Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Fourth Quarter Fiscal 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded for playback and will be available at approximately 1:00 p.m. Eastern Time today. [Operator Instructions] I will now turn the conference call over to Mollie O'Brien, Vice President of Investor Relations.

Thank you, and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; 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'm proud of the performance of our teams across the company as they showed resourcefulness, passion and unwavering focus on our customers this past year. Throughout fiscal '24, we demonstrated strong operational execution as we navigated a pressured CE sales environment. This allowed us to deliver annual profitability at the high end of our original guidance range even though sales came in below our original guidance range. Importantly, we grew our paid membership base and drove customer experience improvements in many areas of our business, particularly in services and delivery. For Q4 specifically, we are reporting profitability at the high end of our expectations, with revenue near the middle of our guidance range. Our comparable sales declined 4.8% in the quarter. At the same time, we expanded our gross profit rate 50 basis points from last year due to profitability improvements in our membership program as well as Best Buy Health. Excluding the impact of the extra week, we lowered our SG&A expense compared to last year as we tightly controlled expenses and adjusted our labor expense rate with sales fluctuations. As expected, customers were very deal-focused through the holiday season, and the promotional environment overall was in line with our expectations. While shopping patterns more closely resembled historical holiday periods and Black Friday and Cyber Week performances were in line with our expectations, the sales lull in December was even steeper than we had modeled. Then customer demand strengthened considerably and was higher than we expected during the 4 days before Christmas. Our Q4 digital sales mix was flat to last year at 38% of total domestic sales. Customer in-store pickup of online orders was also consistent at 44%. We improved our delivery speeds, expanding the percent of ship-to-home online…

Good morning, everyone. Before getting into our quarterly results, let me start by sharing a few details on the extra week that occurred in the fourth quarter. We estimate that the extra week added approximately $735 million in enterprise revenue and approximately $0.30 in non-GAAP diluted earnings per share to the quarter. Also as a reminder, revenue from the extra week is excluded from our comparable sales calculation. Next, I will share details on the fourth quarter results including the extra week. Enterprise revenue of $14.6 billion declined 4.8% on a comparable basis. Our non-GAAP operating income rate of 5% improved 20 basis points compared to last year and included a 50 basis point improvement in our gross profit rate. Non-GAAP SG&A dollars were $30 million higher than last year and increased approximately 30 basis points as a percentage of revenue. Compared to last year, our non-GAAP diluted earnings per share increased 4% to $2.72. When viewing our performance compared to our expectations, revenue was near the midpoint of our guidance. As Corie mentioned, our comparable sales trends were not linear, with the more traditional holiday shopping days being our strongest from a growth perspective. Our comparable sales by month were November, down 5%; December, down 2%; and January, down 12%. Although our sales were near the midpoint of our guidance, our non-GAAP operating income rate of 5% was at the high end. Our gross profit rate was higher than we expected, primarily driven by a more favorable gross profit rate in our services category, which includes our membership offerings. Our non-GAAP SG&A expense was near the high end of our expectations due to additional incentive compensation. Next, I will walk through the details of our fourth quarter results compared to last year. In our Domestic segment, revenue decreased 0.9%…

[Operator Instructions] First question is from the line of Scot Ciccarelli with Truist Securities.

This is probably difficult to answer but I'd be interested in any color you might have. When you kind of look at the comp performance and the comp decline, how would you segment it between, let's call it, broader pressures on discretionary spending versus, let's call it, the pull forward of demand that happened during the pandemic? Because we're kind of getting into that kind of 4-year period since the pandemic. Typical life cycle of a lot of your products is 3 to 5 years. Just how are you guys kind of thinking about that? Or is it at all possible to segment that?

I wish there was an exact science to this one. That being said, we did try to give you in the prepared remarks a few indicators that we're seeing that say we might be starting to get into that replacement cycle. We talked specifically about laptop units returning to growth in Q4 and that trend continuing here as we head into Q1. That, to me, feels like an early indicator of at least some foray into that replacement cycle. Because honestly, really, right now, there isn't any massive current innovation that would spur you to go buy a new laptop. There's a little bit but we're expecting more as the year goes on. And then obviously, that -- the laptop category would be kind of earlier in the realm of replacement cycles that we've talked about. So I think you're starting to see some goodness there, Scot, which makes me think a little bit more of the overhang that we're seeing is that kind of combo batter of 5 macro factors that I talked about that continue to weigh on the industry and haven't abated nearly to the pace that I think anyone thought from a macro perspective.

