Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Q1 FY 2022 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-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 Corie.

Good morning, everyone. And thank you for joining us. Today, we are reporting record Q1 financial results, which include comparable sales growth of 37% and non-GAAP earnings per share growth of more than 230%. We are lapping an unusual quarter last year that included both periods of high demand and periods when our stores were closed to customer traffic. When we compare to 2 years ago, our results are very strong. Compared to the first quarter of fiscal '20, revenue is up 27% and our earnings per share are up more than 100%. Customer demand for technology products and services during the quarter was extraordinarily high. This demand is being driven by continued focus on the home, which encompasses many aspects of our lives, including working, learning, cooking, entertaining, redecorating and remodeling. The demand was also bolstered by government stimulus programs and the strong housing environment. Our teams across the organization met that demand with remarkable execution. From our merchant and supply chain teams working behind the scenes to our Blue Shirts and Geek Squad agents on the front lines. Our employees once again showed amazing flexibility and execution managing extraordinary volumes. Most importantly, they provided exceptional customer service in a safe environment. From a merchandising perspective, we saw strong comparable sales across virtually all product and service categories. The biggest contributors to the sales growth in the quarter were home theater, computing and appliances. With the extraordinarily high customer demand, as well as production and distribution disruptions, product availability constraints continued to be a theme during Q1, as they have been throughout the pandemic, particularly in large appliances, computing, televisions and gaming. Our teams collaborated closely and effectively with our vendors to bring in as much inventory as possible. This is a testament to the trust and unique relationships…

Good morning, everyone. Let me start by thanking our employees for the extraordinary results they delivered in the first quarter. Our team's ability to not only keep pace with the strong customer demand, but also provide an unmatched customer experience, while making strategic progress is truly remarkable. As a result, our performance was well-ahead of our working assumptions we laid out at the start of the quarter. Enterprise comparable sales growth of 37% far surpassed our estimate of approximately 20%. We were able to capitalize on the elevated demand for technology that has remained throughout the pandemic. The sales originating from inside our stores was also higher than we anticipated and was a contributor to our higher sales volume versus expectations. In addition, our original outlook did not include the benefit of the March stimulus payments. Our non-GAAP gross profit rate improved approximately 30 basis points versus last year, which exceeded our expectations of a slight rate decline. The primary driver was a more favorable promotional environment, as the demand for technology remains strong throughout the entire quarter. In addition, the impact of supply chain costs was slightly favorable to our gross profit rate due to the higher mix of sales originating from our stores. Lastly, non-GAAP SG&A dollars grew approximately 15% compared to last year, which was higher than our outlook of approximately 10% growth, primarily due to higher incentive compensation and increased variable costs from higher sales. Let me now share more details, specific to our first quarter versus last year. On enterprise revenue of $11.6 billion, we delivered non-GAAP diluted earnings per share of $2.23, an increase of 233% versus last year. Our non-GAAP operating income rate of 6.4% increased to 350 basis points. This rate expansion was driven by approximately 310 basis points of leverage from…

Thank you, sir. [Operator Instructions] Thank you. Our first question comes from Greg Melich with Evercore.

Thanks. I'd love to focus on the two year trends, and particularly, where you think you are gaining share, or maybe you haven't been gaining share, if you look at it now in hindsight. Like, you mentioned, certain categories where things are strong, but just anything else on those new customers you won and how much up that is versus '19? Thank you.

Sure. Greg, I'll start on the share question. Obviously, it's a little bit of a tricky compared to last year because we had our stores closed as Matt said for part of the quarter. So when you look back 2 years, we feel like across the board, we've at least recovered our share positions. If not, you know, there's obviously some puts and takes in categories, but especially as we got the stores back open, we were able to provide those installation and delivery experiences, then you know we were able to recover, especially in some of those large cube areas like appliances and televisions. As it relates to some of the new customers that we're seeing, like we said on the call, we're seeing - we saw about 50% growth in our new customer acquisition. So we're always acquiring new customers, that's the good news. But during the pandemic, we've seen about 50% growth. And like we said it's been skewing towards a slightly different and different customer mix then what we’ve seen, slightly more female, a little bit more low income demographic, and importantly also a younger demographic. For the first time the largest cohort that we have of customers over the last 12 months is actually millennials, which is good when we're also seeing retention levels similar to what we've seen historically with these new customers. Does that help?

