Q3 2021 Best Buy Co Inc Earnings Call
[music], ladies and gentlemen, thank you for standing by welcome.
Welcome to best Buy's, the Q3, F.Y. 2021 earnings call.
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I will now turn the conference over to the Malia of Brian Vice President of Investor Relations.
Thank you and good morning, everyone. Joining me on the call today are Corie, Barry are CEO, Matt Balloonists, our CFO and Mike, Mike <unk>, Mike Monahan, our president and COO.
During the call today, we'll 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 at 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.
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 at 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 the 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 the Q3 results.
Our comparable sales grew a remarkable 23% as we leveraged our unique capabilities, including our supply chain expertise flexible store operating model and ability to shift quickly to digital to meet what is clearly elevated demand for products that help customers work learn cook entertain and connected there.
Old we provided customers with multiple options for how when and where they shop with us to ensure at met their definition of safe retailing.
The current environment has underscored our purpose to enrich lives through technology and the capabilities. We are flexing and strengthening now will benefit us going forward as we execute our strategy. Our team showed empathy ingenuity and extraordinary execution throughout the quarter best buy has always had a very strong culture.
Over the past several years, we have been period that strong culture with the purpose driven approach and that is showing up in the way. We are responding to the current environment. This pandemic as well as the natural disasters and simple and rest of the past several months has been difficult for so many people physically financially and emotionally I am incredibly.
The proud of the way our teammates are helping not only our customers, but each other and their communities.
Customers continue to shop, and interact with us differently than pre pandemic online sales increased 174% and comprised 35% of our total domestic sales, which we view as a testament to our strength as a multichannel retailer.
Our interactions with customers buy a phone and chat were significantly higher than last year, and we continue to evolve our consultation program as our advisors conducted a much higher mix of customer consultations digitally and in stores than last year. When consultations were predominantly end customers homes.
We have seen elevated growth in new customers since the beginning of the pandemic in Q3. We also saw strong growth in customers, we havent seen in the while who have reengaged with us as well as sales growth from our current engaged customers.
As we shared on our last call sales were up 20% for the first three weeks of the third quarter. Ultimately as you can see at our results today, our sales growth remained elevated throughout the quarter as we continue to benefit from stay at home and the shifting consumer spending away from areas like travel and dining out of.
In addition October included the benefit of our Prime day related sales, which shifted out of July this year at an earlier start to holiday promotions.
From a product category perspective, consistent with last quarter, we saw strong growth across most categories, especially computing and appliances, both large and small.
In addition, our home theater category returned to growth and was a significant contributor to our comparable sales increase.
We were experiencing supply constraints as we entered the third quarter and our teams work closely and effectively with our vendors to bring in as much inventory as possible. While we did see our inventory positions improved through the quarter. We experienced continued inventory constraints in a number of categories, which moderated our sales growth.
At the high level of global demand simply continue to outstrip supply in a number of categories, particularly large appliances and computing.
Our supply chain team was amazing and moving the sheer volume of product into and across the country. In addition, our speed and quality of product delivery in customer at homes improved throughout the quarter with October showing our fastest shifts the homes that since the beginning of the pandemic despite more than 200% growth in online revenue.
From a profitability standpoint, our better than expected sales resulted in significant operating income rate expansion and non-GAAP EPS growth of 80% over the same period last year.
The strong financial performance is allowing us to share our success with the community our shareholders and importantly, our employees.
In the quarter, we made a $40 million donation to the best buy foundation to accelerate progress toward our goal to reach 100 teen tech centers across the U.S.
And today, we announced we are resuming our share repurchase program.
For our employees during the quarter, we structurally raised our starting wage to $15 per hour paid discretionary recognition bonuses to field employees and reinstated our short term incentive compensation.
In addition in recent weeks, we have resumed our four one k. employer match and invested significantly in our employee wellbeing strategy.
Some examples include expanding our caregiver pay program. So it can now be used to care for in laws siblings, and grandchildren, expanding our backup child care benefit. So in place can now use the services of someone they already know end trust and providing tutoring reimbursement for employees children.
In the early days of the pandemic, we established an employee hardship funds that continues to provide emergency funds to our in place were sick have loved ones, who are sick or experiencing financial hardship.
As we manage through the pandemic nothing remains more important to us than the safety of our customers and employees. As you would expect we follow a variety of safety procedures, including requiring customers and employees to wear faced covering requiring employees to complete daily wellness checks frequent cleaning protocols and more as has been the.
Throughout the entire pandemic, we're also limiting the number of customers inside our stores to allow for CDC recommended social distancing.
During the third quarter customers continued to give us high marks for safe interactions as 97% of those surveyed said, we made them feel safe while they were in our stores and while we were in their homes.
We are constantly adjusting our operations and piloting experiences the emphasize safety and build on our ability to flexibly respond as the course of the virus changes for example, we recently extended curbside hours to allow customers to pick up their curbside order prior to store opened hours or after store close hours.
Additionally, in almost all stores, while customers are still welcome to come in and shop freely we have transitioned all store pickup orders to curbside pickup orders. This will help reduce the people at our stores, who simply need to pick up their order and will allow more customers inside who want to shop or talk to an expert.
And for the much anticipated gaming console launch earlier. This month, we provided our pre order customers, who had chosen the store pickup option the ability to schedule of specific time to pick up their product. This resulted in fewer crowds end lines and was hugely successful both customers and employees bumped it.
