Bed Bath & Beyond, Inc. Q1 FY2021 Earnings Call

Welcome to Bed Bath & Beyond's Fiscal 2021 First Quarter Earnings Conference Call. My name is Sylvia, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now turn the call over to Susie Kim. Susie, you may begin.

Thank you, and good morning, everyone. Welcome to our fiscal 2021 first quarter earnings call. On the call with us today are Mark Tritton, our President and Chief Executive Officer; and Gustavo Arnal, our Chief Financial Officer.

Thank you, Susie, and good morning, everyone. Our first quarter results demonstrate continued momentum in our transformation as we progress towards the goals we outlined last quarter, and most importantly, at our Investor Day. 2021 marked the first year of our three-year transformation following the groundwork we laid in 2020, a year of historic and necessary change for this organization against the backdrop of unprecedented challenges due to COVID-19. We took bold steps to build a stronger foundation through talent and team, financial capital and strategy, which enabled us to begin changing the trajectory of our business last year. As our first quarter results prove, we continue to deliver profitable growth as we reestablish our authority in home, recapture market share, and unlock our group's potential. For Q1, we delivered our fourth consecutive quarter of comp sales growth, and achieved gross margin that exceeded our expectations. We continue to execute quarter after quarter, and we are pleased to be raising our full-year guidance outlook today. Gustavo will discuss our financial performance and outlook in more detail shortly. In summary, we have started the new fiscal year in a position of strength, and are clearly on track to accomplish our 2021 goal as part of our three-year growth plan.

Thank you, Mark, and good morning, everyone. I'll provide additional perspective on our strong first quarter result, and also on our second quarter guidance and improved full-year outlook. Let me start by saying that our first quarter performance was better than our expectation on several levels as we delivered our fourth consecutive quarter of growth. Core sales growth of 73% came in higher than our guidance of 65% to 70% growth. This was a stronger-than-expected recovery from our COVID-related store closures last year. Gross margin of 34.9% was also ahead of our 34% guidance, driven by strong Owned Brand penetration, assortment, and better channel mix. Given this positive start of the year, we're raising our full-year outlook for sales and EBITDA, and at the same time reintroducing guidance for adjusted EPS. Looking more specifically at our first quarter results, as a reminder, reported net sales continue to reflect the impact from non-core banner divestitures completed last year, as well as our ongoing store fleet optimization program. Total net sales were $1.95 billion. This represented 73% growth from core banners. Worth noting, we believe that while first quarter growth rates are not fully comparable due to last year's COVID closures, for transparency and analysts' modeling purposes, we estimate comparable sales growth of approximately 86%. This excludes an estimated 13% negative comp sales impact from our store fleet optimization program. This impact was more pronounced this quarter due to last year's lower COVID-impacted revenue base. Versus 2019, on a two-year stack basis, comparable sales grew 3% fueled by significant digital growth of 84%, and offsetting store sales reductions of 20%. As Mark described, our digital-first, omni-always strategy remains an important component of our performance. Our digital channel represented 38% of total net sales for the quarter, doubling versus the penetration rate in 2019, and creating a sustainable strength in our business. For consistency and comparability, our sales perspective by banner or category will be rooted in comparable sales comparisons versus last year, and in sales on a two-year stack versus 2019. In our Bed Bath & Beyond banner, net sales increased 96% versus last year and delivered 3% comp growth on a two-year stack basis. Our key destination categories of bed, bath, kitchen, indoor decor and home organization grew 100% versus last year recapturing strong market share and on a two-year stack comp basis sales grew 7%. Our buybuy BABY banner delivered another strong quarter versus last year, growth exceeded 20%.

Exceeding our plans for the first quarter is yet another positive step during the early stages of our three-year plan. We are proving that our strategy is clear and our ability to execute is strong by delivering on our transformation plan quarter after quarter. We continue to fortify our position as a digital-first, omni-always retailer. And I am confident that our team and our initiatives will enable us to become a more successful enterprise, benefiting all our stakeholders for years to come. This year, we'll not only mark the 50th anniversary as a business, but also an important inflection point in Bed Bath & Beyond's history. We are reinventing ourselves. We're reestablishing authority in home, and repositioning this iconic company to unlock our potential for a new future of sustainable growth and profitability. We'll now take your questions.

Thank you. We'll now begin the question-and-answer session. And our first question comes from Peter Benedict from Baird.

Hi, guys. Good morning. So, a couple of questions. First, there's a lot of noise in the market here over the first quarter, but I'm just wondering if you could maybe expand a little bit on your share gains, how you're thinking about that, how you're measuring that? It sounds like you think you've gained share in a number of these core categories. So that's kind of my first question. Mark, could you build off that?

