Corie Barry
Chief Executive Officer at Best Buy
Good morning, everyone, and thank you for joining us. Today, we are reporting Q1 sales results that are right in line with the expectations we shared in March, and profitability that was better than expected, demonstrating our strong operational execution. We are appropriately balancing the need to adjust in response to the current industry sales trends with the need to invest so we can capitalize on opportunities as our industry moves through this downturn and returns to growth.
In this environment, customers are clearly feeling cautious and making trade-off decisions as they continue to deal with high inflation and low consumer confidence due to a number of factors. At the same time, in Q1, we saw our purchasing customer behavior remain relatively consistent in terms of demographics and the percent of purchases categorized as premium. In addition, our focus on being there for our customers with expertise and support was highlighted by material improvements in satisfaction scores for our in-home services and delivery and record scores in remote support, in-home repair, store care and Best Buy Total Tech call center experiences, all key differentiators for us.
We remain as confident as ever about our strong position in the industry despite reporting lower sales than last year. In Q1, our comparable sales were down 10.1% on a year-over-year basis. From a merchandising perspective, similar to the past few quarters, the largest impact to our domestic comparable sales decline came from computing, home theater and appliances. The promotional environment played out largely as expected. It was slightly more promotional than last year, and we believe we are now fully normalized to pre-pandemic levels from both the percent of products being promoted and the depth of promotions.
In some products and categories, the environment was more promotional than we had expected, and we saw promotional levels above fiscal '20. We effectively managed through those situations in partnership with our vendors. On a blended basis, our overall average selling price, or ASP, was slightly down to last year due to the return of promotionality. While we're on the topic, I would like to take a step back and address what we believe is a common misperception about our industry, that all products we sell are perpetually deflationary. In fact, most of our categories have had price stability over time or even see increases. The price of a product may come down in the year after it launches, only to be replaced by the next generation of the product launched at the same or slightly higher price.
Innovation drives price stability and often drives consumers to adopt even higher ASP products based on new technology or additional features. For example, the five-year compounded annual growth rate for average laptop prices is approximately 2%. For Best Buy specifically, we over-index in the newest innovation and next generation of products so we tend to carry a higher ASP than the overall industry. Additionally, as a reminder, structurally, our overall ASPs have also increased over the last several years 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.
Now back to our Q1 results. Our inventory at the end of the quarter was down 17% compared to last year as we lapped last year's elevated levels. The team continues to manage inventory tightly, targeting approximately 60 forward days of supply. We expect that our inventory levels will continue to normalize and year-over-year variances will more closely match our sales performance as we move through the year. In the first quarter, digital sales comprised 31% of our domestic revenue, very similar to the last two years and twice as high as pre-pandemic.
Our buy online, pickup in store, percent of sales was also very consistent at just over 40%. Considering the speed of our delivery, with almost 60% of packages delivered within two days, we believe the consistency of our high in-store pickup by our customers really underscores the importance and convenience of our stores. I continue to be proud of our team's execution and ability to navigate through this challenging environment, always keeping our customers and their experience as our top priority.
As we look to the rest of the year, we expect the macro environment to continue to pressure demand in our industry this year. However, our guide for the year implies that we expect year-over-year comp performance to improve as we move through the year, and relapse the comparable sales declines we experienced last year. Based on what we can see right now, we continue to believe that calendar 2023 will be the bottom for the decline in tech demand. Matt will provide more color on our expectations later in the call. This year, we are focused on delivering great customer experiences, while running the business efficiently and strategically setting ourselves up to flourish when the industry returns to growth. This includes our efforts to expand our gross profit rate and to continue to prudently manage our SG&A expense.
Now I'd like to update you on our membership program. The goal of membership is to drive increased customer engagement and increased share of wallet over time. As it relates to our paid membership program, our investment thesis remains very much intact. Our members are engaging more frequently with us, shifting their tech spending to Best Buy and buying more across categories than non-members. Additionally, members rate our experience is higher. Our Net Promoter Scores from total tech members remain considerably higher than from non-members.
No membership program is static, and we have always stated that it was our intent to iterate over time as we learned more. We've learned a tremendous amount from our members over the last couple of years, particularly that different customers value very different benefits when it comes to their technology. Earlier this month, we announced changes to our membership program that align all our memberships and will give customers more freedom to choose a membership that fits their technology needs, budget and lifestyle. In addition, these changes will provide more flexibility and result in a lower cost to serve than our existing Totaltech program.
