Best Buy Co. Inc (BBY) — Q1 2025 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 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 better-than-expected Q1 profitability. Through strong execution, we continue to manage our profitability, while at the same time preparing for future growth. We progressed against our fiscal 2025 priorities, grew our paid membership base, implemented various restructuring actions, and drove improvements in our relationship net promoter score and in our operational metrics for most of our prioritized customer experiences. The mix of macro factors continued to create a challenging sales environment for our category during the quarter, and our sales were slightly softer than our expectations. Our Q1 comparable sales declined 6.1% compared to last year, with the largest impacts coming from appliances, home theater, gaming, and phones. Services and laptops were areas of growth for the quarter. The Q1 digital sales mix was 31% of domestic sales, similar to last year. Our omnichannel fulfillment experience continues to improve with almost 60% of our packages delivered or available for pickup within one day, and 40% of our digital sales are picked up in stores by our customers, with more than 90% of these orders available within just 30 minutes. From a profitability standpoint, our non-GAAP operating income rate of 3.8% expanded 40 basis points compared to last year. This was above our expectations due largely to gross profit rate improvement in our membership and services offers. Customers remained very deal-focused, and attracted to more predictable sales moments. Our Q1 product margins were relatively stable even though the environment overall was more promotional than our expectations, in terms of both breadth and depth of promotions. We did see variability by category. For example, the major appliances category was materially more promotional in pursuit of stimulating interest and sales. As has been our practice, we were targeted and thoughtful regarding where and when we made our promotional investments. Throughout the quarter, our teams were driven and diligent, and I continue to be proud of their performance. I believe it is a testament to our strong culture that our people remain engaged, motivated, and passionate about technology and serving our customers while navigating what has been an extended period of dampened demand. Our Q1 retail turnover trended down versus last year and remains lower than industry averages and our recent employee engagement survey shows our people have strong levels of connection, engagement, and belonging that are at or above the global benchmark. As we look to the rest of the year, we are focused on our strategic plan and priorities, while being mindful about the state of the consumer. In February, we said we expect 2024 to be a year of increasing industry stabilization, and we continue to believe that. That being said, clearly, macro factors continue to fluctuate and put pressure on consumer spending. Three months ago, there were several indicators showing some favorability, including decreasing inflation, continued low unemployment, encouraging trends in consumer confidence and the beginnings of a housing market rebound. Since then, inflation is still high, mortgage rates are high, and consumer confidence scores are trending lower. Consumers continue to make tough choices with their budgets, trading down in some areas, while still prioritizing spend in others, like services and experiences like travel. This, in combination with the pull-forward of tech purchases into the early years of the pandemic and lower levels of material innovation has led to continued lower demand for higher ticket consumer electronics and a focus on value and deals for current purchasers. We are not changing our original full-year guidance as it is early in the year. The first quarter is a relatively quiet quarter and we have yet to see the impact of a variety of coming new product launches and innovations. However, at this point in time, it is likely we are trending toward the midpoint of our original comparable sales guidance of flat-to-down 3%. We are strategically operating our business, balancing our response to the pressured sales environment. Therefore, even at the midpoint of the comparable sales guidance, we expect to deliver profitability toward the high end of our non-GAAP operating income rate guidance. At the same time, we are taking action and investing to sharpen our customer experiences and industry positioning. We know more of our key categories will return to growth. And historically, we outperform when there is more technology innovation and we leverage our competitive differentiation to provide the best experience for customers. From a major category standpoint, we continue to expect sales in our computing category to show growth for the full year. We expect revenue for the rest of our product categories as a whole to be down, partially offset by growth of our services revenue. As we plan for the next three quarters, we expect our comparable sales performance to sequentially improve. For the second quarter specifically, we expect comparable sales to decline approximately 3% compared to the 6% decline we saw in Q1. Based on month-to-date sales and results, our estimated comparable sales for May are expected to be better than our Q2 guidance. We are encouraged by these results, but from a timing perspective, we don't fully lap last year's Memorial Day sales until our June fiscal week one, and we continue to be very thoughtful about the time periods between sales events. Let's talk about computing and the exciting things happening there. We expect the category to benefit as early replacement and upgrade cycles gain momentum, and new products featuring even more AI capabilities are released as we move through the year. We have seen early signs of improvement as year-over-year comparable sales for laptops turned slightly positive in the fourth quarter and that trend continued in Q1. Last week, Microsoft announced Copilot Plus and laptops from Microsoft, Dell, HP, Lenovo, and Samsung are available for pre-order on our website right now and will be available on June 18. These devices have faster speed, better battery life, greater efficiency, they are much cooler, and baseline Copilot features like summarization can quickly recap pages of documents or lengthy email threads. They also have exciting new use cases. For example, there is a recall function that makes it very easy to find documents based on visual queues or help users easily navigate back to a website to find a specific item they shopped for three weeks ago. They also have a live language