Q2 2022 Best Buy Co Inc Earnings Call
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release, which is available on our website investors bestbuy 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 a 1995.
These statements may address the financial condition.
Initiatives growth plans investments and expected performance of the company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward looking statements. Please refer to the company's current earnings release and our most recent 10-K and subsequent 10 Qs for more information on these risks and uncertainties.
The company undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise. After the date of this call I will now turn the call over to Corey.
Good morning, everyone and thank you for joining US today, we are reporting record Q2 financial results of $11.8 billion in sales and non-GAAP diluted earnings per share of $2.98.
Comparable sales growth was 20% and our non-GAAP operating income growth was 40%. We are lapping an unusual quarter last year as our stores were limited to curbside service or in store appointments for roughly half the quarter. When we compare to two years ago. Our results are very strong compared to the second quarter of fiscal 'twenty.
Revenue was up 24% and our non-GAAP operating income is up 115%.
Clearly customer demand for technology products and services during the quarter remained very strong.
Customers continue to leverage technology to meet their needs and we provided solutions that help them work learn entertain cook and connect at home.
The demand was also bolstered by an overall strong consumer spending aided by government stimulus improving wages and high savings levels from.
From a merchandising perspective, we saw strong comparable sales growth in almost all categories. The biggest contributors to the sales growth in the quarter were home theater appliances computing mobile phones and services.
Product availability improved in the quarter and except for some pockets in appliances and home theater, we do not believe it materially limited our overall sales growth.
Demand planning and supply chain teams once again did an amazing job managing through the difficult and constantly evolving supply chain environment.
They work strategically to bring in as much inventory as possible during the quarter with actions like acquiring additional transportation pulling up product flow and adjusting store assortment based on availability there.
There will continue to be challenges, particularly as it relates to congested ports and transportation disruptions, but our teams have set us up for as strong and inventory position as possible as we move forward into the back half of the year.
As we think about the holiday period, we often have varying degrees of inventory and supply chain challenges and this year will be no different but we feel confident in our ability to serve our customers during the holiday.
The continued strong demand across retail resulted in an overall less promotional environment, which was a significant driver of our better than expected profitability in the quarter.
During the quarter, we provided customers multiple ways to interact with us depending on their needs preference and comfort similar to last quarter customers migrated back into stores to touch and feel products and to seek in person expertise and service at the same time, they continue to interact with us digitally at a.
Currently higher rate than pre pandemic as online sales were 32% of domestic revenues compared to 16% in Q2 of fiscal 'twenty.
Phone and chat volume also remained very high compared to pre pandemic and sales via these channels continued decline.
In addition of course, we are interacting with customers in their homes, making large product deliveries in selling solutions repairing products and providing sales consultations in fact overall, we are helping our customers with their technology needs in their homes, 20% more than we did two years ago in Q2 of <unk>.
20.
Through all of these interactions across all of these touch points, 98% of surveyed customers tell us they feel very safe, which we believe is still incredibly important at this stage in the pandemic.
I want to genuinely thank our store and in home teams for creating the safe environment for our customers and for continuing to provide exceptional service even in situations where customers resisted following safety guidelines and in some cases were disrespectful.
For customers purchasing online, we delivered product with speed and convenience online sales package delivery was not only much faster than last year. It was faster than two years ago.
Furthermore, we stack up extremely well versus our competition using a third party service, we analyzed competitor websites on a daily basis, and we consistently lead in the proportion of one day or less for public shipping time across a sample of higher volume Zip codes and higher demand items.
In addition, we leveraged our stores to drive fast and convenient fulfillment of online orders in Q2, we continued to see about 60% of our online revenue fulfilled by stores, including in store or curbside pickup ship from store or best buy employees, who are delivering product to customers out of more than 450.
<unk> of our stores.
The percent of online sales picked up by customers at our stores with 42% similar to last year's second quarter.
Clearly the landscape as it relates to the pandemic has been changing rapidly and we remain keenly focused on keeping our employees and customers safe.
We are continuing to encourage all employees to get Covid vaccinations by providing them with paid time off when they received the vaccine and providing them absence time to be used in the event. They develop side effects in June we launched an employee sweepstakes with more than $100000 in cash prizes to encourage our team members to get back.
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To show our appreciation for their hard work and ongoing efforts in the face of pandemic fatigue, we paid employee gratitude bonuses at the beginning of the quarter.
In summary, our team has delivered incredible results to all of our associates across the company I. Thank you for your customer obsession perseverance and ingenuity.
Of course, while we were driving these great Q2 results. We were also looking to the future.
During the quarter, we continued to rollout and run several tests and pilots as we determine the best path forward to become an even more customer centric digitally focused and efficient company.
We believe this is crucial to thriving in a new and different environment, where customers expect to seamlessly interact with physical and digital channels throughout the shopping journey as they seek inspiration research convenience and support.
Last year, we introduced a very important membership pilot called best buy data.
As a reminder, it includes unlimited Geek squad technical support on all of the technology in your home no matter, where or when you purchased it include.
Including $24 seven VIP access to dedicated phone and chat teams that are only available to members.