Starting June 27, our membership program will offer three tiers: My Best Buy, My Best Buy Plus and My Best Buy Total. I'll spend a few minutes going a little deeper on each of the tiers. My Best Buy will remain our free tier plan, built for customers who want convenience. It includes free shipping with no minimum purchase and other benefits associated with a member account like online access to purchase history, order tracking and fast checkout.
As you may recall, My Best Buy had historically been a points-based loyalty program. This past February, we added the free shipping benefit. At the same time, we transitioned the ability to earn points solely to purchases made on our co-branded credit cards. The customer and financial impacts we have seen thus far validate our decisions. For example, the online conversion rate for products under $35 has increased, and our customer enrollments have remained steady. In addition, the early financial impact has been better than we modeled.
My Best Buy Plus is a new membership plan built for customers who want value and access. For $49.99 per year, customers get everything included with the My Best Buy offering as well as exclusive prices and access to highly anticipated product releases. They also get free two-day shipping and an extended 60-day return and exchange window on most products.
My Best Buy Total is a membership plan built for customers who want protection and support. This tier is an evolution of our current Totaltech offer and is $20 cheaper at $179.99 per year. It includes all the benefits from the Plus tier as well as Geek Squad 24/7 tech support via in-store, remote phone or chat on all your electronics no matter where you purchase them. It also continues to include up to two years of product protection, including AppleCare+ on most new Best Buy purchases.
Instead of free in-home installation and Holloway services, members will receive promotional offers from time to time. As we reflected on the goals of our membership programs, we made this change because we could see that many customers who became members primarily for free installation services did not stay with the program as long as other members and had significantly higher churn.
From a financial perspective, we continue to expect our membership program to contribute approximately 25 basis points of enterprise year-over-year operating income rate expansion in fiscal '24. We have already begun to deliver on this expectation as the changes we made to the free My Best Buy tier benefited our gross margin rate this quarter.
Now I will shift topics to talk about our omnichannel operations. We are continuing to adapt our omnichannel capabilities to ensure we maintain a leading position in an increasingly digital age and evolving retail landscape. For example, our portfolio of stores needs to provide customers with differentiated experiences and multichannel fulfillment. At the same time, we need them to become more cost and capital efficient to operate while remaining a great place to work.
We are on track to deliver the fiscal '24 store plans we announced this past March. These include closing 20 to 30 large format stores, implementing eight experience store remodels and opening around 10 additional outlet stores. Consistent with the plans we shared entering the year and incorporated in our fiscal '24 guidance, during Q1, we advanced our operating model to align with the ongoing evolution of our business model and current trends.
As I mentioned on our last call, over the past three years, our overall headcount 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. As a reminder, the vast majority of this headcount change came through the pandemic from attrition in our decisions not to backfill. Throughout these significant changes, we have been working hard to balance the amount of labor hours necessary to deliver the best experience possible for our employees, customers and shareholders.
At the same time, we have been investing in tools and employee development programs that increase their flexibility within and across stores. We also know that not all roles and the associated hourly pay are the same, and strategic trade-off decisions are necessary to give us the ability to flex our labor spend appropriately, particularly customer-facing labor. Based on all these factors, we have been, as we've previously said, making multiple changes to our labor models.
One such example is the recent change to our consultation program. By lowering the overall number of in-store consultants and designers, we were able to add approximately 2 million more hours for customer-facing sales associates into our staffing plan for the year. Customers are already giving us higher marks for improved associate availability in recent customer surveys. It's also important to note that we are moving away from a one-size-fits-all approach to our stores and staffing to a market-based approach. And depending on the needs of each market, we're adding, removing, shifting or arranging the number of associates and roles needed to better and more efficiently serve those customers and to allow for more localized flexibility.
Looking forward, we will continue to iterate our model to align with business trends, including initiatives such as membership and ensuring the span of control of our leaders is appropriate. As you would expect, we are also focused on leveraging existing and emerging technology to drive better customer and employee experiences across channels that also deliver efficiencies and better margins. I'd like to share a few examples around our customer care phone experience and our in-home sales team.
