Q2 2021 Bed Bath & Beyond Inc Earnings Call
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Welcome to bed Bath <unk> beyond fiscal 2021 second quarter earnings Conference call. My name is John and I'll be your operator for today's call. At this time all participants are in listen only mode. Later, we will conduct a question and answer correctly.
A question and answer correct and if you do have a question press Star then one on your Touchtone phone. Please note. The conference is being recorded and now I will turn the call over to Susie Kim V.
P P of Investor Relations.
Again.
Thank you and good morning, everyone welcome to our fiscal 2021 second quarter earnings call. Joining us today are Mark <unk>, our president and CEO and Mr. Ramos, Our Chief Financial Officer before we begin let me remind you that our fiscal 2021 second quarter earnings release and fly.
Presentation can be found in the Investor Relations section of our website bed Bath <unk> beyond Dot com.
And as exhibits our related form 8-K.
This conference call and the slides we refer to 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 objective.
All such statements are subject to risks and uncertainties that could cause results to 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, including the risk factors section in our annual report on Form 10-K, and quarterly reports on Form 10-Q. The company undertakes no obligation to update or revise any forward looking statements.
Additionally, the information we will discuss today contains certain financial measures that exclude amounts or are subject to adjustments that have the effect of excluding amounts that are included in the most directly comparable measure 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 Susie and good morning, everyone.
After several consecutive quarters of delivering positively on our plan.
Second quarter represented a disruptive moment, along that multi year transformational journey.
While we continue to make significant progress on our long term strategies, our immediate results met challenges stemming from both macroeconomic forces and internal execution factors.
We delivered net sales of approximately $2 billion, resulting in a 1% comp decline and murph.
Collective of a choppy quarter.
Following solid growth in June we saw an unexpected and substantial shifts towards the end of the period, which impacted that financial outcome.
In August the final and largest sales month of Q2 traffic unexpectedly slowed and therefore sales did not materialize as we had anticipated.
External disruptive forces such as the resurgence of COVID-19 cases, and growing delta for us created a challenging and volatile environment.
This is particularly evident in large southern states, such as Florida, and Texas, as well as California, which in aggregate represent approximately 30% of that total sales.
From July to August traffic trends devolved in these states and worsen by double digit percentages.
The rapid decline in traffic was particularly detrimental for us given the inclusion and significance of August in our fiscal quarter versus our competitors.
We are cognizant of comparisons to our peers, who are out of July end reporting cycle.
As a proxy our comparable sales grew an estimated 24% based on May June July.
Highlighting the importance of the trading month of August on our Q2 performance.
In diagnosing out quarter. In addition to the external forces. We faced we also saw some internal execution issues that we are now addressing.
There are opportunities, where we should have been more effective in allocating marketing resources to stimulate and support traffic in stores and online.
In an effort to diversify and shift our customer engagement towards online and social media channels, we overcorrected and be too far from the core fundamental historical and current traffic drivers.
For example, we disproportionately would use the distribution about printed circulars, which are a continuous and critical store and digital traffic driver for our bed Bath <unk> beyond business.
Our recently combined brand and digital teams are quickly correcting cost to rectify these issues to the end of the third quarter and full year.
As lower traffic impacted our ability to lead the sales we authorized under unprecedented supply chain conditions that have continued to increasingly global trade since last year.
As the quarter progressed, particularly in August conditions worsen relative to our full preparations.
The speed of industry inflation and lead time pressures outpaced our plans to offset these headwinds and as a result, we did not pivot fast enough, especially on price and margin recovery.
In response, we have leveraged our second quarter experienced increase their agility at swiftly activate offsets to these high input costs and lead times.
Several crucial steps to improve our second half performance such as instituting more effective margin controls through more targeted pricing and promotional strategies.
We will also pursue even greater supply chain optimization.
Our second quarter performance, including the factors I've just discussed have caused us to reframe our outlook for the full year.
The challenges we face in August have not abated in September on.
Surprisingly the media on Wall Street discourse around worldwide fright shortages and port disruptions things should be not deadly chronicled in recent weeks.
We have diagnose problems and develop strong plants change add trajectory recovering by November and delivering a strong holiday is our key focus.
Furthermore, despite this difficult business environment, and moderating home category growth our market share within the quarter remained steady sequentially month by month.
As expected we continued to be below last year's levels given the planned overall net sales decline due to <unk>.
Our strategic pleasure of 200 stores under our fleet optimization initiative.
We have a new baseline from which to grow which further emphasizes the importance of executing on our long term objectives. In addition to driving <unk> performance.
Now turning to out he long term initiatives.
Our omni always principle remains a cornerstone of our evolution to.
So the group, we continued to leverage our enhanced digital channel, which delivered a significant sales increase about 2019 at nearly double the proportion of styles.
