Chief Executive Officer at Best Buy
Good morning, everyone, and thank you for joining us. For the third quarter, we are reporting better-than-expected profitability on slightly softer-than-expected revenue. Specifically, we are reporting a comparable sales decline of 6.9%, which is slightly below our outlook for the quarter as consumer demand softened through the quarter. At the same time, we expanded our Q3 gross profit rate 90 basis points from last year due to profitability improvements in our membership program and better product margins. We also lowered our SG&A expense compared to last year as we tightly controlled expenses and adjusted our labor expense rate with sales fluctuations.
During the quarter, we grew our paid membership base and drove meaningful improvements in customer satisfaction scores across many of our service offerings, including in-home delivery, in-store services, and remote support. Our Q3 results demonstrate our ongoing strong operational execution as we navigate through the sales pressure our industry has been experiencing for the past several quarters. The sales pressure is due to many factors, including the pandemic pull-forward of tech purchases, the shift back into services outside the home like travel and entertainment and inflation.
In the more recent macro environment, consumer demand has been even more uneven and difficult to predict. Based on the sales trends in Q3 and so-far in November, we believe it is prudent to lower our revenue outlook for Q4. But despite the lower sales outlook, the midpoint of our annual EPS guidance is now slightly higher than the midpoint of our original guidance as we entered the year. I want to thank our associates for their resilience and relentless focus on our customers. I continue to be so very proud of the way our teams are managing the business today and preparing for our future.
Now, I would like to provide more color on our Q3 performance and holiday plans before passing the call off to Matt for the financial details on the quarter and our outlook. We continue to strategically manage our promotional plan and we're price-competitive in an environment where consumers are very deals focused and making spend tradeoffs right for their budget. Consumers are looking for value. And from an industry themes perspective, we are seeing some trade-down in the television category, but not as much trade-down in other categories. As a result and as expected, the goal of industry promotions and discounts were above last year and pre-pandemic fiscal '20.
Similar to the first-half of the year, during Q3, our purchasing customers were relatively consistent in terms of demographics versus last year. As a reminder, we over-index with higher income consumers compared to the general population and we saw the percent of revenue categorized as premium and the percent of purchases over $1,000 remain constant versus last year. We have largely maintained our year-to-date industry share in our Circana, formerly NPD tracked categories.
Against this backdrop, our focus on deepening relationships with customers remains crucial. Our membership program delivered another quarter of growth and improved profitability versus last year. The Q3 contribution to the enterprise operating income rate was larger-than-expected due to the combination of a lower cost to serve and higher paid in-home installation services. For the full-year of fiscal '24, we now expect our three-tiered membership program to contribute approximately 35 basis points of enterprise year-over-year operating income rate expansion. It is still early since we introduced material changes in June, but there are a number of insights I would like to share.
One, we continue to increase our paid membership base and now have 6.6 million members. This compares to 5.8 million at the start of the year. During the third quarter, we signed-up approximately 35% more new paid members compared to the third quarter of last year, driven by the addition of the new tier and buoyed by back-to-school and Octobers member month events.
Two, our paid members continue to interact with the brand and shop more frequently compared to non-members, which is the goal of any membership program.
Three, and though it is early and we have not yet lapped the new programs, retention rates are outperforming expectations.
Four, My Best Buy Total, which is the evolution of our prior Total Tech offer continues to resonate more strongly in our physical stores setting. As a reminder, this tier as $179.99 per year 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 up to two years of product protection, including AppleCare Plus on most new Best Buy purchases and includes all the benefits of My Best Buy Plus.
And five, our My Best Buy Plus tier is resonating more with the digital customers and appeals to a broader set of customer segments. This is the new tier 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.
We are still early in the process and are testing different promotional offers to determine what resonates most with consumers, as well as continuously improving the digital experience to make it even easier to find deals and benefits. Of course, we also have a free membership tier that enables free shipping for everyone, a great differentiator especially in the holiday season.
During the quarter, we continue to evolve our omnichannel capabilities to support our strategy and make it easy and enjoyable for consumers to get the best tech and premier expert consultation and service when they want it through our online store and in-home experiences. Last month, we introduced Best Buy drops, which is a new experience only available through the Best Buy app. It gives customers the opportunity to access product releases, limited edition items, launches and deals from a variety of categories. There are multiple drops nearly every week and they are only available in limited quantities. We are encouraged by the early results as Best Buy drops is driving both incremental customer app downloads and higher frequency of app visits.
We have also seen growth in sales from customers who are getting help from our virtual sales associates. These interactions which can be via phone, chat or our virtual store drive much higher conversion rates and average order values than our general dot com levels. This quarter, we had 140,000 customer interactions by a video chat with associates, specifically out of our virtual store location. As a reminder, this is a physical store in one of our distribution centers with merchandising and products that is staffed with dedicated associates and no physical customers. We also teamed up with live shopping platform, TalkShopLive to test a series of live online shopping events this month, starring our virtual sales associates. These events feature products from some of our newer categories like beauty and wellness, as well as new tech and unique products.
