Q2 2020 Bed Bath & Beyond Inc Earnings Call
Welcome to the bed Bath and beyond fiscal 2022nd quarter earnings call. All participants will be in listen only mode until the Q a portion of the call.
Today's conference call is being recorded.
The Reaper broadcast of the conference call will be available via webcast on the company's Investor Relations website.
At this time I would now like to turn the conference over to chat Barth Vice President of Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to our fiscal 2022nd quarter earnings call on.
On the call with US today is president and CEO Mark Tritton.
Chief Financial Officer, and Treasurer stop Arnaud.
Chief operating officer, and President of Buybuy Baby shot Hartman.
<unk>, Chief brand officer, and President of Deckers Cindy Davis.
Before we begin let me remind you that our fiscal 2022nd quarter earnings release, and slide presentation can be found in the Investor Relations section of our website at www dot bed Bath and beyond Dot com.
Exhibit to the form 8-K, we just filed out of this call.
This conference call and the slides will be hurt you may contain forward looking statements, including statements about or references to our outlook regarding the company's performance, our internal models and our long term objectives.
All such statements are subject to risks and uncertainties that could cause actual results could differ materially from what we say during the call today.
Please refer to our most recent periodic SEC filings for more detail on these risks and uncertainties.
And in the risk factor section in our annual report on form 10-K.
The company undertakes no obligation to update or revise any forward looking statements.
Additionally, the information we will discuss today contain certain financial measures that exclude amount well our subject to adjustments that had the effect of excluding an out there, including the most directly comparable measures prepared in accordance with generally accepted accounting principles.
For a reconciliation to the most comparable measures presented in accordance with GAAP. Please refer to the table in our earnings release available on our website and included as an exhibit to our form 8-K filed today.
It is now my pleasure to turn the call over to Mark.
Thank you Jim and good morning, everyone.
We're pleased to share our results with you today. We believe this was a people quota organization with strong sales and profit growth as well as enhance financial strength through high cash flow generation, but in the quarter of $750 million.
Oh with effective expense and debt management.
We achieved strong top line growth and delivered second quarter comparable sales of 6%.
So that's positive quarterly comp since the fourth quarter of 2016.
Additionally, we didn't leave any improvement in gross margin, even with the increased strength about digital business.
Our strong results fly through to the bottom line with adjusted EPS of 50 cents the strongest adjusted quarterly earnings reported in the two years.
Well, we will detail how April 2nd quarter performance today, we're most excited to share how this quarter says the wrong way to add three new plan, who share our virtual desks day on upside the 20 <unk>.
During our call today, Gustavo Nadal Chief Financial Officer, Tricia, who will review our second quarter financial results.
Then Cindy Davis, Chief brand Officer, President Decorous will speak about the quarter from a commercial and customer perspective, and then John Hoffman, Chief operating officer, and President Buybuy Baby, we'll give them, saying well operations.
Then take questions.
As we've said before we are competing in a financial position and our ability to manage through these very uncertain times.
We've taken further action to build a strong financial base, including reducing our cost structure, enhancing our financial flexibility and investing where it matters most to our customers as we strengthen our authority in the home side.
As you'll hear from Gustavo we remained focused on ensuring liquidity and optimizing cost including actions to improve cash flow generation.
With such a strong cash and investments balance now a $1.5 billion plus or Ivy Hill, we have approximately two times more liquidity than debt outstanding on our balance sheet.
We also drove significant improvement in several other key performance metrics, including adjusted gross margin, which increased 200 basis points year over year.
With a sharpened focus on driving a better curation of product mix and curated data driven management of markdowns and promotions, including coupons, we didn't even significant adjusted gross margin expansion. While also driving continued strong caught off guard and add these new channels of 89%.
We have also seen these actions and trends continue throughout the month of September.
By the end of the second quarter, how digital sales represented approximately 32% of title styles benefiting from our enhanced omni channel capabilities, including buy online pick up in store and clips I pick up which now represent 15% of total digital sales and growing.
Together with our ship from store capability Stonesoft owed approximately 36% about total did you moved into the second quarter.
These expanded fulfillment capabilities are favorably impacting our gross margin and will continue to further enhance the overall profitability of our digital business.
During this unprecedented time, when Ohio have become one all of our lives we are well placed as customers spend more on the arm and lifestyle.
We see this trend continuing and we've been responding with agility, the changing needs about customer like insurance about merchandise and service offerings.
We are delighted by the continued strong response to our new Buxton Curbside services this quarter and the recent launch about new same day delivery service this week, making it even easier to shop.
He said this is a contributing to customer growth as we gained approximately 2 million new online customers in the quarter, including approximately 800000 square completely you did that Buck beyond these.
These new customers Apache, saying from a coal higher margin product categories, including bedding, Oh kitchen, food prep and cleaning and high maintenance.
From a merchandising perspective, we're pleased with our performance during this very different back to college season, which is actually fortified our authority and that did quote much stage.
You've heard me say before private acquired 19 pandemic, we plan to lean heavily into the back to college moment to showcase our new brand strategy and elements about enhanced customer value proposition.
In the whites of the pandemic, we quickly mobilize to more able to adapt our plans the changing market conditions, while at the same time, they treat the spirit and maintained about college campaign.
We have a highly successful back to college season, achieving sales growth of 21% compared to last year.
He will provide some more details on this in a few environment.
In addition to our commercial success. This quarter. We also strengthened our operations investing in an improving core proficiencies essential to rebuilding the foundation is all that business.
