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spk12: And ladies and gentlemen, please stand by. And ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Q2 fiscal 2021 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 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 would now like to turn the conference over to Molly O'Brien, Vice President of Investor Relations. Please go ahead.
spk01: Thank you, and good morning, everyone. Joining me on the call today are Corey Berry, our CEO, Matt Palunas, 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 a 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.
spk07: Good morning, everyone, and thank you for joining us. Today we are reporting strong quarterly results, and we are encouraged to see the customer demand for our products and services and proud of the amazing execution of our teams through these unprecedented times. However, we have not lost sight of the fact that people continue to suffer, and we extend our sympathy to all those who have lost someone to this virus are sick with COVID-19, or are facing financial hardship as a result of the pandemic. From the very start of this crisis, we have been focused on guiding the business with two goals in mind. First, ensuring the health and safety of our customers and employees while protecting the employee experience as much as possible. And second, making certain we come out of this moment a strong, innovative company. The results we're reporting today would not be possible without the effort and energy of our frontline employees working in our stores, supply chain facilities, and customers homes. I want to thank all our employees for their tremendous commitment to our customers and for living our purpose to enrich lives through technology. They are navigating not only the impacts of the pandemic, but also fires, hurricanes, and civil unrest. Their willingness, even enthusiasm, to continually adapt as we manage through the evolving environment has been extraordinary. For our second quarter, we are reporting revenue of $9.9 billion, which is growth of approximately 4% from the second quarter of last year. Our Q2 non-GAAP earnings per share were $1.71 compared to $1.08 last year. that our stores were open by appointment only for the first six weeks of the quarter. Products that help people work, learn, connect, and cook at home, like computing, appliances, and tablets, were the biggest drivers of our sales growth. Trends across most categories improved materially throughout the quarter as we opened our stores for shopping, especially categories like large appliances and home theater that benefit from more experiential shopping. We also saw very strong digital demand for some of our newer categories, such as digital health and fitness, at-home fitness equipment, sustainable living, outdoor activities, and camping equipment. While still relatively small categories from a revenue standpoint, they are extremely relevant in today's environment and highlight our ability to leverage our digital-first mindset, supported by our expertise around curation and supply chain. Throughout the quarter, we experienced inventory constraints in a number of categories, which did moderate our sales growth. While we expected product constraints as we entered the quarter, the stronger than anticipated demand as we opened our stores for shopping resulted in more constrained product availability than we expected. Turning to profitability, our Q2 non-GAAP operating income rate of 5.9% expanded almost 200 basis points from last year, due to materially lower SG&A expense. The lower SG&A is a direct result of balanced but prudent decisions to lower costs in response to the uncertainty of the pandemic and our evolving operating model. That level of lower SG&A, for the most part, is not sustainable as we add labor hours in our stores, reinstate short-term incentive plans, and increase advertising spend. Matt will provide more detail later but we expect Q3 SG&A expense to be more in line with last year's third quarter. I would like to take a moment to recap the evolution of our store operating model. We ended Q1 in a curbside-only model with no in-store customer shopping. At the beginning of Q2, we started welcoming customers back into our stores by offering an in-store consultation service to customers by appointment only. On June 15th, we began allowing customers to shop without and across the U.S. And as of June 22nd, almost all of our... At that time, approximately half of the 51,000 associates who had been furloughed in April returned. We also resumed our in-home sales consultations, adding to the other in-home services we provide like delivery, installation, and repair we had previously resumed back in May. as we reopened our stores to customers who clearly value and want an in-store shopping experience. Prior to reopening, we were retaining approximately 92% of Q2. Then, in the last year, sales grew 16% compared to the same period last year.
spk05: Trends have remained strong in August, with sales up approximately six weeks of Q3, as customers demand for products that help entertained from home continues.
spk07: We have now returned approximately two-thirds of the furloughed associates. Throughout this time period and across all the ways customers can shop, we have continued to adhere to safety protocols that limit capacity, follow strict social distancing practices, and use proper protective equipment, including requiring our employees and customers to wear masks.
spk05: Like many reasons, we have reduced store hours, after reading with approximately 20% fewer customer demand patterns this pandemic and this you're really underscores the importance of our for the full quarter our domestic online revenue grew 240 percent from last year even when stores opened for customer shopping online strong In fact, in the last few weeks, online revenue grew approximately 180% over the same period of time. These online sales have continued to be very stable at approximately 175% for the first three weeks of August.
spk07: customers choose what works best for them and options customers have come to expect from all retailers like fast and free home delivery and buy online and pick up in store we will also like curbside pickup in-store consultations and of course home and fitness equipment and more and our digital experiences such as chatting with an expert or leveraging a domain popular options
spk05: During the first half of the year, in responding to the pandemic, we made decisions across all these operating models that stressed safety.