Our physical store portfolio is one of our key assets and the role of our stores is to provide customers with differentiated experiences, services and multichannel fulfillment. At the same time, we need some stores to be more cost and capital efficient to operate. As a reminder, while almost one third of our domestic sales are online, 43% of those sales were picked up in one of our stores by customers in Q3, and most customers stop us in multiple channels.
Consistent with our normal cadence, we have largely completed the changes to our store portfolio for the year so we can focus on the holiday season with minimal disruption to our physical stores. As we think about next year with the current economic backdrop, we plan to spend more of our capital expenditures refreshing a greater number of our stores and less on large-scale remodels. As such, we have three priorities for our US store fleet in the near-term.
Number one, we are refreshing our stores with a particular focus on improving and livening the merchandising presentation given the shift to digital shopping and corresponding lower need to hold as much inventory on the shopping floor. For example, this year in all our stores we installed new premium end-caps in partnership with key vendors that improve the merchandising in the center of the store. This year, we installed up to 10 of these new end-caps per store, or roughly one third of our end-caps per store and plan to add more next year as we work to upgrade these crucial locations in our stores. In addition, this year we rightsized our traditional gaming spaces in roughly half of our stores to allow for the expansion of growing categories like PC gaming and newer offerings such as Greenworks cordless power tools, wellness products like the order ring [Phonetic], absence short throw projectors, e-bikes and scooters and loves at [Phonetic] home purchasing products. While small, we are seeing promising results in some of these new categories with meaningful market share growth.
And as always, we continue to work closely with our vendor partners to add experiences to our stores. For example, Lego and Therabody invested in new shop-in-shops in all our 35,000 square foot experience stores. In addition, and as you would expect, many of our premium partners are continuously updating their in-store spaces to reflect their latest innovations. We will continue this work next year in all our stores, rightsizing a number of categories to ensure we are leveraging the space in the center of our stores in the most exciting, relevant and efficient way possible.
Our second priority is to keep investing in formats we know drive a return. This year, we implemented eight large-format 35,000 square foot experience store remodels for a total of 54, and we'll end the year with 23 outlet stores. At this point in time, we plan to implement a minimal number of remodels and outlets next year.
And the third priority is to open a few smaller footprint stores to keep learning and testing our hypothesis that physical points of presence matter and we need less selling square footage and more fulfillment and inventory holdings space. In addition, we plan to open a few smaller stores in out state markets to test the impact of adding new locations in geographies where we have no prior physical presence and our omnichannel sales penetration is low. At the same time, we also continue to close existing traditional stores as a result of a rigorous review of stores as their leases come up for renewal. This year, we have closed 24 stores. Over the past five years, we have closed approximately 100 Best Buy Stores, which is a 10% decline in store count during that timeframe. And we expect to close roughly 15 to 20 stores per year in the near-term.
We have been enhancing our supply chain network to support these footprint changes and deliver speed, predictability and choice to our customers. For example, we have worked to optimize our ship from store hub footprint to maintain substantial coverage for faster offers and take shipping volume pressure off the majority of the stores to allow them to focus on in-store and pickup experiences. Additionally, we are optimizing our shipping locations to enhance our efficiency and effectiveness, while still delivering with speed. And as a result, in Q3, we had the lowest ship from store volume as a percent of total since well before the pandemic with approximately 62% of e-commerce small packages delivered to customers from automated distribution centers. We also continue to augment our own supply chain to other partners and launched Best Buy on DoorDash marketplace, offering our second scheduled parcel delivery option in addition to Instacart marketplace.
As we have discussed previously, we have made strategic structural changes to our store operating model over the past few years to adjust to the shifts we have seen in customer shopping behavior and our corresponding operational needs. These changes provide more flexibility and have allowed us to flex labor hours with the fluctuation in customer sales, shopping preferences like curbside and traffic. As a result, we kept our labor rates steady as a percent of revenue even as our sales have declined over the past several quarters. As you can imagine, there is a delicate balance to maintain while we adjust our store operating model as the expert service our associates provide customers is a core competitive advantage. We keep a very close watch on our customer satisfaction trends to make sure we are not negatively impacting the customer experience. Broadly, I am proud that the team is doing this work while driving higher purchasing customer NPS versus associate availability, product availability and pricing.
We are also committed, of course, to providing a great employee experience through training opportunities and benefits. As we mentioned last quarter, we have now led thousands of our sales associates through a certification process focused on our foundational retail excellence. We are also leveraging technology in our stores more than ever to continue to elevate our customer and employee experiences in more cost effective ways. A great example is our app built for employees called solution sidekick that provides a guidance selling experience consistent across departments, channels and locations. Our employees have embraced solution sidekick and we can see higher customer NPS when our employees are utilizing the app in their interactions with customers.
