Hello and welcome to the Best Buy Q3 Full Year 2023 Earnings Call. My name is Laura and I will be your coordinator for today’s event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mollie O’Brien, to begin today’s conference. Thank you. 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 execution and their relentless focus on providing amazing service to our customers during what is clearly a challenged environment for our industry. Customers have high expectations regarding service and we were pleased to see NPS improvements across many areas of our business as we continue to focus on creating differentiated experiences that customers will love into the future. Today, we are reporting Q3 financial results that are ahead of our expectations. Throughout the quarter, we were committed to balancing our near-term response to current conditions and managing well what is in our control while also advancing our strategic initiatives and investing in areas important for our long-term growth. Our comparable sales were down 10.4% on a year-over-year basis. This represents 8% revenue growth over the third quarter of pre-pandemic fiscal ‘20, which was consistent with the growth compared to fiscal ‘20 that we saw last quarter. As expected, our non-GAAP operating income rate declined compared to last year due to the increased promotional environment for consumer electronics, the investments in our growth initiatives and SG&A deleverage from the lower revenue. Our non-GAAP earnings per share, was up 22% versus pre-pandemic fiscal ‘20. We continue to manage our inventory effectively. Our inventory at the end of Q3 was down almost 15% from the third quarter of last year. This is more than our Q3 sales decline and projected Q4 sales due to a few factors. First, from a timing perspective, some receipts came in a few days later than expected and arrived just after the quarter closed. Additionally, due to supply constraints last year, we focused on bringing inventory in earlier to secure it for holiday. So October of last year ended with an unusually high…

Good morning, everyone. Hopefully, you’re able to view our press release this morning with our detailed financial results. Before I get into the details specific to our third quarter, I would like to step back and provide some context on how our financials have evolved since the start of the pandemic. As you are all aware, the past couple of years have come with varying levels of financial performance related to the pandemic impacts. There have been quarters where our stores were closed when promotions were nearly nonexistent, in quarters with higher and lower incentive compensation, just to name a few. We also saw record levels of demand as people were spending more time in their homes and receiving government stimulus benefits. And now we are living through the pressures as we lap those periods. However, what has remained consistent over the past few years is the increased penetration of digital sales, which, as Corie mentioned, has nearly doubled since the start of the pandemic. As a result, over the past couple of years, we have modified our store operating model, highlighted new store formats and rolled out a new membership offering. To better understand the financial impacts of all this change, I want to briefly give context on the decline in this year’s non-GAAP operating rate outlook compared to pre-pandemic fiscal ‘20 full year rate of 4.9%. First, our core domestic non-GAAP operating income rate has slightly improved as we have made structural changes in support of our increased digital sales mix, the reductions we have made in store payroll expenses largely offset increased parcel and inflationary supply chain costs as well as our increased technology investments that are designed to support a more digital shopping experience. Over the same time horizon, our core product margin rates have remained…

Thank you. [Operator Instructions] We will now take our first question from Zach Fadem at Wells Fargo. Your line is open. Please go ahead.

Awesome. Thanks so much. This is Sam Reid pitch hitting for Zach here. You guys gave a lot of good color around the Q4 outlook. But I guess I wanted to just unpack things a bit more there because Q3 really did come in nicely, ahead of plan, yet you’re keeping things through the balance of the year unchanged. Could you just give us a bit more detail there around your thinking? And can we interpret some of this as conservatism on your part? Or is there a possibility that there might be some differences in sequencing around holiday sales this year versus last year that might be driving your decision to kind of keep Q4 unchanged? Thanks.

Sure. I’ll start here. This is Matt. I think when you look at the Q4, similar to the whole year, it’s been a bit difficult to properly reflect forecast in this environment. I think we’re trying to plan appropriately with everything that we see, Q4 comp sales are expected to decline about 10%. This is a deceleration from FY ‘20 growth perspective as you think about the quarters as they progress this year. The holiday, we do expect to look a little different than last year. So probably more around the sales events, so less early shopping as we saw last year, but a more early shopping than we saw in fiscal ‘20. So from what we can see as we exited Q3 with October sales down around 15%. We’re seeing November’s sales start around that same amount. So we’re at this point in line with our expectations. Holiday is obviously quite different than it has been over the prior quarters. So I think we’re appropriately planned for where we see the consumer in front of us.