It also includes up to 24 months of product protection on most purchases from bestbuy free delivery and standard installation exclusive member pricing.
Our 60 day extended return window and free shipping of online orders.
All for $199 per year.
The offer is designed to give our customers the confidence that whatever their technology needs are we will be there to help it.
It Leverages, our unique strengths and what we can provide customers that no one else can.
The goal is to create a membership experience that customers will love, which in turn results in a higher customer lifetime value and drive the larger share of spend to best buy.
We are very excited about this membership offer and we are encouraged by the pilot results.
Membership acquisition has exceeded our initial forecast.
In addition data is showing that beta members interact more frequently and have a higher incremental spend than non members.
Given the breadth of the offer it is resonating well across all customer demographics and our members are skewing younger than our total tech support membership program.
In addition, our employees love telling customers about the program.
We plan to scale the program nationally in stores and online at the end of Q3 under the new name ASP by total Tac.
As part of the National rollout, we will be converting our $3.1 million existing total tech support members to the new program.
I want to stress that the goal of the program is for customers to find value in the benefits and use them often it is not designed to be a standalone margin driving service offerings, particularly in the near term in fact as Matt will discuss later a full rollout has a near term investment, which we are confident will be.
Justice side with incremental sales growth and long term customer value.
As it relates to our physical stores and operating model, we are continuing to pilot and test many approaches and formats spin.
Specifically, we are testing more experiential stores, how we can leverage our stores and facilities for more fulfillment purposes.
And how we can deliver customer experiences with a more flexible digitally supported an engaged workforce.
We are not going to outline all of our initiatives today, but I would like to provide a few updates and learnings.
We have begun implementing the pilot of our new holistic market approach in Charlotte.
As we mentioned last quarter. This pilot is designed to leverage all our assets in a portfolio strategy across stores fulfillment services and outlet lockers, our digital app and both in store and in home consultation labor.
We will be testing an array of different prototypes, including remodeling a number of stores to 15, 25, and 35000 square foot stores as well as launching a few new smaller 5000 square foot stores.
We expect the full rollout of the pilot to span a few quarters.
And several store Remodels are currently underway, including the transition of one store into a new type of outlet.
Our current 15 outlet stores focus mainly on large appliance and TV open box product with this new outlet pilot, we will have open box products from all categories. It will also serve as the hub and a new services repair hub and spoke model, we're testing as well as an auto tech Mega hub for our car T.
Tech installation.
Of course, the reason we are piloting and testing. So much is because we are trying some unique prototypes and we need the opportunity to learn and adjust before we roll more broadly for.
For example, in our Ford Minneapolis test stores, where we reduced the <unk> square footage to 15000 square feet to provide more space for fulfillment, we have been making adjustments based on customer and employee feedback. We've re flowed some of the layout added signage to help customers understand the changes we're testing an added assortment.
In areas like small appliances printing and accessories.
We will continue to evolve these test stores based on learnings and feedback.
As it relates to our Houston experiential 35000 square foot store pilot, we continue to receive positive feedback from customers and employees on store design and the way we are showcasing products.
In addition year to date this store generated higher revenue than control stores in the double digit percent range.
Another pilot that we are excited to launch pre holiday is our virtual store for this we are building out a physical store and one of our distribution centers that will have merchandising and products and will be staffed by dedicated associates, including vendor provided expert labor.
But it will have no physical customers.
Instead customers can interact with our experts via chat audio video and screen sharing depending on their preference and be able to see live demos displays and physical products. We are excited about the customer use cases. This provides for example, you could be on our dot com experience.
Click on a product you like and be connected via video to a blue shirt in the bestbuy virtual store and never leave your living room.
Or you could be standing in a store scan a barcode and be taken through year phone directly to this virtual store, where an associate can answer your question.
From a fulfillment perspective, our ship from store hubs, we piloted last year were very successful and we are continuing to iterate on the model.
As a reminder, while all stores will continue to ship online orders, we are driving efficiency and effectiveness by consolidating ship from store units and a limited number of stores across the country.
As we have evolved the model overall, we are using fewer stores than last year as hubs.
In addition, we have begun remodeling a subset of stores to deliver an even greater portion of the volume reducing the sales floor square footage and installing warehouse grade packaging station equipment and supplies.
These 13 locations should be rolled out by holiday and take on about 25% of the national ship from store volume.
As you would expect the various tests and pilots are intended to identify how our store portfolio should evolve from the role they serve to their look and feel.
We learn from these tests, we will develop plans that likely include a rollout of investments in more stores and markets.
We have also been evolving our labor model to meet our customers changing shopping behaviors for our employees, we are designing for more choice flexibility and career opportunity.
We continue to see momentum with our flexible workforce initiative, which is centered on store employees, becoming certified to gain expertise to perform roles outside of their primary job function.
At the end of July 80% of our associates were eligible to flex into different work zones, and 50% of associates have earned four or more jobs.
This allows our employees and us to schedule shifts more flexibly within the store and between channels like virtual sales chat phone remote support or employee product delivery.
And very soon we will be able to schedule associates between stores within a market.
