Public Storage Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 23, 2021

There are 9 speakers on the call.

Operator

You, and good morning, everyone. Joining me on the call today are Corey Barry, our CEO and Matt Balounis, our CFO. During the call today, we will be discussing both GAAP and non GAAP 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.

Operator

Financial statements. 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 ks and subsequent 10 Qs for more information on these risks and uncertainties. Filings.

Operator

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. Financial results. I will now turn the call over to Corey.

Speaker 1

Good morning, everyone, and thank you for joining us. Today, we are reporting record Q2 financial results of $11,800,000,000 in sales and non GAAP diluted earnings per share of $2.98 financials. 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 financial, our results are very strong.

Speaker 1

Compared to the Q2 of fiscal 'twenty, revenue is 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. Customers continue to leverage technology to meet their needs and we provided solutions that help them work, learn, entertain, cook and connect at home. Financials. The demand was also bolstered by an overall strong consumer spending aided by government stimulus, improving wages and high savings levels.

Speaker 1

Financials. From a merchandising perspective, we saw strong comparable sales growth in almost all categories. The biggest contributors to the 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. Financials.

Speaker 1

Our merchant, demand planning and supply chain teams once again did an amazing job managing through the difficult and constantly evolving supply chain environment. Financials. They worked strategically to bring in as much inventory as possible during the quarter with actions like acquiring additional 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. Financials. 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.

Speaker 1

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, finance, which was a significant driver of our better than expected profitability in the quarter. During the quarter, we provided customers multiple ways to 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 pre pandemic, as online sales were 32% of domestic revenues compared to 16% in Q2 of fiscal 'twenty. Phone and chat volume also remained very high compared to pre pandemic and sales via these channels continued to climb.

Speaker 1

In addition, of course, we are interacting with customers in their homes, making large product deliveries, installing solutions, repairing products and providing sales consultations.

Speaker 2

Financials. In

Speaker 1

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 2020. Through all of these interactions, across all of these touch points, 98% of surveyed 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 product with feed and convenience. Online sales package delivery was not only much faster than last year, it was faster than 2 years ago.

Speaker 1

Financials. Furthermore, we stack up extremely well versus our competition. Using a third party service, we analyze competitor websites on a daily basis and we consistently lead in the proportion of one day or less for published shipping time across a sample of higher volume zip codes and higher demand items. Financials. In addition, we leveraged our stores to drive fast and convenient fulfillment of online orders.

Speaker 1

In Q2, we continue to see about by 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 customers out of more than 4.50 of our stores. The percent of online sales picked up by customers at our stores was 42%, similar to last year's Q2. 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 prizes to encourage our team members to get vaccinated.

Speaker 1

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. Financials. 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.

Speaker 1

Of course, while we were driving these great Q2 results, we were also looking to the future. Financials. 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. Last year, we introduced a very important membership pilot called Best Buy Data.

Speaker 1

As a reminder, it includes unlimited Geek Squad technical support on all of the technology in your home, no matter where or when you purchased it, including 20 fourseven VIP access to dedicated phone and chat teams that are only available to members. It also includes financial measures, 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. Financials. The offer is designed to give our customers the confidence that whatever their technology needs are, we will be there to help. Financials.

Speaker 1

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 drive the larger share of CE spend to Best Buy. Financials. We are very excited about this membership offer and we are encouraged by the pilot results. Membership acquisition has exceeded our initial forecast.

Speaker 1

In addition, data is showing that beta members interact more frequently and have a higher incremental spend and non members. 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. Financials. We plan to scale the program nationally in stores and online at the end of Q3 under the new name Best Buy Totaltech.

Speaker 1

As part of the national rollout, we will be converting our 3,100,000 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. Funds. It is not designed to be a standalone margin driving service offering, particularly in the near term. In fact, as Matt will discuss later, financials.

Speaker 1

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. 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.

Speaker 1

We will be testing an array of different prototypes, including remodeling a number of stores to 15, 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 one store into a new type of outlet. Our current 15 outlet stores focus mainly on large appliance and TV open box product. Financials. With this new outlet pilot, we will have open box products from all categories.

