Corie Barry
Chief Executive Officer at Best Buy
Good morning, everyone, and thank you for joining us. Today, we are reporting an in-line operating income rate for the third quarter on softer-than-expected sales. We are proud of our continued ability to maintain our profitability even as sales are slightly lower-than-expected. On revenue of $9.4 billion, we delivered a non-GAAP operating income rate of 3.7%. We drove strong year-over-year gross margin rate expansion of 60 basis points, largely due to improvement in our membership and services offers. Our SG&A spend was in-line with our expectations.
Our comparable sales declined 2.9% compared to our guidance of down approximately 1%. Our sales performance was impacted by overall softer-than-forecasted customer demand during September and October. We attribute this to a combination of overall ongoing macro uncertainty, customers waiting for deals and sales and distraction during the run-up to the election, particularly in non-essential categories. We expected lower demand between sales events, but the impact was even steeper than we estimated. In the last few weeks, as the holiday sales begun and the election is behind us, we have seen customer demand increase again.
From a category perspective, we drove comparable sales growth in computing, tablets and services. This growth was more than offset by declines in appliances, home theater and gaming. We again delivered strong results in our domestic computing and tablet categories, which together posted comparable sales growth of 5.2% versus last year. The year-over-year growth rate for laptops specifically increased to 7% in the third quarter. With our market position, expert sales associates and compelling merchandising, we continue to capitalize on demand driven by customers' desire to replace or upgrade their products, combined with new innovation. As we expected, customers remain deal focused and attracted to more predictable sales moments.
Similar to prior quarters in this environment, many categories, including major appliances and fees [Phonetic] were very promotional in pursuit of stimulating interest and sales. We continued to be targeted and thoughtful regarding where and when we made our promotional investments, strategically balancing profitability and sales.
Our omnichannel operations provided strong support for our Q3 online sales of $2.7 billion, which comprised 31% of domestic revenue. Almost 60% of our packages are delivered or available for pickup within one day. The percent of digital sales picked up by our customers has been increasing steadily over the past few years and is now approximately 45% of domestic digital sales with more than 90% of these orders available within just 30 minutes.
Our paid membership program continued to drive positive contributions to our results as we grew the base of members and the impacts from the changes we made to the program last year once again drove strong gross profit rate expansion. Overall, we are managing well what we can control in what remains a volatile environment. I am grateful for the hard work and dedication to our customers that our team members across the company show every day. I am proud of the culture we have built at Best Buy. And I'm pleased to report that our turnover rate is the lowest we've seen in over three years and lower than it was at the end of fiscal '20. Additionally, our company engagement score as measured by our employee surveys was already at the global benchmark level earlier in the year and increased in the third quarter. As we look to the rest of the year, we are excited for the holiday season. We feel well-positioned with compelling deals, inspirational merchandising and competitive fulfillment options. We have a unique position that we leverage at this time of the year. We will, of course, have deals across a wide range of price points. At the same time, our promotional plan over-indexes on offering great prices for the latest innovation and premium products and assortment that not everyone has. Let me provide a little more detail on our holiday plans.
From a timing perspective, we kicked off our Black Friday sale a week earlier this year, starting last Thursday, November 21st. We also brought back the concept of Doorbusters, which drop every Friday between November 8th and December 20th on the Best Buy app, bestbuy.com, and in our stores. As a special perk to our paid members, they get early access to the Doorbusters every Thursday before they are available to everyone. It's early in the holiday season, but we are encouraged by how our Doorbusters and other Black Friday sales are resonating with customers thus far. In fact, our enterprise comparable sales for the first three weeks of November are up approximately 5% over last year.
To help customers find the perfect gifts, we're bringing back the holiday gift ID section on bestbuy.com, a one-stop resource for the hottest gift ideas and curated gift lists with something for everyone, from crafting and self-care to traveling and gaming. And in our app specifically, this year we have an AI-powered gifting experience called the Best Buy gift finder. Customers can have an interactive exchange to help guide them to the perfect gift they might not have even considered or knew that Best Buy offered. We also have our Yes, Best Buy sells that section on our website, where customers can find fun and unexpected tech, like electric scooters, toys and collectibles, [Indecipherable] grills, electric outdoor power tools and so much more. For even more gift inspiration, we created more than 30 videos to help customers discover must-have tech this holiday season on our Best Buy YouTube channel.
In our stores, customers will experience the magic of tech this holiday with new merchandising displays, and of course, expert help if they need it. For example, customers can see XXL TVs, which are over 97 inches at more than 700 stores. They can also interact with Copilot Plus PCs, the new Aura Ring, Ray-Ban AR glasses, gaming computers, the latest Quest VR systems, new over-ear headphones and so much more. Our stores also offer the strategic advantage of convenience during a shorter selling season, both for in-person shopping as well as our fast and easy buy online pickup in-store. Of course, we have a very comprehensive trade-in program that we will highlight throughout the holiday to help customers more easily get new tech.