We are also building on the underlying foundation of the business as part of our commitment to enhancing the customer experience, we instituted cross banner browsing across our entire group of concepts, including bed Bath <unk> beyond buy buy baby and Harman will.
We look forward to further enabling cross banner shopping and checkout soon.
Our omnichannel presence continues to grow as well during the quarter, we expanded that same day delivery reach by our new partnership with Friday, which is in addition to our existing capabilities with both door dash and shipped.
We continue to make significant progress against our store remodel plans, our bold new remodels are showing early signs of success.
We currently have approximately 70 stores remodel at about planned after the day to $150 to 2021.
And they are performing above plan.
July reopening about re imagined in New York City flagship store in Chelsea, where the celebratory milestone trusts on our transformational journey.
Our Chelsea store serves as a beacon for the overall redefinition of the new bed Bath and beyond we've.
We've enhanced the customer experience on many fronts, including key national brand shop in shops, and upgraded mobile shopping capabilities.
Performance at at Chelsea flagship is exceeding expectations on many levels and it is now our most productive store in the chain a square foot.
Momentum within our other brands is growing in its first year of development.
With the second quarter, we've now exceeded our own brand penetration Gulf of fiscal 2021 in total and more than 20% of federal sales well ahead of schedule.
Penetration is even higher in our new store Remodels.
These new higher margin umbrella driving differentiation for bed Bath and beyond.
These early stages, we are attracting engaging and converting new and existing customers and also seeing lower coupon attachment rates.
Our next to owned brands decided to launch in early October and November marking our seventh midnight brands for 2021.
Also encouragingly Bye Bye baby was a shining star for the group this quarter.
Building on several periods of consecutive positive momentum baby comparable sales grew again consistently by a high teens percentage for the second quarter signaling its fourth consecutive month of share gains versus last year.
This performance is being driven by particular growth in apparel and travel gear.
Similar to trends, we are currently seeing across the retail sector.
We are proud to be answering the needs of our customers along their parenting journey and planning to build up strengths throughout key transformational pillars, including differentiated product strategies, such as our own brands.
Finally, and importantly, our operational transformation remains on track we ended the mixed phase of that supply chain modernization through our partnership with Ryder, which we announced at the end of July.
In September we opened our new northeast regional distribution center.
These developments are instrumental to our end to end transformational strategy and will help in the long term control and protection from supply chain stress.
Such as those we are facing today.
I will now turn the call out of <unk> and now our Chief Financial Officer to review, but that second quarter financial results and our outlook for the third quarter and full year.
Stubhub.
Thank you Mark and good morning, everyone.
To build on what Mark just discussed I would like to underscore that we're acting quickly to offset and navigate the near term macro supply chain challenges the entire industry is facing.
It is also important to understand that given our current size and margin profile small relative changes in costs pricing and margin can have a magnified impact on our earnings results.
Core perspective.
Hundred basis points of margin variation, which could stand from 1% in cost changes or 1% of improvement from pricing or product mix are worth $80 million of EBITDA for the year and approximately 50 bps.
EPS.
These exists on the upside but also on the downside.
Evidenced in our Q2 results significantly higher than anticipated and unprecedented trade increases lessor performance falling below expectations.
Therefore, the actions we are implementing are important as we manage cost pressures, specifically pricing freight optimization and marketing interventions.
With these in mind I will cover our second quarter results as well as our third quarter guidance and revised full year outlook.
As a reminder, as unexpected reported net sales continue to reflect the impact from expected noncore banner divestitures completed last year as well as our ongoing planned store fleet optimization program.
Total net sales were $96.0 billion and represented a small comp sales decline of 1%.
Core banners were down 11%, which included a 10% APAC from our ongoing fleet optimization program.
Our digital channel represented 34% of total net sales and were pleased to see that our digital base continues to be a meaningful portion of our results with double dip penetration versus pre pandemic levels.
Store comps delivered growth of 3%.
Given solid performance in June, but lower in subsequent months due to slower traffic as the quarter progressed.
Bed Bath <unk> beyond banner comparable sales decreased 4% versus last year.
Back to college performance, though 12% growth was solid on top of strong growth last year, we had expected to see even higher growth.
As Mark noted our buy buy baby banner delivered exceptional results for the quarter.
Delivering comparable sales growth in the high teens percentage versus last year exceeding our expectations.
Adjusted gross margin was 34%.
Third 90 basis points lower than last year.
This was driven by a 360 basis point drag from increased freight costs compared to last year, given the unprecedented supply chain challenges, particularly in July and August.
This impact far exceeded the significant 240 basis points increase we had built into our plants.
For example, we had anticipated container rates to increase more than 100% relative to last year, yes.
Yet, we ultimately curve rate, 150% higher as we acted with agility to ensure supply availability.
Increases like these unfortunately, offset a 170 basis points of positive merchandise margin expansion.
