Q1 2019 Earnings Call
Thank you.
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Number is 47.
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Jason Harman.
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In Q1 moment.
Yes of the conference call will be available beginning on Wednesday July 10th 2018.
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<unk> eastern time through eight o'clock PM Eastern time on Friday July 12, 2018.
To access the rebroadcast you may dial 888843.
Or one nine with a passcode I'd of 48713 230 at this time I would like to turn the conference call over to Janet Barth, Vice President Investor Relations. Please go ahead.
Thank you Carol and good afternoon, everyone before we begin I want to remind you that our fiscal 2019, the first quarter earnings release and slide presentation can be found in the Investor Relations section of our website at www dot bed Bath and beyond Dot com and as an exhibit to the form 8-K, we filed just ahead of this call.
Joining me on our call today are Mary Winston and Bath and beyond interim Chief Executive Officer, and member of the board of Directors and Robin Williams, Our Chief Financial Officer and Treasurer.
Let me remind you that this conference call and the slides, we'll refer to may contain forward looking statements, including statements about or references to 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 .
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 subject to adjustments that had the effect of excluding amounts that are included in the most directly comparable measures prepared in accordance with generally accepted financial measures a reconciliation to the most comparable measures presented in accordance with GAAP. Please refer to the tables at the end of our earnings release available on our website and included as an exhibit to our form 8-K filed today.
Some highlights from the first quarter include adjusted net earnings per diluted share were 12 cents at the high end of our guidance range of between approximately seven and 12 cents and excluded $3.03 related to a non cash impairment of goodwill and other intangible assets as well as severance and shareholder activity costs.
Net sales declined approximately 6.6% slightly below our guidance of approximately $2.6 billion.
Retail inventories were reduced by approximately $124 million at cost or approximately 5% compared to the end of the prior year first quarter.
We ended the first quarter with approximately $923 million of cash and investments, which is approximately 9% more than the amount we had at the end of the prior year period.
In addition on July eight our board of directors declared a quarterly dividend of 17 cents per share payable on October 15, 2019 to shareholders of record at the close of business on September 13th 2019.
I will now turn the call over to Mary.
Thank you Janet and thank all of you for joining us this afternoon.
On today's call I'd like to share my initial thoughts and observations about the business and speaks to our four near term priorities and areas of focus.
Following my comments I will turn the call over to Robin for review of the financial and operational highlights for the quarter as well as our outlook for the full year and then we will take your questions. As you May know I joined the bed Bath and beyond board of directors in early May in connection with the company's transformation and refreshment of the boards composition and governance structure.
As a longtime customer I believe bed Bath and beyond is a great brand with a strong customer affinity and I was eager to join the board and contribute to stabilizing and repositioning the business for future growth as a successful omni channel retailer.
When the board then determined it was the right time to identify the company's next generation of leadership I was honored to step in as interim CEO .
I am working closely with the board and management, leveraging my retail industry experience as well as my background in finance and corporate strategy. During this transition period.
As you my role as one where I can provide strategic leadership and help prioritize and drive forward. The most meaningful initiatives to advance the work underway to improve our financial performance enhance our competitive position and drive shareholder value.
I will start today with my initial observations of the company have made a concerted effort over the past several weeks to meet with many associates across the organization gaining an understanding of the company's history culture and the way we operate.
As visited many of our stores across multiple banners.
As well as one of our distribution facilities changed your I saw first hand separation of our business.
During these visits I witnessed our associates passion for customer service and the deep connection we have with our customers with obvious.
It is also compelling to see our customers' enthusiasm and commitment to our brand.
That said it is also clear that the company has not kept pace with how the customer.
Has evolved and how consumers shop today.
We need to give our customers a reason to keep shopping in our brick and mortar stores and in order to do that we must update and enhanced store experience.
This will continue to be a priority for us.
Beyond enhancing our store experience, we must also transforms online shopping experience.
To engage our customers digitally.
Both our store and digital experiences will continue to be areas of focus for us.
It's still early and there is much work to do to fully assess the business.
Importantly, what I've seen and heard up to this point has validated my confidence that did that and beyond is iconic brand with tremendous opportunity.
The company has a strong geographic footprint as well as attractive and growing product categories.
We also have a resilient team that is operating with a sense of urgency to improve the company's competitive position.
As we look ahead the board and the management team are in full agreement that there needs to be a fundamental change in our approach to executing the company's business transformation.
A key challenge for the business in the past has been that there have been too many initiatives underway.
Which has resulted in a lack of strategic focus and less meaningful results.
We are committed to completing a deep review of the business to prioritize and drive forward the most meaningful initiatives to improve performance.
This is part of the critical work underway at the board level.
Under the leadership of independent Chairman, Patrick Estonia, the new board consisting of a highly diverse set of leaders with a wide range of fresh perspective, and background is well equipped to oversee and partner with management to drive the intensive business transformation that is needed.
