Q2 2023 Best Buy Co Inc Earnings Call
<unk> results would be softer this year as we lapped record sales volumes. However, the macro environment has been more challenged and uneven than expected due to several factors and that has put more pressure on our industry changing the trajectory of our business versus our original plan.
We are focused on balancing our near term response to difficult conditions and managing well what is in our control while also delivering on our strategic initiatives and what will be important for our long term growth our strategy and our confidence in it remains unchanged. We have exciting opportunities ahead of us in a world that is more reliant on <unk>.
Knowledge than ever we are a financially strong company with a resilient world class team that will successfully navigate the current environment.
Now onto the second quarter results, we reported this morning.
Our comparable sales were down 12, 1% as we lap strong Q2 comparable sales last year of almost 20%. This represents eight 3% sales growth over the second quarter of pre pandemic fiscal 'twenty.
Our non-GAAP operating income rate declined compared to last year on the SG&A deleverage from the lower revenue the investments in our growth initiatives and the increased promotional environment for consumer electronics.
Our non-GAAP earnings per share was up 43% versus pre pandemic fiscal 'twenty.
We are clearly operating in a volatile consumer electronics industry.
We assume the CE industry would be lower following two years of elevated growth driven by unusually strong demand for technology products and services and fueled partly by stimulus dollars.
In addition, we expected to see some impact to our business as customers broadly shifted their wallet spend back into experienced areas such as travel and entertainment.
We did not expect and compounding these impacts as a changing macro environment, where consumers are dealing with sustained and record high levels of inflation in some of the most fundamental parts of their daily lives like food.
While these factors have led to an uneven sales environment. They have not deter us from continuing to make progress on our initiatives during.
During the quarter, we drove broad customer NPS improvements, even compared to pre pandemic levels, particularly in installation and repair.
We signed up new best by total Tech members and increased our delivery speed delivering almost one third of customer online orders in one day.
We also completed store Remodels open new outlet stores and began implementing newly signed deals with health care company.
From a top line perspective, we saw year over year sales declines across most product categories with the largest impacts to comparable sales coming from computing and home theater.
Although down from last year's strong sales compared to Q2 of fiscal 'twenty, our computing revenue has grown more than 20%.
Our domestic appliance business comparable sales declined slightly as it laps more than 30% growth in the second quarter of last year and revenue is up more than 45% compared to fiscal 'twenty.
Our data would tell us that customers are making some decisions to trade down, particularly those in lower income households.
This is not across all categories, but for example in the TV category customers are moving more into our lower price point exclusive brands products.
We're also seeing more interest in sales events, such as Prime day tax free events and other events geared at exceptional value.
Plot, our team's proactive management of our inventory during the quarter as we saw the sales trajectory changing our.
Our inventory at the end of Q2 was down 6% from the second quarter of last year and up approximately 16% from pre pandemic fiscal 'twenty.
Overall, our inventory is healthy and reflects an evolving mix of product and our network, including more high ASP appliances, and larger screen televisions, which also have longer lead times and a slower inventory turn.
While we took more inventory markdowns than last year, the level reflected a normalization to pre pandemic activity.
Within our inventory numbers, there are categories, where we have ample inventory supply and still pockets, where we are constrained.
In our industry, it's not as simple as we have inventory or we don't it can be incredibly variable byproduct and even brands within a particular product. For example, we are also still experiencing inventory constraints in key models and brands across computing and gaming.
As we move into the back half of the year, we are planning inventory thoughtfully, yet investing strategically for holiday while it is important to manage inventory against current demand. We also want to ensure we are well positioned to react to the ever changing consumer needs.
The promotional environment was more intense than last year, and even more than we expected entering the quarter as sales demand softened.
Some areas, we're quite aggressive from a promotional standpoint, especially where inventory was ample or in excess <unk>.
Overall, we feel the level of promotion Audi has returned to pre pandemic levels.
Over the past few years, we have seen gross profit pressure from higher supply chain costs, which of course includes increased parcel costs from our higher mix of online sales in.
In addition, we estimate that roughly half of the increased supply chain costs this quarter versus the comparable period in fiscal 'twenty is being driven by cost increases or inflationary pressures.
Conditions across the global supply chain continue to evolve on a year over year basis, we saw higher costs in Q2 and expect that to continue through the remainder of the year. However, we are starting to see some signs that the market is stabilizing and moderating.
During the pandemic the capacity and rate pressure started in international and worked their way to domestic logistics now we are experiencing some relief in international first and early signs of loosening markets domestically.
For example in Ocean logistics, we are taking advantage of some rate opportunities, but continue to be mindful of I L. W. You labor discussions and overall U S port congestion as we move into the peak shipping season.
As it relates to inbound domestic transportation, while we're starting to see a more balanced capacity markets. We continue to see inflationary pressures from higher fuel and labor cost and rail yard in general supply chain network congestion.
I would like to provide an update on total Tac our unique membership program designed to provide customers with complete confidence in their technology with benefits that include member pricing discounts product protection free delivery and standard installation and $24 seven tech support.
Considering the macro environment and decline in our product sales. We are encouraged with the pace at which we are acquiring new members in Q2 nearly half of the new members joining the program were either new or lapsed customers reinforcing how the value of this program resonate beyond our existing loyal customers.
Our associates continue to embrace the program as the fulsome nature of the offering not only simplifies the sales interaction. It also has a program our team members can confidently stand behind as they believe in the value. It provides to every single customer.
