressures in the business, we continue our longstanding diligence on increasing productivity and decreasing cost. Our current target established in Q2 of last fiscal year is $600,000,000 in additional annualized cost reductions and gross profit optimization to be completed by the end of fiscal 2021. During the Q2, we achieved approximately $70,000,000 in additional annualized reductions, bringing the cumulative total to $335,000,000 towards our goal. So looking ahead, as a result of the strong performance in the first half of the year and our updated expectations for the back half, we are raising our full year sales and earnings guidance.
We now expect fiscal 2019 comparable sales growth of 3.5% to 4.5% versus our original guidance of flat to 2%. And we are raising our expectations for our non GAAP diluted EPS to a range of $4.95 to $5.10 versus our original guidance of $4.80 to $5 We continue to expect an approximately flat non GAAP operating income rate of 4.5% for the year. Corie will provide further details on our outlook for the full year in Q3. You'll note that the profile of the next two quarters is not completely linear as we're expecting an operating income rate decline in Q3 followed by an increase in Q4 to result in an approximately flat rate for the year. Similar to the past several years, we remain focused on managing the business for long term success rather than ensuring a straight line quarterly margin performance.
In conclusion, we are very excited about the opportunities in front of us from enriching lives with technology and providing services and solutions that solve real customer needs and build deeper customer relationships and the related value creation opportunities that this entails. So I want to reiterate how much I appreciate the leadership, passion, talent, ingenuity and hard work of our associates across the company. You are making it all possible. And now I'd like to turn the call over to our CFO, Corie Barry, for more details on our Q2 performance 2019 guidance.
Good morning, everyone. Before I talk about our Q2 results versus last year, I would like to talk about them versus the expectations we shared with you last quarter. On enterprise revenue of $9,400,000,000 we delivered non GAAP earnings per share of $0.91 both of which exceeded our expectations. We saw better than expected top line results across multiple categories with home theater, gaming, health and wearables and mobile phones being the largest drivers. Our gross profit rate was in line with our expectations, whereas our SG and A rate was favorable due to the higher revenue combined with slightly lower than expected spend.
I will now talk about our Q2 results versus last year. Enterprise revenue increased 4.9 percent to $9,400,000,000 primarily due to the comparable sales increase of 6.2%. Enterprise non GAAP diluted EPS increased $0.22 or 32 percent to 0.91 dollars This increase was primarily driven by an $0.08 per share benefit driven by a lower non GAAP effective income tax rate, an $0.08 per share benefit from the net share count change and the flow through of higher revenue. Our comparable sales growth of 6.2 included a 150 basis point benefit from the calendar shift. As we discussed last quarter, our reported comparable sales are computed on like for like fiscal weeks and are not shifted to more closely aligned calendar weeks following last year's 53 week year.
For the remainder of the year, in Q3, we expect the calendar shift to have a negative impact of approximately 70 basis points on our reported comparable sales. And in Q4, we expect a positive impact of approximately 50 basis points. In our domestic segment, revenue increased 4.4 percent to $8,600,000,000 This increase was primarily driven by a comparable sales increase of percent, partially offset by the loss of revenue from 292 Best Buy Mobile and 17 large format store closures in the past year. From a merchandising perspective, the largest comparable sales growth drivers were home theater, computing, appliances, gaming, mobile phones and smart home. These drivers were partially offset by declines in our digital imaging and tablet categories.
Domestic online revenue of $1,210,000,000 was 14% of domestic revenue compared to 13.2 percent last year. On a comparable basis, our online revenue increased 10.1 percent on top of 31.2% growth in the Q2 of last year, primarily driven by higher conversions and increased traffic. Let me take a minute to provide a couple of additional points on this topic. As Hubert said, we are pleased with our overall revenue growth and the progress we are making on improving the customer experience. We believe based on the most recent data we have, we are continuing to gain market share online.