That helps a lot. I’ll let somebody else go. Thanks.

Thank you.

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

Good morning. Great quarter. So my question, you talked a bit about this in the prepared comments with recent trends, but clearly, some significant upside to your sales expectations here in Q1. How much do you think was stimulus driven, and if you look at the ongoing strength in the business here into the second fiscal quarter, is stimulus still playing a factor there?

Yeah. Thanks, Brian. Clearly, we do believe stimulus did play a factor at our performance, as we think about going from Q1 to Q2. March and April, a little stronger than February and as we entered into May, we're starting the quarter off at about 30%. And clearly stimulus, like the other stimulus’s that we saw is playing an impact. It's very difficult to monitor or actually estimate what that is. And it's part of the reason as we look to the future, you know, the back half of this year, we know that it has had some impact and why we would see the back half being a little bit different than the front half of this year. But it clearly is having an impact and we'll have to watch and see where that goes. There is an element of childcare tax credits that are coming that could also help and replace some of the stimulus, so we'll watch that as close as we can.

Great. Thank you, very much.

Thank you. Our next question comes from David Bellinger with Wolfe Research.

Hey. Thanks for taking the question. And best of luck to Mike as well here. So in regards to monetizing the Best Buy website and digital properties, I think in the past you previously mentioned around 2 billion visits per year to your site and that number is likely much higher now with the shift to e-commerce. So are you taking any extra measures and monetizing those page views as their, you know, even greater potential for a stream of higher margin revenue to build much more quickly this year and in the years ahead, just given the shift we've had in the overall space?

Yeah. Thank you for the question, David. Well, we haven't really disclosed specific details on it. You can imagine that finding a way to monetize that level of traffic is an important part of the retail model, and that's definitely true for us as it is for any other retailer. Our traffic and our engaged customers are an incredible asset. We think they are very valuable to our brand partners, both currently, but also increasingly, as the media landscape evolves. So, you can imagine that we are leveraging those assets currently. And we're continuing to develop new and differentiated ways in which we can make sure that we optimize that traffic.

Great. Thank you.

Thank you.

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

Good morning. I wanted to focus on the fulfillment strategies. Maybe a specific focus on, I believe, Corie, you mentioned delivered by employee as a growing sort of method for your customer base. So can you expand on how that works? Like, what these employees are trained to do as they arrive at the customer's home? And how the offering is or how you expect it to impact the evolution of the customer relationship?

Yeah. So first, I'm just going to take one gigantic step back and just say I'm incredibly proud of our supply chain performance and myriad teams that have helped us deliver throughout what is unprecedented demand. And I think it's interesting because there's such a portfolio approach to how we think about supply chain at Best Buy. I mean, it's evolved from the conventional distribution center model. And think about all the touch points we have with customers for fulfillment, vending machines, lockers, alternate pickup locations, curbside, in-store, same-day, next-day, employees, ship from store. I actually think it’s really important to set that context, first, because it allows us a great deal of flexibility to deliver with speed and with convenience to the customer. Specific to what we're seeing with our employee delivery, we saw a bout two times the penetration that we had in Q1 - in Q4, excuse me, into Q1. And what those employees are trained to, they're mostly actually supporting our next day capabilities, and it's actually kind of a surprise and delight moment. They're able to leverage some of the extra capacity, they're driving around the neighborhoods near the store. They're able to walk up deliver that package. And typically, the customer feedback we hear is, I wasn't expecting a Blue Shirt necessarily to come walking up with a package and deliver it safely to my home. So I think it's a way for us to leverage the brand and the unique aspects of our Blue Shirts, but also do with some level of convenience. Mike, do you have something to add?

Yeah. Steve, I think its great question and I'm excited for what the team has put together. As you look forward, as scheduling, flexibility and some of the systems will enable us to even be more on demand, we really want to have a great experience, so that's why like Corie mentioned most of this is next day, so we can queue it up and have this amazing experience. I think what makes us interesting is that we got the permission from customers to get across the threshold and we're thinking about that quite a bit. So today, it's a ring a doorbell and drop it on the step, but I think you can maybe pull on the string a little bit and we have the ability to get into someone's home, have a conversation, set up a profile, maybe even have a discussion around membership, and potentially get them set up as an advisor. So I think you know, that's one of the things we're excited about the most. But also we’re going to give our employees some choice in the moment if they want to pick up extra income, they can also be doing this and supporting the experience with our customers.

