Ladies and gentlemen, thank you for standing by. Welcome to Best Buy’s First Quarter Fiscal ‘23 Earnings Conference Call. [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 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; 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. I am proud of our team’s strong execution and focus on providing amazing service for our customers. Throughout the quarter, they navigated the uncertain macro environment and drove higher customer satisfaction scores while keeping energy and excitement going around the initiatives that we believe will drive longer term opportunities. We grew our Totaltech membership, increased momentum in our health business, launched new product categories and reached our fastest ever Q1 average online sales delivery speed. At our investor update in March, we said we expected our fiscal ‘23 financial results to look different. As we all lap stimulus and other government support, our industry cycles the last 2 years of unusually strong demand and we leverage our position of strength to continue to invest in our future. In addition, we said we expected promotional activity to increase and supply chain expenses to be a pressure. As such, we guided our annual comparable sales to decline 1% to 4% and our non-GAAP operating income rate to decline 60 basis points to approximately 5.4%. Therefore, the drivers of our Q1 financial results were largely as expected. Macro conditions worsened since we provided our guidance in early March, including higher inflation and the war in Ukraine, which resulted in our sales being slightly lower than our expectations and supply chain costs a little higher than we planned. Our investment in Totaltech at approximately 100 basis points of gross margin pressure was in line with our expectations and revenue from our credit card profit share was higher than anticipated. Overall, I am proud of our team’s ability to develop and execute plans to adapt to the changing environment over the past 2 years and to the more recent macroeconomic conditions. Our revenue and profitability remained…

Good morning, everyone. Hopefully, you were able to view our press release this morning with our detailed financial results. As Corie mentioned, we expected our Q1 financial results to be softer on a year-over-year basis. Our Enterprise revenue of $10.6 billion declined 8% on a comparable basis as we lapped a very strong 37% comparable sales growth last year. Our non-GAAP operating income rate of 4.6% compared to 6.4% last year. If you compare it to the first quarter of fiscal ‘20, before the pandemic, our non-GAAP operating income rate increased 80 basis points. Our revenue growth has clearly played a role in our improved SG&A rate, but I would also like to highlight a few other factors. Our investment in Totaltech membership alone added more than 100 basis points of operating income rate pressure this quarter compared to the fiscal ‘20 period. We are also investing in Best Buy Health. These are both areas that we know create near-term pressure, but we believe they will drive compelling financial returns over time as they scale. I also want to note that since fiscal ‘20, our mix of revenue from our online channel has more than doubled, and we have efficiently evolved our operating model to support this shift in consumer shopping behavior, while at the same time, navigating higher wages and increase supply chain and technology costs. Let me now share more details on the first quarter performance versus last year. In our Domestic segment, revenue decreased 8.7% to $9.9 billion, driven by a comparable sales decline of 8.5%. From a monthly phasing standpoint, as expected, the largest comparable sales decline was the 5-week fiscal March period. As Corie noted, from a category standpoint, the largest contributors to the comparable sales decline in the quarter were computing and home theater.…

Thank you. [Operator Instructions] We take our first question today from Zachary Fadem of Wells Fargo. Please go ahead.

Thanks so much. It’s actually [indiscernible] pitching for Zach here. I wanted to ask kind of a big picture question. Maybe could you sort of recast your FY ‘25 assumptions in the context of today’s updated guidance? Obviously, some of these macro headwinds you called out are maybe likely to be temporal. That said, does it put more pressure on your business to deliver in FY ‘24 and FY ‘25? And how should we be thinking about those 2% to 4% out year comps in that 6.3% to 6.8% operating margin target in that context?

Yes. Thank you for the question. Obviously, I think it’s way too early for us to be updating our FY ‘25 goals at this point. You’re right. I mean I think the lowering of the range this year does create a bit of a different picture. But at the same time, we very much believe in the strength of our industry and are very encouraged by the initiatives that we have, that we outlined at the Investor Day, Totaltech, and expanded assortment in our health initiatives. Those all remain the same. And if anything, we’re even more excited about those as we look forward. So obviously, the ranges we gave this year, they are pretty wide. And the ranges for FY ‘25 is still pretty wide. So there is a number of outcomes we already had contemplated in setting those goals back in March. So we still remain pretty confident in those numbers.

Awesome. No, that’s super helpful. And then maybe pivoting a little bit here to appliances, obviously, it’s great to see you guys still delivering positive comps here, especially given what you were up against last year. Kind of maybe you want to talk to the sustainability of the positive comps in the appliance segment, especially as we really kind of continue to lap some of that stimulus and maybe face some of these macro pressures. Thanks so much.