In July we enhanced our in store point of sale tools to better assist our team and showcasing the value of total tech to potential new members and the early results have been positive.
At this point in the National launch, we continue to be encouraged by the higher engagement customer satisfaction and increased revenue, we're seeing from customers, who have signed up to become members.
As we have previously shared from a financial perspective total tech as a near term investments to drive longer term benefits over time, we expect the incremental spend we garner from members will lead to higher operating income dollars as.
As I've just covered there are several things we are seeing with the program that give us confidence that customers value the membership and that our thesis in general is playing out.
At the same time consumer electronics is a low frequency category and we are in a unique macro environment, meaning it will take time for us to truly assess the performance.
As you would expect we will continue to monitor the program and iterate on the offering as we learn more.
In addition to total tech are best buy branded credit card continues to drive our valuable and sticky relationship with our customers.
We continue to see growth in card holders more than 25% of our revenue is transacted on our best buy branded card and card holders have been increasing the use of their card outside best buy stores as well.
These customers tends to be more engaged with us by overtime with higher frequency and spend the non cardholders can.
Combined with our partners largest lease to own portfolio and our buy now pay later test. This means we can offer our customers a variety of ways. They can shop confidently with us and we can leverage those relationships into our future.
As we emerge from the pandemic. It is clear that our customer shopping behavior has changed our online sales as a percentage of domestic revenue in Q2 was 31% nearly twice as high as pre pandemic.
Virtual revenue via video phone and chat is growing rapidly as well as sales for the first six months of the year are already almost equal to the virtual revenue regenerated for all of last year.
While still small overall sales in our virtual store are ramping quickly and we recently expanded categories to include appliances and home theater in.
In addition, our high NPS in home interactions continued to increase rapidly in fact in home installations have seen double digit growth versus the prior year and five of the last six quarters and.
And year to date in home sales consultations are up more than 30% over last year and pre pandemic.
Of course, our stores remain incredibly important for customers to see and touch products and get advice. In addition, they are crucial to our fulfillment strategy in the second quarter customers, representing 42% of our online sales chose to pick up their products at our stores.
And an additional 18% of online sales were shipped out of our store to customer homes.
These in store pickup and ship from store numbers have remained incredibly consistent for the last several years, even as shipping speed and options have dramatically increased.
It is imperative that we evaluate how we operate and service of these evolving customer needs and make the necessary adjustments to ensure we come out of this not just a vital company, but a vibrant one we.
We tested new field operating models in four markets over the past year to help us better understand how to deploy leadership resources in a more digital world as a result of these tests earlier. This month, we made structural changes to our operating model that resulted in some store roles being eliminated we hope to retain as many of these talented associates as possible.
This is one component of our enterprise wide restructuring initiative that commenced this quarter with these changes we are able to reinvest back into frontline customer facing sales associates.
We are continuing to re imagine our physical presence in ways that cater to our customers' changing shopping patterns as well.
As part of our Charlotte holistic market approach pilot, we are testing a new 5000 square foot store with a unique digital first approach.
Just opened last month the store includes a seven foot tall digital display that customers will see as they enter the store that explains what's new and how customers can shop.
The store includes curated assortments across our product categories, except for major appliances and other large products.
The majority of products will primarily be on display to touch and try to purchase customers can scan the QR code on any product price tag using their phone.
This immediately sends a notification to a best buy employees to pick up the product from the stores back room and bring it to the register for checkout.
Of course customers, who want to we'll be able to consult with sales associates in home consultants and Geek squad agents, who always have access to a complete assortment online using our increasingly rapid shipping.
From an online sales fulfillment perspective, the store offers both in store pickup and convenient lockers.
The Charlotte market pilot also include the traditional core stores that we converted to an outlet store.
The outlet hasnt expanded assortment of product categories.
Dedicated team of employees and agents that rapidly quality check and repair all product for resale are new.
New services repair hub and spoke model and an auto tech Mega hub for car Tech installation.
This outlet is performing extremely well and is frankly on track to deliver revenue on par to the pre converted conventional store with a considerably lower operating cost and greater productivity.
Those results give us confidence in our outlet strategy during the quarter, we opened two new outlet stores in Virginia, and Phoenix and just opened a location in Chicago earlier, this month, bringing us to 19 locations.
We see twice the recovery rates of our Cogs, when we sell open box clearance and end of life inventory at our outlets versus alternative channels.
With assortment expanded to include major appliances, large Tvs computing gaming and mobile phones. We believe now is an opportune time to appeal to our existing best buy customers as well as an increasingly deal seeking consumer overall.
Our outlet store assortment is also available for purchase online with many products eligible for national shipped to home fulfillment as well as local store pickup this capability unlocks a very productive way to refurbished inventory, giving it a new life. While also serving a deal seeking customer we still plan to double the number of outlets to approximately 30.
Suddenly not open until fiscal 'twenty four.
So far this year, we have invested in and completed seven experience store concept remodels. The results. We are seeing in the existing two pilot remodels, including higher NPS and higher customer spend continue to make us confident and excited about this part of our strategy we.
We expect to complete a total of approximately 40 experienced store remodels this year.
I am very proud of how much work the team has done to test and iterate multiple store and operating model concepts over the past few years in response to the dramatic pivot in customer behavior, we introduced a great deal of change into the field not always perfectly and we have learned and accelerated some initiatives while stopping others.
