Ladies and gentlemen, thank you for standing by. Welcome to the Best Buy's Q3 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 A.M. Eastern Time today. [Operator Instructions] I will now turn the conference 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; and Matt Bilunas, our CFO. 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 Q3 financial results of $11.9 billion in sales and non-GAAP diluted earnings per share of $2.08, which is up 1% over last year and up 84% compared to 2 years ago. Against a still evolving backdrop, our leaders continue to drive new ways of operating, and our employees continue to do amazing things to support our customer's technology needs and knowledgeable, fast and convenient ways. Our omnichannel capabilities and our ability to inspire and support across all of technology in a way no one else can means we are uniquely positioned to seize the opportunity in this environment and in the future. We continue to capitalize on strong customer demand as more people sustainably work, entertain, cook and connect at home. And Domestic comparable sales growth was up 2% on top of 23% last year. From a merchandising perspective, the biggest contributors to our comparable sales growth in the quarter were appliances, home theater and mobile phones. Product availability continued to improve throughout quarter. We have pockets of constraints in areas like appliances, gaming and mobile phones. Similar to last quarter, however, we do not believe this materially limited our overall sales growth. While we have faced and continue to face supply chain challenges, including delays and higher costs, we are proactively navigating a situation that we have been dealing with for several quarters, as our industry has been facing disruptions and supply constraints since early in the pandemic. Our merchant demand planning and supply chain teams made strategic sourcing and inventory decisions early in the year to set us up well heading into holiday. And we are resourcefully adapting to the constantly evolving environment with actions like pulling up product flow, adjusting store assortment based…

Good morning, everyone. We are once again reporting strong financial results that continue to support our belief that technology plays an even more important role in everyone's lives and we are uniquely positioned to serve them. Despite lapping the extraordinary 23% comparable sales growth from last year, we were once again able to generate positive comparable sales growth in each fiscal month of the third quarter. Compared to our guidance, Enterprise revenue of $11.9 billion exceeded the high end of our revenue outlook of $11.6 billion, driven by the better-than-expected comparable sales growth of 1.6%. Our non-GAAP gross profit rate and SG&A expense were essentially in line with our expectations. Compared to last year, Enterprise revenue grew $57 million, and our non-GAAP diluted earnings per share of $2.08 increased $0.02. A lower share count resulted in a $0.12 per share benefit on a year-over-year basis. Our non-GAAP operating income rate of 5.8% decreased 30 basis points as we invested in the launch of our new Totaltech membership. When comparing our results against 2 years ago for the third quarter of our fiscal '20, total revenue grew more than 20%. Additionally, our Domestic store channel revenue was approximately flat versus 2 years ago, while online revenue grew almost 150% in that time frame. As a result of the higher revenue and our ability to adjust to a new customer shopping behavior, our enterprise non-GAAP operating income rate was 160 basis points higher this quarter than the comparable quarter from 2 years ago. Let me now share more details specific to our third quarter. In our Domestic segment, revenue increased 1.2% to almost $11 billion. This increase was driven by a comparable sales increase of 2%, which was partially offset by the loss of revenue from store closures in the past year.…

Thank you. [Operator Instructions] Our first question comes from Anthony Chukumba with Loop Capital Markets.

Good morning. Thanks so much for taking my question and congrats on a great quarter, particularly your ability to comp the comp against that really tough comparison year-over-year. So having said all that, one thing that just struck me a little bit was that you simply [ph] called out shrink as a gross margin headwind. I was just wondering if you can just provide a little bit more color around that? Thanks.

Yeah, absolutely, Anthony. I think you've probably seen in the media that across retail, we are definitely seeing more and more, particularly, organized retail crime and incidence of shrink in our locations. And I think you've heard other retailers talk about it, and we certainly have seen it as well. I want to start with, our priority has always been and will remain the safety of our people, whether that's the pandemic, whether that is unruly customers, whether that is outright theft, which is a great deal of what we're seeing right now, and this is a real issue that hurts and scares real people. We are doing a number of things to protect our people and our customers. We are - as we talked about in the prepared remarks, we are finding ways where we can lock up product but still make that a good customer experience. In some instances, we're hiring security. We're working with our vendors on creative ways we can stage the product. We're working with trade organizations. But you can see that pressure in our financials. And more importantly, frankly, you can see that pressure our associates. This is traumatizing for our associates and is unacceptable. We are doing everything we can to try to create as safe as possible environments.