Yes. I think this appliances has been a place where we’ve been sustaining growth for a long time, what’s been growing every quarter for 10 years, except for one when we closed our stores. So we are very confident in our team’s ability to continue to drive sales up. Clearly, there are some very elevated levels of comp that were coming over the last couple of years of spend. But the team continues to drive the assortment and the experience changes that make it a very meaningful place to buy appliances. And that includes both the majors and the small side. So we remain really excited and confident about the prospects there. For the 5th straight year, we see the J.D. Power award for the highest customer satisfaction among appliance retailers. So the team is getting the right experience that I think will help us drive sales higher as we look into the future.

Awesome. Thanks so much, guys. Really appreciate it.

Thank you.

Thank you. We take our next question from Steven Forbes of Guggenheim Partners. Please go ahead.

Thank you and good morning. Corie, I wanted to focus on Totaltech, and I appreciate the color, but I was hoping if you can provide us a little more details around how membership is framing relative to expectations, maybe in the context of churn and/or retention? And then just a broader comment on what part of the value proposition do you think is resonating most with your customer in the current sort of environment?

Yes. So I’m just going to start by taking a little bit of a step back here. Obviously, what we’re aiming to do here is take our deep knowledge of the customer, combined with our history of a multitude of membership programs and our unique abilities to create a very unique paid membership offer with very broad reach. That broad appeal means we see more different types of demographics that this appeals to. And by the way, it is also more comfortable to sell because our associates just have a lot of passion around the multitude of offers. To specifically your question about what’s resonating, the truth is all aspects are resonating, but different pieces seem to resonate with different demographics. Certainly, the included warranty aspects, especially the Apple Care resonates with some of our younger demographics. The pricing and discounts actually resonates across all and then the support we see resonate with some of our older demographics. So the point here is actually this broad reach of a multitude of pieces of the offer that will actually appeal to many. The purpose, as we said, is to drive frequency and share of wallet over time. The reason we’re not updating right now is we are just starting to lap our beta test from last year. If you remember, we actually launched in April with the full rollout in October. And so we are literally just getting a feel now for what retention looks like. It remains in line with – as we’ve converted customers remains in line with what we had expected. But right now, we’re just – we want to actually start to lap some of those new customers who actually opted into the program before we comment too much on retention. What I will say is, look, the goal here is to create a moat around the consumer and to make it kind of inconceivable for them to buy CE anywhere else. And we know we’re growing our share of wallet with those that are shopping us. So we know it’s doing what we want it to do, but we’re using this time period to continue to learn and iterate on the acquisition, the usage that we’re seeing right now and then ultimately those retention figures.

Thank you. I’ll keep it to one. Best of luck.

Thank you.

Thank you. Joe Feldman of Telsey has our next question. Please go ahead.

Hey, guys. Thanks for taking the question. Back on the promotions, you mentioned some products are starting to get more promotional. And I guess I was just wondering which areas you are seeing more of that pressure and your view of promotions? Maybe the balance of this year, will it accelerate or do you think it will just be kind of normalized relative to a year ago? Thanks.

Sure. Thanks Joe. As we outlined back in March, we expected to see promotions be pressured this year compared to last year. And we also commented that we – that eventually, they would return to closer to FY ‘20 levels at some point. As we have got into the quarter, we actually started to seeing a little bit more pressure on the promotion side than we expected. Again, that was offset by a little bit of credit – better credit card profit share from the arrangement we have. But we did see a little bit more promotionality. And I think it’s pretty broad across most of our categories. We are starting to increase in terms of the amount of discount and the mix on promotion. TVs was a place where we did see more promotions on a year-over-year basis. Computing has been starting more promotional all the way back to July of last year. So, that continued as well. So, those are the areas I would probably highlight, but there are also even just some very iconic type of products to in specific categories that are very promotional, even though in some cases inventory is constrained. And so overall, we know it’s returning as we expected it would. It isn’t quite back to FY ‘20 levels, but it is heading in the same – heading to that path as we expected.

That’s great. Thank you. And I will also keep it to one and good luck this quarter.

Thank you.

Thanks Joe.

We will move now to Mike Baker of Davidson. Please go ahead.

Hi. Thanks guys. A couple of related questions. One, you said March was the worst part of the quarter. So, can you talk a little bit about April? It sounds like you said the weakness is continuing, but a little bit more detail there. And then related to that, it looks like – and this is similar to your previous guidance, but the back half is much better in terms of year-over-year changes versus the implied front half. What gives you that confidence? Is it simply just different comparisons, or why are we expecting a significantly better back half? Thanks.