On top of that of course, the macro backdrop has shifted and the trajectory of the business has changed significantly in an incredibly short time.
We continue to invest in our people and our stores with an eye towards the best possible customer experience leveraging our unique differentiators through all the changes overarching store MTS is substantially higher than pre pandemic, including more stores than we have ever seen at what we consider to be best in class levels.
This is entirely due to our amazing store associates' hard work and dedication to always being there for our customers.
We have consistently invested in our employees over the past three years, including raising hourly wages more than 20% versus pre pandemic and adding additional benefits such as paid caregiver leave financial hardship assistance and paid time off for part time employees.
Now I would like to touch on best buy health.
Our consumer health business, where we curate health and wellness products online and in our stores is largely experiencing similar revenue trends as our core category.
We're excited about the new FDA ruling that allows the sale of over the counter hearing aid, we just announced an expanded collection of hearing devices and in store experience and more than 300 stores and a new online hearing assessment tool, making it more convenient than ever for the millions of Americans with mild to moderate hearing loss to get the product and support.
They need.
During the second quarter, we continued to see 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.
Revenue for this business was slightly up in the quarter compared to last year.
We are encouraged by the momentum we have built in the virtual care business in the first half of the year. We are very focused on successfully implementing the large U S. Health system accounts that have been won recently, including NYU Langone health for hospital at home and Mount Sinai Health systems for chronic disease management.
And we are also making progress leveraging our best buy capabilities in this space.
Our Geek squad team successfully completed additional health training in Q2 and launched a new Geek squad pilot service with Guising her health.
As a reminder, the revenue contribution from virtual care is currently very small and we will take time to ramp as health industry has a longer return on investment.
We just published our 17th annual ESG report, which outlines how we are working across the company to make a positive impact on our planet employees customers and communities.
We continue to focus on ESG initiatives that drive sustainable long term value creation.
Last year, we made significant progress toward our goals to reduce our carbon footprint.
Our 2025 hiring commitments and expand our best by Teen Tech Center program.
We recently hit a milestone with the best buy Foundation Teen Tech centers. When we opened one earlier this month in Gary, Indiana, marking our 50 <unk> Tech Center. These centers provide teams from Disinvested communities with guidance training and tech access to help successfully prepare them for the future.
In terms of the environment, we continued to drive forward the circular economy, a system in which nothing is wasted since 2009, we have reduced our carbon emissions, 62% through investments in renewable energy and operational improvements.
We are on track to reduce our carbon emissions, 75% by 2030 and last year, we became a founding member of the breakthrough 2030 retail campaign, which aims to accelerate climate action within our industry.
We continue to operate the most comprehensive consumer electronics and appliances Takeback program in the U S collecting more than $2 5 billion pounds since 2009.
We also made significant progress toward our fiscal 'twenty five hiring commitments to help ensure we build an inclusive diverse and thriving workforce.
In fiscal 'twenty to be filled 37% of new salary corporate positions with black indigenous and people of color employees ahead of our goal to sell one and three position and we sold 26% of new salaried field positions with women employees marketing progress on our goal to build one of three position.
We're proud that 60% of our most senior leaders, including our board of directors and executive team is made up of women and people of color.
We encourage you to review our full ESG report available on our corporate website.
In summary, the first half of the year has been difficult from a sales perspective, and our employees have executed well in the evolving environment in many cases, making hard decisions to run the business effectively and prioritize our customers.
I just wanted to take a moment to address the fiscal 'twenty five financial goals. We introduced in March we remain confident in the strategic premise covered in March. However, the current macro backdrop has changed in ways that we and many others, we're not expecting.
As such we are removing these targets and we'll share more context on our midterm financial expectations. Once we begin to experience a more stable operating environment.
As I said at the beginning of my remarks, we are managing thoughtfully and carefully while still investing in our future. This includes actively assessing further actions to evolve our operating model manage profitability and iterate on our growth initiatives.
We fundamentally believe that technology is more important than ever and our everyday lives and as a result of the past few years consumers have even more technology devices in their homes that will need to be updated upgraded and supported overtime as our vendor partners continue to innovate in the world becomes increasingly more digital in all aspects, we will be there to uniquely.
Help customers in our stores online virtually and directly in their homes. This.
This company has navigated monumental change writing incredible highs and managing difficult lows since our founding 56 years ago as we have done throughout our history. We will use this moment to lead a double down on our purpose.
It clear that we continue to uniquely support customers and with literally no. One else can now I would like to turn the call over to Matt for additional details on our second quarter results and outlook for the remainder of the year.
Good morning, everyone.
So you were able to review our press release this morning, with our detailed financial results I will walk through.
Details on our Q2 results before providing insight into how we're thinking about the back half of the year.
Enterprise revenue of $10 3 billion declined 12% on a comparable basis as we lapped very strong 20% comparable sales growth last year.
Our non-GAAP operating income rate of four 1% compared to six 9% last year.
As expected and similar to last quarter, our investment in total <unk> membership added approximately 100 basis points operating income rate pressure this quarter compared to last year.
non-GAAP SG&A expenses were $129 million lower than last year were 120 basis points unfavorable as a percentage of revenue.
Compared to last year, our non-GAAP diluted earnings per share of $1 54 decreased $1 44 or 48%.
