Q3 2021 Bed Bath & Beyond Inc Earnings Call
Welcome to the bed Bath <unk> beyond fiscal 2021 third 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 a listen only mode. Later, we will conduct a question and answer session. During the question and answer session.
Press Star.
Star then one on your Touchtone phone.
Please note the conference is being recorded.
I'll turn the call over to Susie Kim.
Thank you and good morning, everyone welcome to our fiscal 2021 third quarter earnings call. Joining us today are Mark Triton, our president and CEO Gustavo I know, our Chief Financial Officer.
Before we begin let me remind you that our fiscal 2021 third quarter earnings release.
The presentation can be found in the Investor Relations section of our website at bed Bath <unk> beyond dot com and as exhibits to our related form 8-K.
This conference call on the slide when you 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 objectives.
All such statements are subject to risks and uncertainties that could cause actual 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 our 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 general 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. We hope you had a safe and healthy holiday season. During these turbulent times.
During this past year for a comprehensive transformation. Our most recent results demonstrate the complexities of executing our long term and the turnaround plan, while managing our business in a highly unpredictable current short term environment.
Unprecedented macro forces continue to permeate operating conditions, leading to a neat vessels long term bifurcation and alcohol.
While we effectively offset higher freight costs that had been at the core of global supply chain pressures, increasing inventory disruptions impacted our ability to meet demand during the holiday season.
These conditions like the south a demonstrated need 10 volatility despite progress on our multiyear transformation.
We continued to execute our long term strategic initiatives to modernize our infrastructure and enhance our agility in any future operating environments.
More specifically during the third quarter. Our revenue had mentioned was below our expectations with net sales of $1 $9 billion and a 7% comp decline.
Shared with you previously we experienced a slower start to south in September and October in preparation for the holiday season and against the backdrop of a challenging supply chain environment.
Fortify that plans to secure the right Brett.
In depth product.
Overall, our inventory position remained healthy with great irrelevant compared to last year and in November we drive improvement and arrested comp decline.
Unfortunately, despite strong customer demand operational challenges such as the constraints locked inventory once enough position and are currently illiquid legacy infrastructure impacted our ability to drive further improvement in sales trends.
Issues and receipt flow in on shelf availability affected our top 200 items, such as kitchen appliances, and personal electronics as well as our key categories, such as bed and Bath.
Experience was compromised of strong demand wasn't made with strong product availability.
This resulted in approximately $100 million in la filed a demand or a mid single digit impacted the quarter and an even higher impact on December.
Operational issues, but not limited to our inventory. We also took steps during the quarter to rebalance, our marketing resources and correct. The disproportionate reduction about printed sector was which are a key traffic driver for our business as COO.
Context, a disproportionate amount of our sales are generated from our circular stores and are a key trip driver.
While we were able to activate additional plans for distribution in October paper supply in library shoes, with print vendors and pages or our ability to reach full scale circulation.
Delivery of these take to inspire and there was also an issue that prevented the returned to historical levels of secular distribution and further impacted our ability to drive traffic and generate sales.
Yet amid somewhat normalized conditions, we converted traffic a bit demand successfully both in store and online for example, we delivered a high single digit sales comp in the U S. After the Black Friday, cyber Monday period, underscoring bed Bath and beyond as a top destination for customers.
We're also pleased to see customers returned to brick and mortar shopping this year as our U S stores delivered mid single digit sales comps over this five day holiday period.
During the quarter, we delivered gross margin of 35, 9% well above our plans despite sharp increases in inflation and pervasive fright and supply chain cost pressures.
Stemming from our experienced last quarter once we diagnosed the fright cost pressures that impact us in Q2, we swiftly implemented pricing actions promotional optimization and product and its plans to achieve margin recovery.
Surgical in our approach on a SKU by SKU basis to also ensure we remain competitive with the market.
And still remain so.
We also optimize that promotional activity, increasing our regular price penetration throughout the quarter versus last year. Despite the highly competitive retail month of November.
As evidenced by our highest gross margin performance, we have an arsenal of Preplanned promotions that we can now use strategically to drive engagement with our customers profitably.
Coupon exclusions less clearance discounts and event driven coupons during peak shopping periods.
Some of the examples of how we can diversify our value message without being more promotional in totality.
These decisive actions and strategies led to an adjusted gross margin right now I don't think city expectations significantly, but above at 2020 and 2019 levels.
As you know this is a key financial barometer about three <unk> transformation strategy.
Our armed brands continued to produce higher merchandise margins and increased penetration rates.
Spot the supply chain related inventory environment, we launched the final two of our total plant owned brands for fiscal 2021.
<unk> three D and H for happy enables our customers to whom happier with options for modern and contemporary key items to assist with everyday moments of the seasonal celebratory needs.
