Earnings Call Transcript - BBBY Q3 2020

Operator, Operator

Welcome to the Bed Bath & Beyond Fiscal 2020 Third 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. At this time, I would now like to turn the conference over to Janet Barth, Vice President of Investor Relations. Please go ahead.

Janet Barth, Vice President, Investor Relations

Thank you and good morning everyone. Welcome to our fiscal 2020 third quarter earnings call. On the call with us today is President and CEO Mark Tritton; Chief Financial Officer and Treasurer Gustavo Arnal; Chief Operating Officer and President of buybuy BABY John Hartmann; and Chief Digital Officer Rafeh Masood. Before we begin, let me remind you that our fiscal 2020 third 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 or 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 press 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.

Mark Tritton, President and Chief Executive Officer

Thank you, Janet, and good morning and Happy New Year to you all. It's hard to believe it's been a full year since my first earnings call as CEO of Bed Bath & Beyond and what an exceptional year of change it has been. At that time, I clearly stated our fiscal 2019 third quarter results were unsatisfactory and underscored the imperative for change. I declared that we must respond to the challenges we face as a business, including pressured sales and profitability, and reconstruct a modern, durable model for long-term profitable growth. Today, we stand in a very different position as a company than we did just a mere 12 months ago. Firstly, we continue to execute on our digital-first, omni-always strategy and have delivered a second consecutive quarter of comparable sales and EBITDA growth through strong margin management. Secondly, we responded to our customers wherever they needed us, growing our omni-capabilities to accelerate profitable digital growth and grow our customer base. Thirdly, we continue to strengthen an already strong balance sheet and remain focused on ensuring liquidity, optimizing costs and significantly reducing debt while driving positive cash flow generation. And while we drove overall business results, we also completed our non-core banner monetization plan with the final transaction set to close in our fiscal 2020 fourth quarter. These efforts will help fund our transformation and put us in a position to start fiscal 2021 with a more cohesive set of core businesses.

Gustavo Arnal, Chief Financial Officer and Treasurer

Thank you, Mark, and good morning, everyone. Today, I will cover two key topics. First, I will provide perspective on the performance of our third quarter as well as on December sales trends. And then, I will provide visibility on the current fourth quarter as well as on our outlook for fiscal year 2021. To begin, it is important to note that our fiscal first quarter runs through September, October and November. And consistent with last year, the Saturday of Thanksgiving weekend was the last date of the period. We delivered strong results despite extensive and widely reported COVID-related headwinds. These included lower foot traffic trends, shipping capacity constraints and much higher freight costs. Further, during a challenging holiday period, we strengthened our commercial plans to drive significant digital demand, while remaining focused on delivering gross margin expansion. Positive comparable sales growth was led by our core Bed Bath & Beyond banner, which was up 5%. It was fueled by exponential digital growth of 94%, which more than offset store declines of 14%. Growth was healthy and broad-based across five key destination categories, which grew 11% and represented two-thirds of revenue. Total enterprise comparable sales grew 2%, also driven by strong digital comparable growth, up 77%.

