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

Thank you, and good morning, everyone. Welcome to our fiscal 2021 third quarter earnings call. Joining us today are Mark Tritton, our President and CEO; and Gustavo Arnal, our Chief Financial Officer. Before we begin, let me remind you that our fiscal 2021 third quarter earnings release and slide presentation can be found in the Investor Relations section of our website at bedbathandbeyond.com, and as exhibits to our related Form 8-K. This conference call and the slides we refer to may contain forward-looking statements, including 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 and our quarterly report on Form 10-Q. The company undertakes no obligation to update or revise any forward-looking statements. Additionally, the information we will discuss today contains certain financial measures that exclude amounts or are subject to adjustments that have the effect of excluding amounts that are included in the most directly comparable measure prepared in accordance with generally accepted accounting principles. For a reconciliation to the most comparable measures presented in accordance with GAAP, please refer to the table in our earnings release available on our website and included as an exhibit to our Form 8-K filed today. It is now my pleasure to turn the call over to Mark.

Thank you, Susie, and good morning, everyone. We hope you had a safe and healthy holiday season during these turbulent times. During this first year of our comprehensive transformation, our most recent results demonstrate the complexities of executing a long-term end-to-end turnaround plan while managing a business in a highly unpredictable short-term environment. Unprecedented macro forces continue to permeate operating conditions, leading to a near-term versus long-term bifurcation in our performance. While we effectively offset higher freight costs that have been at the core of global supply chain pressures, increasing inventory disruptions impacted our ability to meet demand during the holiday season. These conditions demonstrated near-term volatility, despite progress on our multi-year transformation. We continued to execute our long-term strategic initiatives to modernize our infrastructure and enhance our agility in any future operating environments. More specifically, during the third quarter, our revenue momentum was below our expectation, with net sales of $1.9 billion and a 7% comp decline. As shared with you previously, we experienced a slower start to sales in September and October. In preparation for the holiday season and against the backdrop of the challenging supply chain environment, we fortified our plans to secure the right breadth and depth of product. Overall, our inventory position remained healthier with greater relevancy compared to last year, and in November, we drove improvement and arrested comp decline. Unfortunately, despite strong customer demand, operational challenges such as vendor constraints, locked inventory once in our possession, and a currently illiquid legacy infrastructure impacted our ability to drive further improvement in sales trends. Issues in receipt flow and on-shelf availability affected our top 200 items, such as kitchen appliances and personal electronics, as well as our key categories such as bed and bath. The customer experience was compromised as strong demand wasn't met with strong product availability. This resulted in approximately $100 million in lost sales versus demand, or a mid-single-digit impact to the quarter and an even higher impact in December. Operational issues were not limited to our inventory. We also took steps during the quarter to rebalance our marketing resources and correct the disproportionate reduction of our printed circulars, which are a key traffic driver for our business. As context, a disproportionate amount of our sales are generated from our circular at stores and are a key trip driver. While we were able to activate additional plans for distribution in October, paper supply and labor issues with print vendors impeded our ability to reach full scale circulation. Timely delivery of these circulars by a vendor was also an issue that prevented a return to historic levels of circular distribution, and further impacted our ability to drive traffic and generate sales. Yet, amid somewhat normalized conditions, we converted traffic and met demand successfully both in-store and online. For example, we delivered a high single-digit sales comp in the U.S. over the Black Friday to Cyber Monday period, underscoring Bed Bath & Beyond as a top destination for customers. We're also pleased to see customers who returned to brick-and-mortar shopping this year, as our U.S. stores delivered mid-single-digit sales comps over this five-day holiday period. During the quarter, we delivered gross margin of 35.9%, well above our plans despite sharp increases in inflation and pervasive freight and supply chain cost pressures. Stemming from our experience last quarter, once we diagnosed the freight cost pressures that impacted us in Q2, we swiftly implemented pricing actions, promotional optimization, and product mix plans to achieve margin recovery. We were surgical in our approach on a SKU-by-SKU basis to also ensure we remain competitive with the market. We also optimized our promotional activity, increasing our regular price penetration throughout the quarter versus last year, despite the highly competitive retail month of November. As evidenced by our higher gross margin performance, we have an arsenal of pre-planned promotions that we can now use strategically to drive engagement with our customers profitably. Coupon exclusions, less clearance discounts, and event-driven coupons during peak shopping periods are just some of the examples of how we can diversify our value message without being more promotional in totality. These decisive actions and strategies led to an adjusted gross margin rate not only fitting expectations significantly, but above our 2020 and 2019 levels. As you know, this is a key financial barometer of our three-year transformation strategy. Our owned brands continue to produce high merchandise margins at increased penetration rates. Despite the supply chain-related inventory environment, we launched the final two of our eight total planned owned brands for fiscal 2021. Studio 3B and H for Happy enable