Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Fourth Quarter Fiscal Year 2021 Earnings Conference 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 a.m. Eastern Time today. [Operator Instructions] I will now turn the conference call over to Mollie O'Brien, Vice President of Investor Relations.

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 and subsequent 10-Q 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. During the fourth quarter, our teams across the company delivered an exceptional customer experience in a safe environment. They showed amazing flexibility and execution, managing extraordinary volume in a dynamic situation, and they strive every day to create safe shopping experience often in the face of pandemic fatigue. As a result, today we’re reporting strong Q4 financial results which include comparable sales growth of 12.6% and non-GAAP earnings per share growth of 20%. We continue to leverage our unique capabilities, including our supply chain expertise, flexible store operating model and ability to shift quickly to digital to meet the ongoing elevated demand for stay-at-home products and services. Online sales grew almost 90% to a record $6.7 billion and made up 43% of our total domestic sales. Our stores played a pivotal role in the fulfillment of these sales, as almost two thirds of our online revenue was either picked up in-store or curbside, shipped from a store or delivered by a store employee. The percent of online sales picked up by customers at our stores was 48%, representing a 90% increase in volume. Ship-to-home volume was up 38% and even with that increase in volume, we were able to accelerate the delivery speed to our customers on a year-over-year basis by strategically using our partners, our stores and our employee delivery. For additional context, same-day shipping volume was up 376% and our employees delivered more than 1 million units. From a product category perspective, the biggest contributors to the strong comp sales growth in the quarter were computing, appliances, gaming, virtual reality and home theatre. As you recall, this year we started holiday promotions in October, which is in our third quarter. We started these events early and spread them over…

Good morning. Our financial results for the year far surpassed what we thought was possible entering the year. We are leaving fiscal '21 with an even healthier balance sheet and we -- than when we started the year and saw our non-GAAP operating income rate expand 90 basis points versus the prior year. The rate expansion was possible due to both our ability to capitalize on the elevated demand for technology and by reducing spend early in the year in certain discretionary areas beyond the unknown -- based on the unknown situation we were facing at the beginning of the pandemic. We also accelerated strategies that allowed us to begin adjusting our cost structure to what we believe will be a permanent shift in how customers want to shop. Despite the difficult decisions we made, throughout the year we remain committed on investing in areas we felt were most crucial to delivering our future growth plans. Let me now share more details specific to our fourth quarter. On enterprise revenue of $16.9 billion, we delivered non-GAAP diluted earnings per share of $3.48, an increase of 20% versus last year. Our non-GAAP operating income rate of 6.9% increased 40 basis points. This rate expansion was driven by approximately 90 basis points of leverage from the higher sales volume on our SG&A, which was partially offset by 60 basis point decline in our gross profit rate. In addition, a lower effective tax rates had a $0.08 favorable year-over-year impact on our non-GAAP diluted EPS. In our domestic segment, revenue for the quarter increased 11% to $15.4 billion, an all time high for revenue in a single quarter. Comparable sales growth of 12% was partially offset by the loss of revenue from stores that were permanently closed in the past year. From a…

[Operator Instructions] We can now take our first question from Anthony Chukumba of Loop Capital Markets. Please go ahead.

Good morning, and congratulations on a strong finish to a -- to an incredible year, particularly given the COVID-19 dystopia that we're all living through. So my question was on the competitive landscape. I mean, it sounds like or I would guess that you're expecting things to be more competitive in 2021, as you said, as the world sort of returns to normal compared to maybe what you saw in 2020. But just would love to have your perspectives on that. That's my one question. Thank you.

Yes, I'll start and Matt can add color. I think we would expect that we actually set it as Matt provided the outlook there to be a higher level of promotionality as we start to lap some of the strengths, obviously, from last year and we start to get into more normalized inventory positions throughout the year. And so part of the color I think that Matt provided for next year would imply that. We likely are going to have to invest a bit more to remain price competitive, which of course, since the beginning has been our priority. So, Anthony, I think your intuition is right there that we would expect things to normalize a bit in terms of promotionality.

Got it. Keep up the good work.

Thanks so much, Anthony.

And we can now take our next question from Chris Horvers of JPMorgan. Please go ahead.

Thank you. Starting with a longer term question and then have a follow-up on something more near-term. As you think about migrating to the new model, obviously, in the consumer electronics, business warranties and accessory attachment are really important. So can you talk about the -- how you see those attachment rates, in-store versus a BOPUS and versus online. Are you building an expectation that you can improve that attachment rate as the consumer becomes more digital?