Our customer care agents receive millions of customer phone calls every year. We recently launched a capability that uses generative AI to summarize the main points and follow-ups from each call. In the past, customer care agents manually took notes to capture interactions real time with customers. This new capability allows our agents to both fully focus on the customer during the call and reduces time between calls, lowering overall cost and improving agent satisfaction. In addition, this is providing us with valuable information about friction in our experiences, allowing us to continuously drive upstream improvements.
In another example, we're piloting a virtual reality training and simulation experience for our in-home consultants and designers. We expect this will decrease the cost to develop and certify in-home sales team, and elevate the specialized in-home selling skills of consultants and designers, especially those who are newer and less experienced. Additionally, these tools are always available for reference, whether a team member is in a customer's home or training in store.
Now I will take a few moments to share our thoughts on our broader industry backdrop. As I mentioned, we expect that next year, the consumer electronics industry will see stabilization and possibly growth following two down years. I believe it's worth repeating why we are confident our industry will return to growth. First, we believe 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 just 2019.
Second, we expect to begin to see the benefit of the natural upgrade and replacement cycles for the technology bought early in the pandemic, 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 years 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. We continue to see our lapsed customers returning at higher rates year-over-year, especially as customers we acquired early in the pandemic return for additional technology purchases.
Third, this is not a static industry. Billions of dollars of R&D spend by some of the world's largest companies and likely some we haven't even heard of yet, means innovation is constant over the long term, driving interest, upgrades and experiments. We can see the customer demand for newness exemplified in the last few weeks by the record-breaking launch of the new Zelda software for Nintendo Switch and the stronger-than-expected preorders for the new ASUS handheld gaming device. We continue to believe the industry will get back to a more normalized pace of meaningful innovation toward the end of calendar 2023 and into 2024. Additionally, there are several macro trends that we believe should drive opportunities in our business over time, including cloud, augmented reality, generative AI and expansion of broadband access.
While our existing product categories have slightly different timing nuances, in general, we believe they are poised for growth in the coming years. We are also furthering our expansion into newer categories like wellness technology, personal electric transportation, outdoor living and electric car charging. We carry multiple EV charging brands, and we were the first retailer to carry Tesla chargers. We also launched Starlink satellite Internet kits on our digital channels and will have it available in stores later this summer.
In addition, we are partnering with our vendors in new ways that leverage our capabilities to create new opportunities. For example, we are partnering with Roku to make TV advertising more relevant and performance-driven. The first-ever TVs to be designed and made by Roku are available exclusively at our stores and on bestbuy.com, and brands will be able to work with us to target, optimize and measure their ads on Roku using Best Buy audience data. We also continue to build our Partner+ program that leverages our supply chain and fulfillment capabilities. We have several vendor partners, including Samsung, who are offering their online customers the option to conveniently pick up their products at their local Best Buy store.
The recent launch of Oura Smart Rings is an example of how we partner with some of our smaller emerging vendors in a very comprehensive and unique way to drive customer engagement. Oura is a smart ring that uses sensors to track a variety of metrics to provide continuous health monitoring to improve the user's health habits. We launched the products exclusively on bestbuy.com and in 850 stores. We have an interactive demo experience with the ability to try on the rings and order any configuration of style, color and size. We also incorporated the Best Buy store finder on Oura's website so customers can visit their closest store and see the products in person.
I want to extend my heartfelt appreciation for all our associates across the company who continue to uniquely position us for the future through immense change. We continue to focus on providing competitive pay and benefits and leveraging flexible work models. And I'm pleased to report that we maintain industry load turnover rates, particularly in key leadership roles, the vast majority of which we hire internally. It's amazing to see so many of our key leaders choosing to build the future of retail with us. And I am proud of the many ways we were recognized during the quarter for our commitment to our people and the environment.
We were included on DiversityInc's 2023 list of Top 50 companies for diversity and ranked 17th on DiversityInc's top companies for Board of Directors list, reflecting our ongoing work to ensure our leaders and our company reflect the communities we serve. Just last week, we were listed on Parity.org's list of best companies for women to advance as well as their inaugural best companies for people of color to advance. We were one of fewer than 20 companies named to both lists this year. We were also recently named one of Barron's 100 most sustainable US companies for the sixth year in a row. In fact, this year, we were the top-ranked retailer.
My summary is consistent with my comments last quarter. 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 environments, 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 a focus on our strategic initiatives and future.
I will now turn the call over to Matt for more details on our first quarter financials and fiscal '24 outlook.