Speaker 1

It will also serve as the hub in a new services repair hub and spoke model we are testing, as well as an AutoTech mega hub for our car tech installation. Filing. 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 layout, added signage to help customers understand the changes we are testing and added assortment in areas like small appliances, printing and accessories.

Speaker 1

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 pre holiday is our virtual store.

Speaker 1

Financials. 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. We are excited about the customer use cases this provides. For example, filings.

Speaker 1

You could be on our dotcom experience, click on a product you like and be connected via video to a blue shirt in the Best Buy virtual store and never leave your living room. Or you could be standing in a store, scan a barcode and be taken through your phone directly to this virtual store where an associate could answer your questions. From a fulfillment perspective, financing. Our ship from store hubs we piloted last year were very successful and we are continuing to iterate on the model. As a reminder, in a limited number of stores across the country.

Speaker 1

As we have evolved the model overall, we are using fewer stores than last year as hubs. Packaging station equipment and supplies. These 13 locations should be rolled out by holiday and take on about 25% of the national shipped 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.

Speaker 1

Financials. 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 side to gain expertise to perform roles outside of their primary job function. At the end of July, funds.

Speaker 1

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, financial measures.

Speaker 1

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 initiative 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, financials. We have also invested significantly in compensation and benefits for our associates. On top of raising our starting wage to $15 centers last year.

Speaker 1

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 childcare, child tutor reimbursement, mental health support and many others. Financials. Overall, we are operating with a smaller field workforce than we were pre pandemic, which is very reflective of how the business model has changed 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.

Speaker 1

In fact, technology is the underpinning to the success of our company's FETCHI. We need technology tools and capabilities to help us as we transform and evolve the way we operate. Financials. 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.

Speaker 1

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 dotcom 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. Financials. For our virtual store to really come to life seamlessly for our customers, we are building out a new digital communication platform that will combine multiple systems into one experience for call, chat, video and screen sharing.

Speaker 1

This will quickly and seamlessly put our customers in control of how and when they want to be served across these vehicles. Financials. Of course, we are also continuing to make significant investments in fundamental technology capabilities like data and analytics and broader cloud migration in order to drive scale, efficiency and effectiveness. Earlier this month, FAST company named us to its 2021 list of the 100 best workplaces for innovators. This is our first time on the list, which recognizes companies that created cultures of innovation despite the challenges posed by the pandemic.

Speaker 1

Financials. During the quarter, we continued to expand our assortment in newer categories where we can leverage our ability to commercialize new technology. And grew our SKU count by more than 150%. These include new products important to our health strategy, specifically those focused on conditional health management that help customers track blood glucose levels, keep tabs on heart data, managed weight or even help identify allergens in foods. Furthermore, we are working with hospitals and care centers to curate health products for their patients on co branded landing pages.

Speaker 1

Because customers are looking to us to complete their solutions, financials. We are also expanding to additional adjacent categories. For example, we have expanded our assortment in categories like outdoor living as more and more consumers look to make over or upgrade their outdoor spaces. This includes products like patio furniture, grills, fire pits and electric mowers to name a few. Many of these products are available online only as part of our digital first strategy.

Speaker 1

Altogether, they are a small part of our overall business, but growing fast as we continue to add to the assortment. Financials. In the back half of the year, we expect to add more products in the fitness, beauty, sleep, pain management, vision, hearing and electric transportation categories. Before I conclude my prepared remarks, I want to update you on our ongoing commitment to inclusion and diversity and our community. During the Q2, we announced our commitment to spend at least $1,200,000,000 with BIPOC and diverse businesses by 2025.

Speaker 1

Financials. This pledge includes plans to increase all forms of spending with black, indigenous and people of color businesses from nearly every corner of the company, from how we bring goods and services to stores to where and how we advertise. The goal is to create a stronger community of diverse suppliers and to help increase BIPOC representation in the tech industry. In addition, earlier this month, we announced we are investing up to $10,000,000 with financials. The goal of this investment is to help break down the systemic barriers often faced by BIPOC entrepreneurs, including lack of access to funding and empowering the next tech generation.

Speaker 1

To make a difference in our local communities, we are passionate about building out our teen tech center program. These provide teens in disinvested communities access to the training, tools and mentorship needed to seed in post secondary opportunities and careers. We are also building a diverse talent pipeline for jobs of the future. During the second customers can choose to donate when they make a purchase, including at a Best Buy store, bestbuy.com or the Best Buy app. Financials.

