Best Buy Co., Inc. (NYSE:BBY) Q2 2024 Earnings Call Transcript

Best Buy Co., Inc. (NYSE:BBY) Q2 2024 Earnings Call Transcript August 29, 2023

Best Buy Co., Inc. beats earnings expectations. Reported EPS is $1.22, expectations were $1.06.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Best Buy’s Second Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1:00 p.m. Eastern Time today. [Operator Instructions] I will now turn the conference call over to Mollie O’Brien, Vice President of Investor Relations.

Mollie O’Brien: Thank you, and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; and Matt Bilunas, our CFO. During the call today, we will be discussing both GAAP and non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning’s earnings release which is available on our website, investors.bestbuy.com. Some of the statements we will make today are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may address the financial condition, business initiatives, growth plans, investments, and expected performance of the company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the company’s current earnings release and our most current 10-K and subsequent 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. I will now turn the call over to Corie.

Corie Barry: Good morning, everyone, and thank you so much for joining us. Today we are reporting better-than-expected Q2 financial results. Our comparable sales came in at the high end of our guidance and profitability was better than expected. These results continue to demonstrate our strong operational execution as we balance our reaction to the current industry sales pressure with our ongoing strategic investments. As expected, our year-over-year comparable sales performance improved from the 10% decline we reported last quarter. For the second quarter, comparable sales were down 6.2%. We expanded our Q2 gross profit rate 110 basis points from last year due to better product margins and profitability improvements in our membership program.

We kept our SG&A expenses flat while absorbing higher incentive compensation expenses than we recorded last year. Our industry continues to experience lower consumer demand due to the pandemic pull-forward of tech purchases and the shift back into services spend outside the home like travel and entertainment. In addition, of course, persistent inflation has impacted spending decisions for a substantial part of the population. I continue to be incredibly proud of the way our teams are managing the business today and preparing for our future in light of the industry pressure and ongoing uncertain macro conditions. We strategically managed our promotional plan and we’re price-competitive in an environment where consumers are very deal focused and the level of industry promotions and discounts were above last year and often and above pre-pandemic fiscal ’20.

In the first half of the year, our purchasing, customer behavior has remained relatively consistent in terms of demographics and the percent of purchases categorized as premium. Our inventory at the end of the quarter was down compared to last year in line with our sales decline as the team continues to manage inventory strategically targeting approximately 60 days of forward supply. Our customer satisfaction with product availability has been improving over the past few years and is now the highest it has been since the start of the pandemic. I would note that while we were not a perfect inventory levels last year, we were more rightsized than many and are not lapping the kind of clearance pressure that other retailers experienced. We continue to make it easy and enjoyable for consumers to get the best tech and premier expert service when they want it through our online store and in-home experiences.

Almost one-third of our domestic revenue came from our digital assets including our mobile app. We have made considerable improvements to our app customer experience and the percent of our online sales coming through the app has doubled in just the last three years to more than 20% of our online revenue. We are pleased to see higher app usage overall as our app customers engage three times more often than customers engaging with us on other digital platforms. Our Buy Online Pickup In Store percent of online sales continues to be just over 40%, considering the speed of our delivery with almost 60% of packages delivered within two days, we believe the consistency of our high rate of instore pickup by our customers truly underscores the importance of the combination of our digital and physical locations.

In addition, our focus on providing customers with expertise and support continues to be highlighted by material improvements and satisfaction scores for our in-store and in-home tech services as well as our home delivery experience. In fact, our remote support services, where we have the ability to remotely access and fixed your computer while you’re at home has the highest NPS of all our experiences and continues to increase. These are all services we can provide at scale that no one else can. Our tech services play a material role in our unique membership program that is driving increased customer engagements and increased share of wallet. As we would expect, paid members also report much higher customer satisfaction than nonmembers. During the quarter, we successfully launched significant changes to our program designed to give customers more freedom to choose a membership that fits their technology needs, budget, and lifestyle.

