Best Buy Co. (NASDAQ:BBY) reported fourth-quarter financial results before the market open on Tuesday. The transcript from the company’s fourth-quarter earnings call has been provided below.
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Operator
Welcome to Best Buy’s fourth quarter fiscal 26 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session at that time. If you have a question, you will need to press Star one on your phone. If you choose to be taken out of the question queue, please press Star one again. As a reminder, this call is being recorded for playback and will be available by approximately 1:00pm Eastern Time today. If you need assistance on the call at any time, please press Star zero and an operator will assist you. I will now turn the conference call over to Molly O’Brien, Head of Investor Relations.
Mollie O’Brien (Head of Investor Relations)
Thank you and good morning everyone. Joining me on the call today are Corie Barry, our CEO, Matt Bilunas, our Chief Financial and Strategy Officer and Jason Bonfig, our Chief Customer, Product and Fulfillment Officer. During the call today we will be discussing both Generally Accepted Accounting Principles (GAAP) and non Generally Accepted Accounting Principles (GAAP) financial measures. A reconciliation of these non Generally Accepted Accounting Principles (GAAP) financial measures to the most directly comparable Generally Accepted Accounting Principles (GAAP) financial measures and an explanation of why these non Generally Accepted Accounting Principles (GAAP) financial measures are useful can be found in this morning’s earnings release which is available on our website investors.bestbuy.com some of the statements we will make today are considered forward looking within the meaning of the Private Securities Litigation Reform act of 1995. These statements may address the financial condition, business initiatives, growth plans, investments and expected performance of the Company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward looking statements. Please refer to the Company’s current earnings release and Our most recent Form 10-K and subsequent Form 10-Qs for more information on these risks and uncertainties. The Company undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise after the date of this call. And now I will turn the call over to Corey
Corie Barry (Chief Executive Officer)
Good morning, everyone and thank you for joining us today. We are reporting better than expected profitability for the fourth quarter on revenue of $13.8 billion. We delivered an adjusted operating income rate of 5% and adjusted earnings per share of $2.61, both of which are slightly up to last year. Our fourth quarter comparable sales were down 0.8% versus last year within our guidance range for the quarter. Our data sources show our market share was at least flat, pointing to slightly softer consumer demand for our industry during the holiday quarter. Our holiday customer demand patterns were also different than modeled. Despite sales event timing that was very similar to last year’s, we saw softer than expected sales in November and the beginning of December. We then experienced strong sales in the last two weeks of December and the start of January and sales were negatively impacted by weather induced store closures during the last week of the quarter. We were prepared for a promotional holiday and the environment was even a bit more promotional than we factored heading into the quarter. I’m proud of how our team strategically pivoted throughout the quarter in terms of marketing, promotionality and labor. From a product category perspective, we delivered our eighth consecutive quarter of positive comparable sales in computing driven by laptops, desktops and accessories. In mobile phones, we delivered our fourth consecutive quarter of growth driven by our expanded partnerships and in store operating model improvements with large carriers. We grew our gaming category revenue but at a much slower rate than the previous two quarters. As expected, we also saw strong growth in newer and emerging categories like augmented reality glasses, 3D printers, collectibles and toys, health rings and PC gaming handhelds. These positive growth categories were offset by declines in home theater and appliances. We are pleased with the progress we have made in our advertising and marketplace initiatives and both delivered positive contributions to gross profit rate in the quarter. We are also pleased with our customer experience metrics. Our relationship Net Promoter Score (NPS) was up materially year over year and the highest it has been in 11 consecutive quarters. We delivered significant year over year gains across all five of our most important attributes including helpful, empathetic, meeting tech needs like no other company can, value and ease. As we exited the year, we saw continued five star customer satisfaction gains in associate availability, product availability and store appearance for our online customers. We reached our fastest ever fulfillment speeds for a fourth quarter with 70% of online purchases fulfilled within two days. As I step back and look at the full year, I am proud of what we have accomplished. First, we returned to positive comps and stabilized our share position while navigating a complex and often evolving tariff