Bill Seymour - Vice President of Investor Relations Hubert Joly - Chief Executive Officer, President and Director James L. Muehlbauer - Chief Financial Officer and Executive Vice President of Finance Michael A.

Vitelli - Executive Vice President and President of US Operations

Christopher Horvers - JP Morgan Chase & Co, Research Division Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division Daniel T.

Binder - Jefferies & Company, Inc., Research Division Michael Lasser - UBS Investment Bank, Research Division David Gober - Morgan Stanley, Research Division Daniel R. Wewer - Raymond James & Associates, Inc., Research Division Scot Ciccarelli - RBC Capital Markets, LLC, Research Division Matthew J.

Fassler - Goldman Sachs Group Inc., Research Division Alan M. Rifkin - Barclays Capital, Research Division Michael Baker - Deutsche Bank AG, Research Division

Good morning and thank you for joining us on our Fiscal Third Quarter 2013 Conference Call. We have 2 speakers today: Hubert Joly, our President and CEO; and Jim Muehlbauer, our CFO, who is continuing in his role until December 10, when Sharon McCollam will join Best Buy.

After our prepared remarks, we'll be happy to take Q&A. A few items before we get started.

As usual, the media are participating in this call in a listen-only mode. Let me remind you that comments made by me or by others representing Best Buy may contain forward-looking statements, which are subject to risks and uncertainties.

Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. Please note that our reported results this morning including non-GAAP financial measures.

These results should not be confused with the GAAP numbers we reported this morning in our earnings release or with the GAAP numbers we will report in our 10-Q. For GAAP to non-GAAP reconciliations of our reported to adjusted results and guidance, please refer to the supplemental schedules in this morning's news release.

And one other housekeeping item. We plan to announce holiday revenue results for the 9 weeks ending January 5, 2013, for fiscal November and December on January 11, 2013.

Now I'd like to turn the call over to Hubert.

Thank you, Bill, and good morning, everyone. And thanks to all of you for joining the call and to those who attended our Analyst Day last week.

And for those of you that were not able to attend, please note that the webcast is available on our website. On that day, we shared a candid assessment of Best Buy.

We highlighted Best Buy's strengths and underscored its performance has been unsatisfactory in a number of areas over the last 3 years. We also unveiled Renew Blue, a set of priorities to begin reinvigorating the company's performance and rejuvenating Best Buy.

Today, we are reporting our third quarter financial results. In line with trends experienced over the last 3 years, Best Buy's financial performance during the quarter was clearly unsatisfactory.

The results we're reporting today only strengthens our sense of urgency and purpose. Now there were some positive developments during the quarter.

We did well in a number of product categories, including mobile phones, appliances and tablets and eReaders. We had positive comps in these categories.

We also grew market share year-over-year in these product categories, as well as in notebooks. In addition, our online channel continue to grow at over 10% year-over-year.

However, our overall performance was not satisfactory. Now some of it can be attributed to the effect of product transitions, especially related to the Windows 8 launch and the launch of several new smartphones and tablets.

These product transitions have had a negative impact on sales and margins in the quarter as customers delayed their purchases in anticipation of new products to be introduced. At the same time, we also had a number of items that impacted our bottom line, including investments in front-line training and compensation, as well as executive transition expenses.

So we do not believe that the rate of decline that Best Buy experienced in the third quarter can be extrapolated in anyway. Now let me be clear, we are determined to turn around the performance of the company.

And on November 13, we outlined the priorities that we are focused on to turn around and transform our Domestic business including, number one, reinvigorating and rejuvenating the customer experience by putting the customer at the center of what we do, addressing their needs and providing superior value to them. This means both improving our execution, as well as working on reinventing the business.

And number two, increasing our return on invested capital with an unrelenting focus on revenue growth, efficiency and disciplined capital allocation. Our view is that we have ample opportunities to improve ROIC by improving the operational performance of our business and capturing key market opportunities in our space.

We are confident that we can enhance the return on our existing assets by increasing the revenue they produce and taking out unnecessary or unproductive costs. In the short term, of course, we are also focused on making the holiday season successful.

We know that 3/4 of Americans intend to give customer electronics -- excuse me, consumer electronics as a gift for the holidays. Tens of millions will be coming to us online and into our stores between now and the end of the season, and we are ready for them.

