Q4 2021 Best Buy Co Inc Earnings Call
<unk> Dot 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 1095. These statements may address the financial condition and 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.
And from such forward looking statements. Please refer to the company's current earnings release and our most recent 10-K and subsequent 10 Qs for more information on these risks and uncertainties.
The company undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise. After the date of this call.
I will now turn the call over to Corey.
Good morning, everyone and thank you for joining us.
During the fourth quarter, our teams across the company delivered and exceptional customer experience and a safe environment day.
Showed amazing flexibility and execution, managing extraordinary volume and a dynamic situation and they strive everyday to create safe shopping experiences often in the face of pandemic fatigue.
As a result today, we are reporting strong Q4 financial results, which include comparable sales growth of 12, 6% and non-GAAP earnings per share growth of 20%.
We continued to leverage our unique capabilities, including our supply chain expertise flexible store operating model and ability to Chris.
To shift quickly to digital to meet the ongoing elevated demand for stay at home products and services.
Online sales grew almost 90% to a record $6 $7 billion and made up 43% of our total domestic sales.
Our stores played a pivotal role and the fulfillment of these sales as almost two thirds of our online revenue was either picked up and store or curbside shipped from a store or delivered by a store employee.
Percent of online sales picked up by customers at our stores was 48%, representing a 90% increase and volume.
Ship to home volume was up 38% and even with that increase in volume, we were able to accelerate the delivery speed to our customers on a year over year basis by strategically using our partners our stores and our employee delivery for.
For additional context same day shipping volume was up 376% and our employees delivered more than 1 million units.
From a product category perspective, the biggest contributors to the strong comp sales growth and the quarter were computing appliances gaming virtual reality and home theater.
As you recall this year, we started holiday promotions in October which is in our third quarter. We started these events early and spread them over the course of several weeks to help avoid overly crowded days and our stores and order to create a safer shopping experience. These.
These efforts to manage the traffic flow into our stores proved effective and even out some of the peaks and valleys through the holiday season.
As planned it also resulted in some holiday sales being pulled into Q3 after reaching 33% comp growth in October our growth rate moderated as we lapped last year's November and December holiday sales before accelerating again in January due to the ongoing elevated stay at home demand boosted by government stimulus actions that.
Sales growth momentum we saw in January has largely continued into February.
As a result of both the successful early holiday sales and the product availability issues. The industry has been seeing all year, we continued to experience product availability constraints during the fourth quarter, which we believe moderated our holiday sales, particularly on large appliances computing and televisions. In addition demand for the new gaming consoles far outstripped supply across.
The industry as is well documented on.
Our teams work closely and effectively with our vendors to bring in as much inventory as possible and inventory positions improved through the quarter.
As I step back and reflect upon the whole year. It was truly a year like no other.
In addition to and international pandemic, there was social unrest across the nation and numerous natural disasters I am proud of and inspired by the way our teams have navigated the challenges and what they have accomplished we.
We saw remarkable customer demand and delivered outstanding execution and that led to a very strong financial results for.
For the year, we delivered comparable sales growth of nine 7% and non-GAAP earnings per share growth of 30%. We drove record free cash flow of $4 2 billion and ended the year with $5 5 billion and cash and short term investments.
Since the beginning of the pandemic, we have responded to the impacts of it with a focus on safety and helping customers get the products they need to work learn cook entertain and communicate at home we.
We provided customers with multiple options for how when and where they shop with us to ensure we met their definition of safe retailing and customers noticed the percent of customers surveyed who said we made them feel safe while they were in our stores and while we were in their homes was consistently above 97% throughout the year.
To best serve our customers during the pandemic, we had to be innovative and flexible early in the year, we quickly rolled out enhanced curbside pick up across our stores to provide our customers convenience.
And we made the difficult decision to close our stores and March and me, we developed and in store appointment model that provided our customers with an option to shop and our stores as we prepare to open stores backup to customer shopping.
We developed solutions like virtual consultations with advisors and video chats with our store Associates. In addition, we made significant improvements to the functionality and customer experience of our app to provide access to shopping support and fulfillment. This drove not only new users of the app, but also increased levels of customer engagement with the app.
And Q4 first time launches of the App were up almost 80% and the average number of App visits per unique user were up 34%.
During the year, we also increased our investment and supported by our employees.
Early on and the pandemic, we continue to pay employees, who worked working for a full month. After we closed our stores to customer shopping we paid hourly appreciation pay for those who are working on the front lines and establish multiple hardship funds for anyone impacted physically emotionally or financially by COVID-19.
We provided enhanced benefits that included 100% coverage of Covid related health care expenses expanded caregiver leave additional support for backup childcare tutoring reimbursement and access to physical and mental health virtual visits Inc.
<unk> our estimates for fiscal 'twenty, two we will have invested more than $75 million on enhancements to our structural employee benefits over a three year period.
In addition to enhanced benefits starting in August we raised the starting minimum wage to $15 per hour for all our employees, which brought our average hourly wages for hourly employees up to $17 67.
To show our appreciation for their hard work over the past year and and recognition of their ongoing efforts in the face of pandemic fatigue, we're paying employees and additional cash gratitude bonus and the next few weeks all hourly U S employees will receive $500 at full time and $200 at part time or occasional seasonal.
In addition to help keep employees and customers safe, we are encouraging all employees to get Covid vaccinations as they are available by providing them with paid time off when they receive the vaccine and providing them absence time to be used in the event they develop side effects that warrant and they're needing to stay home and rest after receiving the vaccination.