Rafeh Masood, Chief Digital Officer

Thank you, Gustavo. With COVID as a headwind to our store traffic, we have stepped up our strategy as an omni-always retailer, and it is paying off. During the third quarter, we delivered digital growth of 77%, our third consecutive quarter of growth in excess of 75% this year. Our Bed Bath & Beyond banner alone posted digital comparable sales up 94%, almost doubling last year's sales. With this momentum and based on current trends, we are on track to exceed our digital sales goal of $3 billion by the end of fiscal 2020. We have laid out a transformation plan to unlock the potential of our omni-always growth strategy by elevating customer experience, building out our omni-capabilities and evolving to a digital-first culture. The goal of this initiative is to meet customers wherever they are. I am pleased to report that the company is now incredibly equipped to do that. The benefits are coming through not only in digital sales growth but also in customer metrics. During the quarter, we gained 2.2 million new online customers of which the Bed Bath banner alone added 1.8 million. Year-to-date, we have gained approximately 7 million new online customers. And not only are we attracting new customers, we are seeing them return at a higher rate than ever before. In the third quarter, 21% of our Bed Bath & Beyond customers placed more than one online order compared to about 16% last year. So what's driving the sticky customer experience for online customers? We believe the true hero for us is Buy-Online-Pick-Up-In-Store. Since introducing BOPIS and contactless Curbside Pickup services earlier this year, we have seen a rapid rate of adoption by our customers. In the third quarter, approximately 1.2 million customers placed a BOPIS order, representing 16% of our total digital revenue. In the Bed Bath & Beyond banner, BOPIS orders represented 15% of total digital sales and 17% of total digital orders. And 60% of our BOPIS orders are ready within 30 minutes, surpassing our two-hour promise. This fast and convenient experience has earned Bed Bath & Beyond a Net Promoter Score of 80% for our BOPIS services, up from 49% in May when we first introduced this service. Our stores are now a competitive advantage of our omni strategy, fulfilling a total of 36% of all digital sales in the third quarter. This capability was not in place last year. Now, we're connecting our stores with our online platforms, and the power of omni is enabling us to better serve our customers however they choose to shop. We know omni-channel is the future of retail, and we are making the right investments that are resonating with our customers. The fast-paced transformation of our digital offering and elevated customer experience has resulted in a 25% lift in our online conversion rate for the third quarter as compared to the prior year. Key drivers of the increase include: first, the re-launch of our mobile sites and mobile apps. We implemented a new framework with an optimized experience that drove a 33% increase in conversion and mobile sales growth of 107% versus the prior year period. During the five-day holiday shopping period from Thanksgiving to Cyber Monday, our mobile homepage loaded 74% faster than the same period last year. We also re-launched Bed Bath & Beyond and buybuy BABY mobile apps, resulting in over 800,000 downloads this quarter. Our Bed Bath & Beyond mobile app was launched over 15 million times during this quarter and revenue more than doubled versus last year. We have also seen the rate of app uninstalls continue to improve, further underscoring the stickiness of our customer experience. Second, in order to ensure that we were firing on all cylinders going into the holiday season, we launched Same Day Delivery on bedbathbeyond.com and buybuybaby.com to provide our customers another convenient and cost-effective way to shop. This service was introduced in Q3. Results are preliminary, but we have seen hundreds of thousands of our customers take advantage of this new convenient way to shop. We also began to offer Same Day Delivery service through the launch of Bed Bath & Beyond and buybuy BABY stores on Shipt and Instacart with both marketplaces each reaching more than 80% of U.S. households. Harmon Face Values was recently added to the Instacart marketplace, and we are pleased with its initial launch and continued positive response from customers on this platform. Third, we implemented over 100 improvements to make our shopping experience more convenient and easier to use, including a faster checkout process and new payment type options. This includes Buy Now Pay Later options like Afterpay and PayPal's Pay in 4 as well as extending Apple Pay from store only to our mobile apps. During the quarter, we also focused on optimizing our experiences and speed to place orders on our site, making it even easier, more convenient and faster for our customers to shop with us. Again, each of these initiatives were geared to customers with the goal of meeting them where they are and creating multiple options for payment and delivery. As we look at our digital program holistically, it is a true revolution from where we were a year ago and has become part of the fabric of how we operate at Bed Bath & Beyond. The customer environment is rapidly changing, and we are there to greet them at every turn. Through our enhanced services, speed and focus on engagement, our customer perception continues to improve. Our omni-always strategy is working and was a key driver of our third quarter sales performance. Our strength in digital has more than compensated for the headwind of the pandemic and has fast-tracked our transformation as we moved into the important holiday season this year and sets us up for success moving forward. We have delivered an elevated customer experience, we launched meaningful capabilities and pivoted to digital from a laggard tactic to a strategic asset and a profitable growth engine that has delivered another strong quarter of growth. With that, I will turn the call over to John Hartmann, our Chief Operating Officer and President of buybuy BABY. John?