That's helpful, Corie. And then one other quick one. Like, you guys talked a bit earlier in the script on personalization. I guess the question is for your kind of category, do you get enough frequency in terms of customer visits to really be able to little leverage that data and the personalization that you're targeting?

I think what's important is to differentiate purchase frequency from the frequency of interacting with the brand. And we have the luxury because we do know -- like I said, 90% of our purchasing customers we can identify, we can actually see many behaviors. And people don't just come to us because they want to make a purchase. There's a lot of research done in the category. There are repairs done in the category. There are curiosity about upgrades done in the category. And so we do see enough frequency of visits and our ability to understand how the consumer is acting that do allow us to make those personalizations. And that's why one of the things that we mentioned and why we try to get really specific examples is in the app, having that personalized front page means we're not just targeting you for what you might purchase next. We're literally trying to figure out your next best action, and that action might just be discovery. You might just want to come and scroll through and take a look at what's new or what's coming and educate yourself. And we will gladly help you do that. And so I think the next realm of personalization -- I think personalization often gets lumped in with purchase. And it's for us, in particular, because we really deal with the full life cycle of how people use these products, it's a lot broader than that.

Your next question is from the line of Brian Nagel with Oppenheimer.

So I want to start, Corie, bigger picture. You mentioned in your prepared comments, I know we've been talking a while about this AI. We talked about some of the products and then how Best Buy's utilizing AI in its own business model. The question I have is as you're talking now to your vendor partners, maybe going back to CES or before, how much excitement is starting to really build around AI as -- in terms of products that we could see in the relative near term for Best Buy, from a consumer base standpoint?

Yes. I will give you my very best qualitative answer here. I think if you followed what happened at the Consumer Electronics Show in January at all, it was, I would argue, the largest foray into how AI will impact our world going forward from here, particularly as it relates to consumer electronics. And I think in the coming year, there's enough noise out there that you can get this feel that you're going to start to see the computing side of this really start to take light and make it easier and more seamless for everyone to be able to use tools that will help them be more efficient and effective. But the horizon question, and that's how I like to think about it, I like to think about it as the kind of innovation horizon, I think, is really vibrant right now in terms of what AI technology might be able to do. Because it's not just compute. It gets into like how smart can I make the things around me. And one of the other things that's really interesting about AI is it actually makes consumer electronics products more human. And so there's this question of how do I make these CE products interact with me more seamlessly? How are the robots that are in my house even smarter because they can triangulate faster and they just get smarter on their own? So my little robot vacuum gets smarter every single time that I use it, right? And so these aren't just innovations in the compute side of things. You're starting to see it in the phone side of things. You're starting to see it and how far can we kind of push the envelope on what consumer electronics can do for you in your home to just make your home life more seamless. So I'm not saying it's going to be a revolution overnight, Brian, to be clear. But I do definitely see more excitement and kind of this unlock in how technology can fit even more seamlessly into your life.

That's very, very helpful. I appreciate that. And then just a follow-up, unrelated. With regard to the [Technical Difficulty] normalization within the CE category, you talked about through the holiday promotions being, I guess, normal. But the question I have is, are you seeing more nonspecific CE retailers come back to the category now as the overall consumer backdrop normalizes post pandemic?

I wouldn't say there's more. I mean, I think when we were headed into holiday, we said this is typically a category that is promotional. It's typically a category that many different partners play in for the holiday because whether or not it blew the doors off, it is always a category that people look for as it relates to holiday. And so I think you always see some players come in and out of the space as it relates to gifting and CE as a gift. And I -- my personal point of view, didn't see more than we would have expected this holiday than any other. Obviously, we're always watching the competitive landscape. But I think that's why we're really focused in the coming year on our unique positioning in the CE landscape and the both pre-purchase and then post-purchase offerings that we have that are pretty unique in the marketplace, no matter who enters it.

Your next question is from the line of Michael Lasser with UBS.

It's on market share trends. Best Buy has always been very dynamic with its strategy. It's one of the factors that has led to its success that it's been able to change with the market, but it does seem like in the last several years the pace of change with the strategy has increased significantly, whether it comes to membership, store format, the composition of store associates. How do you think this is having an impact on Best Buy's market share especially in light of the fact that if we look at Best Buy sales in the Domestic segment for this year, it's likely that the company is going to be on pace to have sales that are about $2 billion below where they were in 2019.

