Best Buy Co. Inc (BBY) — Q2 2022 Earnings Call Transcript

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. Some of the statements we will make today are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may address the financial condition, business initiatives, growth plans, investments, and expected performance of the Company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the Company's current earnings release and our most recent 10-K and subsequent 10-Q for more information on these risks and uncertainties. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the call over to Corie.

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 overall strong consumer spending aided by government stimulus, improving wages, and high savings levels. From a merchandising perspective, we saw 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. 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 many 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 surveyed 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 times 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 and delivery from 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 concerning 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. I want to thank all of our associates across the Company for their 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 a larger share of CE spending 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. Additionally, 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.

Good morning everyone. We are once again reporting very strong financial results as the demand for the products and services we provide remained high during the quarter. With enterprise revenue of $11.8 billion, we delivered non-GAAP diluted earnings per share of $2.98, an increase of 74% versus last year. Our non-GAAP operating income rate of 6.9% increased by 100 basis points. This rate expansion was driven by an 80 basis point improvement in our gross profit rate. Despite lapping actions to reduce our SG&A spend last year, we were able to leverage our SG&A 20 basis points on the higher sales volume. In addition, a lower effective tax rate had a $0.47 favorable year-over-year impact on our non-GAAP diluted EPS. As a reminder, in Q2 of last year, our stores were closed to customer traffic for about half the quarter while we were helping customers through our curbside service and in-store appointments. We also made several cost reduction decisions last year to align with the lower sales and channel trends we were seeing and were expecting to continue at that point. As Corie mentioned, when comparing our results against two years ago, or the second quarter of our Fiscal '20, total revenue grew more than 24%. Also, our domestic store channel revenue was higher than two years ago, despite almost 50 fewer stores, and online revenue growth of almost 150% in that timeframe. As a result of the higher revenue and adjusting our business model to a new customer shopping behavior, our enterprise non-GAAP operating income rate was 290 basis points higher this quarter than the comparable quarter from two years ago. Let me now share a few comments on how our Q2 performance compared to the outlook we shared on our last call. Enterprise comparable sales growth of 20% was above our estimate of approximately 17%. Our non-GAAP gross profit rate improved 80 basis points versus last year, compared to our outlook of approximately flat. As Corie stated, this better-than-expected gross profit rate performance was primarily driven by a more favorable promotional environment. Lastly, non-GAAP SG&A dollars grew 18% compared to last year, which was slightly favorable to our outlook of approximately 20% growth. Let me now share more details specific to our second quarter. In our Domestic segment, revenue for the quarter increased 21% to $11 billion. Our comparable sales growth was also 21% for the quarter. In recent quarters, our revenue growth has been lower than our comparable sales growth, due to the loss of revenue from stores that were permanently closed in the past year. Although that was still true this quarter, that impact was partially offset by revenue growth from stores that were closed for remodel as a result of last year's unrest and fall outside of our comparable sales calculations. As a reminder, our comparable sales calculation includes revenue from all stores that were temporarily closed or operating in our curbside-only operating model during the period. This year, we expect to close approximately 30 U.S. stores compared to roughly 20 closures in each of the last two years. Consistent with our previous practice, we will make every effort to retain the employees from the closing locations. From a monthly cadence perspective, the strongest sales growth was in May. As expected, July's monthly comp was the lowest of the quarter as we lapped the reopening of our stores in June of last year. Turning now to gross profit, the domestic non-GAAP gross profit rate increased 90 basis points to 23.7%. The higher gross profit rate was driven by improved product margin rates, rate leverage from our supply chain costs, and higher profit-sharing revenue from our private label and co-branded credit card arrangements. Overall, the promotional mix and sales discounts for the full quarter were once again lower than the levels we experienced last year. However, our comparisons are now beginning to lap periods of very low promotional activity last year. In July, the overall promotional activity increased compared to last year but was still below the levels we experienced during Fiscal '20. Moving next to SG&A. Domestic non-GAAP SG&A increased 19% compared to last year and decreased 30 basis points as a percentage of revenue. As expected, the largest drivers of the expense increase versus last year were the first higher incentive compensation for corporate and field employees of approximately $100 million, which is partially due to the suspension of our short-term incentive program last year. Second, higher store payroll costs due to