Q2 2021 Best Buy Co Inc Earnings Call
[music].
And ladies and gentlemen, please standby.
And ladies and gentlemen, thank you for standing by welcome to Best Buy's Q2 fiscal 2021 earnings call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session at that time. If you have a question you'll need to press star one on your phone.
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As a reminder, this call is being recorded for play back and will be available by approximately 11 am eastern today.
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Now I'd like to turn the conference over to my.
As president of Investor Relations. Please go ahead.
Thank you and good morning, everyone. Joining me on the call today, our Corie, Barry our CEO Napa Lewis, our CFO and Mike Monahan, our president and COO.
During the call today, we will be discussing both GAAP and non-GAAP financial measures 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 that best buy dot 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 planned investments unexpected 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 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 Corey.
Good morning, everyone and thank you for joining us.
Today, we are reporting strong quarterly result, and we are encouraged to see the customer demand for our products and services and proud to be amazing execution of our teams to these unprecedented times. However, we have not lost sight of the fact that people continue to suffer and we extend our sympathy to all those who have lost someone to this virus are sick.
With cobot 19 or are facing financial hardship as a result of the pandemic.
From the very start of this crisis, we had been focused on guiding the business with two goals in mind.
First ensuring the health and safety of our customers and employees, while parts and the employee experience as much as possible and second making certain we come out of this moment a strong innovative company.
The results we are reporting today would not be possible without the effort and energy of our frontline employees working in our stores supply chain facilities and customers' homes.
I want to thank all our employees for their tremendous commitment to our customers and for living our purpose to enrich lives through technology.
They are navigating not only the impacts of the pandemic, but also fires kerr occasions, and civil unrest their willingness even enthusiasm to continually adapt as we manage through the evolving environment has been extraordinary.
For a second quarter, we are reporting revenue of $9.9 billion, which its growth of approximately 4% from the second quarter of last year.
Our Q2 non-GAAP earnings per share or one dollar and 71 cents compared to one dollar an eight cents last year.
Enterprise comparable sales growth was 5.8%. Despite the fact that our stores were opened by appointment only for the first six weeks of the quarter.
Products that help people work learn connect and Cook at home like computing appliances, and tablets were the biggest drivers of our sales growth.
Trends across most categories improved materially throughout the quarter as we opened our stores for shopping, especially categories like large appliances and home theater that benefit for more experience will shopping.
We also saw very strong digital demand for some of our newer categories, such as digital health and fitness at home fitness equipment sustainable living outdoor activities and camping equipment, while still relatively small categories from a revenue standpoint, they are extremely relevant in today's environment and highlight our ability to lead.
Average our digital first mindset supported by our expertise around curations and supply chain.
Throughout the quarter, we experienced inventory constraints in a number of categories, which did moderate our sales growth.
While we expected product constraints as we entered the quarter the stronger than anticipated demand as we opened our stores for shopping resulted in more constrained product availability than we expected.
Turning to profitability, our Q2 non-GAAP operating income rate of 5.9% expanded almost 200 basis points from last year due to materially lower asked DNA expense.
The lower SDMA as a direct result of balanced but prudent decisions to lower costs in response to the uncertainty of the pandemic and our evolving operating model.
That level of lower SGN name for the most part is not sustainable as we add labor hours in our stores reinstate short term incentive plans and increased advertising spend Matt will provide more detail later, but we expect Q3 EPS DNA expense to be more in line with last year's third quarter.
I would like to take a moment to recap the evolution of our store operating model.
We ended Q1 in a curbside only model with no in store customer shopping.
At the beginning of Q2, we started welcoming customers back into our stores by offering and in store consultations service to customers by appointment only.
On June 15th we began allowing customers to shop without an appointment at more than 800 stores across the U.S.
And as of June 22nd almost all of our stores were opened for shopping.
At that time, approximately half of the 51000 associates, who had been for load in April returns.
We also resumed our in home sales consultations, adding to the other in home services, we provide like delivery installation and repair we had previously presumed back in May.
As we reopened our stores, we saw considerable demand from customers, who clearly value and wants in in store shopping experience.
Prior to reopening we were retaining approximately 92% of last year's revenue at the start of Q2, then in the last seven weeks of the quarter total sales grew 16% compared to the same period last year.
Trends have remained strong in August with sales up approximately 20% for the first three weeks of Q3 as customers demand for products that help them work learn cook and.
To meet this increase demand we have now returned approximately two thirds of the furloughed associates.
Throughout this time period and across all the waste customers can shop, we have continued to adhere to safety protocols that limit capacity follow strict social dispensing practices and use proper protective equipment, including requiring our employees and customers to wear masks.
Like many retailers. We're also operating at reduced store hours and after reopening our stores, we were operating with approximately 20% fewer hours than last year to match customer demand patterns.
This pandemic and the swift shifting customer buying behavior really underscores the importance of our strong multichannel capabilities.
For the full quarter, our domestic online revenue grew 240% from last year.
Even when stores opened for customer shopping online sales growth continued to be extremely strong in fact in the last seven weeks of the quarter online revenue grew approximately 180% over the same period last year.