Despite the disruption and uncertainty related to the pandemic and our current environment. We remain focused on executing our building the new blue strategy. Our current way of life in our homes reliance on technology has only reinforced our belief in our strategic direction and purpose.
Many of the strategic themes, we discussed at our Investor update last September have come to life in a very accelerated way over the last year. These can be summed up in the following three concepts, we believe to be permanent and structural implications of the pandemic.
One customer shopping behavior will be permanently changed in the way that is even more digital and puts customers entirely in control to shop, how they want our strategy is to embrace that reality and to lead not follow it is too early to know exactly how much of our sales and customer shopping activity will be buy a digital channels over time.
Jim but as the result of the pandemic, we expect it will be higher than it has been historically.
To our work first we'll need to evolve in the way that meets the needs of customers, while providing more flexible opportunities for our people.
And three technology is playing an even more crucial role in People's lives and as a result, our purpose to enrich lives through technology has never been more important.
Said differently people are using technology to address their needs in ways. They never contemplated before and we play a vital role in bringing tax to life for both customers and our vendor partners.
These concepts are extensive and interdependent and we are as quickly as possible both implementing change today and assessing future implications across our business.
As you will see we are taking the opportunity to test and pilot a range of models at initiatives in order to chart, the very best path forward.
In line with our other strategic priorities, we continue to see opportunity for efficiencies, which will allow us to reinvest in the business and build on the experience will differentiation in the future.
Now I would like to share. Some examples of the work we are doing as it relates to our stores and labor model starting with stores.
Our stores provide customers the opportunity to see and touch product ask questions get advice and receive support.
As we have discussed many times. They also serve at important role in the fulfillment of online sales.
We have created what we believe to be an industry, leading store pickup experience that our customers value and now expect from us.
Stores stores will look different overtime in terms of function size, and possibly even quantity, but the remain incredibly valuable at a cornerstone of our strategy.
As we mentioned last quarter, we have started to evolve the way we use our stores for fulfillment. We are pleased with the progress of our 250 ship from store hub locations that we first piloted in September in fact, we are adding about 90 locations for the holiday period, all our stores will continue to ship online orders, but.
These locations are positioned to ship out significantly more volume and utilized dedicated labor aimed at fulfilling orders originating online.
These locations required minimal capital investment as we had the technology in place and were chosen due to their available warehouse space and proximity to carrier partners.
Our expectation is that these 340 locations, we'll ship more than 70% of our ship from store units during Q4.
A significant benefit of our hub model is that at allows us to extend the online order cut off to ATM for next day delivery, enabling more speed to customers.
We're also testing new store formats to test our hypothesis of stores as more primary fulfillment hubs in for Minneapolis locations, we reduce the Shoppable square footage to approximately 15000 square feet from an average of 27000 the.
The product assortment on the sales force. We will still include the primary categories. These locations had before the remodel, but the merchandised SKU count will be reduced focusing on the most popular items.
The Remodels will result in incremental space for staging product for in store pickup and to support ship from store transactions as well as provide the ability to stage inventory for items that may not be on the sales floor in one of the four locations. We are utilizing some of the available space to increase the previous allocation to our geek squad business.
Normally we would not remodel any stores this close to the holiday season, but we feel it's imperative to move quickly to gain the learnings about how the store format a complement our omnichannel strategy within a particular market.
In another store pilot, we are testing the financial return of Reorienting. The location of the store warehouse to be adjacent to a new covered drive up curbside experience and lockers.
From a labor operating model, we are working to provide our employees opportunities to learn new skills and have more flexibility in their jobs.
During the quarter, we continued to advance our flexible workforce initiative, which allows store employees can become certified to perform tasks outside their primary job functions.
This initiative helps inflated develop their careers by giving them an opportunity to learn new skills to broaden their experience.
It also gives team members the ability to earn a different hourly wage depending on the tasks performed at the potential for working additional shifts that otherwise may not have been available in their primary job function. This.
This in turn reduces turnover and improved satisfaction.
At the start of November over half of our associates were eligible to flex into different workloads and almost 20% of associates were scheduled in more than one department.
For example in associated with historically at computing specialist could take a shift in the mobile department either because he or she wanted the change of pace or perhaps we needed extra labor in the department to support the launch or at associate who want to the additional hours can grab an extra shifts making deliveries to customers homes.
In the near future employees will also be able to easily take shifts in different store locations.
Overtime, we believe in plays will continue to gain additional skill sets and be able to fulfill multiple roles, which will lead to additional scheduling eligibility eligibility and flexibility for them and also drive efficiencies at LIBOR planning and cost.
This initiative works in concert with our focus on evolving the way we position employees to serve customers based on need irrespective of Jim.
An example of this is the way we are supporting our customers, who want to interact with us buy a phone or online chat instead of coming into the store as I mentioned earlier, we have seen demand for phone and chat interactions skyrocket during the pandemic we.
We have moved quickly to get about 450 dedicated store associates cross trained to help customers buy of phone and chat and our skill setting another 5000 people to flex into digital sales if needed based on demand.
These 5000 people could hop on line at the store a slow or be utilized in high volume periods. During the holiday. We're looking to utilize the staff during Thanksgiving as our stores will be closed this year.
In addition, the phone and online chat we of just added the ability for customers to launch a live video chat with one of the store sales associates from the comfort and safety of their own home.
As it relates to our customer consultation program, our advisors continue to leverage their flexibility end skill set in meeting customer demand whether that is digitally in our stores or in homes.
While the majority of consultations are still end customers homes. The number of digital consultations is becoming a meaningful percentage of the mix.
