Q4 2021 Bed Bath & Beyond Inc Earnings Call
Welcome to the bed Bath <unk> beyond fiscal 2021 fourth quarter earnings Conference call. My name is John 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. If you do have a question.
Zero one on your Touchtone phone. Please note the conference is being recorded and I will now turn the call over to Susie Kim head of Investor Relations.
Thank you and good morning, everyone welcome to our fiscal 2021 fourth quarter earnings call. Joining us today are Mark Triton, our president and CEO and Gustavo now our Chief Financial Officer.
Before we begin let me remind you that our fiscal 2021 fourth quarter earnings release and slide 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 and the slides we refer to may contain forward looking statements, including.
<unk> 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 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 in.
And 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.
As we close the first year of our comprehensive transformation, we're disappointed that our new term results demonstrated a dislocation between our short term operations versus our long term strategy.
Sales and gross margin during the fourth quarter did not reflect our team's hard work and execution against our long term transformational efforts.
Our business has been impacted by extraordinary macro economic factors such as the routing of the global supply chain continued disruption from the <unk> variant.
That inflation rising interest rates and a turbulent geopolitical landscape, which have also weighed on consumer confidence.
Internally. These factors are exposed more short term to medium term vulnerabilities that we did not to say at this stage of our transformation as we completely rebuilt the foundation of our business.
Have been operational deficit in our near term execution and as we enter fiscal 2022, we are focused on really stabilizing that business, while navigating the headwinds still persist.
The court issues remain embedded in face of supply chain challenges, which led to fourth quarter comparable sales of minus 12% and adjusted gross margins at 28, 8%.
Specifically, the lack of available inventory, which impacted us last quarter has proved to be a continuing impediment.
Despite our overall inventory levels product not available for sale or held at ports in D. C remain at a normal highs.
Sales for the fourth quarter suffered an impact of approximately $175 million or a high single digit deficit as a result of the ongoing lack of in stock and available to sell merchandise in a baseball fan out.
This level of pressure continue towards the end of the quarter.
And throughout March.
For perspective on a traditional November through January basis used by many of our retail piece a quarterly comparable sales would have been only down high single digits.
Furthermore, through our iron data tracking and analysis industry trends have continued to worsen since February as macro market volatility and overall consumer uncertainty has surged.
Our not available to sell inventory remained high at 30% across key categories compromising our traffic generating recovery strategies.
For example, our initial projections had anticipated recovery in Q4, driven by a return to a more normalized circular strategy.
However, major items advertising that sick and that were affected by out of stocks and therefore, we are unable to proceed as planned.
We will continue to align marketing resources with in stock availability and redirect our strategy is to other revenues such as postcards and doorbuster events, which have seen relative success.
Although these do not mirror the traffic generating power of <unk>.
In line with that strategy will continue to increase our structurally healthier merchandize margins. There are other brands as well as more efficient pricing and promo optimization.
However, historically high freight and shipping costs and unexpected port related fees as part of those costs had a significant negative impact to overall gross margins for the quarter.
Excluding these escalating supply chain costs, our adjusted gross margin would've been 32, 4%.
Taking a step back 2021 marked the first year of our multi year transformation.
The macroeconomic environment, we have been chatting, a new course for our group buy reconstructing our operating model to drive greater long term efficiency and effectiveness.
Our recent financial performance, even further underscores the need for our long term strategy and in this first year I'm encouraged that we achieved all of our transformational milestones to set the foundation for our future.
This was no small feat.
Firstly, we fortified our product offering through the launch of eight new owned brands collectively.
Collectively we exited 2021 at a run rate of approximately 25% in penetration of our brands exceeding our 20% goal for the year and compared to only 10% in 2023.
Through our brands, we introduced a new suite of products differentiate bed Bath and beyond while also creating your opening price points to remain competitive, especially now in light of inflation pressures.
Furthermore, we continued to deliver improvements with our customer connections in both digital and in stores.
We enhanced our digital first omni always commitment through the enablement of cross banner shopping on our website as well as the launch of our own marketplace.