Importantly, all of our directors are highly engaged and are moving quickly to continue to enhance our governance structure transform our compensation program.
Evaluate our capital allocation priorities and assess and shape, a new strategic direction for our company.
To that end the recently formed business transformation and strategy Committee is set to review and evaluate the ongoing business transformation and will make recommendations on how the company can best capitalize on and navigate the evolving retail environment to accelerate the company's evolution.
Together the board and management team are challenging our current value proposition and operating model to take on a more holistic approach to the transformation.
While also maintaining a focus on delighting, our customers and delivering long term value to shareholders.
We are in full agreement on our four key near term priorities.
First stabilizing sales and driving top line growth.
Secondly, resetting the cost structure.
Third reviewing and optimizing the company's asset base, including our portfolio of retail banners.
And finally.
Refining our organization structure.
As I evaluate and assess the work underway my early observations revealed that our number one priority must be a focus on stabilizing our top line and optimizing our sales opportunities.
This will require collaboration and refinement of initiatives across multiple areas of the business, including merchandising marketing branding pricing and supply chain.
And as I mentioned, we will also be sharpening our focus on delivering a seamless omni channel experience, including our current in store and digital experiences.
To be clear our efforts will be focused on opportunities to drive profitable sales growth.
Our second priority is to reset our cost structure to better align with the current state of the business.
This will include reductions in cost of goods and as DNA.
While the company has previously initiated some actions and made progress on this front.
We need to dig deeper and to cast a wider net.
Focus on our cost of goods and gross margin will entail an assessment of opportunities within our proprietary and private label brands as well as our supply chain and global sourcing capabilities.
Prior actions underway relating to pricing strategies coupon expense and outbound shipping expense are showing early positive results. Our initial focus on as DNA has resulted in further reductions in store payroll primarily through better alignment of store hours with foot traffic.
A streamlining of our field support structure.
And the reduction in tests performed at the store level.
In advertising, we have been improving the efficiency of our direct mail events and digital marketing.
As we continue our focus on our cost structure, we will take a fresh look at our corporate overhead.
Ensuring we have the right structure and resources for the business, we're managing today.
Finally, the company commenced a comprehensive real estate optimization efforts six months ago with the assistance of a specialized real estate consultant.
Who's leading the renegotiation of the company's leases.
Occupancy savings from this effort will benefit fiscal 2019 and far beyond.
Our third near term priority is to review the company's asset base.
This encompasses a fleet optimization project for all bed Bath and beyond stores to understand how best to position our store locations in various markets across the country and Canada.
In addition to the real estate optimization efforts I just mentioned, we anticipate leveraging the findings.
Of this fleet optimization project to evaluate potential store closures and or relocations.
These decisions will be based on a combination of each store's performance profitability is geographic location and the customer demographics.
Our ultimate objective is to find the right balance between our physical and digital presence within the markets, we serve and to deliver the shopping experience our customers want.
The board and I are also in the process of evaluating the various retail banners, we operate to better understand their strategic and financial contributions to the portfolio.
Following this review we will determine the appropriate next steps.
Our fourth near term priority is to take a fresh look at our organization structure, we have a seasoned management team that understands the business and culture well.
And as I mentioned earlier, our seen our teams operating with urgency and I'm grateful for their hard work and commitment.
It is critically important that as we transform bed bath and beyond we ensure we have not only the right talent and expertise, but also the right teams structures in place to facilitate a connected and efficient organization.
To build the future of this business leaders will operate with clarity.
And focused and be empowered to make decisions for which there will be accountability.
By focusing on our four near term priorities, we will reset our approach to the company's business transformation prioritizing the things that we believe are going to deliver the greatest value to our customers and our shareholders.
Before I turn the call over to Robin I'd like to provide a brief update of the board CEO search.
With the support of a leading executive search firm. The CEO search committee has undertaken a robust process to recruit a permanent CEO .
Working to identify a leader who has a multifaceted skillset, including transformation and innovation experience in the retail sector as well as e-commerce and marketing experience.
We have generated significant interest and while urgent we will take the time, we need to select the right leader for the future of bed Bath and beyond.
We will update you further once we have something to share.
Finally, I'd like to comment briefly on our first quarter results and our outlook for the full year.
As you saw in our news release first quarter sales were slightly below the range. The company had provided.
While EPS on an adjusted basis was at the high end of the company's previously provided range.
As we look forward to taking into consideration both the work to be done in our transformation as well as continuing challenges in the broader retail environment.
We are taking a more conservative approach to our outlook for the remainder of fiscal 2019.
As Robin will discuss in a moment, we have maintained our sales and earnings expectations for the year, albeit at the lower end of the previously stated guidance ranges in summary.
