Bed Bath & Beyond, Inc. Q4 FY2020 Earnings Call

Welcome to Bed Bath & Beyond's Fiscal 2020 Fourth Quarter Earnings Call. All participants will be in a listen-only mode until the Q&A portion of the call. Today's conference call is being recorded. A rebroadcast of the conference call will be available via webcast found on the company's Investor Relations website.

Thank you, and good morning, everyone. Welcome to our fiscal 2020 fourth quarter earnings call. On the call with us today is President and CEO, Mark Tritton; Chief Merchandising Officer and President of Harmon Face Values, Joe Hartsig; Chief Operating Officer and President of buybuy BABY, John Hartmann; and Chief Financial Officer and Treasurer, Gustavo Arnal. Before we begin, let me remind you that our fiscal 2020 fourth quarter earnings release and slide presentation can be found in the Investor Relations section of our website at www.bedbathandbeyond.com, and as exhibits to the Form 8-K we just filed ahead of this call. This conference call and the slides we refer to may contain forward-looking statements, including statements about or references to our outlook regarding the company's performance, our internal models and our long-term objectives. All such statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say during the call today. Please refer to our most recent periodic SEC filings for more detail on these risks and uncertainties, including the Risk Factors section in our Annual Report on Form 10-K. The company undertakes no obligation to update or revise any forward-looking statements. Additionally, the information we will discuss today contains certain financial measures that exclude amounts or are subject to adjustments that have the effect of excluding amounts that are included in the most directly comparable measure prepared in accordance with generally accepted accounting principles. For a reconciliation to the most comparable measures presented in accordance with GAAP, please refer to the table in our earnings release, available on our website and included as an exhibit to our Form 8-K filed today. It is now my pleasure to turn the call over to Mark.

Thank you, Janet, and good morning, everyone. Fiscal 2020 was a year of fast-paced transformation, in which we reformed the past, overcame extraordinary circumstances of the present, and established a firm foundation for the future. Despite the challenges created by COVID-19, we have relentlessly focused on taking purposeful and bold steps to transform our entire organization, and remain true to our plans to rebuild our authority in home and restore this iconic company. Throughout 2020, we achieved a great deal. We established an entirely new leadership team with world-class retail and digital experience, who helped design and shape the growth strategy that will define our future.

Thank you, Mark. Our digital-first omni-always strategy is working and was a key driver of our fourth quarter performance. We elevated the customer experience across all of our channels to make it easier to shop with us and created a more inspirational and more productive assortment that delivered growth in both comp sales and product margin. Today, let me start with some highlights on the quarter from a commercial perspective, including our strong performance in digital and within our top product categories. Then I will talk about our owned brands, including the recent launch of Nestwell. Our positive comp sales this quarter were again driven by strong digital growth of 86%, marking our fourth consecutive quarter of greater than 75% growth this year. This was led by our Bed Bath & Beyond banner, which posted digital comp sales growth of 99%, practically doubling last year's sales. During the quarter, we gained 3.1 million new digital customers, of which the Bed Bath banner alone added 2.4 million. Year-to-date, we have gained approximately 11 million new online customers, an increase of 95% over last year. In the quarter, we experienced more than 300 million visits to our digital channels, including 162 million unique visitors, and we had more than 1 billion visits for the year, with conversion up by 30%. And not only are we attracting new customers, we are also seeing them return at a higher rate than ever before.