Regarding our online comp specifically, I would add that consumer electronics category is a more mature online category than several other retail categories, with customer buying patterns moving online earlier than most. As many of you know, we have been focused on our multi channel capabilities and have been investing heavily for several years. For example, we have been offering our customers the option to buy online and pick up in store for more than 10 years and all our stores have been shipping product to fulfill online orders since the beginning of 2014. In the last 5 years, we have doubled our online sales and on an annual basis, they are now approximately 15% of our total domestic sales. Now back to our Q2 sales results.
In our International segment, revenue increased 10.8 percent to $740,000,000 This was primarily driven by comparable sales growth of 7.6 percent driven by both Canada and Mexico incremental revenue associated with 6 new large format store openings in Mexico over the past year and approximately 60 basis points of positive foreign currency impact. Turning now to gross profit. The enterprise gross profit rate decreased 30 basis points to 23.8%. The domestic gross profit rate was 23.8% versus 24% last year. The rate decline of approximately 20 basis points was driven primarily by higher supply chain costs from both investments and higher transportation expense as well as the national rollout of our total tech support office.
Both of these were in line with the expectations we shared last quarter of approximately 25 basis points of pressure each. These pressures were partially offset by higher overall product margin rates, which included the benefit of our gross profit optimization initiatives. From a category perspective, increases in the smart home and appliance categories were partially offset by rate pressure in mobile phones and computing. The international non GAAP gross profit rate decreased 200 basis points to 23.1%, primarily due to a lower year over year gross rate in Canada, driven by lower rates in the home theater and mobile phone categories. Now turning to SG and A.
Enterprise SG and A was $1,880,000,000 or 20 percent of revenue, which increased $47,000,000 but decreased approximately 50 basis points versus last year. Domestic SG and A was $1,710,000,000 or 19.8 percent of revenue versus $1,670,000,000 or 20.2 percent of revenue last year. The $43,000,000 increase was primarily due to growth investments, which includes specialty labor, higher depreciation expense and higher variable costs due to increased revenue. These increases were partially offset by cost reductions and lower incentive compensation. The specialty labor investments include additional dedicated labor in areas such as in home advisor, appliances and smart home.
In addition, it also includes the impact of competitive wage and benefit investments we have made in relation to rising wage rates across the retail industry. As we have stated in prior quarters and on our Investor Day, increasing wage rates are an ongoing pressure in our business that we are balancing with a combination of returns from a new initiative and ongoing cost reductions and efficiencies. International and A was $165,000,000 or 22.3 percent of revenue versus $161,000,000 or 24.1 percent of revenue last year. The $4,000,000 increase was primarily due to increased variable costs associated with higher revenue and the negative impact of foreign exchange rates. On a non GAAP basis, the effective tax rate decreased to 25.4% from 32.6% last year.
The lower effective tax rate was primarily due to the reduction in the U. S. Statutory corporate tax rate as a result of tax reform. From a cash flow perspective, we ended the 2nd quarter in line with our expectations. We returned approximately $500,000,000 to shareholders in the form of share repurchases and dividends.
As it relates to our acquisition of GreatCall, we plan to use existing cash for the $800,000,000 purchase. The acquisition of GreatCall is not expected to impact our previously communicated plan to spend $1,500,000,000 on share repurchases this fiscal year. I would now like to talk about our annual and Q3 guidance. As Hubert mentioned, we are raising our full year guidance for revenue and EPS to reflect the outperformance in the first half of the year and our expectations for the back half. For the full year, we are now expecting the following: enterprise revenue in the range of $42,300,000,000 to $42,700,000,000 enterprise comparable sales increase of 3.5% to 4.5 percent non GAAP operating income rate of approximately 4.5%, which is flat to fiscal 20 eighteen's rate on a 52 week basis.
