Q1 2022 Bed Bath & Beyond Inc Earnings Call

Welcome to the bed Bath <unk> beyond fiscal 2022 first quarter earnings My name is Sylvia 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 session.

During the question and answer session. If you have a question. Please press zero one on your Touchtone phone.

As a reminder, the conference is being recorded.

I'll now turn the call over to Susie Kim head of Investor Relations Susie Kim you may begin.

Thank you and good morning, everyone welcome to our fiscal 2022 first quarter earnings call. Joining us today are Harry Edelman Independent chair of our board of Directors shall go director and interim Chief Executive Officer, and Gustavo right now, our Chief Financial Officer before.

We begin let me remind you that our fiscal 2022 first 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 objective.

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 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 later today.

I would now like to turn the call over to Herriot.

Thank you Susie and good morning, everyone. Thank you for joining us today.

Before Gustavo covers this quarter's financial results in detail I will spend a few minutes on the announcement we shared earlier.

Today, we announced significant changes to our executive leadership team.

Sue Gove independent director and chair of the strategy Committee has been named interim Chief Executive Officer, replacing Mark Tristan who is leaving the company.

And Morris there how has been appointed Chief merchandising officer, taking over for Joe Heartsick, who is no longer with the company.

Sue has a pivotal role in overseeing this transition and making sure we take Swift action.

Sue has served on our board since 2019 and is a deeply experienced board member and business executive across a number of senior financial operating and strategic roles.

Leading the strategy Committee has given her strong insight into the potential of the company and her deep experience in corporate retail transformation will enable quick decisive actions during this transition.

She and I have worked together closely for the past few years.

She was an insightful intelligent and influential leader I know she will quickly make a significant impact as.

As for Mara having most recently served as bed Bath and beyond senior Vice President and General manager for Harman, She will be responsible for driving the company's omnichannel merchandising planning and owned brand strategies, while also retaining her position as general manager for the health beauty and consumer.

Both business.

On behalf of the entire board I want to recognize and thank mark for his many contributions over the past two and a half years.

Mark's accomplishments include launching our transformation strategy, introducing owned brands investing in technology and infrastructure repositioning buy buy baby and building out omnichannel and digital capabilities.

In addition, he led the company through the COVID-19, pandemic and was dedicated to keeping our associates customers and communities safe answer.

I'd also like to thank Joe for his hard work and dedication in developing and implementing our overall product strategy and in particular on brands.

Our performance today requires an adjustment to strategy and a deep focus on basic operational execution.

The results that Gustavo will discuss in a few minutes are not reflective of our capabilities and potential we should be achieving so much more.

Board members and management came to our company because we believe that our unique place amongst customers. Many options is as compelling today as it was at its founding.

And the opportunity to drive growth and unlock the value of our banners is what we are here to do.

The macro environment right now presents a number of challenges for our business.

A convergence of factors and the cereal nature of them is unparalleled in my years of experience in the consumer sector still we recognized first and foremost that our results will be improved by our making important changes in how we serve customers operate our business and.

Ever against the premise mentioned earlier.

I will also share a few comments regarding the update provided on the strategy Committee.

As you know our strategy committee has been evaluating options for buy buy baby.

The committee is working closely with both strategic and financial advisors to properly assess the businesses inherent value potential.

That work is ongoing and it is important to underscore that the board sees significant value and buy buy baby. It is a highly relevant banner with a strong market position and favorable demographics.

Before I turn this over to Sue who will discuss her near term priorities in more detail I will close by emphasizing on behalf of the board.

We are United behind the priorities needed to stabilize the company and create value for shareholders.

Now I'd like to turn the call over to Sue for some quick introductory remarks Sue.

Thanks, Harriet and good morning, everyone. We appreciate you joining us today I want to begin by saying how honored I am that the board of directors has placed their trust in me to lead bed Bath and beyond at this critical moment.