Thank you, Joe. Today I’ll first provide some perspective on the quarterly performance of our buybuy BABY business, and then continue with an update on our enterprise operations. To expand on Joe’s commercial update, our buybuy BABY banner showed significant improvement in the fourth quarter, returning to positive growth of low single-digit comp sales led by strong growth in digital of over 50%. On a full-year basis, BABY sales were over $1 billion. As we discussed on our last call, BABY was disproportionately impacted in the third quarter by COVID-related headwinds. We then made key pivots in November and December, including crisp customer communications, collaborative partnerships with our vendors, and targeted digital marketing, which produced positive sales and category trends that sustained throughout the fourth quarter and are continuing into the current quarter. Top performing categories in the quarter included baby and toddler safety, feeding, toys, educational and playroom items, as well as apparel. In 2020, BABY gained 2.5 million U.S. online customers, an increase of 45% versus prior year, including more than 600,000 in the fourth quarter alone; nearly two-thirds of those customers shopped only online. We had over a 40% increase in visits this quarter to 51 million, including 24 million unique visitors and an 8% increase in conversion. Nineteen percent of U.S. customers placed more than two orders compared to 15% in the prior year period. And more than 200,000 customers placed a BOPIS order, including almost 20% from mobile. BOPIS represented 14% of our digital sales in the quarter. Approximately 87% of orders were ready for pickup within two hours. There were 150,000 buybuy BABY mobile app downloads in the quarter, which contributed to significant mobile growth representing more than 60% of total digital sales. We are excited to begin the transformation of the BABY banner this year and unlock the value of this brand. We previously outlined our six-point strategy to accelerate growth, which includes investments to scale our store footprint nationwide. In fiscal 2021, we expect to open seven baby stores, bringing the total store count to 139 by fiscal year-end. In preparation for this transformation, we have taken a deep dive into understanding who our customer is and how we can exceed their expectations. This work has manifested into a new customer value proposition, which states: we build trust with parents by supporting them with what they need next so families can celebrate every milestone, big and small, together. We know that parenting looks different for every person and the journey is unique to every family, but there are experiences that are shared by all. We want buybuy BABY to be the destination of choice for all new parents and young families, and to help guide them on their journey and grow with them. We will continue to share our progress in future conference calls. Pivoting now to an update on our enterprise operations, we remain focused on modernizing our operations and optimizing our use of data and analytics to meet our customer and business expectations. The advancements made across our real estate network, supply chain operations and technology roadmap during the fourth quarter reflect these strategic objectives. We continue to make substantial progress with our store network optimization program and remain on pace to achieve our targeted closings of approximately 200 stores by the end of fiscal 2021. Through the end of fiscal 2020, we have closed a total of 144 Bed Bath & Beyond stores including 118 stores closed during the fourth quarter. The program is tracking to plan; it is now about 70% complete. The remaining store closings will occur in fiscal 2021 and be weighted toward the second half. As we move through the year, we will continue to review our plans and assess the evolving real estate market and conduct further negotiations with our landlord partners. We also remain on track with our previously communicated $100 million EBITDA contribution target for this program. And importantly, while still early, transfers from these closed stores to other store locations and/or our digital channels is measuring above 20% versus our previously communicated goal of between 15% and 20%. Turning now to our Bed Bath & Beyond store remodel program. We recently completed our proof-of-concept store models in the Houston market, which consisted of four type A full store remodels and three type B remodels, which involved a room reset and updates to about half the store. This represents the first fully designated market area we have addressed in the country. Above and beyond the general store improvements Joe mentioned, including room resets and new signage, we are now beginning the next wave of remodels by applying the learnings from the New Jersey test store and the Houston market to iterate and continuously improve. As we have said previously, we plan to invest approximately $250 million over the next three years to remodel a total of approximately 450 stores, which together represent about 60% of our revenue. In fiscal 2021, we are targeting about 130 to 150 stores across the country covering nearly 30 states, including 26 stores during our first quarter. We applied a similar level of focus in execution with our supply chain during the fourth quarter, which included the Christmas holiday sales period. As expected, our comp sales growth in the quarter was led by digital, which nearly doubled in size versus last year to approximately 40% of our total comparable sales. Throughout this year, we've been moving with agility to optimize our store network to support this rapid growth. Earlier in the year, we converted about 25% of Bed Bath & Beyond and buybuy BABY stores in the United States and Canada into regional fulfillment centers to use our vast inventory resources to assign orders locally and deliver even faster. In the fourth quarter, our stores fulfilled 41% of total digital sales including 17% in BOPIS orders. As we got closer to the holiday, BOPIS accounted for 48% of our Bed Bath & Beyond digital demand during Christmas week as customers chose to avoid third-party shipping constraints and ensure they would have their gifts in time. More than 80% of BOPIS orders were ready within our two-hour promise window. We've experienced about a six-fold increase in BOPIS penetration since first launching the service in April 2020, driven by nearly 4 million customers. In addition, customer feedback is highly positive and our net promoter score has increased further from 79 to 81. We've had very similar strong customer adoption and satisfaction with our new same-day delivery services. In Q4, over 220,000 same-day delivery orders were placed with 78% of orders coming directly from our websites and 22% through a combination of shipped and Instacart marketplaces, which provide access to over 80% of American households. We also launched Harmon Face Values on Instacart, enabling same-day delivery for everyday health and beauty care essentials. In other supply chain activity, we kicked off our search for a third-party logistics partner as I mentioned last quarter. We plan to establish four regional distribution centers to more efficiently and cost-effectively manage the flow of merchandise to our stores. We believe this is a key first step in vastly improving our store replenishment approach. During the quarter, we conducted a thorough RFP evaluation process, which included many market-leading third-party logistics companies. Ultimately, our partner selection will be based on what we believe yields the best strategic partner and long-term economic outcome for the business. We are working now through the final stages of selection and anticipate being able to make a public announcement soon once we have signed an agreement. The initial focus of the strategic partnership will be to establish two RDCs in key trading areas, one in the Northeast and the other in the West. Once in place, we expect to achieve many operational and business benefits over time, including reducing the store replenishment time from the current noncompetitive period of 35 days to under 10 days, which will yield improved sales based on reduced out-of-stocks as well as lower store inventory levels. Turning now to an update on our technology roadmap, having the right retail technology in place is fundamental to our business transformation. Over the past year, we've been laying the foundation for this change, including our expanded partnership with Google to leverage their cloud technologies to personalize the shopping experience for our customers, enhance fulfillment capacity, and optimize merchandise planning and demand forecasting. In February, we announced the selection of Oracle as our Enterprise Resource Planning or ERP technology provider to replace our legacy suite of technology systems and deliver new data insights and planning capabilities. This ERP deployment is the first key component in our planned $250 million technology investment roadmap over the next three years to deploy industry-leading solutions that enhance the experience for our customers and drive efficiencies across the enterprise. Last month, we announced another technology partnership to help modernize our inventory management systems. We selected Vellum Solutions to deliver automated forecasting, replenishment and allocation planning in order to improve inventory productivity and our ability to respond to customer demand. Our technology transformation effort is expressly focused on building proficiencies to modernize, stabilize, optimize, invest in, and operationalize our systems. This technology transformation is further enabling our business transformation and the building blocks for all of our fulfillment, forecasting, inventory management, and sourcing proficiencies. Alongside these transformations in real estate, stores, supply chain and technology, there's also a cultural transformation underway. For example, we have put in place a business operating structure to manage all of our transformation initiatives. Having this formalized structure has strengthened our foundation, contributed to our progress to date, and will guide us as we continue on our commitments. I look forward to sharing our progress on these important investments in a future call. Now I will turn the call over to Gustavo Arnal, our Chief Financial Officer and Treasurer, Gustavo.