And all the Covid related decisions, we have made since the beginning of the pandemic to support our employees totaled more than $350 million. This includes paying employees, while they weren't working to restore closures appreciation pay guaranteed pay bonuses vaccination support and hardship funds.
We've also deepened our commitment to community last year, we made a $40 million donation to the best buy foundation to accelerate the progress toward our goal to reach 100 teen tech centers across the U S.
And we committed to making systemic permanent changes that address social injustices to improve our company and our communities.
We also signed the climate pledge committing to be carbon neutral across our operations by 2040, a decade earlier than our previous goal of 2015, we were honored to be recognized for our efforts by Barron's earlier. This month when we were named to the top of their most sustainable public companies list. The list rated the 1000 largest public companies on five key.
Stakeholder categories shareholders employees customers community and planet.
Notably best buy was also called out as the company with the leading Covid response, citing our efforts to maintain employee and customer safety health and players experiencing hardship and continue to meet the technology needs of customers. This is the fourth time, we have been and the top five and the second time, we have been and the number one position.
And we think about our strategy moving forward and many of the themes. We discussed at our 2019 investor update came to life and a very accelerated way last year.
It is important to reiterate the following three concepts, we believe to be permanent and structural implications of the pandemic that are shaping our strategic priorities.
One customer shopping behavior will be permanently changed in a way that is even more digital and puts customers entirely and 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, but as I mentioned.
Earlier online sales were up 43% of our domestic food online sales were 43% of our domestic sales in fiscal 'twenty, one and we are planning for the mix to be approximately 40% in fiscal 'twenty two.
That compares to 19% and fiscal 'twenty and only 5% just 10 years ago.
And to our workforce will need to evolve and a way that meets the needs of customers, while providing more flexible opportunities for our employees.
And three technology is playing and EBIT more crucial role in People's lives and as a result, our purpose to enrich lives through technology has never been more important.
Play a vital role and bringing technology to life for both our 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 entire business and.
Including how we evolve our stores and labor model and how we spend our investment dollars.
Our research indicates our customers look to best buy to serve for shopping needs inspiration research convenience and support and.
And customers expect to be able to seamlessly interact with physical and digital channels.
And we must be ready to serve all of these needs at all times and all channels.
We are building all of our experiences around meeting these needs as we move from being a big box retailer with a strong omnichannel presence to anomaly omnichannel retailer with a large store footprint for support and fulfillment.
Fundamentally when you are looking for help and want to be inspired the best experience will always be and our stores talking to one of our amazing employees the proximity to our physical stores still matters to many customers and our stores serve an important role and fulfillment and support and also provide awareness and convenience that are critical to retaining and growing sales.
We also know that customer shopping behaviors are changing and we need to evolve with them.
And the fourth quarter, the pandemic drove a roughly 15% reduction and traffic to our stores, including both in store shoppers and customers picking up online orders by our in store or curbside.
And while some traffic will likely shift back to our store channel and fiscal 'twenty two like many retailers. We believe much of what we saw last year will be permanent or.
Our employees and the stores will always be central to our strategy. We are simply looking at how we can best deploy our team and our physical assets to meet customer expectations and needs.
As we discussed last quarter, we are taking the opportunity to test and pilot a range of models and initiatives in order to chart the best path forward.
We must balance the urgency for change with the need to learn and understand how customer shopping behavior is changing.
We are already gathering learnings and iterating on our initiatives.
An example is our ship from store hub pilot that we've talked about for the past few quarters.
During Q4, we used 340 stores or roughly 35% of our store locations to handle about 70% of our total ship from store units.
We believe that we can achieve similar results consolidating volume using a smaller group of stores as hubs overtime.
In addition, and a subset of these stores, we plan to reduce the sales floor square footage and install warehouse grade packaging and station equipment and supplies.
As a result, we expect to drive both efficiency and effectiveness.
We also continued to pilot reduced selling square footage and alternative layouts, and a number of stores and the Minneapolis market.
As you would expect pandemic or not we're constantly looking at our store network responding to customer and demographic shifts just as any retailer does.
We will continue our normal review process, which involves putting stores through rigorous evaluations as their leases come up for renewal.
As we look to the near term there will be higher thresholds on renewing leases as we evaluate the role each store plays and it's market the investments required to meet our customer needs and the expected return based on a new retail landscape.
For context, we have approximately 450 leases coming up for renewal in the next three years or an average of 150 each year.
As part of the review process, we have closed approximately 20 large format locations each of the past two years and expect to close a higher number this year.
We have also been reducing the length of our average lease term, which will continue to provide us flexibility.
In addition to our physical stores are operating model needs to evolve to meet our customers changing shopping behaviors that have been accelerated by the pandemic the sudden and lasting shift customers have made to shopping more regularly and seamlessly across all of our channels has forced us to look at how we get our work done.
Our response to the pandemic has shown our ability to be successful when broadening the scope of responsibility of our associates and has highlighted the importance of ongoing flexibility and adaptability.
Two was the hypothesis, we shared at our 2019 investor update and was massively accelerated buy customer shopping behavior changes.
Since the pandemic began our overall head count has been going through a transformation.
As a reminder, we made the difficult decision to furlough approximately 51000 retail employees due to store closures last April by August we brought back about two thirds of them.