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 average tenure excluding our seasonal workforce for field employees is just under five years and our General Manager tenure is almost 16 years. This is crucial as we can directly tie tenured experience and training, certifications to NPS improvement overtime. We have also seen a strong pool of applicants for new associates to supplement our store teams this holiday season.
As you have likely noticed, the holiday shopping season has begun. Since we are preparing for a customer who is very deal focused, we expect shopping patterns will look even more similar to historical holiday periods than they did last year with customer shopping activity concentrated on Black Friday week, Cyber Monday, and the last two weeks of December. From an inventory perspective, we expect to have strong product availability across categories this year. We will continue to manage inventory strategically to maximize our ability to flex with customer demand.
We are excited about the promotions and deals we have planned for all customers and budgets, including special promotions and early access to deals for our My Best Buy Plus and My Best Buy Total members. We have curated gift list to help everyone find the perfect gift. We also introduced a new resource on bestbuy.com and the Best Buy app called Yes, Best Buy Sells That, where customers can find the latest in tech and gifting like pet tech, baby tech or electric vehicle chargers, all the way to unique products, some shoppers may not know we sell, like skin treatments, choice for all ages and electric outdoor power equipment.
For added ease of shopping and peace of mind, we've extended both our store hours and our product return policy for the holiday season. And this year for the first time, we also extended the our shoppers can connect directly with one of our virtual sales experts to get help with their holiday shopping. We're also offering free next day delivery on thousands of items, in addition to convenience store and curbside pickup options. Most orders placed on bestbuy.com or through the Best Buy app are ready for store pickup within one hour. Same day delivery is also available on most products for a small fee.
From a merchandising perspective, we're excited for shoppers to see new innovation in a variety of categories, including AI-powered devices like Microsoft copilot and Windows 11 computers, the latest in virtual and mixed reality with Meta Quest 3 or Ray-Ban Meta smart sunglasses, immersive audio with Bose QuietComfort Ultra Headphones and more. And we can help our holiday shoppers take advantage of this new innovation through our trade-in program, which gives the customer value for their old technology.
In addition to great deals for our flagship categories like computing, home theater and gaming that feature our unique ability to showcase higher-end technologies at great value, we also have an expanded assortment of new and growing categories, including e-transportation, health and wellness and outdoor living. Our e-transportation assortment has more options for people of all ages and skill levels. We have twice as many outdoor cooking brands compared to last year and more than 5,000 health and wellness products, including a lineup of fitness, recovery, beauty skincare, baby tech and more. As you can likely hear, we're very excited to provide customers an amazing experience this holiday season. Of course, the macro environment remains uncertain with some tailwinds and increasingly more headwinds, all contributing to uneven impacts on consumers. The job market remains strong and upper income and older demographics in particular continue to benefit from excess saving. Overarchingly, the consumer is still spending. But as we have said before, they're making careful choices and trade-offs right for their households, given the sustained inflationary pressure on the basics like food, fuel and margin and the ongoing preference towards services spending, like restaurants, concert tickets indications. Additional indicators have continued to soften, including declining consumer confidence, increasing debt and waning savings and we saw sales trend soften as we move through the quarter.
This environment continues to make it challenging to predict shopping behavior even during the most exciting time of the year. While we are lowering our Q4 sales outlook, we have a wide range to allow for a number of scenarios and the mid-to-high-end of the range reflects sequential improvement. As we discussed on our last call, there are several factors supporting our belief that our Q4 year-over-year comparable sales can improve.
We expect home theater year-over-year performance to improve as we expect to be better positioned with inventory across all price points and budgets than last year. We're starting to see signs of stabilization in our TV units as they grew in Q2 and Q3 and are expected to grow in Q4. We expect performance in our computing category to improve as we build on our position of strength in the premium assortment. Notebook units were flat compared to last year in Q2, down as expected in Q3 and expected to be up slightly in Q4. And we expect to see continued growth in the gaming category as inventory is more readily available and our strong new software titles.
In summary, while the macro and industry backdrop continues to drive volatility, 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 confident about our future opportunities. After two years of declines, we believe the consumer electronics industry should see more stabilization next year and possibly growth in the back-half of the year.
While our existing product categories have slightly different timing nuances, we believe they are poised for growth in the coming years, benefiting from a materially larger install base and the ongoing desire and need to replace technology as it ages. Much of this replacement is spurred by innovation. And 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.
Our purpose to enrich lives through technology is more relevant today than ever. We are the largest CE specialty retailer. We continue to hold one third of the market-share in both the US computing and television industries and we can commercialize new technology for customers like no one else.
With that, I would like to turn the call over to Matt for more details on our third quarter results and our fiscal '24 outlook.