Out of the senior leadership team of highly experienced Retalix that is now in place and we're pleased to be joined by several new next level leaders to accelerate the transformation even further.
John will talk more about this as well as the operational investments we are making in areas such as technology.
<unk> power our growth.
As we focus our efforts to optimize growth opportunities within harm baby beauty and wellness, we remain highly committed to reviewing on non core asset.
We completed the style of personalization molded comment probably August with net proceeds of approximately $245 million and we continue to believe there was significant by either to be unlocked through the asset sales, which we are continuing to review.
In framing out second quarter results against the backdrop of an abnormal first quarter. We have built a strong financial base and developed a blueprint for delivering long term success. Our transformation journey has begun I mean, I always say to that growth strategy are unlocking improved financial performance.
I will now turn the call after the stuff I'd to review, our second quarter results in detail Gustavo.
Thank you Mark and good morning, everyone our sales.
Our second quarter performance showed solid comparable sales growth as well as strong growth margin expansion and EBITDA increase.
At the same time, we unlocked significant cash flow generation and with these we strengthened our balance sheet and our financial flexibility with even greater liquidity and a meaningful reduction in girls that.
During this quarter, we generated more than 750 million in cash, including over 500 million from operational earnings and working capital improvements net of capital investment and coupled with approximately $245 million in proceeds from the sales of people.
We capitalize on the strong capital generation by purchasing approximately 300 million in principal value of our bonds at a significant discount and also by paying down a bank loan of $236 million.
With these actions, we reduced our gross debt by over $500 million or 30% from 1.7 billion at the end of the first quarter to 1.2 billion at the end of this quarter import.
Importantly, we had a pivotal point in our financial position by moving from a net debt position of over 500 billion at the end of the first quarter to a net cash surplus position of 300 million at the end of the second quarter, we had in the.
We ended the quarter with 1.5 billion in cash and investments well above our debt.
Further as shared during our first quarter earnings call, we secured asset backed lending facility in June.
Together with our cash balance our liquidity strength into $2.2 billion, which is approximately two times higher than our bonds outstanding.
Turning now to our sales results total comparable sales grew 6% benefiting from a significant increase in digital comp sales, which were up 89% for some.
For some context sales.
Sales from our digital channels represented about one third of total sales this quarter are.
Our strong digital sales performance has been driven by further expansion of our BOPUS curbside pickup service book.
Focus generated sales represented 50% of total digital sales in the quarter tripling its penetration from the last quarter. When the service was first introduced net.
Net sales in the quarter were $2.7 billion, a decrease of 1% versus last year, partially due to the divestiture of one Kings Lane.
In looking at the monthly progression of sales recall that we began are phased approach to store we openings from may through June and by early July virtually all stores were open.
Encouragingly, we delivered positive comparable sales in each month of the quarter.
Digital comp growth was consistently above 80%, which offset the sales decline things stores.
Starting in June our comparable sales were positive and reported net sales were down 7%.
In July comp sales were also positive with reported net sales growth of 2%.
In August comp sales were again policy with reported net sales growth of 1%. Despite the impact on bright investigators during the quarter.
Importantly monthly sales for September in an up or even every basis also show positive comparable sales growth was seen in their store and digital sales I think the second quarter and accelerated both trends.
I'll now continue to review, our second quarter financial results.
On a GAAP basis, we reported net earnings per diluted share of $1.75 cents compared to a net loss per diluted share of one dollar and 12 cents in the prior year period.
Our GAAP reported net earnings include favorable impacts of approximately $230 million pretax which are excluded from adjusted results.
This includes gains from two special items.
190 million dollar gain on the sale of personalization mall Dot com and a $77 million gain on the extinguishment of debt from the bond tender.
These gains were partially offset by other special items with a net unfavorable impact of approximately 37 million, including non cash charges, mostly related to impairments of trainings and certain store level assets as well as restructuring and transformation initiatives costs.
On an adjusted basis, our net earnings per diluted share were 50 cents, an increase of 47% compared to adjusted net earnings per diluted share of 44 cents last year.
Consistent with our prior disclosures the following references to quarterly results will be on a non-GAAP basis to better represent year. Good performance of the business maybe.
Moving to gross margin, our gross margin increased 200 basis points to 35.9%. This.
This was driven by approximately 150 basis points of favorable product mix, including lower coupon expense and opinions Asian promotional markdowns, coupled with distribution and fulfillment cost leverage of 190 basis points.
As expected these benefits were partially offset by the impact of channel mix of 135 basis points from the larger proportion of total sales from digital channels.
Our company's management team will remain focused on gross margin and ensuring we have a healthy gross margin progression over time.
We said last quarter that gross margin was abnormally low due to the significant feedback from store closures or.
Our second quarter gross margin shows a return to a more representative base and reflect the benefit of our efforts to unlock our potential growth by optimizing product margin with an increased proportion of digital sales.
Moving to SDMA SDMA as a percentage of net sales was 31.5% decline of approximately 10 basis points compared to the prior year period. This.
This was behind the decrease in payroll advertising and payroll related expenses, partially offset by an increase in professional fees to support the company's transformation.
Considering the unprecedented he back from coal that 19, we have taken decisive steps to reduce costs further simplify our operations and support our teams to emerge from this pandemic in an even stronger position.
In August we implemented our organizational realignment, which included a workforce reduction of approximately 2800 roles as part of our previously announced restructuring plan.
