Best Buy Co., Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's fiscal year 2020 third quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you'll need to press star 1 on your phone. If you choose to be taken out of the question queue, please press star 2. As a reminder, this call is being recorded for playback and will be available by approximately 1 p.m. Eastern Time today. If you need assistance on the call at any time, please press star zero and an operator will assist you. I will now turn the conference over to Molly O'Brien, Vice President of Investor Relations. Please go ahead.

Thank you and good morning, everyone. Joining me on the call today are Corey Berry, our CEO. Matt Balunis, our CFO, and Mike Mohan, our President and COO. During the call today, we will be discussing both GAAP and non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release, which is available on our website, investors.bestbuy.com. Some of the statements we will make today are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may address the financial condition, business initiatives, growth plans, investments, and expected performance of the company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current earnings release and our most recent 10-K for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the call over to Corey.

Good morning, everyone, and thank you for joining us. Today we reported $9.76 billion in revenue, expanded our non-GAAP operating income rate by 70 basis points, and delivered non-GAAP diluted earnings per share of $1.13. which was up 22% compared to the third quarter of last year. We delivered another strong quarter and are excited about our continued momentum and the opportunities we have ahead of us. Our teams continue to execute well and navigate ever-increasing customer expectations, a consistently competitive retail environment, and the uncertain tariff situation. And they are doing all this while making significant progress against our Building the New Blue strategy, which we believe will uniquely position us over the long term. Specifically, our comparable sales growth of 1.7% was on top of 4.3% last year and above the high end of our guidance range for the quarter. Our domestic segment comparable sales were up 2% as we continue to focus on the customer experience across online, stores, and home. From a product category standpoint, the comp growth was driven by strength in appliances, headphones, tablets, and computing, partially offset by declines in gaming and home theater. The Q3 profitability was better than expected. This was primarily the result of lower SG&A due to strong expense management, a reflection of the culture we have built around driving cost reduction and efficiencies to help fund investments and offset pressures. The Q3 gross profit rate was flat on a year-over-year basis. Due to the strong Q3 results, we are updating our annual guidance today. Matt will discuss in more detail later in the call, but at a high level, we're maintaining the top line guidance we shared last quarter while raising the non-GAAP EPS guidance. We are now expecting non-GAAP EPS of $5.81 to $5.91. This compares to the original guidance of $5.45 to $5.65 that we provided last February as we entered the year. As it relates to tariffs, our assumptions of the impact on our business are basically unchanged from our last call. As a reminder, our guidance includes our best estimates of the impact of all tariffs, both implemented and planned, including List 3 at 25%, List 4A at 15%, which was implemented on September 1st, and List 4B at 15%, which is planned for December 15th. As we shared in our investor update in September, we are entering the second chapter of building the new blue. Our purpose remains the same, to enrich lives through technology. Our strategy is to leverage our unique combination of tech and touch to meet everyday human needs and build more and deeper relationships with our customers. We introduced three five-year goals at our investor update focused on employees, customers, and financials. As a reminder, they are, first, to be one of the best companies to work for in the U.S., exemplified by being named to Fortune's 100 Best Companies to Work For list. Second, to double the number of significant customer relationship events to 50 million. This includes total tech support memberships, homes visited, active digital engagement, financial services, and senior lives supported. And third, to deliver continued top and bottom line growth over time. specifically to get to $50 billion in revenue and a 5% non-GAAP operating income rate in fiscal 2025. We believe our strategy will translate to an economic model that delivers results by better serving existing customers, capturing new demand, entering new spaces, and building capabilities while maintaining profitability over time. Last quarter, we talked about how our penetration by geographic market varies widely. yet our tools and structure have been one-size-fits-all for our local markets. To better serve existing customers, we made strategic changes to our field operations to accelerate growth and to create a more seamless experience across channels, putting single leaders in a position to be accountable for stores, services, supply chain, and home propositions in their market. These leaders are supported by a channel agnostic program centered around insights, data, and analytics, to view a market's largest opportunities, and fast-track initiatives that will make a financial impact, as well as provide a more seamless customer experience. For example, in the New York area, we are focused on expanding both our fulfillment options and in-home resources. During the quarter, we launched 175 alternate pickup locations for customers in areas where either our store locations are not convenient or the ship-to-home option is not desired. These alternate locations are in UPS stores and CVS stores in the New York market. In New York, as well as Los Angeles and Chicago, online customers can order as late as 8 p.m. and still receive their products the next day for free. Starting in New York, we are also adding the ability for online customers who want their product the same day to select specific three-hour delivery windows for that same-day delivery. And for those online customers who prefer to pick up the products themselves, we are beginning the process of rolling out curbside pickup at stores in the New York market where a Best Buy employee will bring the product directly to the customer's car. To