Best Buy Co. Inc (BBY) — Q1 2024 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-Qs 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 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: My Best Buy, My Best Buy Plus, and My Best Buy Total. I'll spend a few minutes going a little deeper on each of the tiers. My Best Buy will remain our free tier 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. As you may recall, My Best Buy had historically been a points-based loyalty program. This past February, we added the free shipping benefit. At the same time, we transitioned the ability to earn points solely to purchases made on our co-branded credit card. The customer and financial impacts we have seen thus far validate our decision. For example, the online conversion rate for products under $35 has increased, and our customer enrollments have remained steady. In addition, the early financial impact has been better than we modeled. My Best Buy Plus is a new membership plan built for customers who want value and access. For $49.99 per year, customers get everything included with the My Best Buy offering as well as 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. My Best Buy Total is a membership plan built for customers who want protection and support. This tier is an evolution of our current Totaltech offer and is $20 cheaper at $179.99 per year. It includes all the benefits from the Plus tier, as well as Geek Squad 24/7 tech support via in-store, remote, phone, or chat on all your electronics no matter where you purchased them. It also continues to include up to two years of product protection, including AppleCare+ on most new Best Buy purchases. Instead of free in-home installation and haul-away services, members will receive promotional offers from time to time. As we reflected on the goals of our membership programs, we made this change because we could see that many customers who became members primarily for free installation services did not stay with the program as long as other members and had significantly higher churn. From a financial perspective, we continue to expect our membership program to contribute approximately 25 basis points of Enterprise year-over-year operating income rate expansion in fiscal '24. We have already begun to deliver on this expectation as the changes we made to the free My Best Buy tier benefited our gross margin rate this quarter. Now, I will shift topics to talk about our omnichannel operations. We are continuing to adapt our omnichannel capabilities to ensure we maintain a leading position in an increasingly digital age and evolving retail landscape. For example, our portfolio of stores needs to provide customers with differentiated experiences and multi-channel fulfillment. At the same time, we need them to become more cost and capital efficient to operate while remaining a great place to work. We are on track to deliver the fiscal '24 store plans we announced this past March. These include closing 20 to 30 large format stores, implementing eight Experience Store remodels, and opening around 10 additional outlet stores. Consistent with the plans we shared entering the year and incorporated in our fiscal '24 guidance, during Q1, we advanced our operating model to align with the ongoing evolution of our business model and current trends. As I mentioned on our last call, over the past three years, our overall headcount has declined by approximately 25,000 people or 20% as we adapted to the shift in customer shopping behavior and in the effort to drive more flexibility. As a reminder, the vast majority of this headcount change came through the pandemic from attrition and our decisions not to backfill. Throughout these significant changes, we have been working hard to balance the amount of labor hours necessary to deliver the best experience possible for our employees, customers, and shareholders. At the same time, we have been investing in tools and employee development programs that increase their flexibility within and across stores. We also know that not all roles and the associated hourly pay are the same, and strategic trade-off decisions are necessary to give us the ability to flex our labor spend appropriately, particularly customer-facing labor. Based on all these factors, we have been, as we'd previously said, making multiple changes to our labor models. One such example is the recent change to our consultation program. By lowering the overall number of in-store consultants and designers, we were able to add approximately 2 million more hours for customer-facing sales associates into our staffing plan for the year. Customers are already giving us higher marks for improved associate availability in recent customer surveys. It's also important to note that we are moving away from a one-size-fits-all approach to our stores and staffing to a market-based approach. And depending on the needs of each market, we're adding, removing, shifting, or arranging the number of associates and roles needed to better and more efficiently serve those customers and to allow for more localized flexibility. Looking forward, we will continue to iterate our model to align with business trends, including initiatives such as membership and ensuring the span of control of our leaders is appropriate. As you would expect, we are also focused on leveraging existing and emerging technology to drive better customer and employee experiences across channels that also deliver efficiencies and better margins. I'd like to share a few examples around our customer care phone experience and our in-home sales team. Our customer care agents receive millions of customer phone calls every year. We recently launched a capability that uses generative AI to summarize the main points and follow-ups from each call. In the past, customer care agents manually took note to capture interactions in real-time with customers. This new capability allows our agents to both fully focus on the customer during the call and reduces time between calls, lowering overall costs and improving agent satisfaction. In addition, this is providing us with valuable information about friction in our experiences, allowing us to continuously drive upstream improvements. In another example, we're piloting a virtual reality training and simulation experience for our in-home consultants and