Domestic strong in Q3 and are up approximately 175% for the first three weeks of August.
We believe it is essential to provide options that let customers choose what works best for them. We are continuing to provide fulfilled all retailers like fast and free home delivery and buy online and pick up in store.
We will also continue to provide great experiences like curbside pickup in store consultations and of course home installation of appliances, Tvs fitness equipment and more.
And our digital experiences such as chatting with an expert or leveraging and digital consultation in your home remain popular options.
During the first half of the year in responding to the pandemic, we made decisions across all these operating models that stressed safety.
Although we temporarily gave up some share where our well our stores were closed customer traffic. According to our data our share has largely recovered since reopening.
Most importantly, we made the right decisions for our employees and customers in Q2 more than 97% of customer survey indicated that we made them feel safe and we believe the credibility we garnered will overtime contribute to more brand love and thus more revenue.
I would add that since the beginning of the pandemic, we have seen elevated growth in the number of new customers and while it is still early these new customers are showing a higher likelihood to return that new customers in the prior year period.
As we look forward the environment is still evolving and our operating model and supporting cost structure is evolving as well.
The pandemic has accelerated the evolution of retail and compelled us to change our operating model and employees.
It has also allowed us to expedite some planned strategic changes that will set us up to emerge from this time, even strong quarter.
I'd like to provide.
It was three concepts, we believe to be permanent and structural implications.
The pandemic.
One customer shopping behavior will be permanently changed in the way that is even more.
For digital and puts customers entirely in control to shop, how they want our strategy is to embrace.
To our workforce will need to evolve in a way that so providing more flexible opportunity.
He's for our people.
And three technology is playing an even more crucial role in People's lives due to the pandemic and as a result, our purpose to enrich lives through technology has never been more important.
Said differently to address their needs in ways they never.
Play a vital role in bringing text.
Partners.
As.
Sensitive and interdependent and.
We are both implementing change today across our business.
As we have made decisions throughout the course of the pandemic and will help shape.
Our strategy for our future store design, our operating models and our digital investments.
On strategic implications.
From a store standpoint, we have been responding to the impacts.
From the pandemic in the way that had been enabled by tremendous flexibility at the local lies data and analytics that allow us to pilot various services like.
Since only.
Using data.
Productively customize operations to the local situation if necessary. This is especially important for us to effectively respond should the virus.
It is too early to know exactly how much of our sales and customer shopping.
Activity will be via digital channels overtime, but as a result of if it has been historically.
Use our stores for fulfillment.
For example, next month, we will be.
Well to help handle significant volume pre holiday and year round.
All our stores will still ship out.
Online orders, but approximately 250 locations will be positioned volume.
These locations were chosen for their space proximity to carrier partners in a bill.
Every.
Overtime.
This should allow us to deliver a more productive fulfillment model.
We're also continuing to add patients for online orders.
Provide more flexibility and convenience for customers and now have more than 85% of the population within five.
At Myles.
As it relates sensation and beginning to incorporate elements of the flexible workforce. We first introduced at our Investor day, a year ago.
Earlier this month by evolving the pay structure for our store employees and raising the starting wage to $15 per hour.
Since the early stages of the pandemic and supply chain employees, who were working received incremental hourly appreciation pay.
Incremental our lead appreciation pay started March 22nd and ended August Onest.
On August we implemented a new pay structure that reflects an ongoing evolution.
And as the result of clear and consistent feedback from field employees across the more predictability and pay a fee.
Replaced short term incentive compensation for our lease store employees.
After the 4% hourly pay.
At $15 per hour huh.
Well our per hour starting wage.
Ways, where we instituting short.
For the back half of the year.
Since the beginning of the pandemic.
Or Dick Shultes to provide our im pleased with.
Emergency financial assistance totaling more than $10 million.
Part time employment in general financial help.
Okay, and a second for those who have become ill with the virus.
In addition employees to serve customers based on need irrespective of channel.
A few early examples.
Include our consultation program and our Geek squad agents.
As most of you know we launched our in home advisor program a few years ago.
At that time. The program consisted of highly trained individuals who were strictly going into customers homes to provide free comprehensive technology consultations.
In May we developed an in store appointment engine as we adapted our operating model to respond to the pandemic as a result.
Hope our in home advisor program has been across all channels model.
Hi, servers, which provides more opportunities for more employees by.
Matching employees with the needs of the customer.
And they can bring in homes and via phone or chat depending on customer preferences.
Our geek squad agents are not only providing technical support to customers in stores. Many of them have also been cross trained to work in our call centers, providing crucial phone and chat support to solve a variety of customer needs.
Another example of the way we are increasing the flexibility of our workforce is our store employees, who are making same day deliveries to customers homes from 200 of our stores.
The examples I just shared have largely stemmed from our response to the pandemic.
Going forward, we are on a path to develop a flexible workforce model that leverages gets the ability to work whenever and wherever they want.
Right.
A leading our store employees through skills based training for their existing rules overtime, there will be opportunities for employees to gain additional skill sets and be able to fulfill multiple rules, which will lead to additional scheduling eligibility and flexibility.