So I'm going to take a little bit of a step back here in that. I think we strongly believe our competitive advantage is our ability to provide both support and advice across all the channels -- any channel that anyone wants to shop in. And obviously, there are different challenges and different modes of doing that across the different channels. But regardless, we know our employee, or our customers, excuse me, are looking for both that advice and that support across channels. And we've been investing in our capabilities and technology in order to deliver that. We've also talked about the fact that what our customers expect from us from a support perspective has changed over time. And it's less about that break, fix support, although that's still important and we need to be there when that happens. And it's much more about supporting your technology seamlessly across your devices. And it's more about is my printer staying on my network? Or is my content streaming the way that I want it to? And hence, the reason we've been migrating to a model that looks more like Total Tech Support, which provides you obviously coverage for all the technology devices in your home, regardless of where you bought them. And so it's not just about now from -- for your question, specifically, digitally, it's not just about the buying experience, it's actually about using digital across all aspects of the shopping experience. And so we have been working and we are continuing to work and if you think about the investments that Matt mentioned, in technology, we're investing in things like video chats, virtual consultations, adding digital checkout in the app, this is still all empowered by our amazing Blue Shirts [ph] who are actually creating these experiences, we're just creating them digitally. And so while the gross margin rate has been lower online, over time it's constantly improving because we're constantly improving that customer experience. And we are seeing increases in our ability to transact Total Tech Support or digital consultations, we're seeing more in-home advisor leads online as an example. So I think it's hard to replace that expertise and support you get by visiting our stores. But we are seeing customers get more comfortable with experiencing some of those things online. And it's less about exactly what channels have happening and more about how to in every channel we interact with you. We are constantly trying to improve that experience. So to your point and your question, it does become more natural to make the buying decisions in a digital environment.

Understood. And then, on the first quarter gross margin and inventory and promotional environment, I guess, you have a very strong comp guide in the first quarter. And it doesn't sound like you're fully in stock on items. So why would you expect a more promotional environment in the first quarter? I would -- is that something you're seeing already and sort of early? I would certainly expect that to be the case as you progress through the year, but it would seem like all the pieces put together, it wouldn't seem like the promotional environment would really change year-over-year?

Yes, I will start and Mike or Corie can add. Yes, I think, despite the fact that we do expect some elevated sales in Q1, as we start to enter in especially the latter part of Q1, we're going to be seeing a competitive environment where a lot of our competitors are comping some big numbers of themselves. And so we're just aware of where that might take technology and how we need to stay competitive in that environment. So you're right. There's the tale of Q1 is going to be leading up to the time we close our stores. And then we close our stores for a bit of time, the last other week. So there's a lot of different areas within Q1 and we do think towards the tail end of it, we'll start to see a bit more promotions and competitiveness as we start to see competitors react to their own situations.

Understood. Thanks for all the great information.

And we can now take our next question from Michael Lasser of UBS. Please go ahead.

Good morning. Thanks a lot for taking my question. When you laid out your comp guidance for the year, how did you factor in the potential for demand being pulled forward, not just the tougher compares you're going to face in the back half? And do you think the potential for demand being pulled forward exists for a multiyear period or is that unfold because of this wallet to shift back to leisure categories it'll happen pretty quickly and be sustained just for a short period of time? And then I’ve one follow-up on your longer term guidance.

Good morning. This is Matt. I'll take that and Corie or Mike can jump in. I think, fundamentally if we step all the way back, we believe the role of technology in people's lives is only intensified as a result of the pandemic and the proliferation of devices in people's lives will continue to support advancement as innovation continues. So that -- and the role we play in that is extremely important and even stronger than it was before. And so as we look at next year, when we think about it being probably a tale of two halves with growth in the first and then declines in the latter, I think we still see opportunity for innovation to keep fundamentally technology important in people's lives. Clearly, at a micro level there, you could imagine some categories could see a little bit of pull at any given point. But there's also an element of personal savings rates being so elevated now. Right now they're about 14%, which is twice what they were going into the pandemic. So there are a lot of puts and takes in the year. Fundamentally, the guide for next year really incorporates a view that as we get to towards maybe the middle of the year, we start to see that shifting of consumer behavior back to places that were a little muted as the pandemic hits. So we wouldn't characterize the pullback, but just a changing of people deciding to use their wallet.

I think no matter what, Michael, people use of technology in their homes, in particular has changed forever. You have more proliferation and you're going to have more people upgrading more products and more people trying to make different ecosystems all try to work together in their homes, which I think regardless of the puts and takes in any one given year is a good thing strategically for us over the longer term.

Okay. And my follow-up is on the comments around your expectation for your operating margin being above 5%, or the level that you had laid out at your analyst meeting a couple of years ago. And obviously at that time, it was impossible to predict that e-commerce penetration in your business would be as high as it is today this quickly. But presumably now that's a drag relative to what you expected for your profitability back then, is the offset or the entirety of the offset and even more, this new model where you're going to operate a little more efficiently at the store level, or is there other factors that are driving this expectation that your profitability is going to be higher than what you expected a couple of years ago. Thank you.