Non GAAP diluted EPS in the range of $4.95 to $5.10 an increase of 12% to 15%. This represents an increase of 17% to 21% when compared to fiscal 2018 on a 52 week basis. A non GAAP effective income tax rate of approximately 24.5 percent and capital expenditures of approximately $850,000,000 There are assumptions in our annual guidance that I would like to remind you of. We continue to expect the Best Buy Mobile small format store closures to negatively impact revenue by approximately $225,000,000 with flat to slightly positive impact on our operating income. Our investments, in particular in specialty labor, supply chain and increased depreciation related to strategic capital investments and ongoing pressures in the business, including approximately $40,000,000 of lower profit share revenue in the 4th quarter, will be partially offset by a combination of returns from new initiatives and ongoing cost reductions and efficiencies.
Specifically, the higher supply chain costs from increased investments and higher transportation expense are expected to pressure the domestic gross profit rate by approximately 25 basis points. The national rollout of total tech support is expected to pressure the domestic gross profit rate by approximately 15 to 20 basis points. Also, our guidance reflects lower annual incentive compensation expense in the 4th quarter as at the beginning of the year we reset our performance targets to align with our fiscal 2019 expectations. Finally, our guidance does not reflect any impact from the GreatCall acquisition as we are pending close of the deal. As Hubert stated earlier, we expect the impact of the acquisition to be neutral to our non GAAP earnings in fiscal 2019.
As Hubert also mentioned earlier, the quarterly composition in terms of year over year operating income rate performance is not linear and we expect more pressure on our operating income rate in Q3 than the other quarters in the year. I would note that this is consistent with how we saw the composition of the quarters unfolding at the beginning of the year. Our Q3 outlook is as follows: enterprise revenue in the range of $9,400,000,000 to $9,500,000,000 comparable sales growth of 2.5 percent to 3.5 percent domestic comparable sales growth of 2.5 percent to 3.5 percent international comparable sales growth of 2% to 4% non GAAP diluted EPS of $0.79 to 0 point 84 dollars a non GAAP effective income tax rate of approximately 25% and a diluted weighted average share count of approximately 281,000,000 shares. A few additional comments specific to our Q3 guidance. As I mentioned earlier, the calendar shift is estimated to negatively impact Q3 domestic comparable sales by approximately 70 basis points.
We expect to see our gross profit rate pressured due to the following: 1, approximately 30 basis points of gross profit pressure from supply chain, including increased investments as well as higher transportation costs 2, approximately 20 basis points from the rollout of total tech support as we incur costs as members tend to receive services and discounts immediately when they join the program, while we recognize the related revenue equally over 12 months. And 3, while we experienced these pressures in Q2 as well, we partially offset them with better year over year merchandise margins, including the impact from gross profit optimization initiatives. As we knew and planned for when we entered the year, we are lapping a unique collection of benefits that occurred in Q3 of last year and thus do not expect as much merchandise margin expansion in Q3 of this year. We expect the SG and A dollar growth rate to be in the low single digits. This is largely due to higher investments, particularly higher depreciation expense and specialty labor, including investments in competitive wages and benefits.
In addition, due to timing of incentive compensation accruals last year, we expect to see slightly higher incentive compensation costs in Q3 before the material year over year decline expected in Q4. Finally, due to the calendar shift this year, which results in Q3 ending a week closer to the holiday season, we expect to end the 3rd quarter with an inventory balance increase of approximately 18% compared to the Q3 of last year. On a like for like calendar basis, our Q3 ending inventory balance is expected to be up just slightly compared to last year. I will now turn the call over to the operator for questions.
Thank
We'll take our first question from Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. Good morning, Michael. Good morning. What's the slope of the growth in services going to look like from here?
Should we expect that that particular comp rate should accelerate? And as that becomes a bigger piece of the business, how is that going to affect the gross margin over time?
Yes. I'll start and then Hubert can add. You're cutting out a little bit, but I think what you were looking for was the slope of the growth on services and how that could potentially impact the margin profile. Obviously, pleased with the growth that we saw and reported in Q2. So most of that growth transparently still coming from our traditional warranty business.