Particularly fueled by owned brand penetration.
Worth, noting even with these outside freight costs gross margin is above 2019.
SG&A dollar expense was in line with our regional plan, but therefore higher as a percentage of sales given our lower than expected revenue base late in the quarter.
As we continue to navigate the volatile operating environment for the remainder of the year, we're focused on managing expenses appropriately while not sacrificing the strategic investments, we must make to support and drive our business transformation.
We deliver adjusted EBITDA of $85 million below our expectations driven by the lower sales and gross margin performance of the quarter.
We reported a GAAP EPS loss of <unk> 72 per diluted share.
These results include approximately $77 million of specialized related to planned restructuring and intensive transformation initiatives.
These are excluded from adjusted results to provide a more accurate picture of the underlying performance of our business.
As we progress ahead through the initial stages of a transformation we have planned for these charges to decrease over time.
On an adjusted basis EPS was <unk> <unk>.
Reflecting our lower EBITDA and the sensitivity dynamics I described earlier.
Turning to our balance sheet and cash flow.
We continue to demonstrate strong cash and liquidity we.
We generated $75 million in operating cash flow during the quarter driven by working capital improvements.
Consistent with our capital allocation principles, we continue to drive our ongoing transformation initiatives.
We invested approximately $76 million of capital.
Such as the store Remodels supply chain and IP system.
Which led to a neutral free cash flow position.
Our cash and investment balance remains strong at $2.0 billion.
Solidifying our capital availability further we improved terms and increased our asset base revolving credit facility to $1 billion or not.
Bringing our total liquidity to $2 billion.
We continue to follow a balanced data driven approach to return cash to shareholders.
During the quarter, we executed approximately $100 million in share repurchases or approximately 3 million shares.
Program to date, we have repurchased approximately $600 million.
Or 20% of our shares outstanding.
Now I will discuss our guidance for the third quarter and revised outlook for the full year.
First on the third quarter, which covers the month of September October and November.
So far in the month of September we have not seen an improvement from the challenging traffic and sales trends we experienced in August <unk>.
Having said that similar to last quarter. The final month of this quarter November is the largest and most impactful.
We are committed to being transparent and want to be explicit.
November has historically represented nearly half of the sales for Q3 due to the Thanksgiving sales period inclusive of the Black Friday selling period.
Our third quarter guidance takes into account September trends, including the supply chain challenges, we're experiencing as well as the importance of the month of November.
We are expecting approximately flat comparable sales for Q3.
Accordingly, net sales are expected to be in a range of $97.0 billion to $2 billion.
Again divestitures and fleet optimization will continue to impact year on year comparison.
In terms of macroeconomic factors, we're not anticipating an improvement to the unprecedented global supply chain conditions that existed.
We're exercising caution on the near term pressures related to rising cost inflation and the ongoing tightening of supply availability.
Visibility across the industry remains complex and any other sudden and dramatic worsening would be difficult to predict or estimate accurate.
We are acutely aware of these factors that are outside our control, which is why we're hyper focused on offsetting inflation with the strategic pricing and promo optimization actions.
With these factors in mind, we expect adjusted gross margin in the range of 34% to 35%.
Given our sales and gross margin expectations. Adjusted EBITDA is estimated to be in a range of $80 million to $85 million, leading to an adjusted EPS range of zero to five.
Based on our performance for the first half of the year as well as our expectations for the third quarter, we feel it is appropriate to revise our guidance for the full year.
We now expect net sales in the range of eight one to $11.0 billion.
Just on comp sales growth of flat to slightly positive for the second through fourth quarters.
For modeling purposes, the translates to a double digit full fiscal year comp.
Adjusted gross margin for the year is now expected to be in a range of 34% to 35% compared to our previous expectation of approximately 35%.
SG&A is now expected to be approximately 32% of total net sales.
In line with our revised sales and gross margin expectations. Adjusted EBITDA is now expected to be in a range of $425 million to $465 million.
This translates to an adjusted EPS range of 70.
To $11.0
Our balance sheet and cash flow assumptions remain largely unchanged, including capex of approximately $400 million.
A gross debt to EBITDA leverage ratio of approximately three times.
And plans for a total of $325 million in share repurchases for the full year or approximately $100 million for the remainder of the year.
We have also provided additional assumptions on depreciation and amortization interest and tax rate in today's presentation to assist with EPS modeling.
Despite the backdrop of the current operating environment, our guidance reflects the immediate mitigation plans as well as fundamental processes and strategies that are stronger today than in prior years.
We have pivoted quickly to improve traffic across all channels and implement strategies that can offset the cost increases that we're experiencing.
Additionally, we should benefit from our ongoing initiatives, including the increasing penetration and growth of our view on brands.
Better market based pricing.