designers. We expect this will decrease the cost to develop and certify in-home sales teams and elevate the specialized in-home selling skills of consultants and designers, especially those who are newer and less experienced. Additionally, these tools are always available for reference whether a team member is in a customer's home or training in a store. Now, I will take a few moments to share our thoughts on our broader industry backdrop. As I mentioned, we expect that next year, the consumer electronics industry will see stabilization and possibly growth, following two down years. I believe it's worth repeating why we are confident our industry will return to growth. First, we believe that much of the growth during the pandemic was incremental, creating a larger install base of technology products in consumers' homes. On average, U.S. households now have twice as many connected devices as they did in just 2019. Second, we expect to begin to see the benefit of the natural upgrade and replacement cycles for the technology bought early in the pandemic possibly later this year, depending on the macro environment, even more likely in calendar 2024 and 2025. Historically, customers upgrade or replace their tech every three to seven years, depending on the category, with mobile phones on the lower end, computing in the middle, and home theater and large appliances toward the higher end of that range. We continue to see our lapsed customers returning at higher rates year-over-year, especially as customers we acquired early in the pandemic return for additional technology purchases. Third, this is not a static industry. Billions of dollars of R&D spent by some of the world's largest companies, and likely some we haven't even heard of yet, means innovation is constant over the long term, driving interest, upgrades, and experimentation. We can see the customer demand for newness exemplified in the last few weeks by the record-breaking launch of the new Zelda software for Nintendo Switch and the stronger-than-expected pre-orders for the new ASUS' handheld gaming device. We continue to believe the industry will get back to a more normalized pace of meaningful innovation toward the end of calendar 2023 and into 2024. Additionally, there are several macro trends that we believe should drive opportunities in our business over time, including cloud, augmented reality, generative AI, and expansion of broadband access. While our existing product categories have slightly different timing nuances, in general, we believe they are poised for growth in the coming years. We are also furthering our expansion into newer categories, like wellness technology, personal electric transportation, outdoor living, and electric car charging. We carry multiple EV charging brands, and we were the first retailer to carry Tesla chargers. We also launched Starlink's satellite Internet kits on our digital channels and we'll have it available in stores later this summer. In addition, we are partnering with our vendors in new ways that leverage our capabilities to create new opportunities. For example, we are partnering with Roku to make TV advertising more relevant and performance-driven. The first-ever TVs to be designed and made by Roku are available exclusively at our stores and on bestbuy.com. And brands will be able to work with us to target, optimize, and measure their ads on Roku using Best Buy audience data. We also continue to build our Partner+ program that leverages our supply chain and fulfillment capabilities. We have several vendor partners, including Samsung, who are offering their online customers the option to conveniently pick up their products at their local Best Buy store. The recent launch of Oura smart rings is an example of how we partner with some of our smaller emerging vendors in a very comprehensive and unique way to drive customer engagement. Oura is a smart ring that uses sensors to track a variety of metrics to provide continuous health monitoring to improve the user's health habits. We launched the products exclusively on bestbuy.com and in 850 stores. We have an interactive demo experience with the ability to try on the rings and order any configuration of style, color, and size. We also incorporated the Best Buy store finder on Oura's website, so customers can visit their closest store and see the products in person. I want to extend my heartfelt appreciation for all our associates across the company, who continue to uniquely position us for the future through immense change. We continue to focus on providing competitive pay and benefits and leveraging flexible work models. And I am pleased to report that we maintain industry low turnover rates, particularly in key leadership roles, the vast majority of which we hire internally. It's amazing to see so many of our key leaders choosing to build the future of retail with us. And I am proud of the many ways we were recognized during the quarter for our commitment to our people and the environment. We were included on DiversityInc's 2023 list of Top 50 Companies for Diversity and ranked 17th on DiversityInc's Top Companies for Board of Directors list, reflecting our ongoing work to ensure our leaders and our company reflect the communities we serve. Just last week, we were listed on Parity.Org's list of Best Companies for Women to Advance, as well as their inaugural Best Companies for People of Color to Advance. We were one of fewer than 20 companies named to both lists this year. We were also recently named one of Barron's 100 Most Sustainable U.S. Companies for the sixth year in a row. In fact, this year, we were the top-ranked retailer. My summary is consistent with my comments last quarter. We believe the macro and industry backdrop will continue to be volatile this year. We have a proven track record of navigating well through dynamic and challenging environments, and we will continue to adjust as the macro evolves. At the same time, we remain incredibly excited about our future. We believe our differentiated abilities and ongoing investments in our business will drive compelling financial returns over time, and we are carefully balancing our reaction to the current environment with a focus on our strategic initiatives and future. I will now turn the call over to Matt for more details on our first quarter financial and fiscal '24 outlook.

