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BBY.N - Q3 2022 Best Buy Co Inc Earnings Call

EVENT DATE/TIME: NOVEMBER 23, 2021 / 1:00PM GMT

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NOVEMBER 23, 2021 / 1:00PM, BBY.N - Q3 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

Anthony Chinonye Chukumba Loop Capital Markets LLC, Research Division - MD

Brian William Nagel Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

Christopher Michael Horvers JPMorgan Chase & Co, Research Division - Senior Analyst

Elizabeth Lane Suzuki BofA Securities, Research Division - VP

Gregory Scott Melich Evercore ISI Institutional Equities, Research Division - Senior MD

Hannah M. Pittock Morgan Stanley, Research Division - Research Associate

Katharine Amanda McShane Goldman Sachs Group, Inc., Research Division - Equity Analyst

Seth Mckain Basham Wedbush Securities Inc., Research Division - MD of Equity Research

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

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Best Buy's Q3 FY 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 over to Mollie O'Brien, Vice President of Investor Relations.

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.

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NOVEMBER 23, 2021 / 1:00PM, BBY.N - Q3 2022 Best Buy Co Inc Earnings Call

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

Good morning, everyone, and thank you for joining us. Today, we are reporting record Q3 financial results of $11.9 billion in sales and non-GAAP diluted earnings per share of $2.08, which is up 1% over last year and up 84% compared to 2 years ago.

Against a still of all the backdrop, our leaders continue to drive new ways of operating, and our employees continue to do amazing things to support our customers' technology needs in knowledgeable, fast and convenient ways. Our omnichannel capabilities and our ability to inspire and support across all of technology in a way no one else can means we are uniquely positioned to seize the opportunity in this environment and in the future.

We continue to capitalize on strong customer demand as more people sustainably work, entertain, cook and connect at home. And Domestic comparable sales growth was up 2% on top of 23% last year. From a merchandising perspective, the biggest contributors to our comparable sales growth in the quarter were appliances, home theater and mobile phones.

Product availability continued to improve throughout the quarter. We have pockets of constraints in areas like appliances, gaming and mobile phones. Similar to last quarter, however, we do not believe this materially limited our overall sales growth. While we have faced and continue to face supply chain challenges, including delays and higher costs, we are proactively navigating a situation that we have been dealing with for several quarters as our industry has been facing disruptions and supply constraints since early in the pandemic.

Our merchant demand planning and supply chain teams made strategic sourcing and inventory decisions early in the year to set us up well heading into holiday. And we are resourcefully adapting to the constantly evolving environment with actions like pulling up product flow, adjusting store assortment based on availability and acquiring additional alternative transportation. We have deep, long-standing relationships with our transportation and logistics vendors, and they have been incredibly supportive as we navigate.

In addition, through our close partnerships with our product vendors, we have a great deal of visibility into and can influence the status of product in the supply chain process. We have varying degrees of inventory and supply chain challenges every holiday season, and this year will be no different, but we entered Q4 with 15% more inventory year-over-year and feel confident in our ability to serve our customers throughout the holiday.

As expected, we did experience a more promotional environment for many of our products when compared to last year. When compared to 2 years ago, we still saw a less promotional environment during Q3. From a sales channel perspective, results were similar to last quarter. Customers are returning to stores and they are also choosing to interact with us digitally and via phone and chat at much higher rates than pre-pandemic.

Online sales were 31% of Domestic revenue compared to 16% in Q3 of fiscal '20, growing by more than $2 billion during that time. Our app saw 19% increase in unique visitors versus last year, and phone and chat sales continued to climb versus last year and 2 years ago.

We continue to be an industry leader in fast and convenient product fulfillment for our customers. During the third quarter, we reached our fastest small product delivery times ever. Compared to last year, same-day delivery was up 400% and we nearly doubled the percent of products delivered within 1 day. Based on a third-party analysis of competitor websites, we are the leader in 1 day or less published shipping time across a sample of higher-volume ZIP codes and higher demand items.