As we approached the fourth quarter any remaining employees that had been on furlough. We're asked to return to work as seasonal employees for the holidays.
As employees, who are on furlough decided not to come back and other employees left as a result of attrition we have not been back filling positions as we consider how to adjust our operations to better meet our customers' needs going forward.
As a result, we entered fiscal 'twenty, one with 123000 employees across the entire organization and we are leaving the year with about 102000 team members a decline of roughly 21000 or 17%.
Even though head count across the enterprise has been declining primarily due to this attrition and we still have had to make difficult decisions.
Earlier this month one of those decisions was to adjust the mix of full time and part time and place at each of our store locations and.
And in aggregate level. This was due to having too many full time and not enough part time and place as part of the process part time roles were offered to many of the displaced fulltime employees, who are interested and qualified.
And the end result was that we laid off and provided severance to approximately 5000 and place the majority of which were full time.
At the same time, we are adding approximately 2000 additional part time positions.
Decisions like these are never easy or taken lately, but they position us to be more responsive and flexible as we continued to refine our operating model going forward and response to the incredibly rapid change and how customers want to shop with us.
It is important to add that we are intent on re skilling and retraining employees wherever possible. So we can retain our people and employees can flexibly work across all our channels.
Our vision of a flexible workforce is about more than having our associates gain the knowledge and skills to be effective and more areas within the traditional store setting and expands to include the type of interactions that have become even more relevant and a digital shopping environment.
Over the past year thousands of employees, who possess unique skills were leveraged across multiple areas of our business like virtual sales chat phone and remote support. In addition, we are investing in people and hiring and areas like supply chain smart small parcel delivery customer care and technology and.
Support of our long term strategy.
And the last year has demonstrated technology is playing an even more crucial role in People's lives. We are excited about the technology trends and innovation, we see over the next several years as.
As expected there has been immense innovation and the consumer health category. The fitness industry has pivoted quickly and the category is exploding as consumers want to stay fit at home and outfit home gyms.
Beyond the connected equipment customers now have the ability to integrate data for and different types of activities like rowing biking, and running into any number of wearable devices to measure their overall fitness and progress more seamlessly.
There's also innovation around more chronic conditions, such as diabetes and heart disease with Wearables that monitor insulin levels and heart rates.
Hearing AIDS is another category going through innovation and we are excited to help our customers with hearing needs both online and in our stores.
The proliferation of health related devices has become so great. We created a health and wellness digital shopping experience accessible directly from the homepage of our website.
Of course, Theres and innovation curve and products that help people work at home as well.
There is an influx of products are on all aspects from high tech chairs to monitors to standing desks. These are products that were not even on vendor roadmaps before the pandemic and now truly complete the working at home experience.
Access to five G is still growing as networks are rolling out across cities and we move into next year and the year. After it will be more mainstream and accessible for all of US. We are excited about the introduction of new products over time that will leverage the speed and capabilities of <unk> beyond the mobile phone.
Of course, our customers expect best buy to be there to help inspire and support all of our technology.
Our consultation program continues to be an important differentiator and advisors are inspiring technology solutions by a customer consultations happening and homes digitally in stores and buy a chat and phone.
We are also leveraging our consultation program with our partners for example customers can schedule an appointment with one of our advisers, while shopping on Samsung Dot com.
On the support side, our total Tech support program continues to receive very strong customer ratings and has a unique program that we believe only we can offer.
Membership growth recovered after we opened our stores more broadly we continue to see significant opportunity over time to evolve all of our many customer memberships, which also includes our millions of my best buy customers.
And we purposefully pressed pause on this initiative at the start of the pandemic and are planning to rollout a pilot and the next few months that will leverage our learnings from the material evolution of customer shopping behavior over the past year.
I'd also like to update you on our health business more broadly.
The pandemic has only served to underscore our purpose and strategy the adoption of virtual care and telehealth by patients and physicians has been greatly accelerated by COVID-19, and is expected to continue to grow we.
We see significant opportunity over the long term to make the experience much better for both patients and physicians by providing an integrated seamless technology solution that is easy to use.
To that and our best buy health strategy focuses on three areas that start with our strength and retail and build to connecting patients and physicians.
The first focus area is the consumer health category I spoke about a little earlier. These products are for customers, who want to be healthier sleep better or need to monitor a chronic condition like diabetes or heart disease for example.
The second area is active aging, which includes device based emergency response and other services for generation eight who wish to continue to live independently in their homes.
Active aging builds on the great call CST and <unk> acquisitions.
The third focus area is virtual care and includes digital health carrying center services that connect patients and physicians to enable virtual care and remote patient monitoring.
And we provide personal emergency response remote patient monitoring and care counseling services to payers, serving Medicare advantage and Medicaid populations and we will expand these services to help people monitor their chronic disease and connect to their physician.
Our differentiated approach combines best buy in home and care counseling services with digital health Baidu.
Buy digital health, we mean curated monitoring devices packaged with the consumer in mind with a platform to distribute activate and test the devices to ensure that consumers can use them and connect to their physician.
In fiscal 'twenty, two we plan to expand the consumer health product assortment and additional devices and services to our active aging business and add new remote patient monitoring offerings, and our new technology platform and virtual care.
In order to do this we plan to invest and people product development and the ongoing development of our health technology platform and our data analytics and intelligence engines.
In addition to the investments and our health strategy, our investments and technology and automation and will be important aspects and defining how our model continues to evolve and the future.