More effective data driven promotional and markdown strategy and supply chain and freight optimization.
Despite the near term turbulence that has led to update our guidance today.
Our confidence on the systemic progress we have and will continue to make on our transformation.
Even on a lower store and revenue base, particularly when considering our divestitures our core profitability for 2021, largely exceeds our profitability 2019.
Our gross margins are projected to be approximately 100 to 200 basis points higher.
We are offsetting stranded overheads from divestitures.
Core EBITDA is anticipated to be flat or up to nearly 10% higher again on a smaller more streamlined base business.
This implies earnings per share we will have expanded by one 5% to two five times further enabled by our commitment to shareholder return through our share repurchases.
We are a healthier more profitable enterprise today than we have previously been.
And are better positioned to overcome the short term volatility we're currently experiencing.
I will now turn the call over to Mark for some closing remarks.
So as you can see we are a company executing a comprehensive turnaround while simultaneously navigating ever changing macro and business conditions.
I want to thank our organization to the perseverance diligence and pulp grades that is evident daily.
One quarter does not define or derail our multiyear strategic plan.
Steps, we are taking will get us back on track to achieve our near and medium term goals.
As always with turnarounds at Pops will be dynamic, but we are confident and committed to our three year goals and beyond.
Our foundation is strong strategically operationally and financially.
As Gustavo discussed our cash balance and liquidity provide us ample resources above and beyond our already robust plans with.
With that strategy in play in the hotline in Q2, we are well positioned to continue delivering on our transformation.
We have the plan the team and the capital to unlock that potential.
We will now take questions.
Thank you, we'll now begin the question and answer.
We do have a question.
Star then one on your Touchtone phone, if you wish to be removed from the queue. Please press the pound sign or the hash key.
If you're using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question and then one on your Touchtone phone.
And our first question from Susan.
Anderson from B Riley.
Hi, good morning, Thanks for taking my question.
I'm curious on the owned brands. So it sounds like they definitely did well in the quarter, reaching that 20% penetration.
Wow Thats a huge positive I'm curious are they impacting the top line at all given they would be lower ticket versus branded product that you would normally sell in their place and then also maybe if you could just talk about how much they helped the gross margin in the quarter.
Yes. Thanks.
Look we are experiencing some transitioning opening price point, because it's a completely new addition in that business, so with that and clearance markdown. So we did see AUR slightly lower.
And that was somewhat expected, but it is adding to that profitability is disproportionately adding to that profitability that we said 170 basis points of increase in margin bodes well for now and as we grow but our brands and the rest of our initiatives. Unfortunately offset by some of those charges. We sold so we're very positive with the fab excellence.
Strategy, how it's implemented and we see further growth from that initiative.
Great and then if I could just add one more I guess just on the traffic front I'm curious just your thoughts around.
Increasing store traffic kind of during those slower shopping times and then also I'm curious what your plans are for holiday to drive traffic into the stores and also the products.
Yeah look at one of the critical missteps, we had during the quarter system, but it's really that we've called back on key vehicles that had been traditionally strong traffic drivers for both digital and stores.
Engaging our customers, even with coupons and that was really the reduction in circular which was dramatically cut and we can get clarity on that until much later in the quarter and it had a real impact on traffic that coupled with the cause it issues that we saw particularly in key states that we were correlating the increase in the Delta variant growth as.
Creating risk and concern for customers was kind of a double dip that was within the quarter. So we're looking for issues that systemic or one time and we feel like that we can address both of those by re addressing our investments in marketing appropriately and we're starting to do that as well as reaching out to our customers engaging in.
Have a nice critical geographical sites.
In terms of the holiday period, we feel buses.
Particularly the fourth quarter of last year and the end of third quarter, we had a lot more tools in our tool belt to be able to challenge that.
That season, and really drive growth, we've got assortment, we've got inventory management.
We've got our revised marketing plan, we'll have a better balance about digital and store business were up 41% penetration in the fourth quarter last year and it was an unusual time and then we've really added an awful of ease and convenience of opportunities for our customers to engage with us. So we feel strongly about our plans to date.
Great. That's really helpful. Thanks for all the details good luck the rest of the year.
Thank you.
Our next question is from income from Morgan Stanley.
Yes.
Hey, everyone.
Hey, Mark.
High level question is when you came to the business. There were some execution issues. This is pre COVID-19 and you started fixing some things and then COVID-19 happened.
Accelerated a lot of change the category had a big positive shift and it looked like things were going in the right direction.
And then there was stimulus.
You are very early in your turnaround.
And I wanted to ask whether it may just be a year or two until we start seeing more positive change.
There's a lot of things that are obscuring the environment, especially with stimulus and the category doing well and you just started launching of new brands and I remember a target it took a year if not two for the strategy to really blend so.
I'm curious if we're setting the expectations a little too high here and maybe the turn and whats Your engineering may just take a bit longer.
