Q1 2023 Best Buy Co Inc Earnings Call
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.
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.
I will now turn the call over to Corey.
Everyone and thank you for joining us I am proud of our team's strong execution and focus on providing amazing service for our customers throughout the quarter. They navigated the uncertain macro environment and drove higher customer satisfaction scores, while keeping energy and excitement going around the initiatives that we believe will drive longer term.
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We grew our total tech membership increased momentum in our health business launched new product categories and reached our fastest ever Q1 average online sales delivery speed.
At our Investor update in March we said, we expected our fiscal 'twenty three financial results to look different as we all lap stimulus and other government support our industry cycles. The last two years of unusually strong demand and we leverage our position of strength to continue to invest in our future. In addition, we said we expected promotional.
To increase and supply chain expenses to be a pressure as such we guided our annual comparable sales to decline, 1% to 4% and our non-GAAP operating income rate declined 60 basis points to approximately five 4%.
Therefore, the drivers of our Q1 financial results were largely as expected macro conditions worsened since we provided our guidance in early March including higher inflation and the war in Ukraine, which resulted in our sales being slightly lower than our expectations and supply chain costs, a little higher than we planned our investment in total tech at APA.
Proximately 100 basis points of gross margin pressure was in line with our expectations and revenue from our credit card profit share was higher than anticipated.
Overall, I am proud of our team's ability to develop and execute plans to adapt to the changing environment over the past two years and to the more recent macroeconomic conditions are.
Our revenue and profitability remained much stronger than they were pre pandemic Q1 revenue of $10 $6 billion is $1 5 billion or 16% higher than Q1 of pre pandemic fiscal 'twenty.
And while our non-GAAP operating income rate is currently being impacted by our investments. It is still 80 basis points higher than fiscal 'twenty, even with those investments and supply chain pressures.
Our enterprise comparable sales declined 8% as we lapped, particularly strong comparable sales last year, the 37% comp sales growth in Q1 of last year was driven by the timing of government stimulus payments lapping a quarter during which our stores were closed early in the pandemic and the heightened demand for stay at home focused purchases.
From a category standpoint, the biggest contributors to the comp sales decline were computing and home theater, although down from last year's strong sales compared to Q1 of fiscal 'twenty, our computing revenue has grown more than 30%.
Our domestic appliance business, which has grown every quarter, except for one for more than 10 years delivered comparable sales growth of 3% on top of 67% growth last year.
We aspire to help customers with all of their technology needs in the most seamlessly possible across all touch points and we are encouraged by the improvements in our customer net promoter scores.
We have been leveraging our omnichannel strength to serve and support our customers as their shopping behavior and expectations have evolved significantly over the past two years.
While customers have returned to physical stores to see and touch products and get advice, our digital engagement with customers remains very high.
Our online sales as a percentage of domestic sales are 31% still twice as high as pre pandemic levels.
And revenue from virtual phone and chat interactions continues to increase rapidly. Additionally.
Additionally, we are expanding our engagement with customers in their homes as in home consultations and in home installations are up significantly.
During the quarter, we saw higher NPS overall, and we saw our highest ever NPS from in store purchasers and in store services.
I would like to take a moment to expand on the topic of inflation important in the current environment.
Like other companies, we are seeing cost inflation in areas, such as labor marketing and supply chain. However, this cost inflation was largely in line with our expectations and benefited from planning and execution over the previous two years.
As it relates to product pricing, we have seen an increase in our average selling prices over the past two years due to a number of factors first our product sales mix has changed as customers have mixed into premium products at higher price points.
This has been happening for years and accelerated during the pandemic. Additionally, we have driven material growth in appliances, which carry higher asps and have become a larger part of our mix.
Second there was overall lower promotional and markdown activity during much of the pandemic due to the shortage of product to meet demand.
Third our vendors are absorbing higher transportation and component costs and some of that has led to higher cost of goods sold for us in many cases, we have pass through this higher cost of goods sold in the form of higher prices to customers.
Importantly, and fundamentally we aim to be competitive in our pricing we have seen that pick up in the promotional environment. As we have consistently noted starting in July of last year as we entered fiscal 'twenty three we expected the promotional environment to create margin pressure in Q1 and throughout the year.
In Q1, we did experience a more promotional environment for many of our products when compared to last year and some products were even more promotional than we expected coming into the quarter and were similar to pre pandemic levels.
Turning back to our Q1 results, our ending inventory was up 9% compared to last year and essentially in line with the growth of our revenue since fiscal 'twenty. Our teams did an amazing job actively managing inventory levels as the quarter progressed in this evolving supply and demand environment.
<unk> of inventory constraints still exist, but are currently isolated to certain products and vendors overall, our inventory remains healthy.
Even though inventory availability and CE is much better than it has been for much of the pandemic. The supply chain continues to be challenging with ongoing transportation disruptions and higher costs, including containers labor and fuel.
We are of course, not immune to the supply chain challenges in the world today, and we are seeing some impacts on our business. We have invested in many aspects of our supply chain over the last several years in ways that have helped us navigate the environment and mitigate the impacts.
We've employed a portfolio approach as it relates to carriers transportation partners and parcel delivery partners and we have built deep relationships across our supply chain, including port carriers and deconsolidation operations.
