Best Buy - Earnings Call - Q2 2026

Executive Summary

• Q2 FY26 delivered modest top-line growth and an earnings beat: revenue $9.44B (+1.6% y/y) and adjusted EPS $1.28; both exceeded S&P Global consensus on revenue ($9.23B) and EPS ($1.225). Mix shift toward lower-margin gaming/computing pressured gross margin 30 bps y/y to 23.2% while adjusted operating margin printed 3.9% (+10 bps y/y). Values retrieved from S&P Global.
• Management maintained FY26 guidance but said sales are “trending toward the higher end” of the range; Q3 comps expected similar to Q2 and adjusted OI rate ~3.7% (flat y/y).
• Demand catalysts: Switch 2 launch, Windows 10-to-11 upgrade cycle, improving mobile phones and AI-PC features; Marketplace launch and Retail Media (“AI That” campaign) underpin margin dollars over time.
• Tariff impacts were “not material” to Q2 results; blended effective tariff exposure estimated ~16% with heavy vendor mitigation; U.S.+Mexico sourcing now ~25% of COGS (zero tariffs), China down to ~30–35% (half at 30% tariff; half at 20%).
• Capital returns remain consistent: Q2 dividends $201M and buybacks $65M; board declared a $0.95 quarterly dividend payable Oct 9, 2025.

What Went Well and What Went Wrong

• What Went Well

  • Broad-based demand in gaming (Switch 2-led), computing, and mobile drove the first positive enterprise comp in three years (+1.6%); online comps +5.1% and online mix rose to 32.8% of Domestic revenue. “We delivered comparable sales growth of 1.6% in the second quarter, our highest growth in three years.” — Corie Barry, CEO.
  • Execution tailwinds: strong vendor partnerships (vendor labor +~20% in 2H), AI PC assortment (125+ models; ~70% retail-exclusive), and operational improvements (FedEx as primary parcel carrier; data-driven sourcing cut costs, improved on-time delivery).
  • Marketplace launched mid-August (Mirakl) more than doubling online SKU count, expanding into select non-tech categories; expected positive OI contribution in FY26 even after startup costs.

• What Went Wrong

  • Mix headwind: outsized growth in lower-margin gaming/computing drove 30 bps y/y gross margin decline to 23.2%; Domestic GM down 10 bps to 23.4%.
  • Category softness persisted in home theater and appliances; teams plan sharper pricing, assortment rebalancing and faster fulfillment to stabilize these businesses in 2H.
  • Restructuring: $114M pre-tax in Q2 (labor/store optimization and Health-related impairments), following $109M in Q1; GAAP EPS fell to $0.87 on charges.

Transcript

Speaker 6

Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's second quarter fiscal 2026 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, if you have a question, you will need to press *1 on your phone. If you choose to be taken out of the question queue, please press *1 again. As a reminder, this call is being recorded for playback and will be available by approximately 1:00 P.M. Eastern Time today. If you need assistance on the call at any time, please press *0, and an operator will assist you. I will now turn the conference call over to Mollie O'Brien, Head of Investor Relations. Please go ahead.

Speaker 2

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 a financial condition, business initiative, 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. I will turn the call over to Corie.

Speaker 5

Good morning, everyone, and thank you for joining us. I want to, and think it's important to, start by acknowledging the horrific shooting that occurred at the Annunciation Church and Elementary School in Minneapolis yesterday morning, just a short distance from our corporate headquarters. Our hearts break for the young lives lost and their families who are grieving. Our thoughts are with the victims, their loved ones, and our community as we process this unimaginable tragedy. 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 three 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 pre-order 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 5th midnight opening, and every store had lines of excited customers waiting to get in.

I will add that in addition to Switch 2 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 points. 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, continued 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 moments, 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 2026 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 2026 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 at-home 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 in 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 systems. 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 games. 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 new tech and more AI capabilities are released. In fact, we offer 125 models of laptops and desktops featuring enhanced AI capabilities like Copilot+, 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 install 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 longstanding partnerships and in-store investment 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. 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 US. 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 two of the locations also serving as pickup points for most products that can be purchased on IKEA.com. 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 2026 is focused on incremental profitability streams. I'm excited to say that we launched our Best Buy Marketplace last week. We now have six times 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 chairs, 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 Fanatics sports merchandise to Karat 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 prompts and a "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 brand, 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 the marketplace to have a positive impact on our operating income rate in fiscal 2026, even after startup 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 two 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, outlining our scale, performance, and innovation to key decision-makers across agencies, brands, partners, and press.

We continue to see fiscal 2026 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 2026. 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 2026. It is imperative that we continue our longstanding 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 efficiencies.