spk07: Although we temporarily gave up some share while our stores were data, our share has largely recovered since reopening. Most importantly, we made the right decision in Q2 more than 97% that we made them feel safe.
spk05: And we believe the credibility we garnered will over time contribute to more brand love and thus more revenue.
spk07: I would add that since the beginning of the pandemic, we have seen elevated growth in the number. It is still early. These new customers than new customers in the prior year period.
spk05: As we look forward, the environment is still in cost structure is evolving as well.
spk07: The pandemic has compelled us to change our operating model in the best interest of our customers and employees.
spk05: And strategic changes that will set us up to emerge from this time even stronger. Some insight into our approach.
spk07: Starting with three concepts we believe to be permanent and structural implications of the pandemic. One, customer shopping behavior will be permanently changed in a way that is even more digital and puts customers entirely in control to shop how they want. Our strategy is to embrace that reality and lead, not follow. Two, our workforce will need to evolve in a way that will providing more flexible opportunities for our people. And three, technology is playing an even more crucial role in people's lives due to the pandemic. And as a result, Our purpose to enrich lives through technology has never been more important. Said differently, people are using technology to address their needs in ways they never did before. We play a vital role in bringing tech technology to life for both customers and our vendor partners. As you would imagine, these concepts are extensive and interdependent, and we are both implementing change today across our business. as we have made decisions throughout the course of the pandemic and will help shape our strategy for our future store design, our operating models, and our digital investments. We will provide more examples as our plans on strategic implications. From a store standpoint, we have been responding to the impacts from the pandemic in a way that has been enabled by tremendous flexibility at the local level. We are leveraging localized data and analytics that allow us to pilot various services like opening stores an hour earlier for consultations only. Using data productively, customize operations to the local situation if necessary. This is especially important for us to effectively respond should the virus flare up in certain markets. It is too early to know exactly how much of our sales and customer shopping activity will be via digital channels over time, but as a result of the pandemic, we expect it will be higher than it has been historically. As a result, we are starting to evolve the way we use our stores for fulfillment. For example, next month, we will be piloting a ship from store hub model to help handle significant volume. All our stores will still ship out online orders, but approximately 250 locations will be positioned to ship out significantly more volume. These locations were chosen for their space, proximity to carrier partners, and ability to support same- and next-day delivery. Over time, this should allow us to deliver a more productive fulfillment model. We are also continuing to add additional third-party physical pickup locations for online orders to provide more flexibility and convenience for customers and now have more than 75% of the population within 5 miles. As it relates to our people, we are investing in compensation and beginning to incorporate elements of the flexible workforce we first introduced at our Investor Day a year ago. We took a major step earlier this month by evolving the pay structure for our store employees and raising the starting wage to $15 since the early stages of the pandemic. All hourly retail associates and supply chain employees who were working received incremental hourly appreciation pay starting August 1st. On August 2nd, the beginning of our third quarter, we implemented a new pay structure that reflects an ongoing evolution and is the result of clear and consistent feedback from field employees across the country. To provide more predictability in pay, a 4% increase in hourly rate replaced short-term incentive compensation for hourly store employees below the leadership level. After the 4% hourly pay increase, employees were not yet at $15 per hour had their pay increased to the $15 per hour starting wage. For field leadership and corporate income incentive compensation programs, since the beginning of the pandemic, we've worked in partnership with our company founder, Dick Schultz, to provide our employees with emergency financial assistance.
spk05: Together, we've established two funds, one for the benefit of any full or
spk07: part-time employee needing general financial help, and a second for those who have become ill with the virus. We are also evolving the way we work today based on need, irrespective of channel.
spk05: A few early examples in Squad Agents. As most of you know, we launched our in-home . At that time, the program consisted of highly trained individuals who were strictly going into customers' homes
spk07: of technology consultations an in-store appointment engine as we adapted our operating model to respond to the pandemic as a result our in-home advisor program has across all channels model we now have a system with tiered advisors which provides more opportunities for more employees by matching employees with the needs of the customer And they can provide support in homes and via phone and online services.
spk05: Our Geek Squad has been able to provide support to customers in stores. Many of them have also been cross-trained to work in our call centers, providing crucial phone and chat support to solve a variety of customer needs.
spk07: Increasing the flexibility of our workforce is our store employees who are making same-day deliveries to customers' homes
spk05: The examples I just shared have .
spk07: Going forward, we are on a path to develop a flexible workforce model that leverages the ability to work whenever and wherever they want.
spk05: Right now, we are building the foundation by skills-based training for their existing roles. Over time, additional skill sets and be able which will lead to additional scheduling eligibility and flexibility. At this point, our strategy is to not only keep pace with, but anticipate changes, including safety, by adopting a customer-obsessed approach that is primarily digital.