our customers to make their homes happier with options for modern and contemporary key items to assist with everyday moments and seasonal celebratory needs. In accordance with our long-term strategy, all our owned brands help to create lifelong memories and are a key cornerstone of our three-year profit algorithm. We are pleased to see progress continue quarter after quarter in just the first year of launching this key initiative. Our progress is even more evident in our newly remodeled stores. They're growing faster than the chain with owned brands penetration and accordingly, overall product margin rates are higher as well. Just as we delivered on gross margins during the quarter, our holistic focus is on elevating our top- and bottom-line performance as we continue to transform. In the near term, we anticipate conditions to remain complex and we are defining solutions to navigate each quarter. We're implementing plans that will enable sales acceleration over the near and medium term. And we will constantly leverage marketing to assist us in strengthening and driving traffic further. Our number one priority is to continue to change our current systems and processes to unlock inventory in a faster and more efficient way to meet demand, above and beyond our mid- to long-term investments. To improve our in-stock positions, we are working with our vendors to target constrained inventory and improve flow to DCs and stores. Concurrently, we must enhance our ability to fulfill our store demand once inventory is within our possession from shipping containers to warehouses to stores. In the near term, we've created new transfer processes that increase third-party logistics capacity and decrease warehouse holds to assist with flow. We're also adding digital supply chain capabilities to automatically shift inventory sources between our owned, vendor-direct, and marketplace availability. Our legacy infrastructure undermined our response times to offset the holiday inventory impediments, as visibility was limited ahead of our planned supply chain efforts. To create a more nimble operating model, enablement through better tools and processes is the basis of our ongoing supply chain and technology transformation. This reformation will help us mitigate misalignments in supply and demand and prevent interruptions to our plan in the future. We believe these work streams will add the necessary reinforcement to alleviate constraints in fiscal '22 and beyond. Given our largely seasonless and therefore resilient inventory, the short-term disruptions we're experiencing will normalize as the supply chain imbalances improve with our enhanced plan. As always, we will monitor product category demand and our market share to inform our operational plan. We continue to attract customers in the kitchen categories segment that relates most to our business. Recently, we've seen two trends persist. First, overall market growth continues to normalize in the post-COVID environment compared to the high-demand environment last year. Secondly, despite the total market decrease in nesting dynamics from 2020, NPD data in the bed, bath, and kitchen categories still show our market share is sequentially stable. We are narrowing the gap in declines versus the prior year, and in fiscal 2022, we expect our market share to stabilize further given the conclusion of our store fleet optimization initiative. Furthermore, our customer acquisition strategy for the Bed Bath & Beyond customer base gained traction during the quarter, as evidenced by our Beyond+ loyalty program. We grew from 1.8 to 2.2 million members after one of our largest new subscriber events in November, leading to one of our most successful membership acquisition quarters of Beyond+ in years. We will leverage this momentum throughout 2022 as we support plans for our new loyalty program later this year. Spanning all our banners, our new program will be designed to reestablish us as the preferred channel for our customers' home and baby needs, while building authority, trust, and long-term value across our ecosystem of banners. Another key highlight to the quarter was the continued improvement in overall growth of our buybuy BABY banner. Baby continues to deliver double-digit growth with additional benefits to the total group as more than 65% of our new digital universal card capability, our same-cart shopping between Bed Bath & Beyond and buybuy BABY as well as Harmon. As a result of our targeted efforts to improve this business since last year, we are on track to achieve approximately $1.3 billion in sales ahead of our initial goal, all while improving profitability and market share. We achieved these results even before the initial strategic transformation of this business, which is planned to begin in the new fiscal year. We now intend to expand owned brands to BABY in 2022 as we look at margin optimization strategies, given sales results in the business that have now stabilized. Of course, we will continue to drive BABY sales through exciting new partnership opportunities that combine the power of Bed Bath & Beyond and buybuy BABY. For example, BABY is an important cornerstone of our recently announced Kroger partnership, as well as our own digital marketplace. Finally, as you saw in today's announcement, we are committed to managing our business responsibly. We are extending our SG&A expense optimization measures of approximately $100 million annualized for next year and are exploring areas such as further store fleet optimization, fixed costs, and discretionary savings opportunities. We will ensure an appropriate expense-to-sales ratio that reflects our current business, while not at the expense of our long-term initiatives. During this first year of our three-year transformation, there has been no shortage of activity. From our new omni-channel and merchandising initiatives to the reformation of our supply chain and technology, we are paving a path towards greater profitability and growth for the future. We are focused on plans to deliver gross margin expansion with sales stabilization and growth through both immediate action plans and our unwavering execution of the transformational initiatives we outlined at our Investor Day. Now onto Gustavo Arnal, our Chief Financial Officer, who will review our third quarter financial results and our outlook for the next quarter and full year. Gustavo?

