Operator:

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Fourth Quarter Fiscal 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded for playback and will be available at approximately 1:00 p.m. Eastern Time today. [Operator Instructions]

Mollie O'Brien:

Thank you, and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; and Matt Bilunas, 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 financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release, which is available on our website, investors.bestbuy.com.

Corie Barry:

Good morning, everyone, and thank you for joining us. I'm proud of the performance of our teams across the company as they showed resourcefulness, passion and unwavering focus on our customers this past year. Throughout fiscal '24, we demonstrated strong operational execution as we navigated a pressured CE sales environment. This allowed us to deliver annual profitability at the high end of our original guidance range even though sales came in below our original guidance range. Importantly, we grew our paid membership base and drove customer experience improvements in many areas of our business, particularly in services and delivery.

In addition, in fiscal '25, we are taking actions to, one, ensure our resources are directed at the right strategic areas; and two, to rightsize our model based on current operations. These actions will allow us to do the following:

balance field labor resources to make sure we are providing the optimal experience for customers where they want to shop, redirect corporate resources to make sure we have the necessary assets dedicated to areas like AI and other elements of our strategy and rightsize parts of the business where we expect to see lower volume than we envisioned a few years ago. whether that is the result of lower industry sales or due to decisions we made like evolving our paid membership benefits.

Scot Ciccarelli:

This is probably difficult to answer but I'd be interested in any color you might have. When you kind of look at the comp performance and the comp decline, how would you segment it between, let's call it, broader pressures on discretionary spending versus, let's call it, the pull forward of demand that happened during the pandemic? Because we're kind of getting into that kind of 4-year period since the pandemic. Typical life cycle of a lot of your products is 3 to 5 years. Just how are you guys kind of thinking about that? Or is it at all possible to segment that?

Scot Ciccarelli:

That's helpful, Corie. And then one other quick one. Like, you guys talked a bit earlier in the script on personalization. I guess the question is for your kind of category, do you get enough frequency in terms of customer visits to really be able to little leverage that data and the personalization that you're targeting?

Brian Nagel:

So I want to start, Corie, bigger picture. You mentioned in your prepared comments, I know we've been talking a while about this AI. We talked about some of the products and then how Best Buy's utilizing AI in its own business model. The question I have is as you're talking now to your vendor partners, maybe going back to CES or before, how much excitement is starting to really build around AI as -- in terms of products that we could see in the relative near term for Best Buy, from a consumer base standpoint?

Brian Nagel:

That's very, very helpful. I appreciate that. And then just a follow-up, unrelated. With regard to the [Technical Difficulty] normalization within the CE category, you talked about through the holiday promotions being, I guess, normal. But the question I have is, are you seeing more nonspecific CE retailers come back to the category now as the overall consumer backdrop normalizes post pandemic?

Michael Lasser:

It's on market share trends. Best Buy has always been very dynamic with its strategy. It's one of the factors that has led to its success that it's been able to change with the market, but it does seem like in the last several years the pace of change with the strategy has increased significantly, whether it comes to membership, store format, the composition of store associates. How do you think this is having an impact on Best Buy's market share especially in light of the fact that if we look at Best Buy sales in the Domestic segment for this year, it's likely that the company is going to be on pace to have sales that are about $2 billion below where they were in 2019.

Matthew Bilunas:

Yes, Michael, I'll take that. I think if I look at just going forward in an ideal setting, when you get past the flat to slightly down year this year, we do expect when you look out into the next number of years that the industry will continue to grow and that we will grow along with it.

Operator:

Your next question is from the line of Seth Sigman with Barclays.

Corie Barry:

You said it very well. It's not a perfect correlation with our business, the housing market, I mean. But there are definitely pieces of the business that tend to correlate more highly, particularly as you think about appliances, and then somewhat as you kind of creep into television. Those tend to be the areas that are most highly correlated. In the prepared remarks, I talked about that kind of stacked macro pressures on CE.

Corie Barry:

I think we've had a pretty consistent view on the fact that we believe online penetration -- we kind of said we'll first stabilize because it went so high during the pandemic, we knew there'd be some level of pullback. And the last -- I'm going to call it like 18 months have been a little bit more around, where does it stabilize, particularly as a percent of our overall revenue.

Operator:

Your next question is from the line of Katharine McShane with Goldman Sachs.

Matthew Bilunas:

Yes. Sure, Kate. When you think about it in the next year, I think what we've been seeing, if I look just back at last year, we saw our average selling prices be a little more pressured in the -- a little bit in the first part of the year and then it started to stabilize in Q3, and in Q4, in fact, our average selling price was up compared to last year. And some of that was this unit mix that we talked about. As well as we look to next year, we clearly are trying to see both -- some level of ASP stabilization, some unit growth, which is why we've seen such a promotional environment to kind of stimulate the unit side of this equation.

Katharine McShane:

Okay. And our second question was just on the usage of your credit cards, if you're seeing anything different. Or did you see anything change in the fourth quarter in terms of frequency or size of transaction?

Operator:

Your next question is from the line of Greg Melich with Evercore ISI.

Corie Barry:

Yes. We haven't explicitly broken out the percent of services, that is, membership. But we did say we now have 7 million members, and that is compared to 5.8 million at the start of the year. During Q4, we actually signed up 35% more paid members compared to the fourth quarter of last year. So remember that we have a new tier in there. So we have the My Total and the My Best Buy Plus. And so that has driven some growth. And I think it's important to remember, our goal here is to drive engagement and increased share of wallet.

Matthew Bilunas:

And maybe just for a little additional context, the services growth you see at 6% in Q4, that growth was driven more by increased revenue collected from our installation business. As Corie mentioned, we've shifted -- we've changed our membership program. So we're seeing more of that revenue growth now come off the installation revenue that we're now collecting because it's no longer part of the benefits of Total Tech.

Gregory Melich:

Great. And then my follow-up is on that is really -- I think you mentioned that ad expense or marketing expense will be up $50 million this year. Could you just say what that's on? And I'm curious, are there any efforts to use all -- the data that you're getting, whether it's from your members or just customers in general, to maybe get some revenue from all that data and insight?

Operator:

Today's final question will come from the line of Joe Feldman with Telsey Advisory Group.

Corie Barry:

Yes, absolutely. Let me start with, to be clear, we're not remodeling every store in the fleet. So I have to be clear there. But what we are doing is taking, I would argue, kind of a stronger position than we ever have to ensure that the shopping experience reflects that kind of excitement and that sparkle that technology brings to life.

Corie Barry:

No, no problem. Thanks for the question. And with that, that was our last question. I want to thank everyone for joining us today during what I know is a very busy earnings season. We look forward to updating you on our results and progress during our next call in May. Have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Best Buy's Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available for -- by approximately 1:00 P.M Eastern Time today. [Operator Instructions] I will now turn the conference call over to Mollie O'Brien, Vice-President of Investor Relations.

Corie Barry:

Good morning, everyone, and thank you for joining us. For the third quarter, we are reporting better-than-expected profitability on slightly softer-than-expected revenue. Specifically, we are reporting a comparable sales decline of 6.9%, which is slightly below our outlook for the quarter as consumer demand softened through the quarter. At the same time, we expanded our Q3 gross profit rate 90 basis points from last year due to profitability improvements in our membership program and better product margins. We also lowered our SG&A expense compared to last year as we tightly controlled expenses and adjusted our labor expense rate with sales fluctuations. During the quarter, we grew our paid membership base and drove meaningful improvements in customer satisfaction scores across many of our service offerings, including in-home delivery, in-store services and remote support. Our Q3 results demonstrate our ongoing strong operational execution as we navigate through the sales pressure our industry has been experiencing for the past several quarters. The sales pressure is due to many factors, including the pandemic pull-forward of tech purchases, the shift back into services outside the home like travel and entertainment and inflation. In the more recent macro-environment, consumer demand has been even more uneven and difficult to predict. Based on the sales trends in Q3 and so far in November, we believe it is prudent to lower our revenue outlook for Q4. But despite the lowered sales outlook, the midpoint of our annual EPS guidance is now slightly higher than the midpoint of our original guidance as we entered the year. I want to thank our associates for their resilience and relentless focus on our customers. I continue to be so very proud of the way our teams are managing the business today and preparing for our future. Now, I would like to provide more color on our Q3 performance and holiday plans before passing the call off to Matt for the financial details on the quarter and our outlook. We continue to strategically manage our promotional plan and we're price-competitive in an environment, where consumers are very deal-focused and making spend tradeoffs right for their budget. Consumers are looking for value, and from an industry themes' perspective, we are seeing some trade-down in the television category, but not as much trade-down in other categories. As a result, and as expected, the goal of industry promotions and discounts were above last year and pre-pandemic fiscal '20. Similar to the first half of the year, during Q3, our purchasing customers were relatively consistent in terms of demographics versus last year. As a reminder, we over-index with higher-income consumers, compared to the general population. And we saw the percent of revenue categorized as premium and the percent of purchases over $1,000 remain constant versus last year. We have largely maintained our year-to-date industry share in our Circana, formerly NPD-tracked categories. Against this backdrop, our focus on deepening relationships with customers remains crucial. Our membership program delivered another quarter of growth and improved profitability versus last year. The Q3 contribution to the enterprise operating income rate was larger-than-expected due to the combination of a lower cost to serve and higher paid in-home installation services. For the full year of fiscal '24, we now expect our three-tiered membership program to contribute approximately 35 basis points of Enterprise year-over-year operating income rate expansion. It is still early since we introduced material changes in June, but there are a number of insights I would like to share. One, we continue to increase our paid membership base and now have 6.6 million members. This compares to 5.8 million at the start of the year. During the third quarter, we signed up approximately 35% more new paid members compared to the third quarter of last year, driven by the addition of the new Tier and buoyed by back-to-school and October’s member month events. Two, our paid members continue to interact with the brand and shop more frequently compared to non-members, which is the goal of any membership program. Three, and though it is early and we have not yet lapped the new programs, retention rates are outperforming expectations. Four, My Best Buy Total, which is the evolution of our prior Total tech offer, continues to resonate more strongly in our physical store setting. As a reminder, this tier is $179.99 per year and includes Geek Squad 24/7 tech support via in-store, remote, phone or chat on all your electronics no matter where you purchase them. It also includes up to two years of product protection, including AppleCare Plus on most new Best Buy purchases and includes all the benefits of My Best Buy Plus. And five, our My Best Buy Plus tier is resonating more with the digital customers and appeals to a broader set of customer segments. This is the new tier for customers who want value and access. For $49.99 per year, customers get exclusive prices and access to highly anticipated product releases. They also get free two-day shipping and an extended 60-day return and exchange window on most products. We are still early in the process and are testing different promotional offers to determine what resonates most with consumers as well as continuously improving the digital experience to make it even easier to find deals and benefits. Of course, we also have a free membership tier that enables free shipping for everyone, a great differentiator, especially in the holiday season. During the quarter, we continued to evolve our omnichannel capabilities to support our strategy and make it easy and enjoyable for consumers to get the best tech and premier expert consultation and service when they want it through our online store and in-home experiences. Last month, we introduced Best Buy Drops, which is a new experience only available through the Best Buy app. It gives customers the opportunity to access product releases, limited edition items, launches and deals from a variety of categories. There are multiple drops nearly every week, and they're only available in limited quantities. We are encouraged by the early results as Best Buy Drops is driving both incremental customer app downloads and higher frequency of app visits. We have also seen growth in sales from customers who are getting help from our virtual sales associates. These interactions, which can be via phone, chat or our virtual store, drive much higher conversion rates and average order values than our general dot.com levels. This quarter, we had 140,000 customer interactions by a video chat with associates, specifically out of our virtual store locations. As a reminder, this is a physical store in one of our distribution centers with merchandising and products that are staffed with dedicated associates and no physical customers. We also teamed up with live shopping platform Talk Shop Live, to test a series of online shopping events this month, starring our virtual sales associates. These events feature products from some of our newer categories like beauty and wellness as well as new tech and unique products. Our physical store portfolio is one of our key assets, and the role of our stores is to provide customers with differentiated experiences, services and multichannel fulfillment. At the same time, we need some stores to be more cost and capital efficient to operate. As a reminder, while almost one-third of our domestic sales are online, 43% of those sales were picked up in one of our stores by customers in Q3. And most customers shop us in multiple channels. Consistent with our normal cadence, we have largely completed the changes to our store portfolio for the year, so we can focus on the holiday season with minimal disruption to our physical stores. As we think about next year with the current economic backdrop, we plan to spend more of our capital expenditures refreshing a greater number of our stores and less on large-scale remodels. As such, we have three priorities for our US store fleet in the near term. Number one, we are refreshing our stores with a particular focus on improving enlivening the merchandising presentation given the shift to digital shopping and corresponding lower need to hold as much inventory on the shopping floor. For example, this year, in all our stores, we installed new premium end caps in partnership with key vendors that improve the merchandising in the center of the store. This year, we installed up to 10 of these new end caps per store or roughly one-third of our end caps per store and plan to add more next year as we work to upgrade these crucial locations in our stores. In addition, this year, we rightsized our traditional gaming spaces in roughly half of our stores to allow for the expansion of growing categories like PC gaming and newer offerings such as Greenworks cordless power tools, wellness products like the Oura ring, Epson short throw projectors, e-bikes and scooters and Lovesac home furnishing products. While small, we are seeing promising results in some of these new categories with meaningful market share growth. And as always, we continue to work closely with our vendor partners to add experiences to our stores. For example, LEGO and Therabody invested in new shop-in-shops in all our 35,000 square foot experience stores. In addition, and as you would expect, many of our premium partners are continuously updating their in-store spaces to reflect their latest innovations. We will continue this work next year in all our stores, rightsizing a number of categories to ensure we are leveraging the space in the center of our stores in the most exciting, relevant and efficient way possible. Our second priority is to keep investing in formats we know drive returns. This year, we implemented 8 large format 35,000 square foot experienced store remodels for a total of 54 and will end the year with 23 outlet stores. At this point in time, we plan to implement a minimal number of remodels and outlets next year. And the third priority is to open a few smaller footprint stores to keep testing our hypothesis at physical points of presence matter, and we need less selling square footage and more fulfillment and inventory holding space. In addition, we plan to open a few smaller stores in outstate markets to test the impact of adding new locations and geographies where we have no prior physical presence and our omnichannel sales penetration is low. At the same time, we also continue to close existing traditional stores as a result of our rigorous review of stores as their leases come up for renewal. This year, we have closed 24 stores. Over the past five years, we have closed approximately 100 Best Buy stores, which is a 10% decline in store count during that time frame. And we expect to close roughly 15 to 20 stores per year in the near term. We have been enhancing our supply chain network to support these footprint changes and deliver speed, predictability and choice to our customers. For example, we have worked to optimize our ship-from-store hub footprint to maintain substantial coverage for faster offers and take shipping volume pressure off the majority of the stores to allow them to focus on in-store and pickup experiences. Additionally, we are optimizing our shipping locations to enhance our efficiency and effectiveness while still delivering with speed. And as a result, in Q3, we had the lowest ship from store volume as a percent of total since well before the pandemic, with approximately 62% of e-commerce small packages delivered to customers from automated distribution centers. We also continued to augment our own supply chain through other partners and launched Best Buy on DoorDash marketplace, offering our second scheduled parcel delivery option in addition to Instacart Marketplace. As we have discussed previously, we have made strategic structural changes to our store operating model over the past few years to adjust to the shifts we have seen in customer shopping behavior and our corresponding operational needs. These changes provide more flexibility and have allowed us to flex labor hours with the fluctuations in customer sales, shopping preferences like curbside and traffic. As a result, we kept our labor rates steady as a percent of revenue, even as our sales have declined over the past several quarters. As you can imagine, there is a delicate balance to maintain while we adjust our store operating model as the expert service our associates provide customers is a core competitive advantage. We keep a very close watch on our customer satisfaction trends to make sure we are not negatively impacting the customer experience. Broadly, I am proud that the team is doing this work while driving higher purchasing customer NPS for associate availability, product availability and pricing. We are also committed, of course, to providing a great employee experience through training opportunities and benefits. As we mentioned last quarter, we have now led thousands of our sales associates through a certification process focused on our foundational retail excellence. We are also leveraging technology in our stores more than ever to continue to elevate our customer and employee experiences in more cost-effective ways. A great example is our app built for employees called Solution Sidekick, that provides a guided selling experience consistent across departments, channels and locations. Our employees have embraced solution Sidekick and we can see higher customer NPS when our employees are utilizing the app in their interactions with customers. We are gratified that our employee retention rates continue to outperform the retail industry, particularly in key leadership roles, the vast majority of which we hire internally. Our average tenure, excluding our seasonal workforce, for field employees is just under five years, and our general manager tenure is almost 16 years. This is crucial as we can directly tie tenured experience and training certifications to NPS improvement over time. We have also seen a strong pool of applicants for new associates to supplement our store teams this holiday season. As you all have likely noticed, the holiday shopping season has begun. Since we are preparing for a customer who is very deal focused, we expect shopping patterns will look even more similar to historical holiday periods than they did last year with customer shopping activity concentrated on Black Friday week, Cyber Monday and the last two weeks of December. From an inventory perspective, we expect to have strong product availability across categories this year. We will continue to manage inventory strategically to maximize our ability to flex with customer demand. We are excited about the promotions and deals we have planned for all customers and budgets, including special promotions and early access to deals for our My Best Buy Plus and My Best Buy Total members. We have curated gift list to help everyone find the perfect gift. We also introduced a new resource on bestbuy.com and the Best Buy app called Yes Best Buy Sells That, where customers can find the latest in tech and gifting, like pet tech, baby tech or electric vehicle chargers, all the way to unique products, some shoppers may not know we sell like skin treatments, toys for all ages and electric outdoor power equipment. For added ease of shopping and peace of mind, we've extended both our store hours and our product return policy for the holiday season. And this year, for the first time, we also extended that our shoppers can connect directly with one of our virtual sales experts to get help with their holiday shopping. We're also offering free next-day delivery on thousands of items in addition to convenience store and curbside pickup options. Most orders placed on bestbuy.com or through the Best Buy app are ready for store pickup within one hour. Same-day delivery is also available on most products for a small fee. From a merchandising perspective, we're excited for shoppers to see new innovation in a variety of categories, including AI-powered devices like Microsoft CoPilot and Windows 11 computers, the latest in virtual and mixed reality with Meta Quest 3 or Ray-Ban Meta Smart Glasses, immersive audio with Bose Quiet Comfort ultra-headphones and more, and we can help our holiday shoppers take advantage of this new innovation through our trade-in program, which gives the customer value for their old technology. In addition to great deals for our flagship categories like computing, home theater and gaming, that feature our unique ability to showcase higher-end technologies at great value, we also have an expanded assortment of new and growing categories, including e-transportation, health and wellness and outdoor living. Our e-transportation assortment has more options for people of all ages and skill levels. We have twice as many outdoor cooking brands compared to last year and more than 5,000 health and wellness products, including a lineup of fitness, recovery, beauty, skin care, baby tech and more. As you can likely hear, we are very excited to provide customers an amazing experience this holiday season. Of course, the macro environment remains uncertain with some tailwinds and increasingly more headwinds, all contributing uneven impacts on consumers. The job market remains strong and upper income and older demographics, in particular, continue to benefit from excess savings. Overarchingly, the consumer is still spending. But as we have said before, they are making careful choices and trade-offs right for their households. Given the sustained inflationary pressure on the basics, like food, fuel and lodging and the ongoing preference towards services spending, like restaurants, concert tickets indications. Additional indicators have continued to soften, including declining consumer confidence increasing debt and waning savings, and we saw sales trends soften as we move through the quarter. This environment continues to make it challenging to predict shopping behavior even during the most exciting time of the year. While we are lowering our Q4 sales outlook, we have a wide range to allow for a number of scenarios and the mid- to high end of the range reflects sequential improvement. As we discussed on our last call, there are several factors supporting our belief that our Q4 year-over-year comparable sales can improve. We expect home theater year-over-year performance to improve as we expect to be better positioned with inventory across all price points and budgets than last year. We are starting to see signs of stabilization in our TV units as they grew in Q2 and Q3 and are expected to grow in Q4. We expect performance in our computing category to improve as we build on our position of strength in the premium assortment. Notebook units were flat compared to last year in Q2, down as expected in Q3 and expected to be up slightly in Q4 and we expect to see continued growth in the gaming category as inventory is more readily available and there are strong new software titles. In summary, while the macro and industry backdrop continues to drive volatility, we have a proven track record of navigating well through dynamic and challenging environments, and we will continue to adjust as the macro conditions evolve. And we remain incredibly confident about our future opportunities. After two years of declines, we believe the consumer electronics industry should see more stabilization next year and possibly growth in the back half of the year. While our existing product categories have slightly different timing nuances, we believe they are poised for growth in the coming years, benefiting from a materially larger installed base and the ongoing desire and need to replace technology as it ages. Much of this replacement is spurred by innovation, and in addition, we continue to see several macro trends that should drive opportunities in our business over time, including cloud, augmented reality, expansion of broadband access and, of course, generative AI, where we know our vendor partners are working behind the scenes to create consumer products that optimize this material technology advancement. Our purpose to enrich lives through technology is more relevant today than ever. We're the largest CE specialty retailer. We continue to hold one-third of the market share in both the US computing and television industries and we can commercialize new technology for customers like no one else. With that, I would like to turn the call over to Matt for more details on our third quarter results our fiscal '24 outlook.

Operator:

Thank you. [Operator Instructions] Your first question comes from the line of Simeon Gutman of Morgan Stanley. Your line is open.

Corie Barry:

Thanks for the question, Simeon. I think we have a few things going on to your point. So if you think about the comments that I had in the macro section, you've got a variety of stacked issues happening. One is absolutely you had pull forward throughout the pandemic. Two is you also have this kind of sustained inflation. And again, it's sustained inflation on the basics that we've been talking about food, fuel and lodging. And so that's pulling people. We also talked about the fact that a lot of spend right now is geared towards the more service type of things like concerts, like trips. Everywhere you look, people are taking more and more vacations. And so you have all of this kind of shift of spend that's happening. I think secondarily, as it relates specifically to the holiday time frame, the other interesting thing is people have also been buying CE a little bit more steadily throughout the year. If you think about CE as more of a need-based item, not just that kind of giftable item, and so I think there's also just been a little bit of a shift in where people are spending. But I think broadly, what we're seeing reflected right now is the kind of culmination of not just pull forward, but all of these other factors that we're seeing from the consumer as they make those trade-offs. And we've been using the words uneven for probably six quarters now, and I think that is what you're seeing in the variety of results from consumers and where they're choosing to spend their dollars.

Matt Bilunas:

Yeah. I think the comparison certainly gets better. As you think about last year, we were about 3% lower than FY '20 levels. This year, we're lower against FY '20, but the sequential is better in Q4. I think there's still a lot of optimism for holiday. I think there's a lot of great holiday promotions and events. And I think we're trying to temper any expectation on holiday just with the pragmatic view of where the consumer is at right now. And I think you commented on the share. I think we actually -- we say largely held share because it's really hard to actually get a good meaningful number on share, but we feel good about our share position as we go into the holiday period.

Operator:

Your next question comes from the line of Chris Horvers of JPMorgan. Your line is open.

Matt Bilunas:

Sure. Thanks for the question. For credit card next year, I mean, obviously, there's a number of scenarios we're trying to understand as you think about next year. So we're not really guiding next year now. But when we think about the credit card, that pressure that we expect to see, we believe, will largely be offset by benefits we might see from the membership program and services category expanding a bit more from a gross property perspective. The factors within the credit card, one of the biggest things we're trying to understand is just where do net credit losses go. They're -- at the moment, they're pretty close to where they were pre-pandemic. They were very low levels during the pandemic. And so we've been seeing them grow a little bit. And so the question would be how high did those grow if they do grow into next year and what sort of pressure. The other factor to consider is that, generally speaking, our receivable balance is higher than it used to be over the last several years. And so a higher receivable balance and interest income obviously can offset some of those pressures as well. So those are a couple of the bigger things we're trying to understand as we think about the credit card specifically. And as you mentioned, again, for next year, the other puts and takes, again, we're not guiding next year, but that credit card pressure and the membership benefit is one of the bigger factors we're trying to understand. Another one that I would call out would be -- we know that we're going to likely have to add STI expense back in as we're -- we've lowered the expense this year as we reset STI in the coming year to roughly $85 million that we would likely add back. Clearly, where the industry is a question as well to the extent that sales are flat or up, it helps relieve some of the pressure of some fixed costs. Clearly, the level of pressure matters quite a bit next year. If it's a small increase, small decline, it's less significant than is a bigger decline. So those are some of the bigger factors we're trying to think through as we go into next year.

Corie Barry:

So I alluded to NPS being one of the factors that we -- you can imagine, there is a broad array of both operational and then more survey-based metrics that we're looking at, everything from how fast can we do an in-store pick, how good is the curbside experience. We specifically talked about and we can see meaningful improvements year-over-year in product availability, in associate availability, in a variety of products and pricing, and those have continuously improved even as this year has gone on. And actually, we can also see some level of improvement in some of those through non-purchasers as well. So we're watching both sides of this and that sequential improvement is happening across both purchasers and non-purchasers. And yes, we're watching close rate too, and the team is doing a really nice job measuring themselves and showing some progress against their close rate expectations as well. So we are -- literally, we have the almost Rubik's cube of operational and customer survey-based metrics so we can assess. I think what the team has done a really amazing job at is your point around flexibility. You talked about do you have less. Interestingly, now we have associates who can opt into and get certified in not just multiple areas of expertise within the store, but they can also get certified for operations roles and sales roles, and they can actually move between stores within their markets. And so we can flex not just against what's the consumer demand at the highest level, we can actually flex within a market depending on how and where people are choosing to shop. So I can even use an example like in the last week, we've seen a lot more people opting into in-store pickup and curbside and needing a bit more ship from store, and we can quickly then shift some of that labor into those areas, while still trying to strike the balance. We also talked about even moving some of the ship from store out of stores using those automated facilities so that when we do have labor in the stores, it's more customer-facing. It's facing more some of these key areas where we're trying to deliver these experiences. So not perfect and certainly not going to be perfect every single day at every single location, but we really are working hard, and I give the team a great deal of credit for every day monitoring both the experiences and the operational metrics that will tell us whether or not we're delivering.

Corie Barry:

Thanks, you too.

Peter Keith:

Hey, thanks. Good morning everyone. Happy holidays. Nice to see the membership program changes coming a bit more accretive than initially guided. Could you help us unpack that a little bit in terms of the drivers, if it's just removing the free installation or maybe that middle tier is trending a little more profitable than you thought. Maybe curious on what the uptick is from?

Peter Keith:

Okay. That's helpful, Matt. And then -- and Corie, I guess everyone is very curious on product innovation and understanding we're kind of in this air pocket with very little innovation. But I'm curious are there any little green shoots that you're seeing in stores, maybe smaller products that we're not thinking about that give us some optimism that newness can drive sales?

Peter Keith:

Very good. Good luck with the holiday season.

Operator:

Your next question comes from the line of Mike Baker of D.A. Davidson. Your line is open.

Matt Bilunas:

Sure. I think strategically -- I think we've done a really good job of managing our promotional plan overall. I think the promotions in terms of the discounts and mix of promotions are up versus last year, and in many cases, up compared to where they were pre-pandemic. Again, it hasn't necessarily manifested in our pressure on our product margin rates because we're still receiving a good amount of funding from our vendors to help stimulate the sales that you would expect us to want to do. I think as you look about the holiday season, I think we are expecting the holiday to be a very sales-driven event. Consumers are looking for deals, and they're looking for value. And because of that, we believe it will look probably more closely to like it was pre-pandemic, where people are gravitating towards the big sale events around Thanksgiving and Cyber Monday and a couple of weeks before Christmas. So a pretty similar cadence to what we saw in FY '20, although in FY '20, we did -- didn't have as much pull forward into October as we likely still have in this current year. So a more similar cadence to promotional events. I would expect holiday always to be promotional, and we are well positioned to be promotional and still maintain a great profitable story for our investors. So overall, I think we're in a great spot.

Mike Baker:

Got it. Okay. Thank you. If I could ask one more, and maybe you can't answer this, but you did talk a lot about some crowding out in that kind of dynamic with the higher inflation. Well, now all of a sudden, the inflation concern is turning to deflation concern. Asking you to look into your crystal ball, how that could impact your sales results next year if the inflation goes away and we're more in a deflationary environment?

Mike Baker:

Yeah. Makes perfect sense. Okay. Thank you. Appreciate the color.

Operator:

Your next question comes from the line of Steven Zaccone of Citi. Your line is open.

Matt Bilunas:

Yeah. I -- we'll get into the by category improvement to ASPs. Generally speaking, we are starting to, I would say, lap some of the ASP reduction. We've been seeing ASPs slowly get lower, also the last number of quarters. I think we're starting to lap some of that deflation in that average selling price, if you will. So I think it's probably as much as that as people are gravitating to in some cases, we mentioned that TV is an area of trade down that we are actually seeing. And so those do tend to lower your ASPs because it's a big ticket item. And as we start to lap that, I think you're starting to see some relief on the ASP sequentially. Again, I think in certain areas, so in terms of like Q4, clearly, we've been seeing unit pressure overall, but there are some areas where some of our bigger categories we are expecting the units to improve. We're expecting TV units to increase. We're expecting to see improvements in notebook units as well. So it's a little bit varied, but those are some of the bigger ones.

Corie Barry:

So if I think about how the last year has played out, this industry has largely been in a very promotional stance for over the last year. We've been pretty consistent in saying promos are back to, if not greater, than FY '20 levels. So this is not a new phenomenon for us. So even as we head into next year, we're lapping that. And even in that environment where you've seen that level of promotionality, as Matt said, we've sustained our share position. So I think the team has done a beautiful job positioning us well in a very promotional environment. And I wouldn't be surprised to see that environment continue into the first part of next year. And again, we're lapping that kind of similar environment last year. So it's not a huge change in trajectory for us. I think what starts to make the back half, in our view, potentially more interesting next year is really a function of the innovation cycles. And we can start to see a line of sight toward even read a little bit about, especially on some of the computing and processing side, devices that might start to feed into that as we head into the back half of next year. And back to Peter's earlier question, we can start to see on the horizon, some of that newness and innovation really on the docket as you head into the back half and into holiday for next year as everyone again, it's pretty incented to want to bring some vitality back to the industry.

Corie Barry:

Yeah. Thanks. You too.

Jonathan Matuszewski:

Great. Thanks for taking my question. First one is on the competitive landscape. So you held market share in 3Q, and that's consistent with your comments in the first half. Obviously, you guys have superior customer service and assortment. So what's driving the success among competitors in the industry, who you're tracking who are taking share? Is it purely a function of price? And how is that informing your pricing strategy over the next couple of quarters?

Jonathan Matuszewski:

That's great color. Thanks so much. And then a quick follow-up on Best Buy Health. You've had some exciting announcements on that side of the business in terms of partnerships in the industry. At the Investor Day, I think you called out expectations for that to grow at a CAGR of an impressive 40% over the next couple of years. Is that business at scale to switch from kind of dilution to accretion in terms of the overall enterprise next year? Any thoughts there would be helpful.

Jonathan Matuszewski:

Thanks so much.

Steven Forbes:

Good morning, Corie, Matt.