There is critical work to do and there are challenges we are working to address.
We remain confident in the underlying business and our ability to leverage the strength of the bed Bath and beyond brand and our last in connection with customers to deliver on our near term priorities and transform the company.
With a renewed focus on our customer and a winning customer value proposition. We believe we can capture opportunities in the market and create sustainable value for our shareholders.
As we move forward, we will share our progress about how we are executing against our near term priorities and our plans to deliver improved results and now I will turn the call over to Robin to review, our financials and our outlook.
Thank you Mary.
Starting with our bottom line.
For the first quarter of fiscal 2019, our reported net loss per diluted share this $2.91.
This loss included pre tax charges related to.
Noncash goodwill and other impairments of approximately $401 million.
Severance, including the departures of key senior executive of approximately 38 million.
And shareholder activity costs of approximately $8 million.
Excluding these items our net earnings per diluted share was 12 cents at the high end of our guidance range.
To provide more meaningful insights about the operational performance of our business during the first quarter.
My comments about the quarterly results exclude the impact of these items in 2019.
As well as the impact of severance incurred in last years fiscal first quarter.
Turning now to a review of our sales results.
Our net sales in the quarter were approximately $2.6 billion a decrease of approximately 6.6% from the first quarter of last year.
Comp sales for the quarter also decreased approximately 6.6% and reflected a decrease in the number of transactions in stores.
Partially offset by an increase in the average transaction amount.
On a directional basis comp sales from our stores declined in the high single digit percentage range, partially offset by slight growth in comp sales from our customer facing digital channels.
As we discussed during our earnings call in April .
Our first quarter modeling assumptions included a decline in comp sales due to one the shift in the Easter holiday to later in the quarter this year compared to last year, which for us would reduce the tailwind effect, we typically get from consumers looking to refresh their homes for spring.
To a lower advertising spend in this quarter versus the prior year period.
With plans to shift that spend to the fourth quarter.
And three and acceleration of our bias towards prioritizing profitability over near term sales growth.
Which includes actions such as eliminating less profitable skews from the assortment, adding minimum quantity requirements and excluding coupons for select skews.
Gross margin for the quarter was approximately 34.5% of net sales as compared to approximately 35% in the first quarter of last year.
In order of magnitude this decrease as a percentage of net sales was primarily due to a decrease in merchandise margin, partially offset by decreases in coupon expense and net direct to customer shipping expense.
The decrease in coupon expense was the result of a decrease in the number of redemptions with fewer pieces distributed partially offset by an increase in the average coupon amount.
In addition, as we have previously described our beyond plus membership program has impacted and will continue to unfavorably impact our gross margin as the rate of member enrollment increases.
As a reminder, the consumer focus benefits of this program, including 20% off entire purchase and free shipping.
Our realized immediately upon sale, while the membership fee is currently amortized over the one year membership period.
As of the end of the first quarter, we have approximately $1.2 million Xeon class numbers.
We estimate the impact from beyond plus on our gross margin was approximately 60 basis points for the first quarter. This year and 40 basis points for the first quarter last year.
Notwithstanding the short term margin impact during this period of increasing member enrollment.
We continue to evaluate the learnings and we remain very encouraged by the incremental benefits we are seeing.
As well as the long term potential of beyond plus.
In addition, this program as another means to gain customer insights.
That over time will help us to direct specific product offers and content to these loyal customers through marketing personalization to drive incremental sales and margin enhancement.
As DNA for the quarter was approximately 32.9% of net sales as compared to approximately 31.7% in the prior year period.
In order of magnitude this increase in cash DNA as a percentage of net sales was primarily due to increases in technology related expenses, including depreciation and occupancy expenses.
Heading into the quarter, we expected deleverage from these fixed costs due to our planned decline in comp sales.
Our effective tax rate in the first quarter was approximately 38.6% and includes approximately 2.9 million of net after tax costs due to the strength events occurring in the quarter.
In the prior year period, our effective tax rate was approximately 30.5% and included net after tax costs of approximately $2.6 million due to distinct events occurring in that quarter.
Our first quarter guidance plan for a higher tax rate. However, we had more favorable discrete items that were included in our model representing about two cents per share.
Now looking to our balance sheet.
We ended the quarter with approximately 923 million in cash and investments an increase of approximately $76 million or approximately 9% over the end of the prior year first quarter.
Retail inventories at the end of the quarter were approximately $2.5 billion at cost.
Which represents a reduction of nearly 5% or approximately $124 million compared to the end of the first quarter last year.
During the fiscal first quarter, we further adjusted the carrying value of our goodwill and other intangible assets.
As required by the accounting rules.
By taking an impairment charge of approximately $401 million.
Based noncash pre tax charge was primarily the result of a sustained decline in the company's market capitalization and does not impact our ongoing day to day operations.