A lower share count resulted in the 16 <unk> per share benefit on a year over year basis. However, it was offset by a higher non-GAAP tax rate.
In our domestic segment revenue decreased 13, 1% to $9 6 billion.
By a comparable sales decline of 12, 7%.
Monthly phasing standpoint fiscal June comparable sales decline of 16% was the largest decline, whereas fiscal July was our best performing month during the quarter compared to both last year and to the pre pandemic fiscal 'twenty comparable 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 our international segment revenue decreased nine 3% to 700 $760 million.
This decrease was driven by a comparable sales decline of four 2% in Canada and the negative impact of 420 basis points from unfavorable foreign currency exchange rates.
This marks the first quarter, where Mexico was fully removed from the prior year comparison.
Turning now to gross profit our enterprise rate declined 160 basis points to 22, 1%. The domestic gross profit rate declined 170 basis points, which was primarily driven by the lower services margin rates, including pressure from total tech and.
In addition, lower product margin rates and the impact of higher supply chain costs also negatively impacted our rate during the quarter.
These items were partially offset by higher profit sharing revenue from the company's credit card arrangement.
As a reminder, the approximately 100 basis points of gross profit rate pressure from total tech primarily relates to the incremental customer benefits and the associated costs compared to our previous total tech support offer.
Our product margin rates were lower than our expectations in Q2, driven by higher levels of promotion Ality generally lower consumer demand is combined with the higher levels of inventory across the industry, which has resulted in more discounting across most of our categories as Corey mentioned overall the level of promotion LT has written.
<unk> to pre pandemic levels, which is slightly ahead of our expectations earlier in the year.
Moving next SG&A as I mentioned earlier, our enterprise non-GAAP SG&A decreased $129 million, while increasing 120 basis points as a percentage of sales.
Within the domestic segment the primary driver of the reduced SG&A was lower incentive compensation of approximately $135 million.
Let me add some additional details on the incentive compensation expense, which year to date is approximately $265 million lower than last year through the second quarter.
Based on our current outlook for this year, we are expecting to be below the required financial thresholds for short term incentive performance metrics. This compares to last year when payouts were near the maximum levels.
As a result, we anticipate additional incentive compensation favorability in the second half of the year.
On a non-GAAP basis, our effective tax rate was 16, 7% versus eight 4% last year with.
For the full year, we now expect our non-GAAP effective tax rate to be approximately 23% versus our previous guidance of approximately 24%.
Moving to the balance sheet, we ended the quarter with $840 million in cash as Corey mentioned at the end of Q2, our inventory balance was approximately 6% lower than last year's comparable period, and we continue to feel good about our overall inventory position as well as the health of our inventory.
Year to date, we have returned a total of $862 million to shareholders through share repurchases of $465 million and dividends of $397 million.
We paused share repurchases during the second quarter spending only $10 million looking forward, we will continue to assess the appropriate timing for resuming share repurchases.
We are committed to being a premium dividend payer based on our current planning assumptions for fiscal 'twenty three our quarterly dividend of <unk> <unk> per share will fall outside of our stated payout ratio target of 35% to 45% of our non-GAAP net income.
We view this target as a long term in nature and do not plan to reduce the dividend should it fall outside of the range in any one year.
From a capital expenditure standpoint, we now expect to spend approximately $1 billion. During the year. This is slightly lower than our previous outlook of approximately $1 1 billion. However, it exceeds the level of investment we have been making over the past few years.
Largest driver of the increased spend this year compared to prior trends store related investments.
This includes both our 40 experiential store Remodels, Corey mentioned as well as general improvements in a number of our other locations after delaying the work the past couple of years during the pandemic.
Let me next share more color on our guidance for the full year, starting with our revenue assumptions.
As I mentioned at the start of my comments, we are assuming comparable sales for the year to decline in the range of around 11%.
Which represents a comparable sales decline for the remainder of the year similar to what we just reported for Q2.
In addition, this reflects an assumption that our revenue growth versus fiscal 'twenty, we'll continue to slow in that revenue in the second half of the year will be very similar to comparable pre pandemic fiscal 'twenty time period.
This is due to a belief that the current macro environment trends could be even more challenging and have a larger impact for the remainder of the year.
This aligns with the trends, we're seeing so far this quarter as August revenue declined approximately 10% versus last year.
When comparing to fiscal 'twenty August revenue increased in the low single digit range, which is a sequential decline from the second quarter trends.
Our outlook for non-GAAP operating income rate of approximately 4% for the year is anchored to negative 11% comparable sales assumption.
This represents a decrease of 200 basis points to last year with Ross with roughly half of the decline from lower gross profit rate and half from high higher SG&A rate.
As you May recall, our original guidance entering the year included a non-GAAP operating income rate decline of approximately 60 basis points, which was expected to come almost entirely from the gross profit rate with total tech being the primary driver.
The pressure we are expecting from total tech continues to align with our original expectations, while the additional gross profit rate pressure and our revised outlook is largely due to higher promotional activity in the consumer electronics industry.
From an SG&A standpoint, we have continued to lower our forecasted SG&A spend as the year has progressed, but not at the same pace as our lowered sales expectations as I shared earlier, our outlook for the year assumes incentive compensation to be significantly below prior year levels.
Compared to last year in our original outlook, we are planning for lower store payroll expenses and other variable expenses, we've also reduced spend and discretionary areas by increasing the rigor around backfill and corporate roles capital expenditures in trouble.
