Q2 2019 Earnings Call
Well.
Yeah second quarter fiscal 2019 earnings call.
All participants will be in listen only mode question. It's a portion of the call today's conference call is being recorded.
Yes, the conference call what do you have ever beginning on Wednesday October 2nd 2018, many can eastern time to eight PM Eastern time on Friday October 4th 29.
To access the rebroadcast you may dial eight eight.
Fourth Street seven for Onenine casket idea for 901 0664.
Hi, Matt I turn the conference calls.
Hi, precedent Investor Relations. Please go ahead.
Thank you Adrian and good afternoon, everyone.
Before we begin I want to remind you that our fiscal 2019 second quarter earnings release, a slide presentation.
He found any investor relations section of our website.
W.W. dot.
Beyond Dot com.
I think that's kinda form 8-K, we filed the part of this call.
Joining me on our call today are married Weston adopted beyond interim Chief Executive Officer, and number and the board of directors and Robin Williams, Our Chief Financial Officer and Treasurer.
Let me remind you that their conference call and applying to refer to may contain forward looking statements.
Any statements about all references to our outlook regarding the company's performance, our internal model and our long term objective.
All such statements are subject to risks and uncertainties that could cause actual results could 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 factor section in our annual report on Form 10-K .
The company undertakes no obligation to update or revise any forward looking statements.
Additionally, information we will discuss today contains certain financial measures that exclude them out or subject to adjustment that had the effect of excluding amount that are included in the most directly comparable measure prepared in accordance with generally accepted financial measures.
For a reconciliation to the most comparable measures presented in accordance with gap.
Please refer to the table 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 second quarter included.
Adjusted net earnings per diluted share of 34 cents explained $1.46 cents, which [laughter] severance costs and inventory write downs, which are related to the first wave or transformational initiatives.
Well, a noncash store impairment charges.
A 20 basis point improvement in adjusted gross margin, reflecting benefits several ongoing margin enhancement initiatives.
The 47 million dollar year over year reduction in adjusted EPS DNA expense, reflecting some early benefits from our cost structure optimization efforts, including lower payroll and occupancy expenses.
Cash and that's a balance of approximately $1 billion.
And a decline in retail inventories of approximately $492 million or approximately 18% a cost compared to the end to the prior year period.
Including a transformation related inventory write down of approximately 194 million during the fiscal 2019 second quarter.
In addition today the board declared a quarterly dividend of 17 cents per share that will be payable on January 14, 2020 shareholders of record at the close of business on December 13 2019.
I will now turn the call over to Mary.
Thank you Janet.
Thank all of you for joining us this afternoon on todays call I'd like to provide an update on our actual supporting the company's strategic near term priorities in connection with our ongoing business transformation.
Following my comments I will turn call over to Robin for a review of our financial and operational highlights of the quarter as well as our outlook for the year.
And we'll take your questions.
We feel good about the progress, we're making against our four key near term priorities, including stabilizing sales are driving topline growth.
Resetting the cost structure, reviewing and optimizing the company's asset base, including the portfolio of retail banners.
And refining our organization structure.
This work is being gone with the support and guidance a business transformation strategy Review Committee of the board at a highly engaged leadership team.
I'm, even more confident in the tracking tremendous opportunity in front of.
Today, I would like to provide an update on the progress we have made against each of our four priorities as well as what this means by path forward.
Our goal is to ensure our customers see a meaningful difference this critical holiday season, while laying the foundation for transforming our company for long term success.
Last month in a letter to shareholders Chairman, Patrick I'm, Don and I shared our enthusiasm power progress by providing a few specific examples of our near term actions.
I will now provide more details on those actions and several other initiatives we are pursuing.
Our number one priority is stabilizing our topline and optimizing our sales opportunities.
Core component of our sales stabilization efforts and our transformation overall, it's based on new data driven insight and where you think to identify opportunities for improving our customer value proposition.
We are committed to providing our customers with value and improved omnichannel shopping experience and irrelevant and compelling assortment of products.
To deliver on this commitment we are pursuing a multi pronged approach that includes both near term and long term strategies to create a noticeably different shopping experience and a differentiated value proposition for our customers.
First we are already underway with a rabbit refresh of almost 160 of our highest volume and most profitable bed bath and beyond stores to improve store traffic trend drive failed and reset the store experience.
We intend to create a more inviting and visually appealing shopping environment through a series of physical improvements at the high traffic areas obese Doris such as an injury ways and at checkout.
These basic improvements, including installation of Q lines at checkout to display exciting impulse item will be complement it with the rollout of new visual merchandising elements at the front end of the store and upgraded associate and customer facing technology tools to enhance our associates ability to drive sales and customer end.
Gauge ma'am.
We expect most of the updates to being completed in advance of the 2019 holiday season.
Second we plan to implement performance incentive incentives for our store managers based on sales targets over the holiday period.
To further drive holiday sales, we are adding marketing and promotional support for bed Bath and beyond in the back half of the year.
Included in spend are further investments in life stage marketing and branding to reengage, our customers as well as to drive foundational improvements and loyalty and shopping frequency.
It also includes plans for special in store and online promotional events during Thanksgiving week through cyber Monday as part of our efforts to aggressively target this important retail period.
Increasing enrollment in our beyond plus membership program will be a critical focus during this time as well.