These action is estimated to generate future annual pre tax savings of approximately $150 million, which is at the upper end of our initially stated range of $100 million to $150 million the non oil its DNA savings.
And as you'll hear from John in a few minutes. The next phase of our restructuring plan includes a store optimization project, which is already underway.
Our solid top line performance, coupled with EBITDA margin expansion drove significant EBITDA growth of 36% despite.
This pivotal improvement shows that our efforts to transform the business and build a modern durable business model have already begun.
Turning now to some balance sheet and cash flow statement items.
We continue to carefully manage working capital this quarter with ending inventories of $2 billion on a sequential basis inventories were lower by approximately 200 million or more than 8% compared to be add but the first quarter.
Our capital expenditures in the quarter were $37 million with 60% of the expense related to technology projects to improve our omni channel capabilities.
These include inventory in warehouse management capabilities, such as that Bath allocation logic, and replenishment strategies to improve customer experience.
We do expect to ramp up our capex spending from these current levels in subsequent years in support of our digital first omni always transformation.
We will share perspective on our future capital allocation plan at our Investor Day later this month.
While our share repurchases and quarterly dividends remain suspended we read.
We remain committed to return capital and expect to share our perspective during Investor day.
In summary, our second quarter performance demonstrate our financial agility and discipline as we transform our business we.
We clearly see a pathway and expect to deliver significant EBITDA growth and value creation, we will share a multiyear financial roadmap at our upcoming Investor day on the 28, along with the transformation of strategic growth initiatives already underway I will now turn the call over to Cindy Davis, our chief brand.
Officer, and president of Decorous Baby.
Thank you good starter in second quarter, we deliberately planned that we spoke inspired by firing into existing and new customers alike, we created and communicated compelling value and made it easy with our omni always approach by shop.
By sharpening our focus on the key drivers of gross margin product mix pricing and promotion and channel mix, we were able to deliver growth in both comp sales and margin with the potential to unlock significant expansion going forward.
Digitally we thought lighting growth in the second quarter with more than 180 million visits to our site.
Representing a 52% increase over last year.
In addition, we grew our online conversion to 4% an increase of 33% versus the prior year period.
Our new mobile App was launched 20 million times during the quarter, which contributed to 133% increase in demand from our mobile channel.
From a customer standpoint, we think approximately 2 million new online customers this quarter and 42% of these customers were new to our brand.
These new customers are enhancing our overall customer profile as they are six years younger on average than our existing customers and less likely to use coupons.
In addition over 1 million of our inventory shoppers became omni channel customers shopping online, but that's for the first time this quarter.
Omnichannel customers are highly engaged shopping with us three times more often and spending two times more per year than single channel customers.
Customer response to our new focus and contract lets curbside pickup services has been strong generating over $120 million in sales during the quarter and earn enough a five star rating on over 80% of these orders.
Focusing curbside are great solutions for our customers and benefit us financially with respect to gross margin since focused eliminates the shipping expense usually associated with the digital order because the team since our digital penetration grew to approximately 32% from approximately 18% in the prior.
Here.
But it is what has enabled these results our customer inspired data driven omni always fully integrated approach that gets us the most confident about our ability to sustain this momentum.
There is no better way to illustrate that by looking at our successful back to college campaign, which drove a 21% increase in college product sales may onest.
Great.
We are pleased with these results, especially during what has been a most unusual back to college season.
That doesn't beyond has long been known as a destination for college and this year, we developed an even stronger plan to serve the college market.
We started with insight.
Monitoring data and customer response, especially reopening plans for major colleges and universities across the country and then pivoted our plan as the season unfolds.
Given the uncertainty at the back to college season. This year, we brought back our college student pass the offer students 20% off their purchases all the way through September Thirtyth.
Over 500000 students signed up for the College Stadium passed this year driving over 400000 transactions with an average basket size, 14% larger than other college transactions.
We created an integrated merchandising and marketing plan with better curated assortments more.
Our competitive pricing and strong value communication, both in store and online.
We modernized storytelling that our marketing and on our site as well as increased targeting to drive higher levels of engagement. As a result, we doubled our return on AD spend goal from digital media, while increasing AD recall brand awareness and favorability significantly above industry norm.
And our to our buy online pickup in store and contactless curbside pickup services were available for students and parents at their home store or in their college town, making it easier than ever to shop with us.
From a product perspective top trending categories in our college assortment. This year were kitchen electrics up more than a 160% kitchen, how clearance, which is up nearly 250% and drinkware and flatware categories, which were up more than 650%.
Throughout the season, we kept our finger on the pulse of the college market as many schools and out premiums per remote learning we heard from both parents and students are like that they were disappointed to miss out on yet another milestone that transition from high school to college.
Armed with these insights we launched our college from home campaign in August adding inspiration to the value in use of our back to college experience. We tapped our online interior design team attacker to develop a variety of Ram design help inspire students to create their own perfect storm Ram at home.
Despite the unprecedented cobot impact on our business over the past six months bed Bath and beyond remained a key college destination this year.
And according to research. We recently conducted the college season, it may not be over yet in fact.
In fact, the data shows that 32% of students surveyed said they will be going to campus for the first time in 2021 and they have shopping today.
We will be ready to meet their needs with inspiration value and indeed.
As we look forward to the important holiday season. This year will be one like no other.
We are prepared for customers to shop earlier and expanded our omni services with same day delivery, leveraging our store footprint to allow them to shop whenever wherever and however, they want.
