Best Buy Co., Inc.
Q1 2025 Earnings Call Transcript

Published: 30 May 2024

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's First Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1

[Mollie O'Brien:]

Thank you, and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; and Matt Bilunas, our CFO. During the call today, we will be discussing both GAAP and non-GAAP financial measures. 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, which is available on our website, investors.bestbuy.com. Some of the statements we will make today are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may address the financial condition, business initiatives, growth plans, investments, and expected performance 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 our most recent 10-K and subsequent 10-Qs for 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. I will now turn the call over to Corie.

[Corie Barry:]

Good morning, everyone, and thank you for joining us. Today, we are reporting better-than-expected Q1 profitability. Through strong execution, we continue to manage our profitability, while at the same time preparing for future growth. We progressed against our fiscal 2025 priorities, grew our paid membership base, implemented various restructuring actions and drove improvements in our relationship net promoter score and in our operational metrics for most of our prioritized customer experiences. The mix of macro factors continued to create a challenging sales environment for our category during the quarter, and our sales were slightly softer than our expectations. Our Q1 comparable sales declined 6.1% compared to last year, with the largest impacts coming from appliances, home theater, gaming, and phones. Services and laptops were areas of growth for the quarter. The Q1 digital sales mix was 31% of domestic sales, similar to last year. Our omnichannel fulfillment experience continues to improve with almost 60% of our packages delivered or available for pickup within one day, and 40% of our digital sales are picked-up in stores by our customers, with more than 90% of these orders available within just 30 minutes. From a profitability standpoint, our non-GAAP operating income rate of 3.8% expanded 40 basis points compared to last year. This was above our expectations due largely to gross profit rate improvement in our membership and services offers. Customers remained very deal-focused, and attracted to more predictable sales moments. Our Q1 product margins were relatively stable even though the environment overall was more promotional than our expectations, in terms of both breadth and depth of promotions. We did see variability by category. For example, the major appliances category was materially more promotional in pursuit of stimulating interest and sales. As has been our practice, we were targeted and thoughtful regarding where and when we made our promotional investments. Throughout the quarter, our teams were driven and diligent, and I continue to be proud of their performance. I believe it is a testament to our strong culture that our people remain engaged, motivated and passionate about technology and serving our customers while navigating what has been an extended period of dampened demand. Our Q1 retail turnover trended down versus last year and remains lower than industry averages and our recent employee engagement survey shows our people have strong levels of connection, engagement and belonging that are at or above the global benchmark. As we look to the rest of the year, we are focused on our strategic plan and priorities, while being mindful about the state of the consumer. In February, we said we expect 2024 to be a year of increasing industry stabilization, and we continue to believe that. That being said, clearly, macro factors continue to fluctuate and put pressure on consumer spending. Three months ago, there were several indicators showing some favorability, including decreasing inflation, continued low unemployment, encouraging trends in consumer confidence and the beginnings of a housing market rebound. Since then, inflation is still high, mortgage rates are high and consumer confidence scores are trending lower. Consumers continue to make tough choices with their budgets, trading down in some areas, while still prioritizing spend in others, like services and experiences like travel. This, in combination with the pull-forward of tech purchases into the early years of the pandemic and lower levels of material innovation has led to continued lower demand for higher ticket consumer electronics and a focus on value and deals for current purchasers. We are not changing our original full-year guidance as it is early in the year. The first quarter is a relatively quiet quarter and we have yet to see the impact of a variety of coming new product launches and innovations. However, at this point in time, it is likely we are trending toward the midpoint of our original comparable sales guidance of flat-to-down 3%. We are strategically operating our business, balancing our response to the pressured sales environment. Therefore, even at the midpoint of the comparable sales guidance, we expect to deliver profitability toward the high end of our non-GAAP operating income rate guidance. At the same time, we are taking action and investing to sharpen our customer experiences and industry positioning. We know more of our key categories will return to growth. And historically, we outperform when there is more technology innovation and we leverage our competitive differentiation to provide the best experience for customers. From a major category standpoint, we continue to expect sales in our computing category to show growth for the full year. We expect revenue for the rest of our product categories as a whole to be down, partially offset by growth of our services revenue. As we plan for the next three quarters, we expect our comparable sales performance to sequentially improve. For the second quarter specifically, we expect comparable sales to decline approximately 3% compared to the 6% decline we saw in Q1. Based on month-to-date sales and results, our estimated comparable sales for May are expected to be better than our Q2 guidance. We are encouraged by these results, but from a timing perspective, we don't fully lap last year's Memorial Day sales until our June fiscal week one, and we continue to be very thoughtful about the time periods between sales events. Let's talk about computing and the exciting things happening there. We expect the category to benefit as early replacement and upgrade cycles gain momentum, and new products featuring even more AI capabilities are released as we move through the year. We have seen early signs of improvement as year-over-year comparable sales for laptops turned slightly positive in the fourth quarter and that trend continued in Q1. Last week, Microsoft announced Copilot Plus and laptops from Microsoft, Dell, HP, Lenovo, and Samsung are available for pre-order on our website right now and will be available on June 18. These devices have faster speed, better battery life, greater efficiency, they are much cooler, and baseline Copilot features like summarization that can quickly recap pages of documents or lengthy email threads. They also have exciting new use cases. For example, there is a recall function that makes it very easy to find documents based on visual queues or help users easily navigate back to a website to find a specific item they shopped for three weeks ago. They also have a live language translation function that works real-time on videos without requiring a connection to the Internet. And the co-create capability can take your rough sketches and turn them into works of art. To support these launches, we have built a comprehensive go-to-market plan. At roughly 40 SKUs in total, we expect to have the largest assortment at launch with more than 40% of the assortment retail exclusive to Best Buy. Working in coordination with our vendor partners, we will have inspirational merchandising and demos of the products in our stores, and unique educational and interconnected digital shopping journey. And, of course, we have an extensive training program to ensure we leverage our sales associates and Geek [Squadians] (ph) to ensure Best Buy is the destination for unbiased advice and inspiration around how this new tech can enrich their lives. There is additional innovation to drive excitement and interest, including the recently launched Apple iPads featuring their M4 chips that are already contributing to improved sales trends this quarter. Additionally, we have the new Bose open-ear headphones and [Sodos] (ph) has just announced they are entering the headphone space as well. All these launches are coming just in time for back-to-school, and we expect this drivetime to be an important part of the computing story. From July through mid-September, we will have a series of sales events focused on students and their parents that will feature our new brand positioning. We also plan to offer specific deals to our members to drive acquisition and engagement. As I mentioned earlier, we are taking action to sharpen our customer experiences and industry positioning, while also maintaining our profitability in this environment. Last quarter, we laid out our fiscal 2025 priorities. They are

