Corie Barry
Chief Executive Officer at Best Buy
Good morning, everyone, and thank you for joining us.
Today, we are reporting better-than-expected Q1 profitability. Through strong execution, we continue to manage our profitability, while at the same time preparing for future growth. We progressed against our fiscal '25 priorities, grew our paid membership base, implemented various restructuring actions and drove improvements in our relationship net promoter score and in our operational metrics for most of our prioritized customer experiences. The mix of macro factors continued to create a challenging sales environment for our category during this quarter, and our sales were slightly softer than our expectations.
Our Q1 comparable sales declined 6.1% compared to last year, with the largest impacts coming from appliances, home theater, gaming, and phones. Services and laptops were areas of growth for the quarter. The Q1 digital sales mix was 31% of domestic sales, similar to last year. Our omnichannel fulfillment experience continues to improve with almost 60% of our packages delivered or available for pickup within one day, and 40% of our digital sales are picked-up in stores by our customers, with more than 90% of these orders available within just 30 minutes.
From a profitability standpoint, our non-GAAP operating income rate of 3.8% expanded 40 basis points compared to last year. This was above our expectations due largely to gross profit rate improvement in our membership and services offers. Customers remained very deal-focused, and attracted to more predictable sales moments. Our Q1 product margins were relatively stable even though the environment overall was more promotional than our expectations, in terms of both breadth and depth of promotions. We did see variability by category.
For example, the major appliances category was materially more promotional in pursuit of stimulating interest and sales. As has been our practice, we were targeted and thoughtful regarding where and when we made our promotional investments. Throughout the quarter, our teams were driven and diligent, and I continue to be proud of their performance. I believe it is a testament to our strong engagement and belonging that are at or above the global benchmark. As we look to the rest of the year, we are focused on our strategic plan and priorities, while being mindful about the state-of-the consumer.
In February, we said we expect 2024 to be a year of increasing industry stabilization, and we continue to believe that. That being said, clearly, macro factors continue to fluctuate and put pressure on consumer spending. Three months ago, there were several indicators showing some favorability, including decreasing inflation, continued low unemployment, encouraging trends in consumer confidence and the beginnings of a housing market rebound. Since then, inflation is still high, mortgage rates are high and consumer confidence scores are trending lower.
Consumers continue to make tough choices with their budgets, trading down in some areas, while still prioritizing spend in others, like services and experiences like travel. This, in combination with the pull-forward of tech purchases into the early years of the pandemic and lower levels of material innovation has led to continued lower demand for higher ticket consumer electronics and a focus on value and deals for current purchasers. We are not changing our original full-year guidance as it is early in the year, the first quarter is a relatively quiet quarter and we have yet to see the impact of a variety of coming new product launches and innovations. However, at this point in time, it is likely we are trending toward the midpoint of our original comparable sales guidance of flat-to-down 3%.
We are strategically operating our business, balancing our response to the pressured sales environment. Therefore, even at the midpoint of the comparable sales guidance, we expect to deliver profitability toward the high end of our non-GAAP operating income rate guidance. At the same time, we are taking action and investing to sharpen our customer experiences and industry positioning. We know more of our key categories will return to growth. And historically, we outperform when there is more technology innovation and we leverage our competitive differentiation to provide the best experience for customers.
From a major category standpoint, we continue to expect sales in our computing category to show growth for the full year. We expect revenue for the rest of our product categories as a whole to be down, partially offset by growth of our services revenue. As we plan for the next three quarters, we expect our comparable sales performance to sequentially improve. For the second quarter specifically, we expect comparable sales to decline approximately 3% compared to the 6% decline we saw in Q1. Based on month-to-date sales and results, our estimated comparable sales for May are expected to be better than our Q2 guidance. We are encouraged by these results, but from a timing perspective, we don't fully lap last year's Memorial Day sales until our June fiscal week one, and we continue to be very thoughtful about the time periods between sales events.
Let's talk about computing and the exciting things happening there. We expect the category to benefit as early replacement and upgrade cycles gain momentum, and new products featuring even more AI capabilities are released as we move through the year. We have seen early signs of improvement as year-over-year comparable sales for laptops turned slightly positive in the fourth quarter and that trend continued in Q1. Last week, Microsoft announced Copilot Plus and laptops from Microsoft, Dell, HP, Lenovo, and Samsung are available for pre-order on our website right now and will be available on June 18. These devices have faster speed, better battery life, greater efficiency, they are much cooler, and baseline Copilot features like summarization that can quickly recap pages of documents or lengthy email threads.