We have robust plans under our house strategic framework and our five key pillars to rebuild our authority in the home space.
Look forward to speaking with you again later this month at our Investor day, when we dive deep into each one of these pillars.
We are excited about our growth plans and the positive impact we are already seeing in our results.
With that I will turn the call over to John Hartmann, Our Chief operating officer, and President of Buybuy Baby Jogger.
John.
Thank you Cindy and to add to your conversation on the pivot and focus on our customer let me provide an update on our Buybuy baby business.
On a directional basis, our us and Canadian Buybuy Baby business made up approximately 10% of the company's total net sales in the second quarter, including.
Including strong sales from digital which represented more than half of total baby sales.
Growth in digital was supported by favorable customer response to our new BOPUS and curbside pickup offerings and our big deal babies sale event, which was held in August.
Digital orders fulfilled by our stores represented about one third of total baby sales in the quarter with BOPUS, representing a third of total store fulfilled orders.
Top performing baby categories during the quarter were apparel safety, and playroom, which helped us drive a more favorable product margins.
During the second quarter, we opened our 128, the baby store and subsequently opened another store in September we.
We expect to open three additional stores by the end of the year for a total of 132 baby stores.
As the leading baby specialty retailer in North America, we are committed to expanding our Buybuy baby store network to support our digital presence and Omnichannel strategy and look forward to sharing our vision and growth strategy for baby at our upcoming Investor day.
From an operations perspective, we took bold steps in nearly every area of our operations this quarter to evolve our base and build momentum for change.
I will highlight a few of the theory of today.
In real estate with our previously communicated store network optimization project in South.
In strategic sourcing with our indirect sourcing initiative and in technology with our migration to cloud computing.
But first as you've seen in the media, we have really powered up the team over the past two months with the addition of several senior leaders, including Wade had that SVP of real estate and construction work.
Juan Guerrero, Chief supply chain officer.
Scott Lindbloom, Chief Technology Officer, and a new group to chief strategy and transformation officer.
These next level leaders will help further advance and fortify our transformation initiatives underway.
In real estate, we have begun executing on our store network optimization plan to develop the right network of stores to serve our customers as we rebuild our authority and establish a truly omni always shopping experience.
We recently confirmed that the first one third of the 200 bed Bath and beyond store closures that we previously announced will occur by the end of calendar 2020.
As part of this process there will be store closing sales in the weeks, leading up to the close to work down in store inventory.
In addition, a comprehensive sales and marketing program has been established to drive sales to our other stores and digital channels.
As we said previously we expect to be able to transition that we are 15% to 20% of sales from these planned store closures to our digital channels or other store locations.
Our store network optimization project is not simply to close stores, but to reshape and truly optimize our store footprint.
Our physical stores are a strategic asset for us as we transform as a digital first company.
Market data shows that our current store base addresses 80% of the domestic market.
This is especially important as we further leverage our stores with new omni fulfillment capabilities in BOPUS curbside and now same day delivery.
Following this work we will lean into a store remodel program next year that has been developed to have a clear and positive ROI and deliver a truly omni always an inspirational shopping experience.
I look forward to sharing more on these growth plans at our Investor day.
This is an important step in our multi year program to build a modern durable business model and to invest where it matters most to our digital first customers.
Another area, we're focusing resources is strategic sourcing are.
Our newly formed procurement organization will drive anticipated savings by designing and implementing centralized spend control and vendor management processes across all areas of indirect spend.
This recently launched initiative will deliver substantial savings in fiscal 2021 and beyond these sales.
These savings exclude the impact of any potential future sales of non core assets or any changes to our real estate lease agreements.
From an operations perspective at the core of our transformation is technology.
We have initiated an end to end modernization of our technology infrastructure to deliver a more agile responsive and customer inspired shopping experience to.
Today, our digital platform is supporting substantial digital growth and strong customer adoption of new services like BOPUS and curbside.
Recently, we announced a new multi year collaboration with Google and supported by Deloitte to accelerate our omni always transformation through.
Through this expanded relationship we will deploy a range of platform solutions to further personalize, our omnichannel shopping experience for our customers enhanced fulfillment capacity and optimize merchandizing planning and demand forecasting.
By combining our unique data and insights from the home baby and beauty and wellness markets with the exceptional platform capabilities and expertise that Google with their cloud capabilities provide we will deliver a more agile responsive and customer inspired shopping experience, making it even easier to feel at home with bed Bath and beyond.
And.
As we build our omni always capabilities, we will have a strong foundation of systems to support our long term growth objectives.
Our near term technology roadmap includes a new enterprise resource planning system, including core merchandising and further supply chain improvements such as optimizing processes for omnichannel forecast replenishment and allocation.
The result will be noticeable improvements for our customers, while lowering our overall inventory investment.
I look forward to sharing more details with you on these important investments when we get together again at the end of the month at our Investor Day.
Mark I'll turn it back over to you now for closing remarks.
Thank you John.
We've been making bold pivots to reconstruct renovate and restore our company even despite the impact of a global pandemic.
We said, we would assemble a world class and experienced leadership team and we've done that we see.
We said weve reduced our cost structure and drive financial strength and discipline and way of doing that.
We would take a smarter more efficient approach to gross margin I mentioned about business and we're doing that.
And we said we would leave with a digital first omni always perspective and were doing that we see.
We said, we would modernize our engagement to regain our party behind space to acquire new customers I am I doing that we.