As we improve the technology and experience for digital interactions. It opens up the opportunity for our advisors to reach even more customers.
Fundamentally our strategy and competitive advantage depends heavily on our people and the differentiated service we provide our customers. It is true that due to rapidly evolving operating models and escalating demand in the first half of the year, we saw considerable leverage on lower labor costs.
We learned a lot from which will inform ongoing leverage and efficiencies.
We also learned what may not be sustainable for our strategy and the experience we want to provide our customers. We are both implementing change and piloting tests that will define our long term working model balancing our customer experience expectations and efficiencies.
As you can see we have been examining our business model from top to bottom to determine where we may be able to accelerate our strategic efforts. We've also reviewed areas, where we might scale back.
Importantly, we viewed it as a as critical that the outcome of this analysis would ensure our focus and resources are closely aligned with the opportunities we see in front of us.
As a result during the quarter, we made the difficult decision to exit our operations in Mexico I.
I want to thank the teams in Mexico for their tremendous work over the past several years, they should all be incredibly proud of their accomplishments.
Now, let's talk about holiday.
2020 has truly been a year. Unlike any other and that's certainly true for this year's holiday shopping season first we launched our black Friday deals earlier than ever in mid October and have had several other sales of since that time.
We started these events early and spread them over the course of several weeks to help avoid overly crowded days in our stores in order to create a safer shopping experience.
We also decided to close our stores on Thanksgiving day.
In addition to our existing in stores safety measures. We have added at digital keen for customers, who are waiting for assistance from an employee so they can socially distance outside in their cars or within the store while they wait.
And we now have a dedicated customer experience host at every store to help guide shoppers answer questions and manage any lines.
We have also extended our store hours to close at eight P.M. from six P.M. and similar to prior years will add additional hours as we move through the holiday season.
Meanwhile, customers, who shop online now have more choices for how to get their order contact list curbside pickup is available at all of our stores online customers using our app to pick up their orders can plan their trip buy viewing high and low traffic times.
With the first time launches of our App up 40% in Q3 compared to last year customers are using the at more than ever and it is increasingly becoming a great self help tool. In addition to a compelling shopping experience.
Of course, our online customers can also choose next day or same day delivery. In addition to our diverse network of third party partners. We expect to have about 450 stores set up with dedicated labor end vehicles, so that our own best buy employees can make deliveries to our customers.
Almost all best buy stores now offer same day delivery on thousands of products. If the customer places an order buy one P.M. local time they'll get at by nine pm.
Before I conclude my prepared remarks, I want to update you on our ongoing commitment to inclusion and diversity in our community.
As we've discussed before we are committed to doing all of that we can to further economic and social justice and our communities. This.
The separate take form in several ways, including our signature team Tech centers. Currently we have more than 30 of these locations each of which typically operate year round in service of hundreds of teens, helping them learn the technology skills necessary to be successful in the modern economy. The.
The data on this effort is clear we are making a measurable difference in the lives of teams who might not otherwise have this chance.
By the end of 2025, we will have more than 100 of these teen tech centers, serving more than 30000 teams at year.
In the related efforts, we're also dedicating sizable resources to scholarships, which historically black colleges and universities around the country that will of course, the available to our teen Tech Center graduates.
At the same time, we're looking to do more closer to home and are proud to announce the going forward. We plan to have one out of three non hourly opened corporate positions filled by someone who is black indigenous or a person of color in the field. We also plan to have one out of three non hourly opened roles filled by women.
At the same time, our intention is to create over the next few years parity in retention rates among all of these groups.
In support of these initiatives, we have transferred $40 million in Q3 to the best buy Foundation, the senior leadership team and I are proud of the work. Our company has done on these initiatives and are pleased we could increase funding on this onetime basis in support of our efforts.
Earlier this month, we helped empower our employees to vote by opening our stores at new local time on election day to ensure our store employees had the timing needed to cast of valid in person if they chose to do so.
We also gave paid time off to employees, who volunteered to work at the polls on election day.
We also remain committed to our broader environmental social and corporate governance efforts, including those related to sustainability to that end. We recently signed the climate pledged at commitment to the carbon neutral across our business by 2040, a decade faster than our previous goal of 2050. This commitment is supported by the recent completion of our second solar.
Sales investment.
In conclusion, we delivered very strong Q3 financial results, we are executing well and clearly benefiting from the need for people to connect work learn cook and entertain at home through.
Throughout the pandemic, we've been confident that we will emerge an even stronger company than we were before in the near term of course, much uncertainty still remains around the depth and duration of the pandemic as well as economic impacts of sustained high unemployment rates.
We continue to be encouraged by our clarity of purpose and our momentum which has guided and will 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 are confident regarding our execution adaptability and the opportunities ahead.
In many ways our response to the impacts of the pandemic has allowed us to accelerate our strategy and the remain many aspects of the strategy that require investment to remain relevant with customers in this very competitive omnichannel environment, such as our digital experience supply chain and critically important in store and in home associates in.
In fact, having the foresight to invest in these omni channel experiences for the past several years was essential in delivering our results during the pandemic we.
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 speed and now safety.
Now I would like to turn the call over to Matt for more details on our Q3 financial results.
Good morning, the demand for our products and services has remained incredibly strong for the past several months and our Q3 sales were better than our expectations.
As Corie highlighted technology has taken on an increased importance in all of our lives and while we are clearly seeing sales growth from consumers looking for ways to navigate through the pandemic. The fundamental reliance on technology has also grown and strengthened our purpose.
