Best Buy Co., Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Best Buys Fiscal Year 24th 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 choose to ask a question, you will need to press star 1 on your phone. If you choose to be taken out of the questioning queue, please press star 2. As a reminder, this call is being recorded for playback and will be available by approximately 11 a.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'll now turn the conference call over to Molly O'Brien, Vice President of Investor Relations. Ma'am, please go ahead.

Thank you, and good morning, everyone. Joining me on the call today are Corey Berry, our CEO, Matt Ballounis, 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 Cori.

Good morning, everyone, and thank you for joining us. Today we are excited to report strong Q4 results with revenue of $15.2 billion and non-GAAP earnings per share of $2.90. Our enterprise comparable sales growth for the quarter was 3.2% above the high end of our guidance range and on top of 3% last year. We are posting our 12th straight quarter of comparable sales growth and showing our strength as a successful multi-channel retailer who can meet customers when and where they want. We offered compelling holiday deals that resonated with customers and provided a seamless shopping experience, great inventory availability, and fast, free delivery. Across online, home, and stores, we are fulfilling our purpose to help enrich people's lives with technology while also helping technology companies commercialize their product innovations. Our domestic segment comparable sales were up 3.4%. From a product category standpoint, the comp growth was driven by strength in headphones, computing, appliances, mobile phones, and tablets, partially offset by gaming. We also saw continued growth from our transformative initiatives like total tech support and in-home consultation. The enterprise Q4 non-GAAP operating income rate of 6.5% was better than we expected due to lower SG&A expenses. On the gross profit rate lines, the mix of products we sold in the quarter drove a lower rate than we anticipated. For the full year, we grew enterprise comparable sales 2.1%, expanded our non-GAAP operating income rate 30 basis points, and increased our non-GAAP earnings per share 14% to $6.07. We also returned $1.5 billion to our shareholders through dividends and share repurchases. In summary, we are proud of these results, and I want to thank all of our associates for their hard work, commitment to serving customers, and amazing execution as we navigated ever-increasing customer expectations, a consistently competitive retail environment, and a challenging tariff situation. Against that backdrop, our associates also continue to drive significant progress against our Building the New Blue strategy. We believe our strategy will uniquely position us over the long term by leveraging our combination of tech and touch to meet everyday human needs and build more and deeper relationships with customers. Let me provide some highlights of our progress, starting with how we are better serving our existing customers. We continue to innovate and design digital experiences that solve customer needs across online and physical shopping. This includes enhancing our digital shopping platform with new functionality and evolving our marketing strategies to drive engagement with our customers, with a particular focus on our app. Our app continues to see strong customer ratings, and usage grew significantly through the year. In fiscal 20, customer visits to the app were up 22% overall, and usage of our app within our stores was up approximately 17%. Customers on the Best Buy app engage with us eight times more frequently than those who solely use our website or mobile sites. At the same time, we continue to transform our supply chain using automation and process improvements to expand fulfillment options, increase delivery speed, and improve the delivery and installation experience. We also continue to improve the buy online, pick up in store experience for our customers, including the introduction of curbside pickup and alternate pickup locations. As a result of all the work our teams have done throughout our supply chain transformation, in Q4, we promised free next day delivery on thousands of items all season long to 99% of our customers with no membership or minimum purchase required. And we also promised online customers who wanted to pick up in store that their items would be ready within one hour of placing an order. As a result, store pickup was up over 500 basis points to 42% of online sales in Q4. All of these improvements were made with our customer experiences in mind, and they contributed to continued online growth for the year. We saw particularly strong results in the fourth quarter, where online sales grew 18.7% and represented 25% of our total domestic revenue. For the year, online sales represented almost 20% of our domestic revenue. We also focused on enhancing the in-home experience for our customers. During fiscal 20, we expanded our in-home consultation program from 530 to 725 advisors. This, combined with tools to maximize their productivity, helped us decrease the amount of time customers were waiting for an advisor appointment, a key driver of NPS and close rates, and allowed us to provide more than 250,000 free in-home consultations to customers across the nation. Both employees and customers continue to love it, The net promoter score for purchasers is high at 87, and the advisor-employee turnover remains low. Additionally, we are now seeing a growing percentage of repeat purchases as customers develop and take advantage of their relationship with their advisors. This, of course, was the intent when we began the program, and we're delighted to see these relationships being built as we continue to increase investment in technology that is perfectly suited to this new kind of seamless customer interactions. Providing 24 by 7 support for all their technology needs is another way we build relationships with our customers. Our total tech support program grew steadily during fiscal 20 to end the year with almost 2.3 million members. It continues to get strong customer reviews and members spend more and are twice as likely to use other services than non-members. The average member uses the program approximately 2.5 times per year. During the year, we also rolled out pilots to test new member-requested benefits related to networking, parental controls, and data storage. We also made progress on our initiatives to capture new demand and enter new spaces. In fiscal 20, we became 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. Turning to Best Buy Health, during fiscal 20, we continued to advance our initiatives designed to help seniors live longer in their homes with the help of technology. We successfully integrated two additional acquisitions that have given us unique and essential capabilities and infrastructure, talent, and a base of customer relationships to build from. We are encouraged by the integration with Best Buy and the conversations we are having with potential partners. Of course, our success with customers and the progress we are making on our Building the New Blue strategy is driven by the enthusiasm, talent, and purposeful leadership of our employees. During fiscal 20, we continue to invest in wages, training, and many new employee benefits, including paid time off for part-time employees, paid caregiver leave, expanded mental health benefits, enhanced adoption assistance, and a new surrogacy assistance benefit. Our employee engagement is high, and our turnover rates in our stores remain in the low 30% range, compared to 50% five years ago. Additionally, our average store general manager has been in his or her store for about six years, which is incredibly important from a store leadership and community perspective. In parallel to the customer experience work during fiscal 20, we continued to drive efficiencies and reduce costs in order to fund investments and offset pressure. In the middle of the year, we completed the existing $600 million cost reduction target that we had set in fiscal 18. In September, we announced our new target of an additional $1 billion in annualized cost reductions and efficiencies by the end of fiscal 25. We achieved approximately $160 million toward our new goal in the back half of the year. We are also proud of our progress in advancing our corporate social responsibility and sustainability efforts. In fact, we were just named to the top five on Barron's annual 100 Most Sustainable Companies list for the third consecutive year. You can find more information about our efforts in our annual corporate responsibility and sustainability report, which can be found at investors.bestbuy.com. Similarly, I would like to note our progress related to our teen tech centers, a program we are very proud of and passionate about. These centers are after-school learning spaces equipped with cutting-edge technology where teens learn new tech skills, gain exposure to new career possibilities, and benefit from positive adult and peer relationships. We have added 11 teen tech centers in the past year for a total of 33 locations across the country. Moving forward, we will continue to invest in this program with plans to open 11 new centers this year. And we know this work is making a difference. 91% of teens say they are more optimistic about their futures because of their time at the teen tech centers, and 73% say they are interested or very interested in studying some aspect of STEM in the future. I'm also incredibly proud to report that Best Buy was once again the top partner for the St. Jude Thanks and Giving Campaign, helping raise a record $22 million through customer and employee donations in our stores and online this holiday season. That pushes our cumulative total to more than $100 million raised for the kids of St. Jude since we first partnered in 2013. As we enter fiscal 21, we are excited about our opportunities and are encouraged by our momentum. As a reminder, back in September, we set three fiscal 25 targets focused on employees, customers, and financials. 