[Matt Bilunas:]

Good morning, everyone. Let me start by sharing a few details on our first quarter results. Enterprise revenue of $8.8 billion declined 6.1% on a comparable basis. Our non-GAAP operating income rate of 3.8% improved 40 basis points compared to last year and included a 60 basis point improvement in our gross profit rate. Non-GAAP SG&A dollars were $97 million, lower than last year and increased approximately 30 basis points as a percentage of revenue. Our non-GAAP diluted earnings per share increased 4% to $1.20. Our comparable sales decreased 4.5% in February and decreased approximately 7% in both March and April. As a reminder, our comparable sales are computed on a like-for-like fiscal weeks and are not shifted to more closely aligned calendar weeks following last year's 53rd year -- for a 53rd week year. Although our sales were softer than we had planned, our non-GAAP operating income rate of 3.8% was 40 basis points higher than expected. Our gross profit rate was higher than expected, primarily due to a more favorable gross profit rate in our services category, which includes our membership offerings. Our non-GAAP SG&A expense was also favorable to our expectations, which was driven by lower store payroll and advertising expense. Next, I will walk through the details on our first quarter results compared to last year. In our domestic segment, revenue decreased 6.8% to $8.2 billion, driven by a comparable sales decline of 6.3%. From an organic perspective, the overall blended average selling price or ASPs of our products was higher than last year. The growth was entirely due to an increased mix of units from higher ticket items such as laptops and TVs, even though the individual ASPs for both categories were down to last year. International revenue of $644 million decreased 3.3%. Our domestic gross profit rate increased 80 basis points to 23.4% . The higher gross profit rate was primarily driven by improvements within our services category, which includes our membership offerings. This was partially offset by lower product margin rates and lower credit card profit-sharing revenue, consistent with the previous two quarters, approximately $20 million of vendor funding qualified to be recognized as an offset to SG&A, which was a reduction to cost-of-sales last year. We anticipate similar recognition of this funding in the second quarter of approximately $20 million and beginning in the third quarter of this year, we fully lap the recognition change. Our international gross profit rate decreased 90 basis points to 22.8%. The lower gross profit rate was primarily driven by lower product margin rates. Moving to SG&A, our domestic non-GAAP SG&A decreased $98 million, which was driven by