We said, we will review and optimize our asset base and we have done that and expect to do more.
We're excited to share the details of our growth plans for the future.
We'll investor day on October 28 starts at nine am and during this meeting we will provide a full review of our three year strategic goal.
A multiyear financial plan, incorporating anticipated cost savings and reinvestment.
Key performance metrics that we track a question about transformation journey and.
And a comprehensive capital allocation framework to building long term shareholder value.
Performance this quarter, including solid comp sales growth gross margin expansion increased cash and liquidity and debt reduction gives us the confidence that our transformation is underway.
With that we will now take your questions.
Thank you and now begin the question and answer session. If you do have a question press Star then one on your Touchtone phone if you.
If you wish to be removed from the queue. Please press the pound sign or the hash key.
There will be a delay before the first question is announced.
Using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question press Star then one on your Touchtone phone.
And our first question is from Peter Benedict from Baird.
Hey, guys good morning.
Two questions first just on the ecommerce fulfillment.
Dynamics can can you maybe frame some of the savings you you think you're getting from the store based fulfillment.
Relative to a traditional DTC.
And then and also related to that kind of how the economics, maybe the same day partnership that you announced with which shifted instacart I kind of plays into the ecommerce profitability. That's my first question yes.
Yes. Good morning. Thank you, let me start maybe John can support so it.
So in terms of the economics, we've talked about about 36% about what is currently and growing a big fulfilled by store with a large chunk of those being both us and curbside, which for us economically and quite to an in store sales from a profit margin perspective on outs on the out still fulfill we're actually able to create.
Speed and agility to get customers they goods much faster from the store base and we're continuing to work on the cost structure, all the stores fulfilled versus DC costs.
As we rapidly moved into this this phase of settlements during the kind of environment tempted the same day.
Order fulfillment sorry the.
The direct to customer fulfillment through.
Through same day that is really.
Equivalent to an in store salad as well the cost about a nominates to span the nominal fee basically for the cup of coffee or a cup of coffee to get the order shipped.
And that's it for 99 and we cover.
The the cost of goods, but the shipping cost is covered by the customer.
Okay. That's great. Thank you and then sorry go ahead.
No go ahead.
Okay. Just my other follow up was just around.
Kind of it where you guys are in establishing category roles from merchandising standpoint, I'm just kind of curious.
Which categories are going to see the most impact when you have these on brand introductions next year and.
And how you how you kind of plan to communicate all of this to consumers and a lot of this may come out I guess at the Investor meeting, which is what can you what can you help us with here on that front. Thank you yes.
Yes, definitely looking forward to sharing Dave for details of our brand and category trajectory for 2021 and beyond but what I will tell you is we've got a deep amount of recession, notwithstanding the strength of our categories. Currently on the opportunities that lie ahead.
It's no surprise that they really fall into the bag.
The bed Bath kitchen, and storage in oil gas areas and there are areas that would be doubling down in Q2, and we'll put that in fourth quarter, but we'll really expand those at double down on our brand opportunities as we kind of launch throughout 2021, so more to follow on that but we have see category definition of goals we track.
We tracking discoveries and convenience.
And chips and traffic in each of the categories and have a very distinct plan.
Okay, great well, thanks, so much and I look forward to the meeting.
In a few weeks thanks, Thanks Peter.
Our next question is from Steven Force from Guggenheim Securities.
Good morning.
Maybe somewhat of a follow up as we.
As we look at the building blocks of the gross margin walk in the presentation.
The 190 basis points of distribution fulfillment leverage can you sort of help us better understand the drivers of that is that is that we refer to as sort of the change in.
Or shift in the mix of fulfillment methods relative to last year and.
I don't know if you have.
The ability or or want to quantify the differences and fulfillment costs.
Across those different methods, but it would be it would help us sort of better understand that both.
The focus curbside opportunity as it continues to build here.
Hi, Steve Douglas Cobble Hill, So clearly, we're really focused on driving each of the components of gross margin fulfillment costs being one of those.
And for your specific question of 190 basis points that includes benefit of.
Scale and leveraging some of our costs distribution costs.
Legal costs, and we expect to continue improving on though.
To offset the channel mix impact, which we're planning for.
By continued driving BOPUS you heard CND in her remarks talking about how bopis. It's one of the key elements, we will be focusing on so we're very pleased by the progress. We've made in gross margin year on year, not only by 11, new fulfillment costs, but also by improving product mix and with.
Yes, we need more than offset the anticipated digital channels.
Does that help.
Yes, I think.
No I don't know if you can sort of.
Yes.
Talk about the differences in regions or if there is any sort of re.
Range of penetration mix right, so 15% if we look at.
Cross Hardlines retailer.
I see.
Your broader retail subset immediate do you have certain regions that are running at higher penetrations or where do you where do you sort of expect BOPUS curbside to go over that over that two to three year time horizon.
We will focus on ensuring that we have a very responsive supply chain, which is part of the reason we're talking about supply chain reinvention. So we will satisfy what our customers want and we will get to the digital channel makes that our customers nine and the Bowflex Max that our customer demands.
In Investor Day, we can show more perspective on how we see that playing out and how we plan to address the optimizing the fulfillment cost of the difference route to markets where it is.
On store direct from vendors direct to consumer sales.
Same day delivery et cetera.
Okay.
