Best Buy Co. Inc (BBY) — Q4 2022 Earnings Call Transcript

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.

Thank you so much, Mollie. Good morning, everyone. We are so pleased you could join us today as we report our fiscal ‘22 results and take this opportunity to update our longer-term strategy and our multiyear financial outlook. Today, we will discuss how our business has evolved and how we are planning to drive value over the next few years. We’re not planning to cover all our initiatives or all our business units. We’ve tried to be as succinct as possible to focus on the topics and initiatives that we believe are most important for you to understand about our business, our plans and where we believe we’re headed, both for fiscal ‘23 and for the longer term. First, let’s discuss our fiscal ‘22 results. Fiscal ‘22 was another record year. In addition to record revenue and earnings, our leaders continue to drive new ways of operating, and our employees continue to do amazing things in the face of unprecedented challenge and change to support our customers’ technology needs in knowledgeable, fast and convenient ways. As we discussed when we entered the year, we anchored on three concepts we believe to be permanent and structural implications of the pandemic that were and are shaping our strategic priorities and investments. One, customer shopping behavior will be permanently changed in a way that is even more digital and puts customers entirely in control to shop how they want. Our strategy is to embrace that reality and to lead, not follow. Two, our workforce will need to evolve in a way that meets the needs of customers while still providing more flexible opportunities for our employees. And three, technology is a need and is playing an even more crucial role in people’s lives. And as a result, our purpose to enrich lives through technology has never been more important. With these concepts in mind, we piloted numerous store formats to test and learn in the past year. We advanced our flexible workforce initiatives and invested in our employees’ well-being. We introduced new technology tools designed to support both, our customers and also our employees. And we also launched a bold new membership program called Best Buy Totaltech designed to significantly elevate our customer experience and drive incremental sales. We will be talking more about all these topics today. All of this was against a constantly evolving backdrop. During the year, we navigated supply chain and transportation challenges, uncertainty as virus peaks rolled across the country, and then most recently, the disruption from the Omicron wave. Our teams did an amazing job against that backdrop, expertly managing supply chain challenges since the beginning of the pandemic to bring in products our customers needed. During the year, we continued serving our customers digitally at much higher rates. Our online revenue was 34% of our domestic revenue. And while it declined versus last year, it was up 115% or $8.8 billion compared to two years ago. At the same time, we also reached our fastest package delivery speeds ever. We are an industry leader in fast and convenient product fulfillment for our customers. In fact, the percent of online orders we delivered in one day was twice as high as pre-pandemic levels, despite the significant increase in volume during that same timeframe. These record results are driven by the investment decisions we have made in the last several years in supply chain, store operations, our people and technology, many of which we discussed at our investor updates, both in 2017 and 2019. More importantly, these results are driven by our amazing associates across the company. Over the past 24 months, they have flexibly dealt with rapidly changing store operations as we responded to impacts of the pandemic. They created safe environments for our customers, and they worked tirelessly to provide excellent service. In fact, despite all the changes we went through in the last year, we delivered NPS improvements, both online and in our stores. I’m truly grateful for and continue to be impressed by our associates’ dedication, resourcefulness and flat-out determination. From a financial perspective, we delivered record revenue and earnings per share. Our comparable sales growth was 10.4% on top of a very strong 9.7% last year, growing $8 billion over the past two years. Our non-GAAP earnings per share was just over $10, up 27% compared to last year. And compared to two years ago, we expanded our non-GAAP operating income rate by 110 basis points. Our non-GAAP return on investment improved 840 basis points compared to two years ago, and we drove more than $6.5 billion of free cash flow in the last two years. In fiscal ‘22, we returned $4.2 billion of that to shareholders in the form of dividends and share repurchases. We also continue to deepen our commitment to the community and the environment. Many of you may have had the opportunity to view the video that was playing before the event started. We continue to believe that our ESG efforts are directly tied to long-term value creation, and I am proud of all our initiatives, but we only have time for me to cover a few examples today. We committed to spend at least $1.2 billion with BIPOC and diverse businesses by 2025. The goal is to create a stronger community of diverse suppliers and to help increase BIPOC representation in the tech industry. We also committed to opening 100 Teen Tech Centers by fiscal ‘25. During fiscal ‘22, we opened 9 to end the year with a total of 44. These provide teens in disinvested communities access to the training, tools and mentorship needed to succeed in post-secondary opportunities and careers. In addition, we’re building a diverse talent pipeline for jobs of the future. In terms of the environment, in fiscal ‘22, we were a founding member of the Race to Zero initiative, committing to accelerate climate action within the retail industry. We are also driving sustainability through the unique consumer electronics circular economy. We help keep devices in use longer and out of landfills by leveraging our customer trade-in program, Geek Squad repair services, responsible recycling and Best Buy outlets. These are initiatives our customers and vendors value and capabilities no one else has at our scale and breadth, and we are honored to be recognized for our work. Notably, we are placed in the top 5 on Barron’s Most Sustainable Companies list for the past five years in a row. This ranking recognizes our strong performance across all aspects of ESG. In addition, we are on the CDP Climate A List for the fifth year, which recognizes leadership in making a positive impact on the environment. Now, let’s move on to our Q4 results. I am extremely proud of what we accomplished during the fourth quarter. Our team showed remarkable execution and dedication to serving our customers throughout the important gift-giving season. This was evidenced by the fact that we drove improvement in year-over-year customer NPS metrics across almost all areas, particularly for in-store, online and chat experiences. In fact, we saw our best-ever customer satisfaction scores for our in-store pickup experience. Online sales were almost 40% of domestic revenue compared to 43% last year and 25% in Q4 of fiscal ‘20. We reached our fastest holiday delivery times ever, shipping products to customer homes more than 25% faster than last year and two years ago. We also completed the purchase of two companies that aligned with our strategy, which Jason and Deborah will talk about later this morning. We are deliberately investing in our future and furthering our competitive differentiation. This, as we expected, is temporarily impacting our profitability. The biggest areas of investment in Q4 were our new membership program, technology and Best Buy Health, all core to our future growth potential. In the face of unexpected change, I remain inspired by the way our teams across the enterprise remain flexible to ensure our customers were able to find the perfect gift. We remain well-positioned as we head into fiscal ‘23 as the unique technology provider for the home. I’ll turn the meeting over to Matt to cover more details on our Q4 results and fiscal ‘23 outlook. Matt?