Obviously, we're starting to see revenue flow from the total tech support offer, but that is as we've talked about and believe especially as we start to get deeper into the growth trajectory of total tech support that will help add some of that ongoing growth to the top line and the stability of the business. And so, we're not going to guide services in particular, but at the end of the day, we like and the subscriptions are right in line with where we thought we'd be at this point and they're going to start to add value, particularly as consumers still see value in the existing warranty portfolio that we offer in the business. To your point around the margin specifically, as we delve deeper into and have more of that kind of recurring relationship with our customers, that is certainly not harmful on a margin basis over time. But what's more important to us genuinely transparently is making sure that we're serving the customers and we're developing that longer term stickier relationship with them. That's really what we're most focused on at this point.
Yes. I was going to comment on that. The Best Buy 2020 strategy has a strong solutions and services orientation, but it's not always translated into services revenue. An extreme example of that is the in home advisor program. As I said on the call, and as you know, the first visit is free and then it results in, if there's a sale into products and some services, revenue.
The broader orientation is really focusing all of our activities on the customer needs and building the relationship with the customer. The biggest opportunity is in the expansion of our show of wallet of our existing and prospective customers, which is still today only around 25%, 26% as we discussed at the last Investor Day. So while we report and track services revenue, the strategy is much bigger than this particular line in our revenue breakdown.
And Humeyra, I have one more question for you. Given the healthy results that the mass merchant achieved in the consumer electronics category this quarter. Is this the point in the cycle where there's going to be a handoff from the specialty channels to the mass channel? And if not, why is this time different?
So again, you're cutting a little bit in and out. I think you were asking about whether we intend to have a handoff of our business to the mass channel. The clear answer is absolutely not. We noted like everyone else the strong results of a number of other retailers including in the category. Bear in mind that everybody's business is different in terms of mix.
So depending on the category and the quarter, the headline number can be high, but we note that we continue to gain market share across all of the categories that we compete in. And there is absolutely no intention to have a handoff. We are polite and Minnesota nice, but not to this point. We think that we're building an elevated and unique customer experience. If you're a customer that is excited about technology and is looking for help and support and a relationship, we are building something that's very, very special and we feel it's working.
So I know in the past there's been this idea that once technology matures, it goes to the mass channel and then we have to move on. That's not at all what we're seeing and that's not at all the intention and we're very excited about the opportunities we have to build a very unique customer experience and deep, sticky customer relationships.
Best of luck. Thank you.
And we'll take our next question from Matt Fassler with Goldman Sachs.
Thanks a lot and good morning. I'd like a little more color on the comments you made online and the maturation of online. Obviously, there's lots of nuance I'm sure within that. Are there categories that are still growing at a rapid rate online? And are there ongoing innovation that you think could reignite elements of the categories you think about your e commerce opportunity here?
Thank you, Martin. To be clear, we continue to be very excited by online and all of the digital capabilities we're building for customers. When I see how we've evolved over the last 5 or 6 years, the customer experience on the site, in the app, the delivery, all of this, I look at things and I say, oh my God, our teams are really doing some great things. What we are referring to is a number of things. One is, as you will all appreciate, consumer electronics was one of the first categories that started to move online.
And so the overall penetration is higher than in other categories. In fact, in our business, online is about 15% of our business. So we've doubled the business. We've gone from $3,000,000,000 6 years ago to now $6,000,000,000 You'll also note that we were we've been a pioneer, meaning we've been doing in store pickup for more than 10 years. And we started ship from store in 2014.
So with our teams, we continue to be investing in the shopping experience, but the angle is shifting a bit and it's in line with our Best Buy 2020 strategy, which is to build a broader customer relationship with our customers across all of the touch points and to use technology to improve the experience, whether it's in research, whether it's in the shopping, whether it's in delivery or whether it's in services with our geeks who are able to remotely help you with the support of your products. So now on a category by category basis, there's some products when there is a hot gaming console that tends to fly off the shelf when it's a it's really a well known product and commodity. When it's a more complex buying experience, then the customers will appreciate having a conversation, seeing the experience experiencing the products in the stores and so on and so forth. So I think, yes, it's maturing. We'll continue to invest, but it's a broader approach in the category.