Yes. So let me start a little near term and then I'll work my way back to a little bit longer term. You're right, there have been a number of strategic pivots in the model. And to be clear, this is in service of bolstering our position in the market. That is why we are making the changes that we are, and it's also in service of a changing consumer who expects a different experience. So we've said it many times, Michael, and I know you're familiar. There isn't a great single source of share here for consumer electronics because nobody covers all the categories that we do. But for the Circana track categories, which represent about 70% of our revenue, we held share in Q4 and for the full year, year-over-year. With the same caveats as I think about the last several years, and this is one we have to try to analyze multiple sources over a longer-term period. We believe we've actually largely held share in the key categories since the beginning of the pandemic. Like I said, it is a difficult science because there are so many different sources. But you can imagine, as you started with the question, strategically, we are incredibly focused on those real key categories that are important and underline our strategy to really kind of own that home experience and that CE experience end-to-end for our consumers. So we are tracking this carefully, and I can promise you that the changes to the model are not for the fun of it. The changes are definitely in service of different customer expectations and our commitment to hold position in this industry.

Got it. My follow-up question is, as we look at our model and make an assessment of what the recovery in consumer electronics retail looks like over the next few years, what is the rule of thumb that we should be using in regards to Best Buy sales versus its operating margin and the amount of leverage that the model will produce in light of all the changes that have been made in the last few years? Is there a rule of thumb that you can give us to guide us on how we should be projecting over the next couple of years?

Yes, Michael, I'll take that. I think if I look at just going forward in an ideal setting, when you get past the flat to slightly down year this year, we do expect when you look out into the next number of years that the industry will continue to grow and that we will grow along with it. I think it is our expectation that we will continue to grow sales. It's our expectation that we will continue to expand our operating profit rate as we do that. And to your point, part of that is we expect to be able to leverage on SG&A and take advantage of not just all the initiatives that are adding to our improvements over this last year, but also just a good focus on cost control and efficiency. And so I think by that center, I'm not going to give you a specific how much does rate improve by every point of comp. But it would be our expectation as we grow a few percentage points, we will be able to expand our rate. And I think year-to-year, I think that takes on a little different color as you think about one given year and you move into next year with a different level of operating revenue with a consistent level of cost structure. You can imagine that it does help expand your rate a little bit more as you go from one year to the next.

Your next question is from the line of Seth Sigman with Barclays.

I wanted to follow up on the sales outlook. As you think about sales down in the first half, up in the second half, any more views on the role that housing and moving activity plays in that? I think some of our work has suggested that there is an impact, but obviously, it's not the only driver. Innovation and a lot of the other things you talked about makes sense. But I guess, how do you think about housing and what's embedded here in the outlook as you think about the opportunity for improvement?

You said it very well. It's not a perfect correlation with our business, the housing market, I mean. But there are definitely pieces of the business that tend to correlate more highly, particularly as you think about appliances, and then somewhat as you kind of creep into television. Those tend to be the areas that are most highly correlated. In the prepared remarks, I talked about that kind of stacked macro pressures on CE. And then alluded to the fact that the high end of the range at a flat comp for the year, we're assuming that a few of these in particular start to abate. You're starting to see inflation pull back a bit, that one is important. And also, you are starting to at least see the -- what I'd like to call the green shoots of the housing market maybe start to turn in a bit more positive direction. So I would assume that in that -- again, at that top end of the guide that we were talking about, we continue to maybe see a bit of that slow progression of improvement. There is nothing that would say we expect changes overnight. There's nothing that would say we expect all of a sudden, it's all sunshine and roses in the housing market. But I think in general, we're starting to see enough of the green shoots that make you feel like, yes, there might be a bit of improvement there that helps buoy at least that part of the business. That being said, we also said on the downside scenario at a down 3% comp maybe don't see the level of recovery in any of those macro factors that we talked about. So I think that's why we're prudently trying to create a range that acknowledges we're early in the year and early in, trying to see some of the recovery in some of these more cyclical macro items.

Got it. Okay. That's really helpful. And then my follow-up, as you think about online sales growth seem to outpace store comps very slightly but for the first time since 2020. And I appreciate the role that stores and online both play in driving a seamless transaction. But I'm just curious, anything notable that you're seeing as it relates to consumer behavior across the channels? And how does that tie in with your store closure plans?