On the enterprise revenue of $11.9 billion, we delivered non-GAAP diluted earnings per share of $2.06 or an increase of at 82% versus last year.
Our non-GAAP operating income rate of 6.1% increased 190 basis points as we saw leverage from the higher sales volume on our fixed expenses.
This was partially offset by a 30 basis point decline in of gross profit rate.
In our domestic segment revenue for the total quarter increased 21% to $10.9 billion. The increase was driven by comparable sales growth of 23%, which was partially offset by the loss of revenue from stores that were permanently closed in the past year as part of our normal course of the business.
As Corey mentioned October included the benefit of our Prime day related sales, which shifted out of July of this year at an earlier start the holiday promotions.
This helped push October comp sales up to 33%, our highest mostly comparable sales growth of the quarter.
From a merchandising perspective, we saw broad based strength across most of our categories with the largest comparable growth coming from computing home theater and appliances. This.
This growth was partially offset by a decline in the mobile phone category.
In addition, comparable sales in our services category grew 13% during the third quarter similar to the broad based strength in our product categories or services category had positive revenue growth from both total tech support and our warranty business.
In the international segment revenue increased 25% to $1 billion the.
The increase was driven by a comparable sales growth of 27%, which was partially offset by 140 basis points of negative foreign currency impact.
The growth was primarily driven by Canada, where we experienced similar trends at our domestic segment from a consumer demand standpoint.
Turning now to gross profit the domestic gross profit rate declined 30 basis points to 24%.
The decrease was primarily driven by supply chain costs associated with higher mix of online revenue.
As Corie noted our online sales were 35% of our overall domestic sales in the quarter, which compared to 16% of last year.
We also saw at lower profit sharing revenue from our private label and co branded credit card arrangement.
These pressures were partially offset by promotional environment that was more favorable compared to both last year and our expectations going into the quarter.
Our international non-GAAP gross profit rate increased 10 basis points to 22.6%, primarily due to a less promotional environment, partially offset by increased the supply chain costs from a higher mix of online sales.
Moving to us Jumei domestic non-GAAP EPS unit increased $146 million compared to last year and as a percentage of revenue decreased 210 basis points.
On our last call, we shared our expectation that as strongly dollars in Q3 would be similar to the prior year.
The largest drivers of the expense increase versus last year. We're also the areas that were higher than our expectations at the start of the quarter.
These were one higher incentive compensation for corporate and field employees of approximately $75 million.
True increased variable costs associated with the higher sales volume, which included items such as credit card processing fees.
In three of the $40 million donation to the best buy Foundation.
These increased expenses were partially offset by lower store payroll expense.
Let me share a little additional color on the lower store payroll expense, which was driven by a fewer labor hours for our associates.
This was primarily due to lower store revenue.
Our reduced store operating hours and efficiencies in our labor low.
Which were partially offset by additional hours needed to support the fulfillment of online orders.
This decline in labor hours was partially offset by higher hourly wage rates as the increase in our starting wage the $15 an hour went into effect at the start of Q3.
I would point out that although our Q3 store channel revenue was down approximately 8% to last year, when including the online revenue per store and curbside pickup and ship from store. The revenue supported by our stores labor actually increased on a year over year basis.
On our last earnings call, we sure that about two thirds of our original 51000 furloughed employees had returned to work.
Any remaining employees that had been on flow were asked to return to work as seasonal employees for the holidays.
Let me next provide more context on the restructuring charges from this quarter as Corey mentioned, we made the decision during the quarter the closed on operations in Mexico.
In our domestic segment. We also took actions to more broadly align of our corporate organizational structure in support of our strategy.
As a result of these decisions, we incurred approximately $111 million the restructuring charges and an additional $36 million of inventory markdowns in Mexico that were excluded from our non-GAAP results.
For context on our Mexico business.
Fiscal 2000 annual revenue was approximately $400 million was slightly negative operating income.
Moving to the balance sheet, we ended the quarter with $5.7 billion in cash and short term investments.
In the third quarter, we completed the public bond offering from 650 million at 1.95%.
In October 2013 of the net proceeds from the sales will be used to replace the $650 million and 5.5% notes that mature from March 2021, which we expect to retire during Q4 by exercising the particle.
At the end of Q3, our inventory balance was approximately 1.5% lower the last years comparable period, whereas our accounts payable balance increased 26%.
We entered the third entered the quarter with inventories down 21% the last year and although trends progressively improved throughout the quarter as Corie stated, we still experience constraints driven by the high demand in several of our key categories.
Our capital allocation strategy remains the same we will first reinvest in the business to drive growth and remain committed to being a premium dividend payer.
We will then look to return excess cash to shareholders through share repurchases the.
During the third quarter, we paid $142 million in dividends, we suspended share repurchases last March in order to conserve liquidity in light of the co related uncertainties, but we now plan to resume share repurchases. This month.
We anticipate the level of share repurchases in Q4 to be similar to last year's comparable quarter.
As we look to next year, assuming business trends remain favorable we would expect the spend a higher amounts on share repurchases than we have in more recent fiscal years.
From a capital expenditure standpoint, we now expect to spend of approximately $725 million during fiscal 21.
Lastly, let me finish by sharing of few comments about the fourth quarter.
As a result of the ongoing uncertainty we are not providing financial guidance. Today. However, I would like to provide some insights into how we're thinking about Q4.