Steven Forbes:

Matt, you briefly mentioned 15 to 20 basis points of vendor funding being recorded in expenses. Curious if you can maybe give us a little more color there? And then any sort of different way of thinking about how vendor funding maybe supports the margin outlook for 2024? Or are you changing the 2024 margin color of being able to hold margin in a flat sales environment, any update there?

Corie Barry:

Matt hit on this, but I want to underscore, the way in which our vendors participate with us varies as you would expect, depending on what we're seeing in the macro. Sometimes that shows up as more promotional partnership. But a lot of times, that shows up in very different ways it can be in how we think about specialized labor, it can be in store experiences like we mentioned on the call, it can be in our Best Buy ads business or in supply chain fulfillment or in services. And I think what's important is our overall level of invested support has grown in the aggregate even as we compare it to pre-pandemic levels. And I think that is the part that for us as important is how can we be the very best partner to our vendors as we collectively want to bring, especially some of this newer innovation to market.

Corie Barry:

Yeah. As it relates -- you hit on specifically device life cycle management, I'm maybe going to take it up one level and that is, we've talked about Geek Squad as a service, because it can be everything from device cycle management, which is newer side of this, but also just providing service on behalf of vendors as you think about being an Apple authorized service provider or some of our Best Buy business offerings where we actually use our service profile to go out and do installations writ large. What's nice about an initiative like this is it doesn't require, especially in the earlier stages, much incremental investment. We already have Geek Squad City, which is a very large facility, well staffed with trained experts who we can leverage some of their capacities in order to deliver on something like device life cycle management. Now then we can make decisions as something like that ramps. We didn't mention it this quarter because in Q4, honestly, it's not the biggest front and center area of focus. But you can also imagine behind the scenes, if there are other ways for us to leverage our existing expertise and capacity. Those are very interesting strategic initiatives for us. And we remain excited about this one. We remain excited about the pipeline that we're seeing in this one. And obviously, I think you can expect that we will update you with more clarity as it develops. So with that, I think that -- thank you. I think that is our last question, and I want to thank you all for joining us today. Thank you for the nice wishes. I hope you all also have a wonderful holiday, and we look forward to updating you all on our results and progress during our next call in February. Thank you, and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Best Buy's Second Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1:00 p.m. Eastern Time today. [Operator Instructions] I will now turn the conference call over to Mollie O'Brien, Vice President of Investor Relations.

Corie Barry:

Good morning, everyone, and thank you so much for joining us. Today we are reporting better-than-expected Q2 financial results. Our comparable sales came in at the high end of our guidance and profitability was better than expected. These results continue to demonstrate our strong operational execution as we balance our reaction to the current industry sales pressure with our ongoing strategic investments. As expected, our year-over-year comparable sales performance improved from the 10% decline we reported last quarter. For the second quarter, comparable sales were down 6.2%. We expanded our Q2 gross profit rate 110 basis points from last year due to better product margins and profitability improvements in our membership program. We kept our SG&A expenses flat while absorbing higher incentive compensation expenses than we recorded last year. Our industry continues to experience lower consumer demand due to the pandemic pull-forward of tech purchases and the shift back into services spend outside the home like travel and entertainment. In addition, of course, persistent inflation has impacted spending decisions for a substantial part of the population. I continue to be incredibly proud of the way our teams are managing the business today and preparing for our future in light of the industry pressure and ongoing uncertain macro conditions. We strategically managed our promotional plan and we're price-competitive in an environment where consumers are very deal focused and the level of industry promotions and discounts were above last year and often and above pre-pandemic fiscal '20. In the first half of the year, our purchasing, customer behavior has remained relatively consistent in terms of demographics and the percent of purchases categorized as premium. Our inventory at the end of the quarter was down compared to last year in line with our sales decline as the team continues to manage inventory strategically targeting approximately 60 days of forward supply. Our customer satisfaction with product availability has been improving over the past few years and is now the highest it has been since the start of the pandemic. I would note that while we were not a perfect inventory levels last year, we were more rightsized than many and are not lapping the kind of clearance pressure that other retailers experienced. We continue to make it easy and enjoyable for consumers to get the best tech and premier expert service when they want it through our online store and in-home experiences. Almost one-third of our domestic revenue came from our digital assets including our mobile app. We have made considerable improvements to our app customer experience and the percent of our online sales coming through the app has doubled in just the last three years to more than 20% of our online revenue. We are pleased to see higher app usage overall as our app customers engage three times more often than customers engaging with us on other digital platforms. Our Buy Online Pickup In Store percent of online sales continues to be just over 40%, considering the speed of our delivery with almost 60% of packages delivered within two days, we believe the consistency of our high rate of instore pickup by our customers truly underscores the importance of the combination of our digital and physical locations. In addition, our focus on providing customers with expertise and support continues to be highlighted by material improvements and satisfaction scores for our in-store and in-home tech services as well as our home delivery experience. In fact, our remote support services, where we have the ability to remotely access and fixed your computer while you're at home has the highest NPS of all our experiences and continues to increase. These are all services we can provide at scale that no one else can. Our tech services play a material role in our unique membership program that is driving increased customer engagements and increased share of wallet. As we would expect, paid members also report much higher customer satisfaction than nonmembers. During the quarter, we successfully launched significant changes to our program designed to give customers more freedom to choose a membership that fits their technology needs, budget, and lifestyle. In addition, we wanted to build in more flexibility and drive a lower cost to serve than our previous Total Tech program. We now offer three tears; My Best Buy, My Best Buy Plus, and My Best Buy Total. It is of course very early as we only launched the new programs on June 27th, but we are seeing indicators that the program changes are driving many of the results we expect it, including an uptick in year-over-year growth of overall paid membership sign-ups. For example, My Best Buy Total, which is the evolution of our prior Total Tech offer continues to resonate more strongly in our physical stores setting. As a reminder, this tier is $179.99 per year and includes Geek Squad 24/7 tech support via in-store remote phone or chat on all your electronics, no matter where you purchase them. It also includes two years of product protection, including AppleCare Plus on most new Best Buy purchases. In addition, it includes all the benefits included in My Best Buy Plus. And as a reminder, My Best Buy Plus is a new membership tier built for customers who want value and access. For $49.99 per year, customers get exclusive prices and access to highly-anticipated product releases. They also get free two-day shipping and an extended 60-day return in exchange window on most products. In the first several weeks since launch, this plan is resonating more with digital customers and appeals to a broader set of customer segments across more product categories than My Best Buy Total, and its predecessor, Total Tech. We are still very early in the process and are testing different promotional offers to determine what resonates most with consumers and continuously improving the digital experience to make it even easier to find deals and benefits. Lastly, our My Best Buy tier remains our free plan built for customers who want convenience. It includes free shipping with no minimum purchase and other benefits associated with a member account like online access to purchase history, order tracking, and fast checkout. At the beginning of the year, we added the free shipping benefit and phased out the points-based rewards benefit for non-credit card holders. As a reminder, our credit card holders still have the option to earn 5% back in rewards or choose 12 months, 18 months, or even 24 months of 0% interest-rate financing depending on the product category. The customer metrics continue to validate our decisions to change our free tier and our customer enrollments have remained steady. In addition, the financial impact has been better than we originally modeled. For fiscal '24, we now expect our three-tiered membership program to contribute at least 25 basis points of Enterprise Year-over-Year operating income rate expansion, which is consistent with what we have seen in the first half of the year. During the quarter, we continue to make progress on our journey to evolve our omnichannel capability. We want to ensure we maintain a leading position in an increasingly digital age and evolving retail landscape. This means our portfolio of stores needs to provide customers with differentiated experiences and multichannel fulfillment. At the same time, we need them to be more cost and capital-efficient to operate while remaining a great place to work. We are on track to deliver the fiscal '24 physical store plans we announced at the beginning of the year. These include closing 20 to 30 stores, implementing eight large-format 35,000-square-foot Experience Store remodels, and expanding our outlet stores from 19 to around 25. In addition, of course, we are continuing to refresh our stores. For fiscal '24, we are particularly focused on improving the merchandising presentation given the shift to digital shopping and corresponding lower need to hold as much inventory on the shopping floor. For example, in all our stores, we are installing new premium end-caps in partnership with key vendors that will improve the merchandising in the center of the store. These new end-caps have that product and vendor story on the front with the inventory tucked in on the sides. Importantly, it allows us to have a great demo or presentation, even if we are displaying potentially less in-store inventory than we historically have. This also allows for a much better merchandising experience for products that we have deemed more at risk for shrink and have decided to hold inventory in a more secure location off the sales floor. We invested in digital tools that allow the customer to quickly scan and pick up this inventory in a matter of minutes through our prioritized pick process. This minimizes shrink, prioritizes the customer experience, and drives a much more efficient employee process. In addition, in about half our stores we are rightsizing our traditional gaming and digital imaging spaces to allow for the expansion of growing categories like PC gaming and newer offerings such as green works cordless power tools, wellness products like the Oura Ring, Epson short throw-projectors, e-bikes and scooters, and Lovesac home furnishing products. While small, we are seeing promising results in some of these new categories with meaningful market-share growth. As it relates to the operating model in our stores, we are continuing to drive our evolution based on two overarching goals. First, we needed to more efficiently allocate our labor cost considering the higher online sales have resulted in a decline in physical store traffic and sales. Our customers and their expectations and behaviors have changed dramatically and incredibly quickly. We have been working hard to balance the amount of labor hours necessary to deliver the best experience possible for our customers and employees. In our roles and the associated hourly pay are the same and we have had to make some difficult but strategic decisions to give us the ability to flex our labor spend appropriately. As we mentioned last quarter, with our most recent changes, we were able to add approximately 2 million additional hours for customer-facing sales associates into our staffing plan for the year and we saw improvements in our associate availability NPS metric in the second quarter as a result. Because of these structural changes, we have driven more than 100 basis points of rate improvement in domestic store labor expense as a percent of revenue compared to fiscal '20. Additionally, we have been successful in keeping our labor rates steady as a percent of revenue, even as our sales have declined over the past several quarters. Second, we need to provide our employees flexibility, predictability, and opportunities to gain more skills. We have been investing in tools and employee development programs that increase their flexibility within and across stores. As you would expect, we are also focused on leveraging existing and emerging technology to drive better customer and employee experiences across channels. We are gratified that our employee retention rates continue to outperform the retail industry, particularly in key leadership roles. The vast majority of which we hire internally. Our retail workforce has led through significant change over the past four years. I could not be more proud of how our teams have adapted to the changing environment. But all that change, while necessary can be hard and disruptive for any team. We are pleased to be headed into a period of stability from an operating model perspective and we are now laser-focused on ensuring foundational retail excellence. As such, during Q2, we led thousands of employees, including more than 80% of our sales associates through a certification process, focused on our baseline expectations for interacting with customers, our selling model, and product category proficiency. This is just Phase 1 and we will continue to invest in training hours for subsequent phases of the program to make sure we are driving the interactions and outcomes, we believe are the best for our customers and our business. As I mentioned earlier, we are working hard to balance our response to current industry conditions with our need to invest in our future. It has long been part of our cultural DNA to drive cost efficiencies and expense reductions in order to offset pressures and fund investments and this year is no different. In fiscal '24, we are driving benefits from optimization efforts across multiple areas, including reverse supply chain, large product fulfillment, and our omnichannel operations. This includes leveraging technology and rapidly evolving AI. For example, in customer care, our virtual agents are now answering 40% of customer questions via chat without a human agent and with high satisfaction levels. We are continuing to add capabilities and are creating additional employee and customer-facing virtual agents that will simplify our most complex interactions like technology support services, while also delivering key insights from our customer care centers back into the enterprise. We are also testing new state-of-the-art routing capabilities to optimize our in-home operations, reducing cost-of-service and improving the availability and wait time of delivery and installation appointments for our customers. As we think about our growth strategies, we believe we can leverage our scale and capabilities to drive incremental profitable revenue streams. In this vein, we are exploring Geek Squad as a service opportunities with several large companies, including Accenture, Intel, and Lenovo as we have created differentiated B2C and B2B services capability. Device lifecycle management is a specific example of the service we can provide to others and necessity for all companies, device lifecycle management refers to the process of providing tech devices like phones and laptops to employees. This is not a core competency for most companies and the recent hybridization of work has made it even more complicated. We are already supporting a number of firms as their sole device lifecycle management partner providing end-to-end support of these company-provided devices, including procurement, provisioning, deployment, repair, and end-of-life. This is just one example of our ability to leverage our data and assets and adds to the growth we're already seeing in areas like Best Buy Ads and Partner Plus. Before my closing remarks, I also want to take a moment to recognize our Geek Squad teams for their work with our communities. For more than 15 years, they have been sharing and teaching their tech expertise and skills to prepare the next generation for the future workforce. This summer, we welcomed more than 2,000 kids and teens at nearly 40 Geek Squad Academy camps across the country. These camps give participants the opportunity to learn skills on everything from coding, game design, digital music, and more. More importantly, they help young people build self-confidence, spark creativity, and discover how technology can benefit them in their educational pursuits in future careers. I am incredibly proud of all our Geek Squad agents and volunteers for their work this summer inspiring thousands of young minds through tech. As we enter the second half of the year and look forward to the holiday season, we are both proud pragmatic, and optimistic. Of course, the macro-environment remains uncertain with a number of tailwinds and headwinds soon including the October resumption of student loan payments, all of which results in uneven impacts on consumers. Overarchingly, we believe that the consumer is in a good place. But as we have said, they are making careful choices and trade-offs right for their household. During last conference call, we noted that we were preparing for a number of scenarios within our annual guidance range, and we believed our sales were aligning closer to the midpoint of the annual comparable sales guidance. We knew it would be a challenging year for the industry and we are halfway through the year and narrowing our outlook largely as expected. As Matt will discuss in more detail, we are updating our comparable sales guidance accordingly. We now expect comparable sales to decline in the range of 4.5% to 6%. This compares to our previous range of down 3% to down 6%. At the same time, we are narrowing our profitability ranges effectively raising the midpoint of our previous annual guidance for non-GAAP operating income rate and earnings per share. We continue to expect that this year will be the low point in tech demand after two years of sales declines. Tech is a bigger part of all our lives, both in our homes and in our businesses than ever, and we believe next year the consumer electronics industry should see stabilization and possibly growth driven by the natural upgrade and replacement cycles for the tech bought early in the pandemic and the normalization of tech innovation. Let me say a few words about the fourth quarter specifically. For context, we reported a comparable sales decline of 10% for fiscal '23 and roughly 8% for the first half of this year. We are guiding a Q3 year-over-year comparable sales decline that are similar to or a little better than the 6.2% decline we just reported for Q2. Our full-year guidance implies a wide range for Q4 comparable sales of down 3% to slightly positive. There are a number of factors supporting our belief that our Q4 year-over-year comparable sales will improve and could potentially turn positive. We expect growth in-home theater as we expect to be better-positioned with inventory across all price points and budget spends last year. We are starting to see signs of stabilization in our home theater business. For example, TV sales trends improved in Q2 and units returned to growth. We expect performance in our computing category to improve as we build-on our position of strength in the premium assortment will not exactly linear. We are also starting to see signs of stabilization in this category as Q2 laptop sales trends improved materially and units were flat to last year. We expect to see continued growth in the gaming category as inventory is more readily available and there is a promising slate of new software titles expected to be released in the back half of the year. We are planning for potential growth in the mobile phone category as we expect inventory to be less constrained than last year and expect to drive growth in our unlocked phones business. Our hypothesis regarding the holiday season is that the consumer largely returns to pre-pandemic behavior. By this, we mean that they will be looking for great deals and convenience and traffic will be weighted toward promotional events. We have an excellent team and strong omnichannel assets that thrive in such an environment. In summary, while the macro and industry backdrop continue to drive volatility as we move through the year, we have a proven track record of navigating well through dynamic and challenging environments and we will continue to adjust as the macro conditions evolve and we remain incredibly excited about our future opportunities. While our existing product categories have slightly different timing nuances, in general, we believe they are poised for growth in the coming years. In addition, we continue to see several macro trends that should drive opportunities in our business over time, including cloud, augmented reality, expansion of broadband access, and of course generative AI where we know our vendor partners are working behind the scenes to create consumer products that optimize this material technology advancement. As the largest CE specialty retailer with one-third of the U.S. computing and television market share, we can commercialize new technology for customers like no one else can. And with that, I would like to turn the call over to Matt for some more details on our second quarter results and our fiscal '24 outlook.

Operator:

[Operator Instructions] And your first question comes from the line of Scot Ciccarelli from Truist. Your line is open.

Corie Barry:

Yes, maybe in this, we were talking about computing specifically, and maybe I'll give just a little bit more color there. I mean I think what we're seeing broadly is that computing innovations and the refresh cycles are getting shorter and they are accelerating and we continue to see people using all of their devices more often and far more like a computing processing intensive. And these are really specific activities and you can see both whether you're using it at home, and you're seeing a lot more streaming, or whether using it at work and you're starting to want to leverage some of these more advanced technologies. Obviously, like, for example, Microsoft pre-pandemic focused on dual screen and that was kind of something we had talked about for a while, but they quickly pivoted some of their developments within their Windows OS to address consumer productivity where all of us, we're kind of struggling to make sure we're as productive as possible on multiple devices, a lot of that enhancement went into productivity and I think the emergence of AI is at the heart of many of these innovations. I think in this case, in this example, it centers around the Windows copilot on Windows 11, which brings ChatGPT and AI innovations in the cloud applications within that Windows Office Suite within PowerPoint, Outlook, Excel. And I think what we're expecting will happen and I alluded to it on the call is obviously you're going to have likely at some points here different generation of technology that's going to have more intensively leverage the capabilities that are necessary to run these AI models. I think that's one example. We talk about this often, Scot. It's hard for us always to know exactly what that new horizon of technology is going to be, but this is one that probably has some of the broadest implications for all of our collective productivity.

Matt Bilunas:

No, I think for Q4 specifically, I think as we think about improvement of trends for Q3 and then in Q4, I think we are obviously encouraged by a little bit by back to school. Back to school has been slightly better than we expected as we get into Q3. When you think about Q3 compared to FY '20, it actually has slightly higher growth than what we saw in -- expecting slightly higher growth in Q3 compared to Q2. Q3 compared to '20 has a little bit more holiday sales pulled in. So we are expecting that to continue compared to where pre-pandemic was, but maybe not to the same extent of pull-forward that we've seen in the last few years, so I think we're encouraged by the trends as we leave Q2 if you think about what happened in Q2, we actually saw some stabilization in our business, we saw actually laptop units turned to flat in Q2 in terms of that business and TV units were flat, and so I think there is optimism around how -- what we might expect for the back-half and more specifically Q4 but Q3 we're likely still seeing similar levels to what we saw in Q2.

Corie Barry:

Thank you.

Greg Melich:

Thanks. I wanted to start on the top-line, that sort of improvement in trends and I love an update on what credit as the penetration and also you mentioned that that was a tailwind, becoming a headwind. Could you frame that a little bit more as to what percentage of gross profit it is or something like that?

Greg Melich:

Got it. And then my follow-up is on SG&A specifically. I know you expect it delever for the year. You mentioned the incentive comp up $185 million, was that for the full year or in the back half?

Greg Melich:

And that's more back-half weighted, presumably?

Greg Melich:

Okay. And then in terms of leveraging payroll that 100 bps was in the second quarter, was there something about the second quarter that gave you an unusual amounts of hourly payroll leverage, or should we expect that going forward?

Corie Barry:

And, Greg, just to make sure we're clear that 100 basis points as versus FY '20. So that's more than like structural change that we've seen over the last four-ish years.

Matt Bilunas:

Thank you.

Operator:

Your next question comes from the line of Seth Sigman from Barclays. Your line is open.

Matt Bilunas:

Yes. I think my reference to normal. Thanks for the question is more related to net credit losses as a percentage to the book. So we haven't given that number. I won't give it today, but what we're seeing now is a more normal rate compared to FY '20. What we're watching for is it does that rate increase compared to where it used to be and certainly it's already higher than it has been the last few years when the net credit losses were very low rate. And that is just more to do with just the state of the consumer. So right now we still see a relatively good consumer to the extent that they are still continuing to make tradeoff decisions weighing a little bit more pressure on their personal finances that could less to go up into next year. That's the consideration. We will certainly, as we think about next year, we're not guiding next year, but we're thinking about next year, that could be one of the pressures we face as we think about ROI rate just in terms of where does the net credit losses go.

Corie Barry:

Yes, right now as it relates specifically to the card, we aren't seeing massive change in credit availability. We're continuing to see and we've said before, about 25% of our business is done on the card. We're continuing to see those trends. And what are the nice things about our card is as I mentioned it in the prepared remarks, but I want to emphasize that you can either choose points or you can choose 0% financing and so it's actually it's an offering that is widely accepted and appreciated, especially against the backdrop so the consumer can decide what's more relevant for them. So like Matt said, we're seeing more of a normalization in some of those key metrics. But in general, it remains an incredibly efficient asset for us in partnership, obviously in the profit share structure that we have.

Corie Barry:

Yes.

Liz Suzuki:

Great, thank you. Just a question on appliances, which looked like they were particularly weak this quarter and some other big-box retailers that sell appliances have talked about an increase in vendor-funded incentives and promotions. Have you seen the same behavior from your vendor partners as they try to respond to slower demand and did vendor funding funded promotions have an impact on margins this quarter?

Liz Suzuki:

Great, thank you. And just on the flip side of some of the categories that were particularly strong. Can you just go into a little more detail on what was successful and like the entertainment and services categories and where you see that going in the next couple of quarters?

Liz Suzuki:

Great, thank you.

Matt Bilunas:

Thank you.

Michael Lasser:

Good morning, thanks a lot for taking my question. Matt, you alluded to operating margin pressure in the next fiscal year. So on a similar level of revenue for Best Buy, call it 2024 versus where it was in 2019, what would be the company's operating margin rate in light of the pressure that it's experienced from investments in health care and some of the impact of the rise in e-commerce penetration for the business and all the actions that the company has taken to try and preserve the profitability in light of those pressures? And what levers can be pulled from here in order to improve the operating margin rate over time, especially as things like credit income continue to decline?

Michael Lasser:

Thank you very much. My follow-up question is, there is an interesting dynamic that you're referring to on your call, which is the promotional environment in some cases is higher or more intense than it was in 2019, but you're getting more vendor funding than you were getting at least relative to last year. So A, how much is your vendor funding up or down relative to 2019, and B, what does this overall promotional environment suggest about the profit pool for selling consumer electronics in the United States in Best Buy's share of that overall profit pool? Thank you very much.

Michael Lasser:

Thank you very much, and good luck.

Matt Bilunas:

Thank you.

Kate McShane:

Hi, good morning. Thanks for taking our questions. We wanted to ask a little bit more about the membership strategy, which is now in three tiers. Can you talk about how the profitability differs when compared to your previous program of Total Tech Support and does this profitability improve as the program scales and ramps?

Corie Barry:

I think what's most important is that at any given point in time, what the team I would argue has done a magnificent job doing is balancing acquisition, retention, and engagement. And while to Matt's point, cost to serve as part of our considerations. What we want are not just to acquire a bunch of members but to make sure they are incredibly engaged and to make sure we retain them over time. And so while the profitability impact is part of what we're looking at, the bigger question we are actually looking at is, what is that combination of acquisition, retention, and engagement that drives what we talked about, which is more sticky customers that bring a larger share of wallet and help keep Best Buy relevant over time.

Corie Barry:

So the good news is, overall, we feel very strongly about our position in the industry and we talked about it already a bit. We are confident in our relationship with our vendors and grateful for their partnership and I think we continue to be excited to keep investing in our strategy from a position of strength. We've said before, there is not a great single source for market share, both because we have a large portfolio of services. Also because we are always evolving new categories, but from what we can see in some of the more established categories, we have at least held our share in Q2 and we believe that's been true really the first half of the year. So no major trajectory change. We feel like we're positioned well and obviously, the team will continue to work with our vendor partners and ensure that we have that great valuable assortment for our customers.

Operator:

And your next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Your line is open.

Matt Bilunas:

Sure. I think broadly speaking, let's start with the categories. I think what we said from a product perspective, we certainly have seen a little bit inflation over the years. But what we're now seeing actually is more promotionality on a year-over-year basis in some cases compared to FY '20, so from category product perspective, I think we're kind of beyond past the inflation aspects that there isn't some cost of good increase, but generally speaking, the prices have gone up. So I think that hasn't changed too much outside like sometimes more promotionality is dropping that price on a year-over-year basis. I think for inflation in other areas in terms of cost, there are things that are historically have always had a little inflation there, probably it will continue to go up. Wages is an area where we always expect to have a little inflation, marketing also is a place where you see some pretty consistent inflation over the years. Supply chain is the more notable one that I think we're seeing a lot of inflation over the years and now it's starting to subside a little bit. Supply-chain has a number of different areas, one of them being the ocean side of supply-chain. That's the smallest cost that we have and that's an area where inflation actually has come down. Ground transportation or domestic transportation actually is an area where we are still seeing a higher level of inflation based on the wages that have the wage pressures and just the volume that's increased. The warehousing side of supply-chain is also an area where we've seen inflation and would probably expect to continue to see some. We also have wage inflation on the warehousing side, but also just we've expanded our footprint because our large products have grown in terms of the mix of our categories that we did it to add space. So broadly speaking, there are some areas where we probably continue to see inflation and some areas that will abate a little bit as you get into next year and years out.

Brad Thomas:

That's really helpful. Thanks. Thank you both. And if I could squeeze in one follow-up here around the topic of shrink. Corie, you mentioned some of the new displays you have that have been helpful. But can you just help to put into context the success that you're seeing in this tough environment given that there are so many retailers calling out challenges on shrink right now?

Brad Thomas:

Very helpful. Thank you, Corie.

Brian Nagel:

Hi, good morning. Thank you for taking my questions.

Brian Nagel:

My first question. I think it's a bit of a follow-up to Keith's question just with respect to memberships. So Corie, you spent a lot of time on the call today. Just talking about the ongoing enhancements of membership and you've given some of the nearer-term financial targets, but I guess the question I want to ask is, as we step-back and clearly the big focus for Best Buy. In your minds, what do we play what I don't want to say necessarily say dream the dream, but intermediate longer-term opportunity with membership either providing a financial standpoint more quantifiable or just from an overall consumer engagement standpoint.

Brian Nagel:

No, that's very helpful. I appreciate that. And then my follow-up question different topic. We talked about the sale, the expected sales trajectory through the balance of the fiscal year with the expectation that sales will continue to solidify improved maybe work towards that flatline. But you also did call out. I think it was in the prepared comments. The risk of it - if you will is the challenge of this resumption of student loan payments. So, it's obvious topic is starting to get air time. The question. I have is I mean, to what extent you look closely at this. How are you sizing and if you are sizing that potential risk to your sales trajectory here in the near-term.

Corie Barry:

You bet. Thank you, Brian. We appreciate the questions and overarchingly thank you to everyone who took the time to be with us today. And before we close the call. I want to make sure we acknowledge the wildfires in Maui, but also the wildfires, we've seen in Canada. And those bracing for a hurricane in Florida. Our hearts genuinely go out to those impacted and we are doing all we can to support our employees in all of those impacted areas. Thank you so much for joining us today.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1:00 p.m. Eastern Time today. [Operator Instructions]. I will now turn the conference call over to Mollie O'Brien, Vice President of Investor Relations.

Corie Barry:

Good morning, everyone, and thank you for joining us. Today, we are reporting Q1 sales results that are right in line with the expectations we shared in March and profitability that was better than expected, demonstrating our strong operational execution. We are appropriately balancing the need to adjust in response to the current industry sales trends with the need to invest, so we can capitalize on opportunities as our industry moves through this downturn and returns to growth. In this environment, customers are clearly feeling cautious and making trade-off decisions as they continue to deal with high inflation and low consumer confidence due to a number of factors. At the same time, in Q1, we saw our purchasing customer behavior remain relatively consistent in terms of demographics, and the percent of purchases categorized as premium. In addition, our focus on being there for our customers with expertise and support was highlighted by material improvements and satisfaction scores for our in-home services and delivery and record scores in remote support, in-home repairs, store care, and Best Buy Totaltech call center experiences, all key differentiators for us. We remain as confident as ever about our strong position in the industry despite reporting lower sales than last year. In Q1, our comparable sales were down 10.1% on a year-over-year basis. From a merchandising perspective, similar to the past few quarters, the largest impacts to our Domestic comparable sales decline came from computing, home theater, and appliances. The promotional environment played out largely as expected. It was slightly more promotional than last year, and we believe we are now fully normalized to pre-pandemic levels from both the percent of products being promoted and the depths of promotions. In some products and categories, the environment was more promotional than we had expected, and we saw promotional levels above fiscal '20. We effectively managed through those situations in partnership with our vendors. On a blended basis, our overall average selling price, or ASP, was slightly down to last year due to the return of promotionality. While we're on the topic, I would like to take a step back and address what we believe is a common misperception about our industry, that all products we sell are perpetually deflationary. In fact, most of our categories have had price stability over time or even seen increases. The price of a product may come down in the year after it launches only to be replaced by the next generation of the product launched at the same or slightly higher price. Innovation drives price stability and often drives consumers to adopt even higher ASP products based on new technology or additional features. For example, the five-year compounded annual growth rate for average laptop prices is approximately 2%. For Best Buy specifically, we over index in the newest innovation and next generation of products, so we tend to carry a higher ASP than the overall industry. Additionally, as a reminder, structurally, our overall ASPs have also increased over the last several years due to category mix with the growth of higher ASP appliances and large TVs, as well as more mix into premium products at higher price points. Now back to our Q1 results. Our inventory at the end of the quarter was down 17% compared to last year as we lapped last year's elevated levels. The team continues to manage inventory tightly, targeting approximately 60 forward days of supply. We expect that our inventory levels will continue to normalize and year-over-year variances will more closely match our sales performance as we move through the year. In the first quarter, digital sales comprised 31% of our Domestic revenue, very similar to the last two years, and twice as high as pre-pandemic. Our " Buy Online, Pickup In Store" percent of sales was also very consistent, at just over 40%. Considering the speed of our delivery, with almost 60% of packages delivered within two days, we believe the consistency of our high in-store pickup by our customers really underscores the importance and convenience of our stores. I continue to be proud of our team's execution and ability to navigate through this challenging environment, always keeping our customers and their experience as our top priority. As we look to the rest of the year, we expect the macro environment to continue to pressure demand in our industry this year. However, our guide for the year implies that we expect year-over-year comp performance to improve as we move through the year and we lap the comparable sales declines we experienced last year. Based on what we can see right now, we continue to believe that calendar 2023 will be the bottom for the decline in tech demand. Matt will provide more color on our expectations later in the call. This year, we are focused on delivering great customer experiences while running the business efficiently and strategically setting ourselves up to flourish when the industry returns to growth. This includes our efforts to expand our gross profit rate, and to continue to prudently manage our SG&A expense. Now, I'd like to update you on our membership program. The goal of membership is to drive increased customer engagement and increased share of wallet over time. As it relates to our paid membership program, our investment thesis remains very much intact. Our members are engaging more frequently with us, shifting their tech spending to Best Buy, and buying more across categories than non-members. Additionally, members rate our experiences higher. Our net promoter scores from Totaltech members remain considerably higher than from non-members. No membership program is static, and we have always stated that it was our intent to iterate over time as we learned more. We've learned a tremendous amount from our members over the last couple of years, particularly that different customers value very different benefits when it comes to their technology. Earlier this month, we announced changes to our membership program that align all our memberships, and will give customers more freedom to choose a membership that fits their technology needs, budget, and lifestyle. In addition, these changes will provide more flexibility and result in a lower cost to serve than our existing Totaltech program. Starting June 27, our membership program will offer three tiers

Operator:

[Operator Instructions] And your first question comes from the line of Simeon Gutman from Morgan Stanley. Your line is open.