[Operator:]

We are now opening the floor for question-and-answer session. [Operator Instructions] Our first question comes from Christopher Horvers from J.P. Morgan. Your line is now open. Christopher Horvers from J.P. Morgan. Again, your line is now open. Apologies about that. Moving onto the next question. Our next question comes from Steven Forbes from Guggenheim Securities. Your line is now open

[Unidentified Analyst:]

Good morning. This is [indiscernible] for Steven Forbes. I know you touched on the newness this year, but maybe if you can give us a little more detail on the product roadmap post Labor Day? And if you could maybe remind us of annual revenues that come from some of these newer products? I had a quick follow-up on appliance market share. Any insights you can give and where are the merger market is trending and how your performance is relative to that? And if you see any visibility to that flipping? Thank you.

[Corie Barry:]

Maybe I'll start on some of the product roadmap side of things and then Matt can maybe move into some of the market share. On the product roadmap, we've got a few things right now that are happening. We had a kind of new suite of iPads that came out in about the middle of May here. Those are available for purchase now and we're already starting to see some of that new innovation contribute to what's been a bit of a change in trajectory on the growth rate even as we have been in May here. And then obviously, as we noted in the prepared remarks, Microsoft has announced a line -- a full-line of Copilot Plus products. As we said, that's 40 SKUs, about 40% of which are exclusive to Best Buy. Those are available for pre-order, but don't actually get delivered until June 18. And then we talked about a few of the others that have been announced that will at various stages within the next, call it, one month, be ready for purchase, which are some of the new open-ear headphones from Bose, and some of the new Google Chromecast notebooks that we're also seeing that have some AI-enabled features as well. So all of these kind of -- those we can see right now on the roadmap, likely some other products coming out as we continue into the back-to-school kind of timeframe. Most of that you're going to see flow-through and all of it, you're going to see flow-through that kind of computing area for us. One thing that I would note actually as well is that, the iPads that came out and the Pro side are incredibly powerful and are actually really close to the laptop side of the business as well. So we're watching customers kind of choose between all those things as they think about how they want to maximize their productivity go forward. So you're going to see a lot of that hit here in the kind of middle of Q2 and really becomes relevant, I think, mostly as we head into back-to-school. And like I said, it's part of that larger computing category that you can see us break out.

[Matt Bilunas:]

Sure. And in terms of appliances, I think if I just step back appliances is a great category for us. I think Q1 specifically, you saw an appliance category that was a materially more promotional in pursuit of stimulating interest and sales within the industry and has been our practice. We are very targeted and thoughtful about when and where to make our promotional investments. So in Q1, I think if we looked at it, we probably did lose share in Q1. It was a very promotional category in Q1. Q1 is somewhat quiet quarter for us. April is the smallest quarter in the month. I think the industry is also shifting towards a duress type of purchase of single-item purchase, non-premium package purchases, which hasn't historically been our biggest part of the category. So still feel really good about the category in total. I think where you'll also see us as we look into Q2, Q3, and Q4, you're seeing in our comments that we are now investing in pricing and marketing, and labor in the future to help support that category, which seems more appropriate for the rest of this year versus what we saw happening in Q1. So still feel great about the appliance category in total and are positioning ourselves well as we look out to the remaining part of the year.