In addition, we wanted to build in more flexibility and drive a lower cost to serve than our previous Total Tech program. We now offer three tears; My Best Buy, My Best Buy Plus, and My Best Buy Total. It is of course very early as we only launched the new programs on June 27th, but we are seeing indicators that the program changes are driving many of the results we expect it, including an uptick in year-over-year growth of overall paid membership sign-ups. For example, My Best Buy Total, which is the evolution of our prior Total Tech offer continues to resonate more strongly in our physical stores setting. As a reminder, this tier is $179.99 per year and includes Geek Squad 24/7 tech support via in-store remote phone or chat on all your electronics, no matter where you purchase them.

It also includes two years of product protection, including AppleCare Plus on most new Best Buy purchases. In addition, it includes all the benefits included in My Best Buy Plus. And as a reminder, My Best Buy Plus is a new membership tier built for customers who want value and access. For $49.99 per year, customers get exclusive prices and access to highly-anticipated product releases. They also get free two-day shipping and an extended 60-day return in exchange window on most products. In the first several weeks since launch, this plan is resonating more with digital customers and appeals to a broader set of customer segments across more product categories than My Best Buy Total, and its predecessor, Total Tech. We are still very early in the process and are testing different promotional offers to determine what resonates most with consumers and continuously improving the digital experience to make it even easier to find deals and benefits.

Lastly, our My Best Buy tier remains our free plan built for customers who want convenience. It includes free shipping with no minimum purchase and other benefits associated with a member account like online access to purchase history, order tracking, and fast checkout. At the beginning of the year, we added the free shipping benefit and phased out the points-based rewards benefit for non-credit card holders. As a reminder, our credit card holders still have the option to earn 5% back in rewards or choose 12 months, 18 months, or even 24 months of 0% interest-rate financing depending on the product category. The customer metrics continue to validate our decisions to change our free tier and our customer enrollments have remained steady. In addition, the financial impact has been better than we originally modeled.

For fiscal ’24, we now expect our three-tiered membership program to contribute at least 25 basis points of Enterprise Year-over-Year operating income rate expansion, which is consistent with what we have seen in the first half of the year. During the quarter, we continue to make progress on our journey to evolve our omnichannel capability. We want to ensure we maintain a leading position in an increasingly digital age and evolving retail landscape. This means our portfolio of stores needs to provide customers with differentiated experiences and multichannel fulfillment. At the same time, we need them to be more cost and capital-efficient to operate while remaining a great place to work. We are on track to deliver the fiscal ’24 physical store plans we announced at the beginning of the year.

These include closing 20 to 30 stores, implementing eight large-format 35,000-square-foot Experience Store remodels, and expanding our outlet stores from 19 to around 25. In addition, of course, we are continuing to refresh our stores. For fiscal ’24, we are particularly focused on improving the merchandising presentation given the shift to digital shopping and corresponding lower need to hold as much inventory on the shopping floor. For example, in all our stores, we are installing new premium end-caps in partnership with key vendors that will improve the merchandising in the center of the store. These new end-caps have that product and vendor story on the front with the inventory tucked in on the sides. Importantly, it allows us to have a great demo or presentation, even if we are displaying potentially less in-store inventory than we historically have.

This also allows for a much better merchandising experience for products that we have deemed more at risk for shrink and have decided to hold inventory in a more secure location off the sales floor. We invested in digital tools that allow the customer to quickly scan and pick up this inventory in a matter of minutes through our prioritized pick process. This minimizes shrink, prioritizes the customer experience, and drives a much more efficient employee process. In addition, in about half our stores we are rightsizing our traditional gaming and digital imaging spaces to allow for the expansion of growing categories like PC gaming and newer offerings such as green works cordless power tools, wellness products like the Oura Ring, Epson short throw-projectors, e-bikes and scooters, and Lovesac home furnishing products.

While small, we are seeing promising results in some of these new categories with meaningful market-share growth. As it relates to the operating model in our stores, we are continuing to drive our evolution based on two overarching goals. First, we needed to more efficiently allocate our labor cost considering the higher online sales have resulted in a decline in physical store traffic and sales. Our customers and their expectations and behaviors have changed dramatically and incredibly quickly. We have been working hard to balance the amount of labor hours necessary to deliver the best experience possible for our customers and employees. In our roles and the associated hourly pay are the same and we have had to make some difficult but strategic decisions to give us the ability to flex our labor spend appropriately.