Materialize.
Look I appreciate the comment and say, it's definitely true. It is an evolutionary transformation and it is extensive but we are making significant strides in that and again tens of setting the bar high I think that we believe we could hit those goals. We're just seeing some midterm issues here in terms of.
The Delta there and its effect on the business the supply chain pressures and as we outlined some things in terms of our execution. We just didn't get right. So I think that they had the baby steps of this transformation by two quarters into a 12 quarter transformation plan I agree with you that we're going to see greater momentum sequentially.
As we move through this is just a near term pain point for us, but I appreciate the comment very much.
And then can you tell us where you are I guess it may be an inning of the brand launches of the what you would call the transformation that you're architect thing.
What stages that so we can appreciate the timing a bit better.
Yes look I am not your sports Guy and I get throwing that one side right private quickly decide it's kind of a couple of case agency, there's establish reestablish stabilize optimize and actualize and we've just launched and are about to launch several additional brands in our first year design developed defy.
<unk> and launch <unk>.
Within 2021. So this year is definitely our establishment yet and so we are getting traction with those brands, we're engaging with new and existing customers. We're seeing a lot of positive signs there, we only see that growing.
And.
We are now.
Opening stages with evolutionary stages to fallout.
Okay. Thanks, everyone. Good luck.
Thank you.
Our next question is from Christopher <unk> from Jpmorgan.
Thanks, Good morning so.
My first question is about September in Delta infections have moderated and youre hearing rebounds in the back half of September.
Categories like Airlines and restaurants. So the commentary that September is not getting better or is it that the other states are deteriorating in the big three are improving or do you think that perhaps the home furnishings category is moderating.
We've definitely seen data around hundred finish things moderating.
I think that.
We're up against some big particularly in the kitchen appliance area. Some big L Y comparisons with Q2, even going through into September.
We are seeing some buoyancy in other markets and Thats definitely around the markets didn't exist last year weren't performing like apparel and footwear and it's the diversification of spend including travel. So I think the mid term spend is moderating at we're seeing traffic and search.
Finishing slightly suppressed versus our expectation that's total industry, we see that really sort of settling down more into the end of third and through the fourth quarter.
Got it and then maybe could you share what what August and September comps.
More specifically and then.
Understanding.
November is a big part of the biggest part of the quarter.
What.
Like what changes such that you can get back to a positive comp.
<unk> now the entire quarter.
Well I think one of the key changes and I'll, let Gustavo <unk>.
Some of the more specifics, but one of the big changes in the back end of the third quarter is really re addressing out drive us towards key traffic and really engaging the right amount of customers again.
In our key venues like secular in AML and the right why which we recognized was a self inflicted wound so that's completely different than its approach from what we're seeing in Q2 Gustavo.
Yeah, Hi, Chris to your question on August and September in the month of August we saw mid single digits to high single digit comp decline and Thats, what brought the quarter down to -1% for the month of September we are seeing so far similar trend again, the plans that we.
We have in October and November is would give us the confidence to deliver on.
Protecting now for the third quarter.
Understood. Thanks, so much.
Our next question is from Cristina Fernandez from Telsey Advisory.
Yes, good morning.
One if you could expand on the mitigation efforts that you have in place.
Maybe more details on what are you doing to.
Offset some of the supply chain cost and by the areas of the business do you have.
More flexibility to rightsize the expense without the investments.
Hi, Christina Gustavo here.
We're taking several actions to mitigate the impact on gross margin as you saw it with the significant heard year on year.
<unk> planned for a big portion of that just was higher so when you look sequentially from the second quarter into the third quarter.
Actioning pricing.
Interventions, we're also doubling down in our promo and promotional optimization and the team is also looking at optimizing freight growth.
Looking for alternate ports too many mines.
Impact from price.
So those are two three of the critical interventions to improve margins along with what Mark has described in terms of revenue.
And then Oh.
Go ahead, a question can you talk about your inventory flow with the supply chain challenges, we're seeing good taking longer to arise how do you feel about the flow of inventory the seasonal goods. What would you have been in time here for November and the holiday season.
Yes, I mean, we definitely saw through the quarter Kristen.
Acceleration of pressure there.
Lead times on slide moving out 30% to 45 days and we see that really continuing into the first half of 2022, and we've taken steps to correct that our in stock rates are very solid we kind of at the site and stopped writing September pretty much that we were in June.
So it seems to be working with their key national brand vendors remembering that.
20% of our penetration is I'm, Brian 80 percentage is great national brands and so our partnerships they come into play we're seeing some a couple of categories that are lagging due to raw material availability and of course.
Some of the shipping and freight issues, but in general in stock right.
Good and then if you talk about recovery in the end of third fourth we did have some critical out of stocks last year that we built plans around to recover and thats one of our upside opportunities.