Speaker 1

We also just published our 16th annual ESG report, which outlines how we are working across the company to have a positive impact on our planet, employees, customers and communities. In terms of the environment, this past year we exceeded our goal to reduce carbon emissions in our operations by 60% through investments in renewable energy and operational improvements. We are on track to reduce our carbon emissions 75% by 2,030 and we signed the Climate Pledge, committed to be carbon neutral by 2,040, a decade faster than our previous goal of 2,050. Financials. We also have a robust trade in program that brings a useful second life to products that might otherwise sit idle in someone's home or end up in a landfill.

Speaker 1

For products that need to be recycled, we continue to operate the most comprehensive consumer electronics and appliances take back program in the U. S, taking back more than £2,000,000,000 since 2009. Available on our corporate website, our ESG report also outlines the ways we support our employees and communities. Execution of our teams as they continue to safely meet the needs of our customers in ways that I would argue no one else can. Financial results.

Speaker 1

Based on the strength of the business and our expectations for continued customer demand, we are raising our sales outlook for the back half. Financial measures. Of course, the environment as it relates to the pandemic is still rapidly evolving and there is uncertainty as to the associated impact on many important factors, including consumer shopping behavior, share of wallet on services like dining and travel, return to office and return to school. Funds. Furthermore, we continue to believe the holiday season will remain unique against that backdrop.

Speaker 1

That being said, our teams have proven they can and will continue to proactively navigate these factors and they remain ready to respond and adjust the business as the environment potentially changes. Financials. Over the longer term, we are fundamentally in a stronger position than we expected to be in just 2 years ago. Financials. There has been a dramatic and structural increase in the need for technology and we now serve a much larger install base of consumer electronics with customers who have an elevated appetite to upgrade due to constant technology innovation and needs that reflect permanent life changes like hybrid work and streaming entertainment content.

Speaker 1

This is only underscored by the recent Senate passage of the infrastructure bill, which will provide even more access to broadband and give us the opportunity to serve the needs of currently underserved communities. Our unique omnichannel assets, financials, including our ability to inspire what is possible across the breadth of CE products, as well as our ability to keep it all working together the way customers want truly differentiate us going forward in this new landscape. Now, I would like to turn the call over to Matt for details on our results and insights on our outlook for the next quarter and the full year.

Speaker 3

Good morning, everyone. Financial results as the demand for the products and services we provide remained high during the quarter. Financials. On enterprise revenue of $11,800,000,000 we delivered non GAAP diluted earnings per share of $2.98 financials, an increase of 74% versus last year. Our non GAAP operating income rate of 6.9% financials.

Speaker 3

Despite lapping actions to reduce our SG and A spend last year, we were able to leverage our SG and A 20 basis points on the higher sales volume. In addition, a lower effective tax rate had a $0.47 favorable year over year impact on our non GAAP diluted EPS. Financials. As a reminder, in Q2 of last year, our stores were closed to customer traffic for about half the quarter. Financials and earnings release this year to align with the lower sales and channel trends we were seeing and expecting to continue at that point.

Speaker 3

Financial results. As Corey mentioned, when comparing our results against 2 years ago or the Q2 of our fiscal 'twenty, total revenue grew more than 24%. Financial results. Also, our domestic store channel revenue was higher than 2 years ago, despite almost 50 fewer stores and online revenue growth financials. Our enterprise non GAAP operating income rate was 290 basis points higher this quarter than the comparable quarter from 2 years ago.

Speaker 3

Financials. Let me now share a few comments on how our Q2 performance compared to the outlook we shared on our last call. Financials. Enterprise comparable sales growth of 20% was above our estimate of approximately 17%. Our non GAAP gross profit rate improved 80 basis points financials grew 18% compared to last year, which was slightly favorable to our outlook of approximately 20% growth.

Speaker 3

Financials. Let me now share more details specific to our Q2. In our domestic segment, revenue for the quarter increased financials, our comparable sales growth was also 21% for the quarter. Financials. In recent quarters, our revenue growth has been lower than our comparable sales growth due to the loss of revenue from stores that were permanently closed in the past year.