Partially offsetting these items are increased investments compared to last year, and best buy health technology, and our store remodel work.
Next let me spend a few moments on restructuring.
In light of the ongoing changes in business trends. During Q2, we commenced an enterprise wide restructuring initiative to better align our spending to critical strategies and operations as well as to optimize our cost structure.
We incurred $34 million of such restructuring costs in the second quarter, primarily related to termination benefits.
We currently expect to incur additional charges to the remainder of fiscal 2023, but this initiative.
Consistent with prior practice restructuring costs are excluded from our non-GAAP results.
Lastly, let me share a couple of comments specific to the third quarter.
We anticipate that our third quarter comparable sales declined slightly more than that negative 12%, we reported for the second quarter we.
We anticipate the year over year decline in our non-GAAP operating income rate will be similar to or slightly higher than our second quarter results.
This includes a little less gross profit rate pressure as we lap last year's national rollout of total tech during the quarter.
However, we expect a little more SG&A rate deleverage in Q3 from a larger sales decline.
I'll now turn the call over to the operator for questions.
Thank you as a reminder, it is star one on your phone to ask a question.
The first question comes from the line of Greg Mcleish from Evercore ISI. Please go ahead.
Hi, Thanks.
Wanted to finish.
Where you start where you finished which was the third quarter guidance on margin decline and what it implies for the fourth quarter I want to make sure that that.
Oh, why decline that would be in basis points versus the second quarter down $2 60.
And does that imply that in the fourth quarter.
EBIT margin should only be down maybe 50 bps and would be well above 4% in the fourth quarter and then I'll follow up.
Yes, I think based on the implied comments for Q3 what.
What we said is similar Oi rate decline as Q2.
That's slightly higher which is about 280 basis points.
On the math it would imply that Q4 does improve from an EBIT perspective.
<unk>.
The gross margin rate pressure in Q4 will abate a bit compared to the previous quarters as we've lapped the total tech and we're beginning to lap some of the.
Product margin rate pressures, we experienced last year's promotion Allied has started to return, but youre starting to see more SG&A deleverage in Q4, considering where sales are trending in comparison to the prior quarters.
Got it and then my follow up was more on the topline with consumer I think Corie, you mentioned seeing some trade down.
In some categories could you talk about which categories, you're not seeing it in and where there seems to be a good sell through and whatever you can get.
Yes.
There are categories, where the price points and decisions around the type of product matter lot Tvs as the example, we use there are other categories like let's take mobile phones, where it's not as much a decision between trading upper trading down you want a certain brand do you want a certain type of phone and so or even.
Some of what we're seeing in gaming, whereas much of the kind of gaming hardware as we can get our hands on the consumer is looking to purchase.
That's why it isn't perfectly even throughout the categories in our business in particular, because sometimes youre very brand specific and then sometimes youre more brand agnostic and you're just looking for the right experience.
Got it that's great and good luck.
Thank you. Thank you.
Thank you, we'll now take our next question from Simeon Gutman from Morgan Stanley .
Good morning, everyone.
I wanted to ask about just the high level backdrop realized a year ago things felt different.
In terms of sales and promotions.
Wanted to ask you is it is it getting easier.
To predict the business the visibility getting better meaning are we bottoming in certain categories in terms of units and then as you look around the corner to whether it's.
Don't know if its promotions, creating the deflation or its consumers trading down, but do you see a flattening that debt.
Current.
The environment, we're in is starting to stabilize.
Okay.
I wouldn't say, it's become phenomenally easier to exactly see around the corner I give our teams a great deal of credit for working hard to catch trends quickly.
Think what makes the current environment.
Kind of the most volatile that I've seen is the quantity of inventory at other retailers and the promotional activity correspondingly the Mark downs with some of those heavier inventory levels I think that's the part that right now it makes the business.
A little more volatile I think as some of those inventory levels normalize a little bit more than I. Do think you are perhaps in a more normalized environment and not even hit on it when he was talking about the Q4 EBIT rate you start to lap some of those promos that we actually started to see in consumer electronics, a more promotional environment in Q4 of last year. So I think as you work through the back half.
This years for me in my point of view as it starts to stabilize a little bit, but I hedge that just because there is.
There's so much inventory that's in the marketplace right now a and B. It is still a really volatile macro environment.
And I think <unk> got a very uneven consumer who is making corresponding choices depending on how long inflation last and like I said in my prepared remarks, especially in those core categories like food rent housing.
So.
I'd love to say, it's perfectly stabilizing we can predict it but I still think you have a lot of.
You have a lot of factors at play that are influencing consumer behavior.
And maybe the follow up is the.
The promotions, creating year over year price deflation in the categories or is it.
The lack of innovation, where youre already starting at a quote unquote, but year over year deflationary price point, and then promotions are compounding that.
And I guess the promotion activity is the piece that resolves it or is there innovation around the corner, where you where the industry moves back to some some type of inflation.
So two pieces one right now I believe the impact is mainly promotion ality, because you've had really a sustained period here of a couple of years.
It was disproportionately low promotion ality, because there was such high demand and such low inventory levels as of right now it really is a function of those promotions coming back.
To your second point. This is a really important part of the thesis and what I think is important about best buy our vendors for sure are going to continue to innovate looking for that kind of next cool product that will continue to drive demand and so I think my hypothesis, it's been a little harder to have all.