John Hartmann, Chief Operating Officer and President, buybuy BABY

Thank you, Rafeh. We made exceptional progress across our operations in the third quarter, specifically as it relates to our supply chain reformation, optimizing our real estate portfolio and advancing our technology roadmap. Modernizing our business remains a key focus, and we are evolving our store formats, our distribution and fulfillment capabilities, alongside leveraging our unique data and insights to meet the changing needs of our customers and deliver an exceptional shopping experience. I'll start with supply chain. While we remain focused on mid- to long-term capability building, we made very substantial pivots in the third quarter. As Rafeh mentioned, our stores fulfilled 36% of total digital sales in the third quarter. While last year we didn't have BOPIS, Curbside Pickup or Same Day Delivery in our offering, not only do these new capabilities provide ease and convenience to our customers, they also help us to partially alleviate current shipping constraints and additional cost pressures in the supply chain. During the quarter, we also added a secondary national carrier and several regional parcel delivery carriers, which helped to offset an over 20% cost increase from our primary carrier, FedEx. And importantly, we continue to focus intently on the health and safety of our associates working in our fulfillment centers by instituting daily COVID cleaning procedures in our facilities. Concurrently, we launched an evaluation of a number of potential third-party logistics providers who will partner with us to establish new regional distribution centers and to manage the efficient flow of domestic distribution. We anticipate that using third-party logistics operators will also provide increased financial flexibility and reduced capital expense. This is the cornerstone of the transformation of our supply chain network and will increase our capacity for fast store replenishment while continuing to leverage the store network for omni-fulfillment. By making the replenishment process more efficient, our store teams will have a more predictable and faster flow of the products we sell most. In turn, this will allow us to meet the increased demand for BOPIS, Curbside and Same Day Delivery services, while also reducing the time our store teams spend managing deliveries so they can spend more time with our customers. Also core to our transformation is technology, and we are taking a disciplined approach to our investments in building a technology infrastructure that will enable us to personalize the service for our customers, improve our ability to predict and meet demand, make it easier to collaborate across teams and drive down inefficiencies in our business. Over the next three years, we plan to invest approximately $250 million to modernize the application and technology landscape to a cloud-empowered foundation. Last quarter, we talked about our expanded multiyear partnership with Google and Deloitte to enhance our omni-channel shopping experience. This quarter, we defined our plans for a new ERP system. We will also be pursuing a product lifecycle management solution in support of our own brand initiative and an inventory management capability to improve inventory productivity. These plans will all start in 2021 and are foundational parts of building out our technology infrastructure. In other activity, we are making significant progress toward the targets we have previously highlighted regarding our real estate portfolio, including our Store Network Optimization and store remodel plans. Let me start with our Network Optimization program, which is designed to not only ensure our stores remain a strategic asset for us, but also to ensure that we have them in the right locations to deliver more sustainable sales growth, improved margins, and greater cash generation. As part of this work, we are well underway in the process of closing approximately 200 underperforming Bed Bath & Beyond stores by the end of fiscal 2021. Initially, we identified about one-third of these stores to be closed by the end of the fiscal year. We have since accelerated the pace of targeted store closings this year from 70 to about 120 stores with certain stores closing earlier than planned due to having efficiently sold down store inventory during the closing process. In the third quarter, we closed 4 Bed Bath & Beyond stores and in December, we closed another 75, and we are currently liquidating an additional 42 stores. We are very pleased with our progress to date, and completing the store closure program during fiscal 2021 remains a priority. Turning to our Bed Bath & Beyond store remodel program; we have advanced from the initial prototype phase to active iteration within 10 stores in our Houston markets. These proof-of-concept stores highlight our destination categories: bed, bath, kitchen, and storage. We expect to complete this phase of the remodel program by the end of February 2021. Additionally, we will take all the visual signage enhancements and immediately apply them to an entire fleet of stores on the same timeline. Next, we will take our learnings from Houston and move into our first expanded wave of renovations in 2021, which includes approximately 150 stores. In total, our store remodel plan involves $250 million of investment over the next three years and touches over 450 stores, representing roughly 60% of our revenue. In addition, we will utilize strategic sourcing methods to procure necessary remodel components at a lower cost and leverage economies of scale with this overall initiative. Instead of the legacy store-by-store one-off approach of the past, we have established a unified planning process to identify, prioritize, and sequence all aspects of the remodels. These store remodels and our network optimization plans are crucial steps in building an omni-always organization that serves our digital-first customers with an intuitive and modern shopping experience. We look forward to reporting our progress along the way. Before closing, let me provide some perspective on the quarterly performance of buybuy BABY, which represented approximately 10% of total enterprise reported sales in the third quarter. This included strong growth in digital of approximately 40%, which represented more than half of the sales in the quarter. It remains a challenging environment for our new or soon-to-be parents who are particularly vulnerable to the perceived challenges associated with in-store shopping due to COVID-19. As a result, we saw a disproportionate level of store traffic decline from our BABY customers this quarter than across our other banners. These COVID-related headwinds have also had a short-term impact on the registry component of our business, which is highly correlated to in-store activity. While we have seen overall growth in registry, digital registries created online currently tend to carry a lower average value than those created in-store. Enhancements to the digital registry experience are addressing this opportunity to assist our customers in building a more well-rounded BABY wishlist. COVID headwinds have also constrained inventory levels in certain of our key categories, such as furniture and gear, as a result of disruptions in the global supply chain. We have made key pivots here, including sharing improved forecasts with our vendor partners well into 2021. So, as consumer behavior shifted, we pivoted and leaned into digital to create an enhanced online experience with a more convenient suite of checkout options, including Afterpay, Pay in 4 and Apple Pay. We also upgraded and re-launched our buybuy BABY app in November, strengthening the choices we offer our customers who connect with us digitally. Year-to-date, we have gained nearly 2 million U.S. online customers, an increase of 46% over last year, including more than 0.5 million new online customers in the third quarter. In all, nearly two-thirds of our baby customers only shopped online this quarter. As young parents take safety into consideration this year, our new omni capabilities allowed us to meet them where they are with BOPIS, Curbside and Same Day Delivery services. Digital orders fulfilled by our BABY stores represented a significant portion of total orders in the quarter, with BOPIS orders representing approximately half of all store fulfilled orders. While the holiday period is traditionally not a big BABY season, except for gift-giving or needs of families getting ready for or just having had a baby, we did see strong digital demand comparable growth of 49% year-over-year during the five-day holiday period from Thanksgiving to Cyber Monday. This growth was driven by top-performing BABY categories, including toys, playroom, furniture and apparel. These positive sales and category trends accelerated in December. We believe in this business, and we are now ready to double down on and significantly invest in expanding sales and margin and growing our market share. We plan to accelerate our growth in BABY over the next several years, including introducing own brands, aging up into toddler and younger children, as well as expanding into categories like toys and educational as well as furniture, enhancing our registry and leading with new partnerships. We will also invest to scale our footprint nationwide with about 50 new stores over the next three years. Fiscal 2021 will mark the true beginning of the transformation of this banner as we execute our three-year plan and unlock the value of this brand. Earlier this week, we announced the appointment of Patty Wu as Senior Vice President and General Manager for buybuy BABY. Patty's exceptional experience will help accelerate our plans and drive meaningful change. We look forward to sharing our progress in future conference calls. Mark, I'll turn it back over to you now for closing remarks.

