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BBY.N - Q2 2022 Best Buy Co Inc Earnings Call

EVENT DATE/TIME: AUGUST 24, 2021 / 12:00PM GMT

OVERVIEW:

Co. reported 2Q22 enterprise revenue of $11.8b and non-GAAP diluted EPS of $2.98. Expects FY22 enterprise revenues to be $51-52b.

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AUGUST 24, 2021 / 12:00PM, BBY.N - Q2 2022 Best Buy Co Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Corie Sue Barry Best Buy Co., Inc. - CEO & Director

Matthew M. Bilunas Best Buy Co., Inc. - CFO

Mollie O'Brien Best Buy Co., Inc. - VP of IR

C O N F E R E N C E C A L L P A R T I C I P A N T S

Bradley Bingham Thomas KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst Karen Fiona Short Barclays Bank PLC, Research Division - Research Analyst

Michael Lasser UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines Peter Jacob Keith Piper Sandler & Co., Research Division - MD & Senior Research Analyst

Scott Andrew Mushkin R5 Capital LLC - Founder, Managing Partner, CEO & Director of Research

Steven Paul Forbes Guggenheim Securities, LLC, Research Division - Analyst

P R E S E N T A T I O N

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Second Quarter Fiscal Year 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded for playback and will be available by approximately 11 a.m. Eastern Time today. (Operator Instructions) I will now turn the conference call over to Mollie O'Brien, Vice President of Investor Relations. Please go ahead.

Mollie O'Brien - Best Buy Co., Inc. - VP of IR

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.

Corie Sue Barry - Best Buy Co., Inc. - CEO & Director

Good morning, everyone, and thank you for joining us. Today, we are reporting record Q2 financial results of $11.8 billion in sales and non-GAAP diluted earnings per share of $2.98. Comparable sales growth was 20%, and our non-GAAP operating income growth was 40%. We are lapping an unusual quarter last year as our stores were limited to curbside service or in-store appointments for roughly half the quarter. When we compare to 2 years ago, our results are very strong. Compared to the second quarter of fiscal '20, revenue was up 24%, and our non-GAAP operating income is up 115%. Clearly, customer demand for technology products and services during the quarter remained very strong.

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AUGUST 24, 2021 / 12:00PM, BBY.N - Q2 2022 Best Buy Co Inc Earnings Call

Customers continue to leverage technology to meet their needs, and we provide solutions that help them work, learn, entertain, cook and connect at home. The demand was also bolstered by an overall strong consumer spending, aided by government stimulus, improving wages and high savings levels. From a merchandising perspective, we saw strong comparable sales growth in almost all categories. The biggest contributors to the sales growth in the quarter were home theater, appliances, computing, mobile phones and services.

Product availability improved in the quarter. And except for some pockets in appliances and home theater, we do not believe it materially limited our overall sales growth. Our merchant demand planning and supply chain teams once again did an amazing job managing through the difficult and constantly evolving supply chain environment. They worked strategically to bring in as much inventory as possible during the quarter with actions like acquiring additional transportation, pulling up product flow, and adjusting store assortment based on availability. There will continue to be challenges, particularly as it relates to congested ports and transportation disruptions. But our teams have set us up for as strong an inventory position as possible as we move forward into the back half of the year.

As we think about the holiday period, we often have varying degrees of inventory and supply chain challenges, and this year will be no different. But we feel confident in our ability to serve our customers during the holiday. The continued strong demand across retail resulted in an overall less promotional environment, which was a significant driver of our better-than-expected profitability in the quarter.

During the quarter, we provided customers multiple ways to interact with us depending on their needs, preference, and comfort. Similar to last quarter, customers migrated back into stores to touch and feel products and to seek in-person expertise and service. At the same time, they continue to interact with us digitally at a significantly higher rate than prepandemic as online sales were 32% of Domestic revenues compared to 16% in Q2 of fiscal '20. Phone and chat volume also remained very high compared to prepandemic, and sales via these channels continue to climb.

In addition, of course, we are interacting with customers in their homes, making large product deliveries, installing solutions, repairing products, and providing sales consultations. In fact, overall, we are helping our customers with their technology needs in their homes 20% more than we did 2 years ago in Q2 of fiscal '20. Through all of these interactions, across all of these touchpoints, 98% of survey customers tell us they feel very safe, which we believe is still incredibly important at this stage in the pandemic. I want to genuinely thank our store and in-home teams for creating this safe environment for our customers and for continuing to provide exceptional service even in situations where customers resisted following safety guidelines and, in some cases, were disrespectful.