changes in our operating model last year. And third, the impact of lapping our COVID-related impacts last year, which resulted in higher costs this year for advertising expenses, medical claims expenses, and our 401(K) Company match. Lastly, we increased investments this year to support our technology initiatives. When comparing to two years ago, domestic non-GAAP SG&A increased $94 million and decreased 310 basis points as a percentage of revenue. The largest drivers of the increase versus Fiscal '20 were higher incentive compensation, technology investments, and increased variable costs due to the higher sales volume. Partially offsetting these items was lower store payroll expenses. On a non-GAAP basis, the effective tax rate was 8.4% versus 23% last year. The lower Q2 fiscal '22 rate was primarily due to a multi-jurisdiction, multi-year, non-cash benefit from the resolution of certain discrete tax matters. Moving to the balance sheet. We ended the quarter with $4.3 billion in cash. At the end of Q2, our inventory balance was 55% higher than last year's comparable period and was 23% higher than our Q2 ending inventory balance from two years ago. The increased inventory represents our plans to support the current demand for technology, as well as last year's unusually low inventory balance. The health of our inventory remains very strong. Let me next share more color on our outlook for the second half of fiscal '22 in our updated assumptions for the full year. As we entered the year, we expected revenue growth to be positive in the first half of the year and then negative in the back half as we lap the strong comp growth in Q3 and Q4 of fiscal '21. Our original outlook also reflected a scenario in which customers would resume or accelerate spend in areas that were slow during the pandemic, such as travel and dining out. Although we are seeing some shift in consumer spending occur, the impact has been less pronounced than we previously anticipated. We now expect our comparable sales growth to be down 3% to flat compared to last year in the back half, which is a significant improvement from the high single-digit decline we expected entering the year. Like other companies, we continue to monitor the evolving impacts of the pandemic and supply chain pressures driven by global demand. We continue to be confident in our ability to navigate the ever-changing environment. For the second half of the year, we expect the non-GAAP gross profit rate to be down approximately 30 basis points to last year, which compares to 60 basis points of expansion in the first half of the year. The primary drivers of the sequential decrease include the impact of rolling out Total Tech, increased promotional activity, and less leverage on our supply chain costs than we experienced in the first half of this year. The gross profit rate pressure of our new membership offering primarily relates to the incremental customer benefits and the associated costs compared to our previous Total Tech Support offer. This pressure is expected to have a larger impact on our fourth quarter than in the third quarter. Now, I will provide some color specific to our outlook for the third quarter. We expect comparable sales to be in the range of down 3% to down 1% compared to last year, which is on top of our 23% comparable sales growth in the third quarter of last year. Our revenue growth to start this quarter has been approximately flat to last year for the first three weeks. From a gross profit rate perspective, we are planning for a non-GAAP rate that is approximately 30 basis points below last year's rate. From a non-GAAP SG&A standpoint, we're planning dollars to be approximately flat compared to last year. We expect the lapping of last year's $40 million donations to the Best Buy Foundation and lower incentive compensation to be largely offset by increased technology investments and higher advertising expenses. Turning to our full-year outlook, we expect the following: enterprise revenue in the range of $51 billion to $52 billion, comparable sales growth of 9% to 11%, and a non-GAAP gross profit rate slightly higher than last year. For SG&A, we expect growth of approximately 9%, which compares to the prior outlook of 6% to 7% growth. The increased expense is primarily due to higher store payroll costs and other variable items associated with the higher sales outlook. In addition, we expect the incentive compensation for the full year to increase by approximately $275 million or at the high end of our previously provided range. We expect our non-GAAP effective tax rate to be approximately 20%. We expect capital expenditures to be in the range of $800 million to $850 million and lastly, we expect to spend at least $2.5 billion on share purchases. In closing, over the last two years, our teams have successfully adapted to various changes to our operating model and a dramatic shift in customer shopping behavior. We have seen a surge in reliance on demand for technology as our customers also adapt to their changing needs. The result is that we now expect our sales will surpass $51 billion this year. That is more than $7 billion of increased sales over a two-year period. Thank you to all our employees for driving these amazing results. I will now turn the call over to the operators for questions.

Good morning. I wanted to focus on the pricing and promotional environment. And so maybe I'll just ask my two questions together. The first part is, as we think about the price increases that are being passed through here to the consumer, can you provide some context around the magnitude of them and how the industry as a whole is addressing these? Is everyone passing them through or do you see potential increases in promotional activity? And then the follow-up to that is, as we think about the holiday period, in past years, have other competitors utilized the category to drive traffic during the holiday period? Can you talk about the expectation for holiday as a whole, as it relates to frequency and depth of promotional activity? Thank you.