[Corie Barry:]

And the last thing I would say, just to add-on, I think we're very targeted in the drive times and we talked about the trend in May improving, and a part of what drove some of that trend improvement was an improvement in this particular part of the business where we made some targeted moves as it relates to the bigger drive time of Memorial Day.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

Our next question comes from Simeon Gutman from Morgan Stanley. Your line is now open.

[Simeon Gutman:]

Hey, good morning, everyone. Connected to appliances, you mentioned, I think Corie was quoted in the press release talking about the strengthening your positioning in certain places, and you mentioned pricing on appliances. So can you talk about where the position or I don't know if its market share has weakened. Can you talk about why? And then you mentioned pricing in terms of appliances. Are you using pricing anyplace else? And is it because the industry got more promotional and then I guess, how far do you have to move on price? I guess it's all back into the guidance, but what's the risk that this pricing keeps getting, I guess, more promotional as the year goes on?

[Corie Barry:]

I think if we think about the promotional environment, and I said it in the prepared remarks, it's definitely higher in aggregate than what we saw last year, and even our own expectations. And that's both breadth and depth. And I think that reflects the consumer who we've said is very value-oriented. You said it yourself, I would reinforce implied in the guide is our planned investments to continue to strengthen our positioning in key areas. Now we're going to do it in our own way, right? We're going to do this partially with some of the specialized labor, partially with some vendor specialized labor that we talked about, partially with marketing and we had talked a little bit more about spending more in marketing year-over-year, that was included in the guy, and then, of course, partially in pricing. But I think what you've seen us do and there have been a lot of questions out there -- I've seen in various calls, where people are asking, is it about the revenue or is it about the profit? And my team hates me because I only use one word, and that is, and. And so, I think the team is constantly navigating, when in the right times can we get the best eyeballs, those bigger drive times, that's not going to be in a month like April, that's going to be in places like Memorial Day or the 4th of July. And then how do we use the suite of assets that we have at Best Buy, including installation and delivery and membership to help deliver the best value in a way that balances the outcomes as best we can.

[Simeon Gutman:]

Fair enough. Can I ask maybe one follow-up to exactly the word you said the, and. The business is being managed incredibly well. It's very efficient right now. And you said it yourself, you're going to be adding some expenses back in the second half as the industry turns. Thinking about the operating leverage on the turn, is there a scenario where you get both the and, you get the typical Best Buy operating leverage when the cycle turns or do you have to spend back into it, given how efficient the business is today?

[Matt Bilunas:]

Yes. I mean, I think without guiding next year, I think as we start to see our business improve, see the industry improve and our sales grow along with the industry growth as well. We would expect along with that growth, we would be able to manage our business in a way to continue to get operating rate expansion as we look-forward. Now exactly what quarter and does it show-up exactly perfectly. I think overall we're going to manage our business to increasingly improve our efficiency as well as grow our sales and we'll do that through the means of making the right investments in our business, still continuing to drive efficiency in our business where we see it and also making sure that our initiatives are progressing in the way that also help bolster our profitability as we look-forward.

[Simeon Gutman:]

Thank you. Okay. Good luck.

[Corie Barry:]

Thank you.

[Matt Bilunas:]

Thank you.

[Operator:]

Our next question comes from Peter Keith from Piper Sandler. Your line is now open.

[Peter Keith:]

Hey, thanks, good morning. I wanted to ask about the AI-enabled laptop. Certainly, seems kind of exciting. What's the pre-order interest right now? And also, Corie, what do you think about the $1,000 plus price points? Do you think that's a little high right now to drive mass adoption?

