Best Buy Co., Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's fourth quarter of the school 2024 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. At this time, if you have a question, you will need to press star one on your phone. If you choose to be taken out of the question queue, please press star one again. As a reminder, this call is being recorded for playback and will be available approximately 1 p.m. Eastern time today. If you need assistance on the call at any time, please press star zero and an operator will assist you. I will now turn the conference call over to Molly O'Brien, Vice President of Investor Relations.

Thank you and good morning, everyone. Joining me on the call today are Corey Berry, our CEO, and Matt Ballunis, our CFO. During the call today, we will be discussing both GAAP and non-GAAP financial measures. 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 and subsequent 10-Qs 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. I'm proud of the performance of our teams across the company as they showed resourcefulness, passion, and unwavering focus on our customers this past year. Throughout fiscal 24, we demonstrated strong operational execution as we navigated a pressured CE sales environment. This allowed us to deliver annual profitability at the high end of our original guidance range, even though sales came in below our original guidance range. Importantly, we grew our paid membership base and drove customer experience improvements in many areas of our business, particularly in services and delivery. For Q4 specifically, we are reporting profitability at the high end of our expectations with revenue near the middle of our guidance range. our comparable sales declined 4.8% in the quarter. At the same time, we expanded our gross profit rate 50 basis points from last year due to profitability improvements in our membership program as well as Best Buy Health. Excluding the impact of the extra week, we lowered our SG&A expense compared to last year as we tightly controlled expenses and adjusted our labor expense rate with sales fluctuations. As expected, customers were very deal-focused through the holiday season. and the promotional environment overall was in line with our expectations. While shopping patterns more closely resembled historical holiday periods and Black Friday and Cyber Week performances were in line with our expectations, the sales lull in December was even steeper than we had modeled. Then, customer demand strengthened considerably and was higher than we expected during the four days before Christmas. Our Q4 digital sales mix was flat to last year at 38% of total domestic sales. Customer in-store pickup of online orders was also consistent at 44%. We improved our delivery speeds, expanding the percent of ship-to-home online orders delivered in two days. We have been very focused on getting our app in the hands of customers, and I'm pleased to say that on Black Friday, it ranked number three across shopping apps and number four across all apps on Apple's App Store. We ended the quarter and year with 7 million members across our two-tiered My Best Buy paid membership. Paid members consistently showed higher levels of interaction with comparatively higher levels of spend at Best Buy and a shift of spend away from competitors. From a financial perspective, membership delivered another quarter of higher than expected operating income rate contribution. When you include the changes we made to the free tier and the impact of the mid-year changes we made to the paid program benefits, Our membership program contributed approximately 45 basis points of enterprise year-over-year operating income rate expansion for the full year. And our Best Buy Health business achieved its operating income contribution target of 10 basis points for the year. In addition, we announced strategic partnerships with Advocate Health, Geisinger Health, and Mass General Brigham. And our Care at Home platform is now being used in eight of the top 20 health systems in the U.S. Now I would like to look forward to fiscal 25. We expect this to be a year of increasing industry stabilization. Our strategy is to focus on sharpening our customer experiences and industry positioning while maintaining, if not expanding, our operating income rate on a 52-week basis. Therefore, our fiscal 25 priorities are as follows. One, invigorate and progress targeted customer experiences. Two, drive operational effectiveness and efficiency. Three, continue our disciplined approach to capital allocation. And four, explore, pilot, and drive incremental revenue streams. There's a lot to unpack. I'll start with a discussion about the macro environment, the CE industry, and our sales expectations. At the highest level, there have been and continue to be macro pressures impacting retail overall and CE more specifically. First, Inflation has been slowing, but prices for the basics, like food and lodging, are still much higher, and consumers have to prioritize and make trade-off spend decisions. Second, there is a consumer propensity to spend on services like concerts and vacations in lieu of goods, which has remained sticky even as the prices there, too, have inflated. Third, we have a relatively stagnant housing market. Fourth, CE was a significant recipient of a pull-forward of demand during the first two years of the pandemic. When consumers need to prioritize the basics, that usually does not include the product purchases they recently pulled forward. And lastly, the level of CE product innovation has been lowered during the pandemic and supply chain challenged years. It's not so much about