Why don't I start, and then Corie can jump in. I think there are a few questions in there. Overall, what we're seeing is the first half of the year was less promotional, similar to the trends we experienced last year during the pandemic. As I said in my comments, we are starting to see us lap those periods of very low promotionality. As in July, we're actually seeing the mix of items on promotion and the discounts associated with promotions are actually higher than last year. So, we're starting to see a bit more return to a promotional level that’s higher than last year, but still less promotional than two years ago. And so, we do see that increasing. Over that period of time where promotions have been lower, customers have essentially been paying higher prices because we haven't been promoting as much. And so that's certainly part of the aspect. Also, within pricing, we certainly are seeing a little bit of inflation as well as you look at the prices of goods. In some cases, those are being passed on to consumers. Appliances is an example where there have been increases to the cost of those goods, which the industry is generally passing on. But overall, inflation hasn't been a bigger part of our ASP increases; it’s been more on the promotionality versus inflation, which has been relatively small impacting the first half. It might be a little bit more in the back half, but I wouldn't expect inflation as it relates to pricing to be as significant.

And I would just underscore our priority is always to be priced competitively. And that will be the case no matter what’s coming through the costing side of things. As we head into the holiday, specifically to that part of your question, we said even in the prepared remarks, we would expect the back half to be more promotional, and Matt alluded to July being a little bit of that lead into what we’re seeing. And we would expect the products that we sell to be products that people really want for holiday, and therefore, that environment to heat up correspondingly. And so, that is part of what's embedded in the guidance going forward.

Thank you. Best of luck.

Thank you.

Thank you.

Hey, good morning, everyone. Thanks so much. Great results here. I was hoping you could flesh out a little more on the membership program. It seems interesting. I guess, for the same price, it’s basically upgraded to Total Tech Support. Can you confirm it's going to be at all stores by year-end? And then, the gross margin pressure you're experiencing, is that something that will be ongoing or is it more of an annualized effect as the program gets ramped up?

Thank you, Peter. I'll start, and then Matt can talk a little bit about the financial ramifications. What was important to us in Beta was understanding how we can build on some of what we're learning in Total Tech Support in terms of what our customers love, but add onto that what we think will continue to provide them value over time. Like many membership programs, it’s just continuing to evolve based on what we're learning distinctly from our customers. And so, we started testing that data actually just at the very beginning of this fiscal year. And as we said in the prepared remarks, we're definitely seeing uptake that is greater than both what we expected and greater than what we were seeing in Total Tech Support, and I think it's the combination of features that we talked about in the prepared remarks that are making our customers come to us more frequently. And like we also said, spend a bit more each time that they’re coming to see us because you have this combination that keeps customers very sticky to the Best Buy brand. This is really an evolution of what we have learned in Total Tech Support. We started testing it at the very beginning of this year and then we plan to actually roll it out towards the end of Q3. So it will be in place, like Matt said, and have a bigger impact for Q4. But the key for us is that we expect the membership to grow faster than what we saw in TTS. We've seen that play out in the pilot, and we're going to keep iterating on the offers depending on what it is that customers really value and what it is that keeps them loving our brand and very loyal to the brand. I'll let Matt talk a little bit about the financial implications.

Thank you. Thanks for the question, Peter. Essentially, as you would imagine, the Total Tech offer is just far more inclusive to the benefits to our customers. And so, with that, you're seeing more costs associated with Total Tech. It just has more enhanced benefits than what we had offered in TTS. And that is essentially driving the gross margin profit impact in the back half of this year. The intent of Total Tech is not to actually drive margin rate. The intent of Total Tech is for us to increase sales and therefore leverage more sales into the future. So, the short-term impact certainly is going to be a gross profit rate impact. As you look forward, the intent is not for it to be gross profit accretive because what we want people to do is to use it more. That usage will create more sales and create more leverage on our bottom line in the future. And that's the overall take, but as you would imagine, the enhanced spending does come with more costs, but we believe that will keep people secure and coming back and increase our share of wallet with them.

Okay. Sounds great. Thanks for the feedback.

Thank you.

Good morning. Thanks a lot for taking my question. Do the guidance now include the expectations that your comps could be flatten down in the second half of this year versus last year? You've previously assumed that it could be more down-high single digits. It sounds like the difference being that consumers have yet to really shift their wallet to the categories that you expected. Do you think this reflects some permanent change in behavior or it's going to happen; it's just that it's not going to happen in the second half of the year and it's going to be more like a 2022 event? Can you also give us an indication of how you factored in any sort of composition of your inventory in the back half, meaning, while up significantly overall, are there any areas where you might be a little short on inventory that will lead to some out of stocks when you factor that into the flat down 2%?