Corie Barry:

Yes. Thank you, Simeon. Let me start with a little bit of the backdrop here. And I think we've been pretty consistent in saying -- we started really in Q2 of last year in saying the consumer is clearly making trade-off decisions in a very unique environment. So, to your kind of original question on the reversion, I think what we would say is we've been seeing a consumer who is, whether or not you call it a recession, exhibiting some recessionary behaviors depending on the different category that you're talking about. So, it's absolutely unusual. I think as we look ahead, we start to feel like you see the turn in the business as you head out the back half of this year and into next year. And there are a few industry sources that we're using to help substantiate that. If you look at NPD, CTA, Forrester, a lot of those have the same kind of points of view. So first of all, we're just looking externally to say, what do we see in the landscape. But I think we tried to lay out, even within the prepared remarks, there are some key tenets here that we believe underscore our thoughts for next year. One is, this idea of truly a larger install base. Yes, absolutely, there was some pull-forward in the pandemic, but some of that had to be incremental given you now have two times as many connected devices in people's homes as you had versus just 2019. So, you absolutely have this larger install base of product. And these are not static products. These are products that we can already see our vendors working to upgrade and innovate and drive. The second point that we made, which is replacement cycles. Natural replacement cycle is three to seven years. Like we said, quicker on the mobile side, computing in the middle, appliances and TVs more on the high end. But these are pretty consistent replacement cycles that we see over time. If anything, we saw them maybe accelerate a bit during the pandemic, normalize a bit more now. But on the whole, you've got products that because of their nature, you're going to want to upgrade. And then, the third is the pace of vendor innovation. And you can -- that's why we gave some specific examples in the prepared remarks. You can already start to see some of that innovation coming. I think the window that we have into our vendors would say it's more towards the back half of this year and into next year. I think we were clear in the prepared remarks to say, this is all based on what we can see now, and we're going to continue to evaluate. But as of right now, it feels like that consumers kind of made their choices about the industry that we're in, and we still feel really well set up as we start to head into the next calendar year.

Operator:

Your next question comes from the line of Joe Feldman from Telsey Advisory Group. Your line is open.

Matt Bilunas:

Yes, sure. First, I'll take you back to last year. Last year, we had about $455 million of favorability in incentive compensation. As you think about last year, by the end of last year, we had essentially not paid out any of our incentive comp based on our annual performance last year, a lot of which is driven by revenue and operating income expectations as you enter the year. And so, essentially we've reversed out all of that expense last year. And so, as you set new targets for this year FY '24, you reset your tables and expectations for sales and operating performance. And so, essentially just getting back from essentially almost a zero payout to a 1.0 payout, we've added over -- about $225 million of expense at the top end of our guidance, just simply reflect like a normal payout for this year because it's really more of a year-over-year impact of not paying out anything and then maybe starting the year with the expectation that we would pay out at a more normal midpoint.

Matt Bilunas:

Sure. I think, I'll start and Corie can jump in. There are a few categories that we saw a heightened level of promotionality, appliances is one of them, computing was one of them, headphones was another. There's a number that more promotional year-over-year and in some cases, even more promotional than they were pre-pandemic. And like any year, that's not just us who are incented to drive sales. Our vendors are incented to drive sales as well. And the outcome of that actually didn't lead to strengthen our product margins in totality. So the more heightened promotionality didn't necessarily manifest in profitability pressure on a year-over-year basis, but there were a number of categories that people are trying to stimulate and drive sales because of the environment we're in.

Joe Feldman:

That's really helpful. Thanks, guys. Good luck with this quarter.

Operator:

Your next question comes from the line of Anthony Chukumba from Loop Capital. Your line is open.

Matt Bilunas:

Yes, sure, Anthony. The -- on the Domestic side, the services revenue growth is attributable to the growth in Totaltech members from this point to last year. And so, as we continue to sign up members, we continue to have more revenue come through that. And that's essentially the growth in the services category on the Domestic side. On the International side, we did say that there is some gross profit rate pressure on services. They're doing similar membership changes in Canada, and that's simply a reflection of timing of those membership changes they made last year. This year, they start to cycle those changes they made earlier in their year after this Q1. So that is a reflection of some of the membership changes that they're also making, not the same, but similar to what the Domestic side is doing.

Corie Barry:

Thanks, Anthony.

Mike Baker:

Hi. I just wanted to follow up on the membership question. And so, you're making some changes, which presumably is based on driving better profitability, yet the guidance for the profitability impact this year is unchanged, maybe that's just timing because it takes time to implement these changes. But what does this do to the long-term outlook in terms of the profitability on the membership business? Thanks.

Matt Bilunas:

Yes. So, very specifically, we -- last quarter and this quarter, we've said that the gross profit rate, about 40 basis points to 70 basis points of increase this year, one of those reasons is the changes to the membership program, part of which is the My Best Buy changes, as Corie mentioned, and then just expected changes on the other parts of the membership program. And to your last part of your question, we would expect to continue to iterate and update the membership financials and expect to see probably continued profit rate expansion as you look into next year. Obviously, as you -- we still have Totaltech members that still have two years of benefits, and we'll have to honor those for that two years. And then as you get into the back half of this year, we will start to see the benefit of the changes more. And then, get into next year, we would continue to iterate and have to see it more upside.

Corie Barry:

Well, we promised that there will still be great deals on installation. And we made clear that we're still going to pull some of those great deals. So, you will still see those coming. Also, please don't get too upset yet. And the other thing I just want to add, Mike, before you go is absolutely part of the changes result in impact to profitability. The intent of the changes was to understand customer behavior and then adjust the membership program based on the customer behavior we were seeing. So, in a world where you used to historically value points, but now things like free, reliable, fast shipping matter a lot more, you make that adjustment, not just because it has profitability impacts, but because you're actually learning about what your customers value and what accomplishes what you set out to do, which is to have more sticky customer relationships, increase that frequency and increase that share of wallet. So, we're really trying to balance both sides of the equation as we're making these decisions.

Corie Barry:

Thank you.

Chris Horvers:

Thanks. Good morning. Two related questions. So, you talked about the midpoint for the year on the sales side, but you didn't comment on the operating margin range. And you did just materially beat your sort of gross -- what you talked about for the gross margin in the first quarter here. So, are you expecting some give back? Any comments on that range? And then, Corie, you mentioned preparing for a number of different scenarios. I guess, what does that mean? You have cut a lot of expense out of the business on the labor side. That's your biggest cost. It's still inflationary. Where you see the opportunity to sort of protect the bottom line if comps do come in worse than expected?

Chris Horvers:

Thanks very much.

Operator:

Your next question comes from the line of Peter Keith from Piper Sandler. Your line is open.

Matt Bilunas:

Sure. I can start talking about the cadence of the quarter and then Corie can jump in about broader retail. Similar to the retail industry, we did see our sales sequentially get worse as the quarter progressed. February was the best-performing month that we come in a little bit better than our -- the guidance we gave as we started the quarter, but there are a few reasons for that. I mean we gave growth number, not a comp number, so there's a bit of difference between the growth number and the comp number. We always have a few closing the book entry. So, comps in the quarter did sequentially get worse. We have, as we indicated, starting the quarter in line with the range that we gave for the first -- for the full quarter Q2, so therefore, improving from April into May in terms of comp. And so, we feel good about that range we gave for Q2 at the moment.

Peter Keith:

Okay. Well, thank you very much, and good luck.

Matt Bilunas:

Thank you.

Jonathan Matuszewski:

Good morning, and thanks for taking my question. Mine is on your B2B channel or Best Buy Business. Our checks would suggest you've had some pretty big wins on this side of the enterprise as of late. Curious if you could just update us on that channel, Corie. Where is it tracking in terms of sales penetration? Is recent progress reflective of maybe any investments you've been making on that side of the business? And how are you thinking about this business performing in 2023 and beyond? Thanks so much.

Jonathan Matuszewski:

It's helpful. Thanks.

Operator:

Your next question comes from the line of Brian Nagel from Oppenheimer. Your line is open.

Corie Barry:

Good morning.

Corie Barry:

I think when we talk about the confidence we have, I think it is both relative to the backdrop of the performance we've seen, which was a pullback in demand last year and again projecting an ongoing pullback in demand this year. So, a little bit different than some of the other industries. We started to see the change in consumer behavior much earlier than others. And as soon as, as early as last year in Q1, we talked about it, we started to see that pullback in demand. So, we're going to have now two consecutive years, as we talked about, of a consumer who's making some choices away from consumer electronics. The nature of the industry is really what gives us the most confidence, and then obviously, our very stable position within it. The nature of the industry, this is an industry where technology is necessary, necessary to live our lives every -- think about the quantity of pieces of technology you touch in any given day, and that technology is not static. If you think about how quickly both the hardware and then if you think about what I will call "the software" things like generative AI or like VR and AR, how much that is changing, that will all drive form, feature changes in the product, which is part of what underlies our confidence. At some point people want to -- and we know this based on lots of history through recessions, through lots of different types of industry performance, people will upgrade and want to replace their equipment and their consumer electronics. And so, I think what gives us confidence is understanding that there is a very large vendor community out there that is very interested in continuing to stimulate demand, continuing to create really cool solutions for our customers. And that, over time, I don't see a world where we rely less on technology. And so that -- it is all those underpinnings that are giving us confidence as we head out of this year and into next year. Now we said that -- and I'll repeat it, that is based on what we can see today, it's based on the environment as we understand it today. So, of course, we're going to continue to monitor and see how consumers navigate what is, obviously, a very volatile environment, but that underpinning of how different this industry is versus any others in terms of both need and constant innovation, that is the biggest part that underscores, and then obviously, our position within it and how confident we feel in our partnership with our vendors, that is what gives us the confidence as we head into next year.

Corie Barry:

Yes. We hit out a little bit in the prepared remarks, but they remain more engaged customers. They tend to spend more, they tend to shop across categories, they tend -- on the whole, so I'm just going to talk about this big kind of lump of members, they tend to be our most engaged customers. Now, what a couple of years of paid membership has given us though is a lot of data around what is it customers distinctly value. Because there's really three things you're trying to do with any membership program

Operator:

And your next question comes from the line of Seth Basham from Wedbush Securities. Your line is open.

Corie Barry:

Yes, I'm going to start with the second part of the question, I'll work my way backwards. There is still very specialized labor in our stores. And we are very proud of that, and we are working very hard to make sure that we retain and continue to develop that very specialized experience over time. I think what we're trying to do is make sure that we are most effectively matching our labor, some of which is specialized, like any retailer, some of which is more kind of part-time and generalized in nature, that we are matching that specifically with how many and what type of people are coming into our stores and what it is that they need. And so, we have continued to obviously invest in wages. We were one of the first to go to a minimum $15. Our hourly wages are up more than 25% versus pre-pandemic. We're overarchingly investing hundreds of millions of dollars in benefits, and also, importantly, investing in career development and culture. And then really doing a lot of work to make sure we are bringing our employees along as we make these changes, involving them in the decisions and really trying to make sure that they feel like they also have a voice. And I think, how do we measure that? Well, one way is, obviously, we're looking at turnover, and we're pretty constantly looking at turnover. And we believe our general approach is working. Our turnover remains very low versus retail averages. It's consistent year-over-year. It is incredibly low in some of the most key areas like our general managers, where our turnover is in the mid-single digits, even given everything that RGMs have gone through in the last four years in particular. And I think that is one of the indicators. A second indicator, we continue to see a very high level of applications. Our applications have grown substantially year-over-year. So, you're seeing people want to come into the business, which is a good sign, because that means that GMs are pulling them into the business. And then third, you can imagine, we measure employee engagement. And we measure it very consistently. And not just at the high level, like here's the number. We're looking literally regionally, store-by-store, distribution center by distribution center, how engaged are our employees? And what can we do? How do we read those verbatims? How do we pull the themes? So, we are doing everything we can to create the most engaged workforce. So, it is constant work. It is not easy for our employees to go through this level of constant change, and I am incredibly proud that so many are choosing to stay with us and continue to build this culture for the future.

Corie Barry:

Thank you.

Steven Forbes:

Good morning, Corie and Matt. Maybe just a high-level question on ROIC. Curious if you could update us on your various initiatives, inclusive of space allocation utilization. And then, where do you see ROIC stabilizing sort of as we work our way through this normalization period? I don't know if you could sort of reference a pre-COVID level, mid 20%s. Any thoughts on where we sort of stabilize ROIC?

Corie Barry:

I think we have a great history, I would argue, in optimizing ROIC and making those educated bets. I would use even our store footprint as an example, things like our Experience stores, our outlets. There's a reason that we are pursuing those with vigor. And you can imagine what we're seeing in terms of return on those investments is giving us a lot of confidence into the future. There're other places where we're still testing and trying to make sure we feel like that ROIC is in line. So I think we're point to that continuing to drive that return for our investors. And with that, I think that was our last question. So thank you for joining us today. I hope that many of the investors for listening today will be able to join us for our Annual Shareholder Meeting, which will be held virtually on June 14. So, thank you, and have a great day.

Operator:

Hello, and welcome to the Q4 Full Year '23 Earnings Call. My name is Francois, and I will be your coordinator for today's event. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Mollie O'Brien, to begin today's conference. Thank you.

Matthew Bilunas:

Good morning, everyone. Let me start by sharing details on our fourth quarter results. Enterprise revenue of $14.7 billion, declined 9.3% on a comparable basis. Our non-GAAP operating income rate of 4.8%, declined 30 basis points compared to last year, which is an improvement from previous trends as this was the first full quarter of lapping the rollout of our TotalTech membership offering. Non-GAAP SG&A was $241 million lower than last year and increased approximately 10 basis points as a percentage of revenue. Compared to last year, our non-GAAP diluted earnings per share of $2.61, decreased 4%. The year-over-year decline in our earnings per share was driven by the lower operating income dollars I just mentioned, which were partially offset by a $0.19 per share benefit from a lower share count, a $0.06 per share benefit from higher interest income and a $0.05 per share benefit from a lower effective tax rate.

Moving on to our full year fiscal '24 financial guidance, which is the following:

Enterprise revenue in the range of $43.8 billion to $45.2 billion, Enterprise comparable sales of down 3% to down 6%, Enterprise non-GAAP operating income rate in the range of 3.7% to 4.1%, a non-GAAP effective tax rate of approximately 24.5%, non-GAAP diluted earnings per share of $5.70 to $6.50. In addition, we expect capital expenditures of approximately $850 million. We expect to repurchase shares during fiscal '24, however, we are not providing a target today. We will continue to assess our overall working capital needs and provide updates as we progress throughout the year.

Michael Lasser:

It's Michael Lasser from UBS. Corie, you're making all these changes, it seems like in response just to the evolution of the business where, prior to the pandemic, e-commerce penetration was 20%. Now, it's in the 30% range and that inherently changes the profitability of the Enterprise. So the question is, how do you balance maintaining a strong customer experience, while trying to restore the overall margin level back to where it was prior to the pandemic?

Corie Barry:

So the purpose of the changes we're making is, first and foremost, to meet a changing customer. And that's why my -- I led even in my remarks around the measurement of our customer experiences and how across the board in Q4, we have actually continued to see improvement in NPS and the measurement of those experiences. The primary goal, of course, is to create customer experiences that people love. And when they want to come to the store, to meet their needs in the moment, sometimes -- and this is part of what's changed. Sometimes that is I want very rapid fulfillment of my product. I want to pick up in store and have the confidence of grabbing that product.

Matthew Bilunas:

Thank you, Michael. As you said, our guide prudently assumes that inflation persists and the consumers are going -- be continued to make trade-offs around their spend. And so at a high end, the comps progressively improved throughout the year. And like I said, we will exit the year more on the flat to slightly possibly growing as the pressures in the CE industry kind of abate as we progress through the year. So maybe not perfectly linear, but we do expect that at the high end, the sales performance would progressively improve.

Operator:

Next caller, please, state your name and company name before asking your question.

Corie Barry:

On the membership side, let me make sure I clarify the numbers. We have about 100 million My Best Buy members, of which 40 million to 45 million are active. On the TotalTech side, we currently have 5.8 million members. That's compared to 4.6 million we had last year. So those are kind of the 2 pools of membership that we're talking about. And we haven't given the percent of sales of those members, but you can imagine, it's a fairly high percent of sales between those 2 membership pools.

Corie Barry:

We haven't given renewals, and we're not going to. And as you can imagine -- I mean they've been relatively in line with our expectations. You can imagine, there are some places where we see much better engagement and renewals and people who engage in things like support or who value the warranty side of TotalTech as an example, they are very, very interested in renewing. And so I think that's -- when we talk about tailoring the program for the future, we're looking for those customers who find value in some of the more unique aspects of the program and stick with the program because they see the value in that.

Seth Sigman:

It's Seth Sigman from Barclays. Nice to talk to you. My first question is just around pricing and the promotional environment. I think the point that you made is that Q4 actually ended up being a little bit less promotional. Can you just elaborate on that? And then as you think about this calendar year, it does seem like a lot of retailers are planning conservatively in this category. I guess what have you reflected here in the guidance for gross margin specifically related to discounting and promotional activity?

Seth Sigman:

Okay. And then I guess, just thinking about demand in general, there's obviously a few factors battling each other here. There's a lot of consumer noise. You also have pull forward in your category. You talked about replacement cycles. I guess I'm just trying to think about elasticity as you start to see ASPs come down, and we can't really see it on a category level, we only see it in aggregate. But are there any signs of maybe elasticity starting to kick in here? Just curious how you're thinking about that.

Operator:

Next caller, please go ahead.

Steven Forbes:

That's helpful. And then maybe just a quick follow-up, maybe for you, Corie. Curious about vendor conversations today as compared to maybe past cycles or even just the depth of the COVID are -- your comments about helping them with their direct-to-consumer sales, direct-to-consumer open-box returns, et cetera. Maybe just help phrase, right, how the relationships have evolved here, and how you sort of expect them to evolve over the coming quarters and years just given the challenges that are out there?

Gregory Melich:

It's Greg Melich with Evercore ISI. Really 2 questions. One, Corie, I think you mentioned that average selling prices are still up from where they were a few years ago. If the 3-year comp is flattish, should we assume that ASPs are maybe up 10% and transactional counts are down 10%. Would that be a fair estimate?

Gregory Melich:

Well, I guess that's the natural follow-up. So that's the premiumization with innovation. So I guess as you go through this year in the guide and that improvement in comps from where we are now, is that improvement more based on ASP declines moderating or traffic improving or transactions improving.

Gregory Melich:

And then my follow-up is on services, 5% of revenue. Is that basically TotalTech as a majority of that now? Or how should we think about that in terms of building that side of the business?

Operator:

We will take 1 last question, then hand over to your host to conclude today's conference. Next caller, please go ahead.

Corie Barry:

Yes. So what's been interesting here, and we said it in the prepared remarks, I mean our average hourly wage is up 25% versus 2019. We were one of the first to move our wages up in August of 2020 to $15 minimum almost 3 years ago. And so we've been making continuous investments in our workforce over the last 3 years. And what we're seeing, and we watch it incredibly closely, our turnover rates are really low compared to industry averages, and they're generally very similar year-over-year. And we -- I mean we've talked about it before. We might not be exactly a prepandemic, but we're still in the like mid-30% turnover range overall. And so that is exactly what we watch to make sure we're trying to strike the right balance here.

Scot Ciccarelli:

For you when we kind of think about -- this company has taken a lot of cost out over the last, gosh, decade plus [Audio Gap]

Operator:

Hello and welcome to the Best Buy Q3 Full Year 2023 Earnings Call. My name is Laura and I will be your coordinator for today’s event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mollie O’Brien, to begin today’s conference. Thank you.

Corie Barry:

Good morning, everyone and thank you for joining us. I am proud of our team’s execution and their relentless focus on providing amazing service to our customers during what is clearly a challenged environment for our industry. Customers have high expectations regarding service and we were pleased to see NPS improvements across many areas of our business as we continue to focus on creating differentiated experiences that customers will love into the future. Today, we are reporting Q3 financial results that are ahead of our expectations. Throughout the quarter, we were committed to balancing our near-term response to current conditions and managing well what is in our control while also advancing our strategic initiatives and investing in areas important for our long-term growth. Our comparable sales were down 10.4% on a year-over-year basis. This represents 8% revenue growth over the third quarter of pre-pandemic fiscal ‘20, which was consistent with the growth compared to fiscal ‘20 that we saw last quarter. As expected, our non-GAAP operating income rate declined compared to last year due to the increased promotional environment for consumer electronics, the investments in our growth initiatives and SG&A deleverage from the lower revenue. Our non-GAAP earnings per share, was up 22% versus pre-pandemic fiscal ‘20. We continue to manage our inventory effectively. Our inventory at the end of Q3 was down almost 15% from the third quarter of last year. This is more than our Q3 sales decline and projected Q4 sales due to a few factors. First, from a timing perspective, some receipts came in a few days later than expected and arrived just after the quarter closed. Additionally, due to supply constraints last year, we focused on bringing inventory in earlier to secure it for holiday. So October of last year ended with an unusually high level of inventory. For additional context, this year’s $600 million in receipts moved from October into the first two weeks of November. This shift equates to about 8% of our inventory. The promotional environment continues to be considerably more intense than last year. Like Q2, the level of promotionality in Q3 was similar to pre-pandemic levels and in some areas was even more promotional as the industry works through excess inventory in the channel as well as response to softer customer demand. From a merchandising perspective, we saw year-over-year sales declines across most product categories. Consistent with the first half of the year, the largest impacts to our enterprise comparable sales came from computing and home theater. Compared to Q3 of fiscal ‘20, our computing revenue remains 23% higher and our appliances revenue remains 37% higher. Our blended average selling price, or ASP, in Q3 was down slightly on a year-over-year basis. ASPs will likely continue to be lower on a year-over-year basis as promotional activity that was largely absent during much of the pandemic has returned. Compared to fiscal ‘20, ASPs continue to be higher and we believe they will likely remain higher going forward. This is due to two factors that have been driving ASPs higher for years and accelerated during the pandemic. First, category mix. We have driven material growth and mixed more into products like large appliances and large TVs, which carry high ASPs. Second, within categories, customers have mixed into premium products at higher price points. I would like to pause here for a moment and talk about what we are seeing as it relates to consumer behavior. As I step back at the highest macro level across retail, each customer is making trade-offs, especially with the significant impact of inflation on the basics like food, fuel and lodging. This disproportionately impacts lower income consumers as a much larger proportion of their spend is on those basics. Across consumers, we can also see that savings are being drawn down and credit usage is going up and value clearly matters to everyone. During Q3, we continue to see more interest in sales events geared at exceptional value. As a result, there is no one way to describe all customers and we have repeatedly referred to the impacts of the current macro environment on consumers as uneven and unsettled. As it relates to our results as a specialty CE retailer, we saw relatively consistent behavior from our purchasing customers in Q3. Our demographic mix is basically steady versus last year and pre-pandemic. Our blended mix of premium product is higher, both units and dollars than last year and pre-pandemic. Within some specific categories, we can see some cohorts of customers trading down, but it is not aggregating into an overall impact. While sales are down in our signature categories as we lap the strong growth of the pandemic years, our initiative to expand our presence in adjacent categories is driving sales growth. While still small overall, we are driving sales growth in e-bikes and outdoor living categories as we expand to more stores in addition to our online assortment. Outdoor furniture, in particular, is demonstrating strong growth driven by new showrooms for our Yardbird assortment, including in our Best Buy stores and new standalone showrooms. From a health and wellness perspective, we launched over-the-counter hearing aids last month in almost 300 stores and online, including a new online hearing assessment tool. Volume is still relatively low, but the Q3 sales growth rate exceeded our expectations and demonstrates that customers see Best Buy as a relevant provider of these products. As you have all likely noticed, the holiday shopping season has begun and now more than ever, our customers are looking to bring joy back into their holiday celebration. Like we said in our last earnings call, we expect shopping patterns will look more similar to historical holiday periods than what we have seen in the last 2 years. Specifically, we expect there will be more customer shopping activity concentrated on Black Friday week, Cyber Monday, and the two weeks leading up to December 25. Our results so far in October and the first 2 weeks of November have come in largely as expected and support this view thus far. From an inventory perspective, we have approached holiday strategically, placing bets in areas that require a longer lead time and taking a more flexible approach in other areas. We believe this gives us more room to invest and partner with vendors to changes in demand to provide additional sales opportunities. I would also stress that while November typically represents the largest influx of inventory in Q4, we will continue to receive inventory every week throughout the holiday season to replenish inventory levels. While aligning inventory levels with uncertain and evolving customer demand is always challenging, we are well positioned and feel confident we will be able to react quickly to changes we may see in customer demand. From a labor standpoint, we have seen a strong pool of applicants for seasonal associates to supplement our store team. This combined with our investments in wages over the past few years and comparably low turnover that remains close to pre-pandemic levels means we are ready to provide our customers the great service they expect to find in our stores. We are excited about the promotions and deals we have planned for all our customers, including special promotions available to Totaltech and MyBestBuy members. We have curated gift list with inspiration for all from family members to foodies and content creators to gamers. For added ease of shopping and peace of mind, we have extended both our store hours and our product return policy for the holiday season. We are also offering free next day delivery on thousands of items in addition to our convenience store and curbside pickup options. We feel confident heading into what could be an uneven holiday season and we have tailored our offerings to delight our customers whatever their budget. Strategically, as we look ahead, we are positioning ourselves to lead the way in the future of retailing. This is a future where the customer is in control and expect seamless experiences across all touch points. It is becoming more evident every quarter that the pandemic-induced shopping behavior changes are sticky and that our digital penetration of domestic sales will likely remain above 30%. For the first 9 months of the year, our online sales as a percentage of domestic revenue were 31%, nearly twice as high as pre-pandemic. We expect that penetration rate to begin to increase again over time as it did pre-pandemic. Additionally, customer demand for other virtual interactions has remained elevated and we have seen strong and sustained sales growth from our investments in chat, phone and video sales experiences this year. Of course, that also means that almost 70% of customers are shopping in our stores and customers representing 42% of our online sales pickup their products at our stores. As such, it is imperative we continue to invest in our stores and elevate our unique experiences. One way we are doing that is with our 35,000 square foot experience store remodel. We remain excited about these as we continue to see positive results from our longer running Houston and Charlotte remodels, including stronger sales, increased customer penetration and higher net promoter scores. These stores highlight broader assortment, including the opportunity to showcase the new categories I referenced earlier and really bring them to life. The remodels also include premium home theater and premium appliances, more space for consultations and services and expanded fulfillment capabilities like larger warehouses, in-store and curbside pickup and 24/7 lockers. Additionally, as you would expect, they all include the very best, most up-to-date vendor experiences showcasing premium merchandising and specialized labor. While market conditions have created a tough environment for delivering remodels, our incredible and dedicated team was able to deliver 42 of them by Black Friday. We plan to provide a broader update on our store portfolio refresh strategy at year end. We are also leveraging technology in our stores more than ever to continue to elevate our customer and employee experiences in more cost effective ways. For example, we have introduced a new app for our associates called Solution SideKick that provides a guided selling experience consistent across departments, channels and location. With the app, associates interacting with the customer can see the customers’ profile in the moment, including historical purchases and active memberships. As the associate starts an order with product recommendations, the app automatically calculates total tax savings for existing and prospective members and recommends additional product solutions. Importantly, if a customer isn’t ready to buy in the moment, associates can send the product recommendations and a recap of the conversation to the customer via e-mail, text or QR code so they can purchase later at their convenience. It is early, but we are very encouraged by the ramping employee adoption of the app and the higher revenue per transaction we are seeing when associates leverage Solution Sidekick. We are also leveraging our investment in electronic sign labels to provide a better and more efficient experience for customers who want to buy a product that is locked up or not readily available on the shelf. We have added new functionality that allows the customer to scan the QR code with their phone’s camera and push a button notifying they are ready to purchase. This sends the store associate an instant and prioritized notification to pick the product and have it ready at pickup. We also took a much more digital approach when building out the experience for our 5,000 square foot store pilot we opened in Charlotte over the summer, highly leveraging these digital tools. Similar to the U.S., we are evolving our model in Canada as well and continue to see better-than-expected financial results there. We have been piloting initiatives there, including technology subscription, online marketplace, a market-focused test and small store formats. This expands our testing and innovation capabilities and provides opportunities to learn from their experiences when they are able to iterate faster and are further along in their pilots. We are excited to be able to innovate and leverage learnings on both sides of the border. Turning to membership, our Best Buy Totaltech offering is a very important initiative to drive deeper relationships with our customers. Last month, we passed the 1 year anniversary of our national launch and we are pleased to report that Totaltech is driving the member behavior we envision. Members are engaging more frequently with us and shifting their share of wallet to Best Buy. Additionally, members continue to rate our experiences higher. Our net promoter score from Totaltech members remain considerably higher than non-members. Nearly half of the new members joining the program in the past year were either new or lapsed customers reinforcing that the value of Totaltech resonates beyond our existing loyal customers. Very early retention data shows renewal rates running largely in line with our original expectations. Totaltech is a comprehensive membership with wide appeal across demographics. For example, younger generations and those with children utilize more of our newer warranty and member pricing benefits and older generations utilize more of our enhanced services and support benefit. Our associates continue to love the program since it clearly provides value to every single customer and simplifies the sales interaction. While we are encouraged by the results in the first full year, we will continue to iterate based on the macro environment and what is most relevant to our customers. As we said last quarter, we have been encouraged with the pace at which we have been acquiring new customers, considering the uniqueness of the offer, the macro environment and the decline in our product sales. Nevertheless, these factors have resulted in a lower member count than our original expectations. Last quarter, we enhanced our in-store point-of-sale tools to better assist our team in showcasing the value of Totaltech to potential new members. And the early results continue to be positive. We are also activating on ways to continue to improve acquisition through our digital channel. From an optimization perspective, we will evolve the program in ways that also reduce our cost to serve. We have now lapped the financial pressure from the initial investment impact and anticipate the program to have a neutral impact on Q4 from a year-over-year perspective. Over time, we expect the program to contribute to operating income rate expansion as the program continues to build and we iterate on the offering. In the current economic environment, many consumers are facing increasing financial constraints. We believe we are well positioned to meet customers’ needs in this environment. In addition to creating key promotional moments, offering competitive prices, repairing and supporting existing products and scaling our Best Buy outlets, we offer multiple financing options to improve affordability. These include our co-branded Citibank credit card, lease-to-own program, buy now pay later options and most recently, our exclusive upgrades plus program for Apple Mac books. Upgrade+ powered by Citizens Pay is a brand-new program that allows customers to acquire MAC laptops and related accessories for a low monthly fee. After 3 years, they can easily turn in their old laptop and upgrade to the latest tech while they continue paying a low monthly fee. We can then refurbish this old laptop and offer it to a new customer through our outlet stores or digital platforms. This partnership with Apple is a great example of how we work with our vendors in unique ways to commercialize and showcase their technology innovation while also offering unique value and confidence to our customers. In a different example of a unique vendor partnership, we have started a pilot in the homebuilder space through a collaboration with Whirlpool and one of the top homebuilders in the U.S. to provide and install everything from connected doorbells and thermostats to large appliances. Though early, we have delivered 5 roughly 45 markets for the homebuilder, which is giving us great insight for how we maybe able to expand the pilot. Based on what we have learned, we see this model as an opportunity to partner with numerous other homebuilders to provide them similar or expanded solutions based on our capability. Before closing and turning the call over to Matt, I would like to provide a few updates on our commitment to our employees and the communities we serve. The Best Buy Foundation’s team tech centers are providing access, inspiration and opportunity for young people in the communities that need it most. We continue to expand the program with 52 team tech centers open across the country, including opening our 19 team tech center in the Twin Cities, our hometown. We also remain committed to creating an environment where all employees feel engaged and have access to specialized benefits and resources. We are proud to have women leaders at the highest levels of our company and believe it reflects our commitment to support our employees and their. This year, we are honored to rank #15 on Forbes 2022 list of the world’s top female-friendly company, which recognizes companies that support women professionally and personally. Similarly, we were honored to be named as one of Forbes 2022 America’s Best Employers for Veterans, our first time on that list. In summary, I am proud of our nimble execution this quarter and this year. Our teams have been navigating well through an incredibly dynamic environment and I want to thank them for their ingenuity, drive and commitment to our customers. There is, of course, ongoing macro uncertainty. And as we head through the holiday and into next year, we believe it will continue to be an uneven backdrop. Indicators remain unusually varied. The job market remains strong, consumer spending continues, and inflation appears to be slowing a bit, but savings are starting to erode. Consumer confidence is low. The housing market is cooling and inflation remains a particular concern on the basics like food, fuel and lodging, all of which have a profound and sustained impact. As you would expect, we are planning for multiple scenarios given the very unsettled and uneven consumer response to these varied indicators. We are adjusting our cost structure as we respond to current and potential future conditions. We are also making strategic decisions and trade-offs to continue to advance our initiatives. We are doubling down on our ability to lead the future of omnichannel retailer and capitalize on opportunities as the industry moves through this downturn and eventually returns to growth again. We are as confident and excited about our future as ever. Technology demand over the past few years has resulted in a larger installed base, and customers will want and need to replace and upgrade their tech devices, particularly as we near the 3-year mark since the start of the pandemic. At the same time, our technology vendor partners will continue to innovate and drive excitement and demand. We are the leading technology solutions provider for the home, a home increasingly dependent on all this technology working together and evolving over time. We are uniquely positioned to inspire and help customers with all aspects of their technology from deciding what to purchase, to installing it and getting the most out of it, all the way to helping when it’s not working. We leverage our specialized Geek Squad agents, our expert sales associates and consultants, experienced merchants and sophisticated supply chain to deliver experiences no one else can in customers’ homes, virtually, digitally and in our stores. I will now turn the call over to Matt for more details on our third quarter financials and fourth quarter outlook.