In addition to partnering with a diversified set of delivery partners, we also thoughtfully used our employee delivery capability as we now have more than 400 stores doing employee deliveries, with almost 60% of our customers living within 10 miles of an employee delivery location. We also have an industry-leadingin-store pickup experience. We have, by far, the broadest assortment of CE products available for pickup, and the process is incredibly fast.

In Q3, more than 90% of online orders that were available for product pickup were ready in less than 30 minutes of the order being placed. Customers clearly find value in coming to our stores to pick up their products as the percent of online sales picked up at our stores remained high at 42%, even with our fast home delivery options, with 1/3 of our store pickup customers choosing our convenient curbside option. And our customer NPS for order pickup in Q3 was up versus last year and 2 years ago. In fact, in the last year, 31% of all our purchasing customers bought online and picked up in store at least once.

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NOVEMBER 23, 2021 / 1:00PM, BBY.N - Q3 2022 Best Buy Co Inc Earnings Call

These strong Q3 results and our market-leading omnichannel capabilities are due to our amazing associates across the company and the investment decisions we have made in the last several years in supply chain, store operations, our people, and technology. Clearly, our business has changed dramatically in the last 2 years, with digital sales more than double pre-pandemic levels and phone, chat, and in-home sales growing. Customers are starting their research and shopping online and then branching out from there to all forms of digital and physical shopping depending on their specific needs.

Stores are crucial to our customer experience, and they need to be even more efficient and must keep pace with greater customer expectations. For example, we know customers sometimes seek out in-person help to answer questions, and other times, they would rather use digital tools to learn about products or pick up their orders in our stores.

We have made the right investment decisions to position us as a leader in omnichannel retailing. While we are proud of our progress, there are even more opportunities ahead of us, and it is more important than ever to build on our position of strength and truly become a customer-obsessed company. This means we put the customer at the heart of all we do by anticipating their needs, listening, learning and applying those insights to create long-term relationships and seamless experiences. That led us to launch Best Buy Totaltech last month.

Totaltech is a bold new membership program, leveraging our strengths across merchandising, fulfillment, installation, tech support, and product repair, unique capabilities that customers value and no one else can match. Our membership program offers product discounts and periodic access to hard-to-get inventory, free delivery and installation, free technical support, free product protection and many other benefits.

Let me provide a tangible example of how the offer can come to life. A Totaltech member purchases a 65-inch TV and gets a $150 member discount. She gets the TV delivered and mounted on the wall in her living room. The next month, she buys a new iPhone for her daughter. As long as she keeps up her membership, she gets 2 years of product protection on the TV she bought and 2 years of AppleCare+ protection for the phone.

A few weeks later, she can't get her laptop to connect to her printer. So she hops on the dedicated chat line with Geek Squad who fixes the problem by remoting into her computer, so she can get on with a productive day of working from home. As a member, she received all those benefits for $199 per year. As you can see, not only do members receive significant savings, they can also be confident that whatever their technology needs are, we will be there to help.

The goal is to create an experience that makes it inconceivable for members to purchase their tech from anyone else, driving a larger share of consumer electronic spend to Best Buy. We successfully rolled out the program nationally and online and converted more than 3 million former tech support members. It is very early as we just launched last month. But so far, we continue to see behaviors that we intend to drive and that we saw in the pilot, including more frequent interaction and higher incremental spend than nonmembers.

Given the breadth of the offer, it is resonating well across all customer demographics and our new members are skewing younger than our former Total Tech Support membership program. NPS numbers across all channels are higher than for nonmembers as well. And importantly, our employees believe in and love articulating the value of membership to our customers.

As we discussed in previous calls, we are in the midst of multiple store pilots and tests. Of course, we are always piloting concepts. But right now, we are very focused on piloting and testing to build a framework that will move us from a retailer that is focused foremost on its stores to a true omnichannel one that provides equal focus on all the ways customers shop with us.

I will provide a few updates on our progress. We launched Phase 1 of our virtual store pilot last month. For this, we built out a physical store in one of our distribution centers with merchandising and products that is staffed with dedicated associates, including vendor-provided expert labor. It has no physical customers. Instead, customers interact with our experts via chat, audio, video and screen sharing depending on their preference and are able to see live demos, displays and physical products.