Awesome. Thanks so much. I will pass it along.

Thank you.

Thank you. We will now take our next question from Pete Keith at Piper Sandler. Your line is open. Please go ahead.

Hi, thanks. Good morning, everyone. Nice results. Just sticking on the Q4 theme, we know the macro stuff, but let’s just talk about products. What are some of the product categories looking at this holiday season, as you guys are most excited about and putting in front of your customers?

Yes, I think I’d start with a holiday where – and I said it in the script but I mean it. I think people are really just looking for some joy in their holiday and what feels like a little bit more normal, I say that an [“holiday”] (ph) versus the last couple of years, Peter. So I think what we see as exciting are those things families can do together. So things like televisions. And that’s, again, not just the TV that’s about streaming so much more content than people were before. Things like VR that take you to new places and allow you new experiences and are increasingly having more and more content availability, Gaming continues to be exciting for people. And that is a place where we’re getting as much as we humanly can, but there still is some constraint, and we all know that drives a little bit of excitement. Health and wearables people really taking charge of their own health. We continue to see people very interested in taking control of health and fitness and their own abilities there and then still computing and tablets and this kind of productivity question. I mentioned it in the script. This is after almost 3 years now at the pandemic. You’ve got a cohort of people now who are looking for that latest and greatest in that ability to upgrade, stay on the go, keep their life in the kind of hybrid way that everyone is living. So the cool part – an then there is all the like fun little stuff that we sell that I think people forget, the great gifts that are in things like small appliances and indoor garden, a connected coffee cup that keeps your coffee warm. There is just this incredible array of really interesting products that technology continues to push the envelope on and evolve. And I think what we love most is these are gifts that change every single year. So for the great gift giver, I think we have a lot to offer.

Okay. That’s very helpful. And then just taking a little bit of a longer-term question around Totaltech, so you gave a lot of good information now that you’ve anniversaried the rollout. When we just think about that EBIT margin accretion, is that something that we should now start to see going forward in the next 12 months or if you are running a little bit lower on memberships than you thought, is it maybe 1 year out before it starts to become margin accretive?

Yes. I think consistent with our – what we talked about at the March Investor Day, I think we expect [the backbone] (ph) for our initiatives to help improve our rate as we look towards FY ‘25. So obviously, the world is much different than it was back then, and the program has continued to evolve, and we will continue to iterate. But I think we would expect the Totaltech to help provide a bit of rate improvement year-over-year as we look into next year, but probably more so even as we look into FY ‘25. Clearly, there is – we’re learning a lot around the program and looking to make tweaks to the offer as we progress this next year from all the learnings we’re having. So it would be our expectation that over time, it would help improve our rate from a pressure year-over-year.

And Peter, I just want to make sure I reemphasize something that I said in the script here, which is the good news is it is doing what we want it to do. This is a program that’s geared at those stickier, longer-term relationships with customers, being high consideration for customers and, therefore, driving up that frequency and that greater share of wallet. So I think those early indicators for us are very positive.

Okay, sounds good. Thanks so much and good luck.

Thank you.

Thank you. We will now take our next question from Scot Ciccarelli at Truist. Your line is open. Please go ahead.

Good morning, guys. Scot Ciccarelli. So the additional deceleration you’ve seen in October and so far in November, is that driven primarily from transactions? Or is that more ASP pressures from the heightened promotional environment? And then related to that, any feel for whether those declines are kind of across the board? Or is it more concentrated in specific customer cohorts? Thanks.

