Corie Barry
Chief Executive Officer at Best Buy
Good morning, everyone, and thank you so much for joining us. Today, we are reporting better-than-expected Q2 financial results. Our comparable sales came in at the high end of our guidance, and profitability was better-than-expected. These results continue to demonstrate our strong operational execution as we balance our reaction to the current industry sales pressure with our ongoing strategic investments. As expected, our year-over-year comparable sales performance improved from the 10% decline we reported last quarter. For the second quarter, comparable sales were down 6.2%.
We expanded our Q2 gross profit rate 110 basis points from last year due to better product margins and profitability improvements in our membership program. We kept our SG&A expenses flat while absorbing higher incentive compensation expenses than we recorded last year. Our industry continues to experience lower consumer demand due to the pandemic pull forward of tech purchases and the shift back into services spend outside the home, like travel and entertainment. In addition, of course, persistent inflation has impacted spending decisions for a substantial part of the population. I continue to be incredibly proud of the way our teams are managing the business today and preparing for our future in light of the industry pressure and ongoing uncertain macro conditions.
We strategically managed our promotional plan and were price competitive in an environment where consumers are very deal focused, and the level of industry promotions and discounts were above last year and often above pre-pandemic fiscal '20. In the first half of the year, our purchasing customer behavior has remained relatively consistent in terms of demographics and the percent of purchases categorized as premium.
Our inventory at the end of the quarter was down compared to last year, in line with our sales decline as the team continues to manage inventory strategically, targeting approximately 60 days of forward supply. Our customer satisfaction with product availability has been improving over the past few years and is now the highest it has been since the start of the pandemic. I would note that while we were not at perfect inventory levels last year, we were more right-sized than many and are not lapping the kind of clearance pressure that other retailers experienced.
We continue to make it easy and enjoyable for consumers to get the best tech and premier expert service when they want it through our online store and in-home experiences. Almost one-third of our domestic revenue came from our digital assets, including our mobile app. We have made considerable improvements to our app customer experience and the percent of our online sales coming through the app has doubled in just the last three years to more than 20% of our online revenue. We are pleased to see higher app usage overall as our app customers engage three times more often than customers engaging with us on other digital platforms.
Our Buy Online, Pickup In Store percent of online sales continues to be 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 rate of in-store pickup by our customers truly underscores the importance of the combination of our digital and physical locations. In addition, our focus on providing customers with expertise and support continues to be highlighted by material improvements in satisfaction scores for our in-store and in-home tech services, as well as our home delivery experience. In fact, our remote support services where we have the ability to remotely access and fix your computer while you're at home, has the highest NPS of all our experiences and continues to increase. These are all services we can provide at scale that no one else can.
Our tech services play a material role in our unique membership program that is driving increased customer engagement and increased share of wallet. As we would expect, paid members also report much higher customer satisfaction than non-members. During the quarter, we successfully launched significant changes to our program designed to give customers more freedom to choose a membership that fits their technology needs, budget and lifestyle.
In addition, we wanted to build in more flexibility and drive a lower cost to serve than our previous Totaltech program. We now offer three tiers, My Best Buy, My Best Buy Plus, and My Best Buy Total. It is, of course, very early, as we only launched the new programs on June 27th, but we are seeing indicators that the program changes are driving many of the results we expected, including an uptick in year-over-year growth of overall paid membership signups. For example, My Best Buy Total, which is the evolution of our prior Totaltech offer continues to resonate more strongly in our physical store setting. As a reminder, this tier is $179.99 per yea and includes 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 includes two years of product protection, including AppleCare+ on most new Best Buy purchases. In addition, it includes all the benefits included in My Best Buy Plus.
And as a reminder, My Best Buy Plus is a new membership tier built for customers who want value and access. For $49.99 per year, customers get 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. In the first several weeks since launch, this plan is resonating more with digital customers and appeals to a broader set of customer segments across more product categories than My Best Buy Total and its predecessor, Totaltech. We are still very early in the process and are testing different promotional offers to determine what resonates most with consumers and continuously improving the digital experience to make it even easier to find deals and benefits.
Lastly, our My Best Buy tier remains our free 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. At the beginning of the year, we added the free shipping benefit and phased out the points-based rewards benefit for non-credit card holders. As a reminder, our credit card holders still have the option to earn 5% back in rewards or choose 12 months, 18 months or even 24 months of 0% interest rate financing depending on the product category.
The customer metrics continue to validate our decisions to change our free tier and our customer enrollments have remained steady. In addition, the financial impact has been better than we originally modeled. For fiscal '24, we now expect our three-tiered membership program to contribute at least 25 basis points of enterprise year-over-year operating income rate expansion, which is consistent with what we have seen in the first half of the year.