There's a range of exciting new products to buy at Best Buy, including Windows 8 and other new computing products, new phones, new tablets, new game releases and a new gaming platform, the Wii U. We are also expecting to see a positive impact for this holiday from significantly ramped up Blue Shirt training, the introduction of variable bonus pay for performance for full-time sales associates, as well as our holiday Price Match strategy.

I have been with Best Buy for 11 weeks, and I am excited by the opportunity to turn around and transform Best Buy and solve the 2 problems we highlighted last week: negative comps and declining margins. I am pleased with the progress we've made in the last few weeks in setting a clear direction, building the team at the top and mobilizing our organization around our priorities.

I know that this will be a high growth, and I look forward to successfully tackling our challenges and our opportunities. And in doing so, our team will be guided by the investment thesis we shared with you last week.

Number one, Best Buy is the market leader in a growing fragmented market; number two, we have a unique platform to deliver a multichannel shopping and customer experience; number three, Best Buy has significant operational opportunities to enhance returns with improved retail execution and cost-reduction opportunities; number four, Best Buy has the opportunity to rejuvenate the customer experience in the company, as the preferred authority and destination for technology products and services; number five, Best Buy has the ability to stabilize and then improve its comps and its operating margin with a strong cash flow generation; and six, Best Buy has a results focus management team committed to delivering improved performance. Thank you very much for your attention and your support as we to move forward.

I will now turn it over to Jim.

Thank you, and good morning. As Hubert stated, results in the third quarter were unsatisfactory, highlighted by the significant decline in operating income in both the Domestic and International segments.

The largest portion of the decline was driven by a lower gross margin rate of 160 basis points. I'll cover the key drivers behind the lower rate in both Domestic and International.

Importantly, we do not expect Q4 operating income to decline at rates experienced in Q3. Looking now at some of the Q3 details, starting with Domestic.

The third quarter Domestic segment revenue decline was driven by a comp sales decline of 4% and the impact of previously announced store closures. Domestic online sales, however, totaled $431 million and grew 10%, led primarily by traffic growth.

Areas that had strong comp growth were mobile phones, which had a comp of 32%, benefiting from the launch of several new smartphones. There were also continued growth in comp growth -- in comp sales and appliances and in combined tablets and eReader products.

This growth was offset by comp sales declines in notebooks, gaming, digital imaging and TVs. We believe tablet and notebook revenues were materially impacted by consumers delaying purchases ahead of the key product launches Hubert spoke about.

Domestic gross margin was down 100 basis points. Similar to the second quarter of fiscal 2013, the rate decline was primarily due to 3 factors.

The largest impact was in mobile phones, where we sold a larger mix of higher price point smartphones, which resulted in strong comp sales and solid gross profit dollar growth, although at a lower overall rate than the previous year. Second, televisions.

In TVs, we experienced a less favorable product mix into smaller screen sizes, which carry lower margins and a lower basket. Lastly, gross margins were impacted by the impact of product transitions ahead of key new launches.

Domestic SG&A was up 1%. This increase was due to increased training and higher compensation costs for sales associates, as well as executive transition costs.

Excluding these factors and the impact from the absence of the Best Buy Mobile profit-share payment in Q3, Domestic SG&A expense was approximately flat compared to the prior year. The specific actions related to the sales associates were increased investments in training and the introduction of higher performance-based bonus compensation.

As we discussed at Analyst Day, areas like Best Buy Mobile have shown that better trained and properly incented salespeople drive better results. We have taken these principles and spread it to other parts of the store.

Moving on to the International segment. Q3 comparable store sales in International declined 5.2%.

Europe recorded positive comps in the quarter, but this was offset by continued comp declines in Canada and Five Star in China. The International gross profit rate declined 280 basis points in Q3, which was predominantly attributable to Europe, driven by increased sales mix of lower-margin wholesale business and a price competitive environment for mobile phones, coupled with a mix into more expensive handsets.

International SG&A was up 7%. Last year, the Best Buy Mobile profit sharing was a credit to the International SG&A.

When you exclude the impact of the Best Buy Mobile profit share payment, International SG&A expenses were flat compared to the prior period. As we look forward into Q4, let me highlight a few items from our comments this morning.

