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. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 11:00 AM Eastern Time today. [Operator Instructions] I’ll now turn the conference call over to Mollie O’Brien, Vice President of Investor Relations. Please go ahead. Mollie O’Brien: Thank you and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; Matt Bilunas, 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 Corie.

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. I'm proud of the amazing execution of our teams to 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 the 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've been focused on the 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 are reporting today would not be possible without the effort and energy of our frontline employees working in our stores, supply chain facilities and customers home. 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. Enterprise comparable sales growth was 5.8%, despite the fact that our stores were opened by appointment-only for the first six weeks of the quarter. Products that help people work, learn, connect and cook at home,…

Good morning. As Corie highlighted, the demand for our product resources was remarkably strong during the quarter. Although, we didn’t provide guidance for the quarter during our last earnings 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 continue 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 teams ability to navigate the rapidly changing environment is we also know that our goals reach beyond any one quarter's results and we still face an uncertain environment. An enterprise revenue of $9.9 billion, we delivered non-GAAP diluted earnings per share of $1.71, or an increase of 58% versus last year. As a percentage of sales, our non-GAAP operating income of 5.9% increased 190 basis points compared to the prior year. As Corie mentioned, the primary driver of the operating income rate expansion was lower non-GAAP SG&A expense of $290 million, which was 290 basis points of favorable to last year as a percentage of sales. Gross profit as a percentage of sales decline a 100 basis points compared to the last year, which partially offset the SG&A favorability. In relation to SG&A, we made several cost decisions in Q1 and as we entered Q2 to alight with the lower sales and sales trend we were seeing expecting to continue at that point. These included keep store employees on furlough to spending short-term incentives and lower advertising expenses. And as we opened our stores, we saw significantly improved sales trends that outpaced our staffing levels for the period of time. These sales on…

[Operator Instructions] We will begin with Steve Forbes with Guggenheim Securities. Please go ahead.

Good morning. May be just to start with now you finished there on expenses, as we think back to the Analyst Day last year and the $1 billion cost reduction program, I think you spoke to in the fourth quarter a $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, what's driving the lack of flow-through right on the achievement against the cost reduction program?

Sure. Yes, from a cost reduction standpoint, clearly we did 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 them 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 we'll determine and by how much sales we actually have and how much gross profit rate pressure we'd be able to offset.

Thank you. And then just a quick follow-up, maybe sticking with the margin just on gross. You talked about two pressures, right, in the third quarter, channel mix, right and profit sharing. But you didn't mention promotions or mix. As we think about entering the holiday selling season here, what is sort of the promotional calendar looking like from your perspective today?

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 done online versus 42% in Q1. So parcel expense is the biggest gross profit rate pressure. And then in addition to that, we continue to see pressure from the lower profit sharing from the city relationship we have. Those are expected to continue into Q3. 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 work through the quarter. If you look at promotionality into Q3, we would expect that promotionality to be sequentially up from Q1 and Q2, 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 to be a year-over-year pressure at this point.

And now I'll move to our next caller. We will hear from Chris Horvers with JPMorgan.

Thanks. Good morning, everybody. So I wondered digging on some of the category trends that you’re seeing in August or July, in August whatever you think is better wins to work it through. What are you seeing and sort of what I would describe -- sort of pulls back-to-school category? Are you seeing home theater and TV up or you're seeing wireless up? What about gaming in advance of the two new platforms? And is -- and to what degree is this still all driven by or largely driven by back-to-school and work from home categories?

Hi, Chris. Thanks for the question. We're seeing favorable trends across literally all of our categories right now as we exit Q2 and start Q3 with the one exception that we noted around mobile phones. But we're seeing trends that are applicable to every part of learning, working, entertaining and cooking from home. And some of that in Corie and Matt's prepared remarks are impacted by the fact we don't have as much inventory as we would like to have right now, but the demand curves that we saw when we opened our stores have continued as we've entered into August well beyond just the traditional back-to-school categories. So I hope that gives you a little bit of color.

Can you share with us perhaps, like what you're seeing in home theater as an example on a quarter-to-date basis?

I can't give you the details of quarter-to-date, but we did talk about the improvement in our television performance. I think that's pretty reflective of the -- both the importance of the role we play in the TV or the electronics industry and the importance of stores play because we switched from a negative trajectory in Q1 to a positive trajectory. And our second quarter also includes lapping last year's Prime Day business, where we do a lot of revenue with our own exclusive models with our Amazon Fire TV. So we see the consumer demand strong. We see the demand is strong for larger products and for things that have additional features, higher resolution and clearly, bigger screens as people are spending more time at home.