translation function that works in real-time on videos without requiring a connection to the Internet. And the co-create capability can take your rough sketches and turn them into works of art. To support these launches, we have built a comprehensive go-to-market plan. At roughly 40 SKUs in total, we expect to have the largest assortment at launch with more than 40% of the assortment retail exclusive to Best Buy. Working in coordination with our vendor partners, we will have inspirational merchandising and demos of the products in our stores, and unique educational and interconnected digital shopping journey. And, of course, we have an extensive training program to ensure we leverage our sales associates and Geek Squad to ensure Best Buy is the destination for unbiased advice and inspiration around how this new tech can enrich their lives. There is additional innovation to drive excitement and interest, including the recently launched Apple iPads featuring their M4 chips that are already contributing to improved sales trends this quarter. Additionally, we have the new Bose open-ear headphones and Sodos has just announced they are entering the headphone space as well. All these launches are coming just in time for back-to-school, and we expect this drivetime to be an important part of the computing story. From July through mid-September, we will have a series of sales events focused on students and their parents that will feature our new brand positioning. We also plan to offer specific deals to our members to drive acquisition and engagement. As I mentioned earlier, we are taking action to sharpen our customer experiences and industry positioning, while also maintaining our profitability in this environment. Last quarter, we laid out our fiscal 2025 priorities. They are: one, invigorate and progress targeted customer experiences; two, drive operational effectiveness and efficiency; three, continue our disciplined approach to capital allocation; and four, explore, pilot, and drive incremental revenue streams. I would like to provide some updates on our progress. We are focused on providing increasingly personalized, highly relevant, and motivational content, as we can attribute roughly 90% of our annual revenue to known customers. I'm particularly excited about the work we are doing with our app as we grow the number of users. Customers who use our app spend more than non-app users. During Q1, we went live with a personalized home screen powered by AI that is now rolled out to 50% of our app users. Each of these users' home screens looks different based on their personal preferences, and a number of other factors like current location, shopping history, membership status, and what we know they care about the most based on their activity. This could include the newest and hottest deals, latest gadgets from favorite brands, recommendations on products, services, or accessories, or even a prompt to shop with one of our experts to help them save time. Thus far, customers who receive our personalized homepage are engaging at higher rates than we expected, and we are excited to roll the new features to all app users this summer. Over the past year, we've also been focused on driving speed improvements on the product pages and in checkout in the mobile experience to drive customer experience and sales performance. For example, since starting this work in February, we have driven a 50% reduction in mobile product detail page load time. Of course, we are also focused on the customer experience in our stores. From a physical standpoint, we plan to touch every store in the chain in some fashion throughout Q2 and Q3, improving both our merchandising and ease of shopping for customers. This includes improving and livening the merchandising presentation given the shift to digital shopping and corresponding lower need to hold as much inventory on the sales floor. It also includes rightsizing a number of categories to ensure we are leveraging the space in the center of our stores in the most exciting, relevant, and efficient way possible. For example, we will be removing physical media and updating our mobile, digital imaging, computing, tablets, and smart home departments. We are excited to partner even more with our vendors this year, as it relates to their branded in-store merchandise experiences. Of course, we will see updates in the computing department as we already discussed. We will also see new and enhanced in-store experiences for others, including GoPro, Tesla, Lovesac, and STARLINK. As we mentioned on our last call, we plan to close 10 to 15 stores per our ongoing review process, while opening a few new stores to test concepts. For example, in Kansas City, we are replacing a large store with a small format store close by to maximize store retention through convenience. Also later this year, to capture untapped share, we are opening a store in an outstate area where we have no prior physical presence, and our omnichannel sales penetration is currently low. We want to ensure our customers receive the expert service interactions they want and Best Buy is known for it when they come to our stores. Extensive training is imperative to that experience. For example, as we prepare for the new launches in computing, we have and will continue to partner with our vendors to train and certify thousands of computing experts in Geek Squad AI pros. In addition, this month, we added fully dedicated labor expertise to our in-store computing experience in hundreds of stores. We plan to add back fully dedicated expertise in major appliances and home theater departments in stores this summer. These changes are in addition to the actions taken throughout the past year to streamline our leadership model, allowing us to invest in materially more customer-facing sales associate hours in our stores compared to last year. We also continue to partner with our vendors around expert labor. In fact, we have just expanded our vendor partnership with Samsung to include vendor-provided expert labor in appliance departments across hundreds of stores. This appliance labor will be incremental to our own existing labor plans. We are making good progress against our second key priority to drive operational effectiveness and efficiency. Our long-standing commitment to identifying cost reductions and driving efficiencies is paramount to help offset inflationary pressures in our business and fund investment capacity. Our fiscal 2025 initiatives are focused on driving further efficiencies across forward and reverse supply chain, our Geek Squad repair operations, and our customer care experience. For example, in supply chain, we made enhancements to our