spk07: This is how this is showing up in our app, which saw the number of customer downloads We are piloting more opportunities for virtual consultations with our Blue Shirts and in-home consultants, including abilities to share to be critical during the current environment and increased need for remote . We are also expanding our use of augmented reality, can more easily select the right products based on the space in their homes by using the camera on their own phone. For the in-store experience, we are piloting a self-service in-store experience. This will allow a checkout process that is fast, convenient, and involves minimal contact for customers. For the in-store experience, we are adding functionality that will display information about high and low traffic times and provide digital updates for customers and curbside orders. We will continue to add features and capabilities to the app to drive frequency, retention, and personalization opportunities, all of which are significantly higher in the app than other digital channels.
spk05: As it relates, one of the ways in which technology is playing a more crucial role in our lives is related to health, for best health.
spk07: In particular, helping seniors live more independently with our unique combination of tech and touch has become even more relevant in concepts like telehealth. We continue to expand our assortment of health-related products and looking forward, see this as an area uniquely well-suited to help customers navigate. We recently announced to our employees a new president of Best Buy Health, Deborah DeSanto, who will more than 30 years of experience at the intersection of healthcare and technology, including leading where she launched artificial intelligence offerings designed to help doctors, researchers, healthcare providers, pharmacists, and insurers better serve patients around the world. Healthcare, where she helped bring consumer-grade automatic defibrillators to the market. She is a recognized thought leader in artificial intelligence and big data, has deep experience in running businesses known for their innovation in healthcare, and has a demonstrated ability to drive growth both organically and through acquisitions. We are excited to bring health technology into the home to help people live better, safer, and more independent lives. Before I conclude my prepared remarks, I want to talk about our ongoing commitment to diverse We are always striving to attract and invest in talent that reflects the diversity of all communities and fosters an inclusive culture across the organization. We're powered by the belief that our people matter most and diverse perspectives make us better. Our culture of inclusion values every human being's experience and supports each employee to bring their true and authentic self to work. Our efforts have not gone unnoticed. Earlier this year, the Human Rights Campaign named us a best place to work for LGBTQ equality. And Forbes Magazine named us on its list of America's best employers for women. We were also recently named one of Parity.org's best companies for women to advance. In the wake of George Floyd's death and the subsequent protests, Best Buy is committed to doing better when it comes to taking action to address racial inequities and injustices. We've created a diverse task force within the company to help us define and create meaningful change, and we will provide visibility to our corresponding commitments in the near future. We've also committed to creating more than 100 teen tech centers to help bridge the opportunity gap and digital divide for a teen country. And we're one of the leaders in a new public-private partnership called Connected Minnesota that will provide computers and Internet access to thousands of youth in our home state. Finally, we have signed on as a founding member of the parody.org parody pledge in support of people of color. This is a public commitment to interview at least one qualified person of color for every open leadership role that is at the vice president level or higher, including the C-suite and board of directors. Very strong Q2 financial results in an environment that continues to evolve. We are executing well and also clearly seeing benefit from the need for people to connect, work, learn, cook, and entertain at home. Looking back, it was only five months ago that we closed our stores to customer traffic, drew down the full amount of our revolver, made the difficult decision to furlough associates, and saw total sales declines reach 30% at one time. We have been confident that we will emerge an even stronger company than we were before. Clearly, we are still operating in a dynamic environment, and much uncertainty remains around future outbreaks, government stimulus efforts, and the economic impact of sustained high unemployment levels and ongoing shutdowns that vary by industry. We are cognizant of all these factors. At the same time, we are encouraged by our clarity of purpose and our momentum, which has guided and will continue to guide our operating model changes and investments. Our purpose to enrich lives through technology is more relevant than it has ever been, and we are confident regarding our execution, adaptability, and the opportunities ahead. We will continue to invest in those capabilities that focus on the customer experience over the long term and that are designed to provide choice, speed, and now safety. Now, I would like to turn the call over to Matt for more details on our Q2 financial results.
spk02: Good morning. As Corey highlighted, the demand for our products and services was remarkably strong during the quarter. Although we didn't provide guided call, we shared a belief that our Q2 sales would be pressured and we would experience a decline in our operating income rate. Ultimately, as we continued to see increased demand for our products, our ability to open almost all of our stores to customer traffic much sooner than we had expected resulted in the stronger than anticipated results. And while we are pleased with the financial results and our team's ability to navigate the rapidly changing environment, we also know that our goals reach beyond any one quarter's results, and we still face an uncertain environment. On enterprise revenue of $9.9 billion, we delivered non-GAAP-valuted earnings or an increase of 58% versus last year. As a percentage of sales, our non-GAAP operating income of $5.5 0.9% increased 190 basis points compared to the present. The primary driver of the operating income rate expansion was lower non-GAAP SGMA expense of $219 million. favorable to last year as a percentage as a percentage of sales declined 100 basis points compared to the last year, which partially offset the escalation to SGMA We made several cost decisions in Q1, and as we entered Q2, to align with the lower sales and channel trends we were seeing.