From a customer experience standpoint, our strategy is to not only keep pace with but anticipate changes in customer expectations, including safety by adopting a customer obsessed approach that is primarily digital.
I'll share a few examples of how this is showing up in our app, which saw the number of customer downloads double compared to last year.
We're piloting more opportunities for virtual consultations with our blue shirts, and in home consultants, including abilities to share realized video. This is especially critical during the current environment and increased need for remote consultation and assistance capabilities.
We're also expanding our use of augmented reality in the shopping experience. So customers can more easily select the right products based on the space in their homes by using the camera on their own phone.
For the in store experience, we're piloting a self service in I'll check out for selected skews. This will allow checkout process that is fast convenient and involves minimal contact for customers.
And for our curbside pickup experience, we are adding functionality that will display information about high and low traffic times and provide digital updates for customers when they're in the parking lot waiting for their curbside orders.
We will continue to add features and capabilities to the app to drive frequency retention and personalization opportunities all of which are significantly higher in the app than other digital channels.
As it relates to the third implication of the pandemic one of the ways in which technology is playing a more crucial role in our lives is related to health.
For best buy health, our focus on digital health in particular, helping seniors live more independently with our unique combination of tech and touch has become even more relevant as the world responds to the pandemic and concepts like tele health become more mainstream.
We continue to expand our assortment of health related products and looking forward see this as an area of technology innovation, we are uniquely well suited to help customers navigate.
Yeah.
Deborah Desanto, who will.
More than 30 years of experience at the intersection of healthcare and technology, including leading the IB I'm Watson health team.
Where she launched artificial intelligence offerings designed to help doctors researchers health care providers pharmacists and insurers better serve patients around the world.
She's also the former CEO of Philips healthcare, where she helped bring consumer grade automatic defibrillators to the market.
She is a recognized thought leader in artificial intelligence and big data.
He has deep experience in running businesses known for their innovation in healthcare and has a demonstrated ability to drive growth both organically and through acquisitions. We are excited to have her lead our strategic work to bring health technology into the home to help people live better safer and more independent lives.
Before I conclude my prepared remarks, I want to talk about our ongoing commitment to diversity and inclusion and our community. We're always striving to attract and invest in talent that reflects the diversity of all communities and fosters and inclusive culture across the organization.
We are powered by the belief that our people matter, most and diverse perspectives make us better.
Our culture of inclusion values every human beings experience and supports each employee to bring their true and authentic self to work.
Our efforts have not gone unnoticed earlier this year the human rights campaign named US a best place to work for LGBTQ equality.
And Forbes magazine named US on its list of America's best employers for women.
We were also recently named one of parity Dot Org best companies for women to advance.
In the weight of George flights death in the subsequent protests best buy is committed to doing better when it comes to taking action to address racial and equities and injustices.
We've created a diverse taskforce within the company to help us defined and create meaningful change and we will provide visibility to our corresponding commitments in the near future.
We've also committed to creating more than 100 team tech centers to help bridge the opportunity GAAP and digital divide for teens in disinvested communities across the country.
And we're one of the leaders in a new public private partnership called connected Minnesota that will provide computers and internet access to thousands of use in our home state.
Finally, we have signed on as a founding member of the parity Dot org parity pledge in support of people of color.
This is a public commitment to interview at least one qualified person of color for every open leadership role that is at the vice president level or higher including the C suite and board of directors.
In conclusion, we delivered very strong Q2 financial results in an environment that continues to evolve we are executing well and also clearly seeing benefit from the need for people to connect work learned cook and entertain at home.
Looking back it was only five months ago that we closed our stores to customer traffic drew down the full amount of our revolver made the difficult decision to furlough associates and saw total sales declines reached 30% at one point.
Throughout the Pandemics, we have been confident that we will emerge and even stronger company than we were before clearly we are still operating in a dynamic environment and much uncertainty remains around future outbreaks government stimulus efforts and the economic impact of sustained high unemployment levels and ongoing shutdowns that vary by industry. We are.
Cognizant of all these factors at the same time, we are encouraged by our clarity of purpose and our momentum which has guided and we'll continue to guide our operating model changes and investments.
Our purpose to enrich lives through technology is more relevant than it has ever been and we're confident regarding our execution adaptability and the opportunities ahead.
We will continue to invest in those capabilities that focus on the customer experience over the long term and that are designed to provide choice.
Need now I would like to turn the call overtime.
Two financial results.
Well I did the demand for our products and sort of.
Quarter, although we didnt provide guidance for the quarter during our last earnings.
Goal, we shared a belief that our Q2 sales would be pressured and we would expect.
Ultimately as we continued to see increased demand for across.
All of our stores to customer traffic much sooner than we had expected resulted in the stronger than anticipated results.
While we were pleased with the financial results and our team's ability to navigate the rapidly changing environment. We also know that our goals reach beyond any one quarter's results and we still face uncertain environment.
On enterprise revenue of $9.9 billion, we delivered non-GAAP diluted earnings per share of $1.71 cents or an increase of 58% versus last year.