Capital expenditures for the quarter or approximately $68 million with about 50% related to technology projects, primarily including investments in our digital capabilities analytics and logistics.
The remaining Capex spend was primarily for the opening of three new stores and the remodeling of over 40 existing stores the bulk of which were next generation lab stores.
Share repurchases during the quarter were approximately $81 million, representing about 5.3 million shares.
In addition on July eight our board of directors declared a quarterly dividend of 17 cents per share to be paid on October 15th 2019 to shareholders of record as of September 13th 2019.
Lastly, regarding our balance sheet.
It now reflects operating lease assets of 2 billion and operating lease liabilities of 2.2 billion due to the adoption of the new lease accounting standard, which for US requires all leases with terms greater than 12 months to be capitalized on the balance sheet.
As we noted in the press release the adoption of this standard will not result in significant changes.
Two our statements of operations or cash flows.
In addition, there is no impact to any of our debt covenants related to our indenture for revolving credit agreement.
Additional disclosure is included in our 10-Q filed with the SEC today.
Now turning to our financial guidance for fiscal 2019.
As we evolve our plans around the four key near term priorities. Just described we will continue to evaluate the components of our financial model for the year.
As Mary mentioned taking into consideration.
Both the work to be done in our transformation as well as the continuing challenges in the broader retail environment. We are taking a more conservative approach to our outlook for the remainder of the year.
On our last call, we modeled net sales to be between 11.4 and $11.7 billion.
Considering what we know about the second quarter to date.
And our outlook for the back half of the fiscal year, we expect our consolidated net sales to continue to be within this range, but at the lower end driven by the declines in store comps that we have been experiencing.
Net earnings per diluted share are estimated to fall toward the lower end of the previously provided range of approximately $2.11 to $2.20.
Excluding the goodwill and other impairments severance expenses and shareholder activity costs.
On a quarterly basis, we expect to see improvement in our financial performance as the year progresses.
Our model to achieve consolidated net sales at the low end of our previously guided range anticipates, a gradual sequential improvement in comp sales from stores as we progress through the year.
Benefiting from our efforts to stabilize sales, including changes to our marketing programs, coupled with other sales initiatives underway.
Considering this plus the timing of our transformational initiatives as well as the usual seasonality of our business.
We believe our net earnings per diluted share will be stronger in the back half of fiscal 2019.
Finally capital expenditures for fiscal 2019 are planned to be approximately 350 million to $375 million.
This year's spend includes about $50 million associated with investments in warehouses for e-commerce distribution through personalized products.
Although we are continuing to about evaluate our capital projects for the year.
I will now turn the call back over to Mary.
Thank you Robin.
In closing I want to reiterate my confidence in our associates ability to connect with and serve our customers.
Without question, our associates, our greatest asset, but we need to ensure they have the right tools to effectively and successfully compete in today's retail environment.
As we move ahead to execute against the near term priorities that I laid out our focus will remain on delighting, our customers and delivering long term value for our shareholders.
And with that we can now open the call for questions.
Thank you we will now begin the question and answer session.
If you have a question. Please press Star then the number one on your Touchtone phone. If you are using a speakerphone you need to be comprehensive first refer from seeing any numbers.
Once again, if you have a question. Please press Star then one on your Touchtone phone.
Our first question comes from Bobby Griffin from Raymond James Your line is open.
Good afternoon, its actually Budd bugaj for Bobby is traveling today so.
Sobering for him.
Congratulations very good luck to you on the on the.
Your interim role we wish you the best formats.
I have a few questions if I could.
The first question is to neutral talk a little bit about the ngs stores.
There are now how many of them and what is the performance of those and is the plan still to roll those out.
Thank you for the kind comments.
So in terms of the Ngs stores, yes that is still a priority.
We have 34 stores right now we're still seeing good results. We are refining what we see in the stores and continuing to update and continuing to roll that out so that program is continuing to be.
One of our top priorities.
And again by the low end or.
As I said in my prepared remarks, we are taking a look though at all of the initiatives will be looking at that one as well and again as you know it's still early days, but the performance on that looks good and we are getting good information that we can help.
And that will help us transform our store experience.
Okay.
Robin on the on the chargeable of the goodwill and the other intangibles is that just related to the market cap of fall is attached to any of the particular items.
Or items of goodwill and move on the balance sheet.
The most significant component of the charges related to goodwill and just.
As a point of reference goodwill is now down to zero on the balance sheet, but there was some residual impact related to the trade name for some of the acquisitions that we've had throughout the years.
Okay, and when you look at the cash flow for lease.
Cash flow from operations or free cash that was significantly below last year I suspect that includes some of the of the year.
The unusual items a year the severance and the shareholder activity calls what was the net impact of those unusual items charge in the quarter.
[noise] I don't have that component teeth broken out there right.