First, Hubert covered some of the significant product introductions in key categories for the holidays that we're excited about, including phones, tablets, Windows 8 and gaming, products that were either significantly constrained or not yet launched in Q3. These products are all a big part of our business.

And second, we expect to see a positive impact from the additional training we have put in place for our Blue Shirts and from the holiday Price Match strategy. Let me also make a quick comment on the increase in inventory for Q3.

The inventory increase was primarily driven by the Domestic business and 2 items in particular. First, inventory levels across key product categories increased related to the new product introductions that we have spoken about today.

And second -- and the second factor is related to the timing of the cut off of the quarter. The end of the third quarter this year is actually one week closer to Thanksgiving than the end of the third quarter last year.

When we are preparing our business for Black Friday, that one week makes a significant difference in our inventory levels. Overall, given these factors, we believe the inventory levels are appropriately positioned in advance of the start of the holiday selling season.

We expect to generate free cash flow in the range of $850 million to $1.05 billion for fiscal 2013. As noted in the release, our revised estimate of free cash flow is below our previously communicated range.

The reduction is driven by lower profit expectations, including Q3 performance and the related potential impact on owned inventory at year end. The current and previous free cash flow range also includes approximately $100 million in restricted cash movement related to working capital items.

For comparison purposes, let me also remind you that the year-to-date free cash flow for fiscal 2013 is significantly lower than the same period last year, primarily due to the improvements in working capital during the first half of fiscal 2012. As you may recall, we experienced several large working capital items at the end of fiscal 2011, which significantly benefited cash flow in early fiscal 2012.

Wrapping up my comments on cash -- on the cash items, we finished the quarter with over $300 million in cash and 0 drawn on our $2.5 billion revolver. As this will be my final earnings call as Best Buy CFO, I would like to quickly say thank you to the many shareholders and analysts I've had the opportunity to work closely with over the years.

I enjoyed and always appreciated your questions and candid insights about Best Buy during our many conversations over the last 10 years. And I wish each of you and the entire Best Buy team much success in the future.

With that, let me hand it back to Hubert.

Thank you very much, Jim. And before we turn the call over to the operator, Alicia, for Q&A, I wanted to take a moment to wish all of you a happy holiday.

I want to thank you for your support and your work following our company. I hope your Thanksgiving is spent in the company of friends and family, and I hope, for a few minutes, on BestBuy.com.

I also want to thank all of our employees, especially the Blue Shirts and Geek Squad agents in our stores, our dot-com team, our merchants, our marketing teams, our associates in our distribution centers, in our call centers and in our war room. All of them have worked really hard to get ready for the holidays.

The work of our team this holiday season is critical to our efforts. And I know we can all count on our team members to deliver an amazing customer experience to the millions of shoppers who will visit us.

And I look forward to seeing as many Best Buy shoppers and employees in our stores, Thursday night and Friday morning. So thank you, everyone, and now we will turn it over to Alicia, the operator, for the Q&A.

You mentioned how you don't expect the operating income rate to decline at the same pace in the fourth quarter as it did in the third quarter. Can you talk about, maybe more specifically, what changes in the fourth quarter versus third quarter, whether it's Domestic sales, International sales, Domestic gross margin, International gross margin?

And then on the PC category, it sounds like you're increasingly positive about Windows 8. Can you talk about the performance of PCs before and after the launch of Windows 8?

Yes, Chris, it's Jim. Thank you very much for the question.

Looking at the fourth quarter in comparison to what we've seen so far this year, if you recall, all year long, we've been talking about product launches that we expect to be back-end loaded towards the holidays. And certainly, as the performance that we've seen and others in the marketplace have seen in advance of the computing launches and phone launches so far this year has had an impact on dampering sales.

So now that we have those products in our stores, we expect certainly more momentum behind those things. So that is one of the key attributes that we've been looking at all year from a sales trend performance.

The other element that's rated that sales trend performance impacts our gross margins. In preparation for moving inventory in advance of those new product releases, we took actions in Q3 to make sure that our inventories were in clean position, and that we were all set with the new products.

So we expect benefits in that in the gross margin line. We also have talked historically about one of the key elements that's driving our margin rate down in Q3 and Q4 is the lapping of the smartphone mix in our Best Buy Mobile business.