Sure, yes. So, we are not going to comment on specific months, but March was the biggest decline in Q1. And as the sales pressure continued as we exited Q1 – actually, it was a little more pressure than on sales than we expected. If you remember last year, too, as we got into the second quarter, we talked about how we were still doing about a 30% comp in the first few weeks of May. So, we are still lapping those stimulus payments that kind of came in starting in March of last year. And so that’s what’s driving the lion’s share of that sales decline. As you think about the back half of the year, I mean there is a number of things. We believe as you get to the back half, most of that stimulus impact, a lot of it will have left in terms of a comparison. We also know, as we look to the back half of the year, we do expect product availability and certain products and categories to improve compared to the first part of this year and also if you look at compared to last year, in Q4, there was some notable product shortages in iconic areas that we talked about not getting, that did have an impact on sales. We also, in Q4, shortened our store hours in January as we were lapping some of the Omicron variant impacts. And then lastly, I comment is we do expect our initiatives to start to continue to drive more impact to our sales outlook as you get further down into the trajectory of those ramps. So, those are the reasons I would highlight.

Okay. Thank you for the color.

Thank you.

Next, we will move to Karen Short of Barclays. Please go ahead.

Hi. Thanks very much. I actually just wanted to push a little harder and follow-up on the 2025 guide with respect to where you are at today? And obviously, as you were just asked, you did elaborate a little bit on what the second half and why the second half will look better. But maybe a little more color on why you feel confident in the 2025 guide, about 6.3 to 6.8 in light of the fact that, obviously, 2Q will be much weaker than expected. And then just on that same note, are you factoring in a recessionary environment with respect to your guidance for the year and with respect to your 2025 guide?

Yes. So, I will start with the fiscal ‘25 guidance. I am going to reiterate what Matt said. It is still really early in the long-range guide that we gave. And there are many moving parts and pieces as I outlined in some of the prepared comments. And so we remain confident in the initiatives and the roadmap that we have put together to deliver that ‘25 guide. And as Matt said, it’s a pretty wide range. So, what we are going to use this year to do is to continue to understand how those initiatives develop, how this year plays out, obviously, and then how the implications for all of that in that longer term guide. But I think it warrants giving it some time to see how the year is going to play. Specific to your point about recession, I want to take one step back here for a second. I think I want to start with a reminder that this is a very stable industry. Consumer electronics, over time, is a stable industry. And the last 2 years have clearly underscored the importance of tech in people’s lives. So, I think it’s important for us to have that as a backdrop and the fact that we were obviously already planning for our industry to decline this year, and then we have adjusted based on what we are seeing in the recent results. It’s fair to say that we are factoring in elements of softer demand, but we are not planning for a full recession or guide. We will not assume a full recession at this point. Obviously, if that were the case, we will continue to update the performance and the expectations. But I think I would characterize our guide more as a softer environment, not a full recession.

And I might just add, I think also, I think you made a question around the rate guide as well. I think as you think about the rate this year, we are actually not too far off from our original guidance expectations for this year from 5.2 to 5.4, just acknowledging a little bit of softer on the sales side. But all of the structural things that are included in that expectation are kind of coming in as we expect. It’s nothing that’s too dissimilar at this point. And we have already built those into what we see this year and what we see in the out years to be confident in addition to sales, but also being able to achieve some of those rate expectations for FY ‘25.

Okay. Thank you very much.

Thank you.

Thank you. Seth Basham of Wedbush Securities has our next question.

Thanks a lot and good morning. I would like to follow-up on the promotional environment. If you could give us some sense as to what you are planning for in terms of promotions this year relative to pre-pandemic levels? And how much is embedded in terms of gross margin pressure relative to your prior guide, that would be helpful.

Yes. So, I would say it’s fair to say we expect, like I said earlier, that promotions returned closer and closer to FY ‘20. Throughout this year, exactly when that happens, we are not commenting on, but we would expect it to increase as the year progresses. Importantly, as you look to the back half of this year, though we are starting to lap where promotions increased last year, starting in July in computing. So, we have baked into our plans a slow increase of promotionality in most categories as you get towards the back half of this year. Exactly where that lands exactly at FY ‘20, we are – it’s hard to exactly say, but we have baked that into the plans.

And I think it’s worth noting, and I know all of you know this, but just to reiterate. Obviously, promotions are not just a function of Best Buy. They are a function of relationships with our vendors as well. We are interested in ensuring that their newest and greatest products are out there for the world to see and priced appropriately. So, this is not just a function of Best Buy promotionality. It’s a function of the overall industry promotionality in partnership with our vendors.

Understood. Thank you.