We can certainly give you a call without information.
Okay and the guidance forward guidance does that include any more.
Well once on George's recall that items or are youre unable to predict goes at this point in time.
No the guidance that we're providing would be excluding whats happened to date and any other one time items, it's really.
Guidance from an operational perspective.
Right and are there any other one time items as you can see at this point drawn.
Nothing built into the plan.
Our next question comes from Jamie Katz from Morningstar, Jamie Your line is open.
Hi, Thanks for taking my questions I'm curious I think last quarter. It was commented that comps were expected to be in the low single digit to mid single digit range and I'm, assuming that that low single digit is.
Off the table and were looking more towards a mid single digit decline, even with improving comps over the remainder of the year is that fair.
For the full year, yet we're still in that same low to mid single digit decline.
Yes, Okay, and then I know there are a lot of initiatives underway, but maybe if you can help us think about what initiatives you might have been undertaken already where we might see benefits and expenses things like changes in the buying organization I know that was partially silos across brands in the past where or maybe we can see the elimination of some redundancies going forward in the near term. Thank you.
So I would point I'll just point out that some of the things that I said in my prepared remarks. So we have had a number of initiatives underway. The renegotiation of some of the company's leases that's expected to benefit this fiscal year and beyond.
We've also already seen some reductions in our store labor costs.
As a result of rightsizing to foot traffic and taking a look at streamlining the field organization and eliminating task in the stores. So all of those initiatives are continuing to be ongoing, but we are seeing impact from them now and expect to.
Later in the year.
Beyond some of those we again are going to be looking at where we're getting the greatest impact on reprioritize and within the context of the four key near term priorities. So there may be some shifts and initiatives as we go into the back half of the year, but those are some of the primary ones that we're currently seeing benefit from.
Our next question comes from Christopher.
From JP Morgan Your line is now open.
Thanks, Good evening.
So I had a question about the guide you know usually with a new CEO and in cases like this the guidance is often pulled so it's interesting that you're you're only going to the low end. Despite the strategy is going to shift and that could shift further. So can you talk about the thought process around you know keeping the guide and only going to the lower end and what gives you the confidence whether its you see more cost out opportunity or you see the progression of the competent business, what's giving you that confidence to to to be even in the range at this point.
Well a big piece of it is as you pointed out many of the initiatives are already ongoing so while I am still getting my arms around the business and assessing where those initiatives band and what the impact of them will be I've seen enough to know that we've got lots of activity going on even though we may reprioritize. Some of it we do expect to see some benefit from it.
You will notice that we took out some of the details that were provided in the previous guidance because I think as we Reprioritize initiative. There may be shifts between what will impact gross margin versus as DNA and that kind of thing but at this point.
You know at this point I'm I'm confident in the top line and the bottom line, although at the low end of the range and again our guidance is without any special items. So we make significant changes we'll communicate those at the time.
Thank you that's that's a good segue. So as you think about you know the down six six comp you know well that that's disappointing and below the range and below the market at the same time, the gross margin decline really improves so.
I don't know if you had a chance to think about like how much of the was there a comp and gross margin trade off that was made in this quarter and do you think you know disaster part of strategy per se shift, where you know maybe we get some better comps, but the gross margin declines.
Start to Reaccelerate.
Well as Weve pointed to for the last couple of quarters. You mentioned, you know prioritizing profitability over sales and certainly some of the changes that we've made particularly impacted the customer facing digital channels growth, but we are moving those levers are pulling those levers to drive more profitable results. So that's definitely contributing and those things where you eliminating less profitable skews from the assortment, adding minimum quantity requirements for certain skews coupon exclusions on changing dynamic pricing algorithms and all of those of you know I've been layering in for some consecutive quarters.
I guess in addition to that we also had initiatives driving improvement in the merchant merchandize margin area.
Some of which you know Mary had just recently mentioned, but I would add to that that we have been evaluating our pricing strategies as well.
Our next question comes from Oliver Wintermantel from Evercore ISI. Your line is now open.
Yes, Thanks, and good evening I, just wanted to double check the guidance from last quarter and up in the fourth quarter that.
2020 guidance you Didnt mentioned that is that still a valid guidance or did you did you pull that.
Oh I'm sorry in terms of our guidance, we felt comfortable confirming that our sales and EPS would be at the low end of the range previously provided so our sales range was between 11.4 and 11.7 billion.
And our EPS range was $2 or 11 cents to $2.20.
But these did the 22 any guidance that you gave last time I'm into long trial items.
I'm sorry, we did not provide any guidance beyond 2019 at this point, yeah, and I think that related to the fact that again I and the board will be looking at all the initiatives and of course many of the initiatives that we are going to be prioritizing will have impact beyond 2019, and so once we are set on how we're going to reset the transformation and what the top initiative priorities will be will be in a better position to talk to 2020.