We're actually going to anniversary that in Q4, so we'll have an easier comparison from a margin rate perspective in mobile phones in Q4. So the combination of new products, less transition costs and easier comparisons from a lapping standpoint in mobile phones are all factors that we're looking at as we think about whether that the run rate is going to continue or not, and which is why we're confident in saying, it will not in Q4, Chris.

And so just as a follow up, do you think -- will Windows 8 cause a positive inflection in comps or in the PC category?

I'm not going to comment on specific products within the PC category. But given the trends, certainly, in Q3, in computing, in general, consumers are going to have a great opportunity to look at not only the Windows 8 products but the other new computing products out there and also the array of tablets and eReaders.

And I'll let Mike Vitelli comment further on some of the specifics.

Chris, this is Mike Vitelli. A couple of things I want to say.

We put a tremendous amount of training and emphasis on the Windows 8 launch. And one of the things that we are excited about is that we have 45 exclusive models to Best Buy in Windows 8, in which 25 of those have touch screen, which is one of the key attributes of that.

So with the training, the product launch, the emphasis that the industry is putting on and the effort that we're putting on, it's something we feel good about going into the fourth quarter.

Just following up on the gross margin outlook, 2 other questions. First, how are you thinking about the holiday price match in terms of impacting gross margin in Q4?

And secondly, the International business, the gross margin performance there was very difficult, obviously, related to mobile mix in Europe, primarily. Would you expect that to continue going forward as well?

Colin, this is Mike Vitelli. We're very early in the Price Match process for the holiday season.

We feel good about it from a couple of vantage points. And what I mean by that is our Blue Shirts are very positive about this and very empowered about this by giving them the ability to match prices in areas where they have seen, and we've been showing that we've been competitive and relatively close, particularly in the hardware category.

So we're moving into the fourth competitive quarter with that empowerment, engagement and the ability for our Blue Shirts to make the decision in the moment to take care of our customers.

And Colin, the second part of your question related to International. Our margins in International have been challenged all year long, as we noted in our comments, predominantly driven by the European business.

We do expect the margin to get a little bit better in Europe in Q4, as once again, we're anniversarying some of the effects of the pricing changes we made last year. But I would tell you they're not going to be demonstrably different in International, as we look at the fourth quarter based on our current outlook.

Okay, that's helpful. And Jim, while I've got you, just back on the Price Match.

And what kind of a margin impact do you think that will have? And I understand that you expected to drive incremental sales, and hence, gross profit dollars.

But just in terms of a rate impact, what should we be thinking about?

Colin, we're not going to go through the specific expectations of that in our rate for a couple of reasons. One is we've had the Price Match out there a relatively short period of time.

We feel really good about the prices that we have in place, along our key product categories. And as always, during the holiday selling season, especially during Black Friday, we feel very comfortable about the competitiveness of our prices, in general.

So how that actually plays out into later December, we'll need to see, but we've tried to consider various scenarios in our outcome. And certainly, we look forward to the increased benefit and the confidence that our Blue Shirts get from knowing that they're going be able to offer the customers the best price in the marketplace and the benefits that come along with that for our model.

It's Dan Binder. My question was around working capital.

You made a few comments in your formal remarks. I was wondering if you can just give us a little more color on what you're expecting provided you hit your sales plan, what the fourth quarter end will look like from an inventory and owned inventory standpoint?

Yes, one of the elements that we -- that I talked about in my comments related to our cash flow guidance change is really impacted by the 2 things I mentioned. One is lower level of expected profits in the quarter.

But also as you know, forecasting cash flow at year end, especially after the peak holiday season is impacted materially based on where owned inventory positions. So what I was trying to highlight is that if you just take the change in our cash flow guidance, and if you attributed that whole change to our change in the view of what the profitability is for the year, you'd be wrong in making that assessment.

You really have to break it up in 2 pieces. Part of it is lower profit expectation and a part of it is just different assumptions around owned inventory.

We'll no more, obviously, as the quarter progresses but depending upon what actual sales are, when we see the trends, we're going to pull all the levers we can to adjust inventory up or down appropriately. But just as we snapped the line at the end of the fiscal year, given the fact that we order a lot of the product in advance of the holiday season, we may have purchased -- we may have paid for that inventory by that time we get to quarter end, so our year-end balance could be a little different.