In addition, we strategically leveraged the use of both rail and over the road transportation modes to move product. All of this has helped us to drive capacity avoid large scale disruption and mitigate cost increases importantly, our contractual relationships have allowed us to limit our exposure to the more turbulent spot market.
The strong relationships, we have cultivated with our vendors have also been crucial to our navigation of the supply chain environment.
Looking closely with our vendors, we have a great deal of visibility into and can influence the status of product in the supply chain process.
Additionally, we actually handled transportation for many of our vendors, meaning we take control in Asia or Mexico.
And we have full visibility and control of the inventory movement and cost.
We have invested in our distribution center network, effectively bringing product closer to customers and implementing technology solutions that increase productivity and speed to customer.
We have also invested in our store based fulfillment, including our ship from store customer fulfillment centers and implemented an effective employee delivery system. These investments have allowed us to make dramatic improvements in speed up delivery to our customers even with the significant increase in volume in the past two plus years.
In addition, we have many options for our customers to pick up their products themselves through in store pickup curbside pickup lockers and alternate pickup locations.
Customers clearly appreciate the convenience as the percentage of online sales picked up in stores has remained relatively consistent over the past several years at approximately 40% even with the incredible improvements in shipping time.
As it relates to ESG, we remain encouraged by the recent recognition of our work to support the environment and our community both inside and outside Bestbuy.
We are proud to be included on Ethisphere as 2022 world's most ethical companies list we.
We are one of only three retailers on it and it's our eighth time, earning the honor.
We were also included on the 2020 to Forbes list of best employers for diversity as one of the top four retailers on the list. It's our third consecutive year, making the rankings that recognize leadership and commitment towards building a more inclusive workplace.
During the quarter, we expanded our recycling program to include a new service for customers, who are looking for our help recycling their large products.
We will go to customers' homes to pick up large electronics and appliances as well as an unlimited number of small products and ensure they're responsibly recycled and kept out of landfills.
This service is in addition to our everyday recycling programs available at all best buy stores and our Halloween service with the purchase of new products.
As I mentioned earlier, our employees executed well in the evolving environment in many cases, making hard decisions to run the business effectively and prioritize our customers.
Even with the expected slowdown this year as we lap two plus years of pandemic impacts we continue to be in a fundamentally stronger position than we expected to be at this point, we are confident in the strength of our business and excited about what lies ahead.
We have a compelling value creation opportunity and are investing now as we have successfully invested ahead of change in our past to ensure we are ready to meet the needs of our customers and retain our unique position in our industry.
As we provided a more detailed investor update in combination with our Q4 results on March 3rd I'm, not going to outline all our initiatives, but wed like to provide a few updates on our progress.
In March we spoke quite a bit about total Tac our unique membership program that includes member pricing discounts product protection free delivery and installation and $24 seven Tech support fundamentally total tech is designed to provide our customers with complete confidence in their technology.
Getting it up and running enjoying it and fixing it if something goes wrong.
During the quarter, we continued to sign up more members as customers realize the great benefits of the program and we are encouraged by the higher engagement customer satisfaction and increased revenue. We continue to see from customers, who have signed up to become members we.
We are pleased with the pace at which we are acquiring new members, especially considering the macro environment.
We continue to see that total tech has broad appeal across customer segments.
Additionally, we are improving our ability to gain members not only in retail stores, but in our digital and in home channels.
As a reminder, from a financial perspective total tech as a near term investment to drive longer term benefits.
We expect year over year pressure on our gross profit rate to six as we lap the launch in October .
And over time, we expect the incremental spend we garner from members will lead to higher operating income dollars. Accordingly total tech is a significant contributor to our fiscal 'twenty five goal.
As we outlined in March we are optimizing our workforce and re imagining our physical presence in ways that serve our customers' needs and are more digital world.
We are making investments that provide a better more seamless shopping experience as the customer moves from online shopping to visiting our stores to video chatting from their home.
This includes our virtual sales strategy early in the pandemic the volume of customers interacting with us via phone and chat skyrocketed the volte.
<unk> has remained high and we are actively working to increase the sales opportunity of these interactions through a number of efforts.
One we are leveraging a team of expert sales associates working from their homes, many of whom have in depth store experience and our certified in multiple categories too we have staffed our virtual store with dedicated experts who can help you by a video and demo our product just like they would in our store and three we are enhancing the <unk>.
Training for our offshore call center agents to help them feel like competence salespeople, we're already seeing great results as revenue from these interactions more than doubled in Q1 compared to last year.
Enhancements to our technology platforms are in progress to further streamline our operations and enable these in place to chat video text share their screens and transact with this we will be able to accelerate the productivity and sales opportunity further.
We have spoken quite a bit about our consultation service that provides customers with expert help and inspiration tailored to their unique techniques often right in their homes. This is growing in importance as we continue to see very high customer satisfaction scores and increasing spend by customers who engage with the consultant.
We also have a team that is focused on providing tech products and solutions for businesses in specific industries, including homebuilding hospitality and health care, we have been growing this aspect of our business for several years and more recent investments in our digital capabilities and fulfillment have led to strong growth momentum that we expect will continue.