Thank you, Mark, and good morning, everyone. I would also like to underscore our commitment to the long-term transformation we're making, despite the shorter-term headwinds we currently face. As I look back over a year ago, we have overcome several challenges, and we recalibrated our business with agility. For example, as freight cost increases began in 2020 it was hard to have predicted the breadth and depth of the developments that have materialized since then. Despite this, our gross margin expansion underscores that as an organization, we can and will adapt quickly as we navigate our ongoing transformation. Further, we're managing our business responsibly. In addition to SG&A expense optimization, we also remain intent on utilizing cash according to our capital allocation principles, which includes supporting our transformation initiatives and returning excess cash to shareholders. Earlier this quarter, we announced intentions to complete a $1 billion three-year share repurchase plan ahead of schedule, underscoring our ongoing confidence in our turnaround and our commitment to maximizing capital deployment. Let me now review our fiscal third quarter results, which cover the period ending on Saturday, November 27, 2021, the final day of our quarter. I will also discuss certain calendar metrics to provide greater insight into our holiday trends. This will include our calendar November, our Black Friday through Cyber Monday performance, as well as the trends we saw in December, particularly in the context of our fourth quarter outlook. As a reminder, and as anticipated, reported net sales continue to reflect the effect from expected non-core banner divestitures completed last year, as well as our ongoing store fleet optimization program. Total net sales were $1.9 billion, representing a 14% decline in our core banners, which included a 7% impact from our ongoing fleet optimization program. For the fiscal third quarter, comparable sales were down 7% versus last year, and down 4% versus 2019. As Mark discussed, we saw sequential improvement within the quarter and in fiscal November, our comp sales were down mid-single digits. Encouragingly, on a calendar November basis, we saw flat comparable sales in the U.S. and growth of low single digits in stores. Comparable sales grew high single digits over the Thanksgiving to Cyber Monday period. For the fiscal quarter, store comps were down 5% and improved sequentially each month, reflecting a return to stores following last year's pandemic-related traffic declines. This was most evident in November, when store comps were down just slightly overall and positive in U.S. stores. Our digital channel represented 35% of total net sales, a similar penetration rate to 2020. Despite a 9% decline in sales compared to the strength we experienced last year from the pandemic, our digital business continues to be very important, particularly when compared to 2019. By banner, Bed Bath & Beyond comparable sales decreased 10% versus last year, and 5% versus 2019. Buybuy BABY continued to deliver strong results with mid-teens comparable sales growth versus last year. Adjusted gross margin was 35.9%, 50 basis points higher than last year and 360 basis points above 2019. We're pleased to have driven 320 basis points of merchandise margin expansion, primarily from our own brands and successful pricing actions that more than offset 270 basis points of increased freight costs compared to last year. SG&A dollar expense was in line with our internal plans, although higher as a percentage of sales, given our lower-than-expected revenue based on the quarter. As I touched on last quarter, we're committed to enabling our long-term transformation through investments, while remaining focused on managing expenses appropriately. To ensure SG&A alignment with our overall performance, we're initiating further business optimization plans to target $100 million of annualized expense savings across areas such as fleet optimizations, fixed costs, and discretionary spending. These savings will materialize starting next year, and we will share more details next quarter with the context of our fiscal 2022 plans. We reported adjusted EBITDA of $41 million, driven by lower sales during the quarter. GAAP EPS was a loss of $2.78 per diluted share, which reflects approximately $2.53 of special items for the quarter. These were predominantly driven by $1.82 associated with the accounting effects of a non-cash income tax charge related to a valuation allowance against certain of the company's deferred tax assets. This valuation allowance does not impact the company's ability to utilize any deferred tax assets in the future. I would like to note that during the third quarter, there