Echo Harold's comments that all of us on the board have a deep respect for this company and the heritage of our banners and a firm commitment to our stakeholders to drive improvement.

Been a loyal bed bath and beyond customers since the beginning and it was in our stores. This past weekend working through the college checklist for my daughter today I want to share. Some brief remarks on our results and how I am thinking about near term priorities. We've spent a significant amount of time evaluating areas of need and.

Central for the business and you can expect to hear more from myself and the team in the weeks and months ahead.

Look forward to meeting with our associates partners and shareholders as I lean into my role.

Before I jump into some of the near term priorities I too want to thank mark for his dedicated leadership and counsel through some of the most volatile times in our company's history.

His oversight through the pandemic and commitment to keeping our associates and customers safe has been remarkable that care remains a top priority as I step into this role I could go on but suffice to say mark leaves a meaningful impact.

As Terry mentioned, our results are not up to our expectations nor are they reflective of our potential like many of our retail peers bed bath and beyond is facing a difficult macro environment.

However, even during these periods of industry wide challenge, our shareholders associates customers and partners all expect more from us and I Couldnt agree more we must deliver better results. We have products that are positioned to meet needs for customers across important and resilient categories and we have identified areas of focus.

<unk> in which we can improve our offerings and brands need better balance to what our customer wants our inventory position needs refinement.

Well.

We have been working to address these areas of focus some havent been affected and others have not from where I sit right now the areas that I consider to be working include.

Own brand has a place in our assortment, particularly with the introduction of new opening price points within the label like simply essential.

As we've already discussed we're pleased with where to buy buy baby is positioned and see exciting potential.

Our omnichannel and digital capabilities have grown and services such as <unk> and same day delivery answers the evolving needs of our customers.

We also launched our new loyalty program welcome rewards last week and we're excited about what we're seeing in these early tests days.

In the near term, we have very clear priorities for where we must see improving results first we have to make sure. We are focusing resources on driving traffic to stores and digital platforms. We also must prioritize how we're serving customers to recapture market share.

I believe a lot of this work is best done in a back to basics mantra that prioritizes, knowing our customer and delivering the experience they deserve wherever they interact with us.

Equally we must become a more efficient and profitable business, we must stabilize the company's supply chain reduce costs lower inventory and strengthen the balance sheet you starve. It wont have more on near term efforts on this front, but expect much more on these topics in the future.

We have a lot to do and we must do it quickly that's why as we move through this transformation. We have also decided to hire a leading retail advisory firm BRG to focus on cash inventory and balance sheet optimization.

We understand there are many adjustments happening simultaneously. Therefore, we look forward to sharing an update on our progress later in the summer.

We continue to work with a sense of urgency in these efforts and we are very focused on finding the best opportunities available to maximize value for all stakeholders.

These initiatives would not be possible without the tireless efforts of our leaders and associates, who work to serve and interact with our customers to make it easy to feel at home.

I'm optimistic about the future of the company and its continued progress and I'm confident in our ability to drive improvement in 2022 and beyond.

With that I will turn the call over to Gustavo to address the financials gustava. Thank.

Thank you Sue and good morning, everyone.

For our first quarter total net sales were approximately $1 5 billion, which reflects a decline of 25% and a comp sales decline of 23% versus last year.

This decline was consistent with the quarter to date trends, we shared on our April earnings call.

Sales continued to be challenged throughout the quarter.

As a reminder, net sales continue to reflect the impact from our store fleet optimization program, although the impact is now smaller than in prior quarters.

Also we have fully Anniversaried bar completed noncore divestitures.

<unk> store comp sales were down 24%, while digital sales declined 21% versus last year, our digital channel remains approximately 40% of total net sales.

By banner, but Bath <unk> beyond comparable sales decreased 27% versus last year.

Bye Bye baby comparable sales decreased mid single digits, consistent with market trends and Harman deliver positive comps.

GAAP gross margin for the quarter was 23, 9% and 23, 8% on an adjusted basis.