As has been our practice for the past eight years, we've continued our commitment to leverage cost reductions and efficiencies to help offset investments and pressures.
Our current target set in 2019 is to achieve and additional $1 billion and annualized cost reductions and efficiencies by the end of fiscal 'twenty five we achieved approximately $340 million towards our new goal during fiscal 'twenty, one taking our total to $500 million towards this goal.
In summary during fiscal 'twenty, one we manage through the challenging environment and a way that allowed us to accelerate many aspects of our strategy to deliver on our purpose and thrive and a new and forever changed environment.
Our teams collectively changed the way, we do business at a pace, we never imagined and I must reiterate how proud I am of their perseverance and commitment.
As a result, we advanced our five year plan, both strategically and financially much further than we expected. While we are ahead of plan and several strategic areas. The disruption of the pandemic has also impacted other strategic initiatives.
For example, while our health business has proven to be even more strategically relevant to our mission. The pandemic certainly disrupted the progress and the path forward will take time.
We also still have meaningful opportunity to evolve our membership and services models to drive loyalty and.
In addition, we will need to invest and our future as we proactively evolve all the channels of our business to deliver amazing customer experiences and a world where half of the revenue might be initiated online.
All that being said, we see a path that leads to margin expansion beyond what we articulated at our last investor update and.
In fiscal 'twenty, two we expect our operating income rate to be lower than fiscal 'twenty, one and five 8% operating income rate as we continue to navigate and cycle impacts of the pandemic, while investing and our strategy as Matt will discuss.
We are still in the midst of the pandemic. So we are not updating with a specific metric, but we see long term non-GAAP operating income rate that is beyond the 5% fiscal 'twenty five target we introduced in September 2019.
Now I would like to turn the call over to Matt for details on our results and insights on our outlook for fiscal 'twenty two.
Good morning, our financial results for the year far surpassed what we thought was possible entering leader, we are leaving fiscal 'twenty, one with an even healthier balance sheets, and we and when you started the year and so on our non-GAAP operating income rate expand 90 basis points versus the prior year.
The rate expansion was possible due to both our ability to capitalize on the elevated demand for technology and by reducing spend early in the year and certain discretionary areas beyond the unknowns based on the unknown situation. We are facing at the beginning of the pandemic.
We also accelerated strategy that allowed us to begin adjusting our cost structure to what we believe will be a permanent shift and how customers want to shop.
Despite the difficult decisions, we made throughout the year, we remain committed on investing in areas. We felt were most crucial to delivering our future growth plans.
Let me now share more details specific to our fourth quarter.
On enterprise revenue of $16 9 billion, we delivered non-GAAP diluted earnings per share of $3 48.
And increase of 20% versus last year.
Our non-GAAP operating income rate of six 9% increased 40 basis points. This route expansion was driven by approximately 90 basis points of leverage from the higher sales volume on our SG&A, which was partially offset by a 60 basis point decline and our gross profit rate.
In addition, our lower effective tax rate had a <unk> <unk> favorable year on year impact on our non-GAAP diluted EPS.
And our domestic segment revenue for the quarter increased 11% to $15 4 billion and.
All time highs for revenue and a single quarter.
Comparable sales growth of 12% was partially offset by the loss of revenue from stores that were permanently closed in the past year.
From a merchandising perspective, we had broad based strength across most of our categories with the largest drivers of comparable growth coming from computing appliances gaming virtual reality and home theater.
This growth was partially offset by declines and headphones and mobile phones.
Turning now to gross profit the domestic non-GAAP gross profit rate declined 50 basis points to 27%.
Primarily driven by supply chain costs associated with the higher mix of online revenue.
And the fourth quarter, our online sales were 43% of our overall domestic sales and the quarter compared to 25% last year.
So it was a smaller impact and the supply chain costs, our category and mix was also a pressure this quarter.
These items were partially offset by a promotional environment that was more favorable compared to last year.
Our international non-GAAP gross profit rate decreased 180 basis points to 28%.
Merrily due to increased supply chain costs from a higher mix of online sales and a lower sales mix from our higher margin services category.
Moving next SG&A domestic.
Domestic non-GAAP SG&A increased 5% compared to last year and decreased 90 basis points as a percentage of revenue is.
And as expected the largest drivers on the expense increase versus last year, we're one higher incentive compensation for corporate and field employees of approximately $55 million to increased variable cost associated with higher sales volume, which included items such as credit card processing fees and three technology.
Investments, which also include support of our health initiatives.
And increased expenses were partially offset by lower store payroll expense.
Let me share some additional context on the increased expense from our technology investments and technology has and increasingly will be the foundation on how we will operate and how we accelerated our strategy.
This includes continued technology investments and capabilities to support our health initiatives, increasing and increasing and improving our digital interactions with customers and simplifying task and our stores and building upon our analytics to support decisions, we make on a daily basis.
We are also modernizing our systems and tools as well as utilizing more cloud based solutions. For example, we are partnering with Microsoft to leverage its cloud to help power our health care offerings and.
In addition, we are transforming the structure of our technology teams by bringing more head count in house versus using contract workers.
Let me next provide more context on the $129 million and restructuring charges from this quarter, which also include a $13 million benefit within cost of sales.
$88 million of the charges related to changes and our domestic segment to realign our organizational structure with our strategic priorities.