spk08: These included keeping store employees on furlough, lower advertising expense. We saw significantly improved sales trends that outpaced our staffing levels on a temporarily lower cost base,
spk02: resulted in incremental leverage that drove a more favorable operating income rate.
spk08: I would now on our Q2 results. increased 3.5% to $9.1 billion, sales growth of 5%.
spk02: from 25 stores that were permanently closed in the past year as part of our normal course of business. As a reminder, our comparable sales calculation
spk08: includes closed or operating in our curbside only of COVID-19. Domestic online revenue of almost $5 billion was 53% up from 16% last year and 42% in Q1 of this year.
spk02: On a comparable basis, our online revenue increased 242% over the second online and pickup in store or curbside side was 41 percent of our approximately five billion dollars in revenue represents the most online revenue we have ever generated in a single quarter in the company's history surpassing our previous all-time from a merchandising perspective as corey mentioned the largest comparable growth categories were computing appliances and tablets this growth was partially offset by declines in mobile phones and digital imaging
spk08: Home theater companies were able to keep up with everyone's performance as trends continued to improve as we opened our stores to customers.
spk02: Our gaming category was also approximately flat to last year. While strong demand continued across the category, sales of accessories were set by constrained inventory availability of gaming consoles. comparable sales in the services category declined approximately 9%. The decline in services was primarily due to a higher mix of online sales, which has a lower attach rate than in-store. Within the quarter, our sales growth continued to improve. In our international segment, revenue increased 9.4% to $782 million. The increase was driven by comparable sales, which was partially offset by $400 million. 190 basis points of negative foreign currency impact. The growth was primarily driven by Canada, where we experienced similar trends of our domestic segment from a product category standpoint. All locations without appointment did in the U.S. Turning now to gross profit. Domestic gross profit rate declined 120 basis points to 22.8, primarily driven by supply chain costs associated associated with the higher mix of online revenue or profit sharing revenue from our private label and co-branded credit card arrangement, which impacted our gross profit rate by approximately 20 basis points. The rate as a percentage of sales was higher than our expectations going into the quarter, driven by a more favorable promotional environment and a higher mix of sales from the store SG&A. Domestic non-GAAP SG&A decreased 195% and as a percentage of revenue decreased approximately 280 basis points.
spk08: Expense decline were, one, lower store payroll expense of approximately $1 million, two, lower advertising expense of approximately $40 million, three, lower incentive compensation expense of approximately to both field and corporate employees,
spk02: And four, lower medical claims expense of approximately $25 million. Let me share a little additional color on the lower store payroll expense. The lower store components, but the primary driver was fewer labor hours for our associates, primarily due to stores being closed to non-appointment traffic for approximately half of the quarter, and our reduced decline in labor hours was partially offset by higher hourly wage rates.
spk08: and pay for those who are working in our stores throughout the quarter.
spk02: We are in $24 million compared to last year and as a percentage of revenue, primarily due to lower store payroll expense in Canada and the favorable impact of foreign exchange rates. Moving to the balance sheet, we ended the quarter with $5.3 billion in cash. During the quarter, we repaid the full amount of our utility that we had drawn in March. At the end of Q2, our inventory balance was approximately 21% lower than last year's comparable period, whereas our accounts payable balance increased 31%. The health of our inventory remained strong, and the lower inventory position reflects the inventory challenges. During the second quarter, we returned $143 million to shareholders in the form of dividends. From a capital expenditure standpoint, we still expect to spend in the range of $650 million to $750 million during fiscal 21 by sharing a few comments about the back half of the year. As a result of the ongoing uncertainty, we are not providing financial guidance today. I would like to provide some insights into how we are thinking about Q3 and the rest of the year. Overall, as we plan for the back half of the year, we continue to weigh many factors including a potential future government stimulus actions, the current shift in personal consumption expenditures from areas like travel and dining out, the possible depth and duration of continued higher unemployment, and the availability of inventory to match customer demand. With that said, as we enter Q3, there continues to be a heightened demand for the products and services we offer. It is difficult for us to know how sustainable these sales trends are considering the factors I just noted. We are planning for Q3 sales to be higher compared to last year, but likely will not continue at the current level of approximately 20%. We also have plans in place that will allow us to adapt quickly if we needed through the remainder of the year. We anticipate that are to be pressured compared to last year. as we expect online sales will continue to be a higher percentage of our overall sales mix compared to the prior year. We also expect lower profit-sharing revenue from our credit card arrangement. As Corey mentioned, we expect our Q3 SG&A dollars to be very similar to last year's Q3. We expect the combination of our pay evolution changes and the store labor hours we have planned for our current operating model will actually result in slightly lower store payroll expense in Q3. We expect this will be offset by higher advertising expense as we prepare for our earlier start to the holiday season, as well as increased variable costs from the anticipated revenue growth. On a sequential basis, we expect the increase in SG&A dollars versus Q2 will primarily be driven by increased store labor hours, reinstatement of short-term incentive plans, and the increase in advertising expense. I will now turn the call over to the operators for questions.