were significantly lower adjustments to gross profit. Specifically, there was only a 30 basis point difference between our GAAP and adjusted gross margin of 35.9%. As I shared on our Q1 and Q2 calls, we plan for these adjustments to decrease over time, as we continue to progress through the initial stages of our transformation. On an adjusted basis, excluding special items, EPS was a loss of $0.25, reflecting our lower sales and therefore EBITDA. Special items are excluded from adjusted results to provide a more representative picture of the underlying performance of our business. Turning to our balance sheet and cash flow, during the third quarter consistent with the seasonality of the business, we reported the use of approximately $300 million of operating cash flow, equivalent to the increase of predominantly non-seasonal inventory as we prepared for the holiday period in anticipation of a challenging supply chain environment. Additionally, in accordance with our capital allocation principles, we invested approximately $83 million of capital in store remodels, supply chain, and IT systems. Our cash and investment balance at the end of the quarter was approximately $600 million and total liquidity at quarter-end was $1.5 billion. More currently post-quarter, our recent pro forma cash balance was $700 million, even after share repurchases. This was driven by positive operating cash flow of more than $200 million in December as expected. We remain committed to returning cash to shareholders by following a balanced, data-driven approach. On November 2, we announced the advancement of our $1 billion three-year share repurchase program with the acceleration of our 2022 and 2023 plans. Accordingly, during the quarter, we executed approximately $120 million in share repurchases, or approximately 5 million shares. Program to date, in the third quarter, our repurchase activity has taken a total share count from 127 million shares to 96 million shares, more than a 24% reduction in our shares outstanding. I will now discuss our fourth quarter and full year outlook. We continue to actively monitor the development of the COVID-19 environment, particularly given the surge in cases related to the Omicron variants. Hence, we're guiding based on current visibility, including quarter-to-date trends. Our sales in December followed a highly volatile pattern unlike any prior year, ranging from low single-digit growth to double-digit declines depending on the week of the month due to the pull forward of retail business, as customers shopped earlier, as well as on-shelf availability of inventory. Taking these into account for the fourth quarter, we're estimating a comparable sales decline of high single digits. Net sales are expected to be approximately $2.1 billion; again, divestitures and fleet optimization will continue to impact year-over-year comparisons. Based on our ability to offset increased freight costs, we expect adjusted gross margin in the range of 32.5% to 33%. Given our sales and margin expectations, adjusted EBITDA is estimated to be in the range of $80 million to $100 million, leading to an adjusted EPS range of $0.00 to $0.15. As a result of our third quarter results and expectations for Q4, we're updating our full year guidance to the following. We now expect net sales of approximately $7.9 billion. For modeling purposes, this translates to a high-single-digit comp for the full fiscal year. Adjusted gross margin for the year is now expected to be in a range of approximately 34% to 34.5%, also an expansion versus last year and 2019. As a result of our sales assumptions, SG&A is now expected to be in the range of 34% of total net sales. However, please note our dollar assumptions have not changed. In line with our revised estimates, adjusted EBITDA is now expected to be in a range of $290 million to $310 million. This translates to an adjusted EPS range of negative $0.15 to $0.00. Our balance sheet and cash flow assumptions include positive operating cash flow by year-end, CapEx of approximately $350 million, and plans for a total of approximately $625 million in share repurchases. By next quarter, we expect to have accelerated our $1 billion share repurchase program. We have also provided additional assumptions of depreciation and amortization, interest, and tax rates in today's presentation to assist with EPS modeling. As Mark discussed in detail, we're activating strategies to pivot near-term results so we're positioned well for fiscal 2022, particularly as we anniversary many of the dynamics we face this year. We look forward to sharing our plans and expectations for the new fiscal year next quarter. I will now turn the call over to Mark for some closing remarks.