Thank you, John, and good morning everyone. I will provide additional perspective on the strong results of our fourth quarter. And we'll also discuss our outlook for fiscal 2021 including some visibility on the current first quarter. Before I go on, I'd like to highlight a few key messages. First, our strategies are working. We delivered our third consecutive quarter of comparable sales and adjusted EBITDA growth with positive free cash flow generation. Second, we showed exceptional business agility and financial discipline during a year of unprecedented challenges. We delivered positive comp sales growth, optimized our cost structure, divested non-core assets, reduced debt, invested in the business, and at the same time returned capital to shareholders while increasing liquidity. And third, in a year of fast-paced transformation, we strengthened our strategic positioning to deliver on our three-year financial plan. We are reaffirming our fiscal 2021 outlook on sales and EBITDA while further investing in the business. We are improving our projection of gross debt-to-EBITDA ratio to below three times this year. And we have increased our three-year share repurchase program to $1 billion above what we communicated at our Investor Day. Now, looking at the fourth quarter, total enterprise comparable sales grew 4%, led by continued strong digital growth of 86%. Our digital-first omni-always strategy continues to be a key driver of our results. Sales from our digital channels represented approximately 40% of total net sales for the full year and surpassed $3 billion, almost doubling in size versus the prior year. In our Bed Bath & Beyond banner comp sales grew 6%, driven by 99% growth in digital, partially offset by store declines of 20%. Comp sales were positive each month of the quarter with high single-digit growth in January and February combined, and this happened despite industry-wide weather impacts during February. Growth was strong and broad-based across key destination categories, which grew 12% in total and represented almost two-thirds of revenue. Importantly, our buybuy BABY banner returned to delivering positive comp sales growth led by strong digital growth of over 50%. As previously communicated, our reported net sales would continue to be impacted from our banner portfolio transformation, as well as our fleet optimization program. As expected, total enterprise net sales of $2.6 billion reflected those impacts and declined 16%. This was at the healthier end of the 15% to 20% range of decline we communicated on our earnings call in January. In terms of the bridge from net sales to core banner sales, we saw an approximately 12% favorable impact from the non-core banner divestitures. Therefore, excluding divestitures, core banner net sales were down only 3% on a comparable basis. Store closures reduced sales by approximately 8% in line with expectations, resulting in comparable sales growth of 4%. On a GAAP basis, we delivered net earnings per diluted share of $0.08 compared to a net loss of $0.53 in the prior year. Reported net income results include approximately $38 million of unfavorable impacts from special items, which are excluded from adjusted results to provide better perspective on the underlying performance of our business. These special items include the net loss on the sales of businesses, non-cash impairment charges related to certain store-level assets and charges recorded in connection with the restructuring and transformation initiatives. Excluding these impacts, adjusted EPS was $0.40, which was also an increase over last year. As planned, we drove significant adjusted EBITDA margin improvement in the quarter. EBITDA margin expanded approximately 160 basis points to 6.4%. As we said, we increased adjusted EBITDA on an optimized and healthier revenue base. Adjusted gross margin improved approximately 20 basis points to 32.8% in line with our guidance. Gross margin drivers included 60 basis points of favorable product mix from higher margin categories, 90 basis points of favorable margin from promotion optimization, 190 basis points of leverage from distribution and fulfillment cost efficiencies, partially offset by 170 basis points of unfavorable impact from channel mix due to the anticipated larger proportion of digital sales versus prior year. And lastly, as expected, we saw an unfavorable impact of around 150 basis points from higher shipping costs given industry-wide freight rate increases. Adjusted SG&A expense declined $190 million versus the prior year. This was driven by reductions from the non-core banner divestitures and lower occupancy expense on more efficient stores. As a percent of net sales, SG&A declined approximately 160 basis points to 29.1%. As mentioned, a stronger top-line coupled with gross margin expansion and SG&A reduction resulted in another quarter of EBITDA growth. Fourth quarter adjusted EBITDA increased 13% to $168 million. Turning now to some cash flow and balance sheet highlights, operating cash flow was $76 million given working capital improvements from lower inventory balances. Free cash flow was $62 million. We reduced inventory in our core banners by approximately $110 million versus the prior quarter, primarily from seasonal selling and product transitions in preparation for the introduction of own brands, as well as store closures related to our network optimization program. Capital expenditures were $66 million, nearly double the average in prior quarters as our transformation investments accelerate according to plan. We maintain a strong cash balance of $1.4 billion with even stronger liquidity of $2.1 billion, including our ABL. We're managing cash, including our planned investments to fund our growth on our healthier, more focused and stronger business. We also returned significant capital to shareholders through accelerated share repurchases. Since Investor Day in October, we have repurchased approximately 16 million shares, 13% of our shares outstanding, at an estimated average price of $23. Our first accelerated share repurchase program of $225 million was completed at the end of January and our second ASR of $150 million will be fully completed next week. We continue to be diligent and agile stewards of cash with our data-driven and balanced approach to capital allocation. After having