During the quarter, we continued to make progress on our journey to evolve our omnichannel capabilities. We want to ensure we maintain a leading position in an increasingly digital age and evolving retail landscape. This means our portfolio of stores needs to provide customers with differentiated experiences and multichannel fulfillment. At the same time, we need them to be more cost and capital efficient to operate while remaining a great place to work.
We are on track to deliver the fiscal '24 physical store plans we announced at the beginning of the year. These include closing 20 stores to 30 stores, implementing eight large format 35,000 square foot experience store remodels, and expanding our outlet stores from 19 to around 25. In addition, of course, we are continuing to refresh our stores. For fiscal '24, we are particularly focused on improving the merchandising presentation given the shift to digital shopping and corresponding lower need to hold as much inventory on the shopping floor. For example, in all our stores we are installing new premium end caps in partnership with key vendors that will improve the merchandising in the center of the store.
These new end caps have the product and vendor story on the front with the inventory tucked in on the sides. Importantly, it allows us to have a great demo or presentation even if we are displaying potentially less in-store inventory than we historically have. This also allows for a much better merchandising experience for products that we have deemed more at risk for shrink and have decided to hold inventory in a more secure location off the sales floor. We invested in digital tools that allow the customer to quickly scan and pick up this inventory in a matter of minutes through our prioritized pick process. This minimizes shrink, prioritizes the customer experience and drives a much more efficient employee process.
In addition, in about half our stores we are right-sizing our traditional gaming and digital imaging spaces to allow for the expansion of growing categories like PC gaming and newer offerings such as Greenworks Cordless power tools, wellness products like the Oura Ring, Epson Short Throw projectors, e-bikes and scooters and Lovesac home furnishing products. While small, we are seeing promising results in some of these new categories with meaningful market share growth.
As it relates to the operating model in our stores, we are continuing to drive our evolution based on two overarching goals. First, we needed to more efficiently allocate our labor costs considering the higher online sales have resulted in a decline in physical store traffic and sales. Our customers and their expectations and behaviors have changed dramatically and incredibly quickly. We have been working hard to balance the amount of labor hours necessary to deliver the best experience possible for our customers and employees. Not all roles and the associated hourly pay are the same, and we have had to make some difficult but strategic decisions to give us the ability to flex our labor spend appropriately.
As we mentioned last quarter, with our most recent changes, we were able to add approximately 2 million additional hours for customer-facing sales associates into our staffing plan for the year, and we saw improvement in our Associate Availability MPS metric in the second quarter as a result. Because of these structural changes, we have driven more than 100 basis points of rate improvement in domestic store labor expense as a percent of revenue compared to fiscal '20. Additionally, we have been successful in keeping our labor rate steady as a percent of revenue even as our sales have declined over the past several quarters.
Second, we need to provide our employees flexibility, predictability and opportunities to gain more skills. We have been investing in tools and employee development programs that increase their flexibility within and across stores. As you would expect, we are also focused on leveraging existing and emerging technology to drive better customer and employee experiences across channels. We are gratified that our employee retention rates continue to outperform the retail industry, particularly in key leadership roles, the vast majority of which we hire internally.
Our retail workforce has led through significant change over the past four years. I could not be more proud of how our teams have adapted to the changing environment, but all that change, while necessary, can be hard and disruptive for any team. We are pleased to be headed into a period of stability from an operating model perspective, and we are now laser-focused on ensuring foundational retail excellence. As such, during Q2 we led thousands of employees, including more than 80% of our sales associates through a certification process focused on our baseline expectations for interacting with customers, our selling model, and product category proficiency. This was just phase one, and we will continue to invest in training hours for subsequent phases of the program to make sure we are driving the interactions and outcomes we believe are the best for our customers and our business.
As I mentioned earlier, we are working hard to balance our response to current industry conditions with our need to invest in our future. It has long been part of our cultural DNA to drive cost efficiencies and expense reductions in order to offset pressures and fund investments, and this year is no different. In fiscal '24, we are driving benefits from optimization efforts across multiple areas, including reverse supply chain, large product fulfillment and our omnichannel operations. This includes leveraging technology and rapidly evolving AI. For example, in customer care, our virtual agents are now answering 40% of customer questions via chat without a human agent and with high satisfaction levels. We are continuing to add capabilities and are creating additional employee and customer-facing virtual agents that will simplify our most complex interactions like technology support services, while also delivering key insights from our customer care centers back into the enterprise. We are also testing new state-of-the-art routing capabilities to optimize our in-home operations, reducing cost of service and improving the availability and wait time of delivery and installation appointments for our customers.