For example, customers can save $600 by trading in their tablets or up to $900 trading in their phones. We also have exclusive SKUs in a variety of giftable categories, including TVs, monitors, gaming and headphones. We continue to have exclusivity within Copilot Plus laptops with about 50% of our 60 SKUs retail exclusive to Best Buy. Finally, our new branding is resonant in all our communication and marketing this holiday. To highlight our tech and our positioning, our new branding is centered on creating customer experiences that inspire curiosity and enable discovery and includes asking our customers what-if, as well as a new tagline, imagine that. This branding reflects the role that Best Buy and our amazing associates play in our customers' research and purchase journey and our training is also focused on bringing these experiences to life. While this is not an instant evolution, we believe our customers are already taking note as we are seeing satisfaction improvement in the excitement aspect of their experiences.
Even as we have been prepping for holiday, of course, we have continued to execute our strategic plan and priorities for the year. These have been built to sharpen our customer experiences and industry positioning, while also maintaining our profitability in this still uneven environment. As a reminder, our fiscal '25 priorities are: one, invigorate and progress targeted customer experiences; two, drive operational effectiveness and efficiency; three, continue our disciplined approach to capital allocation; and four, explore, pilot and drive incremental revenue stream. I would like to provide some highlights of our progress.
We have initiatives targeting customer experiences across our digital and store channels. We are encouraged by the continued material year-over-year improvement in our relationship NPS, which tracks consumers' likelihood to recommend Best Buy. We have been very focused on improving and refreshing our app and small view experiences, including enhanced personalization, new features like digital wallet, deal alerts and the gift finder I just referenced, along with a more streamlined checkout process and faster content loading times. I'm pleased to report we have driven both higher customer ratings for our app and growth in active users. This is an important way to engage our customers on their entire shopping journey, as of course, their mobile device is always with them. Our data shows that customers who use our app frequent us more often and thus spend more.
Last quarter, we launched a market-leading new experience for our in-home delivery and installation customers. On the day of their appointment, customers can digitally track the live to the minute ETA of their in-home delivery and installation. More than 60% of customers are engaging with the tracking and the feedback has been overwhelmingly positive. It was rated five stars by more than 90% of survey responders. Not only is this a great experience for customers, it is already starting to lower costs by reducing calls to our customer service teams. In Q3, we added the capability for customers to access this ETA view from their locked mobile phone home screen.
Today, we are excited to announce our latest enhancement, scheduled parcel delivery. We are expanding our small product shipping offerings to allow customers to select a specific two-hour delivery window up to seven days out. This provides customers increased convenience, confidence and control of their delivery. It's currently live in a portion of the U.S. market, and we expect it to roll-out more broadly next year.
From a store experience perspective, we have largely completed the refreshes to our store portfolio for the year, so we can focus on the holiday season with minimal disruption to our physical stores. Not every store was touched in the exact same way, of course, but for many, we optimized and refreshed mobile phones, headphones, smart home and digital imaging and created new experiences in tablets and monitors. In the areas completed during the second quarter, we continue to see related sales improvements, particularly in monitors and digital imaging. We also added a new merchandising solution in hundreds of stores. This is a modular experience that will transition more frequently to provide vendors the opportunity to create a branded stage for new technology solutions and innovation, and it enables greater flexibility to spotlight new brands and products during certain timeframes like the holiday season. For example, currently, we are featuring new products from well-known brands like Lenovo, Asus, Sonos and Samsonite, along with new innovation from emerging brands like Whisker, Greenworks, Backbone and the Ridge.
Consistent with the past several years, we continue to rationalize our store portfolio. This year, we closed 12 traditional large-format stores in the U.S. We have also opened six stores, including four Best Buy Outlets and two new stores we just opened in the last few weeks. Our new Bozeman location is unique and that it has about 15,000 square feet of selling space with the computing department anchoring the front of the store. It also has a robust home theater presence, a major appliances department and Geek Squad precinct as it is in an isolated retail node 140 miles from the nearest Best Buy store in Billings.
In Kansas City, Missouri, we are replacing a previously closed larger store with a smaller store format of roughly 12,000 square feet of selling space. This store was designed to complement existing locations in the micro-market and as such, has a more modest presence of major appliances and will also utilize nearby stores for Geek Squad repair instead of having on-site capabilities.
From a store labor models perspective, during the third quarter, we largely completed the rollout of dedicated expert labor in our computing, home theater and major appliances departments in hundreds of our stores. In addition, as we mentioned last quarter, we are seeing our vendors expand their labor investments in our stores, including Samsung, Verizon, AT&T, TCL, LG and others. We believe adding labor in our stores is a highly productive way for many of our vendors to interact with qualified traffic. In fact, we recently deployed new mobile experiences in hundreds of our stores. Depending on the store, either AT&T or Verizon is staffing the mobile department, assisting customers in a fast and seamless way by directly leveraging their own experts and proprietary carrier technology systems. We are encouraged by the initial results in these stores.