Our physical store footprint also improved as we initiated a 131 store remodels at which we completed approximately AED and optimized our fleet by closing more than 200 underperforming stores program to date.
Through expanded partnerships with Uber and door Dash for same day delivery and early of biomass opportunities. The combination about digital and store channel has been a powerful enabler for the future of our omni always customer promise.
In fiscal 'twenty, two we will build on these foundations, we established in 'twenty one.
Inventory pricing and traffic will continue to be the key areas of focus in the near term as we navigate the volatility of the current operating environment.
Are you two transformation milestones will support these efforts, including the core of our product pillar will be clearly on unlocking imagery currently held in transit. So that we can again fulfill customer demand in full.
Additionally, we're going to continue building on the work we've done with our supply chain infrastructure.
Following the opening of our first full regional distribution centers in Pennsylvania in the very late 2021 work on a second distribution center for the West Coast is well underway and slated for opening in late 2022.
The modernization of our operational foundation will be important tailwind as we emerge from the current environment and protect us in a completely different way in the future.
2022, we'll also see some significant changes to our marketing offering grew.
We will launch a new loyalty program that will span all our banners and fulfill our goal to create a compelling value and engagement proposition for our customers.
You'll also begin to see our digital channel evolve further.
This week, we soft launched the moment AD network of retail media platform that builds on our authority in the home and baby market.
Customers and suppliers will be able to connect in a new way across our digital properties as they engage without banners each important life moment.
Our strategic imperative remains to rebuild our authority in creating a home and family for all generations from infancy through adulthood, even into retirement.
We will continue building brand awareness and strength through partnerships and organic investments.
Last week, we announced the exciting launch of our Kroger collaboration on their website expanding the reach of our bed Bath and beyond and buy buy baby to kroger's extensive customer network.
We are currently working on their initial shop in shop concepts for Kroger, which remain slated for this year.
I'm also pleased to announce that we will be opening 20 to 25, new buy buy baby stores. This year.
Live without previously outlined plans to capture the opportunity we are seeing in this space. In addition to incubating new offerings within that harm in banner.
Of course at bed Bath and beyond story model program remains underway with a further 130 to 150 locations planned for this year, taking our remodel total to well over 200 by year end.
We will share updates on our transformation as the year progresses.
I'd like to take a moment to address buy buy baby and this is a firsthand example of our ability to stabilize and optimize businesses without Encumbering forces.
Bye Bye baby achieved approximately $1 4 billion in sales for fiscal 2021 growing double digits versus last year with an adjusted EBITDA margin in the mid single digits.
The actions, we took in 2021 to recover and drive our baby business proved successful and we look forward to unlocking additional value from the spin as we announced a few weeks ago.
At this time, we do not have an update on the work that has already been underway by our board and management team to define how we unlock further value.
We will update you all on material developments as they arise we will not be commenting further on this work today.
Now on to Gustavo to cover our financial results in more detail.
In addition to addressing our outlook for fiscal 2022.
Stobaugh, Thank you Mark and good morning, everyone.
As Mark said, we remain focused on our transformational plans. However, we are not pleased at all with our short term results.
While the macroeconomic environment will never be fully predictable.
21 shows the need to improve how we anticipate and manage volatility.
Our fragile legacy systems or limitation, but steel, we need to compensate and correct accordingly.
For fiscal fourth quarter, which covers the period ending February 26 reported net sales continue to reflect the impact from planned noncore banner divestitures completed last year as well as our ongoing store fleet optimization program.
For the quarter total net sales were $2 $5 billion, which included a comp sales decline of 12% versus last year and down 8% and comp versus 2019.
Sales were negatively impacted by approximately $175 million or high single digit deficit. As a result of the continued low levels of in stock and available to sell merchandise in our bed Bath banner.
This dynamic did not improve as the quarter progressed.
By channel store comp sales were down 8%, while digital sales declined 18% versus COVID-19 fueled growth of 86% last year.
Despite a normalization in digital demand from prior peaks or digital channels steel represented 41% of total net sales overall.
Overall penetration continues to be nearly doubled 2019 levels, which we have largely maintained all year.
