Best Buy Co., Inc. — 2024 Q4
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Fourth Quarter Fiscal 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded for playback and will be available at approximately 1:00 p.m. Eastern Time today. [Operator Instructions]
Thank you, and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; and Matt Bilunas, our CFO. During the call today, we will be discussing both GAAP and non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release, which is available on our website, investors.bestbuy.com.
Good morning, everyone, and thank you for joining us. I'm proud of the performance of our teams across the company as they showed resourcefulness, passion and unwavering focus on our customers this past year. Throughout fiscal '24, we demonstrated strong operational execution as we navigated a pressured CE sales environment. This allowed us to deliver annual profitability at the high end of our original guidance range even though sales came in below our original guidance range. Importantly, we grew our paid membership base and drove customer experience improvements in many areas of our business, particularly in services and delivery.
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 streams.
balance 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.
Good morning, everyone. Before getting into our quarterly results, let me start by sharing a few details on the extra week that occurred in the fourth quarter. We estimate that the extra week added approximately $735 million in enterprise revenue and approximately $0.30 in non-GAAP diluted earnings per share to the quarter. Also as a reminder, revenue from the extra week is excluded from our comparable sales calculation.
Enterprise revenue in the range of $41.3 billion to $42.6 billion; Enterprise comparable sales of down 3% to flat; Enterprise non-GAAP operating income rate in the range of 3.9% to 4.1%, which compares to an estimated 4% non-GAAP operating income rate for fiscal '24 on a 52-week basis; a non-GAAP effective income tax rate of approximately 25%; non-GAAP diluted earnings per share of $5.75 to $6.20.
[Operator Instructions] First question is from the line of Scot Ciccarelli with Truist Securities.
This is probably difficult to answer but I'd be interested in any color you might have. When you kind of look at the comp performance and the comp decline, how would you segment it between, let's call it, broader pressures on discretionary spending versus, let's call it, the pull forward of demand that happened during the pandemic? Because we're kind of getting into that kind of 4-year period since the pandemic. Typical life cycle of a lot of your products is 3 to 5 years. Just how are you guys kind of thinking about that? Or is it at all possible to segment that?
I wish there was an exact science to this one. That being said, we did try to give you in the prepared remarks a few indicators that we're seeing that say we might be starting to get into that replacement cycle. We talked specifically about laptop units returning to growth in Q4 and that trend continuing here as we head into Q1. That, to me, feels like an early indicator of at least some foray into that replacement cycle.
That's helpful, Corie. And then one other quick one. Like, you guys talked a bit earlier in the script on personalization. I guess the question is for your kind of category, do you get enough frequency in terms of customer visits to really be able to little leverage that data and the personalization that you're targeting?
I think what's important is to differentiate purchase frequency from the frequency of interacting with the brand. And we have the luxury because we do know -- like I said, 90% of our purchasing customers we can identify, we can actually see many behaviors. And people don't just come to us because they want to make a purchase.
Your next question is from the line of Brian Nagel with Oppenheimer.
So I want to start, Corie, bigger picture. You mentioned in your prepared comments, I know we've been talking a while about this AI. We talked about some of the products and then how Best Buy's utilizing AI in its own business model. The question I have is as you're talking now to your vendor partners, maybe going back to CES or before, how much excitement is starting to really build around AI as -- in terms of products that we could see in the relative near term for Best Buy, from a consumer base standpoint?
Yes. I will give you my very best qualitative answer here. I think if you followed what happened at the Consumer Electronics Show in January at all, it was, I would argue, the largest foray into how AI will impact our world going forward from here, particularly as it relates to consumer electronics.
That's very, very helpful. I appreciate that. And then just a follow-up, unrelated. With regard to the [Technical Difficulty] normalization within the CE category, you talked about through the holiday promotions being, I guess, normal. But the question I have is, are you seeing more nonspecific CE retailers come back to the category now as the overall consumer backdrop normalizes post pandemic?
I wouldn't say there's more. I mean, I think when we were headed into holiday, we said this is typically a category that is promotional. It's typically a category that many different partners play in for the holiday because whether or not it blew the doors off, it is always a category that people look for as it relates to holiday. And so I think you always see some players come in and out of the space as it relates to gifting and CE as a gift. And I -- my personal point of view, didn't see more than we would have expected this holiday than any other.
Your next question is from the line of Michael Lasser with UBS.
It's on market share trends. Best Buy has always been very dynamic with its strategy. It's one of the factors that has led to its success that it's been able to change with the market, but it does seem like in the last several years the pace of change with the strategy has increased significantly, whether it comes to membership, store format, the composition of store associates. How do you think this is having an impact on Best Buy's market share especially in light of the fact that if we look at Best Buy sales in the Domestic segment for this year, it's likely that the company is going to be on pace to have sales that are about $2 billion below where they were in 2019.
Yes. So let me start a little near term and then I'll work my way back to a little bit longer term. You're right, there have been a number of strategic pivots in the model. And to be clear, this is in service of bolstering our position in the market. That is why we are making the changes that we are, and it's also in service of a changing consumer who expects a different experience. So we've said it many times, Michael, and I know you're familiar. There isn't a great single source of share here for consumer electronics because nobody covers all the categories that we do.
Got it. My follow-up question is, as we look at our model and make an assessment of what the recovery in consumer electronics retail looks like over the next few years, what is the rule of thumb that we should be using in regards to Best Buy sales versus its operating margin and the amount of leverage that the model will produce in light of all the changes that have been made in the last few years? Is there a rule of thumb that you can give us to guide us on how we should be projecting over the next couple of years?