As I take a step-back across our business, this year we are reinforcing our experiences to capitalize on-demand we expect from the confluence of replacement, upgrade and innovation in the coming years. While the environment remains uncertain, we are encouraged by many areas where we can see the results of our actions. For example, in computing, the investments we made in associate training and digital and store experiences are helping drive growth and share in the category. The merchandising, inventory and fulfillment investments we have made in TVs are driving strong growth in XXL TV. Here, we are also leveraging our unique Geek Squad capabilities to offer free installation. Supporting all these examples is our new branding and elevated marketing spend that is driving increased traffic and awareness. We saw particularly strong results from the back-to-school marketing campaigns in Q2 and Q3.
We continue to make progress on the second key priority of our fiscal '25 strategy, which is to drive operational effectiveness and efficiency. Much of what we are doing to improve the effectiveness of our customer and employee experiences also generates efficiencies. Last quarter, we held up the evolution of our store labor model as a great example of where we are constantly driving customer experience improvements as well as effectiveness. It is how we have kept our labor rate flat as a percent of sales through the last few years as we have experienced revenue declines and it is how we expect to hold that rate as revenue grows over time. Of course, we also continue to leverage analytics and technology to achieve efficiencies. For example, because we use AI to route our in-home delivery and installation trucks, we can drive more efficient scheduling and introduce the new and improved customer in-home delivery and install experiences I mentioned earlier. We are also, as you would expect, leveraging Gen AI code generation and shared resources for our engineers across the company to help us enhance our overall tech development effectiveness.
Customer support is another important space where we are activating on many areas of opportunity. For example, we are using an AI-powered virtual assistant that can help 60% of our chat users without the need for a live customer support person. During the third quarter, we began rolling out this capability to our entire IVR phone system to increase the likelihood customers can get their questions answered without having to wait for a live agent. And we are leveraging text analytics to create real-time alerts, directing us to a potential operational or promotional issue. We are, of course, closely observing feedback as we implement these capabilities to ensure we are maintaining a good experience for our customers. And overall, we are seeing customer satisfaction improvements in our call center experiences.
Our reverse supply chain capability is another important ongoing driver of efficiency and savings. In addition to adding new outlet stores this year, we just launched a new section on our website that combines open box, refurbished and clearance product for the first time. We are seeing material sales growth in these products. And while it is early, we believe these digital experiences are helping.
Our third key priority for the year is to continue our disciplined approach to capital allocation in this environment. Our approach has remained consistent. We first prioritize investing in the business and continue to expect our enterprise capital expenditures for fiscal '25 will be about $50 million lower than last year at approximately $750 million. Second, we remain a premium dividend payer. And third, we return the remaining cash to shareholders through repurchases.
Our fourth key priority for fiscal '25 is to explore opportunities that leverage our scale and capabilities to drive incremental profitable revenue streams over-time. Of course, this includes our collaboration with Bell Canada to very quickly expand our physical presence and drive incremental profitable revenue. In a little over five months, we have completed the transformation and rebranding of 167 small format consumer electronics retail stores across Canada. These stores, previously known as the Source, a wholly-owned subsidiary of Bell Canada, were rebranded as Best Buy Express. In this collaboration, we are providing a curated CE assortment and Geek Squad services as well as supply chain, marketing and e-commerce. Bell is the exclusive telecommunications services provider and is also responsible for the store operating costs of the partnership. We have expanded our presence in malls and in smaller and mid-size communities, reaching 61 brand new markets for Best Buy Canada. I am proud of how quickly our teams have implemented the partnership. Also, while it is early, we are encouraged by the positive feedback from both customers and employees.
A longer-term opportunity we are working on is marketplace. We have an established growing third-party online marketplace in Canada, and we are planning to launch one in the U.S., targeting mid next year. We believe that as the trusted leader in CE, we have an opportunity to leverage our positioning and assets to build a differentiated digital marketplace platform, thereby bringing our customers access to much more expansive assortment and new categories. In addition, sellers and advertisers will have an additional avenue to increase their reach and build their brands, leveraging our qualified traffic. And we are continuing to make progress on other opportunities, including Best Buy Health, Best Buy Ads, which is our retail media network and Partner Plus, our vendor supply chain program.
In summary, we believe we are executing well against what we can control and setting ourselves up for future growth. As we expected, we are seeing increasing stabilization in our industry this year. It's just not as linear as we had expected when we entered the year. As we said last quarter, we see a consumer who is seeking value in sales events and one who is also willing to spend on high price point products when they need to or when there is new compelling technology. Thus, we continue to balance our optimism in both the industry and our positioning with a pragmatic approach to likely uneven customer behavior going forward. Therefore, we have adjusted our Q4 comparable sales outlook to be in the range of flat to a decline of 3%. The high-end of the range is a sequential improvement in comp sales trends that assumes the computing category continues to deliver strong growth and other categories show improved trends during the value-oriented holiday season. We are maintaining our full-year non-GAAP operating income rate guidance in the range of 4.1% to 4.2%. This compares to last year's 4% on a 52-week basis.
We are the largest CE specialty retailer with the unique range of product assortment and expert services to help our customers discover how unexpected technology solutions can bring to life what matters to them. We believe we are putting ourselves in the best position for fiscal '25 and beyond. As our industry returns to growth, we expect to grow our sales and expand our operating income rates.
I will now turn the call over to Matt for more details on Q3 financial performance and our outlook.
