Best Buy's Vice President of Investor Relations, Mollie O'Brien, began the Second Quarter Fiscal 2024 Earnings Conference Call by introducing Corie Barry, the company's CEO, and Matt Bilunas, the CFO. The call discussed both GAAP and non-GAAP financial measures and contained forward-looking statements that are subject to risks and uncertainties. The company reported better-than-expected financial results for the quarter.

In the second quarter of the year, comparable sales were down 6.2%, but gross profit rate expanded by 110 basis points due to better product margins and profitability improvements. SG&A expenses were kept flat, and the team managed their promotional plan and inventory strategically. The customer behavior and demographics remain consistent, and the percent of premium purchases has stayed the same.

Our customer satisfaction with product availability has been increasing and is now the highest since the start of the pandemic. We have made improvements to our mobile app, with more than 20% of online sales coming through the app, and over 40% of online sales being picked up in-store. We have also seen an increase in satisfaction scores for our in-store and in-home tech services, as well as our home delivery experience. Our remote support services have the highest NPS of all our experiences and our tech services play a material role in our unique membership program, driving increased customer engagements and share of wallet.

My Best Buy launched a new membership program in June which includes three tiers; My Best Buy, My Best Buy Plus, and My Best Buy Total. Paid members report higher customer satisfaction than nonmembers and the new program has seen an uptick in year-over-year growth of overall paid membership sign-ups. My Best Buy Total is the evolution of the prior Total Tech offer, which includes Geek Squad 24/7 tech support, two years of product protection, and exclusive prices and access to highly-anticipated product releases. My Best Buy Plus is resonating more with digital customers and appeals to a broader set of customer segments.

The company is testing different promotional offers to determine what resonates with consumers and is continuously improving the digital experience. The My Best Buy tier remains free and includes benefits such as free shipping, purchase history, order tracking, and fast checkout. Customer metrics have validated the decision to change the free tier and enrollments have remained steady. The financial impact has been better than expected and is expected to contribute at least 25 basis points of operating income rate expansion for fiscal '24. The company is also making progress on their omnichannel capability, ensuring they maintain a leading position in a digital age and evolving retail landscape while making stores cost and capital-efficient. They are on track to deliver their fiscal '24 physical store plans.

Best Buy is making several changes to their stores, such as closing some stores, remodeling some, and expanding their outlet stores. They are also investing in digital tools to allow customers to scan and pick up inventory from a secure location, and they are rightsizing their gaming and digital imaging spaces to allow for the expansion of new categories. These changes are intended to minimize shrink, prioritize the customer experience, and drive an efficient employee process.

This paragraph discusses how the company has been working to balance labor costs and hours, as well as investing in tools and employee development programs to provide employees with flexibility, predictability, and opportunities to gain more skills. The company has seen improvements in labor expense as a percent of revenue and employee retention rates that outperform the retail industry. The workforce has adapted to the changing environment and the company is proud of their efforts.

The company is focused on ensuring foundational retail excellence and is investing in training and certification programs for employees. They are also driving cost efficiencies and expense reductions to fund investments, and leveraging technology and AI to simplify complex interactions and optimize in-home operations.

Geek Squad is exploring opportunities with large companies to provide device lifecycle management services, such as procurement, provisioning, deployment, repair, and end-of-life. They are also running Geek Squad Academy camps in various locations across the US to teach kids and teens coding, game design, digital music, and more. These camps help build self-confidence and spark creativity, and the Geek Squad agents and volunteers are praised for their work inspiring young minds.

In the second half of the year, the consumer electronics industry is expected to experience stabilization and possibly growth due to the natural upgrade and replacement cycles for technology bought early in the pandemic and the normalization of tech innovation. The company is updating their comparable sales guidance to a range of 4.5% to 6% decline and narrowing their profitability ranges. The fourth quarter is expected to see a comparable sales decline of around 8%, which is lower than the 10% decline reported in fiscal '23.