Got it. Good luck with the holiday selling season.

Thank you, Anthony.

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

Hi. This is actually Hannah Pittock on for Simeon Gutman. Thanks for taking the time. I wanted to ask on your Q4 guide. On the top line, it implies a pretty big deceleration on the comp stack. Are you seeing a slowdown in demand? Was there some pull forward do you think in holiday purchasing into Q3 or is there maybe some conservatism built in there? Any detail you can give?

Sure. I'll take that. This is Matt. We're projecting Q4 comps to be up 1% to down 2% compared to last year. The guidance range we actually gave is slightly up from the implied guidance range from last quarter. As a reminder, in August, we materially raised our sales guidance for the back half of the year from the expectations we had that we started the year. We still feel really confident about our inventory levels and our positioning for the holiday. And so I'd say Q4 is a little bit more unique of a period of time, a place where our category is leveraged by many retailers over the holiday gifting season. I would also say that some sales probably got pulled into October summer [ph] last year as a lot of the narrative in the media and supply chain constraints were our consumers. So during the first three weeks of last year as well, the gaming consoles released, which provided a bit of a lift. And we're also very mindful of lapping the stimulus dollars that came in January. As we talked about last year, we saw strong results in October, the sales moderated, and they started to pick back up in January. The last thing I'd say about Q4 is Super Bowl actually, majority of the business is shifting into Q1 of next year. We're starting the November about flattish sales. So we're still encouraged by the holiday demand that the consumer is very strong still, and so we're excited and think we're well positioned.

That's very helpful. Maybe a quick follow-up just on your Domestic versus International segment. Obviously, Domestic kind of decelerated sequentially, and International actually picked up. In Q4, can you tell us anything about kind of the relative contribution you expect?

I would expect that contribution to be relatively the same in Q3. Our International business on a 2 year basis was pretty similar to the US. They actually did stronger sales in Q3 last year than the Domestic business. So relative to the US pretty consistent. And a lot of the same drivers for the US business are similar internationally as well.

Got it. Thanks so much.

Thank you. Our next question comes from Christopher Horvers with JPMorgan.

Thanks. And good morning. So I guess focusing a little bit on the gross margin and the adoption of Totaltech. Just curious on that impact in the third quarter - as you think about the fourth quarter, down 30 basis points expected, so the Totaltech is a number than that. I was just curious how much of that is sort of diminishment of warranty sales versus more of an accounting phenomenon that you're sort of recognizing the benefit of Totaltech over an extended period of time versus prior?

Yeah. Good morning. Yeah, the Totaltech impact essentially is due to just the enhanced benefits for that offering versus the Totaltech support offering as we've talked about last quarter. It's really that additional benefit that drives more of the - more short term pressure on the gross margin rate. There is a little bit of revenue recognition difference between Totaltech support and Totaltech with Totaltech support a bit more was recognized in the first couple of months. Totaltech support is more spread out across the entire year of some more of that pressure is coming from that. But I'd also note that the whole goal of Totaltech support is to actually drive more sales and then drive more product sales and that will take a little bit of time as we start to ramp up the program. So that will help offset some of the pressure you see from the cannibalization of the services business.

And just as a quick follow-up on the last question. Do you have a sense or an estimate of perhaps how much January actually benefited from stimulus as we think about the sequencing of the current quarter?

Yeah. I mean, we said all of last year that stimulus is really hard to break out. It certainly did have a benefit. We could see the business change in January from the previous months. So we know it did have an impact. It's really hard to break out specifically.

Got it. Understood. Have a great holiday season.

Thank you.

Thank you. Our next question comes from Liz Suzuki with Bank of America.

Great. Thank you. So there are some other big box retailers that have gotten more invested in helping customers age in place, which you talked about in the prepared remarks. Clearly, there's a bigger focus on technology and Connected Health at Best Buy. How are you working on increasing customer awareness? Like what does the marketing look like for this particular initiative?

