Corie Sue Barry
Chief Executive Officer and Director at Best Buy
Good morning everyone and thank you for joining us. Today we are reporting Q4 sales results in-line with our expectations and better-than-expected profitability. We knew customers would be looking for joy during the holiday, but would also be seeking great value, given the pressures of inflation. Consumers responded to our compelling deals and as we predicted their shopping patterns were more similar to historical holiday periods than what we saw the last two years. Specifically, customer shopping activity was more concentrated on Black Friday week, Cyber Monday and the last two weeks of December than last year. Customers continued to choose us for the expertise, service and overall value we provide across all channels. Our customer satisfaction scores indicate that our talented teams and omnichannel capabilities delivered better experiences during the critical holiday period this year compared to both last year and the pre pandemic fourth quarter of fiscal 2020, especially within our services and delivery experiences. Throughout the quarter, we were committed to balancing our near-term response to current conditions and managing well what is in our control, while also advancing our strategic initiatives and investing in areas important for our long-term performance.
Each and every day our management team and employees across the company are making tough trade-off decisions. Our Q4 comparable sales were down 9.3% on a year-over-year basis. Our non-GAAP operating income rate of 4.8% was higher-than-expected. The promotional environment in the fourth quarter was more intense than last year. However, the related financial pressure was less-than-expected and contributed to a stronger gross profit rate performance. As a reminder, we first began to see promotional activity return in the back-half of calendar 2021, since then it has proliferated across categories and we would characterize the promotional environment for consumer electronics as essentially normalized back to pre pandemic 2019 at this point.
We continued to manage our inventory very effectively and are focused on maintaining targeted weeks of supply that we believe are appropriate for the current business trends. Our inventory at the end of Q4 was down 14% from the fourth quarter of last year and is essentially in-line with our sales trajectory versus pre pandemic fiscal 2020. From a merchandising perspective, the largest impacts to our domestic comparable sales decline came from computing, home theater, appliances and mobile phones, partially offset by growth in gaming and tablets.
Our organics were similar to last quarter with our blended average selling price or ASP down low-single digits on a year-over-year basis. ASPs will likely continue to be lower on a year-over-year basis as we start the year until we lap the full return of promotional activity that occurred in the second-half of last year. Compared to fiscal 2020 ASPs continue to be quite a bit higher and we believe they will likely remain higher going-forward. As we've shared previously, this is due to category mix with the growth of higher ASP appliances and large TVs, as well as more mix into premium products at higher price points.
I am proud of our team's execution and their relentless focus on providing amazing service to our customers, while also managing the business for future growth during what continues to be a challenging environment for our industry. As we enter fiscal 2024, macroeconomic headwinds will likely result in continued volatility and we are preparing for another down year for the CE industry, we are expecting the most comparable sales pressure in the first-quarter as year-over-year compares ease through the year. Based on what we can see right now, we believe that calendar 2023 will be the bottom for the decline in tech demand. There are several factors driving the expected return of industry growth, which could occur next year depending on the macro-environment.
First, we continue to see evidence that much of the growth during the pandemic was incremental, creating a larger installed-base of technology products in consumers' homes. On average, US households now have twice as many connected devices as they did in 2019 and consumers indicate that more of their tech purchases are need-based and want based. For example, in our recent surveys, the majority of consumers indicated that most tech purchases are for functional reasons versus emotional ones. Second, we will start to see the benefit of the natural upgrade and replacement cycles for the tech bot early in the pandemic kick in, possibly later this year depending on the macro-environment, even more likely in calendar 2024 and 2025.
Historically, customers upgrade or replace their tech every three to seven years depending on the category with mobile phones on the lower-end, computing in the middle and home theater and large appliances toward the higher-end of that range. Third, this is not a static industry, billions of dollars of R&D spent by some of the world's largest companies and likely some we haven't even heard of yet means innovation is constant, driving interest, upgrades and experimentation. That innovation has largely been paused since the pandemic began and the focus shifted to production and we believe there will be a desire from our vendor partners to stimulate those replacement cycles or build completely new categories going-forward.