As we mentioned last quarter, with our most recent changes, we were able to add approximately 2 million additional hours for customer-facing sales associates into our staffing plan for the year and we saw improvements in our associate availability NPS metric in the second quarter as a result. Because of these structural changes, we have driven more than 100 basis points of rate improvement in domestic store labor expense as a percent of revenue compared to fiscal ’20. Additionally, we have been successful in keeping our labor rates steady as a percent of revenue, even as our sales have declined over the past several quarters. Second, we need to provide our employees flexibility, predictability, and opportunities to gain more skills. We have been investing in tools and employee development programs that increase their flexibility within and across stores.

As you would expect, we are also focused on leveraging existing and emerging technology to drive better customer and employee experiences across channels. We are gratified that our employee retention rates continue to outperform the retail industry, particularly in key leadership roles. The vast majority of which we hire internally. Our retail workforce has led through significant change over the past four years. I could not be more proud of how our teams have adapted to the changing environment. But all that change, while necessary can be hard and disruptive for any team. We are pleased to be headed into a period of stability from an operating model perspective and we are now laser-focused on ensuring foundational retail excellence. As such, during Q2, we led thousands of employees, including more than 80% of our sales associates through a certification process, focused on our baseline expectations for interacting with customers, our selling model, and product category proficiency.

This is just Phase 1 and we will continue to invest in training hours for subsequent phases of the program to make sure we are driving the interactions and outcomes, we believe are the best for our customers and our business. As I mentioned earlier, we are working hard to balance our response to current industry conditions with our need to invest in our future. It has long been part of our cultural DNA to drive cost efficiencies and expense reductions in order to offset pressures and fund investments and this year is no different. In fiscal ’24, we are driving benefits from optimization efforts across multiple areas, including reverse supply chain, large product fulfillment, and our omnichannel operations. This includes leveraging technology and rapidly evolving AI.

For example, in customer care, our virtual agents are now answering 40% of customer questions via chat without a human agent and with high satisfaction levels. We are continuing to add capabilities and are creating additional employee and customer-facing virtual agents that will simplify our most complex interactions like technology support services, while also delivering key insights from our customer care centers back into the enterprise. We are also testing new state-of-the-art routing capabilities to optimize our in-home operations, reducing cost-of-service and improving the availability and wait time of delivery and installation appointments for our customers. As we think about our growth strategies, we believe we can leverage our scale and capabilities to drive incremental profitable revenue streams.

In this vein, we are exploring Geek Squad as a service opportunities with several large companies, including Accenture, Intel, and Lenovo as we have created differentiated B2C and B2B services capability. Device lifecycle management is a specific example of the service we can provide to others and necessity for all companies, device lifecycle management refers to the process of providing tech devices like phones and laptops to employees. This is not a core competency for most companies and the recent hybridization of work has made it even more complicated. We are already supporting a number of firms as their sole device lifecycle management partner providing end-to-end support of these company-provided devices, including procurement, provisioning, deployment, repair, and end-of-life.

This is just one example of our ability to leverage our data and assets and adds to the growth we’re already seeing in areas like Best Buy Ads and Partner Plus. Before my closing remarks, I also want to take a moment to recognize our Geek Squad teams for their work with our communities. For more than 15 years, they have been sharing and teaching their tech expertise and skills to prepare the next generation for the future workforce. This summer, we welcomed more than 2,000 kids and teens at nearly 40 Geek Squad Academy camps across the country. These camps give participants the opportunity to learn skills on everything from coding, game design, digital music, and more. More importantly, they help young people build self-confidence, spark creativity, and discover how technology can benefit them in their educational pursuits in future careers.