They are often achieved with the help of technology and analytics, through ongoing vendor partnerships and vendor selection 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 timeline 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 ship-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 charging 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 pallets 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 the 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 for 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 Best Buy 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. I would like to turn the call over to Matt for more details on our Q2 performance and fiscal 2026 outlook.

Speaker 0

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 Nintendo 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 contributors 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 2025.

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 a higher mix of lower margin product categories. Moving to SG&A, where our domestic adjusted SG&A increased $19 million, primarily due to, one, 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 FY26, 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 2026 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 2026 is the following: revenue in the range of $41.1 to $41.9 billion, comparable sales of down 1% to up 1%, adjusted operating income rate of approximately 4.2%, 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 2025.

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 and 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 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.

Speaker 6

Thank you. If you would like to ask a question, please press *1 on your telephone keypad. If you would like to withdraw your question, simply press *1 again. Please ensure that your phone is not on mute when called upon. Thank you. Your first question comes from Seth Sigman with Barclays. Your line is open.

Great. Hey, good morning, everyone. 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 realized there's different seasonal dynamics in Q1. Just curious how that played out this quarter, and then I have a follow-up. Thanks so much.

Speaker 5

Good morning. 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. 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 flattest share overall. Obviously, you know, 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, especially in those places where we think we can really differentiate, like gaming and computing.

Thank you for that. 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, you would say that the rest of the business would have been down low single digits. Is it that the Switch benefit continues, or are there other drivers that we should be thinking about? Thank you.

Speaker 0

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. 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, yes, the Switch launch did provide a boost to the second quarter results. 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. You continue to see a better performance coming through in the mobile computing category, which includes iPads. Continued growth in computing, better performance in iPads, continued growth in mobile phones.

None of that gets you to a comp that's similar to what was in Q2.

OK, great. Very helpful. Thank you so much.

Speaker 5

Thank you.

Speaker 6

The next question comes from Kate McShane with Goldman Sachs. Your line is open.

Hi, good morning. Thanks for taking our question. Vendor support has been a distinguishing part of your story for a long time with vendor labor and exclusives. It sounds like, at least on the labor side, you are seeing vendors leaning in more. It's up 20%. 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?

Speaker 5

Let me start with, we are incredibly thankful to our vendors for their partnership on so many vectors. We do feel very good about our relationships, and we work with them in a very omnichannel 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. As you noted, part of that is labor, but it is actually across the assets that we have. 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.

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. They're also, in some cases, investing in training our associates. It's not just you throw labor in there. It's how do you keep that labor really fresh and really specialized. 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 Partner Plus program and we fulfill for them, reverse logistics, where we take care of that, trade-in, recycling. These are all the aspects that our amazing merchant team sits down and negotiates with vendors. I think it's a very unique set of assets that we bring to the table in these conversations.

Speaker 6

Thank you. The next question comes from Christopher Horvers with JP Morgan. Your line is open.

Thanks and good morning. 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? As you think about the go-forward, is that quarter-to-date low single digit close to that? Is it 3%? Are you simply just being prudent around the potential for deeper valleys in between events?

Speaker 5

On that whole tariff discussion, I'm just going to take one step back and start with our customers, because our number one focus is being there for our customers. I'm really proud of the way both our teams and our vendor partners have been navigating tariffs, even as it's been changing. 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. I think there's a couple 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 where absolutely necessary, adjusting price.

At this moment, it's important to also remind you we only directly import 2% to 3% of what we sell. 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. Some are just not increasing them at all, given these are very, very global supply chains. 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.

Speaker 0

Yeah, 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, that the events start to slow down in the build-up to holidays. You oftentimes see a slowdown in business a little bit into October as people are waiting for those holiday deals to come. Our guide would reflect the fact that we're starting the quarter strong, feel good about the momentum, but also recognizes that sometimes there is a little bit of a slowdown as you head into the deeper holiday season.

Understood. As it relates to the Nintendo Switch 2, if you look back to the last launch, the strength really persisted in that category. Actually, the fourth quarter was pretty close to the comp, the entertainment category comp, pretty close to what it comped on the launch period. How are you actually planning that? As you 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? Just one clarification, you mentioned you expect sales to trend to the high end of your guidance. Does that also translate to earnings? Thanks very much.

Yeah, 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 strive to do that. We have not changed the OI rate guide for the year so far. In terms of gaming, what I would say is we are planning to see gaming growth in Q3. As you get into Q4, we are planning that based on the knowledge of availability of the Nintendo Switch 2 console. Gaming is always a big part of a holiday sales performance. There is some level of expectations.

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. Gaming is always big in Q4. We'll see. 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.

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 of. We're also proud of the fact that accessories and software, we performed very well in those two areas in addition to it. The other part that is sometimes missed is it's not just Switch 2. Gaming in total is strong for us. 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. We think that there's a lot of momentum on all those things included. Switch will continue to have great demand all the way through the rest of the year into Q4.