[Corie Barry:]

So in terms of pre-orders, let me start by saying, to your point exactly, this price point does not usually represent a huge amount of pre-orders. It tends to be something people want to come in and see, or want to spend a little bit of time researching. That being said, already the preorders are outpacing, I'd call it, our early expectations just a bit, not massively, but just a bit. So that's good. What we're looking for here is early indicators that there is at least interest in learning more. And I think where we're really working hard, as I talked about all the investments we're making is really helping the consumer understand what is the value that I get here. And that's why we started with some of the descriptors like longer battery life -- materially longer battery life or it just runs cooler and your fans not going on all the time. Like these are actually consumer attributes that people find interesting. You're right, it is more premium computing at this point as are the new iPads and iPad Pros that just came out in the middle of the month, which we saw pretty much immediately stimulate some really interesting demand, Peter. So I wouldn't call this -- and we've been pretty clear on this from day one. This is not -- everyone is lined up at the front door waiting to run in and grab the new computer, but it is enough, like most things in CE, where it starts a little bit more premium, has some of the attributes, drives some of the interest, and allows us the chance to partner with our vendors to really think differently about how we go to market with a new generation of computing. And then again in a timeframe that's, let's call it about four and a half years post-pandemic and should be a very ripe timeframe for replacing almost a generation of computing and that probably is nearing at the end of its life cycle.

[Peter Keith:]

Okay. Sounds good. Certainly some innovation is better than where we've been. Maybe just sticking on the AI theme. As you're incorporating AI capabilities into your own business, it sounds like it's more focused on the customer support experience. So the heart of the question is, do you think that drives both a better experience and cost savings or do you prioritize one versus the other, if there are cost-savings any way to kind of frame that up for us?

[Corie Barry:]

This is another and topic. We highlighted one example. It's hard because we can't highlight every single example in the script. But I really think about there's kind of four buckets as we think about using AI in our business. One is more what I would call on the strategic offense. That is more about how do we -- we talked about knowing 90% of our customers when they come to us. That personalized homepage in the app is an exceptional example of how we're using AI in a way that is all geared around the customer experience. And we can easily see in the data that our customers are engaging with us substantially more when they have that personalized experience. One other simple example, if you go out right now and you look at our customer reviews, you will see themes of customer reviews and then you can refine those reviews based on a theme you want to learn more about, meaning someone might complain because the battery life isn't long enough. You can then filter quickly to see all of the reviews based on that. That is all AI-enabled, that is all about customer experience. And we know when people interact with reviews, they are much more likely to follow that transaction all the way through. So there is a lot that is on just the flat out customer experience side of things that will drive incremental engagement and ultimately revenue. Then yes, we also highlighted the expense reduction side of things. But you asked -- I love how you asked the question because it started with, and I will use our call center example. It started with an experience that we felt was suboptimal for both customers and employees. And it started with a complete journey and we could show you the entire journey we're trying to create for our customers that will vastly improve their experience. And then AI and generative AI is a tool that we are plugging into that experience in certain places, so that it can be more efficient. An example there is that, we've talked about this before, our agents don't need to summarize calls now. Those calls are automatically summarized, which means the agent can concentrate a lot more on the person they're talking to. It's also a quicker transaction, and it helps with that end-to-end customer experience all the way through. And yes, at the end-of-the day, that is allowing us to be more efficient and double down on using that agent's time most effectively, which was with the customer who wants a problem solved. And then finally, we're also working on making sure we're doing this in a responsible way, and that we are very clear about our customer's data, and then all of us just are continuing our kind of usage here of these tools. So we're trying to highlight different examples, all of it in service of a customer and employee strategy.

[Peter Keith:]

Okay. Thank you very much and good luck.

[Corie Barry:]

Thank you.

[Operator:]

Our next question comes from Robbie Ohmes from Bank of America. Your line is now open.

[Robert Ohmes:]

Hey, Corie, actually two questions. One is just, I wanted to get a clarification on the May to date comps. The -- can you just remind us what -- explain the impact of the Memorial Day shift is? Are you running above the minus 3, if you exclude the benefit of Memorial Day May to date or I just wanted to clarify on that? And then I had a follow-up question.

