Hello, and welcome to the Q4 Full Year '23 Earnings Call. My name is Francois, and I will be your coordinator for today's event. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Mollie O'Brien, to begin today's conference. Thank you.

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. Later today, we will post a third-party transcript of this call to our Investor Relations website as well as a financial recap slide presentation. I will now turn the call over to Corie.

Good morning, everyone, and thank you for joining us. Today, we are reporting Q4 sales results in line with our expectations and better-than-expected profitability. We knew customers would be looking for joy during the holiday but would also be seeking great value given the pressures of inflation. Consumers responded to our compelling deals, and as we predicted, their shopping patterns were more similar to historical holiday periods than what we saw the last 2 years. Specifically, customer shopping activity was more concentrated on Black Friday week, Cyber Monday and the last 2 weeks of December than last year. Customers continue to choose us for the expertise, service and overall value we provide across all channels. Our customer satisfaction scores indicate that our talented teams and omnichannel capabilities delivered better experiences during the critical holiday period this year compared to both last year and the prepandemic fourth quarter of fiscal '20, especially within our services and delivery experiences. 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 performance. Each and every day, our management team and employees across the company are making tough trade-off decisions. Our Q4 comparable sales were down 9.3% on a year-over-year basis. Our non-GAAP operating income rate of 4.8% was higher than expected. The promotional environment in the fourth quarter was more intense than last year. However, the related financial pressure was less than expected and contributed to a stronger gross profit rate performance. As a reminder, we first began to see promotional activity return in the back half of calendar 2021. Since then, it has proliferated across categories, and we would characterize the promotional environment for consumer electronics as…

Good morning, everyone. Let me start by sharing details on our fourth quarter results. Enterprise revenue of $14.7 billion, declined 9.3% on a comparable basis. Our non-GAAP operating income rate of 4.8%, declined 30 basis points compared to last year, which is an improvement from previous trends as this was the first full quarter of lapping the rollout of our TotalTech membership offering. Non-GAAP SG&A was $241 million lower than last year and increased approximately 10 basis points as a percentage of revenue. Compared to last year, our non-GAAP diluted earnings per share of $2.61, decreased 4%. The year-over-year decline in our earnings per share was driven by the lower operating income dollars I just mentioned, which were partially offset by a $0.19 per share benefit from a lower share count, a $0.06 per share benefit from higher interest income and a $0.05 per share benefit from a lower effective tax rate. While our sales results were down to last year, overall, they aligned very closely with our expectations entering the quarter, including our assumptions on the monthly phasing and the mix of revenue by channel. Our non-GAAP operating income performance exceeded our expectations due to the higher gross profit rate, which included slightly less pressure from promotions than we had expected. Next, I will walk through the details on our fourth quarter results compared to last year. In our Domestic segment, revenue decreased 9.8% to $13.5 billion, driven by a comparable sales decline of 9.6%. Online revenue of 38% of our total domestic revenue, which was 12th consecutive quarter that our online sales mix was above 30%. As expected, December comparable sales decline of approximately 8% was our best performing month on a year-over-year basis. When comparing to the prepandemic fiscal '20 comparable period, January was our best performing…

[Operator Instructions] Our first caller, please go ahead. First caller, please ask your question.

It's Michael Lasser from UBS. Corie, you're making all these changes, it seems like in response just to the evolution of the business where, prior to the pandemic, e-commerce penetration was 20%. Now, it's in the 30% range and that inherently changes the profitability of the Enterprise. So the question is, how do you balance maintaining a strong customer experience, while trying to restore the overall margin level back to where it was prior to the pandemic? And how much customer erosion and sales erosion are you anticipating this year with all the changes that you're making to some of the membership programs?

