Corie Barry
Chief Executive Officer at Best Buy
Good morning, everyone and thank you for joining us. I am incredibly proud of our team as they continue to rise to the challenges of the past few years. With so much going on that is beyond their control, I remained impressed to their ability to manage the rapidly shifting business environment and priorities. As we said in March, we expected our financial results would be softer this year as we lapped record sales volumes. However, the macro environment has been more challenging and uneven than expected due to several factors. And that has put more pressure on our industry, changing the trajectory of our business versus our original plan.
We are focused on balancing our near-term response to difficult conditions and managing well what is in our control, while also delivering on our strategic initiatives and what will be important for our long-term growth. Our strategy and our confidence in it remain unchanged. We have exciting opportunities ahead of us in a world that is more reliant on technology than ever. We are a financially strong company with a resilient world-class team that will successfully navigate the current environment.
Now on to the second quarter results we reported this morning. Our comparable sales were down 12.1% as we lapped strong Q2 comparable sales last year of almost 20%. This represents 8.3% sales growth over the second quarter of pre-pandemic fiscal '20. Our non-GAAP operating income rate declined compared to last year on the SG&A deleverage from the lower revenue, the investments in our growth initiatives and the increased promotional environment for consumer electronics. Our non-GAAP earnings per share was up 43% versus pre-pandemic fiscal '20.
We are clearly operating in a volatile consumer electronics industry. We assume the CE industry would be lower following two years of elevated growth, driven by unusually strong demand for technology products and services and fueled partly by stimulus dollars. In addition, we expected to see some impact to our business as customers broadly shifted their wallet spending back into experience areas, such as travel and entertainment. We did not expect and compound these impacts as a changing macro environment where consumers are dealing with sustained and record high levels of inflation in some of the most fundamental parts of their daily lives, like food.
While these factors have led to an uneven sales environment, they have not deterred us from continuing to make progress on our initiatives. During the quarter, we drove broad customer NPS improvements even compared to pre-pandemic levels, particularly in installation and repair. We signed up new Best Buy Totaltech members and increased our delivery speed, delivering almost 1/3 of customer online orders in one day. We also completed store remodels, opened new outlet stores and began implementing newly signed deals with health care companies.
From a top-line perspective, we saw year-over-year sales declines across most product categories, with the largest impacts to comparable sales coming from computing and home theater. Although down from last year's strong sales compared to Q2 of fiscal '20, our computing revenue has grown more than 20%. Our Domestic appliance business comparable sales declined slightly as it laps more than 30% growth in the second quarter of last year, and revenue is up more than 45% compared to fiscal '20.
Our data would tell us that customers are making some decisions to trade down, particularly those in lower-income households. This is not across all categories. But for example, in the television category, customers are moving more into our lower price point exclusive brands products. We're also seeing more interest in sales events, such as Prime Day, tax-free events, and other events geared at an exceptional value. I applaud our team's proactive management of our inventory during the quarter as we saw the sales trajectory changing.
Our inventory at the end of Q2 was down 6% from the second quarter of last year and up approximately 16% from pre-pandemic fiscal '20. Overall, our inventory is healthy and reflects an evolving mix of products in our network, including more high ASP appliances and larger-screen televisions, which also have long lead times and a slower inventory turn. While we took more inventory markdowns than last year, the level reflected a normalization to pre-pandemic activity.
Within our inventory numbers, there are categories where we have ample inventory supply and still pockets where we are constrained. In our industry, it's not as simple as we have inventory or we don't. It can be incredibly variable by product and even brands within a particular product. For example, we are also still experiencing inventory constraints in key models and brands across computing and gaming.
As we move into the back half of the year, we are planning inventory thoughtfully, yet investing strategically for holiday. While it is important to manage inventory against current demand, we also want to ensure we are well positioned to react to the ever-changing consumer needs. The promotional environment was more intense than last year and even more than we expected entering the quarter as sales demand softened. Some areas were quite aggressive from a promotional standpoint, especially where inventory was ample or in excess. Overall, we feel the level of promotionality has returned to pre-pandemic levels.
