The operator welcomes participants to Best Buy's Second Quarter Fiscal 2025 Earnings Conference Call and reminds them that the call is being recorded. Mollie O'Brien, Vice President of Investor Relations, introduces CEO Corie Barry and CFO Matt Bilunas. She also mentions that the company will be discussing both GAAP and non-GAAP financial measures and that some statements may be considered forward-looking. Corie Barry then thanks everyone for joining and announces that the company is reporting better-than-expected results for the second quarter.

The company's comparable sales performance improved sequentially, with a decline of 2.3% compared to the previous quarter's decline of 6.1%. The non-GAAP operating income rate was also higher than expected, due to lower SG&A expenses. The growth in tablets, computing, and services was offset by declines in appliances, home theater, and gaming. The company capitalized on demand for new products and remained strategic in their promotional investments. Online sales remained consistent at 32% of domestic revenue, with strong support from omnichannel operations.

The paid membership program and changes made last year contributed positively to the company's results. The company expects their industry to continue stabilizing in the second half of the year and has updated their sales guidance to a decline of 1.5% to 3%. The computing category and services are expected to show growth, while other categories are expected to improve. For the third quarter, comparable sales are expected to be down 1% and August sales are estimated to be flat. The company's priorities for the year include improving customer experiences and operational effectiveness.

Best Buy is committed to disciplined capital allocation and exploring new revenue streams. They have seen improvements in customer satisfaction and engagement through personalized experiences on their app and website. They have also launched a new tracking feature for in-home delivery and installation services, which has received positive feedback and reduced costs. This was made possible through their use of AI technology to optimize their delivery and installation routes.

Best Buy is updating and refreshing their stores in preparation for the holiday season. This includes optimizing and refreshing various categories such as mobile phones, headphones, and smart home products. They are also creating new branded experiences with vendors and adding a modular merchandising solution in hundreds of stores. Best Buy is also updating their departments to reflect new products, such as the Copilot+ in the computing department. They have added dedicated expert labor in the computing department and are in the process of doing the same for home theater and major appliances. Best Buy continues to focus on certifications and training for store employees in different departments.

Best Buy has a successful training program for their employees, with over 60% being certified in multiple categories. They also have partnerships with vendors such as Samsung, Verizon, and AT&T to provide expertise in their stores. The company is focused on providing unique experiences for customers and believes that the demand for replacement and upgraded products will continue to grow in the coming years. They have also introduced AI technology in their products, with more innovations expected in the future. Best Buy's role in customers' lives has evolved.

Best Buy has recently launched a new branding centered around creating customer experiences that inspire curiosity and enable discovery. This reflects the role of Best Buy and its associates in the customer journey. The company is also focused on driving operational effectiveness and efficiency, with changes in store staffing and leadership structure. The dedicated in-home sales team has been scaled back to fund investments in store labor.

The company has reduced the overall number of employees and brought back home theater and appliances experts to provide a better customer experience. They have a flexible workforce that can work across different areas of the store and are focused on certifications and adding back zoned labor. The company also uses analytics and technology, such as a virtual assistant, to achieve efficiencies and improve the customer experience. They are currently rolling out this technology to their phone system to reduce the need for live customer support agents.

The company is closely monitoring customer feedback as they implement new technology and process improvements in customer service, resulting in a 20% decrease in cost per customer contact. They have received an award for their use of AI to improve customer and employee experiences. The company plans to continue their disciplined approach to capital allocation and raise their expectation for share repurchases. They are also exploring opportunities to drive profitable revenue streams overseas, including a collaboration with Bell Canada to rebrand and operate consumer electronics retail stores. Bell is responsible for store operating costs and the company is providing a curated assortment of products and services.

Best Buy Canada is expanding its presence in malls and smaller communities, reaching 61 new markets. They have a dedicated team for providing tech products and solutions to businesses, generating over $1 billion in sales. They also have a website for business customers and are leveraging their Geek Squad capabilities to offer services to other businesses. Best Buy is also partnering with vendors to drive incremental revenue, such as their Partner Plus program and their expanded agreement with Amazon to offer Fire TV on Insignia and Toshiba TVs.