Good morning, everyone. Let me start by sharing details on our first quarter results. Enterprise revenue of $9.5 billion declined 10.1% on a comparable basis. Our non-GAAP operating income rate of 3.4% declined 120 basis points compared to last year. Non-GAAP SG&A was $40 million lower than last year and increased approximately 180 basis points as a percentage of revenue. Partially offsetting the higher SG&A rate was a 60 basis point improvement in our gross profit rate. Compared to last year, our non-GAAP diluted earnings per share of $1.15 decreased 27%. While our revenue was down to last year, overall our results once again aligned closely with our expectations entering the quarter. Our non-GAAP operating income exceeded our expectations due to both higher gross profit rate and lower SG&A. The better-than-expected gross profit rate included favorable supply chain costs and benefits associated with changes made last year to our free My Best Buy membership offering. The favorable SG&A was driven by a combination of several smaller items with store payroll expense being the largest driver. Next, I will walk through the details on our first quarter results compared to last year. In our Domestic segment, revenue decreased 11% to $8.8 billion, driven by comparable sales decline of 10.4%. From a phasing perspective, February was our best-performing month on a year-over-year basis with trends softening through the remainder of the quarter. From a category standpoint, the largest contributors to comparable sales decline in the quarter were computing, appliances, home theater and mobile phones, which were partially offset by growth in our gaming and service categories. In our International segment, revenue decreased 11.6% to $666 million. This decrease was driven by the negative impact of foreign exchange rates and a comparable sales decline of 5.5% in Canada. Our Domestic gross profit rate increased 70 basis points to 22.6%. The higher gross profit rate included the following: First, improvement from our membership offerings. This included a higher gross profit rate in our services category, which was primarily driven by the cumulative growth in Totaltech members. In addition, our rate benefited from the program changes we made last year to our free My Best Buy offering. Second, product margin rates improved versus last year despite increased promotional activity. And third, the profit-sharing revenue from our private label credit card arrangement was a benefit to our Domestic gross profit rate. Overall, the results this quarter aligned with our commitment to improve our gross profit rate this year. Our International non-GAAP gross profit rate of 23.7% decreased 60 basis points compared to last year, which added approximately 10 basis points of pressure to our Enterprise results on a weighted basis. The lower International gross profit rate was primarily driven by a lower mix of revenue from the higher margin rate services category. Before moving on, I would like to give some additional context on the profit-sharing revenue from our credit card arrangement, which we have now called out as a benefit to our gross profit rate for the last eight quarters. In fiscal '23, the profit share was approximately 1.4% of Domestic revenue, an increase of 50 basis points compared to fiscal '20. The growth was driven by the increased usage of our card, both at and outside of Best Buy and the favorable credit environment. Our outlook for fiscal '24 assumes the profit share will have a slightly negative year-over-year impact on our gross profit rate for the remainder of the year. Domestic non-GAAP SG&A declined $29 million with the primary drivers being lower store payroll cost and reduced advertising, which were partially offset by higher incentive compensation and depreciation. Moving to the balance sheet. We ended the quarter with a little more than $1 billion in cash. Our year-end inventory balance was approximately 17% lower than last year's comparable period, and we continue to feel good about our overall inventory position as well as the health of our inventory. During the quarter, we returned a total of $281 million to shareholders through dividends of $202 million and share repurchases of $79 million. Our quarterly dividend of $0.92 was an increase of 5% and marked the 10th straight year of dividend increases. We expect to continue share repurchases throughout fiscal '24; however, we are not providing a target. We will continue to assess our overall working capital needs and provide updates as we progress through the year. Moving next to capital expenditures, where we still expect