Our innovation engine flexing here in the last two years. When you are trying so hard to produce at the levels that we've needed. So every every ounce of energy has kind of been focused on production and.
And I think that in the in the future here as especially these inventory levels normalize I think <unk> got a number of vendors who are really interested in now that you have this much larger installed base of connected devices in People's homes. They are also going to be very interested in how do you upgrade those devices. How do you connect those devices, how do you help a customer live in their homes.
Which still increasingly people are spending more time, and so I think that that's the next phase Simeon that I believe we will see from here, which is more of that innovation engine.
It's always been true in CE in the hardest part is I cannot always tell you exactly what the next innovation is going to be but we definitely know that behind the scenes you continue to see innovation in spaces like what you just talked about hearing in spaces like computing with hybrid work model is clearly, becoming the future and some of the replacement cycles, there even speeding up a bit so I think that.
It will be the next level, but for right. Now you are really just kind of course correcting for two years that were.
Very very low in terms of promotional activity.
Great. Thanks, Corey and good luck.
You bet. Thank you.
The next question comes from Anthony <unk> from Loop capital markets. Please go ahead.
Good morning, and thank you so much for taking my questions. So I guess my question was on.
Back to school selling season that you talked about the fact that August was down.
<unk> comps were down about 10%.
Guess what is that.
Say about how back to school performed in and is there any read through for back to school for holiday.
I don't know if that gives you any indication or any thoughts about the upcoming holiday selling season. Thank you.
Yes, Thanks Anthony.
For us the back to school sales are actually slightly ahead of our what I'll call kind of tempered expectations.
It's following a trend that was really more pertinent prior to the pandemic, which is people were shopping later and later and not super surprising given that this is a very different school year than we've seen for the past two years and you've probably got parents and kids, who are just kind of really trying to figure out how do I gear up for a year that at least is starting out much more in <unk>.
<unk>.
And especially the collegiate level much more on campus. So if anything it's been a little bit better than we had thought.
And it's following that same trajectory in terms of implications for the holiday I think it's less about what those back to school Portend I think it's more about kind of broadly what we're seeing so we mentioned, we're seeing a customer who has more value oriented who is definitely moving more towards some of those sale events and so I think our hypothesis is youre going to see a.
Today that starts to look a little bit more like what we saw pre pandemic, maybe becomes a little bit later is probably promotional in our space. That's part of what is embedded in the guide that Matt talked about.
I think it's going to be my personal point of view, a little harder to pull those sales into October when.
There is not just remember for two years in October we were yelling at the consumer and make sure that you get your inventory because there isn't enough obviously, the backdrop looks a little different there and so I think he might have a consumer who's willing to weigh it look for the deals and really look for those great values and again like I said I'm not sure if back to school.
The indicator of that I think that's just more broadly what we're seeing in the macro and the consumer.
Very helpful. Good luck.
We ended the year. Thank you.
Thank you.
Chris <unk> from JP Morgan. Please go ahead.
Thanks, Good morning, So I'll follow up on the prior question. Initially so as you think about the minus 10 sales in August to date and a later.
Arriving back to school that would suggest you still have a few weeks ahead of you, but then the October compare much harder. So are you basically taking the three year comp trend in degree and to the rest of the quarter.
Yes, that's what Chris what the numbers would imply I think 10% in August if you think about the sequential stack up.
Q3 on a three year basis.
The comp is slightly below 12% we saw in Q2 would imply that it's in the low single digit area of comp performance for the entirety of the quarter. So so yes, that's what I assumed the sequential declining as the year progresses, and especially into Q3 and Q4.
Got it and then.
Have you I'm curious, how you're thinking about sort of unit pull forward versus dollar volume because obviously to your point inquiry dollar volumes are being exaggerated right now because of the level of inventory in the market. So how are you thinking about like that.
Everlasting question, a pull forward around the pandemic and share of wallet on the unit side within the computing and TV category.
Maybe I'll start and then Matt can add on.
I think we are watching both sides of the equation carefully both.
ASP side of things and also the unit side of things.
Probably on the whole, we're seeing a stabilization of asps year over year.
And so you can apply in that obviously youre seeing a bit of unit decline.
And I think what's interesting right now is you still got a consumer who is spending on the hall quite a bit I think theyre being choosy erinn, it's uneven as to where they are spending and so I think.
It makes it a little hard to answer the question of exactly how much of a pull forward because you are against a very different backdrop than you were even six months ago. I think what is again I'll go back to it what for US is most compelling is that no matter. What you have a massively higher install base that is in people's homes and people are spending more times in their homes than ever and in a category.
Like computing, we can already see that some of those upgrade cycles are happening a little bit faster than they were before so that would imply.
More than anything it was more incremental purchases and then youll see that upgrades over time and again I mean now it's been two and a half years since some of the original computing devices were purchased at the very beginning of the pandemic. So youre going to have some compelling use case changes here over the next year or two so it's a long way of saying I think it's difficult against the current macro backdrop.
To make a precise indication of how many units were pulled forward or how much was incremental I think instead, we remain focused on.
Sure we have the right inventory there for our customers and being ready is there more ready to upgrade their.
<unk> devices.
Got it thank you very much.
Thank you. The next question comes from at least Suzuki from Bank of America.
Yes.