They also have exciting new use cases. For example, there is a recall function that makes it very easy to find documents based on visual queues or help users easily navigate back to a website to find a specific item they shopped for, three weeks ago. They also have a live language translation function that works real-time on videos without requiring a connection to the Internet. And the co-create capability can take your rough sketches and turn them into works of art. To support these launches, we have built a comprehensive go-to-market plan. At roughly 40 SKUs in total, we expect to have the largest assortment at launch with more than 40% of the assortment retail exclusive to Best Buy.
Working in coordination with our vendor partners, we will have inspirational merchandising and demos of the products in our stores, and unique educational and interconnected digital shopping journey. And, of course, we have an extensive training program to ensure we leverage our sales associates and Geek Squadians to ensure Best Buy is the destination for unbiased advice and inspiration around how this new tech can enrich their lives. There is additional innovation to drive excitement and interest, including the recently launched Apple iPads featuring their M4 chips that are already contributing to improved sales trends this quarter.
Additionally, we have the new Bose open-ear headphones and Sonos Ace has just announced, they are entering the headphone space as well. All these launches are coming just in time for back-to-school, and we expect this drivetime to be an important part of the computing story. From July through mid-September, we will have a series of sales events focused on students and their parents that will feature our new brand positioning. We also plan to offer specific deals to our members to drive acquisition and engagement. As I mentioned earlier, we are taking action to sharpen our customer experiences and industry positioning, while also maintaining our profitability in this environment.
Last quarter, we laid out our fiscal '25 priorities. They 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 updates on our progress. We are focused on providing increasingly personalized, highly relevant, and motivational content, as we can attribute roughly 90% of our annual revenue to known customers. I'm particularly excited about the work we are doing with our app as we grow the number of users.
Customers who use our app spend more than non-app users. During Q1, we went live with a personalized home screen powered by AI that is now rolled out to 50% of our app users. Each of these users' home screens look different based on their personal preferences, and a number of other factors like current location, shopping history, membership status, and what we know they care about the most based on their activity. This could include the newest and hottest deals, latest gadgets from favorite brands, recommendations on products, services, or accessories, or even a prompt to shop with one of our experts to help them save time. Thus far, customers who receive our personalized homepage are engaging at higher rates than we expected, and we are excited to roll the new features to all app users this summer.
Over the past year, we've also been focused on driving speed improvements on the product pages and in checkout in the mobile experience to drive customer experience and sales performance. For example, since starting this work in February, we have driven a 50% reduction in mobile product detail page load time. Of course, we are also focused on the customer experience in our stores. From a physical standpoint, we plan to touch every store in the chain in some fashion throughout Q2 and Q3, improving both our merchandising and ease of shopping for customers. This includes improving and livening the merchandising presentation given the shift to digital shopping and corresponding lower need to hold as much inventory on the sales floor. It also includes rightsizing a number of categories to ensure we are leveraging the space in the center of our stores in the most exciting, relevant, and efficient way possible.
For example, we will be removing physical media and updating our mobile, digital imaging, computing, tablets, and smart home departments. We are excited to partner even more with our vendors this year, as it relates to their branded in-store merchandise experiences. Of course, we will see updates in the computing department as we already discussed. We will also see new and enhanced in-store experiences for others, including GoPro, Tesla, Lovesac, and STARLINK.
As we mentioned on our last call, we plan to close 10 to 15 stores per our ongoing review process, while opening a few new stores to test concepts. For example, in Kansas City, we are replacing a large store with a small format store close-by to maximize store retention through convenience. Also later this year to capture untapped share, we are opening a store in an outstate area where we have no prior physical presence, and our omnichannel sales penetration is currently low. We want to ensure our customers receive the expert service interactions they want and Best Buy is known for it, when they come to our stores.
Extensive training is imperative to that experience. For example, as we prepare for the new launches in computing, we have and will continue to partner with our vendors to train and certify thousands of computing experts in Geek Squad AI pros. In addition, this month, we added fully dedicated labor expertise to our in-store computing experience in hundreds of stores. We plan to add back fully dedicated expertise in major appliances and home theater departments in-stores this summer.
These changes are in addition to the actions taken throughout the past year to streamline our leadership model, allowing us to invest in materially more customer-facing sales associate hours in our stores compared to last year. We also continue to partner with our vendors around expert labor. In fact, we have just expanded our vendor partnership with Samsung to include vendor-provided expert labor in appliance departments across hundreds of stores. This appliance labor will be incremental to our own existing labor plans.
We are making good progress against our second key priority to drive operational effectiveness and efficiency. Our long-standing commitment to identifying cost reductions and driving efficiencies is paramount to help offset inflationary pressures in our business and fund investment capacity. Our fiscal '25 initiatives are focused on driving further efficiencies across forward and reverse supply chain, our Geek Squad repair operations, and our customer care experience. For example, in supply chain, we made enhancements to our systems and process guidelines that reduced TV damage in Q1, and we expect the savings to build throughout the year.