Over the past few years, we have seen gross profit pressure from higher supply chain costs, which, of course, includes increased parcel costs from our higher mix of online sale. In addition, we estimate that roughly half of the increased supply chain cost this quarter versus the comparable period in fiscal '20 is being driven by cost increases or inflationary pressures. Conditions across the global supply chain continue to evolve. On a year-over-year basis, we saw higher costs in Q2 and expect that to continue through the remainder of the year. However, we are starting to see some signs that the market is stabilizing and moderating.
During the pandemic, the capacity and rate pressure started in International and works their way to Domestic logistics. Now we are experiencing some relief in International first and early signs of loosening markets domestically. For example, in Ocean Logistics, we are taking advantage of some rate opportunities, but continue to be mindful of ILWU labor discussions and overall U.S. port congestion as we move into the peak shipping season. As it relates to inbound Domestic transportation, while we are starting to see a more balanced capacity market, we continue to see inflationary pressures from higher fuel and labor costs and rail yard and general supply chain network congestion.
I would like to provide an update on Totaltech, our unique membership program designed to provide customers with complete confidence in their technology, with benefits that include member pricing discounts, product protection, free delivery, standard installation, and 24/7 tech support. Considering the macro environment and decline in our product sales, we are encouraged with the pace at which we are acquiring new members. In Q2, nearly half of the new members joining the program were either new or lapsed customers, reinforcing how the value of this program resonates beyond our existing loyal customers.
Our associates continue to embrace the program as the fulsome nature of the offering not only simplifies the sales interaction, it also is a program our team members can confidently stand behind as they believe in the value it provides to every single customer. In July, we enhanced our in-store point-of-sale tools to better assist our team in showcasing the value of Totaltech to potential new members, and their early results have been positive. At this point in the national launch, we continue to be encouraged by the higher engagement, customer satisfaction, and increased revenue we're seeing from customers who have signed up to become members.
As we have previously shared, from a financial perspective, Totaltech is a near-term investment to drive longer-term benefits. Over time, we expect the incremental spend we garner from members will lead to higher operating income dollars. As I've just covered, there are several things we are seeing with the program that give us confidence that customers value the membership and that our thesis in general is playing out. At the same time, consumer electronics is a low-frequency category. And we are in a unique macro environment, meaning it will take time for us to truly assess the performance. As you would expect, we will continue to monitor the program and iterate on the offering as we learn more.
In addition to Totaltech, our Best Buy branded credit card continues to drive a valuable and sticky relationship with our customers. We continue to see growth in cardholders. More than 25% of our revenue is transacted on our Best Buy branded card. And cardholders have been increasing the use of their card outside Best Buy stores as well. These customers tend to be more engaged with Best Buy over time, with higher frequency and spend than non-cardholders. Combined with our partners' largest lease-to-own portfolio and our buy now, pay later test, this means we can offer our customers a variety of ways they can shop confidently with us. And we can leverage those relationships into our future.
As we emerge from the pandemic, it is clear that our customer shopping behavior has changed. Our online sales as a percentage of Domestic revenue in Q2 was 31%, nearly twice as high as pre-pandemic. Virtual revenue via video, phone and chat is growing rapidly as well, as sales for the first six months of the year are already almost equal to the virtual revenue we generated for all of last year. While still small overall, sales in our virtual store are ramping quickly. And we recently expanded categories to include appliances and home theater. In addition, our high NPS in-home interactions continue to increase rapidly. In fact, in-home installations have seen double-digit growth versus the prior year in five of the last six quarters and year-to-date in-home sales consultations are up more than 30% over last year and pre-pandemic.