So, I will start particularly on the wallet shift question. We noted in the prepared remarks that we definitely are seeing that shift happen slower than what we thought. And it's less than a shift; it's actually been, for a while, we've been seeing growth in both sides. As Matt said, as the pandemic has redoubled its efforts, we've seen it shifting away a little bit from some of the experiences, and we've just seen this growth continue honestly, in both experiences and on the retail side. I think we're pragmatic, and we've said in the prepared remarks, we believe at some point that shift will continue to happen. I think it is being pushed out a bit. But importantly, there are also systemic changes that have happened in the way that all of us live. If you think about something like hybrid work models, that's not just something that's going to happen in the back half or in a quarter. That is likely a new way of working going forward. Streaming, and the amount of streaming content, is not just in the moment change; that is a change in how people will consume content going forward. I think, honestly, you have a little bit of both sides here. You have real systemic changes that have happened in the way that we live, and there's, I think, a push out in people really shifting hard that spending to experiences. Additionally, part of that is being how healthy the consumer is in terms of still savings rates that are at all-time highs and very healthy balance sheets, access to credit, and all of those fundamentals staying really solid, I think, is helping buoy this demand across both experiences and retail.

Yes, I'll just add a little bit. Corie did a great job explaining the consumer side of that. Overall, as you talked about, we are now expecting flat to down 3% in the back half, and that's much better than we had expected at the end of last quarter, which was more closer to down approximately 8%. I think one of the things I would add to that situation is inventory. We feel like we're in a good spot as we look to the back half of this year. I think you asked about inventory. We are still seeing pockets of inventory, but quite honestly, we are really healthy, with a strong position, and are preparing ourselves very well for the holiday season. That clearly adds to our optimism for the back half as well. There are also a lot of uncertainties as you look at it, but we'll update people as we go.

And my follow-up question is on the promotional environment and gross margins. You've mentioned that July, you saw promotions higher than they were in 2020, but still down from where they were in 2019. How do you factor in your gross margin expectations for the next couple of quarters, where the promotional environment is going to be? Will it still be higher than or below 2019? Under what conditions could you see some of the other players in the space becoming more promotional than they were in 2019, especially if sales really start to slow at a greater rate than you're expecting?

Yes, I think overall we're always going to be very aware of what our competitors are doing in the back half, whether it's back-to-school or the holiday season, so we'll always be prepared to adjust as appropriate. We are very thoughtful about how we compete and where we compete, in being thoughtful managers of the P&L, if you will. Overall, I would say the promotionality we would say probably a little bit higher than what we experienced last year or fiscal '21, but still less promotional than we saw in fiscal '20 starting right now. Again, we'll look at that and manage it as it comes, and as we see the holiday unfold a little bit. But because we will fundamentally always be competitive, I think we will be more promotional than last year but probably less promotional than two years ago.

Thank you very much and good luck.

Thank you.

Hi, thanks very much. Just a couple of questions to clarify. First of all, on the gross margin. So, it's fair to say that, with respect to the roll out of Best Buy Total Tech, that that will pressure gross margins from Q1 through Q3 of next year. That's just a clarification. And then my bigger picture question was, when you think about the overall higher installed base of consumer electronics since this pandemic began. I'm wondering if you could give a little color on how you actually see the acceleration in the innovation cycle playing out, meaning obviously we'll have shorter and shorter life cycles leading to a need to upgrade more frequently, but I'm wondering if you could just contextualize that a little bit.

Thanks for the question, Karen. Yes, I will start, and then Corie can jump in on the last part of the question. We're not ready to guide next year yet, but certainly, we are expecting Total Tech to pressure Q3 of this year and Q4 of this year as we roll it out. As you can appreciate, we're still trying to understand usage at a rollout level. It's a little early for us to talk about how long that pressure will exist and in what line of the P&L. As I said, the goal is for it not to actually be accretive to margins. It's supposed to be used, and with that usage will come more costs, but overall, we do expect it to grow our sales over the long term and improve our experiences. It’s a bit early to tell how that impacts for next year, but we’ll obviously update people as we learn more.

