Best Buy Expects Q4 Promotional Cadence to Mimic Pre-Pandemic Level

Second-half revenue will be very similar to the pre-pandemic time period, Chief Financial Officer Matt Bilunas said on a Tuesday earnings call. Current macroeconomic trends “could be even more challenging and have a larger impact for the remainder of the year,” Bilunas said on the company’s Tuesday earnings call. August revenue declined about 10% vs. last year, he said.

For Q3, Bilunas updated comp sales guidance downward to “slightly more than the 12.1% decline we reported for the second quarter.” The retailer expects the year-on-year decline in its non-generally accepted accounting principles operating income rate of about 4%, consistent with a July update, he said. FY ’23 comp sales are expected to decline about 11%. Additional gross profit rate pressure in Best Buy’s revised outlook is due to “higher promotional activity in the consumer electronics industry."

Management cited a return to a pre-pandemic promotional environment for CE. CEO Corie Barry said the retailer has strong inventory in some categories, plus “pockets where we’re still constrained.” Product availability is varied in the CE industry, Barry said: “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.” The retailer remains constrained on key models in computing and gaming, she said.

Lower-income Best Buy shoppers are making decisions to “trade down” in the TV category, Barry said: “Customers are moving more into our lower price point exclusive brands products.” The retailer is also seeing more interest in sales events such as Prime Day and tax-free events, she said. Year-on-year sales declines in Q2 were across most categories, Barry said, led by computers and home theater. On a two-year basis, computer revenue grew 20%, she said.

Inventory was down 6% at the end of Q2 vs. the year-ago quarter and up 16% from pre-pandemic 2020, Barry said. Inventory is “healthy” and reflects an “evolving mix of product in our network.” That includes more high-end appliances and larger screen TVs that have longer lead times and slower inventory turns, she said. Best Buy took more markdowns than last year, reflecting “a normalization to pre-pandemic activity.”

Product margin rates were lower than expected in Q2, Bilunas said, due to higher promotionality. “Lower consumer demand has combined with the higher levels of inventory across the CE industry, which has resulted in more discounting across most of our categories,” he said. The return to normal levels of CE discounting “is slightly ahead of our expectations earlier in the year,” Bilunas said.

The retailer is “investing strategically” for the holiday sales season, Barry said. The promotional environment entering Q3 was “more intense than last year and even more than we expected entering this quarter as sales demand softened,” she said. Areas that were particularly aggressive promotionally – “where inventory was ample or in excess” – included TVs.

Barry referenced several years of gross margin pressure from higher supply chain costs, including shipping costs from a higher mix of online sales. About half of higher supply chain costs this quarter vs. the comparable FY ’20 quarter were driven by cost increases or inflationary pressure, she said. Barry said higher global supply chain costs in Q2 are expected to carry through the end of the year.

“We are starting to see some signs that the market is stabilizing and moderating,” Barry said, citing “some relief” in international logistics and “early signs of loosening markets domestically.” Best Buy is taking advantage of some rate opportunities in ocean logistics, while monitoring labor discussions and overall U.S. port congestion heading into the peak shipping season. The retailer is still experiencing inflationary pressure for fuel, labor costs and rail costs, plus general supply chain network congestion, Barry said.

Domestic gross profit rate was 22% versus 23.7% in the year-ago quarter, Bilunas said. He cited 100 basis points of gross profit rate pressure from the Totaltech membership program related to “the incremental customer benefits and associated costs vs. the retailer’s previous Total Tech Support offering.”

Giving an update on Totaltech, Barry qualified customer uptake by referencing the macro environment and decline in product sales. The retailer remains “encouraged with the pace at which we are acquiring new members,” Barry said. Nearly half of new members joining the program in Q2 were new or lapsed customers, she said, saying it reinforced “how the value of this program resonates beyond our existing, loyal customers.”

Over time, Best Buy expects the incremental spend it receives from Totaltech members will lead to higher operating income. While management believes customers value the membership program, “at the same time, consumer electronics is a low-frequency category, and we are in a unique macro environment.” It will “take time for us to truly assess the performance,” she said. The company will continue to monitor the program and iterate on its features “as we learn more.”

On whether Best Buy is seeing a bottoming of trends, Barry said it’s not easy to “see around the corner.” What makes the current environment so volatile is “the quantity of inventory at other retailers,” with associated promotional activity and markdowns. Through the back half of this year, “it starts to stabilize a little bit, but I hedge that just because there’s so much inventory that’s in the marketplace (a) and (b), it is still a really volatile macro environment. She noted a "very uneven consumer,” who is spending more on food, housing and other basics.

Commenting on the holiday season, Barry said, “You’re going to see a holiday that starts to look a little bit more like what we saw pre-pandemic.” She expects holiday spending to begin later, saying it’s going to be “harder to pull those sales into October.” Barry contrasted this year with the previous two when retailers were pushing hard for early Christmas shopping due to supply shortages. Now, “I think you might have a consumer that’s willing to wait, look for the deals and really look for those great values."