environment. We successfully launched and scaled our US Digital Marketplace, onboarding more vendors than originally expected and drastically increasing our available SKU count for our customers. We grew Best Buy ads while almost doubling the number of ad partners compared to the prior year. We were able to both make the necessary investments in our marketplace and ads initiatives and expand our enterprise operating margin through a combination of disciplined expense management and efficiency optimization efforts. We leveraged the use of new technology in many areas to elevate customer experience and drive efficiency pleased with the investments we have made in customer facing labor over the past couple of years. We plan to keep our labor flat as a percentage of revenue, balancing the growth in dedicated specialized labor with more flexible and multipurpose resources. We expect the level of vendor provided labor hours to grow again this year after going 20% in the second half of last year. Together with our partners, we provide in person expert CE experiences for our customers that are unmatched in today’s retail world. As you would expect, we are also focused on our digital experience. We have already begun to activate on ways to bring our products to life through AI platforms this year. First, we’re partnering with OpenAI to give our customers a new way to explore and discover our products. We’re among the early retailers to make it easier for our product catalog to be displayed on ChatGPT, creating a more seamless path to product inspiration. We’re also an early ads partner and exploring more opportunities to enhance our shopping experience with OpenAI. In addition, we support Google on its new Universal Commerce Protocol, a cross industry standard that helps create a more seamless agentix shopping journey across the web. Using this Universal Commerce Protocol, we’re working with Google to build a new way for customers to purchase directly in AI mode in Google Search and the Gemini app. We are also the first retail partner to launch a native checkout integration with Uizard, an AI powered commerce platform. As agentic commerce matures, we want to serve our customers in new ways both on and off platforms. That includes evolving BestBuy.com to be more agentic friendly and ensuring our site is ready for AI agents to browse and discover on behalf of our customers. Other fiscal 27 online priorities include strengthening customer recognition and personalization, increasing app adoption and engagement, enhancing our new invite only capability and driving online conversion for categories like major appliances and TVs. Now I will discuss our services offerings which have long been a key differentiator for Best Buy. To sustain our leadership, A priority for us this year is to reassess our Geek Squad® services by simplifying our portfolio while at the same time making our services accessible to more customers. The good news is we’re making progress in simplifying our range of offerings with different price points to create customer choice. We are also planning to move beyond break fix and product installation services to dive into experiential solutions that cater to a variety of evolving customer needs. Whether it is a simple product upgrade or a full premium home installation, we will be there for our customers with speed, expertise and convenience. We’re continuing to prioritize our renowned Geek Squad® agent support in home, in store and virtually at the same time we’re enhancing our digital and AI experiences. This dual approach allows customers to choose how they want to receive service, whether it’s through direct interaction with an agent or more autonomous digital solutions, empowering customers to get the support they need on their own terms. Our services are also instrumental to the growth of our Best Buy business arm. Here we focus on business segments like education, hospitality, builders, healthcare and corporate enterprises. Product sales are concentrated in computing, home theater and major appliances and often paired with services such as field installation and end to end product support services like device lifecycle management. Our Best Buy business team generated more than $1.1 billion in revenue in fiscal 26 and we expect to generate a mid single digit sales growth rate again in fiscal 27. Now I’d like to provide an update on our Best Buy Marketplace. First, we have been very pleased with the outcome and performance. Our customers are responding favorably too as sales ramped through through the back half and represented approximately $300 million in domestic GMV in the fourth quarter. Furthermore, our five star ratings for third party purchase experiences are consistent with that of first party purchases. This outcome affirms that the team adopted the appropriate design principles to deliver a seamless customer experience. Regardless of whether the product is 1p or 3p and customer return rates for Marketplace items continue to be lower than our 1p return rates. These customers are taking advantage of the convenient return to store option for more than 80% of product returns. Top unit categories in fourth quarter included mobile phone accessories, computer accessories, movies, and small kitchen appliances, illustrating momentum and opportunity in what have traditionally been lower share