Corey, anything you'd like to add? No.
If there's an opportunity for a very brief follow-up within that context, the entertainment software business reaccelerated having declined in Q1 and outperformed the chain against a very tough compare. Any specific drivers of that category's bounce back?
Yes. So what we saw there was some a little bit unexpected strength in gaming, and a couple of facets on that. 1, as we've talked about before, we tend to over index on gaming consoles, and that is where we saw some particular strength across consoles. And secondarily, as we mentioned last quarter, we continue to see strength in some of the accessories and peripherals as games like and social games in particular like Fortnite Takeoff, there are accessories that tend to make that a more compelling gaming experience. And so we saw a little bit better results even than we expected in that category.
Thank you so much, guys.
Thank you, Matthew.
And our next question comes from Scot Ciccarelli with RBC Capital Markets.
Good morning, guys. Can you please talk about your latest thoughts on the potential impact of tariffs and specifically how you view the price elasticity in the categories where you see risk?
Yes. Thank you, Scott. So there's been a number of waves of tariff increases over the last several months, starting with select appliances and then the $36,000,000,000 with China followed by another $14,000,000,000 with China at the rate of 25%. Both our results in our guidance reflect the impact of these tariffs. Not surprisingly, when there's a price increase, there is an impact.
And in that context, while we, I'm going to say, applaud the administration is pursuing some very important international trade goals and these are difficult negotiations. We've been in dialogue with them on how to minimize the impact on consumers And you've seen that in the $50,000,000,000 the $36,000,000 plus $14,000,000 there's less Quick Change Electronics products than originally contemplated. So I think specifically it's been reported that the tariffs have had some impact on appliances during the first half of the year. It's not completely easy to measure because a lot of the appliance purchases, this stress situation where your fridge is broken, it's not a discretionary decision, and which is why we're going to continue to being close that up with the administration on as they look ahead to minimize the disruption on the U. S.
Consumer and the U. S. Economy.
But are there specific areas in terms of price elasticity where to the degree that there's price increases that year you're kind of forced to pass on where you don't think you can make it up in the unit velocity?
Yes. Specifically, the impact is going to be tightly linked to the gross profit margin rates on the products. When our gross profit rate is very low, then let's say a 25% let's say gross profit rate is 20% on that particular product, The 25% increase in the tariff is going to essentially result in a 20% price increase. These are material numbers. On the other end, any time our gross profit rate is materially higher, so let's say 50%, then the impact if we pass everything along is cut in half.
And so that's a key differentiator. Of course, it's also related to the ability of our vendors to absorb the tariffs and of course we are having negotiations or over time, usually not in the short term, but over time to diversify the supply base. So it's a complex undertaking. Of course, we're very much following this and ongoing dialogue continues as we want to be sensitive, And I know the administration is as well to the impact on American families, workers, schools, small businesses and so forth.
Understood. Thank you.
Thank you.
And we'll take our next question from Chris Horvers with JPMorgan.
Thanks. Good morning. Can you talk a little
bit about
the home theater strength that you saw in the quarter? Maybe parse out that sort of the share that you're seeing there, unit growth versus ASP and whether or not the Amazon partnership sort of lifted that comp as a result of Prime Day and the launch of the product?
So, good morning, Chris. What we did see and what we like is very strong market growth and leading to very strong consumer interest in the category. So that is one of the most exciting things. Obviously, per what we can see in MPD, TVs were up double digit growth in Q2. So that is excellent.
Also similar to the industry and what we can see in the industry, units were up, while ASPs were down. We are lapping some pretty significant share gains from TVs last year and we saw just a little bit of share decline, but honestly on the size of the industry strength we saw very minimal, and in fact less than we saw in Q1. So we like the positioning. We're excited that the consumer is adopting it. And we've always said we'd expect that our share gains moderate over time.