If anything has remained constant since I first joined this company, it is that we're executing a full-scale transformation while simultaneously running a business in a highly unpredictable environment. That said, as aspects of our third quarter results demonstrated, we are diagnosing issues, implementing solutions, and delivering on the long-term structural transformation quarter by quarter to ensure sustainability for our three-year goals. While we continue to face challenges, we're improving our ability to respond to macro forces. This past quarter, it was evident in our pricing strategy, our customer acquisition strategy, our BABY business, and more than 250 million customer visits to our group of banners in-store and online. We look forward to unlocking further progress in the areas of our business that require greater support. While we have concluded just the third quarter of our multi-year plan, we continue to execute our strategic transformation by reforming our legacy business to achieve our long-term goals. We remain in the very early stages of a multifaceted transformation that is foundationally changing Bed Bath & Beyond to become a digital-first, omnichannel retailer; to target a more productive store fleet that is optimized and revitalized through our remodels; to change our product principles to offer customers a more inspirational merchandise assortment through a mix of national brands and unique owned brands; and to answer the needs of every moment in life through our buybuy BABY and Harmon banners, all enabled by a modernized supply chain and technology capabilities. As we prepare for 2022, we look forward to operating in a normalized environment with a base of business upon which to grow. We will now take your questions.

Our first question is from Steven Forbes from Guggenheim Securities.

Good morning. Mark, I wanted to focus maybe just to start on the destination category performance. Curious if you could expand on the pricing and promotional plans that were implemented during the quarter. And just provide some color on how the customer responded to these changes. And if you noticed any difference in customer behaviors among loyalty members versus non-loyalty members.

Good morning. The pricing actions began at the end of Q2 and were implemented through Q3 and consistently through Q4, so they were sequential changes. We've been monitoring those prices as well as our average baskets compared to competitors. Through price scraping and market checks, we believe we're in line with the market and our customers are responding accordingly. So we've seen no tension with the price increases, and that has helped address the margin issue. In terms of customer response between loyal customers and general customers, we actively engaged in a customer acquisition strategy. Our target was half a million customers, and we've achieved that over the arc of Q3 and December, to introduce them to Beyond+ and create long-term value through some stickiness and engagement. So we're at the beginning of that process, but there has been good engagement. Real issues in the quarter were around connecting with our regular customers with key assets like the circular, which was a deficit to our traffic generation, specifically affecting stores.

Thanks. And maybe just a quick follow-up: Gustavo, you reiterated the share repurchase commitment here during the quarter despite sort of what transpired. So I don't know if you could just help us better understand the conviction why that's the right use of capital right now, and maybe just provide some color on where you see free cash flow for the year as a whole? I think you mentioned positive operating cash flow, but any color on free cash flow, as we think about modeling the next couple years here.

Sure. There are two key principles that guide our share repurchase position, discussions between Mark and me and the Board. The first is ensuring that the business is funded and that we have the right liquidity, and we do have that. We have continued funding for the capital investment needs in the business and strong cash balance and liquidity. Beyond that, we don't see share repurchase as a short-term intervention. This is about the long-term. We continue to see the intrinsic value of our stock over the long term as much higher than where we are today. When we're done with the $1 billion share repurchase program, we would have taken out more than a third of the company's shares outstanding, probably at an average near $20 per share. Long-term, there's more potential on that. On your question around free cash and operating cash flow: as you said, we continue projecting positive operating cash flow for the fiscal year; the fourth quarter is crucial on that. Free cash flow might be slightly negative just because of the prevention we took in terms of increasing inventory ahead of the holiday season, and therefore our operating cash flow was slightly lower than initially anticipated.