By banner, but bath and be uncompleted wells sales decreased 15% versus last year and 9% versus 2019.
Bye Bye baby continued to deliver strong results with comp growth of low single digits on the quarter fueled by mid teens growth in stores.
This resulted in double digit growth for the full year on top of solid overall growth last year.
And now moving on to gross margin performance.
Adjusted gross margin was 28, 8% 400 basis points lower than last year, given 40 basis points from product cost increases net of owned brand mix pricing and promotional optimization.
As well as 360 basis points, primarily related to transient port fees freight and shipping inflation.
Freight and shipping costs increases were significantly higher than expected 170 basis points.
Container rate and inbound freight rates move unpredictably higher in late January and February in part given the spike in oil prices as the year started.
Further given the significant portion of inventory that has been put adjusted at ports warehouses or Dcs, we will charge for the first time unexpected poor related the mortgage fees.
These led to an additional unanticipated impact of 100 basis points.
And lastly warehouse related inventory adjustments of 90 basis points were reflected as we finalize the year, which we do not expect to continue in this magnitude moving forward.
Excluding these supply chain cost escalations in the quarter Q4, adjusted gross margin was 32, 4%.
SG&A dollar expense was in line with our internal plans, although slightly higher as a rate of sales due to a lower revenue base.
With these sales and gross margin performance, we reported an EBITDA loss of $30 million.
This led to adjusted EPS of negative 92 cents.
Looking ahead as you all know the importance of pricing has been a critical theme for us as we've been navigating the current environment.
Given our lower margin profile, just 1% of pricing and promo optimization equates to approximately 100 basis points of gross margin and accordingly significant EBITDA dollars.
Therefore, although we have been managing our promotional cadence acutely with regular price sales improving versus last quarter and last year. It was still not enough to offset the volatile supply chain environment.
Pricing and cost recovery will be key to show a resilience in the near term and as we've demonstrated previously we're implementing strategies to recover from current conditions sustainably.
Turning to our balance sheet and cash flow.
Cash liquidity remained solid during the fourth quarter, we generated approximately $280 million of operating cash flow.
We continued with our planned transformational investments of approximately $120 million.
These critical investments supported store remodels supply chain and it systems Reformation.
This led to positive free cash flow of approximately $160 million.
In Q4, we executed approximately $230 million in share buybacks or approximately 14 million shares.
As planned we completed our 1 billion repurchase program inclusive of approximately $40 million of share repurchase in March.
As a result, we have taken our total share count from 126 million shares to 80 million shares for a reduction of approximately 37%.
Our cash and investment balance remains healthy at half a billion dollars with total liquidity at quarter end of $1 4 billion.
I will now share our outlook commentary for fiscal 2022.
Due to the volatility and macro uncertainty of the current operating environment, we're providing qualitative parameters related to where we currently are in the first quarter.
And the fiscal year.
This has been informed by both current trends as well as broad operating expectations for the full year.
At this point in the first quarter, we continued to see challenging sales and traffic trends in our business due to lack of inventory availability as well as the change in market patterns.
Additionally, we're seeing an emerging uncertainty related to consumer sentiment based on market and retail indicators that show a distinct slowdown in consumer demand.
Quarter to date comp sales are running negatively in approximately a 20% range.
We anticipate many of the operating dynamics, we experienced in the fourth quarter, both industry wide and internal to continue in the first quarter as such adjusted gross margin will reflect inflation headwinds that will not be fully offset by pricing in the near term.
In terms of SG&A as announced last quarter, we have initiated an expense reduction plan across the fleet optimization fixed costs and discretionary spending.
With these we expect lower SG&A spend versus prior year despite inflation.
But still right deleverage will occur given our midterm sales declines.
We will continue to manage our cost and expense structure responsibly and prudently.
Adjusted EBITDA will likely be negative for the first quarter due to the factors I have just discussed.
For the full year, we anticipate a sequential recovery in comps by the second half of the year, driven by a normalization and supply chain conditions, both within our own capabilities and in the broader macroeconomic environment.
Turning to gross margins, we're expecting modest gross margin expansion for the full year.