We also developed a statistical model to identify high-return rate products that we leveraged with our major appliance vendors to reduce open-box products in the quarter. We will continue to lean heavily on analytics and technology to achieve these efficiencies. We have already shared how we are leveraging AI throughout 95% of our in-home delivery and installation trucks to drive more efficient scheduling and a better customer experience, and how we have begun using AI tools to improve the accuracy and efficiency of our customer service calls.
During Q1, we announced a partnership with Google Cloud and Accenture to help us further improve the customer and employee experiences in a seamless and human way. Expected to launch late this summer, our enhanced self-service support will leverage a Gen AI-powered virtual assistant to help our customers quickly troubleshoot product issues, make changes to their order delivery and scheduling, and even manage their software Geek Squad subscriptions and membership. This year, we are also taking larger actions to one, ensure our resources are directed at the right strategic areas, and two, to rightsize our model, based on current operations.
While we made most of these decisions and booked the associated restructuring charge in the fourth quarter, we are implementing most of the actions in the first half of the year with some not being implemented until fiscal '26. These actions will allow us to do the following, balanced field labor resources to make sure we are providing the optimal experience for customers, where they want to shop, redirect corporate resources to make sure we have the necessary assets dedicated to areas like AI and other elements of our strategy, and rightsize parts of the business where we expect to see lower-volume than we envisioned a few years ago, whether that is the result of lower industry sales or due to decisions we made like evolving our paid membership benefits.
For example, last year, we made the decision to remove free installation services from our membership program. This, as expected, led to reduced services fulfillment volume. As a result, during the first quarter, we reduced the number of Geek Squad team members to align our headcount to our forecasted demand. This will improve the experience for our remaining employees, and allow them to rely on a more consistent schedule and pay.
Our third key priority for the year is to continue our disciplined approach to capital allocation in this environment. We now expect our enterprise capital expenditures for fiscal '25 to be approximately $750 million, $50 million lower than last year. This decline is largely due to our decision to concentrate our store capital investments more on existing store updates and refreshes and less on major remodels. Our share repurchases are expected to be similar to last year at approximately $350 million. Our annual dividend expense is expected to be approximately $800 million with our current dividend yield over 5%.
As mentioned last quarter, our fourth key priority for fiscal '25 is longer-term in focus. We will continue to explore opportunities that leverage our scale and capabilities to drive incremental profitable revenue streams over-time. This includes endeavors like our Best Buy Health business, our collaboration with Bell Canada to operate 165 small format consumer electronics retail stores across Canada, our Geek Squad of service pilots and our supply-chain Partner+ program. It also includes continuing to build out our Best Buy Ads capabilities.
We have had a robust retail media network business for a long time in partnership with our vendors, and we are expanding our available ad products and improving the advertiser user experience. For example, we recently announced a collaboration with CNET to share inventory across both ad platforms, adding reach and frequency for our brand advertisers along with closed-loop reporting. In addition, customers will see curated content and editorial advice from CNET's experts across various Best Buy channels encompassing a variety of product reviews and expert picks, that align with their shopping experiences. We also rolled out new self-service reporting capabilities to all vendor ad partners. This will make it even easier for ad customers to engage with us and will provide valuable closed-loop insights on the effectiveness of on-site ad products.
Before I close and turn the call over to Matt, I want to take a moment to recognize our employees for their continued work to support the communities we serve. I'm proud to share that we recently opened up two new Best Buy Teen Tech Centers in Los Angeles and Saint Cloud, Minnesota, and have several more set to open later this year. These centers join the Best Buy Foundation's growing network of youth-centered community hubs, where teens have access to the latest technology, learn real-world career skills, and interact with supportive mentors.
We continue to be recognized as an industry-leader in sustainability. For the 11th year in a row, we were named as an Energy Star Partner of the Year. This award reflects our ongoing commitment to help our customers reduce their carbon emissions from Energy Star products. And during Earth Month, we partnered with Microsoft and Junk Kouture to help raise awareness about the importance of responsibly recycling old tech.
In summary, we executed well in the first quarter, and remain focused on our fiscal '25 priorities. The stickiness of certain macro factors and the ensuing impact on consumer demand for our category has been uneven, but we remain undeterred. We will continue to navigate the environment as we have the last few years while remaining focused and energized about our purpose to enrich lives through technology. There is a lot of time left in here with exciting new innovations. We hold roughly one-third of the US retail sales market share in both computing and televisions, and we intend to strengthen our position in key categories like computing, home theater, and major appliances through elevated experiences, pointed marketing spend, and sharp pricing.
We are the largest CE specialty retailer with the unique range of product assortment and expert services to help humanize tech for every stage of our customers' lives. 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 rate.
I will now turn the call over to Matt for more details on Q1 financial performance and our outlook.