We'll recover that in Q1 as we kind of reset those inventory positions and accounts payable positions with the vendors. So we just made sure that we've included a little bit of cushion and estimate in our cash flow forecast for different outcomes around owned inventory.

Nothing's changing in the structure of the working capital in the business. It would just be a year-end timing item.

And do your vendors remain flexible this particular season, given the challenges that you're up against?

Yes, I'll let Mike Vitelli comment further, but we've not seen any material change in the way that our vendors are approaching our inventory patent or our historical agreements around how we buy inventory at this time of year. We certainly get them benefits around seasonal dating, and that hasn't changed.

So Daniel, what Jim said has said is correct. We have not seen any changes there.

The thing that's changed over the last several years, I would think, for the industry as a whole is that the inventory that's produced for this period of time is the inventory that's produced for this period of time. There isn't a lot of inventory in the channel from here to all the production paths.

So everybody's banking on the success of a forecast in this set period. In a sense, it's harder to increase inventories.

Let me add my best of luck to you, Jim. In -- on this mark that you're leaving, can you help us understand as you reflect on the Domestic segment over the last couple years, the business is on pace to have a gross margin rate decline, probably during that time of 130 to 150 basis points depending on where the year ends up.

Can you bucket what has contributed to that rate decline over the last 2 years between the mix shift to less profitable vendors, the Amazon or online competition effect and other factors? And then I have a quick follow-up.

I don't know if we have enough time in the time we have left on the call to go through all of that. But just from an overview standpoint, looking at the gross margins, Michael, over the last couple years in the Domestic business, clearly, the biggest factor that always impacts our margin rate in the business is the mix of the products that are selling, given the wide differences in their profitability.

So historically, in periods where we've mixed more into computing-type products, obviously, our margins have come down. The way we've always looked at the business though is that our model needs to be able to sell what customers have an interest in, and what we're focused on is growing gross margin dollars.

So looking at the rate is interesting and understanding the business, but what's important, are we staying relevant with customers and are we growing dollars over time. Over the last several years, key factors that have impacted the businesses, certainly, from a benefit standpoint, we've mixed much more heavily into mobile phone products over the last 3 years, which has been a good rate and a good dollar story for us, in general.

The price competition and the mix of smaller screen sizes in televisions has certainly been a drag on the business the last several years. And the growth in lower-margin computing products, given the phenomenal success of notebooks, eReaders and tablets has certainly come with great dollar benefits but at lower margin rates, in general.

So those factors, coupled with a larger portion of the business moving online, and basically being hardware-only type sales in the portfolio, I think putting all those together those would pretty much outline kind of the key drivers over the last 2 or 3 years.

Okay, that's helpful. Then one for Hubert.

Given the performance of the International business, and along with what seems to be your focus on the Domestic segment, does this increase your sense of urgency to perhaps rationalize the portfolio and make some moves and changes such that if you are successful in your transformation initiative, the benefits will shine through in the P&L?

Yes, Michael, thank you for your question. So as we discussed last week, Domestic is 75% of the business, so it received the bulk of certainly my attention in my first 10 or 11 weeks.

We see today the continued decline of the performance in the International business, so that part of our business requires attention as well. I think the sense of urgency is evenly spread between Domestic and International because those require a great deal of attention.

But there is a sense of urgency and purpose in driving ROIC across the entire portfolio. And as relates to International, we'll find the right path to get this done.

So no further comments today, but certainly, great sense of urgency and purpose in pursuing that.

Just my question, as we look at the same-store sales in the Domestic business, the 2 categories that showed some sequential slowdown were, obviously, the computing and mobile business that you talked about it in length, and also the services business. Just wondering if you could give some color on what's going on there, given the high level of profitability and the potential impact on gross margins related to that category?

Yes, so the primary impact on the services business, really, driven by 2 parts. From a sequential standpoint, the decline in services comps was really tied to the unit volume that we were selling in our computing business.

So when our computing volume was down, we have less of an opportunity to attach those service products overall. Also, as we mix into smaller screen sizes on televisions, our opportunity to attach an install with our services business declines.

While those items are declining, we still see positive impact and growth from our tech support offerings, providing customers. So we know there's a value proposition there that resonates with customers.