categories for Best Buy. As a result, Marketplace is driving unit market share growth. While we are still early in our journey, our 3P seller community remains highly motivated and excited by the initial performance. To date, we have enlisted over 1100 sellers on Best Buy Marketplace and over 90% of our sellers with an open storefront are experiencing sales in any given week. I would add that our store employees are equipped with the right tools to help customers get what they want, even if we don’t carry it ourselves and are contributing to the marketplace GMV Moving to Best Buy ads in fiscal 26, our gross advertising collections were just over $900 million. This is up more than 7% versus last year. Today, these collections show up mostly as an offset to our cost of goods sold with a small amount flowing through revenue. In fiscal 27, we anticipate growth of approximately 10%. By the end of fiscal 26, we had 750 advertising partners, nearly doubling the count from last year Most of this growth stemmed from Marketplace third party partners following our August launch. Additionally, our first party partners are investing more with an average annual investment up 16% year over year. Our on site inventory m
Matt Bilunas (Chief Financial Officer)
Good morning. Let me start with our fourth quarter performance. Compared to the expectations we shared last quarter, Enterprise comparable sales declined 0.8% and were on the lower end of our guidance range. Despite the softer sales, our adjusted operating income rate of 5% was better than planned and included slightly favorable rates for both gross profit and SGA. I will now talk about our fourth quarter results versus last year. Enterprise revenue of $13.8 billion decreased 1% versus last year. Our adjusted operating income rate increased 10 basis points compared to last year and our adjusted diluted earnings per share increased 1% to $2.61 by month. Our enterprise comparable sales were down approximately 3% in November before improving to 0.2% in December and up 0.4% in January. In our domestic segment, revenue decreased 1.1% to $12.6 billion driven by a comparable sales decline of 0.8%. From a category standpoint, the largest contributors to comparable sales decline were home theater and appliances, which were partially offset by growth in computing and mobile phones. Our Online revenue of $4.9 billion decreased 2.3% on a comparable basis and represented 39% of our domestic revenue. Our online comparable sales growth includes the net commission revenue earned from our third party marketplace sellers. From an organic standpoint, the blended average sales price of our products was approximately flat to last year. International revenue of $1.2 billion increased 0.5% versus last year. The revenue increase was primarily driven by the favorable impact of foreign exchange rates which was partially offset by a comparable sales decline of 1.3%. Our domestic gross profit rate of 20.9% was flat to last year. During the quarter, our gross profit rate benefited from increased collections from Best Buy ads and growth in marketplace commissions. These items were offset by lower product margin rates which were primarily driven by an unfavorable sales mix and increased promotions. Our international gross profit rate decreased 90 basis points to 20.5%. The lower gross profit rate was primarily due to lower product margin rates. Moving to SGA where our domestic adjusted SGA decreased $36 million. This decrease was primarily driven by reduced compensation expenses which included incentive compensation and lower Best Buy health expenses. These items were partially offset by increased expenses related to marketplace and Best Buy ads, including higher advertising and technology expenses. During fiscal 26, total capital expenditures of $704 million were essentially flat to fiscal 25. During fiscal 26, we returned $1.1 billion to shareholders through share repurchases and dividends. We remain committed to being a premium dividend payer and this morning announced that we are increasing our quarterly dividend to $0.96 per share, which is a 1% increase. This increase represents the 13th straight year we have raised our regular quarterly dividend. Moving on to our full year fiscal 2017 financial guidance, which is the revenue in the range of 41.2 to $42.1 billion, comparable sales of down 1% to up 1%, an adjusted operating income rate of approximately 4.3% to 4.4%, an adjusted effective income tax rate of approximately 25.5%, adjusted diluted earnings per share of $6.3 to $6.6, capital expenditures of approximately $750 million and lastly, we expect to spend approximately $300 million on share repurchases. From a phasing standpoint, the repurchases are planned to occur primarily during the fourth quarter, resulting in our weighted average share count remaining near the levels at fiscal 26 year end. Next, I will cover some of the key working assumptions that support our guidance. Earlier, Corey provided context on our fiscal 27 top line assumptions, so let me spend more time on the profitability outlook. We expect our gross profit rate to improve by approximately 30 basis points compared to the prior year due to growth from Best Buy ads in our US Marketplace. Now moving to adjusted SGA expectations we which include the following puts and takes SGA’s plan to increase in support of ads …