This new way of working empowers employees to develop their careers by giving them opportunities to learn new skills broaden their experience and have more flexibility in their jobs.
They are equipped to confidently help customers in more ways and our data is showing us that once in place add skills. They tend to drive a higher customer NPS.
It also gives team members the ability to earn a different hourly wage depending on the job performed and the potential for working additional shifts that otherwise may not have been available in their primary job function.
We believe our flexible workforce initiatives can add to our ability to attract and retain our employees, particularly in this tight labor market.
And in addition to the training and flexibility we offer we have also invested significantly in compensation and benefits for our associates.
On top of breathing, our starting wage to $15 last year, we provide a wide array of competitive benefits across many dimensions, including tuition reimbursement.
Employee product discounts paid time off for part time associates backup childcare child tutor reimbursement mental health support and many others.
Overall, we are operating with a smaller field workforce than we were pre pandemic, which is very reflective of how the business model has changed as our online revenue has more than doubled from two years ago.
We feel like we are largely at the right number as it relates to the strategic evolution of our operating model. The demand we are seeing and the nature of our customer interactions.
What is most important right now is to continue to learn and iterate.
As you can imagine having a more flexible workforce is a very important component of our operating with a smaller workforce and technology is crucial to its success as well.
In fact technology is the underpinning to the success of our company strategy.
We need technology tools and capabilities to help us as we transform and evolve the way we operate.
This fact has been clearly reinforced by all of our pilots.
There are a myriad of technology projects in development, but here are just a few examples.
We will leverage the electronic sign labels in our stores to make it simpler and more seamless for customers to shop, especially in our stores with smaller shopping square footage specifically, we are adding messaging to the labels that mimics our dot com experience.
Other words customers will easily be able to see if the product is in stock in that store or in another store nearby and when it could be delivered and installed.
We are also piloting mobile app checkout, so that customers, particularly grab and go customers can quickly check out without needing to interact with an associate.
For our virtual store to really come to life seamlessly for our customers. We are building out a new digital communication platform that will combine multiple systems into one experience for call chat video and screen sharing this.
Just real quickly and seamlessly put our customers in control of how and when they want to be served across these vehicles.
Of course, we are also continuing to make significant investments in fundamental technology capabilities like data and analytics and broader cloud migration in order to drive scale efficiency and effectiveness.
Earlier this month fast company named Us to its 2021 list of the 100 best workplaces for innovators. This is our first time on the list, which recognizes companies that created cultures of innovation. Despite the challenges posed by the pandemic.
During the quarter, we continued to expand our assortment in newer categories, where we can leverage our ability to commercialize new technology. For example, in the past year across fitness and Wearables wellness and health, we have more than doubled our vendor partners and grew our SKU count by more than 150%.
These include new products important to our health strategy, specifically those focused on conditional health management that help customers track blood glucose levels keep tabs on heart data manage weight or even help identify allergens in foods.
Are there more we are working with hospitals and care centers to curate health products for their patients on Cobranded landing pages.
Because customers are looking to us to complete their solutions. We are also expanding to additional adjacent categories.
For example, we have expanded our assortment in categories like outdoor living as more and more consumers look to make over or upgrade their outdoor spaces.
This includes products like patio furniture, grills fire pits and electric mowers to name a few.
Many of these products are available online only as part of our digital first strategy.
Altogether, they are a small part of our overall business, but growing fast as we continue to add to the assortment.
In the back half of the year, we expect to add more products in the fitness beauty sleep pain management vision hearing and electric transportation categories.
Before I conclude my prepared remarks, I want to update you on our ongoing commitment to inclusion and diversity and our community.
During the second quarter, we announced our commitment to spend at least $1.2 billion with bypass and diverse businesses by 2025.
This pledge includes plans to increase all forms of spending with black indigenous and people of color businesses from nearly every corner of the company from how we bring goods and services to stores to where and how we advertise.
The goal is to create a stronger community of diverse suppliers and to help increase bipap representation in the tech industry.
In addition earlier this month, we announced we are investing up to $10 million with Brown venture group a venture capital firm that focuses exclusively on black Latino and indigenous technology startups.
All of this investment is to help break down the systemic barriers often faced by bypass entrepreneurs, including lack of access to funding and empowering the next tech generation.
To make a difference in our local communities. We are passionate about building out our team Tech Center program.
These provide teens in disinvested communities access to the training tools and mentorship needed to succeed in post secondary opportunities and careers.
We are also building a diverse talent pipeline for jobs of the future.
During the second quarter, we launched our first ever opportunity for customers to donate to the best buy foundation in support of Teen Tech centers.
I mean July 11th and September 11th customers can choose to donate when they make a purchase including at a best buy store best buy dot com or the best by Apple.
We also just published our 16th annual ESG report, which outlines how we're working across the company to have a positive impact on our planet employees customers and communities.
In terms of the environment. This past year, we exceeded our goal to reduce carbon emissions in our operations by 60% through investments in renewable energy and operational improvements we are on track to reduce our carbon emissions, 75% by 2030, and we signed the climate pledge committee to be carbon neutral by 2040, a decade faster.
Or that our previous goal of 2015.