For customers purchasing online, we delivered products with speed and convenience. Online sales package delivery was not only much faster than last year, it was faster than 2 years ago. Furthermore, we stack up extremely well versus our competition. Using a third-party service, we analyzed competitor websites on a daily basis, and we consistently lead in the proportion of 1 day or less for published shipping time across a sample of higher-volume ZIP codes and higher-demand items.

In addition, we leveraged our stores to drive fast and convenient fulfillment of online orders. In Q2, we continue to see about 60% of our online revenue fulfilled by stores, including in-store or curbside pickup, ship-from-store or Best Buy employees who are delivering product to customers out of more than 450 of our stores. The percent of online sales picked up by customers at our stores was 42%, similar to last year's second quarter. Clearly, the landscape, as it relates to the pandemic, has been changing rapidly and we remain keenly focused on keeping our employees and customers safe.

We are continuing to encourage all employees to get COVID vaccinations by providing them with paid time off when they receive the vaccine and providing them absence time to be used in the event they develop side effects. In June, we launched an employee sweepstakes with more than $100,000 in cash prices to encourage our team members to get vaccinated. To show our appreciation for their hard work and ongoing efforts in the face of pandemic fatigue, we paid employee gratitude bonuses at the beginning of the quarter. In summary, our team has delivered incredible results. To all of our associates across the company, I thank you for your customer obsession, perseverance, and ingenuity.

Of course, while we were driving these great Q2 results, we were also looking to the future. During the quarter, we continued to roll out and run several tests and pilots as we determine the best path forward to become an even more customer-centric, digitally focused and efficient company. We believe this is crucial to thriving in a new and different environment where customers expect to seamlessly interact with physical and digital channels throughout the shopping journey as they seek inspiration, research, convenience and support.

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AUGUST 24, 2021 / 12:00PM, BBY.N - Q2 2022 Best Buy Co Inc Earnings Call

Last year, we introduced a very important membership pilot called Best Buy Beta. As a reminder, it includes unlimited Geek Squad technical support on all of the technology in their home no matter where or when you purchased it, including 24/7 VIP access to dedicated phone and chat teams that are only available to members. It also includes up to 24 months of product protection on most purchases from Best Buy, free delivery and standard installation, exclusive member pricing, a 60-day extended return window and free shipping of online orders, all for $199 per year.

The offer is designed to give our customers the confidence that whatever their technology needs are, we will be there to help. It leverages our unique strengths and what we can provide customers that no one else can. The goal is to create a membership experience that customers will love, which in turn results in a higher customer lifetime value and drives a larger share of CE spend to Best Buy. We are very excited about this membership offer, and we are encouraged by the pilot results. Membership acquisition has exceeded our initial forecast. In addition, data is showing that Beta members interact more frequently and have a higher incremental spend than nonmembers. Given the breadth of the offer, it is resonating well across all customer demographics, and our members are skewing younger than our Total Tech Support membership program. In addition, our employees love telling customers about the program.

We plan to scale the program nationally in stores and online at the end of Q3 under the new name Best Buy Total Tech. As part of the national rollout, we will be converting our 3.1 million existing Total Tech Support members to the new program. I want to stress that the goal of the program is for customers to find value in the benefits and use them often. It is not designed to be a stand-alone,margin-driving service offering, particularly in the near term. In fact, as Matt will discuss later, a full rollout is a near-term investment, which we are confident will be justified with incremental sales growth and long-term customer value.

As it relates to our physical stores and operating model, we are continuing to pilot and test many approaches and formats. Specifically, we are testing more experiential stores, how we can leverage our stores and facilities for more fulfillment purposes and how we can deliver customer experiences with a more flexible, digitally supported and engaged workforce.

We are not going to outline all of our initiatives today, but I would like to provide a few updates and learnings. We have begun implementing the pilot of our new holistic market approach in Charlotte. As we mentioned last quarter, this pilot is designed to leverage all our assets in a portfolio strategy across stores, fulfillment, services, an outlet, lockers, our digital app and both in-store and In-Home Consultation labor.

We will be testing an array of different prototypes, including remodeling a number of stores to 15,000, 25,000 and 35,000 square foot stores as well as launching a few new smaller 5,000 square foot stores. We expect the full rollout of the pilot to span a few quarters. And several store remodels are currently underway, including the transition of 1 store into a new type of outlet. Our current 15 outlet stores focus mainly on large appliance and TV open-box product.

With this new outlet pilot, we will have open-box products from all categories. It will also serve as the hub in a new services repair hub-and-spoke model we are testing as well as an auto tech mega-hub for our car tech installation. Of course, the reason we are piloting and testing so much is because we are trying some unique prototypes, and we need the opportunity to learn and adjust before we roll more broadly.