And given the expectation that we have in Q4 around our computing business, we would also expect our comparable store sales in services to benefit as our computing business grows in the fourth quarter and going forward. So a little bit of that is tied just to the driver units within our computing business in Q3, David.

Got you. That's helpful.

And I guess you mentioned within that the TV migration to smaller screen sizes. I know you've talked about that a little bit in last year's fourth quarter and in some other periods.

But just curious if you could give us any sort of expectations for the fourth quarter. It's a little bit surprising, given the decline in ASPs, that we are seeing such a drastic shift to smaller screen sizes.

Any sense if you expect that to continue in the fourth quarter? And maybe any sense of why you think that's happening?

David, this is Mike Vitelli. And as you pointed out, the trend, particularly that we've seen, as consumers go into lower entry points, I would call that the 32-inch category and below in the first 3 quarters has been high or higher percentage than we've seen in growth over previous years in units.

A lot of emphasis and a lot of the activity, you see it in some of our promotions going on right now that'll be going through the remainder of the fiscal year, are emphasizing as the industry is overall of larger screen sizes. So we think there'll be a bit of a -- hopefully, a shift in that period in those -- in that screen size that'll change the ASPs in the fourth quarter.

Mike, this might be a question for you. You discussed the new product lineup in phones and tablets, and that could help benefit the fourth quarter sales.

But it looks like these changes are more evolutionary rather than revolutionary within those product categories. And then further, how do we reconcile the comment that smartphone and tablet sales could benefit during 4Q against the comments that we're going to be anniversarying the ramp in smartphones to lower smartphone gross margins a year ago.

Looks to me like if smartphones were to kick in again in 4Q that would actually pressure gross margin rate?

Well, first, to answer your last -- the last part of your question first. All smartphone mix to the company is a positive from a rate side.

What we were talking about in the third quarter is, if you will, intra-phone category rate change, because you sell different mix of phones within phones. But in all cases, those are positive overall to the company from a rate point of view.

Your other question, I think is yes, there are increases in all those areas but the growth rates that are in smartphones, that are in tablets, that are in eReaders and the launch of a new operating system like Windows 8 are all positive drivers into those categories. And they've all turned into significant gift-giving categories, whether they be phones, tablets, eReaders.

And now people looking to upgrade and change their Window systems into Windows 8, we think are all positive drivers for those categories.

And then, Hubert, one question for you. I know last week's meeting we focused exclusively on the Domestic turnaround strategy.

But in looking at the year-to-date results, the operating loss in Europe is almost long [ph] as much as it has domestically. Is there a turnaround plan to -- for your International business?

Dan, the -- I think the numbers we're disclosing pertain to International as a whole. And so, of course, there's multiple countries in there; each situation is different.

Under the leadership of Sharon, we have initiatives in each of the countries. Europe has its own plan.

Mexico is a different story. It's growing very nicely.

They've just had a very positive weekend. Canada is actually closer to the U.S.

situation. And then China is going through its own transformation.

So there is a set of initiatives today in each of these geographies. I don't think we've really wrapped it yet in an overall, let's say, renewable plan, so there's more to come on that.

But it's not that they're winding their watches in International.

Scot Ciccarelli. My question is back to the Price Match concept, and 2 questions really.

First of all, what percentage of your mix is actually covered by the Price Match? I know you've outlined the categories, but what percentage of the mix is it, when you kind of look at it on a SKU basis or sales basis?

Whatever the right way to look at it is. That's number one.

Number two, maybe I'm just being a little slower than normal here, but what is the expected incremental impact on gross margin for the fourth quarter as the Price Match program gets implemented? I mean, there has to be some sort of plan, I would assume?

Scot, this is Mike Vitelli. The first part of your question, the categories, the major hardware categories we named are a significant portion of all our hardware, televisions, computing, appliances.

So we're probably in the well above 50% to 60% range of the categories that are covered here. And as we've been saying, in doing that analysis and looking at our competitive price points in those areas is why we were able to feel confident moving on with the price strategy, because we believe we were competitive in those categories.

So that's how we move forward with those. And as Jim mentioned earlier, we're in the early phases of that.

And how -- and where all the different Price Matches come and where the promotional activity occurred in the next 2 months will start to let us know that. But in doing price matching, which has been -- price matching in and of itself has not been new for us.