In accordance with our long term strategy all of our brands helped to create lifelong memories and are a key cornerstone about three year profit algorithm.
We are pleased to see progress continue quarter after quarter in just the first year of launching these key initiatives.
Our progress is even more evident in our newly remodeled stores they are growing faster than the chain with <unk> penetration and accordingly, overall product margin right rates higher as well.
Just as we delivered on gross margin during the quarter, our holistic focus on elevating our top and bottom line performance as we continue to transform.
In the near term, we anticipate conditions to remain complex and we are defining solutions to navigate each quarter weighted.
<unk> plans that will enable sales acceleration over the medium term and we will constantly leverage marketing to assist us in strengthening and driving traffic further.
Our number one priority is continue to change our current systems and processes.
A lot of inventory in a faster and more efficient way to meet demand.
Above and beyond our mid to long term investments to improve our topic in stock positions. We are working with our vendors to target constrained inventory and improved flowed about Dcs and stores.
Currently we must enhance our ability to fulfill app store demand once inventories would email position from shipping containers to warehouses to stores in the near term we've created new transplant processes that increased third party logistics capacity.
And decrease way households to assist with flow.
We're also adding digital supply chain capabilities to automatically shift inventory sources between now owned vendor direct and marketplace availability, our legacy infrastructure undermined our response times to offset the holiday inventory impediments as visibility was limited ahead about planned supply chain efforts.
To create a more nimble operating model enabled went through better tools and processes are the basis of our ongoing supply chain and technology transformation.
This Reformation will help us mitigate this alignment in supply and demand and prevent interruptions to our plans in the future.
We believe these work streams will add the necessary reinforcements to alleviate constraints in fiscal 'twenty two and beyond.
Given that largely season less and therefore resilient inventory the short term disruptions. We are experiencing will therefore normalized supply chain imbalances eventually prove with our enhanced plan.
As always we will monitor broader category demand and our market share it to inform our operational plan.
We continue to develop at the counter and Boston kitchen categories, our southern wood.
To contrast segment that relates mostly to our business.
Recently, we've seen two trends persist.
Overall market credit continues to normalize in the post COVID-19 environment compared to the high demand environment last year.
Secondly, the spot the shuttle market decreasing netting dynamics from 2020 NPD data in the bed Bath and kitchen categories still show our market share is sequentially stable.
We are narrowing the gap and declines versus prior year and in fiscal 2022, we expect that market share to stabilize further given the conclusion of that store fleet optimization initiative.
Furthermore, our customer acquisition strategy for the bed Bath and are gaining traction during the quarter as evidenced by out beyond plus loyalty program.
We grew from one eight to $2 2 million members. After one of our largest subscriber event in November leading to one of them a successful membership acquisition quarters.
On plants in years.
We will leverage this momentum throughout 2022, as we support plans for a new loyalty program later this year.
Spanning all outbound is a new program will be designed to re establish us as the preferred channels.
The home and baby needs, while building authority trust and long term value across our ecosystem Bennett.
Another key highlight for the quarter was the continued improvement in overall growth about bye bye bye be better.
Baby continues to deliver double digit growth with additional benefits to the total group as more than 65% about new digital unit peso cost capabilities.
Cross shopping between bed, Bath, and baby as well as Harman.
As a result about targeted efforts to improve this business since last year. We are on track to achieve approximately $1 $3 billion in sales ahead about investor day goals, all while improving profitability and market share.
We achieved these results even with all of the initial strategic transformation of this business, which is planned to begin in the new fiscal year.
We now intend to expand other brands to baby in 2022, as we look at margin optimized pricing strategies given sales result in the businesses that have now stabilized.
Of course, we will continue to drive by yourself sort of exciting new partnership opportunities to combine the power of the bed Bath and beyond and buy buy baby offering for.
For example, baby isn't important cornerstone of our recently announced Kroger partnership as well as our own digital marketplace.
Finally, as you saw in today's announcement, we are always committed to managing our business responsibly and responsibly.
We are extending our SG&A expense optimize explanations of approximately $100 million annualize for next year that will explore areas such as the store fleet optimization fixed costs and discretionary savings opportunities.
We will ensure an appropriate expense to sales ratio that reflects our current business, while not at the expense of that long term initiatives.
During especially about three year transformation, there has been no shortage of activity from our new Omnichannel and merchandising initiatives to the Reformation of our supply chain and technology.
We are paving a path towards greater profitability and growth for the future.
We are focused on our plans to deliver gross margin expansion with sales stabilization and growth.
Through both immediate action plans and our unwavering execution of the transformational initiatives, we outlined at our Investor day.
Now onto Gustavo on now our Chief Financial Officer, who will review, our third quarter financial results and our outlook for the next quarter and full year.