Got it got it thank you and if I made to the online growth did you did you comment on that in the prepared remarks and if not.
Can you can you maybe update us what what online growth was in the quarter.
As we said the growth we had slight growth from our customer facing digital channels and as I just walked through.
The growth in the customer facing digital channels for this quarter was impacted by the actions we took to prioritize profitability over sale.
So.
Eliminated less profitable skews more assortment, we added minimum quantity requirements for certain skews, we have not yet anniversary the increase in our free shipping threshold that we put in place towards the back half of last year. So all of these things are layering on top of one another and impacting the growth in the customer facing digital channels, but we are seeing higher profitability.
Our next question comes from Michael Lasser from.
Your line is now open.
Good evening. This is up a little mice, where are you filling in for Michael Lasser. Thanks, a lot for taking my questions.
My question is a bit of a follow up from one of the from one of the audio questions. So you did list a stabilizing sales is one of our near term priorities.
How do you.
Really expect to achieve this objective without compromising margins given you have prioritize one over the other in the past and I'm wondering what are some of the key changes.
You need to implement to ensure that both sales and margins grow at the same time.
Yes, so obviously, it's still early days and we're still getting our arms around everything that's going on and prioritizing what the initiatives will be but I think the in addition to the sales comment you also have to couple that with our focus on managing gross margin from a cost perspective. So we do expect to drive sales, but we expect that to be profitable and in the gross margin area. I think we talked about you know looking at where we are with our vendors and looking at other just components of cost of sales, where we can get some benefit there.
Thank you.
Our next question comes from Simon Gutman from Morgan Stanley . Your line is now open.
Hi, This is Josh cameras on for Simeon Gutman. Thank you for taking my question. My first question what rate of industry growth is embedded in your guide for 2019, and how did the market growth versus your initial expectations in the first quarter.
Yes.
I'm sorry can you can you just repeat that.
Sorry, yeah, what what rate of industry growth have you embedded into your guide for 29 team and how did the market growth versus your expectations in the first quarter.
So I guess, if you're thinking about our sales plan I mean in terms of our sales guidance, we were anticipating a decline.
I'm in the between five and 6% in the first quarter, we came in slightly below that that sales range.
And for modeling purposes.
Sorry, I was wondering if you were baking in a certain rate of home furnishings industry growth as a whole in to your guide for the year and if you could share what that is and what that might have been in the first quarter like if you sort of finishing so we're going to be flat and maybe the industry declined a little bit.
No not your own guide just just how you're thinking about the industry backdrop for the year.
Now, let us take a look at let us take a look at that and maybe get back with you. I mean, you know as we think about the home furnishing market, it's not a hugely declining market, but it's obviously not robustly growing either I think the biggest thing we see in the market is the continued focus on online sales and that and so thats impacting everybody in the market, but the overall market. We have not built in any significant expectations in either direction for the market to be booming or for the market to be way down.
All right. That's helpful. Thank you and then just as a follow up is it safe to assume that you have 25% tariffs embedded in the guide now and just in the context of the effect of the guide to move that much where they also.
Your own it's John just truck.
Okay.
I'm sorry at this time, so I mean can you. Please read press star one to re prompt for the question answer session.
Your line is now open if you can please complete your question.
Hey, sorry, I'm not sure I think we haven't said 90 issues.
Follow up question was just.
Is it now safe to assume that 25% tariff baked into your guide and just in the context of the fact that it didnt move much. Following what you initially laid out at alongside the fourth quarter results.
Well they also at the 25% level in that initial guide, even though the tariffs hadn't stepped up to that right at that point in time.
No. It's at the onset of the year. They were they were definitely not at the 25% rate and we're continuing to monitor the situation and we haven't.
Made any changes to the guidance at this point.
For that reason.
Okay.
Our next question comes from Steve Forbes from Guggenheim Securities. Your line is now open.
Good evening.
I wanted to focus on that beyond plus program right given sort of the current gross margin implications here and so just on the growth in members, whether it's quarter over quarter or just the run rate of the growth are you surprised by the ramp in membership growth.
As it appears it slowed a little bit and are there any plans to sort of tweak the offering.
Whether it's a certain component of the value proposition.
Do you think about re accelerating that growth.
And maybe just maybe he can comment on what you're seeing as it relates to membership ticket and traffic trends.
So so yes, we have seen some growth during this quarter and that into beyond plus membership program and and as you mentioned, we are continuing to evaluate it. So we may see some changes to the value offers in the future.
At this point, we're continuing to see positive result that beyond plus numbers.
We're seeing that the shop twice as many times as the average customer and that they spend four times the amount of an average customer and so where we're encouraged by that and we're continuing to monitor it.
And then as a follow up maybe for you Mary you think about your 10 year, thus far obviously traveling around to the stores the distribution centers.