Speaker 3

Financials and fall outside of our comparable sales calculation. As a reminder, our comparable sales calculation includes revenue from all stores that were temporarily closed or operating in our curbside only operating models during the period. This year, We expect to close approximately 30 U. S. Stores compared to roughly 20 closures in each of the last 2 years.

Speaker 3

Consistent with our previous practice, financials. We will make every effort to retain the employees from the closing locations. From a monthly cadence perspective, the strongest sales growth was in May. Financials. As expected, July's monthly comp was the lowest of the quarter as we lap the reopening of our stores in June of last year.

Speaker 3

Financials. Turning now to gross profit, the domestic non GAAP gross profit rate increased 90 basis points to 23.7%. And higher profit sharing revenue from our private label and co branded credit card arrangement. Overall, the promotional mix and sales discounts activity last year. In July, the overall promotional activity increased versus last year, but was still below the levels we experienced during fiscal 2020.

Speaker 3

Moving next to SG and A. Domestic non GAAP SG and A increased 19% compared to last year and decreased 30 basis points as a percentage of revenue. As expected, the largest drivers of the expense increase versus last year were financial measures in our operating model last year. And 3rd, the impact of lapping our COVID related impacts financial measures that resulted in higher costs this year for advertising expense, medical claims expense and our 401 company match. Lastly, we increased investments this year in support of our technology initiatives.

Speaker 3

When comparing to 2 years ago, financials. Domestic non GAAP SG and A increased $94,000,000 and decreased 3 10 basis points as a percentage of revenue. The largest financial measures of the increase versus fiscal 'twenty were higher incentive compensation, technology investments and increased variable costs due to the higher sales volume. Partially offsetting these items was lower store payroll expense. On a non GAAP basis, the effective tax rate was 8.4% versus 23% last year.

Speaker 3

The lower Q2 fiscal 'twenty two rate was primarily due to a multi jurisdiction, financial year non cash benefit from the resolution of certain discrete tax matters. Moving to the balance sheet. Financials. We ended the quarter with $4,300,000,000 in cash. At the end of Q2, our inventory balance was 55% higher than last year's comparable period and financials and financials.

Speaker 3

We are pleased with our plans to support the current demand for technology as well as last year's unusually low inventory balance. The health of our inventory remains very strong. Financials. Let me next share more color on our outlook for the second half of fiscal 'twenty two and our updated assumptions for the full year. Financial results.

Speaker 3

As we entered the year, we expected revenue growth to be positive in the first half of the year and then negative in the back half as we lap the strong comp growth in Q3 and Q4 financials of fiscal 2021. Our original outlook also reflected a scenario in which customers would resume or accelerate spend in areas that were slow during the pandemic, financial measures such as travel and dining out. Although we are seeing some shift in consumer spending occur, the impact high single digit decline we expected entering the year. Like other companies, we continue to monitor the evolving impacts of the pandemic and supply chain pressures driven by global demand. We continue to be confident in our ability to navigate the ever changing environment.

Speaker 3

Financials. For the second half of the year, we expect non GAAP gross path of the year. The primary drivers of the sequential decrease financial results include the impact of rolling out Total Tech, increased promotional activity experienced in the first half of this year, financial results. The gross profit rate pressure of our new membership offering primarily relates to the incremental customer benefits and the associated costs compared to our previous total tech support offer. This financial measures, and this pressure is expected to have a larger impact to our Q4 than in the Q3.

Speaker 3

Financials. Now, I will provide some color specific to our outlook for the Q3. We expect comparable sales to be in the range of down 3% to down 1% to last year, which is on top of our 23% comparable sales growth in the Q3 of last year. Financials. Our revenue growth to start this quarter has been approximately flat to last year for the 1st 3 weeks.

Speaker 3

From a gross profit rate perspective, financials. As we expect the lapping of last year's $40,000,000 foundation to the Best Buy Foundation and lower incentive compensation to be largely offset by increased technology investments and higher advertising expense. Turning to our full year outlook, we expect the following: enterprise revenue in the range of $51,000,000,000 financials to $52,000,000,000 comparable sales growth of 9% to 11% and a non GAAP financial results. For SG and A, we expect growth of approximately 9%, which financials, compares to the prior outlook of 6% to 7% growth. The increased expense is primarily due to higher store payroll costs and other variable items associated with the higher sales outlook.