Our next question is from Christopher Horvers from JPMorgan.

Thanks. Good morning. So first, a near-term question, I'll follow up with something more long-term. So can you talk about where you are more specifically on a quarter-to-date basis, recognizing that there's been a lot of volatility, and also the fact that there have been some pull-forwards. So where are you quarter-to-date and sort of what are you baking in for the balance of the quarter to get to the guide?

Through December 31, quarter-to-date, we're at a high-single-digit comp decline. That is consistent with the guidance we're providing for the full fourth quarter. December was very volatile: there were weeks of growth and weeks of decline. The consumer pattern in terms of purchasing habits earlier or later, as well as challenges we're seeing with supply chain availability of fast-rotating and key items, created variability. The quarter guidance is consistent with the trends we see quarter-to-date.

Understood. And then, as you think about the new $100 million cost savings plan for next year, is that something that executes over the year? I know you'll give us more details on that in the fourth quarter. But what drives the urgency for another cost-out plan? Is it that the investments you have to make are coming in higher than you originally thought? And if so, where are they? Where do you see the pressures? Is it wages? Is it technology? Is it supply chain infrastructure that you need to reinvest in? And ultimately, do you think any of that $100 million does drop to the bottom line versus being completely reinvested?

It's not about urgency; it's about managing the business responsibly. Our revenues fell a bit short this quarter, and we want to ensure that our SG&A as a percentage of sales remains in check for our long-term algorithm. So this is about constantly managing cost and identifying opportunities on fixed costs and fleet optimization. We will provide more perspective on that when we provide guidance for fiscal 2022 in April.

To reinforce Gustavo's point, we have taken a conservative view on '22 to ensure we can balance out our SG&A. This is separate from our capital allocation. We remain committed to investing in the initiatives fundamental to our performance going forward while being prudent in our overall cost management.

Our next question is from Kate McShane from Goldman Sachs.

Good morning. Thanks for taking our questions. You mentioned that you are looking at introducing more owned brands at buybuy BABY. We were curious about what the penetration of owned brands is now in the banner, how quickly you can ramp it? And is there a goal for penetration or do you see penetration of owned brands being similar to that of the core banner?

Good morning. Penetration is very low in buybuy BABY today. It has a predominantly national brand business and good discretionary label business. There is an opportunity in key areas like apparel and nursery furniture to create a multifaceted owned brand program. We're excited about what we've put together there and we'll be launching that in the second half of 2022. We do have penetration goals and we'll share more as we get into our '22 plans.

Our next question is from Jonathan Matuszewski from Jefferies.

Hey, good morning. Thanks for taking my question. I noticed on one of your promotional emails yesterday, it highlighted a new subscription plan for things like coffee products, pet care, and other replenishment items, similar to what some other e-commerce players are doing today. Do you have any goals around utilization from a consumer standpoint? And how should we think about that as a contributor to e-commerce sales going forward?

This is something we've had in the digital arsenal as we've improved our capabilities, and we've worked with national brand vendors on supply capabilities and insights. This is a launch of a new program as a test to be relevant. We'll see how it performs for both the Bed Bath & Beyond business and what its transfer value is to BABY. It's in the early stages but part of our digital toolkit overall.

Our next question is from Michael Lasser from UBS.

Good morning. Thanks a lot for taking my question. So if we account for some of the inventory challenges that you had in the quarter, your comp was still down 2%. It suggests that three quarters into the transformation, it's still very difficult to drive folks to your stores and to your website to sell them products without either promoting very heavily or using coupons. As you look into next year, when the environment may get a little tougher, do you expect to see a better balance between being able to drive positive sales growth without having to work gross margin aggressively to drive that growth?