Of course, our stores remain incredibly important for customers to see and touch products and get advice. In addition, they're crucial to our fulfillment strategy. In the second quarter, customers representing 42% of our online sales chose to pick up their products at our stores and an additional 18% of online sales were shipped out of our store to customer homes. These in-store pickup and ship from store numbers have remained incredibly consistent for the last several years, even as shipping speed and options have dramatically increased. It is imperative that we evaluate how we operate and service of these evolving customer needs and make the necessary adjustments to ensure we come out of this not just a vital company, but a vibrant one.
We tested new field operating models in four markets over the past year to help us better understand how to deploy leadership resources in a more digital world. As a result of these tests, earlier this month, we made structural changes to our operating model that resulted in some store roles being eliminated. We hope to retain as many of these talented associates as possible. This is one component of our enterprise-wide restructuring initiative that commenced this quarter. With these changes, we are able to reinvest back into frontline customer-facing sales associates.
We are continuing to reimagine our physical presence in ways that cater to our customers' changing shopping patterns as well. As part of our Charlotte holistic market approach pilot, we are testing a new 5,000-square-foot store with a unique digital-first approach. Just opened last month, the store includes a 7-foot tall digital display that customers will see as they enter the store that explains what's new and how customers can shop. The store includes curated assortments across our product categories, except for major appliances and other large products. The majority of products will primarily be on display to touch and try.
To purchase, customers can scan the QR code on any product price tag using their phone. This immediately sends a notification to a Best Buy employee to pick up the product from the store's backroom and bring it to the register for checkout. Of course, customers who want to will be able to consult with sales associates, in-home consultants and Geek Squad agents, who always have access to our complete assortment online using our increasingly rapid shipping. From an online sales fulfillment perspective, the store offers both in-store pickup and convenient lockers.
The Charlotte market pilot also includes a traditional core store that we converted to an outlet store. The outlet has an expanded assortment of product categories, a dedicated team of employees and agents that rapidly quality check and repair all product for resale, a new services repair hub and spoke model, and an Autotech mega hub for car tech installation. This outlet is performing extremely well and is frankly on track to deliver revenue on par to the pre-converted conventional store, with a considerably lower operating cost and greater productivity. Those results give us confidence in our outlet strategy.
During the quarter, we opened 2 new outlet stores in Virginia and Phoenix and just opened a location in Chicago earlier this month, bringing us to 19 locations. We see twice the recovery rate of our COGS when we sell open box, clearance and end-of-life inventory at our outlets versus alternative channels. With assortment expanded to include major appliances, large TVs, computing, gaming and mobile phones, we believe now is an opportune time to appeal to our existing Best Buy customers as well as an increasingly deal-seeking consumer overall.
Our outlet store assortment is also available for purchase online, with many products eligible for national ship-to-home fulfillment as well as local store pickup. This capability unlocks a very productive way to refurbish inventory, giving it a new life, while also serving a deal-seeking customer. We still plan to double the number of outlets to approximately 30, although some may not open until fiscal '24. So far this year, we have invested in and completed seven experienced store concept remodels. The results we are seeing in the existing two pilot remodels, including higher NPS and higher customer spend, continue to make us confident in and excited about this part of our strategy. We expect to complete a total of approximately 40 experienced store remodels this year.
I am very proud of how much work the team has done to test and iterate multiple store and operating model concepts over the past few years in response to the dramatic pivot in customer behavior. We introduced a great deal of change into the field, not always perfectly. And we have learned and accelerated some initiatives while stopping others. On top of that, of course, the macro backdrop has shifted and the trajectory of the business has changed significantly in an incredibly short time.
We continue to invest in our people and our stores, with an eye toward the best possible customer experience, leveraging our unique differentiators. Through all the changes, overarching store NPS is substantially higher than pre-pandemic, including more stores than we have ever seen at what we consider to be best-in-class level. This is entirely due to our amazing store associates' hard work and dedication to always being there for our customers. We have consistently invested in our employees over the past three years, including raising hourly wages more than 20% versus pre-pandemic and adding additional benefits, such as paid caregiver leave, financial hardship assistance, and paid time off for part-time employees.