Supply chain costs remain elevated impacting adjusted gross margin negatively by 330 basis points year on year, which more than offset 60 basis points of higher net product margin.

Additionally, we had a negative 840 basis point impact from transient costs related to inventory markdown reserves and port related supply chain fees.

Excluding these transient costs in the quarter adjusted gross margin was 32, 2%.

As we announced this morning, we're taking immediate and aggressive actions on cost capital spending and in particular on inventory.

During Q1, the arrival of delayed receipts with long lead times was met with sharply lower demand.

Led to higher inventory of approximately 15% versus last year, while at the same time sales were 25% lower.

This delta of almost 40 percentage points between sales and inventory is worth more than half a billion dollars in cash.

As exhibited by the inventory charge taken this quarter, we intend to work aggressively to clear the excess inventory that we and the industry now face.

Additionally, we will reduced planned capital expenditures by a minimum of $100 million.

To approximately $300 million.

SG&A dollar expense remained below last year, primarily due to cost reductions and lower rent and occupancy expense following our store fleet optimization program.

However, given lower revenues SG&A as a percentage of sales was higher which is why we're taking even more aggressive actions on costs as announced today.

Our sales gross margin performance led to negative adjusted EBITDA of $224 million, which was a loss of approximately $100 million when excluding the aforementioned pension costs that impacted adjusted gross margin.

Turning to our balance sheet and cash flow.

Net cash used in operations was approximately $380 million.

Capital expenditures for the quarter were approximately $100 million as we continue with key investments within supply chain and it systems as well as certain initiated remodels.

As the quarter progressed, we partially funded working capital through zero point $2 billion in borrowings against our $1 billion asset based revolving credit facility.

We ended the quarter with a cash and investment balance of approximately zero point $2 billion and with total liquidity of zero point $9 billion.

I will now share our updated outlook commentary for this year, which will continue to be qualitative.

At this point in the second quarter, our comp sales continue to trend at a negative 20% range.

As we progress through the year and based on the news we announced today, we are sharing the following.

Negative comp sales to improve sequentially in the second half of fiscal 'twenty, two driven by inventory optimization plans, including incremental clearance activity.

Full year SG&A expense below last year, reflecting aggressive actions to align cost structure to sales.

<unk> of the previously announced $100 million expense optimization program.

Finally, we are reducing planned capital expenditures by a minimum of $100 million from 400 million to 300 million for fiscal 'twenty two.

Operator, we're now ready for questions.

Thank you we will now begin the question and answer session.

Have a question. Please press zero one on your Touchtone phone, if you wish to be removed from the queue. Please press star zero to once again, if you have a question. Please press <unk> one on you touched home phone.

If you have Q during the call. Please do so again at this time and give us a moment as we compile the queue. Thank you.

Yeah.

And our first question comes from Jonathan Matuszewski from Jefferies. Please go ahead.

Transition you mentioned the search for a permanent CEO is underway just curious how the criteria youre emphasizing on this go forward search is different from the prior Sir that's my first question. Thanks.

Thank you. This is harriet answering so clearly we won a focus on merchants skills modern retailing.

Digital and omni capabilities, but sharp skills and emphasis on operations execution cost effectiveness and balance sheet.

Yes.

Yeah.

Gotcha. Thanks, so much and then just a follow up question on expense rationalization. It sounds like youre going to be taking a more aggressive stance with operating cost reduction.

Last quarter, we learned about 100 million dollar expense rationalization program for fixed and discretionary costs can you elaborate a little bit more on the new areas that you'll be focused on thanks. So much.

Hi, Jonathan Gustavo here, it's all about not leaving any stone unturned going deeper into some of the areas that we've already started working on <unk>.

Optimizing our.

Four wall profitability store fleet optimization supply chain costs.

And frankly, any indirect spend or variable cost to improve both gross margin and improve our SG&A rate, we need to right size the business. According to Rs <unk>.

Recent sales trends.