Great. Thank you answer regarding the pulling of the fiscal 'twenty five targets that were originally communicated in March and what do you think is the biggest change that's occurred in the last five to six months and is it more of the topline growth expectations that it become less attainable or the longer term margin target.
Yes ill start and Corie can jump in yeah, I think if you look at where we planned the year to be at the beginning of the year.
<unk> comps in the minus one to minus four range and now what we're saying is.
Around a minus 11% comp for the year, that's a pretty significant sales decline again more around the macro environment worsening we expected the year to come down from an industry perspective, as we cycle. Some of the very large growth over the last couple of years, so that change in the macro and the consumer has really caused sales to be.
Much lower this year, so that would say thats, probably the biggest impact as you think about our FY 'twenty five targets going forward because some of the targets that also.
Need scale to drive some of the benefits of the bottom line as well. So that's what we need time to assess the only thing I would add is that and I said at the prepared remarks, but it bears repeating strategically what we laid out we still have incredible confidence in and that's why we want to make sure. We're getting updates on some of those strategic investments that we are.
Making I think the baseline of where we're starting from to Matt's point is quite different than what we originally assumed.
Got it okay. So I mean in theory, we could think about some of those targets is just being still achievable, but at a little further down the line than what you originally thought given where the year is going to shake out.
And I think the premise of us continuing to grow our business and drive more efficiency and profitability of the business over time.
Absolutely what we intend to do.
As we think about once the business stabilizes and operationally the strategies are all very sound and very pleased with how they are progressing its just that the backdrop as much as it was.
Okay. Thank you.
Michael Lasser UBS. Please go ahead your line is open.
Good morning, Thanks, a lot for taking my question putting side the next quarter or two as you look toward next year given some of the changes that you've made like the restructuring the rollout of the outlet location.
Streamlining could your operating margin be flat to up.
On a flat to down sales number.
Yes, maybe I mean, I think what we're trying to do is assess.
What this year looks like we are trying to as you can imagine and fortify our business a bit and understand how do we point resources and work towards the strategically relevant important things as we as well as the operations and I think what we're trying to do is.
Continue assess the topline environment, the macro environment understand where sales will go next year.
All the while knowing that.
The sales growth a CAGR, leading up to the pandemic through FY 'twenty and the last three years was over 3%. So we believe the industry. We believe best buy will return to growth at some point as we navigate some of these choppy waters at the same time, we're taking the right steps forward to optimize our business and set ourselves up structurally as we look forward into next.
During the years after that and drive our strategy and at the same time.
Thank you my follow up question you can go into auto Tech support you know, we'll be lapping the full rollout this quarter.
Given some of the longer tenured of the original members are.
Are you seeing the sales lift.
From those folks that would justify the return on investment and would you expect.
The behavior of those newer members will be different and if not when.
Or if it is would you think about potentially rolling back total tech support if it wasn't meeting our return hurdles.
So we chatted a bit in the prepared remarks and said we still liked what we were seeing in terms of four right now and again, we haven't even lapped a year in terms of the engagement and the spend of the existing cohort of total tech support members. We also said just like you would with any membership program.
We're going to keep looking at the benefits that are included what customers value what keeps customers sticky to best buy and we will continue to iterate on the offer so I don't think its as simple as a light switch like is it on or is it off I think there is a lot about the offer and behaviors that we're seeing that is really compelling.
And at the same time, we want to make sure that the offer is used and is engaging for customers and is over time, keeping them sticky to the brand and we said it in the remarks. It is difficult because frequency is lower in our category. So it takes us more time, especially against the macro backdrop that has changed as dramatically as this one has it's going to take us more time.
To assess for the long term is this doing what we want it to do and so for right now we like what we're seeing in the cohort of customers. It's still early it's against an uneven backdrop and we're going to continue to iterate on the offer to make sure at the end of the day it.
What's most important is that it keeps customers engaged with the brand.
Thank you very much and good luck.
Thank you.
Okay.
Brian Nagel Oppenheimer. Please go ahead.
Hi, Good morning, Thank you for taking my questions.
So.
I have two questions maybe I'll just merge them together I mean first off with regard to sales are you seeing any increased variability across geographically or otherwise that would maybe tie this more together with other inflationary pressures or somebody that velocity effects.
Of the pandemic and then my second question just.
Stepping back and thinking about the different drivers of sales from.
From a manufacturing standpoint, your manufacturing partners has there been a pullback on through the pandemic through the supply chain to try to pull back on sort of say driving innovation that may be changing now with some of these constraints ease that could ultimately become a better sales driver.
Yes, sure I'll start and then Corie can add on Brian I think from a sales.
Perspective, geography from a geography base I think nothing we would necessarily call out I would say, though that.
Some of our test markets, we're seeing good results.
In terms of how we're looking at our store portfolio and the effects. So we are seeing a bit of it.
<unk> and some of our experiential stores that we've rolled out we've rolled out to we're rolling out more and we've seen a good lift in some of those locations and so some of the tests are yielding some positive results from a store portfolio, but that wouldn't necessarily mean, it's due to inflation being different across the across the country. Yes.
We've hit on this a little bit earlier, Brian , but I do think our manufacturing partners have been doing everything they can to produce as much product as possible over the last two years, just kind of writ large if you think about the industry broadly and our hypothesis would be that does make it a little bit more.
<unk> to innovate at the pace that you would like because you're just working so hard to produce what you need to wait for the demand. That's in front of you and so I think as hopefully you start to see a more little bit more normalized demand environment.