Yes. Consistent with what we’ve seen this year, most of that contraction is coming from transactions. ASPs have been a bit down, as we mentioned, and we expect them to probably come down a little bit in Q4. It’s more of the transactions that are causing that top line deceleration on a year-over-year basis. But importantly, too, what we said is if you think about where we sit against FY ‘20 and Q3 and as we start our growth for this holiday season will likely come a little different than it did last year and more of those sale events driving more sales later into Q4 out of Q3. So for most of that organic is coming from transactions versus ASPs.

To your question about customer cohort, we don’t – I mean, it varies a little bit week to week to week. But in general, what we’ve been seeing is a pretty consistent customer mix both versus last year and versus pre-pandemic. And when I say customer mix, I mean kind of demographically, we actually are seeing a pretty consistent mix of customers. Like I said, it can vary a little bit week-to-week depending on sales profiles and the values we are offering. But at the highest level, we are actually seeing pretty consistent behavior amongst our customer cohorts.

Got it. Thank you.

Thank you.

We will now move on to our next question from Chris Horvers at JPMorgan. Your line is open. Please go ahead.

Thanks and good morning. You mentioned some comments on 2023. Can you take us through the building blocks of margins next year? Is the basic math that we add back all the incentive comp savings this year and saying hypothetically low-single digit positive comp environment, it just becomes a leverage story, or are there still structural SG&A savings and any comments on gross margin as well?

Yes. There’s probably a number of scenarios we are planning for next year, and we aren’t going to provide guidance. But we try to lay out some puts and takes around what’s happening in business now to provide some context. We just talked about it here. The largest drivers of our decline year-over-year versus pre-pandemic have been those investments we are making. And as we talked about, Totaltech, it also applies to health that we would expect some of those – some of the contraction to kind of abate a bit as we get into next year. But importantly, even as you look into FY ‘24. So, we would expect some of those initiatives, the pressure coming from would lessen a little bit as we get into next year, but more so even later into FY ‘25. I think from a short-term incentive perspective, you are right, we will reset our performance tables next year, and we will likely have to add back anywhere from $200 million to $250 million of SDI expense when we reset those tables and start next year’s plan. So, that will obviously be a pressure we are managing through. At this point, we don’t necessarily see a lot of change to the product margin rates from next – from this year into next year. But obviously, we are early in our planning process. And lastly, you are right, most importantly, where our OI rate might – is going to be impacted by the level of sales that happened and we are still in the middle of trying to understand what type of sales environment will happen next year, but it is a large impact to how we plan what the overall rate will be.

Got it. And then in terms of the promotional environment, you mentioned certain categories being more promotional than expected. Is that home theater, and computing or another category? And then as you think about what you are seeing in the market right now, some of the big retailers, other retailers have started their Black Friday promotions or any most have already. So, how are you seeing sort of the inventory in the market and what categories in particular, are you elevating your promotional expectations in the fourth quarter?

I think the Black Friday promotions started the day after Halloween. And for everyone, there is definitely a lot out there. I think if you rewind the clock for a second here, I actually was rummaging back through last year, and we actually said last year heading into Q4, we expected CE to be more promotional. And coming out of it, we said there were actually some categories last year that were as promotional as pre-pandemic. And as we headed into this year that we are in now, we said we expected the environment to get back to those pre-pandemic levels. I think it happened a little earlier than we thought. But in general, this is kind of how we expected that the year would play that by now we would be back to those pre-pandemic levels. And obviously, with some of the demand softening and customers targeting value, I think that’s happening at even a more exacerbated rate. I think – and so there is that. We are even seeing some of this promotional intensity in the secondary channels as well because it’s been well reported, there is a great deal of inventory out there in the channel. So, it’s broad-based promotionality, which is a little bit different than a historical holiday where we really, really targeted against some of the certain product drive times. To your specific question about what areas we are seeing it in, we are seeing it across the board, honestly, but really mainly seeing it in some of the iconic traffic driving products, think about like headphones and wearables. And then you can imagine anywhere where the supply is really ample, we are also seeing some of that promotional activity in those spaces. And I think back to the question on like the Q4 guide and how we are thinking about it, I think that’s part of what we see in the background and part of what we are trying to take into account as we look at a competitive environment going forward.