As a percentage of sales our non-GAAP operating income of 5.9% increased 190 basis points compared to the prior year.
Accordingly.
Operating income rates expansion was lower non-GAAP SGN expense of $219 million, which was 290 basis points.
Favorable to last year as a percentage of sales.
Gross profit as a percentage of sales declined 100 basis points compared to last year, which partially offset the estimate favorability.
In relation to estimate we made several cost decisions in Q1 and as we entered Q2 two aligned with the lower sales and channel trend, we receive expecting to continue at that point.
These include keeping store employees on furlough, suspending short term incentives and lower advertising expense.
As we opened our stores, we saw significantly improved sales trends that outpaced our staffing levels for a period of time.
These sales on a temporarily lower cost base resulted in incremental leverage that drove a more favorable operating income route.
I would note to provide some additional details on our Q2 results.
And our domestic segment revenue for the total quarter increased 3.5% to $9.1 billion to increase was driven by a comparable sales growth of 5%, which was partially offset by the loss of revenue from 25 stores are permanently closed in the past year as part of our normal course of business.
As a reminder are comparable sales calculation includes revenue from all stores that were temporarily closed or operating in our curbside only operating model during the period as a result coated 19.
Domestic online revenue of almost $5 billion was 53% domestic revenue, which was up from 16% last year and 42% in Q1 of this year on a comparable basis, our online revenue increased 242% over the second quarter of last year.
By online and pick up in store or curbside was 41% of online sales I want to note that approximately $5 billion in revenue represents the most online revenue we have ever generated in the single quarter and the company's history.
Passing our previous all time high by almost 40%.
From a merchandising perspective comparable growth categories were computing appliances and tablets.
This growth was partially offset by declines in mobile phones and digital imaging.
Theater comp sales were approximately flat to last year, a material improvement from Q1's performance as trends continue to improve because we opened their stores to customers.
Television, specifically saw a year over year comp sales increase.
Our gaming category was also approximately flat to last year, while strong demand continued across.
Like controllers, and headsets was offset by constrained inventory availability of gaming councils.
Comparable sales in the services category declined approximately 9%.
The decline in services was primarily due to a higher mix of online sales, which has a lower attach rate than in store within the quarter. Our sales growth continued to improve because our stores reopened.
Our international segment revenue increased 9.4% to $782 million <unk>.
The increase was driven by a comparable sales growth of 15.1%, which was partially offset by 490 basis points of negative foreign.
Currency impact.
The growth was primarily driven by Canada, where we experienced similar trends of their domestic segment from a product category standpoint, and we were able to open almost all locations without appointment approximately two weeks sooner than we did in the U.S.
Turning now to gross profit domestic gross profit rate declined 120 basis points to 22.8%.
The decrease was primarily driven by supply chain costs associated with a higher mix of online revenue.
We also saw lower profit sharing revenue from our private label and co branded credit card arrangement.
Which impacted our gross profit rate by approximately 20 basis points.
Our gross profit rate as a percentage of sales was higher than our expectations going into the quarter driven by a more favorable promotional environment and a higher mix of sales from the stores channel.
Moving to assuming domestic non-GAAP as she made decreased $195 million compared to last year and as a percentage of revenue decreased approximately 280 basis points. The largest drivers of the expense decline were one lower store payroll expense of approximately $100 million to lower advertising expense.
We have approximately $40 million for $40 million.
Three lower incentive compensation expense of approximately $30 million related to both field and corporate employees and for lower medical claims expense of approximately $25 million.
Let me share a little additional color on the lower store payroll expense.
The lower store payroll expense represents a number of components, but the primary driver was fewer labor hours for our associates. The fewer labor hours were primarily due to stores being close to non equipment traffic for approximately half of the quarter in our reduced store operating hours. This decline in labor hours was partially offset by higher hourly.
Wage rates, mainly incremental appreciation paid for those who are working in our stores throughout the quarter.
Our international as today decreased $24 million compared to last year and as a percentage of revenue decreased approximately 500 basis points, primarily due to lower store payroll expense in Canada, and the favorable impact of foreign exchange rates.
Moving to the balance sheet.
We ended the quarter with $5.3 billion in cash during the quarter repaid the full amount of EUR $1.25 billion credit facility that we had drawn in March.
At the end of Q2 or inventory balance was approximately 21% lower than last year's comparable period, whereas our accounts payable battled increased 31%.
The health of our inventory remained strong and the lower inventory position reflects the inventory challenges Corey referenced earlier.
During the second quarter, we returned $143 million to shareholders in the form of dividends from a capital expenditure standpoint, we still expect to spend in the range of $650 million to $750 million during fiscal 2001.
Lastly, let me finish by sharing a few comments about the back half of the year.
As a result from the ongoing uncertainty we are not providing financial guidance. Today. However, I would like to provide some insights into how we're thinking about Q3 through the rest of year.
Overall as we plan for the back half the year, we continue to weigh many factors, including a potential future government stimulus actions.
The current shift in personal consumption expenditures from areas like travel and dining out the possible depth and duration of the pandemic the risk of continued higher unemployment and the availability of inventory to match customer demand.
