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Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Second Quarter Fiscal 2027 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1 p.m. Eastern time today. [Operator Instructions] I will now turn the conference call over to Mollie O'Brien, Head of Investor Relations. Mollie, please go ahead.

Thank you, and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; and Jason Bonfig, our Chief Customer Product and Fulfillment Officer and incoming CEO.

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 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 Form 10-K and subsequent Form 10-Q 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.

Earlier this month, we announced the appointment of our new CFO, Anne Bramman. As Anne started at the company just 8 days ago, Corie will cover the financial portion of today's call. And now I will turn the call over to Corie.

Good morning, everyone, and thank you for joining us. This is my last earnings call as Best Buy's CEO. And before I discuss our results, I want to express my sincere gratitude to the incredible employees of this company who have made the past 27 years truly extraordinary. It has been a privilege to work alongside such talented, dedicated and customer-focused teams throughout my career. I also want to thank all of you on the call. Over the years, I have greatly valued the opportunity to share our progress, discuss our strategy and build relationships with many of you in the investment community. Your engagement, insights and support have meant a great deal to me. It has been a joy to transition with Jason, not just seamlessly, but in a way that continues to accelerate progress. And as I hand the baton to Jason and the leadership team, I do so with absolute confidence. They are experienced and talented leaders guiding a business that is well positioned for continued success. Thank you for being part of this journey, and I wish you all the very best.

Next, on to our second quarter results. Today, we are very pleased to report better-than-expected Q2 results. Our comparable sales grew 4.1% versus last year, with positive comps across almost all our major product categories. We also drove operating income rate expansion and earnings per share growth. Specifically on revenue of $9.8 billion, we delivered an adjusted operating income rate of 4.3% and adjusted diluted earnings per share of $1.47, which was up 15% versus last year.

I want to extend my appreciation to our employees across the company for their commitment to our customers and for the strong execution of our strategy. We are successfully strengthening our position in retail as a leading omnichannel destination for technology, while at the same time, scaling new profit streams that we expect to provide considerable benefit over time. Our Best Buy Ads and Marketplace initiatives continued to hit their performance targets and contributed to our gross profit rate expansion.

From a category perspective, computing growth led the way this quarter. We delivered our tenth consecutive quarter of positive comparable sales, driven by a combination of customer need to upgrade and replace and product innovation. Our Q2 computing sales continued to be supported by the strong performance of our Best Buy business team, which increased its sales by 21% versus last year. We are excited to announce that home theater was the second biggest weighted comp driver this quarter, with the highest sales growth since Q2 of fiscal '22. We drove market share gains throughout the quarter, and our performance was broad-based across product tiers and price points.

We saw continued strong growth in the group of newer and emerging categories, including AI glasses, trading cards and health rings. Sales for this group of categories in Q2 more than doubled versus last year. In mobile phones, we delivered our sixth consecutive quarter of growth, driven by our expanded partnerships and in-store operating model improvements with large carriers.

In major appliances, we continued the strength we saw in May and delivered slight sales growth for the full quarter. This material improvement in growth trends compared to prior quarters was due to the combination of our investments in pricing, marketing, delivery speed and product availability. As expected, we saw comparable sales decline in our traditional gaming category as we lapped the successful launch of the Switch 2 in June of last year.

Our Q2 results did not materially change our existing commentary on the customer. Consistent with the past several quarters, we see a customer who is still spending, but is value focused and attracted to sales moments. Importantly, while customers continue to be thoughtful about big-ticket purchases, they are willing to spend on high price point products when they need to or when there is technology innovation.

We are pleased with our first half results and our momentum as we enter the second half of the year, and we are raising our annual financial guidance. I am beyond excited to turn the call over to Jason to provide further details on our performance and key business updates.

Thank you, Corie. Good morning, everyone. The strength of our results reflects both deliberate actions we have taken to position the business for growth and a healthy demand environment for our category. Over the past several years, we have invested in areas that matter most to our customers, including elevating specialty expertise in our stores, partnering closely with our vendors to bring innovation to market and improving fulfillment, speed and execution across our supply chain. These initiatives, along with replacement and upgrade cycles, innovation and external demand drivers such as higher tax refunds supported the top line performance.

On our last earnings call, I discussed 4 priorities that will define how we win in the months and years ahead. As a reminder, they are as follows: First, we are advancing Best Buy as a retail media, advertising and technology company; second, we're going to expand and grow our reach; third, we are elevating the Best Buy experience; and fourth, we're continuing to be a human-powered and customer-focused company. These 4 priorities aren't separate tracks, they reinforce each other. A better experience delivered through the right footprints and formats drives reach, greater reach generates customer insights that fuels us as a media and technology company, and all of it is powered by our people, equipped with the best training and technology in the industry, doing what only Best Buy can do.

I'd like to provide key highlights and updates on the progress. Regarding Best Buy Ads, we are on track to deliver 10% growth this year on top of $900 million in collections last year. The Best Buy Ads team will host our second ever showcase on September 23 to highlight our growing scale, performance and innovation to key decision-makers across agencies, brands, partners and press. Last week marked 1 year since our launch of the U.S. marketplace, and we are pleased with how it's expanding our reach with new SKUs and categories. Key experience indicators like Five Star customer rating and return rates are in line with our first-party business, and we are vetting and adding new sellers constantly.

Our domestic marketplace GMV reached approximately $300 million in the second quarter. We now expect our marketplace to reach $1.3 billion GMV for the full year driven by a stronger-than-anticipated performance. We will begin adding international sellers later this quarter, which opens us up to a materially new group of sellers as previously all sellers needed to have a U.S. physical presence. Another way we are expanding our reach is through smaller format stores that allow us to enter attractive markets that cannot support our traditional Best Buy store format, thereby extending the Best Buy experience to new customers and communities. Although the strategy is still in its early stages, we are pleased with the customer response and encouraged by the performance we are seeing. What is particularly exciting is the way these stores accelerate omnichannel engagement. Customers often begin their relationship with Best Buy through a store visit, but quickly adopt our app, our digital channels, membership programs and services. As a result, these locations act as both retail destinations and customer acquisition engines.

I want to be clear that we continue to see significant value in our large-format stores. Through a series of targeted enhancements, we are utilizing these assets more effectively than ever, while improving the customer experience.

As we've discussed previously, we've been reallocating space to higher value experiences like Meta labs at Best Buy. We are more than halfway through the implementation of 50 dedicated spaces each spanning approximately 900 square feet and staffed by specially trained employees focused exclusively on the Meta ecosystem, including both AI glasses and virtual reality solutions. Although still early, customer response has been exceptionally strong and has exceeded our initial expectations. Based on what we are seeing, we believe there is significant potential to expand this model to additional vendor partners.

At the same time, we're repurposing space to enhance our own offerings by integrating outlet experiences into some large format stores. We replaced many stand-alone outlet locations. Customers benefit from greater convenience, while we benefit from stronger utilization of our existing footprint.

Now I'd like to highlight other areas where we've been particularly focused on elevating the Best Buy experience. I'll start with home theater. We are seeing tangible results from our efforts. In the second quarter, we delivered domestic TV sales growth of more than 10% year-over-year. This performance reflects improved execution across multiple areas of the business, including compelling assortments across a wide range of price points and screen sizes, strong in-stocks and continued improvements in delivery and installation services.

Another driver of the excitement in the category has been the mid-quarter launch of RGB TVs. For the next year, Best Buy is the only national retailer where customers can discover, experience and purchase these TVs. We believe RGB represents the most significant innovation in the television segment in the last decade. While it's still in its early stages of adoption, sales performance is progressing as expected and we anticipate this new technology will become an increasingly meaningful contributor to our revenue over the coming quarters.

Importantly, related to this are the marketing campaigns and the extensive associate training that we've done in the category. It creates a halo across the entire category. We think this is not only contributing to the momentum during the quarter, but it also positions us well to capitalize on what we believe is a multiyear TV replacement cycle driven by elevated units in the year 2020.

Major Appliances is another category where improved execution around the customer experience is translating into material improved growth trends. In the current housing environment where the majority of appliances purchased are driven by replacement, speed and convenience matter more than ever. Customers need solutions quickly when an essential appliance fails, and our ability to offer competitive pricing, strong product availability and fast delivery and installation are imperative to compete effectively in the marketplace. For example, we provide next-day availability in almost all metro delivery locations compared to less than half of those locations in Q1.

We also see significant opportunity to further enhance our digital experience around appliances in this quarter. By simplifying how customers view delivery availability, understand pricing and schedule service, we are making it easier and more convenient to complete these complex purchases.

Speaking of online experiences, I'm excited to announce the launch of Ask Blue, our new conversational AI shopping and support assistant. It brings together expertise from across Best Buy's website in one easy-to-use experience. It combines product knowledge, support, resources, customer reviews, availability and pricing to help customers make informed decisions. Ask Blue will help customers figure out what tech is right for them. For example, it can quickly compare products, find important differences between them, check fit or compatibility and get support for common questions. Depending on the need Ask Blue can guide a customer to self-service resources or connect them to a live support specialist. We've begun rolling this out to customers in a phased approach.

We're also continuing to partner with AI companies like OpenAI to make sure we are showing up in the places where our customers look for technology and advice. We recently completed our commerce integration with OpenAI. Customers can now discover products, receive recommendations and complete purchases for Best Buy directly within ChatGPT. We view this as an important step in expanding our digital ecosystem and positioning Best Buy at the forefront of emerging AI-enabled commerce experiences.

Moving on to membership. We are encouraged by the early results from our recent program updates. Our My Best Buy Plus and total members now earn 1% back in rewards on every eligible purchase and 5% back in rewards when they use the My Best Buy Credit Card. We have already seen an uptick in membership sign-ups and expect to grow from just over 8 million paid members in February to approximately 9 million by the end of the year. These reward points are in addition to the many popular benefits our members receive, including fast and free shipping, extended product return windows, exclusive prices and for total members, product protection and 24/7 support.

We continue to enhance the value of the membership program. In Q2, we introduced discounted YouTube TV subscriptions for members. And earlier this month, we kicked off our popular NFL Sunday Ticket offers.

Looking forward, as Corie mentioned, we are raising our financial outlook. We now expect comparable sales growth of 1.9% to 3% and adjusted operating income rate expansion of 10 to 20 basis points for the year. In the back half of the year, we expect to drive continued sales growth in phones, TVs and the collection of emerging categories mentioned earlier. We also expect to drive continued sales trends in major appliances and that demand for Grand Theft Auto VI will benefit the gaming category in Q4.

We expect sales growth in the computing category to slow in the back half of the year as we lap 2 years of growth and a particularly strong Q3 last year, which included tailwinds from the end of support for the Windows 10 operating system.

We continue to navigate impacts from the industry-wide memory cost increases. As expected, product costs have been increasing and higher prices have been flowing into our assortment. In Q2, our ASP growth in computing was in the mid-teens, with units down high single digits. Overall, we expect continued customer demand for the category as we focus on helping customers find great products within their budgets. We also have tools across trade-in, credit card financing and strategic promotions to help ease this impact on price increases.

From an inventory standpoint, at this point in time, we continue to feel well positioned to meet customer demand. This is a dynamic situation, and we will continue to partner closely with our vendors to mitigate impacts.

Last week, we celebrated Best Buy's 60th anniversary, marking 6 decades of helping customers discover, enjoy and get the most from their technology. Throughout our history, we have remained anchored by a single guiding principle, putting the customer at the center of everything we do. As we look to the future, we are executing a thoughtful and orderly leadership transition designed to ensure a smooth handoff as well as an opportunity to accelerate the business now.

While I formally assumed the CEO role on November 1, Corie and I have been working closely to align the leadership team and ensure continuity of execution. The leadership team is largely in place, energized by expanded responsibilities and focused on delivering against our 4 priorities. This strong foundation will enable us to move with speed, clarity and discipline. I'm pleased to welcome Anne Bramman as our new Chief Financial Officer. Anne brings more than 30 years of public company leadership experience spanning financial operations, strategy and transformation. Her background aligns exceptionally well with where Best Buy is headed and the opportunities that we see ahead.

As Mollie said, with Anne officially joining the company last week, Corie will continue the financial portion this morning. I want to thank Corie for providing continuity and leadership during this important transition period. 7 years ago, Corie Barry joined Best Buy and for the last 7 of them was the second longest 10-year CEO in our history. She led this company through more challenge than any single chapter deserved, a pandemic, a reinvention of how we work and the rebuilding of what the brand means to customers. She never claimed the credit for it. Her instincts were always the team gets all the credit and she built a culture that was learning from challenge and change was not a slogan, it was actually the way we operated. Corie taught us that leaders don't have every answer, they create the conditions where people can do the best work of their careers. Best Buy is stronger, more resilient, more clear eyed about who we are because of her, and every one of us who leads in the future is doing so on the foundation that she laid.

With that, I'll turn the call over to Corie for more details on the quarter and our outlook.

Jason, thank you. And to Anne, welcome. I know your skills and experience will be a valuable asset to Best Buy. So let me start with how our second quarter's performance compared to the expectations we shared with you last quarter. Enterprise comparable sales increased 4.1%, and exceeded our guidance of approximately 1%. Our adjusted operating income rate of 4.3% was also better than planned, driven by a higher gross profit rate that included a $34 million benefit from tariff refunds.

Higher-than-expected SG&A, largely driven by incentive compensation, partially offset the favorable gross profit rate.

I will now talk about our second quarter results versus last year. Enterprise revenue of $9.8 billion increased 3.6% versus last year. Our adjusted operating income rate increased approximately 40 basis points compared to last year. And our adjusted diluted earnings per share increased 15% to $1.47.

From a monthly cadence perspective, as expected, May was the strongest month of the quarter with comparable sales growth of 8%. June's comparable sales were approximately 5% as we began to lap the successful Switch 2 launch last year. At the same time, June was positively impacted by the timing shift of our sales event that runs concurrently with Prime Day. July's comparable sales were approximately flat.

In our Domestic segment, revenue increased 4.3% to $9.1 billion, driven by comparable sales growth of 4.5%. From a category perspective, we generated comparable sales growth across most of our categories with the largest drivers on a weighted basis, being computing, home theater and the collection of emerging categories such as AI glasses and trading cards. These drivers were partially offset by a decline in the traditional gaming category.

Our online revenue of $3 billion increased 5.1% on a comparable basis and represented 33.1% of our domestic revenue.

From an organic standpoint, the blended average sales price of our products was once again very similar to last year, with a decrease of less than 1%. It is important to note that price increases in categories like computing and phones are being offset by mix into lower-priced products like trading cards.

International revenue of $709 million decreased 4.2% versus last year. The revenue decrease was primarily driven by a comparable sales decline of 1.8% and the negative impact of foreign exchange rates.

Our domestic gross profit rate increased 60 basis points to 24%, which was driven by growth in our Marketplace and Best Buy Ads initiatives and tariff refunds. These items were partially offset by lower product margin rates that were primarily driven by investments in major appliances. Our international gross profit rate increased 50 basis points to 22.3%, primarily due to improved product margins.

Moving to SG&A. Our domestic adjusted SG&A increased $94 million and was primarily driven by; one, higher compensation expense, including incentive compensation; two, increased Marketplace and Best Buy Ads-related expense; and three, higher advertising expense. The previous items were partially offset by lower Best Buy Health expenses.

Now moving on to guidance. we are raising our full year fiscal '27 financial guidance to the following: revenue in the range of $42.3 billion to $42.8 billion, comparable sales growth of 1.9% to 3%, an adjusted operating income rate of 4.4% to 4.5%, an adjusted effective income tax rate of approximately 25.5%, adjusted diluted earnings per share of $6.70 to $6.90 and capital expenditures of approximately $750 million.

Next, I will cover some of the key working assumptions that support our guidance. On the top line, we now expect enterprise comparable sales growth of 1% to 3% for the second half of the year. We expect our annual gross profit rate to improve by approximately 30 to 40 basis points compared to last year. The primary drivers of the expansion remain growth from our Best Buy Ads and our U.S. marketplace. In addition, our guidance assumes a similar level of IEEPA tariff refunds in the third quarter as the second quarter, along with continued major appliance investments.

Now moving to our adjusted SG&A expectations. As a percentage of revenue, our annual adjusted SG&A is planned to increase by approximately 20 basis points compared to last year. When comparing to last year, the most notable puts and takes for the second half of the year include the following. The high end of our guidance assumes incentive compensation increases by approximately $70 million in the back half of the year and $130 million for the full year. SG&A is expected to increase in support of Ads and Marketplace, which includes advertising, technology and employee compensation expense. Store payroll and other variable expenses are expected to increase at the high end of our revenue guidance with minimal impact from a rate perspective. Lastly, the low end of our guidance reflects our plans to further reduce our variable expenses, including incentive compensation to align with sales trends.

Before I close, let me share a couple of comments specific to the third quarter. We expect enterprise comparable sales growth of 1% to 3%, and we have started the quarter with August month-to-date comparable sales growth at the high end of this range. Our third quarter adjusted operating income rate is planned at approximately 4.1% to 4.2%, which is 10 to 20 basis points higher than last year. And I will now turn the call over to the operator to begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Scott Ciccarelli Rely with Truist.

You noted some of your newer products and form factors doubled in the quarter. How big are those categories now in aggregate? And given the early successes from your store-to-store concepts, is that something we might be able to see expand over the coming quarters?

Yes. So in total, we talked about emerging categories and specifically in that bucket are cards and collectibles, AI glasses as well as health rings. And I think those are really good examples of places where we can lean in around innovation with vendors. Some of those categories are supported by additional space. Mata would be a good example of that. Some of those aren't. In total, the aggregation of those categories is worth about 1 point of comp, which is pretty impactful. So the teams continue to look for innovation from our vendors and are there ways that we can lean in, whether it be digital or physical, that is a great example where that category is becoming larger and larger, and the AI trend and the innovation that they've done is really allowing us to lean in, in a more a dramatic way where we're actually able to put locations at our largest 900 square feet in our stores with labor to support it because the customer trend is so strong. So the teams will continue to look for those things, but we're very excited about those emerging categories and how they're contributing to our business.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

So quick -- I guess, as a follow-up for a question on the comps. So I guess the detail into July, how do you look at that? What is your interpretation? Is there more of a tax refund story in the early part of the quarter? And then what does that mean for product cycle, replacement cycle? Is it as strong and vibrant as it should be?

Yes. So as we expected, that 8% May comp that we saw slowed in June and July. And there's a couple of things going on there. First of all, in June, we started to lap that Switch 2 launch. But importantly, we said this in the comments that Prime Day event switched into June. So that helped bolster the June results. And then you had a comp last year's Prime Day event in July. So that is also part of what brought down the July to more of a flat comp. And I think part of why we wanted to give the August quarter-to-date comp, and we said it at the high end of the 1% to 3% range we gave for the back half is because we've seen that demand profile rebound as we headed into August, and we're happy with both our 60th anniversary sale and the back-to-school volume we're seeing. And I think that continues to support the narrative that we've been talking about as it relates to innovation and replacement cycles.

Okay. And then maybe 1 follow-up. I guess, Corie, during your tenure, when we've seen the comps accelerate, there's been a lot of incremental margin and flow-through. It sounds like gross margins are now moving in the right direction. I don't know what happens with SG&A. There were moments where Best Buy's cost structure was actually declining and/or just growing at a very small rate. So how do you think, Jason, about incremental margins? Do you have a sense of it that you have to wait for Anne to help put the financial plan together? Can you give us thoughts on that?

Jason will give some color on his general thoughts and approach, but I just want to reiterate that the pressure that we saw in SG&A was mainly related to kind of 2 big buckets. One is Ads and Marketplace, which, at the end of the day, is we're going to call it a modest tailwind to OI when everything is all said and done. But the bigger impact here is the short-term incentive compensation. Obviously, at the beginning of the year going from a guide of down 1% to up 1% on the revenue side, all the way now to up 2% to 3% -- basically 2% to 3% and seeing some expansion in that OI rate, so therefore, higher OI dollars, we are able to share in that with our team members. And it's that revenue and OI dollar combination that's about half and half the OI -- or excuse me, the SG&A impact. So we said it on the call that increases year-over-year our incentive compensation about $130 million versus when we started the early first guide, we said to reset back to 0, it was $30 million. So that's the biggest, right now, impact to SG&A. And it's for, I would like to say, all the right reasons and the strength we're seeing in the business. And obviously, as we head into next year, you would reset that incentive compensation back to the [ 10 ], which means that would lower the SG&A about $100 million as you head into next year. So now I can hand it over to Jason to just talk more philosophically about kind of the approach.

Yes. Thank you for the question. At some point in time in the future, we'll talk in more detail about where we see things long term. But just in the right now, I just want to make sure we address your question specifically. So the teams are focused on 2 things. First, they're focused on revenue and making sure that we maintain or grow our share. And and I stress the word and improving our rate. And it isn't one or the other. It is both, and that is the way that the teams are going to continue to be focused and have been focused in the past. That balance is important because it allows us to do things like make investments. One really good example of that is we did need to make some investments in appliances to change the trend and the trajectory of our business, and at the same point in time, balance that with things like Marketplace and Ads that are growing and new profit streams that actually help us improve our rates.

So the teams will always continue to be focused on that and, but it is about making sure we grow revenue, keep our customers and improve the rate over time is really where the focus will continue to be and has been historically.

Your next question comes from the line of Jonathan Matuszewski with Jefferies.

Nice quarter, and I had 1 question and 1 follow-up. My first question was just in terms of the second half, Jason. I think there was reference to lapping the Windows 10 expiration last year and then GTA6 as modeling considerations for the second half. Is there any way to help clarify maybe what's embedded in the implied second half guide in terms of maybe that headwind and that tailwind? That's my first question.

Yes. I think, in total, obviously, Corie has laid out what the guide is. From a category level, I think the way to think about it is, we do see that home theater, mobile phones and that collection of emerging categories will continue to grow. We also think that there'll be continued trend improvement in our appliance business as we move forward and that Grand Theft Auto will have some impact, not only to software business in particular, but it will also impact the hardware business because that's where it can be played. And then it also does have some impact on accessories as well, and that is all factored in.

For computing, the Windows 10 end-of-life in Q3 did create a quarter that was obviously more substantial from a growth perspective for computing, and we are comping up against that. So we do have computing forecasted in the back half to soften from a growth perspective from where it has been. Now again, it's grown for 10 straight quarters. So it's had a pretty nice run, but we'll continue to manage that with our vendors. There still is a lot of demand from customers in the back-to-school period, and I'm sure there will be as we move into holiday. And our focus there will continue to be on budget, making adjustment to our assortment, partnering with our vendors around promotions to try to make sure that we keep that business as healthy as possible, but we do know that we are facing a little bit more headwinds because we are anniversarying that end-of-life period.

Okay. That's helpful. And then just a follow-up on inventory trending up high single digits. I think just obviously, kind of getting ahead of dynamics next year, can you just talk about your plans for the second half in terms of inventory management and pulling forward of SKUs?

Yes. Our inventory management strategy really has not changed. The teams are very focused at for days of supply number and managing to it. A lot of the uptick that you're seeing is very specific one category, and that's computing. And as we talked about, one of our strategies is where there are opportunities, and we actually have visibility that prices are going to go up and we have an opportunity to buy a little bit earlier, we will bring in that inventory a little bit earlier. And we did that in Q1. You're still seeing that happening in Q2. As we move into the back half of the year, if those opportunities exist, we'll take advantage of them at the same point in time that they may not. So the teams may return to a more regular cadence of running that category at inventory levels that we have historically. So there's not a strategy to continue to front load. It's actually very opportunistic in the computing category specifically, where there are opportunities from a cost perspective.

And the only thing that I would add, Jonathan, is that we turn that category really fast. And so it's not like these are inventories that are going to stretch out for years. This is with the teams Jason's plays constantly making these decisions and really doing an excellent job managing and getting ready for holiday. So these are really quick turning categories.

Your next question comes from the line of Michael Lasser with UBS.

One could argue that this year, there's a collection of goodness between collectibles, RGBs that is driving a unique amount of comp growth for Best Buy. How do you expect to be able to drive this momentum next year when maybe the conditions won't be as favorable? And of course, best of luck, Corie Barry.

Thank you, Michael. I'm going to start with something and then maybe Jason can tie on. I think sometimes there is this misnomer that everything is just a launch or everything is just a moment in time. If you go back, let's go pre-pandemic. This industry is supported by constant innovation, constant development of new categories, constant sunsetting of old categories and that wheel and cycle, combined with the need to replace and upgrade and the drive to go get that new innovation is what buoys the category. I would argue we haven't seen as much of that as we came out of the pandemic because; one, you had the pull forward of all those replacement cycles; and two, you just didn't have as much innovation. And so I think my point of view, this is more a normalization back to how this industry more typically would work. It also absolutely plays to Best Buy strengths, which is when there is new innovation, we have an outsized role in the industry.

I would also add to that. I have a lot of confidence in the teams and I'll use 2 examples of where this shows up and will continue to show up. I think Meta is a really good example of where we have a partnership with a brand-new technology, and the way that, that shows up in our experience, whether it be digital or physical, is best-in-class. It's where we lean in. It's where we have opportunities to bring in increased growth. That's a new category and the teams will continue to find more and more of those and lean in faster than anybody else.

On an existing category, let's go to TVs because you mentioned RGB TVs, which we're very excited about. But at the same point in time, only launched in June. That particular technology, the impact on the quarter was probably more halo than anything else. The over 10% growth in TVs is the team doing an amazing job of executing across in-stocks, assortment, price points, promotions and really getting ready for what we think is a replacement cycle in the TV category because RGB will have more impact as we move forward. It didn't have a dramatic impact in the existing quarter, aside from giving a really nice halo and providing more interest in the category. Again, there were about 49 million TVs that were purchased in 2020 in the industry, and we think this is a multiyear replacement cycle. And you're going to see the team function on both of those paths. The new categories lean in really hard, existing categories making sure we're building the best assortment and encouraging customers to upgrade by featuring the latest and greatest from our vendors in those existing core categories as well.

My follow-up question is, you've been pursuing the strategy where you're taking some of the proceeds of these high-margin initiatives like the third-party marketplace and advertising, investing that in key categories and the price of key categories like appliances and home theater. What are you seeing in terms of the competitive reaction and the consumer reaction? How far are you willing to go? And does this undermine the gross margin outlook if you have to invest more of the proceeds than you were actually getting to maintain competitiveness as you move through the rest of this year and into next year?

Thank you for the question. I think as we look at the promotional environment, our categories have always had very competitive promotional environment. And what we saw was very much in line with what we expected. We do compete with some of the largest companies in the world and will continue to. And it's always been a very competitive environment, and we need to make sure we build the absolute best offerings and assortment with our vendor partners, find the areas where we can be differentiated with the things that we do that are different, like service and support and membership. And we really feel very strongly that we can continue to be able to compete in the marketplace the same way that we always have. And it is helpful to have new growth engines like things in Marketplace and Ads that can give us a little bit extra fuel to make sure that we can be competitive, but at the same point in time, also enhance our bottom line, which it is about that and, which I noted on an earlier question.

I would just add 2 things. One, in your question, you explicitly said things like price in appliances. Actually, the investments are broader than that, and I really want to underscore this because it's also about experience. It's about the delivering faster. It's about, in home theater, having the full ability to replace what you have. Those are very unique experiences for us. And they are part of that what creates that amazing customer flywheel that brings the customer back.

The second thing that I would add, if you just look at the guide that we gave you for this year's gross profit rate, absolutely, there's a bit of tariff refunds in there. But the expansion of the gross profit rate in that 30- to 40-basis-point range clearly shows that above and beyond tariff refunds kind of offsetting. And actually, when you put together tariff refunds and the product gross profit, a little bit of pressure there. So on the other pieces of the business, Ads and Marketplace and some of the kind of other line items, you're still seeing flow through even as you're investing in appliances, even as you're investing in experiences. So I think that's the goal, as Jason was talking about how he thinks about the longer-term algorithm, that's the goal we're after.

Your next question comes from the line of Joe Feldman with Telsey Advisory Group.

Congrats, Corie, on such a strong career there. Can you talk a little bit more about the impact of memory pricing? I think you said, in computing, you saw ASPs up, units down. I'm wondering if you're seeing that in other categories, and just how we should think about how the consumer responds to the memory price increases like when they see the higher-priced products?

Sure, Joe. Thank you for the question. We continue to see memory pricing go up and flow into our assortment in the Q2 time frame. It is very much what we expected. So you're looking at ASP increases in the quarter on mid-teens, and then you're seeing unit declines in the high single digits. What we're really focused on with customers because there is still significant customer demand in this category is really finding the right product for their budget, making sure that we match them with the right product for their particular needs. Again, it's important to remember that they're coming in and replacing a product that's probably 4, 5, 6 years old. And what they're upgrading to is dramatically better in so many different ways. One of the largest things that's changed in the years has been battery life in particular, if you think about notebooks. And really, we're focused on finding that right match. We also have tools like trade-ins, financing and then partnership with our vendors, they are finding ways where they can promote to make sure that we kind of ease this from a customer perspective.

So we feel like our model in computing can find ways where we can weather this memory storm, so to speak. And as a result of that, we'll continue to do the things that we've done to make sure that we're there with customers and finding that right budget.

As far as other categories go, it has not really dramatically impacted other categories. There are things that are very memory specific, memory itself, and graphics cards. Other than things like that, it is very much a computing-specific impact from what we're seeing at this point in time, just to be very clear, and we don't expect that to change through the rest of the year.