<unk>.
Thank you Mark and good morning, everyone.
I would also like to underscore our commitment to the long term transformation, we're making.
Despite the shorter term headwinds we currently face.
As I look back over a year ago, we have overcome several challenges and we recalibrated our business with agility. For example, a straight cost increases began in 2020. It was hard to have predicted the breadth and depth of the developments that have materialized. Despite.
Despite this our gross margin expansion underscores that as an organization, we can and will adapt quickly as we navigate our ongoing transformation.
Further we're managing our business responsibly.
In addition to SG&A expense optimization, we also remain intent on utilizing cash according to our capital allocation principles.
Include supporting our transformation initiatives and returning excess cash to shareholders.
Earlier this quarter, we announced the intention is to complete our 1 billion three year share repurchase plan ahead of schedule.
Underscoring our ongoing confidence in our turnaround and our commitment to maximizing capital deployment.
Let me now review, our fiscal third quarter results, which cover the period ending on Saturday November 27 2021.
Even the Saturday of the Thanksgiving weekend was the final day of our quarter I will.
Also discuss certain calendar metrics to provide greater insight into our holiday trends.
It will include our calendar in November and our Black Friday through cyber Monday performance as well as the trends we saw in December, particularly in the context, so far fourth quarter outlook.
As a reminder, and as anticipated reported net sales continued to reflect the impact from expected non core banner divestitures completed last year.
As well as our ongoing planned store fleet optimization program.
Total net sales were one $9 billion, representing a 14% climbing our core banners.
We would have a 7% impact from our ongoing fleet optimization program.
For the fiscal third quarter comparable sales were down 7% versus last year and down 4% versus 2019.
As Mark discussed we saw sequential improvement within the quarter and in fiscal two vendor our comp sales were down mid single digits.
Encouragingly on a calendar November basis, we saw flat comparable sales in the U S and growth of low single digits into our stores.
Comparable sales grew high single digits over the Thanksgiving to cyber Monday period.
For the fiscal quarter store comps were down 5% and improved sequentially each month.
<unk> returned to stores following last year pandemic related traffic decline.
This was most evident in November when store comps were down just slightly overall and possibly continuous source.
Our digital channel represented 35% of total net sales a similar penetration rates of 2020.
Despite a 9% declining sales compare to the strength, we experienced last year.
Nick.
Digital business continues to be very important, particularly when compared to 2019.
By banner bed, Bath, and beyond comparable sales decreased 10% versus last year and 5% versus 2019.
Bye Bye baby continued to deliver strong results with mid teens comparable sales growth versus last year.
Adjusted gross margin was 35, 9% 50 basis points higher than last year, and 360 basis points above 2019.
We're pleased to have driven 320 basis points of merchandise margin expansion, primarily from our own brands and successful pricing actions.
More than offset 270 basis points of increased freight costs compared to last year.
SG&A dollar expense was in line with our internal plans, although higher as a percentage of outcome of sales.
Given our lower than expected revenue base in the quarter.
As I touched on last quarter, we are committed to enabling our long term transformation.
<unk>, while remaining focused on managing expenses appropriately.
To ensure SG&A alignment with our overall performance.
Initiating further business optimization plans to target a $100 million of annualized expense savings across areas, such as freight optimization fixed costs and discretionary spending.
These savings will materialize, starting next year, and we will share more details next quarter with a context for fiscal 2022 plants.
We reported adjusted EBITDA of $41 million driven by lower sales during the quarter.
GAAP EPS was a loss of $2 78 per diluted share, which reflects approximately $2 53 special.
Special items for the quarter.
These will predominantly be driven by a dollar and 82 associated with the accounting effects of a noncash income tax charge related to a valuation allowance against certain of the company's deferred tax assets.
This valuation allowance does not impact the company's ability to utilize any deferred tax asset in the future.
I would like to note that during the third quarter, there were significantly lower adjustments to gross profit and the specific there was only 30 basis points difference between our GAAP and adjusted gross margin of 35, 9%.
As I shared on our Q1 and Q2 calls we plan for these adjustments to decrease over time as we continue to progress through the initial stages of our transformation.
On an adjusted basis, excluding special items EPS was a loss 25, reflecting our lower sales and therefore EBITDA.
Special items are excluded from adjusted results to provide a more representative picture of the underlying performance of our business.
Turning to our balance sheet and cash flow.
During the third quarter consistent with the seasonality of our business, we reported a use of approximately $300 million of operating cash flow equivalent to the increase of predominantly non seasonal inventory as we prepare for the holiday period in anticipation of the challenging supply chain environment.
Additionally, in accordance with our capital allocation principles, we invested approximately $83 million of capital in store Remodels supply chain.