Yes. Thanks, Peter. Good morning. We've been tracking our market share. Obviously we took a hit last year in the subsequent quarter because of the store closures. And so we've been looking at not only how we can perform in an equivalent market, but what the share gain ratio looks like. We see a couple of things there. It's preliminary. Clearly, we're not back to our 2019 levels of share, because we have fewer doors and we're operating as a leaner organization, but what we saw was that rebound was very, very strong, and actually exceeded that of a number of our competitors who were also closed at the same time. As a specialty retailer in the home and baby space and health and wellness, we regained really strong share that we're going to be building off quarter by quarter, and sequential growth by month as we've tracked it.

Okay, thanks. Next question just on inventory and how you're managing that kind of in-store versus online and in-stock levels. I'm curious, I know you mentioned there's a new store replenishment process. Can you talk about that and, as you're transforming the merchandise assortment in the stores, any timeline or metrics around that would be helpful?

Yes. We're really pleased with that progress here, Peter. I think prior to implementing the full technology suite that's going to help us and enable us with the use of AI to manage inventory at the DC, store and digital level, we're seeing the curation of the merchandise first at the store level, and then the exit of underperforming brands and labels to make way for a cleaner assortment punctuated by owned brands. That's resulted in being in-stock at about 95%, and definitely even higher in some of our key items, which is one of our highest statistics in many years. So, in-stock levels are healthy. As we curate the assortment mix, as we noted, we're up for the quarter, but our inventory was down over $100 million or 6%. So, we're doing more sales on less inventory. We're getting that inventory faster to the customer than ever before. This is prior to us implementing a full suite of inventory management and tracking systems and a new supply chain. So, we see those being net benefits as we progress through the three-year plan, and the fundamentals we've put in place are working well for us.

Okay, great. Lastly, one for Gustavo on free cash flow. Negative $100 million this quarter, but how are you thinking about that cadence throughout the rest of the year? What's your view on free cash flow for '21 based on the updated guidance? Any of the puts and takes would be helpful. Thanks so much.

Sure, Peter. Our free cash flow in the first quarter came in line with our expectations as we accelerated our capital investments in line with our three-year plan. Relative to the balance of the fiscal year, we're not guiding to a specific free cash flow number, but we are definitely planning for positive free cash flow. We have a strong plan in terms of EBITDA, a strong plan in terms of further inventory optimization, and we're fully funded for our restructuring costs and marketing spending. All of that will be sufficient to fund our $400 million of CapEx in the year. So, look for positive free cash flow as the year progresses. We typically see the first quarter slower than the balance of the year due to seasonality. So, we're feeling good about that.

Our next question comes from Steven Forbes from Guggenheim Securities.

Good morning. Maybe Mark, just a follow-up on Peter's question about market share: could you provide a brief overview on how you view the company's performance across these top destination categories? What gives you confidence that share gains should build? How are legacy customers engaging with these categories versus the new customers you acquired during COVID? Any context that helps increase conviction that the business is positioned to return to share capture would be helpful.

Great question, Steve. We are doubling down on those core areas that we discussed: bed, bath, kitchen, storage, and indoor decor. We're investing in those, curating our inventory, and clarifying our price. Our price equity in the market is very strong, and we're trading in an omni-channel way, which means customers view us online, shop in-store, or purchase through digital. All that is adding up to a strong bounce back to share recovery for us in those key areas, and we're seeing both existing and new customers follow that trend. We're seeing slightly stronger baskets and higher average transaction value from digital customers, but we're seeing real strength in those areas. Looking at the two-year stack, while we saw over 100% growth in our top categories versus last year, categories like kitchenware that did booming Q1 last year are showing double-digit comps versus 2019, which means the trend is sustained — people are still cooking and they're still thinking about Bed Bath & Beyond in that equation. Having our full omni-channel suite of stores and digital back operational this quarter has really brought us back to share growth, and we'll continue that transformation quarter by quarter.

Our next question comes from Simeon Gutman from Morgan Stanley.

Good morning, guys. This is calling in for Simeon. Two questions: first, Mark, on the owned brands and engagement around that, could you share some of the KPIs you are tracking to gauge success, whether that's POS data or store traffic trends after introducing those brands into a store?

Sorry, wrong mute button. Great question. For us, it's definitely around our sales targets and plans, and the penetration rate overall. We're seeing a lot of curiosity and engagement with these brands. Our penetration rate for owned brands increased rapidly — from around 9% historically we are seeing penetration in the high teens. We had declared a goal of 20% penetration by the end of the year, and we are off to a very strong start. We've been exiting aged owned brand product as well as introducing new products, and customers have responded strongly. We look at a number of digital metrics as well as social media engagement, and all of those have been extremely positive.

Our next question comes from Christopher Horvers from JPMorgan.

Thanks. Good morning, everybody. You reached 34.9% gross margin in the first quarter, so a few questions: one, do you think the clearance activity from store closures and the owned brand transition is done such that there wouldn't be any deductions going forward? And longer-term, if we center on that 34.9% in Q1, you haven't introduced all of the private label brands you plan to; how does that inform how high gross margin could be over the long term?