Got it. Thanks so much for the great holiday.

Thank you.

Thank you. We will now move on to our next question from Liz Suzuki at Bank of America. Your line is open. Please go ahead.

Thank you. Just on your last comment kind of talking about how some of the retailers have had this excess inventory. You have been fairly nimble in managing your inventory level as well. A lot of your peers kind of caught off product that this changes demand landscape. So, I guess just given that this quarter sales came in a little better than what you expected, and I know there is some timing in terms of when holiday is really expected to kind of peak. But – and do you expect to restock in particular categories? And what are you looking to have more of at this point?

Yes. First, I just want to say, I give our teams a great deal of credit for navigating to your point, what has been an incredibly volatile backdrop. I think the expense and analytics of our teams really shines in moments like this. So, we talked a bit in the prepared comments about – some of this is just a shift in timing. Last year, recall, inventory levels were really challenged. And so everyone was trying to bring in inventory really early, and there was lots of customer demand really early because people were worried about not being able to get the products throughout the holiday. This year as we said, we expected the holiday to shape a little bit more traditionally like pre-pandemic, and therefore, our inventory flows are moving more in that direction. And we specifically said in places where we have longer lead time categories, we placed some of those bets earlier and then allowed ourselves a little bit more ability to maneuver on those items that don’t take quite as much long lead time. There are always some spotty places where we wish we had more inventory. This is almost always true in consumer electronics. I mentioned gaming consoles, that’s commonly a place. And I think there has been some conversation about some of the more iconic phones and the production there and availability there. So, that’s not anything that’s new that’s kind of typical as we head into holiday. But those will really be some of the spaces where we would add more. And what I like is that we have a lot of room to maneuver throughout the holiday in partnership with our vendors. As we think about where the demand profiles might ebb and flow, we can bring that inventory in, and we said it. We bring in the majority in November, but we replenish the whole holiday season, and this allows us the room to bring in really what’s resonating with customers.

Great. And just on your comment earlier about online penetration being likely to grow as it did prior to the pandemic, are you agnostic to online versus in-person shopping or is online an inherently lower operating margin business than brick-and-mortar?

I will start a bit and then Matt can add in. What I actually believe that this combination of omnichannel is our strength. And not only are we agnostic, we love it when customers are using the multitude of channels that we have and that includes consultations at home that includes our virtual channels like chat and phone that includes online and that includes stores. And so I – instead of just even saying agnostic, I actually would say we want to double down on a customer, who wants to shop us across all those channels. Matt, maybe you can provide some of the profitability color.

Sure. I think over the last number of years, the team has done an amazing job adjusting for a very different way of delivering to the customers. In my prepared remarks, we talked about how the core of our rate is actually slightly up compared to where it was pre-pandemic. And that’s adjusting for – nearly doubling of the online mix in addition to absorbing all of the inflationary costs that we have seen over the last couple of years. So, that gives a little evidence to financially, we are able to actually do quite well in an environment where our dot-com business can reach those levels of penetration. So, we are absolutely agnostic – and on top of it, we just want to do what’s right for the customer. The customers are going to lead us to where we need to be and our model can absorb that in any type of environment.

Great. Thank you.

Thank you.

Thank you. We will now move on to our next question from Steve Forbes of Guggenheim Partners. Your line is open. Please go ahead.

Good morning Corie and Matt. I wanted to focus on computing and home theater trends during the third quarter. I think you called out in the release, the weakness in those categories on a year-over-year basis, but it looks for the category detail in the press release that the trends improved on a 3-year basis. So, curious if you could just expand on what drove that reacceleration? And then as my follow-up question, is this reacceleration part of the reason to restart the share repurchase program, or any color on what gives you the confidence to do so?