Understood. And maybe can you talk about, as my follow-up question, the gross margin mix in I would have thought in the second quarter. You would have seen a pretty solid gross margin mix headwind. Was that essentially fully offset by a lower promotional posture year-over-year? Or was the net of those two things actually positive?

Yes. We're not going to give specifics. But largely, the product mix that we experienced in Q2 was fundamentally offset by the promotional -- 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 a higher 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 a little bit more than Q2. And to the extent how much it is favorable. We'll determine how much it offsets the mix impact.

[Operator Instructions] We'll now move to your next question, Peter Keith with Piper Sandler. Please go ahead.

Hey. Good morning, everyone. Nice execution here. I wanted to look at the margin differential between the retail stores and e-comm. Historically, you've highlighted that e-comm has a lower contribution margin. But now 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?

Yeah. 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. Overall, on an annual basis, the EBIT levels of both of those channels are actually pretty similar. Now each quarter can be a little bit different. The makeup is a little different, too. Online has typically had a little less, a little lower gross profit rate, a little bit more SG&A leverage. Stores, while carries a little bit more gross profit rate. It carries a little bit more SG&A burden. So they kind of offset each other, and so similar EBIT levels -- or they're pretty similar EBIT level. And when you go through what we saw in Q1, that dramatic change of online sales -- 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 structure. And as we go forward, we'll obviously be looking at how to improve the efficiency of whichever channel we have. I'd say over the years at 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 time. Our store will close in 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 about 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?

Peter, I'm going to take that one. I think there are a few -- I would characterize them more as unknowns as we look into the back half here. And I would cite things like where we are in the government aid programs and whether or not there will be a new package going forward. Obviously, the stimulus, to some extent has helped certainly up to this point. And it's hard to say how long that kind of hangover effect of that continues. 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 what we feel strongly all of our vendor partners are doing everything they can to catch back up. You're talking about holiday levels on manufacturing and fulfillments, and that just is going to take a bit of time to catch trends this tight. And then finally, the actual duration and depths of the virus and how that proceeds through the fall. And so I think it's less about distinctly calling out categories Peter and a little bit more about just the environment that we find ourselves in.

And now we'll take our question from Michael Lasser with UBS.

Good morning. Thanks a lot for taking my question. You noted that your share has largely recovered. Why wouldn't you be gaining share, especially as your stores are now open and you're growing sales 20% quarter-to-date?

So we believe we continue -- we said it in Q1, we lost some share, and we saw that trend continuing in because our stores were largely closed. And we also said, we view that as very temporal in nature. And you're right, we said in the script that we've seen the share recover. There are puts and takes week-to-week, honestly, Michael. There are some where we actually believe we’re gaining. There are others where we think it's a little bit more moderate. Sometimes that can depend on the even inventory position at the time, but overarchingly, we feel pretty strongly that we are in a good share position. And I think our key is that continue to remain incredibly focused on providing the experience that we would expect seamlessly across the channels, still with an emphasis on safety. 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. And I think we're very well positioned as we head into Q3 into the back half from a share perspective.

Including my follow-up is you discussed that SG&A expenses will be similar to last year in the third quarter. You just operated with a new model that showed you can perform pretty well without having to incur as much of a operating expense burden as you had in the past. So what's prompting your view that you need to go back to a full expense rate?

Yeah, I think it's one of the reasons we did the walk of our different models in the script, was -- so everyone understood that we operated the first six weeks on an appointment-only model. And obviously, we saw demand for people wanting to come back into our stores. We opened and we said at that point we brought back about half of our furloughed associates. Honestly, the demand was so high as we opened the stores back up that we were not able to provide the level of service that we would have wanted. And you can see it in things like attach rate of services in the store. You could see it in how heavy the business was at our precincts and 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 reason we said that by the end of the quarter we had two-thirds of our furloughed associates back in the hours associated with that so we can meet some of that demand. Now you're going to have a fully normalized quarter, where you're going to have both a new starting wage of $15, but also what we think is the labor commensurate to meet the demand and provides a level 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.

Okay. Thank you very much and good luck.

Now we’ll take a question from Matt McClintock with Raymond James.

Hi. Yes. Good morning everyone. And congrats to the Best Buy team on good execution. I wanted to ask two questions. The first one is just on supply chain, many fulfillment hubs for the stores that you are shifting to, to this model. Can you talk a little bit about your capacity to shift volume to that method? And then how do you think about the reduction in freight cost and the benefit that you will get as you make this transition? That will be my first question. Thanks.