Operator:

Thank you. [Operator Instructions] We will now take our first question from Zach Fadem at Wells Fargo. Your line is open. Please go ahead.

Matt Bilunas:

Sure. I’ll start here. This is Matt. I think when you look at the Q4, similar to the whole year, it’s been a bit difficult to properly reflect forecast in this environment. I think we’re trying to plan appropriately with everything that we see, Q4 comp sales are expected to decline about 10%. This is a deceleration from FY ‘20 growth perspective as you think about the quarters as they progress this year. The holiday, we do expect to look a little different than last year. So probably more around the sales events, so less early shopping as we saw last year, but a more early shopping than we saw in fiscal ‘20. So from what we can see as we exited Q3 with October sales down around 15%. We’re seeing November’s sales start around that same amount. So we’re at this point in line with our expectations. Holiday is obviously quite different than it has been over the prior quarters. So I think we’re appropriately planned for where we see the consumer in front of us.

Corie Barry:

Thank you.

Pete Keith:

Hi, thanks. Good morning, everyone. Nice results. Just sticking on the Q4 theme, we know the macro stuff, but let’s just talk about products. What are some of the product categories looking at this holiday season, as you guys are most excited about and putting in front of your customers?

Pete Keith:

Okay. That’s very helpful. And then just taking a little bit of a longer-term question around Totaltech, so you gave a lot of good information now that you’ve anniversaried the rollout. When we just think about that EBIT margin accretion, is that something that we should now start to see going forward in the next 12 months or if you are running a little bit lower on memberships than you thought, is it maybe 1 year out before it starts to become margin accretive?

Corie Barry:

And Peter, I just want to make sure I reemphasize something that I said in the script here, which is the good news is it is doing what we want it to do. This is a program that’s geared at those stickier, longer-term relationships with customers, being high consideration for customers and, therefore, driving up that frequency and that greater share of wallet. So I think those early indicators for us are very positive.

Corie Barry:

Thank you.

Scot Ciccarelli:

Good morning, guys. Scot Ciccarelli. So the additional deceleration you’ve seen in October and so far in November, is that driven primarily from transactions? Or is that more ASP pressures from the heightened promotional environment? And then related to that, any feel for whether those declines are kind of across the board? Or is it more concentrated in specific customer cohorts? Thanks.

Corie Barry:

To your question about customer cohort, we don’t – I mean, it varies a little bit week to week to week. But in general, what we’ve been seeing is a pretty consistent customer mix both versus last year and versus pre-pandemic. And when I say customer mix, I mean kind of demographically, we actually are seeing a pretty consistent mix of customers. Like I said, it can vary a little bit week-to-week depending on sales profiles and the values we are offering. But at the highest level, we are actually seeing pretty consistent behavior amongst our customer cohorts.

Corie Barry:

Thank you.

Chris Horvers:

Thanks and good morning. You mentioned some comments on 2023. Can you take us through the building blocks of margins next year? Is the basic math that we add back all the incentive comp savings this year and saying hypothetically low-single digit positive comp environment, it just becomes a leverage story, or are there still structural SG&A savings and any comments on gross margin as well?

Chris Horvers:

Got it. And then in terms of the promotional environment, you mentioned certain categories being more promotional than expected. Is that home theater, and computing or another category? And then as you think about what you are seeing in the market right now, some of the big retailers, other retailers have started their Black Friday promotions or any most have already. So, how are you seeing sort of the inventory in the market and what categories in particular, are you elevating your promotional expectations in the fourth quarter?

Chris Horvers:

Got it. Thanks so much for the great holiday.

Operator:

Thank you. We will now move on to our next question from Liz Suzuki at Bank of America. Your line is open. Please go ahead.

Corie Barry:

Yes. First, I just want to say, I give our teams a great deal of credit for navigating to your point, what has been an incredibly volatile backdrop. I think the expense and analytics of our teams really shines in moments like this. So, we talked a bit in the prepared comments about – some of this is just a shift in timing. Last year, recall, inventory levels were really challenged. And so everyone was trying to bring in inventory really early, and there was lots of customer demand really early because people were worried about not being able to get the products throughout the holiday. This year as we said, we expected the holiday to shape a little bit more traditionally like pre-pandemic, and therefore, our inventory flows are moving more in that direction. And we specifically said in places where we have longer lead time categories, we placed some of those bets earlier and then allowed ourselves a little bit more ability to maneuver on those items that don’t take quite as much long lead time. There are always some spotty places where we wish we had more inventory. This is almost always true in consumer electronics. I mentioned gaming consoles, that’s commonly a place. And I think there has been some conversation about some of the more iconic phones and the production there and availability there. So, that’s not anything that’s new that’s kind of typical as we head into holiday. But those will really be some of the spaces where we would add more. And what I like is that we have a lot of room to maneuver throughout the holiday in partnership with our vendors. As we think about where the demand profiles might ebb and flow, we can bring that inventory in, and we said it. We bring in the majority in November, but we replenish the whole holiday season, and this allows us the room to bring in really what’s resonating with customers.

Corie Barry:

I will start a bit and then Matt can add in. What I actually believe that this combination of omnichannel is our strength. And not only are we agnostic, we love it when customers are using the multitude of channels that we have and that includes consultations at home that includes our virtual channels like chat and phone that includes online and that includes stores. And so I – instead of just even saying agnostic, I actually would say we want to double down on a customer, who wants to shop us across all those channels. Matt, maybe you can provide some of the profitability color.

Liz Suzuki:

Great. Thank you.

Operator:

Thank you. We will now move on to our next question from Steve Forbes of Guggenheim Partners. Your line is open. Please go ahead.

Matt Bilunas:

Sure. Yes, computing, I will start with that. I think it was actually a large driver of a sales decline in Q3. But compared to FY ‘20, it was up 23%. So, we are still seeing very strong growth from the pre-pandemic period. We have seen a very large growth in the installed base over the past couple of years. Clearly, it’s now being impacted by the level of the normalization, if you go from the spend. We are actually seeing a good start to Apple Plus program. We are actually seeing some customers mix towards some of the latest products versus opening price points. So, it’s still relatively small and new, but that’s a good start. Gaming continues to be a strong growth area compared to pre-pandemic in the computing space. So, so much of the gaming world is now kind of blending between gaming consoles and the computing arena and innovation continues on, and we expect that to continue. So, still down year-over-year, but still good strength and a great opportunity ahead of us. TVs, as you expect home theater did have negative comps as well. TVs or promotions are up on a year-over-year basis significantly. A lot more stronger inventory positions from our customers. And so we are still very confident about TVs going forward. Holiday is always a great environment for TV. ASP is down a little bit year-over-year. But again, we are seeing good mix into higher television sizes and premium products over the last couple of years. So, really encouraged by what the business could offer. I think to the confidence of the share repurchase question, I think we – I think appropriately just took some time to understand the environment ahead of us on last year’s – in last quarter, just to make sure we were appropriately planning for the holiday period, giving our self enough space on inventory investment and where we need to sit from a working capital perspective and feel confident about our position in Q4 and where our inventory sits. And it is an establishment of confidence on where we sit financially and as we head into next year or so.

Matt Bilunas:

You bet.

Seth Basham:

Thanks a lot and good morning. My question is on Totaltech. You mentioned that members are tracking a little bit lower than your expectations. You have been able to parse that out between the slower sales and demand environment versus attributes of the program?

Seth Basham:

Got it. Thank you. Fair enough. And my follow-up question is on your store model and refresh program. I think you said you have 42 stores done now. What’s your plan over the next year? And any more color you can provide in terms of the average sales or margin dollars lift from those stores that have been remodeled relative to the core?

Seth Basham:

Thank you and happy holidays.

Operator:

Thank you. We will now move on to our next question from Brad Thomas of KeyBanc Capital Markets. Your line is open. Please go ahead.

Corie Barry:

Yes, absolutely. If I take a really large step back, I think Matt did a nice job in his prepared remarks saying quarter-to-quarter, it is really difficult to sort through all the laps to what you said on stimulus, on stores open, stores close, promotionality, all of those things. And so instead, I think at the sequentials all get difficult. At the end of the day, we are trying to take the biggest step back and look at a consumer that we know is really facing trade-off decisions. Obviously, especially when you have inflation on the basics, like food, fuel and lodging, and we know this definitely impacts lower income consumers to a greater extent. I mean almost 70% of spend in the lowest income earners are on those kind of basics versus more like 55% for the higher income earners. So, you have got a large proportion of your spend going there. And so we know that people are looking for value across all of those cohorts, and there is no easy one way to describe the consumer. It’s very uneven depending on how you came out of the pandemic, and it’s very unsettled. You can see that even just in some of the confidence numbers while people are trying to sort their way. I think as it relates to us specifically, and again, specialty CE retailer, we are actually seeing relatively consistent behavior, and we mentioned this in the prepared remarks. Our demographic mix is essentially steady versus both last year and pre-pandemic. If anything, it’s moved just a touch more into the lower income brackets. And our blended mix of premium product is higher, both in units and dollars than both last year and pre-pandemic. And we did that on a very specific like price point, SKU kind of level to look at where people were really opting into those more premium. Now, obviously, within some specific categories, we are seeing some cohorts of customers trading down, but it’s not aggregating at this point into an overall impact that we are seeing consistently across every single category. So, it can depend like you might see different behaviors in back-to-school than you might see as we are heading into holiday here. But at the highest level, we are actually seeing the consumer behaves relatively similarly as we did even pre-pandemic, I think more so, it’s the overarching decisions about how they are going to make those trade-off decisions between things like services and restaurants and vacations and goods and those base needs that they have.

Corie Barry:

Thank you.

Brian Nagel:

Hi. Good morning. Thanks for squeezing me again here. So, the question I have, just with respect to holiday promotions. Yes, and you recognize I know Best Buy want to keep this plans close to the vest. But as you think about this holiday and maybe what you are seeing already just given the cross currents from spending out there and some of the inventory positions, is Best Buy looking to take more leading promotions or you prepared more to react, what others do in the market? And to what extent are you working closely with your our supplier partners to both stimulate demand, but also start to alleviate some of these excess inventories in the channel?

Operator:

Thank you. Ladies and gentlemen, this concludes today’s call. Thank you for your participation. Stay safe. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Best Buy's Second Fiscal Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 11:00 a.m. Eastern Time today. [Operator Instructions] I will now turn the conference call over to Mollie O'Brien, Vice President of Investor Relations.

Corie Barry:

Good morning, everyone, and thank you for joining us. I am incredibly proud of our teams as they continue to rise to the challenges over the past few years. With so much going on that is beyond their control, I remain impressed at their ability to manage the rapidly shifting business environment and priorities. As we said in March, we expected our financial results would be softer this year as we lapped record sales volumes. However, the macro environment has been more challenged and uneven than expected due to several factors. And that has put more pressure on our industry, changing the trajectory of our business versus our original plan. We are focused on balancing our near-term response to difficult conditions and managing well what is in our control, while also delivering on our strategic initiatives and what will be important for our long-term growth. Our strategy and our confidence in it remains unchanged. We have exciting opportunities ahead of us in a world that is more reliant on technology than ever. We are a financially strong company with a resilient world-class team that will successfully navigate the current environment. Now on to the second quarter results we reported this morning. Our comparable sales were down 12.1% as we lapped strong Q2 comparable sales last year of almost 20%. This represents 8.3% sales growth over the second quarter of pre-pandemic fiscal '20. Our non-GAAP operating income rate declined compared to last year on the SG&A deleverage from the lower revenue, the investments in our growth initiatives and the increased promotional environment for consumer electronics. Our non-GAAP earnings per share was up 43% versus pre-pandemic fiscal '20. We are clearly operating in a volatile consumer electronics industry. We assume the CE industry would be lower following 2 years of elevated growth, driven by unusually strong demand for technology products and services and fueled partly by stimulus dollars. In addition, we expected to see some impact to our business as customers broadly shifted their wallet spend back into experience areas, such as travel and entertainment. We did not expect and compounding these impacts as a changing macro environment where consumers are dealing with sustained and record high levels of inflation in some of the most fundamental parts of their daily lives, like food. While these factors have led to an uneven sales environment, they have not deterred us from continuing to make progress on our initiatives. During the quarter, we drove broad customer NPS improvements even compared to pre-pandemic levels, particularly in installation and repair. We signed up new Best Buy Totaltech members and increased our delivery speed, delivering almost 1/3 of customer online orders in one day. We also completed store remodels, opened new outlet stores and began implementing newly signed deals with health care companies. From a top line perspective, we saw year-over-year sales declines across most product categories, with the largest impacts to comparable sales coming from computing and home theater. Although down from last year's strong sales compared to Q2 of fiscal '20, our computing revenue has grown more than 20%. Our Domestic appliance business comparable sales declined slightly as it laps more than 30% growth in the second quarter of last year, and revenue is up more than 45% compared to fiscal '20. Our data would tell us that customers are making some decisions to trade down, particularly those in lower income households. This is not across all categories. But for example, in the television category, customers are moving more into our lower price point exclusive brands products. We're also seeing more interest in sales events, such as Prime Day, tax-free events and other events geared at exceptional value. I applaud our team's proactive management of our inventory during the quarter as we saw the sales trajectory changing. Our inventory at the end of Q2 was down 6% from the second quarter of last year and up approximately 16% from pre-pandemic fiscal '20. Overall, our inventory is healthy and reflects an evolving mix of product in our network, including more high ASP appliances and larger-screen televisions, which also have longer lead times and a slower inventory turn. While we took more inventory markdowns than last year, the level reflected a normalization to pre-pandemic activity. Within our inventory numbers, there are categories where we have ample inventory supply and still pockets where we are constrained. In our industry, it's not as simple as we have inventory or we don't. It can be incredibly variable by product and even brands within a particular product. For example, we are also still experiencing inventory constraints in key models and brands across computing and gaming. As we move into the back half of the year, we are planning inventory thoughtfully, yet investing strategically for holiday. While it is important to manage inventory against current demand, we also want to ensure we are well positioned to react to the ever-changing consumer needs. The promotional environment was more intense than last year and even more than we expected entering the quarter as sales demand softened. Some areas were quite aggressive from a promotional standpoint, especially where inventory was ample or in excess. Overall, we feel the level of promotionality has returned to pre-pandemic levels. Over the past few years, we have seen gross profit pressure from higher supply chain costs, which, of course, includes increased parcel costs from our higher mix of online sale. In addition, we estimate that roughly half of the increased supply chain cost this quarter versus the comparable period in fiscal '20 is being driven by cost increases or inflationary pressures. Conditions across the global supply chain continue to evolve. On a year-over-year basis, we saw higher costs in Q2 and expect that to continue through the remainder of the year. However, we are starting to see some signs that the market is stabilizing and moderating. During the pandemic, the capacity and rate pressure started in International and works their way to Domestic logistics. Now we are experiencing some relief in International first and early signs of loosening markets domestically. For example, in Ocean Logistics, we are taking advantage of some rate opportunities, but continue to be mindful of ILWU labor discussions and overall U.S. port congestion as we move into the peak shipping season. As it relates to inbound Domestic transportation, while we are starting to see a more balanced capacity market, we continue to see inflationary pressures from higher fuel and labor costs and rail yard and general supply chain network congestion. I would like to provide an update on Totaltech, our unique membership program designed to provide customers with complete confidence in their technology, with benefits that include member pricing discounts, product protection, free delivery, and standard installation and 24/7 tech support. Considering the macro environment and decline in our product sales, we are encouraged with the pace at which we are acquiring new members. In Q2, nearly half of the new members joining the program were either new or lapsed customers, reinforcing how the value of this program resonates beyond our existing loyal customers. Our associates continue to embrace the program as the fulsome nature of the offering not only simplifies the sales interaction, it also is a program our team members can confidently stand behind as they believe in the value it provides to every single customer. In July, we enhanced our in-store point-of-sale tools to better assist our team in showcasing the value of Totaltech to potential new members, and their early results have been positive. At this point in the national launch, we continue to be encouraged by the higher engagement, customer satisfaction and increased revenue we're seeing from customers who have signed up to become members. As we have previously shared, from a financial perspective, Totaltech is a near-term investment to drive longer-term benefits. Over time, we expect the incremental spend we garner from members will lead to higher operating income dollars. As I've just covered, there are several things we are seeing with the program that give us confidence that customers value the membership and that our thesis in general is playing out. At the same time, consumer electronics is a low-frequency category. And we are in a unique macro environment, meaning it will take time for us to truly assess the performance. As you would expect, we will continue to monitor the program and iterate on the offering as we learn more. In addition to Totaltech, our Best Buy branded credit card continues to drive a valuable and sticky relationship with our customers. We continue to see growth in cardholders. More than 25% of our revenue is transacted on our Best Buy branded card. And cardholders have been increasing the use of their card outside Best Buy stores as well. These customers tend to be more engaged with Best Buy over time, with higher frequency and spend than non-cardholders. Combined with our partners' largest lease-to-own portfolio and our buy now, pay later test, this means we can offer our customers a variety of ways they can shop confidently with us. And we can leverage those relationships into our future. As we emerge from the pandemic, it is clear that our customer shopping behavior has changed. Our online sales as a percentage of Domestic revenue in Q2 was 31%, nearly twice as high as pre-pandemic. Virtual revenue via video, phone and chat is growing rapidly as well, as sales for the first 6 months of the year are already almost equal to the virtual revenue we generated for all of last year. While still small overall, sales in our virtual store are ramping quickly. And we recently expanded categories to include appliances and home theater. In addition, our high NPS in-home interactions continue to increase rapidly. In fact, in-home installations have seen double-digit growth versus the prior year in 5 of the last 6 quarters and year-to-date in-home sales consultations are up more than 30% over last year and pre-pandemic. Of course, our stores remain incredibly important for customers to see and touch products and get advice. In addition, they're crucial to our fulfillment strategy. In the second quarter, customers representing 42% of our online sales chose to pick up their products at our stores and an additional 18% of online sales were shipped out of our store to customer homes. These in-store pickup and ship from store numbers have remained incredibly consistent for the last several years, even as shipping speed and options have dramatically increased. It is imperative that we evaluate how we operate and service of these evolving customer needs and make the necessary adjustments to ensure we come out of this not just a vital company, but a vibrant one. We tested new field operating models in 4 markets over the past year to help us better understand how to deploy leadership resources in a more digital world. As a result of these tests, earlier this month, we made structural changes to our operating model that resulted in some store roles being eliminated. We hope to retain as many of these talented associates as possible. This is one component of our enterprise-wide restructuring initiative that commenced this quarter. With these changes, we are able to reinvest back into frontline customer-facing sales associates. We are continuing to reimagine our physical presence in ways that cater to our customers' changing shopping patterns as well. As part of our Charlotte holistic market approach pilot, we are testing a new 5,000 square foot store with a unique digital-first approach. Just opened last month, the store includes a 7-foot tall digital display that customers will see as they enter the store that explains what's new and how customers can shop. The store includes curated assortments across our product categories, except for major appliances and other large products. The majority of products will primarily be on display to touch and try. To purchase, customers can scan the QR code on any product price tag using their phone. This immediately sends a notification to a Best Buy employee to pick up the product from the store's backroom and bring it to the register for checkout. Of course, customers who want to will be able to consult with sales associates, in-home consultants and Geek Squad agents, who always have access to our complete assortment online using our increasingly rapid shipping. From an online sales fulfillment perspective, the store offers both in-store pickup and convenient lockers. The Charlotte market pilot also includes a traditional core store that we converted to an outlet store. The outlet has an expanded assortment of product categories, a dedicated team of employees and agents that rapidly quality check and repair all product for resale, a new services repair hub and spoke model, and an Autotech mega hub for car tech installation. This outlet is performing extremely well and is frankly on track to deliver revenue on par to the pre-converted conventional store, with a considerably lower operating cost and greater productivity. Those results give us confidence in our outlet strategy. During the quarter, we opened 2 new outlet stores in Virginia and Phoenix and just opened a location in Chicago earlier this month, bringing us to 19 locations. We see twice the recovery rate of our COGS when we sell open box, clearance and end-of-life inventory at our outlets versus alternative channels. With assortment expanded to include major appliances, large TVs, computing, gaming and mobile phones, we believe now is an opportune time to appeal to our existing Best Buy customers as well as an increasingly deal-seeking consumer overall. Our outlet store assortment is also available for purchase online, with many products eligible for national ship-to-home fulfillment as well as local store pickup. This capability unlocks a very productive way to refurbish inventory, giving it a new life, while also serving a deal-seeking customer. We still plan to double the number of outlets to approximately 30, although some may not open until fiscal '24. So far this year, we have invested in and completed 7 experienced store concept remodels. The results we are seeing in the existing 2 pilot remodels, including higher NPS and higher customer spend, continue to make us confident in and excited about this part of our strategy. We expect to complete a total of approximately 40 experienced store remodels this year. I am very proud of how much work the team has done to test and iterate multiple store and operating model concepts over the past few years in response to the dramatic pivot in customer behavior. We introduced a great deal of change into the field, not always perfectly. And we have learned and accelerated some initiatives while stopping others. On top of that, of course, the macro backdrop has shifted and the trajectory of the business has changed significantly in an incredibly short time. We continue to invest in our people and our stores, with an eye toward the best possible customer experience, leveraging our unique differentiators. Through all the changes, overarching store NPS is substantially higher than pre-pandemic, including more stores than we have ever seen at what we consider to be best-in-class level. This is entirely due to our amazing store associates' hard work and dedication to always being there for our customers. We have consistently invested in our employees over the past 3 years, including raising hourly wages more than 20% versus pre-pandemic and adding additional benefits, such as paid caregiver leave, financial hardship assistance and paid time off for part-time employees. Now I would like to touch on Best Buy Health. Our consumer health business, where we curate health and wellness products online and in our stores, is largely experiencing similar revenue trends as our core category. We are excited about the new FDA ruling that allows the sale of over-the-counter hearing aid. We just announced an expanded collection of hearing devices, an in-store experience in more than 300 stores and a new online hearing assessment tool, making it more convenient than ever for the millions of Americans with mild-to-moderate hearing loss to get the products and support they need. During the second quarter, we continued to see strong growth in new sign-ups for our active aging business that offers health and safety solutions to enable adults to live and thrive at home. Revenue for this business was slightly up in the quarter compared to last year. We are encouraged by the momentum we have built in the virtual care business in the first half of the year. We are very focused on successfully implementing the large U.S. health system accounts that have been won recently, including NYU Langone Health for hospital at home and Mount Sinai Health Systems for chronic disease management. And we are also making progress leveraging our Best Buy capabilities in this space. Our Geek Squad team successfully completed additional health training in Q2 and launched a new Geek Squad pilot service with Geisinger Health. As a reminder, the revenue contribution from virtual care is currently very small and will take time to ramp as health industry has a longer return on investment. We just published our 17th annual ESG report, which outlines how we are working across the company to make a positive impact on our planet, employees, customers and communities. We continue to focus on ESG initiatives that drive sustainable long-term value creation. Last year, we made significant progress toward our goals to reduce our carbon footprint, attain our 2025 hiring commitments and expand our Best Buy Teen Tech Center program. We recently hit a milestone with the Best Buy Foundation Teen Tech Centers when we opened one earlier this month in Gary, Indiana, marking our 50th Teen Tech Center. These centers provide teens from disinvested communities with guidance, training and tech access to help successfully prepare them for the future. In terms of the environment, we continue to drive forward the circular economy, a system in which nothing is wasted. Since 2009, we have reduced our carbon emissions 62% through investments in renewable energy and operational improvements. We are on track to reduce our carbon emissions 75% by 2030. And last year, we became a founding member of the Breakthroughs 2030 Retail Campaign, which aims to accelerate climate action within our industry. We continue to operate the most comprehensive consumer electronics and appliances take-back program in the U.S., collecting more than 2.5 billion pounds since 2009. We also made significant progress toward our fiscal '25 hiring commitment to help ensure we build an inclusive, diverse and thriving workforce. In fiscal '22, we filled 37% of new salaried corporate positions with black, indigenous and people of color employees, ahead of our goal to fill 1 in 3 position. And we filled 26% of new salaried field positions with women employees, marking progress on our goal to fill 1 of 3 positions. We're proud that 60% of our most senior leaders, including our Board of Directors and Executive team, is made up of women and people of color. We encourage you to review our full ESG report available on our corporate website. In summary, the first half of the year has been difficult from a sales perspective. And our employees have executed well in the evolving environment, in many cases, making hard decisions to run the business effectively and prioritize our customers. I just want to take a moment to address the fiscal '25 financial goals we introduced in March. We remain confident in the strategic premise covered in March. However, the current macro backdrop has changed in ways that we and many others were not expecting. As such, we are removing these targets. And we'll share more context on our midterm financial expectations once we begin to experience a more stable operating environment. As I said at the beginning of my remarks, we are managing thoughtfully and carefully, while still investing in our future. This includes actively assessing further actions to evolve our operating model, manage profitability and iterate on our growth initiatives. We fundamentally believe that technology is more important than ever in our everyday lives. And as a result of the past few years, consumers have even more technology devices in their homes that will need to be updated, upgraded and supported over time. As our vendor partners continue to innovate and the world becomes increasingly more digital in all aspects, we will be there to uniquely help customers in our stores, online, virtually and directly in their homes. This company has navigated monumental change, riding incredible highs and managing difficult lows since our founding 56 years ago. As we have done throughout our history, we will use this moment to lead and double down on our purpose, making it clear that we continue to uniquely support customers in ways literally no one else can. Now I would like to turn the call over to Matt for additional details on our second quarter results and outlook for the remainder of the year.

Operator:

[Operator Instructions] The first question comes from the line of Greg Melich from Evercore ISI.

Matthew Bilunas:

Yes. I think based on the implied comments for Q3, what we said is a similar OI rate decline as Q2, if not slightly higher, which is about 280 basis points on the math. It would imply that Q4 does improve from an EBIT rate perspective, the gross margin rate pressure in Q4 will abate a bit compared to the previous quarters as we've lapped the Totaltech. And we're beginning to lap some of the product margin rate pressures we experienced last year as promotionality started to return. But you're starting to see more SG&A to leverage in Q4 considering where sales are trending in comparison to the prior quarters.

Corie Barry:

Yes. I mean there's -- there are categories where the price points and decisions around the type of product matter. Large TVs is the example we use. There are other categories like let's take mobile phones where it's not as much a decision between trading up or trading down. You want a certain brand. You want a certain type of phone. And so -- or even some of what we're seeing in gaming, where as much of the kind of gaming hardware as we can get our hands on, the consumer is looking to purchase. So that's why it isn't perfectly even throughout the categories in our business, in particular, because sometimes, you're very brand-specific. And then sometimes, you're more brand-agnostic and you're just looking for the right experience.

Simeon Gutman :

I wanted to ask about just the high-level backdrop. Realized a year ago, things felt different in terms of sales and promotions. I wanted to ask you, Corie, is it getting easier to predict the business, is the visibility getting better? Meaning, are we bottoming in certain categories in terms of units? And then as you look around the corner to whether it's -- I don't know if it's promotions creating the deflation or it's consumers trading down. But do you see a flattening that the current environment we're in is starting to stabilize?

Simeon Gutman :

And maybe the follow-up, is the promotions creating year-over-year price deflation in the categories, or is it the lack of innovation where you're already starting at "year-over-year" deflationary price point and then promotions are compounding that? And I guess the promotionality is the piece that resolves it or is there innovation around the corner where you -- where the industry moves back to some type of inflation?

Operator:

The next question comes from Anthony Chukumba from Loop Capital Markets.

Corie Barry:

Yes. Thanks, Anthony. For us, the back-to-school sales are actually slightly ahead of our, what I'll call, kind of tempered expectations. And it's following a trend that was really more pertinent prior to the pandemic, which is people were shopping later and later. And not super surprising given that this is a very different school year than we've seen for the past 2 years. And you probably got parents and kids who are just kind of really trying to figure out, how do I gear up for a year that at least is starting out much more in person and especially at the collegiate level much more on-campus. So if anything, it's been a little bit better than we had thought and it's following that same trajectory. In terms of implications for the holiday, I think it's less about what does back-to-school portend. I think it's more about kind of broadly what we're seeing. So we mentioned we're seeing a customer who's more value-oriented, who is definitely moving more towards some of those sale events. And so I think our hypothesis is you're going to see a holiday that starts to look a little bit more like what we saw pre-pandemic. Maybe comes a little bit later, it's probably promotional in our space. That's part of what is embedded in the guide that Matt talked about. And I think it's going to be, my personal point of view, a little harder to pull those sales into October when there's not -- remember, for 2 years, in October, we were yelling at the consumer, make sure that you get your inventory because there isn't enough. Obviously, the backdrop looks a little different there. And so I think you might have a consumer who's willing to wait, look for the deals and really look for those great values. And again, like I said, I'm not sure back-to-school is the indicator of that. I think that's just more broadly what we're seeing in the macro and in the consumer.