Mark Tritton, President and Chief Executive Officer

Thank you, John. Our strong performance this quarter across several key performance metrics, including positive comparable sales growth, gross margin expansion, positive cash flow generation and gross debt reduction is evidence of our transformation taking hold even despite the significant headwinds of a global pandemic. Yet, what I saw beyond the numbers was even more impressive. Our team was planning, modifying and executing in an aligned and disciplined way like never before. They were learning and improving in real-time as the customer conditions changed, showing true agility in motion. These newly acquired muscles extended from product and price through messaging and digital expression to sales floor and distribution center. I'm truly grateful to all our associates that rallied around this call to action to demonstrate our strengths and opportunities as the new Bed Bath & Beyond team. In what has been an exceptional year of change so far, we still continue to make bold pivots to reconstruct, renovate and restore our company. Simply put, we're delivering on what we said we would do. We said we would put a team in place that would have the right talent and expertise to execute our new vision and inject new ideas and that we will create the right organizational structure to facilitate more streamlined decision-making, and we've done that. We said we would lean into the digital space and make it easier and more convenient for our customers to shop with us, and we are doing that. We said we will reset our cost structure, modernize for growth and refine our organization, and we've done that and continue to focus on gross margin improvement. We said we had a clear mandate to reestablish our authority as the preferred omni-channel Home destination and that we would use customer-inspired and market insights to develop our new customer value proposition, and we are doing that. We said we would evaluate our asset base and how best to optimize its value to the business on a go-forward basis, and we have done that. And finally, we said our mission is to ensure that Bed Bath & Beyond is well-positioned for long-term success, and we're doing just that. I'm proud of what our teams have achieved, and I thank them for their continued dedication and commitment to the long-term success of our company. Our results this quarter set a firm base from which we will continue to drive our bold transformation and seek to deliver on our three-year strategic and financial goals shared at our 2020 Investor Day. We have many bold and exciting plans for fiscal 2021, such as launching new own brands that will help differentiate us in our key destination category, remodeling approximately 150 stores under our Store Network Optimization program, introducing new and unique digital services designed to enhance our omni-always experience, modernizing our technology and operations and reinventing our supply chain for the future, investing to further strengthen our buybuy BABY and Harmon banners and continuing to unlock and deliver shareholder value. In a year like no other, we are embracing and driving transformative change, staying curious and bold and so much more. I'm proud of the commitment our teams have shown and what we have achieved together. With that, we will now take your questions.