Including special promotional offers to drive Inc. increased customer acquisition engagement.
Our beyond plus members today shop on average two times more frequently than our average non member customers and spend on average four times as much.
We continue to optimize our overall marketing mix by reinvesting savings from our direct mail efforts into digital channels, including video paid social and display advertising, while ensuring customers who use coupons to shop continue to receive them.
We're also improving our marketing personalization efforts with more than 125 test campaign block so far.
We have subsequently scale and about one quarter of the campaigns to reach a larger audience.
Our new customer data platform allows for the faster launch of new personalized experiences, while providing greater reach across channels.
Our personalization efforts in email have reached more than 85% of our total email subscribers within the past five months.
And customers receiving personalized E mails are engaging at an average click through rate the between 20 and 40%.
Similar to our approach with marketing personalization, we're forming a cross functional agile team focused on driving customer acquisition and sales within social media channels through rapid cycle testing of new content and targeting approaches.
We're also in the process of rolling out a new promotional framework developed around the retail holiday calendar and other relevant theme with events that are bigger boulder and beyond anything that we've done before.
This includes significant changes to our holiday promotional plan to ensure our pricing on individual offers is compelling to promote better coordination and communication across all customer touch points, both in store and online in a much more cohesive way.
And to amplify our promotions to a greater extent than in previous years through additional investments in new communication channels, such as digital video and radio while we also expand our use of our existing communication channels.
We continue to make strategic pricing decisions to deliver noticeable value to our customers.
These strategies include refining our dynamic pricing algorithm and online in in store pricing actions to address customer price perceptions.
The implementation of markdown optimization software and processes is accelerating sell through resulting in less aged inventory and optimizing the profitability of our seasonal and fashion assortment.
We believe that more effective pricing will drive both top line growth and profit improvement.
These near term opportunities will provide the foundation required to invest in and execute the shop and transformation consumers are demanding and allow us to reinvigorate our iconic brands.
Moreover, successful transformation will require significant enhancements to both our physical and digital channels to provide our customers are more seamless omnichannel shopping experience.
To start we will get better and meeting our customers, where and how they want to shop, and where and how they want to receive their purchases.
We continue to invest in our customer facing digital channels, while material improvements to the search and recommendations functionality of our site and mobile app.
We're also systematically working toward removing customer friction throughout the experience I streamlining the checkout process and by adding estimated delivery dates to the product pages for items that we warehouse.
We also plan to convert our reserve online pickup in store service to buy online pick up in store to provide more convenience for customers to quickly pick up items at the store and enable conveniences like curbside pickup for lockers.
These positive changes are yielding favorable results in our mobile apps sales, which have grown over 90% year over year in the second quarter.
In addition took store refresh initiative I just spoke about we're developing a multiyear plan to upgrade a refresh a majority of our bed bath and beyond locations.
To help execute these plans we are leveraging some of our other initiatives such as our fleet optimization initiative and learnings from our next generation lap stores.
We will also incorporate insights from consumer research, along with new visual and branding standards as well as technology upgrades.
We will have a series of store experiences that we believe will resonate with our customers and enabled them to interact with our brands from wherever its most convenient for them.
Our store renovation plans are more substantial than anything we've done in the past and we believe this plan will deliver noticeable change by our customers. We expect to begin the first wave of store renovations in early fiscal 2020.
Our second near term priority is to reset our cost structure to better align with the current state of the business.
We believe there are several hundred million dollars of cost savings opportunity over the long term embedded in our broader transformation efforts.
Among these actions already taken the initiation first the initiation of a comprehensive real estate optimization efforts, which commenced about nine months ago.
As we have previously discussed we are working with a specialized real estate consultants to renegotiate all leases, including those with longer dated term.
In many cases, we've been able to achieve more favorable lease term and landlord contributions.
Occupancy saving from these efforts are expected to benefit fiscal 2019 and beyond.
Next we continue to review our overhead costs to drive greater operational efficiencies.
We remain committed to doing what is necessary to ensure we have the REIT structure in resources for the business, we're managing today and to this position bed Bath and beyond for a bright future.
Although our review is ongoing a more changes are necessary to date, we've taken the following actions.
First we completed a workforce reduction, which affected approximately 7% of our corporate staff, including executive officers, Vice President directors managers and professional staff.
Second we have realigned the organization structure to better support the transformation underway.
Including changes in reporting structure and responsibilities for some of our senior leaders.
Third we are in the process of outsourcing certain transaction processing functions within our merchandising and finance areas to a third party.
Which is expected to result in the elimination of nearly 80 positions later in the calendar year.
These actions, including other changes in our senior leadership structure combined with our real estate optimization savings will generate cost savings of approximately $30 million.
From for fiscal 2019, and just over 50 million on an annualized spaces.
As we work to optimize our cost structure for the longer term, we are casting a wider net including an assessment of opportunities within our proprietary and private label brands as well as our supply chain and global sourcing capabilities.
To accelerate this initiative, we are actively engaging with the industry, leading sourcing from as we implement multiple initiatives over the next several months, we see opportunity to achieve longer term savings in cost of goods in the range of a few hundred million dollars.
Private label branding provides a lever to not only differentiate our customer value proposition, but also to optimize our margin structure through improved direct import and direct sourcing practices.