I think we've had a pretty consistent view on the fact that we believe online penetration -- we kind of said we'll first stabilize because it went so high during the pandemic, we knew there'd be some level of pullback. And the last -- I'm going to call it like 18 months have been a little bit more around, where does it stabilize, particularly as a percent of our overall revenue. And that, for the last year, has been a little bit more stable year-over-year in terms of penetration of digital sales. But our forward-looking hypothesis has been that at a more normalized pace, we probably continue to see online penetration continues to increase. Now you led in with what I want to remind everyone, which is this is not a channel that is taken alone in and of itself. The other interesting fact that we laid out in the prepared remarks is that 44% of what we sell online is still picked up in a store. And that number was consistent year-over-year, even though we're shipping faster and we talked about our ability to ship in 2 days even faster than the year before. And so for our model, in particular, there is this really important interplay between the digital sales, even as they keep penetrating, and the convenience and the ability to ubiquitously search online but also go into the store, if I would like to, regardless of where I choose to make the purchase, which is why we are moving at a methodical pace, I would say, in terms of the evolution of our store footprint. And that's why I also believe this year, our focus is more on touching as many stores as we can and making sure that, that shopping experience feels good, carefully thinking about what the right portfolio looks like over the longer period. And I think Matt and the team have done a really nice job continuing to make sure we are in the right places at the right time and then testing our way into what we think the right footprint of the future is. Because it's just not as easy as, is it stores or is it online? It really is the interplay between the 2 uniquely, I would argue, for us as a consumer electronic specialty retailer.

Your next question is from the line of Katharine McShane with Goldman Sachs.

Just back to the comp range, I was wondering how we should think about traffic versus ticket when it comes to the down 3% to flat. It seems like there are some moving parts in ticket, and we just wanted to better understand the dynamic of maybe some pressure on prices versus mix.

Yes. Sure, Kate. When you think about it in the next year, I think what we've been seeing, if I look just back at last year, we saw our average selling prices be a little more pressured in the -- a little bit in the first part of the year and then it started to stabilize in Q3, and in Q4, in fact, our average selling price was up compared to last year. And some of that was this unit mix that we talked about. As well as we look to next year, we clearly are trying to see both -- some level of ASP stabilization, some unit growth, which is why we've seen such a promotional environment to kind of stimulate the unit side of this equation. And so I think it all kind of obviously depends by category. And I think the carriers are at somewhat different phases in their -- where is the right ASP to drive the right type of unit velocity. And so I think probably somewhat, I would guess, next year similar to what we've seen this year. There could be quarters where you see a little ASP pressure, a little bit more coming from units and vice versa. So hard to know exactly by quarter, but it's probably nothing too dissimilar from what we've seen in the last year.

Okay. And our second question was just on the usage of your credit cards, if you're seeing anything different. Or did you see anything change in the fourth quarter in terms of frequency or size of transaction?

No, nothing really different in terms of usage. It's still an amazing offering for us. We have about 25% of our sales transacted on our card, which has been pretty consistent for the past 5 years. Last year, it was still 1.4% of our domestic sales similar to FY '23. So nothing too different in terms of the usage. And in fact, we still see a continued level of our card being used for external purchases. That's been growing over the last number of years.

Your next question is from the line of Greg Melich with Evercore ISI.

I wanted to follow up on membership and services. Could you give us an update there in terms of either household or a number of members or what percentage of services revenues are there and what behavior you're seeing?

Yes. We haven't explicitly broken out the percent of services, that is, membership. But we did say we now have 7 million members, and that is compared to 5.8 million at the start of the year. During Q4, we actually signed up 35% more paid members compared to the fourth quarter of last year. So remember that we have a new tier in there. So we have the My Total and the My Best Buy Plus. And so that has driven some growth. And I think it's important to remember, our goal here is to drive engagement and increased share of wallet. And what we do is we're doing that across 3 main aspects. You hit on acquisition. But there's also -- we talked on the call about engagement and retention. And I think we're happy because, right now, our paid members continue to interact with the brand more frequently compared to nonmembers. And in addition, as we've been analyzing incremental spend that says -- based on data from Circana that indicates that our Total Tech members are shifting their share of wallet to us as well. So it's not just about how many of them are using services but it's also about how frequently are they interacting with the brand? And are we keeping them loyal to the Best Buy brand. And I think we're happy, again, with what we're seeing so far there and making good progress. We haven't yet lapped the new rollout. So we still have a little bit of time to understand just how well we're doing in that vein. But right now, we're really happy with our ability to acquire members.