build awareness of these expanded experiences, we have already kicked off a comprehensive local market marketing campaign that includes stores, train stations, billboards, digital, and email. Based on our data, we believe there is much untapped opportunity to serve New York clients in their homes. To capitalize on that opportunity, we are building capacity by adding additional in-home advisors and also increasing the training for existing advisors. We have combined additional resources from both the field and corporate teams to provide these new advisors an accelerated, locally-focused training program that we believe will speed up their ramp-up time. This will free up capacity for our existing advisors in the market to receive more training designed to strengthen their clienteling skills which will lead to deeper customer relationships. Based on local market analysis, we have also added capacity across the country where we continue to see strong customer demand for our in-home consultation program. On a national level, during the quarter, we added 100 in-home advisors to end the quarter with approximately 720 advisors. As we shared in our investor update, 95% of those polled said they would continue working with their in-home advisor, and we continue to see higher spend at a higher gross profit rate from our in-home advisor customers versus other customers. We expect our advisors will become more and more productive as we advance our CRM system and enhance our digital tools. Another important way we are better serving customers and building relationships is through our total tech support program. Total Tech Support provides members unlimited Geek Squad support for all their technology, no matter where or when they bought it, in addition to great discounts on installations, protection, and in-home services. We have grown the membership to over 2 million members from about 200,000 when we launched nationally in May of last year. It continues to get strong customer reviews, and members spend more and are twice as likely to use other services than non-members. We are building on this early success to continue to deliver more benefits our members are asking for. For example, we are piloting a program we are calling Total Tech Support with Networking that includes router setup and installation, parental controls to manage every device on the network, a subscription to Microsoft Office 365, and one terabyte of cloud storage along with all the standard Total Tech Support benefits. We are also continuing to add new services and capabilities that have the potential to attract new customers. As we shared last quarter, Best Buy is now fully certified chain-wide as an Apple authorized service provider, becoming the nation's largest physical destination in terms of points of presence for Apple authorized repair services, including same-day iPhone repairs. Almost 40% of these Apple repair customers are either new to Best Buy or haven't made a purchase in the last year. Our lease to own purchasing option is now fully rolled out to 45 states after we added the last nine states, including California and New York, just a few weeks ago. This provides another purchasing option in addition to our existing strong credit card offer, allowing us to help customers make purchases they might not otherwise be able to. Since we began rolling out the program nationally in March, approximately 65% of lease to own customers are either new to Best Buy or haven't made a purchase in the last year. We also remain focused on developing digital innovation and marketing strategies to drive engagement with our customers. We continue to enhance our digital shopping platforms, both online and on our mobile app, with new functionality and a better customer experience. Our app continues to see strong customer ratings. and year-to-date usage of the app is up more than 20%, and usage of our app within our stores is up more than 30%. Our store employees love the app, which has also been improved with their needs in mind. They can now much more quickly see pricing, promotions, inventory, and fulfillment times through features such as top deals, which I will discuss in a moment, and expanded availability options. The app also provides employees other recommended products, if a certain product is out of stock in their store. During the quarter, we materially changed the way we present product deals to our customers. Several years ago, we created a digital version of our weekly ad as we transitioned away from the paper weekly ad that was distributed every Sunday. We no longer distribute any paper weekly ads, and during Q3, we sunsetted the rigid digital weekly ad technology platform and launched a top deals section in our app and on our website. This leverages cost and gives us more flexibility to introduce multiple promotional cycles within the week and ensure we are featuring our best offers. Most importantly, Top Deals provides a better user experience and helps customers find products faster with fewer clicks, resulting in higher and more consistent traffic throughout the week and better conversion compared to the old experience. At our investor update in September, we also spent time talking about the significant opportunity we see in the health space. Specifically, we reiterated our focus on helping seniors live longer in their homes through our unique combination of tech and touch, thereby reducing their healthcare costs and bringing greater peace of mind for them and their families and caregivers. We serve approximately one million seniors right now, and we shared our goal to serve five million seniors in fiscal 2025. Today, most of the seniors we serve are utilizing easy-to-use mobile phone products and connected devices that are tailored for seniors and come with a range of relevant services. With our five-star service, customers can talk to US-based, specially-trained agents who can connect them to family caregivers, provide concierge services, and dispatch emergency personnel. We expect to continue to scale this business over time in order to reach our five-year target we also expect to advance our commercial business, where the services we provide for seniors are paid for by insurance providers. This includes services such as remote monitoring-based solutions that provide meaningful insights to improve timely care and reduce the cost to serve frail seniors. As previously discussed, we have successfully closed and integrated three acquisitions that have given us unique and essential capabilities