systems and process guidelines that reduced TV damage in Q1, and we expect the savings to build throughout the year. We also developed a statistical model to identify high-return rate products that we leveraged with our major appliance vendors to reduce open-box products in the quarter. We will continue to lean heavily on analytics and technology to achieve these efficiencies. We have already shared how we are leveraging AI throughout 95% of our in-home delivery and installation trucks to drive more efficient scheduling and a better customer experience, and how we have begun using AI tools to improve the accuracy and efficiency of our customer service calls. During Q1, we announced a partnership with Google Cloud and Accenture to help us further improve the customer and employee experiences in a seamless and human way. Expected to launch late this summer, our enhanced self-service support will leverage a Generative AI powered virtual assistant to help our customers quickly troubleshoot product issues, make changes to their order delivery and scheduling, and even manage their software Geek Squad subscriptions and membership. This year, we are also taking larger actions to ensure our resources are directed at the right strategic areas and to right size our model based on current operations. While we made most of these decisions and booked the associated restructuring charge in the fourth quarter, we are implementing most of the actions in the first half of the year, with some not being implemented until fiscal 2026. These actions will allow us to do the following: balance field labor resources to make sure we are providing the optimal experience for customers where they want to shop; redirect corporate resources to make sure we have the necessary assets dedicated to areas like AI and other elements of our strategy; and right size parts of the business where we expect to see lower volume than we envisioned a few years ago, whether that is the result of lower industry sales or due to decisions we made like evolving our paid membership benefits. For example, last year, we made the decision to remove free installation services from our membership program. This, as expected, led to reduced services fulfillment volume. As a result, during the first quarter, we reduced the number of Geek Squad team members to align our headcount to our forecasted demand. This will improve the experience for our remaining employees, and allow them to rely on a more consistent schedule and pay. Our third key priority for the year is to continue our disciplined approach to capital allocation in this environment. We now expect our enterprise capital expenditures for fiscal 2025 to be approximately $750 million, $50 million lower than last year. This decline is largely due to our decision to concentrate our store capital investments more on existing store updates and refreshes and less on major remodels. Our share repurchases are expected to be similar to last year at approximately $350 million. Our annual dividend expense is expected to be approximately $800 million with our current dividend yield over 5%. As mentioned last quarter, our fourth key priority for fiscal 2025 is longer-term in focus. We will continue to explore opportunities that leverage our scale and capabilities to drive incremental profitable revenue streams over time. This includes endeavors like our Best Buy Health business, our collaboration with Bell Canada to operate 165 small format consumer electronics retail stores across Canada, our Geek Squad as a service pilots, and our supply chain partner plus program. It also includes continuing to build out our Best Buy Ads capabilities. We have had a robust retail media network business for a long time in partnership with our vendors, and we are expanding our available ad products and improving the advertiser user experience. For example, we recently announced a collaboration with CNET to share inventory across both ad platforms, adding reach and frequency for our brand advertisers along with closed-loop reporting. In addition, customers will see curated content and editorial advice from CNET's experts across various Best Buy channels encompassing a variety of product reviews and expert picks that align with their shopping experiences. We also rolled out new self-service reporting capabilities to all vendor ad partners. This will make it even easier for ad customers to engage with us and will provide valuable closed-loop insights on the effectiveness of on-site ad products. Before I close and turn the call over to Matt, I want to take a moment to recognize our employees for their continued work to support the communities we serve. I'm proud to share that we recently opened up two new Best Buy Teen Tech Centers in Los Angeles and Saint Cloud, Minnesota, and have several more set to open later this year. These centers join the Best Buy Foundation's growing network of youth-centered community hubs, where teens have access to the latest technology, learn real-world career skills, and interact with supportive mentors. We continue to be recognized as an industry leader in sustainability. For the 11th year in a row, we were named as an Energy Star Partner of the Year. This award reflects our ongoing commitment to help our customers reduce their carbon emissions from Energy Star products. And during Earth Month, we partnered with Microsoft and Junk Kouture to help raise awareness about the importance of responsibly recycling old tech. In summary, we executed well in the first quarter, and remain focused on our fiscal 2025 priorities. The stickiness of certain macro factors and the ensuing impact on consumer demand for our category has been uneven, but we remain undeterred. We will continue to navigate the environment as we have in the last few years, while remaining focused and energized about our purpose to enrich lives through technology. There is a lot of time left in year with exciting new innovations. We hold roughly one-third of the US retail sales market share in both computing and televisions, and we intend to strengthen our position in key categories like computing, home theater, and major appliances through elevated experiences, pointed marketing spend, and sharp pricing. We are the largest CE specialty retailer with the unique range of product assortment and expert services to help humanize tech for every stage of our customer's lives. We believe we are putting ourselves in the best position for fiscal 2025 and beyond. As our industry returns to growth, we expect to grow our sales and expand our operating income rate. I will now turn the call over to Matt for more details on Q1 financial performance and our outlook.