Thank you. Best of luck.

Thank you.

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

Hi, good morning. Thanks for taking my question. Corie, it was great to hear about the new pilot. I wondered what the ultimate goal was with these pilots with regard to real estate. Is it about overall less square footage, or is it about shifting square footage from selling to distribution?

I think it's a little bit potentially about both, but I'd argue right now, a little bit more of the latter, where we're trying to figure out what's the right mix of having those distribution facilities that deliver with convenience. But also enough touch points, importantly, so that you also are able to meet the customer expectations. I mean, when still 60% of what we sell is either being picked up in a store or shipped from a store that in-store capability is incredibly important to the customer experience. And so, I will start with where I did in the prepared remarks and that is our number one goal is to ensure seamless customer experiences. And as we said, our customers look to us for everything from inspiration and support, all the way to that really convenient fulfillment opportunity. And so the goal of the test right now is to say, what is the right balance between that really deep experiential selling square footage, that fulfillment square footage that might be behind the scenes. And one of the things that you didn't quite get in the prepared remarks is that often, you might have a little bit less selling square footage, but all the SKUs are available in the back because it's like a mini fulfillment center, so you can still deliver on the customer experiences. And so it's - right now, it's about trying to test how do all these things play together and then what's the right balance that delivers importantly on the customer expectations over time.

Thank you.

Thank you.

Thank you. Our next question comes from Jonathan Matuszewski with Jefferies.

Hey, guys. Thanks for taking my question and nice quarter. I had a follow up on the store pilots, curious how we should think about the portability of some of these that you're running? Clearly, you're very early on here; they're nascent at this stage. But what are the milestones you need to see? And when do you anticipate being at a point when you maybe to think about a broader rollout? Thanks so much.

You bet. I'd start by just reinforcing kind of where I ended the last question and that is we're testing for the right mix of experience, space, and location. And all those things need to play together in the right way. We obviously feel urgency. We want to make sure that we figure this out. But we don't want to be so urgent that we risk the customer and thankfully also the employee experience in this work. And it's important to note, we're not even in a normalized environment yet, right? We still have the impacts of COVID. You have stimulus like there's a lot of things still impacting shopping behavior, which means you don't want to take a false read, and then roll some of these out. And then even the full market tests that I was talking about on the call, that's set to launch in the back half of this year. So we haven't even started the launch on that one. So we don't have anything to announce today. We wanted to start to give you more clarity on the true impacts we're trying to test the true market level test that we’re doing. And we want to make sure wasn't just seen as done [ph] the fulfillment inside that is also the new experiential aspects that we're adding. And I think we would say we have a pretty good history of rolling out concepts as soon as we feel like we have the right case sitting behind them. And so, as we know more about and feel like we have a sustained understanding of what each of these concepts does for the customer and the employee, then we'll come back to you with the more distinct rollout plans. Mike?

Maybe you know, adding on to what Corie said, Jonathan, maybe two other things is, I just want to reinforce. We have an incredibly good network of real estate locations today and I think that's really important, because it complements the strategy of why we need our stores. And the second is almost half of our stores are up for renewal. We do a relatively short term leases with our team. And so we have the ability to be super flexible to move with speed, depending on what we see, will be like, at any given time in the market as well.

It's really helpful. Thanks for the color.

Yeah.

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

Hey, everyone. Good morning. I'm going to ask one question with two parts, related to store sales sort of coming back here. Can you just tell us if store sales are coming back, what you're seeing in terms of service attach rate, warranty attach rate? And then the mid-30s e-commerce mix, now that it's a little bit lower from your initial expectation. What, if anything, is that doing to your EBIT margin forecast for the year? Did that help in any way?