Today, our private label penetration within bed Bath and beyond as well below our competitors with a smaller percentage that is directly sourced and therefore, we have significant opportunity for margin improvement.
One of our key focus areas is increasing the overall penetration of our portfolio.
Private label brands, such as one SATA salt or be a willow, our typical kitchen supply and Olivia and Oliver as well as our key preferred national brands such as.
Therapeutic.
And brookstone.
We are also in the process of launching two additional private label decorative home furnishing brands, One Kings Lane open house and Marmalade.
These are part of our previously communicated plans to introduce six in house brands during 2019 in 2020.
Our initial launch occurred last spring with the introduction of being below.
Our third near term priority is to review and optimize our asset base.
As we mentioned in the recent shareholder letter, we have plans to aggressively reduce up to $1 billion of inventory at retail over the next 18 months.
As a result of this decision we took a 194 million dollar inventory write down in the second quarter.
We believe this aggressive disposition of inventory will enable us to more quickly reset inventory levels in both our bed bath and beyond stores and distribution centers to allow for a faster refresh of our assortment as well as to enable us to refocus store labor activity to better support our customers and drive sales.
In the short term more than approximately $350 million of inventory at retail will be removed from our stores before the 2019 holiday season.
This will be accomplished through a series of markdown and clearance events as well as with the assistance of an independent liquidator all to be managed thoughtfully to prevent cannibalization of sales.
We've also completed our initial assessment with the fleet optimization program for all did that and beyond stores to create a better balance between our physical and digital presence within the markets we serve.
With the assistance or the third party, we have analyzed each you as doors performance profitability geographic location and customer demographics to understand how best to position our store locations in various markets across the country.
While we previously communicated an estimate of 40 total store closures in fiscal 2019 across all concept. Our fleet optimization work has resulted in the decision to close approximately 60 total stores in fiscal 2019, including approximately 40 bed Bath and beyond stores and 20.
Other concept stores.
With this action, we are increasing the profitability of our remaining portfolio and believe that our remaining fleet will benefit from our renewed focus on driving traffic and operating efficiency.
Through this fleet optimization project, we have refined our internal processes for evaluating our stores performance.
Which will benefit us going forward.
Especially as we look to capitalize on our heavy lease expiration cadence, where we have more than 400 leases across all concept expiring over the next couple of years.
We're also evaluating opportunities for sale leaseback transactions, which could generates significant cash for the company.
We have nearly 4 million square feet of owned real estate, including both retail and non retail building as well as a little over half a million square feet of land.
We're currently evaluating several offers from interested parties.
While our near term priorities are primarily focused on bed Bath and beyond a review of the strategic alignment of all the other business concept is well underway.
As previously announced we are working with outside advisors, and including Goldman Sachs to assess how to better realign and realize greater value from certain of these assets.
As part of our strategic review, we are evaluating a range of options, including outside interest and several of our brands.
At the same time, we have acted to close down one of our lease productive e-commerce businesses.
While we have made no final decisions and cannot make any assurances we believe significant value can be unlocked potential sale lease back and business concept transactions.
Our fourth and final near term priority is to take a fresh look at our organization structure.
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.
During this interim period, we've realigned the reporting structure of the organization such that all other business concepts now report into one leader.
This is a benefit in two ways first this enables us to streamline and provide our strategic review of these businesses.
And second it allows the rest of our senior leaders to focus on transforming the bed bath and beyond business.
As you heard from my update today, we are making good progress across multiple fronts.
Our teams are operating with urgency and focus and I'm grateful for their hard work commitment and support.
Together the board and the management team are challenging our current value proposition and operating model, while also maintaining focus on delighting, our customers and delivering long term value for shareholders.
Before closing I would like to comment briefly on the second quarter results and our outlook for the full year.
Despite the ongoing challenges in our topline performance. We're pleased to have delivered adjusted net earnings per diluted share of 34 cents this quarter.
Reflecting their relentless effort of our teams and our progress and driving the company's transformation efforts.
As Rob will discuss in a moment, we are monitoring the tariffs situation closely and working with our vendor partners to limit the impact on our business and customers.
As this situation is still evolving our financial guidance does not include any incremental impact from the list for eight and for be tariff or the tariff increase to 30% from Liz three items. We continue to expect our fiscal 2019 financial results to be aligned with our most recent guidance excluding incur.
The mental Tara.
I'll now turn the call over to Robin to review, our quarterly financials and our outlook for the year.
Thank you Mary.
On a GAAP basis, we reported a net loss per diluted share of $1.12 cents for the second quarter of fiscal 2019.
This loss includes charges related to the first wave of transformation initiatives, including severance costs of approximately $23 million associated with our corporate workforce reduction in our decision to outsource certain transaction processing functions within the business and.
And inventory write down of approximately $194 million associated with our plans to aggressively reduced up to $1 billion of inventory at retail over the next 18 months.
In addition, we had a noncash charge of approximately $28 million for the impairment of certain store level asset.
Excluding these charges, which aggregate to $1.46 cents, our net earnings per diluted share with 34 cents.
My remarks today on non-GAAP results exclude the impact of these transformation related expenses and other charges.
Better represent the year over year performance as the business during the quarter.
Turning now to review of our second quarter sales results.