For example, Q1 revenue from this team was up 15% over last year's Q1 and up more than 70% from Q1 of fiscal 'twenty.
As I step back to comment on our overall workforce, we have been actively evolving the composition of our teams throughout the last two years of customer behavior changed and became even more digitally focused the result is that our overall head count is actually lower than pre pandemic.
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 interaction. We will continue to learn evaluate and evolve the model in light of the way the business and shopping habits are changing.
At the same time, we have invested and will continue to invest in flexibility training compensation and benefits for our associates.
We are incredibly proud that our field turnover rates remained significantly below the retail average and are near our pre pandemic turnover rates. Additionally, our store general manager turnover is just 6%, meaning our gms have the tenure and experience to effectively help their teams navigate this dynamic environment.
It is clear that we have store managers were invested in their employees their career paths their wellbeing and their communities and I thank them for their dedication.
Of course as previously noted we are also re imagining our physical stores.
This year, we expect to complete approximately 45 remodels to implement our experience store concept. We are excited about these remodels as we continue to see higher revenue and NPS in the pilot locations compared to the control stores, especially as one of the pilots has been running almost two years.
We also continued to see strong results from our outlet stores and are on track to rollout more this year with new stores opening soon in Chicago, Houston and Phoenix.
Our outlet stores open box clearance end of life and otherwise distressed large product inventory in major appliances in TV that might otherwise be liquidated at significantly lower recovery rates.
We tend to see twice the recovery rate of our cost of goods sold when we sell this product at our outlets versus alternative channels.
Additionally, these locations can attract new and re engaged customers last year, we estimate that approximately 16% of outlet customers renewed at bestbuy, and 37%, where we engaged best buy customers.
In fiscal 'twenty, three we plan to double the number of outlets by opening 15 additional stores and we are expanding our assortment beyond major appliances and large Tvs to include computing gaming and mobile phones.
We're already seeing increased performance in these new outlet formats as customers gravitate to the expanded assortment.
Finally, these outlet stores are an important element of our circular economy strategy by providing a second opportunity for products to be resold instead of ending up in a landfill.
And another important element of the circular economy strategy is our trade in program. We have an extensive trade in program covering more major CE categories than anyone else.
In Q1, we took in 135000 trade in units from customers.
Not only does our trade in program keep tech products out of landfills are customers typically spend three times the amount they received on their trade in on new products at best buy.
We are continuing our category expansion strategy as well for example, we're helping customers can you give more sustainably with a new lineup of the best electric bikes scooters and mopeds over the next 18 months, we'll be bringing a selection of these products to nearly every best buy store. We're also rolling out charging devices perfect for our customers' garages and <unk>.
Stores and.
And geek squad cannot only assemble the E bikes for customers, but we're also beginning a pilot to test service and repair for E transportation products and some of our stores.
We also just recently announced further expansion into the health and beauty category by launching new skin care technology products online and in 300 of our stores.
And our best buy health business, we are pleased with our first quarter momentum in Q1, we saw strong growth in new sign ups for our active aging business that offers health and safety solutions to enable adults to live and thrive at home.
In our emerging virtual care business, we connect patients with their physicians to enable care at home.
Last November we acquired current health Technology company with an FDA cleared monitoring platform for care at home to help us accelerate our strategy. The combination of current health offerings, and our scale presence and geek squad in home capabilities is already resonating with the health care industry.
Boosted by its affiliation with best buy current health had its best commercial booking quarter ever including expansion of its relationships with health systems, such as Mount Sinai Health system Parkland health as well as the U K National Health service and others.
I am excited to share that current health was awarded Best Hospital technology implementation and the 2022 Med Tech breakthrough awards programs for its role supporting health systems across the U S implement innovative care at home programs current health was also selected by Frost <unk> Sullivan as the 2022 company of the year in the globe.
Virtual home care platform industry.
In summary, I am proud of how much we accomplished in the first quarter and excited about what lies ahead for us.
Clearly there remains a great deal of uncertainty on one hand consumers still have relatively strong balance sheets. They continue to spend wages are up and unemployment is at record lows on.
On the other hand, many consumers are lapping stimulus income they received last year and are also facing issues like higher gas and food prices rising interest and mortgage rates recession fears stock market volatility and geopolitical uncertainty stemming from the war in Ukraine.
Underlying all of that is the gradual shifting of spend from stay at home purchases to more experiential spend on services and the activities. Many were unable to enjoy during the pandemic.
As I mentioned at the start of my comments, while the drivers of our results were largely as expected the comparable sales decline of 8% was on the softer side as inflationary pressures heightened throughout the quarter.
That trend has continued into the beginning of Q2 and it does not appear that it will abate in the near term therefore, as Matt will outline we are revising our guidance and now expect fiscal 'twenty three comparable sales decline in the range of 3% to 6%.
And we are correspondingly updating our non-GAAP operating income rate to a range of five 2% to five 4%.
We will continue to proactively navigate this rapidly changing environment balancing the day to day operations with our commitment to our long term strategy and growth initiatives.
Before I turn the call over to Matt for more details on Q1, and our outlook I want to thank our employees for everything they do for our customers in all our channels.
Greatly appreciate your teamwork and perseverance I love, the best buy culture, and our commitment to enriching lives through technology and.
