Chief Executive Officer at Best Buy
Good morning, everyone and thank you for joining us. I am proud of our team's strong execution and focus on providing amazing service for our customers. Throughout the quarter, they navigated the uncertain macro environment and drove higher customer satisfaction scores while keeping energy and excitement going around the initiatives that we believe will drive longer-term opportunities.
We grew our Totaltech membership, increased momentum in our health business, launched new product categories and reached our fastest ever Q1 average online sales delivery speed. At our investor update in March, we said we expected our fiscal '23 financial results to look different. As we all lap stimulus and other government support, our industry cycles the last two years of unusually strong demand, and we leverage our position of strength to continue to invest in our future.
In addition, we said we expected promotional activity to increase and supply chain expenses to be a pressure. As such, we guided our annual comparable sales to decline 1% to 4% and our non-GAAP operating income rate to decline 60 basis points to approximately 5.4%. Therefore, the drivers of our Q1 financial results were largely as expected. Macro conditions worsened since we provided our guidance in early March, including higher inflation and the war in Ukraine, which resulted in our sales being slightly lower than our expectations and supply chain costs a little higher than we planned.
Our investment in Totaltech at approximately 100 basis points of gross margin pressure was in line with our expectations and revenue from our credit card profit share was higher than anticipated. Overall, I am proud of our team's ability to develop and execute plans to adapt to the changing environment over the past two years and to the more recent macroeconomic conditions. Our revenue and profitability remained much stronger than they were pre-pandemic.
Q1 revenue of $10.6 billion is $1.5 billion or 16% higher than Q1 of pre-pandemic fiscal '20. And while our non-.GAAP operating income rate is currently being impacted by our investments, it is still 80 basis points higher than fiscal '20, even with those investments and supply chain pressures. Our Enterprise comparable sales declined 8% as we lapped particularly strong comparable sales last year. The 37% comp sales growth in Q1 of last year was driven by the timing of government stimulus payments, lapping a quarter during which our stores were closed early in the pandemic, and the heightened demand for stay-at-home focused purchases.
From a category standpoint, the biggest contributor to the comp sales decline were computing and home theater. Although down from last year's strong sales compared to Q1 of fiscal '20, our computing revenue has grown more than 30%. Our Domestic appliance business, which has grown every quarter, except for one [Phonetic] for more than 10 years, delivered comparable sales growth of 3% on top of 67% growth last year.
We aspire to help customers with all their technology needs in the most seamlessly possible across all touch points, and we are encouraged by the improvements in our customer Net Promoter Scores. We have been leveraging our omnichannel strength to serve and support our customers as their shopping behavior and expectations have evolved significantly over the past two years. While customers have returned to physical stores to see and touch products and get advice, our digital engagement with customers remains very high. Our online sales as a percentage of domestic sales are 31%, still twice as high as pre-pandemic levels. And revenue from virtual phone and chat interactions continues to increase rapidly.
Additionally, we are expanding our engagement with customers in their homes as in-home consultations and in-home installations are up significantly. During the quarter, we saw higher NPS overall, and we saw our highest ever NPS from in-store purchases and in-store services. I would like to take a moment to expand on the topic of inflation, important in the current environment. Like other companies, we have seen cost inflation in areas such as labor, marketing and supply chain. However, this cost inflation was largely in line with our expectations and benefited from planning and execution over the previous two years.
As it relates to product pricing, we have seen an increase in our average selling prices over the past two years due to a number of factors. First, our product sales mix has changed as customers have mixed into premium products at higher price points. This has been happening for years and accelerated during the pandemic. Additionally, we have driven material growth in appliances, which carry high ASPs and have become a larger part of our mix.
Second, there was overall lower promotional and markdown activity during much of the pandemic due to the shortage of product to meet demand. And third, our vendors are absorbing higher transportation and component costs and some of that has led to higher cost of goods sold for us. In many cases, we have passed through this higher cost of goods sold in the form of higher prices to customers.