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, 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, 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 25. We believe our strategy will translate to an economic model that delivers results by better serving existing customers, capturing new demands, entering new spaces, and building capabilities while maintaining profitability over time. I would like to highlight some focus areas for this year. First, in service of our existing customers, we will continue to bring our deep CE expertise and unique ability to partner with vendors to commercialize their new technology, offering customers great products and solutions. In this context, we are excited by the opportunities related to technology innovation over the next several years. As we have discussed previously, these are technologies like 8K, OLED, dual-screen notebook computers, foldable phones, consumer health products, connected fitness, new gaming consoles, and new products that leverage 5G capabilities. We will also launch new categories where we can leverage our digital-first mindset supported by our expertise around curation and supply chain. Some of these will be online only and include areas such as hearing aids, sustainable living products, expanded connected fitness initiatives, and travel and luggage. These are categories that we believe our customers would expect to find at Best Buy. From a digital standpoint, we will continue to drive engagement with customers during their shopping and ownership journey, while making it as seamless as possible for customers as they interact with us across channels. For example, in the app, we will make it much easier for customers to discover and benefit from the support services we offer, including scheduling appointments, which is something that currently requires a separate app download. We also plan to utilize location data to make it even easier and more intuitive for customers in the app to see both product availability and the expanding options for fulfillment. From an in-home standpoint, we will continue to enhance the experience for customers, while at the same time testing new opportunities for growth and becoming more efficient in the way we are serving customers in their homes. As I mentioned earlier, we now have over 720 in-home advisors, and we continue to receive great customer feedback. In fiscal 21, we are testing new tiered advisor roles that will match the right employee with the right customer needs. We are also continuing to enhance our clienteling technology platform to drive better customer experiences. For example, the platform can increasingly help our advisors use knowledge about their client's current and future needs to proactively communicate new promotions and product launches over time that can help meet those customer needs. In addition to our in-home advisors, we also have approximately 900 Magnolia system designers, all of whom are supported by nearly 6,000 Geek Squad agents who are trained in premium home theater and custom installation. Looking forward, we see an opportunity to build upon all of these great resources collectively to enhance the customer experience. Our stores remain incredibly important and must work in tandem with our digital and in-home experiences. In fiscal 21, we will continue to enhance both the proficiency of our store associates and optimize the way they work in order to drive stronger customer relationships. We are also investing in technology, including the rollout of electronic shelf labels to all of our stores to enhance the customer experience and generate cost savings through added efficiency. Additionally, we will test and learn from a small number of new store and remodel pilots with a focus on fulfillment and differentiated shopping experiences for our customers. We will continue to develop and hone our local market focus by leveraging the strategic changes we made last year to our field operations. Designed to create a more seamless experience across channels, these changes put 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 to accelerate growth. In total tech support, our focus will be on driving new memberships and ensuring our members continue to see the offering as something they can't live without. We know that our members tend to use the offering more in the initial months after becoming a member, and our goal is to continue to see the usage increase over time across their membership. As we shared with our investor update last September, we see an opportunity over time to evolve our many customer memberships. which also includes our millions of My Best Buy customers. We plan to roll up pilots during the year as we work on the best way to simplify offerings and move from managing the economics offer by offer, which is how we look at it today, to a more holistic and streamlined offering that is centered on the customer. Turning to our focus on capturing new demand and entering new spaces, in fiscal 21, we plan to expand our lease-to-own purchase options by building awareness throughout the year and then adding an option for customers to use Lease to Own for online transactions in the third quarter. Now I would like to talk about Best Buy Health. As we've shared before, most of the seniors we currently 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. For example, with our health and safety services, customers can talk to U.S.-based, specially trained agents who can connect them to family caregivers provide concierge services, and dispatch emergency personnel. As we enter fiscal 21, there are a number of developments that we believe will accelerate the growth of this direct-to-consumer business. First, we are launching a number of new products and services, including a new mobile medical alert device, also called PERS, a wearable device, and apps designed for both seniors and their caregivers. Second, we are enhancing the customer experience in our Best Buy stores. This includes expanded shelf space and merchandising presentation, as well as the ability for sales associates to help customers activate their devices at the time of purchase, so they can start using the services right away. Third, we have a new distribution agreement with Walgreens to carry our new PERS device in 6,600 Walgreens stores across the country and Walgreens.com. Fourth, We signed a new AARP agreement whereby the organization's 38 million members will get exclusive discounts on our health and safety devices. At the same time, we will continue to focus on the commercial health opportunities, where the services we provide for seniors are paid for by health plans, health systems, and others in the senior care industry. There is a high level of interest in our unique combination of tech and touch. and the potential we have to reduce healthcare costs and bring greater peace of mind for seniors and their families and caregivers. As we expected when we entered the state, the healthcare industry has long sales cycles, and this side of the business will take longer to ramp than the direct-to-consumer side. Turning to supply chain, we will focus on leveraging automation across the supply chain network and offering customers free next-day delivery, which we view as table stakes across the industry. We will also continue to roll out enhancements to buy online pickup in-store to make it even more convenient for our customers to get their products, including alternate pickup locations as well as curbside pickup at Best Buy stores. We have just expanded alternate pickup to approximately 2,000 locations across nine markets and plan to expand to more markets throughout fiscal 21. These alternate pickup locations are in areas where either our store locations are not convenient or the ship-to-home option is not desired. Last quarter, we also introduced curbside pickup at approximately 100 stores, which allows customers to pick up their tech without even getting out of their car. Customers are finding value in this option, as curbside already accounts for 15% of store pickup units at those locations, and we plan to expand this service to the majority of our stores in fiscal 21. Of course, to bring all of the initiatives we have just discussed to light, We will need to invest in technology. It is imperative to the success of our strategy that we continue to improve our clienteling and CRM programs, enhance our data and analytics capabilities, and drive artificial intelligence, machine learning, and automation. Before I turn the call over to Matt, I want to note that we are closely monitoring the developments related to the coronavirus, and our thoughts are with all of those who have been affected. We remain focused on supporting our people and vendor partners during this time. As you all know, this is a very fluid situation that is changing daily, and thus it is very difficult to determine exact financial impacts. Our guidance ranges for both Q1 and the full year reflect our best estimates at this time. Based on what we know today, we have assumed the majority of the impacts occur in the first half of the year. Therefore, we view this as a relatively short-term disruption that does not impact our long-term strategy and initiatives. For the year, we expect comp growth of flat to up 2% and a non-GAAP operating income rate of approximately 4.8%. This guide reflects our continued investment in those areas necessary to make strategic progress and deliver enhanced employee and customer experiences, as well as our continued focus on driving cost savings and efficiency. We remain confident that our Fiscal 21 plan moves us along the path to achieve our Fiscal 25 targets. specifically the financial targets of $50 billion in revenue and a 5% operating income rate. In summary, we are pleased to report strong results for the fourth quarter and full year, and our amazing teams are motivated and ready to deliver on our fiscal 21 initiative. As you can see, we have a lot of exciting work underway and ahead of us. With that, I'll now turn the call over to Matt for more details on our fourth quarter results and our guidance.