The company expects a year-over-year decline in Q3 comparable sales, but a potential for positive growth in Q4. Factors that could contribute to this include growth in home theater, computing, gaming, and mobile phone categories. The company believes that consumers will return to pre-pandemic behavior during the holiday season and they have a strong team and omnichannel assets to take advantage of this.

In the second quarter of fiscal year '24, Best Buy's enterprise revenue of $9.6 billion declined 6.2% on a comparable basis, with non-GAAP operating income rate of 3.8% decreasing by 30 basis points compared to last year. Non-GAAP diluted earnings per share of $1.22 decreased $0.32 or 21%, with half of the decrease due to a higher effective tax rate. Despite this, Best Buy's revenue was at the high end of the range they had provided. They are optimistic about their future opportunities due to macro trends such as cloud, augmented reality, and generative AI.

In the second quarter, Enterprise comparable sales declined by approximately 5-7%, with Domestic segment revenue decreasing 7.1% and International segment revenue decreasing 8.8%. The Domestic gross profit rate increased 110 basis points to 23.1%, driven by a higher level of vendor-supported promotions, benefits from optimization efforts, a higher gross profit rate from membership offerings, and improved gross profit rate from health initiatives.

The company expects Enterprise revenue of $43.8 billion to $44.5 billion and Enterprise comparable sales decline of 4.5% to 6%. They anticipate a full-year non-GAAP operating income rate of 3.9% to 4.1%, non-GAAP diluted earnings per share of $6.40, non-GAAP effective income tax of 24.5%, and for interest and income to exceed interest expense this year. They have returned $560 million to shareholders through dividends and share repurchases and plan to continue share repurchases in fiscal '24.

The company expects an extra week to add approximately $700 million of revenue and $100 million of SG&A, which will benefit its non-GAAP operating income rate by 10 basis points. The full-year gross profit rate is expected to improve by 60 basis points, largely due to membership offerings, higher product margin rates, and health initiatives. SG&A as a percentage of sales is expected to increase by 100 basis points, primarily due to higher incentive compensation and flat store payroll and advertising expenses.

Corie Barry discussed the use of new technology, such as AI, to potentially improve sales trends. She also provided more color on computing innovations and the shorter and faster refresh cycles, as well as how people are using their devices more often and for more intensive computing processes. Lastly, she mentioned that the fourth quarter gross profit rate is expected to improve compared to last year, but not as much as the full year.

Microsoft has shifted their focus to consumer productivity, particularly with the Windows Copilot on Windows 11, which brings ChatGPT and AI innovations in cloud applications such as PowerPoint, Outlook, and Excel. This new technology has broad implications for collective productivity. Additionally, despite a more difficult comparison, there is an expectation for a slight improvement in comp due to more events in the third quarter than the second quarter reverting back to pre-pandemic behavior.

Matt Bilunas discussed the impact of credit on the company's top-line, noting that the credit card portfolio accounted for 1.4% of domestic sales. He also mentioned that the credit card portfolio had been a tailwind for profit share, and that it had come in better than expected in Q2.

SG&A is expected to delever for the year, and net credit losses are normalizing to pre-pandemic levels. Q3 is expected to be slightly better than Q2, and Q4 is expected to be slightly positive or down 3% compared to FY '20. The trend is expected to improve due to a number of factors, but it still represents a more stabilized consumer. The volume is expected to be more normalized to pre-pandemic levels in the back half of the year.

Matt Bilunas and Corie Barry discussed the incentive comp of $185 million for the full year, which is evenly distributed throughout the year. They also discussed store payroll, which is expected to be flat on a percentage of sales basis for the whole year. Matt Bilunas noted that the credit losses as a percentage to the book is more normal compared to FY '20. Seth Sigman asked what normal means if this trend continues into the next year, and Matt Bilunas replied that it means a more normal rate compared to FY '20.

Corie Barry notes that credit availability has not significantly changed and that 25% of their business is done on the card. She emphasizes the card's offering of points or 0% financing, which is widely accepted and appreciated by consumers. She does not expect any major consumer headwinds from student loans or credit availability.