to spend approximately $850 million this year. This reflects a reduction of approximately $80 million compared to last year with lower store related investments being the primary driver of the reduced spend. Now, we'd like to discuss our fiscal '24 outlook. As a reminder, our original guide for this year assumes the consumer electronics industry would continue to feel the pressure of the broader macro environment and the high degree of uncertainty as it relates to the consumer. Our financial performance in the first quarter closely aligned with our expectations, and we are maintaining the full year guidance we provided this past March. Given the current environment, we are, of course, preparing for a number of scenarios within our guidance range. At this point, we believe our sales align closer to the midpoint of the annual comparable sales guidance. It is still early in the year, so we will continue to watch the trends closely and adjust as necessary. Let me provide more details on our guidance and working assumptions. Starting with revenue. We expect Enterprise revenue in the range of $43.8 billion to $45.2 billion and Enterprise comparable sales decline of 3% to 6%. As a reminder, the fourth quarter of fiscal '24 contains an extra week. We expect the 53rd week to add approximately $700 million of revenue and it is excluded from our comparable sales. Our guide implies comparable sales trends versus last year improve as we progress through the year. Let me share context on that. Starting in Q1 of last year, our industry experienced the beginnings of macro pressure and the broader implications of normalizing consumer demand trends after two years of higher growth. This resulted in a 10% comparable sales decline for the full year. For the remainder of this year, we will continue to lap the industry pressure that only worsened from the first quarter of last year. Furthermore, when using fiscal '20 as a comparison, you will see that our guidance implies revenue trends will further soften in the second quarter. After removing the estimated revenue from the 53rd week, the midpoint of our revenue guidance reflects a scenario where our growth compared to fiscal '20 is slightly negative in the second quarter and regresses slightly more in the second half of this year. This is clearly a continued slowdown in revenue growth compared to fiscal '20. For reference, our revenue growth compared to pre-pandemic fiscal '20 peaked at 27% in Q1 of fiscal '22 and generally has been slowing ever since the last quarter at 4%. Moving on to full year profitability guidance, which is Enterprise non-GAAP operating income rate in the range of 3.7% to 4.1%, and non-GAAP diluted earnings per share of $5.70 to $6.50. Our outlook remains unchanged for a non-GAAP effective income tax rate of approximately 24.5% and for interest income to exceed interest expense this year. As it relates to the extra week, we expect it to benefit our full year non-GAAP operating income rate by approximately 10 basis points. I will review the full year gross profit rate and SG&A working assumptions that we shared this past March. We expect to drive gross profit rate expansion of 40 basis points to 70 basis points compared to fiscal '23 due to the following actions and initiatives: we expect to see benefits from optimization efforts across multiple areas, including reverse supply chain, large product fulfillment, and our omnichannel operations; we also expect our membership program and our health initiative to improve our gross profit rate; lastly, we expect the impacts from promotions, supply chain costs, and the profit sharing from our private label credit card to have a relatively neutral impact to our annual gross profit rate compared to this past year. Now, moving to SG&A expectations. We expect SG&A as a percentage of sales to increase by approximately 100 basis points compared to last year. We expect higher incentive compensation as we reset our performance targets for the new year. The high-end of our guidance assumes incentive compensation increases by approximately $225 million compared to fiscal '23. Depreciation expense is expected to increase by approximately $50 million and store payroll expense is expected to be approximately flat to fiscal '23 as a percentage of sales. As it relates specifically to the second quarter, we expect that comparable sales will decline in the range of 6% to 8%, which reflects a sequential year-over-year improvement compared to the first quarter. Our revenue growth trends during the first three weeks of the quarter improved from April and were within our Q2 guidance range.