I am incredibly proud of all our Geek Squad agents and volunteers for their work this summer inspiring thousands of young minds through tech. As we enter the second half of the year and look forward to the holiday season, we are both proud pragmatic, and optimistic. Of course, the macro-environment remains uncertain with a number of tailwinds and headwinds soon including the October resumption of student loan payments, all of which results in uneven impacts on consumers. Overarchingly, we believe that the consumer is in a good place. But as we have said, they are making careful choices and trade-offs right for their household. During last conference call, we noted that we were preparing for a number of scenarios within our annual guidance range, and we believed our sales were aligning closer to the midpoint of the annual comparable sales guidance.

We knew it would be a challenging year for the industry and we are halfway through the year and narrowing our outlook largely as expected. As Matt will discuss in more detail, we are updating our comparable sales guidance accordingly. We now expect comparable sales to decline in the range of 4.5% to 6%. This compares to our previous range of down 3% to down 6%. At the same time, we are narrowing our profitability ranges effectively raising the midpoint of our previous annual guidance for non-GAAP operating income rate and earnings per share. We continue to expect that this year will be the low point in tech demand after two years of sales declines. Tech is a bigger part of all our lives, both in our homes and in our businesses than ever, and we believe next year the consumer electronics industry should see stabilization and possibly growth driven by the natural upgrade and replacement cycles for the tech bought early in the pandemic and the normalization of tech innovation.

Let me say a few words about the fourth quarter specifically. For context, we reported a comparable sales decline of 10% for fiscal ’23 and roughly 8% for the first half of this year. We are guiding a Q3 year-over-year comparable sales decline that are similar to or a little better than the 6.2% decline we just reported for Q2. Our full-year guidance implies a wide range for Q4 comparable sales of down 3% to slightly positive. There are a number of factors supporting our belief that our Q4 year-over-year comparable sales will improve and could potentially turn positive. We expect growth in-home theater as we expect to be better-positioned with inventory across all price points and budget spends last year. We are starting to see signs of stabilization in our home theater business.

For example, TV sales trends improved in Q2 and units returned to growth. We expect performance in our computing category to improve as we build-on our position of strength in the premium assortment will not exactly linear. We are also starting to see signs of stabilization in this category as Q2 laptop sales trends improved materially and units were flat to last year. We expect to see continued growth in the gaming category as inventory is more readily available and there is a promising slate of new software titles expected to be released in the back half of the year. We are planning for potential growth in the mobile phone category as we expect inventory to be less constrained than last year and expect to drive growth in our unlocked phones business.

Our hypothesis regarding the holiday season is that the consumer largely returns to pre-pandemic behavior. By this, we mean that they will be looking for great deals and convenience and traffic will be weighted toward promotional events. We have an excellent team and strong omnichannel assets that thrive in such an environment. In summary, while the macro and industry backdrop continue to drive volatility as we move through the year, we have a proven track record of navigating well through dynamic and challenging environments and we will continue to adjust as the macro conditions evolve and we remain incredibly excited about our future opportunities. While our existing product categories have slightly different timing nuances, in general, we believe they are poised for growth in the coming years.

In addition, we continue to see several macro trends that should drive opportunities in our business over time, including cloud, augmented reality, expansion of broadband access, and of course generative AI where we know our vendor partners are working behind the scenes to create consumer products that optimize this material technology advancement. As the largest CE specialty retailer with one-third of the U.S. computing and television market share, we can commercialize new technology for customers like no one else can. And with that, I would like to turn the call over to Matt for some more details on our second quarter results and our fiscal ’24 outlook.

Matt Bilunas: Good morning, everyone. Let me start by sharing details on our second quarter results. Enterprise revenue of $9.6 billion declined 6.2% on a comparable basis. Our non-GAAP operating income rates of 3.8% declined 30 basis points compared to last year. Non-GAAP SG&A dollars were essentially flat to last year and increased approximately 140 basis points as a percentage of revenue. Partially offsetting the higher SG&A rate was 110 basis-point improvement in our gross profit rate. Compared to last year, our non-GAAP-diluted earnings per share of $1.22 decreased $0.32 or 21%, with approximately half of the decrease due to a higher effective tax rate. When viewing our performance versus our expectations entering the quarter, our revenue was at the high end of the range we provided.