And this is sue I would just add to that that we're going to be focusing our resources on the things that are going to drive immediate results.

We will be prioritizing that in near term as we prioritize our cost opportunities.

Thank you best of luck.

Yes.

Our next question comes from Michael Lasser from UBS. Please go ahead.

Morning, Thanks, a lot for taking my question, how does it does make the necessary systems and supply chain investments at a time, where really needs to preserve capital in it.

On that point.

Do you think you have.

Have enough capital to allow the company to complete its transformation and if you do need to raise capital.

What will be the best approach right now.

Yeah, Hi, Michael.

First in terms of capital spending as Sue said, we're focused on the areas that will matter, most which is why you've already seen a very decisive change in our capital spending plan this year, bringing it down by a third from $400 million to $300 million.

We do think it is important to protect we think that 300 million for now the elements related to capabilities system capability supply chain capabilities technology capabilities, because we're living in a very challenging and dynamic world. There's still the need to modernize the company on your question of <unk>.

As to capital look we have sufficient liquidity within our credit facility as we speak.

Working with BRG working with our financial advisors are avenues that we're exploring to even increase further our liquidity and navigate through the working capital cycle, particularly in the next two quarters given the seasonality of our business. So we are confident on our ability to.

To manage cash liquidity to strengthen the balance sheet and be very focused where we invest and where we take costs out.

Understood. My follow up question is with all due respect when a retailer gets into.

Challenging a precarious situation like this it can be hard to reengage with customers it can be hard to maintain.

The thief of your vendor partners.

And it can be difficult to maintain the experience.

And the stores why is this situation yes.

Yeah, and this is two and you are right.

We're gonna be focusing on balancing our assortment lowering our inventories and managing our costs strengthening our balance sheet, our vendor relationships our vendor partnerships are going to be critical.

And we think that we've got those relationships in place we've got a strong team in place.

And most importantly, we're going to be focusing on the customer and getting them back into our stores in offering them the product that they want to see.

Thank you very much and good luck.

Our next question comes from Justin Kleber from Baird. Please go ahead.

Yeah, Hey, guys. Thanks for taking the question I just wanted to ask about gross margin and any color you could provide.

And kind of a trajectory going forward you mentioned, the 840 basis points of.

Transitory costs during the first quarter I mean, do we expect those to effectively stayed here in <unk> or does some of that linger into the balance of the year. That's my first question.

Yeah, Hey, Jonathan.

Part of the reason we wanted to show those costs separately as we did in the fourth quarter is exactly to the note. What you just said, but those are transient right.

<unk>.

Took a significant charge on inventory right in this first quarter, we will continue working through this but.

This was a big intervention.

To say one off the world is very dynamic.

But thats that and that was a significant portion of it. The other was port related fees I said in my in the call last quarter that this was a Q4 and Q1 dynamic and Thats. The case, we don't expect any material port fees penalties in the second quarter.

So we are full.

Yes, we're keenly focused on the.

Gross margin.

Excluding those items driving cost out offsetting the supply chain increases ongoing supply chain chain increases rates and product margins.

Okay. Thanks for that and then do you have I guess, maybe a year end inventory goal.

You are targeting and then somewhat related can you talk about the improvement in comps across the back half of the year is it seems like it's largely a function of clearing through inventory.

Any way you could kind of size the topline impact.

From a clearance in the back half of the year.

Yes, Justin we do have an internal inventory goal.

Objectives month by month quarter by quarter, we're not at a point of declaring that.

At this point drive other but the flavor I would give you is there is cyclicality in the business right. There is a seasonality we still need to.

While we're addressing inventory down.

Aggressively in the areas, where we feel we.

We're a little bit.

Bloated right and where we are intervening we still need to protect our inventory levels through the back to college season through the important holiday seasons in November and December So expect the inventory reduction to come more later into the fiscal year, just as the nature of the cycle of our <unk>.

<unk>.

Alright, thanks, so much.

Our next question comes from Jason Haas from Bank of America. Please go ahead.