Chris Horvers:

So I'll follow up on the prior question initially. So as you think about the minus 10% sales in August to date and a later arriving back to school, that would suggest you still have a few weeks ahead of you. But then the October's compare much harder. So are you basically taking the 3-year comp trend and degrading it into the rest of the quarter?

Chris Horvers:

Got it. And then have you -- I'm curious what -- how you're thinking about sort of unit pull forward versus dollar volume? Because obviously, to your point, Corie, dollar volumes are being exaggerated right now because of the level of inventory in the market. So how are you thinking about like the everlasting question of pull forward around the pandemic and share of wallet on the unit side within the computing and TV category?

Operator:

The next question comes from Liz Suzuki from Bank of America.

Matthew Bilunas:

Yes, I'll start and Corie can jump in. Yes, I think if you look at where we planned the year to be, at the beginning of the year, we planned comps in the minus 1% to minus 4% range. And now what we're seeing is it's around a minus 11% comp for the year. It's a pretty significant sales decline, again, more around the macro environment worsening. We expected the year to come down from an industry perspective as we cycle some of the very large growth over the last couple of years. So that change of the macro and the consumer has really caused the sales to be much lower this year. So I would say that's probably the biggest impact as you think about our FY '25 targets going forward because some of the targets that also need scale to drive some of the benefits of the bottom line as well. So that's what we need time to assess.

Liz Suzuki:

Got it. Okay. So I mean, in theory, we could think about some of those targets as just being still achievable, but a little further down the line than what you originally thought given where the year is going to shake out.

Operator:

Michael Lasser, UBS.

Matthew Bilunas:

Yes, maybe. I mean I think what we're trying to do is assess what this year looks like. We're trying to, as you can imagine, fortify our business a bit and understand how do we point resources and work towards the strategically relevant important things as we -- as well as the operations. And I think what we're trying to do is continue to assess the top line environment, the macro environment to understand where sales will go next year, all the while knowing that the sales growth, the CAGR leading up to the pandemic through FY '20, the last 3 years, was over 3%. So we believe the industry, we believe Best Buy will return to growth at some point as we navigate some of these choppier waters. At the same time, we're taking the right steps forward to optimize our business and set ourselves up structurally as we look forward into next year and the years after that and drive our strategy at the same time.

Corie Barry:

So we chatted a bit in the prepared remarks and said we still like what we were seeing in terms of -- for right now, and again, we haven't even lapped a year, in terms of the engagement and the spend of the existing cohort of Totaltech support members. We also said, just like you would with any membership program, we are going to keep looking at the benefits that are included, what customers value, what keeps customers sticky to Best Buy, and we will continue to iterate on the offer. So I don't think it's as simple as a light switch, like is it on or is it off? I think there's a lot about the offer and behaviors that we're seeing that is really compelling. And at the same time, we want to make sure that the offer is used and is engaging for customers and is over time keeping them sticky to the brand. And we said it in the remarks, it is difficult because frequency is lower in our category, so it takes us more time, especially against the macro backdrop that has changed as dramatically as this one has. It's going to take us more time to assess. Over the long term, is this doing what we want it to do? And so for right now, we like what we're seeing in the cohort of customers. It's still early. It's against an uneven backdrop. And we're going to continue to iterate on the offer to make sure, at the end of the day, what's most important is that it keeps customers engaged with the brand.

Brian Nagel:

So I have 2 questions. Maybe I'll just merge them together. I mean, first off, with regard to sales, are you seeing any increased variability across geographically or otherwise that would maybe tie this more together with either inflationary pressures or some of the lasting effects of the pandemic? And then my second question, I guess just stepping back, thinking about the different drivers of sales. From a manufacturing standpoint, your manufacturing partners, has there been a pullback on -- through the pandemic, through the supply chain constraint, it's pull back on sort of say, driving innovation that may be changing now as some of these constraint keys that could ultimately become a better sales driver?

Corie Barry:

Yes. We hit on this a little bit earlier, Brian. But I do think our manufacturing partners have been doing everything they can to produce as much product as possible over the last 2 years. So kind of writ large, if you think about the industry broadly. And a hypothesis would be that does make it a little bit more difficult to innovate at the pace that you would like because you're just working so hard to produce what you need to for the demand that's in front of you. And so I think as hopefully, you start to see a more -- a little bit more normalized demand environment, that absolutely -- I can't imagine a world where the manufacturers that we work with aren't working morning, noon and night to try to think through how to innovate on the products that we have today to drive more of that replacement, more of that consumption going forward. And so I don't have an exact measurement to tell you how much are they innovating last year versus next year. But I absolutely fundamentally believe, you've got a manufacturer set that is looking to capitalize on an increasingly digital consumer who is more and more willing to use these products in their home.

Kate McShane:

I just wondered if you could help us think through the Totaltech support, not to beat a dead horse with regards to Totaltech support. But just with regards to its impact to gross margins. I know you're lapping the launch. But is it a bigger headwind sequentially? Just thinking through that maybe more people are going to come through the store for back-to-school and holiday versus maybe the first half.

Corie Barry:

I think the key here is that the goal of the program is ultimately to create an offer that has further reach and has a broad appeal. And that, over time, we drive frequency and greater share of wallet with our customers. Obviously, that's going to take time. And to Matt's point, it's not that it's any more impactful. Actually, as we start to get scale, it is helpful on the Total business because you are in theory growing that frequency and growing that share of wallet. It just takes us time to get there.

Matthew Bilunas:

Sure. I think we have probably a whole lot more to say. As you can imagine, we're still working through those plans, and we would want to share internally as well before. I think the $34 million termination is basically termination benefits that we took in Q2. The 2 aspects of that are the voluntary early retirements and then the workforce optimization. Those are what we've done so far. We'll continue to evaluate other actions. But broadly speaking, we're looking to understand how our business has changed over the last number of years with a digital business that's now double what it used to be in a very different looking consumer to understand where do we need to point our resources and efforts strategically and operationally to make sure we're prepared for how our customers want to shop and providing the best experience for them. And so that will ultimately provide some -- also some efficiency opportunities as we look forward, but also just strategically position us better as we navigate through some of the difficult macro environments that we're seeing right now.

Mike Baker :

Okay. I wanted to ask about the promotions and inventories a little bit, just to follow up on that. What areas are you more or less promotional in? And it sounds like the issue to me -- it sounds like -- it looks like your inventory is pretty clean. It's down 6%, but competitors are still heavy. Do you expect that to be a situation to be rectified by the holidays? And then one last question, if I could squeeze it in. Any comments particularly on what you're seeing in terms of gaming trends within the entertainment category, which was down about 9%, a little bit better than the Total? How did gaming perform within that?

Corie Barry:

Mike, the last thing that I would add on the inventory question is, it is a -- I'm very proud of the work that the teams have done. I'm proud to head into holiday in a good healthy inventory position. And we said it in the prepared remarks, that allows us a little bit more space to invest in those places where we think there really will be consumer demand. So I think it is a really good situation to be in. And with that, I think yours was the last question. Thank you all so much for joining us today. And we look forward to updating you on our results and our progress during our next call in November.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy’s First Quarter Fiscal ‘23 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 11 a.m. Eastern Time today. [Operator Instructions] I will now turn the conference call over to Mollie O’Brien, Vice President of Investor Relations. Please go ahead.

Corie Barry:

Good morning, everyone and thank you for joining us. I am proud of our team’s strong execution and focus on providing amazing service for our customers. Throughout the quarter, they navigated the uncertain macro environment and drove higher customer satisfaction scores while keeping energy and excitement going around the initiatives that we believe will drive longer term opportunities. We grew our Totaltech membership, increased momentum in our health business, launched new product categories and reached our fastest ever Q1 average online sales delivery speed. At our investor update in March, we said we expected our fiscal ‘23 financial results to look different. As we all lap stimulus and other government support, our industry cycles the last 2 years of unusually strong demand and we leverage our position of strength to continue to invest in our future. In addition, we said we expected promotional activity to increase and supply chain expenses to be a pressure. As such, we guided our annual comparable sales to decline 1% to 4% and our non-GAAP operating income rate to decline 60 basis points to approximately 5.4%. Therefore, the drivers of our Q1 financial results were largely as expected. Macro conditions worsened since we provided our guidance in early March, including higher inflation and the war in Ukraine, which resulted in our sales being slightly lower than our expectations and supply chain costs a little higher than we planned. Our investment in Totaltech at approximately 100 basis points of gross margin pressure was in line with our expectations and revenue from our credit card profit share was higher than anticipated. Overall, I am proud of our team’s ability to develop and execute plans to adapt to the changing environment over the past 2 years and to the more recent macroeconomic conditions. Our revenue and profitability remained much stronger than they were pre-pandemic. Q1 revenue of $10.6 billion is $1.5 billion or 16% higher than Q1 of pre-pandemic fiscal ‘20. And while our non-GAAP operating income rate is currently being impacted by our investments, it is still 80 basis points higher than fiscal ‘20 even with those investments and supply chain pressures. Our enterprise comparable sales declined 8% as we lapped particularly strong comparable sales last year. The 37% comp sales growth in Q1 of last year was driven by the timing of government stimulus payments, lapping a quarter during which our stores were closed early in the pandemic and the heightened demand for stay-at-home focused purchases. From a category standpoint, the biggest contributor to the comp sales decline, were computing and home theater. Although down from last year’s strong sales compared to Q1 of fiscal ‘20, our computing revenue has grown more than 30%. Our domestic appliance business, which has grown every quarter, except for 1 for more than 10 years, delivered comparable sales growth of 3% on top of 67% growth last year. We aspire to help customers with all their technology needs in the most seamlessly possible across all touch points and we are encouraged by the improvements in our customer net promoter scores. We have been leveraging our omnichannel strength to serve and support our customers as their shopping behavior and expectations have evolved significantly over the past 2 years. While customers have returned to physical stores to see and touch products and get advice, our digital engagement with customers remains very high. Our online sales as a percentage of domestic sales are 31%, still twice as high as pre-pandemic levels and revenue from virtual phone and chat interactions continues to increase rapidly. Additionally, we are expanding our engagement with customers in their homes as in-home consultations and in-home installations are up significantly. During the quarter, we saw higher NPS overall and we saw our highest ever NPS from in-store purchases and in-store services. I would like to take a moment to expand on the topic of inflation, important in the current environment. Like other companies, we have seen cost inflation in areas such as labor, marketing and supply chain. However, this cost inflation was largely in line with our expectations and benefited from planning and execution over the previous 2 years. As it relates to product pricing, we have seen an increase in our average selling prices over the past 2 years due to a number of factors. First, our product sales mix has changed as customers have mixed into premium products at higher price points. This has been happening for years and accelerated during the pandemic. Additionally, we have driven material growth in appliances, which carry high ASPs and have become a larger part of our mix. Second, there was overall lower promotional and markdown activity during much of the pandemic due to the shortage of product to meet demand. And third, our vendors are absorbing higher transportation and component costs and some of that has led to higher cost of goods sold for us. In many cases, we have passed through this higher cost of goods sold in the form of higher prices to customers. Importantly and fundamentally, we aim to be competitive in our pricing. We have seen a pickup in the promotional environment, as we have consistently noted, starting in July of last year. As we entered fiscal ‘23, we expected the promotional environment to create margin pressure in Q1 and throughout the year. In Q1, we did experience a more promotional environment for many of our products when compared to last year. And some products were even more promotional than we expected coming into the quarter and were similar to pre-pandemic levels. Turning back to our Q1 results, our ending inventory was up 9% compared to last year and essentially in line with the growth of our revenue since fiscal ‘20. Our teams did an amazing job actively managing inventory levels as the quarter progressed in this evolving supply and demand environment. Pockets of inventory constraints still exist, but are currently isolated to certain products and vendors. Overall, our inventory remains healthy. Even though inventory availability in CE is much better than it has been for much of the pandemic, the supply chain continues to be challenging with ongoing transportation disruptions and higher costs including containers, labor and fuel. We are, of course, not immune to the supply chain challenges in the world today and we are seeing some impacts on our business. We have invested in many aspects of our supply chain over the last several years in ways that have helped us navigate the environment and mitigate the impacts. We have employed a portfolio approach as it relates to carriers, transportation partners and parcel delivery partners. And we have built deep relationships across our supply chain, including port carriers and deconsolidation operations. In addition, we strategically leveraged the use of both rail and over-the-road transportation modes to move product. All of this has helped us to drive capacity, avoid large-scale disruption and mitigate cost increases. Importantly, our contractual relationships have allowed us to limit our exposure to the more turbulent spot market. The strong relationships we have cultivated with our vendors have also been crucial to our navigation of the supply chain environment. Working closely with our vendors, we have a great deal of visibility into and can influence the status of product in the supply chain process. Additionally, we actually handled transportation for many of our vendors, meaning we take control in Asia or Mexico. Then we have full visibility and control of the inventory movement and costs. We have invested in our distribution center network, effectively bringing product closer to customers and implementing technology solutions that increase productivity and speed to customer. We have also invested in our store-based fulfillment, including our ship-from-store customer fulfillment centers and implemented an effective employee delivery system. These investments have allowed us to make dramatic improvements in speed of delivery to our customers, even with the significant increase in volume in the past 2 plus years. In addition, we have many options for our customers to pickup their products themselves through in-store pickup, curbside pickup, lockers and alternate pickup locations. Customers clearly appreciate the convenience as the percentage of online sales picked up in stores has remained relatively consistent over the past several years at approximately 40%, even with the incredible improvements in shipping time. As it relates to ESG, we remain encouraged by the recent recognition of our work to support the environment and our community, both inside and outside Best Buy. We are proud to be included on Ethisphere’s 2022 World’s Most Ethical Companies list. We are one of only three retailers on it and it’s our eighth time earning the honor. We were also included on the 2022 Forbes List of Best Employers for Diversity as one of the top four retailers on the list. It’s our third consecutive year making the rankings that recognize leadership and commitment towards building a more inclusive workplace. During the quarter, we expanded our recycling program to include a new service for customers who are looking for our help recycling their large products. For a fee, we will go to customers’ homes to pickup large electronics and appliances as well as an unlimited number of small products and ensure they are responsibly recycled and kept out of landfill. This service is in addition to our everyday recycling programs available at all Best Buy stores and our Holloway service with the purchase of new products. As I mentioned earlier our employees executed well in the evolving environment, in many cases making hard decisions to run the business effectively and prioritize our customers. Even with the expected slowdown this year as we lap 2 plus years of pandemic impacts, we continue to be in a fundamentally stronger position than we expected to be at this point. We are confident in the strength of our business and excited about what lies ahead. We have a compelling value creation opportunity and are investing now as we have successfully invested ahead of change in our past, to ensure we are ready to meet the needs of our customers and retain our unique position in our industry. As we provided a more detailed investor update in combination with our Q4 results on March 3, I am not going to outline all our initiatives, but would like to provide a few updates on our progress. In March, we spoke quite a bit about Totaltech, our unique membership program that includes member pricing discounts, product protection, free delivery and installation and 24/7 tech support. Fundamentally, Totaltech is designed to provide our customers with complete confidence in their technology, buying it, getting it up and running, enjoying it and fixing it if something goes wrong. During the quarter, we continued to sign up more members as customers realize the great benefits of the program. And we are encouraged by the higher engagement, customer satisfaction and increased revenue we continue to see from customers who have signed up to become members. We are pleased with the pace at which we are acquiring new members, especially considering the macro environment. We continue to see that Totaltech has broad appeal across customer segments. Additionally, we are improving our ability to gain members not only in retail stores, but in our digital and in-home channels. As a reminder, from a financial perspective, Totaltech is a near-term investment to drive longer term benefit. We expect year-over-year pressure on our gross profit rate to cease as we lapped the launch in October. And over time, we expect the incremental spend we garnered from members will lead to higher operating income dollars. Accordingly, Totaltech is a significant contributor to our fiscal ‘25 goals. As we outlined in March, we are optimizing our workforce and re-imagining our physical presence in ways that serve our customers’ needs in our more digital world. We are making investments that provide a better, more seamless shopping experience as the customer moves from online shopping to visiting our stores to video chatting from their home. This includes our virtual sales strategy. Early in the pandemic, the volume of customers interacting with us via phone and chat skyrocketed. The volume has remained high and we are actively working to increase the sales opportunity of these interactions through a number of efforts. One, we are leveraging a team of expert sales associates working from their homes, many of whom have in-depth store experience and are certified in multiple categories. Two, we have staffed our virtual store with dedicated experts who can help you via video and demo a product just like they would in our store. And three, we are enhancing the training for our offshore call center agents to help them feel like confident salespeople. We are already seeing great results as revenue from these interactions more than doubled in Q1 compared to last year. Enhancements to our technology platforms are in progress to further streamline our operations and enable these employees to chat, video, text, share their screens and transact. With this, we will be able to accelerate the productivity and sales opportunity further. We have spoken quite a bit about our consultation service that provides customers with expert help and inspiration tailored to their unique tech needs often right in their homes. This is growing and important as we continue to see very high customer satisfaction scores and increasing spend by customers who engage with the consultants. We also have a team that is focused on providing tech products and solutions for businesses in specific industries, including homebuilding, hospitality and healthcare. We have been growing this aspect of our business for several years and more recent investments in our digital capabilities and fulfillment have led to strong growth momentum that we expect will continue. For example, Q1 revenue from this team was up 15% over last year’s Q1 and up more than 70% from Q1 of fiscal ‘20. As I step back to comment on our overall workforce, we have been actively evolving the composition of our teams throughout the last 2 years as customer behavior changed and became even more digitally focused. The result is that our overall headcount is actually lower than pre-pandemic. We feel like we are largely at the right number as it relates to the strategic evolution of our operating model, the demand we are seeing and the nature of our customer interaction. We will continue to learn, evaluate and evolve the model in light of the way the business and shopping habits are changing. At the same time, we have invested and will continue to invest in flexibility, training, compensation and benefits for our associates. We are incredibly proud that our field turnover rates remain significantly below the retail average and are near our pre-pandemic turnover rates. Additionally, our store general manager turnover is just 6%, meaning our GMs have the tenure and experience to effectively help their teams navigate this dynamic environment. It is clear that we have store managers who are invested in their employees, their career paths, their well-being and their communities, and I thank them for their dedication. Of course, as previously noted, we are also re-imagining our physical stores. This year, we expect to complete approximately 45 remodels to implement our experience store concept. We are excited about these remodels as we continue to see higher revenue and NPS in the pilot locations compared to the controlled stores, especially as one of the pilots has been running almost 2 years. We also continue to see strong results from our outlet stores and are on track to rollout more this year with new stores opening soon in Chicago, Houston and Phoenix. Our outlet stores assort open box, clearance, end-of-life and otherwise distressed large product inventory in major appliances and televisions that might otherwise be liquidated at significantly lower recovery rate. We tend to see twice the recovery rate of our cost of goods sold when we sell this product at our outlets versus alternative channels. Additionally, these locations can attract new and reengaged customers. Last year, we estimate that approximately 16% of outlet customers were new to Best Buy and 37% were reengaged Best Buy customers. In fiscal ‘23, we plan to double the number of outlets by opening 15 additional stores, and we are expanding our assortment beyond major appliances and large TVs to include computing, gaming and mobile phones. We are already seeing increased performance in these new outlet formats as customers gravitate to the expanded assortment. Finally, these outlet stores are an important element of our circular economy strategy by providing a second opportunity for products to be resold instead of ending up in a landfill. And another important element of this circular economy strategy is our trade-in program. We have an extensive trade-in program covering more major CE categories than anyone else. In Q1, we took in 135,000 trade-in units from customers. Not only does our trade-in program keep tech products out of landfills, our customers typically spend 3x the amount they received on their trade-in on new products at Best Buy. We are continuing our category expansion strategy as well. For example, we’re helping customers commute more sustainably with a new lineup of the best electric bike scooters and mopeds. Over the next 18 months, we will be bringing a selection of these products to nearly every Best Buy store. We’re also rolling out charging devices, perfect for our customers’ garages in several stores. And Geek Squad can not only assemble the e-bikes for customers, but we’re also beginning a pilot to test service and repair for e-transportation products in some of our stores. We also just recently announced further expansion into the health and beauty category by launching new skincare technology products online and in 300 of our stores. In our Best Buy Health business, we are pleased with our first quarter momentum. In Q1, we saw strong growth in new sign-ups for our active aging business that offers health and safety solutions to enable adults to live and thrive at home. In our Emerging Virtual Care business, we connect patients with their physicians to enable care at home. Last November, we acquired Current Health, a technology company with an FDA-cleared monitoring platform for care at home to help us accelerate our strategy. The combination of Current Health offerings and our scale, presence and Geek Squad in-home capabilities is already resonating with the healthcare industry. Boosted by its affiliation with Best Buy, Current Health had its best commercial booking quarter ever, including expansion of its relationships with health systems such as Mount Sinai Health System, Parkland Health, as well as the UK National Health Service and others. I’m excited to share that Current Health was awarded best hospital technology implementation in the 2022 MedTech Breakthrough Awards program for its role supporting health systems across the U.S. implement innovative care home programs. Current Health was also selected by Frost & Sullivan as the 2022 Company of the Year in the global virtual home care platform industry. In summary, I am proud of how much we accomplished in the first quarter and excited about what lies ahead for us. Clearly, there remains a great deal of uncertainty. On one hand, consumers still have relatively strong balance sheet, they continue to spend, wages are up and unemployment is at record lows. On the other hand, many consumers are lapping stimulus income they received last year and are also facing issues like higher gas and food prices, rising interest in mortgage rates, recession fears, stock market volatility and geopolitical uncertainty stemming from the war in Ukraine. Underlying all that is the gradual shifting of spend from stay-at-home purchases to more experiential spend on services and the activities, many were unable to enjoy during the pandemic. As I mentioned at the start of my comments, while the drivers of our results were largely as expected, the comparable sales decline of 8% was on the softer side as inflationary pressures heightened throughout the quarter. That trend has continued into the beginning of Q2, and it does not appear that it will abate in the near-term. Therefore, as Matt will outline, we are revising our guidance and now expect fiscal ‘23 comparable sales decline in the range of 3% to 6%. And we are correspondingly updating our non-GAAP operating income rate to a range of 5.2% to 5.4%. We will continue to proactively navigate this rapidly changing environment, balancing the day-to-day operations with our commitment to our long-term strategy and growth initiatives. Before I turn the call over to Matt for more details on Q1 and our outlook, I want to thank our employees for everything they do for our customers in all our channels. I greatly appreciate your teamwork and perseverance. I love the Best Buy culture and our commitment to enriching lives through technology. And I will close by saying this. We firmly believe that technology is more relevant today than ever. Every aspect of our lives has changed with technology, and we uniquely know how to make it human in our customers’ homes right for their lives. From our expertly curated assortment to in-home consultations, all the way to tech support when your tech isn’t working the way you want or traded in recycling when you want to upgrade. We believe we have an ability to inspire and support customers in ways no one else can. And with that, I would like to turn the call over to Matt.

Operator:

Thank you. [Operator Instructions] We take our first question today from Zachary Fadem of Wells Fargo. Please go ahead.

Matt Bilunas:

Yes. Thank you for the question. Obviously, I think it’s way too early for us to be updating our FY ‘25 goals at this point. You’re right. I mean I think the lowering of the range this year does create a bit of a different picture. But at the same time, we very much believe in the strength of our industry and are very encouraged by the initiatives that we have, that we outlined at the Investor Day, Totaltech, and expanded assortment in our health initiatives. Those all remain the same. And if anything, we’re even more excited about those as we look forward. So obviously, the ranges we gave this year, they are pretty wide. And the ranges for FY ‘25 is still pretty wide. So there is a number of outcomes we already had contemplated in setting those goals back in March. So we still remain pretty confident in those numbers.

Matt Bilunas:

Yes. I think this appliances has been a place where we’ve been sustaining growth for a long time, what’s been growing every quarter for 10 years, except for one when we closed our stores. So we are very confident in our team’s ability to continue to drive sales up. Clearly, there are some very elevated levels of comp that were coming over the last couple of years of spend. But the team continues to drive the assortment and the experience changes that make it a very meaningful place to buy appliances. And that includes both the majors and the small side. So we remain really excited and confident about the prospects there. For the 5th straight year, we see the J.D. Power award for the highest customer satisfaction among appliance retailers. So the team is getting the right experience that I think will help us drive sales higher as we look into the future.

Corie Barry:

Thank you.

Steven Forbes:

Thank you and good morning. Corie, I wanted to focus on Totaltech, and I appreciate the color, but I was hoping if you can provide us a little more details around how membership is framing relative to expectations, maybe in the context of churn and/or retention? And then just a broader comment on what part of the value proposition do you think is resonating most with your customer in the current sort of environment?

Steven Forbes:

Thank you. I’ll keep it to one. Best of luck.

Operator:

Thank you. Joe Feldman of Telsey has our next question. Please go ahead.

Matt Bilunas:

Sure. Thanks Joe. As we outlined back in March, we expected to see promotions be pressured this year compared to last year. And we also commented that we – that eventually, they would return to closer to FY ‘20 levels at some point. As we have got into the quarter, we actually started to seeing a little bit more pressure on the promotion side than we expected. Again, that was offset by a little bit of credit – better credit card profit share from the arrangement we have. But we did see a little bit more promotionality. And I think it’s pretty broad across most of our categories. We are starting to increase in terms of the amount of discount and the mix on promotion. TVs was a place where we did see more promotions on a year-over-year basis. Computing has been starting more promotional all the way back to July of last year. So, that continued as well. So, those are the areas I would probably highlight, but there are also even just some very iconic type of products to in specific categories that are very promotional, even though in some cases inventory is constrained. And so overall, we know it’s returning as we expected it would. It isn’t quite back to FY ‘20 levels, but it is heading in the same – heading to that path as we expected.

Matt Bilunas:

Thank you.

Operator:

We will move now to Mike Baker of Davidson. Please go ahead.

Matt Bilunas:

Sure, yes. So, we are not going to comment on specific months, but March was the biggest decline in Q1. And as the sales pressure continued as we exited Q1 – actually, it was a little more pressure than on sales than we expected. If you remember last year, too, as we got into the second quarter, we talked about how we were still doing about a 30% comp in the first few weeks of May. So, we are still lapping those stimulus payments that kind of came in starting in March of last year. And so that’s what’s driving the lion’s share of that sales decline. As you think about the back half of the year, I mean there is a number of things. We believe as you get to the back half, most of that stimulus impact, a lot of it will have left in terms of a comparison. We also know, as we look to the back half of the year, we do expect product availability and certain products and categories to improve compared to the first part of this year and also if you look at compared to last year, in Q4, there was some notable product shortages in iconic areas that we talked about not getting, that did have an impact on sales. We also, in Q4, shortened our store hours in January as we were lapping some of the Omicron variant impacts. And then lastly, I comment is we do expect our initiatives to start to continue to drive more impact to our sales outlook as you get further down into the trajectory of those ramps. So, those are the reasons I would highlight.

Matt Bilunas:

Thank you.

Karen Short:

Hi. Thanks very much. I actually just wanted to push a little harder and follow-up on the 2025 guide with respect to where you are at today? And obviously, as you were just asked, you did elaborate a little bit on what the second half and why the second half will look better. But maybe a little more color on why you feel confident in the 2025 guide, about 6.3 to 6.8 in light of the fact that, obviously, 2Q will be much weaker than expected. And then just on that same note, are you factoring in a recessionary environment with respect to your guidance for the year and with respect to your 2025 guide?

Matt Bilunas:

And I might just add, I think also, I think you made a question around the rate guide as well. I think as you think about the rate this year, we are actually not too far off from our original guidance expectations for this year from 5.2 to 5.4, just acknowledging a little bit of softer on the sales side. But all of the structural things that are included in that expectation are kind of coming in as we expect. It’s nothing that’s too dissimilar at this point. And we have already built those into what we see this year and what we see in the out years to be confident in addition to sales, but also being able to achieve some of those rate expectations for FY ‘25.

Matt Bilunas:

Thank you.

Seth Basham:

Thanks a lot and good morning. I would like to follow-up on the promotional environment. If you could give us some sense as to what you are planning for in terms of promotions this year relative to pre-pandemic levels? And how much is embedded in terms of gross margin pressure relative to your prior guide, that would be helpful.

Corie Barry:

And I think it’s worth noting, and I know all of you know this, but just to reiterate. Obviously, promotions are not just a function of Best Buy. They are a function of relationships with our vendors as well. We are interested in ensuring that their newest and greatest products are out there for the world to see and priced appropriately. So, this is not just a function of Best Buy promotionality. It’s a function of the overall industry promotionality in partnership with our vendors.

Operator:

Thank you. We will now move to Jonathan Matuszewski of Jefferies. Please go ahead.

Matt Bilunas:

Sure. Yes. So, as we started the year, we – even the guide that we gave at 5.4% on a range of sales outcomes, we – there is a level of implied already trying to understand the levers you do to keep within the 5.4% rate in terms of the original guidance. So, it’s something that we do as a normal course of business as we see sales slide up or slide down from our expectations. There are a number of areas where you can – that simply happen because they are variable to like check lane tender, but you also start to adjust areas like marketing or store labor associated with the lower volumes if it does happen. So, those are the variable things that we look at to adjust to as the sales trends change. In addition to that, there are even some more discretionary areas that you can start to look at in addition to variable items. But in some cases – or even additional marketing to the extent that you are comfortable or even simple areas like travel or adjusting your capital spend, which can adjust depreciation depending on when you do that during a year. So, there are variable and then more discretionary. And as Corie noted, we are not really planning for a recession this year. To the extent that we did, there is obviously more fixed cost areas you can look at if business trends down even more. Right now, we are not planning for that. You can imagine if that had happened, we would look at some of those areas as well. But we would – in any event, we are trying to hold dear to us strategic investments that we are making, that provide that long-term growth to get to our FY ‘25 goal. So, that’s the last place that we will look at reducing as we look to this year in terms of how we see it now.

Jonathan Matuszewski:

It makes sense. Thanks guys. Best of luck.

Operator:

Thank you. Next, we will move to Brad Thomas of KeyBanc. Please go ahead.

Corie Barry:

Yes. First, just some gratitude to the team who has really done amazing work, carefully managing our inventory levels and then importantly, leveraging some of the investments that we have made in our supply chain. Some context is helpful here. Our inventory balance was unusually low last year. So again, if you remember how much demand there was in the marketplace at 37% comp, we had an unusually low balance last year. And that inventory balance right now is almost perfectly in line with the sales growth versus pre-pandemic. So, if you went back to kind of normalized pre-pandemic, now, sales growth and inventory growth are almost perfectly in line. And I think that’s a true testament to our vendor partnerships and proactively managing those levels in line with what we have been seeing. Behind the theme, as you can imagine, actually, units in some of the key categories are down as we have seen ASP shifting from the variety of factors that I noted, whether it’s premium and the mix shift in our business or inflation. So, that’s even what underscores the confidence that I have in the statement around our inventory being healthy, feeling very much like it’s in the right place. I think it is important to note, there is still some spotty constraints in very isolated areas for specific vendors and some of the more iconic SKUs that Matt mentioned. But over-archingly, we feel very strongly that we are in a good inventory position, and that’s very much in line with how we have managed inventory historically.