Now I would like to touch on Best Buy Health. Our consumer health business, where we curate health and wellness products online and in our stores, is largely experiencing similar revenue trends as our core category. We are excited about the new FDA ruling that allows the sale of over-the-counter hearing aid. We just announced an expanded collection of hearing devices, an in-store experience in more than 300 stores, and a new online hearing assessment tool, making it more convenient than ever for the millions of Americans with mild-to-moderate hearing loss to get the products and support they need.
During the second quarter, we continued to see 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. Revenue for this business was slightly up in the quarter compared to last year.
We are encouraged by the momentum we have built in the virtual care business in the first half of the year. We are very focused on successfully implementing the large U.S. health system accounts that have been won recently, including NYU Langone Health for hospital at home and Mount Sinai Health Systems for chronic disease management. And we are also making progress leveraging our Best Buy capabilities in this space. Our Geek Squad team successfully completed additional health training in Q2 and launched a new Geek Squad pilot service with Geisinger Health. As a reminder, the revenue contribution from virtual care is currently very small and will take time to ramp as health industry has a longer return on investment.
We just published our 17th annual ESG report, which outlines how we are working across the company to make a positive impact on our planet, employees, customers and communities. We continue to focus on ESG initiatives that drive sustainable long-term value creation. Last year, we made significant progress toward our goals to reduce our carbon footprint, attain our 2025 hiring commitments and expand our Best Buy Teen Tech Center program. We recently hit a milestone with the Best Buy Foundation Teen Tech Centers when we opened one earlier this month in Gary, Indiana, marking our 50th Teen Tech Center. These centers provide teens from disinvested communities with guidance, training and tech access to help successfully prepare them for the future.
In terms of the environment, we continue to drive forward the circular economy, a system in which nothing is wasted. Since 2009, we have reduced our carbon emissions 62% through investments in renewable energy and operational improvements. We are on track to reduce our carbon emissions 75% by 2030. And last year, we became a founding member of the Breakthroughs 2030 Retail Campaign, which aims to accelerate climate action within our industry.
We continue to operate the most comprehensive consumer electronics and appliances take-back program in the U.S., collecting more than 2.5 billion pounds since 2009. We also made significant progress toward our fiscal '25 hiring commitment to help ensure we build an inclusive, diverse and thriving workforce. In fiscal '22, we filled 37% of new salaried corporate positions with black, indigenous and people of color employees, ahead of our goal to fill one in three positions. And we filled 26% of new salaried field positions with women employees, marking progress on our goal to fill one of three positions. We're proud that 60% of our most senior leaders, including our Board of Directors and Executive team, is made up of women and people of color. We encourage you to review our full ESG report available on our corporate website.
In summary, the first half of the year has been difficult from a sales perspective. And our employees have executed well in the evolving environment, in many cases, making hard decisions to run the business effectively and prioritize our customers.
I just want to take a moment to address the fiscal '25 financial goals we introduced in March. We remain confident in the strategic premise covered in March. However, the current macro backdrop has changed in ways that we and many others were not expecting. As such, we are removing these targets. And we'll share more context on our midterm financial expectations once we begin to experience a more stable operating environment.
As I said at the beginning of my remarks, we are managing thoughtfully and carefully, while still investing in our future. This includes actively assessing further actions to evolve our operating model, manage profitability and iterate on our growth initiatives. We fundamentally believe that technology is more important than ever in our everyday lives. And as a result of the past few years, consumers have even more technology devices in their homes that will need to be updated, upgraded and supported over time. As our vendor partners continue to innovate and the world becomes increasingly more digital in all aspects, we will be there to uniquely help customers in our stores, online, virtually and directly in their homes.
This company has navigated monumental change, riding incredible highs and managing difficult lows since our founding 56 years ago. As we have done throughout our history, we will use this moment to lead and double down on our purpose, making it clear that we continue to uniquely support customers in ways literally no one else can.
Now I would like to turn the call over to Matt for additional details on our second quarter results and outlook for the remainder of the year.