Hey, good morning, and thanks for taking my questions. So first I wanted to follow up on the comments regarding the strategy committees.

Findings regarding to buy buy baby business I'm curious just to clarify the language is that.

Are you guys still considering yourself for that buy buy baby <unk>.

Division or at this point is that off the table.

And then curious what the strategic path is for that company, if it'll remain with with your business.

Yeah. This is stu so and the business is a very attractive business and we're not alone in appreciating its value. We know there is interest.

And this strategy Committee has done a great deal of work to date on evaluating the potential of the business and the business remains strong today as we stated.

So we're going to continue to build on that work to evaluate the options of the business and stake.

Unlocking the future potential.

It's still a work in process, but as I said, we know there is interest.

Great. Thank you and then as a follow up question maybe for Gustavo.

I think you called out quarter to date still seeing mid down 20% comp.

What extent is the inventory clearance benefiting that quarter to date number.

It is all within the mix Jason.

So we're working.

Within the second quarter right those sales trends.

Will be.

Part or related impacted by the inventory clearance.

Got it okay. So it.

It sounds like that there is some benefit I guess, you're not quantifying it but there is there was some benefit from inventory, Chris because I guess, it's already underway is that the right way to think about it.

Yes, okay.

Thank you.

Our next question comes from Carla Casella from JP Morgan. Please go ahead.

Hi, My question is related to the balance sheet <unk> got 22020 for maturity coming up and giving you got a lot of changes going on now and negative cash flow. I mean have you start to think about how you would address that issue.

Hi, Carla Gustavo here, Yes of course this is part of our capital structure planning, we not own are not only looking at fiscal 'twenty two the immediacy of this fiscal year.

Before quarter to quarter, but also fiscal 'twenty three.

The maturity on the 24th.

We have capacity to deal with that.

We're not declaring anything specific at this point.

Okay, Great and then theres been a lot of questions and talk on inventory, but.

So should we expect inventories to be a large source of cash for the next few quarters or.

Do you still have a lot coming in.

To the ports so it make it more working capital use for the year.

Yes, it won't be a source of cash in the next when we look at Q2 and Q3, particularly because of the seasonality dynamic I mentioned, so it would be more of a Q4.

Dynamic.

Thank you and our next question comes from Seth Basham from Wedbush. Please go ahead.

Yes.

Thanks, a lot. Good morning. My first question is on inventory can you give us some more color as to what areas in which you're bloated and what the assortment plan is going forward.

Yes.

A lot of the immediate actions. We're taking now are related to owned brands and there is a couple of reasons for it.

One these are products, mostly ported that have a long lead time.

Dan.

We spoke earlier there was a mismatch between.

When the demand was estimated when the supply actually happened.

Baidu supply chain challenges in the industry backing last year right.

And now with softer demand. So we are seeing in the home categories contracting as we speak so there's that dynamic on the mismatch on supply chain and.

Demand current consumption.

There is a sue said owned brand.

Important in our strategy, but it needs to be adjusted there.

Perhaps.

Some subcategories and within some brands that we over extended and we're addressing that as we speak suits can provide more color on it yeah. We think that the customer wants to see more of an optimal balance of national brands direct to consumer direct to consumer brands and company owned brands.

So we're focused on improving the category mix.

In driving traffic to our stores with the customer at the focus of that.

Thanks, that's helpful. And then secondly on the marketing plan going forward you guys have struggled somewhat driving traffic and you're losing market share. How are you going to adjust the marketing plan to do a better job driving that traffic to your stores on your website.

Yeah.

Sure.

And our timing and back to college right now.

Made some shifts in our marketing plan, there with them introducing that back to college event.

In early May capitalizing on the high school.

In College to college acceptance day, and we feel pretty positively about our positioning with the marketing momentum.

Traffics that critical area and so we will continue to tackle that we're going to be monitoring the data and results. We also just launched our loyalty program.