Save out to sales such as it is to become a new custom unknown. We've just begun the journey with focus we're seeing that 15% penetration increase on a regular basis and we expect to see that being a real strength during the fourth quarter with building this into our plan as a sustainable part of our mix. So the puts sharing more at the Investor day.
Hey, if I could if I can just a quick follow up Mark for you that we will.
We we look at the second quarter performance and.
The margin profile, and then think about right that profit improvement plan.
You are obviously, a really strong quarter right.
Relative to what you sort of are.
Guiding people to for that two to three year time horizon on a margin profile is there is there anything to call out here, that's somewhat transitory in nature or.
No as we think about the third quarter here should we just expect sort of a a build in the profitability of the underlying business.
No I think what you're saying Steve is the disciplines that will be deploying moving forward I mean.
When we use the word modernize a fair bit try it out.
Discussion. This morning, I think it really does go to what were doing gross margin in terms of merchandise mix doubling down on careful consideration and usage of promotions and coupon.
How we're communicating and engaging with our customer and then offering these new services, which are.
Easy and convenient but help us in our profit margins. So I think what you're seeing is the substructure of the disciplines that we have now apply to our business, our best practice and applying those through the third and fourth quarter and beyond and you'll see further evidence of that as we go into the Investor day, where we layer up even more opportunity.
These for gross margin growth through sourcing and our brands et cetera. So we look forward to continuing that discussion with you.
And our next question is from Brad Thomas from Keybanc capital markets.
Hi, Thanks, so much for taking my question.
I was wondering if you could talk a little bit about the coming.
Competitive environment in which you are participating in and and how you're thinking that may evolve here always move into October and the holidays, particularly as you're seeing.
Retailers pulled forward holiday promotions and and Prime day falling in October now thank you.
Yes, I think we're really pleased Brad said be in an environment, where it is truly competitive app stores are open.
Firing on diesel and were able to compete actively versus how we could in the first quarter I think it's a competitive environment and what we're really pleased with is how the customers really land in both current and new to their relationship with bed Bath and beyond I think relationships and engagement are going to be very important there's no doubt.
Now that this will be a said fourth quarter. Unlike no. Other I think customers were saying from add data points. We will begin to show up earlier, so value add for the holidays and where.
And were adjusting accordingly, like many retailers. So we think it's going to be competitive it's going to be different we are agile and flexible and we built our plans accordingly and are ready to roll. So we're really looking for getting into it up as we said with the first signs we've seen through the month of September have been encouraging.
But the rubber really hits derived from Thanksgiving on woods, when we see that changing shopping patent and behavior.
Very helpful. Mark and then a follow up on some of the monthly cadence that you disclose which I think was very helpful. Thank you. So much I am wondering if you could share more color on what you're seeing from a traffic perspective.
Yes from a traffic perspective.
Obviously, our overall sales results.
Great Omni channel traffic and I think Thats, a key the door for us a digital sales.
It can be represented by someone buying digitally picking up in store. So the power of our omni channel sales is really driving our results overall traffic was good I think we're still seeing some tentativeness specifically in certain regions about a return to shopping and we think that that will grow missing data that suggest customers getting more comfortable with shopping in store.
Youre welcome.
Not back to normal circumstances that old, but I think this is where the power of accelerating digital and balancing out to become truly on the always is really leaned into our favor. So when meeting the customer where they are when they are ready and what they need so I think that was saying traffic differentials.
But we see ongoing trends changing over to be watching those.
And our next question is from Michael Lasser from Us.
Good morning, Thanks for taking my question.
Presumably all this was the best loan.
Loan within the quarter Tom.
Commentary suggested that the timber was equal to the pool.
The comp trend in September with equal to the full second quarter, suggesting that September has slowed versus where August trended why do you think thats the case.
Once they get stability against the quarter and against the trends we are evolving through the month of August about that store and digital levels down to our margin and bought this right. So we're seeing stability in that we let comment any further on FCC results, but wanted to ensure that we would.
Not saying there was just a one moment in time based on big important in the industry.
With the customer mindset. This is developing a patent with our customers that we feel very comfortable with.
So mark just want to clarify there probably will be a lot of discussion about this when you see stability versus.
First it in September do you mean stability in September versus August or stability in September versus the entire second quarter.
Hey, Michael good stable Q, what do we mean stability consistency in the growth rates. So we're seeing growth rates in September that are similar to the growth rate we've seen in the second quarter both.
Both okay on a digital growth basis and comp basis and to your question about trends within the second quarter, because as Mark said, we don't want to get into too much specific into the third quarter other than saying that we sold 14, so far again consistent.
Growth is we saw consistent growth in digital.
Each and every one of the three month in the second quarter June July August we thought we saw digital growth north of 80% of that setting.
Her remarks, and we're very encouraged by that.
Okay.
Q2 gross margin to what extent do you think that you are able to lower your your coupon expense.
Because the overall environment will be there was just less promotional.
How much of that factor in and and as part of the gross margin how much should we incorporate the fact that shipping and freight costs are going to be going up considerably into the fourth quarter and probably in the next year as we calibrate our models moving forward. Thank you so much.
Yes, Michael I mean again, there's going to be pressure on I think time frames in terms of shipping.
And moving forward I think weve calibrated that into App cuts what plans, we feel good about that in terms of the gross margin.
<unk> costs, which are really solid that you know in terms of coupon, yes. The market was less promotional in total.
And we accounted for that but for us we're embarking on a journey on how we use our resources more effectively and strategically so coupon for us ease the strength and its an opportunity used correctly. So in the capital Q ration of it.