And I will close by saying this we firmly believe that technology is more relevant today than ever every aspect of our lives have changed with technology and we uniquely now how to make it human in our customers' homes right for their lives from.
From our expertly curated assortment to in home consultations all the way to tech support when your tech isn't working the way you want or traded in recycling. When you want to upgrade we believe we have an ability to inspire and support customers in ways no one else can.
With that I would like to turn the call over to Matt.
Good morning, everyone. Hopefully you were able to review our press release this morning, with our detailed financial results.
As Corey mentioned, we expected our Q1 financial results to be softer on a year over year basis, our enterprise revenue of $10 6 billion declined 8% on a comparable basis as we lap a very strong 37% comparable sales growth last year.
Our non-GAAP operating income rate of four 6% compared to six 4% last year. If you compare it to the first quarter of fiscal 'twenty before the pandemic, our non-GAAP operating income rate increased 80 basis points.
Our revenue growth has clearly played a role in our improved SG&A rate, but I would also like to highlight a few other factors our investment in total tech membership alone added more than 100 basis points of operating income rate pressure this quarter compared to the fiscal 'twenty period.
We are also investing in best buy health.
These are both areas that we know create near term pressure, but we believe they will drive compelling financial returns over time as they scale.
I also want to note that since fiscal 'twenty, our mix of revenue from our online channel has more than doubled we have efficiently evolve our operating model to support this shift.
Tumor shopping behavior, while at the same time navigating higher wages and increased supply chain and technology costs.
Let me now share more details on our first quarter performance versus last year.
Our domestic segment revenue decreased eight 7% to $9 9 billion.
Driven by a comparable sales decline of eight 5%.
From a monthly phasing standpoint as expected the largest comparable sales decline was a five week fiscal March period.
As Cory noted from a category standpoint, the largest contributors to the comparable sales decline in the quarter were computing and home theater.
In addition services comparable sales declined 12%. This quarter. This was primarily the result of our total <unk> membership, which includes benefits that were previously standalone revenue generating services, such as warranty and installation.
In our international segment revenue decreased five 4% to $753 million.
This decrease was driven by the loss of $19 million in revenue.
From exiting Mexico, and a comparable sales decline of one 4% Canada.
Turning now to gross profit were our enterprise rates declined to 120 basis points 22, 1%.
The domestic gross profit rate declined 140 basis points, which was primarily driven by lower services margin rates, including pressure associated with total Tech. In addition, lower product margin rates, which included increased promotional activity and the impact of higher supply chain costs also negatively impacted our rate during the quarter.
<unk> items were partially offset by higher profit sharing revenue from the company's private label and co branded credit card arrangements.
Lastly, our international non-GAAP gross profit rate improved 130 basis points compared to last year, which provided a weighted benefit of approximately 20 basis points to our enterprise results.
As a reminder, the gross profit rate pressure from total tech primarily relates to the incremental customer benefits and the associated cost compared to our previous total tech support offer on.
On a weighted basis the services category negatively impacted the domestic gross profit rate by approximately 100 basis points compared to last year.
It's largely aligned with our expectations entering the quarter.
Moving next SG&A.
Enterprise non-GAAP SG&A decreased $100 million.
While increasing 60 basis points as a percentage of sales.
Within the domestic segment the primary driver of the reduced SG&A was lower incentive compensation of $130 million, which included lapping $40 million for onetime gratitude and appreciation awards last year.
Partially offsetting the lower incentive compensation were increased expenses for advertising and our health initiatives.
During the quarter, we returned a total of $654 million to shareholders through share repurchases of $455 million and dividends of $199 million.
Our quarterly dividend of 88, <unk> was an increase of 26% Mark the eighth straight year of regular dividend increase at least 10% compared to the prior year.
Consistent with our original guidance, we expect to spend approximately $1 5 billion in share repurchases. This year.
Let me next share more color on our guidance for the full year.
Many of the key assumptions driving our outlook from when we entered the year remain unchanged.
Still expect the first half of the year to be more pressured on a year over year basis.
For both revenue growth and our non-GAAP operating income rate.
In addition, we still expect the non-GAAP operating income rate decline to be primarily come from lower gross profit rate with total tech being the key driver.
Let me next share some context on what has changed in our outlook entering the year, we were cognizant of lapping the large levels of government stimulus actions last year.
As we already shared sales came in a little lower than our expectations for the first quarter and this trend has continued into the second quarter.
<unk> to assess how much of the decline maybe longer tail associated with elevated stimulus spending last year for overall consumer spending slowing down due to inflationary concerns and a shift of consumer spending to experiences.
Based on the trends we are seeing over the past several weeks, we now feel it's more likely that we will be on the lower end of our original guidance expectations.
As a result, we now expect comparable sales declined 3% to 6%.
As Corey discussed clearly, there's still a lot of uncertainty and macro crosscurrents. Thus, we will continue to assess the sales trends adjusting for our spend for variable items like advertising and store labor as well as discretionary areas as appropriate.
We also expect favorable trends in our private label credit card arrangement to partially offset higher costs in areas like supply chain for the remainder of the year.
At the same time, we remain committed to progressing the initiatives. We are confident will deliver compelling financial returns in the future.