So I'm going to start with a bit of a strategic lens on that. And then I think Matt can chime in a little bit on the profitability of the [indiscernible] kind of question. When we set that target in 2019, the good news is our strategic hypothesis was spot on. The interesting part is we have made a massive amount of progress even faster, the customer has made a massive amount of progress. We knew digital penetration was going to grow pretty substantially. What we didn't know is that it was going to double in the span of a year. And so we need to take and we are taking the appropriate time to think about the longer term, given these seismic changes that we've seen. And there are lots of uncertainties including the fact we're still in the middle of a pandemic. And so we're testing and piloting a number of different models that are going to balance this kind of urgency for change, with the need to learn how the customer is changing their behavior. But what we can see in front of us, and then what we can see based on the plans we have in places is that we do think there is that room for operating rate expansion. And Matt will talk a little bit about what we're seeing even in the profitability of the channels.

Yes. If you think about the channels, which are increasingly hard to kind of pull apart, as you see elevated levels of online sales, you see a lot more SG&A leverage because there's a lower fixed cost basis to that. And so, while the gross margins are tend to be lower because they don't -- our stores provide an expert service and support that only our people can give. We do see a SG&A cost structure that is less. And so our job is to actually how to optimize both those channels together to provide the same level of expertise and support, but also allow the support and convenience as they work together. But that fixed cost leverage that you get online is important as you start to look further in the year-end with elevated levels of online mix.

Thank you very much and good luck.

Thank you.

And we can now take our next question from Peter Keith of Piper Sandler. Please go ahead.

Hi. Good morning. It's actually [indiscernible] on for Peter. Thanks for taking my question. I wanted to ask about your full year gross margin guidance, expectations to be down a little bit. I was wondering can you just discuss some of the puts and takes there, strategy down a little bit out there 60 basis points of decline this year, and expectations for online next to moderate that. So just wondering any detail there. Thank you.

Sure. So the thing about gross profit next year, what we said was it would be slightly down. I think the biggest part of that are a belief that, like we said that there'll be a bit more promotionality and competitive environment as we start to get into the latter half of Q1 going forward. There's also periods of time where we had some -- our stores closed, we did -- we were able to offer all of our services or installation delivery, there's a little bit of pressure there. In addition, I think, online mix being assumed at 40% versus 43% this last year, is that a meaningful difference in terms of the impact of supply chain costs. So that's why we don't think supply chain costs fundamentally are much of a benefit as you start to move into next year as you are assuming the same amount of sales between the [indiscernible] years. I also think within there, you've got a little bit of -- a promotional favorability was offset by a little bit of category mix changes that'll happen throughout the year. So fundamentally it's that assumption that online mix which stays pretty much the same.

Thanks, Matt. Appreciate that. Maybe just separately, quickly, turning on the semiconductor charges that have been reported recently. Can you discuss how this might be impacting price availability currently, or perhaps in the coming quarters?

Yes. Now it's Mike Mohan in here. Thanks for the question. I think it was around semiconductor availability [indiscernible] , which is clearly a lot of that in the news right now because we need semiconductors in almost everything that's being made. We feel pretty good because we have long-term plans with our vendors upstream for finished goods, whether they're coming from Asia or parts of the rest of the world. And there's sporadic shortages just based on demand peaks right now. Our online of sight to the incoming inventory feels good on where we're at. I think there will some impacts in other industries, but I wouldn't be the expert to speak about it here.

Okay, thank you. Appreciate the color.

Thank you.

And we can now take our next question from Joe Feldman of Telsey Advisory Group. Please go ahead.

Yes. Hi, guys. Thanks for taking the question. I wanted to ask on inventory, how we should think about inventory through this year? It sounded like we're still -- you're still a little chasing in some categories, or where there's some lightness. But I was thinking, you do get back into stock and inventory was up maybe half percent or so this past quarter, which seemed like in a better position. Maybe you can just take us through the year how to think about it, like, should we end the year or come through the year up a little bit inventory, down a little bit? How do we think about it?

Hey, Joe. It's Mike. I will start and Matt or Corie can chime in. We feel better about our inventory position now versus the last four calls we've had. So I'll start with that, because we've finally gotten back into better stock. That That said, we still have constraints in parts of our business that we don't think we will solve themselves in the first half of this year. Gaming is a good example. We have yet to put the new generation of gaming consoles into our stores, we anticipate to do that soon. But we haven't done that because there just hasn't been enough inventory to meet demand. So those are some of the things that pandemic aside, it would have likely been constrained and is only more heightened based on people wanting to dramatically change their at home experiences. Other categories like printing have been constrained since the sort of pandemic and there's some challenges in that industry at large getting back into a better inventory position. I think it was some of the bigger categories around computing and home theatre, we're going through some natural time transitions. This would be our second home theatre transition as an example during a pandemic. And I think our vendors are getting smarter about the timing of new model introductions, and then what do they use for demand generation. So I can't give you a good window as to what our inventory will look like 12 months from now. I feel we're going to be in better stock overall, but we'll still have a handful of constraints that we have to navigate through. I think the one thing our teams really do well, and I know that you know this, but we work so far upstream [ph] with all of our partners with collaborative forecasting, demand generation, even feature sets on models, which then actually help us give us help -- give our vendors the best forecast possible. So I always look at our forecast accuracy and percent to fill and I feel really good about what I can see going forward and then the rest is based on consumer demand. And I think Matt talked about there's some things on the back half of this year that we have to plan for two different vectors on and I know our teams will be ready.