So the purpose of the changes we're making is, first and foremost, to meet a changing customer. And that's why my -- I led even in my remarks around the measurement of our customer experiences and how across the board in Q4, we have actually continued to see improvement in NPS and the measurement of those experiences. The primary goal, of course, is to create customer experiences that people love. And when they want to come to the store, to meet their needs in the moment, sometimes -- and this is part of what's changed. Sometimes that is I want very rapid fulfillment of my product. I want to pick up in store and have the confidence of grabbing that product. Sometimes that is, "I want a deeper, more immersive experience." And what we're learning our way through it is part of why we've done piloting and testing, and we're taking a long time to make changes, or what sometimes we get feedback seems like a long time to make changes is because we want to give this enough room to breathe, to make sure we feel like we're not eroding the customer experience. It's why we are investing more in our frontline associates, who are the ones who are right there meeting the customer in the moment. And so our priority is not just the cost side. Our priority is actually what does the experience of the future need to look like so that we meet the customer expectations, and we hold ourselves very accountable to the measurement of those experiences. On the membership side -- and we talked about it a little bit in the prepared remarks, what we're trying to figure out is the balance between acquisition of members but also retention of members. And what are…

Okay. My follow-up question is, quarter-to-date, you're trending down 10%. You are expecting within the guidance to be flat by the end of the year. So is the progression from down 10% to flat, is that linear, so we should be expecting steady improvements over the course of the year? And what is -- what is that dependent on in terms of product introductions, execution and the competitive environment?

Thank you, Michael. As you said, our guide prudently assumes that inflation persists and the consumers are going -- be continued to make trade-offs around their spend. And so at a high end, the comps progressively improved throughout the year. And like I said, we will exit the year more on the flat to slightly possibly growing as the pressures in the CE industry kind of abate as we progress through the year. So maybe not perfectly linear, but we do expect that at the high end, the sales performance would progressively improve. At the low end of the guide, we're clearly modeling a more sustained pressure on the CE industry as customers feel the longer effects of the macro pressures of inflation that continue to shift some spend to the activities in travel. So that's kind of the 2 ends of our expectations for next year. But again, at the high end, we do expect our sales and the industry itself to improve as the year progresses, which is consistent actually with what -- some external benchmarking you would look at between NPD and CTA, which would also expect some level of improvement.

Next caller, please, state your name and company name before asking your question.

It's Karen Short from Credit Suisse. So I have 2 questions. I guess the first question is just, obviously, the midpoint of your sales guide is $1 billion above calendar '19, but EBIT margins are 100 basis points below. So again, calendar '19, but promos seem to be likely consistent in '20 -- calendar '23 relative to 2019. So can you just elaborate on that a little bit? And then with respect to the members that you called out, $100 million is clearly a very strong number in terms of members for My Best Buy, TotalTech. Can you just give a little color on what percent of sales those members represent? And then maybe some color on how you could better leverage that program?

Sure. I'll start and then Corie can jump in too. I think the comparison you're talking about is this year compared to FY '20 -- or calendar 2019, if you think about our business -- for me the biggest change from this past year to 2019 is within gross margin in the 2 very big factors that have lower gross margin since that time are: one, supply chain costs that are much higher. Part of that is the online mix that has grown, and the other part of that would be supply chain inflation that hopefully, we would see abate over time. The second biggest impact to gross margin has been our rollout of the membership offering, which, during the quarters last year, when we weren't fully lapped, it was almost 100 basis points of pressure compared on a year-over-year basis. So those are the biggest impacts compared to that 2019 period, which was gross margin... SG&A was -- rate was rather similar to 2019. And so what you do have there is you have savings compared to store labor being down. And then you have offsetting that a bit is the investments we've been making in technology and depreciation coming through from higher capital.

On the membership side, let me make sure I clarify the numbers. We have about 100 million My Best Buy members, of which 40 million to 45 million are active. On the TotalTech side, we currently have 5.8 million members. That's compared to 4.6 million we had last year. So those are kind of the 2 pools of membership that we're talking about. And we haven't given the percent of sales of those members, but you can imagine, it's a fairly high percent of sales between those 2 membership pools. I think we see a lot of opportunity to continue to engage with those members. As you can imagine, with a My Best Buy program that large, we know a lot about those customers. And we are able to tailor to those customers. We know even more about our TotalTech members, of course. And I think we see a future where we're able to tailor more direct opportunities, sales opportunities with them. We also can see potentially that if we look at a tiered approach, there's a whole another tranche of customers who might be interested in doing more with us and having a longer relationship with us. And now as we're heading during the second year of TotalTech, we're learning a lot. We think we're going to drive more engagement through a more personalized approach. We're working on our onboarding process for new members so they really understand what's available to them. And we're leveraging some of our existing vehicles so that people understand everything that we do from consultations, all the way through services, all the way through trade-in and some of the other offers. And then, of course, this speeds into some of our Best Buy Ads model, where we can tailor our advertising to specific audiences based on what we know about them. So this pool of customers is really vital to us, and I think we are continuing to improve the way we engage with them, and also drive their engagement back with us.