Yes, Michael, I'll take that. I think if I look at just going forward in an ideal setting, when you get past the flat to slightly down year this year, we do expect when you look out into the next number of years that the industry will continue to grow and that we will grow along with it.
Your next question is from the line of Seth Sigman with Barclays.
I wanted to follow up on the sales outlook. As you think about sales down in the first half, up in the second half, any more views on the role that housing and moving activity plays in that? I think some of our work has suggested that there is an impact, but obviously, it's not the only driver. Innovation and a lot of the other things you talked about makes sense. But I guess, how do you think about housing and what's embedded here in the outlook as you think about the opportunity for improvement?
You said it very well. It's not a perfect correlation with our business, the housing market, I mean. But there are definitely pieces of the business that tend to correlate more highly, particularly as you think about appliances, and then somewhat as you kind of creep into television. Those tend to be the areas that are most highly correlated. In the prepared remarks, I talked about that kind of stacked macro pressures on CE.
Got it. Okay. That's really helpful. And then my follow-up, as you think about online sales growth seem to outpace store comps very slightly but for the first time since 2020. And I appreciate the role that stores and online both play in driving a seamless transaction. But I'm just curious, anything notable that you're seeing as it relates to consumer behavior across the channels? And how does that tie in with your store closure plans?
I think we've had a pretty consistent view on the fact that we believe online penetration -- we kind of said we'll first stabilize because it went so high during the pandemic, we knew there'd be some level of pullback. And the last -- I'm going to call it like 18 months have been a little bit more around, where does it stabilize, particularly as a percent of our overall revenue.
Your next question is from the line of Katharine McShane with Goldman Sachs.
Just back to the comp range, I was wondering how we should think about traffic versus ticket when it comes to the down 3% to flat. It seems like there are some moving parts in ticket, and we just wanted to better understand the dynamic of maybe some pressure on prices versus mix.
Yes. Sure, Kate. When you think about it in the next year, I think what we've been seeing, if I look just back at last year, we saw our average selling prices be a little more pressured in the -- a little bit in the first part of the year and then it started to stabilize in Q3, and in Q4, in fact, our average selling price was up compared to last year. And some of that was this unit mix that we talked about. As well as we look to next year, we clearly are trying to see both -- some level of ASP stabilization, some unit growth, which is why we've seen such a promotional environment to kind of stimulate the unit side of this equation.
Okay. And our second question was just on the usage of your credit cards, if you're seeing anything different. Or did you see anything change in the fourth quarter in terms of frequency or size of transaction?
No, nothing really different in terms of usage. It's still an amazing offering for us. We have about 25% of our sales transacted on our card, which has been pretty consistent for the past 5 years. Last year, it was still 1.4% of our domestic sales similar to FY '23. So nothing too different in terms of the usage. And in fact, we still see a continued level of our card being used for external purchases. That's been growing over the last number of years.
Your next question is from the line of Greg Melich with Evercore ISI.
I wanted to follow up on membership and services. Could you give us an update there in terms of either household or a number of members or what percentage of services revenues are there and what behavior you're seeing?
Yes. We haven't explicitly broken out the percent of services, that is, membership. But we did say we now have 7 million members, and that is compared to 5.8 million at the start of the year. During Q4, we actually signed up 35% more paid members compared to the fourth quarter of last year. So remember that we have a new tier in there. So we have the My Total and the My Best Buy Plus. And so that has driven some growth. And I think it's important to remember, our goal here is to drive engagement and increased share of wallet.
And maybe just for a little additional context, the services growth you see at 6% in Q4, that growth was driven more by increased revenue collected from our installation business. As Corie mentioned, we've shifted -- we've changed our membership program. So we're seeing more of that revenue growth now come off the installation revenue that we're now collecting because it's no longer part of the benefits of Total Tech.
Great. And then my follow-up is on that is really -- I think you mentioned that ad expense or marketing expense will be up $50 million this year. Could you just say what that's on? And I'm curious, are there any efforts to use all -- the data that you're getting, whether it's from your members or just customers in general, to maybe get some revenue from all that data and insight?
Sure. I'll start, and then Corie can jump on the last part of the question. I think overall, we're adding about $50 million of advertising expense this year. It's for a number of different things, and I'll give you a couple of items. First, we are expecting a brand relaunch in the back half of this year. So some of this money is used for some additional branding spend that we have. I would say also this is a very unique year in terms of we have things like the Olympics and presidential election. So the inflation on marketing actually comes up in these periods of time, which is part of that increase.
And I love the question about data. It's one of the most powerful tools we have in terms of how we reach our customers. And so we have a Best Buy Ads business. That continues to grow top line collections and profitability and it's been outpacing our core business, I think, as you would expect.
Today's final question will come from the line of Joe Feldman with Telsey Advisory Group.
I want to follow up, can you share a little more color on the store refreshes and what we should expect to see over the course of the year as you do touch up the stores and maybe make them a little more engaging from a merchandising standpoint?
Yes, absolutely. Let me start with, to be clear, we're not remodeling every store in the fleet. So I have to be clear there. But what we are doing is taking, I would argue, kind of a stronger position than we ever have to ensure that the shopping experience reflects that kind of excitement and that sparkle that technology brings to life.
No, no, no, that's good. We can end it there.
No, no problem. Thanks for the question. And with that, that was our last question. I want to thank everyone for joining us today during what I know is a very busy earnings season. We look forward to updating you on our results and progress during our next call in May. Have a great day.
Thank you all for joining today's conference call. You may now disconnect.