Good morning, everyone. Let me start by sharing a few details on our first quarter results. Enterprise revenue of $8.8 billion declined 6.1% on a comparable basis. Our non-GAAP operating income rate of 3.8% improved 40 basis points compared to last year and included a 60 basis point improvement in our gross profit rate. Non-GAAP SG&A dollars were $97 million, lower than last year, and increased approximately 30 basis points as a percentage of revenue. Our non-GAAP diluted earnings per share increased 4% to $1.20. Our comparable sales decreased 4.5% in February and decreased approximately 7% in both March and April. As a reminder, our comparable sales are computed on a like-for-like fiscal weeks and are not shifted to more closely aligned calendar weeks following last year's 53rd week year. Although our sales were softer than we had planned, our non-GAAP operating income rate of 3.8% was 40 basis points higher than expected. Our gross profit rate was higher than expected, primarily due to a more favorable gross profit rate in our services category, which includes our membership offerings. Our non-GAAP SG&A expense was also favorable to our expectations, which was driven by lower store payroll and advertising expense. Next, I will walk through the details on our first quarter results compared to last year. In our domestic segment, revenue decreased 6.8% to $8.2 billion, driven by a comparable sales decline of 6.3%. From an organic perspective, the overall blended average selling price or ASP of our products was higher than last year. The growth was entirely due to an increased mix of units from higher ticket items such as laptops and TVs, even though the individual ASPs for both categories were down from last year. International revenue of $644 million decreased 3.3%. Our domestic gross profit rate increased 80 basis points to 23.4%. The higher gross profit rate was primarily driven by improvements within our services category, which includes our membership offerings. This was partially offset by lower product margin rates and lower credit card profit-sharing revenue, consistent with the previous two quarters, approximately $20 million of vendor funding qualified to be recognized as an offset to SG&A, which was a reduction to cost-of-sales last year. We anticipate similar recognition of this funding in the second quarter of approximately $20 million, and beginning in the third quarter of this year, we fully lap the recognition change. Our international gross profit rate decreased 90 basis points to 22.8%. The lower gross profit rate was primarily driven by lower product margin rates. Moving to SG&A, our domestic non-GAAP SG&A decreased $98 million, which was driven by: one, lower employee compensation expense, which was primarily store payroll; two, reduced vehicle rental costs; and three, lower expenses across multiple other areas, such as advertising and credit card fees. These decreases were partially offset by higher technology expense. During the first quarter, we returned $252 million to shareholders through dividends and share repurchases. Moving on to our full-year fiscal 2025 financial guidance, which remains unchanged from the start of the year and is the following: Enterprise revenue in the range of $41.3 billion to $42.6 billion; enterprise comparable sales of down 3% to flat; enterprise non-GAAP operating income rate in the range of 3.9% to 4.1%; and a non-GAAP effective income tax rate of approximately 25%, non-GAAP diluted earnings per share of $5.75 to $6.20. As Corie mentioned, we now believe revenue is trending more towards the midpoint of our annual guidance range, whereas profitability more closely aligns with the high-end of our non-GAAP operating income rate guidance. This is due to our expectation for further gross profit rate improvement. We now believe our gross profit rate compared to fiscal 2024 will slightly exceed our original outlook of 20 basis points to 30 basis points of expansion. There are two key areas that have changed since the start of the year, which are the following: First, the continued profitability improvement of our services membership offering is now expected to provide more than 45 basis points of gross profit rate expansion we expected at the beginning of the year. This is primarily due to a lower cost to serve due to lower expected volume for in-home installation and other related services. Second, we now are expecting additional pressure on our product margin rate for the year, which is primarily driven by pricing investments. As I mentioned, the net impact of these two items is expected to result in gross profit rate improvement compared to our original guidance. The other gross profit rate drivers of our annual guidance remain unchanged from last quarter and they are the following: We still expect Best Buy Health to add a benefit of approximately 10 basis points to our enterprise gross profit rate on a year-over-year basis. We still expect approximately 20 basis points of pressure from a lower profit share on our credit card arrangement. The expected pressure in fiscal 2025 is primarily due to an expected increase in net credit losses. This estimate does not include potential implications from the proposed late fee regulation changes. Now, moving to our annual SG&A expectations, which remain unchanged from the start of the year. The high-end of our guidance assumes SG&A dollars are similar to fiscal 2024, which includes the following puts and takes. We expect higher incentive compensation as we reset our performance targets for the new year with the high-end of our guidance assuming an increase of $40 million compared to fiscal 2024. We still expect advertising expense to increase by approximately $15 million. Partially offsetting the previous items is the benefit of one less week, which is estimated at $90 million. Store payroll expense is expected to be approximately flat to fiscal 2024 as a percentage of sales. Lastly, the low end of our guidance reflects our plans to further reduce our variable expenses, which includes incentive compensation to align with the sales trends. Before I close, let me share a couple of comments specific to the second quarter. As Corie mentioned, we anticipate that our second quarter comparable sales will decline by approximately 3%. We expect our non-GAAP operating income rate to be approximately 3.5% or 30 basis points lower than the prior year comparable period. The lower year-over-year operating income rate is driven by SG&A deleverage as SG&A dollars are expected to be very similar to fiscal 2024 second quarter. I will now turn the call over to the operators for questions.