Thank you. We will now move to Jonathan Matuszewski of Jefferies. Please go ahead.

Great. Thanks for taking my question. Matt, a lot of our clients are focused on the ability of companies to flex expenses in an environment of slowing demand potentially persisting. Could you just update us on the fixed and variable split in your P&L and priorities for reduced discretionary spend if the backdrop does worsen? Thanks so much.

Sure. Yes. So, as we started the year, we – even the guide that we gave at 5.4% on a range of sales outcomes, we – there is a level of implied already trying to understand the levers you do to keep within the 5.4% rate in terms of the original guidance. So, it’s something that we do as a normal course of business as we see sales slide up or slide down from our expectations. There are a number of areas where you can – that simply happen because they are variable to like check lane tender, but you also start to adjust areas like marketing or store labor associated with the lower volumes if it does happen. So, those are the variable things that we look at to adjust to as the sales trends change. In addition to that, there are even some more discretionary areas that you can start to look at in addition to variable items. But in some cases – or even additional marketing to the extent that you are comfortable or even simple areas like travel or adjusting your capital spend, which can adjust depreciation depending on when you do that during a year. So, there are variable and then more discretionary. And as Corie noted, we are not really planning for a recession this year. To the extent that we did, there is obviously more fixed cost areas you can look at if business trends down even more. Right now, we are not planning for that. You can imagine if that had happened, we would look at some of those areas as well. But we would – in any event, we are trying to hold dear to us strategic investments that we are making, that provide that long-term growth to get to our FY ‘25 goal. So, that’s the last place that we will look at reducing as we look to this year in terms of how we see it now.

I do think it’s fair to say the team has obviously navigated this softening environment quite well up to this point. And obviously, the factors that we use, as we are trying to adjust to that softer demand, obviously overlap with the considerations that you would take into account if you are managing for a recession. So, you can imagine behind the scenes, you are running through a bunch of scenarios. And I think the team has done a nice job flexing with a rapidly changing environment and it’s that same type of kind of mindset and considerations you would take if that were to flex down even further.

It makes sense. Thanks guys. Best of luck.

Thank you.

Thank you. Next, we will move to Brad Thomas of KeyBanc. Please go ahead.

Hi. Good morning. Just want to ask about inventory a bit. Corie, I think you characterize inventory as being overall healthy. But just wondering if you could put that into a little more context, talk about some of the levers you may be able to pull if the consumer continues to weaken here? And then maybe if you could just help us think a little bit more about how much inventory levels were up just because of inflation and ASPs? Thanks so much.

Yes. First, just some gratitude to the team who has really done amazing work, carefully managing our inventory levels and then importantly, leveraging some of the investments that we have made in our supply chain. Some context is helpful here. Our inventory balance was unusually low last year. So again, if you remember how much demand there was in the marketplace at 37% comp, we had an unusually low balance last year. And that inventory balance right now is almost perfectly in line with the sales growth versus pre-pandemic. So, if you went back to kind of normalized pre-pandemic, now, sales growth and inventory growth are almost perfectly in line. And I think that’s a true testament to our vendor partnerships and proactively managing those levels in line with what we have been seeing. Behind the theme, as you can imagine, actually, units in some of the key categories are down as we have seen ASP shifting from the variety of factors that I noted, whether it’s premium and the mix shift in our business or inflation. So, that’s even what underscores the confidence that I have in the statement around our inventory being healthy, feeling very much like it’s in the right place. I think it is important to note, there is still some spotty constraints in very isolated areas for specific vendors and some of the more iconic SKUs that Matt mentioned. But over-archingly, we feel very strongly that we are in a good inventory position, and that’s very much in line with how we have managed inventory historically.

That’s great, Corie. And any context on how much inflation has your inventory up and – thank you so much.

Yes. We haven’t sized it specifically as I kind of alluded to the fact. It’s really hard because back to when about the different pieces that are driving our ASPs up, du have got mix shifts in the business. As people have skewed more premium, you have got more appliances, which tends to skew to higher ASPs. You have got over-archingly, over the last couple of years, fewer markdowns, less promotions, and then you also have inflation. So, all of those pieces add into the ASP increases we have been seeing. That’s why the color I am trying to give is we have actually seen in many of the key categories at the unit levels of our inventory are actually down versus some of the pre-pandemic comparisons and a lot of that is being driven by this kind of confluence of ASP increase.

Got it. Very helpful. Thanks Corie.

Yes. Thanks.

Scot Ciccarelli from Truist Security has our next question. Please go ahead.

