Source: Seeking Alpha
Best Buy Co (NYSE:BBY)
Q2 2015 Earnings Conference Call
August 26, 2014 08:00 ET
Mollie O’Brien – VP, IR
Hubert Joly – President & CEO
Sharon McCollam – CAO & CFO
Simeon Gutman – Morgan Stanley
David Schick – Stifel Nicolaus
Alan Rifkin – Barclays Capital
Aram Rubinson – Wolfe Research
David Magee – SunTrust Robinson Humphrey
Mike Baker – Deutsche Bank
Brian Nagel – Oppenheimer
Welcome to Best Buy’s Second Quarter Fiscal Year 2015 Earnings Conference Call. (Operator Instructions). I would now like to turn the call over to Mollie O’Brien, Vice President, Investor Relations.
Good morning and thank you. Joining me on the call today are Hubert Joly, our President and CEO; and Sharon McCollam, our CAO and CFO. As usual, the media will be participating in this call in a listen-only mode.
This morning’s conference call must be considered in conjunction with the earnings release that we issued earlier today. They both contain non-GAAP financial measures that exclude the impact of certain business events. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, but should not be considered superior to as a substitute for and should be read in conjunction with the GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning’s earnings release.
Today’s earnings release and conference call also include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial condition, results of operations, business initiatives, growth plans, operational investments and prospects 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 SEC filings 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.
In today’s earnings release and conference call, we refer to consumer electronics or CE industry trends. The CE industry, as defined by the NPD Group, includes TVs, desktop and notebook computers, tablets not including Kindle, digital imaging, and other categories. Sales of these products represent approximately 65% of our domestic revenue. It does not include mobile phones, gaming, movies, music, appliances or services.
I will now turn the call over to Hubert.
Good morning everyone and thank you for joining us. I will begin today with an overview of our second quarter results and then update you on the progress we’re making against our Renew Blue priorities. Then I will turn the call over to Sharon for additional details on our quarterly results and commentary on our financial outlook. So first, our financial results. In the second quarter we delivered $8.9 billion in revenue and $0.44 in non-GAAP diluted earnings per share versus $0.32 last year. The ongoing benefits of our Renew Blue cost reduction and other SG&A cost containment initiatives drove these better than expected results.
On the top line as expected sales in the NPD track consumer electronics category declined 2.5% in-line with our domestic comparable sales decline of 2.0%. Like other retailers and as reflected in this quarter’s performance we continue to see a shift in consumer behavior. Consumers are increasingly researching and buying online. As a result traffic to our brick and mortar stores continue to decline and yet our in-store conversion and online traffic continue to increase due to the execution of our Renew Blue strategy which is in direct alignment with this shift. Our Renew Blue strategy is designed to grow our online business, enhance our in-store customer experience and leverage out multi-channel capabilities or deliver to our customers great advice, service and convenience at competitive prices in the channel they want to be served. Each of these initiatives contributed to our second quarter results.
And so I’m pleased to update you today on the progress we’re making against our renewable transformation road-map which is built around following areas. Merchandising, marketing, online, stores, Geek Squad services, supply chain, cost structure and employee engagement. So first of these areas is merchandising. We believe we’re raising the bar in our retail channel by continuing to roll out compelling and differentiated customer experiences across major categories such as appliances, home theater and mobile. In the appliance category we opened 18 new Pacific Kitchen & Home stores within a store on our on track to end the year with approximately 115 stores versus 67 last year.
In the Home Theater category we opened seven new Magnolia design center stores within the store and our on track to the end the year with approximately 50 stores versus 33 last year. Both of these premium stores within the store concepts continue to outperform our expectations. We also rolled out over 800 Samsung and Sony Home Theater stores within a store during the quarter. This represents the first major merchandising transformation in Best Buy’s home theater department in almost 10 years. We believe that home theater transformation further solidifies our position as the destination for customers to discover and interact with industry leading home theater technology particularly ultra-high definition or 4k TVs and we’re encouraged by the early consumer response to our expanded ultra-high definition assortments.
We’re excited about the future of this technology even though we believe that the impact to our business this year will be limited.
In the mobile category in the second quarter we began offering customers the option to purchase installment billing plans with the Top 3 U.S. carriers. While mobile phone demand in the second quarter including year-over-year trading volume declined as customers wait for highly anticipated new product launches the penetration of installment billing progressively increased during the quarter and we believe we’re well-positioned to capitalize on the new products when they are introduced.
In the area of marketing, we made progress in our evolution from analog in mass to digital and targeted communications with our customers. During the quarter we continued to shift our marketing investment dollars towards digital media campaigns and away from print and television advertising.
We’re also leveraging our Athena customer database to pilot new targeted email campaigns, we’re in the early stages of being able to personalize marketing messages to individual customers which we view as a 2 or 3 year journey. We do however expect to see gradual and incremental improvements in marketing effectiveness every quarter our customer insights improve and our new personalization capabilities are rolled out.
In our online business in the second quarter we continue to leverage our ship from store, digital marketing and enhanced website functionality to drive a 22% increase in domestic comparable online sales. Similar to the first quarter ship from store represented over half of the online sales growth. We’re also using ship from store to drive gross profit improvements on our clearance and end-of-life inventory by exposing it not only to our retail customers but also to our online customers. We also launched several customer facing improvements on the website to drive increased engagements in a more seamless online shopping experience including number one a new global homepage that is easier for customers to navigate, number two significantly richer visual and editorial content for the ultra-high definition, digital imaging in the health and wearables category.
Number three, new text messaging options for order confirmation and delivery that are garnering significant customer adoption and number four visibility to customers Geek Squad purchases instead of their My Best Buy accounts on bestbuy.com.
As we head into the back half of the year we will continue to launch online shopping experience improvements, such as additional product category we designed, expanded wish list capabilities and improved checkout process in an expanded and more inspirational holiday gift center.
Of course we will also be continuing a significant behind the scenes work on the transformation of our e-commerce platform. In our retail stores the field and store structure changes we implemented last quarter are to-date generating results in-line with our expectations. We have consolidated and simplified the field organization, we organized to help drive local strategies and reduce the number of management level roles.
In total what our year-over-year retail labor cost are now lower, other investment in customer facing labor including vendor funded labor has increased. While we still have much to do in reinvigorating the customer experience, we are making progress and are pleased to see our in-store experience contribute significantly to the 400 basis point improvements in our overall NPS or Net Promoter Score that we saw in the second quarter.