Talking to store Associates, I think you mentioned right in your prepared remarks, revisiting the value proposition.
And sort of rethinking that.
On how you can improve it so what did you hear right from the store associates as it pertains to what was maybe they think where they're hearing from customers as what needs to transpire as it relates to the broader value proposition that bed bath and beyond but puts out there.
Yes, well the first thing I would say that I've heard from our associates is.
Their enthusiasm about the customer's commitment to the stores they know the customers.
Frequent shoppers.
And and they are committed to providing them the best service and the best value that they can so thats. The first thing I think the other thing I've heard from people and seen myself is the affinity for the coupon and so we have to continue to manage that and evaluate how we want to handle that but that's near and dear to the customers Harrods and our store members know that as well.
I think from a value proposition standpoint again. This is something we will be revisiting at the board level and certainly we're working with our transformation in strategy Committee.
But what we are hearing at store level is customers comparing our pricing to others pricing we feel good about the moves we made recently, but customers are focused on pricing value and that type of thing. So we are hearing a little bit of that as well.
Our next question comes from Anthony Chukumba from <unk>.
Capital markets. Your line is now open.
Thank you for taking my question I guess my first question just on the presentation of the results.
Particularly you backed out the.
The.
Goodwill Joker backup the severance costs and the shareholder costs and then you showed the comparison year over year, Rebecca some items in the first quarter of last year I guess I was just wondering why why why did you switch the presentation.
To show the non-GAAP exclusively.
As opposed to historically when you've only really for the most part shown gap with the exception of big goodwill amortization charges. I guess I was just wondering what the rationale was for we're going through that presentation.
Well I think our objective was to present, our operating results presenting on an apples to apples basis. So it's easy to compare and see see the changes are the improvements that we've made on a year over year basis.
Okay. That's helpful. And then just a quick follow up.
You talked about this before.
Near term priorities and one of them is sort of reviewing the basin. It looks like you'll be reviewing all of your conferences, including or sort of non core concepts.
Any any sense for.
Timing in terms of making decisions.
On specifically on the non core concepts like several potential divestitures.
At this point I am not going to commit to any specific timing, we're certainly moving with a sense of urgency. This is a priority for the management team and the board.
The board will be overseeing our work to look at the various concepts and when we have some next steps there is something to announce we will certainly make you aware of it.
Our next question comes from Jonathan Maciejewski from Jefferies. Your line is now open.
Yes, thanks for taking my questions.
So in guiding to the lower end of the range.
You alluded to maybe what sounds like a continuation of of tough topline trends quarter to date is that quarter to date trend consistent with the high single digit decline in brick and mortar comps and slight DTC growth we saw this quarter.
So we are expecting a gradual sequential improvement in the comp sales from stores as we move throughout the year.
And that will will achieve that through our efforts to stabilize sales.
Including some changes we've made to our marketing programs and other sales initiatives that we have underway.
We did mentioned earlier that we were going to shift in advertising expenses from the first quarter.
To the fourth quarter.
So that will help out later in the back half, but we are we are again looking to improve the trend throughout the year.
Gotcha. So that would include a sequential improvement from from one Q2 Q.
Well, what we know about Twoq to date has definitely been built into the model. We haven't seen a major shift in the trend that we've experienced Q1 at this point.
So we thought we are again projecting through the remainder of the year.
Improvement.
Gotcha and then just on the sourcing side you guys have made some enhancements to the team and opened up the second office in Asia.
And obviously.
There were long term plans discussed to to really ramp up direct imports in certain categories. So maybe just.
Share some of your latest thoughts there if theres been any initial traction in ramping up.
Direct imports.
Any thoughts there would be great.
Well, let me speak about it a little bit more broadly and then if robyn wants to add in terms of what we've seen recently.
In general I think obviously, focusing on our supply chain and our direct sourcing opportunities could provide great benefits. So we're definitely taking a look at that that is on the docket with all of the initiatives that will be working with the transformation committee of the board with to prioritize.
We have had early good results and we are looking at certain things in that area, but we don't have a lot to report on at this point.
Our next question comes from Seth Basham from Wedbush Securities. Your line is now open.
Thanks, a lot and good afternoon. My question is first around pricing you talked about evaluating and pricing strategy. What changes have you made recently and how you're thinking about pricing relative to the competition going forward.
We've definitely made changes in terms of.
Changes to our dynamic pricing strategies and algorithm and weve looked to optimize our base pricing or initial and base pricing of merchandise we've seen that those.
Pricing strategy has helped us in the in the merchandise margin area. We saw a decrease in merchandise margin, but it's at a lesser rate I guess than we've been experiencing so the trend is improving due to some of those pricing changes that were put in place.
Got it so your emphasis on the base pricing.
You're raising base prices to protect margin is that what I should be taking away from us.