Got it. That's helpful. And 1 other follow-up on 1 category, I haven't heard you guys talk about it on the cost side is on transportation and fuel, which we've heard from a lot of retailers, the pressures that they're seeing. Maybe you could share a little thought on what you're seeing from that standpoint?

Yes, absolutely. So we are contemplating, as everyone is, higher fuel costs in our updated guidance. Overall, supply chain was actually a slight benefit to gross profit rate in Q1 and Q2. And all throughout the -- as it relates to the full year, we expect it to be relatively neutral. So there is a bit of increased fuel cost in there, but kudos to the team who is finding other ways to offset that.

Next question comes from the line of Steven Zaccone with Citigroup.

All the best in the next chapter, Corie. Can I follow up on the computing question there. Could you talk a little bit about the progression of ASP as we get into the second half of the year? Should we think ASP and computing is up a bit more and then units will be down? And then on an overall basis, ASP being down a little. I know you don't guide to it, but help us just understand what's the expectation for blended ASP as we get to the second half of the year?

Sure. I'll start and then I'll throw it over to Corie. From a computing perspective, obviously, Q2 is the first time when we saw a more dramatic change in our ASP, again, mid-teens, units down high single digits. It appears at this point in time, and again, it's a dynamic situation that, that is probably where we expect things to be as we run through the rest of the year. Again, it's a dynamic situation. We partner very closely with our vendors. We're taking advantage of opportunities where we can bring in inventory early to kind of alleviate it. And then there is also interest in promoting in the vendor community to make sure that we try to keep demand as strong as possible. So that's really where we see it at this point in time. But again, that's something that the teams work on in every everyday basis with our vendors, but it does seem -- I don't know if stabilized is the right word, but it does seem to be very consistent with what we're seeing in Q2 as we look in the back half of the year right now.

And to your second question on the ASPs, you're right, we're not going to guide ASP at this point. But I think the dynamic that we talked about, which is, as Jason just alluded to, those price increases in computing, some price increases in phones, although that has as much to do with new launches as it does anything because we're still seeing nice unit growth there. Those increases then being offset by this mix into some of the lower-priced products, particularly trading cards. I think that dynamic continues to exist as we go through the year. And to Jason's point, maybe more stabilized in terms of some of the increased side of things. But also, we continue to see a great demand profile on those sub-$50 products where the units are really growing. So I don't see that dynamic really changing as we go through the rest of the year.

Okay. The follow-up I had was just just on margins and maybe a couple of people have asked about the promotional backdrop. But as we've turned into August here, right, we've heard about some weakness amongst the consumer. How is back-to-school kind of played out? Are you seeing a higher take rate from promotions across the industry?

And then just a clarification. So the the Best Buy Ads and the Marketplace, right, like positive to OI rate. Was there any change in thinking there versus your initial guidance?

So maybe I'll start, Jason, can add. In terms of promotionality, we're not really seeing anything that is out of line with our expectations. So in general, promotionality looks like we would expect it to look. These are promotional categories. And I mean we continue to see healthy consumer demand, again, being at the top end of that 1% to 3% back half guidance range on revenue here quarter-to-date, that would underscore. We feel like back-to-school is going well. We feel like our anniversary sale is resonating well. And so we continue to feel like, as we have for many quarters, the consumer is in actually a relatively stable position, looking for sales events, looking for their budget, looking for the deals, but also responding to innovation and responding when there is something new and willing to pay those higher price points when there is.

And as it relates to your question around Ads and Marketplace being a modest, I'm going to call it, tailwinds to OI, I think that's slightly improved, which you can imagine we raised the marketplace GMV estimate for the year, so that would probably imply that's maybe getting a little better. We've been pretty consistent on the ads growth we're expecting for the year. So if anything, may be slightly better than where we started the year, but nothing massive.

Next question comes from the line of Steven Forbes with Guggenheim Securities.

Corie, you mentioned 21% business-to-business segment growth in the quarter. So curious if you can maybe expand on what's driving that? And then maybe more importantly, how that's impacted the full year impact? And how the growth strength has sort of rechanged or recalibrated? How you think about that business over the long term and what is going to contribute to the consolidated growth profile?

Yes, I'll start and then maybe Jason can talk a little bit about how we think about the future. Our -- we've talked about before, our Best Buy business segment, it generates more than $1.1 billion annually. It's been growing at, let's call it, 15% to 20% here in the first half. And there are really 6 segments that the team is focused on, education, hospitality, promotions and marketing, builder and multi-dwelling, health care and kind of corporate enterprise. And obviously, then we have digital assets that support and are dedicated for any of our business buyers and some dedicated partner portals that really are also helping our customers transact really seamlessly. We sell across our product categories with a concentration in computing and home theater and majors. And obviously, this is where GeekSqat gives us a really large competitive advantage. And in some cases, we're able to grow the business in some unique ways like we've talked about device life cycle management.

I think right now, the team has done an amazing job getting out there and really trying to think about unique ways in which we can serve our business partners. I think the work -- my take on the work going forward is to really refine where we think are the best places for us to lean into and make sure that we are well positioned to lean into those spaces given the assets that we have. But maybe, Jason, you can give some more color.

Yes. I think Corie did a really nice job. I think Best Buy for business does a couple of things for us. First, our value proposition and experience allows us to show up in a very different way, and we're seeing a lot of demand and she talked about the 4 segments. It allows us to -- it's a great where we can expand our reach, and it's a great way with all the tools we have that we can elevate the experience there. The team is delivering tremendous growth, which we're very proud of. We want that to continue, but the team is also doing an exercise to understand all those different verticals and segments and are there opportunities where we can actually find even additional growth in the future from the business segment because we do think that we are very uniquely positioned in that space, and I'm sure we'll want to talk more about that in the future.

That's great to hear. And then maybe just a quick follow-up, revisiting the elasticity impacts in computing. ASP is up mid-teens, units down high single digits. I'm curious if you can maybe just talk about how that's compared to your expectations for price elasticity demand in the current backdrop, maybe relative to prior periods or prior inflationary cycles? And then what does that sort of mean for how Best Buy positions itself or its assortment in good, better, best over the long time? Like is the current sort of elasticity dynamics providing more optionality for Best Buy to differentiate itself in the go forward and maybe drive tiering of product that creates a competitive advantage for you guys in the long term?

Yes. Thanks for the question. I think specifically, where the ASP and units are is maybe a little bit better than what we expected. If ASP increases, we're going to go up that amount kind of the unit velocity is a little bit better than what we expected. As I think about what the teams do every day, one of the things that we have an opportunity to do because our assortment is so broad as we have opportunities to change the assortment with our vendors to make sure that key price points are hit. And that's 1 of the things that we do across the assortment every single day. So if there's a key price point from a budget perspective, we're a customer walks into our store, I'll use a theoretical example, say they come in and they're looking for an $800 product. We have opportunities to make sure that that's not a gap in the assortment because prices went up, that we can reconfigure products with our vendor partners and find an $8.99 product that meets the customers' needs is dramatically better than what they're upgrading from -- that's obviously 4, 5, 6 years old. -- and the teams make those adjustments every day to try to make sure that our assortment represents the price points that our customers are expecting. -- they'll continue to make those adjustments through the rest of the year and definitely into the future. And I think that's part of the reason why we're seeing that the elasticity is maybe a little bit better than we thought it was going to be because the teams are constantly making those adjustments with our vendors across the entire assortment.

The last question comes from the line of Chris Horvers with JPMorgan.

And Corie, it's been quite the journey since we first met you, I think, 13 years ago. So congratulations and best of look on the next move wanted a quick follow-up to an earlier question. Just curious, that high end of the 1% to 3% in August, are you expecting any back to shift tailwind as you look over the next couple of weeks? Other retailers are essentially embedding acceleration versus where they are quarter-to-date given how to collate the calendar is? And then I'll include my follow-up in this 1 question. I guess more broadly, as you think about the computing demand that you are seeing, how much would you attribute to the improvement related to replacement versus this -- the AI cycle is here and it's now flourishing so you could actually see accelerating stacks and this computing curve extend well beyond sort of, I think, market expectations. And alternatively, are there any indications of demand pull forward? I think there was some concern in the market that when Apple announced some price increases around their product lineup that maybe that caused some demand pull forward. Just trying to gauge the office side of that question where you could see demand post back-to-school hit a low as the consumer is trying to maybe get ahead of price increases?

So I will start with your question around the shaping of the quarter. Obviously, every kind of sub industry in retail is different. And I'll be the first to say we are as well. I mean, I think we're -- we continue to hope to see this back-to-school strength as we head into the season, and then it rolls right into for us, in particular, football and the NFL season and our deep partnership there. But we also talked about the fact that as we head through Q3 here, we lapped some of those harder compares. And Q3 of last year is our -- was our highest comp quarter because we last some of those harder compares as it relates to the sunsetting of Windows 10. So I would actually expect that to have some impact as we roll into the back half of the quarter. So our shape is perhaps a little bit different than others. But for right now, again, we're pleased with how back-to-school is shaping out and pleased with how we're situated as we head into the return of football.

And then, Chris, for the second part of your question, I think computing is a very large category for us, and there's a lot of different segments. If I look at it at a holistic level, there was probably more upgrade volume last year as a result of the end of life of Windows 10. At the same point in time, there's always upgrade volume in demand every single year and there continues to be, but there probably was a little bit more last year. There are other things that are driving growth. We have obviously a gaming segment, a product that's always had a lot of interest within computing. There are products that are leaning in more from an AI perspective that customers are just interested in. And it may not be called out specifically as AI, but it's the features that AI really enables that are really what's driving interest from a customer perspective. I mentioned a little bit earlier battery life. Some of the products that we have today, when you get them for the first time, it really changes the way you completely use the product because you have battery life that's close to a day maybe even more than that. And you're not thinking about plugging the product in. And all of those things are things that are coming from a customer perspective, but every single customer is unique, and that's where our Blue Shirts and our website and our app do a really, really great job of figuring out what that customer need is, narrowing it down to what they want specifically, finding the right thing for their budget and then finding that particular match. But there is probably a little bit of a shift that's moving more towards innovation of innovative products. than the pure upgrade cycle in computing, that's probably a natural shift that we'll continue to see happen as we move through the rest of this year, primarily because that Window 10 end-of-life did drive probably some accelerated demand through.

Chris, on your pull-forward question, we actually did not see at scale evidence of customers pulling forward. There was an immediate pop post one large-scale announcement where we saw just a couple of weeks of immediate demand. But then it kind of came back to normal. And on the quarter, we wouldn't say it was large enough for us to call out as being material. The last thing I would say to just build on Jason's answer, this model works not when it's either innovation or replacement cycles, it works when those 2 things synergistically come together. And it's never quite as simple as one thing or the other. You can see it in TVs. You can see it in things like mobile phones. It's when those things kind of organically come together, and there's just that right tipping point for the customer and it is that sweet spot for the Best Buy model. And in fact, what we're also seeing is our teams are doing amazing work in the field, and they're actually even attaching better. We're seeing warranty attaches get better. We're seeing membership attach, get better, and so they're also when we have more of these at bats, the teams are doing a great job capitalizing on them. And I think it just is fun to watch the model shine. And with that, which I think was our last question, you're right, it was actually 10 years ago, almost to the day that I led my first earnings call as CFO, and those 10 years have literally been the greatest honor of my professional life. And I look forward to listening along with all of you as our amazing new leadership team shares our results in November. Thank you all.

This concludes today's call. Thank you for attending. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's First Quarter Fiscal 2027 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1:00 p.m. Eastern Time today. [Operator Instructions] I will now turn the conference over to Mollie O'Brien, Head of Investor Relations. Mollie, please go ahead.

Thank you, and good morning, everyone. Joining me on the call today are Corie Barry , our CEO; Matt Bilunas , our Chief Financial and Strategy Officer; and Jason Bonfig, our Chief Customer Product and Fulfillment Officer. 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 Form 10-K and subsequent Form 10-Qs 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. Before turning the call over to Corie, I want to note the revenue reclassification referenced within this morning's release. Starting this quarter, we have reclassified certain revenue among our categories. The most notable changes were credit card revenue and digital content which includes digital gaming, software and subscription. Previously, these items were included within our various product revenue categories, and now they are fully included within the services category.

The reclassification only impacts the presentation of revenue by category and does not affect total revenue or total comparable sales as previously reported, nor does it affect our previously reported earnings or cash flow. The information and related schedules were in our 8-K filing this morning and are also available on our Investor Relations website. And now I will turn the call over to Corie.

Good morning, everyone, and thank you for joining us. Today, we are pleased to report better-than-expected results for the first quarter. Our comparable sales grew 2% versus last year, higher than our outlook with positive comps across the majority of our major product categories. We also drove operating income rate expansion and earnings per share growth. Specifically on revenue of $8.9 billion, we delivered an adjusted operating income rate of 4.1% and adjusted diluted earnings per share of $1.28, which was up 11% versus last year. I want to give a big thank you to our employees across the company for their dedication to our customers and commitment to our strategy.

We are delivering on our strategy to strengthen our position in retail as a leading omnichannel destination for technology while at the same time, scaling new profit streams that we expect to provide considerable benefit over time. Our Best Buy ads and marketplace initiatives exceeded their performance targets. We are pleased with our progress and both delivered another quarter of positive contribution to gross profit rate. Our domestic marketplace GMV reached approximately $250 million in the first quarter. In fact, when including our marketplace GMV, our domestic sales growth for the quarter was more than 4%.

From a category perspective, we delivered stronger-than-expected sales performance in the gaming category across the 3 major consoles. Switch 2, PS5 and Xbox. This gaming growth was supported by demand for popular software titles like Pokemon Pocopia. We also saw strong growth in newer and emerging categories including AI glasses, 3D printers, collectibles like trading cards, health rings and PC gaming handhelds. Sales for this group of categories doubled versus last year.

In muting, we delivered our ninth consecutive quarter of positive comparable sales, driven by a combination of customer need to upgrade and replace and product innovation. Our Q1 computing sales were also supported by strong performance from our Best Buy business team, which grew 15% overall and their education, corporate and health care clients. In mobile phones, we delivered our fifth consecutive quarter of growth, driven by our expanded partnerships and in-store operating model improvements with large carriers. In addition, we saw better-than-expected customer reaction to new phone launches in the quarter. In the home theater category, we showed a material improvement in TV growth trends in the first quarter. While sales were still down slightly versus last year, we saw growth in units and market share throughout the quarter.

The improved performance was across tiers and price points, and we believe the momentum in Q1 is a positive sign heading into Q2 with the industry-wide launch of RGB TVs, which we will touch on more later. We will also share plans in a moment to improve the performance of our appliances category, where Q1 sales continued to be pressure and declined versus last year. Our online mix of domestic sales was steady at 32%, we continue to drive faster delivery for our customers. In Q1, 65% of online purchases were delivered or available for pickup within 1 day, up from approximately 60% last year and our in-store pickup experience remains an important asset with roughly 45% of online purchases picked up in a store. As expected, our sales growth increased as we progressed through the quarter, in part, due to new product introductions, and customers choosing to spend their higher tax refunds with us.

Our Q1 results did not materially change our existing thinking around the customer. Consistent with the past several quarters, we see a customer who is still spending but is value focused and attracted to sales moments. Importantly, while customers continue to be thoughtful about big-ticket purchases, they are willing to spend on high price point products when they need to or when there is technology innovation. We are pleased with our risk quarter performance and are maintaining our guidance for the year. This underscores the momentum in our business and provides multiple proof points of progress against the priorities that Jason will lay out shortly. As it relates to Jason, I would like to talk about the CEO session news we announced last month.

After much thought, I made the decision that now is the right time to step aside for me, for Best Buy and for the next generation of leaders. While this was a difficult decision to make, it is made easier knowing that the Board, through an extensive succession planning process that looked inside and outside these walls has found the right person to serve as our next CEO. Jason will officially assume the role on November 1, and he and I are working side-by-side until then to transition not just seamlessly, but in a way that continues to drive progress. He is the right person with the right vision to further accelerate our strategic priorities and to do so with urgency.

I've had the privilege of seeing Jason grow from his role as a merchant to an executive leader whose industry expertise, vendor partnership and influence, maniacal customer focus, innovative thinking, history of driving strategic initiatives and thoughtful decision-making will usher in an exciting and meaningful chapter at Best Buy. Most importantly, he shares my deep passion for this brand and our people and will work tirelessly to see it become even more successful. I would now like to turn the call over to Jason to discuss his priorities and provide key business updates for Q2 and the rest of the year.

Good morning. I want to start by saying how honored and privileged I am to be taking on the CEO role later this year. I'm grateful to the Board of Directors for the trust confidence and encouragement they have shown me. To Corie, I extend my admiration and appreciation. We are so fortunate to have had you at the home for the past 7 years. Best Buy has been a part of my life for almost 27 years. In that time, I've been lucky to work in many different areas of the business, from merchandising, e-commerce and marketing, supply chain, Best Buy ads and in our Canada business. I want to take a few minutes to talk about where Best Buy is headed and the 4 priorities that will define how we win in the months and years ahead. Before I get to them, it's important to acknowledge of the world we live in. .

The retail landscape is shifting faster than at any point in our history. Customer expectations are evolving. Technology is reshaping how we shop, learn and live. And our competitors are not standing still. We do not see this as a threat to us. We see it as an invitation. When the world changes this quickly, the companies that move with intention, clarity and unrelenting focus on the customer are the ones that come out stronger. That's exactly what we intend to do. Our first priority, we are advancing Best Buy as a retail media, advertising and technology company. This signals where we're headed as a business. We're not just a retailer anymore. We're becoming a retailer media, advertising and technology company, and each of those words matter. It means to deepening how well we understand our customers, their needs, their interest, the pain points we can solve better than anybody else.

It means continuing to accelerate Best Buy Ads as a meaningful growth engine, it's high margin, high growth and uniquely powered by the customer understanding that only Best Buy has. And it means expanding our presence across platforms, content in high-value touch points. The second priority, we're going to expand and grow our reach. Our marketplace and strategic partnerships are accelerating, including deeper work with our vendors and select retailers. We're opening Best Buy up to broader assortment, a wider set of partners and new ways for customers to find exactly what they need. We'll continue to expand what we offer not only through Marketplace, but also in our 1P business, capitalizing on key customer trends such as trading cards and collectibles and creating the experiences that drive relevancy and frequency with our customers.

The goal isn't simply to explore new areas of business, but it's about using our unique insights about customers to become a major player in new and growing categories. We will continue to partner with AI companies like OpenAI and Google to make sure we're showing up in the places where customers look for technology and advice. These AI partnerships and others to come will enhance our experience and by participating and showing up on those touch points, we reinforce the trust we built and continue to build with our customers every day.

The third priority, we are elevating the Best Buy experience. This priority is truly foundational to our vision, nearly 60 years in the making without elevating the Best Buy experience, none of the other priorities can succeed. No matter how we evolve, we're committed to being competitive on price and delivering excellence across every customer experience. Every decision, every process, every customer interaction should begin with 1 question. How does this make the customer experience better? It's about the unique mixture of human, physical, digital and AI and how we amplify it. For example, our stores are evolving into activation and experienced hubs. Places where customers come to discover, connect and get their hands on technology in ways they simply can't anywhere else.

Their vendor showrooms, service centers, fulfillment points, community spaces, all in one. As we mentioned last quarter, starting this summer, we are growing our store footprint through medium and small format locations. These aren't scaled down versions of what we already have. They are purpose-built formats designed for how customers actually shop today. The media format gives us flexibility to enter markets and trade areas where full-size stores don't fit the opportunity, but where customer demand is real and growing. These are in the 20,000 to 25,000 square foot range.

The small format lets us get closer to the customer in dense urban neighborhoods, suburban centers and communities that have been underserved. These are in the range of 12,000 to 15,000 square feet. Both formats are built around speed, curated assortment, expert service and a seamless connection to our broader fulfillment network. This is a major step forward because it expands our reach without compromising our experience. It gets us closer to more customers more often. When we place a store closer to a customer, not only does it see our sales and share lift in that market, but it also sees a notable online growth and material lift in our multichannel engagement within the first 6 months.

Proximity also expands our fulfillment footprint enabling faster small parcel ship to home delivery while broadening the reach of our large product delivery and installation services. We will highlight some of these locations later this summer, and we're confident this will lead to additional store growth. Beyond the footprint itself will be continuing to build differentiated value through our services, our membership and our fulfillment capabilities and also the upgrades we offer. And we're going to move faster because customer behaviors change quickly, and so will we.

The fourth priority, we're continuing to be a human-powered and customer-focused company. At Best Buy, our shared company values reinforce our commitment and determination. Our people fuel this company, they are the reasons customers come back, the reasons our partners trust us and the reason we've been able to navigate every shift this industry has thrown at us. Looking forward, we are committed to ongoing investment in our people while embracing technology, including artificial intelligence. That will empower our people to deliver even more remarkable experiences for our customers.

Bringing it all together, these 4 priorities aren't separate tracks. They reinforce each other. A better experience delivered through the right footprint and formats drives reach. Greater reach generates the customer insights that fuel our media and technology business, and all of it is powered by our people, equipped with the best training and technology in the industry and doing what only Best Buy can do. I've never been more confident in where we're headed and the team that's going to take us there or in our ability to deliver value for our customers, our partners and our shareholders.

Now I'd like to share some key business updates for Q2 and the rest of the year. As Corie mentioned, we saw improved TV sales trends in Q1. We and are excited to continue that momentum in Q2 and the rest of the year with the RGB launch. While some RGB televisions are already on display in our stores and online, we expect the full assortment to launch mid-June. For the next year, Best Buy will be the only national retailer where you can shop, experience and buy this new technology. RGB provides accurate full lifelike color never before possible, sharper image clarity for more detailed images and peak brightness for enhanced contrast and dynamic range. It also provides wide angle viewing with consistent picture quality and color from any seat in the room.

The launch of RGB will be supported by a robust marketing plan aimed at driving awareness of this new technology. Launching next month, our campaign is called bleeding is seen. The message will also highlight our easy upgrade process which includes free Geek Squad delivery, installation and Holloway of a customer's old TV. In partnership with our vendors, we've been training tens of thousands of store associates on this new technology. This, in combination with an elevated marketing across stores, TV, digital, social media, influencers, brings an increased level of energy and excitement to the whole category.

Moving to appliances. Our sales in this category have been pressured for quite some time due to the stagnant housing market and a very competitive retail environment. We've been testing several initiatives and are taking decisive actions in Q2. We that we expect to drive improved results. These include investments in pricing, marketing, product availability and delivery speed. We've already seen material improvement in our trends this quarter, with month-to-date growth in demand versus last year. Last quarter -- later this quarter, we also expect to implement material improvements in our digital sales experience for major appliances online.

Earlier, I mentioned opening new small format and medium-sized stores. In our larger stores, we continue to improve the look and feel by using our space and square footage more strategically. Specifically, we're consolidating empty space in approximately 70 stores and then using those new open spaces for value generation initiatives. In 50 stores over the next 2 quarters, these open spaces will be filled with the new meta experience that spans their AI glasses and VR categories. Branded Meta Labs at Best Buy, these 900 square foot areas will be staffed by employees specialized and dedicated to the meta experience.

In the other 20 stores, depending on location, we are leveraging the space for our Yardbird outdoor furniture shop or our outlet assortment. We are excited about this strategy and have hundreds of stores where this can be employed over the next few years. Last month, we announced an exciting development in our membership program. Starting next week, we are introducing rewards points for 8 million paid members. Our My Best Buy Plus and total members will earn 1% back in rewards on every eligible purchase and 6% back in rewards when they use their My Best Buy credit card. Points will provide customers with an always-on benefit for their Best Buy purchases including marketplace.

The rewards points will be in addition to the many popular benefits our paid members already received today, including fast and free shipping, extended product return windows exclusive prices and for our total members, product protection and 24/7 support. No membership program is static, and it's always been our intent to iterate and improve the program as we learn more from our members. Before turning the call over to Matt, I will touch on how we are navigating the impacts of memory cost increases, which mostly impacts our computing category.

As expected, product costs have been increasing and product price increases have been flowing into our assortment. In Q1, our blended computing ASP was flat to last year, largely as a result of product mix and the staggered implementation of these product price increases. As we look into Q2 and the rest of the year, we expect our blended ASP in computing to rise, and we expect some elasticity to lead to lower units. However, we expect the magnitude to be significantly muted due to our assortment strategy. Most customers come to us with a budget. And through our broad assortment of products and price points, find a great product within that budget.

We've seen evidence of this with our customer behavior in the past situations most recently in response to tariffs. We have also made some strategic decisions to pull forward supply in certain areas to alleviate these impacts, as you can see from the growth in our inventory and our balance sheet in the first quarter. At this point, we do not see indications of material inventory supply constraints for the rest of FY '27. This is a dynamic situation, and we will continue to partner closely with our vendors to mitigate impacts. I will now turn the call over to Matt.

Good morning. Let me start with how our first quarter performance compared to the expectations we shared last quarter. Enterprise comparable sales increased 2%, which exceeded our guidance of approximately 1%. Our adjusted operating income rate of 4.1% was better than planned and was primarily driven by SG&A leverage from higher revenue. I will now talk about our first quarter results versus last year. Enterprise revenue of $8.9 billion increased 1.9% versus last year. Our adjusted operating income rate increased 30 basis points compared to last year and our adjusted diluted earnings per share increased 11% to $1.28.

By month, our enterprise comparable sales were down approximately 1% in February for growing to 3% in March and 4% in April. In our Domestic segment, revenue increased 1.5% to $8.2 billion, driven by comparable sales growth of 1.8%. From a category standpoint, the largest contributors to the comparable sales growth were gaming, computing, mobile phones and services, which were partially offset by a decline in appliances. Our online revenue of $2.6 billion increased 1.4% on a comparable basis and represented 32% of our domestic revenue.

From an organic standpoint, the blended average sales price of our products was once again very similar to last year with an increase of less than 1%. International revenue of $687 million increased 7% versus last year. The revenue increase was primarily driven by comparable sales growth of 4.7% and the favorable impact of foreign exchange rates. Our domestic gross profit rate increased 20 basis points to 23.7%, driven by marketplace and Best Buy Ads growth and improved performance from our traditional services offerings. These items were largely offset by lower product margin rates. Our international gross profit rate decreased 50 basis points to 21.5%, primarily due to lower product margin rates.

Moving to SG&A, where our domestic adjusted SG&A increased $17 million. This was primarily driven by higher expenses related to Marketplace and Best Buy Ads and the lapping of a favorable indirect tax settlement. The previous items were partially offset by lower Best Buy Health expenses. During the quarter, we returned a total of $202 million to shareholders through dividends. We have raised our quarterly dividend for 13 straight years and remain committed to being a premium dividend payer. We ended the quarter with our inventory balance up almost 8% and our accounts payable up almost 10% versus last year. The higher inventory balance primarily includes the pull forward of computing product.

Before moving to our guidance, I would like to touch on a key aspect of our financial model which is driving efficiencies and identifying cost reductions. In order to invest in initiatives that we expect will bring long-term value and to offset pressures in our business, this long-standing business priority is crucial. In FY '27, our key opportunity areas remain supply chain, customer care, reverse logistics and the continued optimization of our health business. Now moving on to our full year fiscal '27 financial guidance, which remains unchanged and is the following: revenue in the range of $41.2 million to $42.1 billion comparable sales of down 1% to up 1% and adjusted operating income rate of 4.3% to 4.4%, and adjusted effective income tax rate of approximately 25.5% of adjusted diluted earnings per share of $6.30 to $6.60, capital expenditures of approximately $750 million. And lastly, we expect to spend approximately $300 million on share repurchases.

Next, I will cover some of the key working assumptions that support our guidance. On the top line, as we mentioned last quarter, we expect growth in a number of categories, such as computing, mobile phones and the collection of our newer emerging categories that Corie listed earlier. We expect our gross profit rate to improve by approximately 30 basis points, driven by growth from Best Buy Ads in our U.S. Marketplace. As we mentioned last quarter, we expect ad collections to grow 10% to nearly $1 billion. We expect the U.S. Marketplace GMV to be at least $1.2 billion for the year. We continue to expect our traditional services and membership offerings will be neutral to our gross profit rate this year versus last year.

Now moving to our adjusted SG&A expectations, which include the following puts and takes. SG&A is planned to increase in support of ads and marketplace, which includes advertising, technology and employee compensation expense. We expect higher incentive compensation of $30 million at the high of our guide. Store payroll expenses are expected to increase the high end of our revenue guidance with minimal impacts from a rate perspective. Partially offsetting the previous items are expected to lower Best Buy Health expenses. Lastly, the low end of our guidance reflects our plans to further reduce our variable expenses, including a sense of compensation to align with sales trends.

Before I close, let me share a couple of comments specific to the second quarter. Comparable sales have started strong in May with a month-to-day growth of up high single digits. Our comparable sales outlook for the full quarter is approximately 1% growth as we start to lap last year's very soulful gaming launch in June. We expect our Q2 operating income rate to be approximately 3.9%, which is flat to last year. I will now turn the call over to Corie for summary on before the Q&A session.

Thank you, Matt. I'm proud that after several years of sales volatility during and after the pandemic, innovation is accelerating, and our business has returned to more stable performance over the last 6 quarters. In addition, we are driving momentum based on the investments we have been making in our customer experience and in our initiatives to drive incremental profit streams. Our marketplace is driving unit share gains, our Best Buy Ads is accelerating, and we are driving growth through our ability to uniquely commercialize new technology and serve our customers as they upgrade and replace their tech no matter their budget. In this moment of acceleration, I believe Jason is the right leader and now is the right time for us to lean into our next chapter. And now operator, we would like to take questions.