Thanks, Chris. As we increase our owned brands, we have both exit and clearance markdowns as well as the introduction of higher-margin products. I would say that it bodes well, but we'll continue to see a transition on markdowns and introductions as we introduce the next three brands into key rooms and categories through Q2 with more stabilization in the second half. We've been clear that there's stronger margin potential in the second half than the first, although Q4 traditionally can be a little softer versus the rest of the year. The good news is that we see early positive upside. We came above our guidance, but we are in a transition and establishment phase, and then will stabilize that in the second half. We expect sequential growth in margin, but we will continue to monitor carefully.

Our next question comes from Michael Lasser from UBS.

Good morning. Two-part question: first, your core destination categories on a two-year arithmetic stack are up 107%, while other categories, representing a bit over a third of the business, are up 88%. When do you think you can get all categories working together simultaneously? Second, your quarter overlapped with distribution of some sizable stimulus. How much do you think that contributed to performance during the period?

Thanks, Michael. We have areas like personal care and luggage that are underperforming compared to the core categories; our investment has been focused on the core, which is driving more attention and activity. We expect more stability in the second half and are starting to see early signs of return in those categories. We want to see encouraging store traffic because those categories are more store-based than digital. Regarding stimulus, we saw overall consumer confidence, but we believe the majority of our sales were driven by our strategic initiatives, engagement, and incremental activities like our brand launches. Everyone benefits to a certain degree from stimulus, but our strategic factors are the main drivers and we see more stability in our trend than a one-time stimulus effect.

Our next question comes from Carla Casella from JPMorgan.

Hi, we're seeing a relatively large cash balance, and you gave some comments around cash flow, but could you talk about your priorities for that cash balance?

Hi, Carla. We remain focused on capital allocation principles. First and foremost, we will invest in the business, maintain a strong balance sheet, improve our debt-to-EBITDA credit ratios, and return capital to shareholders as we're doing with share buyback. We will continue being agile on our cash balance and cash flow and act according to those principles.

Carla, I would add that we're in the early stages of our transformation. We have brand investments, technology, supply chain improvements, store remodels, and digital upgrades planned. Where we have free cash flow or additional free cash flow, we'll look to deploy that to accelerate transformation efforts. We are in the right position to review and invest as we move forward.

Our next question comes from Kate McShane from Goldman Sachs.

Hi, good morning. I wanted to go back to the store comp, which was down 20% versus 2019. Could you contextualize what your expectation is specifically for store comp in your guidance? What drives improvements specifically to the store, and is the solution really the completion of the fleet optimization?

Thanks, Kate. We still see upside in the return to stores and we're tracking by region. There are different levels of comfort and traffic generation across regions. The Northeast historically is strong but more reticent to return to stores than areas like the South. As an omni-always retailer, we're balancing digital and store activity. Back-to-college period could be an interesting pivot to return to a new normal and bring multi-generational traffic, both new and existing customers, into stores where they will experience the new Bed Bath & Beyond — whether it's a remodeled or refreshed store. Remodels are not the sole lever, but preliminary data shows sales lift, margin lift, and brand penetration lift where we've completed remodels. We're in early stages and will share more at the end of Q2, but expect a multifaceted pathway to full traffic recovery.

Our next question comes from Bobby Griffin from Raymond James.

Good morning, everybody. Thank you for taking my questions. I want to circle back on the composition of the comps and understand the split between transactions and ticket relative to FY19. On a transaction basis, where transactions include store and digital, can you give color on transactions versus ticket and what's the bigger driver versus FY19?

Good morning, Bobby. We're seeing transaction and value growth in both areas, but definite outperformance in digital. Store traffic is now stable versus 2019 statistics. We're also seeing that when customers shop, they shop bigger and less frequently — larger baskets. Brand penetration and the price-value equation are resonating with customers, helping to build the basket. It's early and we'll continue to monitor through the year.

Bobby, I would add that a larger proportion of our customers are at home. As Mark said, frequency of purchases is changing and ticket sizes are larger, which is where our digital-always strategy is driving the business.

And our next question comes from Zach Fadem from Wells Fargo.

Hi, this is David Lance on for Zach. Thanks for taking our questions. Two questions: could you provide some color on the state of the coupon and how its usage is trending? Second, the 34.9% Q1 gross margin is 40 basis points above Q1 2019 levels. Could you help bridge the gap there?

I'll take the first part and Gustavo can pick up the second. On coupons, they remain a major part of our business and something we celebrate, but we are using them more strategically and surgically. Allocation and redemption are slightly down as per our plan, mainly due to store-based traffic changes and how we've balanced coupons against strong everyday prices. It's resonating with customers, and we are seeing growth in our Beyond Plus membership, which slightly offsets the coupon changes.