Our non-GAAP operating income exceeded our expectations due to a higher gross profit rate driven by a number of areas including lower cost to serve our membership offerings, higher profit-sharing revenue from our private-label credit card arrangement, and lower supply-chain costs. Next, I will walk through the details on our second-quarter results compared to last year. From an Enterprise comparable sales phasing perspective, June’s decline of approximately 5% was our best performing month on a year-over-year basis with May and July both down approximately 7%. As we’ve started Q3, our estimated comparable sales decline in the first four weeks of August was approximately 6%. In our Domestic segment, revenue decreased 7.1% to $8.9 million driven by a comparable sales decline of 6.3%.

From a category standpoint, the largest contributors to the comparable sales decline in the quarter were appliances, home theater, computing, and mobile phones, which were partially offset by growth in gaming. From an organic perspective, consistent with the past several quarters, our overall blended average selling price declined in the low-single digits as a percentage versus last year. In our International segment, revenue decreased 8.8% to $693 million. This decrease was driven by a comparable sales decline of 5.4% and the negative impact of foreign exchange rates. Our Domestic gross profit rate increased 110 basis points to 23.1%, a higher gross profit rate was driven by the following. First, our product margin rates improved versus last year.

The better product margin rates included a higher level of vendor-supported promotions, and the benefits from optimization efforts across multiple areas. Second, improvement from our membership offerings, which included a higher gross profit rate in our services category. And third, an improved gross profit rate from our health initiatives. Domestic non-GAAP SG&A dollars were flat to last year as higher incentive compensation was largely offset by reduced store payroll costs. Moving next to capital expenditures where we still expect to spend approximately $850 million this year. This reflects a reduction of $80 million compared to last year with lower store-related investments being the primary driver of the reduced spend. Year-to-date, we have returned a total of $560 million to shareholders through dividends of $402 million and share repurchases of $158 million.

We expect to continue share repurchases throughout fiscal ’24 with the level of share repurchases being slightly higher in the second half of the year compared to the first half. As I referenced earlier, our non-GAAP effective tax rate of 26.6% was higher than the 16.7% rate last year. The lower effective tax rate last year it was primarily due to the resolution of certain discrete tax matters. Now, I would like to discuss our fiscal ’24 outlook. As Corie mentioned, we are lowering the high end of our full-year revenue outlook to our previous midpoint while keeping the low end of our revenue guidance unchanged. At the same time, we are narrowing our non-GAAP LOI rate and EPS ranges in a way that raises the midpoint of our previous annual guidance for those items.

Let me provide more details on our guidance and working assumptions starting with revenue. We expect Enterprise revenue in the range of $43.8 billion to $44.5 billion. Enterprise comparable sales decline of 4.5% to 6%. Moving on to our full-year profitability guidance, which is Enterprise non-GAAP operating income rate in the range of 3.9% to 4.1% and non-GAAP diluted earnings per share of $6.40. Our outlook remains unchanged for a non-GAAP effective income tax of approximately 24.5% and for interest and income to exceed interest expense this year. As a reminder, the fourth quarter of fiscal ’24 contains an extra week. We expect this extra week to add approximately $700 million of revenue, which is excluded from our comparable sales and $100 million of SG&A.

We still expect it to benefit our full-year non-GAAP operating income rate by approximately 10 basis points. Next, I will review our full-year gross profit and SG&A working assumptions. We now expect our full-year gross profit rate to improve by approximately 60 basis points compared to fiscal ’23 which compares to our prior outlook of 40 basis points to 70 basis points of expansion. The primary drivers of the rate expansion include the following. First, improvement from our membership offerings, which includes a higher gross profit rate in our services category. Our membership offerings are now expected to provide at least 25 basis points of improvement. Second, higher product margin rates, which includes the benefits from our optimization efforts across multiple areas, any higher level of vendor-supported promotions.