With that said as we enter Q3, there continues to be a heightened demand for the products and services. We offer it is difficult for us to know how sustainable do sales trends are considering the factors I just noted.
We are planning for Q3 sales to be higher compared to last year, but likely will not continue at the current level of approximately 20%.
We also have plans in place that will allow us to that quickly if we needed through the remainder of the year.
We anticipate that our Q3 gross profit rate will continue to be pressured compared to last year. As we expect online sales will continue to be higher priced higher percentage of our overall sales mix compared to the priority here.
We also expect lower profit sharing revenue from our credit card arrangement.
As Corey mentioned, we expect our Q3 as June $8 to be very similar to last year's Q3.
We expect the combination of our pay evolution changes in the store labor hours, we have planned for our current operating model will actually result in slow slightly lower store payroll expense in Q3.
We expect this will be offset by higher advertising expense as we prepare for earlier start to the holiday season, as well as increased variable costs from the anticipated revenue growth.
The sequential basis, we expect the increase in us dollars versus Q2 will primarily be driven by increased store labor hours reinstatement of short term incentive plans in the increase in advertising expense I will now turn the call over to the operators for questions.
Ladies and gentlemen, if you'd like to ask a question. Please stop by pressing star one.
Thank you Pat just keep in mind, if you're using your speaker phone make sure. The mute function is released to allow that smelter return equipment once again star one.
We will begin with see forms with Guggenheim Securities. Please go ahead.
Good morning.
Just to start with now when you finish their on expenses.
As you think back to the analyst day last year and in a billion dollar cost reduction program I think you.
I spoke to in the fourth quarter $160 million of savings against that plan in the back half of last year. If you can you update us on where are you guys are today.
You the expectation for flat expenses in the third quarter seems to assume some reinvestment in understanding the variable cost pressure here, but.
The two thirds of furloughed associates have returned just trying to understand what's driving.
You know the lack of flow through right on the achievement again, so that you could cost reduction program.
Sure.
From a cost reduction standpoint.
Clearly, we being on a number of temporary actions in decisions to navigate through Q on Q2.
As it has been our brand for three years, we will continue to look for cost efficiencies to two to help improve our our cost basis.
We're in a very unique timeframe right now to determine exactly how much is structural or permanent reductions.
So we will up we will update people as we go through other means for the year into next year, but we do see permanent savings as we as we move through these this time, it's really difficult to determine exactly from as she may into Q3.
The sequential changes as we talked about.
It was really looking at increasing.
In store labor hours with you some to customer traffic for for the pool.
You look at store labor hours in total.
Hours.
For the being opened and also we have also and increase the hourly wage rates. So with those two included we still have this.
Store labor hours at or slightly.
We're finding some some leverages a moving into Q3, we did say that Q3 sales are actually going to be higher in Q3, exactly how much we don't know, but with US similar SJ level in Q3 with higher sales, we would expect SJ leverage let's continue in Q3 exactly how much will determine by how much.
It's still we actually have and how much gross profit rate partially offset.
Thank you and then.
Just a quick follow up any stick.
Sticking with the margin.
Just on gross you talked about two pressures during the third quarter channel mix right in profit sharing.
But you Didnt you didn't mention promotions or mixes.
Have you think about during holiday selling season here, what are sort of be a promotional calendar looking like from your perspective today.
Sure.
To be clear in Q2, the primary gross profit rate pressure, we saw was coming from supply chain the form of higher personal expense.
As a reminder, we had 53% of our business done online versus 42 in Q1 so.
Parcel expense was the biggest gross profit rate pressure and then in addition to that we continued to see a pressure from the lower profit sharing from the city relationship. We have those X are expected to continue into Q3, Promotionally, we actually expected it to be a little bit more promotional going into Q2. It was actually a little less the we actually.
Expected as we work through the quarter.
If you look at Promotionality into Q3, we would expect that.
Promotionality to be sequentially up from Q1 in Q2, but still not a year year pressure. There are a number of changed the events and promotions in Q3, but we're obviously working through.
But we wouldn't expect to be a year over year pressure at this point.
Thank you.
Now I'll move to color, we will hear from Chris Horvers with Jpmorgan.
Thanks, Good morning, everybody.
I wanted to dig in on some of the category trends that you're seeing you know in August or July and August whatever you think is a better lens to look at it through.
What are you seeing and sort of what I would describe this sort of post back to school category. So and then are you seeing home theater in TV, app or you're seeing wireless up.
What about gaming in advance of the two new platforms and you know is news and to what degree is this still all driven by are largely driven by you know back to school on work from home categories.
Hey, Chris Thanks for question.
We're seeing the favorable trends across the literally all of our categories right now as we execute you answered Q3 with the one exception.
As we noted around mobile phones, but we're seeing tourism applicable to every part of learning working.
Entertaining cooking from home and your than some of it in Korea mass prepared remarks are.
Our impacted by the fact, we don't have as much inventory as we'd like to have right now, but the demand curves that we saw when we opened our stores.