Good morning. Before I talk about our fourth quarter results versus last year, I would like to talk about them versus the expectations we shared with you last quarter. On enterprise revenue of $15.2 billion, we delivered non-GAAP diluted earnings per share of $2.90, both of which exceeded our expectations. We had better than expected revenue results, both online and within our international business. From a category perspective, we saw stronger than expected performance from computing and headphones, whereas gaming and smart home were a bit softer compared to our previous estimates. As Corey mentioned, our non-GAAP operating income rate also exceeded the high end of our expectations for the quarter. The higher operating income rate was driven by lower SG&A, which was primarily the result of lower-than-expected incentive compensation expense and strong expense management. This was partially offset by a lower-than-expected gross profit rate. I will share additional details on the gross profit rate drivers later in my prepared remarks. The favorable earnings per share results versus our guidance also included a net $0.03 per share benefit from a lower effective tax rate that was partially offset by a higher share count. I will now talk about our fourth quarter results versus last year. Enterprise revenue increased 2.7% to $15.2 billion, primarily due to the comparable sales increase of 3.2%. Enterprise non-GAAP diluted EPS increased 18 cents, or 7%, to $2.90. This increase was driven by a 12 cent per share benefit from the net share count change and a 6 cent per share benefit from a lower effective tax rate. In our domestic segment, revenue increased 2.6% to $13.85 billion. The comparable sales increase of 3.4% was partially offset by the loss of revenue from store closures in the past year. From a merchandising perspective, the largest comparable sales growth drivers were headphones, computing, appliances, mobile phones, and tablets. These drivers were partially offset by declines in our gaming category. In addition, comparable sales in the services category were essentially flat the last year. As we shared previously, the slower growth as compared to previous quarters is primarily due to lapping the refinement of revenue recognition for our total tech support offer we made in Q4 of last year. Within the quarter, growth from total tech support revenue was largely offset by a decline in warranty revenue. Looking forward, we expect comparable sales growth in the services category to be in the mid-single-digit range next quarter. Domestic online revenue of $3.5 billion was 25.4% of domestic revenue, up from 21.9% last year. On a comparable basis, our online revenue increased 18.7% over the fourth quarter of last year. The growth was primarily driven by higher average order values, but also benefited from increased traffic and improved conversion rates. In our international segment, revenue increased 3.4% to $1.35 billion, primarily driven by comparable sales growth of 1.6% and approximately 160 basis points of positive foreign currency impact. Turning now to gross profit, the domestic gross profit rate was 21.2% versus 22.1% last year. The 90 basis points decrease was primarily driven by items we shared on last quarter's call. These include, one, an unfavorable sales mix of products. two, rate pressure in our services category, and three, impacts associated with tariffs on goods imported from China, which was largely aligned with our expectations heading into the quarter. During the quarter, we experienced more pressure from product mix than we previously expected due to heavier mix in certain vendor products. The international gross profit rate decreased 30 basis points to 22.6%, primarily due to a lower year-over-year gross profit rate in Canada. Moving to SG&A. Domestic non-GAAP SG&A decreased $48 million compared to last year. The decrease was primarily due to lower incentive compensation expense, which was partially offset by a number of items, including variable expenses associated with higher revenue and higher advertising. As a percentage of revenue, SG&A decreased approximately 70 basis points to 14.7%. I would like to say a few words on incentive compensation expense, which has been a driver of lower SG&A expense compared to last year throughout fiscal 20. Most of the variability over the course of the year has been due to last year's results significantly exceeding our incentive performance targets. Compared to our original expectations at the start of the year, lower than planned incentive compensation had an approximately 10 basis point variable impact to our full year fiscal 20 operating income rate. with nearly all of the impact occurring in fourth quarter. International SG&A of $215 million increased $8 million and was flat last year as a percentage of revenue. The $8 million increase was primarily driven by expense associated with new store locations in Mexico and the negative impact of foreign exchange rates. As Corey said, during fiscal 20, we returned $1.5 billion to shareholders through $1 billion in share repurchases and $527 million in dividends. This morning, we announced that we increased our quarterly dividend 10% to 55 cents per share and provided an outlook for share repurchases of $750 million to $1 billion in fiscal 21. I would now like to talk about our outlook. Our full year fiscal 21 financial guidance is the following. Enterprise revenue in the range of $43.3 billion to $44.3 billion. Enterprise comparable sales of flat to 2%. enterprise non-GAAP operating income rate of approximately 4.8%, enterprise non-GAAP diluted EPS in the range of $6.10 to $6.30, and a non-GAAP effective income tax rate of approximately 23%. I would like to call out a number of assumptions. We expect to continue to operate in a positive consumer environment in 2020. As Corey mentioned earlier, our revenue guidance also includes our best estimate of the impacts from supply chain disruptions caused by the coronavirus outbreak. We expect our gross profit rate to be approximately flat on a year-over-year basis. SG&A, as a percentage of revenue, is expected to be slightly up to fiscal 20. As it relates to capital expenditures, we plan to spend in the range of $800 million to $900 million as we continue to build the capabilities needed to execute our strategy. The increase in capital expenditures will include some of the areas Corey noted previously, such as deploying electronic sign labels and continued investments in technology, health, and supply chain. As it relates to the first quarter, we are expecting the following. Enterprise revenue in the range of $9.1 billion to $9.2 billion. Enterprise comparable sales growth of flat to 1%. Non-GAAP diluted EPS in the range of $1 to $1.05%. a non-GAAP effective income tax rate of approximately 22.5%, and a diluted weighted average share count of approximately 260 million shares. I will now turn the call over to the operators for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your touchtone phone. If you're using a speakerphone, please make sure to switch to your handset and make sure your mute function is turned off to allow your signal to reach our equipment. As a reminder, due to high interest and time, please limit yourself to one question. We will now pause for just a moment to allow everyone the opportunity to signal for questions. Our first question will come from Peter Keith with Piper Sandler.