Any chance you could just tease out a renewal rates?

We haven't given renewals, and we're not going to. And as you can imagine -- I mean they've been relatively in line with our expectations. You can imagine, there are some places where we see much better engagement and renewals and people who engage in things like support or who value the warranty side of TotalTech as an example, they are very, very interested in renewing. And so I think that's -- when we talk about tailoring the program for the future, we're looking for those customers who find value in some of the more unique aspects of the program and stick with the program because they see the value in that.

Next caller, please go ahead.

It's Seth Sigman from Barclays. Nice to talk to you. My first question is just around pricing and the promotional environment. I think the point that you made is that Q4 actually ended up being a little bit less promotional. Can you just elaborate on that? And then as you think about this calendar year, it does seem like a lot of retailers are planning conservatively in this category. I guess what have you reflected here in the guidance for gross margin specifically related to discounting and promotional activity?

Sure. Just to recap, in Q4, we did see product margin rates lower in Q4, driven by on a year-over-year basis of more promotionality. What we did see compared to expectations is actually a little less pressure from promotionality even though we were expecting it to be more promotional year-over-year. As we look into next year, our guide reflects, I think, it's -- one of my comments in prepared remarks was the combination of product margin rates, [ city ] profit share and supply chain, we're going to be pretty neutral to the whole year. That doesn't mean that in some quarters, it might be a little better, a little worse. But for the most part, next year, we're assuming that it's a fairly neutral impact of [ a broad ] promotionality, not that some quarters might also be more promotional from a pricing perspective, the impact of that promotionality might not actually manifest in the financial pressure.

Okay. And then I guess, just thinking about demand in general, there's obviously a few factors battling each other here. There's a lot of consumer noise. You also have pull forward in your category. You talked about replacement cycles. I guess I'm just trying to think about elasticity as you start to see ASPs come down, and we can't really see it on a category level, we only see it in aggregate. But are there any signs of maybe elasticity starting to kick in here? Just curious how you're thinking about that.

Yes. I think you started with what makes the conversation a little bit difficult, which is the incredibly varied indicator that are out there with the consumer right now, right? Everything from historically strong job markets, spending continues specifically on services even more so than goods. Inflation might be slowing, but it still is sustainably high. And it's high in some of the basics like food, fuel and lodging, right? And when the basics are where that sustainable inflation is, it does mean the customer is going to make trade-off decisions. And I think we've used the same language now for probably 3 quarters. You've got an uneven and unsettled consumer who, from a confidence perspective looking forward, is still not confident about the future. And so I think what we are trying to position ourselves for is the best possible value for that consumer when they're ready in the moment. And I feel like in Q4, I think we've played that very well. Our pricing was very competitive. Our price perception was very competitive. And so you can see in spot as there is a better deal to be had, you can see the consumer reacting. But no matter what, it's against this overlay of a consumer who's going to make trade-off decisions based on their own budget and their own life.

Next caller, please go ahead.

It's Steven Forbes from Guggenheim. Corie, Matt, I wanted to focus on trends within consumer electronics. If I look at the disclosures here in the press release, obviously, some apparent challenges in that category. So was hoping that you can expand on what you're seeing across the major subcategories within? And then maybe highlight how that is impacting the cadence of comp, right, that you're expecting for 2023? I would imagine part of that is improvement within those subcategories. But any color there would be helpful.