I will now turn the call over to the operator for questions.

Good morning, and great job navigating this situation. My question is about industry growth and the possibility that we might have hit the bottom this year. Looking at the category, it seems like it has overshot based on your comments about sales trends. One could argue that 2023 was expected to be the bottom and potentially the turning point. What gives you confidence for 2024? Once there’s an overshoot, it becomes challenging to identify where the bottom is. I’d appreciate any additional insights you can share.

Thank you, Simeon. Let me provide some context here. We've been consistent in saying since Q2 of last year that consumers are making trade-off decisions in a unique environment. Regarding your question about reversion, we’ve observed consumers displaying recessionary behaviors depending on the category. This situation is quite unusual. Looking ahead, we anticipate a turnaround in our business as we move into the second half of this year and into next year. We are referencing various industry sources like NPD, CTA, and Forrester, which align with our perspective. We are examining the external landscape for insights. Within our prepared remarks, we highlighted key points that support our outlook for next year. First, there's a larger install base of products. While the pandemic saw some pull-forward, the number of connected devices in homes has now doubled since 2019, creating a significant install base. These products are not static; vendors are actively working on upgrades and innovations. Second, there are consistent replacement cycles averaging three to seven years. While the pace may have accelerated during the pandemic, it has normalized somewhat now. Nonetheless, the nature of these products encourages upgrades over time. Lastly, we see a strong pace of vendor innovation. We provided examples in the prepared remarks, and we're observing that innovation is more likely to show in the latter half of this year and into next year. We conveyed that our outlook is based on current observations, which we will continue to assess. As of now, it appears that consumers have made their choices regarding our industry, and we feel well-positioned as we approach the next calendar year.

Thank you.

Great. Thanks guys for taking the questions. I have a couple of quick follow-ups for you. With regard to the incentive comp for this year, can you help us out why it would go up as much as it is given it's such a challenging year? Not that you guys shouldn't get paid, but I just wanted to better understand it.

Sure. Looking back at last year, we had about $455 million in favorable incentive compensation. By the end of last year, we hadn't paid out any of our incentive compensation based on our annual performance, which was influenced by our revenue and operating income expectations at the start of the year. Therefore, we removed all that expense from last year. As we establish new targets for fiscal year '24, we have reset our expectations for sales and operating performance. As we move from almost no payouts to a full payout, we've included approximately $225 million in expenses at the high end of our guidance. This reflects a typical payout for this year, considering the significant difference from last year's lack of payouts and the expectation that we would start this year aiming for a normal midpoint payout.

Got it. That's helpful. Thank you for explaining. And then, a quick follow-up on the promotional side of things. I think, Corie, you had mentioned that there were some categories that were a little more promotional than expected. I was kind of curious as to what those were. And the sort of second part of promotions, are people responding when promotions do kick in?

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.

From an elasticity perspective, it really depends on the category. For example, in the appliance category, we currently see customers who are under pressure and need to replace items rather than making aspirational purchases. This leads to less elasticity in their responses to promotions. Conversely, in areas like home theater, we're observing positive responses when more promotions and value are offered. Overall, consumers are definitely seeking value and will respond to promotions to some extent, but their mindset and the specific category significantly influence their level of aspiration.

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

Thanks, Joe.

Good morning. Thanks for taking my question. I was just wondering if you could just give a little bit more color on the services business. You had a pretty strong comp increase in the Domestic business, but then in the International business, it was down. And I know part of that had to do with compares, but I was just wondering if you can just give us a little more color in terms of the divergence there. Thanks.

Yes, of course, Anthony. The growth in services revenue on the Domestic side is due to the increase in Totaltech members compared to last year. As we sign up more members, our revenue continues to rise. This explains the growth in services on the Domestic side. On the International side, we mentioned experiencing some pressure on the gross profit rate for services. They are implementing similar membership changes in Canada, which reflects the timing of those changes made last year. This year, they will begin to cycle through those adjustments made earlier this year after the first quarter. This situation mirrors some of the membership changes occurring on the Domestic side, although they are not identical.

That's helpful. Thank you.

Thanks, Anthony.

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.

I can start and then Matt can add to that. We entered the year knowing we needed to make adjustments to our membership program. We have a clear plan for My Best Buy, the free program, and those adjustments were implemented at the beginning of the fiscal year. We also aimed to make changes to the other part of the program. This has provided us some extra time before formally announcing the changes, but we had already anticipated that these updates would be included in our guidance for the year.