System.
Our cash and investment balance at the end of the quarter was approximately $600 billion.
In total liquidity at quarter end was $1 $5 billion.
Currently post quarter, a recent pro forma cash balance was $700 million even after share repurchases. This was driven by positive operating cash flow of more than 200 billion in December as expected.
We remain committed to returning cash to shareholders by following a balance data driven approach on November 2nd we announced the advancement of our $1 billion three year share repurchase program with the acceleration of our 2022 and 2023 plants.
Accordingly during the quarter, we executed approximately $120 million in share repurchases or approximately 5 million shares.
Program to date to the third quarter, our repurchase activity has taking a total share count from 127 million shares to 96 million shares more than a 24% reduction of shares outstanding.
I will now discuss our fourth quarter and full year outlook. We continue to actively monitor the development of the COVID-19 environment.
Particularly given the searching cases related to the army grown variance hen.
<unk>.
We're guiding based on our current visibility including quarter to date trends.
Our sales in December followed a highly volatile pattern unlike any prior year.
<unk> from low single digit growth to double digit declines depending on the week of the month due to the pull forward of retail business as customers shopped earlier as well as on shelf availability of inventory.
Taking these into account for the fourth quarter, we're estimating a comparable sales decline of high single digits.
Net sales are expected to be approximately $2 $1 billion again divestitures and fleet optimization will continue to impact year to year comparisons.
Based on our ability to offset increased freight costs, we expect adjusted gross margin in the range of $32, 5% to 33%.
Given our sales and margin expectations. Adjusted EBITDA is estimated to be in a range of $80 million to $100 million, leading to an adjusted EPS range of zero to 15 cents.
As a result of our third quarter results and expectations for Q4, we're updating our full year guidance to the following.
We now expect net sales of approximately $7 9 billion.
For modeling purposes. This translates to a high single digit comp for the full fiscal year.
Adjusted gross margin for the year is now expected to be in a range of approximately 34 to 34, 5% also an expansion versus last year and 2019.
As a result of our sales assumptions SG&A is now expected to be in a range of 34% of total net sales. However, please note our dollar assumptions have not changed.
In line with our revised estimate adjusted EBITDA is now expected to be in the range of $290 million to $310 million.
This translates to an adjusted EPS range of negative 15, two zero sense.
Our balance sheet and cash flow essentials include positive operating cash flow by year end.
Capex of approximately $350 million.
And plants for a total of approximately $625 million share repurchase.
Next quarter, we expect to have accelerated our 1 billion share repurchase program.
We have also provided additional assumptions on depreciation and amortization interest and tax rates in today's presentation to assist with EPS model.
As Mark discussed in detail, we're activating strategies to pivot our near term results. So we're positioned well for fiscal 2022, particularly as we anniversary many of the dynamics we face this year.
We look forward to sharing our plans and expectations for the new fiscal year next quarter.
I will now turn the call over to Mark for some closing remarks.
If anything has remained constant since I joined this company. It is a reminder, that we're executing a full scale transformation and simultaneously running a business in a highly unpredictable environment.
That said as aspects about the quarter results demonstrated we are diagnostic issues implementing solutions and delivering on the long term structural transformation quarter by quarter to ensure sustainability for our three year goals.
While we continue to face challenges, we are improving our ability to respond to any macro forces. This past quarter. It was evident in our pricing strategy, our customer acquisition strategy, our baby business and more than 250 million customer visits to our group of tenants in store and online.
We look forward to unlocking further progress in the areas of that business that require greater support.
While we have concluded the third quarter of our multiyear plan, we continued to execute our strategic transformation by reforming our legacy business to achieve our long term goals.
We remain in the very early stages of a multi faceted transformation that its foundation like changing bed bath and beyond to become a digital first omni always three Tyler talking I'm more productive store fleet that is optimized and revitalized throughout remodels.
Our product principles to offer customers a more inspirational merchandize assortment, so a mix of national brands and unique arent brands.
The needs for every month through our buy buy baby and Harman banner.
All enabled by a modernized supply chain and technology capabilities.
As we prepare for 2022, we look forward to operating in a normalized environment with a base of business upon which to grow.
We will now take your questions.
Thank you, we'll now begin the question and answer.
If you do have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pound spine or there has to be there'll be a delay before the first question is announce it.
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 is from Steven Forbes from Guggenheim Securities.
Good morning.
I wanted to focus maybe.
Just to start on the destination category performance.
Curious if you could expand on the pricing and promotional plans that were implemented during the quarter.
Just provide some color on how the customer responded to these changes and if you've noticed any difference in customer behaviors among loyalty members versus non loyalty members.
Yes, good morning.