You're right that when you isolate the inventory impact, the comp narrows to around a two-percentage-point decline. We also had a fundamental rhythm and connection with our customer through our circulars. The circular contains coupons but also serves as a connection point and a trigger for customers to explore the website and come into store. A large percentage of sales generated by that circular are manifested at the store level. We reduced that communication too severely, and that impacted our business in Q2 and through Q3. If we return to the fundamentals of customer connectivity and meet supply and demand, we believe we can exceed last year. We're also implementing active plans in 2022 for customer engagement and experience, led by our Chief Customer Officer, to create engagement through loyalty, personalization, and our omnichannel capabilities. The weakened foundations of the last two quarters will be reinstated alongside our other transformation initiatives.

Our next question is from Simeon Gutman from Morgan Stanley.

Hi, everyone. I'll ask one question with a couple parts. First, on the fourth quarter guide, I think the third quarter proved a little aggressive. Why are you confident that this fourth quarter will be okay? And then just connecting the dots of the narrative, if there were problems with getting inventory, it looks like some of the promotions got more aggressive coming into the last legs of the holiday. So why get more aggressive there if you didn't have the inventory? And how come it doesn't sound like this hurt buybuy BABY—maybe it did—but how come buybuy BABY was not impacted and Bed Bath was?

Buybuy BABY was less affected for two reasons. One, we've seen very strong apparel and accessory trends in the market versus the softening of home trends versus 2020, and we have a strong apparel and accessory business. We were better placed in terms of our inventory plan because we pre-purchased a lot of apparel product, which helped us stock. We also had performance issues in Q3 last year at BABY that we anniversaryed with strength coming into Q3 and Q4. Regarding preparation and expectations, September and October were soft, but November represented a disproportionate amount of the quarter's performance. Our inventory plans with vendors showed we would be in a good position, but we couldn't realize that in real time through November. While we changed the trajectory from negative to positive in November, supply chain restrictions limited our ability to fully offset our original plans. On promotions, we actually had higher regular-price sales in the quarter than the prior year and increased our regular-price penetration, which is reflected in gross margin. Perception may be that promotions were aggressive; in some cases, we implemented targeted promotions later in the quarter to drive traffic because our regular circular distribution was limited. Net-net, we were less promotional overall and applied compensatory traffic-driving tactics later in the quarter.

Our next question is from Jason Haas from Bank of America.

Great. Good morning, and thanks for taking my question. Could you talk about the gross margin drivers that you expect for Q4?

They are fairly consistent. We see ongoing owned-brand strength in the mix contributing. Product mix and promotional optimization continue to support margin. While Q4 gross margin is different from Q3 for most of the year, we still see stability in Q4 despite ongoing supply chain pressures. As those pressures condense in post-'22, we see upside to our margin projections consistent with our three-year plan.

Our next question is from Bobby Griffin from Raymond James.

Good morning, everybody. Thanks for taking my question. Mark or Gustavo, I was hoping to understand the inventory and supply chain challenges a little better and where exactly they showed up. When I see inventory per store or total inventory, it's up pretty notably sequentially. So is the issue getting inventory from DCs to stores or any additional color to help me better understand that aspect?

It's a multi-part issue. We started with legacy supply chain infrastructure and our investments will take hold more in the second half of 2022, so timing has been a challenge. We saw two issues: first, our top 200 items sold through very well and we had disappointment in receipt flow from key vendors, so we had constraints on top sellers as the industry did. Second, we had inventory on ships at sea that, due to transportation and flow issues, we could not move effectively, creating a bottleneck. So we had the right inventory in the pipeline and customers responded, but timing of flow and availability hurt this quarter. These are short-term issues we expect to rectify.

Our next question is from Seth Basham from Wedbush.

Thanks a lot, and good morning. My questions are around market share. Mark, you mentioned that you are sustaining the same level of market share performance sequentially. Do you expect to be able to gain market share in your core categories in 2022?

Yes, that's the goal. Store optimization is a planned move that alters our penetration in the marketplace but aims for higher profit and a better-performing fleet. We see that stabilizing through 2022. Our goal is to generate green shoots of reformation in the second year of the transformation plan to stabilize and optimize both sales growth and market share, doubling down in our key categories. We've been experiencing gains in BABY and bed and bath is a current key focus.

Our next question is from Justin Kleber from Baird.