Still taking into consideration these lead time drags that they're industry wide.
Thank you.
Our next question is from Bobby Griffin from Raymond James.
Good morning, Thanks for taking my questions I guess first Mark I, just want to talk about some of the underlying drivers there in gross margin in particular focus and now that stores are reopening we're moving a little bit more towards normal how has the bulk of the share of E. Commerce right now is it staying pretty sticky or have you seen any meaningful changes in that as.
Stores are reopening and all that stuff.
Yes, it looks like have remained steady and strong Bobby the other thing is we've added an awful and same day delivery opportunities, which has really helped us and the customers really leaning into it. So we feel very strongly that the ease and convenience that we've created throughout the last 12 months at most recently is also one of our opportunity.
These strengths going into this quarter, it's going to be.
But getting the goods.
To the customer and for the customer and we think we have the right menu to provide that but we're very happy with how our customers are engaging digitally with us and using but focus on same day delivery.
Okay, and then as a follow up I'll just start with just quick on SG&A. It looks like if we take the midpoint dollar wise of the prior guidance and the midpoint of the new guidance of SG&A dollars. It ticked up about $50 million. So I was just curious is that labor or what some of the underlying drivers of the net dollar increase in the SG&A guidance.
Yes, Bob a big portion of that the largest portion of that is some updates we've made on our depreciation and amortization estimate so no significant impact from EBITDA and upfront we feel good on how we're managing our SG&A and if you compare to 2019 posed.
All of the divestitures, we've eliminated we have plans to eliminate all of the stranded overhead so no significant movement. There we have seen some.
Inflation to your question.
<unk> been working to offset it to the best of our abilities.
Thank you I appreciate the details and the best of luck here for Vanessa <unk>.
Thanks.
Our next question is from Brad Thomas from Keybanc capital.
Hi, good morning, Thanks for taking my question.
The investor deck.
It's a long term.
Your gross margin target of 38% and and Gustavo and Mark I was wondering if you could just talk a little bit more about that.
The drivers of that and your confidence in getting to that with some of the underlying initiatives. You have that are obviously very very positive versus this backdrop, where we are seeing a lot of inflationary pressures.
Thank you Brett look we were very intentional.
Showing a 38% gross margin by 2023, as we said in Investor's day as we continue committed to that we can still see in the line of side of that or all of the rhythm has not changed in terms of driving owned brand penetration optimizing.
Cost to get at least to that that what.
What we're seeing now in the second quarter as Luke significant freight cost increase it's well above of what we had anticipated we had anticipated 240 basis points. We got 360 basis points, we're still projecting some sequential increase in freight cost as we go from Q2 to Q3, but that's temporary in the law.
Long run as we recover it with price we were could have been faster in a price recovery in the second quarter, we recognize that but thats, taking hold now in the third quarter into fourth quarter. So our mid to long term plan remains intact.
We feel good about the transformation.
Yes, I'd just add that Brad I think that the sum of the parts of that spring you plan really come to fruition sequentially.
As I've mentioned for.
For example, as we see in our remodel stores. They are more profitable as we go into saying high on brand penetration a better shopping environment is really contributing to higher sales. So some of the parts comes to fruition as we move through 'twenty, two and beyond and we feel very confident about that 38% number.
That's great. Thank you and and Mark if I could just follow up quickly on the competitive environment. It seems that the consumer is relatively healthy the competitive environment seems to be a bit more benign in terms of promotions I was just curious if that aligns with your observations and your data on competitors and perhaps if that creates a batch.
Drop where you could have some opportunities.
Could you get a little bit more selective and targeted.
With some marketing and promotions, yes, we do Brian.
We look at the moment is as we've talked about is taking into consideration we have had share declines, but that they natural unaccounted pull based on the store closures. So we had about.
And 80% dropping that revenue out of that as we talked about 20%.
And so our share has been stable and sequential that tells us the customer believes is still shopping us and we have category authority that we can ignite I.
I do think in the interim based on these pressures that you see with Covid, we are seeing some shift.
Two interim ships to single point destination shopping so food and essentials driving choices at the outset, we think that that is a moment in time, and we think thats further opportunity to grow with the right targeted marketing as you say.
Very helpful. Thank you so much.
Our next question is from Jenna Giannelli from Goldman Sachs.
And we'll go to our next question Michael Lasser from UBS.
Good morning. This is a nice story on for Michael Lasser, Thanks, a lot for taking our questions.
So on the guidance, which is implying really an improvement in trends over the balance of the third quarter into the holidays I just want to better understand.
As to what's baked into that guidance. So you did cite a slowdown in the category. So are you expecting.
The reacceleration in the category for the balance of the year end and are.
Are you also expecting supply chain pressure streams.
So we're not expecting supply chain pressures to ease with just accommodating them better into our plans.