Corie Barry:

Yes. We haven’t sized it specifically as I kind of alluded to the fact. It’s really hard because back to when about the different pieces that are driving our ASPs up, du have got mix shifts in the business. As people have skewed more premium, you have got more appliances, which tends to skew to higher ASPs. You have got over-archingly, over the last couple of years, fewer markdowns, less promotions, and then you also have inflation. So, all of those pieces add into the ASP increases we have been seeing. That’s why the color I am trying to give is we have actually seen in many of the key categories at the unit levels of our inventory are actually down versus some of the pre-pandemic comparisons and a lot of that is being driven by this kind of confluence of ASP increase.

Corie Barry:

Yes. Thanks.

Scot Ciccarelli:

Good morning guys. Scott Ciccarelli. So, Corie, we have heard that several other retailers that had a pretty tough March and April have indicated that sales have started to improve in May. But your comments on 2Q would suggest you really haven’t seen that. So, I guess my question is, why do you think your business hasn’t necessarily seen the kind of recovery we have seen in some other retail verticals? And related to that, would your cadence comments be any different if we are looking at stock trends? Thanks.

Scot Ciccarelli:

Got it. Thank you.

Operator:

Thank you. Moving now to Scott Mushkin of R5 Capital. Please go ahead.

Matt Bilunas:

Yes, I think we believe that it is structurally more profitable than it was pre-pandemic. As you think about some of the actions and work we have done over the last 2 years to adjust our model with the very heavy shift to digital sales almost doubling from pre-pandemic. We have taken appropriate action to understand the cost structures whether they are to support digital or in our stores or just to support a different type of customer fulfillment need. We have taken the right actions over that period of time to adjust our model – our cost model to understand – to account for the changing sales and margin structure – our gross margin structure. So, we fundamentally do believe that that’s in how we actually decide to fulfill product to customers. That’s on how many associates we have in our stores. It’s a number of things that we have thoughtfully looked at over the last couple of years to change the structure of cost between gross margin rate and SG&A. So, we do believe that fundamentally, in Q1, we were up 80 basis points compared to Q1 pre-pandemic, and that is to account for even though we do have investments like Totaltech at 100 basis points in Q1 and have a doubling of the e-com business, which is a higher parcel cost, we are still getting SG&A leverage considerably better over in Q1 to offset some of those gross margin investments that we are actually making in our business. So, we fundamentally do believe that the structure of our business is finally more profitable. And that’s also underlying in our commitment, our goal is to get to the FY ‘20 goals of 6.3% to 6.8%.

Operator:

We will move next to Peter Keith of Piper Sandler. Please go ahead.

Matt Bilunas:

Sure. I will start with the Totaltech pressure. As you look towards the back half of the year, we started to lap the launch of Totaltech. So, we expect the Q2 drivers to be similar to Q1. That would include Totaltech pressure of around 100 basis points. But as you look to Q3 and Q4, we begin to lap it. We launched Totaltech in October of last year, so we don’t lap until the end of this Q3. So, there is still a little pressure from Totaltech in Q3. Then by Q4, the pressure on a year-over-year basis essentially goes down to zero, if you will, because we have lapped the launch of it. So, that’s how the cadence of Totaltech pressure goes.

Peter Keith:

Okay. Thank you very much.

Mollie O’Brien:

Good morning, everyone. My name is Mollie O’Brien, and I’m Head of Investor Relations at Best Buy. We are very happy to welcome you all this morning. Thank you for joining us. Hopefully, you were able to review our earnings press release from this morning. This press release and the downloadable PDF of today’s slide presentation can be found on our IR website, investors.bestbuy.com. Today, you will hear from several Best Buy executives, including Corie Barry, our CEO; Matt Bilunas, our CFO; Jason Bonfig, our Chief Merchant; Damien Harmon, our EVP of Omnichannel; and Deborah Di Sanzo, our President of Best Buy Health. Here is our agenda for the morning. First, Corie and Matt will recap our Q4 and fiscal ‘22 financial results as well as our fiscal ‘23 outlook. Then, we will begin the strategic update portion of the event. Corie will start with the strategic setup and discuss our membership program. As part of the strategic setup, Jason will talk about technology innovation and merchandising. Damien will follow them with a review of our omnichannel initiatives, then Deborah will provide an update on Best Buy Health. After that, Matt will come back to the stage for the financial discussion. Corie will provide a quick wrap up before we break. We expect to take a 10-minute break at approximately 9:20 a.m. Eastern Time. After the break, we will start our Q&A session. Before we begin, I would like to note that our presentation today contains non-GAAP financial measures that exclude the impact of certain business events. GAAP to non-GAAP explanations and reconciliations can be found in our earnings release and our presentation materials available on our website. Today’s presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and the company undertakes no obligation to update or revise such statements to reflect events or circumstances that may arise after today’s event. Again, thank you so much for joining us. We are looking forward to a great meeting. And now, I could not be more excited to turn the meeting over to Corie Barry, CEO of Best Buy.

Matt Bilunas:

Thank you, Corie, and good morning, everyone. Hopefully, you were all able to view our press release this morning with our detailed financial results. Our Q4 revenue was $16.4 billion. Our domestic comparable sales declined 2.1%, and our enterprise comp sales declined 2.3%. Revenue grew 8% versus two years ago. It was only slightly below the low end of our revenue guidance for the quarter due to a few factors. The first factor was inventory availability. We expected to have pockets of inventory constraints as we entered the quarter and called out a few areas, including appliances, gaming and mobile phones. As the quarter progressed, inventory was more constrained than we anticipated within a few categories and brands. These constraints included some high-demand holiday items, and the categories most impacted were mobile phones and computing. The second factor impacting our results was Omicron. The Omicron wave and the resulting high levels of employee callouts led to a temporary reduction in our store hours in January and to start fiscal ‘23. In mid-February, our staffing level started to improve and we increased store operating hours for the majority of our stores. Excluding these two factors, our revenue would have been comfortably in the guidance range we provided for the quarter. From a category standpoint, on a weighted basis the top areas with positive comparable sales growth included appliances, virtual reality, home theater and headphones. We saw comparable sales declines in gaming, mobile phones, tablets and services. Turning now to gross profit. Our non-GAAP gross profit rate decreased 50 basis points to 20.2%. This was about 20 basis points lower than we expected, primarily due to increased proportionality. When comparing to last year, the largest driver was our services category, primarily driven by Totaltech. Our product margins were largely flat to last year, as the benefit from category sales mix was offset by increased promotions. Higher profit-sharing revenue from our credit card arrangement was a benefit to gross profit rate compared to last year. Lastly, our international gross profit rate improved 210 basis points to last year, which provided a weighted benefit of approximately 20 basis points to our enterprise results. Our enterprise non-GAAP SG&A dollars grew 5% versus last year, less than our guide of 8% growth, primarily due to lower than anticipated incentive compensation. Within our domestic segment, our SG&A dollars increased $139 million. The largest drivers were, one, advertising, which included campaigns for both, holiday and to drive awareness for our new membership offering; two, technology; three, increased store and call center labor that helped drive the record customer satisfaction scores Corie shared; and four, Best Buy Health, which includes the impact associated with our acquisition. Before I discuss the ‘23 financial outlook, let me spend some time on our new Totaltech membership program. Corie will provide a more holistic overview later in her presentation, but I will add some color on the impacts to our Q4 results and for next year. Totaltech is a near-term investment to dive long-term value. The thesis is that over time, we will capture incremental product sales from our members that will lead to higher operating income. But, as we discussed in prior earnings calls, it does come with near-term profitability impacts. First, at $199, the standalone membership is profitable. It just isn’t as profitable as legacy service memberships, due to the breadth of benefits and the cost to fulfill them. Second, there is a loss of revenue and profit from existing revenue streams that are now included as benefits in the program. For example, previously standalone services like extended warranties and products installations are now included within our Totaltech membership. We still offer these services on a standalone basis or to nonmembers. But, you can imagine there’s an aspect of cannibalization as members are no longer paying incrementally for these items. So, what does all this mean? We expect that the gross profit rate of our services category will reset to a new level going forward that is lower than it was prior to launching Totaltech. The way to drive more operating income, despite this lower services gross profit rate, is to add far more members than we thought was possible under our previous membership offerings. The key to increased profit will be through increased volume through a combination of more recurring membership revenue and incremental product purchases of our members. The number of memberships grew very nicely in Q4, and our plans for fiscal ‘23 assume continued growth, but it’ll take some time to reach the scale necessary to offset the lower gross profit rate I just described. Therefore, Totaltech remains a pressure in fiscal ‘23, but we expect it to be a meaningful driver of both, higher sales and operating income dollars in fiscal ‘25 targets. Now, let’s talk about our overall fiscal ‘23 outlook. Our guide is anchored around a comparable sales decline in the range of 1% to 4% and a 5.4% non-GAAP operating income rate. Our non-GAAP diluted EPS outlook is $8.85 to $9.15. Before we discuss the broader assumptions driving our guide, I want to touch on our expected tax rate. Our non-GAAP effective tax rate is planned at a more normalized level of 24.5% in fiscal ‘23 compared to 19% rate in fiscal ‘22. As you may recall, our Q2 results this past year included a $0.47 diluted EPS benefit from the resolution of certain discrete matters. Now, I’d like to share a few important assumptions underpinning our guidance. First, we anticipate the traditional CE industry to decline in the low- to mid-single digits next year as we lap the high levels of growth and stimulus actions from this past year. In addition, we anticipate the number of store closures to be in the range of 20 to 30, which is consistent with the trend over the past five years. As I mentioned, our fiscal 2023 guidance assumes non-GAAP operating income rate of approximately 5.4% compared to 6% in fiscal ‘22. To be clear, the biggest driver of the lower operating income rate in fiscal ‘23 is our investment in Totaltech. As I just described, this near-term pressure will drive long-term value for our shareholders. There are of course, other factors that we expect to impact our results that for the most part offset each other in fiscal ‘23. We do expect higher levels of promotional activity to pressure our gross profit rate, which is partially offset by the favorable impact of expected growth and our monetization of our advertising business, or Best Buy Ads. We expect our full year SG&A expense to be lower than fiscal ‘22 levels. The largest year-over-year variance is lower incentive compensation expense as we reset our plans after paying out at higher levels in fiscal ‘22 due to the overachieving of our performance targets. We expect the lower incentive comp to be partially offset by a few areas. The first area is higher technology cost, primarily due to annualizing spend in fiscal ‘22; the second area is higher depreciation and store remodel expense, as Damien will discuss later; and lastly, we expect to see higher SG&A dollars in support of our Best Buy Ads business. Finally, as you may have noticed, we are not providing quarterly guidance, but I would like to provide some insight on the assumed phasing for fiscal ‘23. Due to the strong first half comps last year, we expect our full year comparable sales decline to be weighted more heavily in the first half of the year. In addition, we expect to see significantly more year-over-year operating income rate pressure in the first half of the year compared to the back half. To summarize, the two largest variables for fiscal ‘23 financial results are the short-term industry declines as we lap high growth in government stimulus and the investment in our new membership program that will drive long-term value. As we look to fiscal ‘25, we expect the CE industry will return to the high levels we saw in fiscal ‘22 and that Totaltech will drive meaningful growth. I will now turn the meeting back over to Corie to begin our strategic update.

Jason Bonfig:

Thanks, Corie. Good morning. We continue to lead the tech industry with significant high-share and high-consideration categories. What I mean by a high-consideration category, generally higher ASPs in a longer period of time from when you start to think about purchasing to when you actually purchase. Continuing to grow our share in these large categories like televisions and computing will always be a cornerstone of our strategy. But to be truly there for our customers and all their technology needs, we need to accelerate our share across other areas of technology as well and also some new spaces. This is where Totaltech comes in. Products with lower ASPs and shorter upgrade and consideration cycles, our share is generally lower. Totaltech creates a new value proposition that benefits customers when they consolidate their technology shopping at Best Buy. I want to give three examples of a customer journey that illustrate this point. Let’s start with a customer that actually wants to upgrade their kitchen. They want to buy an entirely new kitchen suite with three pieces. That customer that has Totaltech does not have to worry about delivery and install. It’s included in the price. That could be between $400 and $500 value. A little bit later in the year, the same customer hypothetically breaks their phone. They want to get a new iPhone. When they purchase that iPhone at Best Buy, AppleCare is included. Just in the first year, that’s just under $120 of value. Then a little bit later in the year, they want to get a new pair of wireless headphones. If you purchase those headphones at Best Buy, the warranty is also included and you’re a Totaltech member. That’s a $30 value. Examples like these is where Totaltech benefits come to life for our customers and create a reason to make a considered visit to our app, our website, our store, and increases Best Buy share across all of the categories on the slide behind me. Technology innovation never stops. And even when you look over the past three years, you can see value of the new technology and what it creates for our customers. During the pandemic, the majority of the focus was around creating products to meet customer demand. This was a distraction, but even with that, there was significant innovation and value created by our vendors. The slide behind me highlights an upgrade over a three-year period of similar price points across laptops and televisions. While I won’t hit on every new feature and advancement that happened, I’ll highlight a few. For televisions, you get a full 10 inches more in screen size, almost no bezel and the ability to navigate your TV with voice, if you’d like to. On the laptop side, you can log in with your face. It’s faster, thinner, lighter and has significantly longer battery life. These continued evolutionary innovation cycles are never ending, and they drive growth. They create reasons to upgrade and unlock new and better experiences for our customers each and every year. In fact, when we look at our customers’ behavior, we’re seeing a 7% to 15% reduction in the amount of time it takes a customer to get back into a category. They’re coming back to categories faster because of these innovations by our vendors. I’ve highlighted how Totaltech and our vendor innovations will drive growth. Now, I’d like to highlight some macro trends that will also drive opportunities in our business. I’ll start with 5G and fiber. The expansion of speed and networks in general are really, really good for customers and technology. You can download a movie in minutes, collaborate with others instantly, excess a video game or video content anywhere you want without latency. These are things that will drive new experiences and growth for our customers. The next trend is the metaverse and cloud, have virtual experiences, play golf with friends or family members virtually, travel to places that you actually can’t and have a full experience in the virtual world. In addition to that, when you look at the virtual world and cloud, there are new experiences that are created. Previously, you could just play a game on a gaming system and your television. Now you can take that same game seamlessly from the system, to your phone, to your tablet. In fact, if some of you have children like I do, you’re constantly battling the ability for them to play anywhere they want, anytime they want. The cloud also solves significant customer pain points. Previously, our customers would tell us when they wanted to upgrade a computing product, it would take them 60 minutes to get it the exact way they’d want to. That would be moving their icons, their data, just getting it the way the old one was and having the features of the new. Today, with cloud, you’re simply putting your credentials and in 10 to 15 minutes, it’s actually exactly the way you want. You get all the benefits of the new technology and you get all of the placement and all the setup of your old product instantly. That does drive upgrade and it drives interest in customers in upgrading more frequently. The next trend I’d like to talk about is automation and support. The connected home has been around for years, and it’s now moving into automation and support more specifically. Single-function devices like robot vacuums today, tomorrow, they’ll move into security of the entire home, communication and assistance for individuals. This is very, very important as our population ages and people want to stay in their homes longer. Automation and support is one of the ways where technology can enable people to just do that and accomplish their goals and solve that pain point. Next, I’d like to talk about customization and personalization. Customers have always wanted to express themselves, and technology is not excluded from that. But there has been significant advancement in manufacturing from appliances to cell phones where customers can express themselves with a touch of color, a family photo or any other type of personal expression that they’d like to integrate into the products. Sustainability is also a significant trend that’s important to customers, but also very important to Best Buy. I’ll start with a vendor example. Samsung televisions that we sell in our stores today have what is called Samsung solar cell technology in their remote controls. This eliminates the need for batteries, which is obviously very beneficial to the environment, but it also charges off of not only solar, but ambient light in the home. And it means that you’re never going to have a remote that’s out of power. That solves a significant customer pain point. Technology like this will expand to more and more categories and drive upgrade cycles. In addition to that, we want to make sure that we’re supporting customers that want to upgrade more frequently. Today, you see that come to life with our recycling and trade-in programs, which are a very important part of our value proposition to customers. Over time, that will start to move into new usage models that may actually be upfront conversations about exactly how long a customer wants to use a product, and when that next upgrade will happen? Will it be a year? Will it be two years, or will it be three years as we move forward? Let’s watch the video highlighting many of the areas I’ve talked about and even some new additional areas that will drive growth. [Audio/Video Presentation]

Corie Barry:

Thanks so much, Jason. Obviously, you are the expert. Back to our second key takeaway. We have built a unique ecosystem of customer-centric assets, delivering experiences that no one else can. Consumer electronics is a distinctive industry. The products are constantly evolving. They’re connected to networks that are constantly evolving. They all use different operating systems, and they range from small and powerful to large and breakable, often at high price points. And customers are more comfortable using tech than they have ever been yet. They also admit it’s likely not doing all it could to make their lives better. Against that backdrop, we have built a unique ecosystem of assets that all work together to create a stickier and more valuable relationship with the customer. And we’re investing in this ecosystem as we pivot against a backdrop of even higher customer expectations. We’ll provide more depth on a number of these assets through the rest of the presentation. So, anchoring this ecosystem is our expert advice and service. Customers are excited about tech and want to be confident in their purchase. We provide that in ways literally no one else can, from our expertly curated assortment to in-home consultations, all the way to tech support when your tech isn’t working the way you want or trade in the recycling when you want to upgrade. And then building on that strength, our Totaltech membership ties these experiences together and provides unique benefits that customers value and no one else can provide. We then combine those unique experiences with our strength in omnichannel retailing, industry-leading and seamless shopping experiences and services across all channels, including in-home, in-store, digitally, remotely and virtually. And finally, all these interactions provide us rich data and insights across customer experiences to create personalized technology solution tailored to the customer-specific technology and needs. And all this data fuels our business, like Best Buy Ads, matching our partners’ marketing to the most appropriate audiences based on our first-party data. When this ecosystem works together, it provides a unique experience tailored to the customer. It also reaches beyond our consumers into business partners, suppliers and other strategic relationships that leverage our capabilities. Whether it’s our consultative services highlighted on partners’ websites or vendors leveraging our in-store pickup to fulfill from their websites, others value our capabilities. So, let me add some color around the first part of the ecosystem. As I said, customers are excited about tech and want to be confident with their purchase, particularly when it’s part of their daily life at home. So, instead of me trying to describe all the parts and pieces to you, I think this video does an excellent job bringing to life the unique ways we provide expert advice and services, seamlessly across all our touch points. [Audio/Video Presentation]

Damien Harmon:

Thank you, Corie. It’s great to be here with you today to talk about our accomplishments and our plans for this year and beyond across our omnichannel portfolio. As Corie mentioned earlier, omnichannel retail is a critical component of our strategic ecosystem. It’s the most direct way to connect our strategy to the needs of our customers and employees. Let’s look at the last two years before we dive into where we’re going. These last two years have challenged our employees in ways we could have never imagined. Powered by our strategic investments, we were able to serve our customers’ needs and grow the business. There are two areas I want to highlight. First, the connection between our online sales, which expanded to 34% of our total domestic revenue and the 150% growth we’ve seen in our virtual interaction across video, chat and voice. Today, 84% of the Best Buy customers use digital channels throughout their shopping journey. These virtual opportunities have created new ways for us to offer customers the immediate ability to shop with an expert wherever they are. Second and also connected to our customers using digital channels throughout their shopping journey is we’ve seen a 72% growth in customers who are using our app while in our stores. This also creates an opportunity for us to build more digital interactions and technology-related solutions to support their needs. These numbers are amazing. We could not be more proud of our teams and how they deliver. Just as importantly, it gives us an incredible foundation for continued growth and optimism as we look to the future. Now from an omnichannel perspective, we look at the combination of customer experience, loyalty plus operating efficiency. The two main drivers of that and what I’m going to talk about today are how we optimize our workforce and reimagine our physical presence in ways that serve our customers’ needs in an ever-growing digital world. Our focus is on further developing our teammates to give them the skills to help customers inside and outside of our stores, but more importantly, through any number of digital channels that at our customers’ fingertips. At the same time, we will optimize our store portfolio. And as Matt mentioned, we will maintain the trend of closing 20 to 30 stores per year. However, with online penetration growing so rapidly in the last two years, we’re making investments in our stores to provide a better, more seamless shopping experience as customers move from online shopping to visiting our stores to video chatting from their home. So, I’ll start with our people. We have significantly improved efficiency and productivity of our store labor model. We’ve seen a more than 100 basis-point improvement in store domestic labor expense as a percentage of revenue compared to FY20. We’ve also materially increased store productivity over the past two years. We’ve done this by reskilling our teammates and making investments that lean into physical and digital shopping experience. A few examples include our fulfillment improvements, consultation labor and our virtual store. This allows us to leverage our employees more effectively inside and outside of our stores. The great news is that as we’ve made these adjustments, we’ve maintained a strong NPS in our stores. These investments in our people have allowed us to help them learn new skills, grow their careers, gain flexibility and realize their dream by keeping them with us longer. We’ve increased our average wage rate 20% in the last two years by raising our minimum wage to $15 an hour and shifting some of our employees into higher skilled, higher paying roles. In fact, our average wage for our field employees this year will be over $18 an hour. Since we started our flexible workforce initiative in 2020, 80% of our talented associates are now skilled to support multiple jobs inside and outside of our stores. And we’re proud of the fact that our fill turnover rates remain significantly below retail average and are near our pre-pandemic turnover rates. Overall, we’re in a place we like right now. We’re becoming more efficient without losing sight of delivering amazing experiences for our customers and our employees. We’re going to continue to strike the balance between spend and productivity as we look at the factors that I just outlined. Now, an obvious differentiator for our workforce is our Geek Squad team, which continues to deliver an experience that creates repeat customers. We have nearly 21 million services interactions across in-store and in-home services. We’ve significantly expanded our repair capabilities in categories that are important to customers [Technical Difficulty] helped us produce fantastic NPS results in-store, in-home and through our remote support. And after we complete the repairs, customer spend one times more [Technical Difficulty]. In fact 35% of our mobile phone customers are new or reengaged with Best Buy. This is enabled by a technical workforce that has an average tenure of almost nine years and a retention rate an 86%, no-one can match that level of expertise at the scale we can. That’s huge. That team here has helped us produce fantastic NPS results. In-store, in home, and remote areas, customer spend 1.7 times more and engage 1.6 times more often across all Geek Squad services. Geek Squad will be a viral part of our Totaltech initiative, and we’ll continue to offer standalone services that matter to customers, deepen those relationships and drive frequency. Our customers are also leveraging our expertise through consultations as well, both inside and outside of our stores. These consultations provide a direct access to customers for an ever-growing set of experts. Employees who have the skill sets to complete a consultation has grown by 78% last year. And with each consultation, we can inspire what’s possible. Customers spend 17% more across their lifetime value, and they purchase more often when engaged for a consultation. Customers are loving this experience, and we’re seeing strong NPS. When surveyed, 92% of customers say they will likely continue working our expert. And when customers engage with one of our consultations or designers, they shop with Best Buy 2 times more frequently. So looking ahead, we believe our annual consultations will grow by more than 200% by fiscal ‘25. As you saw earlier, we had 45 million virtual interactions across all channels, creating opportunities to engage our customers differently. We’re excited about our virtual store, which just launched last fall. To date, our virtual store in comparison to historical chat experiences is generating higher close rate, higher sales and a 20% improvement in customer satisfaction. And that’s not all. Our vendors are extremely excited about it as well. We started with 17 vendors on board, and we will end fiscal ‘23 with over 60 vendors investing in our virtual store. This is an investment in us and the belief that we’re creating a totally differentiating experience. We’re expanding our virtual store and adding more categories like appliances and home theater. And we expect our virtual sales interactions to double by fiscal ‘25. So, let’s talk about ways we are reimagining our store in support of our physical and digital shopping experiences. We are very excited about the things that we’re testing, learning, in some cases, implementing in our stores. First, let’s talk about experiential store. In 2020, we launched a test in one of our Houston stores and added two additional locations since then. Some of the key enhancements include dedicated showcase spaces for some of the new categories Jason mentioned earlier, like e-transportation, outdoor living, fitness. We expanded our Microsoft and Apple shops and dedicated more space to premium experiences like appliances, home theater and audio. We expanded our Geek Squad presence for more customer interactions and space for repair services. And we’ve also enhanced the fulfillment capabilities to include exterior lockers, additional space with shipping, packing and fulfilling from our store warehouses. And we’re excited about the performance. We’ve seen a 370 basis-point improvement in NPS. We’ve seen a steady lift in customer penetration in the retail trade area as well as overall customer spend. And we expect to continue to see strong revenue lift in these experiential stores, and we will remodel 50 locations in fiscal ‘23 and about 300 locations expected by fiscal ‘25. Now, I want to highlight our 16 outlet stores that are open-box clearance, end of life and otherwise distressed large product inventory across major appliances and televisions, which might otherwise be liquidated at a significant lower recovery rate. These outlets unlock value by alleviating space and capacity from our core stores, and they are an important element of our circular economy strategy by providing a second opportunity for products to be resold instead of ending up in the landfill. In FY22, gross liquidation recovery rate is almost 2 times higher than alternative channels. These locations are attracting new and reengaged customers. 16% of customers are new and 37% of customers are reengaged. In FY23, we will double the amount of outlet stores, and we’ll test expanding our assortments by adding computing, gaming and mobile phones. As we discussed last year, we launched a test in Charlotte of a new holistic market approach. And as I mentioned earlier, the ways people are shopping today are entirely different than how they shopped two years ago, and our stores and the way they operate need to change and adjust accordingly. This work in Charlotte is a manifestation of this shopping evolution, and this pilot leverages all of our assets in a full portfolio strategy across stores, fulfillment, services, outlets, consultation labor, and we bring it all together with our digital app. Within the test, we are looking at how a variety of store formats across 15,000, 25,000 and 35,000 square feet locations can serve customers’ needs. And this summer, we will be introducing a 5,000 square-foot store into the marketplace. When you look at the before and after map of the Charlotte market, you can see we have reduced our overall square footage by 5% and yet we’ve increased our customer coverage in the marketplace from 76% to 85%. We’ve also added 260 access points, where customers can get their gear and employee delivery covers nearly half of the metro. So looking ahead, we’ll be focusing on using this market to learn in fiscal ‘23 before we make decisions on what to scale or what not to. Technology enhancements are at the center of many of the changes I just mentioned, from self-checkout to virtual store, technology supporting our teams and customers in new and exciting ways. Take a look at this video to see what we’re doing. [Audio/Video Presentation]

Deborah Di Sanzo:

Thank you, Damien. Here is the ecosystem slide Corie and Damien shared, and it’s a perfect introduction to Best Buy Health as our work is an excellent example of the Best Buy ecosystem and flywheel. Today, I will share the strategy of health at Best Buy. But first, let’s see it come to life in this video. [Audio/Video Presentation]

Matt Bilunas:

Thank you, Deborah. You’ve heard details from Corie, Jason, Damien and Deborah about some key areas that give us excitement about the opportunity in front of us. We firmly believe our differentiated capabilities and focused investments will lead to compelling returns over time. While fiscal ‘22 was certainly an amazing year, we see a path to even higher revenue and earnings by fiscal ‘25. And as we look beyond fiscal ‘25, we see even more opportunity for revenue growth and operating income rate expansion as the benefits from our initiatives like Totaltech and Best Buy Health grow even further. Before I share additional details on our fiscal ‘25 targets, I would like to review a few guiding behaviors that have been our brand for several years. First, we plan to fund our growth through the cash we generate and return excess cash to shareholders. Second, we are committed to leveraging cost reductions and efficiencies to help offset investments and pressures in our business. Our current target set at 2019 is to achieve an additional $1 billion in annualized cost reductions and efficiencies by the end of fiscal ‘25. We achieved approximately $200 million during fiscal ‘22, picking our cumulative total to $700 million towards the $1 billion goal. Let me take a moment to reflect on our past performance. We have talked about our record results over the past couple of years, but it is also important to note that we have had very steady growth in the years leading up to the pandemic. This past year was the eighth straight year of comparable sales growth. In addition, we have expanded our operating income rate, earnings per share and ROI. Earlier in the presentation, we shared our fiscal ‘25 targets, so I won’t cover them in detail here, but I’d like to spend a few minutes on our fiscal ‘25 assumptions. We expect our revenue in fiscal ‘25 to be in the range of $53.5 billion to $56.5 billion. This range reflects a three-year compound annual growth rate of approximately 1% to 3%, despite the anticipated decline in sales in fiscal ‘23. I would also note that due to expected store closures, our comparable sales CAGR would be approximately 2% to 4%. There are a few key assumptions underlying the revenue expectations. First, as Corie shared, we believe the consumer electronics industry will remain significantly higher than it was pre-pandemic, and we expect that fiscal ‘25 will be back to a level similar to fiscal ‘22. Second, we believe we have an opportunity to capture even more market share than we have in the past. This is due to growth from Totaltech and the store initiatives that Damien talked about. As it relates to Totaltech, we believe that the combination of membership revenue and incremental purchases by members will add approximately $1.5 billion in revenue by fiscal ‘25 compared to fiscal ‘23. This is a net impact. So, it incorporates the impact of cannibalizing other standalone services now part of our membership offering. Of course, we also expect revenue growth from Best Buy Health and the expansion into additional categories that Jason shared earlier. As we move to our fiscal ‘25 operating income rate outlook, we expect to expand our rate to a range of 6.3% to 6.8%. As we have highlighted, Totaltech is currently pressuring our fiscal ‘23 operating income rate. Health has also been an area of investment for us over the past few years. However, as each of them scales, we expect them both to meaningfully contribute to our fiscal ‘25 rate outlook. We also see opportunities to lean in even further on capabilities like our in-house media business, Best Buy Ads, which as Corie mentioned earlier, is fueled by our first-party data. We expect this business will benefit our fiscal ‘23 operating income with benefits increasing in the out years. In addition, we expect to see rate benefits from our continued focus on finding cost efficiencies that benefit both, gross profit and SG&A. Damien highlighted a number of strategies that are part of this effort. As we’ve discussed over the past few years, technology will be critical in unlocking many of these opportunities. Of course, there are areas where we will likely see pressure on our rate in the future. The first example of this is pricing. Throughout most of the pandemic, the level of promotions in our categories has been well below levels of fiscal ‘20. This has been largely a result of higher demand and more challenged or constrained inventory environment. We have seen pockets of promotional activity increase over the past two quarters, and our belief is that the promotions will continually progress back to fiscal ‘20 levels. A second area I would highlight is increased spend in technology in our store portfolio. As we have shared over a number of quarters, our technology spend has been increasing in support of our initiatives and overall omnichannel experience. In addition, we expect more depreciation expense from our capital investments in our stores. Lastly, there are a few other factors we will continue to assess, but at this point, don’t see as being a material to our rate in fiscal ‘25 compared to fiscal ‘23. First, from a store labor standpoint, we expect to maintain expenses at a similar rate of revenue. We will continue to invest in higher pay for our employees, but expect to balance the higher wages to efficiencies, leveraging technology and more flexible workforce. Second, we do not expect channel mix to have a material impact to our rate. As Damien shared earlier, our outlook assumes closing 20 to 30 stores per year through fiscal ‘25. This assumption reflects our belief that the online channel mix will grow approximately to 40% in fiscal ‘25. We will continue to apply a rigorous process for lease renewals to ensure we are comfortable with the financial return and overall customer experience. Currently, the vast majority of our stores are cash flow positive, and we believe are essential for us to serve our customers. I’ll move next to our cash flow and our capital allocation approach. To start with, we have been generating healthy levels of free cash flow for several years, which provides us ample room to fund our growth investments. Our average annual free cash flow over the past five years is more than $2.3 billion. Our capital allocation strategy has been consistent for several years. Our first priority is to reinvest in our business to drive growth, highlighted by the strategies you’ve heard today. This includes both, capital expenditures and operating expense investments. Next, we may explore additional partnerships and acquisitions if we believe they will accelerate our ability to achieve more profitable growth. We also plan to continue to be a premium dividend payer and return excess cash through share repurchases. Let me quickly expand on a few of these areas. We expect our annual capital expenditures to increase to a range of $1 billion to $1.2 billion over the next three years. Earlier, Damien outlined a number of changes to our stores to further our strategy. Consistent with our iterative approach, we will test, learn and deploy once we have vetted anticipated returns of our initiatives. Technology investments are expected to remain similar to fiscal ‘23, simply decreasing as a mix of our capital deployment. This morning, we announced a 26% increase in our quarterly dividend to $0.88 per share. Our targeted dividend payout remains in the range of 35% to 45% of prior year’s non-GAAP diluted earnings per share. Lastly, this year marked a record level of share repurchases at $3.5 billion. In fiscal ‘23, we plan to spend approximately $1.5 billion on share repurchases. So, with that, let me turn the stage back over Corie.