spk12: Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Just keep in mind if you're using your speakerphone, make sure the mute function is released to allow that signal to reach your equipment. Once again, star 1. We will begin with Steve Forbes with Guggenheim Securities. Please go ahead.
spk11: Good morning. Maybe just to start with Matt, when you finished there on expenses, As we think back to the analyst day last year in the billion-dollar cost reduction program, I think you spoke to in the fourth quarter $160 million of savings against that plan in the back half of last year. Can you update us on where you guys are today? Because the expectation for flat expenses in the third quarter seems to assume some reinvestment in understanding the variable cost pressure here, but The two-thirds of furloughed associates have returned. Just trying to understand, you know, what's driving, you know, the lack of flow-through right on the achievement against the cost reduction program.
spk02: Sure. Yeah, from a cost reduction standpoint, clearly we've made a number of temporary actions and decisions to navigate through Q1 and Q2. As it's been our brand for years, we will continue to look for cost efficiencies to help improve our cost basis. We're in a very unique timeframe right now to determine exactly how much is structural or permanent reductions. And so we will update people as we go through the remainder of the year and into next year, but we do see permanent savings as we move through this time. It's really difficult to determine exactly how much. I would say as you move from SG&A into Q3, the sequential change, as we talked about, was really looking at increasing store labor hours with the assumption that stores will be open to customer traffic for the whole quarter. And if you look at store labor hours in total, while we are increasing labor hours for being open and also we've also increased the hourly wage rate, so with those two included, we still have store labor hours that are slightly lower than last year. So we do believe we're finding some leverage as we move into Q3. We did say that Q3 sales are actually going to be higher in Q3. Exactly how much, we don't know. But with a similar SG&A level in Q3, with higher sales, we would expect SG&A leverage to continue in Q3. Exactly how much will determine by how much sales we actually have and how much gross profit rate pressure we're able to offset.
spk11: Thank you. And then just a quick follow-up, Andy, sticking with the margin, but this time gross. You talked about two pressures right in the third quarter, channel mix, right, and profit sharing. But you didn't mention promotions or mixes. As we think about entering the holiday selling season here, what is sort of the perspective from your perspective today?
spk02: Sure. To be clear, in Q2, the primary gross profit rate pressure we saw was coming from supply chain in the form of higher parcel expense. As a reminder, we had 53% of our business. So parcel expense was the biggest gross profit rate pressure. And then pressure from the lower profit sharing from the city relationship we have. Those are expected Promotionally, we actually expected it to be a little bit more promotional going into Q2. It was actually a little less than we actually expected as we worked through the quarter. If you look at promotionality into Q3, we would expect that promotionality to be due, but still not a year-over-year pressure. There are a number of changes to the events and promotions in Q3 that we're obviously working through, but we wouldn't expect it to be a year-over-year pressure at this point. Thank you.
spk12: And now we'll move to our next caller. We will hear from Chris Horvath with JPMorgan.
spk03: Thanks. Good morning, everybody. So I wanted to dig in on some of the category trends for July and August, whatever you think is a better lens to look at it through. You know, what are you seeing in sort of what I would describe as sort of so are you seeing home computer and TV up or you're seeing wireless up you know what about gaming in advance of though is is into what degree is this still all driven by you know back to school and work from home categories hey Chris thanks for question of favorable trends across literally all of our categories right now as we execute you and start q3 with the one exception that we know
spk08: But we're seeing trends that are applicable to entertaining and cooking from home.
spk02: And, you know, and some of it, and Corey and Matt's prepared remarks are anything we'd like to have right now.
spk08: But the demand curves that we saw when we opened our stores entered into August, well beyond just categories. So I hope that gives you a little bit of color. Can you share with us perhaps what you're seeing in home theater as an example on a quarterly basis?
spk02: I can't keep up with the improvement in our television performance.
spk08: I think that's pretty reflective of what we play on the TV or the electronics because we switch from a negative trajectory in Q1 to a positive trajectory in Q2.
spk02: We are a second-core time-day business where we do a lot of revenue with our own exclusive model. We see the consumer demand strong.
spk08: We see the demand strong for larger products and for things that have a higher resolution and clearly bigger screens as people are spending more time at home. Can you talk about, as my follow-up to Nick's, and I would have thought, but in the second quarter you would have seen a pretty mixed headwind.
spk03: Was that essentially fully offset by a lower promotional posture year over year or was the net of those two things actually positive?