But for US we see.
Category growth and opportunity in the back quarters. We also see that we can rectify some self inflicted wounds that really impacted that traffic drivers.
In Q2 and that is rectified in the backend of Q3 through Q4, we feel like we are better positioned with inventory. Despite the challenges that we've seen.
Assortment is stronger the margin profile is stronger and we have a suite of.
Engagement to make it easy and convenient for customers to shop that we didn't have last year. So we have some upside potential in that and it's really it's a different environment than the one with pricing now or that we competed with in Q4 of last year outside of the fact that we do see supply chain pressure continue.
The wing pricing cost and lead time and built accountability for that.
Okay, and then as my follow up.
Just circling back on food care.
Lot of your peers have been calling out straight as a pressure point, but it just seems like the magnitude of the impact is the significantly more content.
Yes.
So that they can use it and then b why would not corrective actions, just raising prices or some of the other.
Cost out measures that others aren't taking why would it be and I'm taking over here.
Yeah, let's break it down so we actually are announcing a quarter that is inclusive of an August months that our competitors, who are pre announced have not commented on and we've seen a rapid change between the June July and August months on sprite, precious and delays, which I think it will be well chronicled is there Brian reaches out.
And therefore Q3 results.
As we stated did type various set of actions to incorporate fright as a pressure point in our business to 140 basis points, but as we saw it accelerate in the July August period, even further and again, we are noting in our August results that others have not there is pressure across the board and Youll hear more about that.
From others.
Did take a number of pricing.
Intervention I actually think that we weren't agile enough and we paid the price for that and that's something that we're all set correcting for third and fourth quarter, which should help US go forward. So I just wanted to spell the myth that we were sitting here dominantly are not reviewing any of those impacts we have an apples and oranges and visibility to that that we are sharing today compared to others.
Thank you.
Got it good luck with the rest of the year. Thank you.
Our next question is from Seth Basham.
Thanks, a lot and good morning, I'd also like to touch on freight if you don't mind, just regarding how much of year inbound ocean freight.
Or you or through suppliers is contracted.
And what the outlook is there for freight costs over the next year.
Yes.
We're not going to get into the portion of what's contracted was not constructed we built.
Our estimates looking at import freight container costs inbound freight and then outbound freight we've seen increases across the board.
It's been much much more pronounced in the latter part of the quarter to Mark's point around August, particularly in input costs.
And.
Looking ahead looking forward, we were seeing the costs now we expect them to remain high bogey.
Again, we look to optimize and where we cannot optimize the cost recovered with pricing.
Just gotten significantly tougher in the last couple of months made into the quarter.
Okay and as it relates to your agility to change pricing too.
<unk> represent what's happening with freight costs.
Are you concerned mark that price increases will impact demand how do you feel about the competitiveness of your pricing competitors and move up on price and you stayed behind and what isn't.
Volume improved with application.
Yes look at the data that we're showing is that we were actually hyper competitive on price, but in terms of mix and that first wife opportunity. So our pricing index was actually below our competitors during the quarter and I think that that.
Two points there.
One is is that we didn't underwrite it to a lot of new price points, and then a lot of new growth areas for us.
That really drive a lot of units and we sold very strong unit share across the board in the market.
And we did not react parts not to those prices.
We're going to absorb those through and we think that's just going to be a natural competitive environment thesis then you buy supply somewhat kind of be competing on an equal footing that being slightly behind slightly slower and some of the pressure we involved in that we don't see going forward for us.
Alright, great. Thank you.
Our next question is from Justin Kleber from Baird.
Hey, good morning, guys. Thanks for taking the question.
Wanted to first ask just on the category disclosures in the deck the destination categories lagged the others for the first time I think since you guys have been reporting those numbers does that just <unk>.
Puncturing of easier comparisons are you seeing.
More of an impact within the destination categories as you transition to the owned brands.
Yeah, it's a double dip here I think there are some key areas like kitchen prep that you say.
That were really impacted because of the size and the belt and the strength of last year Youre.
You're seeing areas like game day call down that are actually in very strong transition as we move into our room resets, but that spices. So that's a moment in time and I think the other parts of the decline were really down to us not reaching out to the customer and an effective why with the right.
S and strength during the quarter. So it probably three key factors that have affected that which we believe is a moment in time.
Also see some suppression in some of these categories versus that why because of the strength of the category but.
We're doubling down on our efforts to improving our performance in each of those categories.
Okay. Thanks for that market, if I could just follow up on the beyond plus the trajectory of enrollment Youre seeing there I know right now the membership fees being subsidized so maybe talk about the rationale behind doing so and how that influences sign ups and then just more broadly thinking back to the investor meeting last.
Over there were some discussions around piloting our new loyalty program. Just curious if there is there anything you can share on that front. Thanks.