And maybe just for a little additional context, the services growth you see at 6% in Q4, that growth was driven more by increased revenue collected from our installation business. As Corie mentioned, we've shifted -- we've changed our membership program. So we're seeing more of that revenue growth now come off the installation revenue that we're now collecting because it's no longer part of the benefits of Total Tech. And so although we're growing more members, the price point is changing a bit. So you see more growth coming from the insulation business from a dollar perspective than you would have seen in previous quarters.

Great. And then my follow-up is on that is really -- I think you mentioned that ad expense or marketing expense will be up $50 million this year. Could you just say what that's on? And I'm curious, are there any efforts to use all -- the data that you're getting, whether it's from your members or just customers in general, to maybe get some revenue from all that data and insight?

Sure. I'll start, and then Corie can jump on the last part of the question. I think overall, we're adding about $50 million of advertising expense this year. It's for a number of different things, and I'll give you a couple of items. First, we are expecting a brand relaunch in the back half of this year. So some of this money is used for some additional branding spend that we have. I would say also this is a very unique year in terms of we have things like the Olympics and presidential election. So the inflation on marketing actually comes up in these periods of time, which is part of that increase. We are also trying to ensure that we are positioned right across our key categories and making sure we have the right amount of low funnel marketing spend pointed at growing our categories when we need to. So I think it's a collection of those things that I would explain. It all adds up to that $50 million. So again, positioning ourselves for a great stabilization and growth in the future and making sure we're in the market in the right spots.

And I love the question about data. It's one of the most powerful tools we have in terms of how we reach our customers. And so we have a Best Buy Ads business. That continues to grow top line collections and profitability and it's been outpacing our core business, I think, as you would expect. And I think it's important to know, this isn't new for us. I mean, at Best Buy we've had very close partnerships with our vendors for a very long time in terms of our advertising. It has gotten more scientific. It has gotten a lot more personalized. And I think that first-party data that we have is much more powerful than it has ever been historically. And obviously, we can also leverage our strong share position in places like even smart TV where we do have established relationships and partnerships with both Amazon on Fire TV and Roku. And so we also have partnerships that allow us to partner on those leading streaming platforms, and we can grow that advertising business and deliver even more value to our vendor partners through some of the partnerships we have uniquely there. So you're right, the data that we have stretches, not only on our own platforms like the app, but stretches into how uniquely we can serve those customers.

Today's final question will come from the line of Joe Feldman with Telsey Advisory Group.

I want to follow up, can you share a little more color on the store refreshes and what we should expect to see over the course of the year as you do touch up the stores and maybe make them a little more engaging from a merchandising standpoint?

Yes, absolutely. Let me start with, to be clear, we're not remodeling every store in the fleet. So I have to be clear there. But what we are doing is taking, I would argue, kind of a stronger position than we ever have to ensure that the shopping experience reflects that kind of excitement and that sparkle that technology brings to life. So we've given examples before like some of the investments that we are making in our end caps and those vendor experiences that you see throughout the store, super important positions in the store because they tend to be the most customer facing. And so you're going to see us continue to bring those to life. I think you're also going to see us rightsize a number of the categories and that's particular emphasis on that center of the store area because we want that excitement. We want that relevancy. We also want to be efficient for our associates. And so we're moving physical media, updating mobile, digital imaging, computing, tablets and smart home, things that allows us to make that center of the store really feel a bit more vibrant and exciting. And so the goal here is not that every single store is going to look like an experience store. The goal though is that every single one has a bit of a refreshed look and feel, has more of those vendor partnership opportunities and has a better ability for our associates to merchandise in a way that makes everything feel kind of full and exciting. And with that -- do you have a follow-up, Joe, sorry?

No, no, no, that's good. We can end it there.

No, no problem. Thanks for the question. And with that, that was our last question. I want to thank everyone for joining us today during what I know is a very busy earnings season. We look forward to updating you on our results and progress during our next call in May. Have a great day.

Thank you all for joining today's conference call. You may now disconnect.