We also have a robust trade in program that brings a useful second like to products that might otherwise sit idle in someone's home or end up in a landfill.
For products that need to be recycled we continue to operate the most comprehensive consumer electronics and appliances take back program in the U S. Taking back more than 2 billion pounds since 2009.
Available on our corporate website, our ESG report also outlines the ways, we support our employees and communities.
In summary, we have delivered a remarkable first half against a volatile backdrop I.
I am so proud of the execution of our teams as they continue to safely meet the needs of our customers in ways that I would argue no one else can.
Based on the strength of the business and our expectations for continued customer demand, we are raising our sales outlook for the back half.
Of course, the environment as it relates to the pandemic is still rapidly evolving and there is uncertainty as to the associated impact on many important factors, including consumer shopping behavior share of wallet on services like dining and travel returned to office and returned to school. Furthermore, we continue to believe the holiday season will.
Unique against that backdrop.
That being said our teams have proven they can and will continue to proactively navigate these factors and they remain ready to respond and adjust the business as the environment potentially changes.
Over the longer term, we are fundamentally in a stronger position than we expected to be in just two years ago.
There has been a dramatic and structural increase in the need for technology and we now serve a much larger installed base of consumer electronics with customers, who have an elevated appetite to upgrade due to constant technology innovation and needs that reflect permanent life changes like hybrid work and streaming entertainment content.
This is only underscored by the recent Senate passage of the infrastructure, Bill, which will provide even more access to broadband and give us the opportunity to serve the needs of currently underserved communities.
Our unique omnichannel assets, including our ability to inspire what is possible across the breadth of CE products as well as our ability to keep it all working together the way customers want truly differentiate us going forward in this new landscape.
Now I would like to turn the call over to Matt for details on our results and insights on our outlook for the next quarter and the full year.
Good morning, everyone. We are once again reporting very strong financial results as the demand for the products and services. We provide remained high during the quarter.
On enterprise revenue of $11.8 billion, we delivered non-GAAP diluted earnings per share of $2.98.
An increase of 74% versus last year.
Our non-GAAP operating income rate was six 9% increased 100 basis points.
This rate expansion was driven by an 80 basis point improvement in our gross profit rate.
Despite lapping actions to reduce our SG&A spend last year, we were able to leverage our SG&A 20 basis points on the higher sales volume in.
In addition, our lower effective tax rate at a 47 favorable year over year impact on our non-GAAP diluted EPS.
As a reminder, in Q2 of last year, our stores were closed the customer traffic for about half the quarter.
While we were helping customers through our curbside service and in store appointments.
We also made several cost reduction decisions last year to align with the lower sales and channel trends, we were seeing and expecting to continue at that point.
As Corie mentioned when comparing our results against two years ago, where the second quarter of our fiscal 'twenty total revenue grew more than 24%.
So our domestic store channel revenue was higher than two years ago. Despite almost 50 fewer stores and online revenue growth of almost 150% in that timeframe.
As a result of the higher revenue and adjusting our business model to a new customer shopping behavior. Our enterprise non-GAAP operating income rate was 290 basis points higher this quarter than the comparable quarter from two years ago.
Let me now share a few comments on how our Q2 performance compared to the outlook, we shared on our last call.
Enterprise comparable sales growth of 20% was above our estimate of approximately 17% or.
Our non-GAAP gross profit rate improved 80 basis points versus last year compared to our outlook of approximately flat.
As Cory stated this better than expected gross profit rate performance was primarily driven by a more favorable promotional environment.
Lastly, non-GAAP SG&A dollars grew 18% compared to last year, which was slightly favorable to our outlook of approximately 20% growth.
Let me now share more details specific to our second quarter.
Yeah.
In our domestic segment revenue for the quarter increased 21% to $11 billion.
Our comparable sales growth was also 21% for the quarter.
In recent quarters, our revenue growth has been lower than our comparable sales growth due to the loss of revenue from stores that were permanent impact was partially offset by revenue growth from stores that were closed for remodel.
As a result of last year's unrest and fall outside of our comparable sales calculation.
As a reminder, our comparable sales calculation includes revenue from all stores that were temporarily closed or operating in our curbside only operating model during the period.
This year, we expect to close approximately 30 U S doors compared to roughly 20 closures in each of the last two years.
Consistent with previous practice, we will make every effort to retain the employees from the closing locations.
From a monthly cadence perspective.
The strongest sales growth was in may.
As expected July as monthly comp was the lowest of the quarter as we lap the reopening of our stores in June of last year.
Turning now to gross profit the domestic non-GAAP gross profit rate increased 90 basis points to 23, 7%.
The higher gross profit rate was driven by improved product margin rates rate leveraged from our supply chain costs and higher profit sharing revenue from our private label and co branded credit card arrangements.
Overall, the promotional mix and sales discounts for the full quarter were once again lower than the levels, we experienced last year.
However, our comparisons are now beginning to lap periods of very low promotional activity last year.
In July the overall promotional activity increased versus last year, but was still below the levels, we experienced during fiscal 'twenty.
Moving next SG&A domestic.