[Operator Instructions] Your first question comes from the line of Peter Keith with Piper Sandler.

Corie, wish nothing about the best and gate you look forward to working with you going forward here. I thought maybe just focus first on the home theater category. You did cite some pretty nice improvement during the quarter. We if you could talk about what drove that in Q1? And then to clarify on the RGB TV technology, I think you said you have exclusive distribution rights on a national basis for the next year. So does that imply until May of 2027?

Yes. Thank you for the question, Peter. I think first, I'll start with the TV performance. We saw a strong Q1 that obviously was a change in our trend. We do believe we've gained share with that improved trend and we saw strength across many different parts of the business. There was a situation where ASPs did decline pretty substantially. So we're making sure we're competitive across all the different price points that customers are interested in. The RGB launch, we're extremely excited about. Again, there are products that are on or what in our stores right now, but it will more materially be fully launched as we get to the middle of June. .

You are right. We do have an opportunity where we're the only national retailer that has this product, and that is a time frame that's a year which it actually depends on exactly when the launch was. So between May and June time frame, depending on the vendor. But then there's also continued conversations of -- this is about making sure we represent the latest and greatest in a way that our vendors want us to highlight that technology. That's exactly what we intend to do, not only through what we do in store and online, but also through marketing and training in partnership with our vendors. And I will continue to have conversations about how to make sure that, that technology gets represented in places like Best Buy on a basis that's maybe more exclusive moving forward as well.

Okay. Great. That's encouraging. And then maybe another product category that might pique my attention on appliances, which has been our pressure for a while, I think you said a flip positive in May. Wondering if you could highlight what's working there. We continue to hear that we're just in a direct replacement market. So you're able to shift to faster delivery. What's driving that improvement in appliances and that that's something that can continue to comp positive in Q2?

Yes. Thanks again for that question. I think there's a lot of things that are driving appliance, which is maybe why it's taken us a little bit longer to be able to fix this particular trend. There's a lot of aspects that business that are required to make sure we're competitive. And every customer is a little bit different in a market that is more duress and speed does matter the delivery speed, in particular, and availability is a critical aspect when you mix that with making sure customers understand that through marketing messages as well as making sure we're competitive on price, that combination seems to be working pretty effectively and what the team has done in May, really around the Memorial Day holiday kind of buying season, so to speak.

So we want to continue to learn from the positive trends that we're seeing in May and figure out how we can continue to refine that, double down on that, make sure that the availability and delivery speeds are top of mind because we've seen that as being probably the -- it's all of it in combination, but those are probably the 2 biggest things as we move forward into additional holidays like July 4.

Your next question comes from the line of Christopher Horvers with JPMorgan.

Congratulations, Corie and best of luck in your next chapter and looking forward to working with you, Jason. So my first question is, can you talk about the drivers of the May strength? Like you talked about major appliances improving, but what other categories are accelerating relative to 1Q. Did TV turn up? Is computing accelerating as well? And how does this make you think about the switch to lap because if you look at the monthly and look at the stacks or CAGRs, you had the sharp acceleration in May and you're really decelerating that hard to get down to the 1%. So what informs that overall judgment?

Chris. Yes, we expect Q2 to be about approximately 1% in comps for the full quarter like we said, a month to date through Memorial Day, we're sitting at high single digits. And that's actually coming across most of our categories. So we're seeing continued growth in computing, mobile phones, the collection of a number of emerging categories. And to your question, we are continuing to see sales trend improved. And as we talked about, major appliances has turned to growth in the month of May, so far. So we do see it across a lot of categories.

But to your point, as we get into June, we are going to start lapping the Switch launch last year, which was roughly $200 million of sales in Q2. We'd also say in May, we continue to benefit a bit from the tax refunds. So most of that benefit came in the month of March and April, as you get into May, there's still, as we expected, a little bit more in May as well that sits within that May performance. But it's a pretty significant lap in June and July in terms of lapping that switch to launch, which was a disproportionate amount of sales in 1 quarter of a launch that you would see on a normal run rate. I'd also say as we get to the back half of the quarter into July.

We started seeing really strong back-to-school and Win 10 type of product -- same increases within the computing category last year. So at the back end of this quarter, we start to see a little bit more lapping pressure against that computing category. I still feel like computing is going to grow and still feel great about the category. We're going to get the sequential get a little tougher in that category as you get to the back half of the quarter.

So my follow-up is, it seems like the U.S. consumers become really in tune with supply chains and prices in this post-COVID world with the experience of shortages during COVID and big price increases. I guess the -- so the question is, is there -- is any of -- do you -- have you thought about any of the strength in May, given memory touches all of tech and to something that's in the news cycle that there's this like urgency to buy and get ahead of potential shortages later in the year and potential price increases later in the year?

It's actually very interesting, Chris, in our research around the consumer. We are not seeing any indicators that would say the customer is pulling forward purchases. And in fact, very few really are worried about memory, as I say, in air quotes. And we've been keeping a really tight eye on this. So I think, again, I said it, we continue to see very consistent customer behavior, which is a customer that's under a little more pressure, but still resilient, attracted to deals and sales moments shopping within their budget, which is where our broad assortment really plays in our favor. And while they're thoughtful about the big ticket buys, they're absolutely willing to spend on those high price points when they need to or when the technology is compelling enough. So we just are not seeing in our data this pull-forward behavior, which is great because it's just showing overarching strength and a propensity to want to spend those tax dollars with us. .

Your next question comes from the line of Joe Feldman with Telsey Advisory Group.

I was hoping -- I know you -- thank you for the color on the store format. And I was just wondering if you could share a little bit more there, like should we expect to see you guys maybe repositioning stores more so more relations or even closures of some of the older legacy stores to kind of shift into this newer format that you're talking about?

Thanks for the question. I think there's 2 parts here. The first part, which we covered is we think that in our larger stores, there are opportunities to strategically use some of the space in more effective ways, which we highlighted partnership with Meta in 50 locations, and we talked about things like Yardbird shops. We do think there's hundreds of additional stores where we can use some of that space in a more effective way. The rest of what's in that store is actually highly effective. It's in the right location.

The stores are in a great place. It's just -- we actually have a little bit of space that we can use more strategically. The small and medium stores actually about expanding our reach and putting us in places that we're not today. So we're really excited about. We're going to actually highlight some of those locations as we move through the summer and some of them grand open. And then we'll talk in the future about what we think that strategy can be from a growth perspective. But it is not about replacing. It's really about reaching new markets and customers that we haven't been able to reach before with the store.

Got it. That's really helpful. And 1 more sort of separate question. I know you talked about the inventory pulling forward some of the goods. But I guess, how should we think about inventory for the balance of the year? Should that growth rate that you have sort of slow down or match sales better? Or just any color you could share would be helpful.

Yes. I think we'll continue to play it as strategically as possible. I mean the pull forward is almost entirely driven by the fact we want to bring in as much computing inventory earlier at lower costs as much as we can. And that's what's repented in the quarter and inventory balance. You can see our cables are actually up more than our inventory. So we're in a good working position. As we get into Q3, there could be a continued level of elevated inventory, all really healthy inventory but those are going to be places for us to be strategically well placed in terms of the product we had at the cost profile that we like.

Over time, for sure, our goal would be back to get down to inventory balances that is more in line with what sitting in a forward days of supply need for the quarter ahead of it. So for sure, over time, we'll get there exactly at what point in Q3 or Q4. Hard to say -- but as we've proven over the years, we're really tight at managing our inventory. We run our inventory a lot leaner than a lot of competitors do, and team's got their hands all over it. But yes, this is a very strategic decision to make sure we have the right product at the right time, making sure we're taking into the cost.

Your next question comes from the line of Anthony Chukumba with Loop Capital Markets. .

Let me extend the same sentiments to Mollie and Jason. Sorry, Corie and Jason. So a lot of good information. I really appreciate all the color. As you think about -- once again, the fact that you got off to such a strong start in May, I know you've talked a little bit about this, but was it really just sort of like appliances and the end of -- and I guess, the sort of long tail of the larger income tax refunds? Or was there anything else specifically that you saw in the month of May to attribute to that drove the strength?

Yes. I think, like I said earlier, we saw actually strength across almost all of our categories. For sure, major trends improved, TV trends continue to improve, but we saw continued sales improvement from computing in a lot of our other smaller categories. There was some -- like we've talked about, a little bit of, we believe, tax refund benefit that's sitting there in May. Proportionately a lot smaller than what we would have seen in March and April. So there is some, but I wouldn't say that was the significant driver of the sales so far in May based on our estimation. So I think it was pretty broad-based I think the Memorial Day sale has been successful for us. But again, that's across a lot of our businesses.

Got it. And then just 1 quick follow-up. So I thought it was interesting about 65% of your online orders either being delivered or available to pick up in a day and in fact, it was up 500 basis points year-over-year. Do you think that, that's driving any sort of improvement in your online business, that higher availability? Or does that just kind of take the stakes at this point?

My point of view is that it's ongoing table stakes. I'm very proud of the improvements we're making, I think, across retail, you're seeing improvements. I think what's more important, Anthony, is our ability to deliver on the terms the customer wants. And constantly, I give the team a ton of credit for tweaking, not just is it available, but is it available in the way that I -- that's why we also include available for pickup because with 45% of people still going to the stores to pick things up, that highlights that our customer wants to be in control with items that are often high price points, sometimes breakable and obviously very valuable.

So the team's focus is just maniacally on. Yes, if they want it within that day, let's make sure every mechanism to get it to them. But more importantly, let's just make sure we get it to them in the way that they want.

Your next question comes from the line of Greg Melich with Evercore ISI.

So first, Corie, thank you and Jason, congrats I wanted to dig a little deeper on rebates and tariffs. So I think last year, that was a lot of went through a lot. And I'm just curious, do you guys -- have you applied for rebates? Do you expect to get the through the course of the year? And perhaps more importantly, how are some of your vendors thinking about using any rebates or the suspension of IEFA to improve the value prop and sort of back against some of the AUR increases you talked about?

I'll start and then Jason can build. At the highest level, we've been crystal clear that throughout all of this discussion, our #1 priority has been our customers. And our approach has been to deliver that right assortment to customer needs and budgets while we partner to your point with our vendors to make sure we navigate what's been really dynamic conditions. And I have to say I'm incredibly proud of the way our teams have been successfully over the better part of a year now, navigating tariffs.

Now more explicitly to your question, we've said it before, we're the importer of record for only about 2% to 3% of what we sell. So that means on the refund topic, we are currently complying with the Phase 1 of the refund process. But I think it's important to note, obviously, based on how much we import our refunds are small in the context of our sales. So to be crystal clear our goal is that any recovery of duties we have will be used to deliver value back to our customers. That's really important to us. And of course, we also plan to work with our vendors over the next several months as this plays out. And Jason, maybe you can add a little color.

Yes. So as Corie talked about, obviously, the vast majority of we'll be flowing we'll be flowing back to our vendors. And we're in conversations that as they want to deliver value back to our customers, especially customers that purchased in Best Buy locations and made that choice, we have a lot of tools, both not only in our physical store environment, but also through our digital channels to allow them to do that. And if they decide that they want to invest back in giving customers value as well, we can be an outlet for that to happen very, very quickly and hope that a lot of them make that decision, but we'll talk about that in the future when they do.

The last thing that I would say is I think about tariffs is a little bit of a corollary to the memory situation. Obviously, we talked about making price adjustments as the last resort throughout the better part of the last year. But I think it's important to note while it impacted some parts of the assortment, it did not result in oral ASP increases at the blended enterprise level, which I think just underscores the point that we've been making that our customers come with the budget, we're going to have a wide range of price points and a wide range of availability and will be there to meet the covered no matter what their budget is.

Great. And then a quick follow-up. In terms of the larger format stores, I understand the reallocation to the Meta Labs and other things. Are we still planning on probably rationalizing a dozen of the larger stores a year? Or does that sort of level out at this point?

Yes. I think we've got a pretty tight process around understanding the profitability of our stores as it exists today. Our large stores are still extremely profitable, cash flow positive. We like generally where a lot of them sit -- to the extent that we have a better location to move them to, we will certainly entertain that. And if they end up meeting not meeting the economic hurdles, we will certainly make decisions to close them. I think that the pace of those closures might be slow compared to where they've been in the past.

And in some cases, you want to close a store to open it up maybe in a stronger retail node in another part of the market. So we'll continue to make those decisions. We feel like the store is extremely valuable, convenience for our customers enables very quick delivery and fulfillment options for us. And so -- and that experience is super important. They're all very economically profitable for us. So I feel good about that. We'll continue to find that over time.

Greg, I think you even saw that in the fiscal year that we're in, where we actually said for the first time in a very long time, we're going to have a net store additions this year, which reflects a bit of that slowdown in pace that Matt was referencing. .

Your next question comes from the line of Mike Baker with D.A. Davidson.

First question on memory -- the memory topic. So it sounds like customers come in for a budget. So maybe costs go up to trade down to a different machine. How does that impact the margins? And then follow-up is you don't expect any supply chain issues for 2027 this fiscal year, but what about next year as we think ahead?

I'll start, maybe Jason can jump in. I think from a margin perspective, we don't see it having a large impact to the margin rate overall. What's been actually a bit of pressure this year in terms of margin rates on the collect margin rate side is more of the mix pressure in the early part of the year, not having lapped the gaming release last year, but also just making sure we're being sharp on promotions, particularly in the major business and a little bit in some other categories. So that has more of the product margin pressure for the year versus the memory cost issue.

And as far as supply chain goes, I mentioned, this is a dynamic situation. We have great partnerships with our vendors. For the rest of this fiscal year, we do not expect to have a material product shortages in the category that's most effective, which is computing -- we'll continue to watch it closely. Again, if that changes, we'll make sure to communicate it. But at this point in time, visibility through the end of the year, we feel like we're in good shape. And what's going to happen in previous years, I think, is more people trying to make predictions and we'll work closely with the vendors to try to figure that out as we move into next fiscal year.

Okay. One more follow-up, if I could. On TVs, understanding, it sounds like you're winning back some share, can you talk about the industry in general, what you've seen so far? Has it been a tax refund bump on that? Or are we finally hitting a replacement cycle, what, 6 years after even bought a new TV during COVID?

So I think there's a couple of things. We think we gained market share in Q1, but obviously, our revenue was still not positive. So that would indicate that the industry didn't grow in Q1. I think the second thing is we're excited about RGB and the ability for that to be an accelerator for the business. There has not been a material new display technology and television since 2013 with the launch of OLED. Long time, which was 1 of the reasons that we're so excited about it. And then the other stat that I think is a really interesting 1 is in 2020, there were 49 million television sold. The upgrade cycle is somewhere between 5 and 7 years. So we're getting to that point where we have a lot of customers that have products that are ready to upgrade and there's a new technology that's being introduced that can be accessible to a lot of customers.

So we're excited about where that business has the potential to go, not that similar to where computing was when we started this trend of 9 straight quarters of growth. So I think we're getting into an upgrade cycle. We have new technology, which is where we excel. Those are all really, really good things, but the category didn't grow from an industry perspective in Q1, we're optimistic about Q2, but we'll see what happens.

Your next question comes from the line of Steven Zaccone with Citigroup.

Corie and Jason, congrats on the next step in both of your careers. I wanted to ask about some of the emerging categories you mentioned they doubled versus last year, trading cards was mentioned, it's kind of popular right now. Can you talk about the growth a bit more. It's bringing in a different customer? Do you see this as a onetime list? Or is this some categories that can continue to see growth over the balance of the year?

I think what's interesting about this is the breadth of things that we mentioned within this. So to slow down a little bit. We talked about AI glasses, 3D printers, collectibles, which is where the cards come in, health rings and then we talk about PC gaming handhelds. The reason I want to slow down on that is those are all very different use cases. They're very different customers, they definitely target the demo that wants to come in and shop with us and take in some of those experiences that Jason talked about.

And what we can see is across those take cards as an example, definitely drives demand drives footsteps and that's a customer who we're seeing come back to us. And so in some cases, it's an incremental customer. In some cases, it's an incremental visit. In some cases, it's just something new that we didn't have before that adds some of that excitement to the stores. But across the board, this is becoming a pretty material growth driver for us. And I think more importantly, represents some of what Jason talked about, which is bringing the excitement into the store using our space in different ways, lots of opportunities to highlight some of these fun products, especially to get better at maybe swapping some of these things in and out of the stores. I don't know, Jason, if you have anything to add.

I think the other thing is we just want to stay close to where we see customer trends. I think cards and collectibles is -- there's a lot of categories there that are growing. But cards and collectible is an interesting one, and we're finding ways to use the uniqueness that we have with both great digital properties, but also a physical property to make sure that we can try to meet customer demand in a little bit different way. It's 1 of the things that's driving lines in front of our stores many mornings when we have a drop, which many other retailers don't have the physical locations to be able to play in that area in a particular way, making sure that the customers who want to stay in the line are able to get the particular cards that they're interested in.

So we're excited about it. We want to make sure that we continue to listen to our customers and then make adjustments to how it shows up, not only on our website but so in our stores. And there may be opportunities where we can continue to expand that category as well, which is something the team is looking at and working on.

Great. The follow-up I had was just you mentioned ASA it likely to go up and you expect some new elasticity. Can you just help us understand the cadence of that as we go over the course of the year? Is this something that's more of a ASPs peak in the second half? Just help us understand that dynamic.

Yes. I think as it relates to computing, I think we expect the ASPs to grow as we get into the next few quarters, exactly how much we're not guiding, but we would expect that based on the cost increases that we have seen and continue to expect to see as we get into Q2 and Q3. But again, what it's meant so far for our whole company, the blended ASP has been pretty muted. It's been pretty flat. Does this rise the overall yet to be seen because a lot of things go into the overall ASP calculation in terms of the mix of products. So on the computing side, for sure, we probably expect to see a little bit of ASP increase.

But I would reemphasize the point that consumers aren't generally aware of the cost of some of these items because it's been so long for them to shop. They come in with a specific budget and purpose in mind. They don't necessarily trade on specs. They trade on the use cases and the devices. So we feel good about navigating that when it does come. We've seen some evidence of that as it relates to in terms of they come in from a budget and we continue to drive strength in that category, so.

I would also add, I mean, you see it in our inventory growth. We're looking at ways to partner with vendors to mitigate this as much as possible. So predicting exactly which quarter the peak is going to happen. I mean we actually want to influence that. So we brought in more inventory. You saw that in because we think it allows us to have that broader assortment and have those choices for our customers, and we'll continue to take that stance wherever is beneficial to customers and the way that our assortment shows up. .

Your next question comes from the line of Brian Nagel with Oppenheimer.

So Jason and Corie congrats on your new roles. So I guess the first question I want to ask, I appreciate all the commentary on RGB. I guess more of maybe a longer-term quarter philosophical question. But as you look at this launch, I think you -- in response to a prior question, you talked about the OLED launch more than 10 years ago. But I guess the question I want to ask is, I mean, how significant could this be from either the driver replacement demand or just improved demand overall and then you mentioned the exclusivity that Best Buy is enjoying here for a year. Remind me, is that unique? Or is Best Buy seeing this type of dynamic in prior TV launches or other significant launches?

Yes. It's a great question. I think First, RGB is a really good example of where our differentiation gives us the ability to win. The fact that we are an extension of our vendors for the latest and greatest they have in technology and all the investments that they make to bring it to market, and we're the place that as our marketing campaign has believing as seen in this particular example. This is where we shine. This is where our vendors shine.

I would say that as much as it's taken a really long time, the industry has gotten a little bit kind of flipped in different places from an innovation perspective. Because of what happened during the pandemic innovation at 1 point in time completely stopped, and it was more about just getting as much product out as possible. And now I feel like we're starting to get back to what I would consider to be a more normal cycle where innovation will continue to happen in many different categories. What I would tell you is what you're seeing in TVs right now is an example of where we win and where we can represent it better than any place else and we want to make sure we take advantage of that with our vendors. You should see that continue in other categories. It's always been something that you've seen in the computing category over the years.

So as much as I'm excited about what's happening in the TVs, it is a part of our strategy and something that our merchant teams work with our vendor partners to show up when there's something that's new, something that needs to be seen, something that's the latest and greatest. We want to make sure we're there and we want to make sure that we're there in a differentiated way. Whether that's through having it be more exclusive or differentiated in some other way is something that the teams work very hard every day to do.

I know we're talking explicitly about RGB. But if I kind of take it up a notch, this is the example of where our models shine period. When there is innovation, we are able to lean in. That means our employees are getting specialty training and they're all invested -- that means we use our services backbone so that we can provide that super easy upgrade experience that Jason talked about. And you can see it across more of our categories, kind of getting back to that normalized state where we get the chance to commercialize new technology better than anyone.

That's all very helpful. I appreciate that. So my second question, I guess a little nearer term a lot of talk broadly discretionary about tax refunds, larger tax refunds. As you look at your -- as you look at the Best Buy business for Q1, then maybe in particular, that the acceleration in sales or growth we saw into May, is there any way that you can look at like how much these larger tax refunds have likely added to this?

Yes. We certainly tried to estimate what we thought our amount of the tax refund coming would be for Q1 and also for what would extend into me. So we certainly had an estimate. So you can imagine we had an idea of what we thought would be the impact in Q1. How much -- how specific were we close to that? It's really hard to do that math. We know that we did probably enjoy a benefit from it, feel like it's about what we thought it was going to be. And certainly, as we got into May, we do feel like there's a little bit of what's sitting in May strength as well related to it. But again, more of that was March and April for our consumers which tend to gravitate to the more higher income to come to your point as well. So definitely was part of it, something we had planned for about what we thought it was going to be and for sure, helping a little bit in May.

And I think that is our last question. So thank you all so much for joining us today, and we look forward to updating you on our results and progress during our next call in August. Have a great day. .

This concludes today's call. Thank you for attending. You may now disconnect.

To kick off our first discussion, I'm pleased to introduce Best Buy's Chief Executive Officer, Corie Barry; and Chief Financial and Strategy Officer, Matt Bilunas. Their fireside will be moderated by Michael Lasser. Thank you again for your continued engagement as we begin another great day of dialogue and insight.

I'm kind of sad I missed the tribute to Michael Lasser..

Boy, you missed nothing. Well, I don't think there could be a better way to begin the second and final day of this glorious event than having my friends from Best Buy with us. I am thrilled, so thrilled to introduce Corie Barry, Best Buy's Chief Executive Officer; Matt Bilunas, who is not only the Chief Financial Officer, but the Chief Strategy Officer and someone who needs no introduction, but Mollie O'Brien leads the company's Investor Relations effort. Wow, there is a lot to talk about. So I'm glad to have my friend here.

Where I want to start is Best Buy is a story that has constantly been underestimated by the investment community. I think my folks on the stage kind of like that. They like to be underestimated and under -- I won't say underappreciated because there are many of us who appreciate you lately.

But this is a company that has been through a lot and has figured out ways to navigate through what is a constantly changing environment. So as we begin our conversation, how has the organization been able to stay so agile and achieve so much success and really confront a lot of that hesitancy that outsiders have.

Thank you for a lovely question.

Easy one to start.

You take it harder progressively. I actually am going to start at the beginning. Our founder, Dick Schulze, founded Best Buy 60 years ago. And he laid out 4 core values for Best Buy and one of those values was learning from challenge and change. And it seems real simple, but it's actually quite present given what this organization has gone through. And I think he did that because in his heart, he knew the products we sell at that time will evolve incredibly quickly. And if you don't have an organization that is anchored in the ability to navigate that amount of change quickly, you're not going to succeed. And so we, as a culture, come back to that all the time. So you and I were chatting a little bit about like how do you keep people focused. The key is you have to hire people smarter than you, you have to put them against hard problems.

You have to let them solve them without being hands on as long as they're within the bumpers of the values and the strategic direction of the company. And I think we've created a really resilient team. The last thing that I would say is you also have to be willing to learn from your mistakes. And we're all going to make them in an environment like this. It's moving so quickly that if you're trying to be perfect, you're actually going to shoot yourself in the foot. And so moving quickly, choosing to learn from your mistakes and then talking about them and talking about how you're going to pivot, that for me is a skill that I think the team excels in.

Yes. And would you not add maybe a third point that I think is one of the key values of Best Buy that's really led to success, which is be so customer-focused. I can remember the day where Best Buy's big competitor placed its stores in maybe out of the way areas because its view was, well, customers would come to us. And one of the founding principles of Best Buy was to say, well, we've got to make it easy. Let's put the stores in the most convenient areas for the customer. And it seems like that's been a guiding star for the company ever since.

I mean I think the focus on -- it's so funny that you say that because to me, that's just so core to who we are. I can't even talk about it because we wake up every day, and that's all you think about. And in fact, that's not platitude. You have to be so maniacally focused on the customer that sometimes you're willing to break your own paradigm. The customer always is moving faster than the organization is. And so the question is, are you willing to sometimes break your store example is a beautiful one. At the same time, you've got a customer who wants that in-depth virtual digital experience. And they don't want either or. They want both those things.

They want them on their own terms. And so having the willingness to be in love with your stores and wanting to make them these experiential hubs that are incredible. And at the same time, diverting investment into your digital assets so that day after day, you're faster, better, stronger digitally. It's a very unique balance that the team strives to make every day.

Yes. Thank you for that. At the risk of using maybe a graphic visual too early in the morning, but Best Buy is at the tip of the spear in terms of the change that are -- our societies experience. Not only are you as leaders, strategists and operator trying to -- operators figuring out how this artificial intelligence and all this technological change works, but you're also empowering customers and giving them the tools to be able to do that. So I want to concentrate on this topic for a few minutes. And where I want to start is how's Best Buy using artificial intelligence.

I'm actually going to take it up one level from there. I think about artificial intelligence for Best Buy on 3 levels. The first is truly the product level, what we sell to people. And our goal is to use your own words back at you to be at the tip of the spear in terms of those products that people access. That's everything from operating systems like Copilot+. That is also devices like Meta Glasses, that is whole categories that probably will come back in a completely different way, like smart home, where it actually will be a lot smarter. And that is also thinking about how platforms think ChatGPT or Anthropic start to show up on products, on things like your TVs or in your homes and then how your personality stretches across those things.

So there is -- we're just starting the journey on the product side as it relates to how CE will change. Then there is the Agentic shopping side, what I call the outside AI. How do you want to show up as people are starting to use Agentic shopping in partnership with ChatGPT, we have downloaded our whole catalog. We're also beta testing advertising with them. So you'll actually see [indiscernible] come up as you search. We're also working with Gemini and working on instant checkout with them. We're on with Wizard, which is just a shopping platform. We're just really working on how is the customer going to shop differently in an agentic world. Then finally, really the question you asked, how are we using it? And they're ways large and small.

My strong point of view is you need to really think about processes that you want to reengineer end to end, not just point solutions, although there are some of those too. We have completely reengineered our call centers. And I know that's a common one to say. But all the way to, I have a tool on my desktop, where I can ask natural-language questions and it will filter all of the calls that came through the day before, and I can actually discern what is the biggest call driver, what is happening in the Northeast? What is happening based on sentiment, all in a natural language way. That is incredibly rich data for us and for me as a leader and that came from reengineering a call center experience.

I mean we were chatting before, I was working with the dev team, the pace of change is accelerating, unlike anything I've ever seen. We had a 14-week sprint we were going to run. So you could pick the right box size in a store, very important. It can't be too big, it can't be too small. And that 14-week sprint turned into a day. The code was completely written. It was deployable and we had it in 2 stores 2 days later. But you have to reengineer how the rest of the organization works, if all of a sudden, the codebase can move that quickly. And now we have 6 examples that are moving through the organization at that speed. And so I think we're entering a world now where you're both going to have reengineered processes, and you're going to have very quick code releases of new -- very customer-centric solutions that you can update in the moment. Sorry, long answer. There's a lot going on.

No, you took half my questions, so we're done. Thank you very much. But a lot on unpack there. So I want to dig in a little bit. So number one, on this move from 14 months to 2 days. So this is, hey, when you come to Best Buy, you are -- well, you come to Best Buy, order something, you may get shipped from stores. And as you ship from store, you want to optimize the box that it goes in to make sure that you're not using too much material, but also to ensure the safety of the product and it gets to the customer's home. And in the past, as you go through that experience, that might have taken a year and change. And now just in a week, you were able to create the product, how does that work?

Yes. I mean what is happening is AI is moving so quickly that now the platforms are writing their own code. Claude, as an example, and this is well distributed. Claude literally is writing its own code base. And so in this case, but this is why it's not just a point solution. Yes, I can get the code, then how do I deploy it and so I need to be very quickly piloting, and that's what we did in 2 stores, where now they have just easy technology to say, this is the box and this is the thing in front of me, okay, here is the box I would recommend. That used to be a human kind of looking at a piece of paper, try to judge which one would I put it in, maybe happen, maybe didn't. The reason I like this example is that it will never just be about how fast can the code base written. It's how fast then can the risk teams look at it. How fast can you make sure that you did a little QA on it. How fast can you get it into stores and they have a new SOP to work with it. Then how fast can you deploy it across 1,000 stores, so everybody is working it.