spk02: Yeah, we're not going to get into specifics, but largely the product mix was fundamentally offset by the favorable promotional environment that we saw in Q2 and we would expect the product mix to continue similarly in Q3, assuming computing continues to be our mix of our business. And as we said, promotionality will likely be a little bit more in Q3. We'll see how it ends up, but a little bit more than Q2 favorable will determine how much it offsets the mixed impact.
spk08: Very good. Best of luck.
spk12: Thank you. And ladies and gentlemen, if you find your question has been answered, you can press star 2 to remove yourself from the queue. We'll now move to your next question. Peter Keith with Piper Sandler, please go ahead.
spk02: Hey, good morning, everyone. Nice execution here. I wanted to look at the margin differential between the retail stores and e-com, that e-com has a lower client base. Just considering the stronger digital sales going forward, Are there efforts to maybe close the gap between those two margins and perhaps bring them in line in future quarters? In the past, we've talked about the two channels. First, it's really hard to parse out exactly the two different P&Ls between online and store. On an annual basis, the EBIT levels for both of those channels are actually pretty similar. each quarter can be a little bit different too. Online has typically had a little lower gross profit rate, but a little bit more SG&A leverage. Stores, while it carries a little bit more gross profit rate, kind of offset each other, and so similar EBIT level. They're pretty similar at EBIT level. And that dramatic change of online sale, going to online sales, you can't necessarily correct right away in those periods. So what we've done is made some prudent and necessary steps to kind of look at our SG&A at how to improve the efficiency of whichever channel we have. I'd say over the years and online, we've actually been improving our gross margin rates. And even over this period of time, we've seen better attach rates during the times our store will close and through Q1 and Q2. So we will continue to improve the customer experience to kind of improve the gross margin rates online and continue to look at our cost structure overall for both channels. Okay. That sounds encouraging. And maybe on a more near-term question, with the commentary on sales growth up 20% in Q3 and you would expect that to moderate, certainly I think that's a good stance to take. Although what I'm asking is are there – identifiable aspects of the sales growth today that you think will go away, whether that's back to school or some other category that's abnormally strong right now?
spk07: Peter, I'm going to take that one. I think there are a few. I would characterize the look into the back half here, and I would cite things like in the government aid programs and whether or not there will be a new package going forward. obviously the stimulus to some extent and it's hard to say how long I think there's questions around overall sustained unemployment levels and also school opening and closing decisions and how long those stretch out in the period and then of course we've highlighted inventory availability and while we feel strongly All of our vendor partners are doing everything they can to catch back up. You're talking about holiday levels of manufacturing and fulfillment, and that just is going to take a bit of time to catch trends this tight. And then finally, the actual duration and depth of the virus and how that proceeds, distinctly calling out categories, Peter, and a little bit more about just the environment that we find ourselves in.
spk08: Thanks a lot, and good luck.
spk05: Thank you.
spk12: And now we'll take a question from Michael Lasser with UBS.
spk11: Question.
spk08: You noted that your share has largely recovered, gaining share, especially as your stores are now 1% quarter to date.
spk05: So we believe we lost some share, and we saw that transition.
spk07: continuing in because our stores were largely closed. And we also said we viewed that as very temporal in nature. And you're right, we said there are puts and takes week to week, honestly, Michael. There are some where we actually believe we're gaining. There are others that can depend on the even inventory position at the time.
spk05: But overarchingly, we feel position. incredibly focused on providing the experience that we would expect, still with an emphasis on safety.
spk07: And we definitely see that in our customer responses. They're very favorably responding to the environment that we're creating. And so I think the team has done a very nice job across however the customer wants to shop, meeting their needs, positioned as we head into Q3 in the back.
spk08: And, Corey, my follow-up is, You discussed similar to last year in the third quarter. You just operated with a shield. You can perform pretty well without the operating expense burden as you had in the past.
spk02: So what's prompting your views against rates?
spk07: Yeah, I think one of the reasons we did the walk of our different models in the script was so everyone understood that we operate model and people wanting to come back into our stores.
spk05: We opened and we said at that point we brought back about honestly the demand was so high as we opened the stores by the level of service that we would have wanted.
spk07: And you could see it in things like attach rate of services in the store. You could see it in how many services people wanted to acquire. We literally didn't have enough people in the stores and hours in the stores to be able to handle that kind of demand. Hence the reasons of our furloughed associates back in the hours associated with that so we could meet some of that demand.
spk05: Now you're going to have a fully normalized, a new starting wage of $15.
spk07: we think is the labor commensurate to meet full of service that will help highlight our ability to provide services or financial services or lease to own or many of the other things that come with a full transaction for us.
spk02: Okay. Thank you very much. Good luck. Thank you.
spk12: We'll now take a question from Matt McClintock with Freeman Jones.
spk08: Hi, yes, good morning, everyone, and congrats.
