Negative Points

• Best Buy Co Inc ( NYSE:BBY ) faces headwinds from industry-wide memory cost increases, leading to higher product prices and a decline in computing unit sales.

• The company expects computing sales growth to slow in the back half of the year as it laps strong prior-year comparisons, including the Windows 10 end-of-life tailwind.

• Best Buy Co Inc ( NYSE:BBY ) is experiencing higher SG&A expenses, primarily due to increased incentive compensation, which partially offsets gross profit gains.

• The traditional gaming category saw a comparable sales decline due to lapping the successful Switch 2 launch from the prior year.

• The company's international segment reported a revenue decrease of 4.2% year-over-year, impacted by comparable sales decline and negative foreign exchange rates.

Q & A Highlights

Q: How big are the newer and emerging categories (AI glasses, trading cards, health rings) in aggregate, and could the smaller format store concepts be expanded? A: Jason Bonfig, Senior Executive Vice President, Customer Offering, Fulfillment & Best Buy Canada, stated that the aggregation of these emerging categories is worth about a point of comp. He noted that the teams are looking for innovation from vendors and ways to lean in, whether digitally or physically. The Meta partnership is a great example, where the category has become large enough to justify dedicated 900-square-foot spaces in stores with specialized labor. The company is excited about these categories' contribution and will continue to look for similar opportunities.

Q: Can you clarify the drivers behind the monthly comp cadence in Q2 (May, June, July) and what the demand profile looks like heading into August? A: Corie Barry, CEO, explained that the 8% comp in May slowed in June and July as expected. June was bolstered by the timing shift of the Prime Day sales event, while July was negatively impacted by lapping last year's Prime Day event. She highlighted that August quarter-to-date comps are at the high end of the 1% to 3% back-half guidance, supported by the 60th-anniversary sale and back-to-school volume, which reinforces the narrative of innovation and replacement cycles driving demand.

Q: How should we think about incremental margins and the flow-through from stronger comps, given the recent SG&A pressure? A: Corie Barry, CEO, clarified that the SG&A pressure is mainly from two buckets: investments in ads and marketplace (a modest tailwind to OI) and short-term incentive compensation. She noted that the increase in incentive compensation is about $130 million year-over-year, driven by the stronger revenue and OI performance, and this will reset lower by about $100 million heading into next year. Jason Bonfig added that the teams are focused on both growing revenue and improving rate, balancing investments (like in appliances) with new profit streams (like marketplace and ads) to drive long-term value.

Q: What are the modeling considerations for the second half regarding the Windows 10 expiration headwind and the Grand Theft Auto VI tailwind? A: Jason Bonfig, Senior Executive Vice President, stated that home theater, mobile phones, and emerging categories will continue to grow, with continued trend improvement in appliances. Grand Theft Auto VI will impact Q4 across software, hardware, and accessories. For computing, the Windows 10 end-of-life created a strong Q3 last year, so growth is expected to soften in the back half as they lap that period. The team will manage this with vendors, focusing on budget-friendly assortments and promotions.

Q: How do you plan to sustain the current momentum (collectibles, RGB TVs) into next year when conditions may not be as favorable? A: Corie Barry, CEO, argued that the industry is supported by constant innovation and replacement cycles, and the current strength is a normalization back to how the industry typically works, which plays to Best Buy's strengths. Jason Bonfig added that the teams are confident in finding new categories (like Meta) and leaning into existing ones (like TVs with RGB technology). He noted that RGB TVs had more of a halo effect in Q2, but the team's execution across in-stocks, assortment, and price points drove over 10% TV growth, positioning them for a multi-year replacement cycle.

Q: How are you balancing the investments from high-margin initiatives (marketplace, ads) into key categories, and does this undermine the gross margin outlook? A: Jason Bonfig, Senior Executive Vice President, stated that the promotional environment is in line with expectations and that they compete with the largest companies in the world. The new growth engines like marketplace and ads provide extra fuel to remain competitive while enhancing the bottom line. Corie Barry, CEO, added that the investments are broader than just pricing, including experience and delivery speed. She highlighted that the annual gross profit rate expansion of 30 to 40 basis points shows that ads and marketplace flow through even while investing in appliances and experiences.

Q: What is the impact of memory price increases on computing, and how is the consumer responding? A: Jason Bonfig, Senior Executive Vice President, explained that memory pricing continues to rise, with ASPs up mid-teens and units down high single-digits in Q2. The focus is on matching customers with the right product for their budget, leveraging tools like trade-in and financing. He noted that the impact is very specific to computing and memory-related products, and they don't expect it to change through the rest of the year. The team is working with vendors to adjust assortments and promotions to ease the impact on customers.

Q: How has the back-to-school season played out, and are you seeing a higher take rate from promotions? Also, is the ads and marketplace contribution to OI better than initial guidance? A: Corie Barry, CEO, stated that promotionality is in line with expectations, and the consumer remains stable, looking for sales events and deals but also responding to innovation. August quarter-to-date comps at the high end of guidance underscore that back-to-school is going well. Regarding ads and marketplace, she noted that the contribution to OI is slightly improved, partly due to raising the marketplace GMV estimate for the year, but nothing massive.

Q: What is driving the 21% growth in the Best Buy business segment, and how does this impact the long-term growth profile? A: Corie Barry, CEO, explained that the Best Buy business segment generates over $1.1 billion annually and has been growing 15% to 20% in the first half. The team focuses on six segments: education, hospitality, promotions and marketing, builder and multi-dwelling, healthcare, and corporate enterprise. Geek Squad provides a large competitive advantage, and the team is refining where to lean in for future growth. Jason Bonfig added that the business segment is a great way to expand reach and elevate the experience, with the team conducting an exercise to find additional growth opportunities.

Q: How does the current price elasticity in computing compare to expectations, and does it provide optionality for Best Buy to differentiate its assortment? A: Jason Bonfig, Senior Executive Vice President, stated that the unit velocity is a little better than expected given the ASP increases. The broad assortment allows the team to adjust with vendors to hit key price points, ensuring there are no gaps. For example, if a customer is looking for an $800 product, they can reconfigure products

For the complete transcript of the earnings call, please refer to the full earnings call transcript .