Yeah. Thanks for the question, Liz. We have been really focused on this idea that tech could be instrumental in helping people age more comfortably in their homes for quite a while. It started with our purchase of a GreatCall a few years ago. And part of the reason that we brought GreatCall on board is they had massive experience in dealing with an aging population. And specifically to your question, targeting the right messages to the right people, which is not just targeting the aging population, it's also targeting caregivers who may be looking for some of this product. And so you've seen us over time. We established a relationship with AARP back in March of 2020 as one of our venues. We have a lot of actually, in this space, direct mail and direct targeting because for the populations that we're looking at here, those are some of the most effective means that we have. And then over time, I think you're going to see some of our more broad-based Best Buy messaging, really pointing to the fact that we have a variety of solutions that can help people age in their homes. It's not always just the devices and the care wrappers. Sometimes it's things like a Facebook portal where you can connect with someone on the other side really simply and easily or a device – you know, a camera and a security system where I can easily lock my door without having to get up or I can keep an eye on that aging loved one. And I think already, you've seen me will continue to see run the gamut of both these very targeted messages to the population that we really want to inform all the way to these kind of more broad-based solution driven messages about what we could help you do to care for a loved one.

Great. And just a follow-up on how Totaltech could potentially play into that? And if there are any key performance indicators you can highlight that you're looking at on total effect as you track the opportunity there?

Well, what's interesting about Totaltech in the aging in place scenario is that, it is more important than ever that your technology works for you if you're relying on it for your safety or if you're a caregiver if you're relying on it for the safety of others. And so the support wrapper around all of the things that we're talking about in health is important. And it also will help, obviously, this population, whether it's the caregiver again or the person being cared for, add more devices, feel comfortable adding devices. We can go to your own and help you install those, and then we can keep them up and running, and I think that's really important. In terms of the KPIs that we look at, it's really true across Totaltech. We're looking for things like increased frequency of interactions. And that may be everything from browsing on the website all the way to coming in the store and making an actual purchase. We're looking for stickiness of that consumer, meaning they're more willing to come back Best Buy bigger share of wallet, more purchase behavior with Best Buy over the longer term. And that will be true whether we're talking about aging in place or whether we're talking about the other aspects of Totaltech. And then obviously, we're going to look for customer satisfaction and engagement with the brand and really trying to almost surprise and delight and over deliver wherever we can for these paying members.

Great. Thank you.

You bit. Thanks, Liz.

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

Good morning. Nice quarter, congrats.

Thank you.

So the question I have, just with regard to promotions. So you called out here in the third quarter, higher promotions is somewhat of a headwind to gross margins. But you also made the point that the promotional activity is still more subdued than it was pre-pandemic. And then I don't think you gave the guidance for Q4 within the down 30 basis points in gross margin, I think there was a mention promotion. So the question I have is as you look at what's happening out with promotions, maybe some more color on – there is greater color on kind of who are what's driving these promotions. And then where do you think we're going? Are we heading back to pre-pandemic levels or do you foresee promotional activity remaining more subdued as we go forward?

Good morning, Brian. Yeah, I think in Q3, we've talked about how we expected promotionality to increase, and we certainly saw that, especially in places where inventory is starting to become a little more freeing up and notably in computing. We didn't call it out in Q4, and Q4 product margin rates are expected to be a little bit better, more from product mix, mixing out of things, gaming consoles and computing. At this point, promotionality, we don't necessarily see it as a good guy or a bad guy in Q4. As you would imagine, Q4 is very promotional and competitive every year. And so right now, so last year, we were very focused on that as well. This year, we will continue to look at. But we don't expect it on a yearly basis to be necessarily more or less promotional. Now against 2 years ago, certainly, we would expect it to be a little less promotional than we saw 2 years ago. Where it heads is something that we're going to have to monitor. That's one of the kind of still things that we're evaluating for next year. Clearly, as inventory becomes more free, you can imagine that promotionality is going to start to increase in categories more one at a time as we get into next year. And so likely starting the year with a little bit more promotionality. But we're not really guiding next year, but I would expect that to start to turn over the next number of quarters.

That's very helpful. A second quick follow-up, if I could. Just with regard to - so appliance is a key sales driver here in Q3. Lot of talk about higher prices in appliances, so the question I have is to what extent was inflation in that category actually an incremental sales driver for you?