Domestic non-GAAP SG&A increased 19% compared to last year and decreased 30 basis points as a percentage of revenue.
As expected the largest drivers of the expense increase versus last year were first higher incentive compensation for corporate and field employees of approximately $100 million, which was partially due to the suspension of our short term incentive program last year.
Second higher store payroll costs have changed.
Changes in our operating model last year.
Third the impact of lapping our COVID-19 related impacts last year that resulted in higher cost this year for advertising expense medical claims expense.
Our four one K company match.
Lastly, we increased investments this year in support of our technology initiatives.
When comparing to two years ago domestic non-GAAP SG&A increased $94 million and decreased 310 basis points as a percentage of revenue.
The largest drivers of the increase versus fiscal 'twenty were higher incentive compensation technology investments and increased variable costs due to the higher sales volume.
Partially offsetting these items was lower store payroll expense.
On a non-GAAP basis, the effective tax rate was eight 4% versus 23% last year.
The lower Q2 fiscal 'twenty two rate was primarily due to a multi jurisdiction multi year noncash benefit from the resolution of certain discrete tax matters.
Moving to the balance sheet.
We ended the quarter with $4.3 billion in cash at.
At the end of Q2, our inventory balance was 55% higher than last year's comparable period, usually low inventory balance.
The health of our inventory remains.
Let me share more color on our outlook for the second half of fiscal 'twenty, two and our updated assumptions.
As we entered the year we expected.
As we lap the strong comp growth.
Q3, and Q4 of fiscal <unk>.
So in which customers would resume.
Or accelerated spend in areas that were slow.
Hello, and dining out.
Although we are seeing some shifts in consumer spending occur.
Yeah.
Has been less pronounced than we previously anticipated.
We now expect our comparable sales growth to be down 3% to flat to last year in the back half.
Which is a signal.
<unk> from the high single digit decline, we expected entering the year.
Like other companies, we continue to monitor the evolving impacts will depend on mix.
Apply chain pressures driven by global demand, we continue to be confident in our ability to navigate the ever changing environment.
For the second half of the year, we expect non-GAAP gross profit rate to be down approximately 30 basis points to last year.
Which compares to 60 basis points of expansion in the first half of the year.
The primary drivers of the sequential decrease include the impact of rolling out total tuck ins.
Increased promotional activity and less leverage on our supply chain costs than we experienced in the first half of this year.
Gross the gross profit rate pressure of our new membership offering primarily relates to the incremental customer benefits and the associated cost compared to our previous total tech support offer.
This.
This pressure is expected to have a larger impact to our fourth quarter than in the third quarter.
Now I will provide some color specific to our outlook for the third quarter.
We expect comparable sales to be in the range of down 3% to down 1% to last year.
Which is on top of our 23% comparable sales growth in the third quarter of last year.
Our revenue growth to start this quarter has been approximately flat to last year for the first three weeks.
From a gross profit rate perspective, we're planning for a non-GAAP rate was approximately 30 basis points below last year's rate.
From a non-GAAP SG&A standpoint, we're planning dollars to be approximately flat compared to last year.
As we expect the lapping of last years too.
As we expect the lapping of last year's $40 million donation to the best buy foundation and lower incentive compensation to be largely offset by increased technology investments and higher advertising expense.
Turning to our full year outlook, we expect the following enterprise revenue in the range of $51 billion to $52 billion.
Comparable sales growth of 9% to 11%.
On a non-GAAP gross profit rate slightly higher than last year.
For SG&A, we expect growth of approximately 9%, which compares to the prior outlook of 6% to 7% growth.
The increased expense is primarily due to higher store payroll costs and other variable items associated with the higher sales outlook.
In addition, we expect the incentive compensation for the full year to increase by approximately $275 million or at the high end of our previously provided range.
We expect our non-GAAP effective tax rate to be approximately 20%.
We expect capital expenditures to be in the range of $800 million to $850 million and lastly, we expect to spend at least $2 five to successfully adapted to various changes to our operating model and a dramatic shifts in customer shopping behavior.
We have seen a surge in reliance and demand for technology as our customers also adapt to their changing needs.
The result is that we now expect our sales will surpass $51 billion. This year that is more than $7 billion of increased sales over a two year period.
Thank you to all our employees for driving these amazing results I will now turn the call over to the operator for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one.
One star one SKU for a question.
Well move on to our first question.
From Steven Forbes of Guggenheim Securities. Please go ahead. Your line is now.
Good morning.
One of the focus on the pricing and promotional environment together.
The first.
Part right is if we think about the price increases that are being passed through your COVID-19 consumer.
You sort of provide some context around the magnitude of them and how the industry as a whole is sort of addressing means right.
As everyone sort of passing them through where do you see them.
Potential increases in promotional activity.
And then and then the follow up to that is as we think about the holiday period and.
Last year's write other competitors utilizing the category to drive traffic during the holiday period.
Talk about the expectation right for holiday as a whole as it relates to the frequency and depth of promotional activity. Thank you.
Why don't I start and then Corie can jump in I think there's a few questions in there overall.
We're seeing.
Was the first half of this year was less promotional.