As a test we're very excited about the early reads and we're going to be talking and giving you updates on that in the near term.

Thank you.

Yeah.

Our next question comes from Cristina Fernandez from Telsey Advisory Group. Please go ahead.

Hey, good morning, Thanks for taking my question I wanted to follow up on the on the private brand strategy given the long lead time I guess when do you think you can make more impactful.

Change there in and perhaps add back some of those national brands that consumers would like to senior stores.

Yeah, our merchant team is heads down on this right now they are immediately focused and as we announced today with Mara stepping into the leadership role of merchandising she'll be working very closely with her team to evaluate the assortments there'll be.

Immediately engaging with the vendor groups and we are looking at having a vendor day in the very near term.

So.

We're on it heads down focused on that area immediately.

And then my second question on the press release, you commented about pressures materially escalating in the second quarter to date from the first quarter can you comment more on that and what youre seeing in the last month or so and as it relates to the fluctuations in.

And purchasing patterns by consumers what areas within the home are you seeing the biggest contraction.

Yes, hi, Christina several here.

So we talk escalating through the quarter as Q2, when we spoke last was mid April we provided visibility on our own trends.

For the month of March with quarter to date trends remain but after our release, we saw the results of many retailers.

And the inflation.

<unk> escalating interest rates escalating is just the macro environment has gotten significantly more challenging or at least visibility.

So that's what we referred to it was the second part of the question remind me I apologize for that.

It's surround the changes in purchasing patterns like within that.

I understand that thank you. Thank you yep. Thank you Christina So look we had seen since six months ago started to see declining growth rates and home categories.

We measure.

Larry.

Closely bed, Bath, and kitchen, which are about 50% of the bed Bath.

Revenue those categories.

Are now declining the past three months declined double digit when you look at the data March April may those the aggregate of those three categories declined double digits. So it's part of the explanation for challenging revenues.

But again, we still also have our own internal challenges.

Yep.

We have time for one more question that question comes from Susan Anderson from B Riley Susan. Please go ahead.

Hi, good morning, Thanks for taking my question.

I was wondering if maybe you can give your thoughts just around that bed Bath store base, how you're thinking about that as we look forward.

Especially given the increase in digital penetration and then also as we look into the back to college, how are you feeling about the inventory levels, there or do you think you're appropriately inventoried.

Yes first on the store front, we continue seeing our business as an omni channel business. So theres complement between the stores and our digital business, we're happy with our digital business, we have significantly improves our capabilities in digital and today, 40% of the revenue. So it has.

<unk>.

Importantly, we will continue to be so for stores, what we will continue doing but now <unk> been on an accelerated basis.

Look at the four wall profitability of those stores look at the geographic dispersion of them see what are they complement more or less our buy online pickup in store our supply to customers from those stores.

And we'll come up with a revised plans on that front, but this is a dynamic process is just a dynamic process that with these sales trends drive takes us to a significantly higher sense of urgency.

Okay.

Great. Thank you and just on the inventory front heading into back to college to you. If you feel that you're appropriately inventory there to hopefully try and capitalize on some of the sales.

Yes, that's what Sue mentioned, we're keenly focus on our.

We've spoken in the past of inventory not available to sale. It was stocking within our distribution centers. We were at about 30% last time, we spoke data area has improved we're now in the low twenties.

We're tracking.

Feedstock availability of key items not only in stores, but also digitally.

We're seeing some improvement.

Gradual.

And we are preparing for.

Latter part of July in May.

<unk> right.

Second quarter for back to college, and as I said before for the holidays in General November December .

Great. Thanks, so much.

Thank you so <unk>.

I just want to wrap up with stating that you know again. The next several months are going to be critical for us to take action on these immediate items around balancing our assortment driving traffic sales inventory cost the balance sheet all the things that we've talked about today.

And we really look forward to sharing with you our progress and appreciate your time. Thank you so much.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Okay.

Yes.

[music].

Okay.

Yes.

[music].