each of these individually, but when you stack the five, it has been a heavy weight on the industry. On the positive side, experience tells us that these are all cyclical and transient in nature. And while they are ebbing and flowing, we are optimistic that several indicators will continue to show favorability this year. These include decreasing inflation, leading to the lowering of interest rates, continued low unemployment, encouraging trends in consumer confidence, and the beginnings of a housing market rebound. We remain confident that our industry will grow again after two years of declines. It is simply a matter of the timing. Our underlying thesis is consistent. First, we believe that much of the growth during the pandemic was incremental, creating a larger install base of technology products and consumers' homes. Second, we expect to see the benefit of the natural upgrade and replacement cycles for the tech bot early in the pandemic kick in this year and into the next few years. Third, we are returning to a more normalized pace of meaningful innovation after a pause during the pandemic. Taking all these factors and considerations into account, we expect fiscal 25 comparable sales to be flat to last year on the high end of our guidance range, down in the first half and up in the second half of the year. The low end of our annual comp sales range is a decline of 3%, reflecting a scenario where the mix of the factors I just discussed results in lower customer demand. From a category standpoint, we expect sales in our computing category to improve through the year and show growth for the full year as early replacement and upgrade cycles gain momentum and new products featuring even more AI capabilities are released as we move through the year. We are already beginning to see the improvement as year-over-year comparable sales for laptops turned slightly positive in the fourth quarter and are trending positively so far this quarter. At this point in time, we expect revenue for the rest of our product categories to stabilize through the year and be flattish to slightly down for the full year, partially offset by the continued growth of our services revenue. Even though overall we are expecting flattish sales growth for the full year, There are many examples of innovation, both already introduced and expected through the year, that we believe will drive interest, including the Samsung AI-enabled phone. We are already seeing materially more demand than we expected. New emerging content for VRAR devices, Ray-Ban smart glasses, Bose open-ear headphones, EV universal charging devices, and a proliferation of 98-inch screen TVs, to name a few. Also, the level of exciting and cool new tech at the Consumer Electronics Show in January felt back to normal. Of course, some of that cool new tech hits the market over the following year, while some of it is still a few years from consumer launch. Now I would like to provide more details on some of the key initiatives within each of our fiscal 25 priorities to capitalize on that industry stability. As I mentioned, our first priority is to invigorate and progress targeted customer experiences. Our first initiative is to materially elevate personalization. We are focused on providing increasingly personalized, highly relevant, and motivational content for our known, identified customers. We can attribute roughly 90% of our annual revenue to known customers. Let's start with our efforts around our paid membership program. Here, we're creating seamless, tailored experiences for our members based on their unique preferences or context. Our app-first member deals experience is a great example of this. Rather than bombarding our members with thousands of great member deals, we focus on the experience on the most relevant offers based on their preferences and observed member data. Additionally, we're adding personalization across the membership journey, including in-store at POS, where later this year we'll include prompts to provide both sales associates and customers with relevant contextual information about their membership, like their savings, rewards, protection plans, and offers. We will also include personalized dynamic messaging in our communications to members about their upcoming program renewals. These efforts and more will serve to increase membership engagement and continue to improve retention. As we think about our broader known customer base, we are fortunate to have a tremendous amount of first-party customer data for our advanced analytics capabilities to leverage. While we are elevating personalization across our customer interactions, I'm particularly excited about the work we are doing with our app. We are currently testing a personalization-centric version of the app homepage with the stories and actions that matter most to customers along with critical content and plan to launch to all customers during the second quarter. The second initiative is to invest back into our store experience. Our stores are crucial assets that provide customers with differentiated experiences, services, and convenient multi-channel fulfillment. Customer shopping behavior has evolved in the last four years. And this year, we are particularly focused on ensuring we provide the experience that customers expect to have when they take the time to come into our stores. As a result, our capital investments for fiscal 25 are concentrated more on existing store updates and refreshes and less on major remodels or store openings. We plan to touch every single store in the chain in some fashion, improving both our merchandising and ease of shopping for customers. This