Hi. Good morning. Thanks for taking the question. I just want to ask on the full-year guidance, so it looks like at the midpoint you're guiding to about 2% earnings growth, which is a little bit below last year's initial range. and also below kind of the long-term CAGR to 2025 of about 4% before buyback. So I would assume there's some coronavirus impact to the numbers, but could you just kind of frame up why the overall earnings growth is a little bit below maybe normalized run rate? Sure. This is Matt. I'll start with that. First, as Mark said, I believe we're operating in a very positive consumer environment. Similar to last year, all the data points indicate a good consumer unemployment, good wage growth is good. Consumer spending is good and wage forecast. That being said separately, there is some supply chain related issues as a result of the coronavirus. So on the low end of our guide, we would assume that there's a material disruption, supply chain disruption from that, and that we can't make it all up in the year. So that's one reason, as we said, we did factor in the coronavirus outbreak into the overall guidance and the range. We're still very positive about a number of issues that we have, such as IHA and TTS growth. There's certain categories that we still expect to perform strongly next year, such as appliances and headphones. Like I said, total tech support is still an area of growth for us next year. Gaming would be an area where we are expecting it to be down on a year-to-year basis as well. We do expect to see new console launches in the holiday period next year, but the first three quarters will be down or we expect to be down. And then we still have modern assumptions for TVs and mobile phones to the extent that there is a better adoption to some of those new technologies like 5G. and 8K, then that could help move us up towards the top of the range. So to your earlier point, yes, we did try to factor in the coronavirus outbreak into the overall year, and that did have some impact to the overall guidance. Okay, thanks, Ben. And maybe a quick follow-on. Is there a way to think about the impact of coronavirus on the first half of the year, maybe from a comp sales perspective, understanding that, and it might be wrong, but be helpful to understand how much is factored in at this point?