Operator, Operator

Thank you. And our first question is from Curt Nagle from Bank of America.

Curt Nagle, Analyst, Bank of America

Good morning. Thanks very much for taking my questions. Yes, so the first one is, I understand how constrained shipping and freight was an issue for holiday margins. But how long do you think this pressure carries into '21? It sounds like at least for the full year, you don't think it's an issue since you're still targeting 35% gross margins in 2021? And then I just have a follow-up after that.

Mark Tritton, President and Chief Executive Officer

Good morning, Curt. Thanks. We know that the freight pressure across retail is here to stay, and we've built that into our future plans. So, we see that our margin stability and the offsets that we've created currently in the proof-of-concept over both Q2 and Q3 of this year really stand us in good stead to deliver that 35% margin. So, we feel very comfortable around that.

Curt Nagle, Analyst, Bank of America

Okay. And maybe just again, for you, Mark. Maybe give us a quick update on some of the big merchandising initiatives you guys have outlined in October Analyst Day, such as lower sourcing and vendor costs and then starting to roll out improved and more exclusive product and how much of an impact that will make in '21 or, at least, how to think about the cadence of those things in 2021?

Mark Tritton, President and Chief Executive Officer

The good news is that we've already built a firm foundation with these results. The actions and trends we have here in terms of margin across the board are substantial and sustainable. And then we're going to add into those the rolling benefits as you outlined, Curt. The sourcing benefits that we've undertaken throughout 2020 are really going to be evidenced in the first quarter onwards in 2021. And then we begin in March with the rollout of our own brands, and we'll be sharing more details on the timing throughout the year. Several brands will be launched, but the key point is that in the first half of 2021, we'll be addressing the majority of our big key categories. We're already seeing strength in reinventing those with own brands and also the introduction of opening price point items and a range there, which has been a missing part of our equation in terms of being competitive in the marketplace to build our authority. So the step changes, the consistent management of promotions, the mix management—now we're going to layer in the incremental benefits of sourcing and own brand, so we're excited about that progression in 2021.

Operator, Operator

Our next question is from Simeon Gutman from Morgan Stanley.

Simeon Gutman, Analyst, Morgan Stanley

Good morning. Thanks for taking my question. Can you talk about where your expectations were a couple of months ago for the fourth quarter in sales and now? And I know the outlook for next year embeds flattish. Does that change now that you're going to be lapping something that may be potentially weaker in this year's fourth quarter?

Mark Tritton, President and Chief Executive Officer

Simeon, we have robust plans for Q4 of this year. We feel good about how we're executing on those, but there's no doubt that the COVID headwinds and the impact that has had on foot traffic and overall consumer confidence is something that we've had to factor into our plans. Hence why we talked about the agility of our team through Q3 and now Q4 to respond to those challenges. We think we've met those in what has been a turbulent time, and we really look forward to lapping those next year in a very different way.

Simeon Gutman, Analyst, Morgan Stanley

Okay, thanks for that. And then my follow-up. Can you talk about Q4? You mentioned the freight headwinds, but offset by some optimization on gross margin in terms of promotion and pricing. Can you talk about the promotional environment? And then thinking about how much margin opportunity there still is, I think for next year's guidance revision, it looks like it's more a function of the margin changing as opposed to the top line, just to confirm.

Mark Tritton, President and Chief Executive Officer

We did not become more promotional during the quarter in Q3 or in Q4. We've actually reshaped and reengineered our promotional activity. We had opportunity to do so, and that's paying dividends in terms of generating gross margin and helping to offset the shipping and freight differentials. So we're less promotional, more focused on rate and price. We're winning customers, and we see that progressing forward. As Gustavo outlined, we're not putting pressure on the sales plan to generate our EBITDA. We believe that we can do that through a number of initiatives, through cost control and margin growth in 2021 as we outlined in our three-year plan.