And then ultimately, what is the productivity you get out of that and how do you want to leverage that productivity against maybe a different customer issue. So it's -- it's nothing will be as simple as just go rewrite the code, not in retail, certainly, but you have to almost reengineer the way the company works so that you're moving with speed and agility in a very different way.

Big dog over there wants to know those last couple of questions. Maybe at the front, in terms of the productivity gains, the cost benefit -- the cost savings that might come from that to you as a leader, how are you prioritizing all of this to ensure that you are keeping pace with the changing landscape and tools and capabilities that are available to our organization, but also not moving too fast such that it's disruptive. And then I have one more follow-up.

Yes. This is the hardest question for any leader right now. And they're lying if they say they figured it out perfectly. I think what we're trying to say is where are those problems that are hard to unwind that we haven't had enough resource to put against, that we think could result in better customer and employee experiences. And then how do we develop small teams that can quickly get after those problems. What's most important to me is I need it -- actually, I need a business leader who really cares. Call center reengineering is not done by a technology team. It's done by a business leader who really cares about what the future of our employees in that space will look like, what the future of the customer experience will look like.

And we've had better success putting our resources against tangled problems that where we can really see the benefit to the things -- did you call him big dog -- to the things that he cares about. I mean in the call center example, we've seen 50% less calls because they're getting to agents because they're getting routed automatically, and we've taken an immense amount of cost out of the model. That didn't happen overnight though, that took lots of iteration and movement.

So 2 more questions, 1 for you, 1 for you on this, and then we'll move on. It's important. It's important. One is how -- what we're all struggling with both as people, as business professionals is how does this unfold in a way where we gain productivity from it, but we don't make it disruptive to our economy such that it displaces jobs in a way that is difficult to navigate through. How do you think about that? And then you as a person with the finance angle from it at the forefront, how are you trying to realize the most cost savings, but in a way that it's not disruptive?

In -- retail is a competitive space, I think we all can agree. As you're finding efficiencies that potentially impact people, I have a laundry list of other places that I would like to invest more. And in a lot of cases, that is also in people. I might need more people to help me think through strategically how I want to move AI through the organization. There is absolutely a redeployment aspect here where we're going to have to think differently about how might you redeploy what was cost center talent. Now I might need that, honestly, I might need it in stores. because I need more in-store interaction. But very few of us are just saying, this is just as easy as cost center or cost savings you're going to take to the bottom line. Most of us are thinking, all right, how do I reinvest that so that I continue to have a strategic differentiator in terms of the experience?

So the point is you -- there's a lot of ways that you can redeploy these resources in a way that maybe it won't be as disruptive as feared.

And again, this is -- I mean, I'm talking from a retail perspective, but all of us, I know we all have laundry list of places we would like to reinvest in the business. And so I don't think it's quite as simple as you're just going to pull all this cost out, all these people out. I have many other places I need new and different talent because the world is moving so quickly.

Yes. I mean just to build on that a little bit. I think it's about efficiency and cost savings, but it's almost more importantly about the experiences that you can improve by enabling this AI technology or a new technology. And to Corie's point, there is an inevitability of a capacity constraint within any organization. And there is a list of way longer than we can actually ever get to and what AI will help us do is unlock those things that you just might not get to because there's just a certain amount you can kind of throughput in a year. And I think all of these resources we have can be redeployed in the places that are either going to save us more money, but more importantly, create better experiences, whether you're automating something end-to-end like in call centers or you're actually just improving the way we process marketing in the back office and how we build ads and things like that.

So there is a countless number of places for us to redeploy our people against better experiences. And so yes, it's about efficiency, but it's also about just actually making our customers happier. And you can do both at the same time and we have a lot of different ways to do that. And we'll always invest in the right return on investment type of things. And we'll take chances when we need to, and we will be smart with our dollars. We've proven to be able to do that. But there are a lot of places that we can really kind of get after this digital improvement that we're seeing across all of our channels.

The last thing, I worry that all of the narrative around AI as it relates to large-scale organizations is cost savings. It is a huge enabler of growth and a huge enabler actually of even just good employee experiences. I had an employee who literally over the weekend, rewrote and created an agent for all of our employee tools. Our employees tool websites s***. Like you would type in exactly what you needed, and it would not bring it up. And literally over a weekend, he wrote the agent that now scrapes all that employee information. Now our employees can ask very normal human questions like I'm new here, what are the forms I need to fill out and it's populating. And then that agent will be able to repurpose to also start to solve customer support problems because it's not like you just write an agent and it only solves 1 thing.

If it knows how to ingest data, you can change the data it ingests and now it's solving customer problems. Some of our most powerful use cases are things like creating audiences, like I can take outside signals in data. I can take all my internal data. Now I have LLMs that will mash all that data together and tell me exactly how to target someone. If they've been lapsed, I can pick them at just the right moment because I'm seeing the right demand signals, target them, and we're seeing improved -- an improved ability to bring that customer back to the brand. So I just -- the vectors here are almost limitless. The harder problem is what you hit on, which is how you kind of at least trying to do some level of prioritization and at the same time, opening the aperture for some curious, usually, young person, who wants to get in there and create a solution for the company.

I have to ask for your forgiveness because I do have one more, so that was not my last question. But you brought it up, which I want to give you an opportunity to refute the skeptical argument. A lot of outsiders are of the easy default view that one day, we're all just going to go to our favorite large language model and say, send me a pair of AirPods. And it is going to undermine the need for an organization who will facilitate that transaction. So how should -- how do you think about Agentic commerce, how this is changing? How are -- how is Best Buy being prepared for it? So please forgive me.

I think what you have to go in -- we've taken our time working our way into Agentic Commerce. Why? You do need to go in with a plan around what ubiquitously needs to be available in Agentic Commerce versus what is very unique to your brand, your experience, your data. And I think it's going to be an and world. You're going to need to be present in Agentic Commerce. And in our case, in working with chat, we have really good data that could help them. A lot of -- especially in CE, you would ask questions and there was a lot of wrong answers coming back because it's still -- there are so many models in the world. They can be dated before you know it. There's so much data. And so we're trying to go in with a plan around we need to be present, but we also need to say, look, if you want this installed, if you want us to make for an easy upgrade, then you got to come back to the site.

We'll see. It's early. And I think right now, we'd be lying no one's figured it out and everyone's testing a bit. But I do think a real solid plan around what is your data. And the last thing I would say is you also need to think about your site and your content because not only are you out in an Agentic shopping engine, but their bots are coming and scraping your site for information. And so your site needs to now be geared not just toward people, but you may actually have hidden pages of data, not for customers, simply for bots that they can scrape so they're more knowledgeable, which, again, you might feed a little bit of that in the Agentic answer and then you say, come back to the site if you want more expertise on it.

So smooth. So smooth. .

Well, it all sounds like it. And then when we're trying to do it, it was really, really hard.

One of the second order effects of all this is we're building out the ecosystem to be able to support this. This is creating some shortages of key inputs and raw materials for a host of the products that you sell such that memory prices are rising and could be in short supply over the course of the year. How are you thinking about this? I thought you guys did a really nice job of laying out what your range of expectations are and how you factor that into your guidance. If you could expand on that, that would be very helpful.

Yes. We're really good at creating scenarios and plans.

Me too.

Valuable tool over the last couple of years. Memory costs are another challenge that we are very confident we'll be able to work our way through. I think -- at the high end of what we're planning for the year. I mean let me step back a little bit. Memory costs really are impactful to primarily the 2 big categories, computing and mobile phones. Those -- they're just a bigger percentage of the cost associated for memory within those 2 products. And on the computing side is the place where most people are probably a little bit more cautious about. And I think at the high end of our guide, basically, we're assuming there could be a little bit of a unit pressure because we may -- there may be some costs that come through those products. But at the other side of it, you might have a little bit higher ASP because some of that -- the prices may change.

At the low end, I think we're just contemplating could there be a situation where there's just some constraints. You just actually can't get from the product. If you think about what's happening, all of that memory is being shifted to commercial uses and away from some consumer products, which is creating the shortage overall. And I think we are properly playing. I think one of the good evidence -- signs of evidence for us on the computing side is we've navigated last year's tariff where we entered the year with a lot of -- I think a lot of broad worry about like what would tariffs do to CE. And through the year, we've kind of proven there was a lot of demand and need for computing, and they probably didn't see the level of unit elasticity issues that we maybe were even expecting at the beginning of the year.

And I think memory in a place when people still need to have a computer, they still need to have a mobile phone is super important. And importantly, we were -- we kind of prove that when you come to our stores or come to our website, we have a product at any price you want. And so even if there are some changes to costs, you're going to be able to find the $1,000 computer, you're going to be able to find the phone that you want at the price range that you want because there are some big still demand signals within computing. Replacement cycle is still a thing. People are still replacing computers that they bought that were probably suboptimal back in the pandemic. Win10 is still a transition for us. And then there's even opportunities on the MAX side as well where people are moving from their old chip technology to the M chip.

So there is still a lot of demand. And I think the good thing is there's always a price point at Best Buy to get what you need and to get a better product overall. So I think we feel really confident being able to work with our vendors to adjust the assortment, adjust the schematics of the product just to make sure we can meet their demand at any price point they'd like.

And you raised a bunch of good points. Number one, you've kind of seen the pregame, give a little taste of how this is going to play out given the tariff situation, the silver lining of that. So a, have you noticed any changes in computer consumer behavior? There's concerns that if someone has to pay more for these products, they will be less likely to attach a warranty or attach an accessory. Help us frame that situation.

Yes. I mean we really haven't seen a lot of evidence of people still not wanting to get protection for their device or be able to get a better solution overall for the device. I think the attach rates, if you will, for our big products are really pretty similar. And in fact, last year, we actually improved our attach rates against warranties overall. So we haven't seen a lot of that. I think the broader concern is like in a world where the macro is still a little pressured and what happens in the K-shaped economy, I think that is at a high level of worry for probably everyone. But from a solutions and the experiences that we provide, we still are doing well in those areas.

I think there is also some other parts of our experience that are helpful here. I know we'll get to marketplace, but opening a marketplace earlier this year is helpful in a world where there might be shortages or there is more price competition because you just have a broader assortment that might be available. We have trade-in offers, bring that old device in. We also can refurb product, which means we can put back out open box or refurbished product that might be at better price points for people. We actually can harvest parts at our Geek Squad City, which is a large facility we have where we have agents we actually can take parts out. We keep them and then we can use them for repairs.

So when something like memory is really expensive, we can literally harvest memory from parts that come back. So there are interesting other assets. I mean, you talked about -- it's funny. I think sometimes almost people want to warranty more when they're investing this much money in a large high-ticket piece of hardware. And we have a great credit card offer and a great partnership with Citi, which becomes also very important in a moment like this. So I think what we're trying to use is it's not just about the box. It is about what is kind of the suite of ways in which we can get you into your needs.

At the risk of being shameless, my iPad sitting right there was a trade-in or I traded in my old iPad. It couldn't have been easier. It could not have been easier. And I don't -- I felt like I was getting too much money. So we can talk about that afterwards. I was getting too much money.

That's a new one.

Tariffs. Tariffs, very dynamic topic. Where do we stand right now? What are you hearing from -- before we get there, how long is this memory situation going to last? Is it going to be like years, months, quarters? How long do you think it's going to be a topic?

I think it's really hard to know right now. I mean I think data center demand is high. I don't see it going down. And then to be perfectly transparent, the issues that we're seeing in Iran and the Strait of Hormuz, there are raw materials that now also further up the supply chain are a little bit more challenged. So I just think it's a really fluid situation. I wouldn't expect it to be incredibly short term in nature. But the good news is there are very large companies who are very incented to continue to meet that demand. So I can -- I also believe you're going to see some production changes given just how scaled the demand is right now.

Got you. Like everything else, we'll figure it out. On the tariff topic, and I'm going to put refunds aside because I don't think that's really going to be relevant for at least the intermediate-term future. But we've seen a lot of changes. Are you seeing any changes in how your vendors are trying to navigate through this? The current regime may only be in place for a period of time. How are you operating as a result?

Yes. I think there's still a bit of uncertainty as it relates to the tariff topic. As of now, I don't -- we don't see a lot of changes of direction in the moment because there's still that level of uncertainty. Overarchingly, we have continued to see vendors diversify their supply chain, which is a good thing regardless of what happens. So that is good. As I mentioned earlier, last year, I think we disproved some of the things, not that it didn't have some level of impact on our business, but it did show that when you have the right product and have the right experiences, you can kind of continue to meet what the consumer needs against our products.

So I think we're going to continue to navigate. There's more news that came out this morning about how they're going to approach the 301 process. We still continue to feel very confident in our ability to navigate through it. And one big component of that is just the closeness in the contact we have with our vendors. We work very closely with them with our -- with some of the biggest categories to ensure that we can help influence where the product might get created, what sort of specs might be in the product to navigate any sort of cost pressures that come through as much as we can. That relationship has proven extremely important to us over the decades we've been at this and will continue to be. And I think whatever we feel comes through, we feel like we can confidently navigate through all of the changes that may still happen. But I think we've been able to prove to navigate through a lot of that just looking at last year.

Got you. Very helpful. I want to pivot to some of the product categories, home theater. It's been core to Best Buy throughout its history. And there's some exciting innovation category evolving for Best Buy.

Yes. It's a really exciting new technology for us. In a world where TVs, there hasn't probably been something like this since 2013 when OLED first came out. There are actually RGB TVs today. There's...

Red, green, blue.

Red, green, blue.

Good contrast, really beautiful picture.

Yes, it has very vivid colors. It has -- it's a very high-efficiency machine. It looks great in bright rooms. The viewing angles are much better than a normal television. It has a lot of benefits, a really strong competition to what we've been seeing work well as OLED televisions. And so I think we're really excited about it. We are -- we will be the national partner for all of the major vendors against this technology. It will be a Best Buy. There may be some regional players that have it. But from a national perspective, we are the exclusive provider of this technology at a national scale.

So we feel really great about that in partnership with our vendors to unlock that. I think it goes very well with what we've been trying to do just within our stores as well, expanding our experiences with Hisense and TCL and LG, having more vendor labor to explain the technology is super important. Where it's been is a very large television, is probably too big for a lot of the folks in the city here. But for the Midwest where you have very large homes, you can get 100-inch television, it's going to move its way down to kind of the mid -- the large sizes, the midsizes at really good price ranges, which is super important to be able to really unlock the growth within that new technology. So we're really excited about it in partnership with our vendors.

And we're pairing it with a great services offering. So to just make it easy to upgrade your TV. We'll come, we'll take the old one away. We'll slap the new one on the wall, and we'll just make it easy. And I think that is something that sometimes is misunderstood about our services offerings. It's seen -- the Geek Squad has seen a lot is break fix. That is absolutely part of what we do. But the bigger lean for us now is more into the upgrade, how do we get you into the new. This is the sweet spot for Best Buy, commercializing new technology. You've seen it in computing, 8 straight positive comp quarters in computing because you have some new technology, it combined with a bit of a replacement cycle, and we can help you trade in easily whatever your situation is, get into the new. Like we saw a 20% increase in data transfers because not everyone wants to deal with transferring their data, that becomes a blockage to purchase. If we can take that purchase blockage away, make it seamless and easy, then it's easier for someone to think about upgrading.

And does this influence how you think about the competitive landscape? Best Buy has always competed in a very intensely competitive industry with great competitors. It's -- there are fears that it's getting even more competitive, especially as some of your vendors -- some of your competitors have moved further into certain product categories. How do you think about this?

Go ahead.

I would just say, yes, I think we've always been -- since my time with Best Buy, it's never not been competitive. It's certainly -- we certainly, as Corie often says, have the luxury of competing with the world's biggest companies. And I think that, that competition only makes us stronger. And it is true in some categories, you do see a bit even more intense competition, things like the major appliances area. But in the other large categories, we are very competitive from pricing and assortment and how we approach it, complemented with experiences that none of them can really match in terms of scale.

So we feel really good about our position within that. I think what's happened in broadly over the last couple of years, the economy has moved to a spot where in some categories, they're looking for value. They're looking for price points. And I think that we play very well in all the different price points and all the different tiers when you think about computing and televisions. I think there's just a subtle adjustment as to what consumers are looking for. And as long as you're matching the assortment, matching the prices in the right way, we feel like we're doing very well competitively.

Over the holidays, we feel good about the share of the outcome that we saw. And so I think it's just a constant maintenance as to what do the consumers want, what are the experiences they value, what's the right price points and then there are going to be some nuances that we have to attack a little bit more head on. But I think we feel really good about how we've been able to adjust, especially how the economy has kind of shifted a little bit to that mid parts of the assortments.

Got you. Very helpful. There are some new exciting categories that are really at the core of what Best Buy does, these glasses, no offense. The health category, Best Buy, what is not appreciated is how instrumental Best Buy has been in helping to define some of these categories like wearable health technology. How do you see this playing into the assortment in a way can these -- what are smaller categories that have now accumulated to be something bigger, can they -- are they at the point where they can move the needle? And how do you lean in and capitalize on them even further?

Yes. I mean, Corie said this earlier, we -- what we do best is operationalize new technology. We commercialize it better than anybody else. We lift up smaller brands.

You do a lot of things good, Matt.

Yes, that is true, I guess. But what we really do well is work with smaller vendors to take product and build excitement, build brands, build product technology, and we can help them grow it. And I think between AI glasses, which we've talked about, handheld gaming, there's amazing little handheld games out there that are growing very nicely. There's toys, there's Pokémon cards, and there's a lot of things that you wouldn't think that Best Buy sells, but our customers are looking for that are either technology or technology adjacent that we see customers come in and say, like we really want to see this on your website or in your stores. And this year, it's not insignificant. Over 0.5 point of comp is expected to come from a lot of these small areas that will only continue to grow as we look into the future. Health technology is certainly a thing. I don't think that's going away, especially for executives in big companies. We need to make sure we're watching our health.

You got to practice what you preach.

Yes. I got to make sure I'm taking care of myself. And so I think these aren't things that are like will they grow at the same pace every year? Probably not, but there's no way it's not going to grow across new things. Technology has proliferated everything from transportation, scooters and rings and everything in our lives and it's not going to slow down, especially if you think about what AI might do to how it kind of infuses into televisions and home security and making everything actually, to Corie's point, smarter than it was supposed to be in the first place. So I don't think any of it is going to slow. We do that very well.

One of the hardest things about being a specialty CE retailer is we can't always tell you what the next product is going to be. But it always happens. And if you've ever looked at -- even just looked at videos of the Consumer Electronics Show in Las Vegas, the amount of innovation that's coming through the pipeline is incredible. A lot of it on the back of AI. We haven't even started to talk about the beginning of robotics. It will accelerate quickly. And so I just want to underscore Matt's point. It's exciting to me that we're able to bring in these smaller categories and literally kind of make markets. That is when we're at our best. And I think Matt and the team are doing a great job getting our stores ready for more experiences and making them a little bit more of that just fun place to go for electronics.

I mean I want to underscore this point because it's important. Based on everything you know and what you see today, you feel the pipeline of innovation and new products for the foreseeable future is robust and exciting.

Yes. I think we've actually gotten back to closer to a normal level of innovation with our -- from our vendors back from the -- where it slowed during the pandemic for many reasons. I think we're getting back to a normal level of investment and innovation coming through the pipeline. So to Corie's point, will we know exactly which thing at which quarter? Probably not. But what we see with working with our vendors and when you go to see, you can see it kind of really quickly grow back to a similar pace that we've seen in the past. And you can go back 20 years ago, there weren't doorbells that were electric, right? Like -- and those are only going to continue to grow into different categories as we move forward. And we think the pace is really good at the moment.

Matt Bilunas is aging himself with the doorbells that used to be -- were you going to say something? I'm sorry.

No.

Okay. Yes, it's hard to follow up. On the -- just to pivot on the -- not only are you capitalizing new technology, but you're capitalizing on new ways to do business. Marketplace and Best Buy Ads are great examples of that. You expect 20 basis points of margin contribution from each of those businesses this year. Did I get that -- did I get -- 20 basis points together?

30 basis points of gross profit rate this year and about a little less than half of that number is going to come from marketplace.

Yes, I was trying to raise expectations there. But...

Good try.

Keep it up.

Yes, yes. If you could help us frame what you have seen so far first from marketplace, then from ads and where you see this unfolding from here?

Yes. I mean we are really excited about the launch of marketplace. It's -- we're probably 5, 6 months in at this point. We've seen a really good engagement with our sellers. We saw a strong performance in Q4. We expect this year to continue to ramp. And I think we went in knowing that the experience is super important. And what we can see with marketplace with the experience coming through our 3P marketplace product is every bit as good as the 1P experience. So that's good. The returns are actually lower, and they're coming through our stores, which is good as well. And so experientially, we feel really good about it.

The goal there is to really drive unit share in categories that, quite honestly, have been hard to drive unit share when most of them have moved to 3P marketplaces in the industry. You think of accessories, home automation, small appliances, 3P marketplace have really taken that over, and we see good unit growth in those areas. overall, and we see it solidifying our unit share, which is great. So it's doing the things that we want. It also importantly broadens price perception and pricing for us, gives us more options and assortment when maybe there's some level of outage in our 1P side.

So feel really good about it. It's going to continue to grow this year. It's going to -- it's going to grow the gross profit rate. It's going to be a bit more neutral. The combination of ads and marketplace together is a little bit of a rate improvement this coming year. But as we look outward, we feel like it's going to be an even better from a rate perspective. There's just still investment we need to make in both of those 2 areas for us to really get the most out of it as we look forward.

What are those areas of investment? I think that's been a big question. Is it people? Is it technology?

It's a little bit of everything. So I think a little bit -- it's technology for sure, for both ads and marketplace, maybe a little bit more on the ad side, a little bit for sure, technology on the marketplace side. It's also people like bringing in sellers selling at new ad products takes a different type of people at Best Buy than we used to. So we've been bringing in good skill from the outside and leveraging great talent internally to kind of boost those 2 areas. So it's technology, people and then there's just normal variable costs that come through it as well. Certainly, on the ad side, too, it takes marketing dollars to drive ad sales or ad collections. So there's some level of increase. It's just you have to have the ad -- advertising expense to fuel the collection process. That's also part of the outside.

And is this giving you insight, especially on the marketplace to categories that maybe Best Buy has not traditionally thought about being relevant to its consumer for that you could now consider?

1,000%.

Examples of...

I mean back to some of -- like where are we seeing some of the growth. We're seeing a lot of growth in phone cases, small appliances. I mean, some of those deeply digital categories. But the other thing, it may not be the biggest growth drivers, but you can bring on a new smaller player who might have a really innovative solution and you can see pretty darn quickly without much investment on their side, is this something we should consider for 1P because there's just enough of a demand profile there. So you get both. We can go deep into catalogs that have penetrated much more deeply online and you can bring new technology on a lot faster with a really easy halo with our brands, much easier to find. And we can decide pretty quickly, is that something we want to investigate more from a 1P perspective because there's excitement.

And if we put -- these are going to be important drivers of Best Buy's profitability this year. How are you thinking about product margins and other considerations? And I want to dive into this a little bit.

Yes. One of the -- well, on the ad side, it's a very complementary gross margin rate overall. Right now, the incremental isn't a ton more from a rate perspective because we're investing. But overall, the ads business is extremely profitable.

And it scales nicely.

And it scales nicely. And as you think about having probably some of our less inventory on-site that would be normal for the industry as we scale the on-site inventory that actually produces a better margin rate outcome because you're not paying for inventory to advertise. And so as you look forward, that's going to be -- we believe it's going to be a help as we think about our rate growth in the future. I think we can either let it flow to the bottom line or actually use some of that to invest because we know we are in a very competitive space, to your point.

Marketplace as well. I think as we continue to sign up sellers and grow the GMV, we're okay. There's probably a little bit of cannibalization to the 1P, and we are completely okay with that. That was the go-in strategy. One note to that is like even if it does cannibalize from a sales perspective, the commission rates we make on this product isn't, in a lot of cases, very dissimilar from the product margin rates we would have in some of these categories. So from a profit perspective, it isn't all that painful.

With less inventory risk.

With less inventory risk, less working capital. So I think we feel good about how they -- how we're growing them now and what they're going to prepare us to look like as we go forward.

Got you. You are -- it's also a way for you to become even closer with your vendor community, work even more closely together. Vendors have been seeing the value for ever in Best Buy, they've even increasingly contributed labor to your organization. How do you think about the opportunity for either greater collaboration in that regard? Because one of the questions that overhangs the story is, has Best Buy pulled back too hard on labor? And I think there's a piece of it that's underappreciated where you work so closely with your vendor partners that they're contributing knowledge and labor.

It's actually both and. Our labor model is incredibly complex. And if there's one thing I think we don't get enough credit for, we have actually, over the last 2 years, invested exponentially in our frontline associate labor and especially the more specialty labor, the Best Buy labor. So we have just what I would call normal advisers. They work the whole store. They can help anyone. We have category specialists who actually stay within the category, think home theater or appliances. And we have premium labor who will help you with a full end-to-end like home remodel, think about something like that.

Then incrementally, on top of that, we layer vendor labor. So I think one of the misnomers is that the vendor labor is a replacement of the Best Buy labor. It is not. Right now, we have way more Best Buy labor than we've had over the last 2 years. And incrementally, we said it into holiday, we had 20% more hours in our vendor labor as well. And so the idea here is how can you help a customer seamlessly, depending on how they want to shop, if they're very vendor-specific, you have an answer for that. By the way, that is still labor that we control and we teach and learn. And then if you want something that's a little bit more you want to work across the whole store, we have employees who can help you do that, too.

And then the science back to the AI conversation that sits behind, like how do you get the right people in the right place certified to the right level at the right time, that's the science that we've been working on for the last 2 years. But I wouldn't want the takeaway to be that we're switching to vendor labor. We're not. We are augmenting an already increasingly large Best Buy labor base with more specialized vendor labor as well.

Got you.

And the only thing I'd add is we're actually seeing improvement in our associate availability scores with our customers. So it's all manifesting in an experience that we can see is a really good one for our customers and improving with all of these changes.

And it's only going to get better because you've got a new internal website over the weekend, which is very exciting.

And they'll be happier.

When we are doing this again a year from now, what will we look back on to say Best Buy was able to overcome XYZ and where the organization is a year from now that we may not anticipate today?

I'm actually going to end where we started, which is it's highly likely a year from now, 5, 10 other things have happened that we weren't thinking about, both probably in the macro and the micro. The question is more why does Best Buy exist on the planet? We commercialize new technology better than anyone. And we have amazing vendor partners, to your point, that are helping us bring that to life and are vested. These are the biggest companies in the world who are trying in a race to bring new technology to the consumer. I think actually, we'll be surprised in a year how much newness, innovation, interest there is. And it's a team who knows how to resiliently navigate whatever is thrown their way. Pretty good combo platter.

Well, I can't wait to do this again next year, and I want to thank you so much. I could do this all day. Please join me in thanking Best Buy for a great conversation. Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Fourth Quarter Fiscal '26 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1:00 p.m. Eastern Time today. [Operator Instructions]

I will now turn the conference call over to Mollie O'Brien, Head of Investor Relations.

Thank you, and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; Matt Bilunas, our Chief Financial and Strategy Officer; and Jason Bonfig, our Chief Customer, Product and Fulfillment Officer.

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 Form 10-K and subsequent Form 10-Q 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.

And now I will turn the call over to Corie.

Good morning, everyone, and thank you for joining us. Today we are reporting better-than-expected profitability for the fourth quarter. On revenue of $13.8 billion, we delivered an adjusted operating income rate of 5% and adjusted earnings per share of $2.61, both of which are slightly up to last year.

Our Q4 comparable sales were down 0.8% versus last year, within our guidance range for the quarter. Our data sources show our market share was at least flat, pointing to slightly softer consumer demand for our industry during the holiday quarter. Our holiday customer demand patterns were also different than modeled despite sales event timing that was very similar to last year's. We saw softer-than-expected sales in November and the beginning of December. We then experienced strong sales in the last 2 weeks of December and the start of January, and sales were negatively impacted by weather-induced store closures during the last week of the quarter.

We were prepared for a promotional holiday and the environment was even a bit more promotional than we factored heading into the quarter. I'm proud of how our teams strategically pivoted throughout the quarter in terms of marketing, promotionality and labor.

From a product category perspective, we delivered our eighth consecutive quarter of positive comparable sales in computing, driven by laptops, desktops and accessories. In mobile phones, we delivered our fourth consecutive quarter of growth driven by our expanded partnerships and in-store operating model improvements with large carriers. We grew our gaming category revenue but at a much slower rate than the previous 2 quarters as expected. We also saw strong growth in newer and emerging categories like AI glasses, 3D printers, collectibles and toys, health rings and PC gaming handhelds. These positive growth categories were offset by declines in home theater and appliances.

We are pleased with the progress we have made in our ads and marketplace initiatives, and both delivered positive contributions to gross profit rate in the quarter. We are also pleased with our customer experience metrics. Our relationship NPS was up materially year-over-year and the highest it has been in 11 consecutive quarters. We delivered significant year-over-year gains across all 5 of our most important attributes, including helpful, empathetic, meeting tech needs like no other company can, value and ease. As we exited the year, we saw continued 5 star customer satisfaction gains in associate availability, product availability and store appearance. For our online customers, we reached our fastest-ever fulfillment speeds for our fourth quarter, with 70% of online purchases a fulfilled within 2 days.