Our net sales in the quarter were approximately 2.7 billion.
A decrease of approximately 7.3% from the second quarter up last year.
Comp sales for the quarter decreased approximately 6.7% and reflected a decrease in the number of transactions in stores, partially offset by an increase in the average transaction in them.
On a directional basis comp sales from our stores declined in the high single digit percentage range, our comp sales from our customer facing digital channel declined slightly.
On an adjusted basis gross margin for the quarter was approximately 33.9% of net sales as compared to approximately 33.7% in the second quarter of last year.
His 20 basis point improvement reflects the progress of our margin enhancement initiatives.
In order of magnitude this improvement as a percentage of net sales was primarily due to decreases in coupon expense and net direct to customer shipping expense.
Partially offset by a decrease in merchandise margin.
The decrease in coupon expense. The result of the lower number of redemptions, partially offset by higher average coupon amount.
In addition, as they have previously described our beyond plus membership program has impacted and we'll continue to unfavorably impact our gross margin at the rate of member enrollment increases.
We estimate the impact from beyond plus and our gross margin was approximately 50 basis points for the second quarter. This year.
Compared to 40 basis points for the second quarter last year.
As a reminder, the consumer focused 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.
We currently have approximately 1.3 million beyond plus members, representing a modest sequential increase over the membership level at the end of the first quarter.
We continue to evaluate the learnings from this program and as Mary referenced earlier, the data shows that our beyond plus members shop, two times more frequently than our average non member customers and spend on average four times as much.
The customer insights. We have gained also help us direct product offers and content to these loyal customers through marketing personalization.
As Mary also mentioned, we are planning some beyond Pacific promotional offers around the holiday to increase acquisition and improved member engagement.
Adjusted EPS DNA expense for the quarter with approximately $858 million for 31.6% of net sales as compared to approximately 905 million or 30.8% of net sales in the prior year period.
The year over year $47 million decrease.
Flex some early benefits from our cost structure optimization efforts, including lower payroll and payroll related and occupancy expenses.
As a percentage of net sales the 80 basis point increase was primarily due to the pronounced effect of our fixed costs, such as technology related expenses, including depreciation and occupancy on a lower sales base.
On an adjusted basis, our effective tax rate was approximately 9% and includes approximately $5.3 million of net after tax benefit or about four cents per diluted share due to distinct events occurring in the quarter.
As a result of the lower pretax earnings base in the second quarter. These net after tax benefits result in a greater beneficial impact on the effective tax rate.
In the prior year period, our adjusted effective tax rate with approximately 24.4% and included net after tax costs of approximately 1.8 million.
Due to distinct events occurring in that quarter.
Now looking through our balance sheet.
We ended the quarter with approximately 1 billion in cash and investments.
Retail inventories at the ended the quarter were approximately 2.3 billion, our costs, which represents a reduction of approximately $492 million or approximately 18% at cost compared to the end of the prior year period, including an inventory write down of approximately 194 million.
During the fiscal 2019 second quarter.
Capital expenditures for the first six months were approximately 125 million with about 50% related technology projects, primarily including investments in our digital capabilities analytics and logistics.
The remaining Capex was primarily related to new store openings and maintenance of existing stores and the remodeling of 75 stores the bulk of which were next generation lap stores.
During the second quarter, we closed two bed bath and beyond stores.
Share repurchases under our current $2.5 billion share repurchase program for approximately 16 million in the quarter, representing about 1.4 million shares.
We plan to continue our share repurchase program throughout the remainder of fiscal year subject to business and market conditions.
Our capital allocation strategy is actively under review as the board and management team evaluate future capital investments required to progress the companys ongoing business transformation.
As well as potential uses of funds generated by any potential asset sales or further monetization of our balance sheet, including sale leaseback transactions.
And finally, our board of directors today declared a quarterly dividend of 17 cents per share to be paid on January 14, 2022 shareholders of record as of December 13, 2019.
I'll wrap up my remark from the second quarter by acknowledging that while we have more work to do we are making good progress toward achieving our objectives.
Before turning to guidance I'd like to make a few comments about pair.
Our merchandising and pricing teams have been able to execute appropriate strategies to minimize the unpaid favorable impact from Paris relating to items on list one through three at the current 25% rate.
These strategies primarily include negotiating with our vendor partners and adjusting retail prices when appropriate.
Keep in mind that bed Bath and beyond currently sources, the vast majority of its products domestically.
And therefore, we are not directly subject to these tire changes, but only to the degree that we cannot mitigate any potential pass through from our vendor partners.
And estimations of the lift one through three tariff impact with contemplated in our most recent financial guidance.
Subsequently, we have been evaluating the potential incremental impact from the moves to 30% on list three.
And the proposed list for a and for be tariff, which affect significantly larger part of our assortment than the prior tire.
As you know lifts foray went into effect on September Onest and list for B is expected to be implemented on December 15th.
So far we've not seen any material impact from the implementation of list for Tara.
At this time, we have not included an estimate for an incremental tire impact in our fiscal 2019 guidance.
However, we believe the incremental potential impact could be up to 10 cents and that is assuming we can continue to execute some mitigation strategies.
We are monitoring the situation closely and working with our vendor partners to limit the impact to our business and customers.
Now turning to guidance.