Additionally, there are several macro trends that we believe should drive opportunities in our business over-time. For example, cloud and augmented reality will increasingly lead to new capabilities and customer experiences. The cloud solved significant customer pain points by making it much easier and faster to transfer your data and existing device preferences to the next-generation of product, which creates customer interest in upgrading more frequently. In the augmented reality space, we believe significant develops developments are coming that will generate dramatic change in many products over-time. Also, the recent government infrastructure funding allocated to expand broadband Internet access to more Americans provides additional support for these macro trends and incremental access to broadband is proven to help fuel tech demand.
And as we noted, since the beginning of the pandemic the vendor community has been more focused on making product rather than refreshing product and we believe the industry will get back to more of a normalized pace of meaningful innovation towards the end of calendar 2023 and into 2024. Specific innovation we expect to see this year and our larger product categories include dual screen and foldable laptops in computing and personalization in large appliances. In home theater beyond traditional panel innovation, we're seeing more of a lifestyle type approach to innovation. For example, there is growing popularity of new high-performance audio and video products, including TVs, projectors and speakers that more seamlessly blend into a room versus older technology that takes up a substantially larger physical footprint in the home.
While all our product categories have slightly different timing nuances, in general they are poised for growth in the coming years. In addition, we are continuing our expansion into newer categories like wellness technology, personal electric transportation, outdoor living and electric car charging. We are the CE experts and the best place for customers to see existing and new tech and get advice and support. In our August 2020 Earnings Call during the first year of the pandemic we said we believed customer shopping behavior would be permanently changed in a way that is even more digital and puts the customer entirely in control to shop how they want and our strategy was to embrace that reality and to lead, not follow.
With that as backdrop, we are building out our suite of unique assets that deliver customer experiences no one else can and that we believe makes us a compelling retailer of the future. As we do this, we are carefully balancing our short and long-term initiatives, given the volatile environment. There are five main areas we are strategically focused on, we will not dive deeply into all of them today. One, evolving our omni-channel retail model, two-building customer relationships through membership, three incubating and growing Best Buy Health, four removing costs and improving efficiency and effectiveness and five unlocking reverse secondary market opportunity.
I will now provide more detail on the evolution of our omnichannel retail model. In fiscal 2023, digital sales comprised 33% of our domestic revenue compared to 19% in fiscal 2020. Sales via phone, chat and virtual have also remained significantly higher. Even with that shift, our stores remain a cornerstone of our differentiation not only at 67% of our domestic revenue transacted in our stores, more than half of our identified customers engaged in cross-channel shopping experiences and of course more than 40% of online sales are picked-up in-stores. Further, we play an incredibly important role for our vendors as the only national CE specialty retailer who can showcase their products and help commercialize their new technology.
We were already a leading omnichannel retailer, heading into the pandemic. However, we knew that in order to stay relevant in an increasingly digital age we needed to evolve our omnichannel retail model strategy and within that, our portfolio of stores needed to provide customers with differentiated experiences and multi-channel fulfillment. We also needed them to become more cost-efficient to operate, while remaining a great place to work. Over the past three years, we have been optimizing our store staffing model to reflect the changes in customer shopping behavior and to fuel investments and higher wages.
We have also been rapidly testing different store formats and operating models. During those three years, we closed approximately 70 large-format stores or 7% including 17 closing this week through our normal stringent lease review process. At the same time, we opened four new stores, including new smaller store formats and relocated six stores. In addition, we completed 44 remodels to our 35,000 square-foot experience store format. Finally, we boosted our technology development and our digital tools, including our app to drive customer satisfaction, employee satisfaction and increased efficiency in our stores.
Now, I would like to provide our high-level plans to refresh our US store portfolio over the long-term. We will continue to close an average of 15 to 20 traditional large-format stores per year through our normal lease review process. We will also continue to scale our experience store remodels. As we have shared previously, this format has more premium experiences and a 35,000 square-foot selling area, showcasing the very best of Best Buy. We will decrease the selling square footage and adjust the assortment and merchandising strategy in many of our stores, the shift to digital sales and the resulting lower in-store revenue, in addition to a much larger percent of high ASP appliances sales has pressured our operating model and working capital.