Yeah. Thank you for the question, Simeon. Overarchingly, as we see the store's sales rebound a bit from last year, we are seeing strong attach rates, pretty normal historical level attach rates with our stores and as we've talked about in the past as e-commerce is a growing business. We're seeing continued improvement on e-commerce attach as well. So we're seeing good utilization. We're selling a lot of television appliances and so the installation delivery is quite high, that we've been talking about. So, things are returning to back to normal if you will, and obviously, there's a lot of need to support people in their homes, as they're living in a very hybrid way right now. So, we're seeing a good return to our services business. From an e-com mix and what that does to the EBIT range, clearly, if you look at the implied math this year from our new guide, it does imply that, even though our e-com mix is a bit lower than we estimated in starting the year that the implied math is that our OI rates are actually a little stronger than they would have been at the start of the year. So, even though we're mixing a little bit out of e-com, we are still seeing good leverage on our sales, despite the fact we are shifting back a bit more into store sales.

Thanks, Matt.

Thank you. Our next question comes from Scott Ciccarelli with RBC Capital Markets.

Hi, guys. It's Scott Ciccarelli. You mentioned supply chain efficiencies. But we do continue to hear about product shortages. We have whole categories like automobiles and appliances facing pretty significant shortages. But your inventories, at least from the outside, look like they are in pretty good shape. So can you provide any more color regarding your inventory flow? Are you facing any supply shortages at this point? And how do you think that will evolve in the back half? Thanks.

Yeah, Scott. Thanks for the question. Since the beginning of the pandemic, we have definitely said that we've seen at least some spotty inventory shortages. And so obviously, to your point, the team has done an amazing job navigating an environment where they can drive a 37% comp. And our days of supply have been improving throughout the quarter, and we think they'll continue to improve into Q2. But given the unprecedented demand and some of the production disruptions, we have seen constraints, particularly in appliances, computing, TVs. And then we've talked about gaming, obviously, which has been a bit spotty. We're seeing some of that disruption driven by really four things. You've got raw materials and production capacity. You've got the very well-documented chip shortages. You've got port and container constraints and delays. And then ultimately, over all of that is this kind of sustained unprecedented, truly global demand in our space. And I think what's interesting about our business is we have a high degree of transferability. Meaning because we are a special PCE player, especially if you come into the store, but I would argue in our digital properties, we can help you navigate what exactly you are looking for, and then what are the variety of products that might meet your needs. So if you come in for a certain SKU, Scott, as an example, we'll have an associate there who might say, we don't have that one, but here is another SKU that will meet your same needs, same size TV, same spec, that kind of thing. And so I think that helps us navigate this inventory situation in a way that's a little bit different than others. And like I said, I think we're going to continue we believe, to see some level of inventory constraints likely in pockets throughout the rest of the year, assuming that you kind of continue to see the sustained level of demand. But I'm very proud and impress the way the team is navigating through it. And then the last thing I would say before we got is, our inventory is also in the best situation, I see that in terms of at [ph] risk. It's very clean inventory. Much of it is new. It's turning really fast, like Matt said. So it's actually some of the highest inventory quality we've ever seen.

Super helpful. Thank you.

You bet.

Thank you. Our next question comes from Mike Baker with D.A. Davidson.

Hey, guys. I wanted to ask about the SG&A increase. So you said 225 to 275 in incentive comp increase year-over-year, I think it was an incentive comp. What was the increase in the previous guidance? Because it seems like most of the increase in the SG&A comes from the higher incentive comp. So I guess if you could help us with some numbers there, and then confirm if that's the biggest reason for the increase and what else might be in the increase in SG&A dollars versus the previous guidance? Thank you.

Yeah. Thank you for the question. In the previous guidance, essentially, short term incentive was assumed to be flat for the year, as we looked through the first quarter and our performance. And again, look outwards towards the end of the year, that performance clearly increased. And so that 225 to 275 is really the increased expectations on the full year business, and our original asset was basically flat on a year-over-year basis. So the other elements of SG&A from a guide perspective, it's pretty consistent. We know that we're going to continue developing technology or continue to invest in technology and health, and that's about $150 million. That's still in our guide for the year. And then, as well, we do know that there's about $100 million of COVID-related decisions we made last year that we have to lap this year. And that's inclusive of the $40 million contribution to the foundation, we made in Q3. So those are consistent. The biggest increase is really around that incentive compensation adjustment.

Okay. Thanks. That's helpful. I appreciate the color.

Yeah.

Thank you. Our next question comes from Seth Basham with Wedbush Securities.