Fiscal 2019 full year results continue to be in line with our most recent guidance and assumes our current investment plans to drive topline performance in the back half as well as our comp sales trends year to date.
And excludes goodwill and other impairments severance costs shareholder activity costs.
The inventory write down and any incremental impact from tire.
Fiscal 2019 full year net sale are estimated to be around 11.4 billion and net earnings per diluted share are estimated to be between $2, an eight cents and $2.13.
As we look to the back half of the year I'd like to point out a few items.
First.
Our third quarter ends on November Thirtyth, the Saturday of Thanksgiving weekend.
Therefore, our third quarter results. This year will reflect only the Thanksgiving holiday weekend, including Black Friday.
While our fiscal third quarter results last year included Thanksgiving Black Friday, cyber Monday in that whole week.
Second as Mary noted, we are adding marketing and promotional spend for bed Bath and beyond in the back half. The majority of this expense occurring late in the third quarter with some of the anticipated benefits sales occurring in the fourth quarter.
Lastly, our third quarter last year benefited from a $28 million gain on the sale of the building.
Which represented about 16 cents.
Taking all into consideration, we expect fiscal 2019 third quarter adjusted net earnings per diluted share to be relatively flat versus the prior year period.
Which on an adjusted basis with about two cents per diluted share.
The remainder of our full year net earnings per diluted share is expected to be earned in the fourth quarter.
Finally capital expenditures for the fiscal 2019 continued to be planned at approximately 350 million to 375 million with about 50% related to technology projects as well as the spend associated with our rapid store refresh program and investments in warehouses for E comm.
Mission and personalized products.
I will now turn the call back over to Mary.
Thank you Robyn.
During our call we have provided a lot of transparency around things that we're doing to advance our strategic priorities, including plans to aggressively reduced up to $1 billion of inventory at retail over the next 18 months, including the removal of aged inventory from our stores before the 2019 holiday season to refresh our assortment.
And support topline performance.
The initiation of a rapid store refresh of nearly a 160 of our highest volume and most profitable did that them beyond stores to improve the in store shopping experience.
The completion of our initial fleet optimization analysis.
For bad debt and beyond and the decision to close 40 bed Bath and beyond stores and 20 other concept stores this year.
Our decision to close down one of our lease productive ecommerce businesses.
Finally, the ongoing evaluation of our business concept and our real estate holdings.
In summary, as we continue to work toward executing on our business transformation, we remain confident in the strength of our company and the future bed Bath and beyond.
Our teams are moving rapidly to address many near term opportunities to stabilize the business and lay the foundation for sustainable growth.
I want to thank all of our associates for their ongoing dedication and support of the transformation efforts underway.
Before turning to Q in a let me say a few words about our CEO search.
As we said in the recent shareholder letter substantial progress has been made toward identifying the company's next permanent CEO .
We remain on track and still expect to make an announcement from.
Now we can open the call for questions.
Thank you. Thank you well now begin the question answer session.
Have a question. Please press Star then one and you touched on phone.
If you wish to be removed from the Q. Please press the pound sign or the hash key.
If you think speaker phone you may need to pick up the first pressing the numbers.
Also please limit your questions to one question and one follow up question.
Again, if you have a question. Please press Star then one on your Touchtone phone.
And our first question customers that fashion Wedbush Your line is open.
Thanks, a lot and good afternoon.
Hi, my questions around the outlook for holidays, you guys are shifting a bunch of marketing dollars promotional dollars. The holiday period can you first quantify how much you're shifting out you're adding and secondly, what kinds of improvement you expect in those sales as well as margin over this period.
Sure Thanks that.
So as you as you've mentioned we are shifting dollars into the back half for promotional and marketing support those dollars are being generated from ongoing transformation initiative as well as the benefits that Mary mentioned in our cost structure savings initiatives.
And those dollars that we're planning to invest.
We'll be will be spent on promotional events during Thanksgiving week, the cyber Monday.
As well as driving enrollment in beyond plus.
And investing in new communication channels, such as digital video and radio on in terms of quantifying. It we've built at all into the model.
And those that the reinvestment of those dollars is allowing us to maintain our topline at around 11.4 billion as well as.
Maintain our our bottom line within the previously guided range.
That's helpful. And then I have a follow up as it relates to your inventory you guys are quickly reducing inventory to get to your goal over 1 billion dollar reduction at retail.
Perfect anymore markdowns, Arkansas write downs to reach that goal over the next.
18 months.
And this is Mary no I think we we believe that where we are with the write down we're taking this quarter.
Covers the full billion dollars of inventory. So now our work will just be to accelerate process actually getting it out of our stores.
Okay.
And our next question comes from Brad Thomas from Keybanc capital markets.
Hi, good afternoon, Thanks for taking my question.
First I wanted to ask about some of the.
Strategic review as you analyze.
Some of the different business units and.
Some of the assets that you may be able to sell like some other real estate I guess is there any ability to quantify for us.
Thank you to kind of.
Bids or interest level that may be out there and any more ability to talk about timing with which you might be able to address some of the.
Hi, guys have Mary Thanks for the question Brad.
I would say at this point no we're not in a position to put specific numbers to the two businesses and all that I will say, we are very actively engaged in the process fell and we've had a number of inbound interest on some of our portfolio companies and so we're taking a look at those were evaluating that we're going.