The pricing types were begun at the end of Q2 and really implemented enforced through Q3 and consistently through Q4, so sequential changes.
We've been monitoring those prices as well as our average basket.
Competitors I'll, just say that.
Through price Scribing et cetera were in line with the market and our customer we think is responding accordingly.
Accordingly, so we've seen no tension with the price increases.
And so that's created a stable environment, where we're a little behind our competitors in terms of price increases would not caught up and Thats, obviously assisted that margin issue in <unk>.
All of the customer response between low customers in general customers, we actively engaged in the customer acquisition strategy.
At target was actually half a million customers and we've actually achieved that all over the acre Q3 in December.
To introduce them to be on plus and create.
Long term value through some stickiness and engagement sort of at the beginning of that process, but some good engagement there are real issues in the quarter was around connecting with our regular customers with key assets like secular which just was a deficit to a check or traffic generation specifically affecting stores.
Thanks, and maybe just a quick follow up for Starbucks.
You reiterated the share repurchase commitment here during the quarter, despite sort of what transpired here.
I don't know if you could just help us better understand the conviction.
That's sort of the right use of capital.
Now in.
Maybe just provide some color on where you see free cash flow for the year as a whole I think you mentioned positive operating cash flow, but any color on free cash flow.
As we think about sort of modeling the next couple of years here.
Sure. Good morning look there's two key principles that guide our share repurchase additional fleets of discussions between Mark and I and the board. The first one in terms of capital allocation.
<unk> that the business is funded and ensuring the right liquidity and we have that we have continued funding the capital investment needs in the business and we continue having strong cash balance and strong liquidity.
Beyond that we don't see share repurchase as a short term.
Intervention. This is above the long term and we continue to see the intrinsic value of our stock and long term much higher than when we ought to.
Look when we're done with these billion dollar.
Share repurchase program, we would've taken out more than a third of the company's shares outstanding probably at an average of close to $20 a share long term, there's more potential on that.
On your question around free cash or operating cash flow. As you said, we continue protecting operating cash flow positive operating cash flow for the fiscal.
Fourth quarter. It is crucial on that free cash flow might be slightly negative just because of the prevention. We took in terms of increasing inventory.
Ahead of the holiday season, and therefore, our operating cash flow.
Slightly lower than initially anticipated.
And our next question is from Christopher <unk> from Jpmorgan.
Thanks, Good morning, So firstly, a near term question I'll follow up with something more long term. So can you talk about where you are more specifically on quarter to date basis recognizing that.
There's been a lot of volatility and also the fact that you have stimulus coming up so where you are quarter to date and sort of what are you baking in for the for the balance of the quarter to get to the guide.
Yes, so look quarter to date through December 31st.
High single digit comp decline and that is consistent with the guidance that we're providing for the fourth quarter.
I think we've said in the prepared remarks.
<unk>.
The month of December was a very volatile there were weeks that we saw growth. There were weeks that we saw a decline and clearly the consumer pattern here in terms of purchasing habits earlier or later as well as the challenges we're seeing on supply chain availability of <unk>.
Fast rotating and key pension items in it.
Is the tenants that we can navigate them so.
The quarter guidance is consistent with the trends that we've seen quarter to date.
Understood and then.
As you think about the new 100 million dollar cost savings plan for for next year. Just wanted to understand is that something that executes over the year I know, you'll give us more details on the fourth quarter call, but what drives the urgency for another cost out plan is it.
That.
The investments that you have to make are coming in higher than you originally thought and if so where are they where do you see the pressures is it wages is it technology is it supply chain infrastructure that you need to reinvest in and ultimately.
Do you think any of that $100 million.
Does drop to the bottom line versus being completely reinvested.
Sure Luke its not about urgency he's about managing the business responsibly.
Our revenues have falling a bit short this quarter right and we just want to ensure that our SG&A as a percentage of sales remains in check for our long term algorithm. So this is about.
Just constantly managing cost constantly managing any opportunity down fixed costs looking deeper into our fleet optimization program.
And as you just said we will provide more perspective on that when we provide guidance in fiscal 'twenty two.
Sure.
Yes, Christopher just let me reinforce but Stefan.
Stefan I have looked at our numbers. So when we take a conservative estimate on 'twenty two to ensure that we can balance out of SG&A that is at no point connected to our capital allocation. It remains completely in place to invest in.
The existing plan investments, we want to make to further enhance and turn around the business the fundamental to outperformance going forward or are they separate from us just being prudent in our overall cost management.
Thank you and as a reminder, all participants please limit yourself to one question.
Our next question is from Kate Mcshane from Goldman Sachs.
Good morning, Thanks for taking our question.
You mentioned that Youre looking at introducing more owned brands at Bye Bye baby.