Good morning guys. Scott Ciccarelli. So, Corie, we have heard that several other retailers that had a pretty tough March and April have indicated that sales have started to improve in May. But your comments on 2Q would suggest you really haven’t seen that. So, I guess my question is, why do you think your business hasn’t necessarily seen the kind of recovery we have seen in some other retail verticals? And related to that, would your cadence comments be any different if we are looking at stock trends? Thanks.

I will start and then Matt can clean up anything that I miss. But you have to also look back to last year, and Matt alluded to this. We have that really high sustained growth into May, like we posted the 37% comp in Q1, and then that sustained 30s into May. So, we were we – unlike some others, we are lapping very sustained high growth, both stimulus related, stay at home related from last year, which is a different cadence. I also think you have heard other retailers comment on the weather and some of the – and that’s not going to impact our business nearly as much as others. So, I think from a – like when we – you almost have to go back to kind of a 3-year look at the business, it’s relatively consistent and actually pretty strong as we are heading into Q2 on that 3-year stack.

Got it. Thank you.

Yes.

Thank you. Moving now to Scott Mushkin of R5 Capital. Please go ahead.

Hey guys. Thanks for taking my question. So, I want to get back to profitability a little bit. And the question is basically if, and I know it’s a big if, sales or revenues would fall back to where they were pre-pandemic. Do you guys believe the business even with that is structurally more profitable? And if so, why would you believe that? Thanks.

Yes, I think we believe that it is structurally more profitable than it was pre-pandemic. As you think about some of the actions and work we have done over the last 2 years to adjust our model with the very heavy shift to digital sales almost doubling from pre-pandemic. We have taken appropriate action to understand the cost structures whether they are to support digital or in our stores or just to support a different type of customer fulfillment need. We have taken the right actions over that period of time to adjust our model – our cost model to understand – to account for the changing sales and margin structure – our gross margin structure. So, we fundamentally do believe that that’s in how we actually decide to fulfill product to customers. That’s on how many associates we have in our stores. It’s a number of things that we have thoughtfully looked at over the last couple of years to change the structure of cost between gross margin rate and SG&A. So, we do believe that fundamentally, in Q1, we were up 80 basis points compared to Q1 pre-pandemic, and that is to account for even though we do have investments like Totaltech at 100 basis points in Q1 and have a doubling of the e-com business, which is a higher parcel cost, we are still getting SG&A leverage considerably better over in Q1 to offset some of those gross margin investments that we are actually making in our business. So, we fundamentally do believe that the structure of our business is finally more profitable. And that’s also underlying in our commitment, our goal is to get to the FY ‘20 goals of 6.3% to 6.8%.

Thanks. That was great, Matt. I appreciate it.

We will move next to Peter Keith of Piper Sandler. Please go ahead.

Hi. Thank you. Good morning. One area I was hoping you could address was the Best Buy ads initiative. My understanding was that should be accretive to gross margin. And obviously, there seems to be some change or evolution of the ad spending backdrop. So, maybe address any changes to the outlook of that program. And separately, just sticking on gross margin, Matt, should that 100 basis points of Totaltech pressure that you saw in Q1, should that continue with Q2?

Sure. I will start with the Totaltech pressure. As you look towards the back half of the year, we started to lap the launch of Totaltech. So, we expect the Q2 drivers to be similar to Q1. That would include Totaltech pressure of around 100 basis points. But as you look to Q3 and Q4, we begin to lap it. We launched Totaltech in October of last year, so we don’t lap until the end of this Q3. So, there is still a little pressure from Totaltech in Q3. Then by Q4, the pressure on a year-over-year basis essentially goes down to zero, if you will, because we have lapped the launch of it. So, that’s how the cadence of Totaltech pressure goes.

And just a quick reminder on the ads business. Obviously, this is us selling advertising to brands that want to reach our customers, both on our own channels and then on some external sites. I think what’s important here is that our leadership in CE retail remains very, very valuable, high customer traffic and engagement. And it’s that first-party data that we have, which can allow our advertisers to reach really unique audiences. Because we see people all along their purchase journey, which means you can target them at various points in the purchase journey. We haven’t shared specific financial details, but we did see growth in the ads business in Q1, not material enough to highlight for the quarter, but even entering the year. We knew this would be a favorable contributor to the gross profit rate, but a little bit more weighted towards the second half of the year as this ramp continues. And then obviously, this is something that provides that ongoing growth and incremental profitability over time that gives us confidence in those longer term targets.

Okay. Thank you very much.

Thank you, Peter. And with that, I want to thank you all for joining us today. I hope that many of our investors who are listening today will be able to join us at our Annual Shareholder Meeting, which will be held virtually on June 9th. Thanks everyone and have a great day.