Through the normal process that you would go through to do that and so when we have something to report that actually turns into a potential transaction. We will certainly come forward with that but at this point not knowing.
How many things May go forward in all of that it's hard pressed to put in a number on it.
And in terms of the as other assets the real estate.
I think we talked about that from a square footage standpoint, it's a combination of retail and non retail real estate. So were looking at some inbound there as well and so we'll we'll have a sense of that I would say in in the next quarter or too as we move through that process.
That's helpful Mariam and if I can I ask a follow up around fundamentals.
You are clearly, making some progress on gross margin on expenses, but I guess is I look at same store sales.
A difficult first half of the year, you talk a little bit how youre thinking about same store sales progressing through the balance for the year and what you've been seeing so far on three Q.
Yes so.
I think I'll go first and then I'll, let Robin go out just make a couple of quick comments I think you're writing your comments about what the trends you're currently seeing it has been a rough first half of the year and as we've said early on we expect sales to start to stabilize and to see better trends in the back half of the year for the full year, we do still expect to be.
Comping down, though and we've talked pretty extensively in the prepared remarks about all the initiatives that we have underway to help drive sales ill, let robin jump in and cover some of that so just to cover your comment or question on how we're performing third quarter to date, we are still.
Declining from a comp perspective, but at a lower rate than than what we've experienced through the second quarter.
And our next question comes from Bobby Griffin from Raymond James.
Yes. Good afternoon. Thank you for taking my questions.
I was first hoping to dive a little bit into the gross margin aspect can you maybe give us a little color by concept for or maybe month by month, the progress, you're making and improving the margin structure and then basically the same question on the M&A side too if we can give some color.
Around.
A month over month, how it's improved and where the bigger opportunities last are for the remainder of the year.
Sure just to address your point on breaking out the components by concept that has not historically been are reporting cadence to break it out at that granular level, but from a gross margin perspective.
We are pleased that this quarter, we have favorable trends 20 basis points improvement that is a significant shift from what we've been experiencing.
From a from a trending perspective, and it's driven by benefits in coupons and net direct to customer ship in shipping.
With with some offset in the in merchandise margin, but that merchandise margin, which I'm talking about on a consolidated basis. The trend in that has been improving due to some of the ongoing initiatives that we havent fleet. So for some select products, we've actually move to direct importing and gained efficiencies from our own supply chain, which has been.
Fitted us we've also been actively engaging in vendor negotiations around.
Our merchandise and then we've also continued with some strategic pricing initiatives, which has helped.
Benefit our margin.
And we have more to come.
I guess, how maybe looking on the 20 basis points for the quarter did exit the quarter at a stronger rate than that where we can see that it's improving at a faster rate and we're on pace for a greater than 20 exiting the quarter I guess this on a consolidated basis as what I was asking.
Yes, I guess, the wham viewing it quarter to quarter I mean last quarter, we were down 50 basis points.
Unfavorable and now we have trended positively this quarter by 20 that we are moving in a.
For the momentum.
Okay, and then on the store closures can you just tell us about the timing of the 60, all weighted in fourth quarter, how should we spread amount or model.
They are.
Weighted towards the fourth quarter, which is the typical timing of when we negotiate art leases.
Your next question comes from Carla Casella from Jpmorgan. Your line is open.
Hi, This is Eric.
Carla Casella I was just wondering if you would consider buying back bonds in the market and if you have any update on target leverage figure.
We don't have an update at this point our target leverage figure we are actively discussing with the board our overall capital allocation approach and so we will be sorting that out relatively soon.
As you know we have a number of moving pieces I think right now our capital allocation priorities continue to be what they have been given the amount of transformation effort that we have underway certainly investing back in the business to drive those initiatives and get sales moving in the right direction and improve the business performance is a top priority, but we're also looking.
The other ways to return funds to shareholders. So continuing our dividend program to share buybacks that robin spoke about and buying back our debt is on the list as well so will that will be a consideration as well.
Your next question comes from Simeon Gutman from Morgan Stanley . Your line is open.
Hi, Good afternoon. My first question back on some of the inventory in the Destocking I know you said, an 18 month process can you had until as maybe what innings dividend from I guess from store perspective, and the impact that is happening as the customer shops can you give us. Some sense are you seeing a basket size change are you seeing conversion that go up a minus or not.
Finding something.
In the store and then I have one follow up on the gross margin.
From a from a timing perspective in the short term.
We are planning that to have about 350 million of the inventory out of the stores before holiday we are.
In the early innings of starting that process and of removing the inventory from that from the physical store locations. As we are working through that as we're working through that we're mindful not to cannibalize sales. During this this holiday period.
Okay.
Yes, the follow up on the gross margin I apologize because I was on the beginning part of the call. So you took so the I guess this write down now and you are suggesting we added back and now you're starting to clear out some of this inventory and so can you just talk about some of the mechanics of this on the gross margin how we should think about it.
Sure. So so for the quarter. We took we took a charge of 194 million as that inventory clears through.
Any markdowns associated with that inventory is already been taken from up from a PML perspective.
We also have inventory that.
We've been focused on from an assortment optimization perspective included in this write down that we'll have to.
Work through the process overtime, which will take us about 18 months or up to 18 months to.