Gross margins in the second half of the year are anticipated to improve year on year as comparisons ease and supply chain conditions improve.
Adjusted SG&A expense is expected to be approximately flat to last year with our planned $100 million optimization aiming to offset inflationary pressures.
These dynamics should lead to adjusted EBITDA above prior year in the second half of 2022.
Our balance sheet and cash flow assumptions include capex of approximately $400 million.
With more than half associated with transformational investments, including the remodel and new store openings Mark discussed earlier.
As noted we have completed our $1 billion share repurchase program.
Capital allocation for further share repurchases and debt reduction will be assessed in the second half of the year given our outlook.
We continue to remain focused on navigating the near term, while investing in our foundational transformation through it and supply chain capabilities as well as business growth and investments to execute our strategy.
I will now turn the call over to Mark for some closing remarks.
Thank you Gustavo.
Transformations are complex and often non linear but achieving our strategy of this scale amidst the current macroeconomic environment has made it even more difficult to deliver results commensurate with our efforts.
The friction in these moments is real and we're operating in our retail and consumer industry as challenges I have personally seen in my career.
Part of that critical Covid time frame.
However, we remain steadfastly dedicated to our customer.
Brand.
And our strategy.
Even after the peak of coverage, we continue to see 35 million customers cherish, our differentiated banners across bed Bath and beyond buy buy baby Harmon and decorous, we have a digital reached more than 875 million visits throughout the year further enabled by our powerful fleet of more than 900.
Evolving stores.
Fiscal 2021, with a euro Reformation and establishment of key capabilities still in flight across our core strategic pillars.
Operational execution might have temporarily thwarted our short term efforts our long term strategic execution continues to build sequential momentum.
By the end of 2022, we will have structural capabilities to bring us closer to industry standards and greatly improve our proficiency to renew our business for long term growth and profitability.
The core tenants of our strategy are sound and we will improve our operational deficits by learning from our experiences and leveraging the strengths of our teams who I thank for their dedication and resilience.
We will now take questions.
We will now begin the question and answer Scott. If you do have a question from zero and one on your Touchtone phone.
It should be removed from the queue. Please press zero into if.
Using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you do have a question zero then one on your Touchtone phone.
And please hold while we take a moment to compile the queue.
Okay.
Yeah.
And our first question is from Simeon Gutman from Morgan Stanley .
Yeah.
Hi, Thanks for taking my question and this is actually Hannah Pitcock on for Simeon.
Is there any commentary you can give us on the fourth quarter and quarter to date traffic versus ticket trends as well as like units per basket versus price per unit.
Kind of within those metrics, where you see the most upside over the next quarter or two and then the downside.
Yes, Thanks, Hana, we did see strength in our conversion rate at store level and in digital.
We did see strength in terms of the average unit retail some of that was associated with the cost increases that we implemented and in line with industry inflation.
And we did see some positive signs in terms of the basket in Q4 that coming into Q1 has been a little suppressed based on some of the dynamics that we're currently seeing but that gives us confidence that when we can get our inventory in place and we'd get out communication aligned.
We have a good outreach with our existing and future customer base with good indicators there.
Got it thank you.
Okay.
Okay.
Sure.
Okay.
Go ahead, Justin your line is open.
Yeah.
Alright, Thanks, guys can you hear me.
Yes, sorry, who's on the line.
Justin It's Justin Justin Klaver at Baird.
Thanks for taking the question.
Mark just first for you the $175 million impact you cited from inventory being trapped upstream I.
I guess, how do you measure that figure are you looking at the cart abandonment online just trying to understand how you know.
If you would have actually sold that inventory or if it was on hand.
Hey, Jonathan Gustavo here.
We.
Estimate this the same way we did in the third quarter, we look at loss sales at the store level. We know are in stock in key items are significantly lower than they've been historically and we could calculate week by week and category by category and store by store how much we've lost of that similarly on digital sales.
We can track all of the out of stock views and the lost sales from those transactions and keep in mind that when we do these estimates we trimmed down we assume that there's going to be some transference us customers don't find what they were looking for but anyway.