And $41 million was primarily related to our previously announced plans to exit operations in Mexico.
We don't anticipate any additional material charges in Mexico, and future quarters, and all of our store locations in Mexico will be closed by the end of Q1.
Moving to the balance sheet, we ended the quarter with $5 5 billion and cash and short term investments.
At the end of Q4, our inventory balance was approximately 8% higher than last year's comparable period to support the current demand for technology.
Approximately half of the year over year increase is related to inventories still in transit.
Although trends have improved from earlier in the year, we are still experiencing constraints driven by the high demand and several of our key categories.
During fiscal 'twenty, one, we returned $880 million to shareholders through $568 million and dividends and $312 million and share repurchases.
We resumed share repurchases during the fourth quarter after suspending activity last March this.
This morning, we announced a 27% increase and our quarterly dividend to <unk> 70 per share.
We also announced our plans to spend at least $2 billion on share repurchases and fiscal 'twenty two.
In addition, our board of directors approved a new $5 billion share repurchase authorization.
Placing the existing authorization dated February 2019, which had a $1 $7 billion and repurchases remaining at the end of fiscal 'twenty one.
As we look to fiscal 'twenty, two we are not providing our traditional guidance, but I would like to share our planning assumptions as we enter the year.
As we start fiscal 'twenty two the demand for technology remains at elevated levels and the <unk>.
Sales growth momentum we saw on January has continued through the first three weeks of February and.
Certainty around the admin and administration of the Covid vaccine and the subsequent impact of customer demands and shopping patterns and makes it difficult to predict how sustainable these trends will be.
Other factors to consider include government stimulus actions and the risk of continued higher unemployment.
With that being said.
We estimate fiscal 'twenty, two total comparable sales growth and the range of down 2% to up 1%.
This range reflects a scenario in which customers resume or accelerate spend and areas that were slowed during the pandemic such as travel and dining out and the back half of this year.
We expect growth to be positive and the first half leader and then negative and the back half as we lap strong comp growth and Q3 and Q4 of fiscal 'twenty one.
We will update our expectations during the year if needed and there is more clarity to the various factors driving our outlook.
Regardless, we anticipate revenue for fiscal 'twenty, two will be higher than what we would've expected it to be at this time last year.
From a gross profit rate perspective, we are planning for a non-GAAP rate that is slightly below our fiscal 'twenty one right.
We anticipate more promotional pressure than we experienced this past year as inventory becomes more available and competition competition likely increases.
And as Corie mentioned, we were planning for online sales to represent approximately 40% of our domestic sales in fiscal 'twenty two.
It is only slightly lower than our fixed and fiscal 'twenty one.
As a result supply chain related costs are not expected to have a material impact on our rate compared to the prior year.
From an SG&A standpoint, we are expecting to increase as a percentage and the low single digit range there.
And there are a number of factors driving the expected increase.
We expect our SG&A increased expense to increase approximately $100 million on a year on year basis, as we lap COVID-19 related decisions, we made last year to preserve liquidity.
This includes returning to more normalized spend on items such as for wound care company match advertising spend and store overhead items such as maintenance.
This $100 million increase includes the benefit of lapping the $40 million donation to the best buy Foundation and we made in Q3 of fiscal 'twenty one.
Second we plan to increase our investments and depreciation and depreciation and support of technology, and our health initiatives by approximately $150 million compared to fiscal 'twenty one.
Third we expect store payroll cost to be lower compared to fiscal 'twenty, one and even after including the impact of lapping and $81 million and employee retention credits from the cares Act, we received and the first half of fiscal 'twenty one.
There are clearly other puts and takes that will but we will manage through some that will be more impactful and one quarter versus the next but the previous items are the key drivers of how we are viewing the full year.
Based on the drivers I just outlined our expectation is for our operating income rate to decline on a year over year basis, which is primarily a result of our increased investments and technology and in support of our health initiatives as well as the impact of lapping the temporary actions from fiscal 'twenty, one and I just shared.
In relation to capital expenditures, we expect to spend approximately $750 million to $850 million during fiscal 'twenty, two compared to $713 million and fiscal 'twenty one.
Now I will provide some color on Q1.
We expect comparable sales to be approximately 20%.
As a reminder, and Q1 of last year, we closed all of our stores the customer shopping and move to curbside service only for the last several weeks on the quarter.
We anticipate our gross profit rate will be slightly lower than last year due to a more promotional environment and increased delivery expense.
As a reminder, we suspended and home services for about five weeks during last year's Q1.
We expect SG&A dollars.
Dollars to increase by approximately 10%.
This increase is primarily related to incentive compensation, because we suspended all expense during Q1 of last year for corporate and field employees as well and the gratitude and vaccination related bonuses to Corie discussed.
These items combined are expected to result in more than $100 million and additional expense versus last year. And addition, we anticipate increased expense from our investments and technology and health as well as well as higher variable expenses associated with expected growth I will now turn the call over to the operators for questions.
Yeah.
Thank you. Please press star one to ask a question at this time and please limit yourself to one question only.
Also please do not use speaker phone once you remove yourself on the key you May press star two.
We can now take our first question from Anthony can you comment on new capital markets. Please go ahead.
Good morning, and congratulations on a strong finish to two and incredible year, particularly given the.
COVID-19 has told you that we're all living through.
So my question.
On the competitive landscape.
I mean, it sounds like or I would guess that youre expecting to things.
And be more competitive and.
2021 as.