Continued as Weve entered into August well beyond just the traditional back to school category. So hope that gives you a little bit of color.
Can you can you share with us, perhaps like what you're seeing and home theater as an example on a quarter to date basis.
Oh I can't give you the details and quarter to date, but we did talk about the improvement in our television performance I think thats pretty reflective of the in both the importance of the role we play into TV or the electronics industry in the importance of stores play because we switched from a negative trajectory in Q1 to a positive trajectory in the our second quarter also include.
Lapping last year's Prime day business, where we do a lot of.
Revenue with our own exclusive models with our Amazon fire TV. So you see the consumer demand strong.
We see the demand is strong for larger products and for things that have additional features a higher resolution and include bigger screens as people are spending more time at home.
Understood and you know maybe can you can you talk about as my follow up question. The gross margin mix and the I would've thought in the second quarter, you would've seen a pre.
Solid gross margin next had when was that essentially fully offset by a lower promotional posture year over year or was the none of those two things.
Yeah, we're not gonna give specifics, but largely the the product mix.
Fundamentally offset by the promotion.
Funnel favorable promotional Merck that we saw in Q2, and we would expect the product mix to continue similarly in Q3, assuming computing continues to be our mix of of our business and as we said promotionality will likely be a little bit.
More in Q3, we'll see how it ends up a little bit more than Q2.
To the extent how much it it is favorable will determine how much of that offsets the mix impact.
Very good best of luck.
Thank you.
And ladies and gentlemen, if you find your question has been answered you depress our two to remove yourself from the Q I will now move to your next question Peter Keith with Piper Jaffray. Please go ahead.
Hi, Good morning, everyone nice execution here I wanted to look at the margin differential between the retail stores and E. Com historically, you've highlighted that highlighted that E. Com has a lower contribution margin, but now just considering the stronger digital sales going forward.
Further efforts to maybe close the gap between.
Those two margins and perhaps bring him in line in future quarters.
Yeah in the past we've talked about the two shows first it's really hard to to parse out exactly the two different pianos between online and store.
Overall on an annual basis, the EBIT level sort of both of those channels are actually pretty similar now each quarter can be a little bit different.
Little less little or a little lower gross profit rate, but little bit more SJ leverage still.
Gross profit rate carries a little bit more SJ burden so they can.
It's or the free so already level and when you go through what we saw in Q1 that dramatic change of online sale.
Right away in those into that spirit in those.
In those periods, so what weve left to kind of look at our S.J. structure and as we go forward, we'll obviously be looked efficiency.
Whichever channel, we have I'd say over the years.
Line, we've actually been improving our gross margin rates and even over this period of time, we've seen better attach rates.
During the time to or store will close in through Q1 Q2. So we will continue to improve the customer experience the kind of improve the gross margin rates online and continue to look at our cost structure offerable channels.
Okay that sounds encouraging and.
Maybe on a more near term question.
With the commentary on sales growth up 20% in Q3, and you would expect that to moderate certainly I think thats a good stance to take although what I'm asking is are there identifiable aspects of the sales growth today that you think will go away.
Whether that's back to school or some other category that's abnormally strong right now.
Peter Arnett take that when I think there are a few I would characterize that look into the back half here and I would say things like.
In the government April.
Well ramp and whether or not there will be a new package going forward.
Yes latest stimulus to some extent.
And it's hard to say how long.
Yes, I think theres questions around.
Overall sustained unemployment levels.
And also school opening and closing decisions and how long those stretch out in the period and then of course, we've highlighted inventory availability and while we feel strongly all of our vendor partners are doing everything they can't catch back up you're talking about holiday levels up manufacturing and system.
Settlement.
Not just is going to take it at a time to catch trends that's tight on it and then finally, the actual duration and depth of the virus and how that proceeds distinctly calling out categories. Peter in a little bit more about just environment that we find ourselves then about thanks, a lot and good luck.
Thank you.
And now we'll take a question for Michael Lasser with CBS question. You noted that your share has largely recovered.
She gaining share, especially.
The Oh, you're sorts of 9% quarters a.
So we believe lost some share and we saw that trend.
Continuing and because our stores, where large fully closed and we also said be viewed that as very temporal in nature.
And you're right. We said unless there are puts and takes week to week honestly, Michael there are some where we actually believe are gaining.
There are others.
I can depend on the even inventory position at the time, but.
Over arching Lee we feel.
Fair position and.
In incredibly focused on providing.
In the experience that we would expect smells and still with an emphasis on safety and we definitely see that in our cats.
Tumor responses, there very favourably responding to the environment that we're creating and.
Customer wants to shop meeting their needs.
I think we're very well positioned as we head into Q3 in the back.
Including my follow up is Oh, you discussed.
Be similar to last year in the third quarter, you just operated with them.
Sure you can.
For them pretty well without the operating expense burden.
As you had in the past so what's prompting your views industry.
Yeah, I think as what are the reason we get the walk of our different models in the script was so everyone understood that we operate at the first six weeks on an appointment only model.
And obviously you know we saw demand for people wanting to come back into our stores, we opened and we've had at that point, we brought back about.
Honestly the demand.