Speaker 3

In addition, we expect the incentive of compensation for the full year to increase by approximately $275,000,000 financials or at the high end of our previously provided range. We expect our non GAAP effective tax rate to be approximately 20%. Financials. We expect capital expenditures to be in the range of $800,000,000 to $850,000,000 And lastly, we expect to spend at least financials. We have successfully adapted to various changes to our operating model and a dramatic shift in customer shopping behavior.

Speaker 3

We have seen a surge in reliance and demand for technology financials as our customers also adapt to their changing needs. The result is that we now expect our sales will surpass $51,000,000,000 this year. That is more than $7,000,000,000 of increased sales over a 2 year period. Financials. Thank you to all our employees for driving these amazing results.

Speaker 3

I will now turn the call over to the operators for questions.

Speaker 2

GAAP. We'll move on to our first question from Stephen Forbes of Guggenheim Securities. Please go ahead. Your line is now open.

Speaker 4

Financials. Good morning. I wanted to focus on the pricing and promotional environment together. The first part right is as financial measures and how the industry as a whole is sort of addressing these, right? Is everyone sort of passing them through?

Speaker 4

Financials. Do you see potential increases in promotional activity? And then the follow-up to that is, as we think about Can you sort of talk about the expectation right for holiday as a whole as it relates to frequency and depth of promotional activity? Thank

Speaker 3

Why don't I start and then Corey can jump in. I think there's a few questions in there. Overall, financials. What we're seeing was the first half of this year was less promotional, similar to the trends we experienced last year during the pandemic. Financial statements.

Speaker 3

As I said in my comments, we are starting to see us lap those periods of very low promotionality. Items as in July, we're actually seeing the mix of items on promotion and the discounts associated with promotions are actually higher than last year. Financials, more than last year, but still higher than still less promotional than 2 years ago. And so we do see that increasing. And over that period of items.

Speaker 1

At the

Speaker 3

time where promotions have been lower, customers have been essentially paying higher prices because of the cost we haven't been promoting as much. And so that's certainly part of the aspect. Financials. Also within pricing, we certainly are seeing a little bit of inflation as well But I wouldn't expect inflation as it relates to pricing to be significant.

Speaker 1

And I would just simply underscore, our Priority is always to be priced competitively. And that will be the case no matter what's coming through the costing side of things. And as we head into holiday specifically to that part of your question, we said even in the prepared remarks. We would expect the back half to be more promotional and Matt alluded to July being a little bit of that lead in to what we're seeing. And we would expect the products that we sell to be products that people really want for holiday and therefore that environment to heat up life going forward.

Speaker 5

Financials. Thank you.

Speaker 3

Thank you.

Speaker 2

We will now move on to our next question from Peter Keith of Piper Sandler. Please go ahead. Your line is open.

Speaker 3

Hey, good morning, everyone. Thanks so much. Great results here. I was hoping you could flesh out a little bit more membership program, it seems interesting. Can you confirm that's going to be in all stores by year end?

Speaker 3

And then with the gross margin financials. Thank

Speaker 5

you, Peter. I'll start and

Speaker 1

then Matt can talk a little bit about financial ramifications. So what was important to us in beta was understanding how can we build on some of what we're learning in total tech support in terms of what our customers love, but add on to that what we think will continue to provide them value over time. Like many membership programs, ours is continuing to evolve based on what we are learning distinctly from our customers. And so, we started testing beta actually just at the very beginning of this fiscal year. And as we said in the prepared remarks, we're definitely seeing uptake that is greater than both what we expected, greater than what we were seeing in Total Tech Support.

Speaker 1

And I think it's this combination of features that we talked about in the prepared remarks that are making our customers come to us more frequently and like we also said, spend a bit more each time that they're coming to see us because you have this combination that keeps customers very sticky to the Best Buy brand. And so this is really an evolution of what we have learned in total support, started testing the very beginning of this year and then we plan to actually roll out toward the end of Q3. So it will be in place like Matt said and have a bigger impact for Q4. But the key for us is that we expect the membership to grow faster than what we saw in TTS and we've seen it play out in the pilot and we're going to keep iterating on the offers, frankly, depending on what it is that customers really value and what it is that keeps them loving our brand and very loyal to the brand. I'll let Matt talk a little bit about the financial implications.