Good morning. This is a question for Steven Forbes. You briefly mentioned the new products this year, but could you provide more details on the product roadmap after Labor Day? Also, can you remind us of the annual revenues from some of these newer products? I have a quick follow-up regarding appliance market share. Can you share any insights on that and how the merger market is trending in relation to your performance? Lastly, do you anticipate any changes in that area? Thank you.

I'll begin discussing our product roadmap, and then Matt can cover market share. Currently, we have several initiatives underway. Approximately in mid-May, we launched a new suite of iPads that are now available for purchase, and we’re starting to observe how this new innovation is positively impacting our growth trajectory. Additionally, Microsoft has unveiled a comprehensive lineup of Copilot Plus products, with about 40 SKUs, nearly 40% of which are exclusive to Best Buy. Though these are available for pre-order, they won’t be delivered until June 18. We also mentioned several upcoming products, including new open-ear headphones from Bose and Google Chromecast notebooks featuring AI capabilities, which will be available for purchase over the next month. Most of this activity aligns with the back-to-school timeframe, and you can expect significant flow-through in the computing segment. Notably, the new iPads, particularly the Pro models, offer impressive power and are nearing the capabilities of laptops. We're observing customer preferences as they decide how to optimize their productivity. Expect to see a lot of this activity emerge in the middle of Q2, gaining relevance as we approach the back-to-school season, contributing to that larger computing category we’re breaking out.