As a result of the lower sales outlook, our non-GAAP operating income rate outlook is now at five 2% to five 4%.
Based on these factors I've just outlined our guidance for the full year now represents the following enterprise revenue of $48 3 billion to $49 9 billion.
A comparable sales decline of 3% to 6%.
Enterprise non-GAAP operating income rate of approximately five 2% to five 4%.
non-GAAP diluted EPS of $8 40 to $9, we expect our non-GAAP effective tax rate to be approximately 24%.
And lastly, we still expect capital expenditures to be approximately $1 1 billion.
As we shared on our last earnings call, we no longer plan to provide quarterly guidance going forward. However, we'd like to provide context on our expectations.
Several of the key themes from the first quarter are expected to be consistent in the second quarter. As a result, we anticipate that our second quarter comparable sales on a year over year decline in our non-GAAP operating income rate will both be very similar to our first quarter results also as a reminder, last year's second quarter included a onetime diluted earnings per share.
A 47.
From a lower effective tax rate.
I will now turn the call over to the operator for questions.
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Well take our first question today from.
Zachary <unk> of Wells Fargo. Please go ahead.
Thanks, so much it's actually our Sam Reid pinch hitting for Zach here.
Do you guys kind of a big picture question could you sort of recast your FY 'twenty five assumptions in the context of today's updated guidance.
Obviously some of these macro headwinds you called out or maybe like need to be temporal that said does it put more pressure on your business to deliver in FY 'twenty FY 'twenty five and how should we think you'd be thinking about this.
Those 2% to 4% out year comps in that $6 three to six 8% operating margin target in that context.
Yes. Thank you for the question.
I think it's way too early for us to be updating our FY 'twenty five goals at this point.
I mean, I think that the lowering of the range. This year does create a bit of a different picture, but at the same time, we very much believe in the strength of our industry and are very encouraged by the.
The initiatives that we have that we outlined at the Investor day total Tac and expanded assortment in our health initiatives was all remain the same and if anything we're even more excited about those as we look forward. So obviously the ranges. We gave this year they are pretty wide and the ranges for FY 'twenty five is still pretty wide. So theres a number of outcomes. We already had contemplated in setting those goals back in March so.
We still remain pretty confident in those numbers.
Awesome No that's super helpful and then maybe.
Pivoting a little bit here to our clients. Obviously, it's great to see you guys start delivering positive comps here, especially given what youre up against last year kind of maybe want to talk to the sustainability. The positive comps in the appliance segment, especially as we really kind of continue to lap some of that stimulus and maybe some of these macro pressures. Thanks.
So much.
Yes, I think.
Appliances has been a place where we have been sustaining growth for a long time.
Been growing every quarter for 10 years, except for one when we closed our stores so.
We are very confident in our team's ability to continue to drive sales up clearly there is some very elevated levels of comp that were coming over the last couple of years of spend but.
Team continues to drive the assortment and the experience changes that make it a very meaningful place for to buy appliances. So that includes both majors and small side. So we remain really excited and confident about the prospects there for the fifth straight year. We've received a J D. Power's award for highest customer satisfaction among among appliance REIT.
Taylor so the team is creating the right experience that I think will help us drive sales higher as we look into the future.
Awesome. Thanks, so much guys really appreciate it.
Thank you.
Thank you we take our next question.
So you can foresee.
Please go ahead.
Thank you and good morning.
I wanted to focus on total tech and I appreciate the color, but I was hoping if you provide us a little more details around how membership is framing.
Relative to expectations, maybe in the context of churn <unk> retention.
And then just a broader comment on what part of the value proposition do you think his resignation most with your customer and the current sort of environment.
Yes, so I'm just going to start by taking a little bit of a step back here, obviously, what we're aiming to do here at take our deep knowledge of the customer combined with our history of a multitude of membership program and our unique ability to create a very unique paid membership offer with very broad reach.
That broad appeal means we see more different types of demographics that this appeals to and by the way. It is also more comfortable to settle because our associates just have a lot of passion around the multitude of offers to specifically your question about what's resonating. The truth is all aspects are resonating, but different pieces seem to.
Nate with different demographics, certainly the included warranty aspect, especially the applecare resonates with some of our younger demographics.
The pricing and discounts.
Actually resonates across all <unk>.
And then the support we see resonate with some of our older demographics. So the point here is actually this broad reach.
<unk> Ah pieces of the offer that will actually appeal to many.
The purpose as we said is to drive frequency and share of wallet over time. The reason we're not updating right. Now is we are just starting to lap our beta tests from last year. If you remember we actually launched in April with the full rollout in October .
And so we're literally just getting a feel now for what retention looks like it remains in line with as we've converted customers remains in line with what we had expected.
But right now we're just we want to actually start to lap some of those new customers, who actually opted into the program before we comment too much on retention what I will say is look the goal here is to create a moat around the consumer and to make it kind of inconceivable for them to buy anywhere else and we know we're growing our share of wallet with those that are shopping us. So we know what to do.
Doing what we want it to do but we're using this time period to continue to learn and iterate.
Iterate on the acquisition the usage that we're seeing right now and then ultimately those retention figures.
Thank you I'll keep it to one best of luck.
Thank you.