You said that the.
The world returns to normal compared to me and what you saw in 2020, but just would love to have your perspective on that that's my one question. Thank you.
Yeah, I'll start and Matt can add color.
I think we would expect and we actually set it is Matt provided the outlook there to be a higher level of promotion on the as we start to lap some of the strength, obviously from last year and you start to get into more normalized inventory position throughout the year and so part of the color I think that Matt highlighted for next year would imply that we likely are going to have to invest.
A bit more to remain price competitive which of course since the beginning has been our priority. So Anthony I think I think your intuition is right. There that we would expect things to normalize a bit in terms of promotion ality.
Got it keep up the good work.
Thanks, so much Anthony.
Yes.
And we can now take our next question from Chris <unk> of Jpmorgan. Please go ahead.
Thank you starting with a longer term question and then I have a follow up on on some something more near term as you think about migrating to the new model, obviously and the consumer electronics business warranties and accessory attachment on.
And really important so can you talk about the.
How you see those attachment rates in store versus a bolus and.
And versus online and are you and billing and expectations that you can improve that and attachment rate as the consumer becomes more digital.
So I'm going to take a little bit of a step back here and that I think we strongly believe our competitive advantage is our ability to provide both support and advice across all the channels any channel that anyone wants to shop and.
And obviously, there are different and calendars and different mode of doing that across the different channels, but regardless, we know our employee and our customers excuse me are looking for both advice and that support across channels and we've been investing and our capabilities and technology in order to deliver that deliver that we'd also talked about the fact that what our customers expect from us from a <unk>.
Port perspective has changed overtime and it's less about that break fixed support although that's still important and and we need to be there when that happens and it's much more about supporting your technology seamlessly across your devices and it's more about it as my printer staying on my network or is my content string and the way that I want it to and hence.
The reason, we have been migrating to a model that looks more like total tech support which provides you obviously coverage for all the technology devices and your home, regardless of where you bought them and.
And so it's not just about now for your questions specifically digitally it's not just about the buying experience is actually about using digital across all aspects of the shopping experience and so we have been working and we are continuing to work and if you think about the investments that Matt mentioned and in technology, we're investing and things like video chats Virtu.
Dual consultations.
Adding digital checkout in the App. This is still all empowered by our amazing Blue shirts, who are actually creating his experiences, we're just creating and digitally and so while the gross margin rate has been lower online over time, it's constantly improving because we're constantly improving that customer experience and we are seeing increases and our ability.
And to transact total tech support or digital consultations, we're seeing more in home advisor leads online as an example, so I think it's hard to replace that expertise and support you would get by visiting our stores, but we are seeing customers get more comfortable with experiencing some of those things online and it's less about exactly what.
Channels, and happening and and more about how to and every channel to interact with you. We're constantly trying to improve that experience. So it's to your point and your question. It does become more natural to making buying decisions and a digital environment.
Understood and then on the on the first quarter gross margin and inventory.
And promotional environment.
I guess.
You have a very strong comp guide and the first quarter.
And it doesn't sound like you're fully in stock on an item. So why would you expect a more promotional environment and the first quarter I would I would is that something youre seeing already and sort of early I would certainly expect that to be the case as you progress through the year, but.
It would seem like.
All the pieces put together it wouldn't seem like the promotional environment would really.
Change year over year.
Yeah, I'll start and then neither Mike record can add.
Yes, I think despite the fact that we do expect them to.
Elevated sales in Q1, as we start to enter and especially the latter part of Q1, we're going to be seeing a competitive environment, where a lot of our competitors are copying some big numbers of themselves and so we're just aware of where that might take technology and how we need to stay competitive in that environment and so you're right. There is the sale of Q1 is <unk>.
Going to be leading up to the time, we closed our stores and then we closed our stores for a bit of time unless other week. So theres a lot of different areas within Q1, and we do think that towards the tail end of it we'll start to see a bit more promotions and competitiveness as we start to see competitors react to their own situations.
Understood. Thanks for all the great information.
Okay.
And we can now take our next question from Michael Lasser of UBS. Please go ahead.
Good morning, and swap for taking my question.
When you laid out your dot com volume for the year, how did you factor in that and two for demand being pulled forward not just tougher compares with an updates on the back half and.
Do you think the potential for demand being pulled forward.
For a multiyear period or is that.
And then on Ford because of this wallet share shift back to <unk>.
And these new categories.
And what happened pretty quickly and things.
And just on a short period of time, and then I have one follow up on your longer term guidance.
Good morning. This is Matt I'll take that and Corie and Mike can jump in I think fundamentally if we step all the way back, but we believe through technology and People's lives is the only intensified as a result of the pandemic and the proliferation of devices and People's lives will continue to support.
And advancement as innovation continues and the role we play and that is extremely important and even stronger than it was before and so as we look at next year and when you think about it being probably a tale of two halves with growth and the first and then declines and the ladder I think we still see opportunity for innovation to keep fundamentally technology import.
And People's lives and clearly at a micro level. There you could imagine some categories could see a little bit of pull at any given point, but there's also an element of personal savings rates being so elevated now and right now they're about 14%, which is twice what they were going into the pandemic. So there are a lot of puts and takes and the year.
One day mentally the guide for next year really incorporates a view that as we get to towards maybe the middle of the year, we start to see that shifting of consumer behavior back to places that were a little muted as the pandemic hit so.