We're curious about what the penetration of owned brands is now in the banner how quickly you can ramp it and is there a goal for penetration or do you see penetration of owned brands being similar to that of <unk>.
Banner.
Yes, hi, good morning look the penetration is very low in bye bye bye.
And it has.
Predominantly national brand and good National brand business as well as discretionary liable business. There is an opportunity there in key areas like apparel nest.
<unk> furniture and across the board in the business to create.
Our multi faceted brand program, we're very excited about what we put together there and we'll be launching that in the second half of 2022. So we do have penetration calls we'll share more of that as we get into our 'twenty two plants.
And our next question is from Jonathan <unk> from Jefferies.
Hey, good morning, Thanks for taking my question.
Noticed on one of your promotional emails yesterday it highlighted the new subscription plan.
For things like coffee products pet treat other replenishment item.
Similar in nature to what some other E. Comm players are doing today do you have any goals around utilization usage from a consumer standpoint, and how should we think about that as a contributor to ecommerce sales going forward.
Yes, Jonathan I think this is something that we've had in the digital hospitals being able to change our capabilities and working with national brand vendors on their.
<unk> capabilities that they are in fact, we have been able to provide it. So this is a launch of a new program test me derive will be relevant to see how that performs.
<unk> business somewhat this transfer values to baby.
These stages in the platform, but part of that digital optical fibre roll.
And our next question is from Michael Lasser from UBS.
Good morning, Thanks, a lot for taking my question.
So if we account for the some of the inventory challenges that you had in the quarter your comp was still down two.
2%.
And it suggests that three years three quarters into the transformation, it's still very difficult.
To drive.
Folks to your stores into your web site.
To just sell them products without.
They are promoting very heavily or having to use your your coupon. So as you look into next year when arguably the environment's going to get a little tougher do you expect to see better balance between being able to drive.
Positive sales growth.
Having too.
Worked through gross margin aggressively.
To to be able to drive that sales growth.
Yes, Michael let me just be clear on both depth is youre, absolutely right that narrows down the L y to around two percentage points. What we did also have a affecting us as we articulated in Q2 and so putting that Q3 is we have a fundamental rhythm in connection with that customer tourists oculus and.
While that does contango on the back of this also is the connection point for customers a trigger for them to explore on the website and come into the store and a large percentage of the.
The sales generated by that Covid, which is substantial are.
Manifested at store level, we artificially cut offs that lifeline that regular rhythm of communication to our customer and it was a big mistake that impacted on our business, but I think Q2 is kind of the added through Q3 and beyond.
So what we see there is if we just return to the fundamentals of what we're doing with customer connectivity and meeting supply and demand we would've exceeded last year and so that's the way we were able to compartmentalize short term knee pain versus our long term opportunity outside of what transformation can bring us.
That doesn't mean that we're resting on using those tools aligned we have active plans in 'twenty two for customer engagement and customer experience.
Led by our new customer Chief customer Officer, Rufener stood on how we can create our ecosystem of engagement and communication.
Through loyalty personalization and using our Omnichannel environment So Pat.
Foundations were awakened during these last two quarters really going to reinstate those are not just the fundamentals and the rest of the policy.
And our next question is from Simeon Gutman from Morgan Stanley.
Hi, everyone I'll ask one question with a couple of parts first on the fourth quarter Guide.
I think the third quarter proved a little aggressive why why are you confident I guess that this fourth quarter will be okay, and then just connecting the dots of the narrative.
If there were problems with getting inventory it looks like some of the promotions got more aggressive coming into the last legs of the holiday. So why get more aggressive there. If you didn't have the inventory and then how come it doesn't sound like this hurt bye Bye baby, maybe you did but how can buy buy baby was not impacted.
Bed Bath list of things.
Let me start with the housekeeping and let me start with the second part so I think buy buy baby was less affected for two reasons. One is we saw we've seen very strong apparel and accessory trend in the market versus the softening of home trend versus 2020.
It took advantage of that.
A strong apparel business and strong accessory business.
And we saw nesting really kicking in in a baby environment. This is a great part of the connection between.
Short term baby and long term harm it.
D a nice trend there.
We better place in terms of our overall inventory plan, because we pre purchased a lot of the apparel.
Product so that helped us drive through and we also had some performance issues you might remember in Q3 last year.
And then we've anniversaried them with real strength and conviction coming into the third and fourth quarter.
In terms of the question around the preparation for Q3 and expectations look we will always really clear that September and October had been soft bought that November represented a disproportionate amount of the quarters performance and our inventory plans working with our vendors.
And what we have laid down showed us where we are going to be in a good position. We just couldn't realize that in real time through the month of November so while we actually changed the trajectory of styles from negative to positive in November it wasn't enough in terms of the supply chain restrictions to offset what we'd originally planned the promotional piece that you mentioned is.