Thank you Joe Feldman of Telsey has our next question. Please go ahead.
Hey, guys. Thanks for taking my question.
On the promotions you mentioned some products are starting to get more promotional and I guess I was just wondering.
Which areas you're seeing more of that pressure in your view of promotions maybe.
Balance of this year, we would accelerate or where you think it will just.
<unk> kind of normalized relative to a year ago.
Sure. Thanks, Joe.
We outlined back in March we expected to see promotions be pressured this year compared to last year and we also commented that we use but eventually they would return to closer to FY 'twenty levels at some point.
As we got into the quarter, we actually started seeing a little bit more pressure on the promotion side than we expected and that was offset by a little bit of credit better credit card profit share from the arrangement, we have but we did see a little bit more promotional <unk>.
And I think it's pretty broad across most of our categories. We are starting to increase in terms of the amount of discount in the mix on promotion Tvs was a place where we did see more promotions on a euro basis computing has been starting more promotional.
Back to July of last year, So that continued as well. So those are the areas I'd, probably highlight but theyre also even just some very iconic type of products to in specific categories that are very promotional even though in some cases inventories constrained and so overall, we know it's returning as we expected it would it isn't quite back to FY 'twenty levels, but it is.
Is heading in the same heading to that path as we expected.
That's great. Thank you and I'll also keep it to one and good luck this quarter.
Thank you thanks, Joe.
Thank you moving that to Mike Baker of Davidson. Please go ahead.
Hi, Thanks, guys. A couple of related questions. One you said March was the worst part of the quarter. So can you talk a little bit about April sounds like you said the weakness is continuing but at a little bit more detail there and then related to that it looks like and this is similar to your previous guidance, but the back half.
Much better in terms of year over year changes versus the applied front of house.
What gives you that confidence is it simply just can talk different comparisons or why are we expecting.
A significantly better back half.
Sure, Yes, so we're not going to comment on specific months or in March was the biggest decline in Q1 and as the sales pressure continued as we exited Q1 actually was a little a little more pressure than on sales than we expected.
You remember last year too as we got into the second quarter, we talked about how we're still doing about 30% comp in the first few weeks of May. So we are still lapping those stimulus payments that kind of came in starting in March of last year and so that's what's driving driving the lion's share of that sales decline as you think about the back half of the year I mean, there's a number.
Things, we believe as we get to the back half.
Most of that stimulus impact a lot of it was.
The left in terms of a comparison.
We also know as we look to the back half of the year, we do expect product availability in certain products and categories to improve.
Compared to the first part of this year and also if you look at compared to last year.
In Q4, there was some notable product shortages and iconic areas that we talked about not getting that did have an impact on sales. We also in Q4.
And our store hours in January as we are lapping some of the omicron variant impacts and then lastly, I comment is we do expect our initiatives to start to continue to drive more impact to our sales outlook as you get further down into the trajectory of those those ramps. So those are the reasons I'd highlight.
Okay. Thank you for the color.
Thank you.
Next we move to Karen short of Barclays. Please go ahead.
Hi, Thanks very much.
Just wanted to push a little harder and follow up on the.
2025 guide with respect to where you.
We're at today and obviously.
You were just asked.
You did elaborate a little bit on what the second half and why the second half will look better, but maybe a little more color on why you feel confident in the 2025 guide about six three to six eight in light of the fact that obviously <unk> will be much much weaker than expected and then just on that same note are <unk>.
<unk>.
Recessionary environment with respect to your guidance for the year and with respect to your 2025 guidance.
Yes, so I will start with the fiscal 'twenty guide I'm going to reiterate what Matt said it is still really early in the long range guide that we gave and there are many moving parts and pieces as I outlined in some of the pre prepared comments and so we remain confident in the initiatives and the roadmap that we have put together too.
To deliver that 25 guide and as Matt said, it's a pretty wide range. So what we're going to use this year to do is to continue to understand how those initiatives develop how this year plays out obviously and then how the implications for all of that in that longer term guide, but I think it warrants, giving it some time to see how the year is going to play specific too.
To your point about recession.
I want to take one step back here for a second I think I want to start with a reminder, that this is a.
It's a very stable industry consumer electronics overtime is a stable industry in the last two years have clearly underscores the importance of tech and People's lives. So I think it's important for us to have that as a backdrop and the fact that we were obviously already planning for our industry to decline. This year and then we've adjusted based on what we're seeing in the most recent results.
It's fair to say that we're factoring in elements of softer demand, but we are not planning for a full recession. Our guide would not assume a full recession at this point.
Obviously, if that were the case, we will continue to update the performance and the expectations.
But I think I would characterize our guide more of the softer environment not a full recession.
And I might just add I think also I think you've made a.
Question around the rates guide as well I think as you think about the rate. This year, we're actually not too far off from our original guidance expectations for this year from five two to $5 four just acknowledging a little bit of softer on the sales side.
But all of the structural things that are included in that expectation are kind of coming in as we expected. So nothing's too dissimilar at this point and we have already built those into what we see this year and what we've seen in the out years to be confident in it.
<unk> sales, but also being able to achieve some of those rate expectations for FY 'twenty five.
Okay. Thank you very much.
Thank you.