It is early, and we have not rolled out all the product categories yet, but initial results are showing much higher conversion rates as well as higher average order value than we see with historical chat interactions.

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NOVEMBER 23, 2021 / 1:00PM, BBY.N - Q3 2022 Best Buy Co Inc Earnings Call

In Charlotte, we have made significant progress rolling out the market pilot designed to leverage all our assets in a portfolio strategy across stores, fulfillment services and outlet lockers, our digital app and both in-store and in-home consultation labor. We launched our new outlet featuring all product categories in addition to a new services hub model and remodeled 8 stores. And in Houston, we are continuing to see strong results from our experiential store pilot and plan to roll out aspects of this more broadly in stores across the country as we enter next year.

These are not the only pilots happening, and thus, they aren't the only pilots that will influence where we go as a company. From Northern California to Houston to The Bronx, we are assessing new formats and learning our way to the right physical model. At the same time, we are piloting and evolving our labor models in other markets to meet our customers' changing shopping behaviors. That means leveraging technology in stores that don't have as much labor and developing a much more flexible workforce.

This is a workforce that can not only provide expert help across product categories, both in-store and virtually, but also flex into other activities like curbside fulfillment, and it empowers employees to flexibly pick up shifts at other stores or at our distribution centers.

I also want to highlight our unique ability to both inspire and support our customers through our consultation and our Geek Squad services. We have almost 3,000 consultants and designers to provide free consultations across customers' homes, in stores and virtually. These consultations represent one of our highest NPS experiences consistently over 80. Importantly, they also lead to longer-term and stickier customer relationships as more than 85% of customers who use the program stated they intend to continue shopping with their consultants.

Turning to the product support we provide, as many of you likely know, when something goes wrong with your products or delivery or installation, it is a highly unplanned and often emotional event. Not surprisingly, our customer research tells us that customers value quick response times and demand transparency, fast repair times, and quality repairs from a trusted provider. Our Geek Squad has an industry-leading set of capabilities that garner market-leading NPS and also drive additional revenue for Best Buy in the moment and over time.

Around 20% of our phone and computer repair customers purchase additional products the day they receive the repair. Additionally, our data shows that customers who have phone or computer repairs are far more likely to make a purchase in the following 12 months. Over time, we have also been evolving our partnerships with our vendors in response to changing customer shopping behavior.

Our in-store vendor experiences are crucial to our customer experience and remain a significant source of competitive advantage. We have extended many of these in-store experiences to digital experiences. Our vendors partner with us to provide expert training and tools for our consultants and designers. And importantly, our vendors are increasingly sending sales leads from their own websites to our consultants and designers.

We are also leveraging our unique Geek Squad capabilities to strengthen and expand our partnerships with our vendors. We are already the nation's largest physical destination for Apple authorized repair services, including same-day iPhone repairs, attracting new customers as 1/3 of these Apple repair customers are new or reengaged customers for Best Buy.

In October, we launched Samsung authorized phone repair service nationally. Roughly 30% of our stores will offer same-dayin-store repairs completed by Samsung certified Geek Squad agents, using Samsung parts, diagnostics and tools. Phone repair is a universal need for customers, and this expansion gives Best Buy the capability to repair the overwhelming majority of phones in the marketplace.

In addition, we are also starting to leverage our industry-leading and convenient buy online, pick up in store experience in partnerships with our vendors. Customers purchasing select items on samsung.com now have the option to pick up their products at their local Best Buy store and shoppers purchasing Insignia, Toshiba and Pioneer Fire TVs on amazon.com can pick up their TVs at their local Best Buy stores.

For many of our vendors, we use our considerable supply chain expertise to transport their product often from the country of origin to our distribution centers. In addition to helping our vendors, it allows us to increase our level of visibility into incoming inventory and to garner greater scale.

And finally, we have been investing in our long-standing advertising business, building new capabilities to help vendors effectively reach our customers. Best Buy's relevance, customer relationship, and first-party data have grown along with customers' technology needs and our ability to meet those needs. These are all great examples of value we can provide to our vendor partners that many other retailers cannot.

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