Operator, Operator

And our next question is from Bobby Griffin from Raymond James.

Bobby Griffin, Analyst, Raymond James

Good morning, everybody. Thanks for taking my questions. Gustavo or Mark, the first thing I want to talk about was, looking at the range for next year, it's a fairly tight range of $500 million to $525 million EBITDA. There's still a lot of uncertainty out there. So can you talk a little bit more about what you see in the business now that really gives you confidence in tightening that range up? And as a second part of that, what could be the driver that would cause that range to underperform? Is it sales? Is it margin? What gives you the most concern there?

Gustavo Arnal, Chief Financial Officer and Treasurer

Hi, Bobby. There's still a lot of uncertainties as we look forward, but we feel very confident in our plans. We have clarity on the drivers of gross margin expansion, which is why we are reiterating a gross margin of 35% next year. In spite of the recent headwinds that we're seeing on freight costs, as Mark mentioned, we're being more data-driven in managing our promotion and our mix, and with that, we will offset it. It is a tighter range than the one we provided at Investor Day, but we said that as we completed the portfolio work, the monetization of non-core assets, we would tighten that, and that's why we're coming to you now. On your question of what can throw us off, it's not sales. We are prudently assuming for financial planning purposes that we would have comparable sales in line with prior year. And with that, we would deliver significant EBITDA growth.

Mark Tritton, President and Chief Executive Officer

Bobby, I'd add that the plan we're presenting is responsible based on changing circumstances in the market. Any threat or concern would really be a macro issue, not an internally caused issue. We are monitoring things carefully by week and by quarter. We feel our plan is responsible and achievable, and we're looking forward to delivering that.

Bobby Griffin, Analyst, Raymond James

All right. Thank you. And I guess my second question would be, for the December commentary, you mentioned that the enterprise did show some growth for comparable sales. But then, for the entire quarter, you're kind of calling for flattish versus last year or in line, I believe. Can you talk a little bit about what is going on there? Has something popped up in the last couple of weeks given you concern or is that just a function of being conservative, given the level of uncertainty that's still out there in the world?

Mark Tritton, President and Chief Executive Officer

It's around this: we've seen positive signs in December. Remember that our fourth quarter is December, January, February, so we still have two full months to complete this period. There's a lot going on in the world, and we want to be responsible in our planning. We look forward to sharing more in the fourth quarter.

Operator, Operator

And our next question is from Chris Horvers from JP Morgan.

Christopher Horvers, Analyst, JP Morgan

Thanks. Good morning. So my first question is a follow-up. As you think about changes and evolving assumptions for your 2021 plan, is it fair to say that COVID's recent surge makes you assume a longer duration until vaccines are effective at scale? Also, on freight, presumably some surcharges should come down as shipping normalizes. Is there something structural within freight that you're assuming sticks around?

Mark Tritton, President and Chief Executive Officer

I think it's prudent to think about an environment where we saw acceleration of behavior change between our Q2 results and our November results. Based on foot traffic to stores, customers became concerned about what the future held, particularly around the election period. We're being prudent in thinking through vaccine rollout; it's early and we want to monitor its impact. We haven't factored stimulus checks into the plan because that's uncertain. Ensuring that the level of uncertainty and volatility is conservatively built into our plans allows us to balance headwinds. The home category has seen tailwinds from the COVID moment, but retail has faced headwinds, confusion and concern from customers. We are delivering positive comps and EBITDA in the face of that uncertainty and want to ensure a balanced plan going into 2021.

Christopher Horvers, Analyst, JP Morgan

Understood. In terms of the fourth quarter, for gross margin rate to be worse in the fourth quarter than in the third quarter, can you help me understand that? You mentioned not being more promotional in December. Is the shipping surcharge significantly larger in Q4 than the 80 basis points you saw in Q3? You lapped 180 basis points of markdown pressure, and inventory looks clean. So how should we think about the year-over-year and sequential gross margin dynamics?

Gustavo Arnal, Chief Financial Officer and Treasurer

Chris, the shipping cost is the main reason. In Q3, the impact you saw of about 80 basis points was just the latter part of the quarter. What we're estimating in Q4 is over 150 basis points impact. We're committed to offsetting that through disciplined promotion management and mix. The incidence of shipping cost is much larger in Q4, and that's why we're being prudent on that.