fully funded our capital investment for growth, today we are announcing another increase in our three-year share repurchase program to $1 billion versus the previous $825 million plan. Our fiscal 2020 performance reflects our commitment to unlocking shareholder value. We have been and will continue being focused on driving comparable sales growth, expanding margin and generating cash flow. We will continue deploying cash to attractive investments for our business and also to our shareholders. Turning now to our fiscal 2021 outlook, on a macro level, our financial performance in fiscal 2021 will continue to be influenced by pandemic-related headwinds, including uncertainty around the vaccine rollout and the subsequent impact on customer demand and shopping patterns, especially relating to store traffic and digital sales. Our financial model assumes that our stores will remain open and that the current environment will continue in the short term with gradual improvement as the year progresses. We anticipate in-store traffic trends to begin to recover throughout the year. But we continue to see previously communicated industry-wide headwinds from freight costs. We have strengthened our positioning as we start fiscal '21 and embark on our three-year transformation plan. Our significant portfolio transformation is leading to fewer yet better performing stores, which we believe will result in a healthier core revenue base with a larger proportion of a faster-growing digital business. With consistent execution of our transformation strategy, we remain well positioned to achieve our long-term financial objectives. Also, we’re reaffirming our previously provided fiscal 2021 modeling assumptions. We continue to project net sales to be in the range between $8.0 billion and $8.2 billion. Net sales assumptions include the impacts of the recent non-core banner divestitures, as well as ongoing store closures under the previously communicated network optimization program. On a quarterly basis, in the first quarter, we expect to recapture sales that were lost in the prior year from temporary store closures due to COVID, and because of this, first quarter sales will not be comparable. In quarters two through four, we expect to sustain comp sales relative to the solid base we experienced in those same three quarters of fiscal 2020. We continue to assume for financial planning purposes that total enterprise comparable sales in Q2 through Q4 will be flat versus the strong fiscal 2020 base as we started delivering positive comps as of the second quarter of 2020. We continue to project full-year adjusted gross margin to be approximately 35%. Our model reflects sequential improvement during the year from several key positive drivers, including product sourcing savings from negotiated vendor contracts, higher sales penetration of newly launched own brands in our product mix, and more effective data-driven promotion and markdown strategies. We continue to model full-year SG&A to be approximately 31% of total net sales driven by favorable impacts from store closures under the network optimization program and savings from prior-year cost restructuring. And finally, we continue to model adjusted EBITDA to be in the range of between $500 million and $525 million. Turning to some balance sheet and cash flow assumptions, we plan to invest approximately $400 million in CapEx including key projects supporting our IT transformation, supply chain reinvention and store remodels. We now expect to achieve or improve leverage ratios faster than anticipated. In fiscal 2021, we project our gross debt to EBITDA ratio to be below three times. This is significantly better than the previously stated goal of below 3.5 times for this year. We also plan to increase cash return to shareholders. As mentioned, our three-year plan for share repurchases has increased to $1 billion. We're now planning up to $325 million in share repurchases in fiscal 2021. Together with the two already completed ASRs totaling $375 million, we will have repurchased $700 million in shares by this fiscal year. Again, we're doing this while generating cash and funding our business transformation. We remain committed to our capital allocation principles, namely, investing in our business, maintaining financial resilience, and returning capital to shareholders. I’ll now provide some visibility on the current first quarter, which includes the months of March, April and May. As you may recall, this was the period last year when most of our stores were closed and sales were depressed. In addition to the comparisons when the majority of our stores were closed, our report in itself will continue to be impacted by completed divestitures and fleet optimization. To provide perspective on this portfolio transformation and the quarterly comparisons of our core go-forward banners, we have included a table in our press release and slide presentation with a quarterly summary of fiscal 2019 and 2020 net sales on both a reported GAAP and a core go-forward basis. The latter includes Bed Bath & Beyond, buybuy BABY, Harmon Face Values and the other core efforts. On this core basis, first quarter sales last fiscal year were $1.1 billion. Directionally in Q1 this year, we would expect core banner sales to be significantly higher than last year by approximately 65% to 70%. Core banner sales in March, the first month of the quarter, showed strong growth, and the year-on-year growth will accelerate in April and May as we lap the prior-year period when more stores were closed. In terms of total net sales, directionally we expect them to increase by over 40% on a year-on-year basis. This growth is building through the fiscal year guidance mentioned earlier. In terms of gross margin, we expect to show sequential improvement as this year progresses. Directionally, we would expect adjusted gross margin in the first quarter to be in the mid-34% range. In terms of adjusted EBITDA, we expect to deliver between $80 million and $90 million in Q1. In 2021, we’ll continue to manage the business diligently, leveraging data and analytics to drive performance and deliver on what we say. We remain confident in our future as we embark on the first year of our three-year transformation journey. I’ll now turn the call over to Mark for some closing remarks. Thank you.