Hey, guys, thanks for taking the question. Just wanted to follow up on the BABY business. You mentioned, Mark, improving profitability there. Could you provide any more color on the margin profile of that business? How it compares to the core Bed Bath business? And then how meaningful is BABY as a customer acquisition vehicle for the broader enterprise?

There is a differential between the Bed Bath and BABY businesses. We're excited because we have not yet implemented the store remodel plans and product assortment plans in BABY that helped us favorably in Bed Bath, and that lies ahead. How we manage mix, brands, and partnerships will drive margin improvement. We see early green shoots and expect to capitalize over the next two years. BABY is important to the ecosystem of life moments: a customer engaged during child planning, the first child, college moves, or downsizing gives us opportunities to capture data and engage across life moments. That crossover is powerful.

Our next question is from Anthony Chukumba from Loop Capital Markets.

Good morning, and thank you so much for taking my question. You mentioned in the press release that you picked up nearly half a million Beyond+ subscribers. I got an email and a text saying if I sign up for Beyond+, which is $29 a year, I would get a gift card for $29, so it would be free. I'm trying to figure out how much of a tailwind that promotion was for Beyond+ new subscriptions?

That was a mid- and longer-term strategy to connect with half a million additional customers, inviting them into the program and letting them see the benefit, then doubling back. We forecast a level of stickiness with that cohort, not all of them. We'll be tracking conversion and retention, but it's a gateway to create engagement and future value.

Our next question is from Carla Casella from JPMorgan.

Hi, you talked about the in-store rationalization program. This is the first quarter we saw Harmon stores close. Is that now part of the 200-store rationalization? Or is that part of a separate program?

We view the 200-store program as predominantly Bed Bath & Beyond banner. But we evaluate the full profitability of every single store. Harmon closures are examples of rationalization based on individual store performance; it's not a broad program for that banner.

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

Hi. I was hoping to get a little more color on your thinking for 2022. I know you're not ready to give formal guidance, but specifically as we think about some of these transitory issues like inventory and freight costs, how do you think 2022 nets out? Do you expect net tailwinds from sales and margin, or do you think some headwinds will persist?

We'll give more detail when we issue formal guidance, but broadly, supply chain issues are expected to persist through the first half of the year across the industry. We don't believe our issues will persist that long because we've taken immediate remedial actions. We'll see a bifurcation based on how companies manage internally. We expect tailwinds from owned-brand penetration, gross margin management, the strength of BABY, and the incremental benefit of store remodels. We've remodeled 81 stores so far and expect to complete approximately 130 by the end of the fiscal year, which will drive positive comp performance. We expect 2022 to be a year of stabilization after reengineering in 2020 and 2021.

Our next question is from Cristina Fernandez from Telsey Advisory Group.

Good morning. I wanted to ask about the couponing strategy. Earlier you mentioned you weren't able to send as many circulars as you would have liked. Can you expand on that and how you're thinking about rectifying and balancing couponing going forward?

We've always been committed to a more balanced approach to coupons. In the past, it was overused. We took too severe an action to reduce it, which hurt our customer connection. We want to rebalance the equation. Couponing is a great tool for engagement; it's not a drug. We need to manage it better as a strategic advantage in our business.

We have time for one final question from Susan Anderson from B. Riley.

Hi, good morning. Thanks for taking my question. I'm curious on traffic in the stores: how that performed year-over-year and sequentially? Also, are you still seeing better metrics in the remodeled stores and what are your expectations for the number of remodeled stores this year and next?

In Q3, traffic was below last year by high single digits to low double digits, but it improved sequentially through the quarter. In November, store-level comps were positive. While traffic was challenged, conversion improved year-over-year and average transaction value improved given promotional optimization and pricing plans. Regarding remodels, we remain on track with our 450-store remodel plan over three years. For this fiscal year, we targeted 130 to 150 remodels but given some supply chain challenges we'll likely end closer to 130. We've completed over 80 remodels so far and are seeing mid-single-digit sales growth in those remodeled stores ahead of the rest of the fleet, with higher penetration of owned brands and higher margins.

Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating and you may now disconnect.