With so high as we opened the stores by the level of service that we would have wanted and you can see it and things like attach rate of services in the story you can see it in house.
Any services people want it to acquire we literally didn't have enough people in the stores in hours in the stores to be able to handle that kind of demand hence the reason.
It's the as our furloughed associates back in the hours associated with that so we can meet some of that demand now you're gonna have a fully normalized.
A new starting wage of 15.
We think is the labor commensurate to need.
Well a service that will help a highlight our ability to provide services or financial services or lease to own or many other things that come with a full transaction for us.
Okay, Thanks, very much and good luck.
Thank you.
Well take a question.
Talk with Raymond James.
Hi, Yes, good morning, everyone and congrats to the best buy team on good execution two questions. The first one is just on supply chain comedy fulfillment hubs for the stores that you're shifting to to the what about your capacity on to shift.
The volume on.
How to think about the reduction in freight cost on the benefit you'll get as you as you make this transition W. My first question. Thanks.
Hey, Matt its Mike I'll start with the question I.
I think about it in two different ways than we were a pioneer in this whole audio buy online pickup in store, which led us to do this.
From store and based on some of our store sizes. We have stores that are excess capacity I think you'll work so.
And when we look at what we did for automation over the last year.
For use in the things that.
It's very easy for us to receive products in our seven already season and put them on a normal truck runs out to the store spoke we already do and if we need to run extra trucks out to these 250 locations. So we can actually have rapid replenishment and we've been able to use or.
Analytics Ian.
Shipping volumes will come from as proceed designed to lower expenses, because we do absolutely we have more customers pick up and so that's what's happening with these locations, but it's closer to our carrier delivery pads. So as opposed to the launching our own seem delivery was our best buy team members, which is a lower cost and using a third party service. So there's a mix of all of those choices I will.
Overtime, we believe deliver lower parcel fulfillment expense, but right now our biggest priority is making sure that your shopping on best Buy's digital sites, and we talked about doubling the amount of App downloads, we really want to make sure when you're looking at the item you want that to get it by data is accurate and its competitive we feel very good about that and that's the primary.
Thanks for that and that just.
Following <unk>.
In his new leadership that best buy health any any strategic changes this that you're thinking about that business. We're just seeing any any do different direction that youre going to go with given the.
The victory skills that are actually brings with her thanks.
I mean, our focus Inc.
Confidence in the health business remains incredibly strong and obviously the environment that we find ourselves and only reinforces that strategy I think Deborah brings it just exceptional experience combining technology with health care. This idea attack and touched experiences and bringing those things together. So I think we we found someone.
And as life experience that very closely aligned with where we think the strategy needs to go.
And I I wouldn't see that strategic point of view changed very much I, just think that we have an ability to continue to accelerate our strategy.
Thanks for the color best level.
Thank you.
[noise] and Anthony Chukumba with <unk> capital markets will have a next question.
Good morning, Congrats on another spectacular quarter also a one or two Cummins you on all your everything you're doing from a social justice perspective.
So have a quick question then a follow up.
When you talked a lot about.
The shift to online at some different things are doing in the store on these 200 stores every hubs for the online for the further for online deliveries, Tom and I know, it's early but does that make you rethink how do you think about what's the right number of stores going forward. If you think.
A lot of this online shift is going to be permanent.
Thank you Anthony at fair that complements and let me, let me start by saying.
One of the implications we laid out in the script, we're talking about customer shopping behavior has changed permanently.
The customer is in charge. So this isn't about seeing seamless across channels, it's about being seamless for the customer.
And even our Investor day last year, we were talking about how the customer behavior was changing and accelerating probably even moving faster than most retailers, where and so we've been building with this is the assumption and honestly been improving our digital experiences we've been building a phenomenal and flexible supply chain.
And we haven't played in stores that are moving.
Most of the capabilities that we view this do hit on curbside, but also in store consultations the cross training in the stores, we do shift from all our store. It's not just the hub to hub will be used to ship larger quantities.
And 60% right now what we're selling is flowing through our stores in some way either curbside or into our cap or ship from store.
And so this only underscores our belief that our stores are unique and powerful asset for us and I think that what we will see is that the stores maybe news differently, it's not about less stores, but it might be about more points of presence and a different ability to meet the customer, but we do think what are the unique.
Assets that we have is our ability to move with speed and frankly put the customer in control.
To experience that whenever.
Got it that's helpful. And then just for my follow up.
You beat.
Consensus estimates.
So again this quarter, you repaid challenger and tighter revolving credit facility sitting on over 5 billion dollars' worth of cash.
At what point and I know, there's lot of uncertainty out there I'm living it we're living it everyday Miss post cobot dystopia.
To this call from my Mike My home office at what point do you do you feel like you know.
Brett where we've got kind of got together side, we can start to buyback stock Kim.
Yeah. Thanks for the question.
We're evaluating when we may resume stock buybacks are fundamentally our allocation strategy has not changed we first year, we're always going to reinvest in our business to do what's right for our customer long term, we still plan to be a premium dividend payer and at some point returned all the excess cash to.