As I step back and look at the full year, I am proud of what we have accomplished. First, we returned to positive comps and stabilized our share position while navigating a complex and often evolving tariff environment. We successfully launched and scaled our U.S. digital marketplace, onboarding more vendors than originally expected and drastically increasing our available SKU count for our customers.

We grew Best Buy Ads while almost doubling the number of ad partners compared to the prior year. We were able to both make the necessary investments in our Marketplace and Ads initiatives and expand our enterprise operating margin through a combination of disciplined expense management and efficiency optimization efforts.

We leveraged the use of new technology in many areas to elevate customer experience and drive efficiencies, including faster online shipping and delivery speeds and better customer support capabilities. We further strengthened our in-store customer experience by partnering with multiple key vendors to expand their investment in immersive merchandising areas as well as expert labor.

And we remain committed to being a Best Place to Work, and our most recent employee engagement survey improved year-over-year, ahead of industry benchmarks, and we continue to have industry-leading retail employee retention rates. Finally, we returned $1.1 billion to investors in the form of dividends and share repurchases.

I'm incredibly grateful for the hard work, dedication and resourcefulness of more than 80,000 employees to achieve these results.

Moving forward to fiscal '27, we are excited about the momentum in our business. We also expect to continue to navigate a mixed macro environment. For the year, we are guiding comparable sales growth in the range of down 1% to up 1%. I'll highlight some key assumptions.

Consistent with the past several quarters, we expect to see a consumer who is still spending but is value focused and attracted to sales moments. Importantly, while customers continue to be thoughtful about big-ticket purchases, they are willing to spend on high price point products when they need to or when there is technology innovation. We do expect consumers to spend a portion of their higher tax refunds at Best Buy concentrated in the first quarter.

From a product category perspective, we are planning for continued growth in computing, driven by industry momentum from replacement cycles, the end of support for Windows 10 and innovation driven by AI. We expect continued growth in mobile phones from the new carrier labor models and system enhancements we have implemented over the past year. And we expect continued growth in our newer emerging categories that I referenced earlier, like AI glasses, 3D printers, collectibles and toys, health rings and PC gaming handhelds. And we see opportunities to improve the sales trends in home theater, from extended store experiences, increased expert labor and our role as the national retail launch partner for an exciting new technology, RGB, in the middle of the year.

As you are aware, the significantly increased demand for memory components is driving cost inflation and supply uncertainty, particularly in computing. We are partnering with our vendors to mitigate impacts on the business. We are focused on 5 major [ navigation ] themes. One, we are bringing in as much inventory as we can. We are also providing our vendors with a longer forecast horizon to better plan allocations across commercial and consumer segments and collaborate more effectively with memory partners.

Two, regarding terms, we want to ensure that business and operational terms are situated to make Best Buy a preferred partner in the eyes of our vendors during a constrained environment. Three, we are using our ability in computing to specify configurations to hit price points that match consumer budgets.

Four, we are narrowing assortments to improve in-stocks where there may be constraints. And five, we are focused on educating customers on why now is still a good time to buy. Their current device may not be performing optimally. We have quality options for every budget. And they can get a better device today on the same budget as their last purchase, which may have been years ago.

We have a number of tools to highlight, including trade-ins, financing, refurbished products and easy upgrade with Geek Squad.

As we think about the impact on our fiscal '27 outlook, the high end of our comparable sales guide reflects a more neutral impact as higher prices are offset by lower unit sales. At the low end of the guide, inventory is more constrained across a number of categories.

Now I will talk about our multiyear strategy, which is consistent. We will continue strengthening our position in retail as a leading omnichannel destination for technology, while at the same time scaling new profit streams. Our priorities and resource allocation philosophy remain consistent as we build upon the momentum from fiscal '26. These are: one, drive omnichannel experiences that resonate with our customers; two, scale Best Buy Ads and Marketplace; and three, drive efficiencies and identify cost reductions that are crucial to help fund investment capacity and offset pressures in our business.

Let me provide some key details on initiatives across stores, digital assets and our services offerings. Last year we provided multiple examples of store refreshes and upgrades we implemented in partnership with our vendors, including Meta, Revel, SharkNinja, TCL, Hisense and LG. We are expanding these experiences to yet more additional stores this year, demonstrating the value these are driving for our vendors and our customers.

In addition, we are continuing to improve our stores look and feel by using our square footage more strategically. For example, in approximately 70 stores, we will move computing to the center of the store, consolidate space and allocate open spaces to value-generating initiatives. Many of these open spaces will be filled with a much larger and more comprehensive assortment from Meta. In other stores, we are piloting either outlet sections or outdoor furniture from our Yardbird brand. In these cases, we are shifting from stand-alone locations to leveraging the space and traffic we already have.

This year, we expect to have new Domestic Best Buy store growth for the first time in more than a decade. We plan to open 6 new stores to better meet demand in markets that have grown, including areas where we have not previously had a physical presence. We have created and tested a smaller store model that drives incremental revenue in these types of markets, like the Bozeman store we opened last year. We expect to close only 2 Best Buy stores as a result of our ongoing review of leases as they come up for renewal.

We are pleased with the investments we have made in customer-facing labor over the past couple of years. We plan to keep our labor flat as a percentage of revenue, balancing the growth in dedicated specialized labor with more flexible and multipurpose resources. We expect the level of vendor-provided labor hours to grow again this year after growing 20% in the second half of last year. Together with our vendors, we provide in-person expert CE experiences for our customers that are unmatched in today's retail world.

As you would expect, we are also focused on our digital experience. We have already begun to activate on ways to bring our products to life through AI platforms this year. First, we're partnering with OpenAI to give our customers a new way to explore and discover our products. We're among the early retailers to make it easier for our product catalog to be displayed on ChatGPT, creating a more seamless path to product inspiration. We're also an early ads partner and exploring more opportunities to enhance our shopping experience with OpenAI.

In addition, we support Google on its new Universal Commerce Protocol, a cross-industry standard that helps create a more seamless agentic shopping journey across the web. Using this Universal Commerce Protocol, we're working with Google to build new way for customers to purchase directly in AI mode in Google Search and the Gemini app.

We are also the first retail partner to launch a native checkout integration with Wizard, an AI-powered commerce platform. As agentic commerce matures, we want to serve our customers in new ways, both on and off of platforms. That includes evolving bestbuy.com to be more agentic-friendly and ensuring our site is ready for AI agents to browse and discover on behalf of our customers.

Other fiscal '27 online priorities include strengthening customer recognition and personalization, increasing app adoption and engagement, enhancing our new invite-only capability and driving online conversion for categories like major appliances and TVs.

Now I will discuss our services offerings, which have long been a key differentiator for Best Buy. To sustain our leadership, a priority for us this year is to reassess our Geek Squad services by simplifying our portfolio while at the same time making our services accessible to more customers. The good news is we're making progress in simplifying our range of offerings with different price points to create customer choice. We are also planning to move beyond break/fix and product installation services to dive into experiential solutions that cater to a variety of evolving customer needs. Whether it is a simple product upgrade or a full premium home installation, we will be there for our customers with speed, expertise and convenience.

We're continuing to prioritize our renowned Geek Squad agent support in-home, in-store and virtually. At the same time, we're enhancing our digital and AI experiences. This dual approach allows customers to choose how they want to receive service, whether it's through direct interaction with an agent or more autonomous digital solutions, empowering customers to get the support they need on their own terms.

Our services business -- our services are also instrumental to the growth of our Best Buy Business arm. Here we focus on business segments like education, hospitality, builders, health care and corporate enterprises. Product sales are concentrated in computing, home theater and major appliances and often paired with services such as field installation and end-to-end product support services like device life cycle management. Our Best Buy Business team generated more than $1.1 billion in revenue in fiscal '26, and we expect to generate a mid-single-digit sales growth rate again in fiscal '27.

Now I'd like to provide an update on our Best Buy Marketplace. First, we have been very pleased with the outcome and performance. Our customers are responding favorably too as sales ramped through the back half and represented approximately $300 million in Domestic GMV in the fourth quarter. Furthermore, our 5-star ratings for third-party purchase experiences are consistent with that of first-party purchases. This outcome affirms that the team adopted the appropriate design principles to deliver a seamless customer experience regardless of whether the product is 1P or 3P. And customer return rates for Marketplace items continue to be lower than our 1P return rates. These customers are taking advantage of the convenient return-to-store option for more than 80% of product returns.

Top unit categories in Q4 included mobile phone accessories, computer accessories, movies and small kitchen appliances, illustrating momentum and opportunity in what have traditionally been lower-share categories for Best Buy. As a result, Marketplace is driving unit market share growth.

While we are still early in our journey, our 3P seller community remains highly motivated and excited by the initial performance. To date, we have enlisted over 1,100 sellers on Best Buy Marketplace. And over 90% of our sellers with an open store front are experiencing sales in any given week.

I would add that our store employees are equipped with the right tools to help customers get what they want even if we don't carry it ourselves, and are contributing to the Marketplace GMV.

Moving to Best Buy Ads. In fiscal '26, our gross advertising collections were just over $900 million. This is up more than 7% versus last year. Today these collections show up mostly as an offset to our cost of goods sold with a small amount flowing through revenue. In fiscal '27, we anticipate growth of approximately 10%.

By the end of fiscal '26, we had 750 advertising partners, nearly doubling the count from last year. Most of this growth stemmed from Marketplace third-party partners following our August launch. Additionally, our first-party partners are investing more with an average annual investment up 16% year-over-year.

Our on-site inventory mix was just over 40% last year, lower than many other retail media networks. On-site inventory drives a higher margin than offsite. So as we continue to create more on-site inventory and grow this mix, there is significant margin growth potential over time.

Both Ads and Marketplace positively contributed to our gross profit rate in Q4, and we expect continued gross profit rate contribution this year. From an operating income rate perspective, we expect a slight contribution this year due to ongoing investments in our [ technology stack ], marketing and head count across our sales, operations and technology teams. We expect fiscal '27 to be the last major investment year, with more material operating income rate contribution coming in fiscal '28 and fiscal '29.

In order to invest in initiatives like these that will bring long-term value and offset pressures in the business, our third long-standing business priority is crucial, and that is driving efficiencies and identifying cost reductions. There are many ways we realize these efficiencies, with technology and analytics, through ongoing vendor partnerships and vendor selections throughout the enterprise, and by modifying existing processes or customer offerings. In fiscal '27, our key opportunity areas are supply chain, customer care, reverse logistics and continued optimization of our health business.

In summary, I'm pleased with the progress we made in fiscal '26 and excited about what we expect to accomplish in fiscal '27 as it relates to our multiyear strategy. We are deepening customer relationships and successfully strengthening our position in retail as a leading omnichannel destination for technology, while at the same time scaling new profit streams that we expect to provide considerable benefit over time.

I will now turn the call over to Matt.

Good morning. Let me start with our fourth quarter performance compared to the expectations we shared last quarter. Enterprise comparable sales declined 0.8% and were on the lower end of our guidance range. Despite the softer sales, our adjusted operating income rate of 5% was better than planned and included slightly favorable rates for both gross profit and SG&A. I will now talk about our fourth quarter results versus last year.

Enterprise revenue of $13.8 billion decreased 1% versus last year. Our adjusted operating income rate increased 10 basis points compared to last year and our adjusted diluted earnings per share increased 1% to $2.61. By month, our Enterprise comparable sales were down approximately 3% in November, before improving [ 2.2% ] in December and up 0.4% in January. In our Domestic segment, revenue decreased 1.1% to $12.6 billion, driven by a comparable sales decline of 0.8%.

From a category standpoint, the largest contributors to comparable sales decline were home theater and appliances, which were partially offset by growth in computing and mobile phones. Our online revenue of $4.9 billion decreased 2.3% on a comparable basis and represented 39% of our Domestic revenue. Our online comparable sales growth includes the net commission revenue earned from our third-party Marketplace sellers.

From an organic standpoint, the blended average sales price of our products was approximately flat to last year. International revenue of $1.2 billion increased 0.5% versus last year. The revenue increase was primarily driven by the favorable impact of foreign exchange rates, which was partially offset by a comparable sales decline of 1.3%.

Our Domestic gross profit rate of 20.9% was flat to last year. During the quarter, our gross profit rate benefited from increased collections from Best Buy Ads and growth in Marketplace commissions. These items were offset by lower product margin rates which were primarily driven by an unfavorable sales mix and increased promotions.

Our International gross profit rate decreased 90 basis points to 20.5%. The lower gross profit rate was primarily due to lower product margin rates.

Moving to SG&A, where our domestic adjusted SG&A decreased $36 million. This decrease was primarily driven by reduced compensation expenses, which included incentive compensation and lower Best Buy Health expenses. These items were partially offset by increased expenses related to Marketplace and Best Buy Ads, including higher advertising and technology expenses.

During fiscal '26, total capital expenditures of $704 million were essentially flat to fiscal '25. During fiscal '26, we returned $1.1 billion to shareholders through share repurchases and dividends. We remain committed to being a premium dividend payer and this morning announced that we are increasing our quarterly dividend to $0.96 per share, which is a 1% increase. This increase represents the 13th straight year we have raised our regular quarterly dividend.

Moving on to our full year fiscal '27 financial guidance, which is the following: Revenue in the range of $41.2 billion to $42.1 billion; comparable sales of down 1% to up 1%; and adjusted operating income rate of approximately 4.3% to 4.4%; and adjusted effective income tax rate of approximately 25.5%; adjusted diluted earnings per share of $6.30 to $6.60; capital expenditures of approximately $750 million. And lastly, we expect to spend approximately $300 million on share repurchases. From a phasing standpoint, the repurchases are planned to occur primarily during the fourth quarter, resulting in our weighted average share count remaining near the levels at fiscal '26 year-end.

Next, I will cover some of the key working assumptions that support our guidance. Earlier, Corie provided context on our fiscal '27 top line assumptions, so let me spend more time on the profitability outlook. We expect our gross profit rate to improve by approximately 30 basis points compared to the prior year due to growth from Best Buy Ads and our U.S. Marketplace.

Now moving to adjusted SG&A expectations, which include the following puts and takes. SG&A is planned to increase in support of Ads and Marketplace, which includes advertising, technology and employee compensation expense. We expect higher incentive compensation as we reset our performance targets for the next year, with the high end of our guidance assuming an increase of $30 million compared to fiscal '26. Store payroll expenses are expected to increase at the high end of our revenue guidance with minimal impacts from a rate perspective. Partially offsetting the previous items are expected lower Best Buy Health expenses.

Lastly, the low end of our guidance reflects our plans to further reduce our variable expenses, including incentive compensation, to align with sales trends.

Before I close, let me share a couple of comments specific to the first quarter. We expect our first quarter comparable sales growth to be approximately 1%. From a monthly phasing perspective, comparable sales were down approximately 1% in February and expected to increase in March and April. We expect our first quarter adjusted operating income rate to be approximately 3.9%, with gross profit rate expansion being the primary driver of the 10 basis points of year-over-year improvement.

I will now turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from the line of Kate McShane with Goldman Sachs.

This is Grace on for Kate. We were wondering in the case that product prices do increase due to the higher memory pricing, we were wondering what that could look like. And what do margins look like across the different computing categories like good, better and best?

So overall for next year, our guide for gross profit is about 30 basis points increase year-over-year, which is primarily driven by both Ads business and Marketplace growing. The remaining parts of the gross profit rates are pretty neutral, even inclusive of the product margin rate. So for the year, product margin rates are going to be assuming pretty flat year-over-year. So within that context, there could be some categories, some pressure on margins because of memory costs. But overall, we would expect to be able to navigate based on the list of things that we talked about in our prepared remarks, the ability to manage some of that pressure that might exist.

So overall, pretty, pretty neutral impact to product margin rates in total, but there could be unique areas [ within the company ] that might have some impact.

Your next question comes from the line of Scot Ciccarelli with Truist Securities.

Two questions. First, can you talk about what you saw in the fourth quarter in big screen TV sales, especially as a big competitor was really aggressive in that category from what we could tell? And then secondly, I guess, a bit more open ended, how should we think about the growth opportunities around Meta and Google glasses? And any more details on how you're partnering with those vendors in that specific category?

From a TV perspective, both revenue and units were below expectations in Q4 from an industry perspective. We were actually happy with the way that we showed up from a positioning perspective, but there just was a little bit more softness than expected. But we are excited and optimistic as we move into next year, and there is a new technology trend, as Corie mentioned, as we get into the middle of the year with RGB technology across all of our major suppliers. We do think that's going to drive a lot of demand. It's going to drive a lot of interest in our store. It is really something that you need to see in person. And we'll be there with our vendors to make sure that we put that on display in the best way possible.

From a Meta perspective and just AI glasses in general, it is a significant growth trend for us. It does show up in gaming when we talk about it. We do think we have the best relationship with vendor partners, and our relationship with Meta is phenomenal. The way that they show up in our stores and the way we've been able to bring their new products to market, and then even locations that are even more of a showcase where the way that we were able to represent and partner with them on the display product and bring that to market.

There are other things happening from an AI glasses perspective. There's a lot of noise at CES. And we expect that there'll be even more products, not only from partners that we already do, but probably also from new partners as this continues to be a growth category for us.

Scot, strategically, just to build on that a bit, I think the idea of AI for the consumer is kind of a long-tail space where we will have a unique advantage. Some of that we've already been leaning into, which is think about like enhancing existing technology. That's like Copilot+, it's AI and computing, it's AI and phones. It's our ability to explain that and bring it to market. Some of it is what Jason is hitting on, what you asked about, that lifestyle tech example, and there'll be lots of different ways we'll see that, interactive gaming, we'll see it in glasses.

Then you're going to see some -- probably some reinvigorated categories, things like smart home, where there -- it's actually just going to get a lot smarter. There's a lot more use cases that you're going to see for consumers.

And then ultimately, I think there's the question of what I would call always-on AI support. So what is right now open AI, connected TVs, talk about air pods with cameras, kind of this idea of how do all these platforms start to show up actually in hardware and our experiences. And our goal is, and this is our sweet spot, as this technology comes to life, we want to be that key partner for our vendors to really help explain it to customers.

Your next question comes from the line of Michael Lasser with UBS Financial.

Do you think you've appropriately embedded enough margin flexibility in your guidance in order to compete effectively in the year ahead? It seems like the industry just gets a little bit more competitive each day and 30 basis points of gross margin expansion may not be sufficient in order to drive the top line?

Yes. I mean, I think we'll obviously navigate the year as we know more, Michael. I think a couple of points. Our space is always very competitive. If you think about just FY '26, it was already a very promotional year, and on top of a high promotional year, we had a sales mix impact on the margin rates as well. I think as you think about next year, we're certainly not expecting to not be promotional, probably a similar level of promotionality, but maybe in some quarters a little less sales mix pressure potentially, so which helps mitigate some of the potential product margin rates that might come with memory cost adjustments.

So we'll clearly navigate as best we can. But I think right now, we feel like we've appropriately built in the product rate pressure that we need to be competitive.

Two things I would add, Michael. We've made it very clear that we want to position ourselves to make sure we are driving particularly unit share. And I can see that happening for us as we come out of Q4. So you can imagine, we're trying to build enough flexibility to be able to do that.

Matt also hit on it in his prepared remarks, I did as well. This is where Ads and Marketplace are also very helpful to our model, especially on the gross profit side of things because this is the fuel we are looking for to continue to be able to reinvest in the base business. So you have to remember, it's all those things put together that shows up in that gross profit expectation.

Understood. And it seems like your message this morning is, listen, we expect 2026 to be a bit more challenging year because of these memory shortage challenges, but you'll navigate through it appropriately. Can you anchor the market to a longer-term expectation? Is 2026 just a transition year and the company can get back to positive same-store sales growth at the midpoint of whatever you would expect in the year after that? And what would be the key driver of that? Because presumably, this memory shortages are going to persist for an extended period of time and the industry landscape is not going to get any easier.

If we take a step back, this is an industry that, let's call pre-COVID was, let's call it, flattish to up single digits, pretty consistently. And what that relied on was also a pretty consistent kind of replacement behavior by consumers and a consistent innovation arm from our vendor partners. And as long as there was kind of the innovation and the replacement that really sustained a pretty decent growth trajectory for the industry and then our job is to continue to maintain our position, if not grow our share position in that industry, obviously, there's been lots of puts and takes over the last 6 years. Lots of pull forward.

Now what we're getting back into is an interesting situation. You called out some of that kind of mixed macro that we had also called out, whether it's the ongoing tariff situation or whether it's memory. On the flip side though, we also are starting to see more innovation and more, I'm going to call it, replacement behaviors, especially in computing and even mobile, than we've seen in some time. So I think for our fiscal '27, calendar '26, what we're trying to do is put all of that together and say for the coming year, here's what we see. And you're right, some of that may persist. But the good news is there is also some of that innovation, some of that replacement behavior that is an interesting countervailing wind to some of the mixed macro impacts that we talked about.

So I still believe over time, over the longer term, this is a great industry where, certainly, the world's biggest companies are innovating to bring incredible new products to market, especially with AI coming to life the way that it is. I think it's just how do you navigate some of the challenges we see in front of us.

And the last thing that I would say is, this is a team that has proven they're quite good at navigating in partnership with the vendors, if you just think about the year we went through. So I have a lot of confidence in our ability to do that.

The only thing I'd add would be on the guide for next year, clearly at the high end of our guide, we are factoring some level of memory cost impacting units, but we also potentially get the benefit on the ASP side too. So that ASP could potentially mitigate some of the unit declines on the high end of any sort of outcome. And the low end, obviously, there could be a situation where you have more constraints just broadly within the computing industry that it could bring to the bottom of the guide.

I'd also say during the last couple of years, we've seen that we have price points across computing in all of our areas. So to the extent that there are cost increases, what we've learned is that people come in with a budget, they look to buy a certain product, we always have something in a range of products that customer wants. And so we're seeing some of that mitigate the potential impact of cost increases. We've just proven that over the last couple of years with the tariff situation.

Your next question comes from the line of Brian Nagel with Oppenheimer.

So my first question, I guess, shorter term in nature, just as we look at fiscal Q1, and I guess I want to make sure I heard this correctly, so you said your comps were down 1% in February, but you're planning for a plus 1% for the full fiscal quarter. I guess what underpins that expected acceleration here through the balance of the quarter?

We are expecting the full year -- the full quarter to be about a 1% comp for Q1. We -- in the quarter, we expect to see continued growth in computing and gaming and mobile phones. We also expect to see improved trends within the TV based on the vendor pads that we've added and the specialty labor and just making sure we're priced in the right spot.

From a phasing perspective, like I said, we are seeing February down approximately 1%. There are a few unique things that impact the monthly phasing. First, we are -- as Corie talked about in the prepared remarks, we are expecting the benefit of tax refund spending. More of that is weighted towards the month of March and April for us than it is February. Secondly, there are actually a couple of more material phone launches, timing shift from the beginning of February to the beginning of March. Those actually have a pretty significant impact to a certain month's comp. So that phasing accounts for a lot of that start to the quarter. And we expect other more important launches that kind of hit in the back half of the quarter as well. So that really kind of accounts for the majority of the phasing between February, March and April.

That's very helpful. I appreciate it. Then my second question, I think you mentioned tariffs in response to Michael's questions previously, but I guess I just want to hit harder on tariffs. So where are we right now as far as dealing with tariffs, mitigation efforts? I mean, how does anything with tariffs and what Best Buy is doing to deal with them a factor impact the guidance you laid out for -- now for the current fiscal year?

Yes, Brian, thanks for the question. I'm just going to start with it, and I always start this way, but I think it's important. Our number one focus is always our customers and meeting their budgets wherever they are. And our approach has then been to deliver the right assortment to match the customer needs and the budgets while we partner with our vendors to make sure that there's a good outcome for all of us. And I have to say I'm really proud of the way the team has been navigating.

I think right now where we are, the recent Supreme Court ruling led to a lower effective tariff rate for our products at this point. And at this point, we haven't modeled major impacts to our year based on that. I think there's still a lot of moving pieces and there's still a lot to be figured out. But I think what's important here, and you can see it even in our results, we gave a lot of the reasons why our industry is a bit different. And things like this is a really highly promotional category, it's relatively low frequency, so it's not like you're comparing prices week on week on week. It's an always-changing assortment with different components and features. Innovation tends to drive price points up, while older price points kind of decline. These are global supply chains, so vendors are making decisions across the entire globe. And we have this immense depth of product at all the different price points. So whatever your budget is, when you come in, we're going to have something for you.

And so while there's been lots of moving pieces, at the total company level, we aren't seeing -- our ASP has actually been relatively flat, is what we saw in Q4. And so I think that what that [ leans ] into is customers are able to find what matches their budget, and we continue to work with our vendor partners to do that. So we know there will continue to be some changes in this space, but I think the team has done a really nice job working with our vendor partners to make sure we show up for our customers.

Your next question comes from the line of Steven Zaccone with Citigroup.

First one I wanted to ask was just, how should we think about the same-store sales cadence for the year? Would we expect every quarter to kind of be within the range? And then you gave the commentary on the memory impact, which is very helpful. Is there a cadence to be mindful of when it comes to ASPs and unit volumes just given the disruption?

Yes. I think broadly, if I look at the year, we're clearly talking about a 1% comp for Q1. We clearly haven't guided the rest of the quarters. But if you think about where maybe the more opportunity for us on the comp is probably in Q1 and Q4. Some of our stronger quarters last year were in Q2 and Q3. So that might be a space where you might see a little bit of -- a little bit lower comp than maybe Q1 and Q4 as we're looking at it today.

I think in terms of the memory, I think we already started to see some costs, some prices go up because of the memory in some small parts of categories. So it has begun a little bit. I would imagine that continues to kind of roll through as we move into the future into the upcoming quarters. Hard to say exactly at what pace does it change ASPs, but we are seeing signs that some spots are actually starting to increase.

Okay. The follow-up I had was you gave a lot of detail on the Marketplace and Best Buy Ads, thanks for that. As we think about the opportunity for contribution to EBIT margin and next year and the out year, can this be a material driver that the business can get back closer to a 5% operating margin in time?

Yes. I mean I think as we think about past this year, clearly, we believe strongly in these 2 initiatives, and we're talking about how this year is still an investment year for both of those 2 different areas. But they are scaling pretty materially and they are beginning to -- you're seeing signs of it adding to the gross profit rate. It's just taking a bit of SG&A investment this last year and in FY '27 to kind of build into different new areas to scale it.

As we look beyond this year, we do expect both of them to not only add operating dollars to the bottom line, but also help us generate a better rate as we look forward. Now exactly how much and when we get to that type of OI rate in total, can't really say at this point. But we do believe it will be a great contributor to our ability to expand our operating rate in the future. And we will keep -- stay focused on just on scaling those 2 things in the right responsible way and continue to invest as we see fit to unlock that growth in the future years.

Your next question comes from the line of Steve Forbes with Guggenheim.

Corie, Matt, maybe just following up on Michael's comment from before. You mentioned the average sales price flat, I think, in 2025. And then you also talked about configuration changes in conjunction with the vendors to meet certain price points. I don't know if maybe you can just baseline the outlook for average sales price for the company as a whole in 2026, and if you can maybe just talk about computing, in particular, as we marry together all these elasticity concerns.

Steven, I wish I had the perfect organic forecast for you. To be clear, ASPs were flat in Q4. They actually were kind of down a bit, and some of the other quarters up a bit, but that was a Q4 quote. In terms of what we see going forward, we're not going to guide based on organics because, again, the goal here is have as many different price point opportunities available for the customer. That's true across our assortment, whether it's television, back to the earlier question, where we continue to play really strongly in large screen, whether that is computing, whether that's mobile phones. The goal here is to have as many price points as possible and then have customers opt into what they want.

So it's not even as easy as, all right, if all the SKUs go up x percent. That's probably not how it's going to work. Because the customer might come in with a budget, and they're not going to look at a certain SKU. They're just going to look at how do I fulfill that budget. And so what we're focused on is less about exactly how much does the ASP per item go up. What we're focused on is how do we work with the vendor partners to make sure we have as many different price point items available with the right and best configurations possible, so people can opt into what's most important to them.

That's helpful clarity. And then just I guess a second question around vendor support. You mentioned vendor-sponsored labor hours up, I believe, 20%. And I think there's some concerns out there around just promotional support. So I don't know if we can just talk about the various sort of components of vendor support and if there's any factors where you anticipate change, promotional support maybe being one of focus for investors.

Yes. So thanks for the question. There's a couple of things. Our vendors continue to make more investments in Best Buy. That's in physical experiences in our stores. There was a long list of vendors that continue to contribute and want to grow that presence. There's also been a significant uptick in the amount of vendor labor that's supported, and that doesn't even include the training that they do throughout the year with our labor in total.

From a promotionality perspective, we're not seeing a dramatic change there. I think there is one adjustment that you see naturally happen, and you are probably seeing it in computing first, which is price increases are not the first thing that happens. The first thing that happens is promotions are pulled back a little bit. And that's not that there's less of an impact or less of a funding of promotions, that is that there is less promotions. And in computing, you've actually seen less pure cost increases and more of a general slight pullback in promotions from computing vendors, which is the first thing they'll do under this memory situation. The second thing is that the cost changes will come through.

That's really the only area where we've seen any difference. And it's not a difference in level of support to Best Buy. It's actually an industry difference in level of promotional aggressiveness in a particular category.

And just to be clear, the 20% reference was 20% growth in labor last -- in the second part of last year. We would expect vendor-provided labor to grow this year as well, but that 20% reference was specific to the -- a half of last year.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

I'm going to ask 2 questions in one. So first, the positive comp trends in the first quarter, can you talk about the complexion? Is there any difference from the way the year ended? And then if you can merge that into thinking about the comp outlook for fiscal '27 in totality.