Yes, we've seen a lot of stability in the beyond plus.
Membership profile.
It is a strength for us it does pay dividends, but we are continuing to look at.
A different.
Menu for everything from registry to loyalty credit card.
Because we think we can kind of engage with the customer in a refreshed why al.
New leadership on the revenue so it is taking that under his belt.
Not in test pilot might still financing that but we look forward to.
Introducing something in 'twenty two.
Thank you.
Our next question is from Anthony <unk> from loop capital.
Okay.
Good morning, Thanks for taking my question.
I understand the point about the fact that you do.
August.
Quarter end. So there were some trends that you saw that some of your competitors did not see but I guess I'm just I'm just trying to understand where you guys are from a market share perspective because.
I see that the home housing.
Housing market is stronger than it's been in quite some time and you saw products with a home so all of it.
So the rising tide lift all boats. So would just love some perspective, maybe if you can address this on a looking at the three months.
Comparable to other retailers.
Stood from a market share perspective, thank you.
Yeah look market share progress on the deflation and now it is a slight lag, but we've been able to review that what we saw at that period of time.
Like a slight decline sorry, very moderate growth across the sector and a declining growth by month within our June July and August period, what we mentioned earlier Anthony is that we have seen stability in each of the key categories in terms of balance sheet that in.
<unk> a level of understood decline, because we've exited a number of doors and reduced our overall.
Gross sales profile, so with things south stabilization and getting our strategies in place to really build back share growth as a key strategy. So expected share decline market relatively stable flat out ship month, very very sequentially stable.
But we've got opportunities to ignite that further going forward.
That's very helpful. Good luck with the rest of the year. Thanks.
Okay.
Our next question is from Carla Casella from Jpmorgan.
Okay.
Hi.
One question your Capex guide implies a big back half pickup can you talk about the sequencing of that or maybe any major projects forward that we could see lumpy capex.
Yes, Hi, Carlos.
It's in line with our plan in terms of accelerating our store remodels.
We're halfway through the store remodel program this fiscal year, as we accelerate and get into the crux of the ERP.
System implementation.
As well.
Some of the supply chain.
Our plans as we start up our RPC. So it's the capex profile by semester is in line with our plans.
Yes, I would just say it's been pretty consistent along color I think that what you're seeing in slight hockey stick there because we do have a period that we go dark to focus on our key holiday period.
And that was built into our plans from Taiwan, and then we have things like story models I'd say at supply chain, so full year minus assignments plant.
Our next question is from Jonathan <unk> from Jefferies.
Great. Thanks for taking my question.
First one was just on back to school sounds like it was solid for you guys, but just below expectation. So curious how much of this shortfall do you think was maybe tied to.
Some execution missteps versus potentially just the consumer.
Not spending as much for the occasion potentially across all retailers in the industry just thoughts there.
Yes, I think that's a really good coal Jonathan I think thats the right somebody should we were up 12%, but we had higher plans and we expected a better outcome and so we.
We've learned a lot from that and we think that our office was solid.
We can improve even further but we have to do a better job of outreach to the customer through marketing that we've discussed I think.
Second part of it is I think that the.
The spend in the quarter was lighter than we actually were watching that and we signaled that in July that was taken in July and we thought it was going to materialize much stronger in August and beyond but it didnt and we saw a lot of.
Facts and figures around that there was super high deferment into key discretionary categories like apparel and accessory that didn't occur last year in April people were getting those bumps and growth with home was fairly moderate.
Plus 12% last year, plus 21 is good we could have and should have gained more growth and therefore more sure that's an opportunity for us going forward.
Great and then just a quick follow up.
Some of the pricing actions I think you made a comment that maybe you guys didnt pivot quick enough on price during the quarter.
I think you did reference multiple pricing interventions during the quarter. So just trying to understand.
Did you try and get incrementally promotional to drive traffic or did you kind of raise prices to offset.
The freight headwinds just trying to understand kind of.
Where some of the issues.
Resulted in terms of pricing, yes, I would say, it's very different to that Jonathan I think that we had a high rate of clearance activity as we transition that rooms in our assortment.
That hit us.
In the quarter, but more importantly.
We are not more promotional.
And we don't intend to be more promotional we tend to be more targeted with our promotions and again, we've been doing that well over the last year and we are doubling down on that I think the opportunity for us that we didn't exercised in full is the market started moving if we look at.
Prescribing and ensuring that were in line with the market and there are competitors in some key categories. Because we haven't moved fast enough to adjust our pricing accordingly based on some cost inflation as well, it's bright inflation and those started coming through thick and fast and in a lot lighter than we expected with the velocity we've.
That into consideration as we build in our plants.
And the actions that we've taken.
Okay, and thank you, ladies and gentlemen that concludes our call for today. Thank you for participating and you may now disconnect.