Similar to the trends we experienced last year during the pandemic as we as I said in my comments, we are starting to see us lap those periods of very low promotional promotional holiday in July we're actually seeing the mix of items on promotion and a discount associated promotions are actually higher than last year. So we're.
Starting to see a bit more returned to a promotional level that's.
More than last year, but still higher than still less promotional than two years ago, and so we do see that increasing.
And over that period of time, where promotions have been lower.
<unk> had been essentially paying higher prices because of the cost we havent been promoting as much.
That's certainly part of the part of the aspect.
Also within pricing.
We certainly.
We are seeing a little bit of inflation as well as you look at the prices of goods and in some cases those are being passed onto consumers.
So as an example, where there has been increases to the cost of those goods, which the industry is generally passing on.
But overall inflation hasn't been a bigger part of our ASP increases its been more on the.
The promotion Ality versus inflation has been relatively small impact in the first half it might be a little bit more in the back half, but I wouldn't expect inflation as it relates to pricing to be as significant.
And I would just simply underscore our price.
Specifically to that part of your question.
Mark we would expect the back half to be more promotional and Matt alluded to July being a little bit of that lead into what we're seeing.
And we would expect the products that we sell to the price that people really want for holiday and therefore that environment to heat up.
Correspondingly and so that is part of what's embedded in the guide going forward.
Thank you best of luck.
Thank you.
Thank you.
Yeah.
We will now move onto our next question is from Peter Keith of Piper Sandler. Please go ahead. Your line is open.
Hey, good morning, everyone. Thanks, so much great results here I.
I was hoping you could flesh out a little more on the membership program. It seems in a restaurant with the gross margin pressure you're experiencing is that something that will be ongoing or is it more of an annualized effect has been.
Sure I'll start and then Matt can talk a little bit about.
Cancel ramifications.
So what was important understanding how can we build on some of what we're learning in total tech support in terms of what our customers love.
But add on to that what we think will continue to provide them value over time like many membership programs ours.
<unk> is continuing to evolve based on what.
What we are learning distinctly from our customers and so we started testing data actually just at the very beginning of this fiscal year and as we said in the prepared remarks.
Remarks, we're definitely seeing uptake that is greater than both what we expect to have greater than what we were seeing in total tech support and I think it's this combination of features that we talked about in the prepared remarks that are making our customers come to us more frequently and like we also said spend a bit more each time that they are coming to <unk>.
See us because you have this combination it keeps customers very sticky to the best buy brands and so this is really an evolution of what we have learned in total tech support started testing the very beginning of this year and then we plan to actually rollout towards the end of Q3. So it will be in place like Matt said and have a bigger impact for Q4, but the key for us is that.
We expect the membership to grow faster than what we saw in TTS and we've seen that play out in the pilot and we're going to keep iterating on the offers frankly, depending on what it is that customers really value and what it is that keeps them loving our brand and very loyal to the brand I'll, let Matt talk a little bit about essentially as you would imagine the total tech offer is.
Far more inclusive to opt to benefits to our customers and so with that we're seeing more cost.
Costs associated with total Tech has just has more enhanced benefits than what we had offer and teachers med is essentially driving.
The gross margin profit grow gross margin impact in the back half of the back half of this year. The intense of total tech is not to actually own and therefore leverage more sales into the future. So the short term impact certainly is going to be a gross profit rate impact as you look forward the intent.
Not to be.
Sales and create more leverage on our bottom line in the future and that's that's kind of the royalty, but they do it.
The enhancement of its do come with more cost, but we believe that will keep people stickier and coming back and increase our <unk>.
Sure well with them.
Okay. It sounds great. Thanks for the feedback.
Okay.
Thank you.
Well now move onto our next question from Michael Lasser of UBS. Please go ahead. Your line is open.
Good morning, Thanks, a lot for taking my question she's guidance.
The expectations are.
Your comps to be flat down in the second half.
This year last year.
Prudent we assume more like downside will be get done, but the difference being the.
Consumers have yet to really see you.
Wally.
The categories that you expected.
This reflects some permanent change in behavior.
Sure.
It's going to happen.
Year.
More like a 2022.
You also did the communication how you factored in any sort of composition of your inventory in the back half meaning.
Well.
Overall.
But the guidance.
Okay.
On the wallet shift question.
We noted in the prepared.
That shift happened slower than what we thought and it's less than a shift its actually Ben.
For a while.
We're seeing growth in both sides and as Matt said.
Pandemic has kind of.
Redoubled its efforts we've seen it.
Shifting away a little bit from some of the experiences that we've just seen this growth continue honestly in both experiences and on the retail side.
We are pragmatic and we've said in the prepared remarks, we believe at some point that will that shift will continue to happen I think it is being pushed out of it but importantly, there are also systemic changes that have happened in the way that all of US live right. If you think about something like hybrid work models. That's not just something that's going to happen in the back half or in a quarter that is likely.
A new way of working going forward or streaming in the amount of streaming content. That's not just in the moment change that is a change in how people will consume content going forward and so I think honestly, we have a little bit of.