Sure. I think generally speaking, when you look at 2023, with a minus 3% to minus 6% range, most categories are going to still feel pressure as you look at the year. Most generally would also see a progressive improvement as the year -- at the high end of our range as well. Categories are -- would be very different spots if you think about the last few years. If I think about computing, computing is still a much bigger category compared to where it was prepandemic. It's still seeing more pressure -- compared to the total, just because of the demand it's seen over the last number of years. Appliances, again, also a very big category, growing quite a bit over the last number of years as well, seeing a bit of pressure as we start to rightsize some of that spend, but also just as it relates to the housing market being a little pressure, which -- this is a category that does have some impact from that, although a great deal of -- it is still a direct purchase. There is a housing impact. So those -- TVs we would expect actually potentially for that to be a place where we could outperform the company average as we look into this coming year. We -- in Q4, we did see a little bit of ASP pressure. As you look into next year, we believe that potentially could see some opportunity as you get into future quarters. And so those are some of the bigger trends. The last one I probably mentioned is mobile phones. It had a sales decline in Q4, which is pretty similar to the company average. And if you compare it to prepandemic, a much smaller category as people are holding on to their phones quite a bit longer than they used to. But as you look into the year against continued improvement generally across a lot of the categories. The one area we have been seeing strength is gaming. We mentioned gaming and tablets as being a growing category in Q4. We are seeing more availability of gaming consoles, which is helping to sales trends. And so potentially an area where we see some more positive as we move into this next year. But again, a lot of that is dependent upon overall all demand as it's getting longer in its launch and availability aspect.

That's helpful. And then maybe just a quick follow-up, maybe for you, Corie. Curious about vendor conversations today as compared to maybe past cycles or even just the depth of the COVID are -- your comments about helping them with their direct-to-consumer sales, direct-to-consumer open-box returns, et cetera. Maybe just help phrase, right, how the relationships have evolved here, and how you sort of expect them to evolve over the coming quarters and years just given the challenges that are out there?

Yes. This is an interesting space for us because obviously, our vendor partners they want to succeed as well. And so when we think about things like promotionality, the question we got earlier around elasticity, these are great partnership discussions that we can have with our vendors as we think about how best to stimulate the market. And I said it a couple of times, but it bears repeating, our vendors are highly incented to continue to innovate on their products and to create the new products for the future. I mean obviously, no one's going to sit on their laurels and wait for the customers to come back. People are constantly trying to innovate in a way that will drive demand. And we are really the best place to highlight particularly that new innovation. And so the vendor partnerships have continued to evolve over time with that as the backdrop. I think we often talk about the physical experiences with our vendors, and that remains important. Our partners continue to invest in our existing stores. And I think you can see some really beautiful vendor experiences in the 35,000 square foot remodels that we're doing as well as even some of the smaller stores that we're testing, where you have just a different take on vendor experience. So there still is this real investment and interest in how a vendor shows up in a physical experience. But on top of that, there are so many new spaces where we're developing some different and unique partnerships. We have developed some interesting partnerships around our membership offerings. We have developed really interesting partnerships with Best Buy Ads and how they think about the access to the hundreds of millions of customers that we have that we know very well, and they can target very directly. We have deep services partnerships in many cases, we're an Apple authorized repair facility, and we're building out that services infrastructure with other partners. And then to your point, we're starting to see some real opportunity in supply chain and fulfillment. We have a program that's called Partner Plus. We currently have 6 partners on it. Samsung is one of those where you can actually order online at Samsung and have it fulfilled in our stores. And I think there are so many spaces, especially in an industry where like we said 40% of what we sell online is picked up in store. So there is this like intricate want and need on our customer base to physically have access to that product, and we can partner pretty uniquely with some of our vendors to help provide that experience for them. And we can see a lot of opportunity for that into our future.

Next caller, please go ahead.

It's Greg Melich with Evercore ISI. Really 2 questions. One, Corie, I think you mentioned that average selling prices are still up from where they were a few years ago. If the 3-year comp is flattish, should we assume that ASPs are maybe up 10% and transactional counts are down 10%. Would that be a fair estimate?

Well, we're not going to give the precise numbers, but directionally how you're thinking about it is essentially what we're seeing. And I just want to make sure I underscore 1 more time on the ASP side of things structurally versus calendar 2019 or fiscal 2020, you've really got 2 big things happening. And that is the mix and the category mix is quite different. Larger percent of our revenue now coming from appliances and large TVs. And also second, within our categories, the mix in the premium products has increased. And I think those 2 actually reflect some of the strengths of our model, our ability to really tailor those more premium experiences, our ability to deliver and install that large cube. I think it's -- sometimes it gets a little lost in some of the other inflation conversation. That's not what's happening here. What's happening here is, structurally, we're making what I think are some really positive changes within the business model.

Well, I guess that's the natural follow-up. So that's the premiumization with innovation. So I guess as you go through this year in the guide and that improvement in comps from where we are now, is that improvement more based on ASP declines moderating or traffic improving or transactions improving.