Thank you, Gustavo. As we enter our 50th year of business in our Bed Bath & Beyond banner, our focus remains on being customer inspired in everything we do as we build authority now in the home, baby and beauty and wellness markets. With COVID headwinds expected to subside, and having our full omni-channel suite of options available to us this year, we’ll be able to truly compete fairly and openly with our peers unlike during 2020. In addition to our internal strategic growth drivers, we believe we're well positioned to benefit from the favorable macro environment expected to support continued growth in home-related categories through 2021. These include high consumer confidence, a strong housing market, continued work-from-home trends, and the newly found appreciation for the comfort, safety and value of our homes. As you've heard today, we're excited and confident about our business. We have reaffirmed our fiscal 2021 guidance and are well poised to activate and drive our transformation initiatives to fuel our growth. We have the capital, the plan and the talent to deliver on our three financial objectives. As our transformation continues to take hold, we’ll shop differently for our customers with enhanced omni-channel experiences, modern stores, new communications and differentiated own brands, all improved capabilities that will elevate the shopping experience and make it even easier to shop with the new Bed Bath & Beyond. Earlier this week, we launched our new "Home, Happier" brand campaign, which exemplifies our strategic focus on helping our customers realize each room's potential so they can embrace the possibility in every day, helping them to "Home, Happier." We will deliver the products, values, and experiences to inspire our customers to celebrate the important role their homes play in their lives. We're excited today to build this fully integrated campaign which will be centered by a 30-second anthem TV spot airing nationally today, April 14, and featuring a suite of creative assets supported by an omni-channel paid media plan, including national broadcast and cable TV, streaming online video, paid social, print, in-store, email, and display. In 2021, we'll continue to make bold pivots to reconstruct, renovate, and restore our company and deliver on what we said we would do. We look forward to sharing our transformation progress with you in future quarterly calls. We will now take questions.