We also said we wouldn't expect them to drop off a cliff and to completely acquiesce the business to Hubert's point. And so we like that the consumer is excited. We like the amount of volume that we're seeing in the category, and we very much like our positioning within it.
Understood. And then
Sorry, second part of your question. Well, let me make sure I hit on you asked specifically about Amazon. Obviously, we're not going to comment on specific SKUs, But partnerships like this and the idea of interesting technology evolution continuing in categories like this, I think that's what's actually more important, because this idea that we can showcase these technologies in a unique way that no one else can, That's what's the real differentiator here. So while I'm not going to give you exactly what those SKUs delivered, certainly we like the idea of being able to showcase this technology that no one else really can.
Understood. And then could you help us think about the Q4? It looks like your implied comp for the Q4 based on the raise is sort of flattish, I think, at the high end. So can you just reflect back and talk about the 9 what last year what you thought was sort of one time and shift versus what you really think the underlying business will look like in the Q4 ex those shifts?
Yes. So based on the comp deltas that we're seeing and remember you have the 53rd week in Q4, so it gets a little tricky. The guide would imply a comp of basically flat to up 3%, somewhere in that range for Q4. And so within that, as we're lapping from what we saw last year, remember last year we specifically called out some incredible strength in gaming, particularly due to the switch, which we knew we would be comping against this year. And last year we were comping against some of the product availability issues from the year prior, so 2 years ago.
Those are the pieces that we've factored out. And instead, what we're looking at as we head into Q4 this year is some of that continued strength in those very core categories, smart home, computing, home theater, appliances, the places that we feel very strong about our positioning with the consumer and what we bring to the table.
Thanks very much.
You bet.
And we'll take our next question from Zach Fadem with Wells Fargo.
To clarify on the tariffs on appliance prices in the quarter, it looks like the category was up 10% in the U. S. But could you speak to the impact of pricing here versus unit sales? And with higher prices, are you seeing any signs that demand could be softening or perhaps behavior is changing in favor of trade down in the category, anything like that?
So, thank you, Zach. We are of course very pleased to report, I think it's the 31 consecutive quarter of positive comps in appliances. We believe that the low single low double digit comp we're reporting represents another market share gain in the category. It is true that in certain sub segments, laundry in particular, this is where you've seen the price increase. And so but it's laundry is about a quarter maybe of the total category.
So it's not the end of the world. In terms of macro factors, which is your question with what's happening in housing and so forth, appliances are driven by new housing, but also renovations and moves and so forth. So we're watching the sector, but we're also watching the fact that as we have discussed in previous quarters, there's a significant change in the competitive landscape and significant tailwind from the competitive situation. And so we believe our revenue growth is principally driven by the continued strength in the category because if it fluctuates still a positive category and the market share gains which themselves are driven by the competitive situation and the continued improvements we've made in our proficiency, the specialty labor investments we've made, the supply chain and investments we've made and so forth. So we continue to be upbeat and positive around this category as we move forward.
We had talked about in addition to this during Investor Day about the favorable demographic aspects with the millennials finally leaving their parents' house and which leads them to have to invest in all of the shiny objects we sell in our stores, appliances and others as well. We'll continue to monitor this, but this is what how we see it at this point.
Thanks Hubert. That's helpful. And with the national Total Tech rollout, could you speak to how your initial customer adoption trends compare to your test markets? And for the pilot markets where you've now been there for more than a year, could you also comment on what you're seeing on the renewal rates there? And if you're seeing any easing of the initial gross margin pressure?
Thanks.
So the sales activities are very consistent with the pilots in the U. S. Even though of course during the pilots we had a whole range of options we were testing, but at the highest level it's very consistent. In terms of the renewal rate, the pilot is not truly indicative at this point because we did not have credit card on file as an option when we were initially piloting and we've rolled this out as part of the national expansion. So we're going to have to wait for longer to have a read of that.