Corie Barry:

Welcome back. We are excited to begin the Q&A portion of our event, which we expect to run approximately 45 minutes. But before we do, I want to take this opportunity to introduce and welcome Mark Irvin, our new Chief Supply Chain Officer. Many of you spent time with Rob Bass and may know that he recently announced that he is stepping away from a life in retail to pursue some other passions, as we have been discussing for quite some time. We are so excited for him and thank him for his incredible work on our supply chain transformation. That incredible work extended to his ability to bring in top tier talent. One example of that is Mark Irvin, who came to Best Buy in 2013, specifically to work with and learn from Rob. Mark has been an instrumental part of the team that has led our supply chain transformation and is ready to use his lifetime of knowledge in the space to continue to advance our industry-leading supply chain efforts. We are thrilled to have Mark Irvin taking over the reins in supply chain. And we’ve invited him to join us for Q&A. So, operator, we are now ready for our first question.

Simeon Gutman:

Hey. Hopefully you can hear me and hopefully my mugshot doesn’t stay on as Chris’s. Okay, great. So, my first question is on the industry outlook. So, you’re effectively saying that the industry will revert or digest in ‘22. And I want to make sure I understand that in ‘23 it starts to grow. Can you talk about why does it grow, why doesn’t this revert for two years, given the consumption growth we’ve had? I assume it’s having to do with the innovation and shorter replacements. But, why doesn’t that begin in ‘24 as opposed to ‘23?

Simeon Gutman:

Okay. And maybe as a follow-up to Totaltech, this will just have a couple of pieces, but I promise it’s all Totaltech related. Any quantification of the impact to the EBIT or EBIT dollars in ‘22 or fiscal ‘23? Can you share what you think or expecting or modeling for renewal for year one of Totaltech? And then, you mentioned you’re seeing 20% lift in some of the early sign-ups. Is there a danger or risk you’re basing that off of the period of very good consumption when there was stimulus money hanging around. So, how are you confident that’s a good level to think about going forward?

Matt Bilunas:

Sure. And maybe just to adjust the overall impact to EBIT next year, we talked about the OI rate being at 5.4% and last year ended at 6%. That decline is mostly coming from our gross profit rate decline. And the majority of that gross profit rate decline has been -- is due to the Totaltech membership rollout. As you know, we launched the membership in Q3 -- at the end of Q3 last year, and we don’t cycle that until Q3 of next year, FY23. So, that majority of that gross profit decline is coming from the Totaltech launch, to give you a general size of the impact.

Chris Horvers:

Thank you. Clearly, I need some Totaltech support there. So, I guess, my first question is a bit of a follow-up. You talked about a 2% to 4% CAGR over the next three years. If you’re down at the midpoint, it looks like you’re embedding, if -- check my math, roughly like a 5% comp in the out two years. And if you look back 2015 and 2019, you sort of did a 3%. So, a two-part question is, first, what drives the confidence in that? And then, the second part of it is, are you assuming share gains in core categories, like PC and TV? And to what extent is the contributor from these new opportunity categories that you’ve talked about?

Chris Horvers:

Understood. And then, my follow-up question is any further cadence commentary on the top line? Obviously, you got a couple of years of stimulus here in the first quarter. Is it fair to think that 1Q is the low point in the year? And if you hit the midpoint of the range, or is your expectation that in the fourth quarter you could flip to the positive?

Operator:

Your next question is from the line of Karen Short from Barclays.

Matt Bilunas:

Yes. I’m not sure I caught the entirety of the first part of that question. But, in terms of the store four-wall operating rate in the future. We would expect to continue to find efficiencies in our store operating. Damien outlined a number of things that we’re doing. It’s also important to know that the store is connected to the broadness of how our whole business works from an omnichannel perspective, whether it’s the store, our digital presence, our chat or virtual sales that we’re now engaging in. So, we’re always going to find ways to create efficiencies. Obviously, there are some levels of inflation in fixed costs within our stores that we’re always choosing to navigate, but we would expect that there’s still opportunities for us to continue to drive a better outcome on the store side from a profitability standpoint.

Karen Short:

No. That’s helpful. And then, I’m just curious, with respect to the Charlotte test, any color or metrics you can give on the overall margin, I guess, and/or sales lift in that store? I realize that there’s a decline in sales floor square footage. But, any timeline on unrolling that out to other markets?

Damien Harmon:

The only thing I would add is, traditionally, we’ve looked at one store at a time and how that particular store can create an experience for a customer. Now, you’re looking at the full portfolio, all of our assets in a particular geography, and you’re finding ways to be able to navigate that customer experience and what they’re expecting across a multitude of different experiences. I think, that’s what’s really important is, we’ve never done that before because it’s been in each individual store. Now being able to say across a 15,000 or 25,000 or a 35,000 square-foot store in an outlet experience and our consultation labor, we can take care of that customers’ needs across the board, and our teams are working across the stores. Our teams are working across different customer expectations and really delivering a unique experience in that marketplace. And we’re continuing to learn over time, and then we’ll apply that as we see what’s working best for us or what’s not.

Greg Melich:

I guess, I’d like to start on understanding a little bit more about the pricing commentary that you made in your outlook for the next couple of years. And if we look at just average unit size versus number of transactions last year, could you give us that? And then, help us understand as you get that 2% to 4% comp, how much of it do you expect from ASP as opposed to transactions?

Greg Melich:

Great. I’d love to follow up on that a little bit on the Best Buy Advertising. Is that more of a revenue opportunity or a margin opportunity? And how important is it? Is that basically selling ads to current vendors, or are there opportunities more broadly?

Matt Bilunas:

Sure. The Best Buy Ads business, for now, it’s -- most of that’s coming through our current vendors. And when that’s the case, what it does, it actually drives margin rate is recorded as an offset to cost of sales. So overall, when you take that in addition to the SG&A required to drive it, it does create an OI rate positive experience for us, but it is more of a rate offset in margin. To the extent we drive more sales with people that aren’t our vendors and we go outside of our ecosystem, that actually would then show up into revenue in the future.

Anthony Chukumba:

First thing I wanted to clarify is that picture is not a catfishing situation that I actually do look very similar to that right now as we speak. So, I just wanted to clear that up. But, in terms of my actual questions, I guess, you mentioned that the promotional -- promotions did increase year-over-year. And obviously, that’s kind of a -- it sounds like it’s a sort of end of pandemic type of normalization to some extent. I guess, my first question is, I guess, were promotional levels relative to the fourth quarter, I guess, 2020?

Anthony Chukumba:

Got it. That’s helpful. And then, just a quick follow-up. And you talked a little bit about this in the press release. Just even directionally, what was the impact from, I guess, supply chain issues, product availability issues on your fourth quarter results? And what do you expect the impact to be, even just directionally on your F 2023 guidance?

Corie Barry:

And Anthony, I think the other part of your question was around the inventory levels that we saw in Q4. And we haven’t sized it specifically, but I think it’s fair to say we would have been healthy in our range, had we not had some of those very targeted -- and again, I want to be clear. They’re very targeted inventory constraints that were just a bit larger than we thought. And I think we expect to see some of those continue into, especially the first half of next year and again in a more targeted way. But our overall inventory situation, I think that’s some of what you’re seeing in the promotional environment, our overall inventory situation is very healthy. I mean, they are year up 6%, 15% versus two years ago. So, it’s just these pockets where we’ve seen more demand, so that’s good, but a little bit more constrained than we were expecting.

Michael Lasser:

Best Buy has a long history of doing what it says it’s going to do, setting realistic expectations and then following through on those expectations. If you do get some feedback or there is sentiment coming out of this event, it might be that you set really aggressive targets over the next few years, especially on the profitability side to put some perspective around that. The midpoint of the 6.3% to 6.8% operating margin expectation would be 50 basis points better than what Best Buy’s ever done in the past, and that was during a pandemic. And get to the midpoint, Best Buy will be able to achieve 50 basis points of annual operating margin in fiscal ‘24 and fiscal ‘25, whereas prior to the pandemic, it was generating about 20 basis points of annual operating margin expansion. So, as you look out, what’s changed about the model to make it more -- that much more profitable than Best Buy has been in the past? Is it really healthcare, advertising? You’ve been able to master the profitability of the online business? And as part of that, could you talk about the contribution from Totaltech, Best Buy Ads, Best Buy Health and cost reductions inefficiencies, would they all equally contribute to the profitability expectations a couple of years from now?

Corie Barry:

Michael, I think you have stacked -- and you actually nailed and laid out a lot of them. But you have this kind of stacked quantity of things that both have happened and that we’re investing in. I mean, we have tremendously more scale than we had just two years ago with $8 billion added to the top line. And obviously, that -- majority all coming through are digital experiences. So, we’ve navigated a massive change in the composition of our business. Under that, we’ve also created material efficiency and effectiveness because I think it’s really important to note, we also noted in prepared remarks, in Q4, we saw some of our best NPS results, particularly on the in-store side of things, our teams are doing incredible work garnering skills. 80% of our associates have more than one skill, which allows us to move this labor really flexibly and allows really interesting career paths. So, you’ve got scale, you’ve got a really efficient and effective model that now has moved through this changing dynamic. And then, we’re layering on top distinct initiatives that we have expectations around return. Totaltech being one, the ads business being another, the health business that we’re investing in for our future, the store experience side of things, all of these. We are using behavioral history that we’re seeing in our customers to help us predict how we think this model looks in the future. And I would just underscore what Matt said, I give the team a great deal of credit for choosing to double down on these investments now because we do think this is what unlocks exponential growth for us as we head into the future.

Matt Bilunas:

Yes. Certainly, the ranges we gave from a revenue and OI perspective have those ranges on all the initiatives and various components of our plan. So, we would continue to strive for those targets that we gave for operating rate income, despite maybe coming at the bottom end of that scale. There’s obviously a range when come to the initiatives, but also just the work in our baseline or business to create efficiency. So, we would continue to target that even if it was towards the lower end. But obviously, we’re going to make the right decisions for the long term. So, we’ll always choose to invest as we need to along the way.

Scott Mushkin:

So, getting to the margin, I was wondering if you could give us like cadence. Obviously, you’re going to be down to the -- this year but then sharply up in ‘24 and ‘25. I mean, is it balanced between those two years, or is it mostly expected in ‘25, the improvements?

Scott Mushkin:

Okay. And then, my second question is, obviously, on the revenue side, there’s some pretty ambitious targets. I think, Michael was talking about that a second ago. But, I was wondering, you’re obviously attacking new areas and new categories. When you think about the comp, how much is coming from those new areas? And how much is it increasing your addressable market? I know you threw $300 million out there. But, is your market now actually going to be bigger than that as you attack new areas for the business?

Operator:

Your next question is from the line of Peter Keith from Piper Sandler.

Corie Barry:

Maybe I’ll start with a little bit of context, and then I’ll ask Deborah to come in since she came in partway through the journey. I think it’s maybe not as much about what -- maybe what didn’t perform as well. I think it’s what we’re learning about a consumer that has changed a great deal, particularly in the last two years. So, some of those early hypotheses we had around health moving into the home, around people wanting to age in their homes with technology, I think those hypotheses were actually exponentially sped up over the last couple of years. And, we started to see some new use cases around virtual care in particular. So, I think, we felt like we were pointed in the right direction even three, four years ago. It’s just that the consumer behaviors have really changed in the last two years, having gone through the pandemic. And now we’re refining our focus a bit so that we really target where the industry is going. Maybe Deborah, you could add some color.

Peter Keith:

Okay. Thank you. Maybe another question, I would want to pivot over to Jason on some of the macro and product trends. Here again, 5G, we’ve been talking about for a couple of years. It seems like it’s starting to come to life; metaverse, maybe a couple of years out. Could you bring those to life for us a little bit more in terms of types of products you would expect to sell and how you might be involved from a services implementation as we think about product cycles in these areas?

Corie Barry:

And Peter, to your question about services, this is so interesting. Because what we’re seeing is this really high level of interest and yet confusion around what it is and what I do. I just read a survey that said that 70% of consumers age 65 and older want to try VR experiences, but aren’t even sure exactly where to start. And so, sometimes this is consulting services in the home. But sometimes this is as simple as having that wide array of products from all of the vendors and just being willing to help people kind of dabble into, whether it’s metaverse or 5G, which becomes really relevant as we’re talking about getting out of our homes actually, and being on the go and being able to game and work and learn on the go. So, I think for us, this is long continuum, all the way from coming to the store and we can just help you understand what this is, all the way to, now I have twice as many conducted devices in my home. I want to learn how to leverage a 5G network and maybe get off Wi-Fi. How do I do all of that? And I think over time that -- again, from our unique point of view, that’s where we can be helpful to the consumer.

Zack Fadem:

Can you help us bridge the gap from your current gross margin profile of 25.5? And help us understand what’s embedded in the 6.5% EBIT margin target? And specifically, could you walk us through the expected Totaltech drag in 2023? How that’s expected to normalize? And how we should think about the other moving parts mixing around new categories and promo, et cetera?

Zack Fadem:

And on that OI rate expansion from 5.4 to 6.5 in 2025, it suggests a 100 basis-point improvement over a two-year period. Is it fair to assume that that will be evenly distributed in ‘24 and ‘25, or are there certain drivers or initiatives that are more weighted towards the front or back end?

Operator:

Your next question is from the line of Scot Ciccarelli from Truist Securities.

Deborah Di Sanzo:

Scot, thank you. Thanks so much. I’ll take that. So, think about it this way. First of all, the health presentation that we presented today is a bit different than the strategy that you saw previously. So, this is really one strategic area, three focal points,, taking advantage of the rapid consumerization of healthcare, which did really not exist before two years ago. Second, we continue with active aging. People still do want to live healthy and happy and independently in their homes. And the third area of virtual care is also an era which essentially did not exist before the pandemic. Now hospitals want to have hospital home programs. They want to take care of helping people get better in their homes where they are surrounded by loved ones and feel comfortable. And so, hospitals all over the country are really putting in hospital at home programs, putting in chronic disease management programs. These are growth areas that did not exist before. Our focus before was in active aging. And as I said in my prior remarks, those are consumers 65 years and older and for our products, so the active aging products, they really appreciated a physical store experience. And so, when we had different hours in the last 21 months, when we had some store closures, it did impact the active aging business. But we see it now really -- we had a very strong Q4, and we see that continuing.

Matt Bilunas:

Not necessarily. The growth in membership is indicative of the value of the offer, the interactions that they want to have with us. And so, we would see membership revenue grow, but also to the extent that members are growing, the incremental product sales that they would grow, would grow with that. So, it wouldn’t necessarily impact the pace at which we could actually drive profitability.

Steven Forbes:

I wanted to start with customer relationships event, maybe a topic from the last Analyst Day. So, Corie, if you can, really, if you frame where we are with those events across the various interactions and provide some high-level insight on how the relationship events over the past two years have or maybe amplify the business strategy that you laid out, supporting the upwardly revised targets?

Steven Forbes:

That’s helpful. And then, just a quick follow-up as we revisit the holistic market approach. Just curious what sort of incorporated around that strategy over the next two or three years in those longer-term targets that you laid out?

Corie Barry:

The markets. So, when Matt was talking about the capital guides that we kind of gave, you could see some of that increase in capital. At some point, we’re assuming, and Damien talked specifically about the experiential stores, there probably will be some other store concepts that we may choose to roll. But, what I want to say is we’ve been very clear that the Charlotte market is a pilot, and we mean that. Sometimes people say pilot and then they fully know exactly everything they’re going to roll from there. It is a pilot. We are learning from it. And we assume that at some point, we will continue to roll pieces of that model. But, we’re not yet ready to say this is exactly the concepts, exactly how many and exactly in what markets.

Operator:

Your last question is from the line of Liz Suzuki from Bank of America.

Matt Bilunas:

Yes. It’s increasingly difficult to look at two years and three-year stacks of growth rates. I think, the best guidance for us would be if you look at the next year’s guide of 1% to 4% and think about the first half versus back half. The first half is going to see a bigger weighted sales decline just based on the 37 comp we did in Q1 last year and then the 20 comp in Q2. How that works out exactly -- it won’t necessarily be even from a three-year perspective or a two-year perspective. But if you think about a first half, back half for next year is probably the easiest way. And then, think about the overall guide of 1% to 4% and how that -- where they may land in that order.

Matt Bilunas:

Yes. We didn’t quantify it. What we said is we believe we would have been pretty safely in the range of our revenue performance in Q4 if we hadn’t had to reduce our store hours and if we had seen the level of inventory in certain products and categories that we were expecting. Some of that wouldn’t necessarily be lost because people find that people do come back to us after maybe an attempt that they couldn’t or if the product wasn’t available. So, it isn’t necessarily lost as you look into next year, but we do believe we would have been pretty safely in the range of revenue, had those two factors not happened.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Best Buy's Q3 FY 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 11 A.M. Eastern Time today. [Operator Instructions] I will now turn the conference over to Mollie O'Brien, Vice President of Investor Relations.

Corie Barry:

Good morning, everyone. And thank you for joining us. Today, we are reporting record Q3 financial results of $11.9 billion in sales and non-GAAP diluted earnings per share of $2.08, which is up 1% over last year and up 84% compared to 2 years ago. Against a still evolving backdrop, our leaders continue to drive new ways of operating, and our employees continue to do amazing things to support our customer's technology needs and knowledgeable, fast and convenient ways. Our omnichannel capabilities and our ability to inspire and support across all of technology in a way no one else can means we are uniquely positioned to seize the opportunity in this environment and in the future. We continue to capitalize on strong customer demand as more people sustainably work, entertain, cook and connect at home. And Domestic comparable sales growth was up 2% on top of 23% last year. From a merchandising perspective, the biggest contributors to our comparable sales growth in the quarter were appliances, home theater and mobile phones. Product availability continued to improve throughout quarter. We have pockets of constraints in areas like appliances, gaming and mobile phones. Similar to last quarter, however, we do not believe this materially limited our overall sales growth. While we have faced and continue to face supply chain challenges, including delays and higher costs, we are proactively navigating a situation that we have been dealing with for several quarters, as our industry has been facing disruptions and supply constraints since early in the pandemic. Our merchant demand planning and supply chain teams made strategic sourcing and inventory decisions early in the year to set us up well heading into holiday. And we are resourcefully adapting to the constantly evolving environment with actions like pulling up product flow, adjusting store assortment based on availability and acquiring additional alternative transportation. We have deep, long-standing relationships with our transportation and logistics vendors, and they have been incredibly supportive as we navigate. In addition, through our close partnerships with our product vendors, we have a great deal of visibility into and can influence the status of product in the supply chain process. We have varying degrees of inventory and supply chain challenges every holiday season, and this year will be no different. But we entered Q4 with 15% more inventory year-over-year and feel confident in our ability to serve our customers throughout the holiday. As expected, we did experience a more promotional environment for many of our products when compared to last year. When compared to 2 years ago, we still saw a less promotional environment during Q3. From a sales channel perspective, results were similar to last quarter. Customers are returning to stores and they are also choosing to interact with us digitally and via phone and chat at much higher rates than pre-pandemic. Online sales were 31% of domestic revenue compared to 16% in Q3 of fiscal '20, growing by more than $2 billion during that time. Our app saw a 19% increase in unique visitors versus last year, and phone and chat sales continued to climb versus last year and 2 years ago. We continue to be an industry leader in fast and convenient product fulfillment for our customers. During the third quarter, we reached our fastest small product delivery times ever. Compared to last year, same day delivery was up 400% and we nearly doubled the percent of products delivered within one day. Based on a third-party analysis of competitor websites, we are the leader in one day or less published shipping time across a sample of higher volume ZIP codes and higher demand items. In addition to partnering with a diversified set of delivery partners, we also thoughtfully used our employee delivery capability, as we now have more than 400 stores doing employee deliveries, with almost 60% of our customers living within 10 miles of a delivery location. We also have an industry-leading in-store pickup experience. We have, by far, the broadest assortment of CE products available for pickup, and the process is incredibly fast. In Q3, more than 90% of online orders, that were available for product pickup, were ready in less than 30 minutes of the order being placed. Customers clearly find value in coming to our stores to pick up their products as the percent of online sales picked up at our stores remained high at 42%, even with our fast home delivery options, with one third of our store pickup customers choosing our convenient curbside option. And our customer NPS for order pickup in Q3 was up versus last year and 2 years ago. In fact, in the last year, 31% of all our purchasing customers bought online and picked up in store at least once. These strong Q3 results and our market-leading omnichannel capabilities are due to our amazing associates across the company and the investment decisions we have made in the last several years in supply chain, store operations, our people and technology. Clearly, our business has changed dramatically in the last 2 years, with digital sales more than double pre-pandemic levels and phone, chat and in-home sales growing. Customers are starting their research and shopping online and then branching out from there to all forms of digital and physical shopping depending on their specific needs. Stores are crucial to our customer experience, and they need to be even more efficient and must keep pace with greater customer expectations. For example, we know customers sometimes seek out in-person help to answer questions, and other times, they would rather use digital tools to learn about products or pick up their orders in our stores. We have made the right investment decisions to position us as a leader in omnichannel retailing. While we are proud of our progress, there are even more opportunities ahead of us and it is more important than ever to build on our position of strength and truly become a customer-obsessed company. This means we put the customer at the heart of all we do by anticipating their needs, listening, learning and applying those insights to create long-term relationships and seamless experiences. That led us to launch Best Buy Totaltech last month. Totaltech is a bold new membership program, leveraging our strengths across merchandising, fulfillment, installation, tech support, and product repair, unique capabilities that customer's value and no one else can match. Our membership program offers product discounts and periodic access to hard to get inventory, free delivery and installation, free technical support, free product protection and many other benefits. Let me provide a tangible example of how the offer can come to life. A Totaltech member purchases a 65-inch TV and gets a $150 member discount. She gets the TV delivered and mounted on the wall in her living room. The next month, she buys a new iPhone for her daughter. As long as she keeps up her membership, she gets 2 years of product protection on the TV she bought and 2 years of AppleCare+ protection for the phone. A few weeks later, she can't get her laptop to connect to her printer. So she hops on the dedicated chat line with Geek Squad who fixes the problem by remoting into her computer, so she can get on with a productive day of working from home. As a member, she received all those benefits for $199 per year. As you can see, not only do members receive significant savings, they can also be confident that whatever their technology needs are we will be there to help. The goal is to create an experience that makes it inconceivable for members to purchase their tech from anyone else, driving a larger share of consumer electronic spend to Best Buy. We successfully rolled out the program nationally and online and converted more than 3 million former tech support members. It is very early as we just launched last month. But so far, we continue to see behaviors that we intend to drive and that we saw in the pilot, including more frequent interaction and higher incremental spend than non-members. Given the breadth of the offer, it is resonating well across all customer demographics and our new members are skewing younger than our former Total Tech Support membership program. NPS numbers across all channels are higher than for non-members as well. And importantly, our employees believe in and love articulating the value of membership to our customers. As we discussed in previous calls, we are in the midst of multiple store pilots and tests. Of course, we are always piloting concepts. But right now, we are very focused on piloting and testing to build a framework that will move us from a retailer that is focused foremost on its stores to a true omnichannel one that provides equal focus on all the ways customers shop with us. I will provide a few updates on our progress. We launched Phase 1 of our virtual store pilot last month. For this, we built out a physical store in one of our distribution centers with merchandising and products that is staffed with dedicated associates, including vendor-provided expert labor. It has no physical customers. Instead, customers interact with our experts via chat, audio, video and screen sharing depending on their preference and are able to see live demos, displays and physical products. It is early, and we have not rolled out all the product categories yet. But initial results are showing much higher conversion rates, as well as higher average order value than we see with historical chat interactions. In Charlotte, we have made significant progress rolling out the market pilot designed to leverage all our assets in a portfolio strategy across stores, fulfillment services and outlet lockers, our digital app and both in-store and in-home consultation labor. We launched our new outlet featuring all product categories in addition to a new services hub model and re-modeled 8 stores. And in Houston, we are continuing to see strong results from our experiential store pilot and plan to roll out aspects of this more broadly in stores across the country as we enter next year. These are not the only pilots happening, and thus, they aren't the only pilots that will influence where we go as a company. From Northern California to Houston to The Bronx, we are assessing new formats and learning our way to the right physical model. At the same time, we are piloting and evolving our labor models in other markets to meet our customer's changing shopping behaviors. That means leveraging technology in stores that don't have as much labor and developing a much more flexible workforce. This is a workforce that can not only provide expert help across product categories, both in-store and virtually, but also flex into other activities like curbside fulfillment, and it empowers employees to flexibly pick up shifts at other stores or at our distribution centers. I also want to highlight our unique ability to both inspire and support our customers through our consultation and our Geek Squad services. We have almost 3,000 consultants and designers to provide free consultations across customers' homes, in stores and virtually. These consultations represent one of our highest NPS experiences consistently over 80. Importantly, they also lead to longer term and stickier customer relationships as more than 85% of customers who use the program stated they intend to continue shopping with their consultants. Turning to the product support we provide, as many of you likely know, when something goes wrong with your products or delivery or installation, it is a highly unplanned and often emotional event. Not surprisingly, our customer research tells us that customers value quick response times and demand transparency, fast repair times, and quality repairs from a trusted provider. Our Geek Squad has an industry leading set of capabilities that garner market leading NPS and also drive additional revenue for Best Buy in the moment and over time. Around 20% of our phone and computer repair customers purchase additional products the day they receive the repair. Additionally, our data shows that customers who have phone or computer repairs are far more likely to make a purchase in the following 12 months. Over time, we have also been evolving our partnerships with our vendors in response to changing customer shopping behavior. Our in-store vendor experiences are crucial to our customer experience and remain a significant source of competitive advantage. We have extended many of these in-store experiences to digital experiences. Our vendors partner with us to provide expert training and tools for our consultants and designers. And importantly, our vendors are increasingly sending sales leads from their own websites to our consultants and designers. We are also leveraging our unique Geek Squad capabilities to strengthen and expand our partnerships with our vendors. We are already the nation's largest physical destination for Apple authorized repair services, including same-day iPhone repairs, attracting new customers as one third of these Apple repair customers are new or reengaged customers for Best Buy. In October, we launched Samsung authorized phone repair service nationally. Roughly 30% of our stores will offer same-day in-store repairs completed by Samsung certified Geek Squad agents, using Samsung parts, diagnostics and tools. Phone repair is a universal need for customers, and this expansion gives Best Buy the capability to repair the overwhelming majority of phones in the marketplace. In addition, we are also starting to leverage our industry-leading and convenient buy online, pick up in store experience in partnerships with our vendors. Customers purchasing select items on samsung.com now have the option to pick up their products at their local Best Buy store and shoppers purchasing Insignia, Toshiba and Pioneer Fire TVs on amazon.com can pick up their TVs at their local Best Buy stores. For many of our vendors, we use our considerable supply chain expertise to transport their product often from the country of origin to our distribution centers. In addition to helping our vendors, it allows us to increase our level of visibility into incoming inventory and to garner greater scale. And finally, we have been investing in our long standing advertising business, building new capabilities to help vendors effectively reach our customers. Best Buy's relevance, customer relationship, and first-party data have grown along with customer's technology needs and our ability to meet those needs. These are all great examples of value we can provide to our vendor partners that many other retailers cannot. In addition to focusing our performance on our core CE and appliance categories, we are continuing to expand our assortment in newer categories where we can leverage our ability to commercialize new technology. For example, we created a robust online experience and assortment for electric transportation. And during Q3, our sales in the category more than doubled. As a result, we are expanding our online assortment of electric bikes by four times and also plan to assort them in physical stores early next year. And because customers are looking to us to complete their solutions, we have been expanding our assortment in categories like outdoor living, as more and more consumers look to make over or upgrade their outdoor living spaces. This includes products like patio furniture, grills, fire pits, and electric mowers, just to name a few. In fact, earlier this month, we acquired Yardbird, a leading direct-to-consumer company that specializes in premium sustainable outdoor furniture, including dining sets, lounge seating, fire tables and accessories. We are excited about the opportunity to use our expertise in merchandising and supply chain to scale this business both online and in physical locations across the nation. We also made an exciting acquisition recently in the health space. Let me take a second to reiterate our overall health strategy and how the acquisition fits. Our Best Buy Health strategy focuses on three areas that start with our strength in retail and build to connecting patients to physicians. The first focus area is the consumer health category for customers who want to be healthier, sleep better, or need to monitor a chronic condition like diabetes or heart disease, for example. You can see this built out in a robust way on our website. The second area is active aging, which includes device based emergency response and other services for Generation A, who wish to live independently in their homes. This opportunity shows up prominently in our physical stores. The third focus area is virtual care. Best Buy's role in virtual care is to enable people in their homes to connect seamlessly with their health care providers. The trend to this type of care is increasing, accelerated in large measure by the pandemic. To more fully meet that growing customer demand and accelerate our work with new and innovative services, we acquired a company called Current Health. Current Health developed a market leading remote patient monitoring platform that allows physicians to monitor and connect with patients in their home. Their platform includes an FDA cleared wearable medical device that monitors vital signs, a home hub, which integrates to hundreds of other monitoring devices, and integration to the patient's electronic health record. With their remote monitoring platform, combined with the scale, expertise and connection to the home that Best Buy has, we will be able to create a holistic care ecosystem that shows up for customers across all their health care needs. To be clear, even though the health care industry is evolving quickly, in many ways as a result of the pandemic impacts, it adopts new ways of doing things at a much slower pace than other industries like retail. Virtual care is a truly nascent space with significant opportunity, but it will take time and investment to develop our offerings and scale. As you can see, technology developments are driving our initiatives across the company. We need technology tools and capabilities to help us as we transform and evolve the way we operate and serve our customers. That is why we continue to devote significant resources to technology investments. For example, we are leveraging our investments in electronic sign labels to very nimbly highlight Best Buy Totaltech member pricing for customers shopping in our stores. We also just launched the ability for our electronic sign labels to provide important messaging regarding product availability, so that customers will easily be able to see if the product is in stock in that store or at another store nearby or when it could be delivered and installed. Technology was instrumental in recently launching the first of many new communication enhancements to improve our award winning appliance customer experience. Metro delivery customers, that utilize the appointment tracker page on the day of their delivery, can now see how many stops away their driver is at any given time. It may seem like a small enhancement, but already, we can see significant customer engagement with the page. Another step toward our goal to make customers feel confident and in control throughout the research, purchase, fulfillment and use of their large product. Technology was also crucial in our recent launching of next-day delivery of appliances and large TVs, which we are piloting first for in-store and online customers in our Minneapolis and Baltimore markets. Next month, we are launching a new capability, leveraging QR codes for high-velocity products that are locked up, particularly in areas of high shrink. Instead of waiting for an associate to unlock the product, the customer can scan the QR code and then proceed to check out to pay and pick up the product. And we recently implemented enhancements to our digital platform, improving flexibility across our workforce by seamlessly giving employees the ability to pick up open shifts at nearby locations in addition to their home location. These examples are a small token of the work our digital and technology teams are doing to improve the customer and employee experience. And of course, we are also continuing to make significant investments in fundamental technology capabilities like data and analytics, and broader cloud migration in order to drive scale, efficiency and effectiveness. I would like to take a moment to extend my gratitude to our people. Over the past 21 months, they have flexibly dealt with rapidly changing store operations as we responded to impacts of the pandemic. They created safe environments for customers and worked tirelessly to provide excellent service, even in situations where customers resisted following safety guidelines and in some cases were disrespectful. In addition, we have increased the level of pilots and tests in the field as we evolve our operating model. This has introduced a great deal of change. We know that change is exciting, but we acknowledge it can also be challenging. I am truly grateful for and impressed by our associate's dedication, resourcefulness and flat-out determination. And I'm thrilled to say that our in-store NPS in Q3 increased versus last year and versus 2 years ago before the pandemic despite all of these disruptions. Now I would like to briefly touch on our ESG efforts and how we are working across the company to have a positive impact on our planet. Earlier this month, we announced that we are a founding member of the Race to Zero initiative that aims to accelerate climate action within the retail industry. Best Buy's participation builds on our existing efforts to reduce our carbon footprint. We are proud of our progress in reducing emissions 61% since 2009, and we have pledged to be carbon neutral by 2040. We have also taken on a more specific focus on the circular economy within our operations and with our customers. In Q3, we collected and responsibly recycled more than 48 million pounds of consumer electronics, keeping products and commodities out of landfills. To help our customers live more sustainably, last quarter, we sold more than 5 million ENERGY STAR certified products, helping our customers reduce their carbon footprint and save on utility bills. We also kept more than 600,000 devices in use longer and out of landfills by leveraging our customer trade-in program, Geek squad repair services and Best Buy outlets. These are initiatives our customers and vendors value and capabilities no one else has at our scale and breadth. In summary, we have delivered remarkable year-to-date results, and I am so proud of the execution of all our teams. We are looking forward to a strong holiday season and believe we are extremely well positioned with both the tech customer's wants and fast and convenient ways to get it. We launched some of our Black Friday deals in mid-October that included a price guarantee for all customers. And this past Friday, started Black Friday early by making almost all of our Black Friday deals available. Throughout the holiday season, we are promising free next-day delivery on thousands of items. And of course, store pickup, whether in-store or curbside, will be a great and convenient option for our customers to get their products. Building on that, as we think about next year and beyond, we are mindful of just how much the consumer has changed and how enduring that change will be. Terms like home nesting and virtual care have been invented to describe what all of us know so well, that where we work, entertain, receive health care, and connect has changed, and our homes are now central to our lives more than ever before. The penetration of technology associated with this way of living has been and continues to be sizable. And we are already seeing shorter upgrade cycles as technology evolves and we constantly optimize our homes. The demand for convenience and experience on the customers' terms has exponentially driven change. Our hypothesis has consistently been that true omnichannel retailing would create differentiated experiences that allow us to seamlessly and conveniently engage and retain customers. As such, we have continuously invested in these experiences and notably, we never defined omnichannel as being stores and online. Instead, we included our unique and powerful service, virtual and in-home capabilities. We are certain that technology will continue to play a more dominant role in consumers' lives. Given our omnichannel capabilities, the ones we have today and the ones we are building for the future, we are fully confident that we will capitalize on a much larger, more broadly defined consumer electronics category and be able to better serve a customer who will be using and upgrading much of that CE more frequently. We plan to hold an Investor event next March to share more detail on our initiatives, provide our thoughts on our financial model going forward and introduce longer-term financial targets. I will now turn the call over to Matt for more color on our financial results.