Yes. Last quarter and this quarter, we indicated that the gross profit rate is expected to increase by about 40 to 70 basis points this year. One of the factors contributing to this change is the modifications to the membership program, including the adjustments to My Best Buy, as Corie mentioned, along with anticipated changes in other areas of the membership program. Regarding your last question, we expect to continue refining and updating the membership financials, and we anticipate ongoing profit rate growth as we move into next year. We still have Totaltech members with two years of benefits that we need to honor, and we will begin to see the impact of the changes in the latter half of this year. As we move into next year, we will continue to innovate, which should lead to further improvements.

Got it. Well, as someone who took advantage of the free installation, I'll miss that, but I'll take my $20 savings on the annual fee.

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.

Got it. Fair enough. I appreciate the color.

Thank you.

Thank you. Good morning. I have two related questions. You mentioned the midpoint for sales this year, but there was no comment on the range for operating margin. Additionally, you significantly exceeded your gross margin expectations in the first quarter. Are you anticipating any pullback? Any insights on that range? Also, Corie, you spoke about preparing for various scenarios. Can you elaborate on that? You have already reduced a lot of expenses, particularly in labor, which is your largest cost and continues to face inflation. Where do you see opportunities to safeguard the bottom line if comparable sales fall short of expectations?

I'll start, and Corie can add to this. Thank you, Chris. Regarding the EBIT midpoint, we didn't provide specific comments on that. There are several factors influencing the EBIT level, especially between gross margins and SG&A, giving us flexibility depending on sales trends. The most significant element in that calculation is the gross profit rate, which we expect to range between 40 to 70 basis points. As for our position, we have a few more drivers we can adjust to navigate that range. Concerning the flow-through, we did not apply the Q1 OI beat as we want to maintain some room for maneuvering throughout the rest of the year. We are aware of the various outcomes for the year, and we aim to make careful decisions as we approach the more significant second half of the year.

Thanks very much.

Thank you.

Hi, thanks. Good morning, everyone. I wanted to just talk about the sales trend from the last couple of months in the context of the overall retail landscape. So, you did talk about a bit of a softening through the quarter, although I think February, of the last conference call, you were roughly down 10%. So, it didn't seem like there was too much softening. At the same time, retail has seen a significant weakness in big-ticket discretionary. You would think consumer electronics would be impacted by that. So, your sales can be down, but not falling off a cliff. Maybe comment on what you're seeing within your business versus what you think is happening more broadly at retail?

Sure. I can begin by discussing the quarter's performance and then Corie can provide insights on the broader retail landscape. Like the retail sector, our sales experienced a decline as the quarter went on. February was our strongest month, slightly exceeding the guidance we provided at the beginning of the quarter. This was influenced by a few factors; specifically, we shared a growth number rather than a comparable number, highlighting a distinction between the two. We typically have some final adjustments. Thus, comparable sales did worsen sequentially during the quarter. As we indicated, we began the quarter in line with the range we set for the full second quarter, leading to improvements from April to May in terms of comparable sales. We are currently optimistic about the range we established for Q2.

As it pertains to the consumer, we've maintained a consistent message since the beginning of last year, indicating that in the realm of big-ticket discretionary purchases, especially in consumer electronics, the consumer would have to make trade-off decisions. Faced with record high inflation compared to 2020 in essential areas like food, housing, and fuel, these decisions are influenced significantly. Our focus has been on delivering the best possible value and adapting our membership program to better serve consumers. While it's challenging to gauge our market share, especially in services and emerging categories, we believe we're at least holding our ground in the industry. It's crucial to note that the products we offer are necessities rather than luxuries. As we anticipate upcoming innovation cycles, we expect to see a boost in replacement and innovation activity. Overall, we feel optimistic about our efforts to engage with customers and respond to their trade-off decisions while recognizing that our industry operates differently than others. We've consistently communicated our insights regarding consumer behavior and are therefore addressing their needs effectively.

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

Thank you.

Your next question comes from the line of Jonathan Matuszewski from Jefferies. Your line is open.

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.

I am extremely proud of our team's accomplishments during the pandemic. Although we haven't separated it as a distinct segment, its growth has outperformed our core business. This reflects a creative strategy across various sectors, from education to hospitality and partnerships with sports teams, all of which incorporate significant technology experiences. We believe this represents a valuable growth opportunity for us. We also discussed our appliance business and our pilot program working directly with homebuilders. There are many avenues through which we are evolving. This has been part of our business for a long time, and I’m proud of how our team has transformed to offer more digital experiences. When customers seek to make large purchases online, we guide them through the right digital channels to connect with the appropriate contacts for their needs. We're discovering numerous digital methods to better understand our customers and target them, particularly small business owners, rather than the standard consumer approach. I appreciate the team's efforts in developing capabilities to effectively serve these business clients, and I am pleased with the growth in this area of the business.