[Corie Barry:]

Yes, I'll start with that. So what we said precisely is based on the month-to-date results, the estimated comparable sales for May right now are better than the Q2 guide. We -- that doesn't include a full lap of Memorial Day. It's tricky because the Memorial Day weekend falls like half in May fiscal and half in June fiscal. So it includes a chunk of it, not quite all of it. All that being said, it's still -- even if we try to do all the adjustments, all put together, you're still, if not right in line with the guide, maybe just a little bit better. So you're right in there even with the chips. As best can tell. So I will couch that. I would want to say though just since we're on the topic, we're also thoughtful about those periods between those main drive times. So that's a bit of why we see maybe the guide for the quarter, there'll be some puts and takes in there. But we're liking at least what we're seeing in some of the drive times and in some of the innovation, because where the trend really changed from what we were seeing in April is two main places. One, we saw a trend change in tablets. So as we saw both the new launches, the Pro and the new Air, as well as some of the deals on the older generations, because I think sometimes what people forget is sometimes when you get the new innovation, it allows you to cycle through some of the older [indiscernible] product as well. So you get that broad set of price points that makes it accessible for everyone. Tablets in general was better. And then the second, back to our point that we made about using these key drive times, both major appliances and TVs started seeing some initial positive impacts from some of the intentionality that we're putting into those categories. So, what we like is that, even as we continue to go through the lapping question, the overall change in trajectory kind of underscores the thesis that we've been talking about now for some time.

[Robert Ohmes:]

Thank you. That's helpful. And then just a quick follow-up. Can you remind us the advantages of doing more refreshes versus store remodels?

[Corie Barry:]

Yes, there are a few. So if you think about a full-on remodel, typically there, you're going to take one store and top-to-bottom, you're going to move the walls, do all the things. It is a capital-intensive process. It does definitely result at the end of the day in a lovely store experience, but you are more limited in the quantity of stores that you can do because it requires obviously a little bit more capital-intensive process. And the way we're looking at it this year is the store updates allow us and refreshes allow us to touch every single store in the chain. So instead of remodeling 30, we get the chance to go touch 900. And we gave some examples within the script, where we're going to rightsize some of the categories. We're going to make sure the center of the store is exciting, relevant. We're going to make sure that for some of these new product launches, you're going to see really interesting displays. But importantly, it also gives us a more scaled chance to work with our vendors on their experiences in our stores, because if we're going to go touch all the stores anyway, we get the chance then to partner with our vendors on where they might also want to update some of their store experiences. So you almost get a little bit more reach, not because it's not just us doing it, we get the chance to go into those stores and maybe refresh our experiences as well as some of those vendor experiences. And so I think the advantage is, you get a chance more at-scale to be able to kind of do a refresh and in tandem with some of the innovation that we're talking about.

[Robert Ohmes:]

Got it. Really helpful. Thank you.

[Corie Barry:]

Yes.

[Operator:]

The next question comes from Chris Horvers from J.P. Morgan. Your line is now open

[Chris Horvers:]

Thanks. And thanks for putting me back in, some tech problems here at J.P. Morgan. So my first question is, can you talk about the unit trend momentum sequentially from the fourth quarter to the first quarter in computing and TVs. And presumably, you have a good view of what ASPs could look like in those categories just as you think about the rest of the year, and acknowledging the prior question that talked about some high price points, but you know, was there any deterioration in new trends? And should the ASPs actually just net-net accelerate and not dampen that unit demand?

[Matt Bilunas:]

Yes, overall, I think we've been seeing similar type of units as we progress through Q4 to Q1, and you get into Q2, I think probably nothing too dissimilar there. I think we are seeing the potential for ASP improvements as you look towards the back half of the year with this innovation that's coming, and typically with process -- when you transition your product from the old to the new, you carry on a higher ASP, then it's even higher than the old product. The old product goes down in price and the net of it is either the same, if not typically higher. And I think these new AI capabilities are going to probably drive a level of innovation and excitement in product features that are going to continue to probably push ASPs a little bit. Now, again, it's only in part of our computing category. We're really talking about laptops right now. AI hasn't necessarily filtered its way into desktops in some other areas. So still potential as you look beyond this year.