And third, our health initiatives is also expected to improve our gross profit rate. Lastly, we expect the profit-sharing from our private-label credit card to have a relatively neutral impact to our annual gross profit rate compared to last year. The profit-sharing has provided a slight benefit to our gross profit rate in the first half of the year, which is expected to turn to a slight pressure in the second half of the year. Now, moving to our SG&A expectations. At the midpoint of our guidance, we expect SG&A as a percentage of sales to increase approximately 100 basis points compared to last year. We expect higher incentive compensation, as we lapped the very low levels last year. The high-end of our guidance now assumes incentive compensation increases by approximately $185 million compared to fiscal ’23.

We continue to expect store payroll and advertising expenses to be approximately flat to fiscal ’23 as a percentage of sales. As it relates specifically to the third quarter, we expect our comparable sales to be slightly better than the negative 6.2% we reported for the second quarter. On the profitability side, we expect our non-GAAP operating income rate to be approximately 3.4%. This would represent a decline of approximately 50 basis points versus last year with the contributions from SG&A and gross profit, pretty similar to what we saw in the second quarter. Lastly, I’ll share some color on what our guidance implies for the fourth quarter. As Corie discussed, we are planning for multiple revenue scenarios that range from a comparable sales decline of approximately 3% to slightly positive.

Our Q4 gross profit rate is expected to improve versus last year, but not at the same level as we are expecting for the full year. SG&A as a percentage of sales is expected to be more favorable than our full-year outlook, which is primarily due to the extra week and the more favorable revenue outlook. I will now turn the call over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Scot Ciccarelli from Truist. Your line is open.

Scot Ciccarelli: Scot Ciccarelli. Good morning, guys. Corie, you mentioned some of the newer technology kind of waiting in the wings with AI and stuff. Can you give the group, any kind of flavor for some of the technologies like generically that you guys are thinking about that could potentially drive improvement in sales trends?

Corie Barry: Yes, maybe in this, we were talking about computing specifically, and maybe I’ll give just a little bit more color there. I mean I think what we’re seeing broadly is that computing innovations and the refresh cycles are getting shorter and they are accelerating and we continue to see people using all of their devices more often and far more like a computing processing intensive. And these are really specific activities and you can see both whether you’re using it at home, and you’re seeing a lot more streaming, or whether using it at work and you’re starting to want to leverage some of these more advanced technologies. Obviously, like, for example, Microsoft pre-pandemic focused on dual screen and that was kind of something we had talked about for a while, but they quickly pivoted some of their developments within their Windows OS to address consumer productivity where all of us, we’re kind of struggling to make sure we’re as productive as possible on multiple devices, a lot of that enhancement went into productivity and I think the emergence of AI is at the heart of many of these innovations.

I think in this case, in this example, it centers around the Windows copilot on Windows 11, which brings ChatGPT and AI innovations in the cloud applications within that Windows Office Suite within PowerPoint, Outlook, Excel. And I think what we’re expecting will happen and I alluded to it on the call is obviously you’re going to have likely at some points here different generation of technology that’s going to have more intensively leverage the capabilities that are necessary to run these AI models. I think that’s one example. We talk about this often, Scot. It’s hard for us always to know exactly what that new horizon of technology is going to be, but this is one that probably has some of the broadest implications for all of our collective productivity.

Scot Ciccarelli: Yes, understood. And then thank you for that. And then the second question is the expectation for slight improvement in comp despite a little bit more difficult comparison. Is that really driven by you have more events in the third quarter than the second quarter as we revert to pre-pandemic kind of behavior?

Matt Bilunas: No, I think for Q4 specifically, I think as we think about improvement of trends for Q3 and then in Q4, I think we are obviously encouraged by a little bit by back to school. Back to school has been slightly better than we expected as we get into Q3. When you think about Q3 compared to FY ’20, it actually has slightly higher growth than what we saw in — expecting slightly higher growth in Q3 compared to Q2. Q3 compared to ’20 has a little bit more holiday sales pulled in. So we are expecting that to continue compared to where pre-pandemic was, but maybe not to the same extent of pull-forward that we’ve seen in the last few years, so I think we’re encouraged by the trends as we leave Q2 if you think about what happened in Q2, we actually saw some stabilization in our business, we saw actually laptop units turned to flat in Q2 in terms of that business and TV units were flat, and so I think there is optimism around how — what we might expect for the back-half and more specifically Q4 but Q3 we’re likely still seeing similar levels to what we saw in Q2.