Oh, we're about yes, we're evaluating our pricing strategies holistically in that.
One one element of it yes.
Yes, so I will put an emphasis on the fact that that is one element of and you should not take away that were wholesale increasing prices I mean, we are.
Monitoring what the competition is doing thinking about our need to stabilize sales and how come how sensitive the customer can be to pricing. So we're evaluating it holistically and so on some skews and categories, we might increase prices in other areas, we might not so so its more complicated than just saying.
Being able to say that yeah, we're taking wholesale price increases because we're not doing that.
Our next question comes from Curtis Nagle from Bank of America. Your line is now open.
Great. Thanks, very much for taking my question.
So just a quick one on the I guess potential.
Acid or cost of sales is that something.
You'd be able do or I guess would consider doing without a permanent CEO .
Okay.
Well, what I will say about everything that we're focused on the board has a sense of urgency and the management team has a sense of urgency and so while the CEO search is certainly a priority we're not going to be standing still in the interim so when we see opportunities that we think are really going to be to the benefit of the business. We will move forward on them now whether or not that particular thing will be one of those things can speak to that at this point until we finish our evaluation of things, but we will not be holding off on actions that we think makes sense to really stabilize the company and move forward.
Understood that makes sense.
And just a quick one on the guidance.
I don't think I heard anything.
Pertaining to how buybacks may or may not be factored in.
Other future buybacks in the full year guidance.
[laughter] Oh, we do have we do have plans for buybacks in the guidance, but again, we want to give the metrics that we were most comfortable with which is.
Sales at the low end of the gas at the low end of the range yes.
And what I will just add on that one of the things that the board will be doing is taking a look at the capital that capital allocation approach for the company and so we will be factoring into that the need to invest in the business to transform.
To maintain stability in the business and will also be evaluating how we want to return cash to shareholders through both dividends and share repurchases.
Our next question comes from Zach Fadem from Wells Fargo. Your line is now open.
Hi, This is Erik calling on for Steve Thanks for taking the question.
You commented earlier that historically that has not kept up with changing consumer behavior, and you mentioned that you're going to make updates to that store experience piece of color on what changes we can expect to see many when we can sort of see them in the store to impact the sales or margins.
Well I will what I will say is we continue to have quite a few initiatives underway in that area and that is core to what our next generation Lab store initiative is all about is being able to test those concepts see what's working tweak it as we go rollout thing that makes sense across the chain. So to say specifically at this moment what those things are it's probably a little premature because we're continuing to evaluate the performance in those stores and make those decisions.
Fair enough and then Q cells will come on the changes you're making to the coupon strategy you talked that was actually.
Gross margin benefit this quarter, just sort of how the changes you've made and presumably this led to probably some lost sales that you're comfortable with sort of the lost sales on the table and just sort of how your prices stack up versus peers.
Well from a from a coupon perspective.
We looked at the mix of offer the availability of coupons and then also having some coupon exclusions so from a from a rate of gross sales.
It is favorable this quarter and it did.
There was a decrease this quarter that contributed to our gross margin.
Our final question comes from Brad Thomas from Keybanc Capital. Your line is now open.
Hi, good afternoon, and thanks for squeezing me in here, let's here wanted to just follow up on the.
The review of the different concepts and and over the years. The company has not want to disclose revenues by segment or profit by segment, but I was wondering if theres any more quantification or color you might be willing to provide today about how the different businesses are performing.
Hi.
Unfortunately, no there's nothing more that we're going to provide today on a constant basis, because you're right we have not in the past.
Given those numbers and so for now we're going to continue in that path, but you can be assured that we are going to be evaluating the concepts and looking at all of those businesses and making appropriate decisions.
Gotcha, Thank you and.
If I could follow up then on on maybe the cost expense opportunity.
Recognizing that there could be some moving pieces between the line items versus the way you guided.
Earlier in the year I guess, Mary Robin could you talk a little bit about how youre thinking about the expense opportunity.
In 2019, and maybe how much you could bring that asked you named wind down by this year.
Well I won't attempt to quantify it but as I did say in my prepared remarks, as DNA and Rightsizing for the business that we're managing right now.
Is a top priority for us I think that.
We just have to look at that and so we're going to we've been looking at it we have lots of initiatives underway, we've been executing initiatives in the SGN area area, but we're going to continue our focus there and accelerate some of the activity that's underway.
Okay. Thank you.
Ladies and gentlemen that is all the time, we have for questions. Today I will now turn the call back to Janet Barth for closing comments.
Thank you Sheryl and thank you all for participating in our call today, if we didn't get to your questions or if you have additional questions feel free to contact me for a follow up call.
Other than that have a good night. Thank you.
Thank you ladies and gentlemen that concludes today's conference. Thank you for your participation you may now disconnect.