Thank you. And now, I'll begin the question-and-answer session. Our first question is from Bobby Griffin from Raymond James.

Good morning, everybody. Thank you for taking my question.

Hey, Bobby.

Mark and Gustavo, a lot of moving parts inside gross margin with shipping and distribution and things like that. Could you maybe unpack what's going on and what you're seeing inside the core merchandise margin? What are some of those drivers and expectations for fiscal year 2021?

Yes, I think some of the core drivers are that we've improved our mix and negotiated base costs. We're starting to see the work that we've done on cost negotiations really start to filter through, and we see that moving through 2021. What you didn’t see in the quarter was the improvement from owned brand, because that's a March-onward investment, and we see that incremental benefit occurring quarter-by-quarter with the investments we've made with over eight brands for the full year. But also a big part of that has been John’s team really reengineering the markdown process and the promotional process and getting more effectiveness out of our marketing dollars as well as our promotional spend, and that's helped to improve margin in this quarter and going forward. And that's despite us getting ready for the owned brands coming in, taking additional markdowns to do our room resets, as well as absorbing some of those impacts of freight. So, we feel well poised with the prior work and the ongoing rolling work through 2021 that we'll see incremental benefit to gross margin.

Okay. So, is it fair to say that we saw a sequential slowdown in the year-over-year growth in gross margin, but shipping and different things were headwinds in the fourth quarter? Is it fair to say that the core performance of the merchandise margin was similar in 4Q as it was in 2Q and 3Q of this year?

Yes. I think another big differential is the mix of digital versus stores and the impact that had on margin. We're continuing to double down there. But as we move through to Q1 and beyond, clearly we see a different balance in that margin proposition between increasing our store velocity and balancing out our digital sales and the associated margin.

Our next question is from Brad Thomas from KeyBanc Capital Markets.

Hi. Thanks for all the details and thanks for taking my questions. I wanted to follow up on some of the margin puts and takes because that tends to be one of the most important things investors ask about. Could you follow up on how you're thinking about some of those puts and takes on margins, and how much of an opportunity there may be as these category resets take hold and what they may be able to add for you?

Brad, Gustavo here. Just to give you some perspective, we see sequential improvement in gross margin from Q1 as the fiscal year progresses. As Mark mentioned, we expect the penetration of owned brand to improve quarter-after-quarter. So, expect the mid-34% we're guiding for in Q1 to improve as the year progresses. Also, it's important to keep in mind that we've accounted into our estimates the headwinds that we continue seeing in terms of shipping and freight increases, and so we will continue to manage that. And we are getting better and better on the processes that Joe is leading in terms of optimizing promotions, markdowns, and doing more promotions that drive both revenue and margin. So, you will see that improvement as the fiscal year goes.

And Brad, you mentioned the resets in Joe's work. I think that is part of the overall plan: divesting underperforming and lower-margin products, resetting that with new national brands, but definitely featuring our key owned brands and their margin potential.

Our next question is from Jenna Giannelli from Goldman Sachs.

Hi there. Thanks for taking the question. With excess liquidity on hand and some bonds trading below par, might that be an opportunity to manage leverage or get down to that below three times goal? Could you speak to being opportunistic with the debt stack?

Hi, Jenna, Gustavo here. First, let me reinforce that we will be, already in Q1, below the gross debt-to-EBITDA ratio of three, without taking any additional action on our capital structure. Now, as you say, we have some tranches trading below par and some closer maturities trading above par. That is all in our mix. We will remain focused on what we said in terms of capital allocation. First, investing in the business—we have the capital spending allocated to that in the business. We're doing the share buybacks, as you saw. We're increasing it this year. And we will continue monitoring during the year how to optimize our debt structure, and certainly bonds are part of that equation.

Excellent. Thank you so much.

The next question is from Steven Forbes from Guggenheim.

Good morning. Hey, Mark, I wanted to focus on the new digital customer trends — the 11 million customers you called out. Could you review what categories they transacted in during 2020? How often are they repeating — within one month, one quarter? Overall, how will that greater base of new customers entering 2021 affect the guide? As we think about a path to a flat core comp, what is happening with those 11 million customers and how did you incorporate that into the guidance?

It's a great question, Steven. I think we've incorporated it conservatively into the plan. We have been acquiring new customers, and they have been behaving differently — digital-first and then omni-always customers. We're seeing repeat purchases within the quarter, and we've shared some of those ratios in terms of increases we've seen in secondary item purchases within the quarter. The good news is that they are, on average, younger, and they are less likely to buy promotionally. Category-wise, we're seeing them delve into all our categories, especially our core categories, and some growth in indoor décor, which for us is on the rise and something we haven't doubled down on in the past but are starting to invest in now. We're seeing younger, stickier customers. For us, this is a great avenue to connect with a wider customer base. Particularly because it's digital-focused, we're able to use the data and the storytelling to share details around the new Bed Bath & Beyond, including the launch of new owned brands to a wider constituency. So we've generated a new avenue of growth, and we've baked that in conservatively. We want to see things settle with the vaccines and the return to the new normal, and how that plays into our mix, so there's some potential upside there.

Our next question is from Curt Nagle from Bank of America.