And I think as I said in the prepared remarks, the impact on gross profit is very much in line with the expectations we had indicated when we launched this in a situation that's different from what we had seen in Canada.
Got it. Thanks so much. Appreciate the time.
Thank you.
And we'll take our next question from Greg Milak with MoffettNathanson.
Hi, thanks. I have really one follow-up question and then one little longer term. So the longer term one I would say is about the cash flow. I think, Corey, you mentioned cash will be used for the acquisition. As you're thinking about next year, now that we're lots changes since the Analyst Day, how much cash do you want to run the business and how you're thinking about the dividend versus buyback structure and leverage ratios going into next year?
Yes. So, obviously, I'm not going to guide at this point an exact cash balance, but clear that we've been working that cash balance down here over the last couple of years in particular with some of the more aggressive buybacks and dividends. We're not going to guide next year at this point. We'll do that as we head in, but you can see the fact and especially us using cash on hand as well for the acquisition of GreatCall that we continue to work that down to a place that we feel is not just suitable to run the business, but suitable to help us in any large times of unexpected risk. And we'll continue to work that down.
As it relates to our capital allocation strategy, we stayed very consistent with that, not just at Investor Day, but prior to that where we've said priority 1 is to invest in the business, whether that's in the form of the capital we're using internally or whether that's in the form of an acquisition like GreatCall. After that, the next priority being a premium dividend payer for our shareholders and then finally returning excess cash through share repurchases. And that remains our strategy going forward and we'll provide more clarity on exactly what that means for next year as we head in.
Got it. And then the follow-up was just to understand the a little better, the makeup of it. There's not a lot of talk of pricing and tariffs, etcetera. Could you help us understand of that 6% comp, how much would have been ticket growth as opposed to number of transactions, just maybe a mix or a balance of it? And thanks.
Yes. So in the comp, let me just say take a big step back broadly across our channels, what we saw was actually increases in traffic, increases in our transactions and increases in our close rate or our conversion, if you think about it that way. So when we know all our channels together and that's what's most important to us, that's what we saw across everything. And that's been relatively consistent as we've headed through these last few quarters here. In terms specifically of tariffs, super minimal at this point, because you're basically talking about laundry where they've been impacted or a few smaller categories.
So it's just a tiny little slice. That is not slice. That is not going to be the driver at this point. More so what we're excited about is that the underlying drivers across the channels, have remained pretty consistent with good traffic, good conversion and, therefore, very nice transaction growth.
Thanks. Good luck. Just a back half.
Thank you, Greg.
And our next question comes from Anthony Chukumba with Loop Capital Markets.
Good morning and congrats on another very strong quarter and it's a very tough comparison.
Thank you.
I wanted to just quickly touch base on the GreatCall acquisition. You mentioned some of the different opportunities to scale the business and integrate the business. I guess, I was wondering about Assured Living from 2 perspectives. 1, how did your experience with Assured Living sort of inform the GreatCall acquisition? In other words, I would assume that maybe you're happy with the results of the short living and that's why you decided to do the GreatCall acquisition?
And then 2, how are you planning to integrate, if at all GreatCall with a short living? Thank you.
Yes. Thank you, Anthony. Let me start with the second part. We will be initially running GreatCall as a separate entity because it's a different business. We will be and we've studied we have a number of, as you would expect, integration task forces pursuing targeted value creation opportunities, in particular related to selling their existing products like the Jitterbug phones more aggressively, if I can put it this way.
So they've been in our stores for a long while, but we both GreatCall and the Best Buy team feel that there's more that we can do there. So it's going to be a separate business with targeted points of integration, targeted at the value creation opportunities. Most of GreatCall's business today is these consumer products. They have a small but promising business that's analogous to Assured Living. And across both Assured Living and GreatCall, we believe we have a there's an exciting opportunity in this idea of monitoring the behaviors and health of frail seniors in their homes with potentially very significant benefits, of course, for the aging seniors, the caregivers, as well as the payers and providers.