So, Peter, this is Corey. I think trying to size perfectly the coronavirus impact at this point is incredibly difficult. I think you, as much as anyone, would respect that it's an incredibly fluid situation. We are trying to, for Q1 and the full year, estimate as best we can the impact, mainly in the form of lower sales volume, as you can imagine. And we literally so far have gone vendor by vendor to analyze and size the impact. But it is complicated and very difficult to size. And we're trying to weigh things like which factories are back up and running, and they're all at varying capacities across Asia. Even if the product isn't finalized produced in Asia, some people are waiting for components that may flow from there. There are varying levels of safety stock across the industry, and global vendors have varying levels of global inventory. And then obviously estimating the transportation situation once the production comes back is also difficult. And so based on what we know today, we're assuming the majority of the impact is in the first half. And we do view it as a relatively short-term disruption that doesn't impact our longer-term strategy. But obviously right now we are isolating our approach to the supply chain impacts. And as Matt said, we're assuming the consumer continues on a relatively good pace. So there's still a lot for us to learn there, which means sizing it perfectly just doesn't seem appropriate at this point.

Okay. Fair enough. That's helpful, and thank you very much. Thank you.

Thank you. Our next question comes from Simeon Gutman with Morgan Stanley.

Hi. This is Josh Ron for Simeon. Thanks for taking our questions. The complexion of your margin guidance is a little bit different from the recent past. What are you doing to stabilize gross margins when some of the headwinds like tariffs appear to be rising? And are there internal or external factors responsible for the reversal on the SG&A leverage that you've seen over the past few years?

Sure. As it relates to gross profit in Q4, I think the implied guidance going into the quarter assumed about 60 to 70 base points of pressure. What we saw in the quarter largely played out with what we expected in the same areas. As a reminder, what we said was One of the buckets was unfavorable sales mix of products and vendor mix was part of that. Services pressure was another aspect to the pressure we saw going into the corner. And then as well, we factored in tariffs on imported goods from China. Largely, those all still played out. What we did see was a little bit more pressure on the sales and vendor mix than we expected. During the quarter, we made a point to meet the market in a few key categories. We weren't leading the market from a promotional perspective. In those categories, the customer demand was very high, even higher than we probably even expected going into it, and the mix of that had a negative impact on margins. So we don't believe that – we wouldn't characterize it as irrational or overly promotional, more or less just meeting the customer demand in a very thoughtful way. And if you step back and look at the entire year, the full year gross property was down 20 basis points. Q4 was most of that decrease. And as we said, next year we're expecting gross margin rates to be flat. So we do believe that pressure will start to stabilize next year. Now, we're not going to guide every quarter, and we don't expect it all to be the same. But from a full year perspective, we do expect some of that to stabilize through next year.

I think some of your question was also going to go forward in nature for next year. And the reason we think they stabilize a bit more, there's a couple things. One, while tariffs had – some impact on Q4 for the next year, we would expect there to be very minimal impact over the years. The teams work through their own efforts to mitigate And obviously that gets a little hard to measure along with the coronavirus impact, but we feel like the teams are very well positioned to mitigate the vast majority of the tariff impact for the next year. So that's part of what changes the trajectory of that margin pressure as we head into next year, as well as more of a stabilization of the services business, as Matt talked about, as we lap all of the changes to the total tech support curves and all those things next year. You have a bit of a stabilization there as well. In terms of your SG&A leverage question, I think we would characterize that as two things. One, Matt mentioned the incentive comp implications over the last year, and we were pretty specific about that. And then two, the cost reduction and efficiencies work that the team has done, at least portions of that also flow through SG&A, and that's a bit of where we're also picking up some of that leverage.

Great. Thank you.

Thank you. Our next question comes from Brian Nagel with Oppenheimer.

Hi, good morning. Thanks for taking my question. So I apologize for hitting on the coronavirus issue. It's obviously topical. I mean, clearly, as you've mentioned, it's fluid. But I guess the question I have is, as you start to try to contemplate what impacts this could have on 2020 trends, could you help us understand what you're seeing, if anything, right now? Are you seeing indications of supply chain disruptions at the moment, or are they coming in the very near future? Thank you.