spk10: Two questions. The first one is just on supply chain, many fulfillment hubs for the stores that you're shifting to. Talk a little bit about your capacity to shift volume. How to think about the reduction in freight cost, the benefit that you'll get as you make this transition? That would be my first question. Thanks.
spk02: Hey, Matt. It's Mike. I'll start with the question. I think about it in two different ways. We were a pioneer in this whole idea of buy online and pick up in store, which led us to be from store. And based on some of our store sizes, we have stores that are of excess capacity. I think you're aware of some of ours. Look at what we did for automation over the last three years and the things that we're able to do. It's very easy for us to receive products in our seven RDCs and then put them on a normal truck runs out to the stores that we already do and if we need to run extra trucks out to these 250 locations so we can actually have rapid replenishment and we've been able to use our analytics and algorithms to understand where the density and shipping volumes will come from it's partially designed to lower expenses because we can absolutely have more customers pick up and store that's what's happening with these locations but it's closer to our carrier delivery pads It's also places we're launching our own same delivery with our Best Buy team members, which is a lower cost than using a third-party service. So there's a mix of all of those choices that will, over time, we believe, deliver a lower partial fulfillment expense. But right now, our biggest priority is making sure when you're shopping on Best Buy's digital sites, and we talked about doubling the amount of app downloads, we really want to make sure when you're looking at the item you want that the get-it-by-date is accurate and it's competitive, and we feel very good about that. And that's the primary thing we're focused on for this holiday.
spk10: Thanks for that. And then just a follow-up question is new leadership at Best Buy Health. Any strategic changes that you're thinking about with that business or just any new different direction that you're going to go with given the various skills that she brings with her? Thanks.
spk07: I mean, our focus and confidence in the health business remains incredibly strong. And obviously, the environment that we find ourselves in only reinforces that strategy. I think Debra brings just exceptional experience combining technology with healthcare, this idea of tech and touch experiences and bringing those things together. So I think we found someone who has life experience that very closely aligns with where we think the strategy needs to go. And I wouldn't see the strategic point of view change very much. I just think that we have an ability to continue to accelerate our strategy.
spk10: Thanks for the call. Best of luck.
spk07: Thank you.
spk12: And Anthony Chukuma with Loop Capital Markets will have the next question.
spk00: Good morning. Also, I wanted to commend you on everything you're doing from a social justice perspective. So I have a quick question and then a follow-up. You talked a lot about the shift to online and some different things you're doing in the store, and 200 stores are going to be hubs for online deliveries. And I know it's early, but does that make you rethink? How do you think about what's the right number of stores going forward if you think a lot of this online ship is going to be permanent?
spk07: Thank you, Anthony, for the compliments. And let me start by saying one of the implications we laid out in the script while we were talking is that customer shopping behavior has changed permanently. The customer is in charge. So this isn't about being seamless across channels. It's about being seamless for the customer. And even on our investor day last year, we were talking about how the customer behavior was changing and accelerating, probably even moving faster than most retailers were. And so we've been building with this as the assumption, honestly. We've been improving our digital experiences. We've been building a phenomenal and flexible supply chain. And we have employees in stores that are moving most of the capabilities that we've used. You hit on curbside, but also in store consultations, the cross-training in the stores. We do ship from all of our stores, not just the hubs. The hubs will be used to ship larger quantities. and 60% right now of what we're selling is flowing through our stores in some way, either curbside or in-store prep or shipped from store. And so this only underscores our belief that our stores are a unique and powerful asset for us. And I think that what we will see is that the stores – may be used differently. It's not about less stores, but it might be about more points of presence and a different ability to meet the customer. But we do think one of the unique assets that we have is our ability to move with speed and, frankly, put the customer in control to experience us in whatever.
spk00: Got it. That's helpful. And then just for my follow-up, so you beat the consensus assessment by a country mile again this quarter. You repaid, you know, your entire revolving credit facility. You're sitting on over $5 billion worth of cash. At what point, and I know there's a lot of uncertainty out there, you know, we're living it every day in this post-COVID dystopia as I do this call from my home office. At what point do you feel like, you know, we've kind of gotten to the other side, we can start to buy back stock again?
spk02: Yeah, thanks for the question. We're evaluating when we may resume stock buybacks. Fundamentally, our allocation strategy has not changed. We're always going to reinvest in our business to do what's right for our customers long term. We still plan to be a premium dividend payer and at some point return all the excess cash to shareholders. I think Ultimately, you nailed it. This is kind of in a very uncertain environment for many reasons. Holidays likely look very different, and like many companies, we're taking the time to really evaluate when we might resume that. But right now, we like the position we're in to be able to keep flexibility through the remaining part of this year, but we will certainly readdress that at some point. That's helpful.
spk00: Keep up the good work.
spk02: Thank you.
spk12: Thank you. And next we'll hear from Brian Nagel with Oppenheimer.