Sure. And in terms of appliances, I think if I just step back, appliances is a great category for us. I think Q1 specifically, you saw an appliance category that was materially more promotional in pursuit of stimulating interest and sales within the industry and has been our practice. We are very targeted and thoughtful about when and where to make our promotional investments. So in Q1, I think if we looked at it, we probably did lose share in Q1. It was a very promotional category in Q1. Q1 is somewhat quiet quarter for us. April is the smallest quarter in the month. I think the industry is also shifting towards a duress type of purchase of single-item purchase, non-premium package purchases, which hasn't historically been our biggest part of the category. So still feel really good about the category in total. I think where you'll also see us as we look into Q2, Q3, and Q4, you're seeing in our comments that we are now investing in pricing and marketing, and labor in the future to help support that category, which seems more appropriate for the rest of this year versus what we saw happening in Q1. So still feel great about the appliance category in total and are positioning ourselves well as we look out to the remaining part of the year.

And the last thing I would say, just to add on, I think we're very targeted in the drive times and we talked about the trend in May improving, and a part of what drove some of that trend improvement was an improvement in this particular part of the business where we made some targeted moves as it relates to the bigger drive time of Memorial Day.

Hey, good morning, everyone. Connected to appliances, you mentioned, I think Corie was quoted in the press release talking about strengthening your positioning in certain places, and you mentioned pricing on appliances. So can you talk about where the position or I don't know if its market share has weakened. Can you talk about why? And then you mentioned pricing in terms of appliances. Are you using pricing anyplace else? And is it because the industry got more promotional and then I guess, how far do you have to move on price? I guess it's all back into the guidance, but what's the risk that this pricing keeps getting, I guess, more promotional as the year goes on?

The promotional environment is definitely more robust compared to last year and even surpasses our own expectations. This reflects a consumer base that is very focused on value. Our planned investments, which are implied in our guidance, aim to strengthen our positioning in key areas. We will approach this in a unique way, utilizing a combination of specialized labor, vendor specialized labor, and increased marketing spend, which we have previously discussed. This will also include pricing strategies. There have been numerous inquiries about whether our focus is on revenue or profit, and I believe the answer encompasses both. Our team is keenly aware of finding the right opportunities to capture attention during prime times, not in slower months like April but during events like Memorial Day or the 4th of July. Additionally, we will leverage the range of services at Best Buy, such as installation, delivery, and membership, to provide the best value while balancing our outcomes effectively.

Fair enough. Can I ask maybe one follow-up to exactly the word you said the, and. The business is being managed incredibly well. It's very efficient right now. And you said it yourself, you're going to be adding some expenses back in the second half as the industry turns. Thinking about the operating leverage on the turn, is there a scenario where you get both the and, you get the typical Best Buy operating leverage when the cycle turns or do you have to spend back into it, given how efficient the business is today?

Yes. I mean, I think without guiding next year, I think as we start to see our business improve, see the industry improve and our sales grow along with the industry growth as well. We would expect along with that growth, we would be able to manage our business in a way to continue to get operating rate expansion as we look forward. Now exactly what quarter and does it show up exactly perfectly. I think overall we're going to manage our business to increasingly improve our efficiency as well as grow our sales and we'll do that through the means of making the right investments in our business, still continuing to drive efficiency in our business where we see it and also making sure that our initiatives are progressing in the way that also help bolster our profitability as we look forward.

Thank you.

Thank you.

Hey, thanks, good morning. I wanted to ask about the AI-enabled laptop. Certainly seems kind of exciting. What's the pre-order interest right now? And also, Corie, what do you think about the $1,000 plus price points? Do you think that's a little high right now to drive mass adoption?

In terms of pre-orders, I want to point out that this price point typically does not lead to a high volume of pre-orders. People generally prefer to see the product in person or spend time researching it. That said, our pre-orders are slightly exceeding our initial expectations, which is encouraging. We are looking for early signs of interest in learning more about the product. We are putting in a lot of effort to help consumers understand the value they receive, which is why we have highlighted features like significantly longer battery life and quieter operation. These are attributes that resonate with consumers. It's true that this is positioned as more premium computing, similar to the new iPads and iPad Pros released earlier this month, which have generated notable demand. I wouldn't describe the situation as everyone rushing to buy the new computer, but there is enough interest, typical of consumer electronics, where premium pricing and appealing features spark curiosity. This approach allows us to collaborate with our vendors to innovate in how we market this new generation of computing, especially in a time that is ripe for replacing older devices nearing the end of their life cycle, roughly four and a half years after the pandemic.

Okay. Sounds good. Certainly, some innovation is better than where we've been. Maybe just sticking on the AI theme. As you're incorporating AI capabilities into your own business, it sounds like it's more focused on the customer support experience. So the heart of the question is, do you think that drives both a better experience and cost savings or do you prioritize one versus the other, if there are cost savings any way to kind of frame that up for us?

This is an important topic, and we highlighted a specific example. It's challenging to cover every instance, but I believe there are about four categories to consider regarding our use of AI in the business. One category focuses on strategic offense, which involves understanding 90% of our customers when they engage with us. A great example of this is the personalized homepage in our app, which enhances the customer experience. Our data shows that customers engage significantly more with us when they have this personalized experience. Another straightforward example can be seen in our customer reviews. You can observe themes in the reviews and filter them based on specific topics, like battery life complaints, allowing for quicker access to relevant feedback. This AI-enabled feature contributes to improving customer experience, leading to higher engagement and ultimately more revenue. We also discussed the aspect of expense reduction, and I appreciate how your question emphasized our call center experience. We identified that this experience was lacking for both our customers and employees. We are designing a comprehensive journey to greatly enhance our customers' experience. AI and generative AI are being integrated as tools at specific points within that journey to enhance efficiency. For example, our agents no longer need to summarize calls, as this is done automatically. This allows agents to focus more on their interactions with customers, streamlining transactions and enhancing the overall customer experience. Ultimately, this makes us more efficient and ensures that agents’ time is spent effectively, addressing the needs of customers seeking solutions. Finally, we are committed to implementing these changes responsibly and ensuring transparency regarding our customers' data, while continuing to explore the effective use of these tools. We are showcasing various examples, all aimed at enhancing both customer and employee strategies.