Today, in both cases, this is a small business. We think the potential is material. It rests in part on the ability to demonstrate that the solution has a material benefit, as I indicated. And we're going to be working together to see how we go after this market. So think in this area, small parallel tracks with a big opportunity down the road.
Got it. And just one, not even really a follow-up question, but just more of a comment. I'm really glad to hear that being Minnesota nice means that you're not going to give away all your market share to the mass market. So good to hear.
How is that coming from a Frenchman who's been in Minnesota for 10 years? I'm learning still the local practices.
Thank you, Anthony. Thank you.
And our next question comes from Curtis Nagle with Bank of America.
Good morning. Thanks for taking the question. So I just wanted to follow-up a little on the growth in home theater. So as commented, it was going to see a nice pickup, particularly in units. I guess what's driving it?
Is it interest in OLED or HDR, continued trade up or something else that's caused the pickup?
Yes. I think you've got a couple of things going on and we've been talking about them for a while. I think the speed of adoption has increased. And so it's a combination of larger screen sizes. So the idea of more fits in the home and you have this very nice form that's coming with new TVs.
And then secondarily, those being coupled with higher technologies, 4 ks HDR, particularly in those spaces, incredibly available now. And I think those 2 combined with price points now that have come down to a range that feels like more and more people are ready for adoption here, I think you've just hit a bit of a sweet spot between those things. And again, it's part of why we've said we feel uniquely well positioned because when those become some of the most important pieces being able to see it and being able to really have a line of sight to how this will look in my home and exactly what technology I'm buying is pretty important. But I think you just have this real sweet spot now between lot more size for the money, a great technology that sits behind it, think more 4 ks HDR kind of technologies and then a price point that makes sense for my budget.
Okay. That makes sense.
And then just a quick follow-up. Forgive me if you gave this out already, but what's the expectation for free cash flow for the year?
We haven't guided free cash flow specifically, and that's why we're kind of just updating you each quarter as we come. But where we are right now is exactly where we had expected to be at this point in the year.
Okay. Thanks very much for taking the questions.
Thank you.
And we'll take our last question from Peter Keith with Piper Jaffray.
Hi, thanks. Good morning. Good quarter, guys. I want to just dig into the in home advisor a little bit. You've clearly ramped that up.
Could you give us an update if that's starting to move the needle on the same store sales now that you're annualizing that rollout? And as a follow on, are there any categories where IHA is over indexing to that that we might be able to see some of the outperformance working?
Yes, Peter, we as you said, we've continued to expand our IHA program and have done that as we've said we always would in line with the demand that we're seeing in the marketplace. Obviously, we're not going to give out exactly what the revenue associated with the IHAs is, but you can be rest assured that it was both part of how we guided and part of overarchingly where we're seeing strength in the business. In terms of categories where we tend to see strength, as we've talked about before, home theater is a very nice lead in to things that you want to do in your home. But we've also seen some nice strength in what I'll call broadly smart home and networking. This idea that somebody can come in and help me figure out how these things work together, as well as a better foray into some of the appliance space, where I can actually have someone physically help me walk through.
I mean, one of the hardest things about appliances is just figure out how to measure them. And so when you have someone who's there to help you with what's counter depth, what's not, what exactly am I trying to get in this space, we've also found that to be helpful. So those as you'd expect, those tend to be the leading categories. And now what we're just starting to get our arms around and don't even have a great feel for yet is as you use those as kind of your foray or your 1st run categories, then what do you see over time in some of those more secondary categories? And we're still, like I said, learning in that space, but we like that it's stretching across the home, into a few of the different rooms and capabilities.
Very good. As we conclude this call, I want to thank you for your continued interest and your work on our company. Of course, reiterate our immense appreciation for the Best Buy teams across the business for what they do for customers and for shareholders every day. You all have a great day. Thank you.
And that does conclude today's conference. Thank you for your participation. You may now disconnect.