Testing and into writing as we do through Q2, we see we will upside benefits to how we use the coupon and so it was more about our strategic intent than it was the market dynamic, but both of them working at five.
And our next question is from Simeon Gutman from Morgan Stanley.
Thanks, Good morning, everyone I have a first the short term and medium term my short term is SGN eight dollar growth in Q3, how to think about it if you're able to share given that I guess store expenses will be more fully ramped up by that quarter.
I see and was terrible here look.
Look we're not going to provide that guidance in our piano component beyond.
Our actual results Q3, what I can say.
We are fully committed to continue driving SGN Angel as we saw in the first quarter. You also some de leverage in the second quarter and keeping in mind that some of the restructuring interventions that we've announced recently are going to start wrapping up ramping up into the third and the fourth quarter. So.
So we're committed to continue optimizing our cost structure and add.
Both up to come.
And then the more efficient promotions and markdown management I assume that's also helping the ticket on the on the topline is that a meaningful lift or is it more and more just more impactful to the gross margin line.
No that would not make the growth margin line, we're becoming much more disciplined on how we look at our data.
How we optimize promotions this month that how we manage coupon you'll see that more reflected in the gross margin line, which is part of the 150 basis points.
Product mix growth margin improvement drivers.
And our next question is from Kate Mcshane from Goldman Sachs.
Thank you good morning, Thanks for taking my question I wondered if I could go back to the comp question earlier.
I did mention that you'll be closing the 200 stores by the end of the year is there a way to quantify the store comp of those 200 stores and how big the gap is between their performance in the rest of the fleet.
Hi, Kate that really pertains to how we'll be performing the third and fourth quarter. So we will be sharing that that did they either that we're fairly comfortable that the 63 stores that were closing have been built into our plan. We'll have accelerated sales based on closure sales, which will be advantageous there and we can absorb that inside the side about slate.
And we got comfortable plans today.
Okay. Thank you and then my second question is just on inventories I wondered if you could update us on the call. These inventory in the store how you feel about in stocks going into the back half of the year.
Yeah, we're definitely trading on lean on inventory, which is partly by design and poly based on the SaaS accelerating and availability of inventory I think the among the industry overall is buckling down in showing that we get the right levels of in inventory for the third and fourth quarter, we have plans in place and working closely with our vendor base.
We feel that the quality of the inventory is very very strong we continue to chase and replenish as much as possible for our key items. We are hyper focused on our top performing items going to third and fourth quarter was we noted last year that was one of our achilles' heels and we.
And we think that we have a better promotional cadence, which will help us get through.
With better quality and size of inventory, so well operating leaner and better with the right inventories of bodes well for the future.
Our next question is from Bobby Griffin from Raymond James.
Good morning, everybody I appreciate taking my questions I guess Mark first in the slide deck is called out the potential for additional asset sales on some noncore assets. If those sales went through on the other noncore asset remaining would that potentially unlock further savings than you've already kind of detailed in that initial restructuring plan.
The asset sales.
Weve factored into our our Ford planes intensive if there was any action, there, which we not declaring either die bumpy, but yes, we think that we factored in the SG nine going forward.
There will be a bit of a non issue really because we've already taken action with inside each of the assets to date and that was part of our restructuring plan so that the bank.
Anything that comes forward in terms of asset sales will just be a net benefit in terms of cash flow.
Okay. That's helpful. And then just go ahead I'm sorry.
Oh do you I guess.
Okay, I guess and my last one is just a modeling question on kind of the spread between comps and net sales look like kind of roughly seven points. This quarter I would assume is it safe to assume that going to widen a little bit as we go through these store closures and help us to help our model should we can we should we think of that seven points plus some store closures for the new.
Yes.
The next three or four quarters to keep us in line with with how things are trending.
Hey, Bobby with double here.
Let me address that understand completely the context of your question and very important one we're paying more and more attention to comp growth as we continue reshaping the.
The portfolio of the company both in terms of contacts and store. So let me address it in two parts first in the second quarter the.
The big difference between door comp and reported sales think of it.
During the month of June right for some of the.
First on the total quarter, we had we boarded.
Sales on stores down 18%.
And comp store performance down 12%.
So you're seeing that six point this delta into the stores and part of it is driven because in the month of June remember in the month of June we were starting opening grad through your stores for that Big Delta is primarily driven by the month of June where in June's store sales were down close to 25.
Thanks.
While.
Lower comp.
Stuart only looked down mid single digits.
Looking forward, we are looking as part of the program that John is leading and optimizing the 200 stores 63 coming this fiscal year, we will be closing the stores that are less productive now it's very hard to predict what's the impact on comp growth going forward, but rest assured that we will provide that.
Perspective, as we report our results each quarter.
While codells.
And our next question is from Christopher Horvers from JP Morgan.
Thanks. Good morning, So first a question about how you're prioritizing the store closings I know you're basing the stores.
On sort of historical performance, but prior to this year, you really didnt have a.
True Omni channel platform. So how are you prioritizing. These first 63 or they should have the most EBITDA negative stores or this where more of the most adjacency and closest to another bath and beyond stores just trying to understand.
Those 63, and then on the 200 do you think as you build out omni you might revisit the overall closing target.
Yes, Christopher this is John Thank you for your question look we've undertaken a very deep analysis around our our network and we focused in on several key areas. The first is unprofitable stores. The second is stores that are too close to one another in the third is where we have a lease arrangements that are burdensome too.