David, two things about our gross margin versus 2019: it is above 2019 by about 50 basis points. We feel good about that because the expansion is in spite of having two times the digital mix penetration and in spite of significant shipping cost increases we've seen over this period. We see further benefits as we continue to operate through the year.

Our next question comes from Jon Matuszewski from Jefferies.

Hey, good morning, guys. Thanks for taking my questions. First, the remodels — it looks like the 26 recent ones are exceeding internal sales estimates and you're planning over 100 more for the remainder of the year. Is your updated annual sales guide contingent on those initial expectations for remodeled store productivity? If the net several dozen remodeled stores do as well as the initial ones, is it fair to assume bias above the midpoint of your updated sales range? Thanks.

Thanks, Jon. What we're seeing with the remodel plan is that we planned for disruption but are actually performing better than expected as stores reopen. Sales, gross margin, penetration and transactions are all above our estimates in those remodels. Our original remodel plan had a very healthy ROIC and we're exceeding that. The current plans for the full year with only 26 completed do not include a revision for upside from remodels; we want ongoing proof of concept and consistent deliverables before changing guidance. We're hopeful and positive based on early results, but haven't baked additional upside into current plans.

Quick follow-up on omni-channel: you're expanding same-day delivery capabilities with DoorDash. Have you looked at the customers using these services — do they skew toward newer or existing customers? Any discernible trend so far in terms of engagement and repeat behavior?

We're tracking the upside potential of these services which create more stickiness with customers. Same-day delivery has brought new customers in and is being used by existing customers. Through agreements with Shipt and DoorDash, our goal is to get goods to customers faster and create more convenience — and that's happening. Early indications show customers becoming sticky: repeat purchases and repeat engagement are up. We're collecting more data on age profile and usage, but people are excited about the ease and convenience. We'll share more on how we'll expand delivery timeframes and proximity as we move forward; last-mile is a constant focus.

Our next question comes from Jenna Giannelli from Goldman Sachs.

Hi, thanks for taking my question. First, on marketing investments: given the better top-line growth and margin, you took up marketing in the first quarter. Is that something we can extrapolate for the balance of the year? Does the guidance raise include increased marketing investment that was not in the original plan?

Yes, it does include increased marketing for the rest of the year. In Q1 we had some exceptional investments for brand launches that will continue into Q2 and then balance down in the second half to more of a maintenance level. There is incremental sustainable investment to support future growth as well as some quarter-specific activity that will dissipate over the year. Our home-happier campaign was intended to resonate with customers and support the brand launch.

Our next question comes from Cristina Fernandez from Telsey Advisory.

Hi, good morning. On private labels, can you share early learnings so far? Which brands you've launched had more impact and in what categories? From a customer perspective, what's the feedback on pricing and quality of these new private label brands versus the national brands they replace?

Thanks, Cristina. On the consumer front, online reviews have been incredibly positive. Customers are very satisfied and excited about quality, value, and aesthetic; average ratings exceed our average digital rating across the board. Out of the three brands launched in the quarter, two were bigger within the mix. Nestwell covers multiple categories in bed and bath and has been a standout — often appearing in our top 10 brands by sales per day and frequently in the number one and two slots. Simply Essential is an incremental business opening a new price point and should have a strong back-to-college moment. All three brands have done well with strong adoption, repeat purchasing, and good word of mouth. Visual presentation in-store and storytelling online are resonating and the value proposition is clear versus competition.

We have time for one more question. That question comes from Seth Basham from Wedbush Securities.

Thanks a lot, and good morning. My first question is on the destination categories: most performed well, but why did bath and indoor decor lag versus 2019?

Seth, bath and indoor decor had the largest product changes as we exited a lot of product in a planned way. We anticipated the category would take a bigger hit with exits as we remix the assortment with Nestwell and other new brands. Bath was slightly off because we had markdowns on exited product and higher mix changes. We view this as a transformation and adjustment in that category rather than a fundamental weakness, and expect subsequent quarters to look different. For indoor decor, we saw good momentum and see further opportunity; many investments in that space will focus on the second half of 2021.

Relatedly, about markdowns last quarter: your delta between adjusted and reported gross margin was 130 basis points previously and 250 basis points this quarter. How should we think about that delta in subsequent quarters this fiscal year?

Hi, Seth. We see this as a transition and expect that delta to start coming down as we move into Q2 and Q3. It was heaviest in Q1.

By next fiscal year, should we be clean with no adjustments?

There may still be minor adjustments related to supply chain or restructuring, but the major year of markdown-related adjustments is fiscal 2021 due to the transformation.

Thank you.

I'll now turn the call over to Susie Kim for final remarks.

Thank you for participating on our call today. If you have any further questions, please contact us at IR@bedbath.com. Have a wonderful day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.