Compensate for a different item.
Yeah.
Okay and then just the one question I am curious what you guys are seeing in your wedding registry business I know that Dirk mentioned your number five retailer and baby registry. So specific to weddings, just how do registry creates maybe compared to last year and are you doing anything different within that business to capitalize on the.
Expected wedding boom here in 2022. Thank you, yes, we're seeing an uptick in wedding and baby creates we.
We have adjusted our outreach in the way that we were investing in this key business.
I think that we see.
What trends in wording that everyone's expecting I don't want to capitalize on that so early indicators through the back end of Q4 on creates bodes well.
And again, we just need to get our image inventory into stock to be able to facilitate that.
Yeah.
Alright, Thank you guys.
Our next question from Michael Lasser from UBS.
Good morning, Thanks, a lot for taking my question.
You talked a lot about the transformation plan and all the actions.
That has taken up until this point yet traffic remains a key source of weakness.
What is the plan for improving traffic from here, especially as bed Bath and beyond.
Or demographic has really been aging.
It has resonated well with the baby boomer demographic overtime.
Yes, we actually have a multifaceted customer and our target there.
Michael and we have been working with that again, we have to get inventory in line to be able to facilitate that.
But we actually have got been increasing our numbers in our loyalty.
Costa, which ensures that the customers don't even more sticky and they purchased a higher right. That's actually multi generational, but we've been attracting registry rubric key tool in that and we're also working with outreach to our lapsed customers and customers where were creating a high degree of change in the individual market. So a complete revision of our marketing our brands.
Strategy to create an expanded profile on the customer base, but also a deeper more personalized engagement with existing customers.
Okay.
Okay.
Steven Forbes from Guggenheim.
Good morning, Mark Gustavo.
I wanted to focus on the banner level margin performance Mark you mentioned buy buy baby mid single digit EBITDA for the full year, but I was wondering how consistent that banner's profitability wise throughout the year given the challenges that were noted.
And more importantly, where the profitability of that banner is running today or where it wasn't the fourth quarter.
Hey, Steve Gustavo here.
We're not going to getting to profitability by banner by quarter at this stage, but I can tell you we're very happy with the financial performance of buy buy baby as we said we finished the year $1 5 billion $1 4 billion in revenue growing double digits with mid single digit EBITDA margin. The four wall profitability of this business is very attractive.
Practice, we're keenly focus on gross margin as you may imagine and the pattern of their own gross margin of this business have been fairly consistent throughout the year.
Our fourth quarter performance stayed was definitely in line with that plan.
Yeah.
Sure.
Okay.
William Reuter from Bank of America.
Good morning.
I have I have one question in terms of your outlook for rate improving in the back half of the year.
I can't remember your contracting strategy are you contracting for this year and have you entered into agreements that will kind of lock in some lower costs.
Year over year.
We are working actively is always on the reduction of our cost William but we're not going to comment on individual contract negotiations at this time, but we also have a lot of supply chain cost improvement that we can build in through the maturation of our supply chain transformation, which we said is a multiyear transformation and we have.
Had that benefit to date, we've done all the establishment work.
But we haven't had that transparency into it actualizing so.
Internal benefits and negotiated benefits that we'll be working on.
Throughout 2022, and as we flow the product out of the warehouses, we would not expect to see port related fees beyond the second quarter or so.
Thank you.
Right.
Okay.
I'm, sorry, what was that.
Operator, we're having a hard time hearing you.
We now have a question from Jason <unk> from Bank of America.
Great. Good morning, Thanks for taking my question. So you have a large shareholder that put out a letter advocating for pivot and the strategic.
I guess path for the company and also advocating for potential sale.
Bye Bye Baby unit I think they put out they think.
Maybe it's worth several billion dollars. So I'm curious what your thoughts are on if theres a need for a change in the strategic strategy and just what do you think of that valuation for buy buy baby.
Yeah, Thanks, Jason Firstly I think.
Upon entering this company in 'twenty late 2019, it was really clear that the business had been underinvested in and required.