Matt Bilunas stated that there has been an increase in vendor-funded promotions across all categories, including appliances, which has led to an uptick in the vendor-supported promotions they are running. This has not impacted their product margins. Additionally, entertainment and services categories have been particularly strong and they expect this trend to continue in the coming quarters.

Corie Barry and Liz Suzuki discuss the stability of the gaming and hardware supply, and the annualization of Best Buy's membership offering. Matt Bilunas clarifies that he was referring to potential pressure on the credit card profit share for the next year, but he does not provide guidance for the next year. He does suggest that if sales remain flat, the company's goal is to at least hold their operating income rate flat or drive a little bit of expansion.

The main factors that will affect the company's performance in the coming years include the credit card, resetting incentives, industry growth, membership and health initiatives, cost takeout initiatives, and potential regulatory changes. The credit card could become a pressure, and the resetting of incentives could lead to rate pressure. The industry growth could provide SG&A leverage, and the membership and health initiatives should continue to improve rate. Lastly, potential regulatory changes around late fees could also affect the company's performance.

Corie Barry states that Best Buy's vendor funding has increased or stayed the same relative to 2019, and that their vendors are as interested as Best Buy in stimulating consumer demand, sometimes through innovation in order to drive replacement cycles and incremental demand.

The My Best Buy program has been changed to include three tiers of memberships, which has had a positive impact on the company's OI rate, improving it by at least 25 basis points. This improvement is due to the changes made to the free membership program, which shifted points away from the credit card.

Corie Barry and Matt have discussed how the growth in annual membership fees, changes to the Total Tech program, and the team's focus on acquisition, retention and engagement have all helped to improve Best Buy's gross margin rate. They have also discussed the company's strong position in the industry, and while there is not a single source for market share, they are confident in their relationship with vendors and continue to invest in their strategy.

Matt Bilunas states that while there has been some inflation in product categories, there is now more promotionality and a decrease in prices compared to the previous year. Other areas where inflation is expected are wages and marketing costs.

Supply chain inflation has been decreasing, but ground transportation and warehousing have seen higher levels of inflation due to wage pressures and the increased demand for larger products. Corie Barry highlights that the category has become more promotional in 2021, but over time, prices have increased due to the addition of higher-priced products such as appliances and home theater.

Corie Barry explains that Best Buy has always prioritized the safety of their customers and employees, and they are seeing an increase in attempts to break into stores and grab items. Despite this, Best Buy has not seen a material impact to their business, and their shrink as a percent of revenue is within 10 basis-points of pre-pandemic fiscal '20. Best Buy has been addressing shrink aggressively for many years due to the high-ticket nature of the items they sell.

Corie Barry talks about the differences between Best Buy and other stores, such as front door asset protection, one entrance, and a high digital penetration. She also explains how Best Buy invests heavily in technology solutions to protect the customer experience and the employees. Brian Nagel then asks about the longer-term opportunity of membership from a financial and consumer engagement standpoint.

In order to create and maintain a deep relationship with customers, Best Buy has created a membership program with three tiers: Free, Plus, and Total. The Free tier offers free shipping, the Plus tier offers promotions, early access, and a 60-day return window, and the Total tier offers all the benefits of the previous tiers plus additional support. Ultimately, the goal of the membership program is to drive customer engagement and increase share of wallet by making it easy for customers to make purchases with Best Buy.

Matt Bilunas and Corie Barry acknowledge the wildfires in Maui and Canada, as well as the hurricane in Florida. They are doing what they can to support their employees in those impacted areas. Bilunas explains that they have factored in the potential risk of student loan payments into their sales trajectory for the back-half of the year, as their demographic is slightly more exposed to this risk. However, there are other factors influencing consumer spending.

The Best Buy second quarter fiscal 2024 earnings conference call has ended and the operator thanked everyone for joining and wished them a good day.

This summary was generated with AI and may contain some inaccuracies.