And then Matt, I know you mentioned promotionality when we saw you in December, you talked about reserving the right to be more promotional, if needed be. So can you talk about how that tone progressed through Q4 and then the position you enter -- or fiscal '27 with?

Sure. Yes. So as we enter Q1, we do expect Q1 to see growth in areas. They're pretty consistent with what we had been seeing in places like computing and gaming. We haven't quite lapped the Switch launch in Q2 of last year. Mobile phones, we'd expect it to be a growth area for us as we look here into Q1. We do expect improved TV trends. That would be something that we would carry through the remainder of the year as well. And then like I said, we have some easy timing shifts between the months here in Q1 between some of the mobile phone launches and other product launches.

So those carry, as you get into the latter part of the year, continue to expect computing to grow at high end of that guide. At the low end, we'd assume a level of constraints that we can't foresee at the moment. But that's supported by a continued end of support for Windows 10 and improved use cases for AI and general replacement cycle continued need. The growth in mobile phones will continue to be fueled this year through the new carrier labor models and system enhancements that we have implemented last year.

Interestingly, as you look into this year too, there are a lot of newer emerging categories that we've talked about, like AI glasses, 3D printers, collectibles, toys, health rings. Those are all small individually, but collectively, they're about -- they're even more -- they're about 0.5 point or more of our growth next year. That will add up to something that's very nice that can support our business. And like I said, improved TV trends as the year progresses.

Like Corie mentioned earlier, we haven't contemplated any changes related to the tariff moves that we've had. But I think, again, building on continued momentum, the other thing I'd note is gaming, we should expect to see gaming growth in Q1. We do expect GTA in the back half of the year to help us in the back half. We will be lapping that Switch launch in the mid part of the year, so you we'd see a little bit of a difference in sequenced growth there for the gaming category.

As it relates to promotionality, we've been pretty clear and pretty consistent. Customers have been drawn to key value events. And what we have also been clear about is we will lean into those places in partnership with our vendors and make sure that we are competitive. And so I think to Matt's point, when you heard [ it last ], we know that these key moments, whether it's holiday, whether it's Fourth of July, whether it's Super Bowl, those are the moments where customers are really in the Marketplace, and we are going to lean into those. But we have lots of tools also in our arsenal to lean into those.

We've done a nice job really working hard on our more strategically personalized promotional levers as we can see signals now that we use to try to reengage customers back into the brand. Those have been very effective. And so I think what we're trying to do is make sure that when the customers in the Marketplace for a good value, we are there and we are competitive, and we are using other tools like trade-in and refurbish product and outlets and financing, to make sure that we have the very best values there for them. And it seems to be resonating.

Your next question comes from the line of Zachary Fadem with Wells Fargo.

So with the SG&A moving parts around vendor labor as well as investments, could you update us on your leverage point in 2027? And then as the investment cadence dials back in 2028, how does that impact your leverage point and incremental margins going forward?

Yes. I mean I think what you've seen us be able to do as sales, broadly speaking, move from positive to negative, we've been able to adjust our SG&A in a responsible way to kind of mitigate the impact of OI rate, continue to lever on a relatively big fixed cost base that we have. And so you see us in those situations, we responsibly, we'll always measure and look at customer experience to make sure we're not doing anything that's damaging. But we'll scale that -- first thing is scales back as incentive compensation as you move down on the scale of sales performance and OI performance, you remove a level of incentive compensation within the year, and that is certainly represented in our guide. So at the bottom end of our guide, we'll probably remove about $100 million of incentive compensation at the minus 1% sales guide.

We also will responsibly move down in terms of store labor and marketing and other variable expenses to make sure that we're putting in the right of SG&A to support the sales outlook that we see. So those are a couple of examples. And then you see other changes to supply chain costs. If dotcom comes up and down, you can -- it can impact your parcel costs and bad debt expense. So there are things that just naturally flex down and then there are things that you just responsibly move down because you're trying to match what you see in terms of demand. And you've seen that for us, be able to manage our sales when sales do go down in a pretty responsible way to deliver an operating income outcome that is actually as good, in many cases, as what it would have been at higher net sales.

Got it. And then on the appliance category, you've had some challenges there. Curious, any thoughts on the game plan for fiscal '27 to return to share gain? And how should we think about the glide path towards returning to positive comps?

Yes. Thank you for the question. Appliances continues to be a tough environment. Obviously, home sales and remodels are down, so the vast majority of the market, it continues to be duressed, and replacement is something that has broken. It also has been very promotional, not necessarily promotional that's led to an increase in business. So we're watching very carefully with our vendor partners around what promotions are actually doing to drive the business in total.

Because the market is shifting to more the duressed and has been duressed for a very high percentage, we are focused on a couple of things. Investments from our vendor partners in more specialty-specific labor to appliances, which we think will be helpful in investing in that experience. Investing in the ability for customers to take an appliance with them if they'd like to do that, which is something that customers are showing more interest in doing in particular stores.

And then we're really, really focused on delivery speed because it is around something broke, I need to have it replaced in a relatively short amount of time, and making sure we have that core set of SKUs that customers are able to get as quickly as possible and we're able to actually get it to them as fast, if not faster, than what our competitors. And those are really the areas that the teams are focused on as we move into next year just based on where the market is. And then when it flips, obviously, we will be very focused on the other part of the market, which is more experience-driven, more bundle more upgrading. But we'll make sure that we serve both those segments of customers and be very, very focused in the first part of the year on that speed component.

Your next question comes from the line of Jonathan Mateuszewski with Jefferies.

Great. Matt, 2 questions. First one, you're in top-to-top meetings with vendors frequently. Do your supplier conversations your plans to slow the pace of innovation and product launches in '26 given the memory chip shortage distraction?

And my second question, there's conjecture that recent computing and smartphone category performance could be aided by a pull forward in demand with consumer awareness of potentially higher prices ahead. Are you seeing any evidence that would support a thesis of pull forward?

Great questions. On the first one, we're seeing nothing from our vendor partners that would slow down innovation. In fact, when you have something, like we have in front of us with memory, there's actually a large push to try to find other things that are very valuable from a feature and benefit perspective to customers that will actually continue to drive the growth in the individual category.

So looking at actually other parts of technology and computing, it could be size of screen, quality of screen, some of the AI features, but really other things that will drive interest into the category and make up for some of the pressure that we're going to see from a memory perspective in total. So there is absolutely nothing that would indicate that.

And then as far as the pull forward, where possible, we will pull in inventory. But from a demand perspective, we've actually seen continued stability in growth. We talked about computing. We've grown for the last 8 quarters, and in mobile phones, we've grown for the last 4 quarters. There's not anything that's indicating that customers are actually trying to pull forward. It's actually just continued demand in 2 categories that we're actually seeing customers want to upgrade .

There's one more thing that I would want to add to that before closing the call, and that is the concept of rising memory or component costs or shortages is not something that's new to the industry. It is something that we have dealt with in peaks many times over the last 25 years. And so to reinforce some of what Jason said, our vendor partners are really excellent at pivoting and thinking differently. And by the way, there's no vendor partner out there that doesn't want to also drive consumer demand and continue to make sure their products are front-end leading.

And so this isn't a brand-new space. It's just one more, I think, set of features that we need to work through with our vendor partners.

And with that, I think that was our last question. We thank you for joining us this morning, and we look forward to updating you on our results and our progress on our next call in May. Thanks, everyone.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Third Quarter Fiscal '26 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1:00 p.m. Eastern time today. [Operator Instructions]

I will now turn the conference call over to Mollie O'Brien, Head of Investor Relations.

Thank you, and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; Matt Bilunas, our Chief Financial and Strategy Officer; and Jason Bonfig, our Chief Customer Product and Fulfillment Officer.

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 Form 10-K and subsequent Form 10-Q 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 the call.

And now I will turn the call over to Corie.

Good morning, everyone, and thank you for joining us. Today, we are very pleased to report strong results for the third quarter. On revenue of $9.7 billion, we delivered an adjusted operating income rate of 4% and increased our adjusted earnings per share 11% year-over-year to $1.40. We delivered better-than-expected comparable sales growth of 2.7%. Our better-than-expected profitability was due to the higher revenue and lower-than-expected SG&A expenses.

We continue to drive strong sales performance across computing, gaming and mobile phones. We also saw growth in other categories, including wearables and headphones. This growth was partially affect by declines in the home theater, appliance and drone categories. In computing, we delivered our seventh consecutive quarter of positive comps with sales growth coming from across the assortment and price points. This is due to continued momentum driven by customers' need to replace and upgrade products, combined with our unique blend of broad assortment and expert advice, service and support.

We were there for students and their families no matter their budget, and we're pleased with our back-to-school sales performance. We were also focused on helping customers get what they needed to transition to Windows 11 as Microsoft ended support for the Windows 10 operating system mid-October. This contributed to our comparable sales performance evidenced by strong Windows-based sales overall and almost 30% year-over-year growth in desktop computers.

In gaming, we continue to see strong demand for the Nintendo Switch 2, as expected, the growth rate slowed from the material Q2 launch time frame. We also continue to see healthy demand for handheld gaming and augmented reality glasses. In mobile phones, we leveraged our expanded partnerships and in-store operating model improvements with the largest carriers to drive strong sales growth across phones.

Our Q3 Enterprise comparable sales were driven by growth across both our online assets and our stores. Online sales were up for the fourth consecutive quarter due to higher traffic and increased customer adoption of our highly rated app. We also drove our fastest shipping fulfillment speed ever, coupled with our highest on-time rate for a third quarter. According to our 5 Star surveys, our store customer experience ratings for product availability, store appearance and associate availability all improved year-over-year. We were also pleased to see continued year-over-year growth in our overall relationship Net Promoter Score, reflecting improved customer perception on all relationship attributes with the largest gain in meeting my tech needs for the second straight quarter.

For the most part, customer shopping behavior in Q3 did not change materially from the commentary we have shared for the past several quarters. Customers remain resilient, but deal focused and attracted to more predictable sales moments including back-to-school sales events and our Techtober sales have close -- in close proxy to the October Prime Day event.

September, which was relatively quiet outside of the Labor Day sales event, has lowest growth of the quarter. Importantly, while customers continue to be thoughtful about big ticket purchases in the current environment, they are willing to spend on high price point products when they need to or when there is technology innovation.

To summarize our Q3 performance, we are flexing the unique strength of our model as customers need to upgrade or replace their CE and new products are coming to market. I want to thank our amazing employees for their dedication to our customers and their strong execution in delivering these Q3 results and setting us up well for an exciting holiday quarter.

I would like to provide a few updates on the progress we are making on our fiscal '26 strategy. As a reminder, our strategy is to continue to strengthen our position in retail as a leading omnichannel destination for technology, while at the same time, building and scaling new profit streams that we believe will drive returns in the future. Our first fiscal '26 strategic priority is to drive omnichannel experiences that resonate with our customers. Last quarter, we provided multiple examples of store refreshes and upgrades planned for the back half of the year, many of which were in partnership with our vendors.

A few updates. We launched the latest AI glasses from Meta across all stores. In more than 50 locations, we now have immersive showcase areas staffed by Meta experts to help customers discover and try the technology hands on. The strong customer demand for in-person demos continues to outpace available appointments.

We introduced new experiences with Revel and SharkNinja that feature expanded assortments for at-home baristas and chefs and innovative health and beauty solutions. Very early reads are positive and we are excited to monitor customer response during the holidays as many of these new experiences will be staffed with expert sales associates to bring this innovation to life for our customers. We expanded the merchandising areas featuring TVs from TCL, Hisense and LG, which are staffed by dedicated experts to address questions and help customers get what they need. These were not all live for the whole quarter, but very early reads are showing positive results.

And earlier this month, we implemented most of the new IKEA pilots we announced last quarter. These 1,000 square foot areas are staffed by IKEA coworkers and showcase kitchen and laundry room settings from IKEA and appliances from Best Buy. While there are only 10 pilot locations, this is the first time IKEA products and services are available through another U.S. retailer, creating innovative ways for both of us to meet customer needs in a changing environment. We continue to drive the digital experience forward as well. Usage of our app is growing every quarter, which helps us recognize more customers as they shop with us and gives us the opportunity to provide better personalization and product recommendations.

In addition to launching our marketplace, we continue to make online customer enhancements, a few specific examples. We improved the online TV shopping experience by both lowering the price for our delivery and installation services and improving the digital flow to make it even easier for customers to add the services to their online TV purchase. For shippable products across categories, customers in all our markets can now pick a 2-hour window for delivery up to 7 days out. This capability was only available in about 1/3 of our markets last year. This is a great option for customers, especially those who may want more security around their high price point purchases.

As always, we have a relentless focus on the employee experience and being the best place to work, which is driving engagement, historically low turnover and healthy applicant pools. This, in turn, allows us to provide our customers the expert service that Best Buy is known for across stores, online and in homes. On top of that, our vendors have grown their investment in our specialized labor programs to [ augment ] our staff. We continue to expect vendor labor investment to be approximately 20% higher than last year in the second half of the year.

Our second strategic priority for fiscal '26 is focused on incremental profitability streams. We are excited about our new Best Buy marketplace. We are about 3 months into the launch and have more than 1,000 sellers and 11x more SKUs available online for customers than we did before.

Now we have more tech options than ever for our customers, both from big names like Samsung, Dell, HP and Intel and new vendors that help us level up our tech assortment across categories. We also have hundreds of new brands and new categories like licensed sporting goods, seasonal decor and much more. For our sellers, our marketplace provides an additional avenue to increase their reach and build their brands, leveraging our qualified traffic. I will share some early results in learning.

As expected and an important goal of Marketplace, we are seeing high unit sales in categories like accessories and small appliances. The 5 Star customer reviews for 3P experiences are similar to those we see for our first-party business. Customer return rates for marketplace items have been running lower than our first-party return rates. And for customers who do have a return, they are taking advantage of the convenient return to store option for more than 80% of product retracts.

Marketplace ramped through Q3 in terms of sellers, SKUs, traffic conversion rate and sales. We expect to continue to ramp through Q4. Our marketplace results had a positive impact on our Q3 gross profit rate, and we expect it to positively impact our Q4 gross profit rate as well, and it is already providing opportunities for Best Buy ads through new advertisers.

Speaking of Best Buy ads during the quarter, we hosted our first-ever client showcase in September called We Got Next. It's spotlighted our scale, performance and innovation to key decision-makers across agencies, brands, partners and press. We were encouraged by the reception. Advertisers are particularly excited about our new in-store takeover product, unique to Best Buy. This high-impact program features both large-format signage across the store and screens across the TV wall and computer monitors. It begins running in January with Meta and ESPN.

We continue to invest in strengthening and advancing the technology platform we need to capitalize on the opportunity we see ahead. During the quarter, we launched our self-serve platform, My Ads, which is particularly important for our new marketplace sellers. We also enabled on-site programmatic buying, augmented our reporting capabilities and expanded our on-site ad supply. We are successfully expanding into new opportunity areas like agencies and demand-side platforms or DSPs. We are also gaining traction in non-endemic categories, with several partners testing the platform in differentiated ways.

Financial services is emerging as a standout vertical with PayPal, Klarna and Cap One shopping, all activating campaigns. Other new non-endemic categories include quick-serve restaurants and sports entertainment. Our retail media network is already highly profitable and our Q3 growth in ad collections had a positive impact on our gross profit rate, and we expect it to positively impact our Q4 gross profit rate as well. We expect a neutral impact on this year's operating income rate compared to last year due to the estimates we are making in technology and talent.

This brings us to our third strategic priority for fiscal '26, which is a long-standing strategic imperative, driving efficiencies and identifying cost reductions are crucial to help fund investment capacity for new and existing initiatives and offset pressures in our business. There are many ways we realize these efficiencies, with technology and analytics, through ongoing vendor partnerships and better selections throughout the enterprise and by modifying existing processes or customer offerings.

In our customer support capability, we are leveraging AI to streamline interactions and provide new experiences that empower customers with more self-serve content and options. As a result, we drove a 17% decline in the number of customer contacts in Q3 and improved our customer experience scores. By leveraging a new data-driven sourcing solution to choose the most efficient location to fulfill more than 70% of our online orders, we are seeing faster delivery times, better on-time delivery and lower costs.

Going forward, we will continue to use AI augmented optimization across multiple areas of our business, from scan detection to customer support to personalized e-mail marketing. And we are increasingly using AI for product search, product recommendations and enriching product content as well as expanding into conversational AI and agentic commerce. We have officially kicked off the holiday season we feel well positioned with compelling deals on hot products, strong marketing and competitive fulfillment options.

From a timing perspective, our promotional plans for the most part, line up with last year, doorbusters drop every Friday through the holiday and our Black Friday sales started the week before Thanksgiving. We have something for every budget with deals across a wide range of price points. Because of our unique position, we can also offer customers great prices for the latest innovation and premium products and assortment that not everyone has. This includes limited quantity hardware, games and toys that drive traffic and excitement to our stores and digital properties through invitation-only and other exciting launch events. We expect gaming to be a hot holiday gift category with products like the Nintendo Switch 2, the ASUS Rog Xbox Ally handheld gaming system, gaming laptops and gaming monitors. Other exciting gifts for holiday include AI glasses from Ray-Ban and Oakley, 3D printers, OLED TVs, the new Hyperboot by Nike, limited quantity Pokemon cards and LEGO toys and JBL PartyBox speakers.

For those looking for gifts that we used every day, we have great deals on the new remarkable Paper Pro and Copilot+ laptops, small appliances like Ninja SLUSHi machines and Breville Barista espresso machines, health products like the new Oura Ring 4 and much more.

In stores, you can interact with our immersive experiences and demos and get advice from our blue shirts and vendor experts. And every year ahead of holiday, we, like many vendors, hired thousands of seasonal flex employees. This year, we tried something new and brought all the new associates together for a full weekend earlier this month. The event was a resounding success, not only in training the new employees on products, tools and transacting, but immersing new team members in the values, energy and collaboration that define Best Buy's culture.

Of course, all the in-store products and more are available for customers who prefer to shop from home. We have our holiday gift ideas page with curated gift list based on interest and a personalized discover page designed to help customers discover new technology. In addition to great price points, we have our comprehensive trade-in program that we will highlight throughout the holiday to help customers more easily get new technology. For example, customers can save up to $1,200 by trading in their tablets or up to $1,100 trading in their phones. We also have great no-interest programs available on the credit card in addition to buy now pay later options to help customers complete their holiday shopping list.

We are excited about our holiday marketing campaign that meets people where they already are across ports, streaming and social. We're teaming up with more than 200 influencers and Best Buy creators as they highlight the tech that's topping their gift list. And this year, we are going even deeper with sports. We continue to be the official home entertainment retailer of the NFL, and our holiday campaign will have an increased in-game presence across NBC, Peacock, CBS, Fox and Netflix. We will also have presence on CBSSports.com and across streaming sports content on ESPN.

In summary, we are pleased with our Q3 financial results and execution, which included improved share positions. We expect to deliver sales growth for the year. The high end of our Q4 outlook assumes growth computing, gaming and mobile. It also reflects trend improvements in TVs driven by a blend of pricing, increased marketing specialty labor and improved delivery and install offering. Our results demonstrate an important aspect of our thesis. Our model really shines when there is innovation. This is because we are the trusted source for the latest and greatest new technology. We have a broad range of assortments and price points for every budget in addition to unique in-store and digital experiences. We also have Geek Squad services to help our customers, and we are a true partner to our vendors, working with them early in the product development cycle, all the way to launching products on our sales.

And now I would like to turn the call over to Matt for more details on our Q3 performance and Q4 outlook.

Good morning. Let me start with an overview of how the third quarter performed versus expectations we shared with you last quarter. Enterprise comparable sales growth of 2.7% exceeded our outlook of being similar to our second quarter growth of 1.6%. Our adjusted operating income rate of 4% was 30 basis points better than expected, which was largely driven by lower-than-planned SG&A expense.

I will now talk about our third quarter results versus last year. Enterprise revenue of $9.7 billion increased 2.4% versus last year. Our adjusted operating income rate increased 30 basis points compared to last year, and our adjusted diluted earnings per share increased 11% to $1.40. By month, our Enterprise comparable sales were up approximately 3% in August, 1% in September and 5% in October.

In our Domestic segment, revenue increased 2.1% to $8.9 billion, driven by comparable sales growth of 2.4%. Our online revenue of $2.8 billion increased 3.5% on a comparable basis and represented 31.8% of our domestic revenue. Our online comparable sales growth includes net commission revenue earned from our third-party marketplace sellers.

From an organic standpoint, the blended average sales price of our products was approximately flat to last year, with the unit growth being the primary driver of our sales growth. International revenue of $794 million increased 6.1% versus last year. The revenue increase was primarily driven by comparable sales growth of 6.3% and revenue from Best Buy's best locations that are not yet included in comparable sales.

The previous items were partially offset by the negative impact from foreign exchange rates. From a category standpoint, the largest drivers of international comparable sales growth were computing and mobile phones. Our domestic gross profit rate decreased by 30 basis points to 23.3%. This was primarily due to lower product margin rates partially offset by rate improvement within the services category. The lower product margin rates were primarily driven by an unfavorable sales mix and increased personalized promotional offers.

Our international gross profit rate increased 30 basis points to 22.8%. The higher gross profit rate was primarily due to favorable supply chain costs.

Moving to SG&A, where our domestic adjusted SG&A decreased $4 million, which included lower Best Buy Health expenses that were largely offset by higher incentive compensation expense. During the third quarter, we recorded pretax noncash asset impairments of $192 million related to Best Buy Health, which were excluded from our adjusted results. The impairments were prompted by a change in Best Buy Health's customer base during the quarter and reflect downward revisions in our long-term projections in part due to pressures in the Medicaid and Medicare Advantage markets.

Year-to-date, we have returned a total of $802 million to shareholders through dividends of $602 million and share repurchases of $200 million. For the year, we still expect to spend approximately $300 million on repurchases.

Let me next share color on fourth quarter guidance. From a top line perspective, we expect our fourth quarter comparable sales to be in the range of down 1% to up 1%. In addition, our fourth quarter comparable sales outlook for Canada more closely aligns with our expectations for the domestic segment. On the profitability side, we expect our fourth quarter adjusted operating income rate of 4.8% to 4.9%, which compares to 4.9% last year.

Moving to gross profit. We expect our fourth quarter gross profit rate to decline versus last year due to a lower product margin rate, which is primarily due to increased promotional investments. Other notable drivers that are expected to benefit our gross profit rate include growth from Best Buy ads, our recently launched online marketplace and improved profitability from our services category.

Moving next to SG&A, where the most notable planned puts and takes are the following: increased SG&A in support of our Best Buy ads and marketplace initiatives, which include advertising, technology and employee compensation expense. Offsetting these items are lower Best Buy Health and incentive compensation expense. Lastly, the low end of our guidance reflects our plans to further reduce our variable expenses, including incentive compensation to align with sales trends.

Let me provide more details on our updated full year fiscal '26 guidance, which incorporates the color I just shared on the fourth quarter and is the following: revenue in the range of $41.65 billion to $41.95 billion; comparable sales growth of 0.5% to 1.2%; adjusted operating increase of approximately 4.2%; and an adjusted effective income tax rate of approximately 25.4%; adjusted diluted earnings per share of $6.25 to $6.35 and capital expenditures of approximately $700 million.

Our full year gross profit and SG&A working assumptions are still very similar to what we shared last quarter, and some of the key callouts are the following: we believe our fiscal '26 gross profit rate will now decline approximately 15 basis points compared to last year. The high end of our guidance continues to reflect incentive compensation at approximately flat to last year. As I noted, we now expect our adjusted effective income tax rate to be approximately 25.4%, which compares to our prior guidance of 25%.

I will now turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from Simeon Gutman with Morgan Stanley.

Nice third quarter. I wanted to ask about the puts and takes on Q4. It looks like the comp maybe be light from what we were expecting standing from the second quarter, meaning once you guided the prior quarter, but a little bit better on profit. So can you talk about -- I guess there's a lot of scenarios what could amount, but how you set up your fourth quarter guide? And any difference in thinking from when we talked about it 3 months ago?

Yes. Overall, the high end of our Q4 guide from a sales perspective is pretty similar to what we guided the last time, maybe just a little bit lower. We did -- we did raise the bottom end of that sales guide from something that was implied to down 4% or maybe more to the number we talked about here today of down 1%. So feeling good about where sales are effectively similar to where we expect them to be on the August call.

On the EBIT side, we actually slightly lower the EBIT expectations from what we would have implied last Q4 of closer to 5%. So most of that was on the low end. We did have a little bit more rate pressure on the low end because we have adjusted the revenue expectations, and therefore, the incentive compensation changed a little bit. So overall, at the high end, not a very big difference from what we would have implied in the guide on the August call.

Okay. And then a follow-up, based on the adoption of either Switch 2 or other things in entertainment as well as iPhone. What do the curves look like, meaning this -- does it portend that you have another year's worth of good momentum? Like is a lot of demand pent-up? How do you think about it as you go into fourth quarter and into next year?

Sure. I mean, I think for -- to support the fourth quarter guide, we are still expecting growth on the computing side and mobile phones. Computing is still going to be fueled by the need to replace and upgrade and plus all the ongoing innovation around AI. That will continue into Q4 and likely continue into next year as we still see that there are millions of people who have yet to upgrade the Win 10 device and there's further opportunities even on the MAX side of the business, who haven't upgraded to the new chip technology.

If you think about mobile phones is expected to continue to grow as we get into Q4 likely as we get into next year as well. We are seeing continued benefit from the in-store improvements with the carriers. On the entertainment side, as again in Q4, we still expect to see Switch help us grow in Q4, but on the other console side, that will likely slow as you get into -- they're just later stages of the replacement cycle of those 2 other consoles, plus, there's been some pretty transparent price increases that are obviously probably having a little bit of an impact.

As you get into next year, likely still a little opportunity before we lap the switch to launch midway through the year. We are expecting to see improved trends on the TV side as we get into Q4. We have very competitive pricing. We've put more marketing into the business, and with additional labor and just some changes to the service offer, we feel like that's going to help us improve the trends on the TV side as well. We are seeing already some improvements on the unit -- exercise units grow a little bit in Q3 on the TV. So that's helpful. And plus, we have a lot of other initiatives. We have the marketplace that's continuing to ramp in sales as we get into Q4. So feel really good or great about that, especially as we get into marketplace next year and being able to scale even more along with the ads business.

The next question comes from Peter Keith with Piper Sandler.

I'd like to just follow up, Matt, on that last response on the Q4 outlook for comp because it does seem like you have quite a bit of momentum coming out of Q3 and some product momentum for the holiday. So what's driving the decel in the overall outlook vis-a-vis Q3?

Yes. Let me just start at a high level for Q3. Like I said, we were expecting a pretty similar Q4 guide overall from a sales perspective. Q3, if I start back in Q3, it did come in a bit better than we expected. We saw a strong back-to-school period. We saw a strong October with Techtober and the early part of the year. So we are seeing a positive growth as we go into Q4, although the Q4 did see some growth last year versus Q3 that saw a little bit more -- saw some sales pressure. So the comparisons get a little bit tougher as you get into Q4. Obviously, the holiday is never easy to predict. What we do believe is we have a range of scenarios and the range we've provided gives us a great place to plan and plan our business operationally.

Some of the categories that changed a little bit in terms of sales growth momentum as you get in from Q3 to Q4. Gaming, we are expecting it to grow overall, but maybe not at the same pace that we saw in Q3 and Q4. wearables will be another category, I would say probably aren't going to see the same type of growth that we had saw in Q3.

Okay. Helpful. And then maybe another question for Corie on marketplace. How is it going now that it's rolled out? Do you still expect it will have a positive impact on EBIT this year, but you've shared some helpful KPIs. Are there any challenges now that it's out live, just -- can you give us some of the puts and takes that you're seeing on that launch?

Yes. I'm incredibly proud of the work the team has done to launch the marketplace in a very omni-channel way. We mentioned now more than 1,000 sellers that we onboarded in a quarter and 11x more SKUs. So right away, we can see customers looking for that broader assortment. We can see them leaning into some of the unit growth that we were looking for in places like accessories where you can have a much deeper assortment or small appliances where again, you have that ability to have more breadth across what we're doing. So we're really happy with that. We did hit a few of those points on the call where we're seeing that high unit sales in categories, we're seeing return rates be actually a little bit less than what we're seeing in first party and 80% of those returns coming back to stores. We really like the customer experience metrics we're seeing.

And so in general, those kind of early indicators really feel healthy and good to us, but it still is really early in the ramp. And we want to make sure we give ourselves enough time to create the kind of scale that we're going to see throughout Q4. But we're excited with the progress that we're making and how quickly we've been able to broaden that assortment how much our customers are leaning into that broader assortment for us.

Yes. Regarding the OI rate impact for the year, I think we had previously said we thought maybe it would be a little bit of a rate improvement for the enterprise for the year. We're now expecting that to be a bit more neutral. Nothing super material has changed in our outlook. There's been just a little bit of a different product mix and a little bit slower ramp than we would have had originally modeled. So again, we never really expected it to have a really huge impact to the rate this year. But more into this time at this quarter.