Interesting.
We have shared that we actually had higher Reg price sales.
In the quarter.
And then the prior year, so we actually increased our regular product penetration and I think thats evidenced in the gross margin what you might see.
Your perception is not reality is that the deficit that we had in getting communications out to customers, we offset with a couple of additional promotions to offset because we weren't using the money and making it effective on the one side. So we actually implemented other traffic driving opportunities later in the quarter. So again net net less promotional.
<unk>.
In terms of the sales outcome and some compensating factors to get us to the end goal.
And our next question is from Jason Haas from Bank of America.
Great. Good morning, and thanks for taking my question could you talk about the gross margin drivers that you expect for <unk>.
I think they're fairly consistent Jason I think we see on growing and Brian strength and is that in the mix contributing I think prop.
Product mix.
It'll be the same and I think promotional optimization so.
While we know that the gross margin in Q4 is different than in Q3 and rest of year, we still see stability and some growth in Q4, and that's despite what I would say.
Ongoing supply chain pressure is not a biting and offsetting those so when that starts to condense in post 'twenty, two and beyond we see some real upside to our margin.
Projections and knowing that that's the strongest barometer about three year plan, we feel really confident about the amendments were liking it.
Our next question is from Bobby Griffin from Raymond James.
Good morning, everybody. Thanks for taking my question.
Gustavo I was just hoping to maybe understand the inventory and supply chain challenges, just a little better and where exactly they showed up because when I see inventory per store or just total inventory, it's up pretty notably sequentially. So is the issue of getting inventory from Dcs to stores or any additional color to help me better understand that aspect.
Yes, Thanks Bobby.
Multi part issue and again the perfect storm in this near term issues I think that we know that we're starting off with legacy supply chain infrastructure and our investments, we're making now will really take hold more in second half of 2022, so it's hitting us a little earlier than that preparation.
But what we do see is a two part of our top 200 items sold through very well, we talked about high level of demand at bed Bath and beyond.
But at some demand, but not all of it and then in our initial plans with key vendors. We had disappointment in terms of the receipt flow days. So we had constraints on top sellers as the industry did.
And then the second part of it was that we had inventory.
On chips in D. C. And then just with the transportation was we could not flow that effectively creating a bottleneck. So we.
We had the right inventory the customer responded to the inventory we had its quality inventory and as we mentioned, it's highly resilient because it's seasonal but just the timing and flow and availability. We're off in this quarter. That's still a short term issue short term pain point that we look to rectify out.
And our next question is from Seth Basham from Wedbush.
Okay.
Thanks, a lot and good morning. My question is around market share Mark you mentioned that you are sustaining the same level of market share performance sequentially. I think when you look to 2022 do you expect to be able to gain market share in your core categories.
Yes, it's definitely the golf Seth I mean, it's been a turbulent year store optimizations of loan types.
A lot of planes.
Planes move and its a planned reduction in that penetration in the marketplace, but it's for higher profit goals and benefit to our bottom line, we see that stabilizing through 'twenty two there'll be still some activity, but it'll be relatively stabilized our goal is to really generate.
The green shoots of the Reformation, and the second year of that transformation plan to stabilize and optimize.
Sales growth in there for sure my doubling that down in our key categories.
<unk> been experiencing it through baby.
Bob is our key focus at the moment.
Our next question is from Justin Kleber from Baird.
Yeah, Hey, guys. Thanks for taking the question I just wanted to follow up on the baby business and you mentioned mark improving profitability. There could you provide any more color on the margin profile of that business. How it compares to the core bed Bath business and then just how meaningful is baby as a customer acquisition vehicle for the <unk>.
Broader enterprise.
Yeah look there is a differential between the bed bath in the baby business I think what's really exciting about that opportunity. The adjusted is we've yet to implement.
The store remodel plans.
And the product assortment plans that helped us Piper bleed in bed Bath.
In the <unk> business. So that lies ahead for us I think we manage mix, how we manage our brand.
Putnam of where that national brands.
There's some really good early signs of green shoots there that we're going to capitalize on for the next two years of the transformation.
It is important I think as we think about the ecosystem of life moments that we operate in and connect with customers, whether we engage with the customer when they are planning.
The first child or having their first child or if you're skipping forward to when they send them to college or when they are moving when theyre downsizing, we can capture a lot of data and a lot of engagement really personalize.
Our relationship with that customer by utilizing the engagement of authority in family and the engagement also already in Hollywood.
Things are very strong venn diagram that cost side.
Hence why we use the term ecosystem the power of the two is very very strong.
Our next question is from Anthony <unk> from loop capital markets.