But both sides here you have real systemic changes that have happened in a way that we live and there is I think that a push out and people really shifting hard that spending to experiences and then part of that.
Helping buoy this demand.
And across both experiences and.
Our retail.
Yeah, and I'll, just add a little bit Corie did a great job of explaining the consumer side of that I think overall as you talked about we are now expecting flat to down 3% in the back half.
Better than we had expected at the end of <unk>.
For the last quarter, which was more closer to down approximately 8%.
I think one of the one of the things I would add to that situation is inventory we feel like we're in a good spot as we look to the back half.
After this year I think you asked about inventory we.
We are still seeing pockets of inventory, but.
Quite honestly, we're at a really healthy strong position and are preparing ourselves very very very well for the holiday season, So that clearly adds to our optimism for the back half as well there are still a lot of uncertainties as you look at it but we will update people as we go.
And my follow up question is on on the promotional environment gross margin.
You mentioned that July.
Most of them higher than they were in 2020, but still.
Down.
They were in 2019, how have you factored in your gross margin expectation for the next couple of quarters.
Functional environment can be would you be.
Hi.
<unk> 2019, and under what conditions could you see some of the other players in the.
More promotional than they were in 2019.
Smoking.
Great.
Right.
Yeah, I think overall, we're always going to be very aware of what our competitors are doing in the back half, but it's back to school or holiday season. So we will always be prepared to adjust as appropriately. We are very thoughtful about how we compete and where we compete in being.
Thoughtful managers of the P&L, if you will and what we experienced last year our fiscal 'twenty.
'twenty, one but still.
Less promotional than we saw in fiscal 'twenty, starting right now again, we'll look at that and manage it as it as it comes in as we see the holiday unfolds, a little bit, but because we were fundamentally always be competitive, but I think generally will be more promotional than last year, probably less promotional than two years ago.
Thank you very much and good luck.
Thank you.
Sure from Karen short of Barclays.
Please go ahead your line is open.
Hi, Thanks very much.
Couple of questions to clarify first of all on the gross margin.
So it's fair to say that with respect to the rollout of FY <unk>.
It'll tax that will pressure gross margin.
Through one Q3 <unk> of next year and that's just a clarification and then my bigger picture question with when you think about the overall.
Were all higher installed base of consumer electronics pandemic began wondering if you could give a little color on how you see actually see the acceleration in the innovation cycle playing out.
Meaning obviously, we will have shorter and shorter lifecycle, leading to needs to upgrade more frequently but I'm wondering if you could just contextualize that a little bit.
Thanks for the question Karen Yeah, I'll start and then Corie can jump in on the on the last part of the question.
We're not ready to guide next year, yet, but certainly we are expecting total tech to pressure Q3 of this year in Q4 of this year as we roll it out as you can appreciate.
Still trying to understand usage at our rollout level and so it's a little early for us to talk about where how long that.
Pressure will exist and what line of the P&L as I said the goal is for it not to actually a little bit.
The long term and increase or.
Improve our experiences increased increase that wallet share so.
It's a bit early to tell how that impacts next year below.
Favorite question, we definitely are seeing more penetration of consumer electronics and in many cases, it's because people have consumer use cases in their lives.
Great and a hybrid work model I might have one set up at home I might have one set up at work I might even have one set up for on the go and so you've seen this deeper penetration than ever into People's homes and lives. What's interesting about that is what you hit on in terms of innovation I mean, obviously, you've got some of the.
The world's largest companies.
That have both benefited from that deeper penetration, but also of course are going to continue to innovate in a way that will inspire customers to replace and we're definitely seeing to your point those replacement cycles condensing down as new attributes are coming online that are really useful to people I mean, if you think about the evolution of just cameras in.
Peter has over the last year because so many people are using video now you've got cameras that track you even in tablets and so theres just going to be that this constant drive to be the next new interesting features and attributes that you add to products and really what's fascinating is based on survey data that we're looking at right now intent to purchase.
Still remains very high in the next 12 month window, which to US says you've got people who already are trying to think about what might be that next product either add on or upgrade that's going to help me live through maybe another year of on and off at home schooling or another extended period of working from home and so while these are really do.
<unk> numbers to get our arms around in terms of upgrade frequency. We are for sure. We're seeing a customer that more and more often is looking for those new attributes and then importantly vendor partners, who are really working hard to create that next suite of solutions that will kind of solve what we just talked about as being really fundamental structural changes.
And how we're living our lives.
Great. Thanks, very much for the color and great quarter.
Okay.
Thank you.
Well now move on to our next question from Brian Thomas of Keybanc Capital markets. Please go ahead. Your line is open.
Hi, good morning, great quarter.
I was hoping you can talk a little bit more about the outlook for comps as you think about categories.
<unk> very strong results on a one and two year basis across the board.
With comps, having slowed a bit in the guidance or results to be declining.
Declining in the quarters ahead here how are you thinking about the categories that are going to be strongest with me guys. Thank you.
Yes, I think I think there's a.
A lot of category there will continue to see.
Opportunities in growth in the back half of the year, obviously there is.
<unk> could be an opportunity as you look at the the last six months of this year, depending upon the levels of inventory that we receive appliances has been a category both large and small have been growing for years.