It's helpful. Thanks.

Thank you.

Hi. Good morning. Thanks for taking my questions.

Good morning.

So my first question is a follow-up to some previous inquiries. Clearly, you navigated a difficult environment in Q1, which was a challenging sales quarter. In response to other questions, you mentioned that the situation has somewhat deteriorated as the quarter progressed. Considering the current state of the business and consumer activity, what gives you the greatest confidence that this is the bottom? Looking ahead to 2024 and 2025, when can we expect a rebound to more normalized growth at Best Buy or in the sector?

I believe our confidence comes from the current situation we are facing, which follows a decline in demand last year and anticipates a continued decline this year. This sets us apart from other industries, as we noticed shifts in consumer behavior sooner than many. We pointed this out as early as the first quarter of last year when we first observed a demand slowdown. Now, we are looking at two consecutive years where consumers are making choices away from consumer electronics. The unique nature of our industry instills confidence, especially given our stable position within it. Technology is essential for daily life; consider how many devices you interact with each day, and that technology is constantly evolving. The rapid advancements in hardware and software, such as generative AI and VR/AR, will lead to significant changes in product design and features, which contributes to our confidence. Historically, during recessionary periods, consumers eventually choose to upgrade and replace their electronics. Our confidence stems from the recognition that a large community of vendors is committed to fostering demand and developing innovative solutions for customers. I don't foresee a future where we depend less on technology. These fundamental factors boost our confidence as we move from this year into next. However, I want to emphasize that this perspective is based on current observations and understanding of the environment. We will keep monitoring how consumers respond in what is clearly a volatile situation. Ultimately, the distinctiveness of our industry, paired with our strong partnerships with vendors, reinforces our confidence as we approach next year.

That's very helpful, Corie. Thank you. And then if I could just ask a quick follow-up unrelated. So, a lot of talk about membership and some of the shifts you're making there with the program. So, I guess as we step back, I mean, clearly, Best Buy, there's a revenue piece of the membership program, how do customers that are members of Best Buy, how do they perform versus non-member customers from just from an overall sales perspective?

We mentioned briefly in our prepared remarks that our members are more engaged customers. They typically spend more and shop across various categories. Overall, when we look at this large group of members, they are our most active customers. Over the past couple of years, our paid membership has provided us with valuable data on what customers truly value. There are three key objectives for any membership program: acquiring customers, retaining customers, and continually engaging them. These elements—acquisition, retention, and engagement—are fundamental to any membership initiative. Therefore, we've focused not only on who we are acquiring but also on their engagement with the program and whether we retain them. It’s more than just a broad view of our customers; we see that they are indeed more engaged and having better experiences. Now, we can begin to categorize our large customer base into different need states. We see customers who prioritize value and convenience, as well as those who seek more comprehensive service and support. This extensive customer data enables us to target these different groups with tailored offerings that we believe will resonate with them.

Got it. I appreciate all the color. Thank you.

Thanks a lot, and good morning. My question is around store labor. You guys have made a lot of changes to the labor model over the last year or two, and you're continuing to iterate. I'd like to get a sense from you as to what you think the status is of morale within the labor force? And then secondly, whether or not the lack of the specialized roles could impact customer service levels in a negative way?

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.

Great. Thank you.

Thank you.

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?

Yes, sure. I think, at the highest level, our ROIC is impacted by the level of profitability that's flowing through that calculation. And I think where we're pointed is at continuing to make improvements in our operating model and our efficiency. As we've talked about, as we look into the next few years, we've said that we expect and want to continue to grow our operating income rate, at the same time, the industry will begin, we believe, turnaround, and we'll continue to grow in sales and our OI rate will continue to improve as we look forward or expected to. With that happening, we'll be able to drive a better profitability and that ROIC will start to climb probably back up closer to where we were, but again, that's through a combination of the industry improving, our initiatives continuing to improve and creating efficiencies and optimization through our business.

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 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.