It's price matching named online competitors as well, which is the thing that we've announced. In some cases, that was occurring in some markets.

And some salespeople were doing that on their own initiative in their earlier phases, so that was what drove us to do this is that we saw it happening, we did it back in Chicago, we saw it happen there, and saw the impacts there were positive on revenue and margin dollars. And now we are implementing that across the board, we'll watch it as it rolls out.

The biggest thing I would have in everybody's minds, and a few of us has mentioned it is the positivity and empowerment that a Blue Shirt has when they're able to do that. It encourages engagement with the customer versus, gee, what's going to happen now.

That is more material than it sounds, is that Blue Shirts now are confident at having 2 customers with confidence in the ability that they can make the right decision in a moment.

So the expectation is potential negative impact on gross margin rate, but more gross profit dollars because the Blue Shirt's more empowered and can improve the close rate?

That's a set of outcomes that you can come up with that conclusion. You could do a variable where it doesn't change rates in any material way, which is actually what we saw in one of our key market tests.

So there's a variety of things that can happen. None of them were done during holiday.

So this will be the first time that we'll see that in that environment.

I want to speak for a moment about the mobile business more broadly. As you've comped up 30% in smartphones, given the moving pieces in ASPs, and in particular, in gross margin presumably as you mix to iPhones, are the earnings in Best Buy Mobile still growing along with that revenue increase?

Yes, Matt, they are.

And if you could just give us a sense on sort of the magnitude of the change in profitability associated with that shift. And also to, I guess, to sort of repeat perhaps what was Scot's question, smartphones and the shift to iPhones presumably, while you're cycling the initial hit, is sort of a megatrend with some legs to it.

So are you saying that once you cycle that initial hit in last year's fourth quarter, this should be -- this should not be a drag on the margin, or just a lesser drag on the margin?

Yes, I think a lesser drag on the margin. What I'm calling out specifically in explaining what we expect to change in the run rate, in the margins that we've seen so far this year from Best Buy Mobile to what we see in Q4.

That fact that we're going to anniversary a similar sales mix from the previous year is going to be a big change year-over-year. As the business mixes more into smartphones, key thing to remember, and I think most on the call are aware of this, the profitability in the smartphone is primarily driven by the bounty we receive from the carrier and from the attachment of accessories in services that go with it.

The price point of the smartphone is almost irrelevant in the calculation, because it's a heavily subsidized product. So when you're looking at a gross margin rate, the higher the value of the smartphone, we're still getting the same level of bounty and same attachment at the end of the day.

So what we really focus on is kind of the gross margin dollars available per connection and per attachment. So a little bit of the business is, in looking at the margin rate, really depends on what the sales price and the sales mix is within the mobile phone business.

So I hope that answers your question, Matt. But clearly, the profitability in the mobile business continues increases.

Selling more smartphones in the mix is a good thing for the model at the end of the day because they have better attachments, they buy more services overall in the portfolio. And quite frankly, that's what customers are interested in.

So we're interested in selling products, obviously, that have high customer interest and drive profitability for the portfolio.

You folks cited higher training as one of the reasons for the SG&A deleverage. I was wondering if you can maybe provide a little bit more color on that line item.

What are the early results thus far of the training program? And in total dollars, will that program take on a greater proportion of SG&A in Q4 relative to Q3?

And then I do have a follow-up.

This is Mike Vitelli. The training dollars are -- the way we talk about that, there is travel and actual out of the store time that's in there.

And we did a substantial amount of that training in the third quarter. So relative from one quarter to the other, there's way more of it in the third quarter, as we're trying to ensure that everyone is prepared heading into the fourth quarter that we're in right now.

So there's much, much more of it there. As far as its payback, the investment was made -- the investment thesis was made, what we saw in mobile is that employees that are engaged and trained are confident.

They come back from training confident. They're coming back from that training with the knowledge of how to engage with customers, how to give customers what they need, and they're now empowered with the Price Match.

So we think that we're going to see positive results with our employee engagement, with our customer satisfaction, and those will start to show up in the fourth quarter.

Okay. And then a follow-up, if I may.

Jim, you cited the calendar shift as the predominant reason why the ending inventory Q3 versus Q3 was up significantly. Excluding that shift, are inventories at the level where you would like them?