Well, last thing I'd say, Peter, I think the great part about having this, especially as we head into Q4, is it just really extends the amount of giftable items that we have for our customers. And the teams are finding really interesting ways to highlight these new extended assortments. So as you look on our global homepage or as you look at search, we're finding new ways to kind of pull the depth of this assortment up. So people really realize there's a lot more out there that our customers can find to be the perfect gift giver.

The next question comes from Joe Feldman with Telsey Advisory Group.

So I wanted to touch on the loyalty program a bit. And just if you could share some more details on how that's been performing. It seems like it's been a good driver for much of the year. I don't rehearing too much this morning on it. So I was just curious if you could share some thoughts.

Yes. I mean, obviously, our membership program remains a really important part of our customer experience and the way in which we engage with our customers. We have more than 100 million members across our 3 tiers, obviously, the fee -- my Best Buy membership is the one that has the greatest reach. But on the paid membership side, which is Best Buy Plus, invest by total, we ended the year with nearly 8 million paid members, and that was up from 7 million the year before.

And what our focus is right now is how can we continue to drive real value and unique offers for those members. And so one of the things that we have found to be really working well for us is the strategic use of some very personalized promotions. And it's where we can use the breadth of our data to really try to reengage maybe some of those customers who haven't been engaged with us. So you can use this data we have about our customers plus the signal we're seeing from customers in the way that they're shopping and really target them carefully to offer which we're finding is a very unique way for us to reengage those customers who maybe would have lapsed or wouldn't have been shopping with us this holiday season.

And another [indiscernible] we tried and we have talked about is a deep discount on the NFL Sunday ticket for plus and total members, some more of that idea of because you remember with us, are there other ancillary, especially services and subscriptions that might really resonate. And we're going to continue to test and try and build on those learnings across our membership. The goal no matter what is consistent. We want to drive engagement. We want to increase the share of wallet and we want to use this as another tool that helps us fuel our ads business. And so I think the evolutions that you'll continue to see from here will all be based in continuing to fulfill that goal for our customers.

That's great. And then just maybe shifting gears a little bit to me early, but I did want to ask about how are you thinking about stores and store investment for the coming year? You've done a lot of things to keep tweaking the model and trying different things inside the stores. And I'm just curious how you're your initial thoughts for next year would look.

Yes, I'm going to start where Easter, which is our stores are incredibly crucial assets. they provide not only differentiated experiences, not only differentiated services but also amazing multichannel fulfillment options. We still are running at 46% in-store pickup no matter what all of the advancements that we made in terms of shipping speed. So this is a really important asset base for us. And we've been very consistent, and this is true for this year and it will bleed into next year.

Our focus right now is on great store look and feel. And so a lot of our capital investments this year have been about ensuring that we're really investing in that look and feel we listed a number of the ways we're doing that both ourselves and in partnership with our vendors. And that will continue as we think into this year as we continue to refresh and make sure that we feel like our store updates reflect those great immersive experience in places like AR and gaming and TVs, small appliances, many of the categories that we've talked about, including the experiences that we're driving in mobile in partnership with some of our vendors.

We do have some cohort of stores where they're a little bit larger than what we need. And so we've been working on several different ways. And this, again, will move into next year, including relocations, resizing some of the existing formats, now we're looking at some of the new and more innovative ways where maybe we can consolidate the space and bring partners like the IKEA pilot is a great example of that. But you can mention there's a multitude of partners who might be interested in having some of that shop-in-shop space.

And then finally, we've talked about some of the smaller format stores. We now have 3 new small format stores open, testing kind of a couple of different concepts. One is somewhere like Bosman, where maybe we can enter a market, we wouldn't otherwise enter in other areas, it's closing a larger store and opening a small one. We like what we're seeing in those small format stores, and I would expect us to lean into those a bit as we head into next year as well. So I think all in all, what we're really focused on is making sure that if someone makes the trip to the store, and here is a defining small data point.

When we look at our demographics, in just our youngest cohort, Gen Z is really leaning into the store experience. We can see it in their visits, and we can see it in where they choose to interact, and we can see it in our ability to start to grow share with this cohort, and it's a cohort who is starting to see our brand as updated, refreshed and more relevant. So this -- I think this idea of leading in here, both ourselves and with our vendor partners, augmenting maybe with the fewer smaller locations. I think that's what you're going to see us focus on as we head forward.

The next question comes from Greg Melich with Evercore.

I had 2 questions. First, on tariffs. Could you just update us on how much of that do you think has actually flowed through to on the shelf AUR at this point? Is it all in the numbers now or the base?

Yes. Overall, like we talked about in the prepared remarks, our ASP at an enterprise level is essentially pretty flat year-over-year, and most of the growth is coming from the unit side of the business. So that would infer that all of the tariff changes that we would have made on select portions of our assortment would be flowing through in the price again that those any tariff increases we would have had. We're only on small portions of the assortment overall, the effect of tariff rate is probably still in the mid-teens, if you will.

But that is not what the actual price increases on those portions of assume the rate is there were close to that number. So all of that would be implied in the ASP generally being flat year-over-year. What's there about our industry and that is that it's a very -- as you know, a very promotional industry. And so even though they're tariffs we have to be competitively priced all the time to be competitive. And so that sometimes will mute the overall impact to ASPs. Also we have product at every part of budget, whether you're in computing or TVs. And so any product mix changes, assortment changes can also have an impact on ASPs as well. So overall, they are included, but we're all seeing pretty competitively priced industry and our ASPs, like I said, are not necessarily the one that's not driving our business overall is more on the unit side.

I just want to lift up one thing that Matt said. Our #1 focus is on our customer and ensuring we have every price point and every budget available. And one of the interesting things when we looked at our price bands, you can imagine we're looking at how many SKUs we have in each price band in a couple of our largest categories year-over-year very similar amount of SKUs by price band. And so I think the team is doing an amazing job staying focused on having that breadth of assortment regardless to Matt point, whether or not we have a few small price adjustments coming through so that whatever the budget is, we're there for them, and that will be the goal through the holiday.

Got it. Makes a lot of sense. I'd love to follow up on labor and working with vendors. Could you just level set us on now how much of the store has some vendor support in -- I think you said that you're adding TVs recently. And I just -- I'd love to hear how that really helps engagement score with customers when you have vendors funding some of the labor in the store?

The amount of vendor labor is not a static answer. It flexes and it depends on both time of year and, of course, launches or innovation as different vendors choose to lean in and lead out at various points in time. I think one of the differences in our model when it comes to labor is we actually have a number of different ways in which we interact with customers from a labor perspective. We have everything from kind of that adviser who can flex over the whole store all the way into our own specialized category liver or something like an appliance pro who really understands appliances, all the way into vendor labor, which the team, again, I give them a lot of credit, has done a great job. That is a very close partnership between us and our vendors.

And in most cases, that is our labor that we are training and deploying that is, of course, more trained against that particular vendor assortment, but is part of our broader umbrella of labor here at Best Buy. And then sometimes, we have a few examples where we also have just flat out vendor-provided labor that's in our stores.

And what I think we've gotten good at is the operating model amongst all of those different teams of labor. So you know when to hand off to a specialist who might have more experience in a certain product. And those specialists also understand what is time to make hand the back off to someone who might be more of a generalist because they want to go shop a different department. And so that when we concentrate on how does the operating model work at Best Buy, it is embracing that vendor partnership labor, but also ensuring it stays consistent with the culture, the values, the way that we think about serving the customer here at Best Buy.

The next question comes from Jonathan Matuszewski with Jefferies.

Corie, you referenced Agentic Commerce. I was curious if you could expand there how you think about the top line and potential margin benefits from the prospects of something like instant checkout? And if you have any time line slated for integration, that would be great.

My time line is fast. How's that? But at the same time, looking aside, you really have to prioritize not just where the incremental flows through, but what does the customer experience really look like, and particularly in a business like ours that often includes AB scheduled delivery, maybe installation, maybe services or membership. You really need to think about an instant checkout. How do you want those experiences to translate for the customer. And that's just when we're talking about the actual transaction point, more broadly, we want to make sure we're thinking about how does our brand, how does our specific knowledge of our customers show up? And how is it helpful to customers as they're using a variety at this point of Agentic tools. .

So we're obviously working quickly to make sure that we are relevant and showing up in the right places. But most important for us is protecting the customer experience, so that, that stays consistent with how we would want them to experience our own digital assets.

That's helpful. And then, Matt, how should we think about the magnitude of hiring and technology spend for retail media maybe next year versus what took place in 2025, trying to understand maybe how much of the neutral operating margin impact for this business is being constrained by elevated investments this year?

Yes, thanks. We're not obviously going to guide next year, but I do think as it relates to how we're thinking about next year at a high level, we're clearly seeing some sales momentum this year, and we would hope to be able to continue to drive continued momentum on the sales side as we get into next year and obviously, higher sales helps from a rate leverage perspective. It is likely true that as we get into next year for some of our initiatives, we're going to need to continue to invest in those marketplace and the ads business, exactly how much and how much flows through still haven't completed the math on that quite yet. But that is something we want to do because over the long period of time, it's going to help us drive more rate and fuel our other parts of our business over the long term, and we think that it's a good trade-off. So exactly how much that looks next year, hard to say, but we do think it's an accretive thing for us over the 1- to 3- to 5-year period.

The next question comes from Seth Sigman with Barclays.

I wanted to ask about SG&A. You were able to manage that down quite a bit this quarter despite the best sales growth in more than 4 years. So just curious, was there anything unique this quarter you could unpack that, that would be helpful. And then I'm just curious, does SG&A need to come back more as you think about a scenario where comps remain positive, what does the normal operating leverage in the business look like?

Yes. I mean, for Q3, I think we did see a rate favorability on the SG&A side. A lot of that came from the higher-than-expected sales expectation and higher sales year-over-year. We did see a combination of a few things coming better than we expected, like lower technology spend a little bit lower labor spend in the quarter, again, nothing. We also had a few smaller settlements that also helped us in the quarter as well. Those things -- none of them were dramatic, but a lot of that SG&A favorability in the rate is just coming from the leverage we get on the sales in terms of our performance.

So as we get into next year, again, not guiding, but there's places where we're obviously always have a little bit of inflation as we go year-to-year in terms of wages and whatnot, we'll factor those in. And there's some places where we feel like we're going to need to continue to invest to drive long-term growth. We just talked about a couple of marketplace in the ads business. So -- but that would be our goal to be able to drive sales over the long term and get rate leverage as we grow that sales exactly how much.

We're still -- like I said, we're still doing the math on that next year. But we have been really good about finding operational efficiencies and cost reductions to kind of help offset the pressures that we have. We've been doing that for years. We would continue to expect to be able to do that. We've talked a lot about those places in the past where and we're using kind of new data-driven sourcing around our supply chain. We have a primary relationship with FedEx as a partial carrier. We've talked about the automated guided vehicles in our warehouses, which we continue to test and roll out. And then there's just a lot of efficiencies through technology and analytics that we can help with our partners, drive more efficiencies around customer support capabilities and just future AI opportunities as it relates to a lot of our business areas overall. So there are places for us to kind of offset some of those pressures that do come every year like we've been doing. And so we feel like over the long term, that would be our intent is to try to drive more profitability in our business as we grow the sales.

Okay. That's helpful. And then, obviously, great to see comps positive, but I want to ask about the categories they're not performing as well, what needs to happen for the CE category and the appliance category to get back to growth? .

Thanks for the question. The appliance category is probably the most difficult one that we have in the market today, the vast majority of the appliance market is duress customers, meaning that they're replacing a product that is broken in some way. We're also seeing a very high amount of single unit purchases, meaning washer breaks, they're now replacing the washer and dryer pair, they're just replacing the washer, which is just very different than what generally happens in the market, and that is a very high percentage in total, which means that promos are not as effective as they are in total because you're dealing with a fixed customer base. We also don't have a Pro business. And really, our sweet spot is primarily premium and packages in historic years.

Really, what we have to do is shift our model a little bit. So we're looking at increasing our labor coverage in the department, also looking at focusing on delivery and speed of delivery in particular, which is critical in a direct market, and then also looking at even having opportunities in some of our stores for a customer to be able to take the product with them that day, which is also something that is emphasized more in the market that we're in.

So looking to adjust our model until it flips back a little bit more towards our sweet spot, which is, again, that premium in packages, but we really need to meet the customer where they're at in a very duress market. And hopefully, as housing and different things change, then the market starts to swing back to something that might be a little bit more normal.

On the TV side, I would just make a couple of comments there. Our revenue performance did improve sequentially, even though it was still down year-over-year. What's interesting is that our unit performance really accelerated and moved to slight growth in the quarter. And so you can see some of the industry-wide ASP compression there, which we've talked about. Our share trends have improved materially on the unit side, and we believe that we're up slightly year-over-year on TV. And a lot of that is because we have invested in some of the things that we've been talking about, the sharp pricing, the increased marketing that expanded specialty labor and those expanded merchandising experiences in the stores with TCL and Hisense and LG and then augmenting that with the expanded services offering working on how that experience works digitally, all of that, I think the team is doing a great job putting together a more fulsome assortment and more -- even more price point options for our customers, which is at least moving that business in the right trajectory.

The next question comes from Christopher Horvers with JPMorgan.

So my first question, I'm going to try to go at the marketplace and the ads margin and accretion a little bit differently. I know that others have asked. So can you talk about what you're seeing in terms of like the benefit of both businesses to the gross margin line in the second half?

And then as you think about in 2026, one would expect the revenue growth there to accelerate, is it your expectation that as the business scales, the margin rate of those businesses also accelerate? I think on our side, we think of that as strong double-digit margin rates for both businesses.

Yes. I'll break that a little bit for both different parts of the P&L here. First, if I think about gross profit rate for both ads and marketplace, they have both helped the gross profit rate in the back half of this year. So obviously, on the marketplace side, we're scaling that business. If you think about the rate is helpful there. As we get into next year, we would continue to expect the marketplace to scale, we're clearly going to lap the launch in midway through next year, which might have an impact. But generally speaking, the more you grow it, the more GMV, the more net commissions should be helpful to the gross margin rate, not exactly not linear every quarter, depending on the scaling and when we lap.

On the ad side, from a gross profit rate perspective, again, we're continuing to explore and expand into new parts of the ads business and to the extent that we are successful in driving incremental revenue and profitability from that, which we're planning to do. That would also be helpful to the gross profit rate into the future, now again exactly how much and how it laps every quarter might not be exactly the same, but those would be the intent.

On the OI rate side, I think it's going to come down to, as we talked a little bit earlier, like how much do we feel like we need to invest and what the opportunity for that investment in return looks like. And so as we get into next year, that's something we're still evaluating in terms of the technology, the people and other things that we might need to drive those 2 initiatives. We think those are the right decisions overall over time for us to drive more rate opportunities from those 2 initiatives, exactly how much flows through to OI. We're not quite ready to commit to at this point, but we do believe it's a good return for us.

And Chris, the last thing that I would add, and I know you know this, but I feel compelled. Our goal here is really to stay more relevant with the customer. And our goal is to drive more units to be there. We're often in consideration and to make sure that we are leveraging like partnerships. We mentioned a few on the call to stay relevant with that consumer has so many choices.

And so that part we're starting to see early green shoots on, and that becomes really the flywheel that we've been talking about that helps feed all parts of the business, and that's as much what we're focused on building and expanding next year as anything.

Got it. And then how are you planning the holiday? You mentioned a largely similar promotional calendar and an event-driven consumer, but November was tough last year, and you had a government shutdown to stop -- to start the month, as we look at monthly 2-year trends are all over the place, but the business is bending upwards. So can you talk about what you're seeing here in November, if there was any impact early in a month on the shutdown and how you're thinking about sort of the cadence over the quarter given the comparison dynamics last year?

Yes. I mean as we start Q4, we are lapping strong sales last year. As we noted on the call last year, we were running at about 5% growth for the first 3 weeks of November. I'm not sure how much the government -- we haven't done the math on specifically the government shutdown, it probably doesn't help certain geos obviously are more impacted than others. But we are comping a pretty larger amount of growth through the first 3 weeks of November. So the shape of the quarter is likely going to be a little bit different this year compared to last year. November was up 4% last year. December was down 2%. So as we get into December, the compare is going a little easier, and we are seeing people gravitate towards those big events that, obviously, this week and as the weeks before Christmas are the biggest events in the holidays. So we do feel like there's an opportunity there for us. So still feel like there's an opportunity for us to grow our sales. The shape will look a little different, even though the timing is pretty similar to how we saw it last year.

Your next question comes from Anthony Chukumba with Loop Capital Markets.

I know this is always kind of tough because of all the different product categories that you're in, but how do you feel just at high I level in terms of market share, I mean, particularly given the fact that our sales have accelerated and you did have the best comps in several years. So how do you think about that at a high level?

I appreciate where you started, Anthony, which is it is really difficult in this industry. There just isn't a single source of share information, and there are multiple cuts. That being said, when we try to pull and triangulate all the data sources, we believe we have improved our share position over the last 2 quarters. And in Q3, we estimate that our share was flattish to slightly up. Obviously, we've always said share is a long game conversation for us and all the initiatives that we're talking about are driving toward more of the sustainability to at the highest level, drive shares.

And in that, you're going to constantly be making trade-offs, promotion decisions, trade-off pricing decisions. We feel like we're strong right now, particularly in computing and gaming. I talked about our TV unit share position, which now we feel like is airing on the positive side, and there's a lot of these kind of newer categories or the expand so that we're seeing a marketplace that is bolstering our point of view about how we feel like we're sitting for share. So again, always a conversation, longer game, but feel like the trajectory is head of the direction that we want.

Got it. That's helpful context. And then just real quickly on the Switch 2, obviously, that's been selling quite well and Nintendo, just is their unit estimate for their fiscal year. How have you found about your Switch 2 allocations relative to your initial expectations? I know you historically have over-indexed on Nintendo products, particularly relative to Play Station and Xbox, but just love your thoughts just in terms of how you feel you guys are doing from an allocation perspective.

Yes. Thank you for the question. We've actually been very happy with Switch 2 obviously, the launch was outstanding. It drove growth last quarter, and we do expect gaming to continue to grow as we lead into Q4. It's been highly publicized at the amount of Switch 2 units in the market is a lot higher than what Switch 1 was in the same time frame. So we have actually been happy with the ability to come closer to meeting customer demand. We do think demand over holiday will continue to still be very strong.

And then in gaming, in general, it's not just Switch there are other aspects of that business that are diving growth. We're just seeing a handheld in general, whether it be the new product from Asus that is a partnership with them on Xbox or other products from companies like Lenovo with their Legion Go, handheld gaming is a driver across the entire gaming segment. We're really excited that we think we have the best assortment there and can really meet customers' needs across anything they want to do, whether it be Switch all the way up to any aspect of handheld gaming in total. And that's really making up for some of the slowing sales that you see in just the traditional PS5 and Xbox as we'll get to the end of their life cycle.

And one of the things thing that's interesting about all the devices that Jason just talked about, these are pretty high price point devices and especially considering their gaming, they tend toward kind of a younger cohort, so we really like our position here, and we're kind of doubling down both physically and digitally to make sure we offer the best possible experience. I give our teams a ton of credit as part of the reason that we're able to get the kind of allocations we can is because we can deliver these amazing experiences, especially at retail.

So with that, I think that's our last question. Thanks, Anthony. Appreciate it. So I think that's our last question. Thank you all so much for joining us. You all have a lovely holiday season, and we look forward to speaking with you all at the end of our year.

This concludes today's conference call. Thank you for joining. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Second Quarter Fiscal '26 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1:00 p.m. Eastern Time today. [Operator Instructions]

I will now turn the conference call over to Mollie O'Brien, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; Matt Bilunas, our CFO; and Chief Financial and Strategy Officer; and Jason Bonfig, our Chief Customer Product and Fulfillment Officer.

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 Form 10-K and subsequent Form 10-Qs 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.

And now I will turn the call over to Corie.

Good morning, everyone, and thank you for joining us. I want to, I think it's important to start by acknowledging the horrific shooting that occurred at the enunciation Church Canela Mentry School in Minneapolis yesterday morning. Just a short distance from our corporate headquarters, our hearts break for the young life lost and their families who are grieving and our thoughts are with the victims, their loved ones and our community, as we process this unimaginable tragedy.

And with a deep breath, we will now turn to earnings. Today, we are very pleased to report better-than-expected results for the second quarter. On revenue of $9.4 billion, we delivered an adjusted operating income rate of 3.9% and adjusted earnings per share of $1.28. We delivered comparable sales growth of 1.6%, our highest in 3 years. This was driven by a mix of new technology innovation, our relentless focus on a seamless omnichannel customer experience and our strong vendor partnerships.

We grew sales in several product categories, including gaming, computing, mobile phones, wearables and headphones. This growth was partially offset by declines in the home theater, appliance, tablet and drone categories. We reported higher-than-expected growth in gaming, largely due to our successful Switch 2 release. We saw strong results, not only in console sales, but also the related peripherals and software. We provided our customers with a smooth experience from the preorder process all the way to getting the console in their hands at midnight on launch day and subsequent post-launch inventory drops. There was a lot of customer and employee enthusiasm for our June 5 midnight opening and every store had lines of excited customers waiting to get in.

I will add that in addition to switch to growth, we also saw growth in other types of handheld gaming as well as augmented reality glasses. In computing, we delivered our sixth consecutive quarter of sales growth and the highest number of second quarter laptop unit sales in 15 years. This is due to continued momentum driven by customers' need to replace and upgrade products combined with our unique blend of broad assortment and expert advice, service and support.

Growth came from across the assortment and across price. As expected, tablet sales declined as we lapped the strong sales of the new generation iPad that launched in Q2 of last year. Our online sales were 33% of domestic sales in Q2. They grew year-over-year for the third consecutive quarter due to higher traffic and increased customer adoption of our highly rated app. Customers chose to visit one of our stores to pick up 45% of online purchases and our store pickup, including curbside, customer satisfaction metrics continue to improve even as volumes have increased.

For the most part, customer shopping behavior in the first half of the year has not changed materially from the commentary we have shared for the past several quarters. Customers continue to be resilient, but deal focused and attracted to more predictable sales momentum, including our Black Friday and July sales event. In the current environment, customers continue to be thoughtful about big ticket purchases and are willing to spend on high price point products when they need to or when there is technology innovation.

We delivered yet another year-over-year increase in our relationship Net Promoter Score, which tracks consumers' likelihood to recommend Best Buy. As well as higher marks from consumers for meeting tech needs like no one else, offering good deals and being a company they can trust. We also saw year-over-year improvements in associate availability and product availability. I am proud to see the lowest employee turnover rates in 10 years, in addition to the higher engagement scores in our last employee survey. I am inspired by the way our teams have been successfully navigating tariffs, even as the backdrop continues to change. The impact during the quarter was basically in line with our expectations and was not material to our Q2 financial results.

Our approach is to deliver the right product assortments to match customer needs and budgets while partnering with our vendors. We delivered better-than-expected results in the second quarter, and we feel increasingly confident about our plans for the back half of the year. Given the uncertainty of potential tariff impacts in the back half, both on consumers overall as well as our business, we feel it is prudent to maintain the annual guidance we provided last quarter. At this point, we do believe we are trending toward the higher end of our sales range.

I am pleased with the progress we are making on our fiscal '26 strategy. As a reminder, our strategy is to continue to strengthen our position in retail as a leading omnichannel destination for technology, while at the same time, building and scaling new profit streams that we believe will drive returns in the future.

Our first fiscal '26 strategic priority is to drive omnichannel experiences that resonate with our customers. We often do this in partnership with our vendors, and we have a busy and exciting second half in front of us. This fall, we are amplifying our partnership with Meta, bringing AI glasses and expanded experiences to all stores. In more than 50 locations, immersive showcase areas and expert support will allow customers to discover and demo the technology.

Ray-Ban and now Oakley Meta AI glasses are available. We expect them to be fun and highly giftable products for holiday. In small appliances, we are launching new experiences with brands like Revel and SharkNinja. These will feature expanded assortments to inspire [indiscernible] baristas and chefs and innovative health and beauty solutions. We are also introducing expert sales associates in select locations to bring this innovation to life for our customers.

In home theater, we are expanding the merchandising areas, featuring TVs from TCL, Hisense and LG. The technologies and focus for TCL and Hisense will be mini LED screens. And for LG, it will be the latest and most striking OLED screens. Each area will be staffed by a dedicated expert to address any questions and help customers get what they need. In the mobile phone department, we are bringing our new operating model with Verizon and AT&T to more stores. This model gives customers the opportunity to work with expert salespeople like Verizon, AT&T or specially trained Best Buy employees who can tap directly into the carrier system. This is resulting in better customer experience and higher sales growth.

We will have this in the majority of stores in the back half of the year, which we believe puts us in an even stronger position for the new innovation and phone launches. In gaming, we worked with Nintendo to double the switch merchandising space in all stores ahead of the June launch. Nintendo not only invested in store merchandising, they also partnered exclusively with us to have game trucks at select stores. These game trucks are physical trailers that allow fans to play the new system and the latest game.

In computing, we provide customers with the help and inspiration they need as they upgrade or replace their products. We continue to collaborate with our vendors as Newtek and more AI capabilities are released. In fact, we offer 125 models of laptops and desktops featuring enhanced AI capabilities like CoPilot Plus with almost 70% of them retail exclusive to Best Buy. They are supported by 16,000 specially trained experts to help customers explore features and applications in daily life. We are also focused on helping customers get what they need to transition to Windows 11 as Microsoft will end support for the Windows 10 operating system this October. After October, customers who have not transitioned will no longer receive new features, technical support or security updates. We believe this is a more significant opportunity than prior end-of-support examples because there is a large installed base of customers who need new devices with more processing power to use Windows 11.

In collaboration with Microsoft, we are leveraging personalized marketing, promotions and store associate training to drive product refreshes and support. Our Geek Squad can help customers who need a computer repair to convert instead to an upgraded device. Additionally, Geek Squad can help customers set up and transfer their data to new devices, whether in stores, in homes or remotely.

Customers can also trade in their old devices for value, they can use to purchase new Windows 11 devices. All the examples of collaboration and vendor investment I just outlined are in addition to the long-standing partnerships and in-store investments from other large vendors like Apple, LG and Samsung. Many vendors invest not only in training our associates but also in labor hours to augment our staff. In fact, we expect vendor labor investment to be approximately 20% higher than last year in the second half of this year. This is an important aspect of the Best Buy story. We have relevant traffic, a unique expert sales and service model and physical space that is extremely valuable to our vendors. And we have seen the demand for store presence grow from both our existing vendor base as well as new partners who recognize the value of live interactions for complex conversations.

In fact, we just announced a new partnership with IKEA U.S. We are collaborating with them to pilot 1,000 square foot areas that showcase kitchen and laundry room settings from IKEA and appliances from Best Buy, staffed by IKEA coworkers, this experience will launch in 10 stores throughout Florida and Texas, with 2 of the locations also serving as pickup points for most products that can be purchased on ikea.com.p

This is the first time IKEA products and services will be available through another U.S. retailer, creating innovative ways for both of us to meet customer needs in a rapidly changing environment. Our second strategic priority for fiscal '26 is focused on incremental profitability streams. I'm excited to say that we launched our Best Buy marketplace last week. We now have 6x more products available online for customers than we did before. We have more tech options than ever, both from big names like Samsung, Dell, HP and Intel and new vendors that help us level up our assortment across categories. For example, customers can personalize their gaming setup with products like custom controllers and more options around shares, keyboards, monitors and headsets.

We tripled our mobile phone accessories assortment with more options for cases, screen protectors, chargers and more. We also have hundreds of new brands from fanatic sports merchandise to Caroti cookware, in new categories like licensed sporting goods, seasonal decor and much more. With this growing product availability, our upgraded search technology will be important. This new AI search, which we are testing now and expect to roll out by holiday, uses helpful comps and to see more like this option that guides customers to be more specific, improving their chances of finding what they need.

For our sellers, our marketplace provides an additional avenue to increase their reach and build their brands leveraging our qualified traffic. Our stores also play a key role in our marketplace. Customers can return most products purchased through a marketplace seller at their local Best Buy store, plus our Blue Shirt sales associates use an app that makes it easy for them to help customers find products across our wide assortment, in-store and online, including third-party sellers. It also allows them to seamlessly send product links directly into a customer's online cart.

We continue to expect Marketplace to have a positive impact on our operating income rate in fiscal '26 even after start-up costs, investments and estimated cannibalization of our first-party product revenue. Over time, we expect it to help drive profit dollars and unit share. In addition, it will provide opportunities for Best Buy ads through new advertisers and increased traffic. Our Best Buy ads team had a productive quarter, orchestrating our largest ad campaign ever in combination with our marketing team. It was centered around the theme, AI that designed to drive more awareness of the benefits of AI in your everyday life. It included several advertisers and spanned the full advertising funnel, including video, social, display, owned assets and in-store presence.

It was successful across a number of fronts, impressions, clicks, product interactions and units sold all exceeded our expectations. We are planning Phase 2 of the campaign to run as we move into the holiday season. The Best Buy ads team will host our first-ever client showcase on September 16. The spotlighting our scale, performance and innovation to key decision-makers across agencies, brands, partners and press. We continue to see fiscal '26 as a pivotal year for Best Buy ads as we expand into new opportunity areas including agencies, demand-side platforms or DSPs, and non-endemic advertising relationships. We are excited to take our already robust retail media network to a new level in the coming years.