[Chris Horvers:]

And then just to clarify that. And then on, I guess on the home theater side, were TV units positive? And then as my follow-up question is really on the services growth. I mean, I believe it comp like 9% here in the first quarter. So I guess how much of that is what's changing there? Is it renewal rates, is it attach rates? Is it changes that you made to the program that's driving that growth? Any detail there would be great. Thanks very much.

[Matt Bilunas:]

Sure. No, on the TV side, both units and ASPs were both down. So I'm not seeing the unit growth there on the TV side again. Where TVs is a very low price point, low-tier type of environment. And so we're obviously navigating the overall part of that industry. And as we -- the second part of the question was services, the service growth was driven by charging for installation services that were previously part of the membership program. So back in June of last year, we removed installation as part of the free membership offering and started charging for that service going forward. And so that's what's driving most of that services revenue growth. There's also a little bit of growth coming from standalone warranty that's improved this year compared to last year.

[Chris Horvers:]

Got it. Thanks very much.

[Matt Bilunas:]

You bet.

[Operator:]

And the next question comes from Anthony Chukumba from Loop Capital. Your line is now open.

[Anthony Chukumba:]

Good morning, and thanks for taking my question. Pretty quick one. In terms of the store refreshes, a two-part question, I guess, how quickly can you execute those? And then what's the and I know it's built into your $750 million CapEx guidance, but what's the sort of rough cost on them? I know they're obviously a lot cheaper than a full refresh, but would just love to get some perspective on that? Thanks.

[Corie Barry:]

Absolutely. I can start with the how fast question. We said in the prepared remarks, we're going to be doing this throughout Q2 and Q3. So you're going to see us pretty quickly here start to move and obviously, a piece that needs to go right away is the computing presentation and how we're making some updates to the computing of the store. So you're going to see these roll throughout Q2 and Q3 with the objective being as set as possible as we head into holiday. The team does a really nice job being able to move through these. There's probably one other advantage of doing more a refresh model is, you can do these overnight. You can get in, get it refreshed and get out, get it ready.

[Matt Bilunas:]

Yeah from a cost perspective, we've never really given the total. I mean, from a remodel, you're talking, sometimes a couple of million dollars. In some cases, if you're looking at a refresh and ranges depending on what you want to do, it could be $50,000 up to a few hundred thousand dollars. I would add that our partners also participate in some of these remodels because we're changing some of their own -- their presentation, which they like to see, their product presentation change, when we make these store changes. So it really depends on the store and what you're changing in terms of the scope of any individual store, but it's significantly less than a new store build.

[Corie Barry:]

And Anthony, just to rip on it just a little bit, there's a bunch of things that kind of work in concert here over the next couple of quarters. Innovation, that kind of drives us to want to highlight both vendor spaces and our own spaces in our stores. So you get the store refreshes. You're going to see us do a brand refresh here at Best Buy and we'll use some of that new branding as we head into back to school. That also brings through a little bit of refresh from a store perspective. We've talked about the dedicated labor zones that we're bringing into hundreds of stores. So you start to get the dedicated labor in appliances and home theater and computing, and we're augmenting that with incremental vendor labor that's new in a couple of spots. We used the Samsung Appliance example explicitly. And then we wrap around that some of the more personalized approaches to trade in or to membership. I think as you look into Q2 and Q3, we're kind of trying to bring all of this together in a way that both physically and digitally shows up as being kind of new and exciting for our customers and our employees.

[Anthony Chukumba:]

That's very helpful. Thank you.

[Corie Barry:]

Yes.

[Operator:]

Our next question comes from Seth Basham from Wedbush Securities. Your line is now open.

[Seth Basham:]

Thanks a lot. My question is on the membership program. If you could provide some more insight into how that's growing on a paid basis and the key drivers of your better than expected margin performance from it, that would be helpful?