There are also some new products launching that are partnerships between Microsoft and Asus that will also bring demand in total. We're excited about our total gaming portfolio, and we feel well-positioned to take advantage of that for the rest of the year.

Great. Thanks very much. Have a great Labor Day.

Speaker 5

Thank you. You too.

Speaker 6

The next question comes from Steven Forbes of Guggenheim. Your line is open.

Good morning, Corie.

Speaker 0

Morning.

Corie and Matt, I wanted to focus on the post-Labor Day promotional calendar. The thought here is we're hearing the potential for a change in frequency of promotional events, maybe less about change in depth of those promotional events. I'd 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.

Speaker 5

I think one of the team's strengths is the ability to very carefully plan out, especially as it relates to the back half, a compelling promotional calendar. 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. You're going to plan across your assortment. It goes back to something that actually I should have said in the earlier tariff answer. This is a really promotional category. That means all of us are, in partnership with vendors, working to stimulate demand from our consumers. 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. We assume that will continue, and that is reflected in the guide that we gave.

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.

Maybe following up on that, right, so breadth and depth higher than last year. I think, you know, given the tariff pressures in net terms, I think there was a lot of conversations within the expert networks over the past three months about just sharing of the cost and maybe an increased % 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 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. That is priority one for everyone together. We are not going to go into the level of detail of talking about exactly who shares what. Of course, I'm going to say that it varies by vendor and it varies by product category. As I said before, when we have been seeing increased costs, it is materially lower than the overall effective rate. 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. For us, this is just, and 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. So far, I think we've been able to do that.

I appreciate the color. Thank you.

Speaker 6

Next question comes from Michael Lasser with UBS Financial. Your line is open.

Good morning. Thank you so much for taking my question. Best Buy has long talked about the profit pool associated with core consumer electronics retail not really growing. 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 profits in other ways and through other streams? Thank you very much.

Speaker 0

Yeah, thanks for the question, Michael. I think what you'll see in our prepared remarks, we had focused a lot on our strategies. There has been a lot of dynamic shifts 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. You are seeing us now launch a marketplace to help us strengthen some of those places where unit share has been harder to capture because so much of that's being delivered from a third-party marketplace. As we try to ensure or stabilize our base within CE, that is an important aspect as we go forward. 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.

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. 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.

Speaker 5

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. 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. We are the only place where you get 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.

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 one place where you can come and see all of these brands and all of these operating systems. You can imagine that behind the scenes, we continue to navigate that in partnership with our vendors to bring these things to market uniquely.

OK, thank you very much for that. My follow-up question is, in the 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 steps that you're going to take in order to stabilize those businesses, including making sharper pricing. 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? If you look across your portfolio profits, how much are you willing to fund some of these or take the profits associated with these emerging pools like Best Buy Ads and Best Buy Marketplace and reinvest them back in stabilizing parts of your core business?

Thank you for the question. I think TVs and appliances are very different categories, but maybe I'll hit on each really quickly and some of the differences associated with each. In half one, the TV trend has been a little bit softer, and there has been more of a shift towards value. 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 LG, 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.

On top of that, additional marketing investments to make sure that we're driving the right traffic. Appliances is a little bit different situation in the fact that the market is very, very focused on duress right now, just because the housing and housing upgrade market has been a little bit softer. Duress has not historically been our sweet spot. Our sweet spot is more around packages associated with appliances. There is a need for us to modify our assortment there and also placement. 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 it that particular day. 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.

Speaker 0

Hey, 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. I think even in our guide this year, though, we did note that product margin rates are expected to be lower year over year. Some of that, most of that is due to just the mix of what we're selling. 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 competitively priced standpoint. We have tried to incorporate that into our guidance as best as we can see. Obviously, we'll adjust as we see it move.

Speaker 5

I think it's just worth noting, because I had kind of a ribbon on this, that guide that we put out includes all of these things we're talking about. It includes mix, making sure we feel like we have a very strong promotional stance, and that conversation we just had about balancing sharing in the tariffs. 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?

Speaker 0

Yeah, I don't think our profit expectation has changed dramatically. We haven't changed the guide for the year. 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 we're a little more confident in the top end of that sales range, as we talked about. We did exceed our expectations in Q2, which is coming in some lower margin category areas. It's fair to say that on the high end, as you mix into those lower margin areas, it doesn't come with as much profitability. We have a little bit of room there. That would have we've already factored that in.

Thank you very much, and good luck.

Speaker 5

Thank you.

Speaker 6

The next question comes from Anthony Chukumba with Loop Capital Markets. Your line is open.

Speaker 0

Good morning. Thank you for taking my question. It sounds like the Nintendo Switch 2 launch was a success. I was just wondering, how did it perform relative to your expectations? How did that flow through to your guidance for the back half of this year? Thanks.