spk09: Hi, good morning. Very nice quarter. Congratulations.
spk03: Thank you.
spk09: So the first question I want to ask, I think, of course, you discussed in your prepared comments, you know, just the degree to which new customers come to Best Buy. I think either stores or online is helping to drive the sales recovery. Maybe discuss this a little further, you know, the makeup of these customers, you know, where they may be coming from, how different are they than, the customers that Best Buy had catered to in the past? Are we seeing now that the Best Buy brand is, through this crisis, actually reaching a new demographic?
spk07: Yeah, obviously it's early, so we're still assessing exactly who all these customers are. I think it's at least clear for us that they are customers for whom we may not have been in the consideration set prior. And like we said in the prepared remarks, Clearly, it's only been five months, but some of those new customers we attained in March have shown a much higher propensity to repeat sales than the new customers we retained last year during the same period. Nicely, we have also seen our engaged customers start to rebound as we've reopened stores. So it's a little bit the best of both worlds, which is why we're so experientially focused on creating the right environments, both safety and choice. that will make us appealing for all customers. So we'll continue to peel apart who those customers are, but honestly, our bigger priority right now is not just who they are, it's how do we re-engage them, how do we continue to bring them into the Best Buy ecosystem and make them a little bit stickier to the brand, which is why we talk about things like brand love, we talk about things like safety, because those become the measures by which the brand is valued over time.
spk09: Got it, that's helpful. My follow-up, just unrelated, You talked, obviously, broad-based sales strength in the quarter, with the exception if you called out the mobile category. So my question there is, do you think the weakness in the mobile category is more of a function of maybe a lack of product cycle or just the disruptions to the stores through most of the second quarter?
spk02: Hey, Brian, it's a good follow-up question. Yeah, I think you've got actually both of the answers in a part of your question. It's the one category that is most dependent on our store traffic for the customer experience to make sense.
spk00: It's still complicated to do that process online.
spk02: Even some of the carrier stores aren't even open seven days a week right now. So we're really focused on the customer experience in advance of new handset launches this fall and 5G. We're still very excited about the category and the experience we create. We did make some enhancements so you can trade in your whole connected device portfolio online because we're trying to be cognizant of what the customer is going to need. But it's one area where having our stores closed for a big part of the quarter probably played the biggest impact on the performance we just announced.
spk09: Thank you very much.
spk12: Looks like we have time for one final question. We'll hear from Kate McShane with Goldman Sachs.
spk06: Hi, good morning. Thanks for taking my questions. I actually have just two quick follow-up questions to some that have already been asked. We wanted to ask about the acceleration that you're seeing in sales in August. Just what do you think is driving that, given the fact that the stimulus has faded here a little bit? And then just wanted to follow up on the promotional commentary, too, about why you don't necessarily see more pressure in Q3 year over year. Does it have to do with still trying to control traffic into the store or the tighter inventory level?
spk07: I'll start, Kate. Maybe Matt can follow with some of the promotional commentary. In terms of the strength, and Mike had said it, we are really seeing broad-based strengths. Now, clearly, there is a work-from-home, learn-from-home component to this, and especially heading into back to school. You've got, right now, estimates are two-thirds of kids doing at-home learning. So that combination of learning at home and a lot of parents working from home and can't share devices, have to be able to have your own networks and own devices and own webcams. I mean, there's clearly a lot there. And that will be an extended phenomenon as it's going to have kids going back and forth probably from school to work. But we're also seeing people want to entertain. We talked a little bit about gaming and the demand there. We thought that was a category that was going to be well down this year heading into new launches, and it's been performing. And it's not just about gaming consoles. It's about the computing that's used for gaming as well, which has been incredibly strong. Mike talked about televisions and entertainment and this idea of back to sports and being able to start to at least watch sports again on devices. I mean, everything that people are doing right now is on the back of technology in their homes. And it completely underscores our purpose and our philosophy in that you actually right now are enriching your life through technology. And we're seeing it across basically every aspect of what we're selling in our stores.
spk02: Sure. And getting to the promotional question, I think what I said earlier was, you know, promotionally will probably be a little higher in Q3 than it was in Q2 and Q1, but fundamentally still not a pressure on a year-over-year basis. In terms of Q3, we would still expect to see a heightened customer demand and just overall some level of inventory constraints as we work through the quarter. Clearly, as those change, it could affect promotionality, but with those two factors involved, I think we still expect to see promotionality a little, not a pressure on a year-over-year basis. Clearly, the promotional cadence and events could change in Q3, and we probably start earlier, but even with those, we believe that the demand for the products and services we sell, and just also the inventory availability will continue to lend itself to a little less promotional environment.
spk06: Thank you.
spk07: Thank you. And with that, I want to thank you all for taking the time to join us today, and we look forward to chatting with you next quarter. Have a great day.
spk12: Ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation, and you may now disconnect.
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