Holders I I think ultimately it you nailed. It this is a little kind of in a very uncertain environment for per for many reasons holidays likely look very different.
Like many companies, where we're taking the time to really evaluate and when we might resume that but right now we like to position were end to be able to keep flexibility through the remaining part of this year, but we will certainly you address that.
At some point.
That's helpful keep up the good work.
Thank you. Thank you.
And next we'll hear from Brian Nagel with Oppenheimer.
Hi, good morning, very nice quarter congratulations.
Thank you so.
The first question I want to ask your core you discussions with her comments just the degree to which new customers companies that side I think you. The schwartzel online is helping to drive sales recovery.
Maybe discussions will walk you know they could you just touched one of the maybe coming from how different all day again the customers I guess, thank you to June the path, we always see now, but that's like Brad is through this crisis actually reaching a new demographic.
Yeah. We are obviously, it's early so we're still assessing exactly who all these customers are I think it's at least clear for us that they are customers for whom we may not have been into consideration set prior and like we said in his prepared remarks, clearly, it's only been five month, but some of those new customers we attained in March.
Have shown at much higher propensity to repeat sales and then the new class measuring that hey last year. During the same period nicely. We've also seen are engaged customers start to rebound as weve reopened story. So it's a little bit the best of both worlds, which is why we're so experience really focused on creating the right environments, both safety and choice.
That will make us appealing for all customers. So we'll continue to Peel apart, who those customers are but honestly our bigger priority right now is not going to they are it's how do we re engage them. How do we continue to bring them into the best buy ecosystem and make them a little bit stickier to the brand, which is why we talk about things like brand Love, we talk about things like safety because those become.
Measures by which said that brand is valued overtime.
Got it. It's helpful. Then my follow up I'll, just unrelated you told US is broad based strength from quarter with the exception you called out the mobile category. It's my question. There is that you can do we use mobile carriers the more of a function of maybe a lot for product cycle orders to be disruption to the stores or through.
Through most of the second quarter.
Hey, Brian Fortier somebody else question, but yes, I think you've got actually both of the answers in a part of your question.
The one category that is most dependent on our store traffic for the customer experience to make sense is though.
Online, even some of the carrier stores aren't even open.
Seven days a week right now so we're really focused on the customer experience in advance of new handset launches. This fall on Fiveg, we're still very excited about the category in the experience we create.
Didnt make some enhancements. So you can you know treated in your old connected device portfolio online because we're trying to be cognizant of what the customer is going to need.
That is one area, we're having our stores closed for big for the quarter, probably played the biggest impact.
On the performance, we just announced.
Thank you very much.
[noise] looks like we have time for one final question, we'll hear from Mcshane with Goldman Sachs.
Hi, Good morning, Thanks for taking my question actually have just two quick follow up questions to some that have already been ad.
We wanted to ask not the acceleration that you're seeing in sales in in August just what do you think that's driving that give then.
The fact that the stimulus that saving here a little back and then just wanted to follow up on the promotional commentary to about why you don't necessarily see more pressure in Q3 year over year doesn't have to deal with cell trying to control traffic into the store or the tighter inventory level.
I'll start Cape maybe Matt can follow with some of that promotional commentary in terms of the strength and Mike had said it we're really seeing broad based strength now clearly there is a work from home learn from home component to this and especially heading into back to school, you've got right now estimate that two thirds of.
Doing at home learning, so that combination of learning at home and a lot of parents working from home and she can't share devices has to be able to have euro networks and owned devices and owned web cams and I mean, there's there's clearly a lot there and that will be an extended.
Phenomenon as it's going to have kids going back and forth probably from schools work, but we're also seeing people want to entertain.
When we talk a little bit about gaming and the demand. There. We thought that was category that we can be well down this year heading into new launches and its.
It's been performing and it's not just about gaining canceled its about the computing, let's use for gaming as well, which has been incredibly strong my talks about television and entertainment and this idea of back to sports and being able to start to at least watch sports again on devices. I mean, everything that people are doing right now is on the back of.
Technology in their home and it completely underscores our purpose in our philosophy and not have you actually right now our enriching your life [laughter] through technology, and we're seeing it across basically every aspect of what we're selling in our stores.
Sure and gain to the promotional question I think what I, what I said earlier was promotionally will probably be a little higher in Q3 that was in Q2 in Q1, but fundamentally still not to have a pressure on a year over year basis.
In terms of Q3, I would I would we would still expect to see a heightened consumer demand and just overall some level of inventory constraints as we work through the quarter clearly as the those changes could you could affect promotionality, but with those two factors involved you know I think we still expect to see promotion probably a little.
Not a pressure on a year over year basis, clearly the promotional cadence of events could change in Q3, and we holiday that is we'll probably start earlier, but even with those we believe the demand for for the products and services. We sell than just also the inventory availability will continue to to lend itself to have a less promotional environment.
Thank you.
Thank you.
And with that I want to thank you all for taking the time to join US today and we look forward is heading into next quarter have a great day.
Ladies and gentlemen, this fall.
Today, we do thank you for your participation and you may now disconnect.
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