At a time, so we just see more opportunities there are clearly a home theater has opportunities as it always does in the back end and the back half of the year, especially with the holiday season. So those are some of the bigger ones I'd say computing might be an area, where it might be a little it might be slowing based on that.
Immense demand that it's had over the last several years going back, but there are a number of categories that will continue to grow I think you'd likely also have some new category and new product introductions, both the new categories that we talked about that we're expanding into <unk>.
While not as big definitely provide some growth opportunity as well as likely some new product launches here in the back half that always stimulate back to the question about constant innovation that always stimulate a little bit of demand as well.
Great and Cory if I could follow up with a longer term question about health care I was wondering if you could just give us an update on how optimistic you are feeling about that growth initiative going forward. You did mentioned partnerships with hospitals and care centers that you're working on but how are you feeling today versus.
The analyst day in a couple of years now in terms of the growth opportunity in healthcare.
Yeah. So just as a reminder, there are three main aspects to our health care strategy. The first is the consumer health category, we talked a lot about that today, which is how you monitor chronic conditions, such as diabetes or heart disease, and expanding our assortment of health care products in the way that only we can win.
Commercializing new technology, the second areas active aging, which is all about emergency response device based tools that can help those who wish to live independently in their homes.
And that builds on some of the acquisitions that we've already seen and then the third which is a little bit more Nathan as virtual care and that includes digital health carrying center services that can connect patients and physicians to enable virtual care and remote patient monitoring that was the most maisons and that one will take the longest to develop on the first two we remain really bullish and you can.
You can hear even in our prepared remarks, the amount of devices that are proliferating right now to help people manage their own care is absolutely incredible and so on the consumer side, we feel really strong as well as the active aging side, where we're starting to see that business rebound, especially as we're starting to see more people come back into our stores and I think the appetite.
As you think about virtual care, especially given the last 18 months that we've all gone through and that ability to not always rely on an in person hospital visit but in fed being able to monitor some of your vitals.
Thank you know obviously it doesn't even greater use case now than there was 18 months ago. So when I put all of that together I think broadly we remain really optimistic about how the future of health care can be changed through technology and the role that we can play in that.
Really helpful. Thank you so much.
Thank you.
We will now move on to our next question from Scott Moskin of <unk> Capital. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions I had two and one was just trying to get my arms, a little bit better around that fourth quarter.
What it might look like from an inventory perspective from a margin perspective.
From an inflation perspective, it just seems in the fourth quarter is always a challenge I was wondering if you could give us a little bit more maybe what youre thinking there.
And then I had a longer term question as well.
Short term.
Yeah. Thanks, Scott I think I'll start and Cory it might be a jump in the last part there I think overall for the Q4 we.
We're very confident that we're going to have inventory to meet and support the demands of our customers. There's always a level of constrained inventory when you get into Q4.
We are still seeing pockets of constraint now we are in a very healthy inventory position clearly we'd like to have more in certain areas, but we have a high degree as we've talked about transferability between categories and within the category assortment to meet customers' demands. So we're feeling good there I think overall from a gross profit.
Respect from a profit perspective, one of the we did talk about how we expect to see gross profit rate pressure in Q4.
The total tech is certainly the bigger part of that pressure.
We'll see probably more.
We've returned to more promotion ality compared to last year, but again overall compared to two years ago. It should be less but again, we'll watch we'll watch and see where it goes and adjust accordingly.
Terrific I appreciate the color and then my second question is would you guys talked about with the holistic market approach down in Charlotte again, just looking for a little bit maybe a little bit more detail, where you guys can be re modeling all the stores how many stores do you have down there.
Will it be complete just any more details around that that sounds very exciting.
Yes, I am excited about what we're working on in Charlotte, because I think it uniquely leverages all of our assets across both our physical assets our stores.
And for the most part we are touching every single store there will be a number of remodels, but if not every single one.
But it also leverages, our unique people assets, our consultants and designers and advisers in our stores and leverage them across not just the conventional store footprint, but also in places like an outlet or in places like in auto task Mega hub, which might have eight or 10 auto base, where you can work on all the cars together as an example.
We said in the call I think it's going to take a couple of quarters structural everything out in the market and then obviously there is still our operating model changes that go with that as we learn how to more flexibly operate all of these models, but the goal for US is balancing that this isn't just about like quantity of stores. This is about what you want each of your physical footprint to do for you.
And then the operating model and the people flexibly working around that physical footprint in a way that uniquely provides customers both that inspiration and support that we offer that really no one else can and so I think this is our very best foot forward not just on one concept about trying to put all the concepts together and say if I want to serve a market.
How may I help a customer navigate different bestbuy experiences and also help our employees work more flexibly across all those experiences.
Perfect. Thanks.
Yes.
Oh I was going to say these guys have incredible job given what's been thrown out here. So.
Nice work.
Thank you very much that means a lot.
So I just want to close by saying Thank you again to all of our amazing associates and thank you all so much for joining US today, we look forward to updating you on our results and our progress during our next call coming up in November have a great day.
Yeah.
[music].
Yeah.