A full scale transformation and full scale investment in the business and we outlined a robust plan and it had to be robust because the level of work required to return us to a level of competition with our.
The competitive retail market I think the supply chain environment really exemplifies where other retails are able to cope better than we are at this moment in time at this pivot because of that Underinvestment. So a robust transformation plan, we cannot survive unless we implement that appropriately and so technology supply chain assortment.
Planning pricing the way, we cost and where we source from all of these have been undertaken robustly firstly are completed.
It's not yet generate and clearly.
So the strategy remains in place and we're always looking at our strategy with our board and are open to ways that we can finish that to improve but we have to monitor a number of fundamentals through this transformational plan. So that stays as is what we now have is is that we have been talking to the street and maybe some time around.
Bye Bye baby.
As an opportunity that is not showing its true value to a shareholder and how do we unlock that and so the what began in January our board agreed to create a strategic committee solely focused on what is the best way of unlocking the value of the buy buy baby assay, which is the growth accelerator asset and as we've shared today is performing.
Very well performing consistently and has a good consistent profitability level that work is in flight, we won't be commenting on that but we look forward to sharing more.
Oh.
Sure.
Next question is from Jonathan <unk> from Jefferies.
Great. Good morning, Thanks for taking my question.
Just wanted to ask you about the trends when comparing bed bath versus buy buy baby.
Much of the Delta do you think is tied to a more domestic supply chain for buy buy baby relative.
Maybe just a varying degree of demand across categories.
And I guess Relatedly, how did the in stock rates look at our banner like buy buy baby relative to the core bed bath. Thanks, so much.
Yes, Thanks, Jonathan Great question I think there is a key differentiator first in the status of the business versus Earl Y trajectory. So in the year. Prior we had execution issues, but also too.
We had a lessening demand in baby I think parents, what much more reticent to be out in stores.
And with shopping for basic needs rather than once we saw that pivot in the fourth quarter and throughout 2000 22021 actually.
<unk> has really bounced back with double digit growth.
Which makes up for a more profitable outcome.
On the flip side of that is product availability.
Yes, there is more of a domestic source base currently.
In baby.
Thus as bed Bath, <unk> beyond which helped enable it but it also has key categories like apparel, which we havent bed Bath that really turned back on in the second half.
We're in stock and they're more domestic currently in availability said that worked in spite of some L Y crossing the blood is there that helped as well as a differentiated merchandise mix and therefore supply chain model.
Our final question is from Seth Basham from Wedbush.
Thanks, a lot and good morning. My question is around your customer count at your analyst day.
Talk to 40 million customers today, Mark you talked to $35 million, so youre down double digits.
And I'm, just trying to understand what's driving that or was it simply that the Colgate bump where you've got a lot of new customers online that aren't sticky or are there. Other issues that you think are emerging and are leading customers to detect so to speak.
Yes, I think its great question, Seth I think couple of influences there I think you're right I think during the closet Amendment, we definitely saw in 2020 one.
A one time customer that was searching digitally and thats affected our customer count in the short term.
I think second to that is that we had store closures and inside of that we're able to retain customers and have transparency right, but our overall penetration.
In the face to the customer with very different.
And we expected some of that I think what we're seeing is a stabilization of that base and we're really now investing in 2022 in those customers, both current and future things like our loyalty program and getting back into a proper cadence with our marketing outreach as part of that solution.
But there is.
There's no doubt the during the early Covid moment.
We were closed right. So others will open in some chip consolidation win went on in that period. So we're recovering out of that and we have plans to fortify that 35 million that make them stickier and build more new customers across multi generations.
And to Mark's point of being stickier larger proportion of our customers and our omni shopping both online and in store and the frequency of shopping is much higher than when he was the store only.
Customer.
And with a larger.
Ticket basket, so and Thats, where the loyalty program is focused on.
Yeah.
Yeah.
Yeah.
Operator, Thank you, Brian still having issues hearing you.
I can't speak for you that is all the time, we have today for our call.
Billable following today's call. If you have any questions. Please feel free to follow up with that thank you so much for listening today.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect speakers standby for your debrief.
Okay.