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. Totaltech is a near-term investment to drive 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 in 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.

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 in 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 are 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 the value of 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, access 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, with virtual experiences, play golf with friends or family members virtually, travel to places that you cannot 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 will move into security of the entire home, communication and assistance for individuals tomorrow. 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.

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 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 the 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 the 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.

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.

Thank you so much, Matt. Extraordinary ecosystems have formed over the last 20, 30, 40 years as digital has transformed every aspect of how we all do business. That same transformation is happening in our homes, meaningfully accelerated in the last two years. And while we started as a music retailer, selling fun-to-have products, we’re now the only company built around the same extraordinary transformation of technology in our lives and in our homes. While others sell some of the same products we do, we alone offer the complete technology solution across manufacturers and operating systems. We are the only company in all channels and at scale that can do everything from designing your personalized hardware and software solution in the home, to install and connect all of it, to keep it working when there are any issues from unreliable networks to broken screens. These assets appeal not only to our customers, but they are also unique and investable for our marketing partners, technology vendors, small businesses and education relationships and other strategic connections. As we look to the future, we see technology as a permanent and growing need in the home, constantly evolving as the world’s largest companies innovate with new use cases around the metaverse, transportation, green electricity and health, just to name a few. We have a unique value creation opportunity into the future and are investing now as we’ve successfully invested ahead of change in our past to ensure we pivot to meet the needs of our customers and retain our exclusive position in our industry. We are excited to help customers enrich lives through technology in ways no one else can. And with that, we will break for 10 minutes before beginning our Q&A session.

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?

I’ll begin, and Matt can provide additional insights. As you mentioned, we are anticipating a slight decline in the next year as we adjust to the end of some stimulus effects. However, there are several factors we discussed in our prepared remarks that we believe will contribute to an increase in inventory as we move into the following year. One key point is the significant presence of technology in our homes, which has led to a strong reliance on these devices. This trend of staying at home is likely to continue, driven by the increasing use of technology for activities like streaming, learning, and hybrid work, as well as gaming. These behaviors have become ingrained in our daily lives. Additionally, there are now twice as many connected devices in households compared to two years ago, highlighting the rapid growth in device usage. With continuous innovation, we are also noticing a decrease in replacement cycles for most of our key products; we've seen this trend reflected in our customers over the past two years. While we expect some decline next year, the sustained interest in the industry, new uses for technology, and ongoing innovations in areas such as the metaverse suggest that growth will resume as we recover from this temporary setback.

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 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.

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?

Yes. Thanks, Chris. Yes. So essentially, you’re right that roughly, as we think about our path to FY25, FY23, we talked about it being down as the industry is assumed to be in the low single digits to mid single digits. As you move to FY25, that would assume a higher pace of growth in those couple of years, not necessarily being linear, but a little higher pace of growth than we have historically. What gives us confidence in the ability to do that is a lot of the initiatives that you heard today. So, we’ve outlined a number of things, Totaltech, changes to our stores, expanding our assortment, growing into Best Buy Health. Those things give us confidence in being able to accelerate our sales as we look out past FY23. What’s assumed in that number as well is essentially, we would expect to still modestly gain share on a baseline of our business but then be able to accelerate our share growth with these initiatives that we talked about and then expand our markets with the items that Jason shared and also Best Buy Health as well.