I think as we go through this coming year, there could be some -- when we start the year, there could be some ASP pressure year-over-year, but not to the extent that we compare it to FY '20, obviously. We believe that will remain elevated. And as you get into the latter part of this year, we'll have to see, but it's probably a bit of growth coming from the industry improving, which means demand is improving, which means it's probably a combination of units improving and potentially, give or take, some ASP increase. Again, we're not guiding it, but we probably see both as you -- our expectation is at the high end is that the industry would continue to grow and demand would come back, which would actually drive more units.

And then my follow-up is on services, 5% of revenue. Is that basically TotalTech as a majority of that now? Or how should we think about that in terms of building that side of the business?

Yes. TotalTech has become majority of that number as it's -- as we launched that membership program, it's replacing more of the stand-alone services sales that we would have had in the stand-alone warranty sales that we would have had. So we've seen it shift into being a TotalTech more based number. There is still stand-alone services and stand-alone warranty sales, but it's shifted to TotalTech.

We will take 1 last question, then hand over to your host to conclude today's conference. Next caller, please go ahead.

It's Scot Ciccarelli with Truist. I know that reduction in incentive comp is a big part of the SG&A swing. But domestic SG&A was essentially flat on a year-over-year basis on a high single-digit comp decline. That's not really easy to do. So does that level of austerity, let's call it, create a situation where retention actually starts to become a challenge, especially in an environment where a lot of other retailers are actually talking about accelerating wage pressures in '23 even on top of '22's levels?

Yes. So what's been interesting here, and we said it in the prepared remarks, I mean our average hourly wage is up 25% versus 2019. We were one of the first to move our wages up in August of 2020 to $15 minimum almost 3 years ago. And so we've been making continuous investments in our workforce over the last 3 years. And what we're seeing, and we watch it incredibly closely, our turnover rates are really low compared to industry averages, and they're generally very similar year-over-year. And we -- I mean we've talked about it before. We might not be exactly a prepandemic, but we're still in the like mid-30% turnover range overall. And so that is exactly what we watch to make sure we're trying to strike the right balance here. We are continuing to invest -- and it's not just wages, it's also hundreds of millions of dollars in benefits over the last 3-year period as well. And of course, we're going to keep monitoring that on a market level basis, but we remain laser-focused on making sure that as we adjust the operating model, we are reinvesting into those employees that we have. And I think, for some of the key roles like our general managers, our turnover is in the mid-single digits, and we tapped before about some of the tenure that we see in our [ peak ] slot agents or within some of our consultants. So we are very carefully monitoring constantly both the balance of pay and benefits and, frankly, some of the work-life balance and flexibility that our employees are demanding, and we continue to see it reflected, I would argue, in industry-leading turnover numbers.

For you when we kind of think about -- this company has taken a lot of cost out over the last, gosh, decade plus [Audio Gap]

Model is always evolving, and there are always new and interesting and different ways to take cost out. I would use -- 1 of the things that we've been talking more about lately is outlets. That is a unique and differentiated customer experience. And we're pulling different customers in who are finding great values and we see a recovery rate. We've said this before, that's 2x what we would see if we were selling that sideways or selling it outside our own channel. Cost reduction is not always about expense reduction. It is often about finding flaws in the experience and then making opportunity kind of out of those flaws. Many of our cost reduction efforts actually have ended up and, I would argue, better employee and customer experiences. If you take some of the TV damage work that we've done over time, nobody wants to bring home a damaged TV, and there's a huge amount of cost in that for us. And so I think what we are trying to do is continuously assess our model. And then given some of the advancements we're seeing, there continues to be opportunity. We see opportunity ahead in how we run our call centers as an example. And that's a space where we've been able to pull cost out and have better customer NPS and experiences. So this isn't -- I think sometimes it's a zero-sum kind of game that people play in their heads with cost reduction. But I think what the team is doing is really creatively finding kind of flaws in our system. And because it's always evolving, there's always something that we're learning from and evolving. So I'm really proud of the work that the team has done, and I think we continue to have opportunity. And with that, yes, you bet. I'd love to thank you all so much for joining us today. We look forward to updating you on our results and progress during our next call in May. Thank you and have a great day.

Thank you for joining today's call. You may now disconnect your lines.