Best Buy offers customers the option to purchase their TVs on Amazon.com and pick them up at a local store. They also have an agreement with Roku for improved targeting and reporting for advertisers. The company also supports communities through Geek Squad Academy camps and has been recognized for their inclusive workplace culture. The first half of the year has shown signs of stabilization, but the macroeconomic climate can change quickly. Customers are seeking value in sales events but are also willing to spend on high-end technology.

In the second quarter, the company's revenue declined slightly but their operating income rate improved due to a higher gross profit rate. Customer behavior has not significantly changed and the company plans to focus on improving customer experiences and expanding their operating margin. They believe they are well-positioned for future growth and expect to see an increase in sales and operating income as the industry recovers. The company's comparable sales were down in May and June but improved in July.

In the second quarter, the calendar shift had a positive impact on reported comparable sales by 90 basis points, but negatively impacted the first quarter by 30 basis points. It is expected to have a negative impact of 20 basis points in the third quarter and 60 basis points in the fourth quarter. The non-GAAP operating income rate was 60 basis points higher than expected, primarily due to lower SG&A expenses. Gross profit rate aligned with expectations, with better performance in the services category offsetting lower product margins. In the Domestic segment, revenue decreased by 3% and gross profit rate increased by 40 basis points. International revenue decreased by 4%.

The company's vendor funding offset to SG&A has remained consistent at $20 million for the past three quarters. The international gross profit rate decreased by 30 basis points due to lower product margins and higher supply chain costs, partially offset by growth in higher margin services. Domestic non-GAAP SG&A decreased by $46 million, driven by lower employee compensation and reduced expenses in areas such as vehicle rental and credit card fees. The company has updated its full year fiscal '25 guidance, with revenue projected to be between $41.3 billion and $41.9 billion, a comparable sales decline of 1.5% to 3%, and a non-GAAP diluted earnings per share of $6.10 to $6.35. The company is raising its profitability outlook based on strong performance in the first half of the year. The main drivers of this outlook are expected improvements in services and membership offerings.

The company is expecting higher revenue from installation and delivery services, but lower product margin rates due to price investments and vendor support. They also expect pressure from lower profit share on credit card arrangements. In the second half of the year, they expect to see gross profit rate expansion, but not as much as in the first half. The company also expects a decline in non-GAAP SG&A dollars, with the benefit of having one less week this fiscal year and flat store payroll expenses. However, advertising expenses will increase and they plan to reduce variable expenses to align with sales trends.

In the third quarter, the company expects a slight improvement in comparable sales compared to the previous quarter. They anticipate a 1% decrease in comparable sales and a non-GAAP operating income rate of 3.7%. The first question from an analyst was about the comparisons faced for the rest of the quarter, to which the company responded that last year's August, September, and October were down 6%, 7%, and 8%, respectively. The second question was about the mix of laptops, and the company stated that while AI-enabled chip devices are being rolled out, they still make up a small percentage of sales. Customers are still primarily interested in upgrading their laptops.

Best Buy's Copilot+ program has had a positive effect on consumer behavior and has had a "halo effect" on the entire department. The company has also made efforts to improve expertise, displays, and the app, which have all contributed to the overall success of the category. However, the company is still cautious about the unpredictable and uneven consumer environment, especially with the upcoming election and holiday season, and has adjusted their comp guidance for the rest of the year accordingly.

Corie Barry, CEO of Best Buy, is discussing the company's market share and profitability with an analyst. She mentions that there are signs of stabilization in the category and that their market share is also stabilizing. She cautions that share is a long game for them and is not easily measurable quarter by quarter. She also notes that the team has done a good job in certain categories, such as computing and gaming, but there is still room for improvement in others, like major appliances. She hands over the question about profitability to Matt, who will discuss the critical factors that will influence the company's incremental margins as they experience an upturn in sales.

The company is experiencing a slowdown in the housing industry, which is a major category for them. They are focusing on targeting consumers who are value-oriented or looking for innovation replacements. In the long term, they expect to see growth in this industry and plan to increase their market share and profitability through cost reductions and other initiatives. They also tend to do well when there is innovation and they can leverage their competitive differentiation.

The company's Copilot+ service is currently small but shows potential for outperformance. Laptops and tablets have been strong sellers, driven by innovation and product cycles. The next product cycle that may see improvement for the company could be in the area of Apple Intelligence.