Speaker 3

Yes, thank you. Thanks for the question, Peter. Essentially, as you would imagine, the GAAP associated with Total Tech. It just has more enhanced benefits than what we had offering in TTS. And that is essentially driving the gross margin profit gross margin impact in the back half of this year.

Speaker 3

The intent of Total Tech is not to actually financial measures. So the short term impact certainly is going to be a gross profit rate impact. As you look forward, the intent is for not to be gross profit accretive

Speaker 5

financials. Thank you.

Speaker 2

We'll now move on to our next question from Michael Lasser of UBS. Please go ahead. Your line is open. Financials.

Speaker 6

Your guidance now includes the expectations that your comps can be flat financials. Down in the second half of this year versus last year, you previously assumed that you could be more like items down high single digits. It sounds like the difference being that consumers have yet to really shift their wallet It's going to happen. It's just that it's not going to happen in the second half of the year and it's going to be more like a 2022 event. Financials.

Speaker 6

And within that, can you also give us an indication how you factored in any sort of composition of your inventory inventory in the back half, meaning while it's up significantly overall, financials. Are there any areas where you might be a little short on inventory that would lead to some out of stock repackage that into

Speaker 1

financials. So I will start, particularly on the wallet shift question. Financials. We noted in the prepared remarks that we definitely are seeing that shift happen slower than what we thought. And it's less than a shift.

Speaker 1

It's actually been side. For a while, we're seeing growth in both sides. And as Matt said, as the pandemic has kind of redoubled its efforts, we've seen it shifting away a little bit from some of the experiences, but we've just seen this growth continue honestly in both experiences and on the retail side. Financials. I think we're pragmatic and we've said in the prepared remarks, we believe at some point that will that shift will continue to happen.

Speaker 1

I think it is being pushed out of it. But importantly, there are also systemic changes that have happened in the way that all of us live, right? If you think about something like hybrid work models. That's not just something that's going to happen in the back half or in a quarter. That is likely a new way of working going forward or streaming and the amount of streaming content.

Speaker 1

That's not just in the moment change. That is a change in how people will consume content going forward. Financials. And so I think honestly, you have a little bit of both sides here. You have real systemic changes that have happened in the way that we live.

Speaker 1

And there's I think been a push out in people really shifting hard that spending to experiences. And then part of that just being how healthy the consumer is in terms of still savings rates that are at all highs and very healthy balance sheets access to credit and all of those fundamentals staying really solid, I think is helping buoy this demand across both experiences and retail.

Speaker 3

Yes, and I'll just add a little bit. Corey did a great job explaining the consumer side of that. I think overall, as you talked We are now expecting flat to down 3% in the back half and that's much better than we had expected at the end of last quarter, which was more closer to down approximately 8%. I think one of the things I would add to that situation is inventory. We feel like we're in a good spot as we look The back half of this year, I think you asked about inventory.

Speaker 3

We are still seeing pockets of inventory. But quite honestly, we're in a really healthy strong position and are preparing ourselves very, items very well for the holiday season. So that clearly adds to our optimism to the back half as well. There are still a lot of uncertainties as you look at it, but we'll

Speaker 6

financials. And my follow-up question is on the promotional environment and gross margin. You mentioned that July, you saw promotions higher than they were in 2020, but still down items from where they were in 2019. So how have you factored in your gross margin expectation for the next couple of quarters financials. Where the promotional environment is going to be?

Speaker 6

Will it still be higher than or below 2019? And under what financial conditions. Could you see some of the other players in the state start to become more promotional than they were in 2019, especially

Speaker 3

financials. We will be very aware of what our competitors are doing in the back half whether it's back to school or the holiday season, so we'll always be prepared to adjust as appropriately. We are very thoughtful about financials. How we compete and where we compete in being thoughtful managers of the P and L, if you will. But overall, I would say The promotionality, we would say probably a little bit higher than what we experienced last year or fiscal 2021, but still financials.

Speaker 3

Less promotional than we saw in fiscal 'twenty starting right now. Again, we'll look at that and manage it as it comes and as we see the holiday unfold a little bit,

Speaker 6

Thank you very much and good luck. Thank you.