Hey, Brian. It's Mike. Thanks for the question. When we do all of our product forecasting and department selection processes, we have full visibility to what's coming into the country through a variety of sources from our top vendors, including the things we source directly. So what we're trying to infer in our guidance is there's a handful of issues around some items that are going to either be delayed or we have some constraints that we can't have full transparency at any time in the year. that we could decommence or get constrained. We don't have yet. And what we're not also speculating is any delays in launches or technologies. And so I think about this a little bit how we thought about tariffs last year. The U.S. market is the most important consumer electronics market in the world, and we're a very significant part of that. And so when we think about high-value goods and new technology and where consumer demand is, everything gets prioritized for this part of the world. And I don't think that's going to change when things are back running at full speed. And our partners want to work with Best Buy just like we're making sure everything we can do to help them during this trying time is in place. That's probably the best visibility I can give you right now.

That's really helpful. Thank you. And then if I can just slip one quick follow-up in. As we look at the fourth quarter gross margin, and you called out a number of, you know, kind of, transitory or unique factors that contributed to that decline. But is there a way you could parse it out more just so we can understand the true margin performance of the business as we take into consideration guidance for flat margins here in the next year?

Sure. I think as we went into the quarter, I gave you the big buckets of where the pressure was. It was the product mix sales and vendor mix and then services category as well as tariffs. Last time we spoke, we did kind of indicate that most of those buckets kind of equally weighted. And, again, we implied the guidance to be down about 60 to 70 basis points. So, you know, you can do the math there. As we went through the quarter, we also, as we just said a second ago, we did see a little bit more pressure on the mix for products and vendor mix. So that would make that a little bit more of the increase from where we expected it to be. Does that help?

That's very helpful. Thank you.

Thank you. Our next question comes from Anthony Chukumba with Loop Capital Markets.

Good morning. I actually will not be asking a coronavirus-related question. I actually wanted to talk a little bit about rent-to-own. I guess I have two questions. First off is, you know, was offering rent-to-own financing a significant contributor to the domestic comp performance? And then the second question, you know, you mentioned it sounded like you were going to be maybe advertising a bit more aggressively. You also mentioned financing. adding it online in the third quarter. And I was just wondering if you can just give a little more color in terms of on the advertising piece in terms of what your plans are there for rent-to-own. Thank you.

So, good morning, Anthony. I will start with the significance question. It's definitely having a bit of a positive impact, but it is still relatively small in the scheme of things. I would not characterize it as significant to the nature of your question. Second, in terms of advertising more or going online, we definitely think that having this as a digital offering is important, just given the way we're seeing our customers shop. We want to be able to have this as an option online, so yes, you'll see that in Q3. From an advertising or marketing perspective, We've been doing some regional testing on that. I wouldn't expect to see us go full scale, put a ton of muscle behind a big marketing or advertising campaign. I think we still, right now, this is mainly a referral process. As we've talked about before, we tend to start customers with our own branded private label card. And if for any reason they're unable to qualify for that, then we move on to the lease-to-own option. And so I think it's a little bit less about a large-scale advertising effort, and we continue to see it as a nice secondary option. And look, financing and purchasing is all about different purchase options, and that's what we feel like we can provide here.

That's very helpful. Thank you.

Thank you. Our next question comes from Michael Lasser with UBS.

Good morning. Thanks a lot for taking my question. We want to focus on either the aggressiveness or the conservative nature of the gross margin expectation for fiscal 2021. So can you give us a sense for the cadence of gross margin over the course of the year? Do you expect it to be down in the front half and up in the back half? And what would have to go right for it to be better than that? And what would have to go wrong for it to be Worse than that, the question comes just on the heels of you missing your gross margin expectation in the fourth quarter because of MIPS.

Yeah, thank you. In terms of next year's gross profit rate, I would characterize, again, the year we're expecting it to be flat, and we outlined a little bit of the puts and takes there, I think, From a benefit perspective, we expect to see continued growth in our health business, and as Corey mentioned, continued cost reduction efficiencies helping us on the margin rate. On the pressure side, we will see a little bit of pressure on the supply chain as we move bigger products through our supply chain system. We'll see a little bit of pressure there too. Tariffs will be a little bit of an impact, but again, not a material impact next year. And services, when you take out health, will be a little bit of a pressure next year, again, as we're moving more large products. So those are kind of the major things that are benefiting and putting a little pressure on it. We're not going to get exact quarter guidance. Things aren't always going to be the same in every quarter, but I wouldn't expect any quarter to be much different than that basic makeup, meaning one materially down versus the other, at least as far as we can see right now. We do expect it to stabilize for most of the year, and some of that pressure we saw this Q4, we would expect to lap as we look into next year.

If I could also add one clarifying question. Have you only assumed supply chain disruptions in your guidance? How long do you assume those will persist? And have you assumed anything about changes in behavior, consumer behavior, because of all the headlines we're seeing?

Right now, we have isolated it to supply chain disruption because literally every consumer indicator and every more macro forecast that we can get our hands on right now would say you continue to see growth in the consumer. And for us to predict exactly how the consumer is going to react given how quickly this is evolving and changing every day didn't seem prudent.

Thank you very much.

Thank you. Our next question comes from Steve Forbes with Guggenheim Securities.