Good morning, and thank you so much for taking my question. So I had a question you mentioned in the press release that you picked up nearly half a million dollars beyond plus subscribers.
Guess, what I was wondering because I got an email and I think a text message as well, saying that if I sign up for beyond plus.
$29, a year I would get a gift card for $29. So it's for all intents and purposes would be free and I guess I'm just trying to figure out how much of a benefit of a tailwind was that promotion for beyond plus.
Subscriptions. Thank you.
Yes, Thanks, Anthony I think that is.
Longer medium to longer term strategy about.
Connecting with half a million additional customers inviting them into the program to see the benefit and then doubling back with them.
We were forecasting a level of.
Stickiness with that customer not all of them. So we're going to be tracking that but it's a great gateway to create engagement and specifically talk to our future customer.
Our next question from Carla Casella from Jpmorgan.
Hi, he talked about the store rationalization program and.
This is the first quarter, we saw Harmon stores close is that now part of the.
200 store rationalization or is that part of a new the new program.
Look we look at the 200 store program of predominantly bed Bath and beyond banner, but we look at the four wall profitability of every single store and I do know specifically because the example, you mentioning harman.
One example, that's not a broad program for that banner.
And our next question is from Brad Thomas from Keybanc capital markets.
Okay.
Alright, Thanks, Mark and Gustavo.
Hoping to just.
See if I can get a little more color how do you all in terms of your thinking for 2022, I know you're not ready to give formal guidance.
But specifically as we think about some of these transitory issues like inventory like the freight cost I guess as we think about 'twenty two on the whole.
How do you think it nets out at this point some of these items, obviously may wrap until the beginning of the year, but are you thinking that on the whole you get net tailwind from a sales and margin standpoint.
Or that perhaps it neutralizes out or that next year, there may be still some some headwinds just curious any broad strokes at this point. Thanks.
Limiting our comments on 'twenty, two obviously I will come back and give more color on Q4 results and full year 2002 expectation.
I think that we've seen pretty much any industry, Brad communication why that supply chain issues will persist.
Through half one, but we don't believe that our issues.
To sit through hotline, because we've taken remedial action immediately so we will see a bus catching up our results not on the macro market issues, but how we manage them internally I think what we see as good top wins on things like the Orange brand penetration the gross margin management, the continuing strength of baby.
Optimizing our athlete, but also to where.
Where we're seeing store remodel program pay dividends at that expanding quarter by quarter over 2022, remembering this year to point, we've only remodeled 81 stores and will do approximately 130 by the end of the quarter. So completion over the next couple of months, we'll see sequentially more of the store remodels, which are adding positive comps, but since the.
The rest of the fleet. So we've got a number of cumulative benefits as well as the underpinnings of that transformation technology supply chain assortment. So again, a year of stabilization for US we believe after a lot of reengineering in 2020 in 2021.
Our next question is from Cristina Fernandez from Telsey Advisory group.
Hey, good morning.
I'll ask about the couponing strategy.
Earlier in your remarks, you mentioned that you weren't able to spend as much as you wanted maybe could you expand on that.
And how you're thinking about rectifying balancing that going forward.
Yeah, I think that.
You start off with we've always been committed to having a more balanced.
The arrangement with the coupon it was out of the blood and in the past we've been able to manage that in the play we just took too severe and action Kristina. So I think what we want to do with this rebalance that equation coupon is a great tool for customer engagement and traffic. It is not a drug it's an opportunity we just need to manage it better and.
So we kind of need to create the balance about so still committed to coupon as a strategic advantage in our business.
And we have time for one final question and that'll be from Susan Anderson from B Riley.
Hey, good morning, Thanks for taking my question.
I'm just curious on the traffic in the stores how that perform year over year and then also sequentially. And then also are you still seeing better metrics than the remodeled stores and what are your expectations for the number of Remodels choices here next thanks.
Yes so.
Susan in terms of traffic, we saw traffic below last year Q3 high single digits.
Low double digits, it improved sequentially through the quarter and as we shared earlier in the month of November.
Was positive positive sales comp sales at the store level. So traffic was a challenge but improved the <unk>.
Flip side is the conversion improved year on year, and therefore, our transaction value also improve year on year as our average AUR was improving even the promotional optimization and the pricing plans. We've been taken on your second question about store Remodels, we can.
<unk> on track with our 450 store remodel over a three year period for this fiscal we were.
We're targeting a 130 to 150.
Given some of the supply chain challenges, probably we'll end this year closer to the 130 stores.
We're pleased with the performance of these stores. So far we've completed remodel over 80 stores and we were seeing mid single digit sales growth ahead of the balance of the chain and goes model stores with high penetration of owned brands and higher margin.
And thank you ladies and gentlemen that concludes today's call for today. Thank you for participating and you may now disconnect.