Clear through that merchandise and be able to present, the CRISPR fresher point of view from a customer perspective.
And our next question comes from Michael Lasser from.
Your line is open.
Good afternoon. This was a 73 on for Michael Lasser, Thanks for taking my questions.
So it seems like a digital growth took a step down this quarter what drove this distribution Lance do you have to Reaccelerate topline Reaccelerate online sales.
And then the along those lines what have you baked in for digital growth in the back half of the year.
And while this is Mary I'll take the first part of your question about our digital business or your observation is correct.
We were slightly down on that business this quarter and I would say the biggest impact is somewhat self inflicted we're still suffering the ramifications of decisions that were made earlier, where we were focused on profitability at the expense of sales. So for the online business, we did things like.
In eight some of the skewed online because of their level of profitability. We minimize we put a minimum order quantity on some of the online sales we increased our free shipping threshold. So collectively all those things have put pressure on on that business. What we're trying to do about that is where reversing.
Many of those decisions again, our top priority now is to focus on sales and to manage the cost line through all the other initiatives that we've talked about and so we are reinvesting in our online we're investing in improvements in our search and recommendation.
Capabilities on the website were streamlining the checkout process, we're about to be rolling out our BOPUS buy online pickup in store. So we're doing a number of things to change the tide and change the direction of that and move that start to move that into right direction.
And what was your decorate claims.
So we can do what have you begun.
Our digital growth in the back half of the year.
So in terms of the back half.
To get to the range of around 11.4 billion. It does imply that there's.
Less negative I guess less negative comps for in it from a back half perspective, but we don't break that out by channel explicitly.
Your next question comes to Jonathan matches key from Jefferies. Your line is open.
Yes, Thanks for taking my questions first one just to follow up on E. Com you alluded to closing down one of your.
Lease productive digital businesses to maybe just give us some more color there in terms of.
I mean rationale in back to sales and profitability and then I had just a quick follow up.
Okay on that particular business. The timing is the end of this month. It is one of our smallest businesses. So the impact on the financial performance overall is immaterial, it's a business that specializes in selling specialized in unique fashion and home products.
And again, it's one of our smallest ecommerce businesses.
Okay, Great and then just a follow up question on for Q.
So.
Based on the revised.
Annual guide it looks like we'd be looking for around three quarters of annual earnings coming in for Q and Thats a bit above kind of whats been earned in recent years. So could you just confirm is it the new promotional framework during the holiday season that.
You think is going to be driving the earnings growth and then just clarify whether that implied fourq guiding include things like potential sale leaseback proceeds. Thank you.
So so we do have a significant amount of earnings included in the fourth quarter.
One due to the timing shift.
Of the holiday period, so the third quarter. This year ends on the Saturday right after Thanksgiving.
Whereas last year. It has it had included.
Thanksgiving Black Friday, and the and the four week following that.
So thats one one item that the fourth quarter now picks up that that.
Initial lead falling Thanksgiving. Additionally.
With the incremental marketing and promotional spend now we're adding for the year.
You may recall that from the accounting rules. Once you send an event out you immediately haptics sense that event is full even though the benefits of that events may spread over a period of time and so it will impact third quarter more heavily and benefit fourth quarter, because they'll have to sales spillover into that period.
And as far as.
Sorry bars on considering proceeds from sale lease backs that is not contemplated in the model.
And our next question comes from Alan for which you Manso from Evercore ISI. Your line is open.
Yes, thanks, very much I just wanted to clarify when would you set the inventory sell through.
That should not have a gross margin impact.
Throughout the rest of to use its just to clarify that and then and then my other question on gross margins is like the shipping costs seem to be a benefit and in the second quarter.
So was that driven by lower sales and Thats why should March shipping costs were better and then now looking into the back into for you. If you expect that to you.
Your sales are going to improve throughout the year and.
Beyond plus membership.
Promotions that you have and.
The holiday season should we expect gross margins to be to be down because of shipping costs was written have negative impact. Thank you.
So that would that was a multipart question I'm going to start with the first on and I may have to ask you to repeat.
A couple of your sub bullet point so.
On the inventory, you're asking about the margin impact as the.
Take out the merchandise again, we're mindful not to Cannibalized sales during the holiday period and began using a third party liquidator remove that merchandise from our stores, but not have it out in the market competing competing.
Against ourselves or be liquidating it in a heavy fashion during this timeframe.
And then I think you asked about.
Shifting expense, yes, we've seen shipping as a favorable driver as a percentage sales benefiting gross margin this quarter.
And I'm, sorry, if you could repeat here.
Yes, Thats a question was just with your improving sales in the back end of two year and beyond plus.
Membership promotions should we expect them.
Gross margins to be negatively impacted because of shipping costs in the second half.
Im assuming a significant.
Ramp up in beyond plus the ASP and calling out that how that impacted margin because they do have free shipping associated with.
Increased enrollment, but they also spend more frequently and spend heavier when they're buying from us.
Than the average customer.
Thanks very much.
Welcome.
And our next question comes to Curtis Nagle from Bank of America. Your line is open.
Great. Thanks, very much for taking my question.
Just a little bit more detailed the progress of the CEO search.
Perhaps how many candidates are down to what assuming.
And are you still within weeks.
As you guys laid out your shareholder letter.