Good morning. Good morning. Maybe just given all the near-term noise here with the virus, I kind of wanted to step back and revisit the 5% long-term EBIT margin target, right, given the achievement of that level in the U.S. segment this year. So if you can, maybe just discuss how the expectation breaks down on a segment basis, right, as we look out, and if possible, provide some directional color around the EBIT margin structure for 2020, 2021 on a segment basis.

Sure. So overall, I think as we try to achieve or as we look to achieve the 5% goal in FY25, I think we always talk about the path. It wasn't going to exactly be linear. We did achieve a pretty high operating income rate this end of the year. A chunk of that was actually due to the short-term incentive favorability that we had. So as we look at next year and the years out, we still expect health to be a good contributor to that expansion of OI rate. Internationally, I would say more of the same, probably operating income rate more stabilized over that period of time. Domestic is where we'll probably see more of the expansion as we look into FY25 from a segment perspective.

Thank you.

Thank you. Our next question comes from Kate McShane with Goldman Sachs.

Hi, good morning. Thanks for taking my question. I wondered if I could talk about the holiday season, just how did you manage the six fewer days and did you see any change in patterns or demand as a result? And just from a promotional standpoint with promotions coming earlier, is that something that impacted gross margins during the quarter?

So I'll start and Mike can add anything he would like to. I think one of the things we're most proud of in terms of Q4 is that it really felt like our investments in our digital experiences and our supply chain were really paying off. And I would definitely extend kudos to our merchandising and marketing teams who just did a great job hitting promotions early in the holidays and ensuring that we had a really consistent plan throughout the holiday season. We said in our last call when we guided, we felt like the number of days was not nearly as large an impact this year as it had been in the past, meaning because there are so many ways in which you can get products fulfilled and how we felt about our strength was next day, same day, and particularly in-store pickup, which we said was 42% of what we sold online, we had a really unique ability to offer customers what they wanted on the terms that they wanted it. And so I think this was a period where we really felt like you could see the investments that we had chosen to make up to this point shine. Mike, I don't know if you have anything else you'd want to add.

No, I would just – thanks, Corey. Kate, I would just reinforce the efforts that we talked about at the investor event in September, really thinking about customer experience around fulfillment and what the role Best Buy could play more on a long-term basis. We knew the environment would be different, and we've historically thought about the timeframe broader than just the days between Thanksgiving and Christmas and being able to deliver things that consumers wanted when they wanted and where did it play that well for us? And I think that's a big part of our strategy going forward.

Okay, thank you. And just one follow-up on the related question. I think you talked about the decline in warranty growth during the quarter. But within the guidance for services for 2020, it sounds like you said it would be up mid-single digits. So I just wanted to know what the view is on warranties within that guidance, or will the majority of growth be from the total tech support?

Yeah, thank you for the question. Next year's total tech support will drive most of our services growth next year. I think in Q4 we did see a bit of lower warranty revenue. If you think about the mix of products we sold and heavier online mix as well, those tend to put a little bit of pressure on the warranty revenue, which we saw in Q4. Next year, we believe that stabilizes a bit, but most of that growth we're going to see next year is on the total tech support side.

Thank you.

Thank you.

Thank you. Our next question comes from Mike Baker with Numera.

Great. Thanks. A couple follow-ups. In fact, I'll follow up right on that services question. So mid-single digit from total tech support yet, you have 2.3 million people signed up now. And I think a year ago, it was like a million. So that's like a double. So I guess why wouldn't that be growing more than mid-single digit? That's one question. The second follow-up is on incentive comp. You said 10 basis points. It helps. relative to your plan for the year, and you had already been planning it down, and that 10 basis points, if it was mostly in the fourth quarter, is like 30 basis points for the quarter. I guess the two questions there is, one, in such a short amount of time, how could it have been so much better than planned, especially with the fourth quarter being a pretty strong quarter? Why would it have come in so much lower than planned? And in total, how much did it help you over the year, not just relative to plan? Thank you.

So, on the TTS, the total tech support side, and the growth that we're driving there, we're absolutely seeing that grow. And I think what you have to remember is this is one of those recurring revenue businesses that's going to pay back over time. There is growth there. On the flip side, we also plan to invest more in free installation and delivery, which eats away at some of that growth and also shows up in the services line. I think broadly, I would go back to, though, what's important to us is what we talked about at Investor Day, which is there is services as it's defined in that line on our 10Q, and then there are services as we think about it, which is a much broader definition. It includes things like the memberships that we talked about, in-home consultations, like the broad range of things we offer for customers. And so I would absolutely ask you not to just think about services as the revenue that you see there, but as the broader suite of things that we provide for our customers.

Can I follow up on that? So when I pay the total tech support, which I am a member, by the way, I think it was $199 spread out over a year, does that fall into that services line item?

Yes.

Okay. Thanks. And then on the incentive comp, again, how clear would it have been so much better than plan if the fourth quarter was pretty good? And then what was the plan, I guess?

Yeah, as you can imagine, every year we set the SDI based on this year's budget. And going into the quarter, we had four, and then we changed the guide and forecast every quarter during the year. Going into Q4, we simply had a forecast that had us achieving some of those budgeted expectations that are the basis for both our store plans and our corporate plans. And by the end of the quarter, we simply just didn't get to those budget expectations, and hence the better than expected incentive compensation for the quarter.

So presumably they were gross margin plans rather than sales plans.

We have – the predominance of our plans are both revenue and operating income.