Mark Tritton, President and Chief Executive Officer

If you're looking at Q4 versus Q4 last year, remember the consumer behavior shift to digital versus store was significant and has natural pressure on margin and mix, including shipping. We're offsetting and mitigating that to be stable. It is a Q4 like no other. Consumer behavior, digital mix and the resulting margin implications, inclusive of shipping, are what we're balancing. We're one month into a three-month quarter and want to make sure we're prudent.

Operator, Operator

And our next question is from Peter Benedict from Baird.

Peter Benedict, Analyst, Baird

Hey, guys, thanks. First, curious on the adoption of BOPIS and Curbside. How is that trending relative to your expectations and what are your plans or goals to drive continued adoption in the months ahead?

Mark Tritton, President and Chief Executive Officer

Peter, we only introduced BOPIS and Curbside in May. We're seeing escalation and movement into the new muscle. We reported the overall Q3 stats, and when you unpack that you see week-on-week growth. We have an NPS score of 80% for BOPIS, we're able to provide about a two-hour assurance on order fulfillment at store level and often it's around 30 minutes. Customers are loving it. During December rates escalated week-by-week as customers became more concerned about delivery times, so we leaned into creating ease and convenience that customers responded to. We believe these are persistent capabilities and they're now muscles in the business. Fulfilling digital orders via store is almost equivalent to a store-based profitability benefit, so this helps our shipping and profitability costs. We think BOPIS is here to stay.

Peter Benedict, Analyst, Baird

Okay. Thanks. Second, you mentioned registry in the prepared remarks. Can you comment qualitatively on BABY versus wedding registry and how you see those businesses across the segments over the next couple of years?

Mark Tritton, President and Chief Executive Officer

Good question. For BABY, the registry has been more reliant on in-store experience, which builds a bigger basket and higher engagement. We're enhancing the digital registry and will invest further. For Bed Bath & Beyond, the registry is a strength; we remained at the top of rankings and held market share in recent data. While 2020 saw fewer weddings, 2021 should see pent-up demand as ceremonies occur, and because we're well placed, we expect this to be a runway for growth over the next couple of years. We'll double down and invest further in registry capabilities.

Operator, Operator

Our next question is from Steven Forbes from Guggenheim.

Steven Forbes, Analyst, Guggenheim

Good morning. I wanted to focus on trends within the categories outside the top five. How are these categories performing and are they performing in the new concept or remodel stores? What initiatives are centered around addressing performance there, since they still represent about one-third of sales?

Mark Tritton, President and Chief Executive Officer

Steven, there's been natural headwinds because some of these categories are more relevant to store traffic than digital. Personal Care is an example: in our remodel stores Personal Care is performing very well compared to control, and when we get traffic we get trade. Cleaning is another area; supply constraints and shortages have impacted our ability to capture demand. We also cleared out smaller categories like food to clean up assortment. We're focused on doubling down on our strength categories, and you see that in Q3 and Q4 and our 2021 strategy. We're already starting to see positive signs in January.

Steven Forbes, Analyst, Guggenheim

Thanks. Quick follow-up on minimum wage and wage increases from other retailers. How do you think about that as a pressure point and what's incorporated in the guidance for 2021?

Mark Tritton, President and Chief Executive Officer

We see the emerging trends and are evaluating the impact carefully. We want to be competitive in the marketplace and will absorb any wage changes into our overall cost and financial plans going forward.

Operator, Operator

Our next question is from Carla Casella from JP Morgan.

Carla Casella, Analyst, JP Morgan

Hi. Could you give us an update on how much of your cost savings goal you've achieved in the quarter?

Gustavo Arnal, Chief Financial Officer and Treasurer

We're on track with our objective of $200 million to $250 million in annualized savings. Next year, we expect about $125 million at least. In the current quarter, we saw savings shown in the results: 180 basis points from product margin and savings, including leverage, and distribution costs of 210 basis points.

Carla Casella, Analyst, JP Morgan

Okay. Should we count those towards the cost-savings program? Also, did you provide same-store sales at buybuy BABY or Harmon for the third quarter? I don't think I heard the overall same-store sales number.