So to answer the last part of your question first yes, we are definitely down to the final weeks.
Not going to get into the details of the number of candidates. Both we have been very actively focused on the surge we've got.
Great search from working with best we've had great interest in the position. So we've had quite a number of strong candidates as I think we had mentioned before were.
Looking for somebody with.
Retail transformation experience innovation.
Online and digital experience marketing experience. So we're looking for all of the things that we would need to really continue the transformation of the business and we feel good about where we are in the process and so we expect to be naming a permanent CEO soon.
Okay fair enough uninterested in terms of Threeq is now about the timing in the calendar shift when holiday.
Secondly, impacts how you guys for comps or is that going to be adjusted for.
Our comps will be based on the same period in the in the prior year. So we wouldn't.
We wouldn't adjusts for it.
Okay understood. Thank you.
And our next question comes from Zacks Faden from Wells Fargo.
Hi, Thanks for fitting me in.
Again on the gross margin you mentioned the ramp in.
Beyond plus but I believe you said the coupon had a less negative impact from fewer redemption. So curious if you could speak to that in a little more detail whether the lower coupon usage was self inflicted and how we should think about the coupon going forward as it's impacted sales and gross margin.
Sure. So so coupon the decrease in the redemptions of coupons with I would say not self inflicted we had as many coupons distributed.
This quarter this year versus versus last year.
And we will continue to issue coupons to customers, who who utilize that a new want them when they're shopping with us.
Okay understood and then.
On the store manager incentives, maybe you could talk a little bit more about the metrics, you'll be tracking and rewarding and when you were evaluating whether to move forward with this planned curious to hear whether you piloted the program in any of your stores and maybe you could talk about your findings there and.
Any sales or margin lift per store that we should anticipate.
So we don't have those detailed quite Andy I know, we did not piloted separately and this is basically a one time program that targeted toward.
Driving sales over the holiday period. This is a really critical period for us we're doing a lot of things to bring people into the stores and so we also want to incentivize our sales managers to to be thinking about selling and driving sales as they are in the stores and is also good for morale in.
Time of change in the stores and sales Comping down up to this point so it will give them the opportunity to participate in driving incremental sales.
And one last question will come from Daniel Hofkin from William Blair. Your line is open.
Hi.
Good afternoon and just.
A quick question about general fundamentals on them quick just a couple of quick housekeeping questions.
So you talked about efforts to drive more sales in the back half. The holidays can you just talk about what sort of impact you expect on.
Profit margins or profitability from that and how that.
Kind of build over time.
Obviously, driving topline is important but in terms of a trade off between sales and margins on them like I said I have a couple of quick housekeeping questions after that.
So, let's let me just start and then I'm going to turn it over to Robbins, and maybe talk at a little bit more detailed level, but even as we said in the fourth quarter. We are focused on driving me in the first quarter call. We're focused on driving top line, but we're focused on maintaining profitability as well. So we believe given the number of low.
Levers, we have to pull in the number of opportunities we have in the business that we can drive sales and we may be on promotion of course through the holiday season and be doing more advertising, but we think we have other levers to pull to control the cost structure to maintain profitability.
And and considering that and the sales stabilization initiatives that we have it is but let us to maintaining our guidance at the sales around 11.4 billion and then EPS between $2 neat sense in $2 or 13 cents.
Okay. Thanks, and then I guess just.
Couple of things a couple adjustments you guys made I guess in this release and then.
Prior quarter to you took a.
It looks like a sizable reduction in your sales return liability.
On the last couple of quarters relative to last year like more than 200 basis points by our amount.
As a percentage of sales just wondering what what would have driven that at all and that large reduction.
And on the other question I was just on the size of the inventory adjustment this quarter in terms of like adding it all back to adjusted earnings.
So from our from a sales return perspective.
That reserve is definitely impacted by the seasonality of our business and so if sales are coming down depending on the timing of the year that we're in we're certainly going to see reductions in that reserve. In addition, we made some changes to our returns policy, which.
Over time.
We would assume that the sales returns would be fewer than what we've had experienced in the past. However, we don't know if weve compromised sales by some of those changes initially from a customer facing perspective.
But again over time the sales return policy with impacted if you have a specific quarter detailed dollars. We could certainly have a follow up call to walk through the mechanics.
What you're seeing.
Okay.
You had its second question, yes, just about the inventory adjustment I mean, I understand conceptually, but it's kind of seems like.
This is the inventory, presumably which ill.
Either in hindsight, you overpaid forward or market conditions, or whatever kind of competitive 'cause. This change just wondering why it would be why you guys would add back kind of that full charge within this quarter supposed to be part of that or applied against historical earnings over the period, where it would have lost value.
Well this inventory write down is tied to.
Our strategic initiative.
Lagging inventory that we see as aged inventory or duplicative using our assortment that we've been actively working on identifying those duplicative use and wanting to.
Move them out of our assortment again, so that we can.
Present, a clean a clearer point of view from an inventory in merchandising perspective to our customers that we view this as tied to transformation.
And this concludes the question answer session I'll now turn the call back over to Jennifer for final remarks.
Thank you. Thank you all for participating on our call today, if we didnt get to your questions or if you have additional questions. Please feel free to contact me off our follow up call email Ami be happy to get back to you otherwise have good night.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating 80 now disconnect.