Good morning, guys. Thanks very much. A quick one for Gustavo: what's driving the faster deleveraging in 2021? The EBITDA guidance is the same. Is this primarily working capital? What should we expect for working capital gains this year?

A couple of comments there, Curt. First, we completed and signed the divestiture of Cost Plus World Market, and that impacts our operating lease liabilities and our balance sheet. That helps explain why we're below 3X already if you look at the math in Q1. On working capital, you saw sequential improvement in the fourth quarter relative to the third quarter: $110 million of inventory improvement on the core banners. We expect to continue improving inventory as we go along. A few months ago we said we would reduce inventory by approximately $1 billion of retail versus the closing position of 2019. That would take us to about $1.6 billion of inventory. We're not at $1.7 billion, so we're well on track with what we said in terms of working capital improvements. It could vary quarter-to-quarter, but our objective remains driving working capital improvements as we work toward our targets.

Our next question is from Seth Basham from Wedbush Securities.

Thanks a lot, and good morning. My question is around market share performance. You gave some comments last quarter on your performance for core categories. Could you talk about the trends this quarter? Also, the non-core categories in your business declined materially this quarter; what are you doing to improve performance in those categories?

Thanks for the question. In some non-core areas, performance pertains to categories like personal care, which for us is dependent on store-based traffic. Digital is returning stronger than stores, and we expect that to stabilize and contribute more as store traffic recovers. We are up against a more compact market given store closures, so we'll continue to focus on balancing store and digital throughout the year and on share increases. To your follow-up about core categories: we were pleased to have positive comps consistently while we were readjusting in the fourth quarter and getting readiness for 2021. We were focusing on room and assortment resets, reducing overall inventory, curating assortments so that we can be more powerful in key categories. We anticipated taking markdowns and having some out-of-stocks in order to reset the assortment, so this quarter was partly a reestablishment and foundation period to get ready for 2021 while still delivering growth. There's more work to be done on share growth throughout 2021.

Our next question is from Michael Lasser, and Atul Maheswari is on for Michael Lasser from UBS.

Good morning. This is Atul Maheswari on for Michael Lasser. Thanks a lot for taking our question. Gustavo, on the private brand penetration going from 10% to 30%, how much gross margin expansion can that contribute over time? Are you able to size that in any way?

Yes, good morning. We've said we're looking at about a 10 percentage-point improvement in gross margin from our owned brand assortment — think about 1,000 basis points in the owned brand assortment margin improvement. This is part of our gross margin algorithm and is reflected in our guidance: 35% in fiscal 2021 and 38% in fiscal 2023. We will continue driving own brand penetration, improving gross margin with that, while also optimizing pricing, promotion, and driving cost savings. It's a crucial element of our strategy and of underlying gross margin expansion.

Understood, thank you. And a follow-up: you guided core banner sales to be up approximately 65% to 70% in the first quarter. Where are you tracking relative to that expectation right now?

We're tracking very well relative to that expectation. We won't give month-by-month revenue performance, but keep in mind this is versus a base last year where we closed the majority of our stores in March, April and May. March showed a strong growth rate, and growth will be higher in April and May as we lap the depressed comparisons. Overall in the quarter, 65% to 70% is the directional expectation, and we're focused on core performance. Also, Q1 core growth is a low single-digit growth rate on a two-year stack basis, so when we compare Q1 versus Q1 2019 it's positive comp sales growth.

Our next question is from Anthony Chukumba from Loop Capital.

Good morning, and thanks for taking my question. You’ve talked a fair amount about the change in private label penetration that you’re projecting over the next few years, but I was wondering about the other merchandising changes that you had talked about, particularly in terms of rationalizing SKU count. Where are you in terms of other merchandising changes aside from increasing private-label penetration?

Anthony, hi, it’s Joe Hartsig. A few things: you saw growth in our destination categories, and we've been focused on getting a line-of-view on our categories. We're using internal and external data to drive better decisions. We've done Bed Bath and kitchen resets and are taking that capability across other categories. We're coupling this with room resets you're starting to see. For example, the introduction of Nestwell, our new own brand, was part of that category work where we removed many unproductive SKUs that were cluttering our assortment at common price points, helping customers shop. We're bringing that to the newly remodeled stores, both in Houston that John talked about and across the banner, where we're working out a new reset program. We're excited about coupling product and proposition using our new go-to-market integrated planning process that we call blueprints to deliver a unified centralized plan to our stores and our digital channels at the same time. Our customer value proposition that Mark talked about, launching today, is emblematic of the new Bed Bath & Beyond. So, things are coming together from a common view. There's more work to be done, but we're building new capabilities.

Our next question is from Carla Casella from J.P. Morgan.

Hi, I’m wondering if you could give the same-store sales for stores only, or the digital percentage of sales in the fourth quarter. I think you said the 40% was for the full year?