Yeah, I mean, we did exceed our sales expectations in Q2, and a big part of that was our performance coming from the Nintendo Switch 2 launch. It is fair to say that that was a significant part of the beat to our expectations in Q2. We do expect to continue to grow in gaming as we get into Q3 and Q4, and we've reflected any sort of additional upside that we might see as it relates to that product. It did represent some beat. We also 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. In terms of the Windows 10 support expiration, based on that, I know your computing sales have been quite strong for quite some time. Is it safe to say that you would expect a further acceleration just based off of that?

Yeah, in computing, we expect to see continued momentum. There have been six consecutive quarters of growth in computing. In Q2, as Corie mentioned, we actually had the highest laptop volume in Q2 than we've had in 15 years. We are continuing to see that acceleration. There are really three 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 is also a pretty significant trend of MacBook users that have MacBooks that are three to eight years old that are still on the Intel-based platform that can get some significant changes in performance and battery life and performance in general, as well as AI when they upgrade.

That is driving interest in the market. The AI features continue to evolve. Every single quarter, there are new features dropped from Apple and Microsoft in total. Customers are seeing interest. Our Copilot+ AI PCs assortment has grown pretty dramatically. We're up to 120 different models in our store. Those three factors are really what's driving the growth. We think it'll continue moving forward because those are all really important things to different groups of customers.

That's helpful. Thank you.

Speaker 5

Thanks, Anthony.

Speaker 6

The next question comes from Robert Bass of Bank of America. Your line is open.

Good morning. Thanks for taking my question. Maybe for Corie, on the Verizon and AT&T carrier system commentary, can you 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?

Speaker 5

It's not a structural change. I would think about it more as an expansion. We actually saw mobile phone sales grow in both Q1 and Q2. That was after years of declines. What we're doing is we're actually expanding an operating model that we have had in some of our stores with both Verizon and AT&T. The reason it's advantageous is it's just easier to access all of the myriad of pricing and arrangements that you need in this space with a 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, but also have access to the greatest deals. 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 that higher end of the range.

Got it. That's helpful. Maybe for Matt, the restructuring charge in this quarter makes sense. Should we expect more restructuring charges through the balance of the year?

Speaker 0

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

Terrific. Thanks so much.

Speaker 5

Thank you.

Speaker 6

The next question comes from Scott Ciccarelli with Truist Securities. Your line is open.

Speaker 0

Good morning. This is Shervin on for Scott. I 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. What's the split of your exposure today to China versus other countries? What's the end goal? What are you doing and when do 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. Thanks.

Speaker 5

Sure. As a reminder, before I start this conversation, we are the importer of record on only about 2% to 3% of what we sell. 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. About half the China-sourced products are at 30% tariffs. Roughly half are at 20% tariffs. That leaves another roughly 40% of CE products coming from other countries like Vietnam, India, South Korea, and Taiwan, which, as you know, are at varying levels right now.

The kind of blended effective rate of all that is about 16% versus the 12% to 13% we shared with you. I will reinforce that because we continue to work on the mitigation strategies that we've talked about, the 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.

Speaker 0

Great. Thank you.

Speaker 5

Thank you.

Speaker 0

Thank you.

Speaker 6

The last question will come from Zach Sadam of Wells Fargo. Your line is open.

Speaker 0

Hey, good morning. This is David Lanson for Zach. Thanks for taking our questions. I guess first one from me, how do you think about sizing a potential upgrade cycle, and to what extent is that incorporated in guidance?

Yeah, I think I'll step back a little bit. I think every category is at a different level of upgrade cycle pretty uniquely. I think, as an example, we've been seeing, as we've talked about a lot, a 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, always strength in gaming computers as well. 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. I think it kind of varies by product category. Gaming is another example. It's usually pretty launch-dependent. We just had a Nintendo Switch 2 launch. We probably won't see a PS5 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 six, seven, eight-year cycle. Probably not seeing a large level of replacement happening there, although there was a lot of innovation happening in some aspects of those categories, like extra-large televisions that didn't exist, you know, years ago. I think every category is a little bit different. I think broadly our business shines when there's innovation. 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. Both of those things combined is kind of where we do our best work. 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. With expectations that rates ease and some of your business tied to housing, curious how a retail wind would impact your business.

Yeah, I think probably in appliances the most. I think there's a strongest correlation with the housing turnover or housing starts coming through the major appliance business. Maybe a little bit on the home theater TV side, but mostly on the majors. 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 packaged appliances versus right now it's a very duress market. We also offer a very broad range of assorted major appliances, all the way from Viking and Therm down to high-end opening price points. I think as we get into better housing turnover, housing starts, you start to see people want to pursue different types of major appliance purchases. 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 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.

Got it. That's helpful. Thank you.

Speaker 5

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

Speaker 6

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