Importantly and fundamentally, we aim to be competitive in our pricing. We have seen a pickup in the promotional environment, as we have consistently noted, starting in July of last year. As we entered fiscal '23, we expected the promotional environment to create margin pressure in Q1 and throughout the year. In Q1, we did experience a more promotional environment for many of our products when compared to last year. And some products were even more promotional than we expected coming into the quarter and were similar to pre-pandemic levels.
Turning back to our Q1 results. Our ending inventory was up 9% compared to last year and essentially in line with the growth of our revenue since fiscal '20. Our teams did an amazing job actively managing inventory levels as the quarter progressed in this evolving supply and demand environment. Pockets of inventory constraints still exist, but are currently isolated to certain products and vendors.
Overall, our inventory remains healthy. Even though inventory availability in CE is much better than it has been for much of the pandemic, the supply chain continues to be challenging with ongoing transportation disruptions and higher costs including containers, labor and fuel. We are, of course, not immune to the supply chain challenges in the world today, and we are seeing some impacts on our business. We have invested in many aspects of our supply chain over the last several years in ways that have helped us navigate the environment and mitigate the impacts. We have employed a portfolio approach as it relates to carriers, transportation partners and parcel delivery partners. And we have built deep relationships across our supply chain, including port carriers and deconsolidation operations. In addition, we strategically leveraged the use of both rail and over-the-road transportation modes to move product. All of this has helped us to drive capacity, avoid large-scale disruption and mitigate cost increases.
Importantly, our contractual relationships have allowed us to limit our exposure to the more turbulent spot market. The strong relationships we have cultivated with our vendors have also been crucial to our navigation of the supply chain environment. Working closely with our vendors, we have a great deal of visibility into and can influence the status of product in the supply chain process.
Additionally, we actually handled transportation for many of our vendors, meaning we take control in Asia or Mexico. Then we have full visibility and control of the inventory movement and costs. We have invested in our distribution center network, effectively bringing product closer to customers and implementing technology solutions that increase productivity and speed to customer. We have also invested in our store-based fulfillment, including our ship-from-store customer fulfillment centers, and implemented an effective employee delivery system.
These investments have allowed us to make dramatic improvements in speed of delivery to our customers, even with the significant increase in volume in the past two-plus years. In addition, we have many options for our customers to pick up their products themselves through in-store pickup, curbside pickup, lockers and alternate pickup locations. Customers clearly appreciate the convenience as the percentage of online sales picked up in stores has remained relatively consistent over the past several years at approximately 40%, even with the incredible improvements in shipping time.
As it relates to ESG, we remain encouraged by the recent recognition of our work to support the environment and our community, both inside and outside Best Buy. We are proud to be included on Ethisphere's 2022 World's Most Ethical Companies list. We are one of only three retailers on it and it's our eighth time earning the honor. We were also included on the 2022 Forbes List of Best Employers for Diversity as one of the top 4 retailers on the list. It's our third consecutive year making the rankings that recognize leadership and commitment towards building a more inclusive workplace.
During the quarter, we expanded our recycling program to include a new service for customers who are looking for our help recycling their large products. For a fee, we will go to customers' homes to pick up large electronics and appliances as well as an unlimited number of small products and ensure they're responsibly recycled and kept out of landfill. This service is in addition to our everyday recycling programs available at all Best Buy stores and our Holloway service with the purchase of new products.
As I mentioned earlier, our employees executed well in the evolving environment, in many cases making hard decisions to run the business effectively and prioritize our customers. Even with the expected slowdown this year as we lap two-plus years of pandemic impacts, we continue to be in a fundamentally stronger position than we expected to be at this point. We are confident in the strength of our business and excited about what lies ahead. We have a compelling value creation opportunity and are investing now, as we have successfully invested ahead of change in our past, to ensure we're ready to meet the needs of our customers and retain our unique position in our industry. As we provided a more detailed investor update in combination with our Q4 results on March 3, I'm not going to outline all our initiatives, but would like to provide a few updates on our progress.
In March, we spoke quite a bit about Totaltech, our unique membership program that includes member pricing discounts, product protection, free delivery and installation and 24/7 tech support. Fundamentally, Totaltech is designed to provide our customers with complete confidence in their technology. Buying it, getting it up and running, enjoying it and fixing it if something goes wrong.