We expect growth in ad collections to benefit our gross profit rate in fiscal '26. From an operating income rate perspective, we expect a neutral impact due to the investments we are making in technology and talent. This brings us to our third strategic priority for fiscal '26. It is imperative that we continue our long-standing diligence around driving efficiencies and identifying cost reductions to help fund investment capacity for new and existing initiatives and offset pressures in our business. There are many ways we realize these. They are often achieved with the help of technology and analytics through ongoing vendor partnerships and vendor selections throughout the enterprise and by modifying existing processes or customer offerings. Other times, they are the result of us moving on from initiatives that aren't generating the financial return in the time line we had originally envisioned such as the exit of our Care at Home Best Buy Health initiative.

Today, I want to highlight the ongoing modernization of our supply chain, which is driving efficiencies and elevating our customer experience. We are implementing a new data-driven sourcing solution to choose the most efficient location to fulfill online orders, 40% of all shift to home units were processed through this new model during the second quarter. delivering cost savings while also improving our on-time delivery performance. We are targeting at least 70% of all orders to go through this new model prior to holiday with 100% implementation in early 2026.

In addition, we have evolved our carrier strategy and FedEx is now our primary national parcel carrier. We are partnering with them to make our supply chain smarter and expect increased integration between us to both improve customer experience and lower costs. For example, just last week, we added FedEx real-time tracking data into customer order communications across all our FedEx orders. This will provide customers with more timely and accurate updates and should reduce support calls, cancellations and reship costs. With FedEx, we can also expand our national shipping operations, especially for Sunday deliveries. So we can deliver products to our customers even faster than we do today. As you would expect, we are continuing to automate our distribution centers. We are currently outfitting our distribution centers with automated guided vehicles that autonomously move talents around the warehouse, both horizontally and vertically, optimizing warehouse flow and storage. In summary, we are pleased with our Q2 execution and financial results.

Our sales momentum has continued into August, and our quarter-to-date comparable sales are running in the low single-digit range. We are seeing a strong customer response to our back-to-school sales events. These results demonstrate an important aspect of our thesis. Our model really shines when there is innovation. This is because we are a trusted source for the latest and greatest new tech. We have a broad range of assortments in addition to unique in-store and digital experiences. We also have Geek Squad services of our customers, and we are a true partner to our vendors, often working with them from early in the product development cycle, all the way to launching products on our sales floor. In the back half of the year, we expect to drive continued growth in computing, gaming, phones and augmented reality. We also intend to improve the performance of our home theater and major appliance categories in the back half of the year.

We plan to do this through a blend of sharp pricing, assortment adjustments, increased marketing, expanded specialty labor and faster large product fulfillment options. We are also excited about the launch of our marketplace and the opportunity to offer customers even more tech options. We wholeheartedly believe Best Buy is uniquely positioned to unlock what technology can do for every person in every moment. I want to sincerely thank all of our team for their enthusiasm for technology, their customer service passion and their determined execution during the quarter.

And now I would like to turn the call over to Matt for more details on our Q2 performance and fiscal '26 outlook.

Good morning. Let me start with an overview of how our second quarter performed versus the expectations we shared with you last quarter. Enterprise comparable sales growth of 1.6% exceeded our outlook of being slightly down to last year. Our adjusted operating income rate of 3.9% was 30 basis points better than expected, which was largely driven by SG&A leverage from the stronger sales.

Our gross profit rate declined 30 basis points to last year versus an outlook of being approximately flat. This was primarily driven by a higher mix of sales coming from lower-margin categories such as gaming and computing. I will now talk about our second quarter results versus last year. Enterprise revenue of $9.4 billion increased 1.6% versus last year.

Our adjusted operating income rate decreased 20 basis points compared to last year. And our adjusted diluted earnings per share decreased 4% to $1.28. By month, our Enterprise comparable sales were down approximately 1% in May before increasing to almost 3% in both June and July. These results included lapping last year's strong tablet performance in May as well as the successful launch of the Switch 2 in June.

In our Domestic segment, revenue increased 0.9% to $8.7 billion, driven by comparable sales growth of 1.1%. From a category standpoint, the largest contributor to comparable sales growth were gaming, computing and mobile phones, which were partially offset by declines in home theater, appliances, tablets and drones. International revenue of $740 million increased 11.3% versus last year, which was primarily driven by comparable sales growth of 7.6% and revenue from Best Buy Express locations that opened in Canada after the second quarter of fiscal '25.

From a category standpoint, consistent with our domestic segment, the largest drivers of comparable sales growth were gaming, computing and mobile phones. Our domestic gross profit rate decreased 10 basis points to 23.4%. This was primarily due to lower product margin rates partially offset by rate improvement within the services category. The lower product margin rates were primarily driven by the higher sales mix of lower-margin categories.

Our international gross profit rate decreased 210 basis points to 21.8%. The lower gross profit rate was primarily due to lower product margin rates which were also largely driven by higher mix of lower-margin product categories.

Moving to SG&A, where our domestic adjusted SG&A increased $19 million, primarily due to 1 compensation expense, which included higher medical claims; two, lapping last year's favorable legal settlement of approximately $10 million; and three, technology investments. The previous items were partially offset by reduced Best Buy Health expenses. As we continue to narrow our focus on our strategy, we incurred $114 million of restructuring charges in Q2 FY '26, associated with the enterprise-wide restructuring initiative that commenced in the quarter.

Year-to-date, we have returned a total of $568 million to shareholders through dividends of $403 million and share repurchases of $165 million. For the year, we still expect to spend approximately $300 million on repurchases.

Moving on to our full year fiscal '26 financial guidance. We are encouraged by our better-than-expected second quarter results and the momentum to start the third quarter. As Corie shared earlier, we are maintaining the annual guidance we provided last quarter. At this point, we do believe we are trending towards the higher end of our sales range. As expected, the tariff situation has continued to evolve since our last call.

The tariff rates have increased since May. However, we believe the estimated impacts of the higher rates still fall within our previous guidance range. Consistent with our comments last quarter, due to mitigation efforts by both vendors and by Best Buy, the increased product costs that are flowing to us are expected to remain lower than the tariff rates. Our reiterated enterprise guidance for fiscal '26 is the following: revenue in the range of $41.1 billion to $41.9 billion, comparable sales of down 1% to up 1%, adjusted operating income rate of approximately 4.2% and an adjusted effective income tax rate of approximately 25%; adjusted diluted earnings per share of $6.15 to $6.30 and capital expenditures of approximately $700 million.

Next, I will cover some of the key working assumptions that support our guidance. We still expect our annual gross profit rate to be slightly unfavorable compared to last year. In the second half of the year, we expect gross profit rate pressure will be similar, if not a little higher than it was in the first half of the year. When compared to last year, the more notable gross profit rate drivers for the second half of the year include: first, our product margin rates are expected to be unfavorable, largely due to a higher mix of lower-margin products and our plans to remain competitively priced. Lower product margin rates are expected to be partially offset by: one, the rollout of our U.S. marketplace; two, improved profitability from our services category; and three, growth from Best Buy ads. Now moving to our adjusted SG&A expectations. As a percentage of revenue, we expect our adjusted SG&A to be slightly lower than fiscal '25. The most notable puts and takes for the second quarter of the year include the following: we continue to expect benefits from ongoing efficiencies and effectiveness work streams, including Best Buy Health. Partially offsetting these items are SG&A increases in support of our Best Buy ads and marketplace initiatives, which include advertising, technology and employee compensation expense. The high end of our guidance reflects incentive compensation that is approximately flat to last year.

From a phasing standpoint, we expect Q3 to be higher than last year in Q4 to be lower. Lastly, the low end of our guidance reflects our plans to further reduce our variable expenses, including incentive compensation to align with sales trends. Before I close, let me share a couple of comments specific to the third quarter. We expect our third quarter comparable sales growth to be similar to our second quarter performance. In addition, we are planning for an adjusted operating income rate that is approximately flat to last year's rate of 3.7%.

I will now turn the call over to the operators for questions.

[Operator Instructions] Your first question comes from Seth Sigman with Barclays.

I wanted to focus on market share this quarter and around some of the bigger events that you mentioned I think last quarter, you highlighted some weakness in Q1, but I realize there's different seasonal dynamics in Q1. So just curious how that played out this quarter. And then I have a follow-up.

So we say it every time and I'm going to say it again, there is no great single source of share information for our categories. But that being said, as we try to cobble together all the different sources that we have, we do feel better about our share position this quarter. We feel like we had some good momentum here in Q2 and at least felt like we had flattish share overall. And obviously, to your point, we feel like share is a long game conversation for us. It has some variability quarter-to-quarter. But what we're trying to do. And I think you can see it in the prepared remarks, is really position ourselves on our front foot across categories and especially in those places where we think we can really differentiate like gaming and computing.

And then if you could just bridge us to the third quarter comps being similar to Q2. Q2 obviously had the Switch launch. If we look at Q2 comps, excluding the entertainment category, I would say that the rest of the business would have been down low single digits -- so is it that the switch benefit continues? Or are there other drivers that we should be thinking about?

Yes. Let me start with first. As we entered August, we talked about we're still seeing momentum as we enter the third quarter -- we're seeing a very strong response to our back-to-school sales events. And as we said, the quarter-to-date comps are up low single digits as we exist here in August. I think going from Q2 to Q3, I think, yes, the Switch launch did provide a boost to the second quarter results. But as we noted -- there was a significant iPad launch last year in May that we also had to comp, which goes the other way.

As you get into Q3, you continue to see growth from gaming, albeit not as much as you saw in Q2, and then you continue to see -- you see a better performance coming through in the mobile computing category, which includes iPad. So continued growth in computing better performance on iPads, continued growth in mobile phones. And then net of that gets you to a comp that's similar to what was in Q2.

The next question comes from Kate McShane with Goldman Sachs.

Vendor support has been a distinguishing part of your story for a long time with vendor labor and exclusive. And it sounds like at least on the labor side, you are seeing vendors leaning in more is up 20%. So I wondered if you can maybe talk to that just what changes are being made there? And are you baking in any kind of sales lift from this increased investment?

So let me start with, we are incredibly thankful to our vendors for their partnership on so many vectors. And we do feel very good about our relationships, and we work with them in a very omni-channel way just like our business. If I just take a big step back, overall, the level of invested support from our vendors has been growing. And as you noted, part of that is labor, but it is actually across the assets that we have.

And I think as I said in the prepared remarks, this is a really important part of our story. It's highly relevant traffic both to stores but also digitally unique expert sales and service and then the physical space, the ability to really showcase what these products can do in a unique way that can help our vendor partners run across the assortment of what they do in any given space. And so I think it's not only they're investing in labor, they're investing in some of the updates and upgrades consistently to those physical spaces. There are also, in some cases, investing in training our associates.

So it's not just you throw labor in there. It's how do you keep that labor really fresh and really specialized. And then there are lots of other unique ways they're partnering with us. Best Buy ads, membership, the app and online presence. You can see some of those vendor shops replicated in our digital experiences. Supply chain and fulfillment where we have our partners program and we fulfill for them, reverse logistics or we take care of that trade in, recycling. I mean, these are all the aspects that our amazing merchant team sit down and negotiate with vendors. And I think it's a very unique set of assets that we bring to the table in these conversations.

The next question comes from Chris Horvers with JPMorgan.

I was just curious how you're thinking about the risks around the consumer in terms of what you've seen the reaction from tariff price increases in the July and August time frame, is elasticity surprising you in either direction? And then as you think about the go forward, is that quarter-to-date low single digit close to that -- is it 3%? And are you simply just being prudent around the potential for deeper valleys in between events?

So on that whole tariff discussion, I'm just going to kind of take 1 step back and start with our customers because our #1 focus is being there for our customers. And I'm really proud of the way both our teams and our vendor partners have been navigating tariffs even as it's been changing. And our approach, as it always is, is to deliver the right product assortments to match our customer needs and budgets while we partner with the vendors to navigate these conditions.

Q2, as we said, was basically in line with our expectations and not material to our financial results. And I think there's a couple of reminders here. We had talked last time about the mitigation strategies that we're using in partnership with our vendors. Everything from manufacturing flexibility, cost negotiations, country diversification, assortment adjustments and then ultimately, only were absolutely necessary adjusting price and I think at this moment, it's important to also remind you, we only directly import 2% to 3% of what we sell.

So that means as it relates to tariffs, some vendors are clearly communicating cost increases. Some are adjusting promotions. Some are planning to potentially increase prices with new product introductions, which always happens in our space, and some are just not increasing them at all given these are very, very global supply chains. And so I think what we saw in Q2 is what we expected, those strategies, when they're all put together, are ensuring that those cost increases are much, much less than the overall effective rate of the tariffs because we're able to put so many of those other mitigation strategies into play.

Yes. And in terms of Q3, I think, as we talked about in August, we're in that low single-digit range, seeing a good performance from back-to-school. We're also very cognizant as you get into September and the last part of September and October, the events start to slow down in the buildup to holiday.

So you oftentimes see a slowdown in business a little bit in October as people are waiting for those holiday deals to come. So our guide would reflect the fact that we're starting the quarter strong. We feel good about the momentum, but also recognizes that sometimes there is a little bit of slowdown as you head into the deeper holiday season.

Understood. And then as it relates to the switch to if you look back to the last launch, the strength really persisted in that category and actually, the fourth quarter was pretty close to the comp, the entertainment category come pretty close to what it comped on the launch period. How are you actually planning that? As you do get into the fourth quarter, obviously, entertainment does go up in the mix -- and so would comps -- would you expect some comp acceleration in the fourth quarter? And just 1 clarification. You mentioned you expect sales to trend to the high end of your guidance? Is there any -- does that also translate to earnings?

Yes. So maybe I'll start with the last part of that question. We are saying we are trending towards the higher end of our sales guidance. Clearly, to the extent we can drive a better operating income performance based on those higher sales, we will continue to try to do that, but we have not changed the OI rate guide for the year so far. In terms of gaming and what I would say is we are planning to see gaming growth in Q3. And as you get into Q4, clearly, we're planning that based on the knowledge of availability of the switch to council. We do gaming is always a big part of a holiday sales performance.

So clearly, there was some level of expectations. And I think the team's ability to deliver on a really strong launch in Q2 in that event and just how we show up in the store and online does give us comfort and confidence in our ability to get the product we need to deliver on the sales expectations that we have. So clearly, gaming is always big in Q4. So we'll see, but if you do apply the Q3 guide, it kind of infers that the Q4 guide is pretty similar to what we're going to see in Q3.

And then specific to the gaming category, we're obviously very pleased with our performance in Q2 and what happened with Switch. We did have really strong momentum from a market share perspective in gaming heading into that, which we're proud, but we're also proud of the fact that accessories and software, we performed very well in those 2 areas in addition to it. The other part that is sometimes missed is it's not just switch to gaming and total is strong for us.

So handheld gaming not including switch, things that have either the Windows operating system or the steam operating system also grew at a pretty significant rate in Q2 as well. And we think that there's a lot of momentum on all those things included. So obviously, Switch will continue to have great demand all the way through the rest of the year into Q4. And then there's also some new products launching that our partnerships between Microsoft and ASUS that will also bring demand in total. So we're excited about our total gaming portfolio, and we feel well positioned to take advantage of that for the rest of the year.

The next question comes from Steve Forbes of Guggenheim.

Corie, Matt, I wanted to focus on the post Labor Day promotional calendar. And the thought here is we're hearing the potential for change in frequency of promotional events, maybe less about change in depth of those promotional events. So just love to get your thoughts on how the depth and frequency of events are slated for this year relative to last year and sort of how that impacts your ability to forecast the business, given your comments around how the consumer is more attracted to those events.

I think one of the team's strength is the ability to very carefully plan out, especially as it relates to the back half, a compelling promotional calendar. And like any year, you're going to find those right moments where you think the consumer is going to be most open to those promotional events, and then you're going to plan across your assortment. And it goes back to something that actually I should have said in earlier tariff answer. This is a really promotional category. And that means all of us are -- in partnership with vendors, all of us are working to stimulate demand from our consumers and all of us are working to position at the right time. In general, we have seen both breadth and depth of promotions higher than last year.

And we assume that will continue, and that is reflected in the guide that we gave. And we are going to try to find those right moments to ensure we are competitive like Black Friday in July, which was quite successful for us. so that we are showing up and we are resonating with our customers.

And then maybe following up on that, right? So breadth and depth higher than last year. I think given the tariff pressures in net terms, I think there was a lot of conversations within the expert networks over the past 3 months about just sharing of the cost and maybe an increased percentage of share being pushed down to the retail community. I guess I'd love to just hear your thoughts on just control over gross margin, right, as we approach that holiday selling season?

Look, all of us are working in partnership, especially in this category to be there for our customers and drive demand. And that is priority one for everyone together. We are going to go into the level of detail of talking about exactly who shares wet. But of course, I'm going to say that it varies by vendor, and it varies by product category. And as I said before, when we have been seeing increased costs, it is materially lower than the overall effective rate. And that's because every vendor is taking their own approach to how they think about navigating this backdrop.

Like I said, some have already communicated cost increases. You can see that in some of the older gaming platforms as an example. Some are adjusting promotions. Some are planning cost increases with new launches. Some are balancing this across the whole global supply chain and maybe not adjusting costs here in the U.S. And so for us, this is just a -- this is frankly what our vendors do all the time. This is making sure that we have the broadest assortment, opening price point to more premium. That is an advantage that we have as an only consumer electronics retailer. So that whatever the budget is of the person walking in the door, we've got something that matches that budget. And so far, I think we've been able to do that.

Next question comes from Michael Lasser with UBS Financial.

If I have long talked about the profit pool associated with core consumer electronics retail, not really growing and Best Buy was either going to have to harvest a greater share of the profit pool or serve other categories, such that it was able to drive growth in the overall enterprise. How are you looking at this now, especially in light of the challenges that have been realized by serving health care and home furnishings and the prospect that increasingly your competitors could push down the overall core profit pool to harvest profit in other ways and through other streams?

Yes. Thanks for the question, Michael. I think what you'll see in our prepared remarks, we focused a lot on our strategies. And there has been a lot of dynamic shift over the last number of years in CE. One of those shifts has been a proliferation of third-party sellers in a lot of our categories. And you're seeing us now launch a marketplace to help us strength in some of those places where unit share has been harder to capture because so much of that is being delivered from a third-party marketplace.

So as as we try to ensure or stabilize our base within CE, that is an important aspect as we go forward, and we believe that's going to help us on an aspect of solidifying categories that have shifted in that direction. We're also working on growing our ad business and growing that ad business actually provides a bit of fuel for us so that we can continue to reinvest back into things like price, reinvest into things like the customer experience and into driving awareness. Those are -- that growth of that profitability will help us fuel the core retail business as you were talking about. Those are a couple of examples of how we are evolving our strategy to move forward, which helps us move beyond maybe just harvesting the business in terms of being more aggressive in terms of like how do we grow the business more proactively in the future?

The last thing that I would add, Michael, is even as it relates to the core business, our priority is driving those amazing experiences for our customers. And we highlighted on the call so many ways that we do that in partnership with our vendors.

You can imagine we are continuing to expand and deepen those relationships. So that we provide not just the like SKU for SKU competition with others, but this really broad, really immersive technology experience that is different. And we are the only place where that kind of breadth which means we get to partner with people like Roku or Amazon and bring to life these experiences, not just for the hardware but also in terms of how we think about connecting with our customers on the software side. We also talked about the upgrades from Windows 10 to 11. So these relationships are deeper than just let's go fight it out on the SKU for SKU hardware level, but we will do that. They are also about us being the 1 place where you can come and see all of these brands and all of these operating systems. And you can imagine that behind the scenes, we continue to navigate that in partnership with our vendors to bring these things to market uniquely.

Okay. My follow-up question is last couple of quarters, home theater and appliances, have been a bit more challenging for Best Buy as you do the review and diagnose some of those challenges you outlined step that you're going to take in order to stabilize those businesses, including making sharper pricing. So how much are you willing to invest in order to improve the performance of those categories? Is it really just a function of price? Are there other factors at play? And if you look across your portfolio of profits, how much are you willing to fund some of these -- or take the profits associated with these emerging pools like Best Buy ads in marketplace and reinvest them back in stabilizing parts of your core business?

Yes. Thank you for the question. I think TVs and appliances are very different categories. So maybe I'll hit on really quickly and some of the differences associated with each. In half 1, the TV trend has been a little bit softer, and there has been more of a shift towards value. So there is a need for us to make modifications to our assortment. Some of that is price, but some of that is also what we offer and the way that we bring that experience to life in store. As Corie alluded to, we are actually expanding relationships with some of our vendors, in particular, TCL, Hisense and creating more experiences in our store that not only lean into the more premium side of technology but also allow us to better meet some of those value-seeking customers. That's the way things look from a TV perspective. And on top of that, additional marketing investments to make sure that we're driving the right traffic Appliances is a little bit different situation and the fact that the market is very focused on duress right now just because the housing upgrade market has been a little bit softer and the rest has not historically been our sweet spot.

Our sweet spot is more around packages associated with appliances. So there is a need for us to modify our assortment there and also placement. So in some cases, it's less about price, but more about speed of fulfillment or even the ability for a customer to actually take an appliance out of our store and just directly take in that particular day. And those are some of the moves that the teams are making as well to better meet the customer where they are in the market today.

Michael, I might just add in terms of how that's represented in our financials. I think we're always strategically trying to balance sales and profitability. And I think even in our guide this year, though, we did note that product margin rates are expected to be lower year-over-year. And some of that, most of that is due to just the mix of what we're selling, but we have built in a level of promotionality or competitive pricing so that we can actually make sure we are being competitive as we get into Q3 and Q4 to support not just all the experiences that Jason talked about, but also just from a competitive price standpoint, we have tried to incorporate that into our guidance as best as we can see. And obviously, we'll adjust as we see.

And I think it's just worth noting that kind of a ribbon on this. That guide that we put out -- that includes all of these things we're talking about includes mix. It includes making sure we feel like we have a very strong promotional stance. And it includes that conversation we just had about balancing sharing in the tariffs. And I think it's worth noting that even with all of that put together, our guide has remained very stable on the profitability side.

Is that why you are thinking, hey, we might be at the high end of our top line, but just in line on the profitability side because of tariff pricing mix, those factors are just playing out to be a little bit more challenging?

Yes. I don't think our profit expectation has changed dramatically. We haven't changed the guide for the year. And in the previous guide. We did also talk a little bit about building in that promotionality and that remains pretty consistent I think we are believing that we're a little more confident in the top end of that sales range, as we talked about. And we did exceed our expectations in Q2, which is coming in some lower-margin category areas. So -- it's fair to say that on the high end as you mix into those lower margin areas doesn't come with as much profitability. So we have a little bit of room there, but that would have -- we've already factored that in.

The next question comes from Anthony Chukumba with Loop Capital Markets.

So it sounds like the Switch launch was a success, but I was just wondering how did it perform -- or sorry, switch to, have it performed relative to your expectations? And then how does that how did that flow through to your guidance for the back half of this year?

Yes. I mean we did exceed our sales expectations in Q2. A big part of that was our performance coming from the Switch launch. So fair to say that, that was a significant part of the B2 expectations in Q2. and we do expect to continue to grow in gaming as we get into Q3 and Q4, and that we've reflected any sort of additional upside that we might see as it relates to that product. But it did represent something. We also, though, did exceed expectations in other categories like computing as well. So it wasn't the only thing that did better than we expected in the second quarter.

Got it. And then in terms of the Windows 10 support expiration, so based on that -- because I know your computing sales has been quite strong for quite some time. But is it -- is it safe to say that you would expect a further acceleration just based off of that?

Yes. In computing, we expect to see continued momentum. So a couple of things. There's been 6 consecutive quarters of growth in computing and Q2, as Corie mentioned, we actually had the highest laptop volume in Q2 than we've had in 15 years. So we are continuing to see that acceleration. And there's really 3 factors that are driving growth in computing -- the Windows 10 end of life support is driving customers that have not been in the market for a long time in and they have very specific needs, specific things like data transfer and things like that are top of mind. There's also a pretty significant trend of MacBook users that have MacBooks that are 3 to 8 years old that are still on the Intel-based platform that can get some significant changes in performance in battery life and performance in general as well as AI when they upgrade, and that's driving interest in the market. And then just the AI features continue to evolve. Every single quarter, there are new features dropped from Apple and Microsoft in total and customers are seeing interest and our CoPilot plus PC assortment has grown pretty dramatically. We're up to 120 in different models in our stores. So those 3 factors are really what's driving the growth, and we think it will continue moving forward because those are all really important things to different groups of customers.

The next question comes from Robert Ohmes of Bank of America.

Maybe for Corie. Just -- sorry, on the Verizon and AT&T carrier system commentary, can you just walk us through, is this a significant back half benefit you're expecting in traffic? Or is there any structural change in the agreement versus things you've done in the past?

A structural change. I would think about it more as an expansion. We actually saw mobile phone sales grow in both Q1 and Q2, and that was after years of declines. And so what we're doing is we're actually an operating model that we have had in some of our stores with both Verizon and AT&T. And the reason is advantageous is it's just easier to access all of the myriad of pricing and arrangements that you need in this space with the customer, depending on if they have a family and they have multiple lines and they have different needs in terms of data. This just allows a really seamless way for the customer to interact with a more specialized associate given the complexities also have access to the greatest deals.

So yes, we expect that to continue to drive momentum in the mobile category in the back half. It's part of what is baked into our belief system around being at the higher end of the range.

Got it. That's helpful. And then maybe for Matt, any -- the restructuring charge in this quarter makes sense. Just any -- should we expect more restructuring charges through the balance of the year?

The restructuring charge that we took in the quarter reflects basically our motivation to move resources towards those strategic areas in our business. And I think there are some of the impacts will happened this year. Some of those actual impacts happen as we carry into next year, but we don't expect to be adding a material amount more restructuring at the rest of the year.

The next question comes from Scott Ciccarelli with Truist Securities.

This is Shervin on for Scott. Just had a question here regarding tariffs again. While we've been in a bit of a limbo situation still dynamic. I'd love to hear about your progress since last quarter when we talked about sourcing, distribution like what's the split of your exposure today to China versus other countries? What's the end goal? What are you doing and like when you expect to get there? I also think that you talked about your progress with vendor negotiations surrounding costs. A little bit more color there would be great.

Sure. So as a reminder, before I start this conversation. We are the importer of record on only about 2% to 3% of what we sell. So whenever we're quoting the sourcing on this, it is in partnership with our vendors and understanding where they are doing the majority of the sourcing. Right now, the U.S. plus Mexico are about 25% of product cost of goods sold at this point, those have 0 tariffs. China has come down to 30% to 35% compared to the 55% we shared back last March and about half the China source products are at 30% tariffs, roughly half or a 20% tariffs, and that leaves another roughly 40% of CE products coming from other countries like Vietnam, India, South Korea and Thailand, which as you know, are at varying levels right now. And so the kind of blended effective rate of all that is about 16% versus the 12% to 13% we shared with you and I will reinforce that because we continue to work on the mitigation strategies that we've talked about amount of cost adjustments that are coming through are materially less than that blended rate because our partners are doing an amazing job really trying to work through these very global supply chains.

And the last question will come from Zach Fadem of Wells Fargo.

This is David Lantz on for Zach. I guess first 1 for me. How do you think about sizing a potential upgrade cycle? And to what extent does that incorporated in guidance?

Yes. I think I'll step back a little bit. I think every category is at a different level of upgrade cycle pretty uniquely. And I think as an example, we've been seeing, as we've talked about a lot, replacement cycle, upgrade cycle coming through computing. It first started with notebooks. It's moved into other things like desktops. There's been a long-nose strength in gaming computers as well. And I think that's the first place where we saw because of that significant purchase during the pandemic, maybe not getting the optimal machine, seeing a replacement cycle happen for quite a bit of time now in that category. And I think it kind of varies by by product category.

Gaming is another example. It's usually pretty launch dependent where we just had a switch launch. We have -- we probably won't see a PS or Xbox for a little bit of time. I think TVs and appliances are a little longer in the replacement cycle window closer to the 6-, 7-, 8-year cycle, probably not seeing a large level of replacement having there, although there is a lot of innovation happening in some aspects of those categories like extra large televisions that didn't exist years ago. So I think every category is a little bit different. I think broadly, our business shines when there's innovation. And so it's always some combination of needing to replace the technology in your life, but also being interested and curious about new innovation that's coming that both of those things combined is kind of where we do our best work. And so we aren't quite back all the way on an innovation or replacement cycle, but we see the momentum building in a number of the different categories.

Got it. That's helpful. And then with expectations that rates ease in some of your business tied to housing, curious how retail wind would impact your business?

Yes. I think probably in appliances the most. I think there's the strongest correlation with the housing turnover or housing starts coming to the major appliance business, maybe a little bit on the home theater TV side, but mostly on the majors. And I think as people start to get into new homes or actually want to remodel their homes, we start to see people gravitate maybe towards package appliances versus right now, it's a very dressed market. And we also offer a very broad range of assorted major appliances, all the way from Viking and [indiscernible] the high end to opening price points. And so I think as we get into better housing turnover, housing starts, you serve to see people want to pursue different types of major appliance purchases. And I think from that respect, that helps our business because we have more dedicated labor. We have more showcasing in our stores. We have a broader assortment. I think so when we do see that, we would expect to be able to drive a bit of better performance on the major side of the business. All right.

With that, I think that's our last question. I want to thank you all for joining us, and we look forward to updating you on our progress in November. Have a great day.

This concludes today's conference call. Thank you for joining. You may now disconnect.