I wouldnt characterize as a pull back but just a changing world people deciding to use the wallet I think no matter what Michael people use of technology in their homes in particular has changed forever and you have more proliferation and youre going to have more people upgrading more products and more people trying to make different <unk>.
<unk> system I'll try to work together and their homes, which I think regardless of the puts and takes in any one given year is a good thing strategically for us over the longer term.
Okay and my follow on on ease on the comments around your expectation for your operating margin being above 5% or the level that you had laid out at your analyst meeting a couple of years ago, and obviously at that time, Inc.
Impossible to predict the e-commerce penetration and your business would be as high as it is today and this quickly.
And presumably now that the drug.
Relative to what you expected for your profitability back then.
Austin or the entirety be offset and even more.
Model, where you're going to operate on a more efficiently and store level.
Or and there are other factors that are driving this expectation that your profitability is going to be higher than what you expect with a couple of years ago. Thank you.
So I'm going to start with a bit of a strategic lens on that and and I think Matt can chime in a little bit on the profitability of the channels kind of question.
Net debt target in 2019, the good news is our strategic hypothesis was spot on the interesting part is we have made a massive amount of progress even faster. The customer has made a massive amount of progress. We knew digital penetration was going to grow pretty substantially what we didn't know is that it was going to double in the span of a year and so.
We need to take and we are taking the appropriate time to think about the longer term given these seismic changes that we've seen and there are lots of uncertainties, including the fact, we are still in the middle of a pandemic and so we're testing and piloting a number of different models that are going to balance this kind of urgency for change.
And with the need to learn how the customer is changing their behavior, but what we what we can see in front of US and then what we can see based on the plans we have in places and that we do think there is that room for operating rate expansion and Matt will talk a little bit about what we're seeing even and the profitability of the channels.
Yes, if you think about the channels, which are increasingly hard to kind of pull apart and <unk>.
You see elevated levels of online sales you see a lot more SG&A leverage because there's a lower fixed cost basis to that and so while the gross margins are tend to be lower because they don't know on <unk>.
<unk> provided expert service and support that only of our people can give but we do see it.
SG&A cost structure that is that is less and so our job is to actually how to.
Both of those channels together to provide the same level of expertise and support but also allow the support and convenience as they work together, but that fixed cost leverage as you get online and as important as you start to look further and the year and it was elevated levels of online mix.
Thank you very much and good luck.
Thank you.
And we can now take our next question from Peter Keith of Piper Sandler. Please go ahead.
Hi, Good morning, it's actually Bobby free and they're on for Peter Thanks for taking my question just wanted to ask about your full year gross margin guidance and expectations to be download that.
Was wondering if you can discuss some of the puts and takes there.
And a little bit after your 60.
And 60 basis points and declined this year and expectations for online next to moderate that.
Just wondering any detail there. Thank you.
Sure. So if you think about gross profit next year, what we said was it would be slightly down I think.
The biggest parts of that are our belief that like we said that there'll be a bit more promotional and competitive environment as we start to get into the latter half of Q1 going forward Theres also periods of time, where we had some our stores close and we did we were able to offer all of our services or installation delivery, there's a little bit of pressure there.
In addition, I think online mix being assumed at 40% versus 43%.
This last year is that a meaningful difference in terms of the impact of supply chain costs. So that's why we don't think supply chain costs fundamentally are much of a benefit as you start to move into next year.
Or assuming the same amount of sales between the fundamental between the two two years.
I also think within there you've got.
A little bit of.
Promotional favorability was offset by a little bit.
Category mix changes and that'll happen throughout the year. So finally and set assumptions on online mixed with stays pretty much the same.
Alright, Thanks, Mike appreciate that.
Separately quickly.
Turning on semiconductor shortages that have been on reported recently.
We just got the ore and this might be impacting product availability currently or perhaps in the coming quarters.
Yes, no it's Mike Mohan here and thanks for the question I think it was around and somebody conductor availability insured, which is clearly a lot of that and the news right now because need semiconductors and almost everything that's being made we feel pretty good because we have long term plans with our vendors upstream for finished goods, where they're coming from Asia or parts of the rest of the world.
And Theres sporadic shortages just based on demand peaks right now.
And our line of sight to income in inventory.
Feels good on where we're and I think there'll be some impacts and other industries, but it wouldn't be the expert to speak about it here.
Okay. Thank you appreciate and got it.
Thank you.
And we can now take our next question from Joe Feldman of Telsey Advisory Group. Please go ahead.
Hi, guys. Thanks for taking my question.
Yes.
On inventory and how we should think about inventories this year. It sounded like you know we're still.
There's still a little.
Tracy and some categories, where there was some lightness, but I was thinking.
As you do get back into stock and inventory was up you know.
Centre zone.
And this past quarter would seem like you and a better position.
Maybe you could just take us through the year on them.
Think about it like should we and the year on come through the year up a little bit on inventory down a little bit harder.
How do we think about.
Joe It's Mike I'll start and matter Corie can chime in we feel better about our inventory position now versus the last four calls we've had so I'll start with that because we finally have gotten back into better stock.
That said, we still have constraints and parts of our business that we don't think it will solve themselves and the first half of this year gaming is a good example, we have yet to put the new generation of beam and counsels and to our stores, we anticipate to do that soon but we haven't done that because there just hasnt been enough inventory to meet demand.
So those are some of the things that.