For context, roughly 80% of the SKUs we display on our sales floor, sell one or few per week. In these core medium-sized stores, some of the selling square footage will be shifted into larger backrooms so the total square footage of these stores is not expected to change materially. Our stores have multiple purposes now and a larger backroom provides better support for other capabilities like our high-rate of in-store pickup of online orders.
In addition, we see significant opportunity to leverage these larger store warehouses and our supply-chain expertise to help our vendor community fulfill a larger portion of their direct-to-consumer channel. In addition, we will open more outlet stores that support our value-focused customers. These stores are driving a higher mix of new and reengaged customers, in addition to a better financial recovery on open box and return product. Over-time, we believe we can also leverage these outlet locations to help our vendor community with their own open box and refurbished goods that are coming from other channels.
As it relates to our small format pilots that focus on tech essentials we will continue to monitor them to determine the go-forward plan. We believe there is an opportunity for these to be growth vehicles in underserved urban neighborhoods, as well as small remote markets. We're utilizing a market-based approach to evolve our stores. This means we're moving away from a one-size fits-all model to a portfolio comprised of store formats and fulfillment solutions appropriately sized and working together to efficiently serve our market.
From a timing perspective, as you would expect, we're going to phase face changes in-line with how the business evolves. We view our store portfolio evolution as a long-range rolling plan continually making adjustments each year with a sustainable annual investment over time. For fiscal 2024, specifically our plans include closing 20 to 30 large-format stores, implementing eight experience store remodels and opening around 10 additional outlet stores. In addition, we plan to complete two remodels of our medium core format. We expect to incur approximately $200 million in capital expenditures for both these physical store changes and routine store resets and maintenance.
This is down approximately $100 million from last year. Of course, at the same time, we will continue to evolve our operating model to match the lower selling square footage and the ongoing evolution of our business model. Over the past three years, our overall head count has declined by approximately 25,000 people or 20% as we adapted to the shift in customer shopping behavior and in the effort to drive more flexibility. Our most recent restructuring activities will allow us to invest more in our customer-facing labor and at the same time drive increased ability to flex labor spend with revenue fluctuations. Stepping back, we expect the evolution of our store portfolio and operating model to drive sales lift inefficiencies over time.
Most importantly, these changes are necessary to relieve the pressures of a changing world, a world in which customers are in control an increasingly more digital and the cost to operate physical stores such as rent and labor are not likely going to come down. Now, I'd like to talk about membership and its role in driving deeper relationships with our customers. As we said last quarter, in fiscal 2024, we will continue to iterate our programs based on the macro-environment and what is most relevant to our customers. I'll start with an update on our entry tier of membership, our My Best Buy Program. For context, we have approximately 100 million members with 40 to 45 million members active per year.
My Best Buy has long been a points-based loyalty program. The efficacy of points programs has been declining over-time and as we analyze the data and talk to our customers we found free shipping resonated even more than 1% back on their purchases. As a result, earlier this year, we added free shipping for all purchases with no minimum purchase. At the same time, we transitioned the ability to earn points solely to purchases made on our co-branded credit cards. Our credit card members will continue to earn 5% back in rewards on their purchases at Best Buy in addition to flexible financing options. Thus far, feedback indicates that the changes are resonating with our customers.
Moving on to Totaltech, our comprehensive paid membership that includes 24/7 technical support, product protection for all your tech products, special member pricing and much more. We launched it knowing it was a bold new membership program, unlike anything else in the retail industry. Our investment thesis remains very much intact. Members are engaging more frequently with us, shifting their tech spending to Best Buy and buying more cross-category than non-members.
Additionally, members continue to rate our experiences higher. Our net promoter scores from Totaltech members remain considerably higher than non-members. Like we did with My Best Buy we have been studying these customers closely in the first year of the program to really understand what drives, not just acquisition but engagement with us. We're going to use that data to evolve our membership proposition. For example, we will tailor the offer with the intention of retaining customers at increasingly higher levels, at the same time explore a tiered approach that may resonate with an even bigger population of customers.
We mentioned on our November call that we plan to iterate in ways that reduce the cost-to-serve and we're leveraging member usage and retention data to do so. We've made two small changes already with more planned this year. These two changes were adding back restocking fees for certain product returns and removing free same day delivery as a benefit. From a financial perspective we lapped the financial pressure from the initial investment impact late in Q3 and the program had a neutral year-over-year impact on Q4.