Speaker 2

We'll now take our next question from Karen Short of

Speaker 5

GAAP. Just a couple of questions to clarify. First of all, on the gross margin, so it's Fair to say that with respect to the rollout of Best Buy total tax that, that will pressure gross margins through 3Q of next year? That's just a clarification. And then my big more picture question was, when you think about the overall higher installed base of consumer electronics since this pandemic began.

Speaker 5

Wondering if you could give a little color on how you see actually see the acceleration in the innovation cycle playing out, meaning obviously we'll have shorter and shorter life cycles leading to needs to upgrade more frequently, but wondering if

Speaker 1

you could just contextualize that a little bit.

Speaker 3

Thanks for the question, Karen. Yes, I'll start and then Corey can jump in on the last part of the question. We're not ready to guide next year yet, So certainly we are expecting Total Tech to pressure Q3 of this year and Q4 of this year as we roll it out. GAAP. It's supposed to be used and with that usage will come more cost, but overall, we do expect it to grow our sales over the long term and increase our improve our experiences, increase that wallet share.

Speaker 3

So, it's a bit early to tell how that impacts next year, but we'll obviously update people as we learn more.

Speaker 1

Electronics. And in many cases, it's because people have consumer electronics for multiple locations and use cases in their lives, right? In hybrid work model. I might have one set up at home. I might have one set up at work.

Speaker 1

I might even have one set up for on the go. And so you've seen this deeper penetration than ever fiber into people's homes and lives. What's interesting about that is what you hit on in terms of innovation. I mean, obviously, you've got some of the world's largest companies, that have both benefited from that deeper penetration, but also of course are going to continue to innovate in a way that will inspire customers to replace. And we're definitely seeing to your point those replacement cycles condensing down as new attributes are coming online that are really useful to people.

Speaker 1

I mean, if you think about the evolution of just cameras in computers over the last year because so many people are using video. Now you've got cameras that track you even in tablets. And so there's just going to be this constant drive to be the next pricing, new interesting features and attributes that you add to products. And really what's fascinating is based on survey data that we're looking at right now, expense. Intense of purchase still remains very high in the next 12 month window, which to us says you've got people who already are trying to think about what might be that next products either add on or upgrade that's going to help me live through maybe another year of on and off at home schooling or another extended period of working from home.

Speaker 1

And so while these are really difficult numbers to get our arms around in terms of upgrade frequency, We are for sure seeing a customer that more and more often is looking for those new attributes and then importantly vendor partners who are really working hard to create that next suite of solutions that will kind of solve what we just talked about as being really fundamental structural changes in how we're living our lives.

Speaker 5

Great. Thanks very much for the color and great quarter.

Speaker 1

Thank you.

Speaker 2

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

Speaker 7

Financials. Hi, good morning. Great quarter. I was hoping you could talk a little bit more about the outlook for comps as you think about categories. Obviously, in 2Q, very strong results on a 1 year and 2 year basis across the board.

Speaker 7

With comps having slowed a bit and the guidance for results to be declining in the quarters ahead here. How are you thinking about the categories that are going to be strongest in the weakness? Thank you.

Speaker 3

Yes, I think there's a lot of categories that we'll continue to see opportunities and growth in the back half of the year. Obviously, there's financials. Gaming could be an opportunity as you look at the last 6 months of this year depending upon the levels of inventory that we receive. Clearly, home theater has opportunities as it always does in the back half of the year, especially with the holiday season. So those are some of the bigger ones.

Speaker 3

I'd say computing might be an area where it might be a little it might be slow based on the immense demand that it's had over the last several years

Speaker 1

talked about that we're expanding into, while not as big, definitely provides some growth opportunity as well as likely some new product launches here in the back half that always stimulate back to the question about constant innovation that always stimulate a little bit of demand as well.

Speaker 7

Great. And Cory, if I could follow-up with a longer term question about healthcare, I was wondering if you

Speaker 8

could just give us

Speaker 7

an update on how optimistic you're feeling about that growth initiative going forward. You did mention partnerships with hospitals and care centers that you're working on, but how are you feeling today versus the Analyst Day a couple of years ago in terms of the growth opportunity in healthcare?