For example, in our 4 Minneapolis test stores where we reduced the shoppable square footage to 15,000 square feet to provide more space for fulfillment, we have been making adjustments based on customer and employee feedback. We've reflowed some of the layouts, added signage to help customers understand the changes we are testing and added assortment in areas like small appliances, printing and accessories. We will continue to evolve these test stores based on learnings and feedback. As it relates to our Houston experiential 35,000 square foot store pilot, we continue to receive positive feedback from customers and employees on store design and the way we are showcasing products. In addition, year-to-date, this store generated higher revenue than control stores in the double-digit percent range.

Another pilot that we are excited to launch preholiday is our virtual store. For this, we are building out a physical store in one of our distribution centers that will have merchandising and products and will be staffed by dedicated associates, including vendor-provided expert labor, but it will have no physical customers. Instead, customers can interact with our experts via chat, audio, video and screen sharing depending on their preference and be able to see live demos, displays and physical products.

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AUGUST 24, 2021 / 12:00PM, BBY.N - Q2 2022 Best Buy Co Inc Earnings Call

We are excited about the customer use cases this provides. For example, you could be on our dot-com experience, click on a product you like and be connected via video to a Blue Shirt in the Best Buy virtual store and never lead your living room. Or you could be standing in a store, scan a bar code and be taken through your phone directly to this virtual store where an associate could answer your question.

From a fulfillment perspective, our ship-from-store hubs we piloted last year were very successful and we are continuing to iterate on the model. As a reminder, while all stores will continue to ship online orders, we are driving efficiency and effectiveness by consolidating ship-from-store units in a limited number of stores across the country. As we evolve the model overall, we are using fewer stores than last year as hubs.

In addition, we've begun remodeling a subset of stores to deliver an even greater portion of the volume, reducing the sales floor square footage and installing warehouse-grade packaging station equipment and supplies. These 13 locations should be rolled out by holiday and take on about 25% of the national ship-from-store volume. As you would expect, the various tests and pilots are intended to identify how our store portfolio should evolve from the role they serve to their look and feel. As we learn from these tests, we will develop plans that likely include a rollout of investments in more stores and markets.

We have also been evolving our labor model to meet our customers' changing shopping behaviors. For our employees, we are designing for more choice, flexibility and career opportunity. We continue to see momentum with our flexible workforce initiative, which is centered on store employees becoming certified to gain expertise to perform roles outside of their primary job function. At the end of July, 80% of our associates were eligible to flex into different work zones, and 50% of associates have earned 4 or more jobs. This allows our employees and us to schedule shifts more flexibly within the store and between channels, like virtual sales, chat, phone, remote support or employee product delivery. And very soon, we will be able to schedule associates between stores within a market.

This flexibility is important for all of our stores going forward, but even more important for our smaller stores with less labor. This new way of working empowers employees to develop their careers by giving them opportunities to learn new skills, broaden their experience and have more flexibility in their jobs. They are equipped to confidently help customers in more ways. And our data is showing us that once employees add skills they tend to drive a higher customer NPS. It also gives team members the ability to earn a different hourly wage depending on the job performed and the potential for working additional shifts that otherwise may not have been available in their primary job function.

We believe our flexible workforce initiatives can add to our ability to attract and retain our employees, particularly in this tight labor market. And in addition to the training and flexibility we offer, we have also invested significantly in compensation and benefits for our associates. On top of raising our starting wage to $15 last year, we provide a wide array of competitive benefits across many dimensions, including tuition reimbursement, employee product discounts, paid time off for part-time associates, backup child care, child tutor reimbursement, mental health support and many others.

Overall, we are operating with a smaller field workforce than we were prepandemic, which is very reflective how the business model has changed as our online revenue has more than doubled from 2 years ago. We feel like we are largely at the right number as it relates to the strategic evolution of our operating model, the demand we are seeing and the nature of our customer interactions. What is most important right now is to continue to learn and iterate.

As you can imagine, having a more flexible workforce is a very important component of our operating with a smaller workforce. And technology is crucial to its success as well. In fact, technology is the underpinning to the success of our company strategy. We need technology tools and capabilities to help us as we transform and evolve the way we operate. This fact has been clearly reinforced by all of our pilots.

There are a myriad of technology projects in development, but here are just a few examples. We will leverage the electronic sign labels in our stores to make it simpler and more seamless for customers to shop, especially in our stores with smaller shopping square footage. Specifically, we are adding messaging to the labels that mimics our dot-com experience. In other words, customers will easily be able to see if the product is in stock in that store or in another store nearby and when it could be delivered and installed.

We are also piloting mobile app checkout so that customers, particularly grab-and-go customers, can quickly check out without needing to interact with an associate. For our virtual store to really come to life seamlessly for our customers, we are building out a new digital communication platform

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