Got it. Thanks. And then, if I could ask a follow-up on a separate topic. With regard to digital in the stores and fulfillment, like I guess, when you were talking about retraining re-skilling, is that related to having to teach the employees to do a better job of fulfilling orders and shipping and doing things beyond [technical difficulty] servicing the electronics, support when people come in? Like is it more about the digital support than the in-person support?

Thanks for the question, Joe. It's a little bit about everything you just mentioned, in fact. And so in other words, there are multiple ways in which employees can in many cases opt into gaining further certifications and skills. Sometimes that looks like within the four walls of the store. I might opt into garnering more skills in home theatre and computing, I might opt into garnering more skills around services, therefore I am more flexible throughout the store. In some cases, that might also mean I am willing to spend some of my time doing fulfillment work, fulfilling on car side -- curbside, excuse me, orders, or packing inventory in the back out of some of those ship-from-store locations. So I may add those skills, which might add more hours and more flexibility. And then there are some real digital experiences that we are leveraging our associates for. I might opt into being able to answer calls from a national call queue, while I'm on my shift, it's not that busy, and I can pick up a customer's question by a call, or I might opt into being more of a -- an expert that's virtual, that can help you with whatever your question is in a virtual connection through our app. All of those are different ways in which we're rescaling. And then you can imagine on top of that, there might be flexibility to go work in a supply chain location, or there might be flexibility to train myself into more of a technology job and be able to do that remotely. And so in all of those different vectors, we are actually starting to create training modules and create opportunities for our employees, not just for us to them flexibly, but for them to flexibly opt into different roles and different hours in a way that might meet their lives with a little bit more flexibility and progress their careers, frankly.

That's helpful. It makes a lot of sense. And good luck this quarter. Thanks.

Thanks, Joe.

And we can now take our next question from Karen Short.

[Technical difficulty] fiscal '22 in terms of operating margins with respect to that 5% target. So when I look at the ranges that you provided, I kind of back into a range of EBIT margins of 4.2% to 4.7%. And so I guess, in the context of that 5% target remaining intact, that does seem like a fairly, at least on the low end, big leap to make to get that to the 5% target. So I'm wondering if you could comment a little bit on that. And correct me if I'm wrong in terms of the math on that range? And then I had a follow-up.

Sure. I think for the full year, if we think about the top -- if we use the top end of the range, zero comp, we're likely -- our math would indicate a range that's a little bit higher than that, about 5%. That's assuming a 3%-ish sales, our SG&A increase and slight moderation or decline in operating or gross profit rate. So we -- the top end of the range should imply something that's a little north of five. Now certainly as you start to slip towards the bottom of that range, we'll look at decisions that we need to make to see if we -- where we want to end the year from an operating rate perspective. We do believe we're in a very strong position financially and we probably would resist making short-term decisions to overly manufacturer rate when we know we need to invest for our future so, but the top end of our guidance should imply something north of 5%.

Okay. And then wondering just generally speaking, I know you gave a lot of details on the number of employees. Could you maybe just talk a little bit about what you think the optimal full time versus part time mix was? And as you said, obviously, you skewed or you had, I think a higher percent of full time but not by -- not that much. So wondering how you're thinking about that optimal mix with 102,000 in mind?

Yes, it's a little hard for me to say what's optimal when we're still striking the balance between learning about what we think the right operating model is for the future and where we are today. And so I don't -- I would hesitate to comment on what we think the optimal mix is. I think what's important for us right now is we are trying to build in flexibility that will allow us to meet the customer wherever they're deciding to interact with us across those channels. And we'll bring a little less about exactly what the optimal mix is and instead really trying to figure out how best can we use that and play our space across all the things that we need to do, and therefore staff appropriately against that. So I -- optimal, I don't think we know yet, given that we're still in the midst of a pandemic, we still have a lot of unknowns in front of us. But we do feel pretty strongly that we are now set up in a better position to be able to flex with the changing customer dynamic.

Great. Thanks very much.

Thank you. Oh, and with that, I think that was our last question. I want to thank everyone for joining us today and we look forward to updating you as we continue to progress against our strategies. Have a great day.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.