That absolutely.
I can't imagine a world where the manufacturers that we work with aren't working morning noon and night to try to think through how to innovate on the products that we have today to drive more of that replacement more of that consumption going forward and so I don't have an exact measurement to tell you how much are they innovating last year versus next year, but I absolutely fundamentally believe.
<unk> and <unk>.
<unk> got a manufacturers that that is looking to capitalize on an increasingly digital consumer with more and more willing to use these products in their homes.
I appreciate it thank you very much.
Thank you.
Okay Mcshane from Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking our questions.
Just wondering if you could help us think through the total tech support not to beat a dead horse with regards to total tech support, but just with regards to its impact to gross margins I know you're lapping the launch but is it a bigger headwind sequentially.
Just thinking through that maybe more people are going to come through the store for back to school and holiday versus maybe the first half.
No I'll start with where I get out if she'd like.
It doesn't pressure does not increase as we get into the back half. They are in fact at a base a bit as you get into Q3 as we lap the launch and so even with the higher volumes expected coming three coming through in Q3 or Q4 from a holiday perspective doesn't necessarily create more pressure.
Effectively I mean, you have your basis.
It mitigates.
The quarter as the quarters progress at the beginning of the year, we talked about how the pressure. This year was just.
Just between 60 to 80 basis points and Thats about what we are seeing right now for the year.
Pre pandemic basis.
Would represent about 100 basis points of pressure from where we were before but again as we as we scale that offer and we've signed up more people.
The pressure subsides as you scale on those sales over times and you drive more incremental product sales.
I think the key here is that the goal of the program is ultimately to create an offer that has further reach and has a broad appeal and that over time, we drive frequency and greater share of wallet with our customers. Obviously, that's going to take time and to Matt's point, it's not.
Got it.
More impactful actually as we start to get scale. It is helpful. On the total business. Because you are in theory growing that frequency and grow in that share of wallet. It just takes us time to get there.
Okay. Thank you and my follow up question is.
Aside from some of the labor adjustments that you need.
Where you're focused on reducing costs and better to better align costs with demand.
Sure I think we would have probably a whole lot more to say as you can imagine we're still working through those plans and would want to.
Wouldn't want to share internally as well before I think.
The 34 million termination is basically termination benefits that we took in Q2.
Two aspects of that of the voluntary early retirements and workforce optimization.
What we've done so far we'll continue to evaluate.
Other actions.
But broadly speaking, we're looking to understand how our business has changed over the last number of years with a digital business that's double what it used to be.
And a very different looking consumer to understand where do we need to wean, our resources and efforts strategically and operationally to make sure. We're prepared for how our customers want to shop and providing the best experience for them and so that will ultimately provide some.
Also some efficiency opportunities as we look forward, but also just strategically positioning us better as we navigate through some of the difficult macro environment that we're seeing right now.
Thank you.
Thank you, we'll now take hour we have time for one last question today from Mike Baker from D. A Davidson. Please go ahead.
Okay, Hi, Thanks, guys I wanted to ask about the promotions and inventory is a little bit just to follow up on that.
What areas are you more or less promotional in.
And it sounds like the issue to me is it sounds like it looks like your inventory is pretty clean at down 6%, but our competitors are still heavy do you expect that to be situations to be rectified by the holidays.
And then one last question if I can squeeze it in and any comments specifically on what Youre seeing in terms of gaming trends within the entertainment category, which was down about 9% a little bit better than the total how gaming perform within that thanks.
Sure overall.
We said proportionality is a bit higher than Q2 than we expected as we rebuilt those those expectations into the remaining part of the year and what we're seeing is generally more most of our categories are returning to pre pandemic levels. So there really isn't there's always a few areas that may not be quite back there yet, but generally we're back to where levels of promotion.
They were before the pandemic started and that has more to do with.
The general amount of inventory in the channel right now.
As the consumer demand wanes and inventory increases there is just generally the dynamic of having more promotion ality, it's less around needing to mark down our inventory more because it's not in a healthy position it as a very healthy position, that's simply just normalizing to where we were pre pandemic.
The marketplace competitive dynamic is what's driving a little bit of that promotion LD again, maybe not as much as others because.
Started the year expecting promotion that would be a return to pre fund demos at some point, it's just happening a little bit a little bit faster in terms of gaming.
It still continues to be an area, where if we had more inventory we would be able to sell it the demand outpaces supply.
As well I think we're seeing actually some gaming the gaming council side of the business relatively flat to last year, we're seeing a little bit more pressure year over year from a software perspective of peripherals perspective, but if you think about where gaming. If you took all of gaming not just the console cycles you took in PC gaming and you brought in VR and.
And all the things related to our gaming area, it's actually up over 50%.
In Q2 versus a pre pandemic.
At levels. So it's seeing a lot of our growth over the last couple of years, although like most categories total is coming down a little bit on a year over year basis.
The last thing that I would add on the inventory question is it is that I'm very proud of the work that the teams have done I'm proud to head into holiday and a good healthy inventory position and we said it in the prepared remarks that allows us a little bit more space to invest in those places where we think there really will be consumer demand. So I think it is a really good situation.
To begin.
And with that I think yours was the last question. Thank you all so much for joining us today and we look forward to updating you on our results and our progress during our next call in November .
Thank you. This concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
Yes.