During the quarter, we continued to sign up more members as customers realize the great benefits of the program. And we are encouraged by the higher engagement, customer satisfaction and increased revenue we continue to see from customers who have signed up to become members. We are pleased with the pace at which we are acquiring new members, especially considering the macro environment. We continue to see that Totaltech has broad appeal across customer segments.
Additionally, we are improving our ability to gain members not only in retail stores but in our digital and in-home channel. As a reminder, from a financial perspective, Totaltech is a near-term investment to drive longer-term benefit. We expect year-over-year pressure on our gross profit rate to cease as we lap the launch in October. And over time, we expect the incremental spend we garnered from members will lead to higher operating income dollars. Accordingly, Totaltech is a significant contributor to our fiscal '25 goals.
As we outlined in March, we are optimizing our workforce and reimagining our physical presence in ways that serve our customers' needs in our more digital world. We are making investments that provide a better, more seamless shopping experience as the customer moves from online shopping to visiting our stores to video chatting from their home.
This includes our virtual sales strategy. Early in the pandemic, the volume of customers interacting with us via phone and chat skyrocketed. The volume has remained high, and we are actively working to increase the sales opportunity of these interactions through a number of efforts. One, we are leveraging a team of expert sales associates working from their homes, many of whom have in-depth store experience and are certified in multiple categories. Two, we have staffed our virtual store with dedicated experts who can help you via video and demo a product just like they would in our store. And three, we are enhancing the training for our offshore call center agents to help them feel like confident salespeople.
We are already seeing great results as revenue from these interactions more than doubled in Q1 compared to last year. Enhancements to our technology platforms are in progress to further streamline our operations and enable these employees to chat, video, text, share their screens and transact. With this, we will be able to accelerate the productivity and sales opportunity further.
We have spoken quite a bit about our consultation service that provides customers with expert help and inspiration tailored to their unique tech needs often right in their homes. This is growing and important as we continue to see very high customer satisfaction scores and increasing spend by customers who engage with the consultants. We also have a team that is focused on providing tech products and solutions for businesses in specific industries, including homebuilding, hospitality and healthcare. We have been growing this aspect of our business for several years and more recent investments in our digital capabilities and fulfillment have led to strong growth momentum that we expect will continue.
For example, Q1 revenue from this team was up 15% over last year's Q1 and up more than 70% from Q1 of fiscal '20. As I step back to comment on our overall workforce, we have been actively evolving the composition of our teams throughout the last two years as customer behavior changed and became even more digitally focused. The result is that our overall head count is actually lower than pre-pandemic. We feel like we are largely at the right number as it relates to the strategic evolution of our operating model, the demand we are seeing and the nature of our customer interaction. We will continue to learn, evaluate and evolve the model in light of the way the business and shopping habits are changing.
At the same time, we have invested and will continue to invest in flexibility, training, compensation and benefits for our associates. We are incredibly proud that our field turnover rates remain significantly below the retail average and are near our pre-pandemic turnover rates. Additionally, our store general manager turnover is just 6%, meaning our GMs have the tenure and experience to effectively help their teams navigate this dynamic environment. It is clear that we have store managers who are invested in their employees, their career paths, their well-being and their communities, and I thank them for their dedication.
Of course, as previously noted, we are also reimagining our physical stores. This year, we expect to complete approximately 45 remodels to implement our experience store concept. We are excited about these remodels as we continue to see higher revenue and NPS in the pilot locations compared to the controlled stores, especially as one of the pilots has been running almost two years. We also continue to see strong results from our outlet stores and are on track to roll out more this year with new stores opening soon in Chicago, Houston and Phoenix.
Our outlet stores assort open box, clearance, end-of-life and otherwise distressed large product inventory in major appliances and televisions that might otherwise be liquidated at a significantly lower recovery rate. We tend to see twice the recovery rate of our cost of goods sold when we sell this product at our outlets versus alternative channels. Additionally, these locations can attract new and reengaged customers.