Sure. Yes, computing, I will start with that. I think it was actually a large driver of a sales decline in Q3. But compared to FY ‘20, it was up 23%. So, we are still seeing very strong growth from the pre-pandemic period. We have seen a very large growth in the installed base over the past couple of years. Clearly, it’s now being impacted by the level of the normalization, if you go from the spend. We are actually seeing a good start to Apple Plus program. We are actually seeing some customers mix towards some of the latest products versus opening price points. So, it’s still relatively small and new, but that’s a good start. Gaming continues to be a strong growth area compared to pre-pandemic in the computing space. So, so much of the gaming world is now kind of blending between gaming consoles and the computing arena and innovation continues on, and we expect that to continue. So, still down year-over-year, but still good strength and a great opportunity ahead of us. TVs, as you expect home theater did have negative comps as well. TVs or promotions are up on a year-over-year basis significantly. A lot more stronger inventory positions from our customers. And so we are still very confident about TVs going forward. Holiday is always a great environment for TV. ASP is down a little bit year-over-year. But again, we are seeing good mix into higher television sizes and premium products over the last couple of years. So, really encouraged by what the business could offer. I think to the confidence of the share repurchase question, I think we – I think appropriately just took some time to understand the environment ahead of us on last year’s – in last quarter, just to make sure we were appropriately planning for the holiday period, giving our self enough space on inventory investment and where we need to sit from a working capital perspective and feel confident about our position in Q4 and where our inventory sits. And it is an establishment of confidence on where we sit financially and as we head into next year or so.

Thank you.

You bet.

[Operator Instructions] We will now move on to our next question from Seth Basham at Wedbush Securities. Your line is open. Please go ahead.

Thanks a lot and good morning. My question is on Totaltech. You mentioned that members are tracking a little bit lower than your expectations. You have been able to parse that out between the slower sales and demand environment versus attributes of the program?

Not right now, we are not going to kind of give the exact numbers and some of the science behind it. I think it’s fair to say as we head into next year, we will probably give a little bit more color on what we are seeing there. And as you can imagine, it’s very hard to parse out the two pieces there. I think what we are remaining focused on is striking the balance between what really resonates with our customers and accomplishes what we want in terms of share of wallet and frequency. And the cost of the program and ensuring that when we are investing in the program, it makes sense, and it’s in those pieces that really resonate over the long-term, again, with our customers. And I think – I am not trying to skirt the question. It is going to take us a little bit of time to parse those things because the frequency that we have with our customers is a little bit different than some other retailers. And so as we are assessing just whether or not this program is doing what we want and to your specific question, why people are choosing to or not to enroll, it’s going to take us a little bit of time to pull those pieces apart.

Got it. Thank you. Fair enough. And my follow-up question is on your store model and refresh program. I think you said you have 42 stores done now. What’s your plan over the next year? And any more color you can provide in terms of the average sales or margin dollars lift from those stores that have been remodeled relative to the core?

Yes. We haven’t really given the quantity of stores yet that we want to do into next year. And we actually mentioned in the prepared remarks, we are planning to give an update as we head into next year on our kind of experience refresh plan. I think it’s important to note that everything that we are doing, we are trying to root in this really incredibly elevated shopping experience with this broader assortment, expanded fulfillment, best vendor experiences. And while we haven’t given specific numbers, we have said we continue to see really good and improved sales results out of at least the two that have been opened more than 2 years now. And NPS results consistently in those as well. So, we continue to remain bullish on them now. We just opened a bunch of that 42 here recently. So, we are going to read on how they are performing out of the gate. But like I said, we will give you more of an update on our future plans as we head into next year.

Thank you and happy holidays.

You too. Thank you.

Thank you. We will now move on to our next question from Brad Thomas of KeyBanc Capital Markets. Your line is open. Please go ahead.

Hi. Good morning. Thanks for taking my question. I wanted to ask another just about the state of the consumer. Obviously, nice to see the sequential improvement in trends which I think is somewhat a function of the comparisons from stimulus and the pandemic getting behind us. I was wondering if you could talk a little bit more about what you are seeing in terms of mix and trade up and trade down and comments on perhaps the trends in the appliance category where we have seen a little bit of slowdown. Thanks.