Thank you Seth Basham of Wedbush Securities.
Question.
Thanks, a lot and good morning, I like to follow up on the promotional environment and if you could give us some color too.
What are you planning for in terms of promotions this year relative to pre pandemic levels and how much is embedded in terms of gross margin pressure relative to your prior guide that'd be helpful.
Yeah.
Yes.
I would say, it's fair to say, we expect that like I said earlier promotions return closer and closer to FY 'twenty.
Throughout this year exactly when that happens, we're not commenting on but we would expect it to increase as the year progresses.
Importantly, as you look to the back half of this year, though we are starting to lap where promotions increased last year starting in July in computing. So we have baked into our plans are slow.
Increase in promotion Ality in most categories as you get towards the back half of this year.
Actually where that lands exactly to FY 'twenty, we're it's hard to exactly say, what we have baked that into into the plants and I think its worth noting and I know.
All of this but just to reiterate obviously promotions are not just a function of best buy their assumption of relationships with our vendors as well who are interested in ensuring that their newest and greatest products.
Are out there for the world to see a price appropriately. So this is not just a function of best buy proportionality, it's a function of the overall industry proportionality in partnership with our vendors.
Understood. Thank you.
Thank you, we now move to Jonathan <unk> of Jefferies. Please go ahead.
Great. Thanks for taking my question.
Matt a lot of our clients are focused on the ability of companies to flex expenses in an environment of slowing demand potentially persisting could you just update us on the fixed and variable split in your P&L and priorities for reduced.
Question, Harry spend if the backdrop does worsen thanks, so much.
Sure, Yes, so as we started the year, we even in the guide.
The guide that we gave at a five 4% on a range of sales outcomes, we theres a level of implied already trying to understand the levers you do to keep within the five 4% rate in terms of the original guidance. So it's something that we do as a normal course of business as we see sales on the slide up or slide down from our expectations. There are a number of.
Areas, where you can simply happen because they are variable to like Chuck Lane tender, but you also start to adjust areas like marketing or store labor associated with lower volumes. If it does happen. So those are.
The very variable things that we look at to adjust to as the sales trends change. In addition to that there are even some more discretionary areas that you can start to look at it. In addition to variable items that in some cases are even additional marketing to the extent that you are comfortable or even simple areas like travel or adjusting your capital spend which can adjust depreciation.
Pending on when you do that during a year. So there are variable and then more discretionary.
As Greg noted, we're not really planning for a recession. This year to the extent that we did there is all there is obviously more fixed.
Fixed cost areas you can look at our business trends down even more right now we're not planning for that.
You can imagine if that hadn't happened we would you would look at some of those areas as well, but we would.
Any event, we are trying to hold dear to us strategic.
Strategic investments that we're making that provide that long term growth to get to our FY 'twenty five goals. So that's the last place that we will look at reducing as we look to this year in terms of how we see it now.
I think it's fair to say the team is obviously navigated the softening environment quite well up to this point and obviously the.
The factors that we use as we are trying to adjust to that softer demand obviously overlap with the considerations that you would take into account. If you are managing for a recession. So you can imagine by diluting your.
You are running through a bunch of scenarios and I think the team has done a nice job flexing with a rapidly changing environment and it's about the same type of kind of mindset and considerations you would take if it were to flex down even further.
Makes sense, thanks, guys best of luck.
Thank you.
Thank you next we move to Brad Thomas of Keybanc. Please go ahead.
Hi, good morning.
Just wanted to ask about inventory a bit Corey I think I think you characterize inventories being overall healthy, but just wondering if you could put that into a little more context talk about some of the levers you may be able to pull if the consumer continues to weaken here.
And maybe if you could just help us think a little bit more about how much inventory levels were up just because of inflation and asps.
Thanks, so much.
Yeah first I'd, just some gratitude to the team who has really done amazing work carefully managing our.
Our inventory levels, and then importantly, leveraging some of the investments that we've made in our supply chain.
Some context is helpful. Here, our inventory balance was unusually low last year. So again, if you remember how much demand there was in the marketplace about 37 comp we had an unusually low balanced last year and that inventory balance right. Now is almost perfectly in line with the sales growth versus pre pandemic. So if you went back to kind of normalized pre pandemic now sales growth.
And inventory growth are almost perfectly in line and I think thats, a true testament to our vendor partnerships and proactively managing those levels in line with what we've been seeing.
And the thing is as you can imagine actually units and some of the key categories are down as we've seen ASP shifting from the variety of factors that I noted, whether it's premium and the mix shift in our business or inflation.
Even what underscores the confidence that I have in the statement around our inventory being healthy feeling very much like it's in the right place I think it is important to note. There is still some spotty constraints and very isolated areas for specific vendors and some of the more iconic skus that Matt mentioned, but overarching Lee we feel very strongly that we are in a good inventory position and it's very much.
In line with how we manage inventory historically.
Hey, thanks, great quarter, and any context on how much inflation has your inventory up and.
Thanks, so much.
Yes, we haven't sized it specifically if I kind of alluded to the fact, it's really hard because back to when we talked about the different pieces that are driving our asps up you've got mix shifts in the business as people have skewed more premium you've got more appliances, which tends to skew to higher Asps you have got overarching Lee over the last couple of years fewer markdowns less promotion.