The profitability of the stores, so weve undertaken a deep analysis to identify the stores that that should be closed.
And from there.
From there the first roughly third we've announced.
Will we will be closing by the end of the year.
Got it and then two one off questions you know based on prior disclosure it looks like ecommerce mix actually goes down and that third quarter I'm not sure if that's true.
True in September, giving back to college, but if you're holding E commerce trends consistent and store comps consistent that would suggest deceleration relative to twoq. So just trying to see if there's a nuance there and.
And secondly in the first quarter you did have a benefit from an accounting change of about 300, Bips and gross margin year over year. So was trying to see what.
What that benefit was then and this quarter as well thank you.
Sure Hi, Chris Good stable here first.
First on your question on the trends throughout the quarter as mentioned before we have seen consistent.
Digital sales growth of above 80% in each one of the month in the second quarter and we continue seeing that trend.
In the month of September so we feel pretty good about that.
Your question about the accounting change was there was an adjustment and refinement on how we record from a fulfillment costs into growth margin specifically into making the metric that has no impact on total EBITDA on gross margin in the second quarter. The Buck was 150 basis points UK.
Keeps asset anticipated in the first quarter was 300 basis points. So it was less than half even that our revenue doubled more or less quarter to quarter.
Understood Thanks very much.
Our next question is true Nagle from Bank of America.
Good morning, Thanks very much.
Maybe I'll just stick to one question on capital allocation.
Looking at the quarter.
You guys had substantially improved EBITDA and arguably.
[music] much cash on the books with 300 net against that.
More cash on the comment from free cash flow and.
Asset sales potentially so.
So where do we stand in terms of Reengaging. The buyback are we reached a restricted.
When could we expect you guys back in the market.
Yes, hi, Kate Thanks for recognizing the strong fiscal position that it's definitely what would be building towards.
You can see us coming at the end of the month and having a real clay point of view on Asps will three plant in terms of capital expenditure and allocation.
Doug will provide real clarity on how we intend to use our liquidity and cash strength to generate extra business model.
Modernize as well as return to shareholders. So we look forward to sharing more then.
Okay, maybe I'll just take one more quick one.
To your Mark in terms of merchandise.
Merchandise mix, so kind of looking back to the back half last year.
Things were a bit messy to say the least out of stocks not having the right inventory.
How much of a difference do you think you guys can make and with some of your new early merchandising plans in the back half in terms of comps and perhaps better margin.
Yeah, I mean, as we kind of detail through the quarterly results back then there was some self inflicted wounds that I think this team has made with agility and scale.
Around different strategic mindset. So I think as you saw in the back to college peers.
Period, you saw us representing cleaved value on end caps and clarity and alignment between digital and stores that you source in stock of key items, you saw us have really meaningful promotions that were talking to specific customers and to the best of our ability post coming out the whole blip of cloud, but really getting back in stock so the items that.
Customers want it we've built a robust plan so the third and fourth quarter to focus on that top items being in stock to Q right that promotional plan and to be a meaningful storytelling to the customers about their needs and I think it can be a very different the fourth quarter. So we really look forward to using the blueprint of how we're managing inventory.
We focus on best sellers and key items, our promotional cadence clearly clarifying communicating great price value and.
And using our omni channel.
Services to really bring a very different than the fourth quarter.
And we have time for one more question and last question is from Seth Basham from Wedbush Securities.
Thanks, a lot. Good morning. Thank you for taking my question and congrats on a great quarter. My first question is just on some of the underlying improvements made in gross margins, which had been very strong and in short order time on as we think about the go forward plan here in the back half of the year you'd elaborate on some of the drivers being sustainable and I know, you're not providing financial guidance.
But is there anything that you did in the second quarter that we should think about not being sustainable in the back half the year in terms of gross margin year over year performance.
Hi, Thanks for the question now we think that the efforts we had to talking Q2 out very sustainable or a good runway to our efforts in third and fourth the mix becomes rebalance we've doubled down on on meaningful promotions and curation of promotion and now coupon.
We're ready for the promotional period, we are ready for the gift giving period our stocks looking.
Stocks looking better as I, just mentioned I think that and also too we see a ramping up of.
The pipe is penetration right as well as the addition of same day. So it's a really good leaders there that just wouldn't nonexistent in three four last year that are going to be in CLI and we already have proof of concept and green shoots on from Q2 that we see providing into the fourth quarter.
That's great perspective, and then lastly, as it relates to some of the new customers that you've acquired can you talk to repay.
Repurchase activity, you've seen from them, thus far relative to prior cohorts of new customers are you seeing them more sticky and you think thats a positive driver going forward.
We've seen them engaged we definitely colliding more deiter in engagement with them and.
And we saw what was saying and that is a younger customer who may not have had have as much discretionary income, but they're very focused on the arm. So we've seen key areas like home decor really fly and.
And the kitchen area. So they are investing early on we think theyre going to be best frequently we're going to be connecting with them engaging them and looking that didnt for long term value and engagement.
Thank you and ladies and gentlemen that is all the time, we have for today today for questions and I will now turn the call back over to Janet Barth for closing remarks.
Thank you and thank you also participating in our call today. Please feel free to contact me I feel X with additional questions or comments on our quarterly results.
Look forward to speaking with you again later this month at our virtual Investor Day on Wednesday October 28.
I will start at nine am will sales.
Thanks, Jason.
Available sales.
Have a great day stay safe.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.