Hey, Matt, it's Michael. I'll start with the question. I think about it in two different ways. We were pioneer in this whole idea of buy online and pick up in store, which allowed us to be the first major retailer to figure out how do we ship from store. And based on some of our store size, as we have store that has access capacity, I think you're aware of some of our store conditions. And when we look at what we did for automation over the last three years and the thing that we need 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 in shipping volumes will come from. It's partially designed to lower expense because you can absolutely have more customers pick up in-store, that's happening at these locations, but it's closer to our carrier delivery pads. It's also basically 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 we 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 to get it by data is accurate and it's competitive, and we feel very good about that. And that's the primary thing we focused on for this holiday.

Thanks for that. And then just my follow-up question is new leadership Best Buy Health. Any strategic changes that you're thinking about 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.

I mean our focus and confidence in the health business remains incredibly strong, and obviously the environment that we find ourselves been only reinforces that strategy. I think Deborah brings just exceptional experience combining technology with healthcare, this idea of tech and touch that we've talked about before, her life experiences in 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.

Thanks for the color. Best of luck.

And Anthony Chukumba with Loop Capital Markets will have the next question.

Good morning. Congrats on another spectacular quarter. Also wanted to commend you on all your -- everything you're doing from a social justice perspective. So I have a quick question then a follow-up. You talked a lot about the shift to online. It's --different things we're doing in the store and the 200 stores are going to be hubs for the online, for online deliveries. And I know it's early, but does that make you sort of rethink, how do you think about, what's the right number of stores going forward if you think a lot of this online shift is going to be permanent?

Thank you, Anthony, for the compliments. And let me start by saying, one of the implications we laid out in the script were talking 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 at 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 have employees in stores that are moving at speed with the customers. 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 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 pickup 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 maybe used differently. It's not about left 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 whatever the way they want.

Got it. That's helpful. And then, just for my follow-up. So, you beat the consensus estimate by a country mile again, this quarter. You repaid your entire revolving credit facility. You're sitting on over $5 billion worth of cash, at what point and I know there is lot of uncertainty out there. 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 where we've got kind of gotten to the other side, we can start to buy back stock again?

Yeah. Thanks for the question. We're evaluating, when we may resume stock buybacks. Fundamentally, our allocation strategy has not changed, we first -- we're always going to reinvest at 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 that this is a kind of a very uncertain environment, for many reasons, holidays like we look very different, as like many companies where we're taking the time to really evaluate and 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. Keep up the good work.

And next we'll hear from Brian Nagel with Oppenheimer.

So, the first question I wanted to ask, I think, Corie, you discussed in your prepared comments just the degree to which, new customers come in Best Buy. I think either stores or online is helping to drive the sales recovery. Maybe discussion just a little further the makeup of these customers, where they may be coming from? How different they are done? And the customers that Best Buy catered to in the past? I mean are we seeing now that Best Buy brand is now through this quite as actually reaching a new demographic?

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 obtained in March, have shown a much higher propensity to repeat sales, than those new customers we obtained 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 environment, 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 reengage 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.

Got it. It’s helpful. And then my follow-up, this time related to – you talked as absolute broad base sales during the quarter with the exception as you called out the mobile category. So, my question there is, is that -- you think the weakness in mobile carriers, is the mobile function of maybe a lack of product cycle or just the disruptions to the stores through most of the second quarter or is it something else?

Hey, Brian. Yes, I think, you've got actually both of the answers and a part of your question. It’s a one category that is most dependent on our store traffic for the customer experience to make sense. It’s still complicated to do that process online even some of the carrier stores aren’t even open 7 days a week right now. So, we are really focused on the customer experience in advance of new handset launches this fall on 5G. We are still very excited about the category and the experience we create. We did make some enhancements so you can trade in your old 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.

Thank you very much.

Looks like we have time for one final question. We'll hear from Kate McShane with Goldman Sachs.

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 stated here a little bit. And 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?

I'll start, Kate, and maybe Matt can follow with some of that promotional commentary. In terms of the strength, and Mike had said it, we are really seeing broad-based strength. 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 shared devices have to be able to have your own networks and own devices and own webcams. And 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 some 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 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 home. And it completely underscores our purpose and our philosophy, and that is you actually right now are enriching your life through technology. And we're seeing it across basically every aspect of what we are selling in our stores.

Sure. And getting to the promotional question, I think what I said earlier was promotionally, we'll 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 -- holiday that will probably start early year. But even with those, we believe the demand for the products and services we sell and just also the inventory availability will continue to lend itself to the less promotional environment.

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.

Ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation, and you may now disconnect.