Okay. Thank you very much and good luck.

Thank you.

Hey, Corie, I have two questions. First, I would like clarification on the May to date comparisons. Can you explain the impact of the Memorial Day shift? Are you performing better than minus 3 if you exclude the benefit of Memorial Day for May to date, or could you clarify that for me? Secondly, I have a follow-up question.

Yes, I'll start with that. Based on the month-to-date results, the estimated comparable sales for May are currently better than the Q2 guidance. This does not account for a full comparison with Memorial Day, as the holiday weekend spans both May and June fiscal months. It includes part of the weekend but not everything. That said, even after making necessary adjustments, the performance is either right in line with the guidance or perhaps slightly better. So, we're seeing positive trends. It's worth noting that we are also considering the periods between major sales drives, which contributes to our quarterly guidance. We're encouraged by what we're observing during key sales periods and with some of our innovations. Specifically, we've noticed a positive trend in tablet sales, aided by the introduction of new models like the Pro and new Air, along with deals on older models. This innovation helps cycle through older products, creating a range of price points for various customers. Overall tablet performance has improved. Additionally, we are seeing early positive impacts in major appliances and TVs from our focused efforts in these categories. So, as we address the challenges of year-over-year comparisons, the overall change in performance reinforces our ongoing strategy.

Thank you. That's helpful. And then just a quick follow-up. Can you remind us the advantages of doing more refreshes versus store remodels?

Yes, there are a few. So if you think about a full-on remodel, typically there, you're going to take one store and top-to-bottom, you're going to move the walls, do all the things. It is a capital-intensive process. It does definitely result at the end of the day in a lovely store experience, but you are more limited in the quantity of stores that you can do because it requires obviously a little bit more capital-intensive process. And the way we're looking at it this year is the store updates allow us and refreshes allow us to touch every single store in the chain. So instead of remodeling 30, we get the chance to go touch 900. And we gave some examples within the script, where we're going to rightsize some of the categories. We're going to make sure the center of the store is exciting, and relevant. We're going to make sure that for some of these new product launches, you're going to see really interesting displays. But importantly, it also gives us a more scaled chance to work with our vendors on their experiences in our stores, because if we're going to go touch all the stores anyway, we get the chance then to partner with our vendors on where they might also want to update some of their store experiences. So you almost get a little bit more reach, not because it's not just us doing it, we get the chance to go into those stores and maybe refresh our experiences as well as some of those vendor experiences. And so I think the advantage is, you get a chance more at-scale to be able to kind of do a refresh and in tandem with some of the innovation that we're talking about.

Got it. Really helpful. Thank you.

Yes.

Thanks a lot. My question is on the membership program. If you could provide some more insight into how that's growing on a paid basis and the key drivers of your better-than-expected margin performance from it, that would be helpful?

I'll start maybe on the topic on acquisition and Matt can talk a little bit about some of the drivers. We're not going to update the overall acquisition numbers every quarter. But as a reminder, we ended fiscal 2024 with 7 million members across the two tiers of paid membership, and that was compared to 5.8 million members at the start of the year. And if I take a big step back, our whole goal here is to drive customer engagement and increased share of wallet, all the more important in a world where people are a little less brand loyal than they were certainly pre-pandemic. And so there's like three things we're always watching. You hit on acquisition, but we're also always watching engagement and we're watching retention. And all of those then factor into kind of the financial outcomes that Matt will talk about. So we continue to grow our new customers in Q1 and add more to both tiers of membership. We still are seeing that paid members consistently are showing higher levels of interaction and comparatively higher levels of spend at Best Buy and the shift away from competitors, and it still is really early. We don't lap the rollout of particularly plus, but even the new revamp of Total until June. But even on the early renewals for Total, retention rates are outperforming some of our expectations. So I give the team a great deal of credit, both for kind of tweaking these offers in a way that resonated more with customers, but also for continuing to refine the way we reach out to those customers to make sure we optimize both their interactions and that resulting financials.