Scot Ciccarelli: Got it. Thanks, guys.

Corie Barry: Thank you.

Operator: And your next question comes from the line of Greg Melich from Evercore ISI. Your line is open.

Greg Melich: Thanks. I wanted to start on the top-line, that sort of improvement in trends and I love an update on what credit as the penetration and also you mentioned that that was a tailwind, becoming a headwind. Could you frame that a little bit more as to what percentage of gross profit it is or something like that?

Matt Bilunas: Yes. I think for the — on the credit side specifically, first, we’ve talked about the credit card portfolio is 1.4 of our domestic sales. 1.4%, so it’s pretty similar to what we had said last time. I think overall what we’ve been seeing for the last number of years is a tailwind for the credit card portfolio of profit share. It certainly — it came in a little better than we expected in Q2. We are seeing net credit losses normalize to where they were pre-pandemic. I think the thing we’re watching for which is based on the state of consumer do this net credit-losses actually turned to higher than they used to be, which would create pressure on the profit share. And in the back half of this year, we are expecting it to be a slight pressure compared to the first part of the year being a benefit for us, but neutral for the year.

So it’s really that net credit losses is one aspect we’re watching, especially as we get into next year. And we think about what the state of the consumer does look like as we get into next year and increasing levels of debt. So still an amazing book and partnership for us in terms of what it does for our consumers and offering a great way to pay for product. It actually also has a very loyal consumer. So we’re really happy with the party, just the reality of what we’ve been trying to normalize a bit, if you will, from the last few years. I think to the improving trends, I think Q3 we’re expecting to be a pretty similar, maybe slightly better comp than we saw in Q2. Like I said earlier, back to school is a little better than we expected, but it’s running a little longer and little later into the season.

And then as you look to Q4, while we are expecting the year-over-year comps improved to at the bottom of the range of minus 3 or the top slightly positive and it still does represent the fact that against FY ’20, anywhere from down 7% to down 3% on the high end. So, yes, we believe the year-over-year trend should improve based on a number of the things that Corie mentioned, it still does represent a more stabilization of our consumers. As you look into the back half, the way to think about a more normalized volume that we had pre-pandemic.

Greg Melich: Got it. And then my follow-up is on SG&A specifically. I know you expect it delever for the year. You mentioned the incentive comp up $185 million, was that for the full year or in the back half?

Matt Bilunas: That would be for the full year. Yes, that’s for the full year.

Greg Melich: And that’s more back-half weighted, presumably?

Matt Bilunas: It’s pretty even throughout the year.

Greg Melich: Okay. And then in terms of leveraging payroll that 100 bps was in the second quarter, was there something about the second quarter that gave you an unusual amounts of hourly payroll leverage, or should we expect that going forward?

Matt Bilunas: No, I think for the year, we expect store payroll to be relatively flat on a percentage of sales basis for the whole year. It has been pretty consistent across, but has been pretty consistent across the quarters, and we would expect it to be pretty consistent in the back half of the year as well.

Corie Barry: And, Greg, just to make sure we’re clear that 100 basis points as versus FY ’20. So that’s more than like structural change that we’ve seen over the last four-ish years.

Matt Bilunas: Thank you. Appreciate that. Well, good luck, everyone.

Matt Bilunas: Thank you.

Corie Barry: Thank you.

Operator: Your next question comes from the line of Seth Sigman from Barclays. Your line is open.

Seth Sigman: Hi, good morning, everyone. I just wanted to follow up on that credit point. So neutral for the year, negative in the second half of the year slightly. Can you just size up for us what normal means if that continues into next year? I think your disclosure is that, it’s up 50 basis points or so since fiscal 2020, so does normal mean that fully reversed is how do we think about that?