We expect membership to contribute to operating income rate expansion from here as the program continues to build and we iterate on the offering. In fiscal 2024, specifically, we expect our membership program changes, including My Best Buy changes to drive approximately 25 basis points of enterprise operating income rate expansion, which will primarily be in the back-half of the year. We expect to share more details on the coming planned changes on our May call. Transitioning to Best Buy Health, the role of technology within healthcare is becoming more important than ever, and our strategy is to enable care at-home for everyone. In fiscal 2024, we expect to grow Best Buy Health sales faster than the base business. We also expect to drive a higher mix of our more profitable and unique service plans and deliver cost optimization in our active aging business.
We expect these initiatives to drive approximately 10 basis-points of enterprise operating income rate expansion. I want to spend a few minutes on our care at-home solution that leverages Current Health. Our leading technology platform that brings together remote patient monitoring, telehealth a full support model and patient engagement into a single solution for healthcare providers and pharmaceutical company. Boosted by its affiliation with Best Buy, Current Health had its best commercial booking year ever last year and we now have relationships with 5 of the top 10 largest health systems in the US. These names include Geissinger, Mt. Sinai Health System, NYU Langone Health and others.
40% of our provider clients launched in Q4, demonstrating our momentum. We also just began a 3-year development partnership with Advocate Health. This partnership will leverage Advocate Health nationally leading hospital at-home program providing care to a population of over 6 million people and Best Buy's technology expertise. Together, we will develop enhanced capabilities and better patient experiences for both Advocate Health and other health systems around the country. We are excited about the momentum of care at-home but it is still a nascent emerging part of the healthcare industry. We are essentially nurturing a startup within a large-scale organization and leveraging Best Buy's core assets, including the Geek Squad to incubate a new business. The revenue contribution is currently very small and will take time to ramp as the care home space matures and expands over the coming years.
Before turning the call over to Matt, I would like to provide a few updates on our commitment to our employees and communities we serve. We know our employees and the expert service they provide are our core competitive differentiator and we are maniacally focused on driving positive employee experience and engagement. Of course, the competitive compensation continues to be table stakes, and we've increased our store associate hourly pay approximately 25% in the last three years. Additionally, external research supports our belief that employees are increasingly prioritizing human factors at their jobs, including well being, work-life balance, career development and culture.
Our unique way of managing our portfolio of employee benefits, coupled with the intentional approach to provide latter and latest career movement at all levels helps counteract the market pressures of rising wage rates in retail. We serve customers in a multitude of ways, in-store, in-home and virtually providing many opportunities for employees to upskill and reskill and ultimately choose the path that's right for them at Best Buy. 60% of our General Managers started at Best Buy in non-leadership role and 94% of our general managers and assistant managers year-to-date were hired internally. We are gratified that our employee retention rates continue to outperform the retail industry.
From a community standpoint, we finished the year with 52 Best Buy Teen Tech Centers and are well on our way to accomplishing our goal of 100. These centers continue to provide young people in our communities with the access, inspiration and opportunity they deserve to help them define their futures. I am proud to say that Best Buy continues to be recognized for the many ways we are supporting our employees and communities. In Q4, we ranked 34th and we're the number-one retailer on the JUST Capital list that evaluates and rates the largest publicly-traded companies in the US in part on how a company invest in its workers, supports its communities and minimizes environmental impact.
In summary, we believe the macro and industry backdrop will continue to be volatile this year. We have a proven track-record of navigating well through dynamic and challenging environment and we will continue to adjust as the macro evolves. At the same time, we remain incredibly excited about our future. We believe our differentiated abilities and ongoing investments in our business will drive compelling financial returns over-time. And we are carefully balancing our reaction to the current environment with focus on our strategic initiatives. The structural hypothesis, we laid out at our investor update last year remains true. There are more technology products than ever in people's homes. Technology is increasingly a necessity in our lives and we uniquely are there for our customers, as they continue to navigate this innovative space. We are in this for the long-term and believe our purpose to enrich lives through technology is only more relevant in the future.
I will now turn the call over to Matt for more details on our fourth quarter financials and fiscal 2024 outlook.