[Corie Barry:]

I'll start maybe on the topic on acquisition and Matt can talk a little bit about some of the drivers. We're not going to update the overall acquisition numbers every quarter. But as a reminder, we ended fiscal 2024 with 7 million members across the two tiers of paid membership, and that was compared to 5.8 million members at the start of the year. And if I take a big step back, our whole goal here is to drive customer engagement and increased share of wallet, all the more important in a world where people are a little less brand loyal than they were certainly pre-pandemic. And so there's like three things we're always watching. You hit on acquisition, but we're also always watching engagement and we're watching retention. And all of those then factor into kind of the financial outcomes that Matt will talk about. So we continue to grow our new customers in Q1 and add more to both tiers of membership. We still are seeing that paid members consistently are showing higher levels of interaction and comparatively higher levels of spend at Best Buy and the shift away from competitors, and it still is really early. We don't lap the rollout of particularly plus, but even the new revamp of Total until June. But even on the early renewals for Total, retention rates are outperforming some of our expectations. So I give the team a great deal of credit, both for kind of tweaking these offers in a way that resonated more with customers, but also for continuing to refine the way we reach out to those customers to make sure we optimize both their interactions and that resulting financials.

[Matt Bilunas:]

Sure. And just a reminder, as we started the year, we expected membership and services to improve our gross profit rate by 45 basis points. And now what we're saying, it's more than 40 -- it's a little bit more than 45 basis points. And so what we're seeing be a little bit better is essentially a little bit lower cost to serve come through in Q1, which we would expect to continue as the year progresses. That's what's driving it. Those are just lower volumes coming through some of our categories driving some improved profit rate. We're also actually seeing a little bit more standalone warranty sales, which is helping our overall membership/services gross profit rate for the year as well.

[Seth Basham:]

Thank you very much.

[Operator:]

Our next question comes from Jonathan Matuszewski from Jefferies. Your line is now open.

[Jonathan Matuszewski:]

Great. Thanks for taking my questions. So on the spend across demographics, I imagine the initial debut of AI PCs may resonate with certain demographics until it becomes more mainstream, maybe a little bit higher income, maybe a little bit younger in age perhaps. So, are the spending trends for those customer cohorts outperforming the broader customer base?

[Corie Barry:]

Well, just to be explicit, we haven't launched the new AI PCs yet. They don't actually start shipping and getting out there until June 18th. So everything has been announced and there are pre-orders available, but we haven't had a chance yet to see what the impact will be. I think in general, the interesting part about this is because we're seeing innovation across both computing and tablets, I think it's going to create broad opportunity, because we hit on this just a little bit in one of the earlier questions. It's not just about the newest gen of product, which to your point might resonate to a certain cohort. It also sometimes makes the older generations of product more approachable because those tend to be at a different price point because now you have the new innovation and as Matt talked about, that's what kind of props up some of the higher ASPs. So I typically, it's not just about this will only resonate with one demographic, it's actually a question of how do you create that kind of good, better, best assortment that we're always creating, which then can make -- it might not be only the new stuff that someone gravitates to, but it might give them a better entry point, a more value-based entry point to that new refreshed product at least for them versus what they've had for the last four or five years.

[Jonathan Matuszewski:]

That's helpful. And my second question, just on discounting. So it sounds like promos were materially deeper in appliances. So just to be clear, I guess the midpoint of the 2024 comp guide, does that assume that the promo activity in that category stays stable as the year moves on? Does it embed any improvement or deterioration in discounting levels? Any more color there would be great? Thanks.

[Matt Bilunas:]

Yes, I think what our guide assumes is that, there's actually more promotionality for the remaining part of the year. In our prepared remarks, we talked about how -- where our product margin rates will be slightly lower than our expectations as we started the year that was driven by the expectation that will be more pricing investments because of the promotionality as the year progresses. Although that was included in our guide and still included in the fact that we still feel like the profit rate is trending towards the higher end of the original guide that we gave. But I'd say it's beyond just major appliances, that is certainly a category that's been very promotional. I would say there's also increased promotionality across other categories as well, notably TV is another place where I'd call out.

[Corie Barry:]

And I think that is our last question. Thank you all for joining us today. And I hope that many of our investors who might be listening today will be able to join us at our Annual Shareholder Meeting, which will be held virtually on June 12th. Thank you all and have a wonderful day.

[Operator:]

Thank you for attending today's call. We hope you have a wonderful day. You may now disconnect.