Yes, Carla. Digital was 40% for the full year and it was also 40% for the fourth quarter. Store comp was minus 20%. We saw minus 20% on stores, 86% digital growth, and 4% total comp growth.

Okay, that’s great. Given the cost cuts that you’ve made to date, are you done implementing cost initiatives and is the remainder just flow-through? Have you quantified what's remaining on the program? Also, are you looking at additional asset sales or a new cost-cutting program going forward?

In terms of cost optimization, we continually look to optimize our cost structure. We're using a zero-based approach to optimize costs. We're working on rent reductions and continuing to work with our vendors on reducing input costs. We're capitalizing on the savings from the restructuring done last year. We continue to evaluate and implement opportunities to improve efficiency and cost structure.

Our next question is from Alex Arnold from Odeon Capital Group.

Hey, guys. Thanks for taking my question. Could you give any granularity or update on the relative performance of re-merchandised/remodeled stores?

Early indications are positive, and we're pleased with initial results, but it's still early. We'll share more detail quarter-by-quarter as the remodel program scales. So far, results are in line with or a bit above plan, but we want to wait for a larger sample of remodeled stores and more time before providing more granular results.

Okay, great. How about an update on recent traffic trends — are you seeing any shifts as vaccinations roll out more aggressively?

Overall, we're seeing improving consumer confidence, which is impacting spending positively. Traffic trends are showing some positivity in the market, and the home-related trends look multi-year in nature. That said, performance does vary by geography and we continue to monitor traffic trends closely.

Our next question is from Simeon Gutman from Morgan Stanley.

Hi, everyone. Good morning. A couple of questions on sales: first, the core Bed Bath & Beyond comp in the fourth quarter of 6% — I assume it's being helped by store closures and transfer effects. Is that a fair way to view it? Second, looking sequentially from 4Q to 1Q on a core basis, is the business accelerating?

Simeon, thanks. Just to clarify, total enterprise comps were up 4%, and Bed Bath & Beyond banner comps were up 6%. We believe this growth is driven by our core strategic efforts, not just by transfers. Regarding the sequential trend, we expect different dynamics in Q1 as we lap the store closures from last year, and our guidance incorporates conservative assumptions. We're seeing the strategic traction from marketing and product, and we expect the business to express a different balance across quarters as traffic and vaccination progress impact store versus digital mix.

Okay. Quick follow-up: any early impact or reception to the new private brand launches?

It's early, but results so far have exceeded our expectations. By the end of Q1 we will have launched three brands in substantial categories and additional opening price-point brands across the company. Online and in-store reception has been strong, and the run rate is a little higher than we expected. We are only at the beginning of our journey and look forward to sharing more data on penetration and growth as we progress through Q1.

Our next question is from William Reuter from Bank of America.

Good morning. Can you remind us what percentage of your products come from Asia? Are you seeing impacts of out-of-stocks due to port disruption on the West Coast, particularly given some of the category resets? And have any of the new private brands had such challenges?

Thanks, William. We won't disclose a specific percentage of production by region. Port issues have been well factored into our planning and are generally being managed. For our own brand launches, the team planned well in advance, brought inventory in earlier, and built capacity for upside, so we feel comfortable about the supply plan for those launches. We're working closely with our vendor base to replenish key items and have been improving in-stock positions through the end of Q4 and into Q1.

Our final question is from Jonathan Matuszewski from Jefferies.

Hey, guys, thanks for taking the questions. First one, Mark: you mentioned recently acquired customers are less likely to use discounts and buy on promotion. To what degree is the backdrop influencing that dynamic? Do you think these newly acquired customers will be predisposed to shop more full price as the backdrop normalizes? And where are these newly acquired customers coming from?

We focus a lot on everyday value. We had work to do on price perception and we've improved everyday prices to be competitive pre-coupon. Customers, especially younger ones, shop online first and check pricing, so demonstrating strong everyday pricing and value is important. We're seeing positive indicators that newly acquired customers are less promotion-dependent, but we will continue to monitor and cultivate that behavior. As for where we're acquiring customers from, we're acquiring them across digital channels and then working to deepen their relationship across banners. For instance, we now provide cross-navigation between Bed Bath & Beyond and buybuy BABY on our websites to facilitate cross-banner shopping and build an ecosystem. Our marketing, social and storytelling efforts have been effective in attracting new customers and we will continue to develop those relationships.

That concludes the question-and-answer session.

Thank you, John, and thank you all for participating in our call today. Please feel free to contact me or our affiliates with additional questions. Have a great day. Stay safe. Goodbye.

Thank you. Ladies and gentlemen, this concludes today’s call. Thank you for participating, and you may now disconnect.