Yeah. Specifically to appliances, that is one of the areas where it's been pretty well noted that prices have gone up. And so we - and that's probably an area where, in most cases, we've those prices on to the consumer. So those prices have - or sales prices have increased. That's not to say that, that happens in all circumstances and a lot of categories where you still want to make sure you're very competitive with our pricing, even if costs do go up your, you're actually being thoughtful about serving them in the best way possible. I think generally, as you look at our ASPs, inflation - the inflation or cost of those goods going up is still the smaller part of those - what we would see as ASP increases right now, still the bigger part of the ASP increases would be just premium mix of our business right now versus the inflation estimate. So it is a little higher generally overall than we saw in the first half of the year, but still not the biggest impact to ASPs.

And Brian, I think this is why in this space, we continue to really invest in the experience because our ability to deliver on some of those more premium items in the assortment is really distinctive and different. And so this investment - and this is a great example of the investment in the experience is not just for today, but it's so that we continue to represent the premium side of the business over the longer term.

Appreciate all the color. Thank you.

Thank you.

Thank you. Our next question comes from Greg Melich with Evercore ISI.

Thanks. I had a two part question. One was I wanted to understand a little bit more about the SG&A dollar growth in the fourth quarter. How much of that is due to the acquisitions or the particular membership investment? And how much of that is just the inflation or normal growth in the business?

Sure. The Q4 SG&A, essentially, we have to first start with the idea. Our business is very different than it has been over the last few years. Over 2 years ago, the way customers are shopping, the channel they're shopping is very different. And there's just a lot more volume coming through generally compared a couple of years ago. So as you look at a year-over-year difference, we're still seeing continued investments in technology and health being a driver of that SG&A increase. Our advertising is also an area where it's up year-over-year. And that is included and that is the total tech launch that we've talked about. We're actually also increasing our store and call center labor to better support the customer experience. Last year, in Q4, it was probably - we would say probably running the light from where we wanted to be. So we've made the decision to invest a little bit more from a customer experience standpoint. And while incentive compensation was flat on a year-over-year basis in the back half of this year, is going to be flat. The pressure in Q4 is actually a pressure in Q4 versus a slight of a good eye in Q3. So those are what's driving the SG&A on a year-over-year basis. And a lot of we're doing is really focused on investing as we've talked about to make sure our customer experience is in the right spot, and we're actually positioning ourselves well for the future.

And maybe to flip it around a little bit, inventory up, I guess, 15% year-on-year and still 13% versus 2019. How should we think about that growth in inventory versus a comp that looks like it will be flattish in the fourth quarter, at least in your plan?

Yeah. I mean when you look at it versus a 2 year sales volume increase, I mean, the inventory is much more in line. We actually, when we look at our inventory, look at how many days of supply we have outstanding and we're in that very normal range of days of supply at this point. Now there's still pockets of constraint in areas like gaming consoles and things like that, but we feel really good about it on a 2 year basis. It's seemingly - it's in line for us as we look forward to the sales.

And Greg, I would just underscore something Matt said in his prepared remarks, we were unduly light last year in inventory. And that's why we're going back to the 2 year – 2 year stack growth of right in that 13% range and then inventory 2 year in that same range. So I just think last year is not a great indicator because I think everyone was looking - we certainly were looking for more last year.

Got it. And I guess if I could cheat with one more. Has the business - the seasonality of the operating margin sort of fundamentally changed now with the growth of services, Total Tech? Or is that still an anomaly, you think?

Yeah...

Improved margins look like the rest of the year?

Yeah, I think what you've seen from us this year, last year was a little unique each quarter. But this year, what you've seen is actually improved operating margin rates in each of the first three quarters more than what we've seen. If you look at a 2 year stack, it's much different in the first three quarters. I think just generally, technology is important for all our lives regardless of how the seasons and seasons that are starting to spread out across the year. So the operating margins have on a relative 2 year basis have been improving in the first 3 quarters. And quite honestly, the volumes in Q4, it's very important for us to make sure we have the right expense profile to support the customers.

Okay.