As we start the fourth quarter the demand for the products and services, we sell remains at elevated levels, but similar to last quarter. The continues to be difficult for us to predict how sustainable these trends will be.
In fact, we're seeing coded case of surged throughout the U.S and Canada, the time of significant holiday volume through our stores online and supply chain.
There continue to the other factors to consider such as potential future government stimulus actions. The current shifts in personal consumption expenditures from areas like travel and dining out.
At the risk of continued higher unemployment and the availability of inventory to match customer demand.
From a revenue standpoint, we believe our Q4 sales growth will be positive, but we don't expect sales trends to remain at the levels we experienced during Q3.
While our sales in the first few weeks of November have remained strong. They include the launch of the new gaming councils from Sony and Microsoft and also likely of pull forward of sales from later in the holiday season.
In addition inventory constraints are expected to continue in certain key categories.
We anticipate that our group Q4 gross profit rate will continue to be pressured and we expect the year over year rate decline in Q4 to be higher than it was in Q3.
This is due to an expectation that a higher mix of online sales, we will continue to drive higher supply chain costs, including the increased parcel surcharges from our carrier partners in.
In addition, we anticipate a higher sales mix from lower margin gaming consoles to negatively impact the rate.
As it relates to the promotional environment, while we expect to see continued favorability on a year over year basis, we expected to be less retail women at has been in the first three quarters of this year.
We expect our Q4 EPS sinead dollars versus the prior year to increase as a percentage in the mid to high single digit range. The.
The increase in the US you know the is expected to be driven by incentive compensation increased variable costs from the higher expected sales and investments in both our health business and in technology.
We expect these increases to be partially offset by slightly lower store payroll expense.
I will now turn the call over to operators for questions.
Thank you Sir at this time, the we'll open the floor for questions.
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Our first question comes from Karen short of Barclays.
Hi, Thanks, very much for taking my question.
I wanted to just follow up on your last comment there I think end.
You commented that the second half would potentially benefit from the lower or less promotional environment on the gross margin from so wondering if you could talk a little bit about that as you look at Fourq you given the comments you just made on the gross margin and then also wondering if you could just Jim Gary a high level puts and takes of we look.
At 21 end, because obviously, there's so many moving parts on the on the gross margin and nastiness side sales. If you could just kind of high level comments on how we should think about both of those into the 21 that would be helpful.
Sure. So from promotions Q3 was definitely less promotional than last year.
But a little at more than we saw earlier in the year of Dude due in part to the early start to the holiday, which which occurred in October.
Due to the continued demand for products in the industry wide inventories strength, it's we're still seeing at promotionality be less on a year over year basis.
Our assumption would be that in Q4 promotional increases a bit relative to Q3, but considering the elevated level demand and continued constraints in some areas in the story, we don't expect the to be a year over year pressure.
So looking into next year from a co.
The cost perspective from a margin initially I think it'll is the it's a bit early to know exactly how that manifests next year, we're clearly going to be looking at next year quarter by quarter every quarter. This year was a bit different than the others and so as we enter next year, it's likely that the trends that we're seeing continue on from a demand perspective of the from the start and so we will look at the.
The early part of the year, a little differently probably than the rest of it will obviously of remain competitive from a from a from a pricing perspective throughout the year, but we'll also look to to leverage the deficiencies in the end the alert learnings. We've made this year in terms of the yesterday structure.
Okay. Thanks.
Thank you. Our next question comes from Simeon Gutman with Morgan Stanley.
Thank you good morning, everyone.
My question I'll make it in two parts, maybe first of all Corey.
Thinking about the merch margin structure of the business over the medium term I think you know you outlined all of those steps, you're taking and the experimentation with with the stores at the different labor models.
Hi, I'm wondering to the.
Doing that because you think the margin of the business could end up north of the non-GAAP goal of 5% or earnings changes to in order to uphold the.
And then just the second question is I think Matt mentioned look we still expect comp stores sales to be positive for the fourth quarter I think of it I think a lot of of expect that.
The given some of the pull forward that you are seeing today is there any reason.
We should see a sharp slowdown and you do you have a sense of.
How much that pull forward of affecting the business.
Given how early some of the Black Friday sales of started thanks.
Good morning Simeon.
As we go back to the update that we provided last year you could hear at in the remarks, we feel like of the strategy is spot on and in fact more relevant than ever and obviously the proliferation of consumer electronics is as high as its ever been people are just getting more comfortable using connected devices and living at connected.
Frankly across our home.
Obviously, you can appreciate we're not going to update the financial targets I think what we would say is in the many ways. We're ahead of where we thought we would be at this time, we've accelerated a massive amount of learnings and investments and I think you'd also argued many retailers are ahead of where they thought they would be at this time I think right now we believe that all of the more reason we need to double down.
On what makes US unique therefore, we're testing we're learning and then probably have some suite of investing to do once we understand better the results of those tests and those hypotheses.
What's most important what remains the most important building those fundamentally sound relationships with our customers that keeps us from relative and in their consideration set overtime and so we will continue to make investments around technologies stores membership.
Could we see in EBIT rate higher than the 5% we laid out.
Maybe but thats not the goal the goal right now is to figure out how customers are shopping differently and therefore, the will we need to play to bill those foundationally sound relationships overtime.
The maybe from a Q3 at pull forward question that you had I think.
Clearly, we outline October sales benefited from of earlier start the holiday season. It also benefited from a shift the prime day in from July into October from.
It's really difficult to predict.
Exactly how much was pulled into the into Q3 from Q4, but there are a few considerations of we talked about October being 33% growth in the month.