And then lastly, for Hubert, there's no doubt that, obviously, the cash flow numbers compared to the your last forecast have come down very materially. As we calculate it, it looks like the dividend is costing you about $225 million a year.

Would you be able to state whether or not you are committed to continuing to pay the dividend as it stands today?

I'm sorry, the first part of the question?

The first part of the question, Jim, was even pulling out the calendar shift, inventory levels were high, where are your inventories x the one-week calendar shift?

Yes, thanks, Alan. So the inventory levels, as I mentioned really, driven by one week closer to the holiday.

That was the primary reason for it. Another reason that I didn't mention specifically in my comments, because it was third and less significant was last year, at this time, we also had constrained inventories, especially in some of the DI in the computing products, given that the floods in Thailand, so that was a little bit of a factor as well.

The reality for the inventory that we have on high end today, in light of the holiday season we have in front of us, we're going to turn through that inventory and take receipts. So we feel really good about what we have on hand today in light of what we see in front of us in November and December.

The real decisions around levels of inventory will be based on what we see after November and after we see the first couple of weeks of December. So looking at the balances today doesn't give me any concern at all from what we have from an inventory perspective.

Hubert, any comment.

Yes, thank you, Alan, for your questions. Your question is -- given the decline in the cash flow is whether we are committed to continuing the dividend.

We've not made any decision one way or the other on that. What we'll be doing, of course, is assessing future cash flow and investments, in particular going into fiscal 2014, which will be a year of transition.

But at this point in time, there is no intention to suspend the dividend. But, of course, we want to carefully look at this.

Be assured that our focus as we discussed last week is on increasing the return on our investment capital, and that the use of capital will be a prudent one. So I would love to give you a definitive answer today, Alan, but I -- until we've made an actual decision on that, I will refrain from making commitment.

But don't read anything negative into this at this point.

So I'm going ask, your TV shares, you said thought you gained share in notebooks, what about TVs? And I guess related to that, the unilateral pricing policy has been in place for a while, which is essentially a price match program.

And so I'm wondering if -- how that has worked for you guys? And if you one can -- if one can infer anything as relates to the Price Match?

I remember when we visited you guys, one of the ideas was that the employees would be more confident in selling the TVs, because they know that you couldn't go elsewhere and get a lower price. I'm wondering if that's something that can be used as an example for the Price Match?

It's Mike Vitelli. So the first part, when we look at the share of television, year-to-date through what we have, it's relatively stable.

I would call it flat through August. And August is the latest period that we have.

NPD is changing the members in the -- of their overall panel and POS data. So they are going to produce some new data shortly that we anxiously waiting for, but that's where we've been on TVs for the year.

On unilateral pricing, obviously, not all vendors do it. They don't it on every product in their line, but where it exists, it's successful in what it's attempting to do, which is to stabilize pricing of that particular SKU at that particularly price point.

So to your point, it makes the ability to price match on a unilateral product relatively easy, because everyone's by direction selling at the same price. But it's a mix of the total business.

It's not -- I wouldn't call it a predominant part of the television business today.

But are you seeing better sales trends or better gross profit dollar trends on the TVs, the Samsung and Sony, larger TVs that are on the UPP?

What you see is you see price stability and you see margin stability.

Do they necessarily sell any better?

It all depends on the price that's set. So if the competitor set that -- historically, the difference with unilateral pricing is historically, a retail we would independently decide how they wanted a unit to throttle and would change their price accordingly.

In unilateral pricing, that's the manufacturer's decision.

Thank you, Mike. And in closing, I would like to do 2 things, one is on behalf of all of us at the company, and I was very pleased to hear many of you on the call, thank Jim for the 10 years he spent at Best Buy.

His loyal service to the company, the support he's given over the years to the company, and to me personally in the last few weeks. Between now and the end of the fiscal year, Jim will be working with Sharon, as Sharon comes on board on December 10, ensuring a smooth transition.

And beyond the thanks, I think all of us wish you, Jim, well for the future. So thank you for that.

The second thing I'd like to do is, again, as a head sales person of the company is encourage everybody to shop at Best Buy between now and Christmas. And as you shop there, please give us feedback on your experience, both the good and the bad as we're focused on driving the customer experience now.

So look forward to your purchases and your feedback. With that, thank you very much.