Operator:

Thank you. [Operator Instructions] Our first question comes from Anthony Chukumba with Loop Capital Markets.

Corie Barry:

Yeah, absolutely, Anthony. I think you've probably seen in the media that across retail, we are definitely seeing more and more, particularly, organized retail crime and incidence of shrink in our locations. And I think you've heard other retailers talk about it, and we certainly have seen it as well. I want to start with, our priority has always been and will remain the safety of our people, whether that's the pandemic, whether that is unruly customers, whether that is outright theft, which is a great deal of what we're seeing right now, and this is a real issue that hurts and scares real people. We are doing a number of things to protect our people and our customers. We are - as we talked about in the prepared remarks, we are finding ways where we can lock up product but still make that a good customer experience. In some instances, we're hiring security. We're working with our vendors on creative ways we can stage the product. We're working with trade organizations. But you can see that pressure in our financials. And more importantly, frankly, you can see that pressure our associates. This is traumatizing for our associates and is unacceptable. We are doing everything we can to try to create as safe as possible environments.

Corie Barry:

Thank you, Anthony.

Hannah Pittock:

Hi. This is actually Hannah Pittock on for Simeon Gutman. Thanks for taking the time. I wanted to ask on your Q4 guide. On the top line, it implies a pretty big deceleration on the comp stack. Are you seeing a slowdown in demand? Was there some pull forward do you think in holiday purchasing into Q3 or is there maybe some conservatism built in there? Any detail you can give?

Hannah Pittock:

That's very helpful. Maybe a quick follow-up just on your Domestic versus International segment. Obviously, Domestic kind of decelerated sequentially, and International actually picked up. In Q4, can you tell us anything about kind of the relative contribution you expect?

Hannah Pittock:

Got it. Thanks so much.

Christopher Horvers:

Thanks. And good morning. So I guess focusing a little bit on the gross margin and the adoption of Totaltech. Just curious on that impact in the third quarter - as you think about the fourth quarter, down 30 basis points expected, so the Totaltech is a number than that. I was just curious how much of that is sort of diminishment of warranty sales versus more of an accounting phenomenon that you're sort of recognizing the benefit of Totaltech over an extended period of time versus prior?

Christopher Horvers:

And just as a quick follow-up on the last question. Do you have a sense or an estimate of perhaps how much January actually benefited from stimulus as we think about the sequencing of the current quarter?

Christopher Horvers:

Got it. Understood. Have a great holiday season.

Operator:

Thank you. Our next question comes from Liz Suzuki with Bank of America.

Corie Barry:

Yeah. Thanks for the question, Liz. We have been really focused on this idea that tech could be instrumental in helping people age more comfortably in their homes for quite a while. It started with our purchase of a GreatCall a few years ago. And part of the reason that we brought GreatCall on board is they had massive experience in dealing with an aging population. And specifically to your question, targeting the right messages to the right people, which is not just targeting the aging population, it's also targeting caregivers who may be looking for some of this product. And so you've seen us over time. We established a relationship with AARP back in March of 2020 as one of our venues. We have a lot of actually, in this space, direct mail and direct targeting because for the populations that we're looking at here, those are some of the most effective means that we have. And then over time, I think you're going to see some of our more broad-based Best Buy messaging, really pointing to the fact that we have a variety of solutions that can help people age in their homes. It's not always just the devices and the care wrappers. Sometimes it's things like a Facebook portal where you can connect with someone on the other side really simply and easily or a device – you know, a camera and a security system where I can easily lock my door without having to get up or I can keep an eye on that aging loved one. And I think already, you've seen me will continue to see run the gamut of both these very targeted messages to the population that we really want to inform all the way to these kind of more broad-based solution driven messages about what we could help you do to care for a loved one.

Corie Barry:

Well, what's interesting about Totaltech in the aging in place scenario is that, it is more important than ever that your technology works for you if you're relying on it for your safety or if you're a caregiver if you're relying on it for the safety of others. And so the support wrapper around all of the things that we're talking about in health is important. And it also will help, obviously, this population, whether it's the caregiver again or the person being cared for, add more devices, feel comfortable adding devices. We can go to your own and help you install those, and then we can keep them up and running, and I think that's really important. In terms of the KPIs that we look at, it's really true across Totaltech. We're looking for things like increased frequency of interactions. And that may be everything from browsing on the website all the way to coming in the store and making an actual purchase. We're looking for stickiness of that consumer, meaning they're more willing to come back Best Buy bigger share of wallet, more purchase behavior with Best Buy over the longer term. And that will be true whether we're talking about aging in place or whether we're talking about the other aspects of Totaltech. And then obviously, we're going to look for customer satisfaction and engagement with the brand and really trying to almost surprise and delight and over deliver wherever we can for these paying members.

Corie Barry:

You bit. Thanks, Liz.

Brian Nagel:

Good morning. Nice quarter, congrats.

Brian Nagel:

So the question I have, just with regard to promotions. So you called out here in the third quarter, higher promotions is somewhat of a headwind to gross margins. But you also made the point that the promotional activity is still more subdued than it was pre-pandemic. And then I don't think you gave the guidance for Q4 within the down 30 basis points in gross margin, I think there was a mention promotion. So the question I have is as you look at what's happening out with promotions, maybe some more color on – there is greater color on kind of who are what's driving these promotions. And then where do you think we're going? Are we heading back to pre-pandemic levels or do you foresee promotional activity remaining more subdued as we go forward?

Brian Nagel:

That's very helpful. A second quick follow-up, if I could. Just with regard to - so appliance is a key sales driver here in Q3. Lot of talk about higher prices in appliances, so the question I have is to what extent was inflation in that category actually an incremental sales driver for you?

Corie Barry:

And Brian, I think this is why in this space, we continue to really invest in the experience because our ability to deliver on some of those more premium items in the assortment is really distinctive and different. And so this investment - and this is a great example of the investment in the experience is not just for today, but it's so that we continue to represent the premium side of the business over the longer term.

Corie Barry:

Thank you.

Greg Melich:

Thanks. I had a two part question. One was I wanted to understand a little bit more about the SG&A dollar growth in the fourth quarter. How much of that is due to the acquisitions or the particular membership investment? And how much of that is just the inflation or normal growth in the business?

Greg Melich:

And maybe to flip it around a little bit, inventory up, I guess, 15% year-on-year and still 13% versus 2019. How should we think about that growth in inventory versus a comp that looks like it will be flattish in the fourth quarter, at least in your plan?

Corie Barry:

And Greg, I would just underscore something Matt said in his prepared remarks, we were unduly light last year in inventory. And that's why we're going back to the 2 year – 2 year stack growth of right in that 13% range and then inventory 2 year in that same range. So I just think last year is not a great indicator because I think everyone was looking - we certainly were looking for more last year.

Matt Bilunas:

Yeah...

Matt Bilunas:

Yeah, I think what you've seen from us this year, last year was a little unique each quarter. But this year, what you've seen is actually improved operating margin rates in each of the first three quarters more than what we've seen. If you look at a 2 year stack, it's much different in the first three quarters. I think just generally, technology is important for all our lives regardless of how the seasons and seasons that are starting to spread out across the year. So the operating margins have on a relative 2 year basis have been improving in the first 3 quarters. And quite honestly, the volumes in Q4, it's very important for us to make sure we have the right expense profile to support the customers.

Corie Barry:

Just one more little bit of color and again, at it in his remarks, but this will be the first full quarter of Totaltech too. And so you'll start to see that go through into next year as you get into those other quarters. So that makes it a little different this year comparing Q4 to the rest of the course. But everything Matt said in the rest of it. I mean, our goal would actually be a little bit more even business throughout the year, ultimately.

Operator:

Thank you. Our next question comes from Kate McShane with Goldman Sachs.

Corie Barry:

So I'll start with virtual store. Obviously, really early into this, so we're really just getting our legs under is. So it's hard for me to say whether or not there's more than one. The nice part is you should be able to get very good from one location in a model like this, right. Because you can flexibly queue people and you can move them through at your own speed, and you could do this across all the departments in this kind of fake store that's virtual. So I don't think this is going to be about a ton of virtual stores throughout the network. I think it's going to be about scale with a few locations that can provide some interesting use cases. Because truthfully, it's not just about the customer use cases where they might find the virtual store where they're doing digital shopping. It also could be about employee use cases, where I might be in the car installation area and may not have the expertise, but I could zoom right into one of our installation, our Autotech experts who could help you in the moment even as an employee, it gives you a lot of confidence there, too. So I think what we want to find out right now is what are the use cases? How often is it being used? And then ultimately, what does that customer experience look like? But like we said in the prepared remarks, we'd like what we're seeing early. And we'll see just how far you can stretch this kind of one asset that we have right now. In terms of flexible labor, absolutely, it is helpful for us in this environment, and it's helpful on a couple of levels. One, the customer shopping behaviors have changed and they continue to change and they can change week-to-week depending on how important something like speed is as an example. Like the week before Christmas, in-store pickup curbside will become very important assets. And with a more flexible model, I can move employees and employees can being moved to different areas in the store. That means they can pick up more hours or potentially more flexible hours. The other thing that hasn't been brought to light as much as there still are many people calling in sick, which we want. If they're not feeling well, we want them to stay home. A model like this allows you to much more flexibly cover for those call offs. So it's not just about hiring and retention. It's actually about how can I move the labor around the store in the most flexible way. And then the last thing I would say is we have more employees than ever in the history of the company that are skilled in multiple areas in the store. And that isn't just about us flexibly leveraging that labor. That is about them opting into potentially schedules and even in some cases, pay grades that meets whatever they want to try to accomplish in their lives. And that's really for the employee the more positive side of the flexible arrangement and ultimately adding to more confidence in their capabilities and their interactions with customers. That's why we tend to see higher NPS correlate very highly with multiple skill sets.

Corie Barry:

Thank you.

Seth Basham:

Thanks a lot. And good morning. My first question is around the Totaltech offering and how we think about that into 2022? Should we be thinking about 20 to 30 basis points of gross margin pressure through at least the first half of the year? And should we think about additional sales contributions building through 2022?

Seth Basham:

Got it. Thank you. And then my follow-up question is, when we think about the market's growth rate potential over the next year or so, given the fact that tech is more important than ever in consumers' lives, is this market one that's likely to continue growing in the near term? Or are there pressure points because of the some of the year-over-year comparisons with computing and other areas have seen such a surge in growth from the pandemic?

Corie Barry:

Yeah. And just to underscore, I think you'll continue to see product innovation at an accelerated pace. And you will see CE proliferate into other areas like you're seeing it proliferate into health care or even into outdoor spaces. And so I think that makes it even harder for us to answer the question because it's not even just about how you define the market. It's about how the market, in essence, expands over time because it taps into new areas. And that's the part that really has us excited for the future even if to Matt's point, there might be a bumpy quarter here or there. It's really the sustainability of CE as an ever-evolving space from here on out.

Operator:

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

Operator:

Welcome to our Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. At that time, [Operator instructions]. As a reminder, this call is being recorded for playback and will be available by approximately 11 A.M. Eastern Time today. If you need assistance on the call at any time, [Operator Instructions] and the Operator will assist you. I will now turn the conference call over to Mollie O'Brien, Vice President of Investor Relations, please go ahead.

Corie Barry:

Good morning everyone, and thank you for joining us. Today, we are reporting record Q2 financial results of $11.8 billion in sales and non-GAAP diluted earnings per share of $2.98. Comparable sales growth was 20% and our non-GAAP operating income growth was 40%. We are lapping an unusual quarter last year, as our stores were limited to curbside service or in-store appointments for roughly half the quarter. When we compare to two years ago, our results are very strong. Compared to the second quarter of Fiscal '20 revenue is up 24% and our non - GAAP operating income is up 115%. Clearly, customer demand for technology products and services during the quarter remains very strong. Customers continue to leverage technology to meet their needs. And we provided solutions that help them work, learn, entertain, cook and connect at home. The demand was also bolstered by an overall strong consumer spending aided by government stimulus, improving wages, and high savings levels. From a merchandising perspective, we saw a strong comparable sales growth in almost all categories. The biggest contributors to the sales growth in the quarter were home theater, appliances, computing, mobile phones, and services. Product availability improved in the quarter, and except for some pockets in appliances and home theater, we do not believe it materially limited our overall sales growth. Our merchant, demand planning, and supply chain teams once again did an amazing job managing through the difficult and constantly evolving supply-chain environment. They worked strategically to bring in as much inventory as possible during the quarter, with actions like acquiring additional transportation, pulling up product flow, and adjusting store assortment based on availability. There will continue to be challenges, particularly as it relates to congested ports and transportation disruptions, but our teams have set us up for as strong an inventory position as possible as we move forward into the back half of the year. As we think about the holiday period, we often have varying degrees of inventory and supply chain challenges, and this year will be no different. But we feel confident in our ability to serve our customers during the holiday. But continued strong demand across retail resulted in an overall less promotional environment, which was a significant driver of our better-than-expected profitability in the quarter. During the quarter, we provided customers multiple ways to interact with us depending on their needs, preference, and comfort. Similar to last quarter, customers migrated back into stores to touch and feel products and to seek in-person expertise and service. At the same time, they continue to interact with us digitally at a significantly higher rate than pre-pandemic as online sales were 32% of domestic revenues compared to 16% in Q2 of fiscal '20. Phone and chat volume also remained very high compared to pre-pandemic and sales via these channels continue to decline. In addition, of course, we are interacting with customers in their homes, making large product deliveries, selling solutions, repairing products, and providing sales consultations. In fact, overall, we are helping our customers with their technology needs in their homes, 20% more than we did 2 years ago in Q2 of Fiscal '20. Through all of these interactions, across all of these touchpoints, 98% of survey customers tell us they feel very safe, which we believe is still incredibly important at this stage in the pandemic. I want to genuinely thank our store and in-home teams, for creating this safe environment for our customers. And for continuing to provide exceptional service, even in situations where customers resisted following safety guidelines, and in some cases were disrespectful. For customers purchasing online, we delivered products with speed and convenience. Online sales package delivery was not only much faster than last year, it was faster than 2 years ago. Furthermore, we stack up extremely well versus our competition. Using a third-party service, we analyze competitor websites on a daily basis, and we consistently lead in the proportion of one day or less for published shipping time across a sample of higher volume zip codes, and higher demand items. In addition, we leveraged our stores to drive fast and convenient fulfillment of online orders. In Q2, we continue to see about 60% of our online revenue fulfilled by stores, including in-store or curbside pickup, ship from store, or Best Buy employees who are delivering the product to customers out of more than 450 of our stores. The percent of online sales picked up by customers at our stores was 42%, similar to last year's second quarter. Clearly, the landscape as it relates to the pandemic has been changing rapidly and we remain keenly focused on keeping our employees and customers safe. We are continuing to encourage all employees to get COVID vaccinations by providing them with paid time off when they receive the vaccine and providing them absence time to be used in the event they develop side effects. In June, we launched an employee sweepstake with more than $100,000 in cash prizes to encourage our team members to get vaccinated. To show our appreciation for their hard work and ongoing efforts in the face of pandemic fatigue, we paid employee gratitude bonuses at the beginning of the quarter. In summary, our team has delivered incredible results. To all of our associates across the Company, I thank you for your customer obsession, perseverance, and ingenuity. Of course, while we were driving these great Q2 results, we were also looking to the future. During the quarter, we continued to roll out and run several tests and pilots as we determine the best path forward to become an even more customer-centric, digitally focused, and efficient Company. We believe this is crucial to thriving in a new and different environment where customers expect to seamlessly interact with physical and digital channels throughout the shopping journey as they seek inspiration, research, convenience, and support. Last year we introduced a very important membership pilot called Best Buy Beta. As a reminder, it includes unlimited Geek Squad technical support on all of the technology in your home no matter where or when you purchased it, including 24/7 VIP access to dedicated phone and chat teams, that are only available to members. It also includes up to 24 months of product protection on most purchases from Best Buy, free delivery and standard installation, exclusive member pricing, a 60-day extended return window, and free shipping of online orders. All for $199 per year. The offer is designed to give our customers the confidence that whatever their technology needs are, we will be there to help. It leverages our unique strengths and what we can provide customers that no one else can. The goal is to create a membership experience that customers will love, which in turn results in a higher customer lifetime value and drives the larger share of CE to spend to Best Buy. We are very excited about this membership offer and we are encouraged by the pilot results. Membership acquisition has exceeded our initial forecast. In addition, data is showing that Beta members interact more frequently and have a higher incremental spend than non-members. Given the breadth of the offer, it is resonating well across all customer demographics and our members are skewing younger than our Total Tech Support Membership Program. In addition, our employees love telling customers about the program. We plan to scale the program nationally, in stores and online, at the end of Q3 under the new name Best Buy Total Tech. As part of the national rollout, we will be converting our 3.1 million existing Total Tech Support members to the new program. I want to stress that the goal of the program is for customers to find value in the benefits and use them often. It is not designed to be a standalone margin-driving service offering, particularly in the near term. In fact, as Matt will discuss later, a full rollout is a near-term investment, which we are confident will be justified with incremental sales growth and long-term customer value. As it relates to our physical stores and operating model, we are continuing to pilot and test many approaches and formats. Specifically, we test how we can leverage our stores and facilities for more fulfillment purposes, and how we can deliver customer [Indiscernible] supported and engaged workforce. We are not going to outline all of our initiatives today, but I would like to provide a few updates on learning. We have begun implementing the pilot of our new holistic market approach in Charlotte. As we mentioned last quarter, this pilot is designed to leverage all our assets in a portfolio strategy across stores, fulfillment, services, outlet, lockers, our digital app, and both in-store. We will be testing and arranging remodeling a number of stores to 15, 25, and 35,000 square foot stores, as well as launching a few [Indiscernible] foot stores. We expect the full rollout of the pilot to span a few quarters either way, including the transition of one store into a new type of outlet. Our current fits large appliance and TV open box product. With this new outlet pilot, we will have open box products from all categories. It will also serve as the hub in a new services repair hub and spoke model we are testing, as well as an auto tech mega [Indiscernible] Of course, the reason we are piloting and testing so much is because we are trying some new unique prototypes, and we need the opportunity to learn and adjust before we roll more broadly. For Minneapolis test stores, were [Indiscernible] to 15,000 square feet to provide more space for fulfillment. We have been making adjustments based on customer and employee feedback. We've reflowed some of the layouts, added signage to help customers understand the changes we are testing, and added assortments in areas like small appliances, printing, and accessories. We will continue to evolve feedback as it relates to 5,000 square foot store pilot. We continue to receive positive feedback from customers and employees on store design and the way we are showcasing products. In addition, year to date, this store generated higher revenue than controlled stores in the double-digit percent range. Another pilot that we are excited to launch pre-holiday is our virtual store. For this, [Indiscernible] in one of our distribution centers that will have merchandising and products, and will be staffed by dedicated associates, including vendor [Indiscernible], but it will have no physical customers. Instead, customers can interact with our experts via chat, audio, video, and screen sharing, depending on their preference, and be able to see live demos, displays, and physical products. We are excited about the customers. For example, you could be on our dot.com experience, click on a product you like, and be connected via video, to a blue shirt in the Best Buy virtual store, and never leave your living room. Or you could be standing in a store, scan a bar code, and be taken through your phone directly to this virtual store where an associate could answer your question. From a fulfillment perspective we piloted last year, we're very successful, and we're continuing to iterate on the model. As a reminder, while all stores will continue to ship online orders, we are driving efficiency and effectiveness by consolidating ship from store units in a limited number of stores across the country. As we evolve the model overall, we are using fewer stores than last year as hubs. In addition, we have begun remodeling a subset of stores to deliver an even greater portion of the volume, reducing the sales floor square [Indiscernible], packaging, station equipment, and supplies. These 13 locations should be rolled out by holiday and take on about 25% of the national ship-from-store volume. As you would expect, the various tests and pilots are intended to identify how our store portfolio should evolve from the role-based serve to their [Indiscernible] these tests we will develop plans that likely include a rollout of investments in more stores and markets. We have also been evolving our labor model to meet our customer's changing shopping behaviors. For our employees, we are designing for more choice, flexibility, and career opportunity. We continue to see momentum with our flexible workforce initiative, which is centered on store employees' expertise to perform roles outside of their primary job function. At the end of July, 80% of our associates [Indiscernible] into different work zones, and 50% of associates have earned four or more jobs. This allows our employees and us to [Indiscernible] in the store and between channels, phone, remote support, or employee product delivery. And very soon we will be able to schedule associates between stores within a market. This flexibility is important for all of our stores going forward, but even more important for our smaller stores with less labor. This new way of working empowers [Indiscernible] giving them opportunities to learn new skills, broaden their experience jobs. They are equipped to confidently help customers in more ways, and our data is showing us that once employees add skills, they tend to drive a higher customer NPS. It also gets team members the ability to earn a different hourly wage depending on the job performed and the potential for working additional shifts that otherwise may not have been available in their primary job function. We believe our flexible workforce initiatives can add to our ability to attract and retain our employees, particularly in this tight labor market. And in addition to the training and flexibility we offer, we have also invested significantly in compensation and benefits for our associates. On top of raising our starting wage to $15 last year, we provide a wide array of competitive benefits across many dimensions, including tuition reimbursement, employee product discounts, paid time off for part-time associates, back-up child care, child tutor reimbursement, and many others. Overall, we are operating with a smaller field workforce than we were pre-pandemic, which is very reflective of how the business model has changed. As our online revenue has more than doubled from two years ago, we feel like we are largely at the right number as it relates to the strategic evolution of our operating model, the demand we are seeing, and the nature of our customer interaction. What is most important right now is to continue to learn and iterate. As you can imagine, having a more flexible workforce is a very important component of our operating with a smaller workforce. And technology is crucial to its success as well. In fact, technology is the underpinning to the success of our Company strategy. We need technology tools and capabilities to help us as we transform and evolve the way we operate. This fact has been clearly reinforced by all of our pilots. There is a myriad of technology projects in development, but here are just a few examples. We will leverage the electronics sign labels in our stores to make it simpler and more seamless for customers to shop. Especially in our stores with smaller shopping square footage. Specifically, we are adding messaging to the labels that mimic our Dot.Com experience. In other words, customers will easily be able to see if the product is in stock in that store, or in another store nearby. And when it could be delivered and installed. We are also piloting mobile app checkout so that customers, particularly grab-and-go customers, can quickly check out, without needing to interact with an associate. For our virtual store to really come to life seamlessly for our customers, we are building out a new digital communication platform, that will combine multiple systems into one experience for a call, chat, video, and screen sharing. We put our customers in control of how and when they want to be served across these vehicles. Of course, we are also continuing to make significant investments in fundamental technology capabilities, like data and analytics, and broader cloud migration, in order to drive scale, efficiency, and effectiveness. Earlier this month, Fast Company named us to its 2021 list of the 100 Best Workplaces for Innovators. This is our first time on the list, which recognizes companies that created cultures of innovation despite the challenges posed by the pandemic. During the quarter, we continued to expand our assortment in newer categories where we can leverage our ability to commercialize new technology. For example, in the past year, across fitness and wearables, wellness and health, we have more than doubled our vendor partners and grew our SKU count by more than 150%. These include [Indiscernible], specifically those focused on conditional health management that helps customers track blood glucose levels, keep tabs on heart data, manage weight, or even help identify allergens in food. Furthermore, we are working with hospitals and care centers to cure-rate health products for their patients on co-branded landing pages. Because customers are looking to us to complete their solutions, we are also expanding to additional adjacent categories. For example, we have expanded our assortment in categories like outdoor living as more and more consumers look to makeover or upgrade their outdoor spaces. This includes products like patio furniture, grills, fire pits, and electric mowers, to name a few. Many of these products are available online only as part of our digital-first strategy. All together, they are a small part of our overall business but growing fast as we continue to add to the assortment. In the back half of the year, we expect to add more products in the fitness, beauty, sleep, pain management, vision, hearing, and electric transportation categories. Before I conclude my prepared ongoing commitment to inclusion and diversity and our community. During the second quarter, we announced our commitment to spend at least $1.2 billion with BIPOC and diverse businesses, by 2025. This pledge includes plans to increase all forms of spending with black, indigenous, and people of color businesses, from nearly every corner of the Company. From how we bring goods and services to stores, to where and how we advertise. The goal is to create a stronger community of diverse suppliers and to help increase BIPOC representation in the tech industry. In addition, earlier this month, we announced we are investing up to $10 million with brown venture group, a venture capital firm that focuses exclusively on black, Latino, and indigenous technology startups. The goal of this investment is to help break down the systemic barriers often faced by BIPOC, entrepreneurs, including lack of access to funding, and empowering the next tech generation. To make a difference in our local communities, we are passionate about building out our Teen Tech Center program. These provide teens in disinvested communities access to the training, tools, and mentorship needed to succeed in post-secondary opportunities and careers. We are also building a diverse talent pipeline for jobs of the future. During the second quarter, we launched our first-ever opportunity for customers to donate to the Best Buy Foundation in support of teen tech centers. Between July 11th and September 11th, customers can choose to donate when they make a purchase, including at a Best Buy store, bestbuy.com, or the Best Buy app. We also just published our 16th annual ESG report, which outlines how we are working across the Company to have a positive impact on our planet, employees, customers, and communities. In terms of the environment, this past year, we exceeded our goal to reduce carbon emissions in our operations by 60% through investments in renewable energy and operational improvements. We are on track to reduce our carbon emissions by 75% by 2030. And we signed the climate pledge committed to being carbon-neutral by 2040, a decade faster than our previous goal of 2050. We also have a robust trade-in program that brings a useful second life to products that might otherwise sit idle in someone's home or end up in a landfill. For products that need to be recycled, we continue to operate the most comprehensive consumer electronics and appliances take-back program in the U.S., taking back more than 2 billion pounds since 2009. Available on our corporate website, our ESG report also outlines the ways we support our employees and communities. In summary, we have delivered a remarkable first half against a volatile backdrop. I am so proud of the execution of our teams as they continue to safely meet the needs of our customers in ways that I would argue no one else can. Based on the strength of the business and our expectations for continued customer demand, we are raising our sales outlook for the back half. Of course, the environment as it relates to the pandemic is still rapidly evolving and there is uncertainty as to the associated impact on many important factors, including consumer shopping behavior, the share of wallet on services, like dining and travel, return to the office and return-to-school. Furthermore, we continue to believe the holiday season will remain unique against that backdrop. That being said, our teams have proven they can and will continue to proactively navigate these factors. And they remain ready to respond and adjust the business as the environment potentially changes. Over the longer term, we are fundamentally in a stronger position than we expected to be just two years ago. There has been a dramatic and structural increase in the need for technology. And we now serve a much larger install-base of consumer electronics with customers who have an elevated appetite to upgrade due to constant technology innovation and needs that reflect permanent life changes, like hybrid work and streaming entertainment content. This is only underscored by the recent Senate passage of the Infrastructure Bill, which will provide even more access to broadband and give us the opportunity to serve the needs of currently under-served communities. Our unique omnichannel assets, including our ability to inspire what is possible across the breadth of CE products, as well as our ability to keep it all working together with the way customers want, truly differentiate us going forward in this new landscape. Now, I would like to turn the call over to Matt, for details on our results and insights on our outlook for the next quarter and the full year.

Operator:

Thank you. [Operator instructions] We'll move on to our first question from Steven Forbes of Guggenheim Securities. Please go ahead. Your line is now open.