Okay. Thank you. Understood.

Thank you. Our next question comes from Ray Stochel with Consumer Edge Research.

Great. Thanks for taking my question. Could you talk a little bit more about the electronic sign label investment? I think we've seen that in stores. What exactly are you referring to there? How significant is it? And how are you thinking about ROI and strategy there?

Hey, Ray. It's Mike. Thanks for the question. You're correct. We have rolled out approximately 200 stores in our chain with electronic signs. And we've been testing a variety of different ways of doing two things to truly see how to improve the customer experience with more accurate information on a tag, more flexibility on our pricing, which has a significant corollary benefit of having less people needed to physically change price tags. And as you can imagine, in this omni-channel world, highly promotional timeframes like the end of November through the Christmas selling season, we still have a lot of our employee labor dedicated to resetting the store, reprinting tags, setting up bundle promotions. We do a lot of unique things. We needed to really pilot this to understand, could it handle all the aspects of pricing for Best Buy, because we're far different than a mass retailer or grocery store. We're very happy with the outcomes that we're seeing, and we finalized a program to scale this to the balance of change. So we see it as a net benefit for us long term, both on a cost standpoint, an employee engagement standpoint, and most importantly, on a customer experience standpoint.

Great, thanks. And then could you give us a sense around how toys perform for you all this holiday? It looks like you've grown assortment over the last few years without Toys R Us in the market. Is this a meaningful business for you all now, and are you seeing any of the overhangs that other retailers discussed?

Thanks. We are growing our toy assortment, Ray, but it is not a meaningful business for us, and I don't think it will be. We look at toys as a nice corollary to our gaming business, and while traditional gaming has been down, computing gaming is up significantly, and We're always trying to find ways to meet our customers where they are from our shopping experience, and we'll continue to do that, but it's not a very large part of our business today. I don't see it being that in the future.

I think the wonderful thing is the vast majority of our assortment is now seen as toys by kids. When you think about iPads, when you think about computing gaming, I mean, toys for us is such a bigger answer because of the way kids are growing up today, what they value and want. So it's not just about the toy assortment for us. It's about being positioned right at holiday to finish the list, like Mike said.

Great. Thanks again.

Thank you. Our next question comes from Scott Mishkin with R5 Capital.

Thanks, guys. Yeah, I think I want to touch on just the kind of the cadence of new technology coming to market. I know, Corey, you kind of outlined some of the things in the next couple of years, but I know there's been some thought with 5G technology. will really be a 2021 event and that the 8K TV cycle might disappoint a little bit. So I was trying to get your view on kind of the cadence of new technology coming to market.

Yeah, Scott, I'll start. And, you know, Corey can definitely say that. I mean, we're always excited about where technology has given us, the role we play. I think it's both – it's a short-term and a long-term game. What I mean by that is short-term – There's a lot of noise out there around what 5G is or isn't from the mobile networks. There's a consolidation that likely is going to occur, and that's just going to create confusion for consumers. When that happens, I think Best Buy plays a significant role. There's an advantage to what a 5G network will do today, but we're just starting to scratch the surface on what it will do longer term when you think about it from an overall standpoint of being connected both mobile and in your home. I think Best Buy's position is we're excited about it, and we're going to continue to lead in innovation, Now, it's currently helping consumers understand what it can do, and it will drive some demand in the mobile sector regardless because there'll be new devices that come out that people want to understand. So the second question around 8K TV, I think the technology, well, it's interesting what it does. What it really does, it enables customers to get a better quality, larger television set, and that is one of the key driving things that we see. When consumers bring something home, one of the reasons we actually get TVs returned today, one of the top reasons is they didn't buy it, as big of a TV as they thought they should have, even though they had the space. And the better the TV can look, which 8K resolution helps, the easier it is to have that conversation with the consumer and get them what they really need. So we see it as a driver for large-screen TV, and that's been a significant part of the business segment to date, and I think it will continue to drive going forward.

And the only thing I would add to what Mike said is that when it relates to 5G, I think we have a really unique advantage here. When we think about our very localized market-based strategy and combined with our ability to commercialize new products, which will be coming over the next, to your point, multitude of years, we can help customers because this is going to be market-by-market, and it's going to be confusing for customers. because some phones will be available, some phones won't. And this is where I think our market strategy and our ability to commercialize technology really will show up over a multitude of years here. And with that, go ahead.

No, I was just going to, because no one touched on it yet, I just wanted a quick thought on the healthcare initiatives and what kind of the pushback you're getting from healthcare providers. I know it's right at the end, but I just wanted to give this call here. Thanks.

Yeah, and you're probably mainly referring to the commercial side of the business, which is where we're working on some partnerships with providers. I think it's less about pushback, and it's more about how do we collectively move it forward. It's very new. It's very different. Actually, everyone is very interested in health care in the home. There isn't a partner we've talked to who's not interested. It's a question of how do you fit it into the existing reimbursement methodologies, existing systems, existing way we think about care. and how do you provide enough room to test and pilot at a small level so you can learn enough that it makes it worthwhile to roll out on a larger scale. So it's not actually pushback. There's a lot of interest. It's a question of how best do you start to pilot and then scale. And with that, I think that's our last question. I'm going to thank you all for joining us today, and we look forward to updating you on our next call in May regarding our Q1 results. Have a great day.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.