Yes, absolutely. If I take a really large step back, I think Matt did a nice job in his prepared remarks saying quarter-to-quarter, it is really difficult to sort through all the laps to what you said on stimulus, on stores open, stores close, promotionality, all of those things. And so instead, I think at the sequentials all get difficult. At the end of the day, we are trying to take the biggest step back and look at a consumer that we know is really facing trade-off decisions. Obviously, especially when you have inflation on the basics, like food, fuel and lodging, and we know this definitely impacts lower income consumers to a greater extent. I mean almost 70% of spend in the lowest income earners are on those kind of basics versus more like 55% for the higher income earners. So, you have got a large proportion of your spend going there. And so we know that people are looking for value across all of those cohorts, and there is no easy one way to describe the consumer. It’s very uneven depending on how you came out of the pandemic, and it’s very unsettled. You can see that even just in some of the confidence numbers while people are trying to sort their way. I think as it relates to us specifically, and again, specialty CE retailer, we are actually seeing relatively consistent behavior, and we mentioned this in the prepared remarks. Our demographic mix is essentially steady versus both last year and pre-pandemic. If anything, it’s moved just a touch more into the lower income brackets. And our blended mix of premium product is higher, both in units and dollars than both last year and pre-pandemic. And we did that on a very specific like price point, SKU kind of level to look at where people were really opting into those more premium. Now, obviously, within some specific categories, we are seeing some cohorts of customers trading down, but it’s not aggregating at this point into an overall impact that we are seeing consistently across every single category. So, it can depend like you might see different behaviors in back-to-school than you might see as we are heading into holiday here. But at the highest level, we are actually seeing the consumer behaves relatively similarly as we did even pre-pandemic, I think more so, it’s the overarching decisions about how they are going to make those trade-off decisions between things like services and restaurants and vacations and goods and those base needs that they have.

Great. Thanks so much Corie.

Thank you.

And we will now take our last question from Brian Nagel at Oppenheimer. Your line is open. Please go ahead

Hi. Good morning. Thanks for squeezing me again here. So, the question I have, just with respect to holiday promotions. Yes, and you recognize I know Best Buy want to keep this plans close to the vest. But as you think about this holiday and maybe what you are seeing already just given the cross currents from spending out there and some of the inventory positions, is Best Buy looking to take more leading promotions or you prepared more to react, what others do in the market? And to what extent are you working closely with your our supplier partners to both stimulate demand, but also start to alleviate some of these excess inventories in the channel?

I would almost go back to how we talked about holiday pre-pandemic. And holiday is always a very different time of the year. This is about really making targeted decisions about when, how and where any retailer wants to be promotional. And we have, I would argue, a good long history of deciding where and how within the holiday, we want to be promotional. That doesn’t mean you go toe-to-toe on exactly the same items, exactly the same days with every other retailer. It means you create a pretty foundational holiday plan and then you stick to that pivoting as you see where the customer might have more interest. To your point, that means you are partnering with vendors way upstream prior to holiday to really think through what we think is both going to resonate with the customer but also hit those promotional price points that make sense. Obviously, we are committed to being competitive on price and our own data would actually say we have improved our price competitiveness, both compared to last year and compared to pre-pandemic. So, not only are we baseline, I think more competitive, we are then obviously picking those targeted. And I talked about it a lot in the prepared remarks, places where we can offer value. And for us, that’s across the spectrum of price points, especially when we are still seeing consumers bear towards those more premium products, we are really going to try to offer any budget, that sense of value and we are going to, in a targeted way, decide where and how we want to play throughout the holiday. And I think that is really the foundation of how Matt and the team have tried to forecast what we expect in Q4. And with that, I think that’s our last question. I want to thank you all so much for – thank you, Brad. I want to thank you all so much for joining us today. I hope you all have a wonderful holiday season, and we look forward to updating you on our results and progress during our next call in February. Thank you.

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