Sure. As we began the year, we anticipated that membership and services would enhance our gross profit rate by 45 basis points. Now, we're indicating that it's slightly over 45 basis points. What we're observing is a modestly lower cost to serve reflected in Q1, which we expect will persist throughout the year. This improvement is primarily due to lower volumes in some of our categories leading to a better profit rate. Additionally, we are experiencing an increase in standalone warranty sales, which is also contributing positively to our overall membership/services gross profit rate for the year.

Great. Thanks for taking my questions. So on the spend across demographics, I imagine the initial debut of AI PCs may resonate with certain demographics until it becomes more mainstream, maybe a little bit higher income, maybe a little bit younger in age perhaps. So, are the spending trends for those customer cohorts outperforming the broader customer base?

We haven't launched the new AI PCs yet, as they will start shipping on June 18th. While everything has been announced and pre-orders are open, we haven't seen the impact yet. The interesting aspect here is that innovation in both computing and tablets is likely to create broad opportunities. It's not solely about the latest generation of products, which may appeal to certain groups; it also makes older product generations more accessible due to their different price points. With new innovations, as mentioned by Matt, this helps maintain higher average selling prices. The strategy isn't just about appealing to one demographic, but about creating a range of product options that can cater to various preferences, providing better entry points and value for customers upgrading from products they've used for several years.

Good morning, and thank you for taking my question. I have a quick two-part question regarding the store refreshes. How quickly can you implement those? Also, while I understand it's included in your $750 million CapEx guidance, could you provide a rough estimate of the cost for these refreshes? I know they are significantly cheaper than a complete overhaul, but I would appreciate some insight on that. Thank you.

Absolutely. I can start with the how fast question. We said in the prepared remarks, we're going to be doing this throughout Q2 and Q3. So you're going to see us pretty quickly here start to move and obviously, a piece that needs to go right away is the computing presentation and how we're making some updates to the computing of the store. So you're going to see these roll throughout Q2 and Q3 with the objective being as set as possible as we head into holiday. The team does a really nice job being able to move through these. There's probably one other advantage of doing more a refresh model is you can do these overnight. You can get in, get it refreshed and get out, get it ready.

From a cost perspective, we haven't disclosed the total expenses. For a remodel, costs can range from a couple of million dollars. If it's a refresh, expenses can vary from $50,000 to a few hundred thousand dollars, depending on the specific changes you want to implement. Additionally, our partners often participate in these remodels since we enhance their product presentations during the store updates, which they appreciate. The overall costs depend on the individual store and the scope of the changes, but they are significantly lower than building a new store.

And Anthony, just to rip on it just a little bit, there's a bunch of things that kind of work in concert here over the next couple of quarters. Innovation that kind of drives us to want to highlight both vendor spaces and our own spaces in our stores. So you get the store refreshes. You're going to see us do a brand refresh here at Best Buy and we'll use some of that new branding as we head into back to school. That also brings through a little bit of refresh from a store perspective. We've talked about the dedicated labor zones that we're bringing into hundreds of stores. So you start to get the dedicated labor in appliances and home theater and computing, and we're augmenting that with incremental vendor labor that's new in a couple of spots. We used the Samsung Appliance example explicitly. And then we wrap around that some of the more personalized approaches to trade-in or to membership. I think as you look into Q2 and Q3, we're kind of trying to bring all of this together in a way that both physically and digitally shows up as being kind of new and exciting for our customers and our employees.

Thanks a lot. My question is on the membership program. If you could provide some more insight into how that's growing on a paid basis and the key drivers of your better-than-expected margin performance from it, that would be helpful.

I'll start maybe on the topic on acquisition and Matt can talk a little bit about some of the drivers. We're not going to update the overall acquisition numbers every quarter. But as a reminder, we ended fiscal 2024 with 7 million members across the two tiers of paid membership, and that was compared to 5.8 million members at the start of the year. And if I take a big step back, our whole goal here is to drive customer engagement and increased share of wallet, all the more important in a world where people are a little less brand loyal than they were certainly pre-pandemic. And so there's like three things we're always watching. You hit on acquisition, but we're also always watching engagement and we're watching retention. And all of those then factor into kind of the financial outcomes that Matt will talk about. So we continue to grow our new customers in Q1 and add more to both tiers of membership. We still are seeing that paid members consistently are showing higher levels of interaction and comparatively higher levels of spend at Best Buy and the shift away from competitors, and it still is really early. We don't lap the rollout of particularly plus, but even the new revamp of Total until June. But even on the early renewals for Total, retention rates are outperforming some of our expectations. So I give the team a great deal of credit, both for kind of tweaking these offers in a way that resonated more with customers, but also for continuing to refine the way we reach out to those customers to make sure we optimize both their interactions and that resulting financials.