includes improving and livening the merchandising presentation given the shift to digital shopping and corresponding lower need to hold as much inventory on the sales floor. It also includes right-sizing a number of categories to ensure we're leveraging the space in the center of our stores in the most exciting, relevant, and efficient way possible. For example, we will be removing physical media and updating our mobile, digital imaging, computing, tablets, and smart home departments. We are also excited to partner even more with our vendors this year as it relates to their branded in-store merchandise experiences. The coming innovation, combined with our plan to refresh every store in our fleet, provides much more opportunity for vendor investments in our stores. A few examples I can share at this time include Tesla, Lovesac, and Starlink. Although we still see opportunities for additional large experience store remodels, we believe we have a better opportunity to improve existing store experiences at scale in fiscal 25. At the same time, we are planning to open a few additional outlet centers and new formats to continue to test two important concepts. First, we will open small locations in a couple out-state markets where we have no prior physical presence and our omni-channel sales penetration is low to measure our ability to capture untapped share. Second, we will test our ability to close a large format store and open a small format store nearby, thereby maximizing physical store retention through convenience. These learnings will collectively continue to help us refine our forward-looking store strategy. In addition to a great physical experience, we want to ensure our customers receive the expert service interactions they want and Best Buy is known for when they come to our stores. During fiscal 25, we will continue to leverage our multi-skilled store associates, but in hundreds of stores, we will also add back fully dedicated expertise in key categories like major appliances, home theater, and computing. Our plan is to deploy some of our most skilled sellers against these categories and double down on category-specific training and certifications for these employees. We know that our selling certifications create a better experience for our customers as our certified employees, on average, drive nearly 15% higher revenue per transaction and garner higher net promoter scores than a non-certified employee. In fact, the third initiative under our drive targeted customer experiences priority is to make sure we are prepared to bring coming innovation to life for customers in ways no one else can. This means we need to be ready to leverage the unique strengths that make us the best place for customers to see new tech and the best partner for vendors to launch new tech. This includes everything from expertly trained associates who can explain the new technology and what it can do for you, the best merchandising presentation both in-store and online, all the way to great trade-in values for customers to use technology. This will be particularly important later this year when more computing products featuring AI are expected to launch. As a reminder, we hold one-third of the retail market share in both the U.S. computing and television industries, roughly 20% in gaming, and well over 10% share in other categories like major appliances. We intend to strengthen our position in these key categories through the initiatives I just outlined, as well as pointed marketing spend and sharp pricing. Our second key priority for the year is to drive operational effectiveness and efficiency. We have a long-standing commitment to identifying cost reductions and driving efficiencies to help offset inflationary pressures in our business and fund investment capacity for new and existing initiatives. Our fiscal 25 initiatives are focused on driving further efficiencies across forward and reverse supply chain, our Geek Squad repair operations, and our customer care experience. We will continue to lean heavily on analytics and technology to achieve these efficiencies. This includes leveraging AI safely and effectively. Let me provide a few specific examples of how we are leveraging it. One, we're using AI to route our in-home delivery and installation trucks to drive more efficient scheduling and a better customer experience. Two, we're leveraging AI to summarize the main points and follow-ups from each of our customer service calls. It also improves the accuracy of the interaction and data collection, while reducing average engagement time by almost 5%. To help us enhance our overall tech development effectiveness, We are leveraging GenAI code generation and shared resources for our engineers. We are also establishing a digital and technology hub in Bangalore, India, which will give us expanded, more economical access to talent and skills. The hub will open and begin the process of onboarding team members later this year. In addition, in fiscal 25, we are taking actions to, one, ensure our resources are directed at the right strategic areas, and two, to right-size our model based on current operations. These actions will allow us to do the following. Balance field labor resources to make sure we are providing the optimal experience for customers where they want to shop. Redirect corporate resources to make sure we have the necessary assets dedicated to areas like AI and other elements of our strategy. And right-size parts of the business where we expect to see lower volume than we envisioned a few years ago, whether that is the result of lower industry sales or due to decisions we made like evolving our paid