Gustavo Arnal, Chief Financial Officer and Treasurer

Yes, count those towards the cost-savings program. We did not provide a specific same-store sales number for buybuy BABY in the prepared remarks. We noted that in the third quarter, same-store sales were down at buybuy BABY and then recovered in December. Store traffic, particularly at buybuy BABY, slowed significantly in November and was partly compensated by digital strength. That recovery started in December.

Carla Casella, Analyst, JP Morgan

Okay, great. And how much of the Bed Bath & Beyond business alone was done by digital? You gave growth rates but what percentage of sales was digital for Bed Bath & Beyond versus last year?

Mark Tritton, President and Chief Executive Officer

We shared digital growth of 94% for the Bed Bath & Beyond banner in the quarter. About one-third of the overall company's sales were digital, roughly a third.

John Hartmann, Chief Operating Officer and President, buybuy BABY

As a reference, last year digital was about 16% of overall company sales, so you can see the exponential growth.

Operator, Operator

And our next question is from Mike Lasser from UBS.

Michael Lasser, Analyst, UBS

Good morning. How are you going to balance a higher penetration of e-commerce, which could reduce in-store traffic, with your initiatives to drive in-store productivity over the long run?

Mark Tritton, President and Chief Executive Officer

We saw when things started normalizing earlier in the year that stores and digital together drove great comps. In our three-year plan we've already factored in a high digital rate so our financials remain stable. Digital growth is often driven by an omni-channel environment. Trips to store, whether for BOPIS or full shopping trips, still generate community and engagement. We're investing in stores — visual merchandising, assortment and remodels — and in those environments the differential to control is strong and sales growth is achievable. We believe in the role of stores and are investing accordingly.

Michael Lasser, Analyst, UBS

My follow-up: In the bridge for gross margin from 2019 to 2021, I didn't see discussion of reinvestment in price or other traffic-driving initiatives. Are you assuming promotions stay disciplined even as some home category tailwinds may fade in a reopening environment?

Mark Tritton, President and Chief Executive Officer

That work is already underway. Our KPIs show parity to our peers in key categories and our promotional strategy is more effective and cost-efficient. These muscles have driven gross margin growth and are sustainable. We don't expect an exceptional chase into promotional activity in 2021. We see the home trend as sticky and our promotional cadence is ready for 2021.

Operator, Operator

And our last question is from Seth Basham from Wedbush Securities.

Seth Basham, Analyst, Wedbush Securities

Thanks and good morning. On your EBITDA guidance for 2021, could you give color on the impact from banner sales, specifically Cost Plus and Christmas Tree Shops, in that forecast?

Gustavo Arnal, Chief Financial Officer and Treasurer

The guidance we're providing for 2021 is on a core banner basis. It only includes Bed Bath & Beyond, buybuy BABY, Decorist and Harmon. We showed in the bridge what pro forma 2019 would look like after those banner divestitures. That's a starting point of $425 million on an ongoing basis.

Mark Tritton, President and Chief Executive Officer

Seth, we had to include Cost Plus World Market in full in our prior projections in terms of EBITDA but not in sales. With the sale of those banners, we can present a firmer range based on the true pro forma of 2019. This provides a more definitive view toward future growth.

Gustavo Arnal, Chief Financial Officer and Treasurer

Importantly, the guidance is on a comparable basis. When you compare net sales 2021 versus reported sales in 2020 or 2019, they're not comparable due to the banner divestitures. In Q4 you will see some of that dynamic: while we mentioned Q4 net sales are expected to be down double-digits on a reported basis, between 15% and 20% of that is simply the impact of the banner divestitures. It's a significant transformation with a different shape of the P&L next year in terms of concepts and stores.

Seth Basham, Analyst, Wedbush Securities

Understood. My follow-up: On the mix of online versus in-store sales for 2021, would you expect in-store sales to increase from 2020? If so, why do you assume such significant channel shift headwinds given freight increases?

Mark Tritton, President and Chief Executive Officer

We expect a natural pivot back to stores as the environment normalizes, though digital penetration will remain high. We had 36% of all digital sales fulfilled by stores in the quarter, which is an important offset to shipping costs. We see some freight pressure in 2021 but we are factoring in the high digital penetration rate and the omni advantages of store fulfillment.

Operator, Operator

And that's all the time today we have for questions. I will now turn the call back over to Janet Barth for closing remarks.

Janet Barth, Vice President, Investor Relations

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

Operator, Operator

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