Speaker 5

Financial measures. Yes, so just

Speaker 1

as a reminder, there are 3 main aspects to our healthcare strategy. The first is the consumer health category. We talked a lot about that today, which is how you monitor our chronic conditions such as diabetes or heart disease and expanding our assortment of health care products, in the way that only we can when it comes to commercializing new technology. The second area is active aging, which is all about emergency response device based tools that can help those who wish to live independently in their homes. And that builds on some of the acquisitions that we've already seen.

Speaker 1

And then the third, which is a little bit more nascent is virtual care, and that includes digital health caring center services that can connect patients and physicians to enable virtual care and remote patient monitoring. That was the most nascent, and that one will take the longest to develop. Help people manage their own care is absolutely incredible. And so on the consumer side, we feel really strong as well as the active aging side where we're starting to see that business rebound, especially as we're starting to see more people come back into our stores. And I think the appetite as you think about virtual care, especially given the last 18 months that we've all gone through and that ability to not always rely on an in person hospital visit, but instead be able to monitor some of your vitals.

Speaker 1

I think, obviously, there's an even greater use case now than there was 18 months ago. So when I put all of that together, I think broadly, we remain really optimistic about how the future of healthcare can be changed through technology and the role that we can play in that.

Speaker 2

We'll now move on to our next question from Scott Mushkin of R5 Capital. Please go ahead. Your line is open.

Speaker 8

Financials. Yes, guys. Thanks for taking my questions. I had 2, and one was just trying to get my arms a little bit better around that 4th quarter And what it might look like from an inventory perspective, from a margin perspective and from an inflation perspective, it just seems and the Q4 is always a challenge. But

Speaker 3

Yes. Thanks, Scott. I think I'll start and Cory might need to jump on the last part there. I think overall for the Q4, we We're very confident that we are going to have inventory to meet and support the demand of our customers. There's always a level of constrained inventory when you get into Q4.

Speaker 3

Side, but we have a high degree as we've talked about transferability between categories and within category assortment to meet customers' demand. So we're feeling good there. I think overall from a gross profit perspective or profit perspective, one of the we did talk about how we

Speaker 1

financials.

Speaker 8

Terrific. I appreciate the color. And then my second question is what you guys talked about with the holistic market approach down in Charlotte. Again, just looking for a little bit maybe a little bit more detail. Are you guys going to be remodeling all the stores?

Speaker 8

How many stores do you have down there? When will it be complete? Just any more details around that? That sounds very exciting.

Speaker 1

Yes, I am excited about what we're working on in Charlotte, because I think it uniquely leverages all of our assets across both our physical assets, our stores. Pricing. And for the most part, we aren't touching every single store. There will be a number of remodels, but it's not every single one. But it also leverages our unique people assets, our consultants and designers and advisors in our stores and leverage them across not just like conventional store footprint, but also in places like an outlet or in places like an auto tech mega hub, which might have 8 or 10 auto bays where you can work on all the cars together as an example.

Speaker 1

And we said in the call, I think it's going to take couple of quarters for us to roll everything out in the market. And then obviously, there's still our operating model changes that go with that as you learn how to more flexibly operate all of these models. Financials, but the goal for us is balancing not this isn't just about like quantity of stores. This is about what you want each of your physical footprints to do for you and then the operating model and the people flexibly working around that physical footprint in a way that uniquely provides customers both that inspiration and support that we offer that really no one else can. And so I think this is our very best foot forward, not just on one concept, but trying to put all concepts together and say, if I want to serve a market, how might I help a customer navigate different Best Buy experiences and also help our employees work more flexibly across all those experiences.

Speaker 8

Perfect. Thanks. I just want to see you

Speaker 3

guys oh, I was going to say these

Speaker 8

guys have done an incredible job even what's been thrown at you. So Nice work.

Speaker 1

Thank you very much. That means a lot. So I just want to close by saying thank you again to all of our amazing associates. And thank you all so much for joining us today. We look forward to updating you on our results and our progress during our next call coming up in November.

Speaker 1

Financials. Have a great day.

Remove Ads
Powered by Quartr
Earnings Conference Call
Public Storage Q2 2022
00:00 / 00:00
Remove Ads