And the pandemic aside it would've likely being constrained and it's only more heightened based on people wanting to dramatically change that are at home experiences other categories like printing and been constrained and since this pandemic and there's some challenges and that industry at large getting back into a better inventory position I think about some of the bigger categories are on computing and home theater.
And we're going through some natural time transitioned there should be and our second theme.
Her transition and as an example, during a pandemic and I think our vendors are getting smarter about the timing of new model introductions and then what did you use for demand generation. So I can't give you bill window as to what our inventories look like 12 months from now.
We're going to be and better stock overall, but we still have a handful of constraints that we have to navigate through I think the one thing our teams and really do well and.
I know that you know this but we work so far on upstream with all of our partners with collaborative forecasting demand generation.
Yourself on models, which then actually help us give us hope our vendors the best forecast possible. So I always look at.
<unk> accuracy and our percent to fill and I feel really good about what I can see going forward and and the rest is based on consumer demand and I think Matt talked about Theres. Some things on the back half of this year that we have to plan for two different vectors on and on.
I know our teams will be ready.
Got it thanks, and then and if I can just follow up.
And that's separate topic with regard to digital.
And in the stores and fulfillment.
When you were talking about retraining and Reskilling.
Is that related to having.
The employees to do a better job of.
Fulfilling orders and shipping and doing things beyond me on you now.
Servicing the electronics support when people come in and that gives it more about the digital support then.
And then the in person support.
Thanks for the question, Joe, It's a little bit about everything and you just mentioned and bat and.
And so in other words, there are multiple ways, and which employees can and in many cases opt into gaining further certifications and skills and sometimes that looks like within the four walls of the store I might opt into garnering more skills and home theatre and computing I might opt into.
Garnering more skills around services, and therefore, I am more flexible throughout the store and some cases that might also mean I am willing to spend some of my time doing fulfillment work that day.
Moving on car side, and curbside excuse me orders or.
Packing inventory and the back on some of those ship from store locations and so.
And I may add those skills, which might add more hours and more flexibility and then there are some real digital experiences that we are leveraging our associates for I might opt into being able to answer calls from our national call Q, while I'm on my shelf, that's not that busy and I can pick up a customer's question and <unk>.
Our call or I might opt into being more of a and expert that's virtual that can help you with whatever your question is and a virtual connection through our App all of those are different ways, and which were re skilling and then you can imagine on top of that there might be flexibility to go work and our supply chain location or there might be flexibility and train myself into.
More of a technology job and be able to do that remotely and so and in all of those different vectors and we're actually starting to create training modules and create opportunities for our employees not just for us to them and flexibly, but for that and to flexibly opt into different roles and.
And different hours and a way that might meet their lives with a little bit more and more flexibility and and progressed our careers frankly.
And that's helpful and makes a lot of sense and.
Good luck this quarter. Thanks.
Thanks, Joe.
And Mike can now take our next question and Karen short vaccines. Please go ahead.
Hi, Thanks very much.
Actually I just wanted to talk a little bit about fiscal.
Fiscal 'twenty two in terms of operating margins with respect to that 5% target. So when I look at.
And the ranges that you provided I kind of back into a range of EBIT margins of four two to four 7% and.
And so I guess and the context of that 5% target remaining intact that does seem like a fairly at least on the LOE and.
Big leap to make to get back to the 5% target.
And I'm wondering if you could comment on little bit on that and you know correct me if I'm wrong in terms of the math on that range.
And then a follow up.
Sure I think for the full year, if we think about the topic, we use the top end of the range zero comp.
And we're likely our math would indicate a range, it's a little bit higher than that above 5%.
That's assuming a 3% ish sales, our SG&A increase and a slight moderation of decline and operating or gross profit rate. So.
On the top of another and should imply something that's a little north of five and I'll. Certainly is as you start to look towards the bottom of that range. We'll look at decisions that we need to make to Nick to see if we where we want to end the year from an operating rate perspective.
We do believe on a very strong position financially and we probably would resist making short term decisions to.
Overly manufacturer right when we know we need to invest for our future so but the the top end of our guidance should imply something north of 5%.
Okay, and then wondering just generally speaking.
I know you gave a lot of details on the number of employees could you maybe just talk a little bit about what you think the optimal full time versus part time mix was and as you said, obviously you skewed. Our you had you know I think a higher percent of full times, but not buy it not that much. So I'm wondering how are you thinking about that optimal mix with the 102.
<unk> thousand and mind.
Yeah, It's a little hard for me to say, what's optimal when we're still striking the balance between learning about what we think the right operating model for the future and where we are today and so.
So I don't I would hesitate.
Take the comment on what we think the optimal mixes I think what's important for US right now and we are trying to build in flexibility that will allow us to meet the customer wherever they are deciding to interact with us across both channels and.
And we'll bring a little less about exactly what the optimal mixes and instead really trying to figure out how best can we use that and play our space across all of the things that we need to do.
And therefore, our staff appropriately against that so optimal I don't think we know yet and given that we're still in the midst of a pandemic and we've got a lot of unknowns in front of us.
But we do feel pretty strongly that we are now set up and a better position to be able to flex with the changing customer dynamic.
Great. Thanks very much.
Thank you.
And with that I think that was our last question I want to thank everyone for joining us today and we look forward to updating you as we continue to progress against our strategies have a great day.
Yeah.
Ladies and gentlemen, this concludes today's call and thank you for your participation you may now disconnect.
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