The speaker discusses the importance of Apple Intelligence, which will be available on various devices such as phones, tablets, and Macs. They believe that AI capabilities will eventually be present on all screens, starting with computing devices and potentially expanding to smart home devices and televisions. The company expects a longer cycle for AI adoption and is not concerned with immediate demand. They also mention a calendar shift in Q2, with May being more impacted than July. The membership program is becoming more profitable, which may have a positive impact on gross margin.

Best Buy's membership program is designed to increase customer engagement and share of wallet. The program has been successful in acquiring new customers, with a growth in paid members compared to the same quarter last year. These paid members also show higher levels of engagement and spend at Best Buy. While it is still early, the retention rates for both tiers of membership are outperforming expectations.

The company is pleased with the early indicators of their membership program, but it will take some time to fully understand customer behaviors. They expect the promotional environment to continue for the rest of the year, with appliances, televisions, and computing being particularly competitive. There was a one-time legal settlement that resulted in a $10 million benefit to SG&A in the second quarter. The company is preparing for continued competitiveness in the second half of the year.

The speaker is discussing the performance of back-to-school sales and how they are meeting expectations. They also mention that back-to-school sales tend to continue into September. The speaker also talks about the outlook for the fourth quarter, mentioning a wide range of potential outcomes and factors that could impact sales, such as strong sales in computing and tablets, price investments, increased marketing, and dedicated labor.

The speaker expects improvement in the TV market in the later quarters of the year, especially in larger televisions. They also expect a stagnant or slightly lower performance in the lower end of the market. When discussing the growth in tablets and computers, the speaker mentions that ASPs were flat or slightly down in the notebook category, but could potentially increase with new innovations and AI-enabled computers. ASPs in the tablet category may come down during the holidays due to promotions. However, the company does not base their business planning on these organic changes, but rather on product launches and category cycles.

The speaker, Corie Barry, discusses the impact of innovation on the consumer electronics (CE) category. She notes that in the early stages, innovation can drive higher average selling prices (ASPs), but also acknowledges the highly promotional and price-sensitive environment in the industry. She emphasizes that their objective is not ASP expansion, but rather meeting the customer's needs and providing value. The question of wallet cannibalization within the category is raised, and Barry mentions the stacked pressures on the industry, including inflation and competition for consumer spending.

The housing market is still struggling, but people are spending more on experiences than goods. This trend has remained consistent, but there are signs of it starting to slow down. The lack of innovation in the industry and the pull forward of spending during the pandemic have affected the market, but there is hope for improvement in the future. The company will continue to monitor key indicators and believes that a combination of easing inflation, innovation, and replacement cycle timing will lead to a rebound in the industry. Their observations in Q1 and Q2 have reinforced their beliefs.

The company expects gross profit rate expansion to be similar in the third and fourth quarters, with the exception of an extra week in Q4. However, the rate will likely be lower than the first half of the year due to product margin pressure and credit card profit share. Overall, the company anticipates a 35 basis point expansion for the year.

The drivers for the biggest items in the quarter were dissimilar, and the company saw a benefit from higher services and weaker product margins. The exact quantification of this benefit was not disclosed. The company expects product margins to be affected by promotional activity and the mix of categories. However, if inventory is managed well, there should not be excessive write-off markdowns. The company was thanked and wished luck for the rest of the year.

The speaker is asked about the company's flat quarter-to-date sales and the headwinds they are facing. They decline to give specific details about weekly impacts, but mention that July and August have been flat and the two quarters combined are also flat, showing an improvement from previous quarters. They also mention that it is difficult to estimate weekly shift impacts as there are other factors at play. On the topic of SG&A, the speaker mentions that it was down 4% in the first half of the year, but is expected to be up 2% to flat in the second half. They also note that the S&A favorability in the first half may not translate to the back half due to various factors.

The first half of the year saw a lot of favorability in store payroll, but this will not continue in the back half due to operating model changes and a better sales outlook. The $40 million of geography change for offsetting SG&A versus cost of sales will not occur in the back half, and medical claims costs were also lower in the first half. This will result in a noticeable change in SG&A trajectory from the first half to the back half of the year. These factors were largely included in their previous guidance. The call has now concluded.

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