membership benefits. While we made these decisions during the fourth quarter, which resulted in a restructuring charge that Matt will discuss later, many of the actions will be implemented through the first half of fiscal 25, and we will provide more details as we move through the year. Our third key priority for the year is to continue our disciplined approach to capital allocation. This will include striking the appropriate balance of prioritizing areas that best position us for the future, while prudently dealing with the near-term uncertainty in the CE industry. There are a few key points that I want to highlight. First, as it relates to our capital allocation strategy, our overall approach isn't changing. We still plan to first fund operations and investments in areas necessary to grow our business, and next return excess free cash flow to shareholders through dividends and share repurchases. Second, while our enterprise capital expenditures for fiscal 25 are planned at a similar level to last year, Our domestic segment capital expenditures are expected to decline by approximately $50 million due to the store portfolio investment approach I discussed earlier and lower technology-related expense. This is offset by a year-over-year planned increase in CapEx in Canada to reflect investments for new stores and necessary supply chain automation projects. Third, and consistent with our practice over the past several years, we will continue to tightly manage our working capital. Our teams have done a tremendous job managing our inventory in a very uneven sales environment, keeping inventory aligned with our forward-looking sales projections while at the same time maintaining as much flexibility as possible. And lastly, this morning, we announced a 2% increase in our quarterly dividend. This represents the 11th straight year of dividend increases and puts our current dividend yield near 5%. Our fourth key priority for Fiscal 25 is longer-term and focused. we will continue to explore opportunities that leverage our scale and capabilities to drive incremental profitable revenue streams over time. The most developed example of this is Best Buy Health, where we are leveraging our expertise and our Geek Squad agents to capitalize on the growing use of technology to help provide healthcare in the home. While still very small in relation to our core business, our fiscal 25 Best Buy Health sales are expected to grow faster than the core business, which combined with cost synergies from fully integrating acquired companies are expected to drive another 10 basis points of NRI's operating income rate expansion. Another example is our recently announced collaboration with Bell Canada to operate 165 small format consumer electronics retail stores across Canada. These stores, previously known as The Source, which was a wholly owned subsidiary of Bell Canada, will be rebranded as Best Buy Express. We will provide the CE assortment as well as supply chain, marketing, and e-commerce. Bell will continue to be the exclusive telecommunications services provider and will also be responsible for the store operating costs and labor components of the partnership. This collaboration will allow us to expand our presence in malls and in smaller and mid-sized communities across Canada. Best Buy Express stores are expected to roll out during the second half of this year. Other examples of opportunities we are pursuing include continuing to build out our business case for Geek Squad as a service, and adding vendors to our Supply Chain Partner Plus program. Before I close and turn the call over to Matt, I wanted to touch on a few of the ways we are being recognized for the support we provide our employees and communities. From an employee standpoint, I'm proud to share that we continue to maintain industry-low turnover rates, and our fiscal 24 employee turnover was down on a year-over-year basis. To that end, this is our second year as the number one retailer on the Just Capital list. which evaluates and ranks the largest publicly traded companies in the U.S., in part, on how a company invests in its workforce. This year will also mark the fifth anniversary of our caregiver pay benefit. During that time, we've supported 22,000 employees with almost 3 million hours of time away so they could care for those who matter most. We continue to be credited as a leader in sustainability. In Q4 for the 13th year, we were named to the annual Dow Jones Sustainability North America Index. We were also just named for the seventh consecutive year to the CDP's prestigious Climate A-List, which looks at how organizations demonstrate best practices associated with environmental leadership. In summary, we are focused and energized about delivering on our purpose to enrich lives through technology in our vibrant, always-changing industry. We don't assort tech products just for the sake of technology. We see technology in service of humans. And as the largest CE specialty retailer with our unique range of product assortment and expert services, we deliver that human experience to millions of customers. I want to reiterate our fiscal 25 strategy. In what we expect to be a year of increasing industry stabilization, we are focused on sharpening our customer experiences and industry positioning while maintaining, if not expanding, our operating income rate on a 52-week basis. We are putting ourselves in the best position for fiscal 25 and beyond. As our industry returns to growth, we expect to grow our sales and expand our operating income rates. I will now turn the call over to Matt for more details on Q4 financial performance and our outlook.