and infrastructure, talent, and a base of customer relationships to build from. We have also hired additional talent to deepen our expertise. That includes Dr. Daniel Grossman, our new chief medical officer for Best Buy Health. He is a practicing emergency medicine physician at a major academic medical center in Rochester, Minnesota, with extensive strategy and business development experiences at leading health tech companies. He has been on all sides of healthcare, physician, patient, payer, disruptor, and educator. We are excited to have him on our team. As we have reiterated many times, our continued focus on reducing cost and driving efficiencies in order to fund investments and help offset pressures is a key element of our long-term strategy. In September, we announced a new cost reduction and efficiency target of $1 billion by the end of fiscal 2025. We made good progress against this new goal during the third quarter and plan to provide more detailed annual updates on our Q4 calls going forward. In addition to our strong business results, we have continued to make strides toward our goal of becoming one of the best companies to work for in the United States. For example, we have recently added a variety of employee benefits, including paid caregiver leave, paid time off for part-time employees, backup child care, a PTO purchase plan, and enhanced mental health resources. We also increased our adoption assistance benefit and introduced a new surrogacy benefit as part of our efforts to support employees who want to grow their families. And finally, last month, we announced an updated dress code that allows employees to wear jeans and comfortable shoes. This is something our store employees have been asking for and, importantly, saves them money. These changes have all been extremely well received by our store teams across the country. These are just a few examples of the ways we are continuing to invest in our people and underscores our commitment to be a great place to work. And these investments have produced some very positive results. Our store turnover remains in the low 30% range compared to 50% five years ago. And our average store general manager has been in his or her role for about six years. In fact, as we enter Q4, more than 92% of our store general managers already have experience leading their stores through a holiday season. Our progress has also been noticed outside the company. We are proud of the breadth of recognition we have received in recent months, including ranking number 66 on Forbes list of the world's best employers, and being named the number one best company to work for during the holiday season by Glassdoor. We are also honored to be ranked one of the top employers for students and graduates of historically black colleges and universities. Our culture at Best Buy is incredibly strong, It's the reason I'm here, and I firmly believe it is our competitive advantage. As we look ahead, we are excited about our holiday plans and everything we have to offer our customers this holiday season. Our team has once again put together a best-in-class assortment, prepared an amazing set of deals, and ensured we have great inventory availability across all the product categories we carry. And we're supporting that work with a steady drumbeat of marketing and promotions that will keep us by top of mind with shoppers throughout the holiday season. Earlier this month, we released our Black Friday ad full of thousands of deals on the hottest tech. Hundreds of those deals were available immediately, and we will continue to provide compelling offers throughout the holiday season. On the fulfillment side, we're making it even easier and much faster for customers this year. We are promising free next-day delivery on thousands of items all season long with no membership or minimum purchase required. The fact that we are able to make that promise to our customers is a huge testament to all the work our teams have done throughout our supply chain transformation. About 99% of our customers now live in the zip code where next-day delivery is available, up from 80% last quarter. And if a customer lives in an area where free next-day delivery isn't available, or they're shopping for an item that isn't eligible for it, they can still get free standard shipping. As we have shared previously, we also offer same-day delivery on thousands of items in 42 markets. And of course, store pickup remains a fast and convenient option for our customers. More than 70% of Americans live within 10 miles of a Best Buy store, and we promise that their items will be ready within one hour of placing an order. And on average, 80% of online orders are ready for store pickup in less than 30 minutes. The NPS score for the experience continues to increase, and about 40% of our online sales are picked up in our stores. Finally, as I mentioned earlier, we are offering curbside pickup in a few stores in New York and other select markets across the country, allowing customers to pick up their tech without even getting out of the car. Our fulfillment options are all focused on providing customers with the choice and convenience they expect and deserve. And with the digital shopping experience on the Best Buy mobile app, it is now easy and intuitive to see your options for when and where you can get your order, whether you opt for delivery or store pickup. I also want to highlight that once again this year we are supporting the St. Jude Thanks and Giving Campaign with customer and employee donations in our stores and online. We have been the program's top fundraising partner for three consecutive years, helping to raise $80 million for St. Jude's life-saving work since we first partnered in 2013. We hope to bring that cumulative total to more than $100 million with this holiday season. In summary, we are pleased to report strong results for the third quarter and our teams are excited and ready to deliver an outstanding holiday season. I want to take a moment to genuinely thank our amazing Best Buy employees in advance for all their hard work this week and throughout the holidays. Whether you work in one of our stores, spend your time making house calls to our customers' homes, or work in a distribution center or the corporate office, please know that you are a critical part of what makes Best Buy so special. The holidays can be a fun and very busy time in retail, and I want you to know how much we sincerely appreciate all that you do. And with that, I'll now turn the call over to Matt.