On the question of installed bases, it's my favorite question. We definitely are seeing more penetration of goods because people have consumer electronics from multiple locations and use cases in their lives. In a hybrid work model, I might have one setup at home. I might have one setup to go. You've seen this deeper penetration then of people's homes and lives. What's interesting about that is what you hit on in terms of innovation—a lot of companies have both benefited from that deeper penetration and seek to innovate in a way that will inspire customers to replace, meaning replacement cycles are condensing in coming online products that are really useful to people. If you think about the evolution of just cameras in computers over the last year because so many people are using video, now you have cameras that track you. There’s going to be this constant drive for features and attributes that you can add. What's fascinating is based on survey data that we're looking at right now, intent to purchase still remains very high in the next 12-month window, which to us says you've got people who are already trying to think about what might be the more upgrades that will help them manage life as they seek to work or have extended periods at home. While these are really difficult to quantify, we are for sure seeing a strong customer desire looking for those new attributes. Importantly, vendor partners are really working harder to create that next suite of solutions to meet the demand stemming from a shift in people's lifestyles.

Great, thanks.

Thank you.

Hi, good morning. Great quarter. I was hoping you could talk a little bit more about what you think about categories. I see in 2Q very strong results on a 1 and 2-year basis across the board. With comps having slowed, where do you see potential declines in the categories that are going to be strongest in weakness?

I think there are a lot of categories that will continue to be robust, depending upon the levels of inventory that we receive. Appliances, both large and small, have been growing for years. So, we just see more opportunities there. Clearly, home theater has opportunities as it always does in the back of the holiday season. So, those are some of the bigger ones. I think computing might be an area where it could be a little bit slower based on the last several years going back, but there are a number of categories that will continue to grow.

New category and new product introductions are also critical. Both the new categories that we talked about that we're expanding into, while not as big, are likely to see new product launches stimulate demand. This echoes back to the question regarding constant innovation that always stimulates a little bit of demand as well.

Great, and Corie, if you could tell us a bit about longer-term expectations.

Technology is integral. The second area is all about emergency response device-based tools back in our homes. That builds on some of the acquisitions that we've already seen. Then the third, which is a little bit more nascent, is digital health caring center services that can connect patients and physicians to enable care. That one is the most nascent, and that one will take the longest to develop. On the first two, you can hear even in our prepared remarks, the unmet needs proliferating right now to help people manage their care is absolutely incredible. On the consumer side, we feel really strong dependency on technology in that sector, especially as we're starting to see more people come back into our stores. I think the assets as you think about virtual assistance that we've all gone through, and that person-to-hospital touchpoint is very valuable—able to deliver care from a distance. That, I think, is an even greater use case now than it was previously.

Really helpful. Thank you so much.

Thank you.

My question is, I had to get my arms a little bit better around the inventory perspective, from a margin perspective. It just seems in the fourth quarter there is always a challenge, but I was wondering if you'd give us a little bit more on what you're thinking there.

Yeah, thanks. We’re confident that we are meeting the demand of our customers. There's always a level of constrained inventory although you are still seeing pockets of constraints now. We are in a very healthy position, but we have a high degree of transferability between categories and within category assortment to meet customer demand. I think, overall, from a gross profit perspective, as we expect to see gross profit rate pressure in Q4 with total projections against last year. But fundamentally we should see more return to promotional marketing compared to last year. Overall, compared to two years ago, it should be lower. But again, we'll watch and adjust accordingly.

Great, I appreciate the color. And then, my second question is what you guys talked about with the whole remodeling initiative. Are you guys going to be remodeling on there, and when will it be complete? Any more details around that? That sounds very exciting.

Yeah. I want to underscore because I think it uniquely builds on both our physical assets, our stores, and seeing every single store—there will be a number of remodels but it's not for every single one, but it also allows our consultants, designers, and advisors in our stores to be leveraged across not just conventional storefronts, but also in places like an outlet, or in areas like an auto services base where we can collaborate on all the cars together as an example. We said in the remarks—everything is rolling out in the market includes model changes that go with that as you learn to more flexibly operate all of these models. The goal for us is balancing that. This isn't just about the quantity of stores; it is truly what we are going to provide for you, and then the operating model and the people flexibly working around that foot print to uniquely provide customer experiences and solutions that no one else can. I think we’re moving into a stage where we can get customers to navigate different Best Buy experiences as we enable employees to work more flexibly across those experiences.

You guys do an incredible job, given what’s been thrown at you, so, kudos!

Thank you very much. So, I just want to close by saying thank you to our associates and thank you all so much for joining us today. We look forward to our progress during our next call coming up in November. Have a great day.