We also talked about at the start of the quarter was about 20% growth of the first few weeks so.
We have clearly with the elevated levels of demand in October at clearly points to a period in between those two that is around 20% of or slightly lower so that's why when we look at Q4, we don't necessarily expect the trend of Q4 to continue on at the Q3 pace, although we wouldnt necessarily say, we're signaling sharp declines were.
Just very thoughtful about the rest of the quarter coming and that the we're pulling sales further into October end in November and we have some pretty significant days ahead in terms of Thanksgiving day being closed but also the cyber cyber week end the week before Christmas. So just a lot of factors to lose the flow through.
Okay. Thank you both.
Thank you.
Thank you. Our next question comes from Brad Thomas with Keybanc capital markets.
Hi, Good morning, Thanks for taking my question of Great results.
Question on inventory can you talk a little more about where you're seeing shortages.
The how much you think that co.
So to increase to the how much of nitrogen or two and.
When you think the supply chain the sort of potential at the strong demand. Thank you.
Hey, Brian Thanks for the question as we announced in our prepared remarks, we started the quarter with the inventories down pretty significantly versus prior year at least matched against our sales trends.
And the team and I decided to call. It out the remarkable work, we receipt of merchandise in our fiscal third quarter. The I think in the history of best buy at which is of feeding itself of the pressures of stolen the long lead time categories domestically major appliances.
The tax both on inconsistent demand and then dr. shutting down for corporate related issues and clearly the as consumer demand with the housing market the receipt of the long tailed play.
We're excited about the back into the mid to position we need. The we think is going to remain constrained probably into early next year. The demand in computing has been sustained rate since the start of the co decreases in Gary the middle of the Chris We have the back to school of it normally you guys will be asking questions about the back to school season is going back to school or back to work at home or back.
The educating at home since March.
Really happy with the supply chain model there, we have great relationships with all of the the world's top Oems and we work with them literally every day the fulfill the needs, but I think we're going to be.
We'll be tighter than the we appreciate but of the enough inventory to support our sales.
As we transition to the next year I don't see the long tail things, there's some real constraints, obviously part of the goal of saying on the new gaming consoles and that will probably be sustained through the holiday season, but they are a long products like we will not see us getting in the good position fairly quickly after the holiday.
Thanks for the question.
Thank you. Our next question comes from Greg Melich with Evercore ISI.
Hi, Thanks.
My question was the about the one area that was down in the quarter or mobile phones.
Just curious if that is simply a function of the delay of the iPhone versus the year ago.
Or is there something else there in terms of replacement cycles of you're seeing an end consumer demand.
The Greg Thanks for that question I think you kind of hit it on the head there has been a year over year change on when the new product true launch versus when the were in 2019 that is probably the biggest transition. The just to think about what we're excited about is on the new devices of the.
Demand for the higher capacity larger screen and the phones that are purely ready to be fiveg enabled our are quite good and the best the jury or the parts, we're selling the RC fiveg enabled so we like the demand signal going in to what the new devices will look like I think the replacement cycle on phones has been forever change.
And so the role we will play will continue to help customers who are seeking out the newest technology to get the best of of their experience in other words, we were excited about going forward.
And then I have follow up. Thank question is is on the services how many new customers did you get in total Tech services at home Advisor you mentioned you had more.
Can you give us enough Gary.
Yes for a total tech support at we did grow the member count after holding pretty steady in the first half of the year, we havent been updating that number quarterly and we're not going to now but the reference the lacked we shared was about 2.3 million members at the end of fiscal 20, we definitely buy usage of the remote support offering.
Continued to increase during the pandemic end, we also saw improved trends compared or compared to earlier in the year as it relates to things like installation and repair and we expect that usage to continue to ramp up as the stores are fully opened more back end homes, providing the more fulsome suite of services and the entire.
Underscore what Mike said I think of our teams a ton of credit for the work that they have done to creatively find ways to help our customers who in some cases are pretty desperate to.
To make sure at their devices are working together.
Thats, great great job in the ever happy Thanksgiving holidays, everyone.
Thank you you too.
Thank you. Our next question comes from the Scot Ciccarelli with RBC capital markets.
Good morning, guys.
Wanted to ask the about some of the changes to the operating model just in terms of shrinking your at your physical space in some of the shifts you've made to the the labor model and I guess, what I'm wondering is if the shift resulted in lower sales so lower market share, but higher returns from profitability is that a winning is at a go forward strategy or the.
You have to win on both of those fronts. Thanks.
Yes. Thanks for the question Scott I, the the point of sale the Theres kind of two different subjects here. One is a very small tests that we're doing right now four stores around the square footage and it's more about stores as a real fulfilment hub that can act as a convenient and easy place for our customers to come and get what they want end.
Both the at a more limited SKU assortment that at merchandise, but frankly, a wide assortment that's available for pickup in the stores as well as in services. That's really early at small and were at 30.
What we're trying to achieve with our operating model changes, it's interesting what we're actually trying to achieve as a better customer experience at the end of the day that is enabled through a more flexible end more educated workforce and the idea in that the the wind is actually that we can provide more flexible expertise.
Across the store that you might have one teammate who can work with you across the entire store that we develop the best in class curbside and in store pickup capabilities, but that that the concept is not about pull out as much cost. The top of the concept is about creating a workforce as more flexible and can be used across departments and frankly across customer needs. So it's not quite clear.
Moving around.