Thanks a lot. Good morning. It's Seth Basham. My question is around the computing category. You continue to see strength there, little bit some product shortages. But as you think about the prospects for that category going forward, against really strong sales last year, probably doing work from home and school from home phenomenon, do you expect to see a meaningful drag on your sales results from that category?

Hey, Seth. Its Mike. I'll start, and Corie and Matt can chime in. Computing has been a phenomenal sales success story in the industry and for Best Buy. And I think the position that we created look for consumers and then, you know, for some of our direct-to-business segments as well driving our good results. I think the category is also going to be constraint and we have talk a little bit about our inventory. And we feel we have enough inventories to meet the demands, and inventory is getting better. We're going to have a - maybe more normal back-to-school selling season as kind of things normalize. In an environment where the inventory remains relatively tight, and some of the form factors are changing quickly. We moved from things needed to be ultra portable and very productivity driven to things that need bigger screens, for example. And that means new product revs, when we see new product revs, we usually see less proportionality. So overall, I think you guys know that computing does have a lower profit rate than some of the other businesses at Best Buy, but the actual revenue contribution and then actual EBIT flow through is really attractively we like it. And I don't know if Corie or Matt, you might have anything else to add here.

No. I would just underscore. I think we are seeing a huge refresh right now as Mike said, and it's still not done. And demand for PC gaming and crypto and graphics cards remains really high as well. So it's a broad category, when we talk about it. And so I think you are still going to see a population that likely is going to be living some hybrid [ph] life for the foreseeable future and I think the refresh cycle as a result are going to continue to speed up as people look forward that new and better way for them to work-from-home, school-from-home and continue actually the stream-from-home in some cases. So yeah, obviously it's been six quarters of positive comp growth, but we continue to see a real demand for the continued innovation of the products.

Thank you.

Thank you. Our next question comes from Curtis Nagle with Bank of America.

Good morning. Thanks very much for taking the question. So maybe I was hoping we can maybe contextualize the comp guidance a little bit. So you guys just put up in certainly good 1Q number, 2Q looks great, took up your guidance by a lot obviously. But in terms of kind of what's implied for the rest of the year, I don't think that there's been much of a change and. Or put another way, it implies a pretty significant deceleration. I guess, the holidays didn’t come and we don't know where spending is going to go. But at least today if we sort of look at the data, in markets that have opened up and travel is coming back. That doesn't look to me like, you're seeing a pullback in home or see or anything else. So I guess, just any more – anything more you could say in terms of framing that and how conservative or not maybe do you think your guidance for the year is?

Sure. Thank you. And I can start and then Corie could jump in if she wants there. I think fundamentally, we believe, just starting with the rural technology and people's lives has only intensified. And so essentially, what we've done is we took our Q1 beat and then increased our cost [ph] expectations for Q2. And we really left the back half unchanged at this point because there's still a lot of uncertainty. We are seeing customers shop in the service category areas now in addition to ours. We're still seeing some strength even though people are returning to more normalized shopping behavior. But we also are thoughtful about the fact that stimulus will probably have a less event impact as we get into the back half of the year. And so those are some of the bigger things in our mind. I think we do believe that the hybrid work model will continue. So there could be some continued opportunity there as well. As you look at the back half, the personal saving rate is very high and people's financial credit stability is very strong. And again, there could be some additional child tax credits coming in earlier - this back half of the year. And then in addition, we have - we continue to be optimistic about innovation and how continued relationships with partners like T-Mobile will help our business. But there's still a lot of uncertainty in terms of what the back half will hold in terms of the customer shopping trends. And also, we just still are wary of inventory availability. We have a lot of inventory. We can still support a high level of sales with constraints, but there is a very high demand that we have to be thoughtful about as well. So that's essentially the thoughts that went into the EBIT guide.

Okay. Understood. Thank you.

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

Thanks so much for squeezing me in. Pretty simple question, if I look at your 2 year stack comp, it's up almost 32%. Just wondering when the last time that Best Buy did a 32% 2 year stack comp? Thanks.

I think before our recorded history. Thanks for the question, Anthony.

No problem. Keep up the good work.

Thank you. And with that, I think that's our last question. Thank you so much for joining us today. And I hope that many of our investors listening today are able to join us at our Annual Shareholder Meeting, which will be held virtually on June 16. Thanks so much, and have a great day.

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