Just one more little bit of color and again, at it in his remarks, but this will be the first full quarter of Totaltech too. And so you'll start to see that go through into next year as you get into those other quarters. So that makes it a little different this year comparing Q4 to the rest of the course. But everything Matt said in the rest of it. I mean, our goal would actually be a little bit more even business throughout the year, ultimately.

Makes sense. Congrats. Have a great holiday.

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

Hi, thanks. Good morning. Thanks for taking our questions. I just had two questions on all the pilots that you mentioned in the prepared comments. First, with the virtual store, how are you thinking about this longer term? Do you think it will be a concept where you just need one? Or is it something that rolls out and will always be integrated into a DC? And then the flexible labor model, I know it's early and also in a pilot stage, but has this helped you at all in finding workers in this tight labor market? And how do you think about potential savings from this initiative?

So I'll start with virtual store. Obviously, really early into this, so we're really just getting our legs under is. So it's hard for me to say whether or not there's more than one. The nice part is you should be able to get very good from one location in a model like this, right. Because you can flexibly queue people and you can move them through at your own speed, and you could do this across all the departments in this kind of fake store that's virtual. So I don't think this is going to be about a ton of virtual stores throughout the network. I think it's going to be about scale with a few locations that can provide some interesting use cases. Because truthfully, it's not just about the customer use cases where they might find the virtual store where they're doing digital shopping. It also could be about employee use cases, where I might be in the car installation area and may not have the expertise, but I could zoom right into one of our installation, our Autotech experts who could help you in the moment even as an employee, it gives you a lot of confidence there, too. So I think what we want to find out right now is what are the use cases? How often is it being used? And then ultimately, what does that customer experience look like? But like we said in the prepared remarks, we'd like what we're seeing early. And we'll see just how far you can stretch this kind of one asset that we have right now. In terms of flexible labor, absolutely, it is helpful for us in this environment, and it's helpful on a couple of levels. One, the customer shopping behaviors have changed and they…

Thank you.

Thank you.

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

Thanks a lot. And good morning. My first question is around the Totaltech offering and how we think about that into 2022? Should we be thinking about 20 to 30 basis points of gross margin pressure through at least the first half of the year? And should we think about additional sales contributions building through 2022?

Yeah. As you can imagine, we're not in a position to guide for next year. What we've talked about is the more benefits included in Total Tech certainly are causing a near-term pressure on the business. Some of those things will continue on. A lot of what we're still trying to do is understand the incrementality, the usage, the frequency, all of those things go into understanding what the overall increment does to the business. In addition to that incremental sales of our products, we're still in the process of evaluating. So I would imagine to be a continued pressure heading into next year, exactly how much we're still trying to evaluate.

Got it. Thank you. And then my follow-up question is, when we think about the market's growth rate potential over the next year or so, given the fact that tech is more important than ever in consumers' lives, is this market one that's likely to continue growing in the near term? Or are there pressure points because of the some of the year-over-year comparisons with computing and other areas have seen such a surge in growth from the pandemic?

Yeah. I mean, I think certainly it's something we're evaluating over what the market is going to look like over the next few years. We're certainly not in a position to guide next year from a sales perspective either. You're right, comping, there's going to be some big quarters next year. We grew 27% in the first half of last year. So we very much could see some bumpiness quarter-to-quarter. But again, fundamentally, we believe that our customers never technology has only grown and that we have a very unique way to serve those customers, and there's still a lot of long-term opportunities. We're excited about our Total Tech membership program. We're excited about investing more in our business around technology and our operating model changing in our store portfolio. So there's a lot of room for optimism in addition to understanding that Total Tech's that much more important. We'll have to see where the industry goes.

Yeah. And just to underscore, I think you'll continue to see product innovation at an accelerated pace. And you will see CE proliferate into other areas like you're seeing it proliferate into health care or even into outdoor spaces. And so I think that makes it even harder for us to answer the question because it's not even just about how you define the market. It's about how the market, in essence, expands over time because it taps into new areas. And that's the part that really has us excited for the future even if to Matt's point, there might be a bumpy quarter here or there. It's really the sustainability of CE as an ever-evolving space from here on out.

And with that, I want to thank all of you so much for joining us today, and I know it's a very busy earnings season, so we appreciate it. And happy holidays to all of you, and we look forward to seeing you in March.

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