Around in the stores success that is actually you have the more fulsome in store experience and your associates have the ability to garner more skills to opt into more flexible schedules and to be able to potentially at some point the new between stores depending on their availability.
So if we would characterize it as more qualitative rather than quantity of in terms of at the the scorecard.
I think at both honestly Scot flooding that hit on in his prepared remarks, there are some efficiencies that you're able to build in.
In terms of ours, but again thats not the goal in of itself. The goal is to provide more seamless customer experiences better employee experiences that actually that and continue to create that relationship over time, which also is the quantitative measure. It's just that if at more of the plant same measure overtime.
Okay. Thanks have a great holiday.
Thanks, you too.
Thank you. Our next question comes from Mike Baker with da Davidson.
Hi, Thanks, So product related question Bill.
The parts of record first an update on your healthcare initiative, which really hasn't come up too much and of course, you talk loan products and the great call business and also we are on the commercial side of that as the pandemic of slowdown discussions with insurance companies and then the second product of questions on gaming.
So the console the some concerns at that was strong at October in Bolduc, Hindu Oksana skews Darren background.
My question of both that continue into the fourth quarter as well some of the Russian getting the console also be very strong of the fourth quarter, so while without slowdown. Thanks.
Absolutely I'll start with some color around the health business I think it's obvious.
Obvious, but at bears repeating what we're living through right now with the pandemic completely underscores our track at our strategy of what we're trying to do and that is to help seniors live more end independently with the help of technology.
I think we do that through this unique combination of technology and touch on our ability to both have the right products to your point, but also have the services wrappers cycle around at the consumer business at was impacted earlier in the pandemics with the closure of the stores.
Obviously, the sell a lot of those devices through the stores, where you have a chance to really interact at the customer and explain the unique capabilities of those products.
Obviously as we've opened the stores more broadly those trends have improved materially and we're definitely seeing that that kind of great call consumer side of the business ramp up. There is also just the question of broader health and fitness kind of writ large and again you probably know at kind of your own life. There are more people using technology devices, whether it's at home fitness weather.
Its monitoring and tracking year on that there are more people using those devices. So we continue to like our positioning in the kind of broader health and fitness arena beyond just the kind of aging side of things and then obviously, we continue to work on our relationships on the commercial side of the business, where we work directly at the payers and providers there continues to be significant interests.
You can imagine there is a lot going on on that side of the business given the pandemic the or we're working through but the adoption of things like Tele health the ability and frankly pull from consumers to use more tools like thats only underscores the potential in that market. We believe from here Mike.
Mike maybe want to comment on gaming certainly Mike Good question on day near the maybe some clarification.
In Q3, we didnt call of those specifically, but the the gaming category. Our growth was driven from legacy devices, primarily products from Nintendo peripherals and accessories as we moved into Q4 of the.
Two new caused the launches from Microsoft and Sony or are off to a great start and the reflected in the comments that Matt had the started the quarter I think the only thing under the perspective on is there going to be constrained through the quarter end there'll be more demand than the will be devices, which has been sort of a recurring occurrence or the six or seven years. This year is more heightened because more people.
I think the never need something to do with their families at home, but were excited about is the customer experience steps, we took to create of the best experience on something constrained. These are two world class partners book Lesser Hearts, the didn't do us any favors the way the launch products and so when we at pre order demand, we sort of everything from how you Q4 at how you booked in the appointments. The you wouldn't wait long and you got your.
The products and as we get the additional inventory during the holiday season, we'll release beginning of the way that you can find at on best buy at our common or digital channels and you can actually get it as the customer we're trying to protect the experience. So people who are trying to buy at the reseller of bots can't get through a set of usually is perhaps other places, it's a lot of work or technology and customer experience.
And operation teams are doing but our goal is to get as many of these products into the consumers' hands to delight them. What we can't tell you how many other will sell because I actually don't know how many were going to get and that's probably indicative of everybody else you guys cover I think the long Phil on the so we can be pretty strong given the fact people want these devices at home and the early signs on people were volume from best buy or our new.
Customers to us slightly younger and we're excited about other does it come back end visit us for approval of and accessories.
I hope that helps Mike.
That does thank you appreciate it.
Thank you. Our next question comes from Seth the Sean with Wedbush.
Thanks, a lot good morning.
The question you are on the store miles cash that youre doing at birth in Minneapolis, and secondly, the with the pilot.
Pilot at Nebraska, Jason.
On the the driver.
Can you give us some color as to the timing associated with measuring the ROI on that and the potential from rolling that out in 2020 onto the broader corporate stores.
I think we're going to need to give this one a little bit of time, obviously and we said at the remarks. This is about a market working together to serve customers in the most effective way possible and so this is the the very first foray into fulfillment stores. Like this end my guess not my guess I know, we will continue to try at this.
Bill formats in the additional ways that we will approach the market as we head into next year and so we'll keep you apprised as we learn more but we have we want to give this one enough time, especially in us and at 10 dynamic world where operations are different than what the steady state might look like over time.
So we are we are urgent with it but at the same time, we want to make sure we give it enough times, so that we capture as many of learnings as possible in the thrilled market tailored approach.
You guys just to clarify at enough time to kind of six or 12 month timeframe that you're measuring already the box.
I don't I don't see at being something that looks like three years certainly.
And I think a little bit of this depends on how the business normalizes back through the pandemic through some of the economic implications. So it's not just about the time line lease at its also about making sure that we feel like we're getting accurate and results from where the business is going to go from here.
Appreciate it thank you.
No problem.