As we think about our growth strategies, we believe we can leverage our scale and capabilities to drive incremental profitable revenue streams. In this vein, we are exploring Geek Squad as a service opportunities with several large companies, including Accenture, Kyndryl and Lenovo, as we have created differentiated B2C and B2B services capability. Device life cycle management is a specific example of the service we can provide others, a necessity for all companies, device life cycle management refers to the process of providing tech devices like phones and laptops to employees. This is not a core competency for most companies and the recent hybridization of work has made it even more complicated. We are already supporting a number of firms as their sole device life cycle management partner, providing end-to-end support of these company provided devices, including procurement, provisioning, deployment, repair and end-of-life. This is just one example of our ability to leverage our data and assets and adds to the growth we are already seeing in areas like Best Buy Ads and Partner+.
Before my closing remarks, I also want to take a moment to recognize our Geek Squad teams for their work with our communities. For more than 15 years they have been sharing and teaching their tech expertise and skills to prepare the next generation for the future workforce. This summer, we welcomed more than 2,000 kids and teens at nearly 40 Geek Squad Academy camps across the country. These camps give participants the opportunity to learn skills on everything from coding, game design, digital music and more. More importantly, they help young people build self confidence, spark creativity and discover how technology can benefit them in their educational pursuits and future careers. I'm incredibly proud of all our Geek Squad agents and volunteers for their work this summer, inspiring thousands of young minds through tech.
As we enter the second half of the year and look forward to the holiday season, we are both pragmatic and optimistic. Of course, the macro environment remains uncertain with a number of tailwinds and headwinds, soon including the October resumption of student loan payments, all of which results in uneven impacts on consumers. Overarchingly, we believe that the consumer is in a good place. But as we have said, they are making careful choices and trade-offs right for their households.
During last quarter's first call, we noted that we were preparing for a number of scenarios within our annual guidance range, and we believe our sales were aligning closer to the midpoint of the annual comparable sales guidance. We knew it would be a challenging year for the industry and we are halfway through the year and narrowing our outlook largely as expected. As Matt will discuss in more detail, we are updating our comparable sales guidance accordingly. We now expect comparable sales to decline in the range of 4.5% to 6%. This compares to our previous range of down 3% to down 6%. At the same time, we are narrowing our profitability ranges effectively raising the midpoint of our previous annual guidance for non-GAAP operating income rate and earnings per share.
We continue to expect that this year will be the low point in tech demand after two years of sales declines. Tech is a bigger part of all our lives, both in our homes and in our businesses than ever. And we believe next year the consumer electronics industry should see stabilization and possibly growth driven by the natural upgrade and replacement cycles for the tech brought early in the pandemic and the normalization of tech innovation.
Let me say a few words about the fourth quarter specifically. For context, we reported a comparable sales decline of 10% for fiscal '23 and roughly 8% for the first half of this year. We are guiding a Q3 year-over-year comparable sales decline that is similar to or a little better than the 6.2% decline we just reported for Q2. Our full year guidance implies a wide range for Q4 comparable sales of down 3% to slightly positive. There are a number of factors supporting our belief that our Q4 year-over-year comparable sales will improve and could potentially turn positive.
We expect growth in home theater as we expect to be better positioned with inventory across all price points and budgets than last year. We are starting to see signs of stabilization in our home theater business. For example, TV sales trends improved in Q2 and units returned to growth. We expect performance in our computing category to improve as we build on our position of strength in the premium assortment. While not exactly linear, we are also starting to see signs of stabilization in this category as Q2 laptop sales trends improved materially and units were flat to last year.
We expect to see continued growth in the gaming category as inventory is more readily available and there is a promising slate of new software titles expected to be released in the back half of the year. We are planning for potential growth in the mobile phone category as we expect inventory to be less constrained than last year and expect to drive growth in our unlocked phones business.
Our hypothesis regarding the holiday season is that the consumer largely returns to pre-pandemic behavior. By this, we mean that they will be looking for great deals and convenience and traffic will be weighted toward promotional events. We have an excellent team and strong omnichannel assets that thrive in such an environment.
In summary, while the macro and industry backdrop continue to drive volatility as we move through the year, we have a proven track record of navigating well through dynamic and challenging environments, and we will continue to adjust as the macro conditions evolve and we remain incredibly excited about our future opportunities.
While our existing product categories have slightly different timing nuances, in general, we believe they are poised for growth in the coming years. In addition, we continue to see several macro trends that should drive opportunities in our business over time, including cloud, augmented reality, expansion of broadband access and of course, generative AI, where we know our vendor partners are working behind the scenes to create consumer products that optimize this material technology advancement. As the largest CE specialty retailer with one-third of the U.S. computing and television market share, we can commercialize new technology for customers like no one else can.
And with that, I would like to turn the call over to Matt for some more details on our second quarter results and our fiscal '24 outlook.