And then you also have inflation so all of those pieces add into the ASP increases we've been seeing that's why the color Im trying to give is we've actually seen in many of the key categories that the unit levels of our inventory are actually down versus some of the pre pandemic comparisons and a lot of that's being driven by this kind of confluence of ASP increase.
Got you very helpful. Thanks Corey.
Yes. Thanks.
Yeah.
Scott Ciccarelli from true with Securities has our next question. Please go ahead.
Good morning, guys Scot Ciccarelli.
So clearly and that we've heard that several other retailers have had a pretty March in March and April have indicated that sales have started to improve in may but your comments on <unk> would suggest you really haven't seen that so I guess my question is why do you think your business hasnt necessarily seen the recovery we've seen in some other retail verticals and relay.
Added to that.
Cadence comments being different if we were looking at stock trends. Thanks.
I'll start and then Matt can clean up anything that I Miss.
But you have to also look back to last year and Matt alluded to this we have that really high sustained growth into may like we posted 37 comp in Q1, and then that sustain 30 into may so we weren't we unlike some others. We are lapping very sustained high growth both stimulus related stay at home related from last year.
This is a different cadence I also think you've heard other retailers comment on the weather and some of the slides that's not going to impact our business nearly as much as others. So I think from like when we see you almost have to go back to kind of a three year look at the business.
Relatively consistent and actually pretty strong as we're heading into Q2 on that three year stack.
Got it thank you.
Yep.
Moving now to Scott Moskin of all five capital. Please go ahead.
Hey, guys. Thanks for thanks for taking my question just wanted to get back to profitability a little bit and.
The question is basically if and I know, it's a big if.
Sales or revenues would fall back to where they were pre pandemic do you guys believe the business even with that is structurally more profitable and if so why would you believe that.
Okay.
Yes, I think.
We believe it is structurally more profitable than it was pre pandemic as you think about some of the actions and.
Work, we've done over the last two years to adjust our model with the very heavy shift to digital sales almost doubling from pre pandemic, we've taken appropriate action to understand the cost structures, whether they're to support digital or in our stores or just the supported a different type of customer fulfillment of need we've taken the right.
Actions over that period of time to adjust our model our cost model to understand.
To account for the changing sales and margin structure gross margin structure. So we fundamentally do believe that thats in how we actually decided to fulfill product to customers. That's on how many associates. We have in our stores. It's a number of things that we've thoughtfully looked at over the last couple of years to change the structure of costs between gross margin rate and SG&A. So we do.
Believe that fundamentally in Q1, we were up 80 basis points compared to Q1 of pre pandemic and that has to account for even though we do have investments like total tech at a 100 basis points in Q1 and have a doubling of the E com business, which is a higher parcel costs, where we're still getting SG&A leverage considerably better.
Over in Q1 to offset some of those gross margin investments that we're actually making in our business. So we fundamentally do believe that the structure of our businesses suddenly more profitable and that's also underlying and our commitment our goal is to get to the FY 'twenty of the goals of six three to $6 eight.
Yeah.
Thanks that was great appreciate it.
We move next to Peter Keith of Piper Sandler. Please go ahead.
Hi, Thank you good morning.
Hoping you could address what is the best buy ads initiative my understanding was that should be accrued.
Accretive to gross margin and obviously there seems to be some.
Change your evolution of the AD spending backdrop, so maybe address any any changes.
The outlook of that program and separately just sticking on gross margin, Matt should that 100 basis points of total tech pressure that you saw in Q1 should that continue with Q2.
Sure I'll start with the.
Total type pressure as you look towards the back half of the year, we start to lap the launch of total tech. So we expect the Q2 drivers to be similar to Q1 I would include total tech pressure of around 100 basis points, but as you look to Q3 and Q4, we begin to lap it.
We launched total Tac in October of last year, and so we don't lapse at the end of this Q3, so there's still a little pressure from total tech in Q3, and then by Q4 the pressure on a year over year basis, essentially goes down to zero. If you will because we've lapped the launch of it so.
That's how the kind of the cadence of total pressure goes.
And just a quick reminder, on the ads business. Obviously this is us selling advertising to brands that want to reach our customers both on our own channels and then on some external sites I think what's important here is that our leadership in CE retail.
<unk> very very valuable high customer traffic and engagement and as that first party data that we have and which can allow our advertisers to reach really unique audiences because we see people all along their purchase journey, which means you can.
You can target them at various points in the purchase journey, we havent shared specific financial details.
But if we did see growth in the ads business in Q1, not material enough to highlight for the quarter, but even entering the year. We knew this would be.
Favorable contributed to the gross profit rate, but a little bit more weighted towards the second half of the year as the ramp continues and then obviously this is something that provides that ongoing growth and incremental profitability over time that gives us confidence in the longer term targets.
Okay. Thank you very much.
Thank you Peter.
With that I want to thank you all for joining us today I hope that many of our investors who are listening today, we will be able to join us at our annual shareholder meeting, which will be held virtually on June 9th thanks, everyone and have a great day.
Thank you, ladies and gentlemen, Bob will conclude today's conference call. Thank you for your participation you may now disconnect.
Yeah.