Thank you. Our first question. Our next question comes from Curtis Nagle with Bank of America Jim.
Good morning, Thanks, very much for taking my question.
Maybe just following up on Mike's question on gaming.
And just kind of how to think about what our business from towards the reverse in the quarter.
Clearly demand for these new causes.
The control good although.
Although at the basically sold out at this point so.
Just with.
This call sales.
At least in kind of very limited stocks.
Do you think the suppresses demand or do you think that just because of the category of that people will receive moving into now and.
Well, maybe the odd gifting category.
Category of things from the good I do you think about that going through the rest of for Q.
The current I'll start I think it's a good questions non end use when the give you an answer on other than the category itself and the the desire for people to.
The energy and their families and the cells with with gaming. The type of solutions is is extremely strong and thats applicable to the things that are constrained most of the the council's from Sony and Microsoft, but we're still seeing incredibly strong demand for all the legacy products that you could argue but in the market for a year and a half the two years and where I think you're going to see is as allocations continue.
The to improve.
We've always focused on the customer experience and execution of making sure those who use these devices get them as fast as possible. The U.S it turns into the ability for us to get more products sooner, but this is one of the items that are hard to predict I don't think you're going to see this pull any drag on demand.
The you will be the most of the high.
The main items for this holiday and we're going to work or best of yet.
Our unfair share of the allocation to take care of as the customers as possible Corie widgets any deals from the south at a perfect.
Okay and the maybe just one other quick one on one of the.
Turning to your question.
Just thinking about health and extra of equipment.
Looking at could you go toast.
Focused on a little bit more this year for obvious reasons.
Out of the forming how do you think the category looks through the holiday in the next year is on the.
Area of the discontinued extension.
Yes. The another good question, we're excited about the category and we talked about at a couple of quarters ago Rolling Hills from products to our stores of the pandemic of started the as you think about the ability to communicate the consumers in the digital first world. We're more excited right now about expanding the assortment of working on the logistics of getting some of these bigger products into people's homes, helping them get set up and.
Some of these is getting stuff out of the homes at one of the big pain points people are seeing at the.
We've got some excitement in the space not just for the quarter, but as it moves forward into next year at I think it's applicable to all these other kind of consumer connected health products that you might think of in the simply the watch where the fit the that you're working today, but as you start to put them in concert with other devices. At hope you have at healthier lifestyle I will return the hard to help show customers the various options.
Some solutions you can get with the complete suite of things to help with your fitness and wellness needs. So.
We're excited about the category.
Okay. Thanks, and good luck for the holiday.
Thank you. Thank you.
Thank you. Our next question comes from Scott Mushkin with.
Our five capital.
Hey, guys. Thanks for taking my questions. So.
So I was just wondering if you could talk about how you guys are thinking about.
The next years, you're trying to call at this comp what you can do.
To make it easier.
Easier to go over.
Sure I'll start inquiries or Mike can jump in I think overall and the inquiry kind of said this a little earlier I think it's far too early for us to really come on comments on sales next year right now, we're very very focused on helping our customers.
Either demand right now at with the premium on sales for both of them at our employees. So that's our first objective right now I think there's still going to be a lot of factors for us the way as we move into the beginning of next year certainly there is a continuation of elevated demand for things to work at learn and Cook and entertaining at home and its likely at some of that continues on it.
As we go into the beginning of next year, but may start to subside a bit.
You know there is still a heightened level of unemployment right now and likely to continue into next year as well.
And clearly the we're not totally sure on how the vaccine starts to get distributed out to everyone. So there's a lot of factors that will continue into the way in which is.
Primarily to as well we have a whole holiday quarter ahead of us and so we've got to see how that shakes out.
In addition to the so I think what we can see like I said earlier is I think we will these elevated trend will likely continue a bit as we go into next year, the will likely have to take each quarter.
Individually and look at the at the demand trends that we saw this year and try to understand what they look like next year I think fundamentally we are seeing.
The role of technology only intensify in People's lives Weve said this before I think it's it's really proliferated, we proliferated the devices in People's homes, and those devices need to continue to be supported those devices needed to.
Additional advancement in innovation of the as we go forward and so we see a lot of opportunities ahead of us each quarter will present its own unique challenges and we'll we'll work through that and we'll give more update on next year as you towards the end of year.
In the kind of the along that lines. How are you thinking about the inflation both from a product perspective, but also from of ways perspective, and then the non yield. Thank you.
Sure maybe starting with the wage perspective, we this year, we clearly opened to move to $15 an hour with our associates at our stores and so we'll continue to approach of income.
The increases based on the based on our merger processes as we go forward. So we take a fairly large so for this year in terms of.
Setting our minimum wage of $15 an hour so from a wage perspective, we feel like we're very competitive with of the wage and all the other benefit that we offer our associates from a macro perspective, a little early to know exactly how inflation take hold next year. There is theres always some level that we're factoring in the overall actually it's not something that we are to worry about at this point.
I think the structurally what the team has done an excellent job with is investing in our employees and then finding ways for us to meet the customer needs in the most flexible way possible I think about this kind of like as efficiency efficiencies at our in service of the customer so whatever the inflation.
End of environment looks like what we're focused on is making sure we find the balance between what we need to do for our people and how we can best operating the business.
And so at that I'm going to end of where we started I want to thank all of our customers our employees for the amazing work that they've been doing effort that they put forth sort of really incredibly different in challenging times and thank you to all of you for joining US today, we hope you have a safe and happy holiday.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
Okay.
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