Last year, we estimate that approximately 16% of outlet customers were new to Best Buy and 37% were reengaged Best Buy customers. In fiscal '23, we plan to double the number of outlets by opening 15 additional stores, and we are expanding our assortment beyond major appliances and large TVs to include computing, gaming and mobile phones. We are already seeing increased performance in these new outlet formats as customers gravitate to the expanded assortment.
Finally, these outlet stores are an important element of our circular economy strategy by providing a second opportunity for products to be resold instead of ending up in a landfill. And another important element of this circular economy strategy is our trade-in program. We have an extensive trade-in program covering more major CE categories than anyone else. In Q1, we took in 135,000 trade-in units from customers. Not only does our trade-in program keep tech products out of landfills, our customers typically spend 3 times the amount they received on their trade-in on new products at Best Buy.
We are continuing our category expansion strategy as well. For example, we're helping customers commute more sustainably with a new lineup of the best electric bike scooters and mopeds. Over the next 18 months, we'll be bringing a selection of these products to nearly every Best Buy store. We're also rolling out charging devices, perfect for our customers' garages in several stores. And Geek Squad can not only assemble the e-bikes for customers, but we're also beginning a pilot to test service and repair for e-transportation products in some of our stores. We also just recently announced further expansion into the health and beauty category by launching new skincare technology products online and in 300 of our stores. In our Best Buy Health business, we are pleased with our first quarter momentum. In Q1, we saw strong growth in new sign-ups for our active aging business that offers health and safety solutions to enable adults to live and thrive at home.
In our Emerging Virtual Care business, we connect patients with their physicians to enable care at home. Last November, we acquired Current Health, a technology company with an FDA-cleared monitoring platform for care at home to help us accelerate our strategy. The combination of Current Health offerings and our scale, presence and Geek Squad in-home capabilities is already resonating with the healthcare industry. Boosted by its affiliation with Best Buy, Current Health had its best commercial booking quarter ever, including expansion of its relationships with health systems such as Mount Sinai Health System, Parkland Health, as well as the UK National Health Service and others.
I'm excited to share that Current Health was awarded best hospital technology implementation in the 2022 MedTech Breakthrough Awards program for its role supporting health systems across the US implement innovative care home programs. Current Health was also selected by Frost & Sullivan as the 2022 Company of the Year in the global virtual home care platform industry.
In summary, I am proud of how much we accomplished in the first quarter and excited about what lies ahead for us. Clearly, there remains a great deal of uncertainty. On one hand, consumers still have relatively strong balance sheet, they continue to spend, wages are up and unemployment is at record lows. On the other hand, many consumers are lapping stimulus income they received last year and are also facing issues like higher gas and food prices, rising interest in mortgage rates, recession fears, stock market volatility and geopolitical uncertainty stemming from the war in Ukraine.
Underlying all that is the gradual shifting of spend from stay-at-home purchases to more experiential spend on services and the activities, many were unable to enjoy during the pandemic. As I mentioned at the start of my comments, while the drivers of our results were largely as expected, the comparable sales decline of 8% was on the softer side as inflationary pressures heightened throughout the quarter. That trend has continued into the beginning of Q2, and it does not appear that it will abate in the near term.
Therefore, as Matt will outline, we are revising our guidance and now expect fiscal '23 comparable sales decline in the range of 3% to 6%. And we are correspondingly updating our non-GAAP operating income rate to a range of 5.2% to 5.4%. We will continue to proactively navigate this rapidly changing environment, balancing the day-to-day operations with our commitment to our long-term strategy and growth initiatives.
Before I turn the call over to Matt for more details on Q1 and our outlook, I want to thank our employees for everything they do for our customers in all our channels. I greatly appreciate your teamwork and perseverance. I love the Best Buy culture and our commitment to enriching lives through technology. And I will close by saying this. We firmly believe that technology is more relevant today than ever. Every aspect of our lives has changed with technology, and we uniquely know how to make it human in our customers' homes right for their lives. From our expertly curated assortment to in-home consultations, all the way to tech support when your tech isn't working the way you want or traded in recycling when you want to upgrade. We believe we have an ability to inspire and support customers in ways no one else can.
And with that, I would like to turn the call over to Matt.